<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 26, 1996
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------
ADVANCED FIBRE COMMUNICATIONS, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 3661 68-0277743
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) No.)
</TABLE>
1445 MCDOWELL BOULEVARD NORTH
PETALUMA, CA 94954
(707) 794-7700
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
---------------------
DONALD GREEN
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
ADVANCED FIBRE COMMUNICATIONS, INC.
1445 MCDOWELL BOULEVARD NORTH
PETALUMA, CA 94954
(707) 794-7700
(Name and address, including zip code, and telephone number, including area
code, of agent for service)
---------------------
COPIES TO:
<TABLE>
<S> <C>
SCOTT D. LESTER, ESQ. MARK A. BERTELSEN, ESQ.
KEITH M. ROBERTS, ESQ. KENNETH M. SIEGEL, ESQ.
BROBECK, PHLEGER & HARRISON LLP DAVID S. KIM, ESQ.
ONE MARKET WILSON, SONSINI, GOODRICH & ROSATI
SPEAR STREET TOWER PROFESSIONAL CORPORATION
SAN FRANCISCO, CA 94105 650 PAGE MILL ROAD
(415) 442-0900 PALO ALTO, CA 94304-1050
(415) 493-9300
</TABLE>
-------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS
PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of 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 delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
-------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF PROPOSED MAXIMUM
SECURITIES TO BE AGGREGATE OFFERING AMOUNT OF
REGISTERED PRICE(1) REGISTRATION FEE
<S> <C> <C>
Common Stock, $.01 par value............................................................ $64,400,000 $22,207
</TABLE>
(1) Estimated solely for the purpose of computing the registration fee pursuant
to Rule 457(o).
-------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
EXPLANATORY NOTE
This Registration Statement contains two forms of prospectus: (i) one to be
used in connection with an offering in the United States and Canada (the "U.S.
Prospectus") and (ii) the other to be used in connection with a concurrent
offering outside of the United States and Canada (the "International
Prospectus"). The U.S. Prospectus and the International Prospectus are identical
in all respects except for the front cover page of the International Prospectus,
which is included herein after the final page of the U.S. Prospectus and is
labeled "Alternate Page for International Prospectus." Final forms of each of
the Prospectuses will be filed with the Securities and Exchange Commission under
Rule 424(b).
i
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROSPECTUS (SUBJECT TO COMPLETION)
ISSUED JULY 26, 1996
SHARES
[LOGO]
COMMON STOCK
---------------------
OF THE SHARES OF COMMON STOCK OFFERED, SHARES ARE BEING OFFERED
INITIALLY IN THE UNITED STATES AND CANADA BY THE U.S. UNDERWRITERS AND
SHARES ARE BEING OFFERED INITIALLY OUTSIDE OF THE UNITED STATES AND CANADA
BY THE INTERNATIONAL UNDERWRITERS. SEE "UNDERWRITERS." ALL OF THE SHARES
OF COMMON STOCK OFFERED HEREBY ARE BEING SOLD BY THE COMPANY. PRIOR
TO THIS OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR THE COMMON
STOCK OF THE COMPANY. IT IS CURRENTLY ESTIMATED THAT
THE INITIAL PUBLIC OFFERING PRICE PER SHARE WILL BE BETWEEN
$ AND $ . SEE ``UNDERWRITERS"
FOR A DISCUSSION OF THE FACTORS TO BE CONSIDERED IN
DETERMINING THE INITIAL PUBLIC OFFERING PRICE.
------------------------------
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE ``RISK FACTORS"
COMMENCING ON PAGE 5 HEREOF.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
PRICE $ A SHARE
------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS (1) COMPANY (2)
------------------ ------------------ ------------------
<S> <C> <C> <C>
PER SHARE................................................ $ $ $
TOTAL (3)................................................ $ $ $
</TABLE>
- ------------
(1) THE COMPANY HAS AGREED TO INDEMNIFY THE UNDERWRITERS AGAINST CERTAIN
LIABILITIES, INCLUDING LIABILITIES UNDER THE SECURITIES ACT OF 1933, AS
AMENDED.
(2) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY ESTIMATED AT
$ .
(3) THE COMPANY HAS GRANTED TO THE U.S. UNDERWRITERS AN OPTION, EXERCISABLE
WITHIN 30 DAYS OF THE DATE HEREOF, TO PURCHASE UP TO AN AGGREGATE OF
ADDITIONAL SHARES AT THE PRICE TO PUBLIC LESS UNDERWRITING
DISCOUNTS AND COMMISSIONS FOR THE PURPOSE OF COVERING OVER-ALLOTMENTS, IF
ANY. IF THE U.S. UNDERWRITERS EXERCISE SUCH OPTION IN FULL, THE TOTAL
PRICE TO PUBLIC, UNDERWRITING DISCOUNTS AND COMMISSIONS AND PROCEEDS TO
COMPANY WILL BE $ , $ AND $ , RESPECTIVELY.
SEE "UNDERWRITERS."
------------------------------
THE SHARES ARE OFFERED, SUBJECT TO PRIOR SALE, WHEN, AS AND IF ACCEPTED BY
THE UNDERWRITERS NAMED HEREIN AND SUBJECT TO APPROVAL OF CERTAIN LEGAL MATTERS
BY WILSON, SONSINI, GOODRICH & ROSATI, PROFESSIONAL CORPORATION, COUNSEL FOR THE
UNDERWRITERS. IT IS EXPECTED THAT DELIVERY OF THE SHARES WILL BE MADE ON OR
ABOUT , 1996 AT THE OFFICE OF MORGAN STANLEY & CO. INCORPORATED, NEW
YORK, N.Y., AGAINST PAYMENT THEREFOR IN IMMEDIATELY AVAILABLE FUNDS.
------------------------
MORGAN STANLEY & CO.
INCORPORATED
MERRILL LYNCH & CO.
COWEN & COMPANY
HAMBRECHT & QUIST
, 1996
<PAGE>
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY BY ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL FOR SUCH PERSON TO
MAKE SUCH AN OFFERING OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCE IMPLY THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE
HEREOF.
------------------------
UNTIL , 1996 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary................................................................................................. 3
The Company........................................................................................................ 4
Risk Factors....................................................................................................... 5
Use of Proceeds.................................................................................................... 13
Dividend Policy.................................................................................................... 13
Capitalization..................................................................................................... 14
Dilution........................................................................................................... 15
Selected Consolidated Financial Data............................................................................... 16
Management's Discussion and Analysis of Financial Condition and Results of Operations.............................. 17
Business........................................................................................................... 24
Management......................................................................................................... 37
Certain Transactions............................................................................................... 48
Principal Stockholders............................................................................................. 50
Description of Capital Stock....................................................................................... 52
Shares Eligible for Future Sale.................................................................................... 55
Underwriters....................................................................................................... 57
Legal Matters...................................................................................................... 60
Experts............................................................................................................ 60
Additional Information............................................................................................. 60
Index to Consolidated Financial Statements......................................................................... F-l
</TABLE>
------------------------
The Company intends to furnish its stockholders annual reports containing
audited consolidated financial statements examined by an independent accounting
firm and quarterly reports for the first three quarters of each fiscal year
containing interim unaudited consolidated financial information.
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
------------------------
The Universal Modular Carrier 1000-TM- is a trademark of the Company. All
other trademarks or trade names referred to in this Prospectus are the property
of their respective owners.
------------------------
EXCEPT AS OTHERWISE NOTED HEREIN, INFORMATION IN THIS PROSPECTUS (I) ASSUMES
NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION, (II) REFLECTS A
TWO-FOR-ONE STOCK SPLIT TO BE EFFECTED IN AUGUST 1996 AND (III) REFLECTS THE
AUTOMATIC CONVERSION UPON THE CLOSING OF THIS OFFERING OF ALL OUTSTANDING SHARES
OF PREFERRED STOCK OF THE COMPANY INTO AN AGGREGATE OF 18,717,472 SHARES OF
COMMON STOCK. THE COMPANY OPERATES ON A 13-WEEK FISCAL QUARTER, COMPRISED OF
FOUR, FOUR AND FIVE WEEK MONTHS ENDING ON THE LAST SATURDAY OF THE LAST WEEK OF
THE FIVE-WEEK MONTH. FOR PRESENTATION PURPOSES ONLY, THE COMPANY HAS SHOWN ITS
FIRST THREE FISCAL QUARTERS AS ENDING ON MARCH 31, JUNE 30, AND SEPTEMBER 30,
AND ITS FISCAL YEAR AS ENDING ON DECEMBER 31.
<PAGE>
THE UMC SYSTEM PROVIDES COST-EFFECTIVE, MULTI-FEATURE
SUBSCRIBER LOOP SOLUTIONS FOR SMALL LINE-SIZE MARKETS.
The UMC architecture is based upon a modular software and hardware product
platform that can be configured and adapted to the particular requirements of
the customer.
Line cards are designed to provide voice and data transmissions in either analog
or digital form for both domestic and international requirements.
The Company believes that the UMC system is the only digital loop carrier that
can operate simultaneously over a variety of transmission media, including
copper wire, fiber optic cable, coaxial cable and analog radio networks.
<TABLE>
<S> <C>
The proprietary backplane
design currently supports
a variety of voice and
data services.
[diagram of the UMC channel bank assembly including line cards] The UMC system is easily
scalable from six to 672
lines through the addition
of plug-in components.
</TABLE>
<TABLE>
<S> <C>
The UMC system was designed [diagram of basic UMC configuration]
to require a low amount of
overhead and a minimum
number of common control
units.
</TABLE>
[AFC Logo]
<PAGE>
PROSPECTUS SUMMARY
THE PROSPECTUS CONTAINS CERTAIN STATEMENTS OF A FORWARD-LOOKING NATURE
RELATING TO FUTURE EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF THE COMPANY. IN
EVALUATING SUCH STATEMENTS, PROSPECTIVE INVESTORS SHOULD SPECIFICALLY CONSIDER
THE VARIOUS FACTORS IDENTIFIED IN THIS PROSPECTUS, INCLUDING, BUT NOT LIMITED
TO, THE MATTERS SET FORTH UNDER THE CAPTION "RISK FACTORS," WHICH COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED BY SUCH FORWARD-LOOKING
STATEMENTS. THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE
DETAILED INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO
APPEARING ELSEWHERE IN THIS PROSPECTUS.
THE COMPANY
Advanced Fibre Communications, Inc. ("AFC" or the "Company") designs,
develops, manufactures, markets and supports the Universal Modular Carrier
1000-TM- (the "UMC" system), a cost-effective, multi-feature digital loop
carrier system developed to serve small line-size markets. The Company's UMC
system is designed to enable telephone companies, cable companies and other
service providers to connect subscribers to the central office switch for voice
and data communications over copper wire, fiber optic cable, coaxial cable and
analog radio networks. The Company believes that the UMC system is the only
digital loop carrier that can operate simultaneously over a variety of
transmission media. The UMC system meets the service needs of subscribers,
including analog voice communications, universal voice grade service and high
speed digital data service. ISDN capability is currently in beta testing and the
Company believes the UMC system will be capable of providing asynchronous and
synchronous data channel service in the near future.
The UMC system has been sold to more than 350 independent telephone
companies in the United States, is being initially deployed by Ameritech and
GTE, and is in laboratory or field trials at Pacific Bell, BellSouth and U.S.
West. The Company has also sold the UMC system to telephone companies in France,
Hong Kong, Canada, Mexico, the Netherlands Antilles, the Dominican Republic and
China. The Company has formed several strategic relationships in order to
broaden the distribution of the UMC system into developing international markets
and to leverage the UMC technology for applications in markets not directly
targeted by the Company.
THE OFFERING
<TABLE>
<S> <C>
U.S. Offering...................................... shares
International Offering............................. shares
Total.......................................... shares
Common Stock to be outstanding after the shares (1)
offering..........................................
Use of proceeds.................................... For repayment of indebtedness and for general
corporate purposes, including working capital.
Proposed Nasdaq National Market symbol............. AFCI
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------- --------------------
1993 1994 1995 1995 1996 (2)
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues....................................................... $ 620 $ 18,802 $ 54,287 $ 19,245 $ 53,772
Gross profit (loss)............................................ (1,954) 4,678 20,818 7,324 22,714
Operating income (loss)........................................ (7,291) (7,791) 3,805 348 (10,028)
Net income (loss).............................................. $ (7,291) $ (7,765) $ 2,341 $ (155) $ (1,541)
Pro forma net income (loss) per share (3)...................... $ 0.09 $ (0.01) $ (0.06)
Shares used in per share computations (3)...................... 27,329 23,800 24,711
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
--------------------------
ACTUAL AS ADJUSTED (4)
--------- ---------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.............................................................. $ 10,885 $
Working capital........................................................................ 23,720
Total assets........................................................................... 67,299
Redeemable convertible preferred stock................................................. 39,317
Total stockholders' equity (deficit)................................................... $ (8,241) $
</TABLE>
- -------------
(1) Based on the number of shares outstanding as of June 30, 1996. Excludes
7,175,676 shares of Common Stock reserved for issuance under the Company's
stock option plans, under which options to purchase 4,076,918 shares were
outstanding as of June 30, 1996, and 1,500,000 shares reserved for issuance
under the Company's Employee Stock Purchase Plan. Also excludes 5,135,080
shares of Common Stock reserved for issuance pursuant to the exercise of
warrants outstanding as of June 30, 1996. See "Management -- Stock Incentive
Plan," " -- Employee Stock Purchase Plan," "Certain Transactions" and
"Description of Capital Stock."
(2) Includes a charge of $15.8 million in the quarter ended June 30, 1996 for
cash payments and the issuance of Common Stock to DSC Communications
Corporation in settlement of outstanding litigation. See "Business -- Legal
Proceedings." Without this charge, operating income for the six months ended
June 30, 1996 would have been $5.8 million.
(3) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the determination of the number of shares used in computing pro forma net
income (loss) per share.
