<PAGE> 1
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 24, 1999
REGISTRATION NO. 333-76385
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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PARADYNE NETWORKS, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 3670 75-2658219
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification Number)
incorporation or organization)
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8545 126TH AVENUE NORTH
LARGO, FLORIDA 33773
(727) 530-2000
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
---------------------
JAMES L. SLATTERY
SENIOR VICE PRESIDENT, CHIEF LEGAL AND INTELLECTUAL PROPERTY OFFICER AND
CORPORATE SECRETARY
PARADYNE CORPORATION
8545 126TH AVENUE NORTH
LARGO, FLORIDA 33773
(727) 530-2000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
COPIES TO:
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KENNETH L. GUERNSEY BRYAN E. DAVIS
SUZANNE SAWOCHKA HOOPER ADAM V. BATTANI
LAURA A. BEREZIN ASHLEY E. HUFFT
PAUL D. HUIE ALSTON & BIRD LLP
COOLEY GODWARD LLP ONE ATLANTIC CENTER
FIVE PALO ALTO SQUARE 1201 WEST PEACHTREE STREET
3000 EL CAMINO REAL ATLANTA, GA 30309-3424
PALO ALTO, CA 94306 (404) 881-7000
(650) 843-5000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement
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If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act") check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) of the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] ---------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ---------------
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the same
offering. [ ] ---------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE> 2
SUBJECT TO COMPLETION -- JUNE 24, 1999
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PROSPECTUS
, 1999 (PARADYNE LOGO)
6,000,000 SHARES OF COMMON STOCK
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PARADYNE NETWORKS, INC.:
- - We make products and provide services to facilitate high speed transmission of
information over conventional telephone lines.
- - Paradyne Networks, Inc.
8545 126th Avenue North
Largo, Florida 33773
(727) 530-2000
PROPOSED TRADING SYMBOL & MARKET:
- - PDYN/Nasdaq
THE OFFERING:
- - We are offering 4,000,000 shares of our common stock.
- - A group of stockholders is offering an additional 2,000,000 shares.
- - The underwriters have an option to purchase an additional 900,000 shares from
these stockholders to cover over-allotments.
- - This is our initial public offering, and no public market currently exists for
our shares. We anticipate that the initial public offering price will be
between $12.00 and $14.00 per share.
- - Closing: , 1999.
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Per Share Total
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Public offering price: $ $
Underwriting fees:
Proceeds to Paradyne:
Proceeds to the selling stockholders:
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This investment involves risk. See "Risk Factors" beginning on page 4.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
- --------------------------------------------------------------------------------
DONALDSON, LUFKIN & JENRETTE
BANCBOSTON ROBERTSON STEPHENS
DAIN RAUSCHER WESSELS
A DIVISION OF DAIN
RAUSCHER INCORPORATED
RAYMOND JAMES & ASSOCIATES, INC.
The undersigned is facilitating Internet distribution.
DLJDIRECT INC.
WE WILL AMEND AND COMPLETE THE INFORMATION IN THIS PROSPECTUS. ALTHOUGH WE ARE
PERMITTED BY U.S. FEDERAL SECURITIES LAW TO OFFER THESE SECURITIES USING THIS
PROSPECTUS, WE MAY NOT SELL THEM OR ACCEPT YOUR OFFER TO BUY THEM UNTIL THE
DOCUMENTATION FILED WITH THE SEC RELATING TO THESE SECURITIES HAS BEEN DECLARED
EFFECTIVE BY THE SEC. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES
OR OUR SOLICITATION OF YOUR OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION
WHERE THAT WOULD NOT BE PERMITTED OR LEGAL.
<PAGE> 3
INSIDE COVER GRAPHICS:
- Diagram depicting customers using Paradyne broadband access solutions to
connect to the Internet and corporate intranets.
The graphic is entitled "Paradyne Broadband Access Solutions" with a
statement at the bottom "High-Speed Access and Service Level Management.
Changing the Way the World Communicates."
Diagram includes the following description of these solutions:
- Frame Relay Service Level Management. Our FrameSaver solution enables
Frame Relay service providers to offer high-speed service, managed
end-to-end. It also enables customers to graphically view real-time and
historical network performance statistics, and trouble-shoot failures
across the Frame Relay network from our Open Lane network management
system.
- High-Speed DSL for Voice and Data. Our Hotwire solution delivers
broadband DSL access across the existing phone line. Hotwire products
enable network service providers to offer broadband access to business
customers and teleworkers at lower rates than conventional services.
- Network Service Providers. The final mile ends at the local central
office, where access lines converge into a high-speed fiber-optic network
called a "backbone" network.
- Business Voice and Data. Our NextEdge products are used by network
service providers and businesses to offer integrated voice and data
services, plus managed Frame Relay services. NextEdge access
consolidation reduces high-speed access costs, and may increase
performance when consolidating narrowband lines into broadband
facilities.
- Small Business and Residential Voice and Data. The SuperLine System
integrates voice and broadband data services for the residential and
small office/home office markets. SuperLine provides up to three phone
lines and high-speed internet access over a single telephone line.
- Diagram and photographs depicting Paradyne Hotwire DSL solutions
connecting customers' voice and data to the public switched telephone
network and to the Internet over the copper local loop.
The graphic is entitled "Paradyne Hotwire DSL Systems, Broadband for the
Last Mile." The graphic includes the following description:
- High-Speed Access for Business and Residential Users. Our Hotwire
solution delivers broadband DSL access across the copper wire last mile.
Hotwire products enable network service providers to provide broadband
access to business customers, teleworkers and residential customers at
reduced rates compared to conventional service offerings. In addition,
our Hotwire solution allows network service providers the ability to
deploy a broad array to serve a wider array of customers, and also allows
for a more efficient utilization of expensive control office equipment
space.
- Diagram and photographs depicting Paradyne FrameSaver customer premise
equipment and service level management network management screens.
The graphic is entitled "Paradyne FrameSaver System, Broadband Service
Level Management." The graphic includes the following description:
- Optimizing End-to-End Network Performance. The FrameSaver solution
enables network service providers to offer managed high-speed service
from end-to-end across their networks and across multicarrier networks.
With an SLM solution, the network service provider and the business
customer can proactively manage and guarantee the level of service across
the network. The FrameSaver solution allows customers to graphically view
real-time and historical network performance statistics and troubleshoot
failures end-to-end across the Frame Relay network from our OpenLane
network management system.
<PAGE> 4
TABLE OF CONTENTS
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PAGE
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Prospectus Summary...................... 1
Risk Factors............................ 4
Special Note Regarding Forward-Looking
Statements............................ 15
Use of Proceeds......................... 16
Dividend Policy......................... 16
Company Information..................... 16
Capitalization.......................... 17
Dilution................................ 18
Selected Consolidated Financial Data.... 19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 20
</TABLE>
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PAGE
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Business................................ 32
Management.............................. 53
Certain Transactions.................... 62
Principal and Selling Stockholders...... 71
Description of Capital Stock............ 73
Shares Eligible for Future Sale......... 74
Underwriting............................ 76
Legal Matters........................... 79
Experts................................. 79
How to Get Additional Information About
Paradyne.............................. 79
Index to Financial Statements........... F-1
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<PAGE> 5
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. This summary is not complete and does not contain all of the
information that you should consider before buying shares in this offering. We
urge you to read the entire prospectus carefully. Unless stated otherwise, the
information contained in this prospectus assumes that the Underwriters'
over-allotment option to purchase 900,000 shares from the selling stockholders
is not exercised and assumes a one-for-two reverse split of our common stock to
be effected prior to the closing of this offering.
OUR BUSINESS
We are a leading developer, manufacturer and distributor of broadband, or
high-speed digital, and narrowband, or conventional analog, communications
products for network service providers and business customers. We offer
cost-effective hardware and software products that enable business class,
service level managed, high-speed connectivity over the existing telephone
network infrastructure. We believe that demand for high-speed, broadband
transmission will continue to increase as more business and residential users
find narrowband access technologies inadequate to meet their high-speed
requirements. Our objective is to maintain and build upon our position as one of
the leaders in the broadband access market by focusing on next generation
digital subscriber line, more commonly known as DSL, service level management,
more commonly known as SLM, and other broadband access products. We have a long
history of technological innovation, and we hold over 155 U.S. patents and have
over 100 U.S. patent applications pending. We have sold our products to over 50%
of the Fortune 500 companies and to businesses and network service providers in
over 125 countries.
Since 1996, various DSL products and technologies have been introduced into
the market to increase the speed and reduce the complexity of deploying high
speed data and voice services over the traditional copper telephone
infrastructure. DSL products are installed on each end of a telephone line and
simultaneously permit high-speed data transmission and voice services. The
advantages of DSL include the ability to be deployed on the existing copper
infrastructure worldwide, to operate at higher speeds for less cost, and to
allow network service providers to offer services that are "always-on" and don't
require the user to initiate a new connection each time the service is used.
Since 1996, various SLM products and technologies have been developed to
allow network managers to obtain critical information regarding the performance
of their networks. Frame Relay is a technology that puts data into packets, or
envelopes, and transports the data across a network that is shared by many
customers. In many cases, SLM technology allows network managers who purchase
shared data services, such as Frame Relay, to obtain information about their
portion of the shared service. Before SLM, this information was unavailable and
network managers were not able to confidently evaluate the performance of
critical applications over shared services.
Over the past several years, data traffic generated by computer users
accessing the Internet or business networks has increased significantly and is
expected to continue in the future. As a result of changes in the
telecommunications industry and the increased demand for high-speed
transmission, network service providers are requiring flexible solutions that
meet their current needs and permit easy, cost-effective enhancements in the
future.
Our current hardware and software products include the following:
- Broadband DSL. Our Hotwire hardware products deliver broadband DSL
access across the existing copper wire infrastructure, more commonly
known as the local loop. Our Hotwire products enable network service
providers to provide broadband access services to business customers,
teleworkers and residential customers at substantially reduced rates
compared to conventional service offerings. The recently introduced
SuperLine system was jointly developed by Paradyne and AG Communications
Systems. Superline incorporates Paradyne's Tripleplay technology that
allows network service providers to offer cost effective, multiple line
voice and high speed data services over a single traditional telephone
line to residential customers, small offices and home offices.
1
<PAGE> 6
- Broadband Service Level Management. The FrameSaver solution consists of
a suite of software and hardware products that enable customers to view
performance statistics and troubleshoot failures across the Frame Relay
network.
- Broadband Conventional Access. Our Acculink and NextEdge products enable
network service providers and business customers to offer cost-effective,
service level managed, high-speed access to public and private networks.
- Narrowband Products. Introduced in the early 1990s, our Comsphere modems
enable network service providers and business customers to build
low-cost, centrally managed networks over dial up or dedicated analog
circuits.
The end-users of our equipment are primarily network service providers and
business customers. Network service providers use our broadband products to
enable high speed managed connections between the network service providers'
central office and the customer premise. Moreover, our broadband products enable
network service providers to more efficiently provide network access services by
allowing a high level of management, monitoring and control over network access
equipment and circuits. Business customers use our broadband products for
high-speed connections of voice and data communications to connect their
employees to corporate networks and to the Internet using both public services
and private leased line services provided by network service providers. We sell
our products worldwide through a multi-tier distribution system that includes
direct sales, strategic partner sales, network service provider sales and
traditional distributor or value added reseller sales. Our network service
providers and business customers include AT&T, Ameritech, Bank of America, First
Union, Lucent, NTT, Rhythms, SITA, Sprint and Unisys.
Paradyne Corporation was originally incorporated in Delaware in 1969,
acquired by AT&T in 1989 and spun out of AT&T as part of Lucent Technologies in
1996. In July 1996, a limited partnership controlled by the Texas Pacific Group
acquired Paradyne Corporation and formed Paradyne Acquisition Corp. as a holding
company to hold the shares of common stock of Paradyne Corporation. In June
1999, Paradyne Acquisition Corp. changed its name to Paradyne Networks, Inc. Our
corporate headquarters are located at 8545 126th Avenue North, Largo, Florida
33773. Our telephone number is (727) 530-2000.
THE OFFERING
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Common stock offered by Paradyne............. 4,000,000 shares
Common stock offered by the selling
stockholders............................... 2,000,000 shares
Over-allotment option........................ 900,000 shares
Common stock to be outstanding after the
offering................................... 30,312,508 shares (1)
Use of proceeds.............................. We intend to use the net proceeds to Paradyne
from the offering to repay indebtedness and
for general corporate purposes, including
working capital and capital expenditures. We
will not receive any proceeds from the shares
sold by the selling stockholders. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol....... PDYN
</TABLE>
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(1) Based on the number of shares outstanding as of May 15, 1999. Assumes no
exercise of stock options after that date. Options to purchase 3,621,948
shares of common stock with a weighted average exercise price of $3.45 per
share were outstanding as of May 15, 1999.
2
<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL DATA
(In thousands, except per share data)
You should read the following summary consolidated financial data for
Paradyne together with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our consolidated financial statements
and notes thereto included elsewhere in this prospectus. The as adjusted balance
sheet data assumes the sale by us of 4,000,000 shares of our common stock in
this offering at an assumed offering price of $13.00 per share after deducting
the underwriting discounts and commissions and estimated offering expenses and
the application of the net proceeds therefrom. See "Capitalization" and "Use of
Proceeds."
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YEARS ENDED QUARTERS ENDED
DECEMBER 31, ---------------------------------------------------------------
------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1997 1998 1998 1998 1998 1998 1999
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED
STATEMENTS OF
OPERATIONS DATA:
Total revenues........ $181,303 $198,801 $ 43,039 $ 46,218 $ 51,384 $ 58,160 $54,062
Gross margin.......... 89,815 90,260 20,992 22,214 22,471 24,583 24,096
Operating income
(loss).............. (15,580) (1,825) (972) (1,226) (174) 547 1,465
Net income
(loss)(1)........... 21,342 (3,645) (1,151) (1,397) (339) (758) 2,368
Income (loss) per
common share:
Basic............... $ 0.84 $ (0.14) $ (0.04) $ (0.05) $ (0.01) $ (0.03) $ 0.09
Diluted............. 0.81 (0.14) (0.04) (0.05) (0.01) (0.03) 0.09
Shares used in
computing
income (loss) per
share:
Basic............... 25,552 25,623 25,602 25,610 25,627 25,663 25,893
Diluted............. 26,291 25,623 25,602 25,610 25,627 25,663 27,227
</TABLE>
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AS OF MARCH 31, 1999
----------------------
ACTUAL AS ADJUSTED
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CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 2,634 $ 39,555
Working capital............................................. 14,324 61,684
Total assets................................................ 78,332 115,253
Total debt.................................................. 11,228 789
Total stockholders' equity.................................. 32,142 79,502
</TABLE>
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(1) Net income for 1997 includes a $51.2 million non-recurring gain in
connection with the renegotiation of a contract with Lucent.
3
<PAGE> 8
RISK FACTORS
This offering and an investment in our common stock involve a high degree
of risk. Please carefully consider the following risk factors and the other
information in this prospectus before deciding to purchase shares of our common
stock. Any of the following risks could seriously harm our business and results
of operations. As a result, the trading price of our common stock could decline,
and you could lose part or all of your investment.
RAPID TECHNOLOGICAL CHANGE COULD RENDER OUR PRODUCTS OBSOLETE
The telecommunications and data communications markets are characterized by
rapid technological change. Our success will depend on our ability to adapt and
to respond to technological changes. If we fail to keep pace with technological
change, our product sales could suffer.
Our existing products could become obsolete or unmarketable as a result of
the emergence of new industry standards or customer demands. For example, our
customers could determine that they no longer require service level management,
or SLM, with network access products. Furthermore, our products could become
obsolete or unmarketable as a result of any new technology or products which are
superior to ours. We may be unable to compete effectively if we are unable to
adapt to changes in industry standards, meet customer demands or develop new
products or enhancements to existing products.
Our products compete with numerous high-speed access technologies,
including cable modems, satellite technology and other wireless technologies.
These competing technologies may ultimately prove to be superior to our
products. Our products may become uncompetitive or obsolete as a result of the
development of competing technologies that are more reliable, faster and less
expensive than our technology. For example, substantially all of our products
are deployed in networks that use standard copper telephone wires. The physical
properties of copper wire limit the speed and distance over which data can be
transmitted. Service levels degrade as distance from the central switching
station increases. Other competing technologies, such as wireless and cable are
not subject to such limitations.
OUR SUCCESS WILL DEPEND ON THE ACCEPTANCE OF NEW TELECOMMUNICATIONS SERVICES
BASED ON DSL
Our future success is substantially dependent upon whether DSL technology
gains widespread market acceptance by network service providers, or NSPs, and
end users of their services. If DSL technology fails to gain widespread
acceptance, our revenues and results of operations may be adversely affected.
Historically, we focused on providing innovative solutions to the narrowband
access market. We, however, are increasingly focusing on the broadband access
market. We have invested substantial resources in the development of DSL
technology, and many of our products are based on DSL technology. Many NSPs
continue to evaluate DSL technology and other alternative high-speed data access
technologies, but they may not continue to pursue the deployment of DSL
technology. Even if NSPs adopt policies favoring full-scale deployment of DSL
technology, they may not choose to purchase our DSL product offerings. In
addition, we have limited ability to influence or control decisions made by
NSPs. NSPs are continuously evaluating alternate high-speed data access
technologies and may, at any time, adopt technologies other than the DSL
technologies offered by us.
WE ARE SUBSTANTIALLY DEPENDENT ON NETWORK SERVICE PROVIDERS, WHO MAY REDUCE OR
DISCONTINUE THEIR PURCHASE OF PRODUCTS OR SERVICES AT ANY TIME
We estimate that sales to NSPs accounted for approximately 40% of our total
revenues in 1998. If our NSP customers are forced to defer or curtail their
capital spending programs, we could lose, or experience delays or reductions in
significant sales to such customers. Given the capital requirements, complex
regulatory framework and other barriers to entry in the market, there are a
limited number of NSPs. The market for many of the services provided by NSPs has
only begun to emerge since the passage of the Telecommunications Act of 1996 and
many NSPs are still building their infrastructure and rolling out their
services. Many of these NSPs still need to develop, construct and expand their
networks. The inability of our emerging NSP customers to complete development of
their networks, attract or retain customers, respond to trends, such as price
reductions for their services or diminished demand for telecommunications
services generally, could cause them to reduce their capital spending programs.
4
<PAGE> 9
Generally, our NSP customers do not have an obligation to purchase
additional products or services from us. Termination of purchase arrangements
with these NSP customers or a significant reduction or delay in the amount of
our products they order could materially and adversely affect our revenues. In
addition, the telecommunications industry has recently experienced
consolidation, which may cause us to lose NSP customers. The loss of one or more
of our NSP customers could also materially and adversely affect our revenues.
OUR SUCCESS DEPENDS ON NETWORK SERVICE PROVIDERS INCORPORATING OUR PRODUCTS INTO
THEIR INFRASTRUCTURE
We anticipate that a significant portion of our future revenues will be
attributable to sales to NSPs of our DSL, SLM and other broadband products. Our
future performance will therefore be substantially dependent on incorporation of
our products by NSPs into their service offerings to subscribers. The failure of
our products to become an accepted part of NSPs' service offerings or a slower
than expected increase in the volume of sales by us of SLM products could
materially and adversely affect our revenues. Our success in the NSP market will
depend on numerous factors, many of which are outside our control. Some of these
factors include:
- NSP and subscriber acceptance of and satisfaction with our products;
- the realization of operating cost efficiencies for NSPs when SLM products
are deployed and our ability to demonstrate these operational benefits;
- subscriber demand for our products and support for our products within
the NSPs' sales force;
- our successful development of systems and products that address the
requirements for products deployed as part of an NSP's infrastructure;
- the timing and successful completion of integration development work by
NSPs to incorporate our SLM functionality into their operational support
system; and
- the absence of new technologies that make our products and systems
obsolete before they can achieve broad acceptance.
VARIOUS FACTORS COULD CAUSE OUR RESULTS TO FLUCTUATE
Paradyne's quarterly and annual results of operations have fluctuated in
the past and are likely to fluctuate significantly in the future due to a
variety of factors, many of which are outside of our control. Fluctuations in
our results could cause our stock price to decline substantially. Some of these
factors that might affect our results of operations include:
- - The timing and amount of, or cancellation or rescheduling of, orders for our
products and services to existing and new customers. This may adversely affect
our operating results in any particular quarter if we were unable to recognize
revenue for a particular sale in the quarter in which such sale was expected.
- - Our ability to develop, introduce, ship and support new products and product
enhancements and manage product transitions on a timely basis. Our failure to
accomplish these tasks could render our products obsolete or non-competitive,
particularly since technology in our industry changes often. As a result,
customers may decide to purchase competitive products, which could cause our
revenues to suffer.
- - Announcements, new product introductions and reductions in price of products
offered by our competitors. These events could also cause our customers to
decide to purchase the products of our competitors which would adversely
affect our revenues and, therefore, our results of operations. Also, we may
feel it necessary to reduce prices of our products, which could impact
operating margins and net income.
- - Our ability to achieve cost reductions. As with all companies, we constantly
strive to improve our margins through reductions in our cost of sales. Failure
to reduce our costs could reduce our margins which in turn could adversely
affect our ability to operate profitably.
5
<PAGE> 10
- - Our ability to obtain sufficient supplies of sole or limited source components
for our products. If we cannot obtain components for our products, we may be
unable to produce sufficient quantities of our products to meet demand. As a
result, our revenues could be adversely affected. This is particularly true
with respect to obtaining sole or limited source components because
replacements sources, if any, will take time to identify.
- - The timing and rate of deployment of our products by NSPs. The timing and rate
of deployment by NSPs can affect sales of products to these NSPs and, in turn,
our operating results.
- - Preferential pricing arrangements. We have preferential pricing arrangements
with some of our customers. In our effort to win new business we may negotiate
preferential pricing arrangements in the future with other customers. While
these arrangements are intended to provide greater revenue, they will have a
negative impact on our margins. Furthermore, because our strategy relies on
entering into these arrangements in the future, if we fail to do so, our
results could be below expectations.
- - Our ability to attain and maintain production volumes and quality levels for
our products. Many factors could affect our ability to maintain production
volumes and quality levels. They include an inability to obtain raw materials
or components, labor shortages, and the maintenance of adequate facilities for
production. If we fail to maintain production volumes or quality level we may
be unable to produce sufficient quantities of our products to meet demand,
which would adversely affect our revenues.
- - The mix of products sold and the mix of distribution channels through which
they are sold. The mix of products sold can adversely affect our results.
Margins vary within our newer and older products. If we fail to successfully
sell our higher margin products, our gross margins may be lower than expected.
In addition, some distribution channels have higher costs associated with
sales. As a result, the mix of distribution channels may adversely affect
operating income.
- - Fluctuations in demand for our products and services, especially by our major
customers. Because we are highly dependent on sales to a relatively small
numbers of customers, changes in demand from those customers can have a
disproportionately large effect on our revenues and results of operations. For
example, direct and indirect product sales to, and services performed for,
Lucent constituted approximately 47% of our total revenues in 1998 and 30% in
the first quarter of 1999. If Lucent's demand for our products in 1999 or in
future years were to decline, our revenues would suffer.
- - Expiration of favorable supply or purchase contracts. For example, we
currently have a supply agreement with Lucent under which we are the exclusive
supplier through June 2001 of Lucent's requirements for stand alone network
access products for resale. As a result, Lucent must purchase these products
from us. Direct and indirect sales of these products to Lucent accounted for
approximately 46% of our total revenues in 1998 and 29% in the first quarter
of 1999. After the expiration of the agreement, we may be unable to negotiate
a new supply agreement. If we are unable to negotiate a new supply agreement,
Lucent could enter into a supply agreement with another party or purchase
these products from multiple providers. In either case, our sales of these
products would decline substantially.
- - Costs relating to possible acquisitions and integration of technologies or
businesses. The costs to acquire technologies and businesses is substantial.
In addition to the direct costs, there are significant indirect costs related
to integration of personnel and technologies and potential product redesign.
These costs may decrease operating income or increase operating loss if they
are not offset by comparable increases in revenue.
In addition conditions in the telecommunications market, including
consolidation in the industry, and economic conditions generally could adversely
affect both our revenues and costs. Due to these and other factors,
period-to-period comparisons should not be relied upon as indications of future
performance. It is possible that in some future periods, our operating results
and/or our growth rate will be below what public market analysts and investors
expect.
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WE MAY NOT ACHIEVE REVENUE GROWTH OR PROFITABILITY
We cannot be certain that we will continue to achieve revenue growth or
realize sufficient revenues to achieve profitability. Excluding a one-time gain
in connection with a contract renegotiation with Lucent in 1997 and the related
tax effect, we had an accumulated net deficit of approximately $37.2 million
during the period from August 1, 1996 through December 31, 1998. We have not
been profitable in any fiscal year of operations except in 1997 when we were
profitable as a result of the non-recurring gain in connection with the
renegotiation of a contract with Lucent. We anticipate that we will continue to
incur significant product development and selling, general and administrative
expenses and, as a result, we will need to generate higher revenues to achieve
and sustain profitability on an annual basis.
OUR DEPENDENCE ON ONLY A FEW MAJOR CUSTOMERS FOR A SUBSTANTIAL PORTION OF OUR
REVENUES EXPOSES US TO FINANCIAL RISKS
We depend on a small number of customers for a substantial portion of our
revenues. As a result, a loss or a significant reduction or delay in sales to
any of our major customers could materially and adversely affect our revenues.
Direct product sales to Lucent and services performed for Lucent in 1998
accounted for approximately 35% of our total revenues. Sales to Tech Data
Corporation, a distributor, in 1998 accounted for approximately 15% of our total
revenues. We estimate that approximately 70% of our sales to Tech Data
represented products that were resold to Lucent. Collectively, we estimate that
direct and indirect sales to, and services performed for, Lucent accounted for
approximately 47% of our total revenues in 1998 and 30% in the first quarter of
1999. Sales to SITA, an NSP, in 1998 accounted for approximately 9% of our total
revenues in 1998 and 8% in the first quarter of 1999, and sales to Rhythms, also
an NSP, accounted for approximately 6% of our total revenues in 1998 and 24% in
the first quarter of 1999. Unless and until we diversify and expand our customer
base, our future success will significantly depend upon certain factors which
are not within our control, including:
- the timing and size of future purchase orders, if any, from our larger
customers;
- the product requirements of our customers;
- the financial and operational success of our customers; and
- the success of our customers' services deployed using our products.
Diversification and expansion of our customer base is particularly critical
because of the highly competitive nature of our business. Our contracts are
generally subject to annual renewal with the exception of our contracts with
Lucent and several other customers, which have two to five year terms, and our
customers generally do not have any obligation to purchase products solely from
Paradyne. Under a supply agreement between Lucent and Paradyne, Paradyne is the
exclusive supplier of Lucent's requirements for stand alone network access
products, such as our FrameSaver products, for resale through June 2001.
WE COMPETE IN HIGHLY COMPETITIVE MARKETS AND COMPETITION COULD HARM OUR ABILITY
TO SELL PRODUCTS AND SERVICES
The telecommunications market is highly competitive. We compete directly
with other providers of broadband and narrowband access equipment. If we are
unable to compete effectively in the market for our products or services, our
revenue and future profitability could be materially and adversely affected. We
believe that competition may increase substantially as the introduction of new
technologies, deployment of broadband networks and potential regulatory changes
create new opportunities for established and emerging companies in the industry.
We expect that competition for products that address the broadband access market
will grow as more established and new companies focus on this market.
Many of our current and potential competitors are larger than we are and
have significantly greater financial, sales and marketing, technical,
manufacturing and other resources and more established channels of distribution.
As a result, these competitors may be able to respond more rapidly to new or
emerging technologies and changes in customer requirements, or to devote greater
resources to the development,
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promotion and sale of their products. Our competitors may enter our existing or
future markets with solutions that may be less costly, provide higher
performance or additional features or be introduced earlier than our solutions.
Our markets are characterized by increasing consolidation both within the
data communications sector and by companies combining or acquiring data
communications products and technology for delivering voice-related services, as
exemplified by the recently announced acquisitions of Ascend by Lucent, Diamond
Lane by Nokia and Xylan by Alcatel. We cannot be sure of the impact of any of
these acquisitions on the competitive environment for our products. Increased
competition and consolidation could result in price reductions and a decrease in
our market share.
OUR DEPENDENCE ON DEVELOPMENT RELATIONSHIPS COULD THREATEN OUR ABILITY TO SELL
PRODUCTS
Our success is dependent upon our continued relationship with certain
companies, including AG Communications Systems, Ascend, GlobeSpan, NetScout and
Xylan. If any of these companies breaches or terminates its agreement or fails
to perform its obligations under its agreement, we might not be able to sustain
or grow our business. In particular, if any of these companies, other current
corporate partners or future corporate partners discontinue their support of
products that we have developed in cooperation with them, fail to continue to
develop product enhancements required to meet customer demand, fail to
appropriately address performance issues related to products that we have
developed in cooperation with them, face claims of infringement of third party
intellectual property rights with respect to the technology included in products
that we have developed in cooperation with them or fail to continue to support
joint marketing programs, our ability to sell products that we have developed in
cooperation with them would be hampered. Additionally, in the event that any of
our significant relationships are terminated, we may not be able to replace them
in a timely manner, if at all.
For a further discussion of our corporate development relationships with AG
Communications Systems, Ascend, GlobeSpan, NetScout and Xylan please refer to
"Business -- Corporate Development Relationships."
OUR ABILITY TO SUSTAIN OR GROW OUR BUSINESS MIGHT BE HARMED IF WE LOSE SALES OF
ACCESS PRODUCTS TO LUCENT
We have a relationship with Premisys Communications through which we have
exclusive distribution rights through April 2005 for Premisys' IMACS system,
which we market to Lucent and AT&T under the name Acculink Access Controller. We
have also entered into a supply and exclusivity agreement with Lucent under
which we are the exclusive supplier of Lucent's requirements for various access
products, such as the Acculink Access Controller, for resale through June 2001.
Sales of Acculink Access Controller accounted for greater than 10% of our total
revenues during each of 1997 and 1998. Our revenues would be adversely affected
if Premisys fails to meet its obligations under the agreement or if Lucent or
AT&T were to substantially reduce or discontinue their orders of Acculink Access
Controller.
For a further discussion of our marketing and distribution relationship
with Premisys please refer to "Business -- Sales, Marketing and Distribution."
WE DEPEND ON SOLE AND SINGLE SOURCE SUPPLIERS WHICH EXPOSES US TO POTENTIAL
SUPPLY INTERRUPTION
We currently purchase a number of important parts, such as framers,
semiconductors and embedded communications processors, from sole source vendors
for which alternative sources are not currently available. Delays or
interruptions in the supply of these components result in delays or reductions
in product shipments. The purchase of these components from outside suppliers on
a sole source basis subjects us to risks, including the continued availability
of supplies, price increases and potential quality assurance problems. We
currently purchase key components for which there are currently no immediate
substitutes available from approximately 45 vendors. All of these components are
critical to the production of our products. While alternative suppliers may be
available to us, we must first identify these suppliers and qualify them. We
cannot be certain that any such suppliers will meet our required qualifications
or that we will be able to identify alternative suppliers in a timely fashion,
if at all. We may not be able to obtain sufficient
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quantities of these components on the same or substantially the same terms.
Consolidations involving suppliers could further reduce the number of
alternatives for us and affect the cost of such supplies. An increase in the
cost of such supplies could make our products less competitive with products
which do not incorporate such components. Lower margins or less competitive
product pricing could materially and adversely affect our business, financial
condition and results of operation.
OUR SALES CYCLE IS TYPICALLY LONG AND UNPREDICTABLE
Our business is subject to lengthy sales cycles. As a result, we may not
recognize revenues from the sale of our products for long periods of time.
Delays in product testing or approval, or cancellations of orders by customers,
especially our NSP customers, could materially and adversely affect our
revenues. On average, our sales cycle ranges from six to nine months. Sales of
our products require a substantial commitment of capital and time from our
customers, many of whom have lengthy internal procedures for approving large
capital expenditures and lengthy testing and decision-making processes. Before
our NSP customers purchase products from us, they must first make a decision to
standardize their service on a particular product, which involves extensive
testing. Our sales cycle may be slowed further, or affected by, budgetary
constraints and purchasing requirements of our customers, all of which are
beyond our control. Moreover, sales of our products often require significant
training of both our customers and end users before the decision to purchase. As
a result, we may expend significant resources pursuing potential sales
opportunities that will not be consummated.
BECAUSE OF OUR LONG PRODUCT DEVELOPMENT PROCESS, WE INCUR SUBSTANTIAL EXPENSES
BEFORE WE EARN ASSOCIATED REVENUES
In order to remain competitive, we invest significant resources toward
research and development of our current and potential products. Development
costs and expenses are incurred before we generate any revenues from sales of
products resulting from these efforts. Our current or future customer base may
not purchase any products resulting from our current or future development
efforts.
A FAILURE BY US TO PROTECT OUR TECHNOLOGY MAY ADVERSELY AFFECT OUR ABILITY TO
COMPETE
Our success and ability to compete is substantially dependent upon our
technology. A failure to protect our technology could result in competitors
offering similar products potentially resulting in a loss of competitive
advantage and decreased revenues. We rely on a combination of patent, trademark,
copyright and trade secret laws and non-disclosure agreements to protect such
technology. Currently, we hold over 155 United States patents and have over 100
United States patent applications pending. In addition, we hold certain
corresponding foreign patents and have certain corresponding foreign patent
applications pending. However, we cannot be certain that patents will be issued
with respect to any of our pending or future patent applications. In addition,
we do not know whether any of our issued patents will be upheld as valid or that
they will prevent the development of competitive products.
We seek to protect our intellectual property rights by limiting access to
the distribution of our software, documentation and other proprietary
information. If any third parties infringe our proprietary rights, such
infringement could materially and adversely affect our competitive positions. As
with our issued patents, we cannot be certain that the steps we have taken to
protect our intellectual property will adequately prevent the misappropriation
of any of our technology. Our competitors may independently develop technologies
that are substantially equivalent or superior to our technologies. In addition,
the laws of certain foreign countries do not protect our proprietary rights to
the same extent as do the laws of the United States. Third parties may attempt
to copy or reverse engineer aspects of our products or to obtain and use
information that we regard as proprietary. Accordingly, we may not be able to
protect our proprietary rights against unauthorized third-party copying or use.
We are also subject to the risk of adverse claims and litigation alleging
infringement of the intellectual property rights of others. These claims may
require us to enter into license arrangements or may result in protracted and
costly litigation, regardless of the merits of such claims. We may not be able
to obtain necessary licenses on commercially reasonable terms, if at all. From
time to time, we receive and have
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received letters from others requesting licenses or indicating that our products
may require a license. These letters are not uncommon in the industry, and these
letters are dealt with according to normal business practices. In 1999, we
received a letter from a third party patent owner alleging infringement by us of
patents related to product components and manufacturing processes and equipment.
The patents referenced in this letter are also the basis for several
infringement lawsuits commenced by the patent owner to which we are not a party.
No claim has been asserted beyond this letter, but we cannot assure you that the
third party will not commence an infringement action against us. We are in the
process of investigating the allegations. If an infringement claim is brought
against us, we cannot assure you that we would prevail and any adverse outcome
could require us to pay royalties to the third party patent owner.
IF WE ARE UNABLE TO ATTRACT AND RETAIN KEY PERSONNEL AND A SKILLED WORKFORCE, WE
MAY NOT BE ABLE TO SUSTAIN OR GROW OUR BUSINESS
Our success depends to a significant degree upon the continued
contributions of the principal members of our sales, engineering and management
personnel, many of whom would be difficult to replace. The loss of such
personnel could materially and adversely affect our business, financial
condition and results of operations. Specifically, we believe that our future
success is highly dependent on our senior management, and in particular on
Andrew May, President and Chief Executive Officer. Except for agreements with
Messrs. May, Murphy and Slattery, we do not have employment contracts with our
executive officers. In any event, employment contracts would not prevent key
personnel from terminating their employment with us.
We believe that our future success will also depend highly upon our ability
to attract and retain highly-skilled customer support and product development
personnel. The market for qualified personnel in the telecommunications industry
is highly competitive, and we frequently experience difficulty in recruiting
qualified personnel. Recruiting qualified personnel is an intensely competitive
and time-consuming process.
OUR RELIANCE ON INTERNATIONAL SALES MAY MAKE US SUSCEPTIBLE TO GLOBAL ECONOMIC
FACTORS, FOREIGN TAX LAW ISSUES AND CURRENCY FLUCTUATIONS
We currently have 11 sales offices and subsidiaries in North America,
Europe and Asia through which we market and sell our products. International
sales accounted for approximately 20% of our total revenues in 1998. Our
international operations subject us to risks to which we would not otherwise be
exposed. These risks may cause our results of operations to fluctuate. For
example, sales to customers outside of the United States accounted for
approximately 30% of revenues in 1997 and 20% of revenues in 1998, respectively.
This decrease was primarily due to the decline in sales of our older narrowband
products and economic instability in Asia. Our international operations subject
us to risks to which we would not otherwise be exposed, such as:
- impact of recessions in economies outside of the United States;
- currency exchange rate fluctuations;
- political and economic instability;
- policy, legal, regulatory or other changes affecting the
telecommunications and data communications markets;
- uncertain intellectual property rights protection;
- potential adverse tax consequences;
- change in tariffs; and
- difficulties in accounts receivable collection.
OUR FAILURE TO COMPLY WITH REGULATIONS COULD AFFECT OUR PRODUCT OFFERINGS
We are subject to a significant number of communications regulations and
standards, some of which are evolving as new technologies are deployed and due
to ongoing judicial and administrative proceedings. New
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regulations or new interpretations of existing laws or regulations, or
compliance with additional existing regulations due to changes in the nature of
our products could result in significant additional cost to Paradyne. Moreover,
failure of our products to comply, or delays in compliance, with the various
existing and evolving industry regulations and standards could delay the
introduction of our products. Our products may be required to comply with
various regulations, including those promulgated by the Federal Communications
Commission ("FCC"), state public utilities commissions and various foreign
governments. Our products must comply with the Communications Act of 1934 and
the Telecommunication Act of 1996. In the United States, in addition to
complying with FCC regulations, our products are required to meet certain safety
requirements. For example, NSPs may require that our products that are located
in their facilities be network equipment building standard certified before they
purchase the products from us. Outside of the United States, our products are
subject to the regulatory requirements of each country in which the products are
manufactured or sold. These requirements vary widely, and we may be unable to
obtain on a timely basis, or if at all, necessary approvals for the manufacture,
marketing and sale of our products.
Enactment by federal, state or foreign governments of new laws or
regulations, changes in the interpretation of existing laws or regulations or a
reversal of the trend toward deregulation in the telecommunication industry
could materially and adversely affect our customers, and thereby materially and
adversely affect our business, financial condition and results of operations.
For a further discussion of the impact of governmental regulations on the
telecommunications industry, please refer to "Business -- Government
Regulations."
CHANGES TO REGULATIONS AFFECTING THE TELECOMMUNICATIONS INDUSTRY COULD REDUCE
DEMAND FOR OUR PRODUCTS
If our NSP customers are required to comply with new laws, new regulations
or new interpretations of existing laws or regulations, or if they are required
to comply with additional existing regulations due to changes in the nature of
their services, those changes could materially and adversely affect the market
for our products. A large percentage of our customers are NSPs whose voice
services, and many of their other network services, must comply with the
Communications Act of 1934, the Telecommunications Act of 1996 and regulations
prescribed by the FCC. Furthermore, most of our NSP customers' voice services
are subject to regulation by state public utilities commissions. Some of our NSP
customers are subject to foreign government regulation. Many of these federal,
state and foreign regulations continue to evolve due to ongoing judicial and
administrative proceedings, particularly those federal regulations designed to
define rights and obligations under the Telecommunications Act of 1996. For
example, the FCC is considering changes to its regulations, including those
relating to the access to copper telephone lines, the ability of customers to
install equipment at an NSP's central location and the compatibility
requirements placed upon equipment which may be run on copper telephone lines.
Furthermore, the United States Congress is considering a variety of amendments
to the Communications Act of 1934 and the Telecommunications Act of 1996.
COMPLIANCE WITH EVOLVING INDUSTRY STANDARDS COULD ADVERSELY AFFECT OUR PRODUCT
OFFERINGS
Many of our products must comply with equipment standards adopted by
national and international standards bodies. If we are required, or deem it
otherwise necessary or advisable, to comply with new standards or with
additional existing standards due to changes in standards, we may have to modify
our current or future products. The costs of any modification could materially
and adversely affect our business, financial condition and results of
operations. Compliance with these standards is important because it often
enhances the marketability of our products. Many of those standards are
influenced by industry committees that develop draft standards and technical
reports. These industry committees often include us, our customers, and our
competitors and their customers.
WE RELY HEAVILY ON DISTRIBUTORS AND RESELLERS
We estimate that in 1998 over 70% of our sales were made through
distributors and resellers. We often rely on distributors and resellers to
provide installation, training and customer support to the ultimate end users of
our products. As a result, our success depends on the continued sales and
customer support efforts of
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our network of distributors and resellers. Any reduction, delay or loss of
orders from our significant distributors or resellers could materially and
adversely affect our revenues.
OUR ABILITY TO SUSTAIN OR GROW OUR BUSINESS MAY BE HARMED IF WE ARE UNABLE TO
PROVIDE ADEQUATE CUSTOMER SUPPORT
Our ability to continue to grow our company and to retain current and
future customers depends in part upon the quality of our customer support
operations. A failure to offer adequate customer support could materially and
adversely affect our reputation or cause demand for our products to decline. Our
customers generally require significant support and training prior to the
installation and deployment of our products. Providing adequate levels of
support to our customers, requires significant expenditures of resources and
capital. As the market for high speed access devices grows and as the technology
for these devices continues to evolve, we will need to augment and improve upon
our customer support operations.
WE MAY NOT BE ABLE TO FINANCE OUR GROWTH AND CAPITAL REQUIREMENTS
Substantial working capital is required in order to fund and continue to
build our business. If we fail to do so, we will not be able to remain
competitive or continue to meet the increasing demands for our products. We
expect to use the net proceeds of this offering to repay indebtedness and for
general corporate purposes, including working capital and capital expenditures.
We may also need to spend significant amounts of cash to fund operating losses
and increases in expenses, take advantage of opportunities or respond to
developments or competitive pressures. We believe that the proceeds of this
offering, together with our existing capital resources and our revolving line of
credit facility with BankAmerica NT&SA, will allow us to meet our capital
requirements for at least the next 18 months. However, our capital requirements
depend on several factors, including the rate of market acceptance of our
products, the ability to expand our client base, the growth of our sales and
marketing efforts and other factors. If capital requirements vary materially
from those currently planned, we may require additional financing sooner than
anticipated. We cannot be certain that additional financing will be available to
us when needed or that such financing can be obtained on terms favorable to us.
If adequate funds are not available or are not available on acceptable terms, we
may be unable to develop or enhance our services, take advantage of future
opportunities or respond to competitive pressures.
WE RELY UPON DISTRIBUTIONS, DIVIDENDS AND LOANS FROM OUR SUBSIDIARIES IN ORDER
TO MEET OUR OBLIGATIONS AND COMMITMENTS
As a holding company, we have no operations of our own. If our subsidiaries
are unable to pay dividends or make loans or other distributions to us, we may
not be able to meet obligations and debts that we incur, and the market price of
our common stock could be adversely affected. In connection with a line of
credit facility, our operating subsidiary Paradyne Corporation and its Canadian
subsidiary are restricted from paying dividends and making loans and other
distributions. For a further description of these restrictions, please see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
THE YEAR 2000 PROBLEM MAY SEVERELY DISRUPT OUR BUSINESS, FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
As is true for most companies, the Year 2000 problem creates a risk for us.
Some computers, software and other equipment include programming code in which
calendar year data is abbreviated to only two digits (e.g., 99) rather than four
digits (e.g., 1999). As a result, these systems automatically assume that the
first two digits of a calendar year are "1" and "9." Therefore, time-sensitive
functions of these systems may misinterpret dates after January 1, 2000, to
refer to the twentieth century rather than the twenty-first century (i.e., "02"
could be interpreted as "1902" rather than "2002"). The problems associated with
this design decision are commonly referred to as the "Millennium Bug," "Year
2000 problem" or "Y2K problem." If
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systems do not correctly recognize date information when the year changes to
2000, there could be an adverse impact on our operations. The risk exists
primarily in three areas:
- systems we use to run our business;
- systems used by our service providers, distributors and suppliers; and
- the potential for failures of our products, particularly our central
office-based systems, due to Year 2000 problems associated with products
manufactured by other equipment vendors used in conjunction with our
products.
A disruption in the operations of parties with whom we interact could
materially and adversely affect our business, financial condition and results of
operations.
Substantial uncertainty remains in the software industry concerning the
potential effects associated with the Year 2000 problem. We have developed a
comprehensive multi-year plan to ensure that our internal computer software and
hardware systems will be Year 2000 compliant. While we believe that we have
implemented a comprehensive plan for addressing the Year 2000 problem and
anticipate completing our compliance activities in a timely manner, we cannot be
certain that these Year 2000 compliance efforts will be successful. Furthermore,
the financial impact of making the required systems changes cannot be known
precisely at this time.
We are currently developing contingency plans to be implemented as part of
our efforts to identify and correct Year 2000 problems affecting our internal
systems. We expect to complete these contingency plans by the end of the third
quarter of 1999. Depending on the systems affected, these plans could include
accelerated replacement of affected equipment or software, increased work hours
for our personnel or use of contract personnel to correct on an accelerated
schedule any Year 2000 problems which may arise, the provision of manual
workarounds for information systems, and other similar approaches. If we are
required to implement any of these contingency plans, such plans may materially
and adversely affect our business, financial condition and results of
operations. Additionally, we may not complete these contingency plans in a
timely manner, and failure to do so could materially and adversely affect our
business, financial condition and results of operations.
IF OUR PRODUCTS CONTAIN DEFECTS, WE MAY BE SUBJECT TO SIGNIFICANT LIABILITY
CLAIMS FROM OUR CUSTOMERS AND THE END-USERS OF OUR PRODUCTS AND INCUR
SIGNIFICANT UNEXPECTED EXPENSES AND LOST SALES
Our products are complex and, despite extensive testing, may therefore
contain undetected errors or failures. If this happens, we may experience delay
in or loss of market acceptance and sales, product returns, diversion of
research and development resources, injury to our reputation or increased
service and warranty costs. We also have exposure to significant liability
claims with respect to our customers because our products are designed to
provide critical communications services. Although we attempt to limit such
exposure through product liability insurance and through contractual limitations
in our customer agreements, such precautions may not cover all potential claims
resulting from a defect in one of our products.
MANAGEMENT AND OUR SINGLE LARGEST STOCKHOLDER MAY LIMIT YOUR ABILITY TO
INFLUENCE THE OUTCOME OF DIRECTOR ELECTIONS AND OTHER STOCKHOLDER MATTERS
Our executive officers, directors and principal stockholders and their
affiliates will beneficially own 24,961,062 shares or approximately 79.68% of
our outstanding shares of common stock (76.80% if the underwriters'
over-allotment option is exercised in full) after the offering. As a result,
these stockholders, if acting together, would be able effectively to control
substantially all matters requiring approval by our stockholders.
Entities associated with Texas Pacific Group will own approximately 57.23%
of Paradyne after the offering and will be able to exercise control over
Paradyne, subject to the fiduciary duties of its representatives on the board of
directors under Delaware law. The interests of Texas Pacific Group may not
always coincide with the interests of other stockholders. Texas Pacific Group,
through its representatives on
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the board of directors, could cause us to enter into transactions or agreements
which we would not otherwise consider absent Texas Pacific Group influence.
Texas Pacific Group also is currently the majority owner of GlobeSpan. See
"Certain Transactions."
OUR STOCK PRICE MAY BE VOLATILE AND YOU MAY NOT BE ABLE TO RESELL SHARES AT OR
ABOVE THE OFFERING PRICE
There has not been a public market for our common stock prior to this
offering, and a liquid trading market for our shares may not develop following
this offering. The initial price for the shares of our common stock to be sold
in the offering will be determined by negotiations between us and the
representatives of the underwriters and may not be indicative of prices that
will prevail in the trading market. The trading price of our common stock could
be subject to wide fluctuations in response to various factors, some of which
are beyond our control, such as:
- actual or anticipated variations in quarterly results of operations;
- changes in intellectual property rights of Paradyne or our competitors;
- announcements of technological innovations;
- the introduction of new products or changes in product pricing by
Paradyne or our competitors;
- changes in financial estimates by securities analysts;
- announcements of significant acquisitions, strategic partnerships, joint
ventures or capital commitments by us or our competitors; and
- additions or departures of key personnel.
A FAILURE TO MANAGE OUR GROWTH COULD ADVERSELY AFFECT OUR BUSINESS
We have experienced expansions and contractions of our operations in the
past. If we are unable to manage our growth effectively, our future
profitability could be adversely affected. We anticipate that expansion of our
operations will be required to address the potential growth in our client base
and the opportunities in the broadband access market. Our current expansion is
placing a significant strain on our managerial, operational and financial
resources. We may not have adequate resources to support our future operations.
WE MAY ENGAGE IN ACQUISITIONS, AND WE MAY BE UNABLE TO SUCCESSFULLY INTEGRATE
ANY NEW OPERATIONS, TECHNOLOGIES, PRODUCTS OR PERSONNEL
Recently, the telecommunications industry has experienced substantial
mergers and acquisitions activity. We have engaged in discussions in the past
with third parties concerning potential acquisitions of product lines,
technologies and businesses. However, we currently have no commitments or
agreements with respect to any such acquisition. In the event that such an
acquisition does occur, because of the small size of our management team, we may
be particularly susceptible to risks associated with the assimilation of
operations, technologies, products and personnel and the diversion of
management's attention from other business concerns.
SHOULD WE SELL A SUBSTANTIAL NUMBER OF SHARES OF OUR COMMON STOCK IN THE PUBLIC
MARKET,
THE PRICE OF OUR COMMON STOCK COULD FALL
Sales of a substantial number of shares of our common stock in the public
market after this offering could cause the market price of our common stock to
decline and could impair our ability to raise additional capital through the
sale of equity securities. Upon completion of this offering, we will have
approximately 30,312,508 shares of common stock outstanding, of which
approximately 6,000,000 shares offered hereby (approximately 6,900,000 shares if
the underwriters' over-allotment option is exercised in full) will be freely
transferable without restriction or registration under the Securities Act,
unless such shares are held by our affiliates, as that term is defined in Rule
144 under the Securities Act. The remaining 24,312,508 shares of common stock
held by existing stockholders as of May 15, 1999 will be "restricted securities"
as that term is defined in Rule 144 (the "Restricted Securities"). Shares
totaling 24,230,906 will be subject to "lock-up" agreements on the effective
date of this offering. Upon expiration of the lock-up agreements 180 days after
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the effective date of this offering, all of these shares will become eligible
for sale, subject in most cases to the limitations of Rule 144 and Rule 701.
Restricted shares held by non-affiliates will be eligible for sale under Rule
144(k) without volume and manner of sale restrictions. In addition, we intend to
file a registration statement on Form S-8 with the Securities and Exchange
Commission covering the 7,250,000 shares of common stock reserved for issuance
under our 1996 Equity Incentive Plan, 1999 Employee Stock Purchase Plan and 1999
Non-Employee Directors' Stock Option Plan. On the date 180 days after the
effective date of this offering, at least 2,157,445 shares will be subject to
immediately exercisable options (based on options outstanding on May 15, 1999).
Sales of a large number of any of these shares could have an adverse effect on
the market price for our common stock.
OUR CORPORATE CHARTER AND BYLAWS MAY DISCOURAGE TAKE-OVER ATTEMPTS AND DEPRESS
THE MARKET PRICE OF OUR STOCK
Provisions in our restated certificate of incorporation and bylaws may have
the effect of delaying or preventing a change of control or changes in our
management. These provisions include:
- the right of the board of directors to elect a director to fill a vacancy
created by the expansion of the board of directors;
- the ability of the board of directors to alter our bylaws without
obtaining stockholder approval;
- the requirement that at least 50% of the outstanding shares of common
stock are needed to call a special meeting of stockholders;
- the division of the board of directors into three classes, with each
class serving staggered three-year terms; and
- the requirement that all actions by stockholders must be effected at a
duly called meeting of the stockholders and may not be effected by a
consent in writing.
These provisions could discourage take-over attempts and could adversely
affect the market price of our common stock. In addition, these provisions may
limit the ability of stockholders to remove our current management. In addition,
our board of directors can issue up to 5,000,000 shares of preferred stock
without the approval of the holders of common stock. Any preferred stock may
have rights senior to the common stock. The issuance of preferred stock could
adversely affect the voting power of holders of common stock and reduce the
likelihood that such holders will receive dividend payments and payments upon
liquidation. Such issuance could have the effect of decreasing the market price
of the common stock. The issuance of preferred stock could also have the effect
of delaying, deterring or preventing a change in control of Paradyne. See
"Description of Capital Stock" for a further discussion of these provisions.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. All statements
regarding future events, our future financial performance and operating results,
our business strategy and our financing plans are forward-looking statements. In
some cases, you can identify forward-looking statements by terminology, such as
"may," "will," "should," "expect," "intend," "plan," "anticipate," "believe,"
"estimate," "predict," "potential" or "continue," the negative of such terms or
other comparable terminology. These statements are only predictions. Known and
unknown risks, uncertainties and other factors could cause actual results to
differ materially from those contemplated by the statements. In evaluating these
statements, you should specifically consider various factors, including the
risks outlined under "Risk Factors." These factors may cause our actual results
to differ materially from any forward-looking statement.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. We are under no duty to update any of the
forward-looking statements after the date of this prospectus to conform such
statements to actual results or to changes in our expectations.
15
<PAGE> 20
USE OF PROCEEDS
We estimate that we will receive net proceeds of approximately $47,360,000
from the sale of 4,000,000 shares of our common stock in this offering, assuming
an initial public offering price of $13.00 and after deducting estimated
underwriting discounts and commissions and offering expenses. We will not
receive any proceeds from the shares sold by the selling stockholder in this
offering.
We intend to use the net proceeds of this offering to repay all outstanding
indebtedness under our $35,000,000 revolving line of credit facility with Bank
of America NT&SA. Our credit facility expires on January 31, 2000 and carries a
variable interest rate which was 7.75% as of March 31, 1999. As of March 31,
1999, the outstanding balance under the credit facility was approximately $10.4
million. We intend to use the remainder of the net proceeds for general
corporate purposes, including working capital and capital expenditures. The
amounts actually expended for working capital purposes may vary significantly
and will depend on a number of factors, including the amount of our future
revenues and the other factors described under "Risk Factors." Accordingly, we
will retain broad discretion in the allocation of the net proceeds of this
offering. Additionally, we may use a portion of the net proceeds to pursue
possible acquisitions of businesses, technologies or products complementary to
our business. We are not currently evaluating any acquisition opportunities and
we cannot assure you that we will identify suitable acquisition candidates or
that we will consummate any acquisitions. Pending our use of the net proceeds,
we intend to invest the funds in short term, interest-bearing, investment-grade
securities. Another primary purpose of this offering is to create a public
market for our common stock and facilitate our future access to public capital
markets.
DIVIDEND POLICY
We currently anticipate that we will retain all of our future earnings for
use in the operation and expansion of our business and do not anticipate paying
cash dividends in the foreseeable future. Our current financing arrangements
place certain restrictions on the payment of dividends.
COMPANY INFORMATION
We are a Delaware corporation. Our principal executive offices are located
at 8545 126th Avenue North, Largo, Florida 33773, and our telephone number is
(727) 530-2000. Our fiscal year ends on December 31. We maintain a worldwide web
site at http://www.paradyne.com. The reference to our worldwide web address does
not constitute incorporation by reference into this prospectus of the
information contained at that site. Our logo and certain titles and logos of our
publications and products mentioned in this prospectus are our service marks and
trademarks. All other brand names or trademarks appearing in this prospectus are
the property of their respective holders.
16
<PAGE> 21
CAPITALIZATION
The following table sets forth our total capitalization as of March 31,
1999:
- On an actual basis; and
- On an as adjusted basis to reflect the sale of 4,000,000 shares of common
stock by Paradyne in this offering at an assumed initial public offering
price of $13.00 per share and the application of the net proceeds in the
manner described in "Use of Proceeds."
Please read the following information in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our consolidated financial statements and the notes thereto beginning on page
F-1 of this prospectus. The following information regarding shares outstanding
is as of March 31, 1999. It excludes 7,250,000 shares of common stock reserved
for issuance under our stock plans, of which 3,469,608 shares were subject to
outstanding options as of March 31, 1999. Options to purchase 3,621,948 shares
of common stock were outstanding as of May 15, 1999. See "Management -- 1996
Equity Incentive Plan."
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999
----------------------
ACTUAL AS ADJUSTED
(IN THOUSANDS)
<S> <C> <C>
Current portion of debt..................................... $10,850 $ 411
======= =======
Long-term debt.............................................. $ 378 $ 378
Stockholders' equity:
Preferred stock, par value $0.001; no shares authorized,
actual; 5,000,000 shares authorized, as adjusted; no
shares outstanding, actual or as adjusted.............. -- --
Common stock, par value $0.001; 60,000,000 shares
authorized;
26,258,232 shares issued and outstanding, actual;
30,258,232 shares outstanding, as adjusted............. 26 30
Additional paid-in capital................................ 24,368 71,724
Retained earnings......................................... 9,007 9,007
Notes receivable for common stock......................... (1,089) (1,089)
Cumulative translation adjustment......................... (170) (170)
------- -------
Total stockholders' equity........................ 32,142 79,502
------- -------
Total capitalization.............................. $32,520 $79,880
======= =======
</TABLE>
17
<PAGE> 22
DILUTION
Our net tangible book value as of March 31, 1999 was approximately $31.5
million, or approximately $1.20 per share. This is calculated as our total
tangible assets less total liabilities, divided by the number of shares
outstanding as of March 31, 1999. "Adjusted net tangible book value" per share
represents our net tangible book value after adjusting for the net proceeds from
the sale of 4,000,000 shares of common stock offered hereby at an assumed
initial public offering price of $13.00 per share. The sale of shares of common
stock in this offering and the application of the net proceeds therefrom will
result in an immediate increase in net tangible book value of $47.4 million or
$1.41 per share to existing stockholders and an immediate dilution of $10.39 per
share to investors purchasing shares of common stock in this offering. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $13.00
Net tangible book value per share as of March 31, 1999.... $ 1.20
Increase attributable to new investors.................... 1.41
------
Adjusted net tangible book value as of March 31, 1999....... 2.61
------
Dilution to new investors................................... $10.39
======
</TABLE>
The following table summarizes, on an as adjusted basis for the offering,
as of March 31, 1999, the number of shares of common stock purchased from
Paradyne, the total consideration paid to Paradyne and the average price per
share paid to Paradyne by existing stockholders and by the investors purchasing
shares of common stock in this offering, before deducting underwriting discounts
and commissions and estimated offering expense payable by Paradyne:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- --------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
<S> <C> <C> <C> <C> <C>
Existing stockholders................. 26,258,232 87% $24,394,000 32% $0.93
New stockholders...................... 4,000,000 13 52,000,000 68 13.00
---------- --- ----------- ---
Total....................... 30,258,232 100% $76,394,000 100% 2.52
========== === =========== ===
</TABLE>
In the event that we issue additional shares of common stock in the future,
purchasers of common stock in this offering may experience further dilution.
The foregoing discussion and tables assume no exercise of any stock options
at a weighted average exercise price of $3.35 per share as of March 31, 1999. To
the extent these options are exercised, new investors will experience further
dilution. See "Management -- 1996 Equity Incentive Plan."
18
<PAGE> 23
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data is derived from the
consolidated financial statements of Paradyne and from the books and records of
its predecessor business. This data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained elsewhere in this prospectus. The consolidated statement
of operations for the seven months ended July 31, 1996, the five months ending
December 31, 1996 and for the years ended December 31, 1997 and 1998 and the
consolidated balance sheet as of December 31, 1996, 1997 and 1998 are derived
from audited consolidated financial statements. The consolidated statements of
operations data for the three months ended March 31, 1998 and 1999 are derived
from the unaudited consolidated financial statements of Paradyne, which are
included elsewhere herein. The unaudited consolidated financial information
reflects all adjustments (consisting only of normal recurring adjustments) that
the Company considers necessary for a fair statement of the financial data for
such period. The results of operations of the three months ended March 31, 1999
are not necessarily indicative of results to be expected in any future period.
The selected consolidated financial data for the years ended December 31, 1994
and 1995 have not been audited. The predecessor business consists of certain
operating activities of AT&T Paradyne Corporation, a wholly-owned subsidiary of
Lucent Technologies Inc., on a carve-out basis, which were acquired by Paradyne
effective July 31, 1996. In the opinion of our management, the predecessor
business operated in a substantially different organizational structure and
manner than we do and, accordingly, we believe that a comparison of its
operating activities and results to ours is not meaningful. See Note 2 of the
Notes to the Consolidated Financial Statements of Paradyne for an explanation of
the method used to calculate earnings per share. Earnings per share data is not
presented for the predecessor business since the predecessor business did not
have its own capital structure. As a result, this information would not be
meaningful.
<TABLE>
<CAPTION>
PREDECESSOR BUSINESS PARADYNE
------------------------------------ ------------------------------------------------------------
THREE MONTHS
YEARS ENDED YEARS ENDED ENDED
DECEMBER 31, SEVEN MONTHS FIVE MONTHS DECEMBER 31, MARCH 31,
------------------- ENDED ENDED ------------------- ------------------
1994 1995 JULY 31, 1996 DECEMBER 31, 1996 1997 1998 1998 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS
DATA:
Revenues:
Sales...................... $277,935 $259,654 $128,099 $112,293 $177,850 $195,153 $ 42,655 $50,969
Service.................... 5,334 3,910 1,975 1,413 3,040 2,256 384 475
Royalties.................. 120 1,425 464 325 413 1,392 -- 2,618
-------- -------- -------- -------- -------- -------- -------- -------
Total revenues........ 283,389 264,989 130,538 114,031 181,303 198,801 43,039 54,062
Cost of sales:
Equipment.................. 148,711 137,459 73,208 59,634 90,334 107,921 21,922 29,810
Service.................... 4,862 3,980 1,803 744 1,154 620 125 156
-------- -------- -------- -------- -------- -------- -------- -------
Total cost of sales... 153,573 141,439 75,011 60,378 91,488 108,541 22,047 29,966
-------- -------- -------- -------- -------- -------- -------- -------
Gross margin............... 129,816 123,550 55,527 53,653 89,815 90,260 20,992 24,096
Operating expenses:
Research & development
(1)...................... 30,510 30,100 28,019 31,174 37,339 35,132 8,554 8,768
Selling, general &
administrative........... 119,761 115,155 42,928 29,409 66,278 55,969 13,410 13,863
Restructuring charges...... -- -- -- -- 1,778 984 -- --
-------- -------- -------- -------- -------- -------- -------- -------
Total operating
expenses............ 150,271 145,255 70,947 60,583 105,395 92,085 21,964 22,631
-------- -------- -------- -------- -------- -------- -------- -------
Operating loss.............. (20,455) (21,705) (15,420) (6,930) (15,580) (1,825) (972) 1,465
Other (income) expenses:
Interest................... 1,279 1,437 200 3,502 7,712 1,711 554 434
Lucent settlement gain..... -- -- -- -- (51,183) -- -- --
Other, net................. (1,439) (3,708) (2,074) 382 (1,753) 1,191 (33) (2,852)
-------- -------- -------- -------- -------- -------- -------- -------
Income (loss) before
provision for income tax... (20,295) (19,434) (13,546) (10,814) 29,644 (4,727) (1,493) 3,883
Provision (benefit) for
income tax............... 1,565 948 184 -- 8,302 (1,082) (342) 1,515
-------- -------- -------- -------- -------- -------- -------- -------
Net income (loss)........... $(21,860) $(20,382) $(13,730) $(10,814) $ 21,342 $ (3,645) $ (1,151) $ 2,368
======== ======== ======== ======== ======== ======== ======== =======
Income (loss) per common
share:
Basic...................... $ (0.42) $ 0.84 $ (0.14) $ (0.04) $ 0.09
Diluted.................... (0.42) 0.81 (0.14) (0.04) 0.09
Shares used in computing
income (loss) per share:
Basic...................... 25,500 25,552 25,623 25,602 25,893
Diluted.................... 25,500 26,291 25,623 25,602 27,227
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF AS OF AS OF AS OF
DECEMBER 31, JULY 31, DECEMBER 31, DECEMBER 31, MARCH 31,
------------------- -------- ------------ ------------------- ------------------
1994 1995 1996 1996 1997 1998 1998 1999
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.............. $ 5,715 $ 3,094 $ 5,717 $ 1,354 $ 3,240 $ 2,356 $ 169 $ 2,634
Working capital........................ 61,318 26,991 20,265 9,365 9,606 8,382 14,306 14,324
Total assets........................... 162,941 126,428 103,050 144,142 83,200 75,063 84,093 78,332
Total debt............................. 946 302 52 182 18,184 16,836 20,154 11,228
Total divisional equity (2)............ 118,585 80,332 73,327 -- -- -- -- --
Total stockholders' equity............. -- -- -- 5,979 31,402 27,339 30,308 32,142
</TABLE>
- ---------------
(1) Includes $13,114 of purchased research and development for the five months
ended December 31, 1996.
(2) Since the predecessor business was not a legal entity, there was no
stockholders' equity. "Divisional equity" represents the net assets of the
predecessor business.
19
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements and the related notes contained elsewhere in
this prospectus. The following discussion contains forward-looking statements
that involve risks and uncertainties. All statements regarding future events,
our future financial performance and operating results, our business strategy
and our financing plans are forward-looking statements. In many cases, you can
identify forward-looking statements by terminology, such as "may," "will,"
"should," "expects," "intends," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential" or "continue," or the negative of such terms and other
comparable terminology. These statements are only predictions. Known and unknown
risks, uncertainties and other factors could cause our actual results to differ
materially from those projected in the forward-looking statements. In evaluating
these statements, you should specifically consider various factors, including,
but not limited to, those set forth under "Risk Factors" and elsewhere in this
prospectus.
OVERVIEW
We are a leading developer, manufacturer and distributor of broadband and
narrowband network access products for network service providers ("NSPs") and
business customers. We offer solutions that enable business class, service level
managed, high-speed connectivity over the existing telephone network
infrastructure and provide for cost-effective access speeds of up to 45 Mbps.
Our equipment has been sold to over 50% of the Fortune 500 companies and in
businesses in over 125 countries. We estimate that sales to NSPs represented
approximately 40% of our total revenues in 1998. With our reputation and history
as a supplier of access solutions to a large customer base, we believe that we
are well-positioned to provide broadband access solutions to NSPs and business
customers as they upgrade their networks.
In July 1996, as part of a divestiture by Lucent, Paradyne Acquisition
Corp., a wholly-owned subsidiary of Communication Partners, L.P., a limited
partnership controlled by the Texas Pacific Group, acquired all of the
outstanding shares of common stock of Paradyne Corporation. In June 1999
Paradyne Acquisition Corp. changed its name to Paradyne Networks, Inc. Our
business was created when operations of Paradyne Corporation were either
retained by Lucent or assigned to newly created entities in connection with the
divestiture. The business that remained with Paradyne Corporation is referred to
as the predecessor business. The predecessor business derived most of its
revenues through July 1996 from the sale of narrowband products. The predecessor
business purchased products and services from preferred suppliers of AT&T and
Lucent and incurred intercompany charges for services provided by other AT&T
operations. Following the 1996 acquisition, we introduced a series of new
products, including many new broadband products, and discontinued sales of the
Tellabs 74X family of products which were transitioned to Lucent. In addition,
we lowered our expenses and restructured our operations. The cost of the
restructuring was accounted for as part of the purchase accounting associated
with the 1996 acquisition. We believe the revenues and expenses of the
predecessor business are not representative of our current business, financial
condition or results of operations. Accordingly, we believe that a
period-to-period comparison of operating results prior to 1997 is not
meaningful.
In 1997, Paradyne recorded a restructuring charge of approximately $1.8
million. Most of this charge related to staff reductions in our U.S. operations
in November 1997. Staff reductions were appropriate as a result of improved
operating efficiencies resulting from an investment in new systems and processes
as well as changing the composition of our workforce to update the availability
of strategic skills. During 1998, we also incurred expenses of $1.0 million,
related to a restructuring of our international operations.
Through 1997, our revenues were derived principally from the sale and
service of narrowband network access products and, to a much lesser extent,
technology licensing. In 1998, our broadband products, including our Hotwire and
FrameSaver products, which were introduced in 1997, comprised the majority of
our revenue, and we expect broadband products to represent an increasing portion
of future revenues. Royalty revenues consist principally of licensing of
technology, and service revenues are derived from repair of
20
<PAGE> 25
out-of-warranty products. We do not expect that either royalty or service
revenues will constitute a substantial portion of our revenues in future
periods.
We market and sell our products worldwide to NSPs and business customers
through a multi-tier distribution system that includes direct sales, strategic
partner sales, NSP sales and traditional distributor or value added reseller
sales. Direct sales to Lucent in 1998 accounted for approximately 35% of our
total revenues. Sales to Tech Data accounted for approximately 15% of our total
revenues. We estimate that approximately 70% of our sales to Tech Data
represented products that were resold to Lucent. Collectively, we estimate that
direct and indirect sales to Lucent accounted for approximately 47% of our total
revenues in 1998 and 30% in the first quarter of 1999. This percentage reduction
principally results from lower Lucent equipment sales of some of our older
products in the first quarter of 1999. A majority of our sales to Lucent
represented sales to Lucent as a reseller of our products. Sales to SITA in 1998
accounted for approximately 9% of our total revenues in 1998 and 8% in the first
quarter of 1999, and sales to Rhythms accounted for approximately 6% of our
total revenues in 1998 and 24% in the first quarter of 1999. The percentage
increase of our total revenues to Rhythms in the first quarter of 1999 is
primarily due to an increase in the deployment of their infrastructure using our
products. A loss or a significant reduction or delay in sales to any of our
major customers could materially and adversely affect our business, financial
condition and results of operations. See "Risk Factors -- We Depend on Major
Customers for a Substantial Portion of Our Revenues."
We generally recognize revenue from product sales upon shipment. No revenue
is recognized on products shipped on a trial basis. Estimated sales returns
based on historical experience by product are recorded at the time the product
revenue is recognized. Charges for warranty work are included in cost of
equipment sales. We believe that our accrued warranty reserve is sufficient to
meet our responsibilities for potential future warranty work on products sold.
Revenue from services, which consists mainly of repair of out-of-warranty
products, is recognized when the services are performed and all substantial
contractual obligations have been satisfied. License and royalty revenues are
recognized when we have completed delivery of technical specifications and
performed substantially all required services under the related agreement.
We expect our gross margin to be affected by many factors, including
competitive pricing pressures, fluctuations in manufacturing volumes, costs of
components and sub-assemblies, and the mix of products or system configurations
sold and timing of sales of follow-on line cards and endpoints for central
office systems. Follow-on line cards and endpoints are components that are sold
separately from central office systems and margins vary on these products.