(4) As adjusted to reflect (i) the sale of shares of Common Stock by the
Company at an assumed initial public offering price of $ per share,
(ii) the application of the estimated net proceeds therefrom and (iii) the
conversion upon the closing of this offering of all outstanding shares of
Preferred Stock of the Company into an aggregate of 18,717,472 shares of
Common Stock. See "Use of Proceeds," "Capitalization" and Note 1 of Notes to
Consolidated Financial Statements.
3
<PAGE>
THE COMPANY
Advanced Fibre Communications, Inc. ("AFC" or the "Company") designs,
develops, manufactures, markets and supports the Universal Modular Carrier
1000-TM- (the "UMC" system), a cost-effective, multi-feature digital loop
carrier system developed to serve small line-size markets. The Company's UMC
system is designed to enable telephone companies, cable companies and other
service providers to connect subscribers to the central office switch for voice
and data communications over copper wire, fiber optic cable, coaxial cable and
analog radio networks. The Company believes that the UMC system is the only
digital loop carrier that can operate simultaneously over a variety of
transmission media. The UMC system meets the service needs of domestic and
international subscribers, including plain old telephone service (``POTS"),
universal voice grade service (``UVG") and high speed digital data service. ISDN
capability is currently in beta testing and the Company believes the UMC system
will be capable of providing asynchronous and synchronous data channel service
(``ADU" and ``SDU") in the near future. Through a relationship with Tellabs
Operations, Inc. (``Tellabs"), AFC has developed the capability to deliver these
same services over cable TV networks.
Although urban markets have experienced the greatest initial demand for
additional lines and high-speed telecommunications services, the Company
believes that demand for these services is increasing in rural and suburban
markets as well. The Company also believes, however, that telecommunications
service providers in suburban and rural markets generally do not have the
resources to completely replace existing copper networks and therefore must
upgrade over time to fiber. Therefore, these infrastructure upgrades will result
in hybrid networks containing both copper and fiber transmission lines. In
addition, worldwide demand for POTS and, to a lesser extent, high speed
telecommunications services, is creating the need for significant infrastructure
investments to increase the effective capacity of existing copper, replace
deteriorating copper and provide services in new areas. As telecommunications
service providers upgrade to fiber technology, deploy new networks and plan for
future subscriber services, they must determine how to ensure a seamless,
cost-effective connection between copper and fiber facilities within the local
loop.
The UMC system is easily scalable from six to 672 lines through the addition
of plug-in components. Utilizing a single platform and a variety of line cards
supporting specific services, the UMC system is capable of providing a range of
voice and data services. In addition, the UMC system can be installed in a
variety of network configurations to support the varying geographic distribution
of subscriber bases. The Company has designed the UMC system to require a low
amount of overhead and a minimum number of common control units to support
transmission over a variety of media and the delivery of more advanced services
and features by telephone companies. Thus, the UMC system offers a
cost-effective solution to the small line-size market with a wide variety of
features and advanced services as well as with easy installation.
The UMC system has been sold to more than 350 independent telephone
companies in the United States, is being initially deployed by Ameritech and
GTE, and is in laboratory or field trials at the following RBOCs: Pacific Bell,
BellSouth and U.S. West. The Company has also sold the UMC system to telephone
companies in France, Hong Kong, Canada, Mexico, the Netherlands Antilles, the
Dominican Republic and China. The UMC system is distributed and serviced
worldwide through a direct sales force in the United States and through
distributors, agents and joint ventures in international locations. Through the
Company's relationship with Tellabs, the UMC system is sold to cable companies
to allow telephone services to be provided over existing cable TV installed
coaxial systems. In addition, the Company recently formed a joint venture with
the Digital Telephone Systems Division of Harris Corporation ("Harris") to
manufacture and market the UMC system in India, has established a joint venture
with the Hangzhou Communications Equipment Factory ("HCEF") to manufacture and
sell the UMC system in China and has licensed certain UMC technology to the
Taiwan-based Industrial Technology Research Institute ("ITRI") which gives ITRI
and its member companies certain rights to manufacture and sell the UMC system
outside of North America. See ``Business -- Strategic Relationships" and "--
Proprietary Rights and Licenses."
The Company was incorporated in California in May 1992 and reincorporated in
Delaware in September 1995. The Company's principal executive offices are
located at 1445 McDowell Boulevard North, Petaluma, California 94954, and the
telephone number at that address is (707) 794-7700.
4
<PAGE>
RISK FACTORS
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS,
INCLUDING THOSE SET FORTH IN THE FOLLOWING RISK FACTORS AND ELSEWHERE IN THIS
PROSPECTUS. IN EVALUATING THE COMPANY'S BUSINESS, PROSPECTIVE INVESTORS SHOULD
CAREFULLY CONSIDER THE FOLLOWING FACTORS IN ADDITION TO THE OTHER INFORMATION
PRESENTED IN THIS PROSPECTUS.
LIMITED HISTORY OF OPERATIONS AND PROFITABILITY. The Company was
incorporated in May 1992 and was in the initial startup and development phase
through December 1993. The Company began shipping the UMC in January 1994 and,
accordingly, has a limited operating history. The Company has incurred
substantial expenditures related to the development, manufacturing startup and
marketing of the UMC system. As a result of these expenditures, combined with
$15.8 million of charges recorded in the second quarter of 1996 for the
settlement of litigation with DSC Communications Corporation ("DSC"), the
Company had an accumulated deficit of $14.9 million as of June 30, 1996.
Although the Company first achieved profitability in the second quarter of 1995,
it recorded a net loss in the second quarter of 1996 due to charges associated
with the settlement of litigation with DSC, and there can be no assurance that
the Company will sustain or increase its profitability in the future. See
``Management's Discussion and Analysis of Financial Condition and Results of
Operations" and ``Business -- Legal Proceedings."
POTENTIAL FLUCTUATIONS IN FUTURE OPERATING RESULTS; SEASONALITY. The
Company's operating results have been, and will continue to be, affected by a
wide variety of factors, some of which are outside of the Company's control,
that could have a material adverse effect on revenues and results of operations
during any particular period. These factors include: the timing and size of
orders which are received and can be shipped in a quarter; the availability of
adequate supplies of key components and assemblies and the adequacy of
manufacturing capacity; the Company's ability to introduce new products and
technologies on a timely basis; the timing of new product introductions or
announcements by the Company or its competitors; price competition; unit volume;
customer mix; and the mix between domestic and international sales.
The UMC system is sold primarily to telephone companies that install the UMC
system as part of their access networks. Additions to those networks represent
complex engineering projects which can require from three to twelve months from
project conceptualization to completion. The UMC system typically represents
only a portion of a given project and, therefore, the timing of product shipment
and revenue recognition is often difficult to forecast. In developing countries,
delays and reductions in the planned project deployment can be caused by
additional factors, including reductions in capital availability due to declines
in the local economy, currency fluctuations, priority changes in the
government's budget and delays in receiving government approval for deployment
of the UMC system in the local loop. The Company's expenditures for research and
development, marketing and sales, and general and administrative functions are
based in part on future revenue projections and in the near term are relatively
fixed. The Company may be unable to adjust spending in a timely manner in
response to any unanticipated declines in revenues. Accordingly, any significant
decline in demand for the UMC system relative to planned levels could have a
material adverse effect on the business, financial condition and results of
operations in that quarter or subsequent quarters. All of the above factors are
difficult to forecast, and these or other factors could materially adversely
affect the Company's business, financial condition and results of operations. As
a result, the Company believes that period-to-period comparisons are not
necessarily meaningful and should not be relied upon as indications of future
performance. Fluctuations in the Company's operating results may cause
volatility in the price of the Company's Common Stock. Further, it is likely
that in some future quarter the Company's revenues or operating results will be
below the expectations of public market analysts or investors. In such event,
the market price of the Company's Common Stock would likely be materially
adversely affected.
The Company's customers normally install the equipment in outdoor, often
remote, field locations. Shipment of the UMC system is subject to the effects of
seasonality, with fewer installation projects scheduled for the winter months.
Accordingly, the Company believes that over time this seasonality will
5
<PAGE>
cause its revenues in the quarter ended March 31 to be lower than revenues in
the preceding quarter ended December 31. See ``Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Quarterly Results
of Operations."
DEPENDENCE ON TELECOMMUNICATIONS INDUSTRY AND SMALL LINE-SIZE MARKET. The
Company's customers are concentrated in the public carrier telecommunications
industry. Accordingly, the Company's future success depends upon the capital
spending patterns of such customers and the continued demand by such customers
for the UMC system. The target markets for the UMC system are the small
line-size markets of the United States and developing countries. Historically,
these markets have had little access to the advanced services that can be made
available through the UMC system and, accordingly, there can be no assurance
that potential customers will consider the near term value of these advanced
services to be sufficient to influence their purchase decisions. Furthermore,
there can be no assurance that the UMC system will find widespread acceptance
among the telephone companies and other potential customers in small line-size
markets or that such customers and potential customers will not adopt
alternative architectures or technologies that are incompatible with the UMC
technology, which would have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, there can
be no assurance that telephone companies, foreign governments or other customers
will pursue infrastructure upgrades that will necessitate the implementation of
advanced products such as the UMC system. Infrastructure improvements requiring
the Company's or similar technology may be delayed or prevented by a variety of
factors, including cost, regulatory obstacles, the lack of consumer demand for
advanced telecommunications services and alternative approaches to service
delivery. See ``Management's Discussion and Analysis of Financial Condition and
Results of Operations," and ``Business -- Markets and Customers" and
``-- Competition."
CONCENTRATED PRODUCT LINE, NEW PRODUCTS AND RAPID TECHNOLOGICAL CHANGE. The
Company currently derives substantially all of its revenues from the UMC system
and expects that this concentration will continue in the foreseeable future. As
a result, any decrease in the overall level of sales of, or the prices for, the
UMC system due to product enhancements, introductions or announcements by the
Company's competitors, a decline in the demand for the UMC system, product
obsolescence or any other reason could have a material adverse effect on the
Company's business, financial condition and results of operations. See
``Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The telecommunications equipment market is characterized by rapidly changing
technology, evolving industry standards, changes in end-user requirements, and
frequent new product introductions and enhancements. The introduction of
products embodying new technologies or the emergence of new industry standards
can render existing products obsolete or unmarketable. The Company's success
will depend upon its ability to enhance the UMC technology and to develop and
introduce, on a timely basis, new products that keep pace with technological
developments and emerging industry standards and address changing customer
requirements in a cost-effective manner. There can be no assurance that the
Company will be successful in identifying, developing, manufacturing, and
marketing product enhancements or new products that respond to technological
change or evolving industry standards, that the Company will not experience
difficulties that could delay or prevent the successful development,
introduction and marketing of these products, or that its new products and
product enhancements will adequately meet the requirements of the marketplace
and achieve market acceptance. Furthermore, from time to time, the Company may
announce new products or product enhancements, services or technologies that
have the potential to replace or shorten the life cycle of the UMC system and
that may cause customers to defer purchasing the UMC system. There can be no
assurance that future technological advances in the telecommunications industry
will not result in equipment or software systems that could adversely affect the
Company's business, financial condition and results of operations.
The Company has experienced delays in completing development and
introduction of new products, product variations and features, and there can be
no assurance that such delays will not continue or recur in the future.
Furthermore, the UMC system contains a significant amount of complex software
that may contain undetected or unresolved errors as products are introduced or
as new versions are released. The Company has in the past discovered software
errors in certain UMC system installations. There can be no
6
<PAGE>
assurance that, despite significant testing by the Company, software errors will
not be found in new enhancements of the UMC system after commencement of
shipments, resulting in delays in or loss of market acceptance, either of which
could have a material adverse effect on the Company's business, financial
condition and results of operations. See ``Business -- Competition" and ``--
Research and Product Development."
DEPENDENCE ON SOLE-SOURCE AND OTHER KEY SUPPLIERS. Certain components used
in the Company's products, including the Company's proprietary application
specific integrated circuits (``ASICs"), codecs, certain surface mount
technology components and other components, are only available from a single
source or limited number of suppliers. Some of the Company's sole-source
suppliers are companies which from time to time allocate parts to telephone
equipment manufacturers due to market demand for telecommunications equipment.
Many of the Company's competitors are much larger and may be able to obtain
priority allocations from these shared suppliers, thereby limiting or making
unreliable the sources of supply for these components. The Company encountered
supply delays for codecs in the second quarter of 1994 which resulted in delayed
shipments of the UMC system, and there can be no assurance that similar
shortages will not occur in the future or will not result in the Company having
to pay a higher price for components. If the Company is unable to obtain
sufficient quantities of these or any other components, delays or reductions in
manufacturing or product shipments could occur which would have a material
adverse effect on the Company's business, financial condition and results of
operations. See ``Business -- Manufacturing."
DEPENDENCE ON LIMITED NUMBER OF THIRD PARTY MANUFACTURERS AND SUPPORT
ORGANIZATIONS. The Company relies on a limited number of independent
contractors that manufacture the subassemblies to the Company's specifications
for use in the Company's products. In particular, the Company relies on: (i)
Flextronics International Ltd. and Tanon Manufacturing, Inc. (a division of
Electronic Associates, Inc.) to manufacture the Company's printed circuit board
assemblies; (ii) Paragon, Inc. to manufacture backplanes and channel bank
assemblies and (iii) Sonoma Metal Products, Inc. and Cowden Metal Specialties
Inc. to manufacture the outside cabinets. In the event that the Company's
subcontractors were to experience financial, operational, production, or quality
assurance difficulties that resulted in a reduction or interruption in supply to
the Company or otherwise failed to meet the Company's manufacturing
requirements, the Company's business, financial condition and results of
operations would be adversely affected until the Company established sufficient
manufacturing supply from alternative sources. There can be no assurance that
such manufacturers would be able to meet the Company's future requirements or
that such services would continue to be available to the Company at favorable
prices, or at all. See ``Business -- Manufacturing."