Central office systems are often sold as stand-alone chassis with limited number
line cards. Customers purchase follow-on line cards and endpoints in order to
increase the capacity of their central office system. Additionally, our gross
margin may fluctuate due to changes in our mix of distribution channels. Sales
prices of some of our products have decreased recently as a result of increased
competition. Further price reductions may be necessary to remain competitive.
Although we have been able to offset most price declines with reductions in our
manufacturing costs, there can be no assurance that we will be able to offset
further price declines with cost reductions.
Research and development expenses primarily consist of: personnel costs
related to engineering and technical support; consultant and outside testing
services fees; research and development facilities expenses; equipment and
supplies expenses associated with enhancing existing products and the
development of new products; an allocation of information systems charges; and
software and software maintenance expenses. We expense all research and
development expenses as incurred. We believe that continued investment in
research and development is critical to attaining our strategic product and
cost-reduction objectives. We will, however, attempt to control and optimize our
research and development expenditures in order to meet our strategic goals while
at the same time allowing us to meet our profitability goals. Over time, as
revenues increase, research and development expenditures are expected to
increase as well.
We had twelve in-process research and development projects, consisting of
nine broadband and three narrowband projects that were acquired in connection
with the 1996 acquisition. These projects included three Acculink projects, one
Comsphere project, three Frame Relay projects, three Hotwire projects and two
digital
21
<PAGE> 26
service unit projects. We acquired the in-process research and development
projects in order to gain additional product enhancements, technologies and
skills, through which we would enter into new markets and distribution channels
and grow our market share for high speed access products. At the time of the
divestiture, we estimated the value of each in-process project to range from
$0.1 million to $3.2 million, and the aggregate value to be approximately $13.1
million and anticipated that each project would require between five and nine
months to complete. Based on our technological expertise and experience in
completing and commercializing access products, we did not believe there were
any material risks that would affect the timely completion of the projects. The
total cost to complete the development of these projects at the time of the
acquisition was estimated to be approximately $15.2 million. Subsequent
developments have demonstrated that most of the projects have met or exceeded
the initial valuation placed on such projects. Three projects have proven to be
less successful than originally forecast primarily due to unforeseen changes in
the marketplace.
Selling, general and administrative expenses primarily consist of:
salaries, commissions and related expenses for personnel engaged in marketing,
sales and field service support functions, finance, human resource and
administrative activities; advertising, promotional and trade show expenses,
including the related travel expenses; consultant fees; equipment and facilities
expenses, including intangibles amortization; supplies, software and software
maintenance; and consignments. We intend to continue to invest in selling,
marketing and promotional programs. In addition, we expect to expand our field
sales operations and customer support organizations. We expect general and
administrative expenses to increase moderately as our business grows and we
begin operations as a public company. General and administrative expenses have
been significantly reduced since the 1996 acquisition by improving systems and
processes and eliminating unnecessary expenses, and we expect to continue our
focus on controlling expenses in the future.
Sales to customers outside of the United States accounted for approximately
30% and 20% of revenues in 1997 and 1998, respectively. This decrease was
primarily due to the decline in sales of our older narrowband products and
economic instability in Asia. In 1998, approximately 94% of our sales were
denominated in U.S. dollars. While Paradyne is subject to fluctuations in
foreign currency exchange rates with respect to income derived from
international sales not denominated in U.S. dollars, the costs associated with a
majority of these sales are in the same currency, which partially mitigates the
effect of such fluctuations. Historically, currency exchange movements have not
had a material effect on our business, financial condition or results of
operations. If our non-U.S. operations expand, the effect of currency
fluctuations may have a more significant impact on our revenues and costs. At
December 31, 1998, we had no material monetary assets, liabilities or
commitments denominated in currencies other than U.S. dollars. We do not hedge
foreign currency transactions. Our strategy for managing currency risk is to
minimize our foreign currency exposure.
Despite growing revenues, excluding a non-recurring gain recognized in 1997
in connection with a contract renegotiation, we have not been profitable on an
annual basis, and we may continue to incur net losses. In addition to the
customer concentration we have experienced, we also have lengthy development and
sales cycles for our products, and there is often a significant delay between
the time we incur expenses and the time we realize the related revenue. To the
extent that future revenues do not increase significantly in the same periods in
which operating expenses increase, our operating results will be adversely
affected. See "Risk Factors -- Various Factors Could Cause Our Results to
Fluctuate" and "-- We May Not Achieve Revenue Growth and Profitability."
Paradyne's quarterly and annual operating results have fluctuated in the
past and are likely to fluctuate in the future due to a variety of factors, many
of which are outside of our control. Some of these factors include:
- the timing and amount of, or cancellation or rescheduling of, orders for
our products and services to existing and new customers;
- our ability to develop, introduce, ship and support new products and
product enhancements and manage product transitions on a timely basis;
22
<PAGE> 27
- announcements, new product introductions and reductions in price of
products offered by our competitors;
- our ability to achieve cost reductions;
- our ability to obtain sufficient supplies of sole or limited source
components for our products;
- the ability of our NSP customers to raise financing to purchase our
products;
- the timing and rate of deployment of our products by NSPs;
- preferential pricing arrangements;
- our ability to attain and maintain production volumes and quality levels
for our products;
- the mix of products sold and the mix of distribution channels through
which they are sold;
- fluctuations in demand for our products and services, especially by our
major customers;
- expiration of favorable supply or purchase contracts;
- costs relating to possible acquisitions and integration of technologies
or businesses; and
- conditions in the telecommunications market, including consolidation in
the industry, and economic conditions generally.
Due to these and other factors, quarterly and annual revenues, expenses and
results of operations could vary significantly in the future, and
period-to-period comparisons should not be relied upon as indications of future
performance. Additionally, due to all of the foregoing factors, it is possible
that in some future periods, our operating results and/or our growth rate will
be below what public market analysts and investors expect. If that happens, the
market price of our common stock could decline materially.
RESULTS OF OPERATIONS
The following table summarizes Paradyne's operating results as a percentage
of revenues for each of the periods shown.
<TABLE>
<CAPTION>
PARADYNE
PREDECESSOR BUSINESS ------------------------------------------------
-------------------------------------------- THREE MONTHS
FIVE MONTHS YEAR ENDED ENDED
YEAR ENDED DECEMBER 31, SEVEN MONTHS ENDED DECEMBER 31, MARCH 31,
--------------------------- ENDED JULY 31, DECEMBER 31, -------------- --------------
1994 1995 1996 1996 1997 1998 1998 1999
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Sales................. 98.1% 98.0% 98.1% 98.5% 98.1% 98.2% 99.1% 94.3%
Service............... 1.9 1.5 1.5 1.2 1.7 1.1 0.9 0.9
Royalties............. -- 0.5 0.4 0.3 0.2 0.7 -- 4.8
----- ----- ----- ----- ----- ----- ----- -----
Total
revenues...... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of sales:
Equipment............. 52.5 51.9 56.1 52.3 49.8 54.3 50.9 55.1
Service............... 1.7 1.5 1.4 0.7 0.6 0.3 0.3 0.3
----- ----- ----- ----- ----- ----- ----- -----
Total cost of
sales......... 54.2 53.4 57.5 52.9 50.5 54.6 51.2 55.4
----- ----- ----- ----- ----- ----- ----- -----
Gross margin............ 45.8 46.6 42.5 47.1 49.5 45.4 48.8 44.6
</TABLE>
<TABLE>
Operating expenses:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Research &
development......... 10.8 11.4 21.5 27.3 20.6 17.7 19.9 16.2
Selling, general &
administrative...... 42.3 43.5 32.9 25.8 36.6 28.2 31.2 25.6
Restructuring
charges............. -- -- -- -- 1.0 0.5 -- --
----- ----- ----- ----- ----- ----- ----- -----
Total operating
expenses...... 53.0 54.8 54.3 53.1 58.1 46.3 51.0 41.9
----- ----- ----- ----- ----- ----- ----- -----
Operating income
(loss)................ (7.2) (8.2) (11.8) (6.1) (8.6) (0.9) (2.3) 2.7
Other (income) expenses:
Interest.............. 0.5 0.5 0.2 3.1 4.3 0.9 1.3 0.8
Lucent settlement
gain................ -- -- -- -- (28.2) -- -- --
</TABLE>
23
<PAGE> 28
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Other, net.............. (0.5) (1.4) (1.6) 0.3 (1.0) 0.6 (0.1) (5.3)
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before
provision for income
tax................. (7.2) (7.3) (10.4) (9.5) 16.4 (2.4) (3.5) 7.2
Provision (benefit) for
income tax............ 0.6 0.4 0.1 -- 4.6 (0.5) (0.8) 2.8
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss)....... (7.7)% (7.7)% (10.5)% (9.5)% 11.8% (1.8)% (2.7) 4.4
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
Revenues. Total revenues increased $11.0 million, or 25.6%, to $54.1
million for the first three months of 1999 from $43.0 million for the first
three months of 1998. This increase was primarily due to an increase in the
volume of sales of our broadband access products. As a percentage of total
revenues, equipment sales were 94.3% of total revenues for the first three
months of 1999 compared to 99.1% for the first three months of 1998. The
percentage decrease is mostly due to a $2.6 million increase in royalty income
which includes $1.1 million from a one-time royalty fee from GlobeSpan related
to termination of an existing agreement, and $1.5 million from a one-time
license fee from a third party for intellectual property relating to narrowband
technology.
Gross Margin. Gross margin increased $3.1 million, or 14.8%, to $24.1
million for the first three months of 1999 from $21.0 million for the first
three months of 1998. A substantial portion of the increase was due to the
recognition of $2.6 million of royalty revenues. Gross margin as a percentage of
total revenues decreased to 44.6% in 1999 from 48.8% in 1998 primarily because
our newer, competitively priced products comprised a greater portion of our
total revenues. Gross margin for equipment sales increased $0.4 million
reflecting increased sales at lower margins resulting from the competitive
pricing of recently introduced products.
Research and Development Expenses. Research and development expenses
increased $0.2 million, or 2.5%, to $8.8 million for the first three months of
1999 from $8.6 million in the first three months of 1998. As a percentage of
total revenues, research and development expenses decreased to 16.2% in the
first three months of 1999 from 19.9% in the first three months of 1998. This
decrease is primarily attributable to the increase in revenues during the
period.
Selling, General and Administrative ("SG&A") Expenses. SG&A expenses
increased $0.5 million, or $3.4%, to $13.9 million in the first three months of
1999 from $13.4 million in the first three months of 1998. The increase is
primarily due to increases in incentive based expenses of $0.3 million (due to
the increase in revenues), consignment of equipment to customers of $0.3 million
and higher information systems expense of $0.3 million, offset in part by a
reduction in advertising of $0.3 million and fees of $0.2 million. SG&A expense
as a percentage of total revenues decreased to 25.6% in the first quarter of
1999 from 31.2% in the first quarter of 1998 primarily due to the 25.6% increase
in revenues during the period.
Interest and Other (Income) Expense, Net. Interest and other (income)
expense, net, increased by $2.9 million to income of $2.4 million for the first
three months of 1999, from expense of $0.5 million for the first three months of
1998. Interest and other (income) expense, net, is related to interest on notes
payable and borrowings under lines of credit, gains and losses on equity
investments and foreign exchange gains and losses. This increase was primarily
attributable to the receipt by Paradyne of approximately $3.0 million in net
proceeds from the sale of patents. Interest expense also decreased by $0.1
million in 1999 due to a reduction in the debt related to Lucent and
Communications Partners, L.P.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenues. Total revenues increased $17.5 million, or 9.7%, to $198.8
million in 1998 from $181.3 million in 1997. This increase was primarily due to
an increase in the sales of our broadband access products. The increase in sales
was primarily a result of higher average selling price due to product mix and to
volume increases in broadband products. As a percentage of total revenues,
equipment sales were 98.2% in 1998
24
<PAGE> 29
compared to 98.1% in 1997. In 1998 and 1997, we also earned relatively small
amounts of service revenues through the repair of out of warranty equipment and
royalty revenues from the licensing of technology.
Gross Margin. Gross margin increased $0.4 million, or 0.5%, to $90.3
million in 1998 from $89.8 million in 1997. Gross margin as a percentage of
total revenues decreased to 45.4% in 1998 from 49.5% in 1997 for the following
reasons:
- some of our older products faced competitive price pressures, which
resulted in lower average sales prices and accounted for a decline in
gross margin of approximately 3 percentage points out of the 4.1
percentage point decline in gross margin; and
- In 1997 we had a large one-time customer purchase of an out-of-production
product for which we were able to obtain a substantially higher than
average sales price. No similar purchase occurred in 1998, resulting in a
decrease in gross margin of 1 percentage point out of the 4.1 percentage
point decline in gross margin.
Research and Development Expenses. Research and development expenses
decreased $2.2 million, or 5.9%, to $35.1 million in 1998 from $37.3 million in
1997. This decrease was primarily due to a reduction in the number of
contractors and a decrease in employees, as a result of the restructuring in
November 1997. Research and development expenses declined to 17.7% of total
revenues in 1998 from 20.6% in 1997 primarily due to the increase in total
revenues in 1998 along with the expense reductions.
Selling, General and Administrative Expenses. SG&A expenses decreased
$10.3 million, or 15.6%, to $56.0 million in 1998 from $66.3 million in 1997.
The decrease was primarily attributable to a $6.4 million reduction in
amortization expense related to the Lucent settlement, a $3.3 million reduction
in consultant fees and a $2.4 million decrease in advertising costs, offset by a
$0.9 million increase in personnel costs and a $0.9 million increase in rental
expenses. SG&A expenses as a percentage of total revenues decrease to 28.2% in
1998 from 36.6% in 1997 primarily due to the increase in total revenues in 1998
along with expense reductions.
Restructuring Charges. During 1998, we incurred expenses of $1.0 million,
or 0.5% of total revenues, related to restructuring our international
operations.
Interest and Other (Income) Expense, Net. Interest and other (income)
expense, net, decreased $3.1 million, or 51.3%, to $2.9 million in 1998 from
$6.0 million in 1997. Interest and other (income) expense, net, is related to
interest on notes payable and borrowings under lines of credit, gains and losses
on equity investments and foreign exchange gains and losses. The decrease in
1998 was primarily attributable to a reduction in interest expense associated
with the $63.0 million forgiveness of debt by Lucent in 1997.
Income Taxes. Our 1998 income tax benefit was $1.1 million, or 22.9% of
the loss before income tax of $4.7 million. The tax benefit was less than the
statutory federal and state income tax rates principally due to losses incurred
in foreign jurisdictions for which no income tax benefit was available.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE SEVEN MONTH PERIOD ENDED JULY 31,
1996 (PREDECESSOR BUSINESS) AND THE FIVE MONTH PERIOD ENDED DECEMBER 31, 1996
References to the seven month period ended July 31, 1996 and the five month
period ended December 31, 1996 (the "1996 Periods") reflect the combination of
the predecessor business for seven months of 1996 with the operations of
Paradyne for five months of 1996, and do not include any adjustments related to
the purchase.
Revenues. Total revenues decreased $63.2 million, or 25.9%, to $181.3
million in 1997 from $244.5 million in 1996. This decrease was primarily due to
the following factors:
- sales of our older narrowband products, overall, declined at a rapid
rate;
- in an attempt to meet their 1996 contractual targets, Lucent purchased
products from us at the end of 1996, which resulted in lower Lucent
purchases in 1997 as it sold off its inventory (See "Certain
Transactions"); and
25
<PAGE> 30
- we discontinued selling Premisys products through channels other than
Lucent and AT&T and discontinued selling other network access products
which were transitioned to Lucent after the sale of Paradyne.
As a percentage of total revenues, equipment sales were 98.1% in 1997 and
98.3% in the 1996 Periods. We also earned relatively small amounts of service
revenues through the repair of out of warranty equipment and royalty revenues
from the licensing of technology.
Gross Margins. Gross margin decreased $19.4 million, or 17.7%, to $89.8
million in 1997 from $109.2 million in the 1996 Periods. Gross margin as a
percentage of total revenues increased to 49.5% in 1997 from 44.6% in the 1996
Periods for the following reasons:
- we were able to reduce the material costs of some of our products by
obtaining more competitive pricing from our existing and new suppliers,
which resulted in savings in the form of lower product costs in 1997, and
we were able to obtain a higher average sales price for some of our older
products due to increased sales of products with higher margin
configurations, which translated into higher margins. Together these
changes accounted for an increase of approximately 7 percentage points
out of the 4.9 percentage point increase in gross margin.
- one of our major customers making a large one-time purchase of an
out-of-production product in 1997 for which we were able to obtain a
substantially higher than average sales price (resulting in an increase
to gross margin of approximately 1 percentage point out of the 4.9
percentage point increase in gross margin.)
- we introduced new, competitively priced access products, which resulted
in a decrease in gross margin of approximately 4 percentage points out of
the 4.9 percentage point increase in gross margin.
Research and Development Expenses. Research and development expenses
decreased $21.9 million, or 36.9%, to $37.3 million in 1997 from $59.2 million
in the 1996 Periods. Research and development expenses declined to 20.6% of
total revenues in 1997 from 24.2% in the 1996 Periods. This decrease was
primarily attributable to recognition of purchased research and development of
$13.1 million at the time of the 1996 acquisition and a $7.7 million reduction
associated with a reduction in the number of support personnel and contractors
as a result of the restructuring in November 1997.
Selling, General and Administrative Expenses. SG&A expenses decreased $6.1
million or 8.4%, to $66.3 million in 1997 from $72.3 million in the 1996
Periods. This decrease was primarily due to a reduction in personnel following
the 1996 acquisition and $10.3 million associated with a reduction of SG&A
related personnel and contractors in the fourth quarter of 1997 as a result of
the November 1997 restructuring, which more than offset the $4.1 million
increase in amortization primarily due to the Lucent supply contract. SG&A
expenses as a percentage of total revenues increased to 36.6% in 1997 from 29.6%
in the 1996 Periods. This increase was primarily attributable to the reduction
of revenues in 1997.
Restructuring Charges. In the fourth quarter of 1997, we incurred a
restructuring charge of $1.8 million, or 1.0% of total revenues. This
restructuring was necessary to reduce redundant headcount and bring operating
expenses in line with revenues.
Interest and Other (Income) Expense, Net. Interest and other (income)
expense, net, increased $3.9 million, or 196.5%, to $6.0 million in 1997 from
$2.0 million in the 1996 Periods. Interest and other (income) expense, net, is
related to interest on notes payable and borrowings under lines of credit, gains
and losses on equity investments and foreign exchange gains and losses. The
increase in 1997 was primarily attributable to interest expense associated with
the Lucent debt.
Lucent Settlement Gain. As a condition to the closing of the 1996
acquisition, Paradyne entered into a volume purchase letter agreement, whereby
Lucent agreed to purchase minimum levels of network access products from us. At
December 31, 1997, Lucent had not satisfied its obligations and, therefore, was
subject to take or pay provisions contained in the volume purchase letter
agreement. However, in August 1998, Lucent and Paradyne entered into an
arrangement under which we terminated the volume purchase letter agreement,
received an exclusivity agreement with Lucent extending through June 2001 and
received $8.2
26
<PAGE> 31
million of cash and the forgiveness of debt in the amount of $63.0 million owed
to Lucent by Paradyne. This resulted in the recording of a $51.2 million
non-recurring gain in 1997, which is net of the $16.4 million unamortized cost
of the agreement. See "Certain Transactions."
Income taxes. In 1997, as a result of the Lucent settlement gain of $51.2
million, we were able to utilize our net operating loss carryforwards reducing
our federal and state income tax provision to $8.3 million or 28.0% of pretax
income.
LIQUIDITY AND CAPITAL RESOURCES
From our inception through December 31, 1998, we financed our operations
through a combination of debt financing and cash generated from operations. In
connection with the 1996 acquisition, Communication Partners, L.P. acquired the
predecessor business through an equity investment of $17.1 million. In addition,
we incurred acquisition debt totaling $76.8 million and acquisition costs of
$8.4 million. Additionally, in July 1996 we entered into a $45.0 million
revolving line of credit facility with Bank of America NT&SA. This facility was
voluntarily reduced to $35.0 million in March 1999. Following the closing of
this offering, we expect to pay any outstanding balance under the revolving line
of credit in full.
Availability under this facility is the lesser of $35.0 million or the sum
of 85% of eligible trade accounts receivable and the lesser of: $6.0 million,
40% of the value of eligible inventory, or the amount of the machinery and
equipment appraisal. Availability is further reduced by a $3.0 million borrowing
base reserve, in lieu of any financial covenants. The line of credit facility is
secured by substantially all of our assets and contains non-financial covenants
and restrictions as to various matters, including our ability to pay dividends
or to effect mergers or acquisitions, incur other indebtedness or to make
investments without the bank's prior approval. As of March 31, 1999, we were not
in breach of any of these restrictive covenants.
This facility, which terminates on January 31, 2000, bears an annual
interest rate of Bank of America NT&SA's reference rate plus 0 - 100 basis
points, depending on our quarterly fixed charge coverage ratio. The facility
also provides for an unused line fee of 0.375% to 0.50%. The principal amount
outstanding at December 31, 1998 was $16.1 million. The weighted average
interest rate was 9.2% for the year ended December 31, 1998.
In August 1997, Communication Partners, L.P. agreed to provide a revolving
line of credit facility in the maximum amount of $5.0 million. This agreement
was amended in October 1998 to increase the maximum amount of the facility to
$10.0 million. Amounts outstanding may be repaid and reborrowed at any time
during the term of the note that matures on August 25, 2002. Borrowings under
this agreement are subordinated to debt under the Bank of America NT&SA line of
credit facility and bear interest at 8% per annum. The agreement does not impose
specific financial covenants upon Paradyne. It is our intention to terminate
this facility upon completion of this offering.
We are a holding company with no business operations of our own. In the
event we incur obligations, we would be dependent on payments, loans, dividends
and distributions from our subsidiaries for funds to pay our obligations. The
ability of our subsidiaries to pay dividends or distributions or make loans to
us is subject to restrictions. Under the line of credit agreement, neither
Paradyne Corporation nor its Canadian subsidiary may pay dividends or make
distributions to us unless Paradyne Corporation and its subsidiaries meet
minimum financial ratios related to earnings, interest expense and total
indebtedness and obtain the prior approval of Bank of America NT&SA. The line of
credit agreement limits the aggregate payment of dividends and distributions to
fifty percent (50%) of the consolidated net income of Paradyne Corporation for
the period from August 1, 1996 to the end of the immediately preceding fiscal
quarter. The line of credit agreement also requires the prior approval of Bank
of America NT&SA for any loans Paradyne Corporation or its Canadian subsidiary
may make to us.
Three Months Ended March 31, 1999
Cash provided by operations for the quarter ended March 31, 1999 totaled
$4.4 million and resulted primarily from $4.3 million in net proceeds from a
license of intellectual property related to modem
27
<PAGE> 32
technology and sale of patents. Additionally, reductions in trade receivables
due to revenues in the first quarter of 1999 being 7% below fourth quarter 1998
revenues, increases in accounts payable attributable to timing of vendor
payments, offset by an increase in inventory to meet expected April deliveries,
also contributed significantly to cash provided by operations. Total revenues
decreased 7% in the first quarter of 1999 compared to the fourth quarter of 1998
due to lower sales of both narrowband and broadband products. This decrease
principally resulted from lower equipment sales to one of our largest customers.
Cash provided by operations was offset in part by reductions in payroll and
benefit related liabilities which reflect payments of 1998 commissions and
management bonuses, an increase in income tax receivable related to the tax
benefit of employee stock option exercises, and an increase in accounts
receivables from affiliates driven primarily by the $1.1 million one-time
royalty fee from GlobeSpan related to the termination of an existing agreement.
Net cash used in investing activities for the quarter ended March 31, 1999
totaled $0.9 million and reflects capital expenditures made in support of
operations. The Company anticipates that capital requirements for the remainder
of the year will be in the range of $1.5 million to $2.0 million per quarter.
Net cash used in financing activities for the quarter ended March 31, 1999
totaled $3.2 million primarily reflecting debt repayments on our Bank of America
NT&SA revolving credit facility of $5.6 million, offset in part by proceeds from
the exercise of stock options totaling $2.4 million. Net borrowings were not
required to fund operations and capital expenditures in the quarter. We expect
to use the proceeds from the initial public offering to pay down this debt.
Paradyne had $2.6 million of cash and cash equivalents at March 31, 1999
that was an increase of $0.2 million from $2.4 million at December 31, 1998.
Working capital increased by $5.9 million from $8.4 million at December 31, 1998
to $14.3 million at March 31, 1999. We believe that the proceeds from this
offering, together with the cash flows from operations and borrowings under the
Bank of America NT&SA line of credit facility, will be sufficient to meet our
working capital needs for at least the next 18 months.
Year Ended December 31, 1998
Net cash used in operating activities was $4.6 million for the five months
ended December 31, 1996 as compared to $1.1 million for 1997. Net cash provided
by operating activities was $6.2 million for 1998. The reduction in net cash
used in operating activities for the five month period ending December 31, 1996
to 1997 was primarily driven by a reduction in accounts receivable and
inventory, net of a decrease in accounts payable, as a result of lower sales
volume as well as a reduction in the annual run rate of operating expenses after
normalizing for the 1996 non cash related write off of purchased research and
development. Net cash provided by operating activities increased $7.3 million
from 1997 to 1998 primarily as a result of a reduction in receivables reflecting
the collection of the other receivables totaling $8.2 million at December 31,
1997 in connection with the termination of the Lucent volume purchase letter
agreement offset in part by an increase in trade receivables. Trade receivables
increased due to increased sales volume offset in part by a reduction in the
time it takes to collect from customers. Other activities impacting net cash
provided by operations included reductions in operating expense, increased
accounts payable, reflecting timing of incurrence of obligations and payments to
vendors, offset by increased inventory, due to increased sales volume, as well
as an increase in income tax receivable, reflecting overpayment of income taxes
in 1998.
Net cash (used in) provided by investing activities was ($29.0 million),
$11.6 million and ($5.1 million) for the five months ended December 31, 1996 and
the years ended December 31, 1997 and 1998, respectively. Effective July 31,
1996, Communication Partners, L.P. acquired Paradyne's net assets for $24.6
million in cash and $69.3 million in debt to seller. Net proceeds from the sale
of the Largo, Florida facility in June 1997 totaled $20.8 million. Net capital
expenditures relating primarily to the support of operations totaled $4.4
million, $9.2 million, and $5.4 million for the five month period ending
December 31, 1996, 1997 and 1998, respectively.
Net cash provided by financing activities totaled $30.1 million for the
five months ended December 31, 1996. Net cash used in financing activities in
1997 totaled $8.7 million, as compared to $1.7 million for 1998. Communication
Partners, L.P.'s 1996 investment in Paradyne totaled $102.3 million, consisting
of a $17.1 million equity investment, $69.3 million in seller notes to Lucent,
debt to Communication Partners of
28
<PAGE> 33
$7.5 million and $8.4 million of other acquisition costs. Borrowings under other
debt obligations totalling $2.5 million and $6.0 million for the five months
ended December 31, 1996 and the year ending December 31, 1997 consisted
primarily of deferred interest associated with seller debt. Proceeds from the
1997 sale of the Largo, Florida facility were used to retire debt of $20.8
million under various notes and the Bank of America NT&SA revolving credit
facility. Additionally, debt was further reduced by $63.0 million as part of the
Lucent settlement discussed above. Net borrowings under our bank line of credit
to fund operations, capital expenditures and payment of other acquisition costs
totaled $10.6 million and $4.4 million for the five month period ending December
31, 1996 and the year ended December 31, 1997. Net borrowings against our bank
line of credit were not required to fund operations, capital expenditures and
payment of other acquisition costs in 1998. The net borrowings against this line
in 1998 reflected the payoff of $2.7 million in seller debt. Additionally, in
1998 we borrowed and repaid $5.0 million from Communication Partners to cover
working capital needs.
We believe that the proceeds from this offering, together with the cash
flows from operations and borrowings under the Bank of America NT&SA line of
credit facility, will be sufficient to meet our working capital needs for at
least the next 18 months.
QUARTERLY RESULTS
The following table sets forth unaudited quarterly operating information
for each of the nine quarters ending with the quarter ended March 31, 1999. This
data has been prepared on the same basis as the audited financial statements
contained elsewhere in this prospectus and in the opinion of management,
includes all adjustments necessary for the fair presentation of the information
for the periods presented. This information should be read in conjunction with
the financial statements and notes thereto. The operating results in any quarter
are not necessarily indicative of the results that may be expected for any
future period.
<TABLE>
<CAPTION>
QUARTERS ENDED
--------------------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1997 1997 1997 1997 1998 1998 1998 1998 1999
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Sales...................... $43,633 $42,469 $45,739 $46,009 $42,655 $45,224 $49,966 $57,308 $50,969
Service.................... 846 490 947 757 384 644 573 655 475
Royalties.................. 7 155 251 -- -- 350 845 197 2,618
------- ------- ------- ------- ------- ------- ------- ------- -------
Total revenues....... 44,486 43,114 46,937 46,766 43,039 46,218 51,384 58,160 54,062
Total cost of
sales.............. 21,304 22,710 23,221 24,253 22,047 24,004 28,913 33,577 29,966
------- ------- ------- ------- ------- ------- ------- ------- -------
Gross margin............... 23,182 20,404 23,716 22,513 20,992 22,214 22,471 24,583 24,096
Operating expenses:
Research and development... 9,605 9,049 9,477 9,208 8,554 8,728 8,866 8,984 8,768
Selling, general &
administrative........... 16,623 17,187 17,353 15,115 13,410 14,653 13,612 14,294 13,863
Restructuring charges...... -- -- 1,778 -- 59 167 758 --
------- ------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses........... 26,228 26,236 26,830 26,101 21,964 23,440 22,645 24,036 22,631
------- ------- ------- ------- ------- ------- ------- ------- -------
Operating income (loss)...... (3,046) (5,832) (3,114) (3,588) (972) (1,226) (174) 547 1,465
Lucent settlement gain..... -- -- -- (51,183) -- -- -- -- --
Interest and other (income)
expenses, net.............. 2,643 1,269 1,876 171 521 586 265 1,530 (2,418)
------- ------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before
provision for income tax... (5,689) (7,101) (4,990) 47,424 (1,493) (1,812) (439) (983) 3,883
Provision (benefit) for
income tax................. -- -- -- 8,302 (342) (415) (100) (225) 1,515
------- ------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)............ $(5,689) $(7,101) $(4,990) $39,122 $(1,151) $(1,397) $ (339) $ (758) $ 2,368
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
Our revenues, historically, have tended to be strongest in the fourth
quarter and lowest in the first quarter of the following year. We believe this
is primarily due to the calendar year budgeting of many of our customers and to
compensation policies tending to compensate sales personnel in our distribution
channels for achieving annual quotas. Consequently, if revenue levels are below
expectations for a given quarter, operating results are likely to be
disproportionately affected when viewed by quarter since only a relatively small
portion of our operating expenses vary materially with revenues.
29
<PAGE> 34
Our quarterly results are likely to vary due to a number of factors, such
as demand for our products, the size and timing of significant orders and their
fulfillment, the length of sales cycles for some of our newer products to our
larger customers, changes in our level of operating expenses, improvements in
operating efficiencies resulting from changes in systems and processes,
customers' budgeting cycles, changes in our sales incentive plans, changes in
the mix of products sold and conditions in foreign markets.
YEAR 2000 ISSUES
Background: Some computers, software and other equipment include
programming code in which calendar year data is abbreviated to only two digits
(e.g., 99) rather than four digits (e.g., 1999). As a result, these systems
automatically assume that the first two digits of a calendar year are "1" and
"9." Therefore, time-sensitive functions of these systems may misinterpret dates
after January 1, 2000, to refer to the twentieth century rather than the
twenty-first century (i.e., "02" could be interpreted as "1902" rather than
"2002"). The problems associated with this design decision are commonly referred
to as the "Millennium Bug," "Year 2000 problem" or "Y2K problem."
Assessment: In 1996 we identified the Year 2000 problem as a potential
risk to our operations. As a result, we developed a comprehensive multi-year
plan to make our internal computer software and hardware systems Year 2000
compliant. Our Year 2000 compliance plan is comprised of 3 phases: an assessment
phase; an implementation phase; and a testing phase. This plan, initiated in the
first quarter of fiscal 1997, is in the final stages of implementation. While we
believe that we have implemented a comprehensive plan for addressing the Year
2000 problem and anticipate completing our compliance activities in a timely
manner, we cannot be certain that these Year 2000 compliance efforts will be
successful. The financial impact of making the required systems changes cannot
be known precisely at this time, but we currently expect these expenses to be
less than approximately $4.0 million. The financial impact, could, however,
exceed this estimate. Nonetheless, these costs are not expected to be material
to our business, financial condition, or results of operation. To date, we have
incurred expenses of approximately $3.5 million.
Internal Infrastructure: We believe that we have identified all of the
major computer hardware, software applications and other calendar year dependent
equipment used in connection with our internal operations. Our Year 2000
compliance plan addresses items that must be modified, upgraded, or replaced in
order to minimize the possibility of a material disruption of our business. We
have replaced our accounting, sales, distribution and manufacturing systems with
what we believe to be a Year 2000 compliant enterprise resource planning system.
We have replaced our human resource and payroll systems application software
with what we believe to be Year 2000 compliant software, and we have replaced
our internal phone system and associated equipment with what we believe to be a
Year 2000 compliant system. Currently, we are in the process of modifying,
upgrading and replacing, as appropriate, other computer software applications,
hardware, and equipment that could potentially be adversely affected by the Year
2000 problem. We expect to complete this implementation phase by the end of the
third quarter of 1999. The fourth quarter of 1999 has been reserved for final
testing of all of our systems for compliance.
Network Service Providers: Our ongoing operations are dependent on the
uninterrupted service provided to us by our voice (landline and wireless), data
and Internet service vendors. We have initiated communications with our various
service providers and have received assurance that they have or will address
Year 2000 compliance issues associated with their ability to provide
uninterrupted service. Any failure of these vendors to resolve any outstanding
Year 2000 issues in a timely manner could materially and adversely affect our
business, financial condition and results of operation.
Distributors and Suppliers: We have initiated communications with our key
distributors, service support providers and suppliers to establish the status of
their Year 2000 compliance. We have communicated with our major suppliers of
minicomputers, servers, computers, software and other equipment used, operated
or maintained by us to identify and, to the extent possible, resolve issues
associated with the Year 2000 problem. We are also gathering Year 2000
compliance information from web sites and other public sources for our second
and third-tier distributors and suppliers. We believe that we have identified
all of the potential Year 2000 problems with respect to these distributors,
service support providers and suppliers and have
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<PAGE> 35
received their commitment to resolve any outstanding issues in a timely manner.
However, any failure on our part to identify potential third party Year 2000
problems or any failure of these parties to resolve any outstanding issues with
their systems in a timely manner could materially and adversely affect our
business, financial condition and results of operations.
As we must rely to a large extent on representations made by our suppliers
and distributors from surveys and questionnaires, a failure by these parties to
adequately address and resolve Year 2000 problems poses the most likely
unresolved Year 2000 risk to us. In the event our suppliers are unable to
adequately address Year 2000 problems, such inability could disrupt their supply
of critical components to us for the manufacture of our products.
Contingency Plans: We are currently developing contingency plans to be
implemented as part of our efforts to identify and correct Year 2000 problems
affecting our internal systems. We expect to complete these contingency plans by
the end of the third quarter of 1999. Depending on the systems affected, these
plans could include (i) accelerated replacement of effected equipment or
software, (ii) increased work hours for our personnel or use of contract
personnel to correct on an accelerated schedule any Year 2000 problems which may
arise, (iii) the provision of manual workarounds for information systems and
(iv) other similar approaches. If we are required to implement any of these
contingency plans, such plans may have a material adverse effect on our
business, financial condition or results of operations. Additionally, we may not
complete these contingency plans in a timely manner, and failure to do so could
have a material adverse effect on our business, financial condition or results
and operations.
The discussion of our efforts and expectations relating to Year 2000
compliance are forward-looking statements. Our ability to achieve Year 2000
compliance and the level of incremental costs associated with achieving this
compliance could be adversely impacted by, among other things, the availability
and cost of programming and testing resources, the ability of parties with whom
we interact to resolve Year 2000 issues and unanticipated problems identified in
our ongoing compliance review.
MARKET RISK
We are exposed to changes in interest rates primarily from our revolving
line of credit facility with Bank of America NT&SA and, secondarily, from
investments in some held-to-maturity securities. Under our current policies, we
do not use interest rate derivative instruments to manage exposure to interest
rate changes. Additionally, we do not currently engage in foreign currency
hedging transactions to manage exposure for transactions denominated in
currencies other than U.S. dollars.
INFLATION
Because of the relatively low levels of inflation experienced in 1996, 1997
and 1998, inflation did not have a significant effect on our results in such
years.
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<PAGE> 36
BUSINESS
OVERVIEW
We are a leading developer, manufacturer and distributor of broadband and
narrowband network access products for network service providers, commonly
referred to as NSPs, and business customers. Paradyne operates in a single
business segment. We offer solutions that enable business class, service level
managed, high-speed connectivity over the existing telephone network
infrastructure and provide for cost-effective access speeds of up to 45 megabits
per second, or Mbps. We believe that demand for high-speed, broadband
transmission will continue to increase as more business and residential users
find narrowband access technologies inadequate to meet their high-bandwidth
requirements. Our objective is to maintain and build upon our position as one of
the leaders in the broadband access market by focusing on next generation
digital subscriber line, more commonly known as DSL, service level management,
more commonly known as SLM, and other broadband access solutions.
We have a long history of technological innovation, and we hold over 155
U.S. patents and have over 100 U.S. patent applications pending. Our equipment
has been sold to over 50% of the Fortune 500 companies and in businesses in over
125 countries. We estimate that sales to NSPs represented approximately 40% of
our total revenues in 1998. With our reputation and history as a supplier of
access solutions to a large customer base, we believe that we are
well-positioned to provide broadband access solutions to NSPs and business
customers as they upgrade their networks.
INDUSTRY BACKGROUND
Over the past several years, data traffic generated by computer users
accessing the Internet or business networks has increased significantly.
Industry analysts believe that the volume of this data traffic, referred to as
wide area network traffic, will continue to expand rapidly due to four key
trends:
- the dramatic growth in the use of the Internet;
- the proliferation of distributed computing applications, such as
electronic mail, electronic transaction processing, enterprise resource
planning and inter-enterprise information transfer based on Web-
technologies;
- the deregulation of the telecommunications services industry which has
increased the number of service providers and intensified competition;
and
- the continued deployment of high capacity fiber optic networks and the
emergence of high-volume bandwidth network access technologies that
increase the ability to transfer large volumes of information.
In order to accommodate increasingly high volumes of data, NSPs have
invested significant resources to upgrade central office switching centers and
the interconnecting infrastructure, known as the network backbone. While
capacity constraints in the network backbone continue to be addressed through
the use of high speed digital and fiber-optic equipment, the network that
connects end users to NSPs central offices, typically known as the "last mile,"
remains a bottleneck that limits high-speed data transmission. The last mile was
originally constructed with copper twisted-pair wiring designed to support
analog voice traffic. There is an installed base of over 170 million copper
lines in the United States, and over 780 million worldwide. End users have been
frustrated by the limitations on the ability of NSPs to cost effectively deliver
high-speed services, such as telecommuting, branch office internetworking and
Internet access, over the last mile using standard, narrowband dial-up
connections, which are typically limited to data transmission rates of 28.8
kilobits per second, or Kbps, to 56.0 Kbps. We believe that most business and
residential users are finding these types of narrowband access technologies
inadequate to meet their high bandwidth requirements.
Global regulatory changes are increasing the number of competitors in the
access portion of the network and are further accelerating the need for NSPs to
upgrade their networks and increase their service offerings. Internationally, a
number of developed and developing nations have privatized their state-owned
telecommuni-
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cations monopolies and opened their markets to new NSPs. Competitors that have
emerged and potentially could take customers from incumbent carriers include
competitive local exchange carriers, often called CLECs, Internet service
providers, satellite operators, cable operators and electric utilities. For
example, cable operators are already beginning to provide data transmission
services to customers by leveraging the high bandwidth capabilities of their
coaxial cable based infrastructure. This increase in competition for the access
portion of the network is also helping to facilitate the transition from analog
to digital and narrowband to broadband access over the last mile.
New digital technologies have been introduced to increase the speed and
quality of digital transmission over the copper wire infrastructure, or local
loop, in the last mile and provide alternative means of accessing the network
backbone. The increased speed, lower transmission cost, higher reliability and
quality of digital networks are better suited for transmitting the increased
level of enhanced voice and high-speed data traffic that now must pass over the
last mile. Recently, NSPs have begun to install higher-speed, digital broadband
transmission technologies, such as DSL, in the last mile. Dataquest forecasts
that the market for DSL equipment will grow from approximately $286 million in
1998 to over $1.6 billion by 2002.
NSPs have deployed various narrowband and broadband technologies across
customers' wide area networks in order to provide cost-effective access
solutions for their customers. Demand for high-speed access services has
increased and more protocols have emerged to facilitate the connections of
business customers to NSPs' network backbones. Protocols are computer languages
that allow two or more communications devices, such as modems, to communicate
with one another. These protocols include Frame Relay, asynchronous transfer
mode, commonly referred to as ATM, integrated services digital network, commonly
referred to as ISDN, DSL and others. When networks must support multiple
protocols, network management is more difficult because many protocols are being
used simultaneously and the network management devices must decipher each
protocol. The proliferation of protocols makes the provisioning and management
of high-speed access technologies and services increasingly difficult. As a
result, NSPs are required to operate and maintain hybrid networks comprised of
recently adopted new technologies and existing installed equipment.
The performance, quality and maintainability of network services are highly
dependent on the volume and type of traffic running over these hybrid networks.
As a result, NSPs and business customers need sophisticated diagnostic and
management capabilities to monitor business customer application traffic. The
required tools should analyze the physical transmission characteristics as well
as enable NSPs and business customers to evaluate compliance with service level
agreement parameters such as, how much data gets through the network, the time
it takes data to get through the network and availability of the network.
Business customers also need management solutions that can be scaled to meet
growing demand for services, improve network quality, reduce the number of
support personnel managing their networks and lower the overall costs for
bandwidth and maintenance tools.
As demand for high-speed transmission continues to increase, we believe
that the telecommunications industry will continue to develop and deploy new
broadband access technologies, which will become increasingly cost competitive
with traditional technologies. As a result of changes in the telecommunications
industry, NSPs are requiring flexible solutions that can be scaled to meet
growing demand for services, and also permit easy, cost-effective enhancements
in the future. With the increasing number of access protocols and equipment
options, customers are placing a higher level of importance on the ability of
equipment providers to deliver integrated system solutions.
THE PARADYNE SOLUTION
Paradyne is a leading developer, manufacturer and distributor of network
access products for NSPs and business customers. We offer solutions that enable
business class, service level managed, high-speed connectivity over the existing
telephone network infrastructure and provide for cost-effective access speeds of
up to 45 Mbps. NSPs use our broadband products to enable high-speed managed
connections from the central office to the customer premise. Moreover, our
broadband products enable NSPs to more efficiently provide network access
services by allowing a high level of management, monitoring and control over
network access equipment and circuits. Business customers use our broadband
products for high-speed connection of voice
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and data communications to connect their employees to corporate wide area
networks and to the Internet using both public and private services provided by
NSPs. Our products are designed for easy installation by NSPs and end users,
significantly reducing the need for installation by an onsite service
technician, thereby reducing costs for network access. Additionally, our
narrowband products are used by NSPs and business customers to provide
connectivity between an NSP's analog or digital circuit and a customer's digital
equipment.
[Graphic depicting Paradyne Hotwire DSL, SuperLine, FrameSaver SLM and
conventional access solutions connecting to multiple network backbone
facilities.--Graphic entitled "Paradyne Broadband Access Solutions."]
BROADBAND SOLUTIONS
- Broadband DSL Access. Our Hotwire solution delivers broadband DSL access
across the existing copper wire infrastructure. The Hotwire products
enable competitive local exchange carriers, incumbent carriers and other
NSPs to provide broadband access to business customers, teleworkers and
residential customers at substantially reduced rates compared to
conventional service offerings. We believe our Hotwire solution allows
NSPs the ability to deploy the broadest array of DSL technologies of any
commercially available product in a single platform. This enables NSPs to
match the appropriate DSL technology to the customer's application
requirements and thereby serve a wider array of customers. This also
allows for a more efficient utilization of expensive central office
equipment space and minimizes operational support requirements, such as
training and inventory, by using a single vendor. The recently introduced
SuperLine system incorporates our Tripleplay technology, a technology
developed by Paradyne that enables multi-line voice and data service over
a single telephone line, and allows NSPs to offer cost effective,
multiple line voice and high speed data services over a single
traditional telephone line to residential customers, small offices and
home offices. The SuperLine system incorporates products and technology
manufactured and developed by AG Communication Systems and Paradyne.
Contractually, both AG and Paradyne have the rights to sell the entire
system. The SuperLine product can be easily installed by customers to
meet their broadband access needs.
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<PAGE> 39
- Broadband SLM. The FrameSaver solution enables competitive local
exchange carriers, incumbent carriers and other Frame Relay service
providers to offer managed high-speed service from end-to-end across
their networks and across multi-carrier networks. Using packet
technology, Frame Relay and asynchronous transfer mode networks allow for
the economical use of the broadband network backbone. Packet technology
allows many customers data to share the same network. Each customer's
data is put into packets, or envelopes, that contain only their data and
have an identification stamp that designates the customer. These packets,
or envelopes, are then sent over a broadband network along with other
customer's packets. These packets are able to simultaneously share the
broadband network. However, without the use of an SLM solution, the NSP
and the business customer are unable to proactively manage and guarantee
the level of service across the network. The FrameSaver solution allows
customers the ability to graphically view real time and historical
network performance statistics and troubleshoot failures end-to-end
across the Frame Relay network from our OpenLane network management
system.
- Broadband Conventional Access. Our Acculink and NextEdge solutions
deliver broadband access across the existing NSP infrastructure utilizing
T1/E1 links. A T1/E1 link is a connection between two locations that
carries data at the rate of 1.544 megabits per second (T1) or 2.048
megabits per second (E1). The T1/E1 infrastructure is the most commonly
deployed broadband network system today and is widely available in the
United States. Customers often have both voice and data networks that
were installed using multiple broadband and/or narrowband access lines. A
single conventional broadband facility can typically accommodate up to 24
narrowband lines. Acculink and NextEdge act as the required
communications interface to these broadband networks and enable the
elimination of narrowband access lines by consolidating voice and data
over the same broadband circuit. Access consolidation reduces the cost of
high speed access and may also increase performance, particularly when
customers consolidate multiple narrowband access lines onto broadband
facilities. Additionally, NextEdge incorporates FrameSaver SLM functions
to deliver access consolidation and SLM in the same platform. Acculink
and NextEdge solutions are used by competitive local exchange carriers,
incumbent carriers and other NSPs to offer service level managed, high
speed access to public and private networks. Business customers choosing
to manage their own networks also deploy our Acculink and NextEdge
solutions.
NARROWBAND SOLUTIONS
- Subrate Digital Access and Analog Modems. Our Comsphere digital access
products provide an interface between a customer's digital equipment and
an NSP's digital circuit operating at speeds of up to 64 Kbps. Our
Comsphere modems enable analog communications over dial-up or dedicated
circuits. These products enable NSPs and business customers to build
low-cost, centrally managed networks. Introduced in the early 1990s,
these products are widely deployed in NSP networks and business networks
around the world.
STRATEGY
Our objective is to maintain and build upon our position as one of the
leaders in the broadband access market utilizing next generation DSL solutions,
conventional copper broadband solutions and SLM solutions. Key elements of our
strategy include:
CONTINUE TO DEVELOP INNOVATIVE BROADBAND TECHNOLOGY AND SYSTEM SOLUTIONS
We will continue to focus on providing innovative, cost-effective broadband
access solutions that improve communications over the traditional copper
telephone wire infrastructure for NSPs and business customers. We believe that
our internally developed technologies play a key role in differentiating our
products from those of our competitors. We have over 155 U.S. patents issued and
over 100 U.S. patent applications pending, and we expect many of these patents
and patent applications will contribute to the development of new technologies
and systems. In addition, we will continue to collaborate with technology
partners to facilitate the development of competitive products, as we have
previously done with NetScout, AGCS and
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<PAGE> 40
others. Our DSL technological innovations include our MVL and Tripleplay
technologies, which have been implemented in our Hotwire and SuperLine products.
Our SLM technology innovations have been implemented in our FrameSaver, NextEdge
and OpenLane products. We intend to enhance our Hotwire DSL solutions with
higher port densities, additional customer premises equipment capabilities and
additional features for our DSL access multiplexer, commonly referred to DSLAM.
Higher port densities will allow more modems to be deployed in one DSLAM which
lowers the cost of deploying a modem. The cost is lowered because more modems
can share the common cost of the DSLAM chassis and power supplies and because
customers can put more modems in the same amount of shelf space. In order to
increase customer premises equipment capabilities, we intend to build products
that allow customers to perform many functions over their DSL network. These
products could allow voice and data to share the DSL network, SLM to be deployed
over a DSL network, streaming audio and video over a DSL network or special
protocols to be transmitted over a DSL network. In order to create additional
features for our DSLAM we plan to continue to develop new versions of both
hardware and software to support new requirements from our customers. We also
intend to enhance our Tripleplay technology to support additional voice channels
and faster data speeds. Further, we intend to integrate our FrameSaver SLM
technology into additional platforms, including those that support DSL and
asynchronous transfer mode. As our customers continue to expand their DSL
networks into the application space of conventional broadband networks, we
believe our technological leadership and products provide Paradyne a competitive
advantage.
CONTINUE TO CAPITALIZE ON BUILDOUT OF DSL INFRASTRUCTURE
Revenues from worldwide sales of DSL equipment are projected by industry
sources to increase by approximately 275% from 1998 to 2002. To capitalize on
this projected growth, we intend to continue to pursue "design wins" from NSPs
that are offering or plan to offer DSL services. A "design win" is achieved when
an NSP adopts Paradyne products as one of a limited number of DSL platforms for
its central office. A typical NSP buildout includes DSLAMs in an NSP's central
office, resulting in an installed base into which Paradyne will be well
positioned to sell DSL line-cards for the DSLAMs and DSL customer premises
equipment for the end user. Since the third quarter of 1997, Paradyne had
shipped over 2,000 DSLAMs. Some of our current DSL customers include CFW
Communications, Guangdong PTA, HarvardNet, NAS CuNet, Rhythms, TDS Telecom and
Tunisia Telecom. We will continue to focus on increasing our number of design
wins with new NSPs as well as maintain our existing relationships with NSPs who
have awarded us design wins in the past. We also intend to continue to produce a
variety of DSL line-cards and DSL customer premises equipment to handle the
diverse needs of our NSP customers. We intend to install DSL interfaces on our
FrameSaver and NextEdge products which will allow customers to deploy those
solutions into DSL networks. We further plan to enhance our DSLAMs so that they
may be interoperable with other companies' technologies and DSL customer
premises equipment in order to provide a more comprehensive DSL solution.
INCREASE WORLDWIDE DEPLOYMENT OF FRAMESAVER AS PART OF NSP/SLM SOLUTIONS
NSPs are enhancing their service offerings by providing service level
agreements for their Frame Relay and asynchronous transfer mode business
customers. Service level agreements are put in place between an NSP and the
NSP's customer to document how the NSP and the customer expect the service to
operate. If the service does not operate as specified, then there is typically
some type of remedy. An example might be that the service is supposed to be
available 24 hours a day, 365 days a year. If the service is not available for
one of those days, then the NSP might be required to reimburse the customer for
one day's worth of charges. We believe that as service level agreements become
more widely adopted, NSPs and end user customers will increasingly require SLM
solutions and, therefore, that NSPs will be required to incorporate these
solutions in their networks. We intend to focus on further integrating
FrameSaver as part of our existing NSP customers' service level agreement
solutions and obtaining additional FrameSaver design wins from new NSPs.
Currently, Ameritech, Intermedia, IXC and MCI WorldCom offer FrameSaver
solutions to their customers. In addition, we intend to work with other Frame
Relay and ATM equipment vendors to leverage our FrameSaver products.
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<PAGE> 41
FOCUS ON PRODUCT SALES TO AND THROUGH NSPS
We intend to continue focusing on NSPs that provide managed network access
services to capitalize on the increased demand for such services. Over the past
three years, our sales to NSPs have increased as a result of the efforts of our
worldwide NSP direct sales force. We estimate that over 40% of our revenues in
1998 were generated from sales to NSPs. We intend to focus the efforts of our
direct sales force on maintaining and increasing sales within our current NSP
customer base as well as attracting new NSPs. We plan on focusing primarily on
NSPs deploying DSL, Frame Relay and second and third line voice and data
services.
LEVERAGE FORTUNE 500 CUSTOMER BASE AS THEY UPGRADE THEIR NETWORKS TO BROADBAND
We intend to leverage our installed base of Fortune 500 companies and other
businesses that have purchased our narrowband products and conventional
broadband products. Many of these customers have deployed networks including a
combination of our narrowband and broadband solutions, and we expect that over
the next few years many of these companies will upgrade their networks with
additional broadband solutions. We believe that our existing customers prefer to
buy broadband products from Paradyne as a result of the ability to integrate
Paradyne products into their existing networks more efficiently than the
products of our competitors. In order to capitalize on this potential equipment
upgrade within Fortune 500 companies, we intend to continue to provide
cost-effective solutions for our current customers while increasing our sales
effort with our Fortune 500 customer base.
PRODUCTS AND TECHNOLOGIES
We develop, manufacture and distribute an extensive line of broadband and
narrowband network access products and technologies. Sales of broadband products
represented approximately 38% of our total product sales in 1997 and 53% of our
total product sales in 1998. In addition, we provide advanced network management
systems that allow business customers and NSPs to have a high level of
management, monitoring and control over their network access equipment and
circuits. Although advanced network management systems are an important aspect
of our products and technology, they have not been a material aspect of our
sales revenue generation. The table below includes a summary of our principal
products. A further description of such products follows the table.
PARADYNE PRODUCT PORTFOLIO
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION APPLICATION
<S> <C> <C>
BROADBAND SOLUTIONS
Hotwire DSLAM A standalone or stackable Typically resides inside a
chassis that houses different network service provider's
line cards supporting a central office and terminates
variety of DSL technologies. many DSL lines and aggregates
them into a high speed
connection to a network
backbone.
Hotwire RADSL Consists of: The card in the DSLAM and the
- A line card that fits inside endpoint create a high speed
the digital subscriber line packet connection operating at
access multiplexer, or transmission rates up to 7
DSLAM, and supports megabits per second over a two
asymmetric digital wire telephone line. Also
subscriber line, or ADSL, allows voice to be transmitted
and symmetric digital at the same time data is being
subscriber line, or SDSL, transmitted.
technologies that operate at
the highest possible speed
based on the quality of the
telephone line; and
- A standalone endpoint that
connects the user to the
telephone line.
</TABLE>
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<PAGE> 42
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION APPLICATION
<S> <C> <C>
Hotwire MSDSL Consists of: The card in the DSLAM and the
- A line card that fits inside endpoint create a high speed
the DSLAM and supports SDSL connection operating at
technology that operates at transmission rates up to 2
the highest possible speed megabits per second over a two
based on the quality of the wire telephone line. Also
telephone line; and allows voice to be transmitted
- A standalone endpoint that at the same time data is being
connects the user to the transmitted.
telephone line.
Hotwire MHDSL Consists of: The card in the DSLAM and the
- A line card that fits inside endpoint create a high speed
the DSLAM and supports high connection operating at
bit rate digital subscriber transmission rates up to 2
line, or HDSL; megabits per second over a
- Technology that operates at four wire telephone line. Also
the highest possible speed allows voice to be transmitted
based on the quality of the at the same time data is being
telephone line; and transmitted.
- A standalone endpoint that
connects the user to the
telephone line.
Hotwire MVL (Multiple Virtual Consists of: The card in the DSLAM and the
Lines) - A line card that fits inside endpoint create a high speed
the DSLAM and supports MVL packet connection operating at
technology that operates at transmission rates up to 768
the highest possible speed kilobits per second over a two
based on the quality of the wire telephone line. Also
telephone line; and allows voice to be transmitted
- A standalone endpoint that at the same time data is being
connects the user to the transmitted.
telephone line.
SuperLine A standalone endpoint that The endpoint allows up to
allows three telephone lines three distinct telephones,
and one ethernet port to share each with a different phone
a single telephone line. number, to share the single
telephone line into a business
or residence. In addition,
there is an ethernet port that
also allows up to 640 kilobits
per second of data to share
the telephone line.
FrameSaver Consists of: Many locations are connected
- A standalone endpoint that to a Frame Relay network and
connects remote offices to a the service level management
frame relay network. Also software is used to make sure
available as a line card; each location is operating
and efficiently per the
- Service level management configuration of the Frame
software for monitoring and Relay service.
managing a Frame Relay
network.
FrameSaver Network to Network A standalone endpoint that Allows two different Frame
Interface connects two Frame Relay Relay networks to be connected
networks together. together and support the
service level management
software applications.
</TABLE>
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<TABLE>
<CAPTION>
PRODUCT DESCRIPTION APPLICATION
<S> <C> <C>
FrameSaver/ATM A standalone endpoint that Allows one high speed
connects large locations to a connection to a Frame Relay
Frame Relay network through a network that is more efficient
45 megabits per second than many lower speed
connection to an asynchronous connections.
transfer mode network.
Acculink Broadband Digital Standalone endpoints that Allows voice and data traffic
Access transmit data and voice over to share a single, high-speed
high-speed circuits. Also circuit to a variety of
available as a line card. backbone networks.
NextEdge A standalone endpoint that Allows many different data and
supports many data and voice voice services at a remote
connections over several high- office to share one or two
speed circuits. Also supports high speed circuits to a
the FrameSaver service level variety of backbone networks.
management system. In addition, it can be
integrated into a FrameSaver
service level management
system.
NARROWBAND SOLUTIONS
Comsphere Subrate Digital Standalone and line card Allows data services to be
Access products that support data connected over digital leased
transmission over digital lines at narrowband speeds.
network facilities.
Comsphere Modems Standalone and line card Dial-up and leased line modems
products that support data that allow narrowband
transmission over analog connectivity over analog
network facilities. lines.
NETWORK MANAGEMENT SOLUTIONS
OpenLane Network Management Software for managing networks Used as a standalone system or
System built with Paradyne products. part of a larger system to
manage all the Paradyne
products deployed in a
network.
</TABLE>
BROADBAND SOLUTIONS
Broadband DSL
Hotwire. The Hotwire multiservices system includes DSLAM termination
equipment, which provides aggregation of services in the central office, and an
array of customer premises equipment, which extend various broadband access
services over the local loop to the customer premise. The system supports a
range of broadband multimedia access services, such as business and residential
Internet access, remote local area networks access and virtual private network
access at symmetric rates (similar transmission rate for sending and receiving
data over the same line) of up to 1 Mbps and asymmetric rates (varying
transmission rates for sending and receiving data over the same line) of up to 7
Mbps. Hotwire also supports Frame Relay, asynchronous transfer mode T1/E1
channelized access to the wide area networks. With channelized access, customers
can send and receive voice or data traffic on different channels. For example,
channels 1-12 could be used to send data while channels 13-24 could be used to
send voice. In addition to supporting high density configurations for central
office applications, the efficient packaging for lower density market entry
applications allows Hotwire products to be deployed in a variety of private
copper networks, including multi-dwelling-units for both business and
residential access services, universities, hotels, and government campus private
networks.
Our primary customers for Hotwire products are competitive local exchange
carriers, incumbent carriers and other NSPs. Their services are typically
focused on meeting the broadband networking requirements of business customers,
teleworkers and the small office/home office market -- often with an emphasis on
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<PAGE> 44
broadband Internet access. Competitive local exchange carriers customers, such
as Rhythms, are deploying a nationwide network using our Hotwire systems.
Incumbent carriers such as North Pittsburgh Telephone are deploying Hotwire in
their local service areas. NSPs outside the United States, such as the Guangdong
PTA in China, are using Hotwire products to deliver broadband access to the
provinces they serve. The principal focus of these customers, particularly in
the early stages, is to build out central office installations. Our Hotwire
products are easily installed, scaleable and operate over long loops, which
enhance an NSP's ability to deploy them quickly and service new customers.
We believe that the ability to support multiple access services, with a
choice of symmetric or asymmetric DSL technologies, multiple backbone
capabilities and the ability to scale to over 1,000 DSL lines per system makes
Hotwire one of the most flexible and scalable DSL systems available. We believe
this is important because our NSP customers may want to supply symmetric
services to their business customers and asymmetric services to their consumer
customers. In addition, our NSP customers may want to use asynchronous transfer
mode on some backbone connections and Frame Relay on other backbone connections.
The Hotwire system can be configured, monitored and controlled through our
OpenLane network management system that provides complete end-to-end management
and reporting coverage of the entire broadband DSL access solution.
Hotwire products consist of two major product family categories, DSLAMs and
customer premises equipment.
[Diagram depicting Paradyne Hotwire DSL CPE supporting RADSL, MSDSL, MHDSL and
MVL connecting to the supporting DSLAM line cards over the copper local loop
demonstrating DSLAM aggregation to multiple network backbone
facilities.--Graphic entitled "Hotwire Multiservices DSL System." Graphic
indicates that "The Paradyne Hotwire DSLAM supports multiple types of voice and
data transport"]
- Hotwire Multiservices DSLAMs: A DSLAM is a DSL access multiplexer
installed in NSPs' central offices and private copper networks that provides
termination and aggregation of multiple DSL lines and associated services
protocol translation. The Hotwire Multiservices DSLAM systems consist of network
equipment building standard certified chassis and associated DSL line cards, and
an aggregation system with a variety of wide area network options and a
standards based network management system. Network equipment building standard
certification is generally necessary in order for a product to be installed in
the central office of an NSP. Key features of a Hotwire DSLAM system include:
- the ability to support line cards that support between four and 24
ports per card;
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<PAGE> 45
- multiple DSLAM configurations, which include our highly-compact,
stackable DSLAM supporting as few as 4-8 DSL lines which is scalable
to 68 lines and our high-density DSLAM supporting as many as 432 lines
per shelf;
- the ability to support a range of voice and data applications that
operate over packet technologies and channelized access technologies;
- a broad set of available interfaces to consolidate traffic onto a
backbone network. These interfaces operate from between 1.544 Mbps up
to 45 Mbps and can be configured to support Ethernet, Frame Relay or
asynchronous transfer mode. These interfaces include: 10base-T,
100base-T, Channelized T1 and E1, Frame Relay T1 and E1 and
asynchronous transfer mode; and
- a simple network management protocol compliant distributed network
management architecture that supports efficient network management
required for large NSP network deployments.
- Hotwire DSL customer premises equipment: Hotwire customer premises
equipment terminates DSL access services at the customer premise for
connectivity to local area networks, personal computers, plan systems, routers
and other voice and data equipment. Hotwire customer premises equipment operates
at a variety of transmission speeds and loop lengths to meet the needs of our
customers. Hotwire customer premises equipment and associated DSLAM line cards
support multiple DSL technologies.
We expect to continue to implement these multiple DSL technologies in our
Hotwire products, and, consistent with market requirements, to implement
additional DSL technologies, such as G.lite. Additionally, Hotwire customer
premises equipment will be enhanced to include new features required by our
customers and the general market. While we purchase some of the DSL technologies
implemented in the Hotwire DSLAM and customer premises equipment, our MVL
product represents a new DSL technology developed and implemented by Paradyne
that does not require a telephone line splitter and works over very long loops.
The primary advantages of MVL technology are:
- simultaneous voice and data capability over copper loops up to 24,000
feet and is not affected by multiple terminations of copper loop,
commonly known as bridged taps, which provides for ease of customer
installation and eliminate rewiring at the customer premise; and
- operates using low power, which allows higher density DSLAMs which
lowers the cost for our NSP customers.
In March 1999, we received approval from the FCC to register Hotwire MVL
under Part 68 of the FCC's Rules for the Registration of Telephone Equipment
code. The FCC requires that all customer installed equipment that resides on the
telephone infrastructure be registered under Part 68. This approval is based on
the FCC's decision that Hotwire MVL benefits the public's interest by providing
enhanced customer choice and improved service quality for data transmission over
the public switched telephone network and does not pose a risk of harm to the
public switched telephone network. We believe that MVL is the only DSL
technology to receive such approval to date, and that the approval should allow
more customers to deploy MVL while meeting the network requirements of incumbent
carriers.
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<PAGE> 46
SuperLine. SuperLine is an integrated access system that provides
integrated voice and data broadband access services to the residential and small
office/home office markets.
[Diagram depicting the SuperLine integrated access system connecting a
residential customer's data and multi-line voice applications over a single
copper pair to the central office. - Graphic entitled "Superline
Integrated Access Solution."
Graphic indicates that "Superline reduces the cost of adding multi-line voice
and Internet access." Graphic also lists the main features of Superline
Integrated Access Solution as having the following:
- Regular phone line and up to two additional phone lines
- 56 kbps modem support on additional lines
- Consumer installation - no truck roll
- Toll quality voice and calling features supported
- High-speed data (up to 640 kbps)
- Automatic quality of service for voice
- Optimized dynamic bandwidth for data
- Uses a single copper pair]
SuperLine offers several advantages over other currently available
solutions through its support of as many as three telephone lines and a
high-speed Internet access connection over a single existing phone line. We
believe SuperLine is currently the only product to offer such a solution.
SuperLine provides access at rates up to 10 times faster than current narrowband
products. SuperLine can be installed by the end user simply by plugging it into
a standard telephone jack. SuperLine allows carriers to increase service
offerings without installing additional copper lines. The primary customers for
our SuperLine integrated access system are incumbent carriers, many of which are
facing a shortage of available copper wire lines and are seeking alternatives to
physically installing new lines or deriving lines with existing technologies.
The SuperLine system is also compatible with all major switching systems
currently sold in North America. Developed through a partnership with AG
Communications Systems, SuperLine integrates Tripleplay, a technology developed
by Paradyne that enables multi-line voice and data service over a single
telephone line. We also designed and manufacture the associated SuperLine
integrated access device that is distributed as part of the SuperLine system.
The NSP central office equipment included in the SuperLine system was developed
and is manufactured by AG Communications Systems. See "Corporate Development
Relationships." The SuperLine system was introduced in January 1999 and is
distributed by Lucent and AG Communications Systems.
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<PAGE> 47
Broadband Service Level Management
[Diagram depicting the FrameSaver SLM products interconnecting over a Frame
Relay network and an NSP's OpenLine network management system connecting to
monitor and analyze the performance of the network by collecting the data from
the FrameSaver customer premises equipment.--Graphic entitled "Paradyne
FrameSaver--WAN Service Level Management Solution."]
FrameSaver. Our FrameSaver system is an innovative SLM system for Frame
Relay and Frame Relay/asynchronous transfer mode networks. The FrameSaver system
consists of customer premises equipment, NSP equipment and network management
software to monitor and measure network performance across public Frame Relay
systems. The FrameSaver system measures performance and stores the results for
retrieval by our OpenLane network management system. The storage and data
retrieval mechanisms have been implemented according to recognized industry
standards, which makes the FrameSaver system compatible and interoperable with
many other systems that business customers or NSPs may have installed. The
FrameSaver network access units also provide extensive non-disruptive diagnostic
and testing capabilities along with standard access functionality, to give
enterprise customers or service providers a complete managed solution. The
remote monitoring technology included in the FrameSaver System, called RMON-2,
was developed by NetScout and is included in the FrameSaver system pursuant to a
collaboration between Paradyne and NetScout. The significance of utilizing
RMON-2 is that it is a communications language that has been standardized.
Therefore, many different companies build products that utilize RMON-2 which
enables communication with the FrameSaver system. See "Corporate Development
Relationships."
Key features of our FrameSaver system include:
- extensive performance management with diagnostic and control capabilities
that are used to identify and resolve problems quickly without disrupting
the network;
- standards based measurements that allow customers to measure data
throughput both within and above their committed information rates;
- available in a range of network access speeds, from 64 Kbps up to T3;
- non disruptive management that can be accessed over the Frame Relay
network or through an integrated dial modem;
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<PAGE> 48
- the ability to install and diagnose without the presence of a router;
- dial backup through integrated service digital network to protect against
network failures;
- network to network interface for SLM across multiple Frame Relay
networks;
- auto configuration of customer premises equipment for ease of
installation; and
- the ability to scale from small single customer networks to very large
service provider networks.
FrameSaver allows companies to build and manage data networks based on
public network services, while maintaining the same operational efficiency and
confidence used in the management of private networks. By deploying FrameSaver,
business customers can move applications from costly leased lines to shared
public networks and benefit from reduced network services costs, while
maintaining a high degree of control of the network. The FrameSaver system
enables NSPs and business customers to accurately monitor the performance of
individual customer connections across a public or private Frame Relay or Frame
Relay/asynchronous transfer mode network and to report details of that
performance at varying time intervals.
While competing products may offer some of the features of the FrameSaver
product, we believe that no other product on the market today offers such a wide
variety of features. With our FrameSaver solution's ability to operate
completely independent of a router, NSPs are able to manage the network
end-to-end without relying on the customer's router. Router independence is a
key differentiating feature because during installation of the circuit, the
router might not be installed and when diagnosing an operational circuit, it may
be the router that is actually causing the problem. FrameSaver offers NSPs the
ability to perform non-disruptive circuit loopback testing from their network
operations center. This FrameSaver feature allows an NSP to respond to a trouble
call within a few minutes instead of hours, saving time and personnel expense
while increasing customer satisfaction. For these reasons, management believes
that due to its comprehensive feature set, FrameSaver offers NSPs and business
customers cost savings not found in competing solutions.
Broadband Conventional Access
[Diagram depicting the Paradyne NextEDGE solution aggregating multiple voice and
data applications over a single broadband access facility connecting to the
public switched telephone network and a Frame Relay network and providing
SLM.--Graphic entitled "Paradyne NextEdge Consolidated Access Solution."
Graphic indicates that "Multi-Services T1 Access reduces overall network access
charges" and that "FrameSaver inside NextEdge unit provides Service Level
Management."]
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Acculink and NextEdge T1/E1 digital access products consist of a range of
products that provide an interface between a T1 circuit, which carries data at
1.544 Mbps or E1 circuit, which carries data at 2.048 Mbps, and a customer's
high-speed digital equipment, such as a computer, router, multiplexer, wide area
network switch or telephone system. The Acculink and NextEdge products are
managed by our OpenLane network management system, which provides centralized
management of large, geographically disbursed networks for NSPs and businesses.
Businesses, service providers, government entities and other organizations use
these products to build low-cost, centrally managed networks for high-speed,
digital applications. Our T1/E1 digital access products provide a broad range of
features, including centralized, standards-based network management multiple
voice and data interface ports and multiplexing.
Acculink. Acculink products provide integrated voice and data network
access to business customers who want to take full advantage of their T1/E1
bandwidth capacity. The products are used primarily in applications where voice
and data integration over a T1 or E1 line is required. The Acculink T1/E1
products were introduced as a standard part of AT&T's High-Speed Accunet digital
services in the early 1990s, and have been deployed widely in large business
networks ever since.
NextEdge. The NextEdge products add the SLM capabilities of FrameSaver to
the functionality provided by the Acculink products. NextEdge products are used
by NSPs and business customers to deploy integrated voice and data services plus
managed Frame Relay services over a common T1 infrastructure. Business customers
are seeking to maintain the SLM capabilities they have come to view as essential
for their public Frame Relay services as they integrate other network services
onto available bandwidth in their T1 access lines.
NARROWBAND SOLUTIONS
Our Comsphere digital access products consist of a family of managed
digital service units that provide a network interface for a digital circuit
operating at up to 64 Kbps and a customer's digital equipment, such as a
computer, terminal controller, router or other narrowband digital communications
equipment. We introduced the Comsphere digital service unit in the early 1990s,
when they were offered as a standard part of AT&T's digital data services. Our
Comsphere analog modems enable communications over dial-up or dedicated analog
circuits. These analog modems are approved for use around the world and are
widely deployed in business and NSP networks. These highly managed modems
operate on both dial circuits and analog private line circuits where network
applications demand an extremely high degree of network uptime and
manageability. All of the Comsphere products are managed by our OpenLane network
management system, which provides centralized management of large,
geographically disbursed networks for NSPs and businesses.
Businesses, service providers, government entities and other organizations
use these products to build low-cost, centrally managed networks for their
digital applications. Many of these customers have also begun installing our
Acculink, NextEdge and FrameSaver products for their broadband network access
applications. We estimate that we have shipped more than 775,000 narrowband
access products over the past five years.
NETWORK MANAGEMENT SOLUTIONS
OpenLane. The OpenLane network management system, a centralized management
platform, integrates OpenLane into all of our product families and provides NSPs
and business customers with the ability to manage their network access products
located at the edge of the wide area network. The OpenLane software is purchased
separately with each of our products in order to utilize OpenLane's management
capabilities. OpenLane consists of a suite of network management tools that
provide SLM and visibility into network circuits and network access unit
performance. The management tools work together to provide business customers
and NSPs with detailed, accurate performance metrics needed to understand
precisely how their network is performing and where performance problems or
potential problems may reside. The OpenLane network management system offers a
user-friendly graphical user interface and graphical reporting. OpenLane is
designed to work with Hewlett-Packard's OpenView network management platform and
is based extensively on standards, such as simple network management protocol,
which enable it to interface with
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many third-party network management applications that our business and NSP
customers may be using. OpenLane can provide reports and access to screens
either directly or by using the Internet for web-based delivery. Recent releases
of our OpenLane software modules are based on Java programming to permit a
platform independent system. Our NSP and business customers depend on the
OpenLane network management system as the central management system they use to
monitor and control the network access products that they have deployed in their
networks.
CORPORATE DEVELOPMENT RELATIONSHIPS
Our success is dependent upon our continued development relationships with
a number of companies with whom we have development arrangements. We expect to
continue to collaborate with technology partners to facilitate the development
of competitive products. Currently, our development relationships include the
following:
AG Communication Systems. In June 1998, we entered into a joint
development and distribution agreement with AGCS. Paradyne granted a
non-exclusive license to AGCS to incorporate Paradyne's Tripleplay technology
into AGCS's central office switch, digital loop carrier and/or DSLAM equipment
and distribute to sellers of telecommunications systems the products that
incorporate the Tripleplay technology. AGCS agreed to pay a license fee to
Paradyne for the Tripleplay technology. Paradyne granted AGCS a non-exclusive
right to purchase Tripleplay hardware and software for distribution, and AGCS
granted Paradyne a non-exclusive right to purchase switch products for
distribution. The agreement will expire in June 2003, unless renewed.
NetScout. In January 1998, we entered into a marketing and license
agreement with NetScout under which Paradyne agreed to utilize exclusively
NetScout's RMON-2 network management software with our FrameSaver Frame Relay
access unit products, to market and sell NetScout Manager Plus software with our
FrameSaver system and not to compete against NetScout with respect to RMON-2
based technology. NetScout agreed to reference Paradyne as a strategic partner
for digital service units, DSLs and multiplexers and agreed to give preference
to Paradyne when sourcing or integrating digital service units. NetScout granted
a non-exclusive license to promote, market, sell, license and distribute any
NetScout software or product embedded into Paradyne's FrameSaver products in
exchange for royalty fees to NetScout. The agreement will expire in January
2003, unless renewed.
Xylan. Effective March 1999, we entered into a joint development and
supply arrangement with Xylan under which Xylan granted us a non-exclusive,
worldwide right to market, distribute and sell its OmniSwitch product and
related products with our DSL products. The agreement further provides that
through at least March 2001, we are Xylan's primary reseller of these products
for connections to our DSLAMs. Paradyne and Xylan have agreed upon feature
enhancements to these products to meet specific customer requirements. The
agreement continues for two years, after which it may be automatically renewed
for successive one-year periods.
Ascend Communications. In November 1998, we entered into a joint
development and marketing agreement with Ascend in connection with our OpenLane
SLM software and Ascend's Navis, a network management system. Under the
agreement, we agreed to develop interface software which integrates OpenLane
with Navis, creating a single integrated solution for competitive local exchange
carriers, incumbent carriers and other NSPs. Ascend and Paradyne jointly market
Navis, together with OpenLane SLM software, to NSPs. The agreement will continue
unless terminated upon 60 days written notice.
GlobeSpan. Effective March 1999, we entered into a supply agreement with
GlobeSpan which provides for preferential pricing to Paradyne and other terms in
connection with the purchase of GlobeSpan products by Paradyne. Under the terms
of this agreement, GlobeSpan is required to honor Paradyne's orders for
GlobeSpan products in quantities at least consistent with Paradyne's past
ordering practices and agreed to afford Paradyne at least the same priority for
its orders as GlobeSpan affords other similarly situated customers. Paradyne was
also granted immunity under GlobeSpan's intellectual property rights for all
Paradyne customers that purchase Paradyne products that incorporate GlobeSpan
products. GlobeSpan has
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been selling products to Paradyne pursuant to these terms since July 1998. The
agreement will expire in March 2003, unless terminated upon one year's notice.
In addition to the supply agreement, Paradyne and GlobeSpan work very closely
together to develop capabilities that are jointly defined by the two companies.
Our marketing and research and development organizations meet on a regular basis
to review the status of projects.
SALES, MARKETING AND DISTRIBUTION
We sell our products worldwide through a multi-tier distribution system
that includes direct sales, strategic partner sales, NSP sales and traditional
distributor or value added reseller sales. Our sales teams are supported with
marketing programs, educational programs, field technical support and telephone
technical support. Our Internet and intranet sites are used extensively to
communicate with our sales teams, our customers and our resellers.
Our direct sales teams are organized to sell directly to NSP, value added
reseller and distributor customers. Our NSP and value added reseller customers
purchase our products and then sell them or provide them in a service offering
to business customers. We support our resellers' sales activity with a demand
generation sales force. This team markets to business customers in support of
our value added reseller and NSP partners. Our resellers add value by providing
order processing, credit and significant sales and technical support. Our field
sales teams are comprised of sales and systems engineering personnel that are
experienced and knowledgeable about the products and technologies we provide and
support. Our field sales teams are further supported by Paradyne's telesales
team. This inside sales team answers all incoming emails and telephone calls,
makes outbound telephone calls, follows up on leads generated through
advertising and provides telephone support to our resellers.
Our resellers are responsible for identifying potential business customers,
selling our products as part of complete solutions and, in some cases,
customizing and integrating our products at end users' sites. We establish
relationships with resellers through written agreements that provide prices,
discounts and other material terms and conditions under which the distributor is
eligible to purchase our products for resale. Such agreements generally do not
grant exclusivity to the resellers, prevent the resellers from carrying
competing product lines or require the resellers to sell any particular dollar
amount of our products, although the contracts may be terminated at our election
if specified sales targets and end user satisfaction goals are not attained. We
nurture these relationships with resellers with incentive and training programs.
This multi-channel sales strategy encourages broad market coverage by allowing
our sales personnel to create demand for our products while giving customers the
flexibility to choose the most appropriate delivery channels.
We participate in trade shows and seminars and make extensive use of the
Internet and our web presence at www.paradyne.com to promote and generate demand
for our products. (The reference to our worldwide web address does not
constitute incorporation by reference into this prospectus of the information
contained at this web site.) Since most of our customers utilize the Internet,
we believe that our Internet presence is a low cost and highly effective method
for educating our customers about our products and creating demand for our
products. As a result, we place Internet advertising and conduct targeted email
marketing. Our web site includes product information, multimedia presentations
and customer testimonials. We also host Internet based interactive seminars for
promotional seminars, training events and press conferences.
Channel marketing programs allow us to attract and support our resellers,
including NSPs. Our "Connect to Success" reseller program markets and sells
products directly to large resellers and through national distributors, such as
Ingram Micro and Tech Data, to hundreds of value added resellers and NSPs. Our
relationships with these distributors provide significant value to our reseller
partners by giving them immediate availability to product without the cost of
stocking. These well known distributors also extend credit to resellers,
increasing their buying power, and providing them with direct shipments to end
customers further reducing costs. Our reseller programs provide advertising
support, volume incentive rebates, exclusive access to technical support via 800
numbers and through our web site. Special programs encourage value added
reseller loyalty, focus on strategic products, and focus on winning new
accounts. Specialized product training programs are provided to our resellers at
our headquarters, in the field and over the web.
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In addition to the marketing and sale of our products, we resell the
Acculink Access Controller, our private label for the IMACS system of Premisys
Corporation, through a small, focused sales team. Paradyne and Premisys entered
into a distribution agreement in 1992, which has been amended and extended,
under which we have exclusive distribution rights through April 2005 for
Premisys' IMACS system, which we market to Lucent and AT&T. In 1995 and 1996, we
sold the Acculink Access Controller to Lucent, AT&T and many other companies. In
1997, we discontinued selling the product to customers other than Lucent and
AT&T for various pricing and distribution reasons. Currently, we sell the
Acculink Access Controller to Lucent and AT&T for a variety of wireless and
wireline applications. We have also developed and sell a limited number of
hardware and software enhancements for the Acculink Access Controller.
CUSTOMERS
The end-users of our equipment are primarily businesses and NSPs.
BUSINESS CUSTOMERS
Business customers include businesses around the world that purchase
equipment for their company's wide area network from Paradyne's resellers or,
for some international customers, directly from Paradyne. Set forth below is a
representative list of businesses who purchased over $100,000 of our products in
1998:
<TABLE>
<S> <C> <C>
Aon Fifth Third Bank Norwest
Bank of America First Union Paine Webber
Bank One Freddie MAC Progressive
Boise Cascade General Electric Prudential
Chase Manhattan Hartford Roadway Express
Cigna Hertz The Associates
Citigroup JC Penney Toyota
CSX Liberty Mutual Unisys
Delta Airlines Litton Utilicorp
Everen Securities Lucent VISA
Farmers Insurance Merrill Lynch Xerox
</TABLE>
NETWORK SERVICE PROVIDERS
NSPs purchase equipment for their network or for resale into their
customers' networks. Set forth below is a representative list of NSPs who
purchased over $100,000 of our products in 1998:
<TABLE>
<S> <C> <C>
AT&T Guangdong PTA RAM Mobile Data
Ameritech HarvardNet Rhythms
Bell Canada Henan PTA Saudi Telecom
Bell South IBM Global Network Shandong PTA
Cable & Wireless Panama Metronet Shenzhen PTT
Cadvision MGC Communications SITA
CFW Communications MT&T Sprint
Egypt Telecom North Pittsburgh Telephone TDS Telecom
Fonorola NTT Telus Communications
Guangzhou PTT PLDT Tunisia Telecom
</TABLE>
In the year ended December 31, 1998, two of our customers accounted for
greater than 10% of revenues. Direct sales to Lucent in 1998 accounted for
approximately 35% of our total revenues. Sales to Tech Data accounted for
approximately 15% of our total revenues. We estimate that approximately 70% of
our sales to Tech Data represented products that were resold to Lucent.
Collectively, we estimate that direct and indirect sales to Lucent accounted for
approximately 47% of our total revenues in 1998. Lucent purchases products to
include in their data networking solutions products, which it sells to
businesses worldwide. Lucent also purchases our products to package with their
various telephone systems. Tech Data purchases products from us as a
distributor.
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CUSTOMER SUPPORT
We maintain a strong focus on customer service and support for our
resellers and end user customers. We accomplish this at our customers' sites
through systems engineers who work with customers in a pre-sales role, and
through the support teams of our resellers. The Paradyne Technical Support
Center provides telephone based pre- and post-sales support to resellers and
customers on a seven day, 24 hour basis and also provides proposal support to
the sales organization. Our training organization provides technical training to
end users, maintenance service providers, NSPs and sales channels. Training is
included as a part of our channel programs or is provided on a fee basis.
We provide maintenance support offerings that utilize a variety of service
organizations based on geography and skills required. Our authorized service
providers include Lucent, NCR, Myriad and TechForce. These service providers
provide service offerings that include various maintenance packages,
installation, remote management, project management and other professional
service options.
Warranties on most of our hardware products extend for 24 months. A number
of products carry a 12 month warranty and others carry a 60 month warranty.
Software products carry a 90 day warranty. Factory repair or replacement is
provided by us.
COMPETITION
The telecommunications market is highly competitive. If we fail to compete
effectively our business will be adversely affected. We believe that competition
may increase substantially as the introduction of new technologies, deployment
of broadband networks and potential regulatory changes create new opportunities
for established and emerging companies in the industry. We compete directly with
other providers of broadband and narrowband access equipment, including ADC
Telecommunications, Adtran, Alcatel, Ascend, Cisco, Copper Mountain, Digital
Link, Larscom, Motorola, Nokia, Nortel Networks, Orckit, PairGain, Sync
Research, 3Com, Tut Systems and Visual Networks. We expect that competition for
products that address the broadband access market will grow as more companies
and an increasing number of new companies focus on this market to develop
solutions for higher speed access to public networks. We expect that competition
for products that address the narrowband market will not dramatically change
over the course of the next few years.
Many of our current and potential competitors are larger than we are and
have significantly greater financial, sales and marketing, technical,
manufacturing and other resources and more established channels of distribution.
As a result, these competitors may be able to respond more rapidly to new or
emerging technologies and changes in customer requirements, or to devote greater
resources to the development, promotion and sale of their products. Our
competitors may enter our existing or future markets with solutions that may be
less costly, provide higher performance or additional features or be introduced
earlier than our solutions. Some of our competitors currently offer financing
alternatives to their customers at levels at which we cannot compete.
Our markets are characterized by increasing consolidation both within the
data communications sector and by companies combining or acquiring data
communications products and technology for delivering voice-related services, as
exemplified by the recently announced acquisitions of Ascend by Lucent, Diamond
Lane by Nokia and Xylan by Alcatel. Increased competition and consolidation
could result in price reductions and loss of market share by Paradyne. We cannot
be sure of the impact of any of these acquisitions on the competitive
environment for our products. Increased competition and consolidation could
result in price reductions and a decrease in our market share. Our future
success will depend on our ability to compete successfully against our
competitors based on the following factors:
- key product features;
- system reliability and performance;
- technological innovation;
- price;
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<PAGE> 54
- time to market;
- breadth of product lines;
- conformity to industry standards;
- ease of installation and use;
- brand recognition;
- ability to help customers finance purchases;
- technical support and customer service; and
- size and stability of operations.
RESEARCH AND DEVELOPMENT
Since 1969, we have been developing technologies and solutions for the
communications market. We believe that our future success is dependent on our
ability to continue to rapidly deliver innovative broadband access solutions.
Time to market is critical in order to meet the requirements of our extensive
customer base and to be able to quickly adapt to the constantly emerging needs
in the market. Innovation is critical in order to provide the capabilities that
differentiate the products and solutions that we offer from those of our
competitors. We intend to maintain an ongoing investment in research and
development that will support technological innovation.
Our research and development efforts are focused on sustaining and
enhancing our existing products and developing innovative new solutions in the
emerging broadband market. We emphasize early and frequent interaction between
our research and development systems engineers, key technologists and customers
to arrive at unique solutions to meet specific product requirements. Customer
feedback is also obtained from resellers and through participation in industry
events, organizations, and standards bodies.
We have developed core competencies in SLM, broadband systems
internetworking, network management, and broadband access technologies. We will
continue to rely on the use of industry and technology partnerships to further
enhance the capability to quickly introduce new solutions into the broadband
market, and we expect to continue to employ a strategy that uses a combination
of internally developed solutions and external partnering.
We maintain research and development sites in Largo, Florida and Red Bank,
New Jersey. In addition, engineering work is completed in Mexico and India
through technology partnering arrangements. In order to maintain our rapid pace
of product introduction, we will need to continue to attract talented engineers
and invest in state-of-the-art research and development tools and processes. We
will continue to invest resources in key skill areas, such as Java programming,
system software, digital signal processing, internetworking, data communication
protocols, test automation, central office solutions, RISC processing,
transmission technologies, and telephony.
Currently, we are developing enhancements for all of our broadband and SLM
product families. We expect this work to result in feature improvements to these
products, reduce our costs associated with their manufacture or reduce the cost
to deploy them. We are focused on increasing the density of our DSL systems and
expect to introduce 12 and 24 line cards for our Hotwire DSLAM. We are also
adding SLM to products that did not previously include SLM capability, enhancing
the SLM features for those products that already support SLM and adding DSL
function to products that currently have only conventional broadband
capabilities.
INTELLECTUAL PROPERTY
Our success and ability to compete is dependent in part upon our
proprietary technology. We rely on a combination of patent, copyright, trademark
and trade secret laws and non-disclosure agreements to protect our proprietary
technology. We currently hold over 155 U.S. patents and have over 100 U.S.
patent applications pending. In addition, we hold corresponding foreign patents
and have corresponding foreign patent applications pending. There can be no
assurance that patents will be issued with respect to pending or
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future patent applications or that our patents will be upheld as valid or will
prevent the development of competitive products. We seek to protect our
intellectual property rights by limiting access to the distribution of our
software, documentation and other proprietary information. In addition, our
employees execute proprietary information agreements and we enter into
nondisclosure agreements with some of our strategic partners. There can be no
assurance that the steps taken by us in this regard will be adequate to prevent
misappropriation of our technology or that our competitors will not
independently develop technologies that are substantially equivalent or
independently developed technologies that are substantially equivalent or
superior to our technologies. We also are subject to the risk of adverse claims
and litigation alleging infringement of the intellectual property rights of
others. In this regard, there can be no assurance that third parties will not
assert infringement claims in the future with respect to our current or future
products or that any such claims will not require the us to enter into license
arrangements or result in protracted and costly litigation, regardless of the
merits of such claims. Furthermore, from time to time, we receive and have
received letters from others requesting licenses or indicating that our products
may require a license. These letters are not uncommon in the industry, and these
letters are dealt with according to normal business practices. No assurance can
be given that any necessary licenses will be available or that, if available,
such licenses can be obtained on commercially reasonable terms. In 1999, we
received a letter from a third party patent owner alleging infringement by us of
patents related to product components and manufacturing processes and equipment.
The patents referenced in this letter are also the basis for several
infringement lawsuits commenced by the patent owner to which we are not a party.
No claim has been asserted beyond this letter, but we cannot assure you that the
third party will not commence an infringement action against us. We are in the
process of investigating the allegations, but we currently believe that defenses
asserted by others may be applicable to us and that indemnities we have from
third party vendors may insulate us from at least some damages. If an
infringement claim is brought against us, we cannot assure you that we would
prevail and any adverse outcome could require us to pay royalties to the third
party patent owner.
Most of Paradyne's existing patent portfolio, will be enforceable in the
United States for at least the next ten years, provided that periodic
maintenance fees are paid to the U.S. Patent & Trademark Office and unless
determined to be invalid or unenforceable by an appropriate court or the U.S.
Patent & Trademark Office. Most of Paradyne's inventions that are directed to
DSL and Service Level Management technologies are covered in pending
applications that have yet to issue as patents and that have been filed in the
last several years. If and once issued, these patents will be enforceable for 20
years from the date the application was originally filed, pursuant to applicable
laws, provided that periodic maintenance fees are paid to the U.S. Patent &
Trademark Office and unless determined to be invalid or unenforceable by an
appropriate court or the U.S. Patent & Trademark Office.
MANUFACTURING AND FACILITIES
Our principal administrative, engineering and manufacturing facilities are
located in two leased buildings totaling approximately 333,000 square feet in
Largo, Florida. In addition, we maintain a research and development facility of
approximately 29,000 square feet in Red Bank, New Jersey. The leases for the
Largo, Florida facility and the Red Bank, New Jersey facility expire in 2007 and
2003, respectively, and there are two five-year renewal options on the Largo,
Florida facility. Additionally, there is an automatic extension of the lease
term of the Largo, Florida lease if the current landlord sells this property
within the first three years of the lease. The Red Bank lease is not renewable
but we retain the right to renegotiate with the landlord. We also lease offices
for branch sales and administration in Virginia, as well as in Canada, France,
Egypt, Japan, Hong Kong, Singapore and the People's Republic of China.
Collectively, these offices occupy approximately 27,000 square feet. Leases for
these facilities expire at various times during 1999 and 2002. We believe that
the current facilities will be able to accommodate anticipated expansion of
operations in these locations over the next 24 months.
We manufacture substantially all of our products. All of our major
operations are ISO-9001 registered. Many of our parts are procured from a
variety of qualified suppliers per our specification. Some of our strategic
suppliers are electronically linked, and given 26 week visibility of demand. We
believe that this is critical in maintaining high delivery volumes and
minimizing inventory. We use a combination of standard
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parts and components, which are generally available from more than one vendor
and some parts that are obtained from a single source. We have generally been
able to obtain adequate supplies in a timely manner from our current vendors or,
when necessary, to meet production needs from alternative vendors. We believe
that, in most cases, alternate vendors can be identified if current vendors are
unable to fulfill our needs. However, if we are unable to obtain sufficient
quantities of necessary supplies, or if there is a significant increase in the
price of key components or materials, delays or reductions in manufacturing or
product shipments could occur, which would have a material adverse effect on our
business, financial condition and results of operations.
We believe that we have sufficient production capacity to meet current
demand for our product offerings and anticipate meeting future demand through a
combination of the use of additional employees and increased outsourcing of
products or components. In addition, we have the right of first refusal on the
construction of any building on some lands adjacent to our Largo, Florida
facilities if more space is needed to expand our manufacturing operations.
EMPLOYEES
As of March 31, 1999, we employed approximately 855 full time employees.
None of our employees is covered by collective bargaining agreements, and we
believe that our relations with our employees are good.
GOVERNMENT REGULATION
In the U.S., the Telecommunications Act of 1996 changed the regulatory
environment for all NSPs, including the competitive local exchange carriers and
incumbent carriers among our customer base. The Telecommunications Act of 1996
removed federal, state and local barriers to entry into the local telephone
market by CLECs. The Telecommunications Act of 1996 also imposed significant
obligations on incumbent carriers, including obligations to interconnect their
networks with competitors' networks and to unbundle their networks and provide
competitors with access to unbundled network elements. Competitive local
exchange carriers and incumbent carriers are a significant part of our customer
base. The Telecommunications Act of 1996 also directs the Federal Communications
Commission to adopt local loop access rules to enable competitive providers of
advanced services, such as high-speed Internet access, to deploy new
technologies on a faster, more cost-effective basis to consumers. The United
States Congress is considering a variety of amendments to the Telecommunications
Act of 1996. The FCC currently is considering changes to its regulations,
including those relating to network equipment registration and the deployment of
broadband services. We cannot predict whether any amendments to the
Telecommunications Act of 1996 or any future FCC Regulations will have a
negative impact on our business or the businesses of our customers or suppliers.
Companies selling terminal equipment to be connected to the public switched
telephone network must register some of their products with the FCC and conform
them to technical standards promulgated by the FCC in its regulations. These
regulations are designed to protect the public switched telephone network from
harm, including interference and service degradation.
LEGAL PROCEEDINGS
We are not a party to any pending material litigation.
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MANAGEMENT
OFFICERS AND DIRECTORS
Our officers and directors, the positions held by them, and their ages as
of May 15, 1999 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Andrew S. May............................. 38 President, Chief Executive Officer and Director
Sean E. Belanger.......................... 43 Senior Vice President, Worldwide Sales
Patrick M. Murphy......................... 42 Senior Vice President, Chief Financial Officer and
Treasurer
James L. Slattery......................... 59 Senior Vice President, Chief Legal and Intellectual
Property Officer and Corporate Secretary
J. Scott Eudy............................. 41 Vice President, Network Access Products
Paul H. Floyd............................. 41 Vice President, Research and Development
John M. Guest............................. 54 Vice President, Chief Information Officer
Mark Housman.............................. 46 Vice President, Marketing
Sherril A. Claus Melio.................... 47 Vice President, Human Resources and Administration
H. Edward Thompson........................ 52 Vice President, Manufacturing
Frank J. Wiener........................... 38 Vice President, DSL Products
Thomas E. Epley........................... 58 Chairman, Board of Directors
David Bonderman........................... 56 Director
Keith B. Geeslin.......................... 46 Director
David M. Stanton.......................... 36 Director
William R. Stensrud....................... 48 Director
Peter F. Van Camp......................... 43 Director
</TABLE>
Andrew S. May has served as President since December 1996, Director since
January 1997, and Chief Executive Officer since May 1997. From October 1995 to
November 1996, he served as Vice President and General Manager of 3Com
Corporation's Network Service Provider division. From April 1992 to October
1995, Mr. May served as Vice President of Marketing for Primary Access
Corporation, which was acquired by 3Com in 1995. Mr. May holds a B.A. in
economics from the University of New Hampshire.
Sean E. Belanger has served as Senior Vice President of Worldwide Sales
since June 1997. From November 1996 to May 1997, he served as Vice President and
General Manager of 3Com Corporation's Network Service Provider division. From
September 1992 to November 1996, he was Vice President of Sales for Primary
Access Corporation. Mr. Belanger holds a B.S. in business management from
Virginia Polytechnic Institute and State University.
Patrick M. Murphy has served as Senior Vice President, Chief Financial
Officer and Treasurer since August 1996. He also has served as a director and
Vice President, Chief Financial Officer, and Treasurer of Paradyne Credit Corp.,
an affiliated entity, since August 1996. From August 1996 to July 1998 he served
as Vice-President, Treasurer, Chief Financial Officer of GlobeSpan, an
affiliated entity. From January 1987 to August 1996, he served as Chief
Financial Officer of Continental Broadcasting, Ltd., a television and radio
broadcast company. Mr. Murphy holds a B.S./B.A. in finance from John Carroll
University and is a certified public accountant.
James L. Slattery has served as Senior Vice President, Chief Legal and
Intellectual Property Officer and Corporate Secretary since August 1996 and held
various executive positions at Paradyne since April 1985. He has also served as
a director and Vice President and Corporate Secretary for Paradyne Credit Corp.,
an affiliated entity, since August 1996. From August 1996 to March 1999 he
served as Vice President and Secretary of GlobeSpan, an affiliated entity. Mr.
Slattery holds a B.S. from New York University in international relations and
commerce and a J.D. from Washington & Lee School of Law.
J. Scott Eudy has served as Vice President of Network Access products since
December 1997. From February 1981 to September 1996, he held various sales,
engineering and marketing positions with AT&T. Mr. Eudy holds a B.S. in
mechanical engineering and an M.B.A. from Texas Tech University.
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<PAGE> 58
Paul H. Floyd has served as Vice President of Research and Development
since July 1996. From October 1992 to June 1996, he was Director of Research and
Development for AT&T Paradyne's digital products development group. Mr. Floyd
holds a B.S. and M.S. in electrical engineering from Stevens Institute of
Technology and an M.B.A. from the University of South Florida.
John M. Guest has served as Vice President and Chief Information Officer
since October 1996. From April 1990 to October 1996 he served in numerous
management capacities with Paradyne. Prior to joining Paradyne in 1990, he was a
senior manager at AT&T responsible for its data communications product line. Mr.
Guest attended Rutgers University.
Mark Housman has served as Vice President of Marketing since May 1997.
Previously, Mr. Housman was a Vice President of Sales from October 1994 to May
1997. Mr. Housman holds a B.S. in mechanical engineering from the New York
Institute of Technology and an M.B.A. in marketing from New York University.
Sherril A. Claus Melio has served as Vice President of Human Resources and
Administration since May 1997. From July 1993 to May 1997, she was Vice
President of Human Resources. Ms. Melio holds a B.S. in behavioral science from
San Jose State University.
H. Edward Thompson has served as Vice President of Manufacturing since
August 1993. Mr. Thompson holds a B.S. in mechanical engineering from Georgia
Institute of Technology and a Masters of Engineering Administration from the
University of South Florida.
Frank J. Wiener has served as Vice President of Paradyne's DSL Products
since August 1996. From February 1989 to August 1996, he served as a director
and manager of various marketing, sales and business development departments at
Paradyne. Mr. Wiener holds a B.S. in electrical engineering from the University
of South Florida.
Thomas E. Epley has served as the Chairman of the board of directors since
August 1996. He also served as President from August 1996 to December 1996 and
Chief Executive Officer from August 1996 to May 1997. From August 1996 to April
1997, Mr. Epley was Chief Executive Officer and President of GlobeSpan, an
affiliated entity. He has served as a director of GlobeSpan since August 1996
and was Chairman of the board of directors from August 1996 to March 1999. He
has served as a director and President and Chief Executive Officer of Paradyne
Credit Corp., an affiliated entity, since August 1996. From 1993 to 1996, he was
a director of Carlton Communications. From 1991 to 1996, he served as Chairman
and Chief Executive Officer of Technicolor, a provider of services and products
to the entertainment industry. He is also a limited partner in Communication
Partners, L.P. Mr. Epley holds a B.S. degree in mechanical engineering from the
University of Cincinnati and an M.B.A. from the Kellogg School of Northwestern
University.
David Bonderman has served as a director of Paradyne since June 1999. Mr.
Bonderman has been a managing partner in Texas Pacific Group, a limited partner
in Communication Partners, L.P., since its formation in 1992. Prior to forming
Texas Pacific Group, Mr. Bonderman had served as the Chief Operating Officer of
the Robert M. Bass Group, Inc. since 1983. He is a director of several public
and privately held companies including Continental Airlines, Inc., Bell & Howell
Company, Ducati Motorcycles, S.p.A., Realty Information Group, Berringer Wine
Estates, Denbury Resources, Inc., Washington Mutual, Inc., Oxford Health Plans,
Inc., UroGenesys, Inc., J. Crew Group, Inc., Landis & Gyr Communications, and
Virgin Entertainment Group, Ltd. Mr. Bonderman holds a B.A. degree from the
University of Washington and a J.D. from Harvard Law School.
Keith B. Geeslin has served as a director of Paradyne since June 1999. Mr.
Geeslin is a general partner of The Sprout Group, a venture capital firm, where
he has been employed since July 1984. In addition, he is a general or limited
partner in a series of investment funds associated with The Sprout Group, a
division of DLJ Capital Corporation, which is a subsidiary of Donaldson, Lufkin
& Jenrette. The Sprout Group are direct and indirect equity owners in
Communication Partners, L.P. Mr. Geeslin is also a director of SDL, Inc.,
Rhythms NetConnections Inc., GlobeSpan, and several privately held companies.
Mr. Geeslin received a B.S. degree in electrical engineering from Stanford
University, an M.A. degree in philosophy, politics and
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economics from Oxford University and an M.S. degree in engineering and economic
systems from Stanford University.
David M. Stanton has served as a director of Paradyne since August 1996.
Mr. Stanton is a partner of Texas Pacific Group, a limited partner in
Communication Partners, L.P., where he has been employed since 1994. He also
serves as Vice President of TPG Advisors, Inc. and is President of Communication
Genpar, Inc., entities affiliated with Communication Partners, L.P. Prior to
joining Texas Pacific Group, Mr. Stanton was a venture capitalist with Trinity
Ventures, where he specialized in information technology, software and
telecommunications investing. Mr. Stanton currently serves as a director of
Denbury Resources, Inc., and GlobeSpan, Inc. and several private companies,
including Paradyne Credit Corp., an affiliated entity of Paradyne. Mr. Stanton
holds a B.S. in chemical engineering from Stanford University and an M.B.A. from
the Stanford Graduate School of Business.
William R. Stensrud has served as a director of Paradyne since January
1997. Mr. Stensrud has been a general partner at the venture capital investment
firm of Enterprise Partners since January 1997. From February 1997 to June 1997,
he served as President and Chief Executive Officer of Rhythms NetCommunications,
Inc., a network service provider. Previously, from January 1992 to July 1995,
Mr. Stensrud served as President and Chief Executive Officer of Primary Access
Corporation which was acquired by 3Com Corporation, and where Mr. Stensrud
remained as an executive at Primary Access Corporation through March 1996. Mr.
Stensrud is a director of several public and privately held companies, including
Rhythms NetCommunications, Inc. and Juniper Networks. Mr. Stensrud holds a B.S.
in electrical engineering and computer science from the Massachusetts Institute
of Technology.
Peter F. Van Camp has served as a director of Paradyne since June 1999. Mr.
Van Camp serves as President of Internet Markets for UUNET, the Internet
division of MCI WorldCom. Prior to joining MCI WorldCom, he served as an
executive at CompuServe, Inc. and President of CompuServe Network Services. Mr.
Van Camp holds a B.S. degree in accounting and computer science from Boston
College.
Following this offering, the board of directors will be divided into three
classes, with each class serving staggered three-year terms. After the offering,
Class I will consist of Messrs. Epley and Bonderman, with a term expiring in
2000, Class II will consist of Messrs. Geeslin and Van Camp, with a term
expiring in 2001 and Class III will consist of Messrs. May, Stanton and
Stensrud, with a term expiring in 2002.
COMMITTEES OF THE BOARD OF DIRECTORS
The board of directors has established an Audit Committee and a
Compensation Committee. The Audit Committee consists of Messrs. Geeslin and Van
Camp. The Audit Committee makes recommendations to the board of directors
regarding the selection of independent auditors, reviews the results and scope
of the audit and other services provided by our independent auditors and reviews
and evaluates our audit and control functions.
The Compensation Committee consists of Messrs. Stanton and Stensrud. The
Compensation Committee makes recommendations regarding our Amended and Restated
1996 Equity Incentive Plan and concerning salaries and incentive compensation
for our employees and consultants.
DIRECTOR COMPENSATION
During 1998, our outside directors were not compensated for serving as
members of the board of directors. Following the closing of this offering,
outside directors will receive $1,500 for participation in meetings of the board
of directors and $750 for participation in committee meetings held on days other
than those on which meetings of the board of directors are held. In addition,
outside directors will receive automatic option grants under our 1999
Non-Employee Directors' Stock Option Plan as described below.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
As of June 3, 1999, the Compensation Committee of the board of directors
consisted of Messrs. Stanton and Stensrud.
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Mr. Stanton has a pecuniary interest in the Paradyne shares formerly held
by Communication Partners, L.P., which held approximately 97.1% of our common
stock and 83.2% of the common stock of GlobeSpan. In May 1999, Communication
Partners, L.P. distributed an aggregate of 19,348,618 shares of Paradyne common
stock to TPG Partners, L.P. and TPG Parallel I, L.P., limited partners of
Communication Partners, L.P. and to Communication GenPar, Inc., the general
partner of Communication Partners, L.P.. Mr. Stanton is the sole director and
president of Communication GenPar, Inc. and is a partner of Texas Pacific Group,
which organized TPG Partners, L.P. and TPG Parallel I, L.P.
Mr. Stensrud has a pecuniary interest in the Paradyne shares formerly held
by Communication Partners, L.P.. In May 1999, Communication Partners, L.P.
distributed its Paradyne shares to its limited partners and general partner. Mr.
Stensrud and the Stensrud Family Trust are limited partners of Communication
Partners, L.P. and received an aggregate of 533,476 Paradyne shares in the
distribution.
For a further description of interlocking transactions, see "Certain
Transactions."
EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation for
services rendered during the fiscal year ended December 31, 1998 by our Chief
Executive Officer and our four other most highly compensated executive officers
whose salary and bonus for the last fiscal year exceeded $100,000, collectively
referred to as the Named Executive Officers. There were no options granted to
the Named Executive Officers during fiscal 1998.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION (1)
------------------------ ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION
<S> <C> <C> <C>
Thomas E. Epley.......................................... $586,541 -- $18,102(2)
Chairman, Board of Directors
Andrew S. May............................................ 323,094(3) $ 97,425 536(4)
President, Chief Executive Officer and Director
Patrick M. Murphy........................................ 223,628(5) 51,335 479(6)
Senior Vice President and Chief Financial Officer
Sean E. Belanger......................................... 200,018(7) 114,000 492(8)
Senior Vice President, Worldwide Sales
James L. Slattery........................................ 197,002 71,569 2,155(9)
Senior Vice President, Chief Legal and Intellectual
Property Officer and Corporate Secretary
</TABLE>
- ------------------------------
(1) In accordance with the rules of the Securities and Exchange Commission (the
"Commission"), the compensation described in this table does not include
medical, group life insurance or other benefits which are available
generally to all salaried employees of Paradyne and other perquisites and
personal benefits received which do not exceed the lesser of $50,000 or 10%
of any officer's salary and bonus disclosed in this table.
(2) Mr. Epley received life insurance benefits and payments for living expenses
during 1998.
(3) Includes $139,522 contributed to the Key Employee Stock Option Plan.
(4) Mr. May received life insurance benefits during 1998.
(5) Includes $60,000 contributed to the Key Employee Stock Option Plan.
(6) Mr. Murphy received life insurance benefits during 1998.
(7) Includes $47,344 contributed to the Key Employee Stock Option Plan.
(8) Mr. Belanger received life insurance benefits during 1998.
(9) Mr. Slattery received life insurance benefits during 1998.
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AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
The following table sets forth information regarding options exercised
during fiscal 1998 by the Named Executive Officers and the number and value of
securities underlying unexercised options held on December 31, 1998.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE-
NUMBER OF UNEXERCISED OPTIONS AT MONEY OPTIONS AT
SHARES DECEMBER 31, 1998 DECEMBER 31, 1998 (1)
ACQUIRED ON VALUE -------------------------------- ------------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C> <C> <C>
Thomas E. Epley...... -- -- -- -- -- --
Andrew S. May........ -- -- 637,500 637,500 $5,512,500 $5,512,500
Patrick M. Murphy.... -- -- 84,375 65,625 928,125 721,875
Sean E. Belanger..... -- -- 112,500 187,500 1,237,500 2,062,500
James L. Slattery.... -- -- -- 45,000 -- 495,000
</TABLE>
- ------------------------------
(1) The calculations of the value realized and of the unexercised in-the-money
options are based on the assumed initial public offering price of $13.00 per
share less the exercise price payable for such shares.
EMPLOYMENT AGREEMENTS
Paradyne has a Key Employee Agreement with Thomas E. Epley dated as of
April 1, 1999 and continuing until July 31, 1999. During the term of the
agreement, Mr. Epley is entitled to an annualized base salary of $600,000. Mr.
Epley is neither eligible to participate in our 1996 Equity Incentive Plan nor
is he eligible for a discretionary or incentive bonus. During the term of the
agreement, Mr. Epley is serving as President and Chairman of the board of
directors of Paradyne Credit Corporation. Either Paradyne or Mr. Epley has the
right to terminate Mr. Epley's employment at any time for any reason. If we
terminate Mr. Epley's employment without cause or he resigns for a material
breach by us of his employment agreement, he will continue to receive his base
salary through July 31, 1999.
Paradyne has an Employment Agreement with Andrew S. May dated as of October
31, 1996 and continuing indefinitely. Under the agreement, Mr. May is entitled
to receive an annualized base salary of not less than $300,000. He received a
commencement bonus in the amount of $35,000 and is eligible to receive an annual
cash bonus of up to 50% of his base salary. He is also eligible to participate
in the Amended and Restated 1996 Equity Incentive Plan. During the term of the
agreement, Mr. May is serving as President and Chief Executive Officer. Either
Paradyne or Mr. May has the right to terminate Mr. May's employment at any time
for any reason. If we terminate Mr. May's employment without cause or he resigns
for a material breach by us of his employment agreement, he will receive a
severance payment equal to one year's salary.
Paradyne has a Key Employee Agreement with Patrick M. Murphy dated as of
August 1, 1996 and continuing indefinitely. Under the agreement, Mr. Murphy is
entitled to receive an annualized base salary of not less than $215,000. He is
eligible for a discretionary bonus in an annualized amount of up to $70,000. He
is also eligible to participate in the 1996 Equity Incentive Plan. During the
term of the agreement, Mr. Murphy is serving as Senior Vice President, Chief
Financial Officer and Treasurer. Either Paradyne or Mr. Murphy has the right to
terminate Mr. Murphy's employment at any time for any reason. If we terminate
Mr. Murphy's employment without cause, he will receive a severance payment equal
to one year's salary.
Paradyne has a Key Employee Agreement with James L. Slattery dated as of
August 1, 1996 and continuing indefinitely. Under the agreement, Mr. Slattery is
entitled to receive an annualized base salary of not less than $189,410. He is
eligible for a discretionary bonus in an annualized amount of up to $85,000. He
is also eligible to participate in the 1996 Equity Incentive Plan. During the
term of the agreement, Mr. Slattery is serving as Senior Vice President, Chief
Legal and Intellectual Property Officer and Corporate Secretary. Either Paradyne
or Mr. Slattery has the right to terminate Mr. Slattery's employment at any time
for any reason. If we terminate Mr. Slattery's employment without cause, he will
receive a severance payment equal to one year's salary.
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CHANGE OF CONTROL PROVISIONS
We have an arrangement with Andrew S. May governing the vesting of stock
options upon a change in control. The agreement provides that all of Mr. May's
options shall become exercisable upon a change in control. We have arrangements
with Patrick M. Murphy and James L. Slattery governing the vesting of stock
options upon a change of control. Each agreement provides that in the event of a
change in control, 50% of the unvested options held by the officer shall become
immediately exercisable and the remaining unvested shares shall become
exercisable if the officer does not receive comparable employment following the
change of control. Furthermore, if the officer receives comparable employment,
the remaining unvested shares shall become exercisable upon the earlier of the
one year anniversary of the change in control or the officer's termination
without cause. The Company has agreed to guarantee the value of the unvested
shares equal to the value on the date of the change in control. We have an
arrangement with Sean E. Belanger governing the vesting of stock options upon a
change in control. The arrangement provides that all of Mr. Belanger's options
shall become exercisable in the event Mr. Belanger is not offered comparable
employment following a change of control, and his stock options are not either
assumed or replaced with similar stock options. Our employment agreement with
Thomas E. Epley provides that upon a change of control, Mr. Epley shall have the
right to terminate his employment and to receive an amount equal to the balance
of his base salary payable for the remaining term of this agreement.
1996 EQUITY INCENTIVE PLAN
The Amended and Restated 1996 Equity Incentive Plan (the "1996 Plan") was
adopted by Paradyne Acquisition Corp.'s board of directors in January 1997 and
approved by its stockholders in April 1997. An amendment and restatement of the
1996 Plan was adopted by our board of directors and our stockholders in June
1999 which added the provision described below that increases the share reserve
under the 1996 Plan automatically each year and made other minor amendments to
the 1996 Plan in preparation for this offering.
A total of 6,000,000 shares have been reserved for issuance under the 1996
Plan. Each year, the number of shares reserved for issuance under the 1996 Plan
will automatically be increased by the lesser of 4,500,000 shares or 5.0% of the
total number of shares of common stock then outstanding. The 1996 Plan provides
for grants of incentive stock options that qualify under Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), to our employees
(including officers and employee directors) or the employees of any of our
affiliates. Nonstatutory stock options, rights to acquire restricted stock, and
stock bonuses may be granted to employees (including officers), directors of and
consultants to Paradyne or any of our affiliates. The 1996 Plan may be
administered by the board of directors or a committee appointed by the Board of
Directors; references herein to the board of directors shall include any such
committee. After this offering, it is intended that the 1996 Plan will be
administered by a Compensation Committee consisting of "non-employee directors"
under applicable securities laws and "outside directors," as defined under the
Code. The board of directors has the authority to determine to whom awards are
granted, the terms of such awards, including the type of awards to be granted,
the exercise price, the number of shares subject to the awards and the vesting
and exercisability of the awards.
The term of a stock option granted under the 1996 Plan generally may not
exceed 10 years. The exercise price of options granted under the 1996 Plan is
determined by the Board of Directors, but, in the case of an incentive stock
option, cannot be less than the fair market value of the common stock on the
date of grant. Options granted under the 1996 Plan vest at the rate specified in
the option agreement. Except as expressly provided by the terms of a
nonstatutory stock option agreement, no option may be transferred by the
optionee other than by will or the laws of descent or distribution or, in
limited instances, pursuant to a qualified domestic relations order, provided
that an optionee may designate a beneficiary who may exercise the option
following the optionee's death. An optionee whose relationship with Paradyne or
any of our affiliates ceases for any reason (other than due to death or
permanent and total disability) may generally exercise vested options in the
three month period following such cessation (unless such options terminate or
expire sooner by their terms) or in such longer or shorter period as may be
determined by the board and set forth in the option agreement. Vested options
may generally be exercised during the twelve month period after an optionee's
relationship with Paradyne or any of our affiliates ceases due to death or
disability.
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No incentive stock option may be granted to any person who, at the time of
the grant, owns (or is deemed to own) stock possessing more than 10% of the
total combined voting power of Paradyne or any of our affiliates, unless the
option exercise price is at least 110% of the fair market value of the stock
subject to the option on the date of grant and the term of the option does not
exceed five years from the date of grant. In addition, the aggregate fair market
value, determined at the time of grant, of the shares of common stock with
respect to incentive stock options granted under any plan, which become
exercisable by an optionee during any calendar year, may not exceed $100,000.
Any incentive stock options, or portions thereof, which exceed this limit are
treated as nonstatutory options.
If we become subject to Section 162(m) of the Code, which denies a
deduction to publicly held corporations for specific compensation paid to
specific employees in a taxable year to the extent that the compensation exceeds
$1,000,000, no person may be granted options under the 1996 Plan covering more
than 2,500,000 shares of common stock in any calendar year. Shares subject to
stock awards that have lapsed or terminated, without having been exercised in
full, and any shares repurchased by Paradyne pursuant to a repurchase option
provided under the 1996 Plan may again become available for the grant of awards
under the 1996 Plan.
Rights to acquire restricted stock granted under the 1996 Plan may be
granted subject to a repurchase option in favor of Paradyne that will expire
pursuant to a vesting schedule. The purchase price of such awards will be at
least 85% of the fair market value of the common stock on the date of grant.
Stock bonuses may be awarded in consideration for past services without the
payment of a purchase price. Rights under a stock bonus or restricted stock
bonus agreement may not be transferred other than by will, the laws of descent
and distribution or a qualified domestic relations order while the stock awarded
pursuant to such an agreement remains subject to the agreement, provided that a
holder of such rights may designate a beneficiary who may exercise the right
following the holder's death.
Upon particular types of changes in control of Paradyne, all outstanding
stock awards under the 1996 Plan may be assumed by the surviving entity or
replaced with similar stock awards granted by the surviving entity. If the
surviving entity does not assume such awards or provide substitute awards, then
with respect to persons whose service with Paradyne or an affiliate has not
terminated prior to such change in control, the awards shall become fully vested
and will terminate if not exercised prior to such change in control.
As of May 15, 1999, there were options to acquire 3,621,948 shares of
common stock outstanding under the 1996 Plan. The 1996 Plan will terminate in
May 2009, unless terminated sooner by the board of directors.
1999 EMPLOYEE STOCK PURCHASE PLAN
In May 1999, our board of directors adopted and the stockholders approved
the 1999 Employee Stock Purchase Plan (the "Purchase Plan"). A total of
1,000,000 shares of common stock have been reserved for issuance under the
Purchase Plan. Each year, the number of shares reserved for issuance under the
Purchase Plan will automatically be increased by 2.0% of the total number of
shares of common stock then outstanding or, if less, by 1,000,000 shares. The
Purchase Plan is intended to qualify as an employee stock purchase plan within
the meaning of Section 423 of the Code. Under the Purchase Plan, the board of
directors or a committee comprised of at least two members of the board of
directors may authorize participation by eligible employees, including officers,
in periodic offerings following the commencement of the Purchase Plan. The
initial offering under the Purchase Plan will commence on the effective date of
this offering and terminate on April 30, 2001.
Unless otherwise determined by the board of directors, employees are
eligible to participate in the Purchase Plan only if they are customarily
employed by us or one of our subsidiaries designated by the board of directors
for at least 20 hours per week and five months per calendar year. Employees who
participate in an offering may have up to 15% of their earnings withheld
pursuant to the Purchase Plan. The amount withheld is then used to purchase
shares of the common stock on specified dates determined by the board of
directors. The price of common stock purchased under the Purchase Plan will be
equal to 85% of the lower of the fair market value of the common stock at the
commencement date of each offering period or the relevant purchase date.
Employees may end their participation in an offering at any time during such
offering,
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and their participation will end automatically on termination of their
employment with us or one of our subsidiaries.
In the event of a merger, reorganization, consolidation or liquidation
involving Paradyne, the board of directors has discretion to provide that each
right to purchase common stock will be assumed or an equivalent right
substituted by the successor corporation or the board of directors may provide
for all sums collected by payroll deductions to be applied to purchase stock
immediately prior to such merger or other transaction. The board of directors
has the authority to amend or terminate the Purchase Plan, provided, however,
that no such action may adversely affect any outstanding rights to purchase
common stock.
1999 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
In May 1999, the board of directors adopted and the stockholders approved
the 1999 Non-Employee Directors' Stock Option Plan (the "Directors' Plan") to
provide for the automatic grant of options to purchase shares of common stock to
non-employee directors of Paradyne. The Directors' Plan is administered by the
board of directors.
The aggregate number of shares of common stock that may be issued pursuant
to options granted under the Directors' Plan is 250,000. Pursuant to the terms
of the Directors' Plan, each of our directors who is not an employee of Paradyne
(a "Non-Employee Director") will automatically be granted an option to purchase
10,000 shares of common stock upon the closing of this offering (an "Initial
Grant"). Each person who is elected or appointed to be a Non-Employee Director
after the closing of this offering will be granted an Initial Grant upon such
election or appointment. In addition, each Non-Employee Director who continues
to serve as a Non-Employee Director of Paradyne and who attends at least
seventy-five percent (75%) of the regularly scheduled meetings of the board and
the committees of the board of which he or she is a member during the year
preceding each annual meeting of our stockholders will automatically be granted
an option to purchase 5,000 shares of common stock on the day following each
such annual meeting (an "Annual Grant"). The number of shares subject to the
Annual Grant will be reduced pro rata for each full quarter prior to the date of
the grant during which such person did not serve as a Non-Employee Director any
Non-Employee Director who has not continuously served as a director for the
entire 12-month period prior to the date of grant. Each Annual Grant shall be
fully vested on the date it is granted. Initial Grants may, at the discretion of
the board of directors, be fully vested on the day they are granted or be vested
as to 50% of the shares subject to such Initial Grants on the date they are
granted and as to the remaining 50% of the shares subject to the Initial Grant
on the first anniversary of the date they are granted. No option granted under
the Directors' Plan may have a term in excess of ten years from the date on
which it was granted. The exercise price of options under the Directors' Plan
will equal the fair market value of the common stock on the date of grant. A
Non-Employee Director whose service as a Non-Employee Director or employee of or
consultant to Paradyne or any of our affiliates ceases for any reason other than
death or permanent and total disability may generally exercise vested options in
the three-month period following such cessation (unless such options terminate
or expire sooner by their terms). Vested options may be exercised during the
12-month period after a Non-Employee Director's service ceases due to disability
and during the 18-month period after such service ceases due to death. The
Directors' Plan will terminate in May 2009, unless earlier terminated by the
board of directors.
As of May 15, 1999, no options to purchase common stock had been granted
pursuant to the Directors' Plan.
KEY EMPLOYEE STOCK OPTION PLAN
The Key Employee Stock Option Plan (the "Key Employee Plan") was adopted by
our board of directors on December 29, 1997. The Key Employee Plan is
administered by the Plan Committee (the "Benefits Committee"), which committee
consists of John M. Guest, Patrick M. Murphy and H. Edward Thompson. Employees
of Paradyne holding the position of Vice President or above are eligible to
participate in the Key Employee Plan. As of May 15, 1999, fifteen employees are
eligible to participate in the plan. Participants may elect to defer up to fifty
percent (50%) of their total annual compensation in exchange for
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options to purchase shares of common or preferred stock of any publicly-traded
corporation, shares of our common stock or shares in investment funds.
Currently, participants in the Key Employee Plan may only receive options to
purchase shares of investment funds administered by Fidelity Investments. The
Key Employee Plan allows the Benefits Committee, after consultation with an
employee holding an option under the Key Employee Plan, to change the shares
subject to purchase by the optionee upon exercise of such option. The options
granted under the Key Employee Plan are not intended to qualify as "incentive
stock options" under Section 422 of the Code.
Upon the grant of an option under the Key Employee Plan, Paradyne is
required to acquire shares of the stock or investment fund subject to the option
in a number equal to 75% of the shares subject to such option. These shares will
be held by Paradyne under a trust arrangement.
The exercise price of an option granted under the Key Employee Plan will be
equal to the greater of 25% of the fair market value of the shares subject to
the option on the date of issuance of the option or 25% of the fair market value
of the shares subject to the option on the date of exercise of the option. The
cost to the employee is the exercise price. Options granted under the Key
Employee Plan are fully vested upon grant and may be exercised at any time after
the date that is six months after the date they are granted. The term of an
option granted under the Key Employee Plan may not exceed ten years. An optionee
whose service with Paradyne terminates may exercise options granted under the
Key Employee Plan within twelve months following such termination.
Unless the terms of an option granted under the Key Employee Plan provide
otherwise, such options may be transferred to an optionee's spouse or lineal
descendants or the trustee of a trust established for the optionee's spouse or
lineal descendants.
As of May 15, 1999, Andrew May, Patrick Murphy, Sean Belanger, Paul Floyd
and John Guest were the only participants in the Key Employee Plan.
401(K) PLAN
We have established the Paradyne Corporation Retirement Savings Plan
effective August 1, 1996 (the "401(k) Plan"). The 401(k) Plan is intended to
qualify under Section 401 of the Code so that contributions by employees or by
Paradyne, and income earned thereon, are not taxable until withdrawn and so that
contributions by Paradyne will be deductible by Paradyne when made. The 401(k)
Plan provides that each participant may reduce his or her pre-tax gross
compensation by up to 16% (up to a statutorily prescribed annual limit of
$10,000 in 1999) and have that amount contributed to the 401(k) Plan. Employees
become eligible to participate in the 401(k) Plan upon commencement of their
employment with Paradyne. Participants are fully vested in all amounts they
contribute under the 401(k) Plan and in the earnings on such amounts.
In addition to the employee salary deferrals described above, the 401(k)
Plan requires Paradyne to make contributions under the 401(k) Plan on behalf of
the participants. These contributions include a matching contribution of 66 2/3%
of the first 6% of salary deferral contributions made by each participant. The
401(k) Plan also permits Paradyne to make an employer contribution in an amount
to be determined by the board of directors or, if no such amount is determined,
in an amount of between 1% and 4.5% of the annual compensation of each
participant. The amount of such employer contributions to be received by each
participant will be determined based on the age of the participant. Participants
become vested in matching contributions and employer contributions according to
a graded vesting schedule under which they become fully vested after four years
of service with Paradyne.
Employee participants may elect to invest their accounts under the 401(k)
Plan in various established funds.
LIMITATIONS ON DIRECTORS' AND EXECUTIVE OFFICERS' LIABILITY AND INDEMNIFICATION
Our bylaws provide that Paradyne shall indemnify its directors and
executive officers to the fullest extent permitted by Delaware law, except with
respect to some specific proceedings initiated by such persons.
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Paradyne is also empowered under its bylaws to enter into indemnification
contracts with its directors and executive officers and to purchase insurance on
behalf of any person it is required or permitted to indemnify.
In addition, our restated certificate provides that a director of Paradyne
will not be personally liable to Paradyne or its stockholders for monetary
damages for any breach of fiduciary duty as a director, except for:
- any breach of the director's duty of loyalty to Paradyne or its
stockholders;
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- unlawful payments of dividends or unlawful stock repurchases or
redemptions; and
- any transaction from which the director derives an improper personal
benefit.
The restated certificate also provides that if the Delaware General
Corporation Law is amended after the approval by our stockholders of the
restated certificate to authorize corporate action further eliminating or
limiting the personal liability of directors, then the liability of Paradyne's
directors shall be eliminated or limited to the fullest extent permitted by the
Delaware General Corporation Law, as so amended. The provision does not affect a
director's responsibilities under any other law, such as the federal securities
laws or state or federal environmental laws.
We entered into an indemnification agreement with William Stensrud, one of
our directors, on November 6, 1996. Under the agreement, we agreed to reimburse
and indemnify Mr. Stensrud for civil or criminal proceedings or governmental
investigations relating to Mr. Stensrud's actions as a director, except if such
conduct was committed in bad faith or was a breach of Mr. Stensrud's duty of
loyalty to us.
CERTAIN TRANSACTIONS
The following is a description of transactions since January 1, 1996, to
which Paradyne has been a party, in which the amount involved in the transaction
exceeds $60,000, and in which any of our directors, executive officers or
holders of more than 5% of the capital stock had or will have a direct or
indirect material interest other than compensation arrangements which are
otherwise required to be described under "Management."
DIVESTITURE BY LUCENT
Initial Formation
Prior to the divestiture, the predecessor business operated several
businesses, which were either acquired by Communication Partners, L.P. or
retained by Lucent. Shares of common stock of the predecessor business were
traded on the New York Stock Exchange from 1978 to 1989 at which point the
predecessor business was acquired by AT&T. Communication Partners, L.P. was
originally formed under the name Paradyne Partners, L.P. in connection with the
divestiture for the primary purpose of holding investments in Paradyne and
GlobeSpan. In the divestiture, Communication Partners, L.P. formed:
- Lease Acquisition Corp., as a subsidiary
- Paradyne Credit Corp. which was formerly called Rental Acquisition Corp.,
as a subsidiary
- GlobeSpan, Inc., which was formerly called CAP Acquisition Group, as a
subsidiary
- Paradyne Acquisition Corp., as a wholly-owned subsidiary to hold the
common stock of Paradyne Corporation and Lease Acquisition Corp.
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The following chart illustrates the ownership structure of Communication
Partners, LP and its subsidiaries.
COMMUNICATION PARTNERS, L.P.
(formerly, Paradyne Partners, L.P.)
|
|
- --------------------------------------------------------------------------------
| | |
| | |
PARADYNE NETWORKS, INC. PARADYNE CREDIT CORP. GLOBESPAN, INC.
(formerly, (formerly, (formerly,
Paradyne Acquisition Corp.) Rental Acquisition Corp.) CAP Acquisition
| Group)
|
|
- ----------------------------
| |
| |
Paradyne Lease
Corporation Acquisition Corp.
The predecessor business operated a services business and personal end user
business, which Lucent retained. The predecessor business also operated a
development, manufacturing and distribution business for broadband and
narrowband access products, which was retained by Paradyne Corporation, a
high-speed access integrated circuit business, which was acquired by GlobeSpan,
a short-term equipment leasing business, which was acquired by Paradyne Credit
Corp. and a long-term equipment leasing business, which was acquired by Lease
Acquisition Corp. In connection with these acquisitions, the predecessor
business assigned appropriate assets and resources to the subsidiaries. Lease
Acquisition Corp. sold its assets to Paradyne Credit Corp. and was subsequently
merged with and into Paradyne Networks. See "-- Subsequent
Transactions -- Transactions with Paradyne Credit Corporation."
The following table illustrates the corporate structure of Paradyne and
GlobeSpan both before and after the divestiture by Lucent.
<TABLE>
<CAPTION>
PERCENTAGE
INTEREST IN PERCENTAGE PERCENTAGE
GLOBESPAN INTEREST IN INTEREST IN
AND PARADYNE PARADYNE GLOBESPAN
PRIOR TO FOLLOWING FOLLOWING
FORMATION FORMATION FORMATION
------------ ------------ ------------
<S> <C> <C> <C>
Lucent Technologies.................................... 100% -- 10.3%(1)
General and Limited Partners of Communication Partners,
L.P.
Entities Associated with Texas Pacific Group......... -- 75.9% 68.1%
Entities Associated with Sprout Group(2)............. -- 13.4% 12.1%
Entities Associated with Thomas Epley................ -- 8.8% 7.9%
Entities Associated with William Stensrud............ -- 1.9% 1.7%
</TABLE>
- ------------------------------
(1) Represents a warrant held by Lucent to purchase 1,312,500 shares of
GlobeSpan's common stock and assumes a cash exercise of the warrant.
(2) Consists of indirect ownership interests through limited partnership
interests in Communication Partners L.P. and limited partnership interests
in some Texas Pacific Group entities.
In addition to their common ownership, Lucent, GlobeSpan and Paradyne have
continuing business relationships with each other.
Our current board of directors consists of Messrs. Epley, May, Stensrud and
Stanton, Bonderman, Geeslin and Van Camp. Of the current members of the board of
directors, Messrs. Epley, Geeslin and Stanton
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are directors of both GlobeSpan and Paradyne. Mr. Stensrud was a member of the
board of directors of both GlobeSpan and Paradyne until his resignation from
GlobeSpan's board of directors in March 1999. Mr. Stensrud will continue as a
board member of Paradyne.
As of May 1999, Communication Partners, L.P. owned approximately 97.1% of
our outstanding common stock and approximately 83.2% of the outstanding capital
stock of GlobeSpan. In May 1999, Communication Partners, L.P. distributed its
GlobeSpan shares and its Paradyne shares to its general and limited partners.
See "Principal Stockholders."
Mr. Stanton is the sole director and president of Communication GenPar,
Inc., the general partner of Communication Partners, L.P., and is a partner of
TPG Partners, L.P. and TPG Parallel I, L.P., each a limited partner of
Communication Partners, L.P. and the shareholders of Communication GenPar, Inc.
Messrs. Epley and Stensrud, either directly or through various investment
partnerships and corporations, are limited partners of Communication Partners,
L.P.
Interim Promissory Note. In connection with the divestiture, we issued an
interim promissory note payable to Lucent in the amount of $7.5 million. This
note matured on December 31, 1997 and carried an interest rate of 8.5% per annum
for the period July 31, 1996 through December 31, 1996 and 11.5% per annum
thereafter. This note was secured by the land and buildings in Largo, Florida
owned by us at the time of the divestiture. On June 27, 1997, the land and
buildings in Largo, Florida were sold, and this indebtedness was repaid. We
recognized interest expense of approximately $267,000 and $421,000 for the five
months ended October 31, 1996 and the year ended December 31, 1997,
respectively.
Promissory Note. In connection with the divestiture, we issued a
promissory note payable to Lucent in the amount of $61.8 million. This note
carried an interest rate of 8.5% per annum for the period July 31, 1996 through
December 31, 1997, 11.5% per annum for the period January 1, 1998 through
December 31, 1998 and 14.5% per annum thereafter. Under the terms of this note,
interest payments totalling $7.6 million were deferred for the period August 1,
1996 through December 31, 1997. Interest was payable quarterly subsequent to
December 31, 1997. The principal balance, along with any deferred interest, was
due and payable on June 30, 2000. Additionally, the terms of this note called
for a mandatory prepayment of principal and related interest under certain
circumstances. One such circumstance was the sale of the land and buildings in
Largo, Florida, and as such, we paid Lucent $3.7 million in principal and
deferred interest in June 1997. Of the remainder of the principal and deferred
interest, $63.0 million was forgiven in 1997 and $2.7 million was paid in 1998
in connection with a settlement with Lucent as described under "Subsequent
Transactions -- Transactions with Lucent -- Lucent Settlement" below.
TRANSACTIONS WITH LUCENT
Intellectual Property Agreement. As part of the divestiture, we entered
into an intellectual property agreement with Lucent and GlobeSpan. Under this
agreement, Lucent irrevocably assigned to us and our successors all rights in
particular patents related to our proprietary technology. In exchange, we
granted to Lucent a non-exclusive license to develop, manufacture, test or
repair products using the assigned patents.
Non-Competition Agreement. As part of the divestiture, Lucent entered into
a non-competition agreement with GlobeSpan and us. Under this agreement, Lucent
agreed not to compete with us (with a separate agreement not to compete with
GlobeSpan) with respect to the manufacture and sale of products, which either
compete with the principal products of Paradyne or compete with technologies
under development by Paradyne at the time of the divestiture. The cross-license
and non-competition agreements do not prevent GlobeSpan and AT&T from competing
with Paradyne.
AT&T Trademark and Patent Agreement. As part of the divestiture, AT&T
(Lucent's principal stockholder at the time) entered into a trademark and patent
agreement with us and GlobeSpan. Under this agreement, AT&T granted us a
non-exclusive, non-transferable, irrevocable, worldwide, royalty-free license
under particular listed AT&T patents to develop, manufacture, test or repair our
products existing at the time of the divestiture.
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Supply Agreement. As part of the divestiture, we entered into a supply
agreement with Lucent and GlobeSpan. Under the terms of this agreement, we
agreed to sell a variety of listed products to Lucent at prices at least as low
as those prices offered to other customers and Lucent agreed to purchase minimum
amounts of products from Paradyne. We also entered into a volume purchase letter
agreement, whereby Lucent agreed to purchase minimum levels of products from us
for a period of four years. The volume purchase letter agreement was
subsequently terminated with an effective date in 1997 in connection with a
settlement with Lucent. In 1997, we amended the supply agreement in connection
with a settlement with Lucent and became the exclusive supplier to Lucent of
Lucent's requirements for network access products for resale through June 2001,
provided that these products possess satisfactory design, function, and
performance characteristics. See "Subsequent Transactions -- Transactions with
Lucent -- Lucent Settlement" below.
TRANSACTIONS WITH GLOBESPAN
Cross-License. As part of the divestiture, we entered into a cross-license
agreement with GlobeSpan. Under this agreement, each party granted to the other
party a non-exclusive, non-transferable, irrevocable, world-wide, royalty-free
license to the patents Lucent assigned to the granting party in the divestiture,
for use in the other party's products that existed as of the date of the
divestiture, and subsequent modifications to those products. Each party also
granted to the other party a non-exclusive, non-transferable, irrevocable,
world-wide, royalty-free license to the granting party's other technical
information and intellectual property existing at the time of the divestiture.
These licenses give us the right to make, have made, use, sell and import our
products within the scope of the license grants as well as the tools used to
develop, manufacture, test or repair such products. We were also given the right
to convey to any of our customers the right to use and resell such products.
Each party also granted to the other party a non-exclusive, non-transferable,
irrevocable, world wide, royalty-free license to use particular listed
trademarks. All of these licenses have an indefinite duration, subject to the
expiration of patent and copyright terms.
Royalty Payments to GlobeSpan. In conjunction with the license to
reproduce GlobeSpan software, we paid GlobeSpan a total of $235,000 in royalty
payments in 1996. This payment reflected the cost of a chip set reference design
guide and a right-to-use fee. The rates were determined in accordance with a
September 1995 license agreement. Effective July 1998, the Company revised its
pricing arrangement with GlobeSpan such that GlobeSpan sold products to the
Company at preferential prices. In exchange, GlobeSpan agreed to pay a 1.25%
royalty based on net revenues up to an aggregate amount of $1.5 million. The
Company recorded $381,000 of royalty revenue related to the agreement during the
year ended December 31, 1998.
Services Agreement. As part of the divestiture, we entered into an
intercompany services agreement under which we agreed, for a period of time, to
provide GlobeSpan with the following services due to their limited
infrastructure.
- human resources, staffing and legal services;
- administrative services, including risk management, patent management,
tax management and accounting support; and
- operational services, including office communications and
telecommunications systems management, facilities management, rent and
other services.
GlobeSpan now provides all of the above-mentioned services directly, except
for insurance and 401(k) administration, which we still provide. This agreement
can be terminated by GlobeSpan on 60 days notice and by us on 180 days notice.
GlobeSpan paid us a total of $155,000 and $231,000 for the years ended December
31, 1997 and 1998 under the services agreement. In 1998, we subleased additional
office space to GlobeSpan. In connection with the relocation of our offices,
GlobeSpan reimbursed us approximately $392,000 of our moving expenses.
Various Insurance Policies. The directors and officers of Communication
Partners, Communication GenPar, Inc., Paradyne, Paradyne Acquisition Corp.,
Paradyne Credit Corp. and GlobeSpan are covered under one umbrella insurance
policy providing up to $10.0 million of liability coverage. Additionally,
Paradyne, Paradyne Credit Corp. and GlobeSpan are jointly covered under various
general liability, property, casualty
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and workers' compensation policies. The term of these policies is from August
31, 1998 to August 31, 1999. We jointly entered into these policies to obtain
the cost benefit of common control entity premiums. We expect that we will not
share insurance policies with GlobeSpan after this offering. We expect to have
our own directors and officers' insurance policy in effect prior to the closing
of this offering.
401(k) Plan. We maintain a 401(k) plan, which substantially all of
GlobeSpan's employees currently participate in due to the administrative
economic benefits of a single employer plan. Effective May 1, 1999, GlobeSpan
expects to adopt its own 401(k) plan for its employees. Contributions for the
five months ended December 31, 1996 and for the years 1997 and 1998, including
discretionary matches, paid by Paradyne on behalf of GlobeSpan amounted to
approximately $65,000, $321,000 and $379,000. All payments made on behalf of
GlobeSpan have been or will be reimbursed.
TRANSACTIONS WITH LEASE ACQUISITION CORP.
Services Agreement. As part of the divestiture, we entered into an
intercompany services agreement with Lease Acquisition Corp. under which we
agreed to provide:
- general management consulting and services administration, including
lease contract servicing and remarketing services;
- administrative services, including risk management, financial and cash
management, tax management and accounting services;
- human resources, staffing and legal services; and
- operational services, including facilities management, office
communications, telecommunication systems, systems management and other
services.
In exchange for these services, Lease Acquisition Corp. agreed to pay us a
monthly service fee of $5,000 per month. This agreement was terminated by mutual
consent in August 1997. Payments received for these services were $25,000 for
the five months ended December 31, 1996 and $35,000 for the period January 1,
1997 through August 1, 1997.
TRANSACTIONS WITH PARADYNE CREDIT CORP.
Services Agreement. As part of the divestiture, we entered into an
intercompany services agreement with Paradyne Credit Corp. under which we agreed
to provide:
- general management consulting and services administration, including
rental contract servicing administration and remarketing services;
- administrative services, including risk management, financial and cash
management, tax management and accounting services;
- human resources, staffing and legal services; and
- operational services, including facilities management, office
communications, telecommunication systems, systems management and other
services.
In exchange for these services, Paradyne Credit Corp. agreed to pay us a
monthly service fee equal to 5% of their net revenue. This agreement may be
terminated by Paradyne Credit Corp. upon 60 days notice and by us upon 180 days
notice. Payments received for these services were $407,000 and $521,000 for the
five months ending December 31, 1996 and the seven month period ending July 31,
1997, respectively. See "Subsequent Transactions -- Transactions with Paradyne
Credit Corp." below.