The Company also relies on Point-to-Point Communications, Inc.
(``Point-to-Point"), a third-party support organization, to provide first-line
technical assistance and post-sales support to AFC customers. There can be no
assurance that Point-to-Point will be able to provide the level of customer
support demanded by the Company's existing or potential customers. See
``Business -- Competition," ``-- Sales, Marketing and Customer Support," and
``-- Strategic Relationships."
COMPETITION. The market for equipment for local telecommunications networks
is extremely competitive. The Company's competitors range from small companies,
both domestic and international, to large multinational corporations. The
Company's competitors include Alcatel Alsthom Compagnie Generale d'Electricite,
DSC, ECI Telecom, Inc., E/O Systems, Fujitsu America, Inc., Hitron Technology,
Inc., Lucent Technologies, Inc., NEC America, Inc., Northern Telecom Ltd., Opnet
Technologies Co. Ltd., Siemens Corporation, Teledata Communications Ltd. and
Vidar-SMS Co. Ltd. Many of these competitors have more extensive financial,
marketing and technical resources than the Company and enjoy superior name
recognition in the market. In addition, the Company has entered into an
agreement with ITRI which gives ITRI and its member companies certain rights to
manufacture and sell the UMC system outside of North America. Such entities
currently compete with the Company in international markets, primarily in China.
The Company may also face competition from new market entrants. There can be no
assurance that the Company will be able to compete successfully in the future.
See ``Business -- Competition," ``-- Strategic Relationships" and "--
Proprietary Rights and Licenses."
7
<PAGE>
LIMITED PROTECTION OF PROPRIETARY TECHNOLOGY; RISK OF THIRD-PARTY CLAIMS OF
INFRINGEMENT. The Company attempts to protect its technology through a
combination of copyrights, trade secret laws and contractual obligations. The
Company does not presently hold any patents for its existing products and has no
patent applications pending. There can be no assurance that the Company's
intellectual property protection measures will be sufficient to prevent
misappropriation of the Company's technology or that the Company's competitors
will not independently develop technologies that are substantially equivalent or
superior to the Company's technology. In addition, the laws of many foreign
countries do not protect the Company's intellectual property rights to the same
extent as the laws of the United States. The failure of the Company to protect
its proprietary information could have a material adverse effect on the
Company's business, financial condition and results of operations.
The increasing dependence of the telecommunications industry on proprietary
technology has resulted in frequent litigation based on allegations of the
infringement of patents and other intellectual property. The Company recently
settled litigation with DSC under which DSC had claimed proprietary rights to
the UMC technology. See ``Business -- Legal Proceedings." In the future the
Company may be subject to additional litigation to defend against claimed
infringements of the rights of others or to determine the scope and validity of
the proprietary rights of others. Future litigation also may be necessary to
enforce and protect trade secrets and other intellectual property rights owned
by the Company. Any such litigation could be costly and cause diversion of
management's attention, either of which could have a material adverse effect on
the Company's business, financial condition and results of operations. Adverse
determinations in such litigation could result in the loss of the Company's
proprietary rights, subject the Company to significant liabilities, require the
Company to seek licenses from third parties, or prevent the Company from
manufacturing or selling its products, any one of which could have a material
adverse effect on the Company's business, financial condition and results of
operations. Furthermore, there can be no assurance that any necessary licenses
will be available on reasonable terms. See ``Business -- Proprietary Rights and
Licenses."
RISK OF FAILURE TO MANAGE EXPANDING OPERATIONS. The Company has recently
experienced a period of rapid growth, which has placed and could continue to
place, a significant strain on the Company's management, operational, financial
and other resources. The members of the Company's management team have limited
experience in the management of rapidly growing companies. To effectively manage
the recent growth as well as any future growth, the Company will need to
recruit, train, assimilate, motivate and retain qualified managers and
employees. Management of future growth, if such growth occurs, may require the
Company to implement expanded or new management and accounting systems.
Information systems expansion or replacement can be a complex, costly and
time-consuming process, and there can be no assurance that any such activities
can be accomplished without disruption of the Company's business. Any business
disruption or other system transition difficulties could have a material adverse
effect on the Company's business, financial condition and results of operations.
The failure of the Company to effectively manage its domestic and international
operations or any current or future growth could have a material adverse effect
on the Company's business, financial condition and results of operations. The
Company's results of operations will be adversely affected if revenues do not
increase sufficiently to compensate for the increase in operating expenses
resulting from any expansion. See ``Business -- Employees" and ``Management --
Executive Officers, Key Employees and Directors."
CUSTOMER CONCENTRATION. Approximately 15.6% of the Company's revenues in
both 1995 and the first six months of 1996 were derived from sales to ALLTEL
Supply, Inc. In 1995 and the six months ended June 30, 1996, the Company's five
largest customers accounted for approximately 39% and 37% of revenues,
respectively. Although the Company's largest customers have varied from period
to period, the Company anticipates that its results of operations in any given
period will continue to depend to a significant extent upon sales to a small
number of customers. None of the Company's customers has entered into an
agreement requiring it to purchase a minimum amount of product from the Company.
There can be no assurance that the Company's principal customers will continue
to purchase product from the Company at current levels, if at all. The loss of
one or more major customers could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Markets and Customers."
8
<PAGE>
RISKS ASSOCIATED WITH INTERNATIONAL MARKETS. International sales
constituted 13.2% and 12.6% of the Company's total revenues in 1995 and the six
months ended June 30, 1996, respectively. International sales have fluctuated in
absolute dollars and as a percentage of revenues, and are expected to continue
to fluctuate in future periods. The Company intends to expand its existing
international operations and enter new international markets, which will demand
significant management attention and financial commitment. The Company relies on
a number of third-party distributors and strategic partners to market and sell
the UMC system outside of North America. There can be no assurance that such
distributors or strategic partners will provide the support and effort necessary
to service international markets effectively. The Company's management has
limited experience in international operations, and there can be no assurance
that the Company will successfully expand its international operations. The
failure to do so could have a material adverse effect on the Company's business,
financial condition and results of operations.
International telephone companies are in many cases owned or strictly
regulated by local regulatory authorities. Access to such markets is often
difficult due to the established relationships between a government owned or
controlled telephone company and its traditional indigenous suppliers of
telecommunications equipment. In addition, the Company's bids for business in
certain international markets typically will require the Company to post bid
bonds and performance bonds and to incur contract penalties should the company
fail to meet production and delivery time schedules on large orders. The failure
of the Company to meet these schedules could result in the loss of collateral
posted for the bonds or financial penalties which could adversely affect the
Company's business, financial condition and results of operations.
The Company's international sales currently are primarily U.S.
dollar-denominated. As a result, an increase in the value of the U.S. dollar
relative to foreign currencies could make the Company's products less
competitive in international markets. For example, increases in the value of the
U.S. dollar relative to the Mexican peso in late 1994 resulted in a significant
decrease in sales of the UMC system to Telefonos de Mexico for 1995.
Furthermore, operating in international markets subjects the Company to certain
additional risks, including unexpected changes in regulatory requirements,
political and economic conditions, tariffs or other barriers, difficulties in
staffing and managing international operations, exchange rate fluctuations,
potential exchange and repatriation controls on foreign earnings, potentially
negative tax consequences, longer sales and payment cycles and difficulty in
accounts receivable collection. In addition, any inability to obtain local
regulatory approval could delay or prevent entrance into international markets,
which could materially impact the Company's business, financial condition and
results of operations. In order to compete in international markets, the Company
will need to comply with various regulations and standards. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business -- Markets and Customers" and ``-- Sales, Marketing and Customer
Support."
DEPENDENCE ON KEY PERSONNEL. The Company's success depends to a significant
extent upon a number of key technical and management employees. In particular,
the Company's success depends in large part on the knowledge, expertise and
services of its co-founders: Donald Green, Chairman of the Board and Chief
Executive Officer; James T. Hoeck, Vice President, Advanced Development; and
John W. Webley, Vice President, Advanced Development. The loss of the services
of any of these persons or other key employees of the Company could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company does not have employment agreements with, or
key person life insurance for, any of its employees. Competition for highly
qualified employees is intense and the process of locating key technical and
management personnel with the combination of skills and attributes required to
execute the Company's strategy is often lengthy. There can be no assurance that
the Company will be successful in retaining its existing key personnel or in
attracting and retaining the additional employees it may require. See
``Management."
COMPLIANCE WITH REGULATIONS AND INDUSTRY STANDARDS. The UMC system is
required to comply with a large number of voice and data regulations and
standards, which vary between domestic and international markets, and may vary
by the specific international market into which the Company sells its products.
The standards in the United States are determined by the Federal Communications
Commission (``FCC"), by Underwriters Laboratories and by Bell Communications
Research (``Bellcore"). In international markets, the Company's products must
comply with recommendations issued by the Consultative Committee on
9
<PAGE>
International Telegraph and Telephony and with requirements established by the
individual regional carriers which specify how equipment that is connected to
their local networks must operate. In addition, the Company's products must
comply with standards issued by the European Telecommunications Standards
Institute. These standards are implemented and enforced by the
Telecommunications Regulatory Authority of each European nation. Standards for
new services continue to evolve, and the Company will be required to modify its
products or develop and support new versions of its products to meet these
standards. The failure of the Company's products to comply, or delays in meeting
compliance, with the evolving standards both in its domestic and international
markets could have a material adverse affect on the Company's business,
financial condition and results of operations.
In addition, the Company will need to ensure that its products are easily
integrated with the carriers' network management systems. The Regional Bell
Operating Companies (``RBOCs"), which represent a large segment of the U.S.
telecommunications market, require that equipment integrated into their networks
be tested by Bellcore, indicating that the products are interoperable with the
operations, administration, maintenance and provisioning systems used by the
RBOCs to manage their networks. Bellcore testing requires significant
investments in resources to achieve compliance. The UMC system recently
completed a Bellcore technical audit and was found to meet applicable
requirements. The failure to maintain such compliance or to obtain it on new
features released in the future could have a material adverse affect on the
Company's business, financial condition and results of operations.
The Company has not received ISO certification, which certifies that design
and manufacturing processes adhere to certain established standards. Many
telecommunications service providers, particularly in international markets,
will not purchase products from suppliers that have not received ISO
certification. Accordingly, until it is able to obtain ISO certification, the
Company may be precluded from selling its products to these service providers
and its ability to compete with other suppliers of communications equipment may
be adversely affected. Although the Company is seeking ISO-9001 certification,
there can be no assurance as to when or if the Company will obtain such
certification.
The U.S. Congress recently passed new regulations that affect
telecommunications services, including changes to pricing, access by competitive
suppliers and many other broad changes to the data and telecommunications
networks and services. These changes will have a major impact on the pricing of
existing services, and may affect the deployment of future services. These
changes could cause greater consolidation in the telecommunications industry,
which in turn could disrupt existing customer relationships and have a material
adverse effect on the Company's business, financial condition and results of
operations. There can be no assurance that any regulatory changes will not have
an adverse effect on the demand for the UMC system. Uncertainty regarding future
policies combined with emerging new competition may also affect the demand for
telecommunications products such as the UMC system. See ``Business -- Compliance
with Regulations and Industry Standards."
RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS. An important element of the
Company's strategy is to review acquisition prospects that would complement its
existing product offerings, augment its market coverage or enhance its
technological capabilities or that may otherwise offer growth opportunities.
While the Company has no current agreements or negotiations underway with
respect to any such acquisitions, the Company recently acquired a partner's
interest in one of its joint ventures and may make additional acquisitions of
businesses, products or technologies in the future. Future acquisitions by the
Company could result in potentially dilutive issuances of equity securities, the
incurrence of debt and contingent liabilities and amortization expenses related
to goodwill and other intangible assets, any of which could materially adversely
affect the Company's business, financial condition and results of operations
and/or the price of the Company's Common Stock. Acquisitions entail numerous
risks, including difficulties in the assimilation of acquired operations,
technologies and products, diversion of management's attention to other business
concerns, risks of entering markets in which the Company has no or limited prior
experience and potential loss of key employees of acquired organizations. The
Company's management has no experience in assimilating acquired organizations.
No assurance can be given as to the ability of the Company to successfully
10
<PAGE>
integrate any businesses, products, technologies or personnel that might be
acquired in the future, and the failure of the Company to do so could have a
material adverse effect on the Company's business, financial condition and
results of operations. See ``Use of Proceeds."
CONTROL OF THE COMPANY; ANTI-TAKEOVER EFFECTS. Immediately after this
offering, officers, directors and their affiliates will beneficially own
approximately % of the Company's outstanding Common Stock ( % if the
Underwriters' over-allotment option is exercised in full). Due to this ownership
position, these stockholders may be able to control the affairs and policies of
the Company and control the election of directors and to approve or disapprove
certain matters submitted to a vote of stockholders. Furthermore, these
stockholders may have conflicts of interest with other stockholders with respect
to the affairs and policies of the Company. The Company is also subject to
certain provisions of Delaware law which could have the effect of delaying,
deterring or preventing a change in control of the Company, including Section
203 of the Delaware General Corporation Law, which prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholder for a period of three years from the date the person became an
interested stockholder unless certain conditions are met. In addition, the
Company's Certificate of Incorporation and By-laws contain certain provisions
that could discourage potential takeover attempts and make more difficult
attempts by stockholders to change management. The Company's Board of Directors
is classified into three classes of directors serving staggered, three-year
terms and has the authority without action by the Company's stockholders to fix
the rights and preferences and issue shares of the Preferred Stock, and to
impose various procedural and other requirements that could make it more
difficult for stockholders to effect certain corporate actions. The Company's
Certificate of Incorporation provides that directors may be removed only by the
affirmative vote of the holders of two-thirds of the shares of capital stock
entitled to vote. Any vacancy on the board of directors may be filled only by
vote of the majority of directors then in office. Further, the Company's
Certificate of Incorporation provides that any ``Business Combination" (as
therein defined) requires the affirmative vote of two-thirds of the shares
entitled to vote, voting together as a single class. These provisions, and
certain other provisions of the Certificate of Incorporation which may have the
effect of delaying proposed stockholder actions until the next annual meeting of
stockholders, together with the ownership position of the officers, directors
and their affiliates, could have the effect of delaying or preventing a tender
offer for the Company's Common Stock or other changes of control or management
of the Company, which could adversely affect the market price of the Company's
Common Stock. See ``Description of Capital Stock."