In addition, Paradyne Credit Corp. received an option to purchase our used
equipment that had been returned from expired or terminated leases, sales to
customers or consignment activities. Payments received for the purchase of the
equipment totaled $115,000 and $81,000 for the five months ended December 31,
1996 and the year ended December 31, 1997. This option terminated in August 1997
as described under
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"Subsequent Transactions -- Transactions with Paradyne Credit Corp. -- Sale of
Lease Receivables and Related Equipment" below.
TRANSACTIONS WITH COMMUNICATION PARTNERS
Interim Promissory Note. In connection with the divestiture, we issued a
promissory note payable to Communication Partners in the amount of $7.5 million.
This note matured on December 31, 1997 and carried an interest rate of 8.5% per
annum for the period July 31, 1996 through December 31, 1996 and 11.5% per annum
thereafter. This note was secured by the land and buildings in Largo, Florida
owned by us at the time of the divestiture. On June 27, 1997, the land and
buildings in Largo, Florida were sold, and this indebtedness was repaid. We
recognized interest expense of approximately $267,000 and $421,000 for the five
months ended December 31, 1996 and the year ended December 31, 1997,
respectively.
SUBSEQUENT TRANSACTIONS
TRANSACTIONS WITH LUCENT
Lucent Settlement. As at December 31, 1997, Lucent had not satisfied its
obligations under the volume purchase letter agreement and, therefore, was
subject to take or pay provisions. We entered into a settlement with Lucent,
effective in 1997 whereby we agreed to terminate the volume purchase letter
agreement, amended our supply agreement with Lucent to become the exclusive
supplier to Lucent of Lucent's requirements for network access products for
resale through June 2001 and received $8.2 million of cash and the cancellation
of the promissory note to Lucent in the amount of $63.0 million. In addition,
GlobeSpan amended a warrant that it originally granted to Lucent at the time of
the 1996 acquisition. The amendment extended the warrant terms by three years.
Because both GlobeSpan and Paradyne are subsidiaries of Communication Partners,
we recognized a contribution of capital by Communication Partners of $3.6
million, reflecting the estimated fair market value of the extension of the
GlobeSpan warrant.
TRANSACTIONS WITH GLOBESPAN
Reimbursement for Chip Set Purchases. Due to GlobeSpan's limited
infrastructure at the beginning of its existence in 1996, GlobeSpan purchased
chip sets from Lucent through us for sale to GlobeSpan customers. We paid Lucent
for these chip sets on GlobeSpan's behalf, and GlobeSpan reimbursed us for their
cost. These reimbursements totaled $194,000.
Cooperative Development Agreement/Termination Agreement/Supply
Agreement. In November 1996, we entered into a cooperative development
agreement and a related rider agreement with GlobeSpan. Under the terms of these
agreements and in consideration for a contribution of $6.0 million by
Communication Partners to GlobeSpan, we were provided with a broad,
royalty-free, unrestricted license to use GlobeSpan's technical information and
patents for any purpose related to our products. We were also granted the right
to acquire GlobeSpan's chip sets at prices not to exceed cost plus 15%. The term
of the cooperative development agreement was 5 years. The term of rider
agreement was 10 years and we had the right to extend it for an additional
10-year term. In addition, we leased assets and equipment to GlobeSpan for an
annual lease fee of $1.00. Effective December 1998, GlobeSpan and we terminated
these agreements pursuant to a termination agreement. The termination agreement
provided that GlobeSpan agreed, effective July 1998, to pay us a total of $1.5
million in royalties. GlobeSpan and we agreed that approximately $400,000 of
these royalties had been paid as of the effective date of the termination
agreement and that GlobeSpan would pay to us the approximately $1.1 million
balance of royalties the sooner of December 31, 1999 or within 30 days of the
effective date of GlobeSpan's initial public offering.
In conjunction with the signing of the termination agreement, we entered
into a four-year supply agreement with GlobeSpan, which gives us preferential
pricing and other terms in connection with the purchase of GlobeSpan products.
Under the terms of this agreement, GlobeSpan is required to honor our orders for
GlobeSpan products in quantities at least consistent with our past ordering
practices and must afford us at least the same priority for its orders as
GlobeSpan affords other similarly situated highly preferred customers. We were
also granted immunity under GlobeSpan's intellectual property rights for all
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our customers that purchase our products that incorporate GlobeSpan products.
GlobeSpan has been selling products to us pursuant to these terms since July
1998. In 1997 and 1998, we paid to GlobeSpan a total of $373,000 and $962,000,
respectively, for products purchased under the cooperative development
agreement, the related rider agreement and the termination agreement.
Inventory Repurchases by GlobeSpan. In December 1997 and September 1998,
GlobeSpan repurchased some of its chip sets for their own inventory needs, which
we held in more than adequate supply in our inventory in the amounts of $98,000
and $29,000, respectively.
Purchase of Fixed Assets. In 1997 and in 1998, GlobeSpan purchased fixed
assets in a non-arm's-length transaction for approximately $350,000 and
$400,000, respectively, which were owned by us but which they used in their
business. Prior to the sale of the equipment to GlobeSpan, the related
depreciation expense of $106,000 in 1996 and $244,000 in 1997 was transferred to
GlobeSpan for its use, which was reflected as a distribution of equity to a
related party in the statement of changes in stockholder equity. In 1998,
GlobeSpan purchased fixed assets from us related to a subleased facility that
they needed for their operations for $1.0 million, which included costs to
remodel offices previously used by us.
Real Property Agreements. Under a sublease dated August 1997, and
subsequently amended in August 1998, between GlobeSpan and us, GlobeSpan
subleases property at 100 Schulz Drive, Red Bank, New Jersey. The sublease
reimburses us for 100% of all costs we incur under the primary lease. GlobeSpan
currently pays us approximately $68,000 a month for approximately 50,000
rentable square feet, plus approximately $10,000 per month for rent operating
costs. After October 2001, the rent will increase to approximately $79,000 a
month for a period of six months. The sublease expires in April 2002.
TRANSACTIONS WITH LEASE ACQUISITION CORP.
Merger of Lease Acquisition Corp. into Paradyne Acquisition Corp. In
August 1997, Lease Acquisition Corp. sold its net assets to Paradyne Credit
Corp. in exchange for a promissory note totalling approximately $4.8 million and
merged with and into Paradyne Acquisition Corp. As a result of this merger,
Paradyne Acquisition Corp. acquired Paradyne Credit Corp.'s promissory note.
TRANSACTIONS WITH PARADYNE CREDIT CORP.
Purchase of Installment and Accounts Receivables. In December 1996, we
purchased installment and accounts receivables relating to long-term equipment
leases in the aggregate amount of $14.0 million from Paradyne Credit Corp. in
exchange for a promissory note of $13.7 million. A deferred gain of $291,000 was
included in other current liabilities at December 1996. The promissory note bore
an interest rate of 9.25% and was scheduled to mature in December 1997. In
January 1997, we sold the receivables back to Paradyne Credit Corp. in exchange
for cancellation of the promissory note. We recognized interest expense of
approximately $10,000 in connection with the transaction.
Sale of Lease Receivables and Related Equipment. In August 1997, we sold
all equipment under lease, as well as the related future lease payments, to
Paradyne Credit Corp., our equipment leasing affiliate, for approximately $3.5
million, the approximate book value of the equipment and related future lease
payments. We, however, are allowed to purchase from Paradyne Credit Corp.
equipment that has been returned to Paradyne Credit Corp. after the termination
of the lease. These purchases are on terms no more favorable to us than would be
obtained in a comparable arm's length transaction and totaled $0 and $141,000
for the year ended December 31, 1997 and 1998, respectively. Paradyne Credit
Corp. may purchase equipment manufactured or sold by us at prices substantially
equal to those received by us through normal selling channels. Payments received
from the sales of such equipment totaled $181,000 and $317,000 for the year
ended December 31, 1997 and 1998, respectively.
In connection with this sale, the Paradyne Credit Corp. services agreement
was amended to change the monthly service fee to equal the sum of: (i) all
direct costs incurred by us to provide services to Paradyne Credit Corp. and
(ii) up to five percent (5%) of the net revenues of Paradyne Credit Corp. for
any indirect
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costs. Payments received for these services were $344,000 and approximately $1.2
million for the five months ended December 31, 1997 and for the year ended
December 31, 1998, respectively.
In April 1999, this agreement was again modified to adjust the monthly
service fee to equal to the sum of: (i) all direct costs incurred by us to
provide services to Paradyne Credit Corp., (ii) all indirect costs incurred by
us to provide services to Paradyne Credit Corp. and (iii) a 5% mark up on all
charges.
In connection with a sale of lease receivables to AT&T Capital Corp., we
guaranteed collection of selected receivables to AT&T Capital Corp. As of
December 31, 1998, lease receivables for which we were contingently liable, but
for which we have recourse, were outstanding in the amount of $886,000. The
ultimate responsibility for the collection of these receivables is with Paradyne
Credit Corp.
TRANSACTIONS WITH COMMUNICATION PARTNERS
Subordinated Revolving Promissory Note. In August 1997, Communication
Partners agreed to provide to us a revolving line of credit facility in the
maximum amount of $5.0 million. This agreement was amended in October 1998 to
increase the maximum principal amount of the facility to $10.0 million. Interest
paid under this note totaled $0 and $305,000 for the year ended December 31,
1997 and 1998, respectively. As of March 31, 1999, there is no outstanding
balance on the credit facility. Borrowings under this agreement are subordinated
to debt under our Bank of America NT&SA revolving credit facility.
Continuing Limited Guaranty. In October 1998, Communication Partners
entered into a continuing guaranty for the benefit of Bank of America NT&SA in
connection with our revolving credit facility. The maximum liability under this
guaranty was $10.0 million, reduced by any principal amount outstanding under
the subordinated revolving promissory note discussed above. This guaranty was
canceled in March 1999.
PROMISSORY NOTES FROM OFFICERS
On May 5, 1997, James L. Slattery, Senior Vice President, Chief Legal and
Intellectual Property Officer and Corporate Secretary, issued to us a promissory
note in the amount of $149,850 in connection with his purchase of 75,000 shares
of our common stock. The full recourse note accrues interest at a rate of 6.65%
per annum. The principal balance of this note and accrued interest are payable
at the earlier of termination of employment or five years from the date of the
note. The note is secured by the shares of common stock acquired with the note,
which shares are held in escrow by us. As of May 15, 1999, the balance
outstanding was $149,850, plus accrued interest.
On March 29, 1999, Sean E. Belanger, Senior Vice President of Worldwide
Sales, issued to us a promissory note in the amount of $199,800 in connection
with his purchase of 100,000 shares of our common stock. The full recourse note
accrues interest at a rate of 4.72% per annum. The principal balance of this
note and accrued interest are payable at the earlier of termination of
employment or five years from the date of the note. The note is secured by the
shares of common stock acquired with the note, which shares are held in escrow
by us. The balance outstanding as of May 15, 1999 was $199,800, plus accrued
interest.
On March 26, 1999, Paul H. Floyd, Vice President Research and Development,
issued to us a promissory note in the amount of $74,925 in connection with his
purchase of 37,500 shares of our common stock. The full recourse note accrues
interest at a rate of 4.72% per annum. The principal balance of this note and
the accrued interest are payable at either the earlier of termination of
employment or five years from the date of the note. The note is secured by the
shares of common stock acquired with the note, which shares are held in escrow
by us. All unvested shares purchased with the note are subject to repurchase by
us if Mr. Floyd terminates his employment prior to becoming fully vested in
these shares. The shares vest on a quarterly basis and will be fully vested
after August 1, 2000. The balance outstanding as of March 31, 1999 was $74,925,
plus accrued interest. On March 26, 1999, Mr. Floyd issued to us a promissory
note in the amount of $62,475 in connection with his purchase of 12,500 shares
of our common stock. The full recourse note accrues interest at a rate of 4.72%
per annum. The principal balance of this note and accrued interest are payable
at the earlier of termination of employment or five years from the date of the
note. The note is secured by the shares of common stock acquired with the note,
which shares are held in escrow by us. All unvested shares purchased with the
note are subject to repurchase by us if Mr. Floyd terminates his
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employment prior to becoming fully vested in those shares. A quarter of the
shares vest on the first anniversary of the note and the remainder vest in equal
quarterly installments thereafter. The balance outstanding as of May 15, 1999
was $62,475, plus accrued interest.
On March 26, 1999, Frank J. Wiener, Vice President, DSL Products, issued to
us a promissory note in the amount of $159,915 in connection with his purchase
of 42,500 shares of our common stock. The full recourse note accrues interest at
a rate of 4.72% per annum. The principal balance of this note and the accrued
interest are payable at either the earlier of termination of employment or five
years from the date of the note. The note is secured by the shares of common
stock acquired with the note, which shares are held in escrow by us. All
unvested shares purchased with the note are subject to repurchase by us if Mr.
Wiener terminates his employment prior to becoming fully vested in these shares.
The shares vest on a quarterly basis and will be fully vested after January 1,
2001. The balance outstanding as of March 31, 1999 was $159,915, plus accrued
interest. On April 2, 1999, Mr. Wiener issued to us a promissory note in the
amount of $24,990 in connection with his purchase of 5,000 shares of our common
stock. The full recourse note accrues interest at a rate of 5.15% per annum. The
principal balance of this note and accrued interest are payable at the earlier
of termination of employment or five years from the date of the note. The note
is secured by the shares of common stock acquired with the note, which shares
are held in escrow by us. All shares purchased with the note are subject to
repurchase by us if Mr. Wiener terminates his employment prior to becoming fully
vested in those shares. A quarter of the shares vest on the first anniversary of
the loan and the remainder vest in equal quarterly installments thereafter. The
balance outstanding as of May 15, 1999 was $24,990.
On March 27, 1999, Mark Housman, Vice President of Marketing, issued a
promissory note to us in the amount of $64,935 in connection with his purchase
of 32,500 shares of our common stock. The full recourse note accrues interest at
a rate of 4.72% per annum. The principal balance of this note and the accrued
interest are payable at either the earlier of termination of employment or five
years from the date of the note. The note is secured by the shares of common
stock acquired with the note, which shares are held in escrow by us. All
unvested shares purchased with the note are subject to repurchase by us if Mr.
Housman terminates his employment prior to becoming fully vested in these
shares. The shares vest on a quarterly basis and will be fully vested after
February 2000. The balance outstanding as of May 15, 1999 was $64,935, plus
accrued interest.
On March 31, 1999, Andrew S. May, President, Chief Executive Officer, and
Director, issued to us a promissory note in the amount of $99,900 in connection
with his purchase of 50,000 shares of our common stock. The full recourse note
accrues interest at a rate of 4.72% per annum. The principal balance of this
note and the accrued interest are payable at either the earlier of termination
of employment or five years from the date of the note. The note is secured by
the shares of common stock acquired with the note, and those shares are held in
escrow by us. The balance as of May 15, 1999 was $99,900, plus accrued interest.
On March 31, 1999, Patrick M. Murphy, Senior Vice President and Chief
Financial Officer, issued to us a promissory note in the amount of $74,925 in
connection with his purchase of 37,500 shares of our common stock. The full
recourse note accrues interest at a rate of 4.72% per annum. The principal
balance of this note and the accrued interest are payable at either the earlier
of termination of employment or five years from the date of the note. The note
is secured by the shares of common stock acquired with the note, and those
shares are held in escrow by us. The balance outstanding as of March 31, 1999
was $74,925 plus accrued interest. On April 2, 1999, Mr. Murphy issued to us a
promissory note in the amount of $37,485 in connection with his purchase of
7,500 shares of our common stock. The full recourse note accrues interest at a
rate of 5.15% per annum. The principal balance of this note and accrued interest
are payable at the earlier of termination of employment or five years from the
date of the note. The note is secured by the shares of common stock acquired
with the note, which shares are held in escrow by us. All shares purchased with
the note are subject to repurchase by us if Mr. Murphy terminates his employment
prior to becoming fully vested in those shares. A quarter of the shares vest on
the first anniversary of the loan and the remainder vest in equal quarterly
installments thereafter. The balance outstanding as of May 15, 1999 was $37,485.
Except where noted, each of the transactions disclosed in this Section are
on terms no less favorable to Paradyne than it could obtain from non-affiliated
third parties.
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PRINCIPAL AND SELLING STOCKHOLDERS
This table sets forth certain information regarding the beneficial
ownership of our outstanding common stock as of May 15, 1999, by the following:
- each person known by us to own beneficially more than five percent of the
outstanding common stock;
- each director of Paradyne;
- each Named Executive Officer;
- each stockholder of Paradyne who is selling shares of common stock in
this offering; and
- all directors and executive officers of Paradyne as a group.
The following calculations of the percentage of outstanding shares are
based on 26,312,508 shares of our common stock outstanding as of May 15, 1999
and 30,312,508 shares outstanding immediately following the completion of this
offering and assumes no exercise of the underwriters' over-allotment option,
under which the underwriters have an option to purchase an additional 900,000
shares from the selling stockholders. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission and
generally includes voting or investment power with respect to securities,
subject to community property laws, where applicable. Shares of our common stock
subject to options that are presently exercisable or exercisable within 60 days
of May 15, 1999 are deemed to be outstanding and beneficially owned by the
person holding such options for the purpose of computing the percentage of
ownership of such person but are not treated as outstanding for the purpose of
computing the percentage of any other person.
The numbers shown in the table below assume no exercise by the underwriters
of their over-allotment option.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO THE OFFERING AFTER THE OFFERING
------------------------ NUMBER OF ------------------------
NUMBER OF SHARES BEING NUMBER OF
SHARES PERCENT OFFERED SHARES PERCENT
<S> <C> <C> <C> <C> <C>
FIVE PERCENT STOCKHOLDERS:
Entities Associated with
Texas Pacific Group
Communication GenPar, Inc.(1)..... 254,641 * 26,322 228,319 *
TPG Partners, L.P.(1) ............ 17,362,964 65.99% 1,794,750 15,568,214 51.36%
TPG Parallel I, L.P.(1) .......... 1,731,013 6.58 178,928 1,552,085 5.12
Entities Associated with Sprout
Group (2)......................... 3,423,372 13.01 -- 3,423,372 11.29
DIRECTORS AND OFFICERS:
Andrew S. May (3)................... 796,875 2.94% -- 796,875 2.57%
Sean E. Belanger (4)................ 150,000 * -- 150,000 *
Patrick M. Murphy (5)............... 103,125 * 103,125 *
James L. Slattery (6)............... 82,500 * -- 82,500 *
David Bonderman (7)................. 19,348,618 73.53 -- 17,348,618 57.23
Thomas E. Epley (8)................. 2,239,534 8.51 -- 2,239,534 7.39
Keith B. Geeslin (9)................ 3,423,372 13.01 -- 3,423,372 11.29
David M. Stanton (10)............... 19,348,618 73.53 -- 17,348,618 57.23
William R. Stensrud (11)............ 533,476 2.03 -- 533,476 1.76
Peter F. Van Camp................... 0 * -- 0 *
All directors and executive officers
as a group (17 persons) (12)...... 26,961,062 98.66% -- 24,961,062 79.68%
</TABLE>
- ------------------------------
* Represents beneficial ownership of less than 1.0%.
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(1) TPG Partners, L.P. and TPG Parallel I, L.P., affiliates of Texas Pacific
Group, are sole shareholders in Communication GenPar, Inc. TPG Advisors,
Inc. is the general partner of TPG Genpar, L.P., which is the general
partner of both TPG Partners, L.P. and TPG Parallel I, L.P. If the
underwriters over-allotment option is exercised in full, Communication
GenPar, Inc. will sell an additional 11,845 shares, TPG Parallel I, L.P.
will sell an additional 80,518 shares, and TPG Partners, L.P. will sell an
additional 807,637 shares. David Stanton, a director of Paradyne, is the
sole director and President of Communication GenPar, Inc. and a Partner in
Texas Pacific Group. The address of Texas Pacific Group is 201 Main Street,
Suite 2420, Fort Worth, TX 76102.
(2) Includes 1,646,993 shares beneficially owned by Sprout Capital VII, L.P.,
1,346,461 shares beneficially owned by Sprout Growth II, L.P., 342,326
shares beneficially owned by DLJ First ESC L.L.C., 19,132 shares
beneficially owned by The Sprout CEO Fund, L.P. and 68,460 shares
beneficially owned by DLJ Capital Corporation. The address for each of
these entities is 3000 Sand Hill Road, Bldg. 3, Suite 170, Menlo Park, CA
94025. A portion of these shares are expected to become subject to a voting
trust agreement prior to the completion of the offering and are expected to
by held and voted by an independent third party, Norwest Bank Indiana,
N.A., as voting trustee.
(3) Includes 746,875 shares subject to options which are exercisable within 60
days of May 15, 1999.
(4) Includes 50,000 shares subject to options which are exercisable within 60
days of May 15, 1999.
(5) Includes 58,125 shares subject to options which are exercisable within 60
days of May 15, 1999.
(6) Includes 7,500 shares subject to options which are exercisable within 60
days of May 15, 1999.
(7) Includes 254,640 shares held by Communication GenPar, Inc., 17,362,964
shares held by TPG Partners, L.P. and 1,731,013 shares held by TPG Parallel
I, L.P. TPG Partners, L.P. and TPG Parallel I, L.P. are shareholders in
Communication GenPar, Inc. Mr. Bonderman, a director of Paradyne, through
various investment partnerships and corporations, has a pecuniary interest
in the shares held by TPG Partners, L.P. and TPG Parallel I, L.P. However,
Mr. Bonderman disclaims beneficial ownership of the shares held by TPG
Partners, L.P. and TPG Parallel I, L.P. except to the extent of his
pecuniary interest therein.
(8) Consists of 1,711,753 shares held by Epley Investors, L.L.C. and 527,781
shares held by Mr. Epley individually.
(9) Includes 3,423,372 shares held by entities associated with The Sprout
Group. Mr. Geeslin is a general partner of Sprout Growth II, L.P., Sprout
Capital VII, L.P. and the Sprout CEO Fund, L.P. Mr. Geeslin is also a
Senior Vice President of DLJ Capital Corporation, the managing general
partner of Sprout Growth II, L.P., Sprout Capital VII, L.P. and the Sprout
CEO Fund, L.P. Mr. Geeslin is also one of several individual general
partners of DLJ Associates VII, L.P., which is a general partner of Sprout
Growth II, L.P. and Sprout Capital VII, L.P. DLJ First ESC L.L.C. is an
affiliate of DLJ Capital Corporation. As such, he may be deemed to have
voting and dispositive power over the shares held by entities associated
with the Sprout Group. However, Mr. Geeslin disclaims beneficial ownership
of these shares except to the extent of his pecuniary interest therein.
(10) Includes 254,641 shares held by Communication GenPar, Inc., 17,362,964
shares held by TPG Partners, L.P. and 1,731,013 shares held by TPG Parallel
I, L.P. Mr. Stanton, a director of Paradyne, is the sole director and
President of Communication GenPar, Inc. and through various investment
partnerships and corporations, has a pecuniary interest in the shares held
by TPG Partners, L.P. and TPG Parallel I, L.P. However, Mr. Stanton
disclaims beneficial ownership of the shares held by TPG Partners, L.P. and
TPG Parallel I, L.P. except to the extent of his pecuniary interest
therein.
(11) Includes 342,326 shares held by the Stensrud Family Trust and 191,150
shares held by Mr. Stensrud individually.
(12) Includes 1,016,064 shares subject to options which are exercisable within
60 days of May 15, 1999.
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DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of Paradyne Networks consists of 60,000,000
shares of common stock, $.001 par value and 5,000,000 shares of preferred stock
$.001 par value. There were 26,312,508 shares of Paradyne common stock
outstanding as of May 15, 1999, held of record by 133 stockholders, and there
are no outstanding shares of preferred stock.
COMMON STOCK
The holders of common stock of Paradyne Networks are entitled to one vote
per share on all matters to be voted on by the stockholders. Subject to
preferences that may be applicable to any outstanding shares of preferred stock,
holders of common stock are entitled to receive ratably such dividends as may be
declared by the board of directors out of funds legally available therefor. In
the event we liquidate, dissolve or wind up, holders of common stock are
entitled to share ratably in all assets remaining after payment of liabilities
and the liquidation preferences of any outstanding shares of preferred stock.
Holders of common stock have no preemptive, conversion, or subscription rights.
There are no redemption or sinking fund provisions applicable to the common
stock. All outstanding shares of common stock are, and all shares of common
stock to be outstanding upon completion of this offering will be, fully paid and
nonassessable.
PREFERRED STOCK
Under the amended and restated certificate of Paradyne Networks, the board
has the authority, without further action by stockholders, to issue up to
5,000,000 shares of preferred stock in one or more series and to fix the rights,
preferences, privileges, qualifications and restrictions granted to or imposed
upon such preferred stock, including dividend rights, conversion rights, voting
rights, rights and terms of redemption, liquidation preference and sinking fund
terms, any or all of which may be greater than the rights of the common stock.
The issuance of preferred stock could adversely affect the voting power of
holders of common stock and reduce the likelihood that such holders will receive
dividend payments and payments upon liquidation. Such issuance could have the
effect of decreasing the market price of the common stock. The issuance of
preferred stock could also have the effect of delaying, deterring or preventing
a change in control of Paradyne. We have no present plans to issue any shares of
preferred stock.
WARRANTS
There are no outstanding warrants for the purchase or acquisition of stock
of Paradyne.
REGISTRATION RIGHTS
Paradyne intends to enter into an agreement that grants registration rights
related to the stock of Paradyne held by entities affiliated with Texas Pacific
Group. Under the terms of this proposed agreement, if we propose to register
shares not held by the affiliates of Texas Pacific Group, these affiliates would
be entitled to notice of such registration and would be allowed to include their
shares in such registration, subject to various conditions and limitations which
have yet to be finalized. In addition, we might be required to prepare and file
a registration statement under the Securities Act of 1933 if requested to do so
by entities affiliated with Texas Pacific Group owning at least 5% of our
outstanding common stock. We would be required to use our best efforts to effect
such registration, subject to various conditions and limitations which have yet
to be finalized. We would be required to bear substantially all costs in
connection with any such registrations.
DELAWARE ANTI-TAKEOVER LAW
Paradyne is subject to the provisions of Section 203 of the Delaware
General Corporation Law. In general, Section 203 prohibits a publicly held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. A "business
combination" includes mergers, asset sale or other transactions resulting in a
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financial benefit to the stockholder. An "interested stockholder" is a person
who, together with affiliates and associates, owns (or within three years, did
own) 15% or more of the corporation's voting stock. The statute could have the
effect of delaying, deferring or preventing a change in control of Paradyne.
Our amended and restated certificate provides that any action required or
permitted to be taken by our stockholders must be effected at a duly called
annual or special meeting of stockholders and may not be effected by any consent
in writing. In addition, our amended and restated bylaws provide that special
meetings of our stockholders may be called only by the Chairman of the board of
directors, the Chief Executive Officer or the board of directors pursuant to a
resolution adopted by a majority of the total number of authorized directors, or
by the holders of 50% of the outstanding voting stock of Paradyne. Our amended
and restated certificate also specifies that our board of directors will be
classified into three classes of directors. Under Delaware law, directors of a
corporation with a classified board may be removed only for cause unless the
corporation's certificate of incorporation provides otherwise. The amended and
restated certificate does not provide otherwise. In addition, the amended and
restated certificate specifies that the authorized number of directors may be
changed only by resolution of the board of directors and does not include a
provision for cumulative voting for directors. Under cumulative voting, a
minority stockholder holding a sufficient percentage of a class of shares may be
able to ensure the election of one or more directors. Our amended and restated
certificate may only be amended with the approval of 66 2/3% of our outstanding
voting stock and our amended and restated bylaws may be amended either by the
board or by the approval of 66 2/3% of our outstanding voting stock.
Furthermore, our amended and restated certificate requires the advance notice of
stockholders' nominations for the election of directors and business brought
before a meeting of stockholders. Lastly, the amended and restated certificate
provides that a majority of the directors in office, even if less than a quorum,
are entitled to fill vacancies created by resignation, death, disqualification,
removal or by an increase in the size of the board. These provisions contained
in the amended and restated certificate and our amended and restated bylaws
could delay or discourage certain types of transactions involving an actual or
potential change in control of Paradyne or its management, which includes
transactions in which stockholders might otherwise receive a premium for their
shares over then current prices, and may limit the ability of stockholders to
remove our current management or approve transactions that stockholders may deem
to be in their best interests and, therefore, could adversely affect the price
of our common stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Norwest Bank
Minnesota, N.A.
SHARES ELIGIBLE FOR FUTURE SALE
Immediately prior to this offering, there was no public market for our
common stock. Future sales of substantial amounts of common stock in the public
market could adversely affect the market price of the common stock.
Upon completion of this offering, we will have outstanding 30,312,508
shares of common stock, assuming the issuance by Paradyne of 4,000,000 shares of
common stock offered hereby and no exercise of options after May 15, 1999. Of
these shares, the 6,000,000 shares sold in this offering will be freely tradable
without restriction or further registration under the Securities Act, unless
such shares are purchased by "affiliates" as that term is defined in Rule 144
under the Securities Act (whose sales would be subject to certain limitations
and restrictions described below).
The remaining 24,312,508 shares of common stock held by existing
stockholders as of May 15, 1999 will be "restricted securities" as that term is
defined in Rule 144 (the "Restricted Securities"). Shares totalling 24,230,906
will be subject to "lock-up" agreements described below on the effective date of
this offering. Upon expiration of the lock-up agreements 180 days after the
effective date of this offering, all of these shares will become eligible for
sale, subject in most cases to the limitations of Rule 144 and Rule 701.
Restricted Securities held by non-affiliates will be eligible for sale pursuant
to Rule 144(k), as described
74
<PAGE> 79
below. In addition, holders of stock options could exercise such options and
sell certain of the shares issued upon exercise as described below.
As of May 15, 1999, there were a total of 3,621,948 shares of common stock
subject to outstanding options under our 1996 Equity Incentive Plan, 1,606,973
of which were vested. However, all of these shares are subject to lock-up
agreements. Immediately after the completion of this offering, we intend to file
registration statements on Form S-8 under the Securities Act to register all of
the shares of common stock issued or reserved for future issuance under our 1996
Equity Incentive Plan. On the date 180 days after the effective date of this
offering, at least 2,157,445 shares of common stock will be subject to
immediately exercisable options. After the effective date of the registration
statement on Form S-8, shares purchased upon exercise of options granted
pursuant to the 1996 Equity Incentive Plan generally would be available for
resale in the public market.
Our officers, directors and certain stockholders have agreed not to sell or
otherwise dispose of any of their shares for a period of 180 days after the date
of this offering. Donaldson, Lufkin & Jenrette, however, may in its sole
discretion, at any time without notice, release all or any portion of the shares
subject to lock-up agreements.
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year, including any affiliates of ours, would be
entitled to sell, within any three-month period, a number of shares that does
not exceed the greater of:
- 1% of the number of shares of common stock then outstanding, which
will equal approximately 303,125 shares immediately after this
offering; or
- the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of
a notice on Form 144 with respect to such sale.
Sales under Rule 144 are also subject to certain other requirements
regarding the manner of sale, notice filing and the availability of current
public information about Paradyne.
RULE 144(K)
Under Rule 144(k), a person who is not deemed to have been one of
Paradyne's "affiliates," as defined in Rule 144, at any time during the 90 days
preceding a sale, and who has beneficially owned the shares proposed to be sold
for at least two years, including the holding period of any prior owner other
than an "affiliate," is entitled to sell such shares without complying with the
manner of sale, notice filing, volume limitation or notice provisions of Rule
144. Therefore, unless otherwise restricted, "144(k) shares" may be sold
immediately upon the completion of this offering.
RULE 701
In general, under Rule 701, any Paradyne employee, director, officer,
consultant or advisor who purchases shares from Paradyne in connection with a
compensatory stock or option plan or other written agreement before the
effective date of the offering is entitled to resell such shares 90 days after
the effective date of this offering in reliance on Rule 144, without having to
comply with certain restrictions, including the holding period, contained in
Rule 144.
The SEC has indicated that Rule 701 will apply to stock options granted by
an issuer before it becomes subject to the reporting requirements of the
Securities Exchange Act of 1934, along with the shares acquired upon exercise of
such options, including exercises after the date of this prospectus. Securities
issued in reliance on Rule 701 are restricted securities and, subject to the
contractual restrictions described above, beginning 90 days after the date of
this prospectus, may be sold by persons other than "affiliates," as defined in
Rule 144, subject only to the manner of sale provisions of Rule 144 and by
"affiliates" under Rule 144 without compliance with its one-year minimum holding
period requirement.
75
<PAGE> 80
UNDERWRITING
Subject to the terms and conditions contained in an underwriting agreement,
dated , 1999, the underwriters named below, who are
represented by Donaldson, Lufkin & Jenrette Securities Corporation, BancBoston
Robertson Stephens Inc., Dain Rauscher Wessels, a division of Dain Rauscher
Incorporated, and Raymond James & Associates, Inc., have severally agreed to
purchase from Paradyne and the selling stockholders the respective number of
shares of common stock set forth opposite their names below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation.........
BancBoston Robertson Stephens Inc...........................
Dain Rauscher Wessels.......................................
Raymond James & Associates, Inc.............................
---------
Total............................................. 6,000,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares of common stock
offered hereby are subject to approval by their counsel of certain legal matters
and to certain other conditions. The underwriters are obligated to purchase and
accept delivery of all the shares of common stock offered hereby (other than
those shares covered by the over-allotment option described below) if any are
purchased.
The underwriters initially propose to offer the shares of common stock in
part directly to the public at the initial public offering price set forth on
the cover page of this prospectus and in part to certain dealers (including the
underwriters) at such price less a concession not in excess of $ per
share. The underwriters may allow, and such dealers may re-allow, to certain
other dealers a concession not in excess of $ per share. After the
initial offering of the common stock, the public offering price and other
selling terms may be changed by the representatives of the underwriters at any
time without notice.
The underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
The following table shows the underwriting fees to be paid to the
underwriters by Paradyne and the selling stockholders in connection with this
offering. These amounts are shown assuming both no exercise and full exercise of
the underwriters' option to purchase additional shares of Paradyne common stock.
<TABLE>
<CAPTION>
PAID BY SELLING
PAID BY PARADYNE STOCKHOLDERS
--------------------------- ---------------------------
NO EXERCISE FULL EXERCISE NO EXERCISE FULL EXERCISE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Per share........................................ $ $ $ $
Total............................................
</TABLE>
Paradyne will pay the offering expenses, estimated to be $1.0 million.
DLJdirect Inc., an affiliate of Donaldson, Lufkin & Jenrette Securities
Corporation and a member of the selling group, is facilitating the distribution
of the shares sold in the offering over the Internet. The underwriters have
agreed to allocate a limited number of shares to DLJdirect Inc. for sale to
brokerage account holders. DLJdirect Inc. will receive the same selling
concession that other dealers will receive in connection with sales of shares
over the Internet.
76
<PAGE> 81
The selling stockholders have granted to the underwriters an option,
exercisable within 30 days after the date of this prospectus, to purchase, from
time to time, in whole or in part, up to an aggregate of 900,000 additional
shares of common stock at the initial public offering price less underwriting
discounts and commissions. The underwriters may exercise such option solely to
cover overallotments, if any, made in connection with the offering. To the
extent that the underwriters exercise such option, each underwriter will become
obligated, subject to certain conditions, to purchase its pro rata portion of
such additional shares based on such underwriter's initial purchase commitment.
Paradyne and the selling stockholders have agreed to indemnify the
underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended, or to contribute to payments that the
underwriters may be required to make in respect thereof.
Each of Paradyne, its executive officers and directors and certain
stockholders and optionholders of Paradyne, including the selling stockholders,
have agreed, subject to certain exceptions, not to
- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock, or
- enter into any swap or other arrangement that transfers all or a portion
of the economic consequences associated with the ownership of any common
stock
for a period of 180 days after the date of this prospectus without the prior
written consent of Donaldson, Lufkin & Jenrette Securities Corporation. During
such 180-day period, Paradyne may issue shares of common stock in connection
with acquisitions of other businesses, products or technologies, so long as the
recipients of common stock in such acquisitions agree in writing to be bound by
the same restrictions applicable to Paradyne and the selling stockholders. In
addition, during such 180-day period, Paradyne has also agreed not to file any
registration statement with respect to, and each of its executive officers,
directors and certain stockholders of Paradyne, including the selling
stockholders, has agreed not to make any demand for, or exercise any right with
respect to, the registration of any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock without the
prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation.
At the request of Paradyne, the underwriters have reserved up to five
percent of the shares of common stock to be issued by Paradyne and offered
hereby for sale, at the initial public offering price, to directors, officers,
employees, some stockholders and their employees and affiliates, consultants,
customers, distributors and other persons. The number of shares of common stock
available for sale to the general public will be reduced to the extent such
individuals purchase such reserved shares. Any reserved shares which are not so
purchased will be offered by the underwriters to the general public on the same
basis as the other shares offered hereby.
Prior to the offering, there has been no established trading market for
Paradyne's common stock. The initial public offering price for the shares of
Paradyne's common stock offered hereby will be determined by negotiation among
Paradyne, representatives of the selling stockholders and the representatives of
the underwriters. The factors to be considered in determining the initial public
offering price include the history of and the prospects for the industry in
which Paradyne competes, the past and present operations of Paradyne, the
historical results of operations of Paradyne, the prospects for future earnings
of Paradyne, the recent market prices of securities of generally comparable
companies and the general condition of the securities markets at the time of the
offering.
Application has been made to have the common stock approved for quotation
on the Nasdaq National Market under the symbol "PDYN."
Other than in the United States and as described below with respect to the
United Kingdom, no action has been taken by Paradyne, the selling stockholders,
or the underwriters that would permit a public offering of the shares of common
stock offered hereby in any jurisdiction where action for that purpose is
required.
77
<PAGE> 82
The shares of common stock offered hereby may not be offered or sold, directly
or indirectly, nor may this prospectus or any other offering material or
advertisements in connection with the offer and sale of any such shares of
common stock be distributed or published in any jurisdiction, except under
circumstances that will result in compliance with the applicable rules and
regulations of such jurisdiction. Persons into whose possession this prospectus
comes are advised to inform themselves about and observe any restrictions
relating to the offering and the distribution of this prospectus. This
prospectus does not constitute an offer to sell or a solicitation of an offer to
buy any shares of common stock offered hereby in any jurisdiction in which such
an offer or a solicitation is unlawful.
Sprout Capital VII, L.P., Sprout Growth II, L.P., DLJ First ESC L.L.C., The
Sprout CEO Fund, L.P. and DLJ Capital Corporation (collectively, the "Sprout
Entities") are affiliates of Donaldson, Lufkin & Jenrette Securities
Corporation, one of the underwriters. As described under "Principal and Selling
Stockholders," the Sprout Entities beneficially own an aggregate of 3,423,372
shares of the outstanding common stock, which represent more than 10% of the
outstanding common stock. Of these shares, approximately 2.1 million shares are
expected to become subject to a voting trust agreement prior to the completion
of the offering and are expected to be held and voted by an independent third
party, Norwest Bank Indiana, N.A., as voting trustee.
Because the Sprout Entities affiliated with Donaldson, Lufkin & Jenrette
Securities Corporation beneficially own more than 10% of the outstanding common
stock, this offering is being conducted in accordance with Rule 2720 of the
Conduct Rules of the National Association of Securities Dealers, Inc., which
provides that the public offering price of an equity security be no higher than
that recommended by a "qualified independent underwriter" ("QIU") meeting
certain standards. In accordance with this requirement, BancBoston Robertson
Stephens has assumed the responsibilities of acting as QIU and will recommend a
price in compliance with the requirements of Rule 2720. In connection with this
offering, BancBoston Robertson Stephens is performing due diligence
investigations and reviewing and participating in the preparation of this
prospectus and the registration statement of which this prospectus forms a part.
Paradyne will pay BancBoston Robertson Stephens a fee of $5,000.00 in connection
with its services as QIU and will reimburse the QIU for its fees and expenses.
Paradyne has agreed to indemnify BancBoston Robertson Stephens, in its capacity
as the qualified independent underwriter, against certain liabilities, including
liabilities under the Securities Act.
In connection with the offering, the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of
Paradyne's common stock. Specifically, the underwriters may overallot the
offering, creating a syndicate short position. The underwriters may bid for and
purchase shares of common stock in the open market to cover such syndicate short
position or to stabilize the price of the common stock. In addition, the
underwriting syndicate may reclaim selling concessions from syndicate members
and selected dealers if they repurchase previously distributed common stock in
syndicate covering transactions, in stabilizing transactions or otherwise. These
activities may stabilize or maintain the market price of the common stock above
independent market levels. The underwriters are not required to engage in these
activities, and may end any of these activities at any time.
There are restrictions on the offer and sale of the common stock in the
United Kingdom. All applicable provisions of the Financial Services Act 1986 and
the Public Offers of Securities Regulations 1995 with respect to anything done
by any person in relation to the common stock in, from or otherwise involving
the United Kingdom must be complied with.
Each underwriter has also agreed that it has:
- not offered or sold and prior to the date six months after the date of
issue of the shares of common stock will not offer or sell any shares of
common stock to persons in the United Kingdom except to persons whose
ordinary activities involve them in acquiring, holding, managing or
disposing of investments (as principal or agent) for the purpose of their
businesses or otherwise in circumstances which have not resulted and will
not result in an offer to the public in the United Kingdom within the
meaning of the Public Offers of Securities Regulations 1995;
78
<PAGE> 83
- complied, and will comply with, all applicable provisions of the
Financial Services Act 1986 of Great Britain with respect to anything
done by it in relation to the shares of common stock in, from or
otherwise involving the United Kingdom; and
- only issued or passed on and will only issue or pass on in the United
Kingdom any document received by it in connection with the issuance of
the shares of common stock to a person who is of a kind described in
Article 11(3) of the Financial services Act 1986 (Investment
Advertisements) (Exemptions) Order 1996 (as amended) of Great Britain or
is a person to whom the document may otherwise lawfully be issued or
passed on.
LEGAL MATTERS
The legality of the shares of common stock offered hereby will be passed
upon for us by Cooley Godward LLP, Palo Alto, California. Certain legal matters
will be passed upon for the underwriters by Alston & Bird LLP, Atlanta, Georgia.
EXPERTS
The financial statements of Paradyne Networks, Inc. (formerly "Paradyne
Acquisition Corp.") as of December 31, 1998 and 1997 and for each of the two
years in the period ended December 31, 1998 and for the five months ended
December 31, 1996 and the financial statements of AT&T Paradyne for the seven
months ended July 31, 1996, included in this Prospectus, have been so included
in reliance on the reports of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in giving said
reports.
HOW TO GET ADDITIONAL INFORMATION ABOUT PARADYNE
We have filed with the Commission a Registration Statement on Form S-1
under the Securities Act, with respect to the common stock offered hereby. As
permitted by the rules and regulations of the Commission, this prospectus, which
is a part of the Registration Statement, omits certain information, exhibits,
schedules and undertakings set forth in the Registration Statement. For further
information pertaining to Paradyne and the common stock offered hereby,
reference is made to such Registration Statement and the exhibits and schedules
thereto. Statements contained in this prospectus as to the contents or
provisions of any contract or other document referred to herein are not
necessarily complete, and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference. A copy of
the Registration Statement may be inspected without charge at the office of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's regional offices located at the Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade
Center, 13th Floor, New York, New York 10048. Copies of all or any part of the
Registration Statement may be obtained from such offices upon the payment of the
fees prescribed by the Commission. In addition, registration statements and
certain other filings made with the Commission through its Electronic Data
Gathering, Analysis and Retrieval ("EDGAR") system are publicly available
through the Commission's web site on the Internet's World Wide Web, located at
http://www.sec.gov. The Registration Statement, including all exhibits thereto
and amendments thereof, was filed with the Commission through EDGAR.
79
<PAGE> 84
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PARADYNE NETWORKS, INC.
Report of Independent Certified Public Accountants........ F-2
Consolidated Balance Sheets as of December 31, 1997 and
1998 and March 31, 1999 (unaudited).................... F-3
Consolidated Statements of Operations for the Period from
Inception through December 31, 1996 and for each of the
two years ended December 31, 1998 and the Three Months
Ended March 31, 1998 and 1999 (unaudited).............. F-4
Consolidated Statements of Changes in Stockholders' Equity
for the Period from Inception through December 31, 1996
and for each of the two years ended December 31, 1998
and the three months ended March 31, 1999
(unaudited)............................................ F-5
Consolidated Statements of Cash Flows for the Period from
Inception through December 31, 1996 and for each of the
two years ended December 31, 1998 and the Three Months
Ended March 31, 1998 and 1999 (unaudited).............. F-6
Notes to Consolidated Financial Statements................ F-7
PARADYNE PREDECESSOR BUSINESS (A CARVE-OUT BUSINESS OF AT&T
PARADYNE CORPORATION)
Report of Independent Certified Public Accountants........ F-22
Consolidated Statements of Operations for the Seven Months
ended July 31, 1996.................................... F-23
Consolidated Statement of Cash Flows for the Seven Months
ended July 31, 1996.................................... F-24
Notes to Financial Statements............................. F-25
</TABLE>
F-1
<PAGE> 85
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Paradyne Networks, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Paradyne
Networks, Inc. (formerly "Paradyne Acquisition Corp.") and its subsidiaries at
December 31, 1997 and 1998, and the results of their operations and their cash
flows for each of the two years in the period ended December 31, 1998 and for
the period from inception (August 1, 1996) through December 31, 1996 in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Tampa, Florida
June 8, 1999
F-2
<PAGE> 86
PARADYNE NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
----------------- -----------
1997 1998 1999
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 3,240 $ 2,356 $ 2,634
Accounts receivable, less allowance for doubtful accounts
of $2,966, $3,007...................................... 28,852 29,641 28,301
Accounts receivable from affiliates....................... 1,519 721 2,158
Other receivables (Note 4)................................ 8,214 -- --
Income tax receivable..................................... 536 4,230 5,879
Inventories............................................... 14,821 16,997 19,548
Prepaid expenses and other current assets................. 3,820 1,808 1,616
------- ------- -------
Total current assets.............................. 61,002 55,753 60,136
Property, plant and equipment, net.......................... 15,552 16,103 15,752
Deferred tax assets......................................... 2,783 1,143 1,143
Other assets................................................ 3,863 2,064 1,301
------- ------- -------
Total assets...................................... $83,200 $75,063 $78,332
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $10,201 $17,205 $21,751
Current portion of debt................................... 17,782 16,483 10,850
Deferred tax liability.................................... 11,975 2,357 2,357
Payroll and benefit related liabilities................... 5,131 6,263 4,804
Other current liabilities................................. 6,307 5,063 6,050
------- ------- -------
Total current liabilities......................... 51,396 47,371 45,812
Long-term debt.............................................. 402 353 378
------- ------- -------
Total liabilities................................. 51,798 47,724 46,190
------- ------- -------
Commitments and contingencies (Note 12)
Stockholders' equity:
Common stock, par value $0.001; 60,000,000 shares
authorized, 25,592,182 and 25,668,723 shares issued and
outstanding as of December 31, 1997 and 1998,
respectively........................................... 26 26 26
Additional paid-in capital................................ 20,817 21,058 24,368
Retained earnings......................................... 10,284 6,639 9,007
Note receivable for common stock (Note 14)................ (150) (150) (1,089)
Unrealized gain on available-for-sale securities.......... 409 -- --
Cumulative translation adjustment......................... 16 (234) (170)
------- ------- -------
Total stockholders' equity........................ 31,402 27,339 32,142
------- ------- -------
Total liabilities and stockholders' equity........ $83,200 $75,063 $78,332
======= ======= =======
</TABLE>
The accompanying Notes to Consolidated Financial Statements are
an integral part of these financial statements.
F-3
<PAGE> 87
PARADYNE NETWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FIVE MONTHS YEARS ENDED THREE MONTHS ENDED
ENDED DECEMBER 31, MARCH 31,
DECEMBER 31, ------------------- -------------------------
1996 1997 1998 1998 (1999)
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Sales.................................. $112,293 $177,850 $195,153 $42,655 $50,969
Service................................ 1,413 3,040 2,256 384 475
Royalty................................ 325 413 1,392 -- 2,618
-------- -------- -------- ------- -------
Total revenues................. 114,031 181,303 198,801 43,039 54,062
-------- -------- -------- ------- -------
Cost of sales:
Equipment.............................. 59,634 90,334 107,921 21,922 29,810
Service................................ 744 1,154 620 125 156
-------- -------- -------- ------- -------
Total cost of sales............ 60,378 91,488 108,541 22,047 29,966
-------- -------- -------- ------- -------
Gross margin............................. 53,653 89,815 90,260 20,992 24,096
Operating expenses:
Research and development (includes
$13,114 of purchased R&D in 1996)... 31,174 37,339 35,132 8,554 8,768
Selling, general and administrative
expenses............................ 29,409 66,278 55,969 13,410 13,863
Restructuring charges.................. -- 1,778 984 -- --
-------- -------- -------- ------- -------
Total operating expenses....... 60,583 105,395 92,085 21,964 22,631
-------- -------- -------- ------- -------
Operating income (loss).................. (6,930) (15,580) (1,825) (972) 1,465
Other (income) expenses:
Interest............................... 3,502 7,712 1,711 554 434
Lucent settlement gain................. -- (51,183) -- -- --
Other, net............................. 382 (1,753) 1,191 (33) (2,852)
-------- -------- -------- ------- -------
Income (loss) before provision for income
taxes.................................. (10,814) 29,644 (4,727) (1,493) 3,883
Provision (benefit) for income tax..... -- 8,302 (1,082) (342) 1,515
-------- -------- -------- ------- -------
Net income (loss)........................ $(10,814) $ 21,342 $ (3,645) $(1,151) $ 2,368
======== ======== ======== ======= =======
Basic income (loss) per common share..... $ (0.42) $ 0.84 $ (0.14) $ (0.04) $ 0.09
======== ======== ======== ======= =======
Weighted average number of common shares
outstanding............................ 25,500 25,552 25,623 25,602 25,893
======== ======== ======== ======= =======
Diluted income (loss) per common share... $ (0.42) $ 0.81 $ (0.14) $ (0.04) $ 0.09
======== ======== ======== ======= =======
Weighted average number of common shares
outstanding............................ 25,500 26,291 25,623 25,602 27,227
======== ======== ======== ======= =======
</TABLE>
The accompanying Notes to Consolidated Financial Statements are
an integral part of these financial statements.
F-4
<PAGE> 88
PARADYNE NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMPREHENSIVE COMMON STOCK ADDITIONAL RETAINED TOTAL
INCOME -------------------- PAID-IN EARNINGS STOCKHOLDERS'
(LOSS) SHARES AMOUNT CAPITAL (DEFICIT) OTHER EQUITY
<S> <C> <C> <C> <C> <C> <C> <C>
August 1, 1996........................ $ -- -- $-- $ -- $ -- $ -- $ --
Equity investment in the Company.... 25,500,000 26 17,036 17,062
Net loss............................ (10,814) (10,814) (10,814)
Cumulative translation adjustment... (163) (163) (163)
Asset allocation to related party
(Note 14)......................... (106) (106)
-------- ---------- --- ------- -------- ------- --------
Balance, December 31, 1996............ $(10,977) 25,500,000 26 16,930 (10,814) (163) 5,979
========
Contribution from Paradyne Partners
(Note 4).......................... 3,600 3,600
Proceeds from exercise of stock
options and related tax benefit... 92,182 287 (150) 137
Net income.......................... $ 21,342 21,342 21,342
Cumulative translation adjustment... 179 179 179
Unrealized investment gain.......... 409 409 409
Asset allocation to related party
(Note 14)......................... (244) (244)
-------- ---------- --- ------- -------- ------- --------
Balance, December 31, 1997............ $ 21,930 25,592,182 26 20,817 10,284 275 31,402
========
Proceeds from exercise of stock
options and related tax benefit... 76,541 241 241
Net loss............................ $ (3,645) (3,645) (3,645)
Cumulative translation adjustment... (250) (250) (250)
Unrealized investment loss.......... (409) (409) (409)
-------- ---------- --- ------- -------- ------- --------
Balance, December 31, 1998............ $ (4,304) 25,668,723 26 21,058 6,639 (384) 27,339
========
Proceeds from exercise of stock
options and related tax benefit... 589,509 3,310 (939) 2,371
Net income.......................... $ 2,368 2,368 2,368
Cumulative translation adjustment... 64 64 64
-------- ---------- --- ------- -------- ------- --------
Balance, March 31, 1999 (unaudited)... $ 2,432 26,258,232 $26 $24,368 $ 9,007 $(1,259) $ 32,142
======== ========== === ======= ======== ======= ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are
an integral part of these financial statements.
F-5
<PAGE> 89
PARADYNE NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
FIVE MONTHS YEARS ENDED ENDED
ENDED DECEMBER 31, MARCH 31,
DECEMBER 31, ------------------- -----------------
1996 1997 1998 1998 1999
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows provided by (used in) operating activities:
Net income (loss)......................................... $(10,814) $ 21,342 $ (3,645) $(1,151) $ 2,368
Adjustments to reconcile net income (loss) to cash
provided by (used in) operating activities:
Lucent settlement gain.................................. -- (51,183) -- -- --
Investment (income) loss ABI............................ (1,668) 1,353
Loss on sale of assets.................................. -- 22 232 (27) --
Increase in allowance for bad debts..................... -- 181 41 749 398
Depreciation and amortization........................... 5,571 10,558 5,243 1,362 1,448
Purchased in-process research and development........... 13,114 -- -- -- --
Deferred income taxes................................... (625) 9,817 (7,978) (727) --
(Increase) decrease in assets:
Receivables............................................. (16,313) 15,061 7,384 (3,472) 942
Accounts receivable from affiliates..................... (2,230) 711 798 (1,280) (1,437)
Income tax receivable................................... -- (536) (3,694) -- (1,649)
Inventories............................................. (79) 5,266 (2,176) (496) (2,551)
Prepaid expenses and other current assets............... (180) (543) (97) 94 192
Other long term assets.................................. -- 2,564 1,186 543 610
Increase (decrease) in liabilities:
Accounts payable........................................ 5,643 (7,484) 7,629 2,562 4,546
Payroll and related liabilities......................... -- (258) 1,132 (1,085) (1,459)
Other current liabilities............................... 1,358 (4,987) (1,244) (664) 987
-------- -------- -------- ------- -------
Net cash provided by (used in) operating
activities........................................ (4,555) (1,137) 6,164 (3,592) 4,395
-------- -------- -------- ------- -------
Cash flows provided by (used in) investing activities:
Cash used to acquire net assets........................... (24,562) -- -- -- --
Capital expenditures...................................... (4,497) (9,636) (6,945) (1,848) (944)
Proceeds from sale of property, plant and equipment....... 51 21,218 1,532 411 --
Proceeds from sale of investment.......................... -- -- 347 -- --
-------- -------- -------- ------- -------
Net cash provided by (used in) investing
activities........................................ (29,008) 11,582 (5,066) (1,437) (944)
-------- -------- -------- ------- -------
Cash flows provided by (used in) financing activities:
Proceeds from debt issued to parent....................... 7,500 -- 5,000 5,000 --
Repayment of debt issued to parent........................ -- (7,500) (5,000) -- --
Capital contribution from parent.......................... 17,062 -- -- -- --
Payment of acquisition costs.............................. (7,314) (377) (625) (69) --
Proceeds from stock options exercised..................... -- 137 241 29 2,371
Borrowings under (repayment of) bank line of credit,
net..................................................... 10,553 4,390 1,139 (3,333) (5,642)
Borrowings under other debt obligations................... 2,464 6,038 623 357 168
Repayment of other debt obligations....................... (185) (11,426) (3,110) (54) (134)
-------- -------- -------- ------- -------
Net cash provided by (used in) financing
activities........................................ 30,080 (8,738) (1,732) 1,930 (3,237)
-------- -------- -------- ------- -------
Effect of foreign exchange rate changes on cash............. (163) 179 (250) 28 64
-------- -------- -------- ------- -------
Net increase (decrease) in cash and cash equivalents........ (3,646) 1,886 (884) (3,071) 278
Cash and cash equivalents at beginning of period............ 5,000 1,354 3,240 3,240 2,356
-------- -------- -------- ------- -------
Cash and cash equivalents at end of period.................. $ 1,354 $ 3,240 $ 2,356 $ 169 $ 2,634
======== ======== ======== ======= =======
Supplemental disclosures of cash flow information:
Cash paid for:
Interest................................................ $ 798 $ 2,658 $ 1,711
======== ======== ========
Income taxes............................................ $ 471 $ 10,041
======== ========
Non-cash transaction:
Note issued to seller to acquire net assets............... $ 69,350
========
Investment acquired (written down) in exchange for
intellectual property................................... $ 1,668 $ (1,353)
======== ========
Acquisition of installment and affiliate receivables in
consideration for related party note (Note 14).......... $ 13,735 $(13,735)
======== ========
Debt forgiveness (Note 4)................................. $ 63,000
========
Contribution from Paradyne Partners (Note 4).............. $ 3,600
========
Asset allocation to related party (Note 14)............... $ 106 $ 244
======== ========
Stock issued for note..................................... $ 150 $ 939
======== =======
</TABLE>
The accompanying Notes to Consolidated Financial Statements are
an integral part of these financial statements.
F-6
<PAGE> 90
PARADYNE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA OR AS OTHERWISE NOTED)
1. BASIS OF PRESENTATION:
Pursuant to a Purchase Agreement dated June 18, 1996 (the "Purchase
Agreement"), Paradyne Partners, L.P. ("Paradyne Partners") acquired certain
assets and operations of AT&T Paradyne Corporation from Lucent Technologies Inc.
("Lucent") for cash and seller notes totaling $146.0 million. This transaction
was consummated through five direct and indirect subsidiaries of Paradyne
Partners which included Paradyne Acquisition Corp. ("PAC") and its wholly-owned
subsidiary, Paradyne Corporation and its subsidiaries (the "Company"). The
acquisition was accounted for as a purchase. The purchase price was allocated to
the assets acquired and liabilities assumed based on fair values including
long-lived tangible and intangible assets. Property, plant and equipment,
purchased research and development and the Lucent supply agreement values were
based on independent appraised values.
The following reflects a summary of the net assets acquired by the Company
at July 31, 1996:
<TABLE>
<S> <C>
Current assets.............................................. $ 52,957
Property, plant and equipment............................... 30,366
Purchased research and development.......................... 13,114
Premisys contract........................................... 2,251
Lucent contract............................................. 25,441
Other non-current assets.................................... 4,963
Current liabilities......................................... (22,113)
Restructuring liability..................................... (4,629)
--------
Total............................................. $102,350
========
</TABLE>
The restructuring liability related principally to involuntary employee
termination costs ($2.9 million) and costs of exiting surplus facilities ($1.5
million). Approximately $3.1 million of this liability was paid during 1996,
with the remaining $1.5 million paid during 1997.
That portion of the acquired assets and operations of AT&T Paradyne
Corporation that remained with the Company were purchased for $102.3 million,
consisting of a $17.1 million equity investment, $69.3 million in seller notes
to Lucent, debt to the Paradyne Partners of $7.5 million and $8.4 million of
other acquisition costs.
As further discussed in Note 15, subsequent to December 31, 1998, the legal
name of PAC was changed to Paradyne Networks, Inc. The accompanying financial
statements reflect the consolidated historical financial position, results of
operations and cash flows of Paradyne Networks, Inc., Paradyne and Paradyne's
wholly-owned subsidiaries from inception. Also, see Note 14 for discussion of
related party transactions.
The Company is a leading developer, manufacturer and distributor of
broadband and narrowband network access products for network service providers
and business customers. The Company offers solutions that enable business class,
service level managed, high-speed connectivity over the existing telephone
network infrastructure.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The significant accounting principles and practices used in the preparation
of the accompanying consolidated financial statements are summarized below:
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the results of
the Company and its wholly-owned subsidiaries: Paradyne Corporation; Paradyne
Canada Ltd.; Paradyne Japan Corporation; Paradyne International Ltd.; Paradyne
Worldwide Corp. (formerly Paradyne Far East Corporation); Ark Electronic
Products Inc.; Paradyne GmbH; and Paradyne International Sales Ltd. Intercompany
accounts and transactions have been eliminated in consolidation.
F-7
<PAGE> 91
PARADYNE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA OR AS OTHERWISE NOTED)
REVENUE RECOGNITION
Revenue from equipment sales is generally recognized at the date of
shipment. Revenue from services, which consists mainly of repair of
out-of-warranty products, is recognized when the services are performed and all
substantial contractual obligations have been satisfied. Provision is made
currently for estimated product returns. Royalty revenue is recognized when the
Company has completed delivery of technical specifications and performed
substantially all required services under the related agreement. See discussion
of product warranty below.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods presented. Actual results could differ from those estimates.
The markets for the Company's products are characterized by intense competition,
rapid technological development and frequent new product introductions, all of
which could impact the future value of the Company's inventory and certain other
assets.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid instruments purchased with an
original maturity of three months or less to be cash equivalents.
INVESTMENTS
In accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," the Company
has classified its equity securities as available-for-sale. These securities, of
which $2.1 million and $0 are included in prepaid expenses and other current
assets and $180 and $0 are included in other assets at December 31, 1997 and
1998, respectively, are stated at fair value, with the unrealized gain or loss,
net of taxes, reported in stockholders' equity until realized.
CONCENTRATION OF CREDIT RISK
The Company sells products to value added distributors and other customers
and extends credit based on an evaluation of the customer's financial condition,
generally without requiring collateral. Exposure to losses on receivables is
principally dependent on each customer's financial condition. The Company
monitors its exposure for credit losses and maintains allowances for anticipated
losses. Sales to one customer were approximately 42% of total revenues for the
five months ended December 31, 1996. Sales to two customers were approximately
34% and 12% of total revenues for the year ended December 31, 1997 and 35% and
15% of total revenues for the year ended December 31, 1998.
Purchases from one vendor were approximately 37% of total purchases for the
five months ended December 31, 1996. Purchases from two vendors were
approximately 23% and 18% of total purchases for the year ended December 31,
1997 and purchases from one vendor were approximately 15% of total purchases for
the year ended December 31, 1998.
F-8
<PAGE> 92
PARADYNE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA OR AS OTHERWISE NOTED)
International sales accounted for 24% of total revenue during the five
months ended December 31, 1996, and 30% and 20% of total revenue during the
years ended 1997 and 1998, respectively, summarized as follows:
<TABLE>
<CAPTION>
REVENUES (A)
--------------------------------------------
5 MONTHS ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1998
GEOGRAPHIC INFORMATION -------------- ------------ ------------
<S> <C> <C> <C>
United States................................... $ 86,609 $126,802 $158,593
Canada.......................................... 11,439 29,082 26,224
Japan........................................... 6,920 9,790 3,279
Other foreign countries......................... 9,063 15,629 10,705
-------- -------- --------
Total................................. $114,031 $181,303 $198,801
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
LONG-LIVED ASSETS
--------------------------------------------
DECEMBER 31,
1996 1997 1998
GEOGRAPHIC INFORMATION -------------- ------------ ------------
<S> <C> <C> <C>
United States................................... $56,074 $20,105 $17,867
Canada.......................................... 2,660 887 511
Japan........................................... 1,056 922 798
Other foreign countries......................... 328 284 134
------- ------- -------
Total................................. $60,118 $22,198 $19,310
======= ======= =======
</TABLE>
- ---------------
(a) Revenues are attributed to countries based on location of customer.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of the Company's financial instruments, which includes
cash, receivables and variable-rate debt, approximates fair value due to the
short maturities of those instruments.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost includes
material, labor and manufacturing overhead. Cost is determined on a first in,
first out basis.
INTANGIBLE ASSET
Intangible asset, which consists of a contract with Premisys Communications
for exclusive distribution rights, is included in other assets (see Note 7).
This contract is amortized on a straight-line basis over the term of the
agreement of approximately four years. See Note 4 related to favorable supply
contract with Lucent, which was renegotiated. The original contract value was
based on estimated cash flows.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Leasehold improvements
are amortized on a straight-line method over the period of the lease or the
estimated service lives of the improvements, whichever is shorter. Depreciation
expense includes the amortization of capital lease assets.
Expenditures for renewals and improvements that significantly add to
productive capacity or extend the useful life of an asset are capitalized.
Expenditures for maintenance and repairs are charged to operations
F-9
<PAGE> 93
PARADYNE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA OR AS OTHERWISE NOTED)
when incurred. When assets are sold or retired, the cost of the asset and the
related accumulated depreciation are eliminated from the accounts and any gain
or loss is recognized at such time.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the recoverability of its long-lived assets whenever
adverse events or changes in business climate indicate that the expected
undiscounted future cash flows from the related asset may be less than
previously anticipated. If the net book value of the related asset exceeds the
undiscounted future cash flows of the asset, the carrying amount would be
reduced to the present value of its expected future cash flows and an impairment
loss would be recognized in accordance with Financial Accounting Standards
No. 121. As of December 31, 1997 and 1998, management does not believe that an
impairment reserve is required.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred. The Company
purchased in process research and development valued at $13.1 million which was
expensed during the period ended December 31, 1996. The purchased R&D was valued
based on projected discounted cash flows, on a project-by-project basis for 12
projects, using a risk adjusted discount rate of 22%. These projects were
scheduled for completion in late 1996 and 1997. There were no expected
significant variances from historical pricing, margins or expense levels in the
projections other than the normal decline in prices and margins as products age.
PRODUCT WARRANTY
The Company generally provides a return to factory warranty for a period of
two years from the date of sale. A current charge to income is recorded at the
time of sale to reflect the amount the Company estimates will be needed to cover
future warranty obligations for products sold during the year. The accrued
liability for warranty costs is included in the caption "other current
liabilities" in the accompanying consolidated balance sheet.
INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," which
requires use of the asset and liability method of accounting for deferred income
taxes.
EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
during the year. Diluted earnings per share assume the exercise of stock options
for which market price exceeds exercise price, less shares assumed purchased by
the Company with related proceeds.
Options are not included in the 1998 calculation of diluted loss per share
due to their antidilutive effect.
F-10
<PAGE> 94
PARADYNE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA OR AS OTHERWISE NOTED)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
---------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
BASIC EPS
(Loss) income available to common stockholders.............. $21,342 25,552 $0.84
EFFECT OF DILUTIVE SECURITIES
Incremental shares for employee options..................... -- 739
DILUTED EPS
(Loss) income available to stockholders & assumed
conversions............................................... $21,342 26,291 $0.81
</TABLE>
FOREIGN CURRENCY
The local currency is the functional currency of each of the foreign
subsidiaries. Assets and liabilities of the Company's foreign subsidiaries are
translated using fiscal year-end exchange rates, and revenue and expenses are
translated using average exchange rates prevailing during the year. The effects
of translating foreign subsidiaries' financial statements are recorded as a
separate component of stockholders' equity.
In addition, included in other (income) expense are realized foreign
currency exchange losses of $323 for the five months ended December 31, 1996 and
$596 for the year ended December 31, 1997. A foreign currency gain of $181 is
included for the year ended December 31, 1998.
INTERIM FINANCIAL DATA
The accompanying financial statements as of March 31, 1999 and for the
three months then ended are unaudited. In the opinion of management, these
interim statements have been prepared on the same basis as the audited financial
statements and include all adjustments, consisting only of normal recurring
adjustments, necessary for the fair presentation of the results of the interim
periods. The financial and other data disclosed in these notes to the financial
statements for these periods are also unaudited. The results of the operations
for the interim periods are not necessarily indicative of the results to be
expected for any future periods.
3. RESTRUCTURING CHARGES:
The Company recorded a restructuring charge of $1.8 million related to
staff reductions in the U.S. operations in November 1997. Termination charges
related to approximately 93 employees spread throughout all major functions
within the Company. Staff reductions were necessary because the Company had
significantly improved operating efficiencies with its investment in new systems
and processes, as well as changing the composition of our workforce to update
the availability of strategic skills.
In 1998, the Company recorded a restructuring charge of $984. This charge
related to the change in the Company's model for operating within certain
international operations. The Company now operates through a system of
distributors with branch operation support in most foreign locations. In this
restructuring approximately 25 employees were terminated from employment. In
addition, charges were incurred to exit from leased facilities in international
locations.
During 1997 and 1998, the Company paid approximately $957 and $1.4 million
related to restructurings. The remaining $388 accrued as of year end, which is
expected to be paid during 1999, related to the international restructuring.
F-11
<PAGE> 95
PARADYNE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA OR AS OTHERWISE NOTED)
4. AMENDMENT TO LUCENT SUPPLY AGREEMENT:
At July 31, 1996, Lucent delivered, as a condition to the closing specified
in Note 1, a four year Volume Purchase Letter ("VPL") whereby Lucent agreed to
purchase a baseline level of certain products or pay a penalty. At December 31,
1997 Lucent had not achieved the baseline commitment under the VPL and,
therefore, was subject to certain take-or-pay provisions. In August, 1998 the
Company, GlobeSpan Semiconductor Inc., a subsidiary of Paradyne Partners
("GlobeSpan"), and Lucent terminated the VPL including the elimination of all
existing and future minimum purchase requirements under a revised Exclusivity
and Amendment Agreement.
As a result of the Exclusivity and Amendment Agreement, the Company
received $8.2 million in cash and $63.0 million of the outstanding note payable
to Lucent was forgiven. The Company also paid Lucent the remaining $2.7 million
outstanding under the existing terms of the note payable. In addition, GlobeSpan
agreed to amend the warrant originally granted to Lucent at the time of Paradyne
Partners' acquisition of GlobeSpan to acquire 1,500,000 shares of GlobeSpan by
extending the warrant term by three years, which would have expired upon
repayment of the seller notes. Additionally, Lucent and the Company agreed that
the Company will be Lucent's exclusive provider for certain access products for
resale through June 30, 2001.
The contract renegotiation and resolution has been reflected in the
accompanying consolidated financial statements at December 31, 1997 and resulted
in a pretax gain of approximately $51.2 million and a contribution of capital by
Paradyne Partners of $3.6 million reflecting the estimated fair value of the
extension of the GlobeSpan warrant.
5. INVENTORIES:
Inventories are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
----------------- -----------
1997 1998 1999
(UNAUDITED)
<S> <C> <C> <C>
Raw materials........................................... $12,691 $11,064 $ 9,448
Work-in-process......................................... 569 1,970 1,954
Finished goods.......................................... 1,561 3,963 8,146
------- ------- -------
$14,821 $16,997 $19,548
======= ======= =======
</TABLE>
6. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1998
<S> <C> <C>
Leasehold improvements...................................... $ 2,252 $ 1,375
Office furniture and fixtures............................... 1,733 2,556
Machinery and equipment..................................... 18,166 22,922
------- --------
22,151 26,853
Less accumulated depreciation............................... (6,599) (10,750)
------- --------
$15,552 $ 16,103
======= ========
</TABLE>
Depreciation expense amounted to $2.7 million, $3.6 million and $4.6
million for the five months ended December 31, 1996 and the years ending
December 31, 1997 and 1998, respectively.