ABSENCE OF PUBLIC MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE. Prior to
this offering, there has been no public market for the Common Stock. There can
be no assurance that, following this offering, a regular trading market for the
Common Stock will develop or be sustained. The initial public offering price
will be determined by negotiations between the Company and the Underwriters and
will not necessarily reflect the market price of the Common Stock after the
offering. See ``Underwriters." The market price of the Common Stock could be
subject to significant fluctuations in response to variations in quarterly
operating results, changes in analysts' earnings estimates, announcements of new
products and innovations by the Company or its competitors, general conditions
in the telecommunications equipment industry and other factors. In addition, the
stock market in recent years has experienced extreme price and volume
fluctuations that often have been unrelated or disproportionate to the operating
performance of companies. These broad fluctuations may adversely affect the
market price of the Common Stock.
IMMEDIATE AND SUBSTANTIAL DILUTION. Purchasers of the Common Stock offered
hereby will suffer an immediate and substantial dilution of $ per share.
To the extent outstanding options and warrants to purchase the Company's Common
Stock are exercised, there will be further dilution. See ``Dilution."
SHARES ELIGIBLE FOR FUTURE SALE. Sales of a substantial number of shares of
Common Stock in the public market following this offering could adversely affect
the market price for the Company's Common Stock. The number of shares of Common
Stock available for sale in the public market is limited by restrictions under
the Securities Act of 1933, as amended (the ``Securities Act"), and lock-up
agreements under which the holders of such shares have agreed not to sell or
otherwise dispose of any of their shares for a period of 180 days after the date
of this Prospectus without the prior written consent of Morgan Stanley & Co.
Incorporated. However, Morgan Stanley & Co. Incorporated may, in its sole
discretion and at any time
11
<PAGE>
without notice, release all or any portion of the securities subject to lock-up
agreements. As a result of these restrictions, based on shares outstanding and
options granted as of June 30, 1996, the following shares of Common Stock will
be eligible for future sale. On the date of this Prospectus, no shares other
than the shares offered hereby will be eligible for sale. Beginning 180
days after the date of this Prospectus, an additional 19,310,281 shares will
become eligible for sale in the public market upon expiration of lock-up
agreements, subject to compliance with the provisions of Rule 144 adopted under
the Securities Act. In addition, at various times after 180 days after the date
of this Prospectus, an additional 5,476,675 shares will become eligible for sale
in the public market upon expiration of their respective two-year holding
periods, subject to certain volume and resale restrictions set forth in Rule
144. In addition, the Company expects to file a registration statement on Form
S-8 with the Securities and Exchange Commission (the ``Commission") shortly
after the date of this Prospectus to register an aggregate of 8,675,676 shares
of Common Stock reserved for issuance under the Company's 1996 Stock Incentive
Plan and Employee Stock Purchase Plan. Upon expiration of lock-up agreements, an
additional 4,076,918 shares subject to stock options outstanding, if exercised,
will be eligible for sale pursuant to Rule 701 unless sold pursuant to an
effective registration statement under the Securities Act. As of June 30, 1996
there were outstanding warrants to purchase 5,135,080 shares of Common Stock.
These warrants contain net exercise provisions. Accordingly, any shares issued
upon net exercise will be eligible for sale immediately upon expiration of
lock-up agreements pursuant to Rule 144. In addition, the holders of
approximately 20,679,032 shares of Common Stock and warrants to purchase
approximately 5,135,080 shares of Common Stock have certain rights to require
the Company to register those shares under the Securities Act. If such holders,
by exercising their demand registration rights, cause a large number of shares
to be registered and sold in the public market, such sales could have a material
adverse effect on the market price for the Company's Common Stock. If the
Company were required to include in a Company-initiated registration shares held
by such holders pursuant to the exercise of their piggyback registration rights,
such sales may have an adverse effect on the Company's ability to raise needed
capital. See ``Shares Eligible for Future Sale," ``Description of Capital Stock"
and ``Underwriters."
12
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common
Stock offered by the Company hereby, at an assumed initial public offering price
of $ per share, are estimated to be approximately $ million
($ million if the over-allotment option granted to the Underwriters by the
Company is exercised in full), after deducting the estimated underwriting
discounts and commissions and estimated offering expenses. A portion of the net
proceeds will be used (i) to repay the outstanding balance on the Company's
revolving line of credit (approximately $9.7 million as of June 30, 1996), which
expires in November 1996 and bears interest at the prime rate plus 0.50% per
annum and (ii) to repay the outstanding balance on the Company's term loan
(approximately $7.1 million), which is due in January 1997, bears interest at
5.75% per annum and requires compensating balances totaling $4.0 million. The
funds borrowed under the revolving line of credit were used for working capital
purposes, and the funds borrowed under the term loan were used to pay in full
all amounts owed to DSC under the settlement agreement entered into in June
1996. See ``Business -- Legal Proceedings" and Note 9 of Notes to Consolidated
Financial Statements. The Company expects to use the remaining proceeds for
general corporate purposes, including the funding of working capital
requirements. Pending such uses, the Company will invest the net proceeds of
this offering in short-term, investment-grade, interest-bearing securities.
From time to time, the Company may evaluate opportunities to enter into new
strategic relationships, joint ventures, potential acquisitions or other similar
transactions and may use a portion of the proceeds to enter into such
transactions. There are no present understandings or agreements with respect to
any such transaction, and there can be no assurance that the Company will enter
into any such arrangements.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its capital stock.
The Company currently intends to retain all of its earnings, if any, for use in
its business and does not anticipate paying any cash dividends in the
foreseeable future. In addition, the Company's revolving line of credit
agreement requires the prior consent of the bank before payment of dividends by
the Company.
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<PAGE>
CAPITALIZATION
The following table sets forth the short-term bank borrowings and
capitalization of the Company (i) at June 30, 1996, (ii) on a pro forma basis to
give effect to the July 1996 increase in short-term bank borrowings to pay the
DSC settlement and the conversion of all outstanding shares of Preferred Stock
into Common Stock and the authorization of 5,000,000 shares of undesignated
Preferred Stock upon the closing of this offering, and (iii) such pro forma data
as adjusted to give effect to the sale by the Company of shares of Common
Stock at an assumed initial public offering price of $ per share and the
application of the estimated net proceeds therefrom.
<TABLE>
<CAPTION>
JUNE 30, 1996
------------------------------------
ACTUAL PRO FORMA AS ADJUSTED
---------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Short-term bank borrowings.................................................. $ 9,700 $ 16,806 $ --
---------- ----------- -----------
---------- ----------- -----------
Redeemable Convertible Preferred Stock, $.01 par value; actual -- 35,565,816
shares authorized, 17,231,204 issued and outstanding; pro forma and as
adjusted -- no shares authorized, issued and outstanding (1)............... $ 39,317 $ -- $ --
---------- ----------- -----------
Stockholders' equity (deficit):
Preferred Stock, $.01 par value; actual -- no shares authorized, issued
and outstanding; pro forma and as adjusted -- 5,000,000 shares
authorized, no shares issued and outstanding............................. -- -- --
Common Stock, $.01 par value; actual -- 84,654,184 shares authorized,
6,069,484 shares issued and outstanding; pro forma -- 100,000,000 shares
authorized, 24,786,956 shares issued and outstanding; as adjusted --
shares issued
and outstanding (2)...................................................... 61 248
Additional paid-in capital.................................................. 6,806 45,936
Notes receivable from stockholders.......................................... (176) (176) (176)
Accumulated deficit......................................................... (14,932) (14,932) (14,932)
---------- ----------- -----------
Total stockholders' equity (deficit)...................................... (8,241) 31,076
---------- ----------- -----------
Total capitalization.................................................. $ 31,076 $ 31,076 $
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
- ---------
(1) See Note 8 of Notes to Consolidated Financial Statements.
(2) Excludes 7,175,676 shares of Common Stock reserved for issuance under the
Company's stock option plans, under which options to purchase 4,076,918
shares were outstanding as of June 30, 1996, and 1,500,000 shares reserved
for issuance under the Company's Employee Stock Purchase Plan. Also excludes
5,135,080 shares of Common Stock reserved for issuance pursuant to the
exercise of warrants outstanding as of June 30, 1996. See ``Management --
Stock Incentive Plan," `` -- Employee Stock Purchase Plan," ``Certain
Transactions" and ``Description of Capital Stock."
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<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of June 30, 1996
(after giving effect to the conversion of all outstanding shares of Preferred
Stock into shares of Common Stock) would have been $28.2 million, or $1.14 per
share of Common Stock. Pro forma net tangible book value per share is equal to
the Company's total tangible assets less its total liabilities, divided by the
total number of shares of Common Stock outstanding (assuming the automatic
conversion upon the closing of this offering of all outstanding shares of
Preferred Stock into shares of Common Stock). After giving effect to the sale of
shares of Common Stock offered by the Company hereby, at an assumed
initial public offering price of $ per share, and the receipt of the
estimated net proceeds therefrom, the as adjusted net tangible book value of the
Company as of June 30, 1996 would have been $ , or $ per share.
This represents an immediate increase in the net tangible book value of
$ per share to the existing stockholders and an immediate dilution of
$ per share to new 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..................... $
Pro forma net tangible book value per share as of June 30, 1996... $ 1.14
Increase per share attributable to new investors..................
---------
As adjusted net tangible book value per share after the offering....
---------
Dilution per share to new investors................................. $
---------
---------
</TABLE>
The following table summarizes on a pro forma basis, as of June 30, 1996,
the number of shares of Common Stock purchased from the Company (assuming the
automatic conversion upon the closing of this offering of all outstanding shares
of Preferred Stock into shares of Common Stock), the total consideration paid to
the Company and the average price per share paid by existing stockholders and by
the investors purchasing shares of Common Stock in this offering at an assumed
initial public offering price of $ per share (before deducting estimated
underwriting discounts and commissions and estimated offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------- --------------------------- PER SHARE
NUMBER PERCENT AMOUNT PERCENT AVERAGE PRICE
------------ ----------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.......................... 24,786,956 % $ 50,032,000 % $ 2.02
New stockholders...............................
------------ ----- -------------- -----
Total.......................................... 100.0% $ 100.0%
------------ ----- -------------- -----
------------ ----- -------------- -----
</TABLE>
The foregoing analysis is based on the number of shares outstanding as of
June 30, 1996, and excludes 7,175,676 shares of Common Stock reserved for
issuance under the Company's stock option plans, under which options to purchase
4,076,918 shares were outstanding as of June 30, 1996, and 1,500,000 shares
reserved for issuance under the Company's Employee Stock Purchase Plan. The
analysis also excludes 5,135,080 shares of Common Stock reserved for issuance
pursuant to the exercise of warrants outstanding as of June 30, 1996. See
``Management -- Stock Incentive Plan," ``-- Employee Stock Purchase Plan,"
``Certain Transactions" and ``Description of Capital Stock." To the extent that
options and warrants are exercised in the future, there will be further dilution
to new investors.
15
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Company's consolidated financial statements and notes
thereto and the discussion under ``Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
Prospectus. The consolidated statement of operations data for the years ended
December 31, 1993, 1994 and 1995 and consolidated balance sheet data as of
December 31, 1994 and 1995 are derived from financial statements, which have
been audited by KPMG Peat Marwick LLP, independent auditors, included elsewhere
in this Prospectus. The balance sheet data as of December 31, 1993 have been
derived from audited financial statements not included in this Prospectus. The
consolidated statement of operations data for the period from May 29, 1992 to
December 31, 1992 and balance sheet data as of December 31, 1992 have been
derived from unaudited financial statements that are not contained herein but
which reflect, in management's opinion, all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation thereof. The statement
of operations data for the six months ended June 30, 1995 and 1996 and the
balance sheet data as of June 30, 1996 have been derived from unaudited interim
financial statements contained elsewhere herein and reflect, in management's
opinion, all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation thereof. These historical results are not
necessarily indicative of the results to be expected in the future.
<TABLE>
<CAPTION>
INCEPTION (MAY
29, 1992) TO SIX MONTHS ENDED
DECEMBER 31, YEAR ENDED DECEMBER 31, JUNE 30,
--------------- ------------------------------- --------------------
1992 1993 1994 1995 1995 1996 (1)
--------------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues............................................... $ 275 $ 620 $ 18,802 $ 54,287 $ 19,245 $ 53,772
Cost of revenues....................................... 38 2,574 14,124 33,469 11,921 31,058
----- --------- --------- --------- --------- ---------
Gross profit (loss).................................. 237 (1,954) 4,678 20,818 7,324 22,714
----- --------- --------- --------- --------- ---------
Operating expenses:
Research and development............................. 622 2,044 2,867 5,730 2,264 5,894
Selling, general and administrative.................. 266 2,509 5,051 9,660 3,962 7,901
DSC litigation costs................................. -- 784 4,551 1,623 750 18,947
----- --------- --------- --------- --------- ---------
Total operating expenses........................... 888 5,337 12,469 17,013 6,976 32,742
----- --------- --------- --------- --------- ---------
Operating income (loss)................................ (651) (7,291) (7,791) 3,805 348 (10,028)
Equity in loss of joint venture........................ -- -- -- (1,516) (542) (167)
Other income (expense), net............................ (25) -- 26 149 41 66
----- --------- --------- --------- --------- ---------
Income (loss) before income taxes...................... (676) (7,291) (7,765) 2,438 (153) (10,129)
Income taxes (benefit)................................. -- -- -- 97 2 (8,588)
----- --------- --------- --------- --------- ---------
Net income (loss)...................................... $ (676) $ (7,291) $ (7,765) $ 2,341 $ (155) $ (1,541)
----- --------- --------- --------- --------- ---------
----- --------- --------- --------- --------- ---------
Pro forma net income (loss) per share (2).............. $ 0.09 $ (0.01) $ (0.06)
--------- --------- ---------
--------- --------- ---------
Shares used in per share computations (2).............. 27,329 23,800 24,711
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------
1992 1993 1994 1995 JUNE 30, 1996
--------------- --------- --------- --------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............................... $ -- $ 450 $ 3,858 $ 11,118 $ 10,885
Working capital......................................... 77 466 6,809 18,770 23,720
Total assets............................................ 458 3,787 14,884 36,680 67,299
Redeemable convertible preferred stock.................. -- 9,152 23,546 37,777 39,317
Total stockholders' deficit............................. (661) (7,952) (15,706) (15,765) (8,241)
</TABLE>
- ------------
(1) Includes a charge of $15.8 million in the quarter ended June 30, 1996 for
cash payments and the issuance of Common Stock to DSC in settlement of
outstanding litigation. See ``Business -- Legal Proceedings." Without this
charge, operating income for the six months ended June 30, 1996 would have
been $5.8 million.
(2) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the determination of the number of shares used in computing pro forma net
income (loss) per share.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE
RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY
FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF
CERTAIN FACTORS, INCLUDING THOSE SET FORTH UNDER ``RISK FACTORS" AND ELSEWHERE
IN THIS PROSPECTUS.
OVERVIEW
AFC designs, develops, manufactures, markets and supports the UMC system, a
cost-effective, multi-feature digital loop carrier system developed to serve
small line-size markets. The Company's UMC system is designed to enable
telephone companies, cable companies and other service providers to connect
subscribers to the central office switch for voice and data communications over
copper, fiber, coaxial cable and analog radio networks. The Company was
incorporated in May 1992 and was in the initial startup and development phase
through December 1993. The Company began shipping the UMC in January 1994 and,
accordingly, has a limited operating history.
The Company has incurred substantial expenditures related to the
development, manufacturing startup and marketing of the UMC system. As a result
of these expenditures, combined with $15.8 million in charges recorded in the
second quarter of 1996 for the settlement of litigation with DSC, the Company
had an accumulated deficit of $14.9 million as of June 30, 1996. Although the
Company first achieved profitability in the second quarter of 1995, it recorded
a net loss in the second quarter of 1996 due to charges associated with the
settlement of litigation with DSC, and there can be no assurance that the
Company will sustain or increase its profitability in the future.
The Company currently derives substantially all of its revenues from the UMC
system and expects that this concentration will continue in the foreseeable
future. As a result, any decrease in the overall level of sales of, or the
prices for, the UMC system due to product enhancements, introductions or
announcements by the Company's competitors, a decline in the demand for the UMC
system, product obsolescence or any other reason would have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company derives a minor amount of revenue from license fees generated from
the Company's various strategic relationships. Support revenues have been
negligible since most systems shipped to date remain under the Company's initial
two-year product warranty period.
The Company sells its products worldwide, primarily through its direct sales
force in the domestic market, and through distributors, agents and joint
ventures in the international market. In April 1996, the Company began to
consolidate the operations of AFTEK Hong Kong and its 60% interest in the joint
venture, AFTEK Hangzhou, after the Company acquired the 51% of AFTEK Hong Kong
not previously owned. See ``Business -- Strategic Relationships" and Note 2 of
Notes to Consolidated Financial Statements.
17
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage of
revenues represented by certain items reflected in the Company's consolidated
statements of operations:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- ----------------------
1993 1994 1995 1995 1996 (1)
--------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
Revenues..................................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues............................................. 415.2 75.1 61.7 61.9 57.8
--------- --------- --------- --------- -----
Gross profit (loss)........................................ (315.2) 24.9 38.3 38.1 42.2
--------- --------- --------- --------- -----
Operating expenses:
Research and development................................... 329.7 15.2 10.6 11.8 11.0
Selling, general and administrative........................ 404.7 26.9 17.8 20.6 14.7
DSC litigation costs....................................... 126.4 24.2 3.0 3.9 35.2
--------- --------- --------- --------- -----
Total operating expenses................................. 860.8 66.3 31.3 36.2 60.9
--------- --------- --------- --------- -----
Operating income (loss)...................................... (1,176.0) (41.4) 7.0 1.8 (18.6)
Equity in loss of joint venture.............................. -- -- (2.8) (2.8) (0.3)
Other income, net............................................ -- 0.1 0.3 0.2 0.1
--------- --------- --------- --------- -----
Income (loss) before income taxes............................ (1,176.0) (41.3) 4.5 (0.8) (18.8)
Income taxes (benefit)....................................... -- -- 0.2 -- (16.0)
--------- --------- --------- --------- -----
Net income (loss)............................................ (1,176.0)% (41.3)% 4.3% (0.8)% (2.9)%
--------- --------- --------- --------- -----
--------- --------- --------- --------- -----
</TABLE>
- ------------
(1) Includes a charge in the quarter ended June 30, 1996 for cash payments and
the issuance of Common Stock to DSC in settlement of outstanding litigation.
See "Business -- Legal Proceedings." Without this charge, operating income
as a percentage of revenues for the six months ended June 30, 1996 would
have been 10.7%.
SIX MONTHS ENDED JUNE 30, 1995 AND 1996
REVENUES. Revenues increased $34.5 million, or 179%, from $19.2 million in
the first six months of 1995 to $53.8 million for the comparable period of 1996.
This significant increase was primarily the result of expansion of the Company's
customer base and the introduction of new features in the UMC system.
International revenues increased $3.2 million, or 88%, from $3.6 million in the
first six months of 1995 to $6.8 million for the comparable period of 1996, and
represented 18.8% and 12.6% of total revenues during the respective periods.
International revenues have fluctuated in absolute dollars and as a percentage
of total revenues, and are expected to continue to fluctuate in future periods.
ALLTEL Supply, Inc., an affiliate of ALLTEL, a major independent domestic
telephone company, accounted for 17.8% and 15.6% of revenues in the first half
of 1995 and 1996, respectively. No other customer accounted for 10% or more of
revenues in either period. Although the Company's largest customers have varied
from period to period, the Company anticipates that its results of operations in
any given period will continue to depend to a significant extent upon sales to a
small number of customers. There can be no assurance that the Company's
principal customers will continue to purchase product from the Company at
current levels, if at all. The loss of one or more major customers could have a
material adverse effect on the Company's business, financial condition and
results of operations.
GROSS PROFIT. Gross profit is comprised of revenues less materials,
manufacturing and warranty costs. Gross profit increased $15.4 million, or 210%,
from $7.3 million in the first six months of 1995 to $22.7 million in the
comparable period of 1996, and represented gross margins of 38.1% and 42.2% in
such periods. The improvement in gross margins from 1995 to 1996 was due to
lower product costs resulting from engineering design improvements and greater
efficiencies achieved in purchasing and manufacturing activities associated with
higher unit volumes. In the future, gross margins may fluctuate due to a wide
variety of factors, including: the timing and size of orders which are received
and can be shipped in a quarter; the availability of adequate supplies of key
components and assemblies and the adequacy of manufacturing
18
<PAGE>
capacity; the Company's ability to introduce new products and technologies on a
timely basis; the timing of new product introductions or announcements by the
Company or its competitors; price competition; unit volume; customer mix; and
the mix between domestic and international sales.
RESEARCH AND DEVELOPMENT. Research and development expenses increased $3.6
million, or 160%, from $2.3 million in the first six months of 1995 to $5.9
million in the same period in 1996. As a percentage of revenues, research and
development expenses decreased from 11.8% in the first six months of 1995 to
11.0% in the comparable period of 1996, reflecting the increased revenue base.
The increase in absolute dollars resulted primarily from the hiring of
additional personnel and the use of outside services for certain additional
development efforts in the first half of 1996. The number of employees in
research and development increased from 49 as of June 30, 1995 to 98 as of June
30, 1996. The increase in research and development expenses was also
attributable to higher costs for material and test equipment used to develop and
test new products and features. The Company expects that research and
development expenditures generally will continue to increase in absolute dollars
to support the continued development of new features and product cost reduction
efforts. All research and development costs have been expensed as incurred.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased $3.9 million, or 99%, from $4.0 million in the first six
months of 1995 to $7.9 million in the comparable period of 1996. As a percentage
of revenues, selling, general and administrative expenses fell from 20.6% of
revenues in the first six months of 1995 to 14.7% of revenues in the comparable
period of 1996. Employee costs in the sales and marketing area increased
significantly from period to period reflecting the hiring of new employees and
commissions earned by the Company's sales force as a result of higher revenue
levels. Outside service costs also increased in 1996 due to costs of the
third-party support organization that provides first-line technical assistance
and post-sales support to the Company's customers and commissions paid to
international sales representatives. The Company also increased its advertising
and trade show participation in 1996. General and administrative expenses
increased from the first six months of 1995 as compared with the same period in
1996 due to increases in the Company's administrative staff and higher travel
costs associated with the Company's activities in its foreign operations. The
Company anticipates incurring additional general and administrative expenses as
a result of becoming a public company, and additional selling, general and
administrative expenses as a result of anticipated expansion of its operations.
DSC LITIGATION COSTS. Litigation expenses incurred in connection with the
DSC litigation increased $18.2 million from $750,000 in the first six months of
1995 to $18.9 million in the comparable period of 1996. The increase was
primarily attributable to the $15.8 million charge recorded in the second
quarter of 1996 in connection with final settlement of the DSC litigation in
such period. See "Business -- Legal Proceedings" and Note 9 of Notes to
Consolidated Financial Statements.
EQUITY IN LOSS OF JOINT VENTURE. During each quarter of 1995 and the first
quarter of 1996, the Company made advances to a joint venture in which the
Company had a 50% ownership interest. In April 1995, the Company made a loan of
$1.0 million to the joint venture. During the first six months of 1995 and 1996,
the Company recorded its proportionate share of the joint venture's losses to
the extent of the loan and advances. As a result, the loan and intercompany
receivables were reduced to zero on the Company's balance sheets as of December
31, 1995 and June 30, 1996. In the first quarter of 1996, the Company and the
joint venture partner entered into discussions to dissolve the joint venture.
Under the present draft of the agreement to dissolve the joint venture, the
joint venture partner would receive a development license and certain market
rights, principally in the cable television market, in exchange for which the
Company would receive royalties, OEM revenues on certain products, and
reimbursement of all loans and advances made to the joint venture, which totaled
approximately $1.7 million at June 30, 1996. If a definitive agreement is signed
on these proposed terms, the Company will record the reimbursement of loans and
advances as a gain in the period in which the agreement is signed.
INCOME TAXES (BENEFIT). An income tax benefit of $8.6 million was recorded
in the first six months of 1996 to reflect the benefit of the DSC litigation
settlement and the decrease in the valuation allowance recorded against the
Company's deferred tax assets. As of June 30, 1996, the Company has recorded no
valuation allowance against its deferred tax assets because management believes
such assets are realizable. In future periods, the Company anticipates it will
record income taxes at an effective rate that approximates the combined federal
and state statutory rate.
19
<PAGE>
YEARS ENDED DECEMBER 31, 1993, 1994, AND 1995
REVENUES. Revenues were $620,000, $18.8 million and $54.3 million in 1993,
1994 and 1995, respectively. Revenues in 1993 were primarily from license fees.
The Company began shipping the UMC 1000 in January 1994. The revenue level
achieved in 1994 reflected initial market acceptance of the Company's product by
independent telephone companies in the United States, as well as sales to a
distributor in Mexico. The 189% increase in revenues in 1995 compared with 1994
resulted from growth in system sales of the UMC to an expanded customer base.
During 1994, shipments to PTI, a major independent domestic telephone company,
accounted for approximately 27.0% of revenues. In 1995, the Company's largest
customer, ALLTEL Supply, Inc., accounted for 15.6% of revenues. No other single
customer accounted for 10% or more of revenues in 1994 or 1995. International
revenues increased $3.6 million, or 99% from $3.6 million in 1994 to $7.2
million in 1995, and represented 19.2% and 13.2% of revenues in 1994 and 1995,
respectively.
GROSS PROFIT (LOSS). Gross profit increased to $4.7 million and $20.8
million in 1994 and 1995, respectively, and gross margins increased to 24.9% and
38.3% in 1994 and 1995, respectively. The Company had a gross loss of $2.0
million in 1993. Gross margins improved in 1994 and 1995 due to lower product
costs resulting from engineering design improvements and greater efficiencies
achieved in purchasing and manufacturing activities associated with higher unit
volumes. Gross margins in 1993 included a reserve for excess and obsolete
inventory and inventory adjustments resulting from the installation of an
inventory and standard cost tracking system.
RESEARCH AND DEVELOPMENT. Research and development expenses were $2.0
million, $2.9 million and $5.7 million in 1993, 1994 and 1995, respectively. As
a percentage of revenues, research and development expenses were 329.7%, 15.2%
and 10.6% in 1993, 1994, and 1995, respectively. The Company increased its
engineering staff to support continued product development and cost reductions
during these periods from 24 to 38 to 63 employees at December 31, 1993, 1994
and 1995, respectively. The decrease in research and development expenses as a
percentage of revenues from 1993 to 1995 was the result of the Company's rapid
growth in revenues. All research and development costs have been expensed as
incurred.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses were $2.5 million, $5.1 million and $9.7 million, in 1993, 1994 and
1995 respectively. As a percentage of revenues, selling, general and
administrative expenses were 404.7%, 26.9% and 17.8% in 1993, 1994 and 1995,
respectively, reflecting the increased revenue base. The increases in absolute
dollars reflect the building of the Company's domestic and international direct
sales team, investments in customer support and marketing, costs associated with
trade shows and other marketing efforts, expansion of the Company's
administrative staff and installation of information, manufacturing and
financial control systems.