F-12
<PAGE> 96
PARADYNE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA OR AS OTHERWISE NOTED)
7. OTHER ASSETS:
Other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1997 1998
<S> <C> <C>
Intangible asset, net of accumulated amortization of $872
and $1.5 million, respectively............................ $1,379 $ 766
Notes receivable, interest ranging from 8% to 9.25%......... 1,250 429
Security deposits........................................... 905 831
Other....................................................... 329 38
------ ------
$3,863 $2,064
====== ======
</TABLE>
8. OTHER CURRENT LIABILITIES:
Other current liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1997 1998
<S> <C> <C>
Accrued professional fees................................... $2,548 $1,013
Accrued product warranty.................................... 1,319 1,682
Accrued taxes............................................... 637 611
Accounts payable to affiliates.............................. 354 7
Other....................................................... 1,449 1,750
------ ------
$6,307 $5,063
====== ======
</TABLE>
9. INDEBTEDNESS:
Indebtedness consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1998
<S> <C> <C>
Revolving credit facility interest at the bank's stated
reference rate plus 0% to 1% (9.50% and 7.75%,
respectively at December 31, 1997 and 1998) collateralized
by certain assets of the Company, payable monthly,
maturing January 2000..................................... $14,943 $16,082
Note payable, interest ranging from 8.5% to 14.5%
collateralized by the capital stock of the Company,
interest payable quarterly from March 31, 1998 through
June 30, 2000, principal payment due August 28, 1998 (Note
4)........................................................ 2,712 --
Capitalized lease obligations, interest ranging from 8.8% to
9.5%, maturing various dates through July 2000............ 529 754
------- -------
18,184 16,836
Less current portion........................................ (17,782) (16,483)
------- -------
$ 402 $ 353
======= =======
</TABLE>
Scheduled principal repayments on debt for the next five years are as
follows: 1999 -- $16.5 million, 2000 -- $306; 2001 -- $47; 2002 and
thereafter -- $0.
F-13
<PAGE> 97
PARADYNE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA OR AS OTHERWISE NOTED)
REVOLVING CREDIT FACILITIES
On July 31, 1996, the Company entered into an agreement (the "Agreement")
with a commercial lending institution to provide a revolving credit facility in
the amount of $45.0 million with availability subject to a borrowing base
formula. The facility provides for a sub-limit of $5.0 million for letters of
credit, of which none were outstanding at December 31, 1997 or 1998. The
Agreement includes a fee ranging from .375% to .50% of the unused line. Certain
assets of the Company, including accounts receivable, inventories, equipment and
intellectual property rights, are pledged as collateral. The Company is subject
to various non-financial covenants under the terms of the Agreement. Effective
December 31, 1997 and 1998, the Company was in compliance with or had obtained
waivers to the Agreement for such covenants.
Additionally, the Agreement restricts the Company with respect to making
dividends.
On August 25, 1997, the Company entered into a subordinated revolving
credit agreement (the "Credit Agreement") with Paradyne Partners. The Credit
Agreement made available $5.0 million through August 25, 2002. This agreement
was amended in October 1998 to make available $10.0 million. In connection
therewith, Paradyne Partners provided a limited continuing guarantee of the
Agreement. Borrowings under the Credit Agreement are subordinated to debt under
the Agreement and bears interest at 8% per annum. There were no borrowings under
this Credit Agreement as of December 31, 1998.
CAPITAL LEASES
The Company executed several long-term lease agreements for computer and
other equipment. For financial reporting purposes, the leases have been
classified as capital leases; accordingly, assets of approximately $1.2 million
(included in machinery and equipment) and accumulated depreciation of $283 have
been recorded at December 31, 1998.
Future minimum lease payments for assets under capital leases at December
31, 1998 are as follows:
<TABLE>
<S> <C>
1999........................................................ $ 452
2000........................................................ 322
2001........................................................ 48
-----
Total minimum lease payments................................ 822
Less amount representing interest........................... (68)
-----
Present value of net minimum lease payments................. 754
Less current portion........................................ (401)
-----
Long-term capital lease obligations......................... $ 353
=====
</TABLE>
F-14
<PAGE> 98
PARADYNE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA OR AS OTHERWISE NOTED)
10. INCOME TAXES:
The Company files a consolidated federal income tax return. The provision
(benefit) for income taxes is as follows:
<TABLE>
<CAPTION>
FIVE MONTHS
ENDED YEARS ENDED
DECEMBER 31, DECEMBER 31,
1996 1997 1998
------------ ------- -------
<S> <C> <C> <C>
Current:
Foreign............................................ $ -- $ 37 $ 38
Federal............................................ 545 (1,429) 6,316
State.............................................. 80 (123) 542
----- ------- -------
625 (1,515) 6,896
----- ------- -------
Deferred:
Foreign............................................ -- -- --
Federal............................................ (545) 9,041 (7,348)
State.............................................. (80) 776 (630)
----- ------- -------
(625) 9,817 (7,978)
----- ------- -------
Income tax provision................................. $ -- $ 8,302 $(1,082)
===== ======= =======
</TABLE>
Deferred tax assets (liabilities) are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1998
<S> <C> <C>
Payable for cancellation of indebtedness.................... $(18,658) $ --
US net operating loss carryforward.......................... 6,683 --
Property, plant and equipment............................... (2,573) (1,951)
Intangibles................................................. 5,644 117
Foreign net operating loss carryforwards.................... 3,352 1,350
Other....................................................... (288) 620
-------- -------
(5,840) 136
Valuation allowance......................................... (3,352) (1,350)
-------- -------
Net deferred tax liability.................................. $ (9,192) $(1,214)
======== =======
</TABLE>
The Company recorded a valuation allowance at December 31, 1997 and 1998
with respect to the foreign net operating losses due to the uncertainty of their
ultimate realization.
At December 31, 1998, Paradyne Canada had net operating loss carryforwards
of approximately $3.0 million expiring 2003. In the U.K. and Japan, management
has decided that operations will no longer be conducted through Paradyne
International Ltd. and Paradyne Japan Corporation, and thus, there will be no
future benefit related to the NOL carryforwards of Paradyne International Ltd.
and Paradyne Japan Corporation. The foreign net operating losses as of December
31, 1998 have been adjusted to reflect the elimination of loss carryforwards
related to the exit of these foreign subsidiaries.
F-15
<PAGE> 99
PARADYNE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA OR AS OTHERWISE NOTED)
The provision for income taxes differed from the statutory rate as follows:
<TABLE>
<CAPTION>
1996 1997 1998
--------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Statutory Rate.............. $(3,676) -34.0% $10,375 35.0% $(1,654) -35.0%
Foreign loss..................... -- 0.0 -- 0.0 523 11.0
State taxes...................... (540) -5.0 746 2.5 (95) -2.0
Basis adjustments................ -- 0.0 1,561 5.3 -- 0.0
Other............................ 113 1.4 (277) -1.0 144 3.1
Valuation allowance.............. 4,103 37.6 (4,103) -13.8 -- 0.0
------- ----- ------- ----- ------- -----
Provision for income taxes....... $ -- 0.0% $ 8,302 28.0% $(1,082) -22.9%
======= ===== ======= ===== ======= =====
</TABLE>
11. STOCK OPTION PLAN:
The Company has a stock option plan (the "1996 Plan") whereby the Board of
Directors may discretionarily reserve common shares for the purpose of granting
to employees (including officers and employee directors) or the employees of the
Company's affiliates, options to purchase common stock. Nonstatutory stock
options, rights to acquire restricted stock and stock bonuses may be granted to
employees (including officers), directors of and consultants to the Company or
its affiliates. Under the plan, 6,000,000 shares have been reserved related to
options available for grant to employees, directors and consultants through
December 31, 1998. The options are generally fully vested in four years, and
they have a maximum contractual life of 10 years. The exercise price of options
granted under the 1996 Plan are determined by the Board of Directors. The
Company has granted 4,731,025 options to the Company's employees, directors and
consultants of which 4,028,047 options are outstanding as of December 31, 1998.
During 1998, the Company granted 47,950 fixed options to purchase shares of
common stock with exercise prices below fair market value. As a result, $96 of
compensation expense will be recognized ratably over the vesting period of the
related options, of which $6 was recognized in 1998.
Information on stock options is summarized as follows:
<TABLE>
<CAPTION>
1996 1997 1998
----------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year......................... -- -- $ -- 3,883,716 $2.87
Granted........................ -- 4,259,125 2.80 471,900 5.00
Exercised...................... -- (92,182) 2.00 (76,541) 2.03
Canceled....................... -- (283,227) 2.08 (251,028) 2.30
--------- ---------
Outstanding at end of year..... -- 3,883,716 2.87 4,028,047 3.17
--------- ---------
Exercisable at end of year..... -- 949,589 2.81 1,898,226 2.86
========= =========
</TABLE>
<TABLE>
<CAPTION>
OPTIONS WEIGHTED AVERAGE NUMBER OF OPTIONS
WEIGHTED AVERAGE OUTSTANDING AT REMAINING CONTRACTUAL EXERCISABLE AT
EXERCISE PRICES DECEMBER 31, 1998 LIFE OF OPTIONS (YEARS) DECEMBER 31, 1998
<S> <C> <C> <C>
$ 2.00........................... 3,079,678 7.79 1,667,652
5.00........................... 573,369 9.10 43,074
10.00........................... 375,000 7.92 187,500
--------- ---------
4,028,047 1,898,226
========= =========
</TABLE>
F-16
<PAGE> 100
PARADYNE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA OR AS OTHERWISE NOTED)
The Company applies APB Opinion No. 25 and related interpretations for
accounting for stock options. Accordingly, no compensation costs at the grant
dates are recorded for options granted at fair market value. Had compensation
cost for the Company's option plans been determined based on the fair value at
the grant dates as prescribed by Statement of Financial Accounting Standards No.
123, "Accounting for Stock Based Compensation" ("FAS 123"), the Company's net
income and net income per share on a pro forma basis would have been (in
thousands, except per share data):
<TABLE>
<CAPTION>
1997 1998
<S> <C> <C>
Net income (loss):
As reported............................................... $21,342 $(3,645)
======= =======
Pro forma................................................. $20,971 $(4,035)
======= =======
Net income (loss) per share:
As reported............................................... $ 0.84 $ (0.14)
======= =======
Pro forma basic........................................... $ 0.82 $ (0.16)
======= =======
Pro forma diluted......................................... $ 0.80 $ (0.16)
======= =======
</TABLE>
The preceding pro forma results were calculated with the use of the Black
Scholes option pricing model. The following assumptions were used for the years
ended December 31, 1997 and 1998: (1) risk-free interest rate of 6.60%; (2)
dividend yield of 0.0%; (3) expected life of 5.0 years; and (4) volatility of
0.0001%.
At December 31, 1998 the Company has 73,800 options issued to employees at
a weighted average price of $2.13 which vest only in the event of an initial
public offering of the Company's common stock. Accordingly, in the event of an
initial public offering compensation expense will be recorded to the extent fair
value exceeds the option price.
During the first quarter of 1999, the Company issued options to acquire
52,200 shares of the Company's common stock at a weighted average price of $5.00
per share, which was less than fair value by $271, and which is being amortized
ratably over the vesting period. During the three months ended March 31, 1999,
$17 of compensation expense has been included in selling, general and
administrative expenses for all stock options issued at less than fair market
value.
During March 1999, various executives of the Company issued full recourse
promissory notes, totaling $939 to the Company in connection with the purchase
of 394,938 shares of common stock. Additionally, in May 1997, an executive
issued a full recourse promissory note in the amount of $150 in connection with
the purchase of 75,000 shares of common stock. The principal balance of the
notes and the related accrued interest (4.72% and 6.65% per annum) are payable
at the earlier of the termination of employment or five years from the date of
the note. The notes are secured by the shares of common stock acquired with the
notes, and those shares are held in escrow by the Company. All unvested shares
purchased with the notes are subject to repurchase by the Company if the
respective executive terminates their employment before becoming fully vested.
The balance as of March 31, 1999 was $1.1 million plus accrued interest.
F-17
<PAGE> 101
PARADYNE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA OR AS OTHERWISE NOTED)
12. COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES
The Company is obligated under noncancelable operating leases for office
and warehouse equipment and facilities. The leases expire at various dates
through 2007. Rent expense for the years ended December 31, 1997 and 1998
approximated $3.0 million and $3.9 million, respectively. Minimum required
future lease payments under noncancelable operating leases are as follows:
<TABLE>
<S> <C>
1999........................................................ $ 4,182
2000........................................................ 3,921
2001........................................................ 3,817
2002........................................................ 3,968
2003 and thereafter......................................... 16,130
</TABLE>
The Company leases facilities in Red Bank, NJ and subleases this space to
GlobeSpan under a non-cancelable operating lease. Future minimum lease payment
receivables under the leasing agreement as of December 31, 1998 are as follows:
1999 -- $934; 2000 -- $934; 2001 -- $955; 2002 -- $352; 2003 and $0 thereafter
(see Note 14).
SALE/LEASEBACK
In June 1997, the Company sold all of its land and the improvements thereon
at its Largo, Florida facility at approximately net book value, and at the same
time leased back two of the buildings. The primary term of the lease is for 10
years with annual rents approximating $1.8 million for the first five years and
$2.1 million for the remaining five years. If the buildings are sold within
three years of acquisition, the primary lease term will be 12 years. The Company
has the option to renew the lease for two additional five year terms on the same
conditions as the current lease. The Company is responsible for paying for any
necessary improvements to the property and is responsible for its proportionate
share of most operating costs and taxes on the property.
SALE OF INSTALLMENT RECEIVABLES
At December 31, 1998, sales-type lease receivables sold to AT&T Capital
Corporation with recourse were $886. The ultimate responsibility for the
collection of these receivables is with Paradyne Credit Corp., a related party.
13. EMPLOYEE BENEFITS:
401(k) Plan
The Company has a 401(k) plan covering substantially all employees of the
Company. Benefits vest based on number of years of service. The Company's policy
is to match two-thirds of an employee's contributions, up to six percent of an
employee's annual salary. Additionally, the Board of Directors may grant
discretionary contributions. Contributions to the plan were approximately $1.1
million, $2.4 million and $2.4 million for the five months ended December 31,
1996 and the years ended December 31, 1997 and 1998, respectively.
Key Employee Stock Option Plan
The Key Employee Stock Option Plan (the "Key Employee Plan") was adopted in
December 1997, and covers employees holding the position of Vice President or
above. Key Employee Plan participants may elect to defer a portion of their
annual compensation in exchange for options to purchase shares of common or
preferred stock of any publicly-traded corporation, shares of the Company's
common stock or shares in
F-18
<PAGE> 102
PARADYNE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA OR AS OTHERWISE NOTED)
certain investment funds. Upon the grant of an option under the Key Employee
Plan, the Company is required to acquire and hold under a trust arrangement,
shares of the stock or investment subject to the option in a number equal to 75%
of the shares subject to option.
14. RELATED PARTY TRANSACTIONS:
On December 30, 1996, the Company purchased certain installment and
affiliate receivables in the amount of $14.0 million from Paradyne Credit Corp.
("PCC"), a subsidiary of Paradyne Partners, in exchange for a note payable of
$13.7 million. A deferred gain of $291 is included in other current liabilities
at December 31, 1996. The note bore an interest rate of 9.25% and matured
December 30, 1997. The Accounts Receivable Purchase and Servicing Agreement
allowed the Company to require PCC to repurchase the receivables prior to the
due date of the note. On January 3, 1997, the Company sold the receivables back
to PCC in exchange for cancellation of the note payable.
Notes payable to affiliate were owed to Paradyne Partners. As further
discussed in Note 9, the Company executed a revolving subordinated credit
agreement with Paradyne Partners in fiscal 1997. The Company recorded interest
expense of approximately $267, $421 and $305 related to these notes during the
five months ended December 31, 1996 and the years ended December 31, 1997 and
1998, respectively.
The Company provides operating, management and other administrative
services for certain subsidiaries of Paradyne Partners. Total charges to these
entities were approximately $432 for the five months ended December 31, 1996 and
$1.1 million and $1.4 million for the years ended December 31, 1997 and 1998,
respectively. This amount is recorded as a reduction of general and
administrative expenses.
PCC had an option to acquire all used equipment owned by the Company and
its subsidiaries for which the original lease had expired or terminated.
Additionally, the option allowed PCC to purchase all used equipment which had
been returned from sales to customers or consignment activities. The exercise
price of the option was equivalent to one month's rental revenue from the
related equipment. Purchases of such equipment totaled $115, $81 and $0 for the
five months ended December 31, 1996 and the years ended December 31, 1997 and
1998, respectively. In 1997, the Company sold all equipment under leases, as
well as the related lease streams, to PCC in exchange for approximately $3.5
million. As a result of this sale, the option is no longer valid.
In connection with this sale of equipment and related lease streams to PCC
in 1997, the Company entered into an agreement to allow PCC to purchase
equipment manufactured or sold by the Company at prices substantially equal to
those received by the Company through normal selling channels. Purchases under
this agreement totaled $181 and $317 for the years ended December 31, 1997 and
1998, respectively. Additionally, this agreement provides for the Company to
purchase from PCC equipment that has been returned to PCC at the end of the
lease. These purchases are on terms no more favorable to the Company than would
be obtained in a comparable arm's length transaction. Purchases for such
equipment totaled $0 and $141 for the years ended December 31, 1997 and 1998,
respectively.
The Company entered into a license agreement with GlobeSpan for the use of
certain technologies. Total royalty expense related to the use of these
technologies was approximately $235 for the five months ended December 31, 1996
and $0 for each of the years ended December 31, 1997 and 1998. This amount has
been included in equipment cost of sales. In November 1996, the Company entered
into a Cooperative Development Agreement with GlobeSpan. Under this agreement,
the Company was granted an unrestricted license to use GlobeSpan's technical
information and patents. Additionally, the agreement provided for the Company to
purchase GlobeSpan chip sets at prices not to exceed cost plus 15%. The Company
purchased goods approximating $0, $373 and $962 during the period ended December
31, 1996 and the years ended December 31 1997 and 1998, respectively, under this
agreement. Effective July 1998, the Company revised its pricing arrangement with
GlobeSpan such that GlobeSpan sold products to the Company at preferential
F-19
<PAGE> 103
PARADYNE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA OR AS OTHERWISE NOTED)
prices. In exchange, GlobeSpan agreed to pay a 1.25% royalty based on net
revenues up to an aggregate amount of $1.5 million. The Company recorded $381 of
royalty revenue related to the agreement during the year ended December 31, 1998
(see Note 15).
Beginning in August 1996, GlobeSpan participates in a 401K plan which is
maintained by the Company. Contributions paid by the Company on behalf of
GlobeSpan approximated $65, $321 and $379 for the five months ended December 31,
1996 and the years ended December 31, 1997 and 1998, respectively. GlobeSpan has
reimbursed the Company for all payments made on their behalf.
In 1996 and 1997, the Company provided the use of certain assets to
GlobeSpan related to their research activities without material fee.
Depreciation of $106 in 1996 and $244 in 1997 related to those assets has been
excluded from the results of operations and reflected as a distribution of
equity to a related party. Those assets were subsequently sold to GlobeSpan. The
Company sold fixed assets to GlobeSpan for approximately $350 in fiscal year
1997 and $1.4 million in fiscal 1998. These assets were transferred at their
approximate net book values since the transaction involved entities under common
control.
In 1997, the Company received $194 from GlobeSpan as reimbursement for
purchases of product from a supplier on behalf of GlobeSpan. In December 1997
and September 1998, the Company sold to GlobeSpan certain chip sets which it
held in its inventory in the amounts of $98 and $29, respectively. GlobeSpan
purchased these chip sets for resale to other customers.
In May 1997, an executive of the Company issued a promissory note in the
amount of $150 in connection with the purchase of 75,000 shares of common stock.
The full recourse note accrues interest of a rate of 6.65% per annum. The
principal balance and accrued interest are payable at the earlier of the
termination of employment or five years from the date of the note. The note is
secured by the shares of common stock acquired with the note.
In December 1998, the Company subleased additional office space to
GlobeSpan (see Note 12). Also see Note 4 regarding GlobeSpan warrant extension
and Note 9 regarding parent company debt guaranty. In connection therewith,
GlobeSpan reimbursed approximately $392 of the Company's moving expenses.
15. SUBSEQUENT EVENTS:
In March 1999, the Company and GlobeSpan agreed to terminate the
Cooperative Development Agreement ("Termination Agreement") effective December
31, 1998 (see Note 14). In connection with such termination agreement, GlobeSpan
agreed to pay the Company an aggregate of $1.5 million. Of this amount,
approximately $400 was recorded in 1998 and included in royalty revenue. The
remaining $1.1 million is expected to be received in 1999 and is included in
royalty revenue and receivable from affiliates as of March 31, 1999. In
addition, GlobeSpan and the Company as part of the Termination Agreement
affirmed that the earlier technology license provisions of the Cooperative
Development Agreement were never implemented. In conjunction with the signing of
the Termination Agreement, GlobeSpan and the Company also entered into a
four-year Supply Agreement which gave the Company favorable pricing and other
terms in connection with the sale by GlobeSpan of products to the Company. In
addition, under the terms of the Supply Agreement, GlobeSpan is required to
honor the Company's orders for GlobeSpan's products in quantities at least
consistent with the Company's past ordering practices and must afford the
Company at least the same priority for the Company's orders as GlobeSpan affords
its other similarly situated customers. GlobeSpan also granted the Company a
standard customer immunity under GlobeSpan's intellectual property rights with
respect to any of the Company's products which incorporate GlobeSpan's products.
Effective February 25, 1999, Paradyne Partners was renamed Communication
Partners, L.P. In March 1999, the Company voluntarily reduced the amount
available for borrowing under its revolving credit facility
F-20
<PAGE> 104
PARADYNE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA OR AS OTHERWISE NOTED)
to $35.0 million and Communication Partners' continuing limited guaranty under
the facility was canceled (see Note 9).
During April 1999, the Company issued options to acquire 213,250 shares of
the Company's common stock at $5.00 per share, which is less than fair value by
$1.4 million, and which is being amortized ratably over the vesting period.
Effective April 1, 1999, the intercompany services agreement between the
Company and Paradyne Credit Corporation ("PCC") was amended to provide that
Paradyne will charge PCC for all direct and indirect costs incurred on behalf of
PCC by Paradyne plus a 5% service charge on all charges.
In March 1999 the Company recorded $1.5 million from the License and
Assignment Agreement ("Telogy Agreement") entered into with Telogy Networks,
Inc. which is included in royalty revenue for the three months ended March 31,
1999. Finder's fees in connection with the Telogy Agreement in the amount of
$225 or 15% of revenue were paid to a third party and are included in selling,
general and administrative expenses. The Telogy Agreement further provided for
the sale of intellectual property in the amount of $3.5 million which is
included in other income net of $525 or 15% in finder's fees.
In March and April of 1999, 10 employees of the Company issued promissory
notes to the Company in the amount of $1.0 million in connection with the
purchase of 411,187 shares of common stock. The full recourse notes accrue
interest at rates ranging from 4.72% to 5.15% per annum. The principal balance
and accrued interest are payable at the earlier of the termination of employment
or five years from the date of the note. The notes are secured by the shares of
common stock acquired with the note.
In June 1999, the Board of Directors adopted the 1999 Employee Stock
Purchase Plan (the "Purchase Plan"). Under the Purchase Plan, the Company is
authorized to issue up to 1,000,000 shares of common stock to eligible
employees. Employees may elect to have up to 15% of their earnings withheld. The
amounts withheld are used to purchase shares of common stock, on specified dates
determined by the Board of Directors, at 85% of the lower of the fair market
value of the common stock at the commencement date of each offering period or
the relevant purchase date.
Also in June 1999, the Board of Directors adopted the 1999 Non-Employee
Directors' Stock Option Plan (the "Directors' Plan") and reserved 250,000 shares
under the plan to provide for the automatic grant of options to purchase shares
of common stock to non-employee directors of the Company. Each non-employee
director will be granted an initial grant upon appointment. Annual grants of an
additional 5,000 shares will be made to any of the non-employee directors,
subject to attendance of regularly scheduled meetings of the Board as described
in the plan.
On June 8, 1999, the Company changed its legal name from Paradyne
Acquisition Corp. to Paradyne Networks, Inc., which change has been reflected in
the accompanying consolidated financial statements. At the same time, the
Company's Board of Directors authorized a 1-for-2 reverse split of its common
stock, with no change in par value. All share and per-share amounts in the
accompanying consolidated financial statements have been restated to give effect
to the stock split.
Also in June 1999, the Board of Directors authorized 5,000,000 shares of
preferred stock, with a par value of $0.001 per share.
F-21
<PAGE> 105
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Paradyne Corporation
In our opinion, the accompanying consolidated statements of operations and of
cash flows present fairly, in all material respects, the results of its
operations and its cash flows for the period from January 1, 1996 through July
31, 1996 of Paradyne Predecessor Business and its subsidiaries (a carve-out
business of AT&T Paradyne Corporation which was a wholly-owned subsidiary of
Lucent Technologies Inc. and predecessor entity to Paradyne Acquisition Corp.),
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of AT&T Paradyne's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. Our audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Tampa, Florida
November 23, 1998
F-22
<PAGE> 106
PARADYNE PREDECESSOR BUSINESS
(A CARVE-OUT BUSINESS OF AT&T PARADYNE CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEVEN
MONTHS
ENDED
JULY 31,
1996
------------
<S> <C>
Revenues:
Equipment sales........................................... $128,099
Service revenues.......................................... 1,975
Royalty revenues.......................................... 464
--------
Total revenues.................................... 130,538
Cost of sales:
Equipment costs........................................... 73,208
Service costs............................................. 1,803
--------
Gross margin................................................ 55,527
--------
Operating expenses:
Research and development expenses......................... 28,019
Selling, general and administrative expenses.............. 42,928
--------
Total operating expenses.......................... 70,947
--------
Operating loss.............................................. (15,420)
Other (income) expenses:
Interest.................................................. 200
Other, net................................................ (2,074)
--------
Loss before interest and income taxes....................... (13,546)
Income tax provision........................................ 184
--------
Net loss.................................................... $(13,730)
========
</TABLE>
The accompanying Notes to Financial Statements are
an integral part of these financial statements.
F-23
<PAGE> 107
PARADYNE PREDECESSOR BUSINESS
(A CARVE-OUT BUSINESS OF AT&T PARADYNE CORPORATION)
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEVEN
MONTHS
ENDED
JULY 31,
1996
------------
<S> <C>
Cash flows provided by (used in) operating activities:
Net loss.................................................. $(13,730)
Adjustments to reconcile net loss to cash used in
operating activities:
Amortization and depreciation.......................... 6,108
Decrease in assets:
Accounts receivable.................................... 24,735
Inventories............................................ 202
Prepaid expenses and other............................. 495
Other long-term assets................................. 1,057
Increase (decrease) in liabilities:
Accounts payable....................................... 6,641
Accrued expenses....................................... (13,922)
Other current liabilities.............................. (11,069)
Income taxes........................................... 2,267
Other long-term liabilities............................ (250)
--------
Net cash provided by operating activities......... 2,534
--------
Cash flows used in investing activities:
Capital expenditures...................................... (6,596)
--------
Cash flows provided by financing activities:
Advances from parent...................................... 6,454
--------
Effect of foreign exchange rate changes on cash............. 231
--------
Net increase in cash and cash equivalents................... 2,623
Cash and cash equivalents at beginning period............... 3,094
--------
Cash and cash equivalents at end of period.................. $ 5,717
========
</TABLE>
The accompanying Notes to Financial Statements are
an integral part of these financial statements.
F-24
<PAGE> 108
PARADYNE PREDECESSOR BUSINESS
(A CARVE-OUT BUSINESS OF AT&T PARADYNE CORPORATION)
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS)
1. BASIS OF PRESENTATION:
Pursuant to a Purchase Agreement dated June 18, 1996 (the "Purchase
Agreement"), Paradyne Partners, L.P. ("Paradyne Partners") acquired certain
assets and operations of AT&T Paradyne Corporation from Lucent Technologies Inc.
("Lucent") for cash and seller notes totaling $146 million. This transaction was
consummated through five direct and indirect subsidiaries of Paradyne Partners
which included Paradyne Acquisition Corp. ("PAC") and its wholly-owned
subsidiary, Paradyne Corporation and its subsidiaries (the "Company"). The
Company acquired certain net assets of AT&T Paradyne Corporation relating to the
manufacturing, marketing and research activities for data communications and
networking products for commercial end users and network service providers and
also entered into a product distribution agreement with Lucent.
The accompanying financial statements include the accounts of Paradyne
Predecessor Business (a carve-out business of AT&T Paradyne Corporation), which
were acquired by the Company, on a carved-out basis as if it had been an
independent reporting entity for the period presented. See discussion of related
party transactions in Note 4.
The Company designs, manufactures and markets data communications and
networking products for commercial end users and network service providers. The
Company's products enable commercial end users to efficiently access wide area
network services and allow network service providers to provide customers with
high-speed services for data, voice, video and multimedia applications.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The significant accounting principles and practices used in the preparation
of the accompanying financial statements are summarized below:
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the net assets
and the results of operations acquired from AT&T Paradyne Corporation and its
wholly-owned subsidiaries: Paradyne Canada Ltd.; Paradyne Japan Corporation;
Paradyne International Ltd.; Paradyne Worldwide Corp. (formerly Paradyne Far
East Corporation); Ark Electronic Products Inc.; and Paradyne GmbH. Intercompany
accounts and transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods presented. Actual results could differ from those estimates.
The markets for Paradyne Predecessor Business' products are characterized by
intense competition, rapid technological development and frequent new product
introductions, all of which could impact the future value of Paradyne
Predecessor Business' inventory and certain other assets.
REVENUE RECOGNITION
Revenue from equipment sales is generally recognized at the date of
shipment and revenue from services is recognized when the services are performed
and all substantial contractual obligations have been satisfied. See discussion
of product warranty below.
F-25
<PAGE> 109
PARADYNE PREDECESSOR BUSINESS
(A CARVE-OUT BUSINESS OF AT&T PARADYNE CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
CASH AND CASH EQUIVALENTS
Paradyne Predecessor Business considers all highly liquid instruments
purchased with an original maturity of three months or less to be cash
equivalents.
Expenditures for renewals and improvements that significantly add to
productive capacity or extend the useful life of an asset are capitalized.
Expenditures for maintenance and repairs are charged to operations when
incurred. When assets are sold or retired, the cost of the asset and the related
accumulated depreciation are eliminated from the accounts and any gain or loss
is recognized at such time.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
PRODUCT WARRANTY
Paradyne Predecessor Business generally provided a return to factory
warranty for a period of two years from the date of sale. A current charge to
income is recorded at the time of sale to reflect the amount it estimates will
be needed to cover future warranty obligations for products sold during the
year.
INCOME TAXES
Paradyne Predecessor Business joined with AT&T Paradyne Corporation in
filing state income tax returns (and with Lucent in cases where consolidated
state income tax returns were filed), and with Lucent, AT&T Paradyne
Corporation's parent, in filing consolidated Federal income tax returns.
The tax provision of $184 reflected in the accompanying statement of
operations relates to the foreign tax obligations of AT&T Paradyne's foreign
subsidiaries.
CONCENTRATION OF CREDIT RISK
Paradyne Predecessor Business sells products to value added distributors
and other customers and extends credit based on an evaluation of the customer's
financial condition, generally without requiring collateral. Exposure to losses
on receivables is principally dependent on each customer's financial condition.
Paradyne Predecessor Business monitors its exposure for credit losses and
maintains allowances for anticipated losses. Accounts receivable from one
customer was approximately $3,842 (15%) of total accounts receivable at July 31,
1996. Sales to two customers were approximately $35,290 (25%) and $16,580 (12%)
of total revenues for the seven months ended July 31, 1996.
Purchases from two vendors were approximately $15,009 (25%) and $7,836
(13%) of total inventory purchases for the seven months ended July 31, 1996.
FOREIGN CURRENCY
The local currency is the functional currency of each of the foreign
subsidiaries. Assets and liabilities of Paradyne Predecessor Business' foreign
subsidiaries are translated using fiscal year-end exchange rates, and revenue
and expenses are translated using average exchange rate prevailing during the
year. Included in other income are realized foreign currency exchange losses of
$656 for the seven months ended July 31, 1996.
F-26
<PAGE> 110
PARADYNE PREDECESSOR BUSINESS
(A CARVE-OUT BUSINESS OF AT&T PARADYNE CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
3. COMMITMENTS AND CONTINGENCIES:
Paradyne Predecessor Business is obligated under non-cancelable operating
leases for office and warehouse equipment and facilities. The leases expire at
various dates through 2002. Rent expense for the seven months ended July 31,
1996 approximated $1,519. Minimum required future lease payments under non-
cancelable operating leases are as follows:
<TABLE>
<S> <C>
1997........................................................ $908
1998........................................................ 763
1999........................................................ 768
2000........................................................ 760
2001 and thereafter......................................... 987
</TABLE>
4. RELATED PARTY TRANSACTIONS:
Sales to Lucent Technologies and AT&T Paradyne Corporation were $16,580 and
$35,290, respectively. Inventory purchases from Lucent Technologies totaled
$5,547.
Paradyne Predecessor Business made payments to Lucent to participate in
Lucent's pension, 401(k), and other post employment benefit (mainly health) and
retirement plans in the amounts of $2,933, $1,146, and $910, respectively.
Contract services for various administrative and sales support functions
were provided by Lucent to Paradyne Predecessor Business. The total contract
expenses charged to AT&T Paradyne for the period were $2,696, which was included
in operating expenses. Management believes that such amounts are reasonable and
include all significant costs incurred to support this company.
During the seven months ended July 31, 1996, AT&T Paradyne recorded
approximately $146 in interest expense related to outstanding intercompany
advances from Lucent Technologies.
F-27
<PAGE> 111
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
, 1999 (PARADYNE LOGO)
6,000,000 SHARES OF COMMON STOCK
---------------------------
PROSPECTUS
---------------------------
DONALDSON, LUFKIN & JENRETTE
BANCBOSTON ROBERTSON STEPHENS
DAIN RAUSCHER WESSELS
A DIVISION OF DAIN RAUSCHER INCORPORATED
RAYMOND JAMES & ASSOCIATES, INC.
-------------------------
DLJDIRECT INC.
- --------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations as to
maters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted or legal. Neither the delivery of this prospectus nor any
sales made pursuant to this prospectus after the date of this prospectus shall
create an implication that the information contained in this prospectus or the
affairs of Paradyne have not changed since the date of this prospectus.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Until , 1999 (25 days after the date of this prospectus), all
dealers that effect transactions in these shares of common stock may be required
to deliver a prospectus. This is in addition to the dealer's obligation to
deliver a prospectus when acting as an underwriter and with respect to their
unsold allotments or subscriptions.
- --------------------------------------------------------------------------------
<PAGE> 112
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all expenses payable by the Registrant in
connection with the sale of the common stock being registered. All of the
amounts shown are estimates, except for the SEC registration fee, the NASD
filing fee and the Nasdaq National Market application fee.
<TABLE>
<CAPTION>
AMOUNT TO
BE
PAID
<S> <C>
Registration fee............................................ 26,880
NASD filing fee............................................. 10,660
Nasdaq Stock Market Listing Application fee................. 17,500
Blue sky qualification fees and expenses.................... 15,000
Printing and engraving expenses............................. 200,000
Legal fees and expenses..................................... 425,000
Accounting fees and expenses................................ 250,000
Transfer agent and registrar fees........................... 10,000
Miscellaneous............................................... 44,960
Total............................................. 1,000,000
</TABLE>
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Under Section 145 of the Delaware General Corporation Law, the Registrant
has broad powers to indemnify its Directors and officers against liabilities
they may incur in such capacities, including liabilities under the Securities
Act.
The Registrant's Certificate of Incorporation and Bylaws include provisions
to (i) eliminate the personal liability of its directors for monetary damages
resulting from breaches of their fiduciary duty to the extent permitted by
Section 102(b)(7) of the General Corporation Law of Delaware (the "Delaware
Law") and (ii) require the Registrant to indemnify its Directors and officers to
the fullest extent permitted by Section 145 of the Delaware Law, including
circumstances in which indemnification is otherwise discretionary. Pursuant to
Section 145 of the Delaware Law, a corporation generally has the power to
indemnify its present and former directors, officers, employees and agents
against expenses incurred by them in connection with any suit to which they are,
or are threatened to be made, a party by reason of their serving in such
positions so long as they acted in good faith and in a manner they reasonably
believed to be in or not opposed to, the best interests of the corporation and
with respect to any criminal action, they had no reasonable cause to believe
their conduct was unlawful. The Registrant believes that these provisions are
necessary to attract and retain qualified persons as Directors and officers.
These provisions do not eliminate the Directors' duty of care, and, in
appropriate circumstances, equitable remedies such as injunctive or other forms
of non-monetary relief will remain available under Delaware Law. In addition,
each Director will continue to be subject to liability for breach of the
Director's duty of loyalty to the Registrant, for acts or omissions not in good
faith or involving intentional misconduct, for knowing violations of law, for
acts or omissions that the Director believes to be contrary to the best
interests of the Registrant or its stockholders, for any transaction from which
the Director derived an improper personal benefit, for acts or omissions
involving a reckless disregard for the Director's duty to the Registrant or its
stockholders when the Director was aware or should have been aware of a risk of
serious injury to the Registrant or its stockholders, for acts or omissions that
constitute an unexcused pattern of inattention that amounts to an abdication of
the Director's duty to the Registrant or its stockholders, for improper
transactions between the Director and the Registrant and for improper
distributions to stockholders and loans to Directors and officers. The provision
also does not affect a Director's responsibilities under any other law, such as
the federal securities law or state or federal environmental laws.
II-1
<PAGE> 113
At present, there is no pending litigation or proceeding involving a
Director or officer of the Registrant as to which indemnification is being
sought nor is the Registrant aware of any threatened litigation that may result
in claims for indemnification by any officer or Director.
The Registrant has an insurance policy covering the officers and Directors
of the Registrant with respect to certain liabilities, including liabilities
arising under the Securities Act or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since June 14, 1996, Registrant has issued and sold the following
securities, which numbers do not reflect the 1-for-2 reverse split Registrant's
common stock to be effected prior to this offering:
(1) On June 14, 1996, Registrant issued 1,000 shares (not accounting
for the 17,000 for 1 split effected on January 7, 1997 or the 3 for 1 split
effected on April 24, 1997) in a private placement of its common stock at a
purchase price of $1.00 per share, for cash in the aggregate amount of
$1,000, to Communication Partners, L.P. pursuant to the divestiture of
Paradyne.
(2) As of May 15, 1999, Registrant has sold and issued 812,508 shares
of its common stock to employees, officers and directors pursuant to direct
issuances and exercises of options under its 1996 Equity Incentive Plan.
The sale of the above securities was deemed to be exempt from registration
under the Securities Act in reliance upon Section 4(2) of the Securities Act or
Rule 701 promulgated under Section 3(b) of the Securities Act as transactions by
an issuer not involving any public offering or transactions pursuant to
compensation benefit plans and contracts relating to compensation as provided
under such Rule 701. The recipients of securities in each such transaction
represented their intentions to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof, and
appropriate legends were affixed to the share certificates issued in such
transactions. All recipients had adequate access, through their relationships
with the Registrant, to information about the Registrant.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
<C> <C> <S>
1.1** -- Form of Underwriting Agreement.
3.1** -- Amended and Restated Certificate of Incorporation.
3.2** -- Amended and Restated Bylaws.
4.1 -- Reference is made to Exhibits 3.1, 3.2 and 3.3.
4.2 -- Specimen Stock Certificate.
5.1** -- Opinion of Cooley Godward LLP.
10.1** -- Amended and Restated 1996 Equity Incentive Plan.
10.2** -- Form of Stock Option Agreement pursuant to the 1996 Equity
Incentive Plan.
10.3** -- Form of Early Exercise Stock Purchase Agreement.
10.4** -- 1999 Employee Stock Purchase Plan and related offering
documents.
10.5** -- 1999 Non-Employee Director's Stock Option Plan.
10.6** -- Key Employee Stock Option Plan
10.7** -- Loan and Security Agreement between Paradyne and Bank of
America NT&SA, dated July 31, 1996.
10.8** -- Amended and Restated Subordinated Revolving Promissory Note
between Paradyne and Paradyne Partners, L.P., dated October
16, 1998.
10.9** -- Lease Agreement between Paradyne and Shav Associates, dated
October 8, 1996.
</TABLE>
II-2
<PAGE> 114
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
<C> <C> <S>
10.10** -- Sublease Agreement between Paradyne and GlobeSpan
Semiconductor, Inc. dated December 10, 1997.
10.11** -- Amendment to Sublease Agreement between Paradyne and
GlobeSpan Semiconductor, Inc. dated January 1, 1999.
10.12** -- Lease Agreement between Paradyne and Townsend Property Trust
Lease, dated June 27, 1997.
10.13** -- Key Employee Agreement between Paradyne and Thomas Epley,
dated April 1, 1999.
10.14** -- Employment Agreement between Paradyne and Andrew May, dated
December 3, 1996.
10.15** -- Key Employee Agreement between Paradyne and Patrick Murphy,
dated August 1, 1996.
10.16** -- Key Employee Agreement between Paradyne and James Slattery,
dated August 1, 1996.
10.17** -- Change in Control Agreement between Paradyne and Sean
Belanger.
10.18** -- Promissory Note, dated May 5, 1997, by James L. Slattery.
10.19** -- Promissory Note, dated March 29, 1999, Sean E. Belanger.
10.20** -- Promissory Note, dated March 26, 1999, Paul H. Floyd.
10.21** -- Promissory Note, dated March 26, 1999, Paul H. Floyd.
10.22** -- Promissory Note, dated March 26, 1999, Frank J. Weiner.
10.23** -- Promissory Note, dated March 26, 1999, by Frank J. Weiner.
10.24** -- Promissory Note, dated April 2, 1999, Frank J. Weiner.
10.25** -- Promissory Note, dated March 27, 1999, Mark Housman.
10.26** -- Promissory Note, dated March 31, 1999, Andrew S. May.
10.27** -- Promissory Note, dated March 31, 1999, Patrick M. Murphy.
10.28** -- Promissory Note, dated April 2, 1999, Patrick M. Murphy.
10.29** -- Indemnification Agreement between Paradyne and William
Stensrud, dated November 6, 1996.
10.30+** -- Supply Agreement between Paradyne and Lucent Technologies,
Inc., dated July 31, 1996.
10.31+** -- Exclusivity and Amendment Agreement between Paradyne, Lucent
Technologies, Inc., and GlobeSpan Semiconductor, Inc. dated
August 6, 1998.
10.32+** -- Noncompetition Agreement between Paradyne, Communication
Partners, L.P., Lucent Technologies, Inc., and GlobeSpan
Semiconductor, Inc. dated July 31, 1996.
10.33** -- Trademark and Patent Agreement between Paradyne, Lucent
Technologies, Inc., and GlobeSpan Semiconductor, Inc. dated
July 31, 1996.
10.34** -- Tax Matters Agreement between Paradyne, Lucent Technologies,
Inc., and GlobeSpan Semiconductor, Inc. dated July 31, 1996.
10.35** -- Intellectual Property Agreement between Paradyne, Lucent
Technologies, Inc., and GlobeSpan Semiconductor, Inc. dated
July 31, 1996.
10.36+** -- OEM Agreement between Paradyne and Xylan Corporation, dated
March 16, 1999.
10.37+** -- Distribution Agreement between Paradyne and Tech Data
Corporation, dated September 21, 1993.
10.38+** -- OEM Agreement between Paradyne and Premisys Communications,
Inc., dated December 4, 1992.
10.39** -- Network Management Partners Agreement between Paradyne and
Ascend Communications, Inc., dated November 3, 1998.
10.40+ -- Joint Development and Distribution Agreement between
Paradyne and AG Communication Systems Corporation, dated
June 10, 1998.
</TABLE>
II-3
<PAGE> 115
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
<C> <C> <S>
10.41+ -- Marketing & License Agreement between Paradyne and NetScout
Systems, Inc., dated January 26, 1998.
10.42** -- Amendment No. 2 to Loan and Security Agreement.
10.43+ -- Amendment to Supply Agreement between Paradyne and Lucent
Technologies, Inc., dated as of May 5, 1999.
23.1 -- Consent of Independent Accountants.
23.2 -- Consent of Counsel. Reference is made to Exhibit 5.1.
24.1** -- Power of Attorney (see page II-5).
27.1** -- Financial Data Schedule for EDGAR Filing for SEC use only.
</TABLE>
- ------------------------------
** Previously filed
+Confidential treatment has been requested for certain portions which have been
blanked out in the copy of the exhibit filed with the Securities and Exchange
Commission. The omitted information has been filed separately with the
Securities and Exchange Commission pursuant to the application for confidential
treatment.
(B) INDEX TO FINANCIAL STATEMENT SCHEDULES
The following financial statement schedule is included in this Registration
Statement:
Report of Independent Certified Public Accountants on Financial Statement
Schedule
Schedule II -- Valuation and Qualifying Accounts
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to provisions described in Item 14 or otherwise, the registrant has
been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes:
(1) That, for purposes of determining any liability under the Act, the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of Prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) That, for purposes of determining any liability under the Act each
post-effective amendment that contains a form prospectus shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-4
<PAGE> 116
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 4 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Largo, County of Pinellas, State of Florida, on June 24, 1999.
By: /s/ ANDREW S. MAY
------------------------------------
Andrew S. May
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<C> <S> <C>
/s/ ANDREW S. MAY President, Chief June 24, 1999
- ----------------------------------------------------- Executive Officer, and
Andrew S. May Director (Principal
Executive Officer)
/s/ PATRICK M. MURPHY Senior Vice President, June 24, 1999
- ----------------------------------------------------- Chief Financial
Patrick M. Murphy Officer, and Treasurer
(Principal Financial
and Accounting
Officer)
* Chairman of the Board June 24, 1999
- -----------------------------------------------------
Thomas E. Epley
* Director June 24, 1999
- -----------------------------------------------------
David Bonderman
* Director June 24, 1999
- -----------------------------------------------------
Keith B. Geeslin
* Director June 24, 1999
- -----------------------------------------------------
David M. Stanton
* Director June 24, 1999
- -----------------------------------------------------
William R. Stensrud
* Director June 24, 1999
- -----------------------------------------------------
Peter F. Van Camp
*By: /s/ ANDREW S. MAY June 24, 1999
------------------------------------------------
Andrew S. May
Attorney-in-Fact
</TABLE>
II-5
<PAGE> 117
Schedule II - Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Additions
Balance at Charged to Charged to
beginning of costs and other Balance at end
Description period expenses accounts(1) Deductions of period
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
5 months ended December 31, 1996 4,340 52 1,520 (3,127) 2,785
Year ended December 31, 1997 2,785 267 5,800 (5,886) 2,966
Year ended December 31, 1998 2,966 125 12,382 (12,466) 3,007
</TABLE>
(1) - Represents amounts charged to contra revenue accounts for discounts,
rebates and billing adjustments.
<PAGE> 118
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
<C> <C> <S>
1.1** -- Form of Underwriting Agreement.
3.1** -- Amended and Restated Certificate of Incorporation.
3.2** -- Amended and Restated Bylaws.
4.1 -- Reference is made to Exhibits 3.1, 3.2 and 3.3.
4.2 -- Specimen Stock Certificate.
5.1** -- Opinion of Cooley Godward LLP.
10.1** -- 1996 Equity Incentive Plan.
10.2** -- Form of Stock Option Agreement pursuant to the 1996 Equity
Incentive Plan.
10.3** -- Form of Early Exercise Stock Purchase Agreement.
10.4** -- 1999 Employee Stock Purchase Plan and related offering
documents.
10.5** -- 1999 Non-Employee Director's Stock Option Plan.
10.6** -- Key Employee Stock Option Plan
10.7** -- Loan and Security Agreement between Paradyne and Bank of
America NT&SA, dated July 31, 1996.
10.8** -- Amended and Restated Subordinated Revolving Promissory Note
between Paradyne and Paradyne Partners, L.P., dated October
16, 1998.
10.9** -- Lease Agreement between Paradyne and Shav Associates, dated
October 8, 1996.
10.10** -- Sublease Agreement between Paradyne and GlobeSpan
Semiconductor, Inc. dated December 10, 1997.
10.11** -- Amendment to Sublease Agreement between Paradyne and
GlobeSpan Semiconductor, Inc. dated January 1, 1999.
10.12** -- Lease Agreement between Paradyne and Townsend Property Trust
Lease, dated June 27, 1997.
10.13** -- Key Employee Agreement between Paradyne and Thomas Epley,
dated April 1, 1999.
10.14** -- Employment Agreement between Paradyne and Andrew May, dated
December 3, 1996.
10.15** -- Key Employee Agreement between Paradyne and Patrick Murphy,
dated August 1, 1996.
10.16** -- Key Employee Agreement between Paradyne and James Slattery,
dated August 1, 1996.
10.17** -- Change in Control Agreement between Paradyne and Sean
Belanger.
10.18** -- Promissory Note, dated May 5, 1997, by James L. Slattery.
10.19** -- Promissory Note, dated March 29, 1999, Sean E. Belanger.
10.20** -- Promissory Note, dated March 26, 1999, Paul H. Floyd.
10.21** -- Promissory Note, dated March 26, 1999, Paul H. Floyd.
10.22** -- Promissory Note, dated March 26, 1999, Frank J. Weiner.
10.23** -- Promissory Note, dated March 26, 1999, by Frank J. Weiner.
10.24** -- Promissory Note, dated April 2, 1999, Frank J. Weiner.
10.25** -- Promissory Note, dated March 27, 1999, Mark Housman.
10.26** -- Promissory Note, dated March 31, 1999, Andrew S. May.
10.27** -- Promissory Note, dated March 31, 1999, Patrick M. Murphy.
10.28** -- Promissory Note, dated April 2, 1999, Patrick M. Murphy.
10.29** -- Indemnification Agreement between Paradyne and William
Stensrud, dated November 6, 1996.
10.30+** -- Supply Agreement between Paradyne and Lucent Technologies,
Inc., dated July 31, 1996.
10.31+** -- Exclusivity and Amendment Agreement between Paradyne, Lucent
Technologies, Inc., and GlobeSpan Semiconductor, Inc. dated
August 6, 1998.
10.32+** -- Noncompetition Agreement between Paradyne, Communication
Partners, L.P., Lucent Technologies, Inc., and GlobeSpan
Semiconductor, Inc. dated July 31, 1996.
10.33** -- Trademark and Patent Agreement between Paradyne, Lucent
Technologies, Inc., and GlobeSpan Semiconductor, Inc. dated
July 31, 1996.
10.34** -- Tax Matters Agreement between Paradyne, Lucent Technologies,
Inc., and GlobeSpan Semiconductor, Inc. dated July 31, 1996.
</TABLE>
II-6
<PAGE> 119
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
<C> <C> <S>
10.35** -- Intellectual Property Agreement between Paradyne, Lucent
Technologies, Inc., and GlobeSpan Semiconductor, Inc. dated
July 31, 1996.
10.36+** -- OEM Agreement between Paradyne and Xylan Corporation, dated
March 16, 1999.
10.37+** -- Distribution Agreement between Paradyne and Tech Data
Corporation, dated September 21, 1993.
10.38+** -- OEM Agreement between Paradyne and Premisys Communications,
Inc., dated December 4, 1992.
10.39** -- Network Management Partners Agreement between Paradyne and
Ascend Communications, Inc., dated November 3, 1998
10.40+ -- Joint Development and Distribution Agreement between
Paradyne and AG Communication Systems Corporation, dated
June 10, 1998
10.41+ -- Marketing & License Agreement between Paradyne and NetScout
Systems, Inc., dated November 4, 1998
10.42** -- Amendment No. 2 to Loan and Security Agreement.
10.43+ -- Amendment to Supply Agreement between Paradyne and Lucent
Technologies, Inc., dated as of May 15, 1999.
23.1 -- Consent of Independent Accountants.
23.2 -- Consent of Counsel. Reference is made to Exhibit 5.1.
24.1** -- Power of Attorney (see page II-5).
27.1** -- Financial Data Schedule for EDGAR Filing for SEC use only.
</TABLE>
- ------------------------------
** Previously filed
+Confidential treatment has been requested for certain portions which have been
blanked out in the copy of the exhibit filed with the Securities and Exchange
Commission. The omitted information has been filed separately with the
Securities and Exchange Commission pursuant to the application for confidential
treatment.
II-7
<PAGE> 1
EXHIBIT 4.2
<TABLE>
<S> <C> <C>
COMMON STOCK COMMON STOCK
[PDN ] PARADYNE [ ]
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE SEE REVERSE FOR
CERTAIN LEGENDS
CUSIP 69911G 10 7
THIS CERTIFIES THAT
IS THE RECORD HOLDER OF
FULLY-PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, $.001 PAR VALUE PER SHARE OF
PARADYNE NETWORKS, INC.
transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney upon surrender of this
Certificate properly endorsed. This Certificate is not valid until countersigned by the Transfer Agent and registered by the
Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers.
Dated:
/s/ /s/
CORPORATE SECRETARY (SEAL) PRESIDENT AND CHIEF EXECUTIVE OFFICER
Countersigned and Registered
NORWEST BANK MINNESOTA, N.A.
TRANSFER AGENT AND REGISTRAR
By
Authorized Signature
</TABLE>
<PAGE> 2
PARADYNE NETWORKS, INC.
A STATEMENT OF THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE,
PARTICIPATING, OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR
SERIES THEREOF AND THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH
PREFERENCES AND/OR RIGHTS AS ESTABLISHED, FROM TIME TO TIME, BY THE CERTIFICATE
OF INCORPORATION OF THE CORPORATION AND BY ANY CERTIFICATE OF DETERMINATION,
THE NUMBER OF SHARES CONSTRUCTING EACH CLASS AND SERIES, AND THE DESIGNATIONS
THEREOF, MAY BE OBTAINED BY THE HOLDER HEREOF UPON REQUEST AND WITHOUT CHARGE
FROM THE SECRETARY OF THE CORPORATION AT THE PRINCIPAL OFFICE OF THE
CORPORATION.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- _____________ Custodian ______________
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act __________________
in common (State)
UNIF TRF MIN ACT -- _________ Custodian (until age)_______
(Cust)
______________ under Uniform Transfers
(person)
to Minors Act ________________________
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list
FOR VALUE RECEIVED, __________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
[ ]
_______________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
_______________________________________________________________________________
_______________________________________________________________________________
________________________________________________________________________ shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
______________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated: _______________________________
X _____________________________________
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NOTICE: THE SIGNATURE TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN
EVERY PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER.
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<PAGE> 1
EXHIBIT 10.40
Paradyne Corporation ***Text Omitted and
and Filed Separately
AG Communication Systems Corporation Confidential Treatment
Requested Under
Joint Development and Distribution Agreement 17 C.F.R. Sections
200.80(b)(4),
200.83 and
230.406
This Joint Development and Distribution Agreement ("Agreement")
as of June 10, 1998 ("Effective Date") by and between Paradyne Corporation
("Paradyne"), a Delaware corporation, having its principal place of business at
8545 126th Avenue North, Largo, FL 33773 and AG Communication Systems
Corporation ("AGCS"), a Delaware corporation having its principal place of
business at 2500 West Utopia Road, Phoenix, AZ 85027.
WHEREAS, the parties each manufacture and sell certain telecommunications
hardware and software;
WHEREAS, the parties desire to enter into a non-exclusive arrangement to
develop and market a telephony product solution for the Network Service
Provider market (the Derived Telephony Product, as further defined below);
NOW, THEREFORE, in consideration of the foregoing premises and the mutual
promises and covenants set forth below, Paradyne and AGCS mutually agree as
follows:
1. Definitions
a. "DLC" shall mean Digital Loop Carrier technology.
b. "DSLAM" shall mean Digital Subscriber Loop Access Multiplexer
technology.
c. "MVP Endpoints" shall mean the hardware and software intended for use
at the customer premises developed by Paradyne pursuant to this Agreement and
which shall be part of the Derived Telephony Product.
d. "Network Service Providers" shall mean a business with a
telecommunication infrastructure that sells voice and data telecommunication
services to the business and/or consumer market.
e. "Paradyne MVP Technology" shall mean Paradyne's proprietary Multiple
Virtual Phone (MVP) technology, as previously disclosed to AGCS pursuant to a
Confidentiality Agreement dated January 21, 1998 and more fully described on
Appendix A, that is included in both the MVP Endpoint and Switch Product
developed hereunder.
f. "Switch Product" shall mean the Central Office switch, DLC, or DSLAM
(including central office and remote versions) equipment of AGCS incorporating
the Paradyne MVP Technology supporting voice-only traffic or a combination of
voice and data traffic (but excluding data-only traffic) on copper loops, which
is developed by AGCS pursuant to this
<PAGE> 2
Agreement as further specified on Appendix A and which shall be part of the
Derived Telephony Product.
g. "Derived Telephony Product" shall mean the derived telephony product
line jointly developed by the parties hereunder comprised of both the MVP
Endpoint and the Switch Product. The Derived Telephony Product shall have ports
supporting derived voice-only traffic and/or ports supporting both derived
voice and data traffic.
2. Technology Licensing
a. Subject to the terms and conditions of this Agreement, Paradyne hereby
grants to and only to AGCS a non-exclusive, non-sublicensable (except as
expressly provided herein), non-transferable license to use the Paradyne MVP
Technology during the term of this Agreement solely (i) for the purpose of
incorporating the Paradyne MVP Technology into the AGCS-developed Switch
Product and to manufacture, or have manufactured, such Switch Product; and (ii)
to distribute, sell and/or lease solely to Network Service Providers the Switch
Product that incorporates the MVP Technology in accordance with the terms of
this Agreement. AGCS may use distributors provided that each such distributor
may not use other subdistributors and each distributor shall be bound by an
enforceable writing to substantially the same limitations, conditions and
restrictions as those set forth in this Agreement.
b. AGCS agrees that if Paradyne identifies certain AGCS-owned technology
to which Paradyne desires a license for the purpose of developing the Derived
Telephony Product, AGCS shall grant Paradyne a license to use such technology
for such purpose and will negotiate in good faith with Paradyne to establish a
reasonable license fee.
3. Development and Product Availability
a. Paradyne will use reasonable best efforts to develop and manufacture
the MVP Endpoints, and AGCS will use reasonable best efforts to develop and
manufacture the Switch Product in accordance with the schedule set forth below
and the Statement of Work attached hereto as Appendix B. If either party's
performance is delayed beyond the times specified in the Statement of Work, any
dates or time periods relevant to performance by the other party hereunder
shall be appropriately and equitably extended to account for any delays
resulting therefrom if such delays affect that other party's ability to timely
perform. If either party proposes a change to the Statement of Work, the other
party will reasonably and in good faith consider and discuss with the proposing
party the proposed change.
i) Phase 1 - GTE Demonstration product was completed in March 1998.
ii) Phase 2 - Derived Telephony Product based on the integrated line
card and voice-only MVP Endpoints will be available on 7/15/98.
iii) Phase 3 - Derived Telephony Product based on a standalone shelf
unit and voice-only, FCC Class A certified MVP Endpoints will be
available on 8/23/98.
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<PAGE> 3
iv) Phase 4 - Derived Telephony Product based on a standalone shelf
unit and Paradyne voice and data MVP Endpoints with FCC Class B
testing completed and certification requested and will be
available on 9/5/98
v) Phase 5 - The enhancement of the Derived Telephony Product which
includes a standalone shelf unit or integrated card, Paradyne
multidrop voice and data MVP Endpoints, and development, testing,
certification and delivery of a Burr Brown or equivalent AFE.
This enhancement is targeted for 4/15/99, but is subject to
change based on the results of detailed product definition and
associated milestones that will be established by October 30,
1998.
b. The parties will use reasonable best efforts to ensure the
compatibility and interoperation of the MVP Endpoints and the Switch Product.
c. If either party desires to have any third party develop or integrate
new features or products intended for use with the Derived Telephony Product,
such party must obtain the written consent of the other party. In addition, if
such development would infringe the other party's intellectual property or
proprietary rights, the parties will negotiate additional appropriate license
fees for such development.
d. During the design phase of development hereunder, the parties will
cooperate to review the other party's product component selection and, where
appropriate, will use reasonable best efforts to use and jointly purchase common
components.
4. MVP Technology License Fee
In consideration for the license granted by Paradyne to AGCS hereunder,
AGCS shall pay to Paradyne the license fees set forth on Appendix C. If AGCS
desires to use the Paradyne MVP Technology to develop applications other than
the Derived Telephony Product, Paradyne shall use reasonable best efforts to
negotiate with AGCS to establish additional license fees and other parameters
for such use.
5. Ownership and Restrictions
a. Paradyne shall retain all right, title and interest in the Paradyne MVP
Technology and MVP Endpoints. AGCS shall retain all right, title and interest in
the Switch Product (subject to Paradyne's ownership of the MVP Technology
incorporated therein). No rights or licenses are granted by either party except
as expressly set forth herein.
b. Without the express written consent of Paradyne, AGCS shall not (nor
shall it allow others to): delete or fail to reproduce any copyright or other
proprietary notices appearing in or on the Paradyne MVP Technology or MVP
Endpoints, (ii) modify, disassemble, decompile or otherwise reverse engineer the
software comprising the Paradyne MVP Technology or MVP Endpoints or otherwise
attempt to learn the source code, structure, or algorithms
3
<PAGE> 4
underlying such software, or (iii) distribute, sell and/or lease the MVP
Endpoints except as part of the Derived Telephony Product.
c. Without the express written consent of AGCS, Paradyne shall not (nor
shall it allow others to): (i) delete or fail to reproduce any copyright or
other proprietary notices appearing in or on the Switch Product, (ii) except
with regard to the Paradyne MVP Technology contained therein, modify,
disassemble, decompile or otherwise reverse engineer the software comprising
the Switch Product or otherwise attempt to learn the source code, structure, or
algorithms underlying such software, or (iii) distribute, sell and/or lease the
Switch Product except as part of the Derived Telephony Product.
6. Distribution
a. Subject to the terms and conditions of this Agreement, Paradyne hereby
grants to and only to AGCS a non-exclusive, worldwide right to purchase MVP
Endpoint units from Paradyne for distribution and sale to Network Service
Providers only as part of the Derived Telephony Product in accordance with the
terms of this Agreement. Subject to the terms and conditions of this Agreement,
Paradyne grants to and only to AGCS a non-exclusive, worldwide,
non-sublicensable (except as expressly provided herein), non-transferable
license to distribute and sublicense directly to Network Service Providers such
software that is part of the MVP Endpoint in accordance with the terms of this
Agreement, provided that (i) all such use and distribution is in object code
form only; and (ii) such distribution and sublicense shall be pursuant to a copy
of AGCS' standard end user license agreement. AGCS may use distributors provided
that each such distributor may not use other subdistributors and each
distributor shall be bound by an enforceable writing to substantially the same
limitations, conditions and restrictions as those set forth in this Agreement.
b. Subject to the terms and conditions of this Agreement, AGCS hereby
grants to Paradyne a non-exclusive, worldwide right to purchase the Switch
Product units from AGCS for distribution and sale to Network Service Providers
only as part of the Derived Telephony Product in accordance with the terms of
this Agreement. Subject to the terms and conditions of this Agreement, AGCS
grants to Paradyne a non-exclusive, worldwide, non-sublicensable (except as
expressly provided herein), non-transferable license to distribute and
sublicense directly to Network Service Providers in accordance with the terms
of this Agreement such software that is part of the Switch Product that is not
already owned by Paradyne pursuant to this Agreement, provided that (i) all
such use and distribution is in object code form only; and (ii) such
distribution and sublicense shall be pursuant to a copy of Paradyne's standard
end user license agreement. Paradyne may use distributors provided that each
such distributor may not use other subdistributors and each distributor shall
be bound by an enforceable writing to substantially the same limitations,
conditions and restrictions as those set forth in this Agreement.
7. Public Announcement
a. The parties will use reasonable best efforts to create the following
joint public announcements: (i) an announcement of the development of the
voice-only application of the Derived Telephony Product; and (ii) an
announcement of the development of the data
4
<PAGE> 5
application of the Derived Telephony Product no more than ninety (90) days
prior to the first commercial availability of such product (as defined in the
Statement of Work attached hereto as Appendix B). Should market conditions
require, either party may request the other party to accelerate the
announcement set forth in this Section (a); provided, however, that neither
party shall issue a press release with regard to the Derived Telephony Product
or the subject matter of this Agreement without the other party's prior written
approval, which shall not be unreasonably withheld.
b. (i) Each party shall provide to the other party thirty (30) days
advance notice of any material press release by that party prior to July 1,
1999 regarding distribution of derived voice or derived voice and data
products, and (ii) Paradyne shall provide to AGCS thirty (30) days notice of
any material press release by Paradyne prior to July 1, 1999 regarding third
party partnerships using Paradyne MVP Technology; provided, however, that the
notifying party is not required to disclose the name of any involved third
party or the terms of any third party agreement if such name or terms are
protected by a confidentiality agreement with such third party, unless the
third party consents in writing to such disclosure.
8. Confidentiality
Each party (the "Receiving Party") agrees that the technology, and all
code, inventions, algorithms, know-how and ideas it obtains from the other
party (the "Disclosing Party") and all other business, technical and financial
information it obtains from the Disclosing Party are the confidential property
of the Disclosing Party ("Confidential Information"). Except as expressly and
unambiguously allowed herein, the Receiving Party will hold in confidence and
not use or disclose any Confidential Information of the Disclosing Party and
shall ensure that its employees comply with such obligations. The Receiving
Party's nondisclosure obligation shall not apply to information it can
document: (a) was rightfully in the Receiving Party's possession without
restriction as to confidentiality before receipt from the Disclosing Party; (b)
is or becomes a matter of public knowledge through no breach of any
confidentiality agreement by the Receiving Party; (c) is rightfully received by
the Receiving Party from a third party without a duty of confidentiality; (d)
is independently developed by the Receiving Party without use of the
Confidential Information by employees without access to such Confidential
Information; (e) is required to be disclosed by court order, provided that the
Receiving Party uses diligent efforts to limit disclosure and to obtain
confidential treatment or a protective order and has notified the Disclosing
Party reasonably in advance of such disclosure and has allowed the Disclosing
Party to participate in the proceeding.
9. Standardization of MVP
After [***] MVP Endpoints have been sold pursuant to this Agreement,
Paradyne may, at its discretion, consider standardizing the Paradyne MVP
Technology. If Paradyne proceeds with such standardization efforts. AGCS will
cooperate in good faith with Paradyne to support Paradyne's efforts.
- -------
***Confidential Treatment Requested
5
<PAGE> 6
10. Product Pricing
a. AGCS agrees to pay Paradyne the prices set forth on Appendix D for the
units of MVP Endpoints ordered by AGCS and accepted by Paradyne hereunder.
Paradyne agrees to pay AGCS the prices set forth on Appendix D for the units of
Switch Product ordered by Paradyne and accepted by AGCS hereunder. Both parties
mutually agree that the prices set forth in Appendix D shall not increase during
the term of this agreement unless mutually agreed upon by the parties CEOs in
order to address market or manufacturing conditions.
b. AGCS agrees that it will purchase all MVP Endpoints from Paradyne.
Paradyne agrees to not financially compensate its sales force nor accept
financial compensation for itself or its employees from a third party Derived
Telephony DSLAM provider of which compensation is attributed to the sales of
such third party's Derived Telephony DSLAM products.
c. All payments due by either party hereunder shall be paid in U.S.
dollars in the U.S. not later than thirty (30) days following the date of the
applicable invoice. The purchasing party shall be responsible for all taxes
(except the selling party's U.S. income taxes), duties, withholdings or other
governmental assessments due on any amounts owed by the purchasing party
hereunder. All shipping, rigging and other destination charges will be invoiced
by the selling party and paid by the purchasing party. At the selling party's
option, interest charges may be added to any past due amounts at the rate of
[***]% per month; or if this interest rate exceeds the maximum allowed by
applicable law, then at the maximum lawful rate. Risk of loss to products
shipped hereunder shall pass to the purchasing party upon delivery to a common
carrier. The selling party shall cooperate in every reasonable way to facilitate
the purchasing party's claims, if any, to the transportation agent for lost
products. Notwithstanding the passage of title and risk of loss, the selling
party shall retain a security interest in the products shipped hereunder until
full payment is made by the purchasing party to the selling party. The
purchasing party agrees to execute and deliver all documents requested by the
selling party to protect and maintain the selling party's security interest.
d. If a customer requests a specific feature enhancement to the Derived
Telephony Product, the parties shall negotiate in good faith to determine any
appropriate additional fees to be charged to the customer for such enhancements
(including but not limited to upfront payments and/or purchase commitments). The
party that has the primary customer relationship (as mutually agreed upon by the
parties) shall take the lead in such negotiations with the customer.
e. If Paradyne and AGCS mutually determine that the general market demands
enhancements or corrections to the initial Derived Telephone Product, Paradyne
and AGCS will make such enhancements or corrections to the MVP Endpoint and the
Switch Product, respectively, at no cost to the other party.
f. In the event that during the term of this Agreement either party
identifies a one-time key sales opportunity of extraordinarily large volumes,
the parties agree in good faith to negotiate special one-time pricing for
purchases by the other for such an opportunity. As specified under Section 1
Rule 2 and Section 2 Rule 2 of Appendix D products sold to the other party
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*** Confidential Treatment Requested
6
<PAGE> 7
under this arrangement shall not be further discounted. However, the quantity
shipped under theses opportunities will be included in determining the
cumulative number of products shipped for purposes of determining the discount
level under Appendix D.
11. Forecasts/Ordering
a. Paradyne and AGCS, respectively, will commence to provide to the other
four weeks after the Effective Date of the Agreement a rolling twelve (12) month
non-binding forecast of their quantity requirements for the Switch Product or
the MVP Endpoints, respectively, revised on a monthly basis and submitted by the
fifth business day of each month. The start month of each forecast shall the be
the fifth month after the date the forecast is submitted. (e.g. the forecast
submitted in January reflect product needs for May of that year through April of
the next year) If no forecast is timely submitted for a particular month, the
last forecast submitted by the forecasting party shall become the new forecast.
Succeeding forecasts after the initial one shall not reflect increases greater
then 25% of the first month, 50% of the second month and 100% of the months
thereafter. Such percentages shall be calculated on the immediately preceding
forecast for the same month. If orders exceed the limitations set forth in the
preceding sentence, the manufacturing party will have no obligation with respect
thereto, but the parties will discuss in good faith the additional amount, if
any, that the manufacturing party is willing to attempt to supply consistent
with its other obligations and the ordering party will adjust its order
accordingly.
If the parties determine that certain component parts required in the
manufacture of the MVP Endpoints and/or the Switch Product require more than
sixteen (16) weeks lead time prior to shipment date, the parties will negotiate
in good faith a separate agreement whereby the parties can share in the cost of
pre-purchasing and storing inventory of such components in order to expedite the
ordering and manufacturing process.
b. Rescheduling - Upon written notice prior to ten (10) business days
before scheduled shipment of an order, the ordering party may place any order on
hold or reschedule any order once and only once for shipment not later than
ninety (90) days from the originally scheduled ship date.
c. Cancellation of Orders - Upon written notice either party may cancel
all or any part of any Purchase Order upon payment of the following restocking
charges as a percentage of the discounted price of the Product so canceled:
If within 0 to 4 weeks from schedule ship date [***]%
If within 5 to 8 weeks from schedule ship date [***]%
If within 9 to 12 weeks from schedule ship date [***]%
If within 13 to 16 weeks from schedule ship date [***]%
d. Ordering - All orders must allow at least sixteen (16) weeks lead time
prior to the requested shipment date. All orders placed by the parties hereunder
shall reference this
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*** Confidential Treatment Requested
7
<PAGE> 8
Agreement and are subject to acceptance by the other party. Paradyne agrees to
use reasonable best efforts to sell to AGCS such quantities of MVP Endpoints as
AGCS may order in accordance with the terms of this Agreement, and AGCS agrees
to use reasonable best efforts to sell to Paradyne such quantities of Switch
Product as Paradyne may order in accordance with the terms of this Agreement.