DSC LITIGATION COSTS. DSC litigation costs were $784,000, $4.6 million and
$1.6 million in 1993, 1994 and 1995, respectively. DSC litigation costs in 1993
and 1994 included reserves for a possible settlement of $500,000 and $2.0
million, respectively. See ``Business -- Legal Proceedings" and Note 9 of Notes
to Consolidated Financial Statements.
EQUITY IN LOSS OF JOINT VENTURE. During 1995, the Company made a loan of
$1.0 million and other advances totaling approximately $516,000 to a joint
venture in which the Company had a 50% ownership interest. In 1995, the Company
recorded its proportionate share of the joint venture's losses to the extent of
the loan and advances. As a result, the loan and intercompany receivables were
reduced to zero on the Company's balance sheet as of December 31, 1995.
OTHER INCOME, NET. Other income was $26,000 and $149,000 in 1994 and 1995,
respectively, and consisted of interest income from the Company's cash
investments, net of interest expense on stockholder loans in 1993 and 1994, and
advances under the Company's bank line of credit in 1995.
INCOME TAXES. Because of operating losses sustained in 1993 and 1994, the
Company did not provide for income taxes in those periods, other than the
minimum California state franchise tax. In fiscal 1995, the provision for income
taxes was $97,000 and consisted of the federal alternative minimum tax and the
California minimum state franchise tax. See Note 6 of Notes to Consolidated
Financial Statements.
20
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following tables present unaudited quarterly financial information for
the four quarters of 1995 and the first two quarters of 1996. In the opinion of
the Company's management, this unaudited information has been prepared on the
same basis as the audited financial statements contained herein and includes all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the information set forth therein. The operating results for any
quarter are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1995 1995 1995 1995 1996 1996 (1)
----------- --------- --------- --------- --------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Revenues........................................ $ 7,456 $ 11,789 $ 15,548 $ 19,494 $ 24,121 $ 29,651
Cost of revenues................................ 4,633 7,288 9,837 11,711 14,101 16,957
----------- --------- --------- --------- --------- ----------
Gross profit.................................... 2,823 4,501 5,711 7,783 10,020 12,694
----------- --------- --------- --------- --------- ----------
Operating expenses:
Research and development...................... 1,050 1,214 1,406 2,060 2,619 3,275
Selling, general and administrative........... 1,681 2,281 2,471 3,227 3,545 4,356
DSC litigation costs.......................... 358 392 324 549 691 18,256
----------- --------- --------- --------- --------- ----------
Total operating expenses.................. 3,089 3,887 4,201 5,836 6,855 25,887
----------- --------- --------- --------- --------- ----------
Operating income (loss)......................... (266) 614 1,510 1,947 3,165 (13,193)
Other income (expense):
Equity in loss of joint venture............... (202) (340) (526) (448) (167) --
Other income (expense), net................... 26 15 (4) 112 84 (18)
----------- --------- --------- --------- --------- ----------
Income (loss) before income taxes............... (442) 289 980 1,611 3,082 (13,211)
Income taxes (benefit).......................... -- 2 39 56 910 (9,498)
----------- --------- --------- --------- --------- ----------
Net income (loss)............................... $ (442) $ 287 $ 941 $ 1,555 $ 2,172 $ (3,713)
----------- --------- --------- --------- --------- ----------
----------- --------- --------- --------- --------- ----------
<CAPTION>
AS A PERCENTAGE OF REVENUES
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues........................................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Costs of revenues............................... 62.1 61.8 63.3 60.1 58.5 57.2
----------- --------- --------- --------- --------- ----------
Gross profit.................................... 37.9 38.2 36.7 39.9 41.5 42.8
----------- --------- --------- --------- --------- ----------
Operating expenses:
Research and development...................... 14.1 10.3 9.0 10.6 10.9 11.0
Selling, general and administrative........... 22.5 19.3 15.9 16.6 14.7 14.7
DSC litigation costs.......................... 4.8 3.3 2.1 2.8 2.9 61.6
----------- --------- --------- --------- --------- ----------
Total operating expenses.................. 41.4 33.0 27.0 29.9 28.4 87.3
----------- --------- --------- --------- --------- ----------
Operating income (loss)......................... (3.6) 5.2 9.7 10.0 13.1 (44.5)
Other income (expense):
Equity in loss of joint venture............... (2.7) (2.9) (3.4) (2.3) (0.7) --
Other income, net............................. 0.3 0.1 -- 0.6 0.3 (0.1)
----------- --------- --------- --------- --------- ----------
Income (loss) before income taxes............... (5.9) 2.5 6.3 8.3 12.8 (44.6)
Income taxes (benefits)......................... -- -- 0.3 0.3 3.8 (32.0)
----------- --------- --------- --------- --------- ----------
Net income (loss)............................... (5.9)% 2.5% 6.0% 8.0% 9.0% (12.5)%
----------- --------- --------- --------- --------- ----------
----------- --------- --------- --------- --------- ----------
</TABLE>
- ------------
(1) Includes a charge of $15.8 million in the quarter ended June 30, 1996 for
cash payments and the issuance of Common Stock to DSC in settlement of
outstanding litigation. See "Business -- Legal Proceedings." Without this
charge, operating income for the quarter ended June 30, 1996 would have been
$2.6 million, and as a percentage of revenues would have been 8.8%.
The Company's operating results have been, and will continue to be, affected
by a wide variety of factors, some of which are outside of the Company's
control, that could have a material adverse effect on revenues and results of
operations during any particular period. These factors include: the timing and
size of orders which are received and can be shipped in a quarter; the
availability of adequate supplies of key components and assemblies and the
adequacy of manufacturing capacity; the Company's ability to introduce
21
<PAGE>
new products and technologies on a timely basis; the timing of new product
introductions or announcements by the Company or its competitors; price
competition; unit volume; customer mix; and the mix between domestic and
international sales.
The UMC system is sold primarily to telephone companies that install the UMC
system as part of their access networks. Additions to those networks represent
complex engineering projects which can require from three to twelve months from
project conceptualization to completion. The UMC system typically represents
only a portion of a given project and, therefore, the timing of product shipment
and revenue recognition is often difficult to forecast. In developing countries,
delays and reductions in the planned project deployment can be caused by
additional factors, including reductions in capital availability due to declines
in the local economy, currency fluctuations, priority changes in the
government's budget and delays in receiving government approval for deployment
of the UMC system in the local loop. The Company's expenditures for research and
development, marketing and sales, and general and administrative functions are
based in part on future revenue projections and in the near term are relatively
fixed. The Company may be unable to adjust spending in a timely manner in
response to any unanticipated declines in revenues. Accordingly, any significant
decline in demand for the UMC system relative to planned levels could have a
material adverse effect on the business, financial condition and results of
operations in that quarter or subsequent quarters. All of the above factors are
difficult to forecast, and these or other factors could materially adversely
affect the Company's business, financial condition and results of operations. As
a result, the Company believes that period-to-period comparisons are not
necessarily meaningful and should not be relied upon as indications of future
performance. Fluctuations in the Company's operating results may cause
volatility in the price of the Company's Common Stock. Further, it is likely
that in some future quarter the Company's revenue or operating results will be
below the expectations of public market analysts or investors. In such event,
the market price of the Company's Common Stock would likely be materially
adversely affected.
The Company's customers normally install the equipment in outdoor, often
remote, field locations. Shipment of the UMC system is subject to the effects of
seasonality, with fewer installation projects scheduled for the winter months.
Accordingly, the Company believes that over time this seasonality will cause its
revenues in the quarter ended March 31 to be lower than revenues in the
preceding quarter ended December 31.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations since inception primarily through a
series of preferred stock financings. From its incorporation through September
1995, the Company completed five private financings of equity securities
providing aggregate net proceeds of approximately $38.1 million. In September
1995, the Company repurchased and retired approximately $4.2 million of its
outstanding preferred stock.
In April 1995, the Company made a loan of $1.0 million to a joint venture
owned 50% by the Company which bears interest at a rate of 5.5%. Beginning in
fiscal 1995, the Company recorded its proportionate share of the joint venture's
losses to the extent of the loan balance and advances made to the joint venture.
As a result, the loan and advances to the joint venture were written off as of
December 31, 1995. In the first quarter of fiscal 1996, the Company and the
joint venture partner entered into discussions to dissolve the joint venture.
Under the present draft of the agreement to dissolve the joint venture, the
Company's joint venture partner would receive a development license and certain
market rights, principally in the cable television market, in exchange for which
the Company would receive royalties, OEM revenues on certain products, and
reimbursement of all loans and advances made to the joint venture, which totaled
approximately $1.7 million as of June 30, 1996. If a definitive agreement is
signed on these proposed terms, the Company will record the reimbursement of
loans and advances as a gain in the period in which the agreement is signed. See
``Business -- Strategic Relationships."
In April 1996, the Company purchased all of the stock outstanding in AFTEK
Hong Kong that had not previously been owned by the Company in exchange for
220,000 shares of the Company's Series F Preferred Stock and approximately
$939,000 in cash.
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In June 1996, as part of the DSC litigation settlement, the Company paid
$3.0 million in cash and issued 719,424 shares of Common Stock to DSC. In July
1996, the Company borrowed approximately $7.1 million under a six-month term
loan with Bank of the West. The proceeds from the loan were used to pay the
remaining obligations under the DSC litigation settlement. The loan bears
interest at a rate of 5.75% and has a $4.0 million compensating balance
requirement. The loan is due in January 1997. The Company expects to repay the
loan from the proceeds received from this offering. See ``Use of Proceeds,"
``Business -- Legal Proceedings," and Note 9 of Notes to the Consolidated
Financial Statements.
In December 1995, the Company's bank line was increased from $5.0 million to
$12.0 million. The bank line expires in November 1996. Under this line, the
Company is able to borrow up to $12.0 million at an interest rate of prime plus
0.5%. The amount available to the Company for borrowing under the line is based
upon the balance of eligible domestic accounts receivable at the time of
borrowing. As part of the bank line, the bank may issue letters of credit up to
$10.0 million and foreign exchange contracts up to $5.0 million. The bank line
requires the Company to comply with certain financial covenants. As of December
31, 1995 and 1994, no borrowings were outstanding under the bank line. As of
June 30, 1996, a total of $9.7 million was outstanding under the line, and
$564,000 was reserved for forward exchange contracts and letters of credit
supporting bid and performance bonds on certain international transactions. The
Company also has lease lines totaling $4.5 million to be used for equipment and
furniture purchases. Approximately $1.2 million remained available under the
lease lines as of June 30, 1996.
Cash and cash equivalents totaled $10.9 million as of June 30, 1996.
Included in cash and cash equivalents was approximately $150,000 held as
collateral for bonds on certain contracts. Net cash used by operating activities
totaled $7.0 million, $10.6 million and $971,000 for 1993, 1994 and 1995,
respectively. For the six months ended June 30, 1996, net cash used by operating
activities was $7.2 million, primarily due to increases in accounts receivable
and inventory to support the higher sales levels.
The Company anticipates that the proceeds from this offering, together with
existing sources of liquidity and cash anticipated to be provided by operations,
will satisfy the Company's working capital requirements through the next twelve
months.
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BUSINESS
THE FOLLOWING BUSINESS SECTION CONTAINS FORWARD-LOOKING STATEMENTS WHICH
INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A
RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET FORTH UNDER ``RISK FACTORS" AND
ELSEWHERE IN THIS PROSPECTUS.
COMPANY OVERVIEW
Advanced Fibre Communications, Inc. ("AFC" or the "Company") designs,
develops, manufactures, markets and supports the Universal Modular Carrier
1000-TM- (the "UMC" system), a cost-effective, multi-feature digital loop
carrier system developed to serve small line-size markets. The Company's UMC
system is designed to enable telephone companies, cable companies and other
service providers to connect subscribers to the central office switch for voice
and data communications over copper wire ("copper"), fiber optic cable
("fiber"), coaxial cable ("coax") and analog radio networks. The Company
believes that the UMC system is the only digital loop carrier that can operate
simultaneously over a variety of transmission media. The UMC system meets the
service needs of domestic and international subscribers including plain old
telephone service (``POTS"), universal voice grade service (``UVG") and high
speed digital data service. ISDN capability is currently in beta testing and the
Company believes the UMC system will be capable of providing asynchronous and
synchronous data channel service (``ADU" and ``SDU") in the near future. Through
a relationship with Tellabs Operations, Inc. (``Tellabs"), AFC has developed the
capability to deliver these same services over cable TV networks.
The UMC system has been sold to more than 350 independent telephone
companies in the United States, is being initially deployed by Ameritech and
GTE, and is in laboratory or field trials at the following RBOCs: Pacific Bell,
BellSouth and U.S. West. The Company has also sold the UMC system to telephone
companies in France, Hong Kong, Mexico, the Netherlands Antilles, the Dominican
Republic and China. The UMC system is distributed and serviced worldwide through
a direct sales force in the United States and through distributors, agents and
joint ventures in international locations. Through the Company's relationship
with Tellabs, the UMC system is sold to cable companies to allow telephone
services to be provided over existing cable TV installed coaxial systems. In
addition, the Company recently formed a joint venture with the Digital Telephone
Systems Division of Harris Corporation ("Harris") to manufacture and market the
UMC system in India, has established a joint venture with the Hangzhou
Communications Equipment Factory ("HCEF") to manufacture and sell the UMC system
in China and has licensed certain UMC technology to the Taiwan-based Industrial
Technology Research Institute ("ITRI") which gives ITRI and its member companies
certain rights to manufacture and sell the UMC system outside of North America.
See ``-- Strategic Relationships" and "-- Proprietary Rights and Licenses."