Each party shall submit the orders to the other party in writing or
electronically and may be sent by facsimile, e-mail or EDI. Within forty-eight
(48) hours of receipt of an order from the purchasing party, the selling party
shall acknowledge the order and confirm the requested ship date by return
facsimile. In the event that the selling party is unable to meet the purchasing
party's requested ship date(s), the parties will negotiate an acceptable ship
date. Furthermore, it is the intention of the parties that this Agreement be
controlling over additional or different terms of any order, confirmation,
invoice or similar document, and that waivers and amendments shall be effective
only if made by non-preprinted agreements clearly understood by both parties to
be an amendment or waiver to this Agreement.
Each order submitted shall include (i) a description of the product being
ordered, inclusive of any numerical and or alphabetical identification which may
be referenced on the selling party's applicable price list; which may now or
hereafter be attached to this Agreement (ii) the requested delivery date; (iii)
the applicable price, (iv) the location to which the product is to be shipped,
(v) quantity to be shipped and (vi) purchase order number.
12. Product Changes
a. Subject to compliance with the other terms and conditions of this
Agreement, Paradyne may at any time, make changes in the MVP Endpoints or modify
the drawings and specifications relating thereto,or substitute MVP Endpoints of
later design to fill an order provided the changes, modifications or
substitutions under normal and proper use do not impact upon the form, fit or
function or are required for safety purposes. Subject to compliance with the
other terms and conditions of this Agreement, AGCS may at any time, make changes
in the Switch Product or modify the drawings and specifications relating
thereto, or substitute Switch Products of later design to fill an order provided
the changes, modifications or substitutions under normal and proper use do not
impact upon the form, fit or function or are required for safety purposes.
b. Each party will provide prior notice to the other party of all changes
to an MVP Endpoint or Switch Product that changes the revision level of such
product ("Change Notice") at least thirty (30) days in advance of scheduled
shipment. In the Change Notice, the party will identify changes, which affect
interchangeability with previously shipped product or compatibility at a higher
level of assembly. Upon request from the other party, that party will supply a
small number of sample products for test. If the party notifies the other that
the changes are unacceptable within ten (10) days of notification, or if samples
are involved, within fifteen (15) days of receiving the samples, the parties
will meet and in good faith develop mutually acceptable alternative solutions to
the requirement that gave rise to the need for the revision. If the other party
does not provide written notification of objection to the requesting party
within the time period specified above, the requesting party shall have no
obligation to accommodate the other party's objections.
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13. Most Favored Nations
a. Product Pricing. Each party ("the Selling Party") agrees that while
this Agreement is in effect, the product pricing terms set forth on Appendix D
offered to the other party hereunder ("the Purchasing Party") shall be [
] the product pricing offered by the Selling Party [***] (not including an
agreement that is entered as a result of court order or primarily to settle a
bona fide dispute regarding infringement of the MVP Endpoints or Switch Products
or proprietary rights relating thereto) with a similarly situated third party
who offers products directly competing with the Purchasing Party for the sale of
similar products to Network Service Providers. The Selling Party agrees to
provide the Purchasing Party, within (10) days after the close of any agreement
that the Selling Party reasonably believes to fall within the scope of this
section 13(a), with notice of the relevant terms of such agreement. Within ten
(10) days of such notice, the Purchasing Party may elect to substitute such
product pricing terms for the product pricing terms of this Agreement; provided,
however, that: (1) any consideration previously provided to the Selling Party
hereunder shall be non-refundable, and (2) the Purchasing Party shall adopt all
of the additional restrictions, obligations and license limitations imposed in
such agreement. In determining whether an agreement falls within the scope of
this section 13(a), all of the terms of this Agreement and such agreements shall
be analyzed as a whole.
b. License Fee. Paradyne agrees that for a period of [***] months after
the Effective Date of this Agreement, the license fees set forth on Appendix C
hereto shall be [***] percent [***] lower than the license fees offered by
Paradyne for the use of the Paradyne MVP Technology under any agreement of
similar scope under similar terms and conditions (not including an agreement
that is entered as a result of court order or primarily to settle a bona fide
dispute regarding infringement of the MVP Endpoints or proprietary rights
relating thereto) with a similarly situated third party who offers products
directly competing with the Purchasing Party for the sale of similar products to
Network Service Providers. Paradyne agrees to provide AGCS, within (10) days
after the close of any agreement that Paradyne reasonably believes to fall
within the scope of this section 13(b), with notice of the relevant terms of
such agreement. Within ten (10) days of such notice, Paradyne shall offer to
AGCS similar consideration terms; provided, however, that: (1) any consideration
previously provided to Paradyne hereunder shall be non-refundable, and (2) AGCS
shall adopt all of the additional restrictions, obligations and license
limitations imposed in such agreement. In determining whether an agreement falls
within the scope of this Section 13(b), all of the terms of this Agreement and
such agreements shall be analyzed as a whole.
14. Branding
a. Each party hereby grants to the other party a non-exclusive,
non-sublicensable license to use that party's trademarks identified on Appendix
E (the "Marks") solely for the purpose of marketing, distributing and selling
the Derived Telephony Product in accordance with the terms of this Agreement
and the terms of the party's respective marketing guidelines as provided in
writing to the other party. In the event that a party reasonably determines
that the other party is not in compliance with such provisions and guidelines,
that party shall, upon thirty (30) days prior written notice, have the right to
suspend the other party's use of
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*** Confidential Treatment Requested
9
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the Marks until such time as the other party meets such standards and
provisions to Mark owner's reasonable satisfaction.
b. Neither party shall at any time do or permit any act to be done which
may in any way impair the rights of the other party in its Marks and the
parties will discontinue all use of the other party's Marks immediately upon
the termination or expiration of this Agreement.
c. Co-Branding. During the term of this Agreement, the parties agree to
co-brand the Derived Telephony Product as follows: Subject to the terms and
conditions of section 14(a): (i) Paradyne agrees to include the AGCS Marks on
all MVP Endpoints sold pursuant to this Agreement, [***] to AGCS and in a manner
to be agreed upon by the parties, and (ii) AGCS agrees to include Paradyne's
Marks on all Switch Products sold pursuant to this Agreement, [***] to Paradyne
and in a manner to be agreed upon by the parties. Provided, however, that on or
before January 1 of each calendar year during the term of this Agreement, if at
least [***] MVP Endpoints were not shipped to AGCS during the prior year, then
the parties shall discuss in good faith the appropriateness of continued
co-branding and the fees for such when annual shipments are expected to be below
[***] MVP Endpoints and/or [***] Switch Products for AGCS and Paradyne
respectively. Notwithstanding the foregoing, this Section 14(c) shall apply only
to the respective products and shall not obligate either party to include the
other party's Marks on any product packaging or other relevant product
documentation (which either party may do at its discretion, subject to the other
party's approval of such use and under the terms and conditions of Section
14(a)).
d. Private Labeling. If requested in writing by AGCS, Paradyne shall
include a particular customer's trademark on the MVP Endpoints and associated
documentation (in a manner to be agreed upon by the parties), solely for sales
of the Derived Telephony Product to a Network Service Provider of more than
100,000 units per year. In consideration of the foregoing, AGCS shall pay to
Paradyne, within thirty days of the date of invoice from Paradyne, an additional
fee of [***] dollars [***] per MVP Endpoint. If the customers require private
labeling to include packaging, the parties agree to negotiate a mutually agreed
upon fee.
15. Sales and Marketing
a. Within ninety (90) days of the Effective Date of this Agreement, the
parties shall jointly approach GTE, Lucent, Brooks Fiber, Alltel and AT&T
WorldNet in order to convince such companies to adopt the Derived Telephony
Product as their Derived POTS solution.
b. Each party agrees to use reasonable best efforts to market and
distribute the Derived Telephony Product. Either party shall have the right to
separately market and distribute its respective portion of the Derived
Telephony Product on a standalone basis or as bundled with other products.
c. If requested by a customer or mutually agreed to by the parties, the
parties will use reasonable best efforts to established direct fulfillment
structures.
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*** Confidential Treatment Requested
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16. Second Source Requirement
In the event that a potential Network Service Provider customer demands
that a second source for the manufacture of the Derived Telephony Product be
available (a "Second Source Manufacturer"), the party negotiating with such
customer will use diligent efforts to ensure that Paradyne and AGCS are the
Primary Source for the Derived Telephony Product for at least a period of three
(3) years. "Primary Source" for the purpose of this Section 16 shall mean the
provider of at least ninety percent (90%) (or other percentage negotiated with
the particular customer and mutually agreed upon by the parties) of the total
dollar amount and quantity for each party's portion of the Derived Telephony
Product purchased by the customer over the three-year period. Both parties shall
cooperate to mutually negotiate acceptable terms and conditions with such
Second Source Manufacturer with regard to the manufacture of the Derived
Telephony Product.
17. Escrow
a. Paradyne and AGCS each agree to place and periodically update, for
the benefit of the other party, the source code and all reasonable
documentation necessary to manufacture, have manufactured and/or maintain the
MVP Endpoints and the Switch Product, respectively (the "Escrow Materials"), in
escrow with a mutually agreeable escrow agent (the "Escrow Agent"). Both
parties shall enter into a mutually acceptable escrow agreement substantially
in the forms attached hereto as Appendix G ("Escrow Agreement") with the Escrow
Agent setting forth the terms stated herein.
b. The "Release Condition" shall mean that the Releasing Party is unable
to supply or maintain its respective portion of the Derived Telephony Product
in material breach of its obligations to do so hereunder. Upon release of the
Escrow Materials in accordance with the Escrow Agreement, the Escrow
Beneficiary shall have a non-transferable, non-sublicensable, non-exclusive
license, to use the Releasing Party's Escrow Materials solely to sell,
distribute, lease, manufacture, have manufactured, support and maintain the
Releasing Party's portion of the Derived Telephony Product as developed
pursuant to this Agreement only to the extent necessary to fulfill the
Releasing Party's obligations under section 11(d) of this Agreement and only
for so long as such Release Condition continues to include a reasonable phase
back period. The Escrow Beneficiary shall maintain the Releasing Party's Escrow
Materials in confidence as "Confidential Information" of the Releasing Party
and disclose the Escrow Materials to employees or contractors only as necessary
to exercise the rights granted herein.
18. Covenants
a. Each party shall use reasonable best efforts to: (i) keep the other
party informed as to any problems encountered with the Derived Telephony
Product and any resolutions arrived at for those problems, (ii) communicate
promptly to each other any and all modifications, design changes or
improvements of the Derived Telephony Product suggested by any customer,
employee or agent, and (iii) cause quarterly, their respective Chief Executive
Officers (CEO) and one other representative chosen by the CEO to meet and
review Derived Telephony Product cost reductions and pricing to each other.
11
<PAGE> 12
b. Paradyne agrees that AGCS shall have any and all right, title and
interest in and to any such suggested modifications, design changes or
improvements of the Switch Product, without the payment of any additional
consideration therefor either to Paradyne, or its employees, agents or
customers, and that it will reasonably cooperate with AGCS in this regard; and
AGCS agrees that Paradyne shall have any and all right, title and interest in
and to any such suggested modifications, design changes or improvements of the
MVP Technology and MVP Endpoints, without the payment of any additional
consideration therefor either to AGCS, or its employees, agents or customers,
and that it will reasonably cooperate with Paradyne in this regard.
c. Each party agrees to comply with the U.S. Foreign Corrupt Practices
Act (regarding, among other things, payments to government officials) and all
export laws and restrictions and regulations of the Department of Commerce, the
United States Department of Treasury Office of Foreign Assets Control ("OFAC"),
or other United States or foreign agency or authority, and agrees not to
export, or allow the export or re-export of any Derived Telephony Product or
any portion thereof in violation of any such restrictions, laws or regulations;
the exporting party shall obtain and bear all expenses relating to any
necessary licenses and/or exemptions with respect to the export from the U.S. of
all material or items deliverable by the other party to any location and shall
demonstrate to the other party compliance with all applicable laws and
regulations prior to delivery thereof by the other party.
19. Warranty and Disclaimer
WARRANTIES AND DISCLAIMERS OF THE RESPECTIVE PARTIES ARE CONTAINED IN APPENDIX
F.
20. Service and support
a. Paradyne and AGCS each shall provide to the other reasonable training
at the providing party's facility at no cost, however, the attending party
shall pay travel and living expenses. The intent of this training is to ensure
that the sales, technical and engineering forces have a competent understanding
of the functionality, maintenance, support and installation of the MVP Endpoint
and the Switch Product, respectively. The frequency and extent of such training
during the term on this Agreement will be agreed upon with the intent of
optimizing each other's success. Initial training will be conducted within 60
days of the commercial availability of the Derived Telephony Product.
b. Each party agrees to use reasonable best efforts to provide first
level support for the Derived Telephony Product for each party's own customer
base within North America and will establish a mutually acceptable means of
support for Derived Telephony Products sold outside of North America.
c. Paradyne shall use reasonable best efforts to provide second and third
level support to AGCS for the MVP Endpoints, and AGCS shall use reasonable best
efforts to provide second and third level support to Paradyne for the Switch
Products, sold pursuant to this Agreement in accordance with the terms set
forth on Appendix F.
12
<PAGE> 13
d. At each parties expense, each will furnish the other party with such
quantities as shall be determined appropriate, of its standard information,
marketing literature, brochures, manuals, Product information letters, etc.
relating to the Products, Services and Licensed Materials, and thereafter, upon
request each party shall furnish additional quantities at the respective
party's current cost.
21. Indemnification
a. Paradyne hereby agrees to defend, indemnify and hold AGCS harmless
from any third party claims that the Paradyne MVP Technology infringes a third
party's U.S. patent, copyright trademark or other proprietary right or
misappropriates a trade secret; provided that Paradyne shall have received
prompt written notice of the claim from AGCS, Paradyne shall have the option to
solely control the defense and settlement of such claims, and AGCS shall
provide reasonable assistance to Paradyne in the defense or settlement of such
claims. The foregoing obligation of Paradyne does not apply with respect to
Paradyne MVP Technology or portions or components thereof (i) modified by AGCS
or a third party after shipment by Paradyne, if the alleged infringement
relates to such modification, or (ii) where AGCS' use or distribution of the
Paradyne MVP Technology is not in accordance with the licenses granted in this
Agreement. The foregoing sets forth Paradyne's entire liability, and AGCS' sole
remedy, with respect to any alleged infringement of the Paradyne MVP Technology.
b. AGCS hereby agrees to defend, indemnify and hold Paradyne harmless
from any third party claims that the Switch Product infringes a third party's
U.S. patent, copyright, trademark or other proprietary right or misappropriates
a trade secret; provided that AGCS shall have received prompt written notice of
the claim from Paradyne, AGCS shall have the option to solely control the
defense and settlement of such claims, and Paradyne shall provide reasonable
assistance to AGCS in the defense or settlement of such claims. The foregoing
obligation of AGCS does not apply with respect to Switch Product or portions or
components thereof (i) modified by Paradyne or a third party after shipment by
AGCS, if the alleged infringement relates to such modification, or (ii) where
Paradyne's use or distribution of the Switch Product is not in accordance with
the licenses granted in this Agreement. The foregoing sets forth AGCS' entire
liability, and Paradyne's sole remedy, with respect to any alleged infringement
of the Switch Product.
22. LIMITED LIABILITY. EXCEPT WITH REGARD TO THE PARTIES' RESPECTIVE
INDEMNITY OBLIGATIONS SET FORTH IN SECTION 21 ABOVE, IN NO EVENT SHALL EITHER
PARTY BE LIABLE WITH RESPECT TO THE SUBJECT MATTER OF THIS AGREEMENT UNDER ANY
CONTRACT, TORT, STRICT LIABILITY OR OTHER LEGAL OR EQUITABLE THEORY (I) FOR ANY
INCIDENTAL, CONSEQUENTIAL, SPECIAL, INDIRECT DAMAGES, LOST PROFITS OR LOST DATA
OR COST OF PROCUREMENT OF SUBSTITUTE GOODS, TECHNOLOGY OR SERVICES, EVEN IF
SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, OR (II) IN
EXCESS OF THE AMOUNTS PAID BY THE OTHER PARTY HEREUNDER.
13
<PAGE> 14
23. Term and Termination
a. This Agreement shall continue in effect for a period of five (5) years
from the Effective Date hereof (the "Initial Term") and shall renew
automatically for additional one-year periods ("Renewal Terms") unless either
party provides written notice of termination to the other party at least ninety
(90) days prior to the expiration of the Initial Term or any Renewal Term or
earlier terminated as provided in Section 23(b) below. If this Agreement is
terminated by either party upon ninety (90) days notice pursuant to this
Section 23(a): (i) the other party may make one last purchase of the other
party's portion of the Derived Telephony Product, in accordance with the terms
of this Agreement, for delivery within up to three (3) months of termination of
the Agreement, and (ii) either party may purchase continuing support from the
other party, if such support is available, upon payment of the other party's
standard support fee.
b. If Paradyne terminates the Agreement pursuant to Section 23(a) and the
license fee in Section 2a has been paid in full: (i) AGCS' license under
Section 2(a) shall become perpetual following termination of this Agreement,
provided that AGCS complies with all of the other applicable surviving terms
and restrictions as set forth herein, and (ii) if the MVP Endpoints are no
longer commercially available on competitive terms, from either Paradyne or any
other third party, then, Paradyne shall grant to AGCS a royalty free license,
specified in Section 14b, to manufacture, have manufacture, distribute, sell
and/or lease the MVP Endpoints at no charge, provided that AGCS shall provide
all necessary support and maintenance for such MVP Endpoints.
c. If AGCS terminates the Agreement pursuant to Section 23(a): (i) AGCS
shall have a continuing royalty free Paradyne MVP technology license to
maintain the embedded base of Switch Product and a royalty bearing license to
continue to sell the Switch product. Such royalty shall be mutually agreed
upon, and if failing to agree will be resolved using arbitration procedures in
Section 25n and (ii) if the Switch Products are no longer commercially
available on competitive terms from either AGCS or any other third party, then
AGCS will grant to Paradyne a perpetual, royalty free license to manufacture,
have manufactured, distribute, sell and/or lease the Switch Products at no
charge, provided that Paradyne shall provide all necessary support and
maintenance for such Switch Products.
d. Either party may terminate this Agreement as follows: (i) upon thirty
(30) days written notice if the other party materially defaults in the
performance of its obligations hereunder and such default is not corrected
within the thirty (30) day period, or (ii) immediately if the other party files
a petition in bankruptcy, makes an assignment for the benefit of creditors, is
adjudicated bankrupt or insolvent, petitions or applies for a receiver or
trustee for a substantial part of its property, or commences any proceeding
under any reorganization arrangement, dissolution or liquidation law or statute
of any jurisdiction or if there is commenced against such party any proceeding
which has not been dismissed within one hundred twenty (120) days of such
commencement. In the event of the termination of this Agreement in accordance
with the terms of this Section 23.d. the defaulting party under 23(d)(i) above
and the party that is the subject of the bankruptcy or other proceeding under
23(d)(ii) above shall be deemed the terminating party, and the rights and
obligations of the parties set forth in Sections 23.b and 23.c shall apply.
14
<PAGE> 15
e. Except as otherwise expressly provided herein, upon expiration or
termination of this Agreement: (i) all rights and licenses granted herein shall
terminate, (ii) the parties shall each return to the other party, or destroy,
the other party's Confidential Information, and (iii) the provisions of Sections
5, 8, 17, 18(b) & (c), 19, 21, 22, 23 and 25 shall remain in effect. Termination
is not the sole remedy under this Agreement and whether or not termination is
effected, other remedies will remain available in accordance with the terms of
this Agreement as further defined in Section 25n.
24. Paradyne Restriction
a. Paradyne agrees that it will not develop, or have developed, for the
North American or Taiwanese markets, a Paradyne DSLAM which uses the Paradyne
MVP Technology to provide derived POTS applications and which is designed to
directly compete with the Switch Product ("Paradyne Voice DSLAM") prior to
December 31, 1998.
b. Paradyne will not "Introduce" a Paradyne Voice DSLAM in North America
or Taiwan prior to December 31, 1998. The term "Introduce" or "Introduction" for
the purpose of this Section 24 shall mean the first time Paradyne enters into
substantive discussions intended to lead to a definitive agreement for the
distribution of the Paradyne Voice DSLAM to any Network Service Provider in the
North American or Taiwanese markets.
c. In addition, Paradyne will delay Introduction of the Paradyne Voice
DSLAM in North America and Taiwan as follows:
i. until April 1, 1999 if AGCS provides to Paradyne before December 31,
1998 a letter authored by GTE which states that GTE has successfully tested the
Derived Telephony Product in GTE's labs and has certified the Derived Telephony
Product for deployment within GTE's internal network; and that GTE plans to
conduct Derived Telephony Product field trial activity during the fourth quarter
of 1998 and if successful, plans on deploying at least 100,000 lines of Derived
Telephony Product during the calendar year of 1999.
ii. until July 1, 1999 if Paradyne receives by March 31, 1999 a non-
cancelable purchase order from either AGCS or GTE for a minimum of 20,000 MVP
Endpoints, which order is shipped complete by May 31, 1999.
d. If Paradyne fails to produce and make available in accordance with the
acceptance criteria established in the Statement of Work any material milestone
contained in any of the five product phases as further defined in the Statement
of Work set forth on Appendix B, which materially affects AGCS ability to
perform, the parties may mutually agree to extend the dates set forth in
Sections 24(b) and (c) above; provided, however, that the foregoing shall not
apply if Paradyne's failure to meet such milestones was due in whole or in part
to a delay or failure by AGCS hereunder which materially affected Paradyne's
ability to perform.
e. Both parties agree that the restrictions set forth in this Section 24
apply only to North America and Taiwan and that Paradyne may develop Paradyne
Voice DSLAM for, and introduce a Paradyne Voice DSLAM into, any other country or
region at any time.
15
<PAGE> 16
f. Notwithstanding the foregoing, if an entity acquires substantially all
of the business or assets of Paradyne involved in the direct performance of
this Agreement, and such new entity is developing or markets another DSLAM
product, Paradyne may enhance, market, sell and fully exploit such DSLAM
product using Paradyne MVP Technology to provide derived POTS functionality in
any market at any time, provided that, during the period in which any of the
restrictions set forth in this Section 24 above may be applicable, Paradyne
provides written notice to AGCS of such change and does not sell such product
until ninety (90) days from the date of such written notice.
25. Miscellaneous
a. Governing Law. This agreement shall be governed by and interpreted in
accordance with the laws of the State of New York, without reference to
conflict of laws principles and without regard to the United Nations Convention
on Contracts for the International Sale of Goods. In any action or proceeding
to enforce rights under this Agreement, the prevailing party shall be entitled
to recover costs and attorneys' fees.
b. Independent Contractors. The parties hereto are independent
contractors. Nothing contained herein or done in pursuance of this Agreement
shall constitute either party the agent of the other party for any purpose or
in any sense whatsoever, or constitute the parties as partners or joint
ventures. Each party is solely responsible for all of its employees and agents
and its labor costs and expenses arising in connection therewith.
c. No Assignment. Neither party may, without the other party's prior
written consent, which consent shall not be unreasonably withheld, assign or
delegate this agreement or any of the party's rights or duties hereunder.
d. Amendment. No alteration, amendment, waiver, cancellation or any
other change in any term or condition of this Agreement shall be valid or
binding on either party unless mutually agreed to in writing by both parties.
e. No Waiver. The failure of either party to enforce at any time any of
the provisions of this Agreement, or the failure to require at any time
performance by the other party of any of the provisions of this Agreement,
shall in no way be construed to be a present or future waiver of such
provisions, nor in any way affect the validity of either party to enforce each
and every such provision thereafter. The express waiver by either party of any
provision, condition, or requirement of this Agreement shall not constitute a
waiver of any future obligation to comply with such provision, condition, or
requirement.
f. Severability. If for any reason a court of competent jurisdiction
finds any provision of this Agreement, or portion thereof, to be unenforceable,
that provision of the Agreement will be enforced to the maximum extent
permissible to as to effect the intent of the parties, and the remainder of
this Agreement will continue in full force and effect. The parties agree to
negotiate in good faith an enforceable substitute provision for any
unenforceable provision that most nearly achieves the intent and economic
effect of the unenforceable provision.
16
<PAGE> 17
g. Notices. All notices, requests, demands, waiver, and other
communications required or permitted hereunder shall be in writing and shall be
deemed to have been duly given: (i) when delivered by hand or confirmed
facsimile transmission; (ii) one day after delivery by receipted overnight
delivery; or (iii) four days after being mailed by certified or registered mail,
return receipt requested, with postage prepaid to the appropriate address as
set forth below:
Paradyne Corporation
8545 126th Avenue North
Largo, Florida 33773
Attention: President
Copy to: Corporate Secretary
AG Communication Systems Corporation
2500 West Utopia Road
Phoenix, AZ 85027
Attention: VP, Business Operation, New Ventures
Copy to AGCS General Counsel
h. Headings. The heading used in this Agreement are use for convenience
only and are not to be considered in construing or interpreting this Agreement.
i. Entire Agreement. The terms and conditions herein contained and the
referenced exhibits and appendices which are incorporated herein by this
reference constitute the entire agreement between the parties with respect to
the subject matter hereof and supersede all previous and contemporaneous
agreements and understandings, whether oral or written, between the parties
hereto with respect to the subject matter hereof.
j. Counterparts. This Agreement may be executed in counterparts or
duplicate originals, all of which shall be regarded as one and the same
instrument, and which shall be the official and governing version in the
interpretation of this Agreement.
k. Non-Solicitation. During the term of this Agreement and for a period
of one year thereafter, the parties agree that they will not directly solicit
the employees of the other to induce them to come to work for the other party.
This section shall not be construed to prohibit a party from considering
unsolicited requests for employment received from the other party's employees.
l. Force Majeure. A party shall not be liable for nonperformance or delay
in performance caused by any event reasonably beyond the control of such party
including but not limited to wars, hostilities, revolutions, riots, civil
commotion, national emergency, strikes, lock-outs, unavailability of supplies,
epidemics, fire, flood, earthquake, force of nature, explosion, embargo or any
other Act of God, or any law, proclamation, regulation, ordinance or other act
or order of any court, government or governmental agency.
17
<PAGE> 18
m. EQUITABLE RELIEF. The parties agree that a breach by a party, or its
employees or agents, of the obligations under Sections 5 or 3 of this Agreement,
will result in irreparable harm to the other party for which monetary damages
may be inadequate, and the injured party shall be entitled to seek appropriate
equitable or injunctive relief.
n. ARBITRATION. Any controversy or claim arising out of the
interpretation, performance or breech of any provision of this Agreement, shall
be settled by arbitration to be held in New Orleans, Louisiana in accordance
with and through the American Arbitration Association Rules for Commercial
Arbitration in effect on the date of this Agreement. The arbitration shall be
conducted by a single arbitrator selected by the American Arbitration
Association. The arbitrator shall take evidence directly from witnesses and
documents as presented by the parties; all witnesses shall be made available
for cross-examination. The arbitrator shall render an award within six (6)
months of the request for arbitration. Judgment upon the award rendered by the
arbitrator(s) may be entered in any court of competent jurisdiction in any
country, or application may be made to such court for a judicial acceptance of
the award and an enforcement as the law of such jurisdiction may require or
allow. The foregoing shall not prevent either party from seeking equitable
relief as otherwise permitted by the terms of this Agreement.
AG COMMUNICATION SYSTEMS PARADYNE CORPORATION
CORPORATION
Signature: /s/ Mark Somer Signature: /s/ Andrew Mase
Name: Mark Somer Name: Andrew Mase
Title: VP & GM AG Communication Systems Title: President & CEO
Date: 10 June 98 Date: 6/10/98
<PAGE> 19
APPENDIX A
Description of Paradyne Multiple Virtual Phone (MVP) Technology:
MVP is a subscriber line technology includes layer 1 Physical Media Dependent
and Transmission Convergence (TC) layers (TC-cell, TC-frame and TC-bit-sync)
that includes multi-drop concepts for derived POTS services and data services.
Generally, MVP includes invention from the premises POTS interface to the
central office PSTN interface. MVP provides additional POTS services to the
premises. MVP is exclusive of any data communication, including non-POTS
bit-sync data. Multiple Virtual Line (MVL) technology supports data multi-drop
concepts and is a subset and a separately licensed component of the MVP
Technology and which is not licensed under this Agreement.
Description of the Switch Product:
SuperLine(TM) Products are products that provide high speed data access and
multiple lines of telephony service -- allocating bandwidth only on demand; all
over, single cable pair with splitterless POTS support.
One of the product offerings is a SuperLine(TM) platform -- comprising a high
density central site modem that is hardened for use in remote terminal
environments as well as central offices -- combines high speed data services
with additional telephone lines, all without a truck roll to the customer
premises. In addition to the survivable (POTS) telephone service, one or two
additional telephone lines can be provided using SuperLine(TM) bandwidth, when
required. The additional telephony services support all custom features such
as: 911, Caller ID, distinctive ringing, etc., and support FAX and modem calls
up to the V90 standard. Standard analog telephone sets and the existing
telephony infrastructure of local digital switches, CO wiring billing and OAM&P
are used with these SuperLine(TM) lines. Interface to the local digital switch
is TR303, DDI and in the future TR008. Many data services are supported
including: Internet access; work at home access (corporate, governmental and
educational LANs); video meetings, IP telephony, etc.
This SuperLine(TM) platform has capacity for 96 customer links, with each line
card providing 8 ports. Each link to the customer supports 2 derived lines, as
well as, the existing POTS service and data. The shelf telephony interface
supports both DDI for the GTD5 and TR303 for GTD5, 5ESS, DMS100 and most other
digital switching product deployed throughout the network today including
Digital Loop Carrier equipment. The platform's WAN data interface is two 10/100
base T links.
The other product offerings are integrated SuperLine(TM) circuit packs designed
specifically for a particular digital switch or digital loop carrier (i.e.
Server Cards). These Server Cards bring the same technology and capability
inherent in the SuperLine(TM) platform to a single card, which can be inserted,
into an existing digital switch or digital loop carrier's line shelf. This
allows the network provider to use existing switch, power and trucking capacity
to generate additional subscriber revenue with minimum additional investment.
A-1
<PAGE> 20
Appendix B
Statement of Work
Attached hereto
B-1
<PAGE> 21
Appendix C
Paradyne MVP Technology License Fees
AGCS shall select one of the following two license fee options:
Option One - $[***]
AGCS shall pay $[***] to Paradyne as follows: (Note: the Phases denoted below
are further defined in the Statement of Work)
a) Within thirty (30) days of execution of the Agreement - $[***]
b) Within thirty (30) days of Completion of Product Phase 2 - $[***]
c) Within thirty (30) days of Completion of Product Phase 3 - $[***]
d) The later of February 1, 1999 or thirty (30) days after
Completion of Product Phase 4 - $[***]
e) Within thirty (30) days of Completion of Product Phase 5 - $[***]
Option Two - $[***]
1. AGCS shall pay $[***] to Paradyne as follows: (Note: the Phases denoted
below are further defined in the Statement of Work)
a) Within thirty (30) days of execution of the Agreement - $[***]
b) Within thirty (30) days of Completion of Product Phase 2 - $[***]
c) Within thirty (30) days of Completion of Product Phase 3 - $[***]
d) Within thirty (30) days of Completion of Product Phase 4 - $[***]
e) Within thirty (30) days of Completion of Product Phase 5 - $[***]
and
2. AGCS shall pay to Paradyne a fee of $[***] per unit of MVP Endpoint
Technology (Options A, B, E and F) for the first [***] units purchased
hereunder.
For the purpose of this Appendix C, "Completion" of a product phase shall mean
acceptance by AGCS of the deliverable resulting from the applicable Product
Phase as defined by the test and acceptance criteria set forth in the Statement
of Work.
- -------
*** Confidential Treatment Requested
C-1
<PAGE> 22
Appendix D
Equipment Pricing
The parties agree that the pricing set forth in this Appendix D shall
apply to purchases of products under this Agreement up to and including
December, 31, 1999. Thereafter, either party may change the prices listed
hereunder once per year during the term of this Agreement upon sixty-(60) days
written notice to the other party. Notwithstanding, such notice, any mutually
approved outstanding quotes or orders will be honored.
1. MVP Premise Equipment Pricing for 1998 and 1999
A. The first [***] MVP Endpoints purchased by AGCS from Paradyne will be
priced at the [***] unit discount level. AGCS will then market the Derived
Telephony Product to prospective customers. Should AGCS sell the Derived
Telephony Product for more than the combined [***] unit discounted price
(AGCS' port price plus Paradyne's endpoint price), then AGCS shall pay to
Paradyne [***] percent [***] of the incremental revenue. If additional units
are required in 1998, both paries will mutually agree on the discount level.
B. After the sale of the initial [***] MVP Endpoints, the following
pricing shall apply to all purchases by AGCS hereunder:
<TABLE>
<CAPTION>
List Price 25,000 50,000 75,000 100,000
MVP Premise Equipment units. units. units. units.
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
A. Voice Only MVP Endpoint, [***] [***] [***] [***] [***]
POTS / 1 Derived POTS
B. Voice Only MVP Endpoint, [***] [***] [***] [***] [***]
POTS / 2 Derived POTS
C. Ethernet -- Data Only MVP [***] [***] [***] [***] [***]
Endpoint,
POTS / Data
D. USB -- Data Only MVP Endpoint, [***] [***] [***] [***] [***]
POTS / Data
E. Ethernet -- MVP Full [***] [***] [***] [***] [***]
Configuration,
POTS / 2 Derived POTS / Data
F. USB -- MVP Full Configuration, [***] [***] [***] [***] [***]
POTS / 2 Derived POTS / Data
</TABLE>
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*** Confidential Treatment Requested
D-1
<PAGE> 23
EARNED DISCOUNT
The parties mutually agree that:
a) The earned discount period (ED Period) is defined as
January 1 to December 31 of any calendar year.
b) The initial discount level for 1999 will be at the 50,000
unit level. All MVP Endpoints shipped in 1998 will be added to the accumulated
volume shipped in 1999 ED period and will be eligible for earned discount for
the 1999 ED period.
c) The discount level achieved in a ED period will be the
initial discount level for the next ED period (e.g. if Paradyne shipped AGCS
75,000 units during the 1999 ED period, then the initial discount level for the
2000 ED period would be at the 75,000 unit level).
d) The discount level for an order will be based upon the
greater of the earned discount or the total number of all MVP Endpoints (A-F)
shipped prior to the specific order during that year (e.g., if Paradyne has
shipped AGCS 35,000 unit A's, 42,000 unit B's and 45,000 unit E's, the volume
discount level would be at the 1000,000 unit level because the total equals
100,000 units).
e) Earned discount will be determined annually. The calculation
of earned discount will be completed during January and is based on the MVP
Endpoints shipped in the previous ED period. The earned discount is the
difference between the actual discount applied to the individual orders and the
discount earned based on the accumulative total units shipped during the ED
period. Paradyne will determine if further discounts are due based upon the
discount schedule set forth above and the rules stated below. If a credit is
due, Paradyne will issue a credit to AGCS for the total amount due. Paradyne
will apply this credit to subsequent orders by AGCS hereunder. If the credit is
not fully consumed within the first calendar quarter of the current year then
Paradyne will remit to AGCS the excess amount by March 31st of the current year.
If monies are due, Paradyne will issue an invoice to AGCS for the outstanding
amount having net thirty day terms.
Rule 1 -- Application of discount on orders during the ED period:
Higher level discounts will be applied to all shipments
when the number of units shipped exceeds the next
higher discount level. (e.g. during the 1999 the
initial discount level is at the 50,000 unit level. All
orders for MVP Endpoints will be priced at the 50,000
unit level until 75,000 units have been shipped to
AGCS. The 75,000 unit level discount will be applied to
all orders after 75,000 units have been shipped to
AGCS).
Rule 2 -- Special pricing on large orders:
Due to market conditions, an order may receive special
pricing. The units shipped as part of these orders will
not be eligible for earned discount monies, however the
shipped unit volume will be used in calculating the
D-2
<PAGE> 24
total units shipped during the ED period and to determine
the initial discount for the next ED period.
Rule 3 -- Annual True Up of earned discount:
Rule 3a -- Determination of the discount level achieved
At the end of the ED period Paradyne will review all
orders and calculate the actual number of units shipped
to determine the discount level to be applied to all
units shipped during the ED period. The discount level
achieved will be rounded to the unit level nearest to
the number of units shipped. (e.g. if Paradyne shipped
65,000 units to AGCS during 1999 then the level
achieved would be 75,000, if only 60,000 units were
shipped then the discount level achieved would be the
50,000 unit level discount).
Rule 3b -- Calculation of the earned discount
The earned discount will be the different between the
initial discount applied to the units shipped and the
actual discount level achieved using Rule 3a. The
earned discount amount is determined on a per endpoint
type basis for each order. The total earned discount
for the order is the sum of earned discount amounts for
each endpoint type shipped with the order. If a credit
or invoice is required they be issued via the terms and
conditions defined in Section 1 B (e) of this Appendix.
Rule 3c -- Earned discount on units shipped in different ED
periods
The units in an order are given a discount level at the
time the order is placed based on the actual number of
units shipped. The discount level determined at the
date of order will be used for all units shipped as
part of that order. This applies even when the shipment
schedule spans ED periods. Only the units actually
shipped in a given ED period will be used to determine
the earned discount level.
D-3
<PAGE> 25
Example 1: If AGCS places four (4) orders throughout the year, and each order
placed contains various MVP Endpoint types totaling 25,000 units, the pricing
and invoicing would be as shown below: All orders were shipped within the ED
period. The discount level for all orders in the next ED period would be at
100,000 unit level.
Orders placed during 1999
Note Initial discount is at the [***] unit level
<TABLE>
<CAPTION>
Endpoint Order Invoice Earned
Order Type Volume Price Amount Discount Net Amount Comments
- ------- -------- ------- ------- ------- -------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 A 25,000 $[xxx] $[xxx] $[xxx] $[xxx]
2 B 25,000 $[xxx] $[xxx] $[xxx] $[xxx]
3 C 25,000 $[xxx] $[xxx] $[xxx] $[xxx] unit level discount achieved
4 D 25,000 $[xxx] $[xxx] $[xxx] $[xxx]
TOTAL 100,000 $[xxx] $[xxx] $[xxx]
</TABLE>
Earned discount calculation for previous orders
100,000 unit level discount achieved
<TABLE>
<CAPTION>
Endpoint Order Invoiced Earned Earned
Order Type Volume Price Price Discount
- ------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
1 A 25,000 $[xxx] $[xxx] $[xxx]
2 B 25,000 $[xxx] $[xxx] $[xxx]
3 C 25,000 $[xxx] $[xxx] $[xxx]
4 D 25,000 $[xxx] $[xxx] $[xxx]
TOTAL 100,000 $[xxx]
</TABLE>
- -------------
*** Confidential Treatment Requested
D-4
<PAGE> 26
Example 2: The earned discount level achieved in the previous period was at the
100,000 unit level. An order for 50,000 units is placed in March 99 with a
delivery schedule over the next 12 months. However, the shipment schedule
resulted in delivery of only 25,000 units during the ED period. Two other
orders totaling 40,000 units were placed and shipped during the ED period.
Therefore, earned discount must be recaptured for the ED period based on Rule
3b. The discount level for the next ED period is at the 75,000 unit level using
Rule 3c.
<TABLE>
<CAPTION>
SCHEDULE ACTUAL
SHIPMENT SHIPMENT ENDPOINT SHIPPED GROSS EARNED
DELIVERY DATE DATE TYPE VOLUME PRICE AMOUNT DISCOUNT NET AMOUNT
- -------- -------- -------- -------- ------- ----- ------ -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Order 1
a Mar-99 Mar-99 A 12,500 $[***] [***] [***] [***]
b Jun-99 Jun-99 B 12,500 $[***] [***] [***] [***]
c Aug-99 Feb-00 E 0 $[***] [***] [***] [***]
d Feb-00 Apr-00 E 0 $[***] [***] [***] [***]
Order 2 May-99 Oct-99 B 20,000 $[***] [***] [***] [***]
Order 3 Jun-99 Nov-99 E 20,000 $[***] [***] [***] [***]
------ ------ ----- ------ ----- ------ -------- ----------
TOTAL 66,000 [***] [***] [***]
</TABLE>
Earned Discount Calculations
<TABLE>
<CAPTION>
ENDPOINT SHIPPED INVOICED EARNED
ORDER TYPE VOLUME PRICE EARNED PRICE DISCOUNT
- ----- -------- ------- -------- ------------ --------
<S> <C> <C> <C> <C> <C>
Order 1
a A 12,500 [***] [***] [***]
b B 12,500 [***] [***] [***]
c E 0 [***] [***] [***]
d E 0 [***] [***] [***]
Order 2 B 20,000 [***] [***] [***]
Order 3 E 20,000 [***] [***] [***]
----- ------ -------- ------------ --------
TOTAL 65,000 [***]
</TABLE>
- -----------------------
*** Confidential Treatment Requested
D-5
<PAGE> 27
2. AGCS Switch Product Pricing for 1998 and 1999
A. The initial discount level to Paradyne for 1999 will be at the [***]
unit level
<TABLE>
<CAPTION>
Port List Price/ 25,000 Ports 50,000 Ports 75,000 Ports 100,000
Description Port Price/Port Price/Port Price/Port Ports Price/
Port
- ----------- ----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
A - [***] [***] [***] [***] [***]
Integrated
Voice and
Data Port
B - DSLAM [***] [***] [***] [***] [***]
Voice and
Data Port
C - Integrated [***] [***] [***] [***] [***]
Voice Only
Port
D - DSLAM [***] [***] [***] [***] [***]
Voice Only
Port
</TABLE>
Earned Discount
The parties mutually agree that:
a) The earned discount period (ED Period) is defined as January 1 to
December 31 of any calendar year
b) All Switch Products shipped to Paradyne in 1998 will be added to the
accumulated volume shipped to Paradyne in 1999 ED period and will be
eligible for earned discount for the 1999 ED period.
c) The discount level achieved in a ED period will be the initial
discount level for the next ED period (e.g. if AGCS shipped Paradyne
75,000 ports during the 1999 ED period, then the initial discount
level for the 2000 ED period would be at the 75,000 port level).
d) The discount level for an order will be based upon the greater of the
earned discount or the total number of all Switch Products (A-D)
shipped prior to the specific order during the year (e.g., if AGCS has
shipped Paradyne 35,000 unit A type ports, 42,000 units B type ports
and 45,000 unit E type ports, the
- -----------------------
*** Confidential Treatment Requested
D-6
<PAGE> 28
volume discount level would be at the 100,000 port level because the
total equals 100,000 ports).
e) Earned discount will be determined annually. The calculation of earned
discount will be completed during January and is based on the Switch
Product shipped in the previous "ED period". The earned discount is
the difference between the actual discount applied to the individual
orders and the discount earned based on the accumulative total of
units shipped during the ED period. AGCS will determine if further
discounts are due based upon the discount schedule set forth above and
the rules stated below. If a credit is due AGCS will issue a credit
for the total amount due. If the credit is not fully consumed within
the first calendar quarter of the current year then AGCS will remit to
Paradyne the excess amount by March 31st of the current year. If
monies are due AGCS will issue an invoice to Paradyne for the
outstanding amount having net thirty day terms.
Rule 1 -- Application of discount on orders during the ED period:
Higher level discounts will be applied to all shipments when the
number of port shipped exceeds the next higher discount level, (e.g.
during the 1999 the initial discount level is at the 50,000 port level.
All orders for Switch Product will be priced at the 50,000 port level
until 75,000 units have been shipped to Paradyne. The 75,000 port
level discount will be applied to all orders after 75,000 ports have
been shipped to Paradyne).
Rule 2 -- Special pricing on large orders:
Due to market conditions, an order may receive special pricing. The
port shipped as part of these orders will not be eligible for earned
discount monies, however the shipped port volume will be used in
calculating the total ports shipped during the ED period and to
determine the initial discount for the next ED period.
Rule 3 -- Annual True Up of earned discount:
Rule 3a -- Determination of the discount level achieved
At the end of the ED period AGCS will review all orders and
calculate the actual number of ports shipped to determine the
discount level to be applied to all ports shipped during the ED
period. The discount level achieved will be rounded to the unit
level nearest to the number of units shipped. (e.g. if AGCS shipped
65,000 ports to Paradyne during 1999 then the level achieved would
be 75,000, if only 60,000 ports were shipped then the discount
level achieved would be 50,000 port unit level discount).
D-7
<PAGE> 29
Rule 3b - Calculation of the earned discount
The earned discount will be the different between the initial
discount applied to the ports shipped and the actual discount level
achieved using Rule 3a. The earned discount amount is determined on
a per Switch Product Port type basis for each order. The total
earned discount for the order is the sum of earned discount amounts
for each Switch Product Port type shipped with the order. If a
credit or invoice is required, they will be issued via terms and
conditions defined in Section 2e of this Appendix.
Rule 3c - Earned discount on units shipped in different ED periods
The ports in an order are given a discount level at the time the
order was placed based on the actual number of ports shipped. The
discount level determined at the date of order will be used for all
ports shipped as part of that order. This applies even when the
shipment schedule spans ED periods. Only the ports actually shipped
in a given ED period will be used to determine the earned discount
level.
D-8
<PAGE> 30
Example 1: If Paradyne places four (4) orders throughout the year, and each
order placed contains various Switch Product types totaling 25,000 ports, the
pricing and invoicing would be as shown below: All orders were shipped within
the ED period. The discount level for all orders in the next ED period would be
at 100,000 port level.
Orders placed during 1999
Note: Initial discount is at the [***] unit level
<TABLE>
<CAPTION>
ENDPOINT ORDER INVOICE EARNED
ORDER TYPE VOLUME PRICE AMOUNT DISCOUNT NET AMOUNT COMMENTS
- ----- -------- ------ ------- ------------- ------------ ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
1 A 25,000 $[***] $ [***] $ [***] $ [***]
2 B 25,000 $[***] $ [***] $ [***] $ [***]
3 C 25,000 $[***] $ [***] $ [***] $ [***] [***] unit level discount achieved
4 D 25,000 $[***] $ [***] $ [***] $ [***]
TOTAL 100,000 $[33,025,000] $[3,500,000] $[29,525,000]
</TABLE>
Earned discount calculation for previous orders
[***] unit level discount achieved
<TABLE>
<CAPTION>
ENDPOINT ORDER INVOICE EARNED EARNED
ORDER TYPE VOLUME PRICE PRICE DISCOUNT
- ----- -------- ------ ------- ------------- ------------
<S> <C> <C> <C> <C> <C>
1 A 25,000 $[***] $ [***] $ [***]
2 B 25,000 $[***] $ [***] $ [***]
3 C 25,000 $[***] $ [***] $ [***]
4 D 25,000 $[***] $ [***] $ [***]
TOTAL 100,000 $ [***]
</TABLE>
- ------------------------
*** Confidential Treatment Requested
D-9
<PAGE> 31
Example 2: The earned discount level achieved in the previous period was at the
100,000 unit level. An order for 50,000 ports is placed in March 99 with a
delivery schedule over the next 12 months. However, the shipment schedule
resulted in delivery of only 25,000 ports during the ED period. Two other orders
totaling 40,000 ports were placed and shipped during the ED period. Therefore,
earned discount must be recaptured for the ED period based on Rule 3b. The
discount level for the next ED period is at the 75,000 port level using Rule 3c.
<TABLE>
<CAPTION>
Schedule Actual
Shipment Shipment Endpoint Shipped Earned
Delivery Date Date Type Volume Price Gross Amount Discount Net Amount
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Order 1
a Mar-99 Mar-99 A 12,500 S [***] [***] [***] [***]
b Jun-99 Jun-99 B 12,500 S [***] [***] [***] [***]
c Aug-99 Feb-00 C 0 S [***] [***] [***] [***]
d Feb-00 Apr-00 D 0 S [***] [***] [***] [***]
Order 2 May-99 Oct-99 C 20,000 S [***] [***] [***] [***]
Order 3 Jun-99 Nov-99 D 20,000 S [***] [***] [***] [***]
TOTAL 55,000 [***] [***] [***]
</TABLE>
Earned Discount Calculations
<TABLE>
<CAPTION>
Endpoint Shipped Invoiced Earned
Order Type Volume Price Earned Price Discount
<S> <C> <C> <C> <C> <C>
Order 1
a A 12,500 [***] [***] [***]
b B 12,500 [***] [***] [***]
c C 0 [***] [***] [***]
d D 0 [***] [***] [***]
Order 2 C 20,000 [***] [***] [***]
Order 3 D 20,000 [***] [***] [***]
TOTAL 65,000 [***]
</TABLE>
- -------
*** Confidential Treatment Requested
D-10
<PAGE> 32
Appendix E
Marks
TRADEMARKS AND OTHER INDICIA - Paradyne
Products and Licensed Materials purchased hereunder and the packaging therefor
may bear certain trade names, trademarks, trade devices, logos, codes or other
symbols of Paradyne, (herein "Indicia"). Paradyne hereby grants AGCS permission
to use Indicia in the AGCS marketing and advertising of, and in AGCS' publicity
relating to, the Products, Services and Licensed Materials PROVIDED such use
conforms to Paradyne standards and guidelines relating thereto which Paradyne
may furnish from time to time. AGCS may not conduct business under Paradyne's
name or logo. AGCS may not use any of Paradyne's Indicia or variations thereof
to identify AGCS or AGCS' products or services, and AGCS may not use any of
Paradyne's Indicia in a manner that is likely to confuse the public concerning
the relationship of the parties. AGCS' use of Indicia shall inure to the
benefit of Paradyne and shall not invest in AGCS any rights in or to the
Indicia. All uses of Indicia by AGCS shall be subject to pre-publication or
pre-use review and written approval by Paradyne. If, in Paradyne's judgment,
any use of Indicia by AGCS is deemed detrimental to the Indicia or Paradyne's
reputation, or is deemed otherwise undesirable, Paradyne may withdraw such
permission without liability as a result thereof.
TRADEMARKS AND OTHER INDICIA - AGCS
During the Term of this Agreement, AGCS authorizes Paradyne to display and use
the trademarks "AGCS" and "ATTUM(r)" and "SuperLine(tm)", in connection with
Paradyne sales, advertisement, service and promotion of Product(s). Paradyne
will indicate in all publicity and printed material relating to the Product(s)
that such trademarks are the property of AGCS. No rights are granted to
Paradyne to use trademarks and trade names of third parties used concerning
Product(s).
Paradyne shall not change or remove any trademark, trade name, logo, copyright
notice, model or serial number, or other such designation affixed to any
Product(s) without the prior written consent of AGCS.
Paradyne shall not, at any time, use or register, any such AGCS designation, as
a business, corporate or trade name nor shall it use, display or register any
trademark, trade name, business or corporate name which is in whole or in part
similar to or confusing with any such designation.
Nothing contained in this Agreement shall grant Paradyne interest in any
trademark, name, logo or other trade designation of AGCS, and Paradyne agrees
that it will not at any time during or after this Agreement assert or claim any
interest in, or do anything which may adversely affect the validity or
enforceability of, any trademark, trade name, or logo belonging or licensed to
AGCS or the rights of AGCS thereon. On termination of this Agreement, and after
a reasonable phase out period, Paradyne shall forthwith cease all display,
advertising, and use of all such names, marks, logos and designations and shall
not thereafter use, advertise or display any name, mark or logo which is, or
any part of which is, similar to or confusing with any such designation
associated with any Product(s).
E-1
<PAGE> 33
Appendix F
Support and Maintenance Terms
Warranty Policy - AGCS
Hardware Warranty
AGCS warrants that the goods sold hereunder will be free from defects in
material and workmanship; that such goods will be fit for the ordinary purposes
for which such goods are used; and that goods title thereto is conveyed to
Paradyne. The warranty period for Hardware Defects shall be two (2) years from
date of shipment. Other then as expressed herein Paradyne shall not make any
warranties on behalf of AGCS.
This Warranty does not extend to substitute equipment and components specified
by Paradyne, to products not of AGCS' manufacture which are peripheral to or
not integrated into AGCS' manufactured assemblies, including, without
limitation, power equipment, test equipment, traffic data collection equipment
and protective equipment; to equipment normally consumed in operation or which
has a normal life shorter than twelve (12) months; or to purchased products not
sold by AGCS. As to such products, AGCS conveys to Paradyne the Warranty, if
any, of AGCS' supplier. This Warranty does not extend to damage to goods
resulting from extraneous causes not attributable to AGCS, including, without
limitation, damage caused in whole or in part by improper storage,
installation, operation or maintenance; misuse, neglect or abuse; or
unauthorized alteration or repair.
THE FOREGOING IS IN LIEU OF ALL OTHER WARRANTIES, EXPRESSED OR IMPLIED
INCLUDING BUT NOT LIMITED TO THE IMPLIED WARRANTY OF MERCHANTABILITY.
Software Warranty
AGCS warrants that each Software release will perform substantially in
accordance with the User's Guide or documentation provided with the product for
a period of ninety (90) days after in-service.
This Warranty shall be voided, both as to the Licensed Software and as to any
goods used in connection therewith if any Licensed Software is modified or
otherwise changed other than by or at the direction of AGCS.
The failure to insert or permit AGCS to insert any Release (Modification
Release or Point Release or similar instruction provided for the purpose of
correcting deficiencies) into the Licensed Software shall void the Warranty,
both as to the Licensed Software and as to any goods used in connection
therewith.
ANY UNAUTHORIZED USE OF THE LICENSED SOFTWARE TO IMPLEMENT ANY OPTIONAL
FEATURES WHICH HAVE NOT BEEN PURCHASED SHALL
F-1
<PAGE> 34
IMMEDIATELY VOID THIS WARRANTY FOR THAT SITE BOTH AS TO THE LICENSED SOFTWARE
AND AS ANY GOODS USED IN CONNECTION THEREWITH, AND TERMINATE ANY OBLIGATION OF
AGCS TO FURTHER SUPPORT THE LICENSED SOFTWARE FOR THAT SITE.
In Warranty Support
Unlimited, toll-free telephone assistance is provided with AGCS' standard
warranty service, including:
- Seven days a week, twenty-four hours a day (7x24) technical phone
support available through the AGCS Customer Support Center (CSC).
- Telephone response within two (2) hours of reporting a problem.
- Telephone assistance in the diagnosis and resolution of system problem.
- Routine telephone assistance in the support of the initial installation,
daily operation or implementation of system upgrades.
If Paradyne requires warranty service, it should call 1-888-888-AGCS and provide
sufficient, relevant information to enable the CSC to understand, analyze and
resolve the problem.
- - Hardware Support - In case of a defect, AGCS will issue a Customer Return
Authorization (CRA). Based on criticality of need as determined by CSC, CSC
will either; (i) ground ship a replacement unit within two (2) business days;
or (ii) repair and ship the original product within ten (10) business days of
its receipt. For both repairs and replacements, Paradyne shall ship the
warranted Product to AGCS' designated location in its original or equivalent
packaging with the applicable CRA number, prepay shipping charges and bear
the risk of loss or damage during shipment. AGCS will pay freight costs to
return repaired equipment to Paradyne's or a designated U.S. location. If CSC
provided a replacement unit, the hardware unit returned for repair will
remain the property of AGCS.
- - Software Support - For Critical Defects, AGCS will provide ongoing support
until mitigated or resolved. AGCS will provide resolutions to Major Defects
within a reasonable time after they have been reported to, confirmed and
agreed to by AGCS. Resolutions for Minor Defects, that have been reported to,
confirmed and agreed to by AGCS, may be included in subsequent software
modification releases, point releases and feature releases, as AGCS deems
appropriate.
AGCS REPAIRS NOT COVERED UNDER WARRANTY
Paradyne will be charged for second level support for out of warranty Products.
Second level support will be at no charge for in warranty Products.
F-2
<PAGE> 35
AGCS agrees to provide repair services on Products purchased for which the
warranty period has lapsed. Repair charges for hardware will be at 30% of
discounted price of equipment in effect at the time of repair.
Paradyne shall be responsible for all costs associated with returning Product
for repair to AGCS' facility in Genoa. AGCS will pay freight costs to return
repaired Product to specified location within the continental United States.
If Product returned for repair is determined to be irreparable, AGCS shall
promptly notify Paradyne. AGCS shall, at Paradyne's option, sell to Paradyne a
replacement Product, if available, at the then current discounted price or
return the Product in it's irreparable state.
Price for Additional AGCS Services
Product Support
AGCS offers support services in three (3) areas of expertise: Sales and
Marketing, System Integration Engineering and Customer (technical) Support. The
pricing for these services is denoted below:
<TABLE>
<CAPTION>
Support Service Type Price/Hour (US$)*
-------------------- -----------------
<S> <C>
Sales and Marketing [***]
System Integration Engineering [***]
Customer Support [***]
</TABLE>
- -------------------
* Prices do not include AGCS travel and expenses which shall also be the
responsibility of Paradyne should travel be required.
Product Training
Other than the training defined in Section 20(a), AGCS provides both
Installation and Technical training for all their Products in English. The
duration of the class varies depending on content. This training is available
at AGCS' Phoenix, Arizona facility. Airfare for the training in Phoenix and the
related travel cost incurred will be the responsibility of the Paradyne.
<TABLE>
<CAPTION>
Number of Students Price/Student/Dav (US$)
------------------ -----------------------
<S> <C>
One to Four [***]
Five to Six [***]
Seven to Eight [***]
</TABLE>
AGCS will also provide training at a mutually agreed to location within the
United States, for a flat fee of [***] per week. Paradyne shall also be
responsible for AGCS' instructor airfare and reasonable travel expenses during
the duration of the course. Maximum class size for any training course shall be
eight (8) people.
- -------
*** Confidential Treatment Requested
F-3
<PAGE> 36
Note: AGCS reserves the right to adjust the pricing defined in this Appendix
annually. Prices shown are as of January 1, 1998. Discounts do not apply to
Services pricing.
WARRANTY Policy - Paradyne
A. Hardware WARRANTY
Paradyne shall provide a return to factory warranty for two (2) years from the
later of (1) shipping from Paradyne or (2) shipment from AGCS' distributors, but
in no event later than one year from shipment from Paradyne, and provided that
AGCS provides a Point of Sales Report for that Product which AGCS directly ships
to their Distributors and/or their end users identifying (1) the Product by
serial number, (2) the customer to which the Product is shipped, and (3) the
date of shipment. Paradyne warrants to AGCS that the products will, during the
warranty period and under proper and normal use, be free from defects in
material or workmanship and will conform to the specifications contained in the
MVP Endpoint data sheets.
If any failure to conform to the WARRANTY appears in any Product(s), which are
in possession of AGCS or its identified distributors, or any end users,
Paradyne will, at its sole option, either (i) repair or replace the Product(s),
or thereafter (ii) will refund or credit AGCS' purchase price of the defective
Product(s), provided that Paradyne is provided written notification of the
purported failure to conform to this WARRANTY within the applicable Products(s)
warranty period and Paradyne determines that the Product(s) fails to conform to
its specification as defined in the applicable datasheets.
AGCS shall follow Paradyne's then current instructions in the Return Policy
section, regarding return of readily returnable Product(s). No such Product(s)
will be accepted for repair, replacement, refund or credit absent such
instructions being followed. In the case of any such return, AGCS shall assume
risk of loss and damage during shipment to Paradyne and shall pay all
transportation charges. Repaired or replacement Product(s) shall be shipped to
a designated destination within the contiguous forty-eight United States or the
District of Columbia by Paradyne at its expense and risk of loss and damage.
AGCS shall be responsible for any requested premium transportation of repair or
replacement part(s) or Product(s). If Paradyne determines that the Product(s)
do not fail to conform to the specification, AGCS shall pay Paradyne all costs
of handling, inspection, repairs and transportation at Paradyne's then
prevailing rates.
Paradyne shall not be responsible under this WARRANTY for deinstallation or
reinstallation or for related expenses arising out or the alteration of AGCS or
a third party's premise or building, or removal, replacement or relocation of
other items not purchased hereunder.
Repaired and replaced part(s) provided under the above WARRANTY are warranted as
set forth above, but for only sixty (60) days from the date of repair or
replacement or for the remainder of the Product WARRANTY period, whichever is
greater, and such parts may be new, remanufactured or refurbished, at the sole
discretion of Paradyne.
The foregoing WARRANTY does not extend to Licensed Materials; to expendable
items; to experimental or developmental Product(s); or to Product(s) which have
been altered by anyone
F-4
<PAGE> 37
other than Paradyne or Paradyne's authorized service provider; have been used
in material violation of Paradyne's instructions; or have had their serial
numbers or month and year of manufacture of shipment removed, defaced or
altered. AGCS shall not make any warranties on behalf of Paradyne.
THE FOREGOING WARRANTY IS IN LIEU OF ALL EXPRESS AND IMPLIED WARRANTIES,
INCLUDING BUT NOT LIMITED TO WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE. AGCS'S SOLE AND EXCLUSIVE REMEDY SHALL BE PARADYNE'S
OBLIGATION TO REPAIR, REPLACE, CREDIT OR REFUND AS SET FORTH ABOVE.
B. LICENSED MATERIAL (SOFTWARE) WARRANTY
Paradyne warrants to AGCS that, upon shipment, Licensed Materials will be free
from defects which result in a material failure of the applicable Product(s) to
execute instructions. If under normal and proper licensed use, the Licensed
Materials prove to have such a defect (1) within the later of ninety (90) days
from the date of shipment thereof to AGCS, or shipment from AGCS' distributors;
or (2) within ninety (90) days after installation completion, Paradyne at its
sole option, will either correct or replace the same without charge at its
facility or provide a full refund or credit. No Licensed Materials will be
accepted for correction or replacement except upon the written authorization
and in accordance with instructions of Paradyne as defined in the Return Policy
section. Any transportation expenses and risk of loss associated with returning
such Licensed Materials to Paradyne shall be borne by AGCS. At Paradyne's sole
option, correction may be incorporated into a new release of the Licensed
Materials which will be made available to AGCS at no charge. Such
corrections may be performed by Paradyne at AGCS' facility.
In the event that Paradyne determines after investigation that the Licensed
Materials are not defective, AGCS shall pay all costs of handling, inspection,
testing and transportation, including travel and living costs incurred by
Paradyne's personnel.
Paradyne makes no warranty with respect to defective conditions or
non-conformities caused by any of the following acts: misuse, neglect, accident
or abuse by anyone other than Paradyne or its subcontractors; improper actions
(i.e. wiring, repairing, alteration, installation, storage or maintenance) by
anyone other than Paradyne or its subcontractors; use in a manner not in
accordance with specifications, operating instructions or license-to-use;
failure of AGCS, its distributors, or end-users to apply previously applicable
Paradyne modifications and corrections. In addition, Paradyne makes no warranty
with respect to Software defects other than those which materially affect
performance in accordance with Paradyne's specification and defects related to
the Direct VAR's data base errors.
WARRANTY EXCLUSIONS AND LIMITATION OF LIABILITY: THE FOREGOING WARRANTY IS
EXCLUSIVE AND IN LIEU OF ALL OTHER EXPRESS AND IMPLIED WARRANTIES IN CONNECTION
WITH THE LICENSED MATERIALS COVERED BY THIS ARTICLE INCLUDING BUT NOT LIMITED
TO WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. AGCS'
SOLE AND EXCLUSIVE REMEDY SHALL BE
F-5
<PAGE> 38
PARADYNE'S OBLIGATION TO CORRECT, REPLACE, CREDIT OR REFUND, AS SET FORTH ABOVE.
C. Repair Procedure
Paradyne shall provide or arrange for in-warranty or out-of-warranty repair
services in accordance with the Return Policy. For all in-warranty or
out-of-warranty repairs AGCS shall pay transportation charges to Paradyne.
Paradyne shall pay transportation charges back to AGCS, its distributors, or its
end-users. AGCS shall be responsible for all customs, duties, brokerage fees,
and taxes.
Upon attaining a cumulative quantity of [***] units in purchases under this
Agreement or upon a firm commitment for such quantity, Paradyne will provide to
AGCS a mutually agreed to amount of consignment Product within thirty (30) days
of an agreement as to quantity which in no event shall exceed [***] percent
([ ]%) of the quantity purchased to date. AGCS will use this consignment for
the sole purpose of meeting its end user's demand for immediate replacement of
failed in Warranty MVP Endpoints. AGCS will provide a consignment report monthly
detailing the usage of the consignment stock. Additionally, AGCS will return all
defective MVP Endpoints, at its expense. If consignment MVP Endpoints are used
to satisfy out of warranty repair then AGCS will pay Paradyne the applicable
discounted price for the MVP Endpoint.
D. Return Policy
Warranty Verification
Paradyne product warranty's are verified upon the receipt of your call. If a
warranty has not been registered the support personnel may request proof of
purchase and will use the date of shipment shown on the bill or invoice. If the
warranty has not been registered and proof of purchase cannot be provided we
will access the Paradyne equipment base and date the warranty from the time the
unit was shipped to AGCS or its distributor.
Services Available
In Warranty and Out of Warranty Repair Service
Standard Warranty repair service has a fifteen day turn around time. For rush
repairs we provide same day expedite service. Customers must return equipment
overnight, first business day and the repair center will repair and ship
overnight on the day of receipt. The fee for this service is [***] in addition
to the repair fees, if any. Some defects may preclude this service being
available. In the event this were to occur you would be contacted with an
explanation on the same day and other available options would be explored to
meet your needs. Forty eight hour service is available for an additional [***].
Expedited shipping is available in the event a repair has been completed and you
find you cannot wait for standard carrier service. This fee is [***]. All
repairs are quoted at a flat rate which includes standard freight services
within the USA. Customs brokerage, duties, export fees, etc. are the
responsibility of the customer. Evaluation
- --------------------
*** Confidential Treatment Requested
F-6
<PAGE> 39
without repair, cosmetic repairs, test only and update for operational
equipment are available by special quote. Quotes and RMA's are provided on the
same day if the request is made during business hours, 8 a.m. to 5 p.m., EST.
Messages or faxed requests during off hours will be answered promptly the next
business day.
Obtaining Service
In Warranty and Out of Warranty
To obtain service:
Please have the following information available before you call:
- Company Name and address
- Contact name and telephone number
- Ship to, bill to, and attention to
- Model number and serial number of the unit
- Description of the problem you are experiencing
1. Call the number from the list below, Monday through Friday, between the
hours of 8 a.m. and 5 p.m. EST, excluding holidays, or fax the required
information to:
1-800-772-7691 (Phone, USA and Canada only)
1-813-530-8099 (International)
1-813-530-8690 (Fax)
Telephone or fax messages are accepted 24 hours a day.
2. The Repair Center personnel will provide you with a Return Material
Authorization (RMA) number and a repair cost if applicable. If the unit is
submitted as a warranty repair but it is determined that the defect is not
covered a repair center representative will contact you with a flat rate repair
cost. Work on out of warranty units/defects will not commence until your
purchase order has been received.
3. Pack the unit securely, put the RMA Number# in a visible location on the
outside of the package.
4. Ship the package insured and prepaid to:
Paradyne
Attn.: Repair Center Dock A
8545 126th Avenue North
Largo, Florida 33773
5. Our repair center will update if applicable, repair and return the unit to
you.
E. TRAINING
Other then the training defined in Section 20(a), Paradyne provides the
following MVP Endpoint Product training classes, at a standard rate of $____
per student, per day, with all classes being held in Largo, FL. --
F-7
<PAGE> 40
AGCS will be responsible for all travel and lodging expenses associated with
these training classes.
<TABLE>
<CAPTION>
Training Course Duration
- --------------- --------
<S> <C>
SALES 2 DAYS
OPERATIONS 2-3 DAYS
INSTALLATION & MAINTENANCE 2-3 DAYS
</TABLE>
Note: Paradyne reserves the right to adjust the pricing defined in this
Appendix annually. Prices shown are as of January 1, 1998. Discounts do not
apply to Services Pricing.
F-8
<PAGE> 41
Appendix G
Escrow Agreement
ESCROW AGREEMENT
This Source Material Escrow Agreement ("Escrow Agreement") dated this ____ day
of June __, 1998, is entered into among AG Communication Systems Corporation, a
Delaware corporation, having its principal place of business at 2500 West
Utopia Road, Phoenix, Arizona 85027 ("AGCS"), Paradyne Corporation, a Delaware
corporation, having its principal place of business at 8545 126th Avenue North,
Largo, Florida 33773 ("Company"), and _______________a _______________
corporation, with offices at ____________________ ("Escrow Agent").
WITNESSETH
WHEREAS, Company and AGCS are parties to a Joint Development Agreement dated
_______________ ("Agreement") pursuant to which AGCS has agreed to become a
distributor of Company's End Points product (the "Product") which incorporates
Company's MVP technology; and
WHEREAS, the Agreement provides, among other things, that Company shall place
the source code and related documentation for the Product in escrow, all as
more fully set forth in the Agreement; and
WHEREAS, Escrow Agent has agreed to serve as Escrow Agent for the Product
source code and documentation pursuant to the terms and conditions contained
herein;
NOW, THEREFORE, in consideration of the mutual covenants contained herein, and
for other valuable consideration, the adequacy and receipt of which are hereby
acknowledged, Company, AGCS and Escrow Agent hereby agree as follows.
1. Deposits
(a) Within thirty (30) days after delivery to AGCS of the first commercial unit
of the Product as provided for by the Agreement, Company shall deposit with
Escrow Agent, the source material described on Schedule A (the "Source
Material"), attached hereto and made a part hereof, which Schedule lists
software tapes and other materials and documentation related thereto that
would be reasonably necessary for the manufacture and maintenance of the
Product required to be placed into escrow.
G-1
<PAGE> 42
(b) All additions to the Source Material listed on Schedules A, together with
revisions thereto, shall be deposited into escrow as provided in Section 2
below. The Escrow Agent will issue to Company a receipt for each delivery
of Source Material.
(c) The Source Material held by the Escrow Agent shall remain the exclusive
property of Company. The Escrow Agent shall not use the Source Material or
disclose the same to any third party except as specifically provided for
herein and nothing in this Escrow Agreement shall be construed as a
conveyance by Company of all or any of its rights, title or interest in the
Source Material to the Escrow Agent, except as specifically provided
herein.
(d) The Escrow Agent will hold the Source Material in safekeeping pursuant to
the terms and conditions set forth herein, and act as custodian thereof, at
its offices hereinabove indicated, unless and until the Escrow Agent
receives notice pursuant to the terms of this Escrow Agreement that the
Escrow Agent is to deliver the Source Material to AGCS or Company, in which
case the Escrow Agent shall deliver the Source Material to the party
identified therein, subject, however, to the provisions of this Escrow
Agreement. The Source Material shall be retained by Escrow Agent on its
premises at all times, under the express control of an officer designated
by it, whose identity shall be made known to AGCS and Company promptly upon
designation.
2. Representation of Company to AGCS
(a) Company states that:
(i) The Source Material delivered to Escrow Agent constitutes the most
recent Source Material for the Product; and
(ii) The Source Material delivered to the Escrow Agent will be reviewed,
inspected and supplemented with all revisions, corrections,
enhancements or other changes, as necessary, but at least annually,
at AGCS' request, to ensure its current status for each release
thereof made after the date of this Escrow Agreement. AGCS shall
provide Escrow Agent and Company with at least ten (10) business
days' notice of the date and time of the inspection, which shall be
during normal business hours. Escrow Agent shall make the Source
Material available to Company and AGCS for such inspection.
(iii) Each party shall be responsible for its own costs associated with
any inspection of the Escrow Material.
3. Release from Escrow
3.1 Delivery by Escrow Agent to AGCS.
G-2
<PAGE> 43
Escrow Agent agrees that the Source Material shall be held by it for release
and delivery to AGCS, under the terms and conditions hereinafter set forth, but
only in the event that:
(a) Company notifies Escrow Agent in writing to effect delivery to AGCS at a
specific address or
(b) Escrow Agent has received from AGCS:
(i) written notification that Company is unable to supply Product to
AGCS as required by the Agreement, or to maintain the Product as
required by the Agreement ("Company Default");
(ii) evidence satisfactory to Escrow Agent that AGCS has previously
notified Company of such Company Default in writing;
(iii) a written demand, signed by an elected officer of AGCS, that the
Source Material be released and delivered to AGCS;
(iv) a written undertaking from the AGCS, signed by an elected officer of
AGCS, that the copy of the Source Material being supplied to AGCS
will be used only as permitted under the terms of the License
Agreement;
(v) specific instructions from AGCS for this delivery, and
(c) In the event that the provisions of paragraph 3.1(b) are met, Escrow Agent
shall, within five (5) days of receipt of all of the items specified in
paragraph 3.1(b), send by certified mail a copy of all such documents
received by it to Company. Company shall have thirty (30) days from the
date Escrow Agent shall have sent the documents to Company to send to
Escrow Agent a copy of a temporary or final injunction or temporary
restraining order issued by the court granting such relief prohibiting the
transfer of the Source Material to AGCS. In such a case, the Escrow Agent
will retain the Source Material in its possession. In the event the
injunctions or restraining orders obtained by Company are vacated or
released and AGCS again requests the release of the Escrow Material, AGCS
and Company will repeat the procedures set forth in paragraphs 3.1(b) and
3.1(c) hereof.
(d) If, within thirty (30) days after mailing the items specified in paragraph
3.1(b) to Company, Escrow Agent has not received from Company a copy of the
injunctions or restraining order referred to in paragraph 3.1(c) above,
then Escrow Agent shall release the Source Material to AGCS in accordance
with the instructions specified in paragraph 3.1(b)(v).
3.2 Delivery By Escrow Agent to Company
Escrow Agent shall release and deliver the Source Material to Company upon the
occurrence of any of the following:
G-3
<PAGE> 44
(a) Mutual Termination.
The presentation to Escrow Agent of a written notice of termination,
executed by authorized representatives of Company and AGCS, stating that
this Escrow Agreement has been terminated by the mutual agreement of
Company and AGCS and directing Escrow Agent to release and deliver the
Source Material to Company by a specified method within ten (10) days of a
specified date, or
(b) Non-Payment.
Non-payment of any fees or charges invoiced by Escrow Agent to AGCS. Escrow
Agent shall give notice of non-payment of any fee due and payable hereunder
to both AGCS and Company and, in such event, AGCS shall have the right to
pay the unpaid fee within ten (10) days from the date of receipt of notice
from Escrow Agent. Upon timely payment of the unpaid fee by AGCS, this
Agreement shall continue in force and effect. Should the fee not be paid by
AGCS within the notice period, Escrow Agent shall promptly release the
Source Material to Company upon payment of the unpaid fee to Escrow Agent.
4. Use of Source Material
Upon delivery of the Source Material to AGCS, AGCS agrees that its use (and
modification, as required) of the Source Material shall be strictly limited
to the manufacture, sale and/or license and maintenance of the Product.
AGCS shall not duplicate, sell or license the Source Material to others or
market the Source Material in any manner.
5. Duties and Limited Obligations of Escrow Agent
(a) Escrow Agent shall be under no obligation or responsibility to either
Company or AGCS to determine the existence, relevance, completeness,
accuracy or other aspects of the Source Material or any portions thereof
deposited from time to time by Company. Escrow Agent shall have no
obligation or responsibility to determine whether what is deposited or
accepted by it for deposit is or is not Source Material as defined herein.
Furthermore, this Escrow Agreement shall constitute notice to any third
person or entity who may acquire a right of access to the Source Material
that Escrow Agent's duty is limited as set forth herein and that Escrow
Agent is not liable to any such third person or entity. Company and AGCS
further agree that Escrow Agent shall not be liable for any forgeries or
impersonations concerning any documents of record or other documents it is
handling in its capacity as Escrow Agent.
(b) Escrow Agent agrees to prevent any unauthorized person or persons from
gaining access to the Source Material, except as specifically provided by
this Escrow Agreement.
G-4
<PAGE> 45
(c) Escrow Agent agrees not to use the Source Material for any purpose except
as provided hereunder.
(d) Company and AGCS further agree that if they disagree on any matter
connected with this Escrow Agreement, Escrow Agent will not be required to
settle the matter. If Escrow Agent is made a party to legal proceedings,
Escrow Agent will be entitled to such reasonable compensation for services,
costs and attorneys' fees as may be awarded, which compensation shall be
paid by the non-prevailing party.
6. Limitation of Liability
(a) Escrow Agent agrees to exercise care in protecting the Source Material in
the same manner that it would exercise care in protecting its own trade
secrets and materials of this nature. Except for actual frauds gross
negligence or intentional misconduct, Escrow Agent shall not be liable to
Company or to any party claiming beneficiary status under this Agreement
for an act, or failure to act, by Escrow Agent in connection with this
Agreement. In the event Escrow Agent commits said fraud, gross negligence
or misconduct, Escrow Agent shall be liable for direct and actual provable
damages that result from Escrow Agent's violation of the terms of this
Agreement, but Escrow Agent shall not be liable for special, indirect,
incidental or consequential damages. Notwithstanding anything contained in
this Section to the contrary, in the event Escrow Agent discloses the
Source Material to any party other than Company or AGCS in violation of the
terms of this Agreement, Escrow Agent shall be liable, without limitation,
for any and all damages related thereto or resulting therefrom, including
actual, special, indirect, incidental or consequential damages.
(b) The Escrow Agent shall not be liable for any damages due to causes beyond
its reasonable control, including but not limited to, acts of God.
(c) EXCEPT AS SET FORTH HEREIN, AND EXCEPT FOR ACTS WHICH ARE THE RESULT OF ITS
NEGLIGENCE OR MALFEASANCE, THE ESCROW AGENT DISCLAIMS ALL WARRANTIES,
INCLUDING THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE.
(d) Nothing herein contained shall limit Escrow Agent's liability, if any, to
AGCS or Company for damages directly resulting from Escrow Agent's failure
to perform its duties as set forth in this Escrow Agreement.
7. Indemnification
Company and AGCS agree to indemnify Escrow Agent for and hold it harmless
against, any loss, cost or expense incurred or suffered in connection with,
as a result of, service as Escrow Agent under this Escrow Agreement, except
for any costs or expenses suffered as a result of Escrow Agent's misconduct
or negligence.
G-5
<PAGE> 46
UNLESS SPECIFICALLY SET FORTH HEREIN, IN NO EVENT SHALL EITHER AGCS OR
COMPANY, WHETHER AS A RESULT OF BREACH OF CONTRACT, TORT (INCLUDING
NEGLIGENCE) OR OTHERWISE, HAVE ANY LIABILITY TO THE ESCROW AGENT OR ANY
THIRD PARTY FOR ANY INDIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES.
8. Confidentiality
Escrow Agent and its employees agree to hold confidential the Source
Material and to exercise the same degree of care that a reasonable and
careful company would exercise with similar records of its own.
9. Payment to Escrow Agent
As payment for its services hereunder, the Escrow Agent shall receive
annual charges as set forth in Escrow Agent's Escrow Storage Price List.
The first such annual charges will be paid by AGCS within ten (10) days of
the execution of this Escrow Agreement by all parties hereto. Each year
thereafter, AGCS will pay the appropriate charges on or before the
anniversary of the effective date of this Escrow Agreement. The annual fee
may be adjusted by the Escrow Agent on an annual basis by the lesser of ten
(10%) percent or the change in the Producers Price Index over the preceding
twelve (12) months. The Escrow Agent shall notify AGCS of any such
adjustment to the annual fee at least thirty (30) days prior to the annual
fee due date.
10. Termination
Unless the delivery of the Source Material to AGCS is disputed by Company,
this Escrow Agreement shall terminate: (i) on the delivery of the Source
Material to Company; or (ii) one year from the delivery of the Source
Material to AGCS. This Escrow Agreement may also be terminated by Escrow
Agent, Company or AGCS upon sixty (60) days advance written notice provided
that within fifteen (15) days after delivery of the above-referenced sixty
(60) day notice, a successor escrow agent, (agreed to by AGCS and Company),
has been appointed, and a procedure for the orderly transfer of the Source
Material from the Escrow Agent to the successor escrow agent, has been
formalized and agreed to by all parties.
11. Survival of Provisions
The parties agree that where the context of any provision indicates an
intent that it shall survive the completion, expiration, termination or
cancellation of this Escrow Agreement, then it shall so survive.
12. Notices
G-6
<PAGE> 47
All notice and other communications hereunder or in connection herewith shall
be deemed to have been given if delivered personally or sent by registered or
certified mail in writing, return receipt requested and first class postage
prepaid;
(a) If to AGCS: General Counsel
AG Communication Systems Corporation
2500 West Utopia Road
Phoenix, Arizona 85027
(b) If to Company: General Counsel
Paradyne Corporation
8545 126th Avenue North
Largo, Florida 33773
(c) If to Escrow Agent:
13. Waiver, Amendment or Modification, Severability
This Escrow Agreement shall not be waived, amended or modified except by
the written agreement of all of the parties affected by such waiver,
amendment or modification. Any invalidity, in whole or in part, of any
provision of this Escrow Agreement shall not affect the validity of any
other of its provisions, provided that the invalidity of any such provision
does not affect the intention of the parties with respect to the escrow
established hereunder.
14. Applicable Law and Dispute Resolution
This Escrow Agreement including any dispute which may be brought as a
result hereof, shall be construed and enforced in accordance with the laws
of the State of New York. The dispute resolution and/or arbitration
provisions of the Agreement are not applicable to this Escrow Agreement.
15. Subject Headings
The subject headings of this Escrow Agreement have been placed thereon for
the convenience of the parties and shall not be considered in any question,
interpretation or construction of this Escrow Agreement.
16. Disputes and Interpleader
G-7
<PAGE> 48
(a) In the event of any dispute between Company and AGCS or any third party
claiming beneficiary status under this Agreement, Escrow Agent may submit
this matter to any court of competent jurisdiction in an interpleader or
similar action. Any and all costs incurred by Escrow Agent in connection
therewith shall be borne by the third party seeking a copy of the Source
Material. Without limiting the generality of the foregoing, if Escrow
Agent shall be uncertain as to its duties or rights hereunder, shall
receive any notice, advice, schedule, report, certificate, direction or
other document from any person or entity with respect to the Source
Material, that, in the opinion of the management of Escrow Agent is in
conflict with any of the provisions of this Agreement, or shall be advised
that a dispute has arisen with respect to the ownership or right of
possession of the Source Material or any part thereof, Escrow Agent shall
be entitled, without liability to anyone, to refrain from taking any
action other than to exercise best efforts to keep safely the Source
Material until Escrow Agent shall be directed otherwise in writing by an
order, decree, or judgment of a court of competent jurisdiction that is
then finally affirmed on appeal or that by the lapse of time or otherwise
is no longer subject to appeal, but Escrow Agent shall be under no duty to
institute or defend any such proceeding.
17. Entire Agreement
This Escrow Agreement and referenced Schedules constitute the entire
agreement and understanding of the parties with respect to the escrowed
materials, and herein have merged all prior and collateral
representations, promises or conditions, whether oral or written.
G-8
<PAGE> 49
IN WITNESS WHEREOF, the parties hereto have caused this Escrow Agreement to be
duly executed and delivered by the proper and duly authorized officers of each
party as of the day and year first above written.
PARADYNE CORPORATION AG COMMUNICATION CORPORATION
SYSTEMS
By By
-------------------- --------------------
Name Name
-------------------- --------------------
Title Title
-------------------- --------------------
ESCROW AGENT
By
--------------------
Name
--------------------
Title
--------------------
G-9
<PAGE> 1
EXHIBIT 10.41
PARADYNE
- -------------------------------------------------------------------------------
MARKETING & LICENSE AGREEMENT ***Text Omitted and
BY AND BETWEEN NETSCOUT SYSTEMS, INC. Filed Separately
AND PARADYNE CORPORATION Confidential Treatment
AMENDMENT NUMBER 2 Requested Under
PAGE 1 OF 2 17 C.F.R. Sections
DATE 11/04/98 200.80(b)(4)
200.83 and
230.406
NETSCOUT SYSTEMS, INC.
4 TECHNOLOGY PARK
WESTFORD, MASSACHUSETTS 01886
The Marketing & Licensing Agreement dated and signed January 26, 1998
(hereinafter the "Agreement") by and between NetScout Systems, Inc.
(hereinafter "NetScout") and Paradyne Corporation (hereinafter "Paradyne")
shall be amended as follows:
1. Section 1.8 shall be deleted in its entirety and replaced by the following:
1.8 "Revision" shall mean any correction, modification, maintenance
release, update, enhancement, and/or new version of the Licensed
Product developed solely by NetScout.
2. Section 21.1 shall be deleted in its entirety and replaced by the following:
21.1 Term. The initial term of this Agreement shall be five (5) years from
the date set forth in the first sentence of this Agreement. Prior to
the end of this term, the parties shall meet and negotiate in good
faith an extension of this Agreement. Failing to agree upon such
extension, this Agreement shall terminate one hundred and eighty days
after the initial term. During such 180 day period, and
notwithstanding the terms of Section 2.1.3 of this Agreement, Paradyne
shall in preparation for the termination of the Agreement, have the
right to develop, have developed, market and sell, and/or establish
OEM and/or technology licensing agreements for RMON-based technologies
for the purpose of offering such RMON products to customers to sustain
and enhance the market position of Paradyne's RMON products without
detriment due to the pending or actual termination of the agreement.
3. The following Section 21.9 shall be appended to the Agreement:
21.9 Continuing rights. Notwithstanding anything in this Agreement to the
contrary, in the event of termination under this Section 21 or Section
23.3 of this Agreement Paradyne shall have the right to continue to
use and distribute the Licensed Product as necessary (1) to ship any
outstanding orders, (2) to meet ongoing contractual commitments, and
(3) to meet product requirements of Paradyne customers who have an
installed base of the Resale Products and require continued supply.
Such shipments shall be subject to royalties under Schedule A except
where termination is made necessary due to NetScout's default.
Further, in the event royalties are paid, NetScout shall agree to
provide reasonable continued support for bug fixes and maintenance of
the Licensed Product. Paradyne shall further have the right to use and
distribute the Licensed Product as required to support those Resale
Products having shipped prior to the date of final termination or
under the provisions of this Section.
Paradyne Corporation - PROPRIETARY
Use Pursuant to Company Instructions
Amendment Number 2
Marketing and Licensing Agreement, NetScout Systems, Inc.
11/04/98
Page 1 of 2
<PAGE> 2
All other terms of the Agreement remain the same.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment on the
date(s) set forth below.
PARADYNE CORPORATION NETSCOUT SYSTEMS, INC.
By: /s/ Andrew May By: /s/ Nathan Kalowski
-------------------------------- ----------------------------------
Title: CEO Title: VP, Business Development
----------------------------- -------------------------------
Date: 11/11/98 Date: 11/11/98
----------------------------- -------------------------------
Paradyne Corporation - PROPRIETARY
Use Pursuant to Company Instructions
Amendment Number 2
Marketing and Licensing Agreement, NetScout Systems, Inc.
11/04/98
Page 2 of 2
<PAGE> 3
[PARADYNE LOGO]
________________________________________________________________________________
Marketing & License Agreement
By and Between NetScout Systems,
Inc. and Paradyne Corporation
Amendment Number 1
Page 1 of 10
Date 03/__/98
NetScout Systems, Inc.
4 Technology Park
Westford, Massachusetts 01886
Marketing & License Agreement dated and signed January 26, 1998 by and between
NetScout Systems, Inc. and Paradyne Corporation will be amended as follows:
1. Section 1.13: Add the words "or a unique customer application" before "that
cannot be resolved by Paradyne."
2. Section 3.1.3: Add the words "and its Authorized Service Providers" after
the word "Paradyne."
3. Section 3.1.4: Add the words "and Paradyne's Authorized Service Providers"
before the word "Customers."
4. Section 6.1: Add the words "for Licensed Product and Resale Product" before
the words "via a telephone support service as set forth in Exhibit D."
After the words "a paging service after hours, on weekends and holidays"
add the following sentence: "NetScout will make best efforts to reply to
the page within one (1) hour." Change reference to "Tier 1 and Tier 2
Support" to "Tier 3 Support."
5. Section 6.4: Delete last sentence and replace with the following sentence:
"In the event NetScout discontinues manufacture and license of the Licensed
Product, NetScout agrees to continue support and maintenance services for a
period of one (1) year for the software and for the period of five (5)
years for the hardware from such discontinuance.
6. Section 7.1: Add the following at the end of Section 7.1: "Exhibit F
outlines training classes, their locations, costs (if applicable), length
of courses, and complete description of the courses. In the event that
there are seats available for any of the above-mentioned training that are
unfilled by Paradyne employees, such seats may be filled by Paradyne's
Authorized Service Providers."
7. Section 8.2: Add the words "and Authorized Service Provider evaluations"
after the words "sales demonstrations."
Paradyne Corporation - PROPRIETARY
Use Pursuant to Company Instructions
Marketing & License Agreement, NetScout Systems, Inc.
Amendment Number 1
<PAGE> 4
8. Section 8.3: Add the word "day" after "ninety (90)."
9. Section 11.1: Delete the entire last sentence and replace with the
following: "Notwithstanding the preceding sentence, in the event Paradyne
elects to price the RMON feature set separately, the NetScout royalty shall
be the [***] percent [(***%)] of the Paradyne price for the RMON feature or
[***] for each version of embedded RMON as listed in Exhibit A."
10. Section 12.3: Replace entire section as follows: "Purchase Orders. Resale
Product orders may be made via purchase orders, or customer drop ship orders
confirmed in writing by facsimile. Purchase orders shall include the
following details: Paradyne's part number for NetScout's products,
description, quantity, destination, delivery date(s), PO dollar total,
preferred shipper and customer number for billing."
Additionally, add the following paragraphs:
"At Buyer's request Seller shall drop ship orders for product to Buyer or
Buyer's customer at locations specified by purchase orders as defined,
above."
"NetScout will provide proof of delivery for all shipments to Paradyne's
customers, if requested by Paradyne and if specified shipper provides same
upon request from NetScout. NetScout will not ship any of Paradyne's
purchase order short of any parts on the purchase order without the approval
of Paradyne."
"Shipment Acknowledgment"
"Seller will provide Buyer with a shipment acknowledgment form within
twenty-four (24) hours of the shipment to the Buyer or Buyer's customer.
Seller will include, at a minimum, the serial number of the unit, the date
shipped, the part number and quantity shipped, the carrier name, and the
waybill number on the shipment acknowledgment form."
"At no time may NetScout reschedule any previously committed ship dates
without ten (10) days advance written authorization by Paradyne."
11. Add "Section 12.13 Forecast, Buyer will provide a rolling monthly forecast
of Buyer's demand for the Product with visibility for the next six (6)
months. This forecast will be for planning purposes only."
12. Section 12.4: Delete the second sentence and replace it as follows:
"NetScout's normal lead-time for NetScout Resale hardware products is
twenty-one (21) days from order replacement. NetScout's normal lead-time for
NetScout Resale software products is seven (7) days from order placement.
Paradyne Corporation - PROPRIETARY
Use Pursuant to Company Instructions
Marketing & License Agreement, NetScout Systems, Inc.
Amendment Number 1
- --------------------
*** Confidential Treatment Requested
<PAGE> 5
13. Section 12.5: Replace in its entirety with the following:
"Cancellation/Reschedule. Paradyne reserves the right to reschedule or
cancel PO's or parts of PO's without penalty, provided that the requested
reschedule or cancellation is made more than ten (10) days from the
scheduled delivery of the products. Any cancellation requests made inside
the ten (10) day window shall be subject to [***] percent [(***%)]
cancellation fee. Paradyne also reserves the right to reschedule PO's or
parts of PO's within ten (10) days of the scheduled delivery date provided
that the requested delivery date does not extend beyond ninety (90) days
from the original scheduled delivery date."
14. Section 12.6: Add "(subject to Section 17.1, Product Discontinuance)"
after "attached price list" in the first sentence.
15. Section 12.7: Delete paragraph one in its entirety and replace as follows:
NetScout warrants the Resale Products for a period of one (1) year from a
Customer's acceptance and that the Resale Products will be free from
defects in material and workmanship. Paradyne's inspection, approval,
acceptance, use of or payment for all or any such Resale Product shall be
deemed not to constitute a waiver of any warranty or of any term or
condition hereof. NetScout shall repair or replace, at no charge, any
Resale Products returned to NetScout during the warranty period. In the
event that the above remedies are not reasonably available, NetScout shall
refund the purchase price. This is NetScout's sole remedy to Paradyne
and/or End Users under this Agreement for warranty claims.
Add the words, "EXCEPT FOR THE SECTION ENTITLED "EPIDEMIC", before the
words "THE WARRANTIES MADE IN THIS PARAGRAPH ARE MADE IN LIEU OF ALL OTHER
EXPRESS WARRANTIES, WHETHER ORAL OR WRITTEN."
16. Section 12.10: Change "thirty (30) business days" to "forty-five (45)
business days" and add ", and will make best efforts to provide within
thirty (30) days of the close of each calendar quarter," before "Point of
Sale...." Add "the state or the" before the word "zip" in the last
sentence.
17. Section 12.11: Add "or its designated Authorized Service Provider" after
the word "Paradyne" in the first sentence. Add this sentence at the end of
this section: "In addition, out of warranty maintenance agreements for the
Resale Products may be offered by Paradyne's Authorized Service Providers."
18. Add Section 12.14 Repair Period: "Seller will effect the
repair/replacement and return the item(s) to Buyer within fifteen (15)
days after receipt of the defective item(s); however, Seller will respond
to emergency situations by immediately shipping Product on hand within
forty-eight (48) hours. At the cost identified in Exhibit D, Seller agrees
to repair or replace a particular type of Product for a period of five
Paradyne Corporation - PROPRIETARY
Use Pursuant to Company Instructions
Marketing & License Agreement, NetScout Systems, Inc.
Amendment Number 1
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*** Confidential Treatment Requested
<PAGE> 6
(5) years following delivery of the last unit of such Product delivered
under this Agreement. Seller agrees to provide and maintain an adequate
stock of parts peculiar to the Product during this time to effect such
repair."
19. Add "Section 12.15 Quality: The Resale Products shall meet the quality
requirements of Exhibit E of this Agreement.
20. Section 18.4: Delete last sentence and replace with "However, such rights
will not become effective until such time as NetScout dissolves or ceases
to do business.
21. Section 18.5: Change reference to "Section 21, Termination" to read
"Section 21, Term and Termination."
22. Section 18: Add sub-section, Agreement to Negotiate Rights to the Resale
Produce:" Under the following conditions the parties agree to enter into
good faith negotiations for Paradyne to acquire the rights to manufacture,
further develop, market, service and sell NetScout Resale Products.
Discontinuance of the Resale Products defined in Exhibit A, provided
no functionally equivalent substitute is made available at or below
the specified price.
NetScout becomes insolvent, or ceases to honor its commitment to
deliver products under the terms of this Agreement.
Material Breach of this Agreement by NetScout that is not cured within
the time period as specified in Section 21, Term and Termination.
Notwithstanding the foregoing, the obligations of NetScout under this
Section are conditional upon Paradyne's ability to secure such
manufacturing usage licenses or other proprietary rights of third
parties, if any, as may be required to manufacture such Product.
NetScout agrees to provide reasonable assistance to Paradyne to secure
such rights."
23. EXHIBIT D: Add "and its Authorized Service Providers" after the word
"Paradyne" in the first sentence. Within the heading "Repair & Maintenance
Charges add "applicable to Paradyne and its Authorized Service Providers"
before the words "(single repair)". Within the heading "Maintenance
Agreements (h/w & s/w)" add "available to Paradyne and its Authorized
Service Providers". Under the heading "Repair Services" delete the last
sentence and replace with "Paradyne or Paradyne's customer shall be
responsible for transportation expenses to NetScout's facilities and
NetScout will be responsible for transportation expenses back to Paradyne
or Paradyne's customer." Under the heading "Priority Shipments" change
"twenty-four (24) hours" to "forty-eight (48) hours."
24. The Quality Agreement by and between the parties shall be attached hereto
and made a part of this Agreement as Exhibit E.
Paradyne Corporation - PROPRIETARY
Use Pursuant to Company Instructions
Marketing & License Agreement, NetScout Systems, Inc.
Amendment Number 1
<PAGE> 7
25. All other terms and conditions of the above stated Agreement remain
unchanged.
26. SIGNATURE
IN WITNESS WHEREOF, the parties hereto have executed this Amendment on the
date(s) set forth below.
PARADYNE CORPORATION NETSCOUT SYSTEMS, INC.
By: /s/ J. Slattery By: /s/ Nathan Kalowski
--------------------------------- ------------------------------
Title: SVP Title: VP Business Development
------------------------------ ---------------------------
Date: 3/20/98 Date: 4/22/98
------------------------------- ---------------------------
Paradyne Corporation - PROPRIETARY
Use Pursuant to Company Instructions
Marketing & License Agreement, NetScout Systems, Inc.
Amendment Number 1
<PAGE> 8
EXHIBIT E
QUALITY
1.0 QUALITY ASSURANCE
Notwithstanding the post-acceptance obligations of Seller, Buyer has a
significant interest in the quality of the Product. Because the Product has a
useful life expectancy greater than the warranty obligation period and because
of the good will lost by malfunctioning Products, even though they may be
corrected at Seller's expense, it is agreed by Buyer and Seller that without
limiting or abridging Buyers rights to inspect the Product prior to acceptance
or Seller's post-acceptance obligations, the following provisions shall apply
to ensure acceptable quality for Products manufactured for Buyer under the
terms of this Agreement:
1.1 QUALITY CONTROL MONITORING & SOURCE INSPECTION
Buyer reserves the right, at any time during the term of this agreement,
with five (5) calendar days prior notice and subject to product availability,
to place one or more personnel in SELLER facilities to carry out inspection and
acceptance tests, process certifications, review of quality data, and other
functions Buyer may deem reasonably necessary to maintain quality objectives.
Personnel authorized by Buyer shall be empowered to reject the material
intended for the delivery to Customers in the event that such material fails to
meet required specifications or acceptance tests. In the event that the
Representative ascertains that an item of Product is defective, said
Representative will advise Seller's authorized personnel and such defect shall
be remedied prior to shipment. Rejected lots (or Products) will then be
corrected and re-submitted for re-inspection at Seller's expense.
Buyer may, at its option, implement a sampling inspection with lot
rejection in accordance with an appropriate sampling plan and inspection
procedure to be accomplished at Seller's facility. If any inspection or test is
made on Seller's premises, Seller shall, without additional charge, provide all
reasonable facilities and assistance for the safety and convenience of Buyer's
inspector subject to the security and safety regulations existing at the
facilities.
1.2 ACCEPTANCE TESTS
Acceptance test procedures for final manufacturing testing and for product
acceptance purposes will be mutually agreed upon buy the Buyer and Seller.
1.3 WORKMANSHIP STANDARDS
All Products shall be in compliance with the Buyer's workmanship
standards, IPC-A-610, as a minimum criteria of workmanship.
1.4 QUALITY CONTROL SYSTEM & ISO 9000 COMPLIANCE
Seller shall maintain the quality control system mutually agreed upon at
the Effective Date of this contract and as specified in the Specifications.
Seller shall, with every reasonable and timely effort, apply for and/or maintain
ISO 9001 registration. Seller is expected to use its reasonable best efforts to
attain and maintain acceptable ratings resulting from any future quality system
assessments.
Paradyne Corporation - PROPRIETARY
Use Pursuant to Company Instructions
Marketing & License Agreement, NetScout Systems, Inc.
Amendment Number 1
<PAGE> 9
1.5 SELLER/BUYER CONTINUOUS IMPROVEMENT EFFORTS
Buyer and Seller mutually agree to develop a continuous improvement plan in
an effort to reduce overall costs and improve Quality in both Processes and
Products that will mutually benefit both parties in the areas of:
a. On Time Shipments as measured by requirements set forth in Contract.
b. Repair Data, including DOAs, Infant mortality and Root Cause Analysis.
c. Electronic Data Interchange (EDI).
d. Utilizing freight carriers designated by Buyer in Buyer's Corporate
Routing Guide.
1.6 NOTIFICATION OF QUALITY ISSUES
Buyer is to be notified within 24 hours of catastrophic failures affecting
customer safety or equipment performance of Buyer equipment. These failures
include, but are not limited to, Product failures which greatly exceed the
normal failure rate of Buyer product, or line down conditions at SELLER which
may impact the timely shipment or quality of Buyer products. Buyer product
produced at SELLER must maintain a demonstrated confirmed DOA defect rate not
exceeding SELLER supplied MTBF calculations for Product.
1.7 CORRECTIVE ACTION FOR QUALITY ISSUES
SELLER is expected to maintain a functioning and documented Quality system
to provide timely and effective corrective action(s) regarding quality issues.
Upon request from Buyer, SELLER is to determine the root cause of quality
defects, ensure that these defects are prevented from shipping to customers, and
provide effective corrective action to prevent the recurrence of these, or
similar, defects. Buyer reserves the right to stop shipment of Buyer product
from SELLER facilities until such actions deemed necessary to corrective the
defect have been completed.
1.8 INSPECTION AT DESIGNATED DELIVERY LOCATION
Within 30 days of the receipt of any Product at its designated delivery
location, Buyer may submit such Product to the criteria as set forth in the
agreed upon Specifications. Buyer shall be entitled to reject any product that
fails to conform to the Purchase Specifications. Notice of any such rejection
shall be issued within five (5) business days by Buyer to Seller.
Upon rejection, Buyer will notify Seller of such rejection and cause for
rejection and return the entire shipment or any portion, to Seller. Seller
accepts all cost of rejected lost shipping charges back to Seller and Buyer, any
insurance costs, all risk of loss [F.O.B. Destination], and for rejected
Products. If Seller does not receive such notice of any such rejection from
Buyer within thirty [30] calendar days after shipment of Product, such Product
shall be deemed accepted by Buyer for purposes of this Section of this
agreement. Any Products returned under this Section of the agreement will be
shipped by a carrier selected by Seller, or Seller will be liable for freight
charges at a rate equivalent to Buyer's documented freight rates. If it is
determined that any Products returned by Buyer under this Section of this
agreement are conforming to the Specification then (i) Seller shall utilize such
Products for Buyer's releases and Buyer shall, notwithstanding anything to the
contrary in this Section, pay for the expenses associated with Buyers original
return of such Products to Seller under this Section. Notwithstanding the
foregoing, damage to Products caused by Buyer's Shipper shall not be considered
a nonconformity to the Specification.
1.9 FIRST INSTALL SUPPORT
Seller will provide, at Buyer's request, at locations selected by Buyer and
at no cost to Buyer, technically competent personnel and any necessary spare
parts to assist in the identification and resolution of any performance problems
which jeopardize the progress of the installations of the Product in the
continental United States. Seller will also provide, at Buyer's request, any
performance information available which could assist Buyer in an evaluation of
Product performance.
Paradyne Corporation - PROPRIETARY
Use Pursuant to Company Instructions
Marketing & License Agreement, NetScout Systems, Inc.
Amendment Number 1
<PAGE> 10
EXHIBIT F
NETSCOUT TRAINING
The following is a list of available NetScout Training Classes:
Available through March 31, 1998 from NetScout Training Department:
NETSCOUT MANAGER 5.0 - 3 DAY CLASS. STANDARD TUITION: $[***] PER STUDENT
This course is intended to provide network administrators and support
specialists with the knowledge and skills needed to extract the extensive
network monitoring data available through the deployment of NetScout
Manager in combination with NetScout RMON and Enterprise RMON probes.
At the conclusion of the class, participants will be able to:
Install and configure NetScout probes and NetScout Manager
Configure report data polling, report templates, and produce reports
created from polled data
Understand how RMON is used in managing and monitoring Ethernet, Fast
Ethernet, CDDI, FDDI, Token Ring, WAN and switched networks.
NETSCOUT WEBCAST - 1 DAY CLASS. STANDARD TUITION: $[***] PER STUDENT
At the conclusion of the class, participants will be able to:
Install and configure NetScout WebCast Software
Configure report data, report templates, and product reports created
from NetScout SQL database over the Web.
Starting April 1 Chesapeake will be NetScout's Authorized Training Partner
and the above two classes will be combined into
NETSCOUT MANAGER 5.0/WEBCAST TRAINING - 4 DAY CLASS, STANDARD TUITION $[***]
Starting April 1 NetScout will begin offering a class for partners such as
Paradyne:
NETSCOUT MANAGER FOR PARTNERS - 2 DAY CLASS, STANDARD TUITION $[***]
This course is intended to provide partner sales, sales engineers and
service support specialists with the knowledge and skills needed to extract
the extensive network monitoring data available through the deployment of
NetScout Manager in combination with NetScout RMON and Enterprise RMON
probes.
At the conclusion of the class, participants will be able to:
Use NetScout Manager to monitor network problems. The direction of
this new class will be to solve problems. It will be workstation
independent working more with the functionality of monitoring network
segments and trouble shooting problems, less on how to do the basics
such as installation and Unix command line actions.
NETSCOUT MANAGER ADVANCED TRAINING - 5 DAY CLASS, STANDARD TUITION $[***]
(Starting in May)
This course is intended to provide partner Technical Assistance Center
support specialists and Trainers
with the knowledge and skills needed
to provide first and second level TAC support to customers
Paradyne Corporation - PROPRIETARY
Use Pursuant to Company Instructions
Marketing & License Agreement, NetScout Systems, Inc.
Amendment Number 1
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*** Confidential Treatment Requested
<PAGE> 11
and authorized distributors and to Trainers developing course
materials and may be required to answer questions and use NetScout
Manager in ways not covered in a basic class.
Paradyne Corporation - PROPRIETARY
Use Pursuant to Company Instructions
Marketing & License Agreement, NetScout Systems, Inc.
Amendment Number 1
<PAGE> 12
MARKETING & LICENSE AGREEMENT
BY AND BETWEEN
NETSCOUT SYSTEMS, INC.
AND
PARADYNE CORPORATION
January 26, 1998
<PAGE> 13
This Marketing & License Agreement ("Agreement") is made this 26th day of
January, 1998, by and between NetScout Systems, Inc., a Delaware corporation
having its principal place of business at 4 Technology Park, Westford, MA 01886
("NetScout") and Paradyne Corporation, a Delaware corporation having its
principal place of business at 8545 126th Avenue North, PO Box 2826, Largo, FL
34649-2826 ("Paradyne"), (mutually hereinafter referred to as the "Parties").
WHEREAS, NetScout and Paradyne have entered into a memorandum of understanding,
dated December 2, 1997 ("MOU"), for the purpose of summarizing the discussion
between the Parties concerning the integration and co-marketing of each other's
products and technologies; and
WHEREAS, the MOU further sets forth the agreement of the Parties respecting the
arrangement, engineering commitments, training, support, licensing and
royalties obligations; and
WHEREAS, it is the Parties' intentions to enter into a definitive written
agreement no later than thirty (30) days from the date of the MOU, which shall
incorporate the terms and conditions governing such activities as set forth in
the MOU, and shall further define and establish the respective
responsibilities, obligations and rights concerning the transactions associated
with such activities and contemplated by the Parties hereunder, and
WHEREAS, it is the Parties intentions to enter into good faith negotiations to
complete an amendment to this Agreement incorporating mutually acceptable
manufacturing terms within thirty (30) days of the signing of this Agreement.
Now, in consideration of the covenants and premises contained herein, the
parties agree as follows:
1 Definitions
The following words, terms or phrases, where initialized with a capital
letter, shall have the meanings indicated in this section.
1.1 "Affiliate" shall mean an entity that controls, is controlled by or is
under common control with Paradyne (with "control" meaning ownership
of more than fifty percent (50%) of the voting stock of the entity or,
in the case of a non-corporate entity, an equivalent interest).
1.2 "Business Day" shall mean Monday through Friday, excluding local
holidays.
1.3 "Documentation" shall mean a functional description of the Licensed
Product, direction for installation, and use, and any other
explanatory material necessary for a user to perform all of the
functions of the Licensed Product.
1.4 "Customer" for the purpose of this Agreement shall mean the person(s)
or entity properly licensed to use the Licensed Product."
1.5 "Licensed Product" shall mean any NetScout software product/NetScout
RMON feature set embedded into a Paradyne Hardware product (English
and all Foreign Language versions), in object code form, all future
Revisions to such Licensed Product, and all Documentation associated
with such Licensed Product.
1.6 "Paradyne" shall include its Affiliates.
1.7 "Problem" shall mean a demonstrable instance of adverse and incorrect
operation of a Licensed Product due to a material non-conformance to
the Licensed Product's specification or Documentation.
1.7 "Resale Product" shall have the meanings as set forth in Exhibit B.
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<PAGE> 14
1.8 "Revision" shall mean any correction, modification, maintenance
release, update, enhancement, and/or new version of the Licensed Product.
1.9 "Software" shall mean all computer programs, databases and
firmware, (i) embedded in the Products or (ii) sold on a stand-alone basis as
Products, and all Documentation and technical specifications associated
therewith.
1.10 "Source Code" shall mean (i) all Software source code which has
been provided by NetScout (including from time to time each upgrade, enhancement
or other modification), together with, to the extent in existence, (A) any
pertinent commentary or explanation that may be necessary to render such Source
Code understandable and usable by a trained computer-programming expert, (B)
such system documentation, statements of principles of operation and schematics
as are necessary or useful for the effective understanding of such Source Code,
and (C) all devices, programming or documentation (including compilers,
workbenches, tools and higher-level proprietary languages) employed by NetScout
for the development, maintenance and implementation of such Source Code.
1.11 "Tier 1 Support" shall mean the services provided by Paradyne in
response to a Customer's initial notification of a suspected Problem.
1.12 "Tier 2 Support" shall mean the provision of diagnostics provided
by Paradyne to determine the severity of the Problem, attempt to reproduce and
correct the suspected Problem, or determine that the Problem cannot be
reproduced.
1.13 "Tier 3 Support" shall mean the provision of backup technical
and/or engineering services by NetScout the resolve a Problem that has been
determined to be, or is highly probable to be, the result of a design or
manufacturing defect that cannot be resolved by Paradyne.
2. THE ARRANGEMENT
2.1 Paradyne agrees, during the term of the Agreement, to conform to
the following:
2.1.1 to exclusively utilize NetScout's RMON network
management Software and related agent Software
applications in/with its RMON products during the term
of this Agreement; and
2.1.2 to market and offer for sale to customers the NetScout
Manager Plus Software and other NetScout software
modules as available, and exclusively recommend for
sale to customers head end probes in all FrameSaver
FRAUs with RMON technology networks, excepting sales to
customers whose RMON technology networks incorporate
hardware or software which has been purchased form
other source (e.g. through Cisco); and
2.1.3 not to: (i) directly or indirectly develop RMON-based
technologies which are competitive to NetScout, (ii)
position the FrameSaver or any other Paradyne product
as a probe; (iii) incorporate RMON support in any of
their network management platforms; or (iv)
manufacture, OEM or acquire third party probe products
for the purpose of offering such products to customers
as competitive products to NetScout's probes
2.2 NetScout agrees, during the term of the Agreement, to conform to
the following:
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<PAGE> 15
2.2.1 to reference Paradyne as a strategic partner for DSU's,
DSL's and Multiplexers; and
2.2.2 to provide Paradyne preference when sourcing DSU's or
integration of DSU technology into NetScout probe products,
provided Paradyne is meeting its obligations under this
Agreement and Paradyne's proposal is market competitive and
meets NetScout's functional specifications as defined by
NetScout's timely delivered Request for Proposal.
3. LICENSE
3.1 In accordance with the terms and conditions of this Agreement, Net
grants to Paradyne, and Paradyne accepts from NetScout, a worldwide,
perpetual, non-exclusive right and license to promote, market, sell,
license and distribute the Licensed Product as set out below. The
following terms and conditions govern the license granted by
NetScout, and NetScout's obligations thereunder.
3.1.1 NetScout has, upon execution of the MOU, provided Paradyne
with the Source Code for the Licensed Product for the
limited purpose of enabling Paradyne to port/embed the
following groups of RMON into its FrameSaver endpoint
devices:
3.1.1.1 RMON 1 - Statistics Group; RMON 1 - Alarm Group;
RMON 1 - Events Group; RMON 2 TOPN - IP Layer Host
Group, RMON 2 - Protocol Director Group; RMON 2 -
Protocol Distribution Group; NetScout WAN
Enterprise Extensions; and RMON 2 - User History
Group.
3.1.1.2 Paradyne shall further implement enhancements to
its FrameSaver FRAU's to provide mutually agreed
to MIB extensions which shall allow NetScouts
Manager Software access to Paradyne's patented
technology. Such patented technology provides
non-disruptive real-time monitoring of frame relay
parameters (e.g. latency on a per DLCI basis,
dropped packets and mapping of DLCI's to remote
end points.).
3.1.1.3 Paradyne expressly agrees to treat the Licensed
Product Source Code with the same degree of care
that Paradyne treats its own confidential source
code. Paradyne shall limit access to the Source
Code for the Licensed Product to Paradyne
employees to the extent that such employees need
access to perform their respective duties related
to embedding of the Licensed Product in
Paradyne's Framesaver endpoint devices.
3.1.2 Paradyne shall include license terms and conditions
substantially similar to those set forth in Exhibit C with
each Licensed Product sold.
3.1.3 Paradyne may use the Licensed Product for support
evaluation, maintenance, and other activities connected with
service of the Licensed Product including, without
limitation, the provision of updates and Revisions to
Customers.
3.1.4 Paradyne may copy and distribute Documentation for the
Licensed Product. Paradyne agrees to maintain NetScout's
copyright notices or
Marketing & License Agreement Paradyne and NetScout Confidential page 3
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<PAGE> 16
trademarks on all copies of Documentation that is
distributed to Customers.
3.1.5 Paradyne agrees: (i) not to create or attempt to create by
reverse engineering, disassembly, decompilation or
otherwise, the source code or internal structure, or
organization of the Products, or any part thereof, from any
object code or information that may be made available to
it, or aid, abet or permit others to do so; and (ii) not to
remove any Product identification or notices of any
proprietary or copyright restrictions from the Product or
any support material, except for one (1) archival copy.
3.1.6 Paradyne is prohibited from making any modifications,
adaptations, enhancements, changes, or derivative works of
the Licensed Product unless authorized in writing by
NetScout. Notwithstanding the preceding sentence, Paradyne
is expressly authorized to perform whatever work is
necessary or advisable by NetScout to embed the Licensed
Product in Paradyne's FrameSaver products as defined below.
To the extent NetScout authorizes the development of
derivative works, Paradyne shall thereafter retain title to
the derivative work developed by or on behalf of Paradyne,
provided that NetScout shall retain title to the underlying
work upon which such derivative work is based.
4 TITLE AND RIGHTS TO THE LICENSED PRODUCT
4.1 The Licensed Product and Revisions to the Licensed Product are
proprietary to NetScout, and NetScout shall retain all right,
title and interest in and to the Licensed Product including all
rights under applicable patents, copyrights, trademarks and
trade secrets, and to any foreign language version of the
Licensed Product developed or acquired by NetScout.
4.2 NetScout represents that it has at the time of execution of this
Agreement, and will continue to maintain during the term of this
Agreement, the full right and authority to grant this license,
and that neither this license nor performance under this
Agreement does or shall conflict with any other agreement or
obligation to which NetScout is a party or by which it is bound.
4.3 To the extent necessary to give effect to this Agreement, the
licenses granted to Paradyne shall include rights under any
applicable patents, copyrights, trademarks and trade secrets
belonging to NetScout or which NetScout has acquired or may
acquire.
4.4 Paradyne agrees to include NetScout's copyright notice on all
copies of the Licensed Product in substantially the following
form: "portions of this software licensed by NetScout Software,
Inc., Westford, Massachusetts, Copyright(c) [NetScout(TM)] 19__,
All rights reserves."
5. ENGINEERING REQUIREMENTS
5.1 In consideration of Paradyne's purchase obligation as defined
below, NetScout agrees to perform the following engineering
services:
5.1.1 to co-develop the revised RMON User History Group for
support of Paradyne's standard and enterprise MIB's;
Marketing & License Agreement Paradyne and NetScout Confidential page 4
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<PAGE> 17
5.1.2 to deliver the device code for RMON User History Group
capability prior to the alpha availability of the
NetScout agent code version 4.5;
5.1.3 to deliver the updated NetScout Manager Plus Software
that supports configuration and graphical display of the
RMON User History Group capability prior to the beta
availability of the NetScout Manager Software, version 5.5.
5.1.4 NetScout agrees to negotiate in good faith any engineering
changes requested by Paradyne which represent changes in
functionality of the Products not currently included in
NetScout's specifications and user manuals, and not
addressed in NetScout's future development plans may be
identified by NetScout under non-disclosure during business
reviews. NetScout's decision to incorporate any such
engineering changes will be primarily based on Paradyne's
projected sales forecast for such functionally modified
products and the expense to institute the proposed changes.
5.2 NetScout further agrees to provide engineering consulting services to
Paradyne at a rate of [***] dollars per month ($[***] month)
during the porting of the Licensed Product into the Paradyne
FrameSaver endpoint devices. The recommended approach for such
engineering consulting services shall be for Paradyne to bring their
engineering environment to NetScout's facilities to enable Paradyne's
engineers to work more closely with NetScout's engineers and
resources (e.g. QA, testing labs, etc.).
5.3 Epidemic Failure. As a result of the limited purchase volumes
forecasted during the Initial Term of the Agreement, NetScout shall
not establish a definitive position regarding percentages, penalties
and/or specific action plans to address "Epidemic" failures which may
occur during the term of this Agreement. NetScout agrees, however, in
the event that Paradyne or its Customers identify an unreasonably
excessive amount of defective, failed or dead on arrival ("DOA")
products during any quarterly period, to establish an action plan to
effect an immediate remedy to the problem. NetScout further agrees to
provide on-site technical support and all necessary parts to repair
or replace product known to be affected by such Epidemic, and to use
commercially reasonable efforts to ensure that the appropriate
quality controls and other measures are taken so that all product of
similar type supplied subsequent to the date of such an Epidemic
shall be free from the problems which caused the Epidemic.
6. TECHNICAL SUPPORT
6.1 NetScout agrees to provide Tier 3 Support via a telephone
support service as set forth in Exhibit D. The telephone support
service will be delivered by a NetScout support person during
NetScout's normal working hours (8 am - 6 pm, EST.), and a best
effort paging service after hours, on weekends and holidays.
Paradyne shall pay a fee of [***] ($[***]) annually, billed
quarterly, for the first year of Tier 1 and 2 Support; fees for
years 2 and 3 and any subsequent extensions of the Agreement shall
be mutually determined thirty (30) days prior to the expiration of
the then current year. Fee considerations shall include a range of
[***] percent ([***]%) of install base dollar and escalation call
volumes.
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6.2 NetScout will provide Paradyne with updates and Revisions to Licensed
Product at the time NetScout makes such updates and Revisions for
beta to enable Paradyne to meet its Customer support requirements.
6.3 Thirty (30) days prior to the date of public distribution of a
Revision, NetScout will, if applicable, provide the source code of
such Revision to Paradyne to enable Paradyne to port/embed the
Revision to the FrameSaver endpoint devices. NetScout will make best
efforts to provide written notification to Paradyne at least
forty-five (45) days prior to any new release or new version of the
Licensed Product, or any change in the Licensed Product that would
materially affect its performance in the FrameSaver endpoint devices.
6.4 NetScout will support and maintain the most current version and one
(1) version immediately preceding the then most current version of
the Licensed Product as modified to run in the FrameSaver end point
devices. Such support and maintenance will be provided for the term
of this Agreement. In the event NetScout discontinues manufacture and
license of the Licensed Product, NetScout agrees to continue support
and maintenance services for a period of one (1) year from such
discontinuance.
7 TRAINING
7.1 NetScout agrees to provide initial Product training for a mutually
determined numbers of Paradyne employees at NetScout's Westford, MA
location. The initial training shall be provided at no charge,
excluding payment of travel and lodging of Paradyne's employees.
NetScout further agrees to provide no charge training (excluding
payment of travel and lodging of Paradyne's employees) for up to ten
(10) Paradyne employees prior to each major Software release.
Additional students may be added to the Software release training
classes at NetScout's published rates. Any other training required
beyond the initial and major release training will be performed at
NetScout's published rates. It is recommended that "train the
trainer" personnel participate in the initial and/or major release
training to support an efficient and cost effective training roll-out.
8 SALES DEMONSTRATION PRODUCTS
8.1 Paradyne shall procure, at the applicable hardware resale discounts,
a mutually determined number of hardware Products to be used for
sales, Customer demonstration and Beta Test purposes.
8.2 Paradyne shall procure, at a cost of [ *** ] dollars ($[ *** ]) per
copy, a mutually determined number of NetScout Manager Plus Software
packages to be used for sales demonstrations. Paradyne will keep such
demonstration Software current by procuring additional Software for
each Major release developed by NetScout. NetScout shall issue a
permanent license for each demonstration Software product purchased.
Paradyne shall be responsible for maintaining the licenses (serial
tracking and platform designations), and shall identify the serial
number and product platform (e.g. Unix or NT) when ordering upgrades
for the Software product.
8.3 Paradyne shall procure, at a cost of [***] dollars ($[*** ]) per copy,
a mutually determined number of NetScout Manager Plus Software
packages to be used for Customer evaluations. Paradyne will keep such
evaluation Software
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current by procuring additional Software for each Major release
developed by NetScout. NetScout shall issue a limited ninety
(90) license for such Software product purchased. Such license
may only be extended by express written approval by NetScout.
8.4 The fee paid by Paradyne for demonstration and evaluation
Software products shall cover the cost of the CD, Documentation,
order processing and administration. Software product orders
shall comply with the purchase order process defined hereinbelow.
9 MARKETING
9.1 NetScout will assist Paradyne, as necessary, to develop
marketing materials to promote the sale of the FrameSaver end
point devices that contain the Licensed Product.
9.2 Paradyne agrees to allocate sufficient funding to complete
twelve (12) seminars per year and to institute direct mail
programs.
9.3 NetScout grants Paradyne the right and license to use NetScout's
name and trademarks in connection with the marketing and sale of
the FrameSaver products, the Licensed Product, and Resale
Products (NetScout Manager Plus and NetScout probes).
10 DOCUMENTATION
10.1 NetScout will provide sufficient copies of its Documentation,
including any applicable copies in electronic form, to enable
Paradyne to incorporate printed copies of the end user
Documentation with each FrameSaver product shipment. The
Documentation may be distributed either as a standalone manual
or in conjunction with Paradyne's standard documentation,
provided, however, that NetScout's proprietary markings remain in
place and are clearly marked. NetScout retains all underlying
rights and ownership to any pre-existing Documentation that may
be utilized by Paradyne to create end user marketing, sales and
technical documentation for the FrameSaver products.
10.2 NetScout grants Paradyne the right to copy NetScout's
Documentation to distribute internally to its sales and
engineering organization, and externally to Customers either in
promotion of the products or in conjunction with the delivery of
the FrameSaver products.
10.3 Any portion of NetScout documentation used in Paradyne
documentation may be promoted in manners consistent with current
tools available (e.g. the Paradyne Web page). Paradyne, however,
may not incorporate NetScout's entire manual(s) onto its Web
page.
11 ROYALTY FEES AND PAYMENT
11.1 Paradyne agrees to pay NetScout, net thirty (n/30) days after
the close of each quarter, a royalty, as defined in Exhibit A,
for each FrameSaver product (56k and T1 versions) sold with
embedded Licensed Product, during the previous quarter for the
term of this Agreement, any extensions to this Agreement, and
any resulting survival periods. Notwithstanding the preceding
sentence, in the event Paradyne elects to price the RMON feature
set separately, the NetScout royalty shall be [***] percent
([***]%) of the separate list price for the RMON
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feature or [***] as listed for each version of embedded RMON listed in
Exhibit A.
11.2 Payment of service support fees as described in Section 6.1
hereinabove shall be due net thirty (n/30) days after the close of
each quarter.
11.3 Any payments made to NetScout, whether as royalties for the Licensed
Product sales or for Resale Product purchases, shall be made without
deduction for any sales use, value-added or other taxes, duties or
levies, except that Paradyne shall have the right to withhold from
payments to NetScout any taxes that Paradyne is required to withhold
under applicable law. Paradyne shall provide NetScout with a
certificate form the applicable tax authorities or other evidence
reasonably required by NetScout to evidence such tax withholding
status.
11.4 Paradyne agrees to provide audit reports to NetScout on a quarterly
basis indicating the number of Licensed Products sold during the
previous quarter to assist the Parties in their quarterly royalty
reconciliation.
11.5 The Parties agree to meet twice annually to review royalty pricing in
light of competitive pressures. Royalty pricing shall be adjusted,
accordingly, to respond to competitive pricing pressures.
12 NETSCOUT RESALE PRODUCTS TERMS AND CONDITIONS
12.1 Paradyne Purchase Obligation. During the first twelve (12) months
following availability of the FrameSaver FRAU's incorporating the
Licensed Product Paradyne agrees to purchase [***] dollars ($[***]) of
NetScout products of which [***] dollars ($[***]) shall be Resale
Products.
12.2 Pricing & Discounts. In consideration of Paradyne's purchase
obligation as set forth in 11.1 above, NetScout extends to Paradyne
the right and license to resell NetScout's probes, management and
diagnostic applications (the "Resale Products"), set forth in Exhibit
B; and, grants Paradyne, for the initial term of this Agreement, a
purchase discount equal to [***] percent ([***]%) and [***] percent
([***]%) off of NetScout's then current list price for NetScout
Manager Software and probes, respectively.
Thirty (30) days prior to the end of the initial term and any
subsequent term of this Agreement, the Parties agree to meet to review
purchase volumes and determine the appropriate Resale Products'
discount level for the next term of the Agreement.
12.3 Purchase Orders. Resale Product orders may be initially made via
telephone or facsimile, provided Paradyne follows the orders with hard
copy purchase orders ("PO's") within a reasonable period of time
thereafter. PO's shall include the following details: Paradyne's part
number for NetScout's products, description, quantity, delivery
date(s) and PO dollar total.
12.4 Order Acceptance & Lead-time. NetScout will accept orders and confirm
delivery schedules within twenty-four (24) hours from receipt of
Paradyne's order placement. NetScout's normal lead-time for NetScout
products is twenty-one (21) days from order placement. NetScout,
however, will make the best efforts to meet, as necessary, Paradyne's
priority requirements.
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12.5 Cancellation/Reschedule. Paradyne reserves the right to cancel PO's or
parts of PO's, without penalty, provided the requested cancellation is
made more than ten (10) days from the scheduled delivery of the
products. Any cancellation requests made inside the eleven (11) day
window shall be subject to [***] percent ([***]%) cancellation fee.
Paradyne also reserves the right to reschedule PO's or parts of PO's
at any time prior to the scheduled delivery date provided the
requested delivery date does not extend beyond sixty (60) days from
the originally scheduled delivery date.
12.6 Price Changes. NetScout reserves the right to add/delete products from
the attached price list, and further reserves the right to modify
pricing, as required, at any time during the term of this Agreement.
NetScout shall make best efforts to notify Paradyne at least thirty
(30) days prior to any price changes. In the event of a price increase
for Resale Products after order acceptance by NetScout, the applicable
price shall be the price in effect at the time the order was accepted
by NetScout provided the order is scheduled to ship within sixty (60
days from the date of order placement. In the event of a price
decrease in the price of the Resale Products, NetScout shall, on the
effective date of the decrease in price(s), automatically adjust any
unshipped orders for all affected Resale Products to reflect the lower
pricing. In the event of a price increase, NetScout will provide price
protection (e.g. offer products at the lower pricing) for: (i) any
orders placed prior to the price increase and scheduled to ship within
sixty (60) days from the date of the price increase, and (ii) any new
orders placed within sixty (60) days after the price increase.
12.7 Limited Resale Product Warranty. NetScout warrants the Resale Products
for a period of ninety (90) days from a Customer's acceptance that the
Resale Products will be free from defects in material and workmanship.
NetScout shall repair or replace, at no charge, any Resale Products
returned to NetScout during the warranty period. This is NetScout's
sole remedy to Paradyne and/or End Users under this Agreement for
warranty claims.
NETSCOUT HEREBY DISCLAIMS ANY IMPLIED WARRANTIES OR MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE. THE WARRANTIES MADE IN THIS
PARAGRAPH ARE MADE IN LIEU OF ALL OTHER EXPRESS WARRANTIES, WHETHER
ORAL OR WRITTEN.
12.8 Payment. Payment for the Resale Products shall be due net thirty
(n/30) days from the date of receipt by Paradyne. Any payments made to
NetScout for Resale Product purchases shall be made without deduction
for any sales, use, value-added or other taxes, duties or levies,
except that Paradyne shall have the right to withhold from payments to
NetScout any taxes that Paradyne is required to withhold under
applicable law. Paradyne shall provide NetScout with a certificate
from the applicable tax authorities or other evidence reasonably
required by NetScout to evidence such tax payment.
12.9 Title & Risk of Loss. All orders shall be shipped FOB, Westford, MA.
Title and risk of loss shall immediately pass upon delivery to the
respective carrier.
12.10 Point of Sale Reporting. Paradyne agrees to provide to NetScout,
within thirty (30) business days of the close of each calendar
quarter, Point of Sale (POS)
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reports identifying the quantity and dollar value, and zip
code/country code, for the Resale Products sold by Paradyne in
the previous calendar quarter.
12.11 Service and Support. Paradyne shall be obligated to provide
customer service and support for Resale Products during the
applicable warranty period, with backup support from NetScout as
necessary. NetScout shall be responsible for providing customer
service and support for out of warranty Resale Products, provided
such Resale Products carry maintenance agreements. Escalation
guidelines and post warranty service charges are incorporated in
Exhibit D.
13 CONFIDENTIAL INFORMATION
All confidential information exchanged by the Parties during the term of
this Agreement shall be treated pursuant to a certain Non-Disclosure
Agreement, effective December 3, 1997, and incorporated herein by
reference.
14 LICENSED PRODUCT LIMITED WARRANTY AND DISCLAIMER OF LIABILITY
14.1 NetScout has no control over the conditions under which Paradyne
and Customers use the Licensed Product, and does not/cannot
warrant the results obtained by such use.
14.2 NetScout warrants that no security measures have been
incorporated in the Licensed Product which would impair its use
and operation except such measures as are disclosed to Paradyne
in writing and approved by Paradyne in writing.
14.3 In addition to warranting that it has the right to grant the
licenses contained in this Agreement, NetScout warrants under the
terms and conditions of the End User license agreement, attached
hereto as Exhibit C, that the magnetic media on which the
Licensed Product resides shall be free from defects in material
and workmanship under normal usage. NetScout further warrants
that the Licensed Product will perform substantially in
accordance with the current written functional specifications and
documentation. The warranties contained in this paragraph are
made for a period of ninety (90) days from the date that the
Licensed Product is delivered to the Customer.
14.4 NetScout warrants that it has the right and is duly authorized to
enter into this Agreement and has sufficient rights, title and
interest in and to the Licensed Product and related Documentation
to grant the licenses and shall not make commitments to others
inconsistent herewith.
14.5 NetScout does not warrant that the functions contained in the
Licensed Product will meet the requirements of Paradyne or the
Customer, or that the operation of the Licensed Product will be
uninterrupted or error free. The warranty shall not cover any
copy of the Licensed Product that has been altered or changed in
any way by Paradyne, excepting changes authorized by NetScout
pursuant to Section 3.1.6 hereinabove, or by the Customer.
NetScout further shall not be responsible for problems caused by
changes in or modifications to the operating characteristics of
any computer hardware or operating system on which the Licensed
Product was intended to be used, nor will NetScout be responsible
for problems which occur as a result of the use of the Licensed
Product in conjunction with hardware which is incompatible with
the operating system for which the Licensed Product was designed
for and/or intended to be used with.
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14.6 THE FOREGOING LICENSED PRODUCT WARRANTIES OF NETSCOUT ARE IN LIEU
OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING WITHOUT
LIMITATION ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE.
14.7 The above warranties shall survive any delivery, acceptance,
payment, termination or expiration of this Agreement or any PO's
provided hereunder, and shall run to Paradyne, its successors,
assigns, Customers and users of the Licensed Product.
15. ENGINEERING CHANGES
15.1 NetScout may, without prior approval from or prior notice to
Paradyne, make changes to the Licensed Products (i) which do not
adversely affect interchangeability with previously shipped
Product or (ii) when required for safety, regulator, or legal
purposes.
15.2 NetScout will notify Paradyne forty-five (45) day in advance of
scheduled shipment of any changes to the NetScout software
product/NetScout RMON feature set embedded into a Paradyne
hardware product ("Embedded Products") which adversely affect
interchangeability with previously shipped Embedded Products.
NetScout further agrees to provide, with its forty-five (45) day
advanced notification, upgrade recommendations that will
reconcile any interchangeability problems which may result form
the proposed changes.
16. NEW PRODUCT DEVELOPED BY SELLER
16.1 If NetScout develops a new product that NetScout believes will
benefit both parties, NetScout shall notify Paradyne in writing
at least sixty (60) days prior to the time of the initial public
announcement of such new product, unless other terms are mutually
agreed upon, in advance and in writing, by the paries. At the
time of such written notice, NetScout shall also provide to
Paradyne a beta product along with any available specifications,
description, and technical data to enable Paradyne to perform an
engineering evaluation of the new product.
17. PRODUCT DISCONTINUANCE
17.l NetScout agrees to notify Paradyne at least twelve (12) months
prior to the discontinuance of any Resale Product listed in
Exhibit B of this Agreement. Paradyne shall be granted a right to
make a last time buy of the discontinued Resale Product during
the notice period, and shall receive technical support of the
Resale Product and all replacement Resale Products throughout the
term of this Agreement, and for a period of five (5) years after
the Agreement expires.
18. EXTENSION OF MANUFACTURING RIGHTS
18.1 A perpetual license to continue embedding the Licensed Products
during the manufacture of the Paradyne products listed in Exhibit
A, shall be granted to Paradyne under the following conditions:
18.2 Discontinuance of the Licensed Products defined in Exhibit A,
provided no functionally equivalent substituted is made available
at or below the specified price.
18.3 A new Licensed Product replaces or obsoletes existing Licensed
Product and the
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new Licensed Product fails to meet the specifications defined herein
this Agreement.
18.4 NetScout becomes insolvent. Paradyne will have the right to withdraw
the Manufacturing Information contained in the escrow account in
preparation for manufacturing the Products. However, such rights will
not become effective until such time as NetScout dissolves or ceases
to do business.
18.5 Material Breach of this Agreement by NetScout that is not cured
within the time period as specified in Section 21, Termination.
18.6 Such perpetual license will be subject to the royalties set forth in
Exhibit A.
18.7 Notwithstanding the foregoing, the obligations of NetScout under this
Section are conditional upon Paradyne's ability to secure such
manufacturing usage licenses or other proprietary rights of third
parties, if any, as may be required to manufacture such Product.
NetScout agrees to provide reasonable assistance to Paradyne to
secure such rights.
19. LIMITATION OF REMEDIES
19.1 Except as set forth in the Indemnity section below, NetScout's
entire liability and Paradyne's exclusive remedy for breach of
Section 14 shall be the replacement by NetScout of any Licensed
Product which fails to meet NetScout's Limited Warranty defined in
such section. Neither party shall have any liability for special,
incidental or consequential damages, including lost profits, arising
out of this Agreement or with respect to the installation, use
operation or support of the Licensed Product and Resale Products,
even if such party has been apprised of the possibility of such
damages.
19.2 Except as set forth in the Indemnity section below, either party's
total liability arising from breach of warranty, breach of contract,
negligence, strict liability or tort, or any other legal theory shall
in no way exceed the greater of (i) the sum total of license fees
paid and Resale Products purchased by Paradyne, and (ii) ____________
dollars ($_________). This limitation of liability shall not apply to
personal injury or direct damage resulting from claims of gross
negligence or willful misconduct, provided the injured party asserts
a right to recover those direct damages from the other Party.
20. INDEMNIFICATION
20.1 NetScout shall defend, hold harmless and indemnify Paradyne and its
Customers from and against any claim that NetScout's Licensed
Product, Resale Products and Documentation (collectively the
"Materials") supplied or licensed hereunder infringe any patent,
copyright, trade secret, trademark or other intellectual property
rights of a third party, and NetScout will pay the costs and damages
related thereto, including, without limitation, reasonable attorneys'
fees, provided that: (a) Paradyne promptly notifies NetScout in
writing of the claim; and (b) NetScout has sole control of the
defense and all related settlement negotiations.
20.2 The obligation of NetScout under paragraph 1 of this Section 20 is
conditioned on Paradyne's agreement that if the Materials or the
operation thereof, become, or in the opinion of NetScout, are likely
to become, the subject of such a claim, that Paradyne will permit
NetScout, at the sole option and expense of NetScout, either
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<PAGE> 25
to procure the right for Paradyne to continue marketing and
distributing the Materials or to replace or modify them so that they
become non-infringing, provided that such replacement or modification
does not materially degrade the performance or functionality of the
Materials NetScout shall have no liability for any claim based upon
the combination or use of any of the Materials supplied hereunder with
equipment, data or programming not supplied by NetScout, or based upon
alteration or modification of NetScout's Material by Paradyne,
provided the liability would not arise absent the combination,
alteration or modification.
20.3 The foregoing states the entire obligation of NetScout to Paradyne
with respect to infringement of patents, copyrights and trade secrets,
trademarks or other intellectual property rights.
21 TERMS AND TERMINATION
21.1 Term. The initial term of this Agreement shall be three (3) years from
the date set forth in the first sentence of this Agreement.
Thereafter, this Agreement shall automatically be renewed for
additional one (1) year terms, unless terminated by either party upon
ninety (90) days advance written notice to the other party.
21.2 If either party ceases doing business as a going concern, becomes
insolvent, suffers or permits the appointment of a receiver for its
business or assets or shall avail itself of, or become subject to, any
proceeding under the Federal Bankruptcy Code of 1978, (as amended), or
any statute of any state relating to insolvency or the protection of
rights of creditors, then (at the option and upon noticed from the
other party) this Agreement shall terminate and be of no further force
and effect.
21.4 In the event either party defaults any obligations in this Agreement,
the other party shall give written notice of such default, and, if the
party in default fails to cure within sixty (60) days of the notice,
the other party shall have the right to terminate. NetScout's right to
terminate, however, shall be immediate in the event of breach by
Paradyne of Section 2.1.3 hereinabove.
21.5 Upon termination of this Agreement, regardless of the reason, the
rights and licenses granted to Paradyne under this Agreement shall be
immediately revoked. Within ten (10) days after termination, Paradyne
shall return to NetScout or destroy, at NetScout's discretion, the
Source Code for the Licensed Product and all copies thereof, except
those copies necessary for continued maintenance and support as set
forth in Section 3.1.3 hereunder. Any such destruction shall require
certification in writing that the Source Code and any copies thereof
have been destroyed. TERMINATION SHALL NOT RELIEVE PARADYNE OR
NETSCOUT OF ITS OBLIGATIONS REGARDING THE CONFIDENTIALITY IN ANY
LICENSED PRODUCT(S).
21.6 Without limiting any of the provisions contained in the preceding
paragraphs of this section, in the event of termination as a result of
Paradyne's failure to comply with any of its obligations under this
Agreement, Paradyne shall continue to be obligated for any payments
due as of the date of termination. Termination of Paradyne's license
rights shall be in addition to an not in lieu of any equitable
remedies available to NetScout.
21.7 All notices of termination will be in writing and delivered pursuant
to Section
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23.7 All notices shall be mailed to the name and address listed
below in the Notices section.
21.8 Rights and Obligations after Termination. Excepting any rights
provided hereinabove, the Parties mutually agree to return to each
other, no later than thirty (30) days after termination of this
Agreement, any Confidential Information which has been provided.
22 ARBITRATION
22.1 Any controversy or claim, whether based on contract, tort, or other
legal theory (including, but not limited to, any claim of fraud or
misrepresentation), arising out of or related to this Agreement
shall be resolved by arbitration pursuant to this Paragraph and
the then current rules and supervision of the American Arbitration
Association. The duty to arbitrate shall extend to any officer,
employee, agent, or subsidiary making or defending any claim which
would otherwise be arbitrable hereunder. The arbitration shall be
held in the headquarters city of the party not initiating the claim
before a single arbitrator who is knowledgeable in business
information and electronic data processing systems. The
arbitrator's decision and award shall be final and binding and may
be entered in any court having jurisdiction thereof. The arbitrator
shall not have the power to award punitive or exemplary damages.
Issues of arbitrability shall be determined in accordance with the
federal substantive and procedural laws relating to arbitration; all
other aspects shall be interpreted in accordance with the laws of
the State of New York. Each party shall bear its own attorney's
fees associated with the arbitration and other costs and expenses
of the arbitration shall be borne as provided by the rules of the
American Arbitration Association. If court proceedings to stay
litigation or compel arbitration are necessary, the party who
unsuccessfully opposes such proceedings shall pay all associated
costs, expenses and attorney's fees which are reasonably incurred
by the other party. If any portion of this Paragraph is held to be
unenforceable, it shall be served and shall not affect either the
duty to arbitrate hereunder or any other part of this Paragraph.
23. GENERAL
23.1 Governing Law. This Agreement and any PO's issued hereunder shall
be governed by and interpreted in accordance with the laws of New
York.
23.2 Compliance with Laws. All materials and products supplied and work
performed under this Agreement shall comply with all applicable
United States and foreign laws and regulations. Either party's
failure to comply with any of the requirements of this Section may
result in a material breach of this Agreement.
23.3 Assignment: Either party shall have the right to assign this
Agreement and to assign its rights and delegate its duties under
this Agreement either in whole or in part at any time upon written
notice to the non-assigning party and without the non-assigning
party's consent.
Upon an assignment by either party and with thirty days prior
written notice the non-assigning party may terminate the Agreement
in the event that the assignee, in the non-assigning party's
reasonable opinion, is a competitor of the non-assigning party or
is of questionable financial stability and/or soundness.
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An assignment pursuant to this section shall neither affect nor
diminish any rights or duties that either party may then or
thereafter have as to Products, Licensed Materials or Services
delivered prior to the effective date of this assignment. Upon the
assumption of the duties under this Agreement by the assignee, the
assigning party shall be released and discharged, to the extent of
the assignment, from all further duties under this Agreement as to
Products, Licensed Materials or Services not delivered by the
assigning party by the effective date of the assignment.