INDUSTRY BACKGROUND
Much of the existing local loop, which connects the subscriber to the
central office switch, was designed to provide analog voice communications, or
POTS, over copper. As a transmission medium, copper suffers from significant
signal degradation, particularly when transmitting signals beyond 10,000 feet.
In addition, the traditional copper infrastructure was designed to support low
speed telecommunications services and offers relatively poor transmission
quality, especially in data communications applications. Before the 1970s,
various solutions were implemented to address these concerns; however, these
solutions were generally costly to maintain and resulted in complex
architectures. In the early 1970s, to decrease the cost and complexity of
extending service beyond 10,000 feet from the central office, telephone
companies began to deploy digital loop carriers (``DLCs"), which convert analog
signals into digital bit streams for transmission to and from the central
office. The resulting improved signal quality enabled telephone companies to
increase transmission distances from the central office to the customer.
Advancements in digital technology have enabled central office switches to
increase by tenfold the number of lines served. While these advancements have
permitted greater centralization of switch resources, they have also resulted in
increased distances between the central office and the subscribers. Rapid
deployment of DLCs was necessary to effectively transmit signals over these
greater distances. However, the copper
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infrastructures supported by traditional DLCs lacked the bandwidth for
additional lines and the transmission quality for high speed telecommunications.
In response to these limitations as well as the deterioration of the existing
copper infrastructure, telephone companies began installing fiber in high
density urban markets in the late 1980s. Next generation DLCs (``NGDLCs") were
designed and introduced to the market in the early 1990s to support
telecommunications services over fiber-only networks in densely populated urban
markets with 600 to 2,000 lines within the serviceable area of the NGDLC
(``large line-size markets"). NGDLCs address certain of the limitations inherent
in DLCs. However, NGDLCs have high installation costs and complex,
support-intensive characteristics and are optimized for fiber-only networks and
large line-size markets.
Although urban markets have experienced the greatest initial demand for
additional lines and high-speed telecommunications services, the Company
believes that demand for these services is increasing in rural and suburban
markets as well. The Company also believes, however, that telecommunications
service providers in suburban and rural markets generally do not have the
resources to completely replace existing copper networks and therefore must
upgrade over time to fiber. Therefore, these infrastructure upgrades will result
in hybrid networks containing both copper and fiber transmission lines. In
addition, worldwide demand for POTS and, to a lesser extent, high speed
telecommunications services, is creating the need for significant infrastructure
investments to increase the effective capacity of existing copper, replace
deteriorating copper and provide services in new areas. As telecommunications
service providers upgrade to fiber technology, deploy new networks and plan for
future subscriber services, they must determine how to ensure a seamless,
cost-effective connection between copper and fiber within the local loop.
THE AFC SOLUTION
The Company has developed the UMC system to provide cost-effective,
multi-feature local loop systems for the small line-size market, incorporating a
modular architecture that supports copper, fiber and coax and the evolution from
one transmission media to another. The Company believes that the UMC system is
the only digital loop carrier that can operate simultaneously over a variety of
transmission media. The UMC system is easily scalable from six to 672 lines
through the addition of plug-in components. Utilizing a single platform and a
variety of line cards supporting specific services, the UMC system is capable of
providing a range of voice and data services. In addition, the UMC system can be
installed in a variety of network configurations to support the varying
geographic distribution of subscriber bases. The Company has designed the UMC
system to require a low amount of overhead and a minimum number of common
control units to support transmission over a variety of media and the delivery
of more advanced services and features by telephone companies. Thus, the UMC
system offers a cost-effective solution to the small line-size market with a
wide variety of features and advanced services as well as with easy
installation.
AFC'S STRATEGY
AFC's objective is to be the leading provider of cost-effective,
multi-feature local loop systems for small line-size markets worldwide. The key
elements of its strategy to achieve this objective include:
TARGET DOMESTIC SMALL LINE-SIZE MARKETS. The Company sells the UMC system
principally through its direct sales force into domestic small line-size
markets. These markets, which are generally located in rural and suburban areas,
are served by independent telephone companies and by the RBOCs. The Company
intends to expand its direct sales force and augment its indirect sales efforts
to further penetrate its existing customer base of 350 independent telephone
companies and penetrate the balance of the approximately 1,300 independent
telephone companies. In addition, with the recent satisfactory completion of a
Bellcore technical audit, the Company intends to expand into the RBOC market by
offering the UMC system as a solution to the small line-size system requirements
of the RBOCs.
PENETRATE INTERNATIONAL MARKETS. The Company markets the UMC system
internationally through local distributors and agents, through strategic
relationships, and directly to local service providers. The Company intends to
enhance its existing international operations with greater sales and marketing
resources to pursue market opportunities in countries currently undergoing
initial infrastructure deployment or upgrades which demand flexible and
cost-effective systems.
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PROVIDE COST-EFFECTIVE SOLUTIONS. The UMC system enhances the transmission
quality and capacity of existing copper facilities, enabling telephone companies
to maximize the performance of the existing copper infrastructure while
permitting a cost-effective and easily configurable upgrade solution as
infrastructure is modernized or demands for more advanced communication services
increase. The Company believes that the UMC system is the only digital loop
carrier that can operate seamlessly over hybrid networks including copper, fiber
and analog radio. The UMC system can also serve as a platform for providing high
speed data transmission and other advanced digital services such as video
teleconferencing. The Company has designed the UMC system to require a low
amount of overhead and a minimum number of common control units to support
transmission over a variety of media and the delivery of more advanced services
and features by telephone companies. The Company's engineering and manufacturing
efforts are directed toward preserving and enhancing the cost-effectiveness of
the UMC system as new features and designs are released.
EXTEND TECHNOLOGY LEADERSHIP. The UMC system contains a proprietary
software and backplane design and modular architecture, which enable telephone
companies to more easily support the varying geographic distribution of
subscriber bases by employing multiple configurations which may be distributed
over any combination of transmission media (including copper, fiber, coax and
analog radio). The proprietary backplane design currently supports a variety of
voice and data services, and the Company is developing improvements to support
higher bandwidth applications. The Company is engaged in ongoing research and
development to leverage its technical expertise and to adapt its technology to
new markets and applications.
DEVELOP STRATEGIC RELATIONSHIPS. The Company has entered into strategic
relationships in order to broaden the manufacturing and distribution of the UMC
system into developing international markets, such as China and India, and to
leverage the UMC technology for applications in markets not directly targeted by
the Company, such as the provision of telephone services over existing cable TV
installed coaxial systems. The Company intends to continue to invest in existing
strategic relationships and to seek additional relationships to gain
manufacturing and distribution leverage, to access advanced technologies and to
broaden the acceptance of the UMC system. See `` -- Strategic Relationships."
TECHNOLOGY AND PRODUCT ARCHITECTURE
The UMC architecture is based upon a modular software and hardware product
platform that can be configured and adapted to the particular requirements of
the customer. Each line card, transceiver and common control unit contains
proprietary ASICs that incorporate the digital cross-connect function,
eliminating the need for a separate digital cross-connect within the assembly.
This design improves efficiency, allowing the Company to deliver the common
control required by telephone companies with fewer assemblies than most NGDLCs.
A basic UMC system consists of two terminals. Each terminal contains a power
supply, a transceiver and a line card providing subscriber service, such as
analog voice service. The Local Exchange Terminal (``LET"), located next to the
local exchange switch in the central office, contains a central processing unit
and transmits and receives the telephone signal from the Remote Service Terminal
(``RST") mounted close to the subscriber group in a weatherproof housing. The
RST receives analog signals from the telephone instruments of subscribers,
transforms them into digitally encoded, time divisioned multiplexed bit streams,
and transports them across either copper, fiber or radio transmission media to a
central office. There, the LET either decodes the signal and converts it back
into an analog signal for connection into the telephone network, or connects the
digital signal directly into the network.
The base UMC system permits telephone companies to offer basic analog voice
service to six subscribers and is priced at approximately $4,000, excluding the
cabinet. The base UMC system can be expanded to accommodate additional
subscribers, to provide advanced services and to operate over different or
multiple transmission media. The UMC system can be configured to accommodate up
to 120 subscribers through the addition of line cards and up to 672 subscribers
through the addition of channel bank assemblies. During the second quarter of
1996, UMC systems providing 120 and 240 lines of POTS sold for average prices,
including the cabinet, of approximately $25,000 and $44,000, respectively.
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In addition, the UMC architecture enables telephone companies to more easily
support the varying geographic distribution of subscriber bases by employing
multiple configurations which may be distributed over any combination of various
transmission media, including copper, fiber and coax. A sample installation is
depicted below:
[Diagram of sample UMC system installation.]
The UMC system consists of the following modules, which may be
configured according to the needs of the Company's customers:
CHANNEL BANK ASSEMBLY. The channel bank assembly is used at both
the remote and central office location, employing a 98 megabit backplane
and a flexible slot architecture which supports system expansion (via a
fiber connection between channel bank assemblies) to 672 subscribers, as
well as a variety of configurations to match the geographic distribution
of the subscribers served.
COMMON CONTROL UNITS. Common control units include the central
processing unit, power supplies at both the central office and remote
location, connection units for expansion of the system from 120
subscriber lines to 672 subscriber lines and a metallic test unit for
network testing from the central switching office.
TRANSCEIVERS. Transceivers used for providing the transport of the
signal between the subscriber and the central office switch are
available in fiber, E1, T1 and analog radio versions.
LINE CARDS. Line cards are designed to provide voice and data
transmissions in either analog or digital form for both domestic and
international requirements.
SOFTWARE. The UMC proprietary system software is menu driven with
self-configurable plug and play orientation, providing detailed system
monitoring, alarm information, card inventory and security.
CABINET. The UMC cabinet is available in configurations supporting
subscriber levels of 48, 120, 240 or 672. The cabinet is a weather
resistant, field installable unit and includes power supplies, battery
backup, lightning protection and cross-connect capabilities.
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MARKETS AND CUSTOMERS
To date, the UMC system has been deployed primarily in the U.S. rural and
suburban markets served by independent telephone companies. While the Company
believes this market has substantial revenue potential and intends to continue
to pursue customers in the U.S. small line-size market, the Company has also
begun to pursue other potential markets and customers for the UMC system, such
as the RBOCs, international telecommunications service providers and competitive
access providers.
DOMESTIC SMALL LINE-SIZE MARKET
The domestic small line-size markets for telecommunications services are
generally located in rural and suburban areas and are served by approximately
1,300 independent telephone companies and the seven RBOCs. The independent
telephone companies range from rural companies with as few as 125 subscribers to
GTE, with approximately 17 million subscribers. The independent companies in
general do not require telephone equipment suppliers to satisfy Bellcore
testing, and typically do not require specific design changes in the product in
order for the equipment to be deployed. As a result, the Company was able to
deploy the UMC system rapidly to independent telephone companies and to build
customer acceptance of the UMC system quickly. In addition, independent
telephone companies typically have smaller budgets for telephone equipment than
the RBOCs and demand easily scalable and configurable cost-effective solutions.
The UMC system's ability to improve analog transmission and increase the
capacity of existing networks, together with its ability to operate
simultaneously over a variety of transmission media, enables telephone companies
to maximize the performance of existing copper infrastructure while permitting a
cost-effective and easily configurable upgrade solution as infrastructure is
modernized or demands for more advanced communication services increase. Thus,
the Company believes that the UMC system provides an attractive solution for the
independent telephone companies in small line-size markets. Moreover, since the
UMC system has recently completed a Bellcore technical audit, the Company
intends to expand into the RBOC market by offering the UMC system as a solution
to the small line-size requirements of the RBOCs.
The Company has segmented and prioritized the independent telephone company
market into the following: (i) small independents that use consulting
engineering firms to provide network design for service expansion and
modernization; (ii) medium-size independents that perform the network design
internally; and (iii) large independents, such as GTE, that have engineering
committees that approve equipment for standardization and may require testing
and equipment modifications to meet their specific network requirements. The
Company has targeted each of these segments as sources of potential customers
and to date over 350 independents have purchased the Company's products.
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The following table lists the independent telephone companies that have
purchased at least $200,000 of equipment from the Company since July 1995.
3 Rivers Telephone Co-Op
Ace Telephone Association
ALLTEL Supply
Anixter Bros.
Arvig Telephone
Benton Cooperative Telephone Company
Big Bend Telephone
Blackfoot Telephone Co-Op
Blue Earth Valley Telephone Company
Bridgewater Telephone
Central Texas Telephone Co-Op
Central Utah Telephone
Century Telephone
Champlain Valley Telecommunications Co-Op
Chequamegon Telephone Co-Op
Cimarron Telephone
Citizens Telephone
Classic Telephone
Clay County Rural Telephone
Cross Telephone
Crosslake Telephone & Cable
Custer Telephone Co-Op
Dickey Rural Telephone
Ellensburg Telephone
Farmers Telephone Co-Op
Franklin Telephone
Frontier Communications
Geneseo Telephone
Golden West Telecommunications
Granite State Telephone
GTE
Guadalupe Valley Telephone Co-Op
Hancock Rural Telephone
Hill Country Telephone Co-Op
Illinois Consolidated Telephone Company
JBN Telephone
Kratz Communications
Lakedale Telephone
Lincoln Telephone & Telegraph
Lincolnville Telephone
Mankato Citizens Telephone
Midplains Telephone
Nemont Telephone Co-Op
Norcom Agency
North Pittsburg Telephone
Northland Telephone
Pioneer Telephone Association
Pioneer Telephone Co-Op
Planters Telephone Co-Op
Pond Branch Telephone
Ponderosa Telephone
Prairie Grove Telephone
Project Telephone
PTI Communications
Pulaski-White Telephone
Roanoke & Botetourt Telephone
Roanoke Telephone
RT Communications
Rural Telephone Service
St. Joseph Telecommunications
S&A Telephone
Skyline Telephone
Sioux Valley Telephone
South Central Rural Telephone
Spring Valley Telephone
TDS Telcom
Twin Valley-Ulen Telephone
Valley Telephone Co-Op
West Carolina Rural Telephone Co-Op
West River Telecommunications
INTERNATIONAL MARKETS
The international telephone market is segmented into developing countries
requiring basic telecommunication services, or POTS, and developed countries
which, in addition to POTS, have requirements for more advanced
telecommunication services and which have barriers to entry in the form of
standards or unique domestic network specifications. In most of these
international markets, a single telephone company, which is typically highly
regulated and government-owned, provides service throughout the country.