23.4 Modification/Binding Effect. This Agreement shall not be valid until
signed and accepted by an authorized representative of each Party,
and no Party shall be bound by any change, alteration, amendment,
modification, termination or attempted waiver of any of the
provisions hereof unless in writing and signed by an authorized
representative of the Party against whom it is sought to be enforced.
This Agreement shall be binding on and inure to the benefit of the
Parties hereto and their prospective successors, legal
representatives and permitted assigns.
23.5 Nonwaiver.
23.5.1 All rights and remedies conferred by this Agreement, by any
other instrument, or by law are cumulative and may be
exercised singularly or concurrently. If any provision of this
Agreement is held invalid by any law or regulation of any
government or by any court, such invalidity shall not affect
the enforceability of any other provisions hereof.
23.5.2 No forbearance, delay or indulgence by either party in
enforcing the provisions of this Agreement shall prejudice or
restrict the rights of that party nor shall any waiver of its
rights operate as a waiver of any subsequent breach and no
right, power or remedy herein conferred upon or reserved for
either party is exclusive of any other right, power or remedy
available to the Party and each such right, power or remedy
shall be cumulative.
23.5.3 Either Party may seek injunction preliminary or other
equitable relief to remedy any actual or threatened dispute.
23.6 Independent Contractor. The relationship between the Parties is that
of independent contractors, and under no circumstances shall any of
the employees of one party be deemed to be employees of the other
party for any purpose. Except as specifically provided herein, this
Agreement shall not be construed (a) as authority for either party to
act for the other in an agency or any other capacity, or to make
commitments of any kind for the account of or on behalf of the other
or (b) to imply that Paradyne is an agent of NetScout as defined by
applicable law.
23.7 Notices.
Any legal notices ("Legal Notices") given under this Agreement shall
be written and shall be sent by registered or certified mail, postage
prepaid, return receipt requested, overnight courier services with
signature verification, personal delivery, or facsimile if followed
up with original document via any one of the aforementioned delivery
modes. Legal Notices shall be defined as any written correspondence
made by either party to amend or modify this Agreement, provide
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notice of cure in the event of breach, provide notice of
termination/expiration, or to initiate legal proceedings, as provided
for by law, in the event of a contract dispute or tortious action
resulting from the negligence of either party in performing its
obligations hereunder. All Legal Notices shall be effective when first
received at the following addresses listed below:
If to NetScout: If to Paradyne:
NetScout Systems, Inc. Paradyne Corporation
4 Technology Park 8545 126th Avenue North
Westford, MA 01886 PO Box 2826,
Largo, FL 34649-2826
Attention: Charles Tillett Attention: Manager of Corporate
Contracts
with copies to: Nathan Kalowski with copies to: Director of
and Eileen Haggerty Frame Relay
Products
23.8 The Parties mutually agree that technical notices, sales, marketing
and business information shall not be considered Legal Notices, and
shall not follow the formal notice processes defined above, and may be
delivered to/from each other's office locations by personal delivery,
mail or express carrier, electronic means, or facsimile.
23.9 Force Majeure. Neither party will be liable for delay in performing
its obligations or for any failure to perform its obligations
hereunder, if the delay results from circumstances beyond the
reasonable control of the Party including, but not limited to, force
majeure, Act of God, refusal of license, law, ordinance, policy,
regulation, decree, order, judgment or governmental act, utility
curtailments, power failures, fire, flood, bad weather, explosion,
accident, civil commotion, war or act of war, industrial dispute, or
impossibility of commercial impracticability of obtaining materials or
services or providing service due to any of the above circumstances.
23.10 Headings Identification. The headings appearing at the beginning of
the sections contained in this Agreement have been inserted for
identification and reference purposes only, and shall not be used in
the construction and interpretation of this Agreement.
23.11 Entire Agreement/Order of Precedence. Each party acknowledges that it
has read this Agreement, understands it, and agrees to be bound by its
terms, and further agrees that this is the complete and entire
understanding between the Parties on this subject matter and
supersedes all prior agreements, proposals, representations,
statements, or understandings between them on this subject. The
provisions of this Agreement may be amended or waived only by a
writing executed by the authorized representatives of the Parties
hereto. In case of conflict of terms between the terms and conditions
of a PO or an invoice and the terms and conditions of this Agreement,
the terms and conditions of this Agreement shall prevail.
23.12 Survival. All sections, which by their nature should survive the
expiration or
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NetScout and Paradyne Use Pursuant to Company Procedures 01/26/98
<PAGE> 29
termination of this Agreement, shall survive, including, without
limitation, Sections 4.2, 4.4, 5, 12, 13, 17, 18, 19, 20, 21 and 23
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement.
NETSCOUT SYSTEMS, INC. PARADYNE CORPORATION
/s/ Nathan Kalowski /s/ Pat Murphy
- ---------------------------- --------------------------------
Signature Signature
Nathan Kalowski Pat Murphy
- ---------------------------- --------------------------------
Name Name
VP, Business Development S.V.P. & CFO
- ---------------------------- --------------------------------
Title Title
Marketing & License Agreement Paradyne and NetScout Confidential page 17
NetScout and Paradyne Use Pursuant to Company Procedures 01/26/98
<PAGE> 30
EXHIBIT A
PRODUCT ROYALTY SCHEDULE
<TABLE>
<CAPTION>
T1 56k
Product Royalty Royalty Description
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
FrameSaver 9620/9120 $[***] $[***] Existing Products.
Contains no NetScout Intellectual
Property.
FrameSaver 962x/912x $[***] $[***] Contains NetScout mini-RMON1,
w/RMON mini-RMON2, IP Top Talkers, and
User History Group Intellectual
Property
FrameSaver 9621/912x $[***] $[***] Contains NetScout mini-RMON1
w/RMON buckets and User History Group Intellectual
Property.
All other Paradyne DSU's $[***] $[***] Existing products. Contains no
NetScout Intellectual Property.
</TABLE>
Marketing & License Agreement Paradyne and NetScout Confidential page 18
NetScout and Paradyne Use Pursuant to Company Procedures 01/26/98
- ---------------
*** Confidential Treatment Requested
<PAGE> 31
EXHIBIT B
RESALE PRODUCTS LISTING
NetScout Price List
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Model Description Price($)
- ----- ----------- --------
<S> <C> <C>
LAN PROBES
Ethernet
- --------
6010/8 Ethernet Probe (8 Meg)
6010/16 Ethernet Probe (16 Meg)
6010E2/16 Dual-Interface Ethernet Probe (16 Meg)
Multi-port Ethernet
- -------------------
7301ET/32 Four Port Ethernet Probe (32 Meg)
7302ET/64 Eight Port Ethernet Probe (64 Meg)
7303ET/64 Twelve Port Ethernet Probe (64 Meg)
Fast Ethernet
- -------------
7201ET/32 Half Duplex 100BaseTX/Ethernet (32 Meg)
7211ET/32 Full Duplex 100BaseTX/Ethernet (32 Meg)
7221ET/32 Dual-Interface Half Duplex 100BaseTX/Ethernet (32 Meg)
Note: Full Duplex 100BaseTX probes include FDX-TX Tap Kit
7203ET/32 Half Duplex 100BaseFX/Ethernet (32 Meg)
7213ET/32 Full Duplex 100BaseFX/Ethernet (32 Meg)
7223ET/32 Dual-Interface Half Duplex 100BaseFX/Ethernet (32 Meg)
Note: Full Duplex 100BaseFX probes include FDX-FX Tap Kit
Token Ring
- ----------
6020/8 Token Ring Probe (8 Meg)
6020/16 Token Ring Probe (16 Meg)
6020T2/16 Dual-Interface Token Ring Probe (16 Meg)
Ethernet/Token Ring
- -------------------
6030/16 Ethernet/Token Ring Probe (16 Meg)
</TABLE>
4.03P1M1 Rev D Effective January 15, 1998 2
<PAGE> 32
EXHIBIT B
RESALE PRODUCTS LISTING
NetScout Price List
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MODEL DESCRIPTION PRICE($)
- ----- ----------- --------
<S> <C> <C>
WAN PROBES
- ----------
T1/E1 WAN
- ---------
6050/8 T1/E1 WAN/Ethernet Probe (8 Meg) [***]
6050/16 T1/E1 WAN/Ethernet Probe (16 Meg) [***]
6070/8 T1/E1 WAN/Token Ring Probe (8 Meg) [***]
6070/16 T1/E1 WAN/Token Ring Probe (16 Meg) [***]
Note: T1/E1 WAN probes include a T1/E1 Tap Kit.
Please specify the cable interface. (V.35,X.21 single clock,
X.21 dual clock, RS422/RS449, EIA530, RS232) Default is V.35
T3/E3 WAN
- ---------
7401ET/32 T3/E3 WAN (HSSI)/Ethernet Probe (32 Meg) [***]
7401TR/32 T3/E3 WAN (HSSI)/Token Ring Probe (32 Meg) [***]
Note: T3/E3 WAN probes include a T3/E3 Tap Kit. (HSSI interface)
Multi-port Sub-rate WAN
- -----------------------
7502ET/32 Two Port Sub-rate WAN/Ethernet Probe (32 Meg) [***]
7502TR/32 Two Port Sub-rate WAN/Token Ring Probe (32 Meg) [***]
7504ET/32 Four Port Sub-rate WAN/Ethernet Probe (32 Meg) [***]
7504TR/32 Four Port Sub-rate WAN/Token Ring Probe (32 Meg) [***]
Note: Multi-port WAN probes include T1/E1 Tap Kits.
Please specify the cable interface. (V.35, X.21 single clock,
X.21 dual clock, RS422/RS449, EIA530, RS232) Default is V.35
FDDI/CDDI PROBES
- ----------------
CDDI (SAS)
- ----------
7101ET/32 CDDI/Ethernet Probe - Single Attached (32 Meg) [***]
7101TR/32 CDDI/Token Ring Probe - Single Attached (32 Meg) [***]
FDDI (SAS)
- ----------
7102ET/32 FDDI/Ethernet Probe - Single Attached (32 Meg) [***]
7102TR/32 FDDI/Token Ring Probe - Single Attached (32 Meg) [***]
FDDI (DAS)
- ----------
7103ET/32 FDDI/Ethernet Probe - Dual Attached (32 Meg) [***]
7103TR/32 FDDI/Token Ring Probe - Dual Attached (32 Meg) [***]
ATM (OC3)
- ---------
8100ET/32 ATM (OC3)/Ethernet Probe (32 Meg) [***]
</TABLE>
4.03P1M1 Rev D Effective January 15, 1998 3
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<PAGE> 33
EXHIBIT B
RESALE PRODUCTS LISTING
<TABLE>
<CAPTION>
NETSCOUT PRICE LIST
- ----------------------------------------------------------------------------------------------------------------
Model Description Price ($)
----- ----------- ---------
<S> <C> <C>
SOFTWARE
NetScout Manager Plus
9115 NetScout Manger Plus of Unix (SUN, HP-UX, AIX) [***]
9125 NetScout Manger Plus for Windows (95 & NT) [***]
(Note: NetScout Manager Plus provides integrated tools for monitoring LANs, WANs,
Frame Relay links and Switched networks)
Upgrade NetScout Manager to NetScout Manager Plus
9116 Upgrade NSM for Unix to NSM Plus for Unix (Password Upgrade) [***]
9126 Upgrade NSM for Windows NT to NSM Plus for Windows NT [***]
(Password Upgrade)
Expert Visualizer
9130 Expert Visualizer for Unix (SUN, HP-UX, AIX) [***]
NetScout Server
9135 NetScout Server for Unix (SUN, HP-UX, AIX) [***]
9140 NetScout Server for WindowsNT [***]
NetScout WebCast
9145 NetScout WebCast for Unix (SUN, HP-UX, AIX) [***]
9150 NetScout WebCast for WindowsNT [***]
RMON2 Software Agent
5100 NetScout Agent for WindowsNT [***]
PROBE FIRMWARE OPTIONS
Resource Monitor
NRM Resource Monitor Option [***]
Proxy RMON Monitor
PRM Proxy RMON Monitor Option [***]
Note: Supported on Models 6010 and 6010E2 only.
Netflow Monitor
NFM Netflow Monitor Option [***]
</TABLE>
4.03P1M1 Rev D Effective January 15, 1998 4
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<PAGE> 34
EXHIBIT B
RESALE PRODUCTS LISTING
<TABLE>
<CAPTION>
NETSCOUT PRICE LIST
- -------------------------------------------------------------------------------
Model Description Price($)
- ----- ----------- --------
<S> <C> <C>
UPGRADE OPTIONS FOR INSTALLED PROBES
- ------------------------------------
Memory Upgrade Options for 6000 Series
- --------------------------------------
6002M16 Memory Upgrade - 2 Meg to 16 Meg [***]
6004M16 Memory Upgrade - 4 Meg to 16 Meg [***]
6008M16 Memory Upgrade - 8 Meg to 16 Meg [***]
6016M32 Memory Upgrade - 16 Meg to 32 Meg [***]
Factory installed options - requires return of probe to factory for upgrade.
-------------------------
Memory Upgrade Options for 7000 Series
- --------------------------------------
7008M32 Memory Upgrade - 8 Meg to 32 Meg [***]
7016M32 Memory Upgrade - 16 Meg to 32 Meg [***]
7032M64 Memory Upgrade - 32 Meg to 64 Meg [***]
Factory installed options - requires return of probe to factory for upgrade.
-------------------------
Interface Upgrades for 6000 Series
- ----------------------------------
6000E2 2nd Ethernet Interface for Model 6010 [***]
6000T2 2nd Token Ring Interface for Model 6020 [***]
Note: Adding Interfaces to any 6000 Series probe requires a minimum
16 Meg Unit.
Factory installed options - requires return of probe to factory for upgrade.
-------------------------
Interface Upgrades for 7000 Series
- ----------------------------------
7200TX 2nd Half Duplex 100BaseTX Interface for Model 7201 [***]
7200FX 2nd Half Duplex 100BaseFX Interface for Model 7203 [***]
7300E4 Additional Four-Port Ethernet Interface for Model [***]
7300 probes
7500WN Additional WAN Interfaces for Model 7500 probes [***]
Note: Adding Interfaces to any 7000 Series probe requires a minimum
32 Meg Unit.
Factory installed options - requires return of probe to factory for upgrade.
-------------------------
MISCELLANEOUS OPTIONS
- ---------------------
Fast Ethernet FDX Tap Kits (includes cables)
- --------------------------------------------
FDX-TX Additional Full Duplex Fast Ethernet Tap Kit for [***]
100BaseTX
FDX-FX Additional Full Duplex Fast Ethernet Tap Kit for [***]
100BaseFX
T1/E1 WAN Tap Kits (includes cables)
- ------------------------------------
V35-Tap Additional Tap Kit for T1/E1 WAN (V.35) [***]
X21/1-Tap Additional Tap Kit for T1/E1 WAN (X.21) [***]
X21/2-Tap Additional Tap Kit for T1/E1 WAN (X.21) [***]
RS422-Tap Additional Tap Kit for T1/E1 WAN (RS422/RS449) [***]
EIA530-Tap Additional Tap Kit for T1/E1 WAN (EIA530) [***]
RS232-Tap Additional Tap Kit for T1/E1 WAN (RS232) [***]
</TABLE>
4.03P1M1 Rev D Effective January 15, 1998 5
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- ---------------------
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<PAGE> 35
EXHIBIT B
RESALE PRODUCTS LISTING
<TABLE>
<CAPTION>
NetScout Price List
- --------------------------------------------------------------------------------------
Model Description Price
- ----- ----------- -----
<S> <C> <C>
T3/E3 WAN Tap Kit (includes cables)
- -----------------------------------
WAN-HSSI Additional Tap Kit for T3/E3 WAN (HSSI) [***]
Fiber Optic Splitters (Includes cables)
- ---------------------------------------
OPT-SPLT1 Additional 80/20 Multi-mode Fiber Optic Splitter [***]
Cables
- ------
2950-100 Additional Cat 5 CDDI Cable (15') [***]
2950-180 T3/E3 WAN (HSSI) Tap Cables [***]
2950-215 Additional Probe Console Cable (6') [***]
Fiber Cables & Couplers
- -----------------------
2950-60 Additional ST to ST Coupler [***]
2950-70 Additional ST to MIC Coupler [***]
2950-80 Additional Duplex SC to SC Cable (24') [***]
2950-90 Additional Duplex SC to ST Cable (24') [***]
Rack Mount
- ----------
RM-19 Shelf for Rack Mounting (holds three 7000 series probes) [***]
RMK-6000 Rack Mount Kit for 6000 Series Probes [***]
Documentation
- -------------
2930-170 NetScout Probe User Guide [***]
2930-610 NetScout Manager Plus User Guide [***]
2930-620 NetScout Manager Plus Administrator Guide [***]
2930-430 NetScout Expert Visualizer User Guide [***]
NetScout Training
- -----------------
NetScout Manager Plus Training (3 days) [***]
NetScout WebCast Training (1 day) [***]
</TABLE>
(Note: Training classes are held at NetScout Systems and the prices listed above
are per student. Prices for on-site training can be obtained by calling NetScout
Systems).
4.03P1M1 Rev D Effective January 15, 1998 6
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<PAGE> 36
EXHIBIT B
RESALE PRODUCTS LISTING
NetScout Price List
- -------------------------------------------------------------------------------
NetScout Systems, Inc.
Support & Maintenance
Policy and Pricing
NetScout Systems, Inc.
4 Technology Park Drive Westford, MA 01886
TEL 978-614-4000 - FAX 978-614-4004
4.03P1M1 Rev D Effective January 15, 1998 7
- -------------------------------------------------------------------------------
<PAGE> 37
EXHIBIT B
RESALE PRODUCTS LISTING
NETSCOUT PRICE LIST
- --------------------------------------------------------------------------------
If Extended Hardware Maintenance coverage is desired and was not purchased
at the same time the hardware was purchased, coverage will be offered at
NetScout Systems' sole discretion. Contact NetScout Systems' Sales
Administration for a price quote.
(Note: Hardware products covered under Extended Hardware Maintenance will
be repaired or replaced at NetScout Systems sole discretion upon return to
factory, freight prepaid. Hardware Warranty and Extended Hardware
Maintenance do not cover functional upgrades. Functional upgrades such as
faster processors, increased Memory/Flash, etc., are separately chargeable
at the current price listed in the NetScout Price List.)
NON-WARRANTY HARDWARE REPAIR
Hardware products no longer under warranty or Extended Hardware Maintenance
can be repaired on a single occurrence basis by returning a product,
freight prepaid, to NetScout Systems. NetScout Systems will repair and
return, freight included, for the one price indicated. The repaired unit
will be under warranty for a period of 90 days after return to the
customer. (Note: If the unit is not repairable, the customer will be
notified and the unit will be returned to the customer.)
BILLING
For ordering and billing convenience, all yearly prices will be pro-rated
on a monthly basis to provide a single yearly contract covering all
NetScout products.
PROFESSIONAL SERVICES
A new fee based Professional Service is now available to assist customer IT
staffs in the installation of NetScout products. A NetScout trained
technician will install, configure and test NetScout products at the
customer site and provide hands on training to the customer's technical
staff.
Professional Services will be billed at [***] per day plus expenses.
PRICING
<TABLE>
<CAPTION>
MANAGEMENT Software Technical Support
SOFTWARE Updates (only) & Updates
- ---------------------------------------------- -------------- -----------------
<S> <C> <C>
Model 9115 - NetScout Manager Plus for Unix $[***] $[***]
Model 9125 - NetScout Manager Plus for Windows $[***] $[***]
Model 9135 - NetScout Server for Unix $[***] $[***]
Model 9140 - NetScout Server for WindowsNT $[***] $[***]
Model 9145 - NetScout WebCast for Unix $[***] $[***]
Model 9150 - NetScout WebCast for WindowsNT $[***] $[***]
Model 9130 - Expert Visualizer for Unix $[***] $[***]
</TABLE>
4.03P1M1 Rev D Effective January 15, 1998 9
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<PAGE> 38
EXHIBIT B
RESALE PRODUCTS LISTING
NetScout Price List
- --------------------------------------------------------------------------------
GENERAL
Support will be provided, free of charge, for a period of 90 days from the
date of original shipment. Customers will have unlimited phone support
during normal business hours (Toll free 800-357-RMON). As a condition of
support, the user is required to identify the serial numbers of the products
involved. Support Coverage can be extended beyond the initial 90 day period
through the purchase of Technical Support Coverage.
Updates will be provided for Management Station and/or Probe software, free
of charge, for a period of 90 days from the date of original shipment.
Updates will include all bug fixes and enhancements which become elements
of the standard product. Eligibility for software updates can be extended
beyond the initial 90 day period through the purchase of either Software
Update Coverage or Technical Support Coverage.
TECHNICAL SUPPORT COVERAGE
Technical Support Coverage provides unlimited phone support during normal
business hours (Toll free 800-357-RMON) and access to Software Updates. If
Technical Support Coverage is desired, all products purchased by an
individual customer must be under contract.
SOFTWARE UPDATE COVERAGE
Software Update Coverage can be purchased for products not under Technical
Support Coverage. Software Updates will include all bug fixes and
enhancements which become elements of the standard product. If Software
Update Coverage is purchased, all copies of that product (Management
Software or Probe) must be placed contract.
7X24 SUPPORT SERVICES
For an additional charge, 7X24 Support Services can be purchased which
provides telephone support 7 days a week, 24 hours a day, with guaranteed
call back within 2 hours.
Please contact NetScout Systems' Customer Support department for price
quotes on 7X24 Support Services. (Note: This service requires that all
NetScout products be under Technical Support Coverage.)
HARDWARE WARRANTY
Hardware products are warranted for a period of 1 year after initial
shipment and will be repaired or replaced at NetScout System sole discretion
upon return to factory, freight prepaid.
EXTENDED HARDWARE MAINTENANCE
Hardware maintenance coverage can be extended an additional two years
(bringing the total to three years) through the purchase of Extended
Hardware Maintenance Coverage. The Extended Hardware Maintenance pricing
listed in this Price List is valid only if the coverage is purchased at the
same time the hardware is purchased.
4.03P1M1 Rev D Effective January 15, 1998 8
- --------------------------------------------------------------------------------
<PAGE> 39
EXHIBIT B
RESALE PRODUCTS LISTING
NetScout Price List
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
TECHNICAL
SOFTWARE SUPPORT & EXTENDED NON-
PROBES & UPDATE SOFTWARE HARDWARE WARRANTY
SOFTWARE AGENTS ONLY UPDATE MAINTENANCE REPAIR
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Software Agent for NT $[***] $[***] $[***] $[***]
- ---------------------
Model 5100
- --------------------------------------------------------------------------------
LAN Probes
- ----------
Model 6010, 6020 $[***] $[***] $[***] $[***]
Model 6010E2, 6020T2, 6030 $[***] $[***] $[***] $[***]
- --------------------------------------------------------------------------------
WAN Probes
- ----------
Model 6040, 6050, 6060, 6070 $[***] $[***] $[***] $[***]
- --------------------------------------------------------------------------------
FDDI Probes
- -----------
Model 7101 $[***] $[***] $[***] $[***]
Model 7102 $[***] $[***] $[***] $[***]
Model 7103 $[***] $[***] $[***] $[***]
- --------------------------------------------------------------------------------
Fast Ethernet Probes
- --------------------
Model 7201 $[***] $[***] $[***] $[***]
Model 7203 $[***] $[***] $[***] $[***]
Model 7211 $[***] $[***] $[***] $[***]
Model 7213 $[***] $[***] $[***] $[***]
Model 7221 $[***] $[***] $[***] $[***]
Model 7223 $[***] $[***] $[***] $[***]
- --------------------------------------------------------------------------------
Multiport Ethernet Probes
- -------------------------
Model 7301 $[***] $[***] $[***] $[***]
Model 7302 $[***] $[***] $[***] $[***]
Model 7303 $[***] $[***] $[***] $[***]
- --------------------------------------------------------------------------------
T3 WAN Probes
- -------------
Model 7401 $[***] $[***] $[***] $[***]
- --------------------------------------------------------------------------------
Multiport WAN Probes
- --------------------
Model 7501 $[***] $[***] $[***] $[***]
Model 7502 $[***] $[***] $[***] $[***]
Model 7503 $[***] $[***] $[***] $[***]
Model 7504 $[***] $[***] $[***] $[***]
- --------------------------------------------------------------------------------
ATM LAN Probe
- -------------
Model 8100 $[***] $[***] $[***] $[***]
- --------------------------------------------------------------------------------
WAN TAPS
- --------
T1/E1 WAN Taps $[***] $[***]
T3/E3 WAN Taps $[***] $[***]
- --------------------------------------------------------------------------------
Fiber Optic Splitter
- --------------------
OPT-SPLT1 $[***] $[***]
- --------------------------------------------------------------------------------
100BaseT Full Duplex Taps
- -------------------------
FDX-TX $[***] $[***]
FDX-FX $[***] $[***]
- --------------------------------------------------------------------------------
</TABLE>
4.03P1M1 Rev D Effective January 15, 1998 10
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<PAGE> 40
EXHIBIT C
LICENSE TERMS AND CONDITIONS
Paradyne shall license the Licensed Product, subject to terms and conditions
substantially similar to those set forth in the remainder of this Exhibit.
Terms and Conditions
The Licensed Product is owned by Paradyne and its suppliers, and is protected by
the copyright laws of the United States and other countries, and by
international treaty provisions.
Paradyne and its suppliers retain ownership of the Licensed Product and no
rights are granted to you other than a license to use the Licensed Product,
subject to the terms expressly set forth in this license agreement ("License").
This License imposes certain restrictions on your use of the License Product.
YOU MAY:
- - use the Licensed Product with Paradyne FrameSaver Products purchased
within this package;
- - make copies of the Licensed Product for backup purposes, but you may not
use the backup to make copies other than as a replacement for the original
copy. You must include on the backup copy all copyright and other notices
included on the Licensed Product.
YOU MAY NOT:
- - copy any part of the Licensed Product other than for backup or duplicate
any of the Licensed Product onto ROM or similar devices that were not
supplied by Paradyne unless permitted above;
- - copy any of the written materials accompanying the Licensed Product;
- - use the Licensed Product on ANY DSU/CSU, IMUX or xDSL product, or other
hardware except as permitted above;
- - transfer or assign your rights to use the Licensed Product except upon a
transfer of any associated Paradyne hardware with which or for which the
Licensed Product was supplied, and then only if the transferee agrees to be
bound by all of the terms of this License;
- - decompile, disassemble, reverse engineer, or modify, in any way, any part
of the Licensed Product, except to the extent that the foregoing
restriction is expressly prohibited by applicable law.
YOU ACKNOWLEDGE AND AGREE THAT:
- - the structure, sequence, organization and source code of the Licensed
Product are valuable trade secrets of Paradyne and its suppliers;
- - export of the Licensed Product may be restricted by the export control laws
of the United States of America and other countries. You agree to comply
with all such export control laws;
- - upon any violation of any of the provisions of this License, your rights to
use the Licensed Product shall automatically terminate and you shall be
obligated to return to Paradyne or destroy all of the Licensed Product;
- - your opening of this package or use of the Licensed Product signifies that
you have read and agreed to the terms of this License. You further agree
that it is the complete and exclusive
Marketing& license Agreement Paradyne and NetScout Confidential page 20
NetScout and Paradyne Use Pursuant to Company Procedures 01/26/98
<PAGE> 41
EXHIBIT C
LICENSE TERMS AND CONDITIONS (CONTINUED)
statement of the agreement between Paradyne and you, and that it
supersedes any proposal or prior agreement, oral, or written, and any
other communications between us relating to the subject matter of this
License. In addition, you agree that none of the foregoing terms and
conditions may be modified except in writing signed by you and
Paradyne;
- this License shall be governed by Florida law, other than its
provisions concerning the applicability of laws of other jurisdictions.
Limited Warranty
Limited Warranty. Paradyne warrants that under normal use and conditions the
Licensed Product will be free from significant defects in materials and
workmanship for a period of ninety (90) days from the date of purchase by you
from Paradyne or Paradyne's authorized reseller or distributor.
Customer Remedies. Paradyne and its suppliers' entire liability and your
exclusive remedy shall be, at Paradyne's option, (i) repair or replacement of
the Licensed Product that fails to meet Paradyne's Limited Warranty, or (ii)
return of the price paid. Paradyne and its suppliers shall have no
responsibility, warranty or other obligation whatsoever as a result of (a) the
use of the Licensed Product in a manner inconsistent with the accompanying
manuals and this License, (b) any modifications made to the Licensed Product,
or (c) failure of the Licensed Product as a result of accident, abuse, or
misapplication.
NO OTHER WARRANTIES. THE WARRANTIES SET FORTH ABOVE ARE EXCLUSIVE AND IN LIEU
OF ALL OTHER WARRANTIES. PARADYNE AND ITS SUPPLIERS MAKE NO OTHER WARRANTIES,
EXPRESS OR IMPLIED, AND PARADYNE AND ITS SUPPLIERS EXPRESSLY DISCLAIM ALL OTHER
WARRANTIES, INCLUDING BUT NOT LIMITED TO, ANY IMPLIED WARRANTIES OR
SATISFACTORY QUALITY, MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, AND
ANY WARRANTY OF NON-INFRINGEMENT OF INTELLECTUAL PROPERTY RIGHTS. MOREOVER, THE
PROVISIONS SET FORTH ABOVE STATE THE ENTIRE RESPONSIBILITY OF PARADYNE AND ITS
SUPPLIERS AND YOUR SOLE AND EXCLUSIVE REMEDY WITH RESPECT TO ANY BREACH OF ANY
WARRANTY.
LIMIT OF LIABILITY. UNDER NO CIRCUMSTANCES AND UNDER NO THEORY OF LIABILITY
SHALL PARADYNE OR ITS SUPPLIERS BE LIABLE FOR COSTS OF PROCUREMENT OF
SUBSTITUTE PRODUCTS OR SERVICES, LOST PROFITS, LOST SAVINGS, LOSS OF INFORMATION
OR DATA, OR ANY OTHER SPECIAL, INDIRECT, INCIDENTAL, OR CONSEQUENTIAL DAMAGES,
ARISING IN ANY WAY OUT OF THE SALE, LICENSE OR USE OF, OR INABILITY TO USE, THE
LICENSED PRODUCT, EVEN IF PARADYNE AND ITS SUPPLIERS HAVE BEEN ADVISED OF THE
POSSIBILITY OF SUCH DAMAGES, AND NOTWITHSTANDING ANY FAILURE OF ESSENTIAL
PURPOSE OF ANY LIMITED WARRANTY.
Marketing & License Agreement Paradyne and NetScout Confidential page 21
NetScout and Paradyne Use Pursuant to Company Procedures 01/26/98
<PAGE> 42
EXHIBIT D
PRODUCT SUPPORT AND PRIORITIZATION GUIDELINES
Paradyne will provide Tier 1 and Tier 2 Support for Customers in the same manner
that it provides such support for its other similar products. NetScout will
provide Tier 3 Support via telephone or electronic mail, five (5) days per week,
during NetScout's normal business hours (8 am - 6 pm, EST), and, and via a
paging service for after hours, weekend and holiday escalations. Paradyne shall
provide NetScout feedback for any Licensed Product bugs and potential fixes to
the bugs, which will be reviewed by NetScout and subsequently incorporated into
the Licensed Product, as required. In the event Paradyne is unable to resolve a
Customer's problem and NetScout Tier 3 Support is required, Paradyne will
escalate the problem to NetScout per a Customer assigned priority level.
NetScout will respond as follows:
Priority 1: The Customer's production network is down, causing critical impact
to business operations.
NetScout Response: Within four (4) hours, NetScout will provide Paradyne with a
schedule for resolving the problem and will identify the resources which will be
committed to managing the problem resolution. NetScout will make best efforts to
resolve the problem within two (2) days. NetScout will dedicate an individual to
manage the problem until a satisfactory Customer solution has been provided.
Priority 2: The Customer's production network is severely degraded, impacting
significant aspects of business operations.
NetScout Response: Within eight (8) hours, NetScout will provide Paradyne with a
schedule for resolving the problem and will identify the resources which will be
committed to managing the problem resolution. NetScout will make best efforts to
resolve the problem within one (1) week's time. NetScout agrees to commit
whatever resources are commercially reasonable and necessary to manage the
problem until a satisfactory Customer solution has been provided.
Priority 3: The Customer's network performance is degraded, but with little
impact on business operations.
NetScout Response: Within one (1) week, Paradyne will provide Paradyne with a
schedule for resolving the problem. Resources will be assigned, upon
availability.
Critical On-Site Support. In the event critical on-site support is required,
NetScout will make such services available at a charge of [***] dollars per hour
($[ ]), excluding travel and reasonable meal expenses.
Repair & Maintenance Charges (Single Repair)
6000 family $[***] unit
7000 family $[***] unit
Marketing & License Agreement Paradyne and NetScout Confidential page 22
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<PAGE> 43
EXHIBIT D
PRODUCT SUPPORT AND PRIORITIZATION GUIDELINES
Maintenance Agreements (h/w & s/w)
6000 family $[***] year
7000 family $[***] year
Repair Services. NetScout will repair all defective Products within fifteen
(15) days of receipt of the NetScout Products at NetScout's Westford MA
facility. All returned units must be accompanied by a Return Authorization (RA)
number and defective tag which identifies the alleged failure with the unit.
Paradyne shall be responsible for transportation expenses to and from
NetScout's facilities.
Priority Shipments. Provided PRODUCTS are in NetScout's inventory, NetScout
will ship PRODUCTS within twenty-four (24) hours of order receipt to assist
Paradyne in its delivery of critical service and support to customers. In the
event PRODUCTS are not in NetScout's inventory, NetScout will make best efforts
to ship as expeditiously as possible.
Marketing & License Agreement Paradyne and NetScout Confidential page 23
NetScout and Paradyne Use Pursuant to Company Procedures 01/26/98
- -------
*** Confidential Treatment Requested
<PAGE> 1
Exhibit 10.43
*** Text Omitted and Filed Separately
Confidential Treatment Requested
Under 17 CFR 200.80(b)(4), 200.83 and 230.406
[Lucent Technologies Logo]
[Lucent Technologies Letterhead]
April 16, 1999
Agreement No. G-18150-E
Amendment No. Two (2)
Exhibit A
Sheet 1 of 3
Paradyne Corporation
8545 126th Avenue North
Largo, FL 33773
Our Agreement No. G-18150-E, dated July 31, 1996 is hereby amended as follows:
Exhibit A is modified in total to eliminate the Comcode by Comcode reference of
MATERIAL, and instead replace with Product Family reference and a corresponding
discount percentage from list price. Pages two and three of this amendment
describes those discounts, and shall be used for pricing purpose.
Except as otherwise amended, all other Terms and Conditions of G-18150-E shall
remain the same.
Accepted Date May 5, 1999
<TABLE>
<CAPTION>
Paradyne Corporation Lucent Technologies
<S> <C>
By: /s/ James L. Slattery By: /s/ Mark A. Stebbins
Name(Print): James L. Slattery Name: Mark A. Stebbins
Title: Senior Vice President Title: Purchasing Manager
</TABLE>
<PAGE> 2
Agreement No. G18150-E
Amendment No. Two (2)
Exhibit A
Sheet 2 of 3
EXHIBIT A -- MATERIAL DISCOUNT SCHEDULE
<TABLE>
<CAPTION>
Products % Discount
<S> <C>
- --------------------------------------------------------------------------------------------------------
ACCULINK ACCESS CONTROLLER
- --------------------------------------------------------------------------------------------------------
STANDARD (***)%
- --------------------------------------------------------------------------------------------------------
*SEE ATTACHMENT FOR EXCEPTIONS
- --------------------------------------------------------------------------------------------------------
BUSINESS MODEMS
- --------------------------------------------------------------------------------------------------------
ANALOG: 38XXX (***)%
- --------------------------------------------------------------------------------------------------------
LEASED LINE: 39XXX (***)%
- --------------------------------------------------------------------------------------------------------
ACCESS MULTIPLEXING
- --------------------------------------------------------------------------------------------------------
9109, 9162, 9165, 9261, 9261, 9262, 9265 (***)%
- --------------------------------------------------------------------------------------------------------
**HOTWIRE:
- --------------------------------------------------------------------------------------------------------
DSL 50XXX, 51XXX, 56XXX (***)%
- --------------------------------------------------------------------------------------------------------
MVL: 63XXX, 5038 (***)%
- --------------------------------------------------------------------------------------------------------
RADSL: 52XXX, 54XXX, 5620, 85XXX, 8600 (***)%
- --------------------------------------------------------------------------------------------------------
DSLAM: 8000, 8600, 8776, 8784, 8800 (***)%
- --------------------------------------------------------------------------------------------------------
IPC: 81XXX, 82XXX (***)%
- --------------------------------------------------------------------------------------------------------
MSDSL: 7975, 7976, 7985, 8774, 8775, 8784 (***)%
- --------------------------------------------------------------------------------------------------------
FRAME SAVER FRAME RELAY MANAGEMENT:
- --------------------------------------------------------------------------------------------------------
9098, 9121, 9126, 9127, 9128, 9161, 9026, 96XXX, 9620, 9621, 9624, 9627, 9820, 9124. (***)%
- --------------------------------------------------------------------------------------------------------
**NETSCOUT FRAME PROBE
- --------------------------------------------------------------------------------------------------------
6038, 6050, 6070, 7401, 7402, 7504, 8702, 8704 (***)%
- --------------------------------------------------------------------------------------------------------
FRAME RELAY COMPRESSION UNIT
- --------------------------------------------------------------------------------------------------------
9028 (***)%
- --------------------------------------------------------------------------------------------------------
T1/E1 ACCESS PRODUCTS
- --------------------------------------------------------------------------------------------------------
3162, 3156, 71XX, 75XXX, 76XXX (***)%
- --------------------------------------------------------------------------------------------------------
3150, 3151, 3160, 3161, 3164, 3165, 3170, 3172, 3174, 3365 (***)%
- --------------------------------------------------------------------------------------------------------
SUBRATE ACCESS
- --------------------------------------------------------------------------------------------------------
3510, 3511, 3550, 3551, 3600, 3610, 3611, 3615, 3615, 3616, 9120 (***)%
- --------------------------------------------------------------------------------------------------------
7612, 7610, 7510, 7511, 7520 (***)%
- --------------------------------------------------------------------------------------------------------
NETWORK MANAGEMENT:
- --------------------------------------------------------------------------------------------------------
6700 SW, 6800 SW, 7700 SW, 7800 SW (***)%
- --------------------------------------------------------------------------------------------------------
**NETSCOUT
- --------------------------------------------------------------------------------------------------------
9115, 9125, 9135, 9140, 9145, 9150 (***)%
- --------------------------------------------------------------------------------------------------------
OTHER
- --------------------------------------------------------------------------------------------------------
CABINETS, CABLES, CARRIERS, MANUALS ETC. (***)%
- --------------------------------------------------------------------------------------------------------
SPARES (***)%
- --------------------------------------------------------------------------------------------------------
** Hotwire, Netscout Frame Probe, and Netscout products are excluded from the
terms of the Supply Agreement and Exclusivity Agreement signed 9/6/98.
- --------------------------------------------------------------------------------------------------------
</TABLE>
*** Confidential Treatment Requested
<PAGE> 3
Contract No. G18150-E
Amendment No. Two (2)
Exhibit A
Sheet 3 of 3
ACCULINK ACCESS CONTROLLER EXCEPTIONS
<TABLE>
<CAPTION>
MODEL % DISCOUNT
<S> <C>
20148 (***)%
- ---------------------------------------------------------------------
25446 (***)%
- ---------------------------------------------------------------------
10179 (***)%
- ---------------------------------------------------------------------
15813 (***)%
- ---------------------------------------------------------------------
2264-A01 (***)%
- ---------------------------------------------------------------------
2264-A02 (***)%
- ---------------------------------------------------------------------
25879 (***)%
- ---------------------------------------------------------------------
26909 (***)%
- ---------------------------------------------------------------------
15811 (***)%
- ---------------------------------------------------------------------
26907 (***)%
- ---------------------------------------------------------------------
2567-MEG (***)%
- ---------------------------------------------------------------------
2567-PIK (***)%
- ---------------------------------------------------------------------
2525-PIP (***)%
- ---------------------------------------------------------------------
2525-PIU (***)%
- ---------------------------------------------------------------------
2567-PIU (***)%
- ---------------------------------------------------------------------
2525-RW1 (***)%
- ---------------------------------------------------------------------
2525-RW2 (***)%
- ---------------------------------------------------------------------
10194 (***)%
- ---------------------------------------------------------------------
26903 (***)%
- ---------------------------------------------------------------------
10186 (***)%
- ---------------------------------------------------------------------
10200 (***)%
- ---------------------------------------------------------------------
17193 (***)%
- ---------------------------------------------------------------------
2525-N1N (***)%
- ---------------------------------------------------------------------
2525-N2N (***)%
- ---------------------------------------------------------------------
2525-N3N (***)%
- ---------------------------------------------------------------------
2525-N4N (***)%
- ---------------------------------------------------------------------
2525-N5N (***)%
- ---------------------------------------------------------------------
2525-N6N (***)%
- ---------------------------------------------------------------------
2525-N8N (***)%
- ---------------------------------------------------------------------
2525-N9N (***)%
- ---------------------------------------------------------------------
</TABLE>
***Confidential Treatment Requested
<PAGE> 4
April 15, 1999
Agreement: G-18150-E
Amendment No. 1
Page 1 of 14
Paradyne Corporation Lucent Technologies, Inc.
8545 126th Avenue North 188 Mt. Airy Rd.
Largo, FL 33773 Basking Ridge, NJ 07920
Whereas Lucent Technologies, Inc. ("Company") and Paradyne Corporation
("Supplier") entered into a Supply Agreement ("G-18150-E"), as of July 31,
1996 and;
Whereas the Supply Agreement includes reference to a "Volume/Price Letter" also
dated July 31, 1996 that specifies Company's volume purchase requirements and;
Whereas Company and Supplier entered into an "Exclusivity and Amendment
Agreement", dated August 6, 1998, which terminates the "Volume/Price Letter" in
exchange for Company forgiveness of principal on "Core Business Note", and
execution of exclusivity supply relationship;
Now, in consideration of the foregoing recitals, and effective as of August 6,
1998, the following clauses are modified to make G-18150-E consistent with
terms of the Exclusivity and Amendment Agreement. All other terms and
conditions of G-18150-E remain unchanged:
1. TERM
This Agreement shall become effective as of the date here of and shall continue
in effect until June 30, 2001. The amendment or termination of this Agreement
shall not affect the obligations of either party to the other under then
existing Orders issued pursuant to this Agreement, but such Orders shall
continue in effect as though this Agreement had not expired or been terminated
and was still in effect with respect to said Orders.
2. ORDER
For the purpose of this Agreement, an "Order" shall mean Company's form of
purchase order or contract used for the purpose of ordering Material. Each
Order shall reference this Agreement, thereby incorporating in such Order the
terms and conditions stated in this Agreement.
<PAGE> 5
Agreement No. G18150-E
Amendment No. 1
Page 2 of 14
3. MATERIAL
For the purpose of this Agreement, "Material" shall be defined as those
services performed by Supplier for Company and those Access products that are
identified by Product Family and described on Exhibit A to this Agreement
("Existing Products"): which attachment shall be continuously updated, to
include Enhanced and New Products if such products satisfy the requirements of
the clause ENHANCED AND NEW PRODUCTS.
4. ENHANCED AND NEW PRODUCTS
For the purpose of this Agreement, "Enhanced Product" or "Enhanced Products"
shall mean any product which results out of Company's desire to have Supplier
redesign, modify, or enhance an Existing Product or family of Existing
Products. For the purpose of this Agreement, "New Product" or "New Products"
shall mean product which is not an enhanced Product or Existing Product but
which is substantially similar to an Existing Product with respect to design an
function and possesses reasonable performance improvements. If Company desires
to purchase an Enhanced of New Product(s) from supplier, company shall so
notify Supplier and provide Supplier the opportunity to manufacture such
Enhanced or New Product(s), subject to the following conditions and procedures.
The Company requests for Access Product enhancements and new features or new
products shall be processed through the quarterly Meeting process, or as
needed. The decision to proceed will be based upon a business case that is
positive to both Company and Supplier. Supplier shall, within thirty (30) days
from the date of Supplier's receipt of Company's notice, inform Company whether
Supplier desires to manufacture and supply such Enhanced or New Product(s) to
Company. If Supplier desires to manufacture and supply such Enhanced or New
Product(s), Supplier shall provide Company (a) a written production plan
demonstrating Supplier's ability to satisfy the Performance Requirement, as
described in the next sentence, for such Enhanced or New Product(s) (such plan
shall include production locations and proposed dates for prototypes, sample
production and full production) and (b) Supplier's proposed Price for such
Enhanced or New Product(s). "Performance Requirement" shall mean the Company's
reasonably prescribed performance standards for Material, including, but not
limited to, quality, compliance with Specifications, delivery and service
support, each determined in the case of an Enhanced Product with reference to
standards for an Existing Product or family of Existing Products.
<PAGE> 6
April 15, 1999
Agreement: G-18150-E
Amendment No. 1
Page 3 of 14
The parties shall then negotiate in good faith to reach an agreement on such
production plan's ability to satisfy the Performance Requirements and the Price
to be charged for the Enhanced or New Product(s). In the event the parties
agree on the production plan's satisfaction of the Performance Requirement and
the Price for such Enhanced or New Product(s), and Supplier fulfills its
obligations under the production plan (including the commencement of full
production runs), then such Enhanced or New Product(s) will be added to Exhibit
A for the purposes of this Agreement. Where Company and Supplier have agreed
upon a production plan's satisfaction of Performance Requirements, and price,
and such production plan materially slips without contributing fault of
Company, then Company may procure competitive product from alternative source.
Given these circumstances, and when Supplier is able to satisfy the production
plan, Company agrees to add such Enhanced or New Products to Exhibit A.
However, such action by Company shall not restrict the Company from selling
product from (the above) alternative supplier under a dual source arrangement
provided Supplier's product is carried as the preferred product for resale. All
work performed by Supplier under this clause will be at Supplier's sole risk
and expense, unless otherwise agreed to by the parties.
If despite good faith negotiations the parties fail to agree (i) that the
Enhanced or New Product(s) production plan satisfies the Performance
Requirement or (ii) on a Price for the Enhanced or New Product(s), the parties
agree to resolve the dispute through escalation to Supplier CEO and Company
Purchasing Vice President or designee. In the event that this escalation
process is unable to resolve the dispute, the parties agree to promptly retain
an independent, non-affiliated consultant experienced in the industry to
provide an objective assessment of the issue(s) in dispute. The determination
of the consultant shall be final and binding. If the Supplier desires not to
make available for order by Company any Enhanced or New Product, the Company
may purchase the Enhanced or New Product(s) from another source or sources
without further obligation under Article 8.
7. BEST PRICE
Supplier's Prices to Company, within any given geographic region or country,
for Material contained herein with applicable discounts and with any increases
permitted hereunder, shall be [***]. If, within any geographic region or
country, Supplier at any time [***], Supplier shall [***]
***Confidential Treatment Requested
<PAGE> 7
April 15, 1999
Agreement: G-18150-E
Amendment No. 1
Page 4 of 14
Excluded from this provision shall be [***]
8. MARKET RIGHTS
(a) Supplier will supply 100% of Company's requirements for access Products
(as defined in Subsection 8(c)) for resale as "Stand-Alone Products".
Stand-Alone Products means products that operate individually or as a
component in a Supplier system. Examples of Stand-Alone Products are the
Supplier 3160 DSU/CSUs and/or cards that are inserted into a carrier to
create a system. An example of a product that is not Stand-Alone would be
a board or component that is to be inserted into another vendor's product
as an OEM in order to complete a function that the other vendor wishes to
provide. Company shall not purchase products for resale as Stand-Alone
Products that are substantially similar in design, functionality, and
operating characteristics to and compete in the marketplace with those
Access Products defined in Subsection 8 (c), and as they basically exist
on the date of this Amendment. With respect to Company's internal
requirements for Access Products, Supplier shall have Preferred Supplier
status ("Preferred Supplier") through the same period. Preferred Supplier
status shall mean, with respect to Company's internal requirements, that
Supplier shall be given the first opportunity to supply such products.
Supplier's ability to sell to any customer will not be restricted.
Supplier will use diligent efforts to meet such requirements, shall be
free to contract at its discretion with third parties to manufacture
products of its design or otherwise assist in fulfilling the requirements
for its Access Products.
(b) Quarterly relationship meetings will occur with alternating sites between
Supplier and Company. Attendees shall include decision level making
representatives of each party. The host company shall assume agenda and
minute responsibility. Minutes require joint approval or noted objections
but such minutes should not be construed as binding or enforceable legal
agreements. Interim working group meetings will continue similar to the
structure today.
(c)-(1) Company shall satisfy 100% of its requirements for Access Products for
resale as "Stand-Alone Products" during the term of this Amendment
from Supplier for the following core products, their enhancements, and
their normal evolution within currently defined market segments:
***Confidential Treatment Requested.
<PAGE> 8
April 15, 1999
Agreement: G-18150-E
Amendment No. 1
Page 5 of 14
1. Analog Products [***]
2. Subrate DSUs [***]
3. T1 CSUs and T1 DSU/CSUs [***]
4. T1 Access Multiplexers [***]
5. Frame Relay Access Units [***]
a) [***]
b) T3 ATM "Over" Frame Relay Network
Access Products [***]
c) NxT1 ATM/Frame Relay Network Access
Products [***]
(c)-(ii) Company shall not be restricted by this Agreement for Access Product
in the following market segments.
1. T1 Access Multiplexers [***]
***Confidential Treatment Requested
<PAGE> 9
April 15, 1999
Agreement: G-18150-E
Amendment No. 1
Page 6 of 14
2. T3 ATM "OVER" FRAME RELAY OUTSIDE THE SCOPE OF "FRAMEAWARE"
APPLICATIONS.
3. NXT1 ATM "OVER" FRAME RELAY OUTSIDE THE SCOPE OF "FRAMEAWARE"
APPLICATIONS.
4. ALL ATM PRODUCTS MANUFACTURED BY THE COMPANY, UNLESS OTHERWISE
PROHIBITED UNDER THE TERMS OF THE NONCOMPETITION AGREEMENT DATED
7/31/96 BETWEEN COMPANY AND SUPPLIER.
5. ALL VOICE OVER PRODUCTS, RFC 1490 TRANSLATION DEVICES, AND FRAME
RELAY ROUTING DEVICES [***]
(c)-(iii) Exception Statements --
1. APPLICABLE ONLY TO THE SUPPLIER'S ANALOG PRODUCTS OF SECTION
8(c)(i)-1 -- Company shall not be obligated to purchase 100% of
its requirements from Supplier unless the products are currently
embedded in Company designs, drawings, or configurators. Company
will not proactively encourage current analog customers to replace
Supplier's analog products with like products from other
manufacturers. Company shall not be obligated to purchase 100% of
its requirements from Supplier if customer has called for specific
vendor's product in an RFP or sale. In those cases where customer
has called for a specific vendor's product, Company may not make a
concerted effort to expand marketing dollars, include as part of
an offer, promote, pay commission or incentives, nor PEC/Com code
such products for general availability of the other vendor's
analog products. Company should first attempt to respond with
Supplier's equipment and revert to another vendor as a last
resort.
2. APPLICABLE ONLY TO THE SUPPLIER'S T1 CSU AND T1 DSU/CSUs OF
SECTION 8(c)(i)-3 -- Company shall not be obligated to
purchase 100% of its requirements from Supplier to respond to
special situations where the customer has called for a
specific DSU/CSU vendor product in a RFP or sale on a one-off
basis. Company may not, however, make any concerted effort to
expand marketing dollars, include as part of an offer,
promote, pay commission or incentives nor PEC/Com code
products for general availability of the other vendor's
DSU/CSU
***Confidential Treatment Requested
<PAGE> 10
April 15, 1999
Agreement: G-18150-E
Amendment No. 1
Page 7 of 14
products. Company should first attempt to respond with supplier's
equipment and revert to another vendor as a last resort.
3. In all of the above leases, Company will provide Supplier with
written notification of the one-off sale of the other vendor's
products. Company shall provide information consisting of product
type, dollar value of the transaction, and rationale for the resale
of the other vendor's product.
4. Excluded from the exclusivity obligations of this Amendment are
products purchased by Acquired Companies, where prior to acquisition
by Company, these Acquired Companies purchased and included
substantially similar product from other sources in their systems
designs. However, not excluded are substantially similar
Stand-Alone Products where a Supplier Access Product is or becomes
a feasible alternative. To determine if such substantially similar
product is or becomes a feasible alternative, Company and Supplier
shall utilize the Benchmarking provisions, and if required, follow
the dispute resolution process outlined under Benchmarking. Use of
"Other Sourced Product" in any form other than the original offer
will be subject to the exclusivity provisions and not an exception
under subsection 4. Additionally, if after acquisition, the Acquired
Company develops a need for an Access Product substantially similar
to those defined herein, then they shall satisfy 100% of this
requirement from Supplier. In no way is this meant to relieve
Company of its obligations under the Noncompetition Agreement,
dated 7/31/96.
(c) Requests for Access Product enhancements and new features or new products
shall process through the Quarterly Meeting process, or as needed, and
decisions to proceed shall be based upon a business relationship that
assures a positive business case for each party. Upon failure to reach an
agreed upon action plan, the resolution escalation process shall go to
Supplier CEO and Company Purchasing Vice President or designee. In the
event of a dispute, the "industry consultant" steps described under
SECTION 9 ("BENCHMARKING"), as amended in this Amendment, may be invoked
by either party.
9. BENCHMARKING
On a quarterly basis, Company and Supplier shall, if requested by either party,
undertake to benchmark price, quality, product functionality, and service
performance of material offered by Supplier. Price shall mean general pricing
issues or trends, not specific opportunities which shall continue to be handled
under the Supplier's "P Quote" process.
<PAGE> 11
April 15, 1999
Agreement: G-18150-E
Amendment No. 1
Page 8 of 14
Product functionality shall mean a major function that represents an industry
trend and which is considered essential to compete in the current marketplace
and preserve market share. Singular features that Supplier may or may not have
as part of the product offering would not qualify for benchmarking. The decision
to benchmark will be presented and developed at regularly scheduled quarterly
business meetings. Prior to any benchmarking both companies shall agree upon
the framework to conduct the benchmarking process (see Exhibit B). This shall
include clear identification of industry leaders to be benchmarked.
Following the benchmark study, Supplier and Company shall review such benchmark
information and Supplier shall develop a plan of action for improving Material
Price, quality, product functionality, and service performance if such
benchmark information indicates improvements are needed when compared to the
then existing standards of the industry of comparable Price, quality, product
functionality and service. Supplier shall introduce improvements that assure
Company that Material is meeting or exceeding competitive benchmarks with
respect to: (1) Material Price within thirty (30) days after the later of such
review or objective assessment as described below, and (2) for Material
quality, product functionality, or service performance within a mutually agreed
upon period after the later of such review or objective assessment. Supplier
will provide a plan for introducing such improvements within the first thirty
(30) days of such review objective assessment. If Supplier fails to perform as
described in items 1 or 2 above, Company shall have the right to competitively
quote such Material in the marketplace. Company will give Supplier a thirty
(30) day prior written notice of such intent to place business with any other
vendor and provide Supplier that thirty (30) day period to match or beat such
other offer received by Lucent. If Supplier matches or beats such other offer,
Lucent agrees to continue to place Orders with Supplier at the new price,
quality, product functionality, and service levels subject to the terms and
conditions of this Agreement. If Supplier does not match or beat Company's
offer, Company may elect to purchase Material from another source without
further obligation under Article 8 for those Products. Where Company and
Supplier have agreed upon a schedule and the scheduled General Availability for
such new feature, functionality or quality slips without contributing fault by
Company, Company may procure a competitive product.
In the event of a dispute to approach, procedure or results of the benchmarking,
the parties agree to promptly retain an independent, non-affiliated consultant
experienced in the industry to provide an objective assessment of the issue(s)
in dispute. The determination of the consultant shall be final and binding.
<PAGE> 12
April 15, 1999
Agreement: G-18150-E
Amendment No. 1
Page 9 of 14
15. MANUFACTURE DISCONTINUED
Supplier shall provide Company at least one (1) year prior written notice that
any Material covered by this Agreement is recommended as a candidate to be
manufacture discontinued by Supplier. Company shall, within sixty (60) days
after receipt of Supplier's written notice, provide Supplier a written
response indicating Company's approval or disapproval of the manufacture
discontinued status of such Material based upon such Material's impact on the
Company's business, including but not limited to the Company's obligations to
its customers.
If Company does not approve of the Material being manufacture discontinued, the
parties shall negotiate in good faith to determine the final disposition of
such Material. If the parties agree that Material shall become manufacture
discontinued, Supplier shall accept Company's Orders for such manufacture
discontinued Material under the terms and conditions of this Agreement for one
(1) year from the Supplier's notification date of manufacture discontinued
status. Once the manufacture discontinued Material is no longer available to
order by Company, Supplier agrees that the Company may procure substitute
product from alternate source without further obligation under Article 8 for
those products.
36. INDEMNITY AND INFRINGEMENT
All Work performed by Supplier under this Agreement shall be performed by
Supplier as an independent contractor and not as an agent of Company. All
persons furnished by Supplier shall be considered solely Supplier's Employees or
agents, and Supplier shall be responsible for compliance with all applicable
laws, rules, and regulations relating to labor, working conditions, wages, and
payment of all unemployment, social security, and other payroll taxes,
including contributions when required by law.
Supplier agrees to indemnify and save harmless Company, its affiliates and its
customers and their officers, directors, employees, successors and assigns (all
hereinafter referred to in this clause as "Company") from and against any
losses, damages, claims, demands, suits, liabilities, and expenses (including
reasonable attorney's fees) that arise out of or result from: (1) injuries or
death to persons or damage to property, including theft, in any way arising out
of or occasioned by, caused or alleged to have been caused by or on account of
the Material, or the performance or Work or Services performed by Supplier or
persons furnished by Supplier; (2) assertions under Workers' Compensation or
similar acts made by persons furnished by Supplier or by any subcontractor or by
reason of any injuries to such persons for which Company would be responsible
under Workers' Compensation or similar acts if the persons were employed by
Company; (3) any failure by Supplier to perform Supplier's
<PAGE> 13
April 15, 1999
Agreement: G-18150-E
Amendment No. 1
Page 10 of 14
obligations under this Indemnity and Infringement Section; and/or (4) any
infringement or claim of infringement of any patent, trademark, copyright,
trade secret, or other intellectual property right of third parties based
on the manufacture, repair, sale, use, importation, reproduction and/or
distribution of Material furnished to Company hereunder, and/or any part,
component, feature or design of such Material, except that this infringement
arise solely and directly from Company supplied parts or components, or from
Supplier's required adherence to Company's written instructions or
Specifications which are so specified that such adherence directly causes
such claims or infringement and which instructions or Specifications require
the use of Material other than (i) commercial material which is available on
the open market or the same as such Material or (ii) Material of Supplier's
origin, design or selection.
In the case of the infringement indemnity, if Company's or its customers'
manufacture, repair, use, sale, importation, reproduction and/or distribution
of Material is restricted or prevented by injunction, court order or negotiated
settlement on account of such infringement, Supplier shall, at its expense:
(i) procure for Company and Company's customers the right to continue
manufacturing, using, selling, importing, reproducing and/or distributing such
Material; or (ii) replace such Material with a non-infringing product
substantially complying with such Material's Specifications and satisfactory to
Company; or (iii) modify such Material so it becomes non-infringing and
performs in a substantially similar manner to the original Material and
satisfactory to Company; or (iv) in the event of inability to reasonably
perform any of the foregoing, refund to Company the purchase price for affected
Material.
Supplier agrees to defend Company, at Company's request, against any of the
referenced claims, demands, or suits at Supplier's expense. Company agrees to
notify Supplier within a reasonable time of any written claims or demands
against Company for which Supplier is responsible under this Clause.
38. LATE DELIVERY/LIQUIDATED DAMAGES AND CANCELLATIONS
Supplier agrees that in the event that Company is able to provide to Supplier
demonstrable evidence that any delay by Supplier in delivering any Material
committed to by Supplier under any Order caused the loss of a contract of
Company or caused Company to obtain substitute material from a third party in
order to fulfill the contract, then Company shall be permitted to source such
substitute material Order without obligation to Article 8.
<PAGE> 14
April 15, 1999
Agreement: G-18150-E
Amendment No. 1
Page 11 of 14
These provisions concerning late delivery of conforming Material are intended
to be and shall be cumulative and in addition to every other remedy now or
hereafter possessed by Company, including but not limited to its right to
recover damages under the clause entitled WARRANTY.
39. AUDIT
Supplier shall maintain accurate and complete records including termination
charges playable by Company under this Agreement. These records shall be
maintained in accordance with recognized commercial accounting practices so
they may be readily audited and shall be held until costs have been finally
determined under this Agreement and payment or final adjustment of payment, as
the case may be, has been made. Supplier shall permit Company or Company's
Representative to examine and audit these records and all supporting records at
all reasonable times. Audits shall be made not later than one (1) calendar
year after the final delivery date of Material ordered or completion of
services rendered or one (1) calendar year after the expiration date of this
Agreement, whichever comes later.
41. DEFAULT
In the event Supplier shall be in breach of default of any of the material
terms, conditions, or covenants of this Agreement and if such breach or default
shall continue for a period of forty-five (45) days after the giving of written
notice to Supplier thereof by Company that Company intends to cancel because of
such default, then, in addition to all other rights and remedies which Company
may have at law or equity or otherwise. Company shall have the right to cancel
this Agreement and/or Orders without any charge or obligation or liability of
Company.
42. TERMINATION OF ORDER FOR CAUSE
In the event Supplier exceeds the shipping interval plus five (5) working days
as specified in an Order issued hereunder because of reasons attributable to
Supplier (other than those contained in the FORCE MAJEURE Section of this
Agreement), then in addition to all other rights and remedies of law or equity
or otherwise and without liability or obligation to Supplier, Company shall
have the right to:[***]
55. ASSIGNMENT
Except as set forth below, neither Company nor Supplier shall assign any right
or interest under this Agreement or (with respect to Supplier) under an Order
issued pursuant to this Agreement (excepting monies due or to become due) or
delegate any Work or other obligation to be performed or owed under this
Agreement or an Order
***Confidential Treatment Requested
<PAGE> 15
April 15, 1999
Agreement: G-18150-E
Amendment No. 1
Page 12 of 14
either in whole or in part without the prior written consent of the other party
which consent shall not be unreasonably withheld. Any attempted assignment or
delegation in contravention of the above provisions shall be void and
ineffective. Any assignment of monies shall be void and ineffective to the
extent that (1) Supplier shall not have given Company at least thirty (30) days
prior written notice of such assignment or (2) such assignment attempts to
impose upon Company obligations to the assignee additional to the payment of
such monies, or to preclude Company from dealing solely and directly with
Supplier in all matters pertaining to this Agreement including the negotiation
of amendments or settlements of charges due.
Notwithstanding the provisions set forth above, Company shall have the right to
assign this Agreement and to assign its rights and delegate its duties under
this Agreement either in whole or in part, at any time and without Supplier's
consent; provided however that such assignment shall only be permitted to an
affiliate or subsidiary of Company having assets greater than [***]. Company
shall give Supplier thirty (30) days prior written notice of any such
assignment. The assignment shall neither affect nor diminish any rights or
duties that Supplier or Company may then or thereafter have as to services or
Material ordered by Company prior to the effective date of the assignment.
Upon the acceptance of the assignment and assumption of the duties under this
Agreement, Company shall be released and discharged, to the extent of the
assignment, from all further duties under this Agreement as to services or
Material not ordered by Company by the effective date of the Assignment.
60. FORCE MAJEURE
Neither party shall be held responsible for any delay or failure in performance
of any part of this Agreement or Order to the extent such delay or failure is
caused by fire, flood, explosion, war, strike, embargo, government requirement,
civil or military authority, act of God, act or omission of carriers or other
similar causes beyond its control and without the fault or negligence of the
delayed or nonperforming party or its subcontractors ("force majeure
conditions"). Notwithstanding the foregoing, Supplier's liability for loss or
damage to Company's Material in Supplier's possession or control shall not be
modified by this clause. If any force majeure condition occurs, the party
delayed or unable to perform shall give immediate notice to the other party and
the party affected by the other's delay or inability to perform may elect to:
(1) suspend this Agreement or Order for the duration of the force majeure
condition and (i) at its option obtain elsewhere manufacturing or repair
services to have been furnished under this Agreement or Order, and (ii) once
the force majeure condition ceases, resume performance under this Agreement or
Order with an option in the affected party to extend the period of this
Agreement or Order up the length of time the force majeure
***Confidential Treatment Requested
<PAGE> 16
April 15, 1999
Agreement No. G18150-E
Amendment No. 1
Page 13 of 14
condition endured and/or (2) when the delay or nonperformance continues for a
period of at least thirty (30) days, terminate, at no charge, the applicable
Order or the part of it relating to Material not already shipped or Services
not already performed. Unless Written notice is given within forty-five (45)
days after the affected party is notified of the force majeure condition, (1)
shall be deemed selected.
65. EPIDEMIC CONDITION
In the event that during the term of this Agreement and for one year after the
last shipment date of Material hereunder, Company notifies Supplier (in
accordance with the NOTICES clause) that Material shows evidence of an Epidemic
Condition. Supplier shall prepare and propose a "Corrective Action Plan" (CAP)
with respect to such Material within ten (10) working days of such notification,
addressing implementation and procedure milestones for remedying such epidemic
condition(s). An extension of this time-frame is permissible upon mutual
agreement of the parties.
Upon notification of the Epidemic Condition to Supplier, Company shall have the
right to postpone shipment of unshipped Material by giving written notice of
such postponement to Supplier, pending correction of the Epidemic Condition.
Such postponement shall temporarily relieve Supplier of its shipment liability
and Company of its shipment acceptance liability. Should Supplier not agree to
the existence of an Epidemic Condition or should Company not agree to the
Corrective Action Plan, then Company shall have the right to suspend all or part
of its unshipped Orders without liability to Company until such time as a
mutually acceptable solution is reached.
An Epidemic Condition, excluding potential safety hazards, will be considered to
exist when one or more of the following conditions occur:
1. Failure reports or statistical sampling showing that three percent
(3%) or more of any consecutive one hundred (100) units of Material delivered to
Company or Company's customers are rejected for defective materials or
workmanship; or repair reports indicate non-conformance for the same defect of
five percent (5%) of the installed Material base.
2. Reliability plots of relevant data indicate that Material has actual
Mean Time Between Failures (MTBF) of less than eighty (80%) percent of the MTBF
stipulated in Specification for Material. the MTBF parameter of Material is
defined as the total operation or power-on time of any population under
observation ("T"), in hours, divided by the total number of critical failures
("n") that have occurred during the observed period. a critical failure is
defined as a failure to operate per the requirements of Specification. The total
operating time for a population is the summation of operating time of individual
units in that population. MTBF is
<PAGE> 17
April 15, 1999
Agreement: G-18150-E
Amendment No. 1
Page 14 of 14
expressed as MTBF=T/n. An Epidemic Condition shall exist when data
derived from populations being tracked confirms the condition with
eighty (80%) percent statistical confidence.
3. Material Dead on Arrival ("DOA") failures exceed the Epidemic DOA
failure rate which is defined as two percent (2%) of Material
delivered to Company or Company's customer with a one (1) month
period.
Only major functional and visual/mechanical/appearance defects are considered
for determining Epidemic Condition. Material could be either sampled, or at
Company option, one hundred (100%) percent audited at Company warehouses,
factories, or Company's customers' locations. If Material is sampled, the data
must have eighty (80%) percent or better statistical confidence.
For the purposes of this Agreement, functional DOA shall not include Material
for which no defect is found and shall be defined as any Material that during
the test, installation or upon its first use fails to operate as expected or
specified. Visual/mechanical/appearance DOA is defined as any Material
containing one or more major defects that would make Material unfit for use or
installation. An Epidemic Condition shall not include failure due to customer
misapplication, misuse, abuse, lightning, utilization of parts not approved by
Supplier, or chain failures induced by internally or externally integrated
subassemblies.
In the event that Supplier develops a remedy for the defect(s) that caused the
Epidemic Condition and Company agrees in writing that the remedy is acceptable,
Supplier shall:
(a) Incorporate the remedy in the affected Material in accordance with
Engineering Change Control procedures or manufacturing procedures,
as applicable, agreed to by the parties.
(b) Ship all subsequent Material incorporating the required
modification correcting the defect(s) at no additional charge to
Company; and
(c) Repair and/or replace at Supplier's option Material that caused the
Epidemic Condition. In the event that Company incurs costs due to
such repair and/or replacement, including but not limited to labor
and shipping costs, Supplier shall reimburse Company for such costs,
as mutually determined and agreed upon by both parties. Supplier
shall bear such risk of in transit loss and damage for such repaired
and/or replaced Material shipped to Company.
<PAGE> 18
April 15, 1999
Agreement: G-18150-E
Amendment No. 1
Page 15 of 14
Supplier and Company shall mutually agree in writing as to the remedy's
implementation schedule. Supplier agrees to utilize its best efforts to
implement in accordance with agreed-upon schedule.
In the event that Supplier is unable to develop a mutually agreeable
remedy, or does not adequately take into account the business interests of
Company, as reasonably agreed by the parties, Company may (1) develop such
remedy and implementation cost and risk of in transit loss and damage shall be
allocated between the parties as set forth in this clause, and/or (2) cancel
postponed Orders without liability and return all confirmed Material affected by
such Epidemic Condition for full refund, payable by Supplier within thirty (30)
days after receipt of returned Material (with risk of loss of in transit damage
borne by Supplier), and/or (3) terminate this Agreement without further
liability.
All other terms and conditions shall remain unchanged.
ACCEPTED: Date May 5, 199
------ --
PARADYNE CORPORATION
SUPPLIER COMPANY NAME LUCENT COMPANY NAME
By /s/ James L. Slattery By /s/ P. MCleb
----------------------------- ------------------------------
Title Senior Vice President Title Global Purchasing Organization
-------------------------- ---------------------------
Vice President
---------------------------
<PAGE> 19
EXHIBIT B
BENCHMARKING PROCESS
[***]
[***]
1. [***]
2. [***]
3. [***]
4. [***]
5. [***]
6. [***]
7. [***]
8. [***]
***Confidential Treatment Requested
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 (Registration No. 333-76385) of our reports
dated June 8, 1999, relating to the financial statements of Paradyne Networks,
Inc. (formerly "Paradyne Acquisition Corp.") and the Financial Statement
Schedule listed in Item 16(b) of this Form S-1, and our report dated November
23, 1998, relating to the financial statements of Paradyne Predecessor Business,
all of which appear in such Prospectus. We also consent to the references to us
under the headings "Experts" and "Selected Consolidated Financial Data" in such
Prospectus. However, it should be noted that PricewaterhouseCoopers LLP has not
prepared or certified such "Selected Consolidated Financial Data."
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PricewaterhouseCoopers LLP
Tampa, Florida
June 23, 1999