Typically, these companies are striving to install technology that offers the
opportunity in the future for advanced services, with ease of installation and
servicing at an attractive price. In addition, they are striving to optimize
existing facilities, which typically consist of copper, for a growing subscriber
base. The Company is pursuing selected opportunities to develop these markets
primarily through direct contacts with local distributors and through its
strategic relationships, where the market also requires local manufacturing to
address high import tariffs and where the Company benefits from a local partner
that can assist customer relationships.
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As part of its international strategy, the Company is primarily focused on
the substantial market opportunity which the Company believes exists in
developing countries currently undergoing infrastructure deployment.
Telecommunications companies in these markets demand flexible and cost-effective
systems. The Company has sold UMC systems to telephone companies in China,
Mexico, the Netherlands Antilles and the Dominican Republic. In China, the UMC
system has been installed in several customer sites and the Company's joint
venture has begun pilot production of the UMC system in Hangzhou, China for the
China market. In Mexico, the Company was selected as one of two vendors for
Telefonos de Mexico's rural telephone program. AFC has shipped approximately
$2.7 million of equipment to Telefonos de Mexico through June 30, 1996 and
anticipates continued shipments through 1997. In South Africa, the UMC system
has completed field trials and received type approval, and the Company has
recently received its first order which is scheduled for delivery in the second
half of 1996.
Telecommunications companies in more developed countries require that
products have modifications and design specifications that meet local
standardization guidelines. To date, the Company has successfully met these
standards requirements in, and is currently shipping products to, both France
and Hong Kong. The Company was awarded a contract with France Telecom for a
multiplexer subscriber system. Deliveries under this contract began in April
1996. The Company was also awarded a three-year contract with Hongkong
Telecommunications Limited to deploy the UMC system. Although neither of these
contracts require the customer to purchase any specific amount of product from
the Company, the Company believes that these customers present a significant
opportunity to the Company.
The UMC system has received or is currently undergoing type approval
qualification in a number of countries, including Brazil, Hungary, India,
Indonesia, the Philippines and Russia. In addition, the Company has responded to
bid requests from telephone companies in India, Panama, Brazil and Singapore.
There can be no assurance that receipt of type approval or bid requests will
lead to any sales of the UMC system in these countries.
FUTURE MARKET OPPORTUNITIES
REGIONAL BELL OPERATING COMPANIES (RBOCS). The seven RBOCs make up the
largest segment of the U.S. telecommunications equipment market and serve over
80% of all U.S. telephone customers, primarily in urban areas. All of these
companies have stringent testing and approval requirements, known as Bellcore
testing, that must be met before products can be installed in their networks.
Bellcore testing requires significant investments in resources to achieve
compliance. In addition, the RBOCs require that the equipment undergo one or
more field trials to demonstrate that the equipment meets the standards and
satisfies their service and network requirements. The UMC system recently
completed a Bellcore technical audit, and the Company intends to submit new
features for Bellcore testing as they are released. Through June 1996, the
Company has delivered $2.3 million of equipment to Ameritech pursuant to a
purchase agreement. Although this agreement does not require Ameritech to
purchase any specific amount of product from the Company, the Company believes
that Ameritech presents a significant opportunity to the Company. In addition,
the UMC system is in laboratory or field trials at the following RBOCs: Pacific
Bell, BellSouth and U.S. West.
COMPETITIVE ACCESS PROVIDERS. Deregulation has allowed non-regulated
telephone companies to provide local telephone services. Through better pricing,
faster installation and better customer service, these companies, known as
competitive access providers, hope to attract customers away from the RBOCs and
independent telephone companies. These companies historically have focused on
high density downtown business customers. As these carriers diversify their
sales efforts to include smaller businesses and office parks, an increasing
number will require smaller systems. The companies active in this market segment
are attractive targets for the Company because the UMC system has the capability
to cost-effectively provide a full range of communication services. The Company
intends to address this market primarily through its strategic relationship with
Tellabs. AFC intends to serve this market both over traditional transmission
media as well as over coax media. See `` -- Strategic Relationships."
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SALES, MARKETING AND CUSTOMER SUPPORT
The Company markets the UMC system worldwide directly to telephone companies
and indirectly through OEMs, distributors and joint ventures to accommodate
specific markets and customer support requirements. The Company's sales force
consists of two groups, one that focuses on U.S. and Canadian telephone
companies and one that focuses on international markets.
The Company's North American sales force focuses on developing relationships
with independent telephone companies in the U.S. and Canada and on understanding
their network deployment strategies and cost requirements. As of June 30, 1996,
the Company's domestic sales organization consisted of thirteen direct
salespersons, a domestic sales vice president, and technical support personnel.
The Company has sales personnel located in Pittsburgh, Minneapolis, Atlanta,
Denver, Dallas, Chicago and Coeur d'Alene, Idaho. The Company also has sales
personnel dedicated to specific customer accounts, such as GTE and Ameritech. In
addition to direct calls on the telephone companies, sales to customers often
involve marketing through consulting engineers who are retained by small
independent telephone companies for engineering, specification and installation
services.
The Company employs an international direct sales force consisting of three
salespersons and one vice president. The primary tasks of the international
sales force are to market the UMC system directly to international telephone
companies and to select, manage, and train local distributors. Sales to
international customers are primarily fulfilled through the Company's
distributors and agents. The Company currently has an office in Hong Kong.
The AFC sales organization receives support from the Company's marketing
department, which is responsible, among other things, for product marketing,
advertising and marketing communications. The marketing department works closely
with the planning and engineering departments of telephone companies in order to
provide product proposals that are optimal in terms of both performance and cost
for a specific network configuration.
The Company's customer support organization is responsible for servicing the
Company's products and assisting the Company's personnel. Point-to-Point
Communications, Inc. (``Point-to-Point"), a third-party support organization,
provides first-line support for the Company's customers through a toll-free
number open 24 hours per day, 365 days per year, and provides installation
services on a subcontract basis for the Company. Although to date the Company
believes Point-to-Point has provided satisfactory customer assistance, there can
be no assurance that Point-to-Point will be able to provide the level of
customer support demanded by existing or potential customers. The Company
maintains a training organization which is dedicated to developing training
curriculums and materials that are made available to the customer either through
a student training or a train the trainer program. Internationally, the Company
provides customer support either directly or through authorized distributors or
joint venture partners. The Company's products generally have a warranty period
of 24 months.
RESEARCH AND DEVELOPMENT
The Company's research and development efforts have been focused on
developing local loop products with advanced features for small line-size
markets. The Company has developed a modular software and hardware platform that
can be configured and adapted to particular customer requirements. In addition,
development efforts include extensive attention to ease of installation and use
by the customer as evidenced in the menu driven software approach as well as the
compact and efficient hardware design demonstrated in its PCBAs. The Company's
research and development personnel work closely with sales and marketing
personnel to ensure development efforts are targeted at customer needs. In
addition, the Company's Advanced Development Team led by co-founders Jim Hoeck
and John Webley focuses on developing new strategic enhancements to the UMC
system, such as a higher bandwidth backplane.
The current focus of the Company's research and development efforts is
directed at new releases of the UMC system addressing market demands for new
features and services. These efforts include developing new transceivers
incorporating HDSL capabilities, new customer features such as ISDN and new
interfaces such as TR303. The Company is also incorporating MLT remote testing
capabilities into the product in
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support of the RBOC market. In addition, future releases are expected to include
capabilities to support broader star configurations, SONET OC3 transceivers and
multi-point support for the coax transceiver version of the product. Finally,
the engineering team also concentrates its attention on numerous projects in the
areas of cost and quality improvements in the UMC system.
In 1995 and the six months ended June 30, 1996, the Company's research and
development expenditures were $5.7 million and $5.9 million, respectively, which
represented 10.6% and 11.0%, respectively, of total revenues in such periods. In
1993 and 1994, the Company's research and development expenditures were $2.0
million and $2.9 million, respectively. The Company considers its research and
development efforts to be vital to its future success and anticipates that
research and development expenditures as a percentage of revenues will remain
significant for the foreseeable future. As of June 30, 1996, the Company's
research and development staff consisted of 98 employees.
MANUFACTURING
Manufacturing, system integration and certain testing operations are
performed at the Company's headquarters in Petaluma, California. The Company's
manufacturing operations consist primarily of assembling finished goods from
components and custom-made subassemblies (primarily printed circuit boards)
purchased from third parties. The Company monitors quality at each stage of the
production process, including the selection of component suppliers, warehouse
procedures, the assembly of finished goods and final testing, packaging and
shipping. The Company also performs functional, environmental and systems
testing and quality assurance procedures on the subassemblies which are
incorporated into the UMC system and with respect to the final products
themselves.
The Company relies on a limited number of independent contractors that
manufacture the subassemblies to the Company's specifications for use in the
Company's products. In particular, the Company relies on: (i) Flextronics
International Ltd. and Tanon Manufacturing, Inc. (a division of Electronic
Associates, Inc.) to manufacture the Company's printed circuit board assemblies;
(ii) Paragon, Inc. to manufacture backplanes and channel bank assemblies and
(iii) Sonoma Metal Products, Inc. and Cowden Metal Specialties Inc. to
manufacture the outside cabinets. The Company believes that it has good
relations with each of its suppliers. As the demand for the UMC system has
increased, the Company has begun a program to identify, and potentially qualify
at a future date, additional suppliers to manufacture key product subassemblies.
While the Company believes that the subassemblies manufactured by any of the
suppliers could be moved to alternate suppliers, in the event that the Company's
subcontractors were to experience financial, operational, production, or quality
assurance difficulties that resulted in a reduction or interruption in supply to
the Company or otherwise failed to meet the Company's manufacturing
requirements, the Company's business, financial condition and results of
operations would be adversely affected until the Company established sufficient
manufacturing supply from alternative sources. There can be no assurance that
such manufacturers would be able to meet the Company's future requirements or
that such services would continue to be available to the Company at favorable
prices.
Certain components used in the Company's products, including the Company's
proprietary application specific integrated circuits (``ASICs"), codecs, certain
surface mount technology components and other components, are only available
from a single source or limited number of suppliers. Some of the Company's
sole-source suppliers are companies which from time to time allocate parts to
telephone equipment manufacturers due to market demand for the telecommunication
equipment. Many of the Company's competitors are much larger and may be able to
obtain priority allocations from these shared suppliers, thereby limiting or
making unreliable the sources of supply for these components. The Company
encountered supply delays for codecs in the second quarter of 1994 which
resulted in delayed shipments of the UMC system, and there can be no assurance
that similar shortages will not occur in the future or will not result in the
Company having to pay a higher price for components. If the Company is unable to
obtain sufficient quantities of these or any other components, delays or
reductions in manufacturing or product shipments could occur which would have a
material adverse effect on the Company's business, financial condition and
results of operations.
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STRATEGIC RELATIONSHIPS
The Company has entered into strategic relationships with three companies in
order to broaden the distribution of the UMC system into developing
international markets (such as China and India) and to leverage the UMC
technology for applications in markets not directly targeted by the Company
(such as cable TV). The Company intends to continue to invest in existing
strategic relationships and to seek additional relationships to gain
distribution leverage, access advanced technologies and enhance the acceptance
of the UMC system.
AFTEK HANGZHOU. The Company has formed a joint venture, known as AFTEK
Hangzhou, with Hangzhou Communications Equipment Factory (``HCEF") in Hangzhou,
China. The joint venture was established to manufacture, market, distribute and
support the UMC system throughout China. The joint venture is owned 60% by AFC,
through a wholly owned subsidiary in Hong Kong, and 40% by HCEF. AFTEK Hangzhou
has initiated production of the UMC in HCEF's manufacturing facility in China.
HARRIS CORPORATION. AFC and Harris entered into an agreement to form a
joint venture to manufacture, distribute and support the UMC system in India.
The joint venture included formation of a holding company in Mauritius, owned
51% by AFC and 49% by Harris, which in turn intends to form a joint venture in
India with local Indian partners following receipt of certain government
approvals. To date, the parties have identified and selected two Indian
companies that will collectively own 33% of the Indian venture to be located in
Delhi. In addition, as a means to protect its licensed technology in India, AFC
formed a 100% foreign-owned subsidiary in India, AFC India Private (Ltd.), which
holds the rights to license the UMC technology in India for manufacturing in the
local market. To date, the joint venture activities have included testing and
obtaining type approval for the UMC system. The joint venture partners expect to
receive type approval in 1996 and will actively pursue sales opportunities for
the UMC system.
TELLABS. AFC and Tellabs, a stockholder of the Company, entered into a
general partnership in 1994 to design, develop, manufacture and distribute a new
product line derived from the UMC system. This product is designed to allow
telephone services to be provided over existing cable TV installed coaxial
systems as well as other transmission media. AFC contributed a non-exclusive
license to use the UMC technology, Tellabs contributed cash to the joint
venture, and each received defined marketing rights for the developed
technology.
In early 1996, upon review of the development of the market for this
product, the Company concluded that the market for transmitting voice and data
over cable systems would develop at a slower pace than originally anticipated.
In the interest of directing its resources towards more immediate market
opportunities, AFC entered into negotiations with Tellabs in the first quarter
of 1996 to change the relationship between the parties. The new relationship
under discussion is intended to provide AFC with royalties and OEM revenues from
Tellabs on its sales into its markets and in return AFC expects to work on
selected developments of the UMC technology for Tellabs' markets on a
development contract basis. AFC will retain all rights in its technology as well
as the market rights previously defined.
COMPETITION
The market for equipment for local telecommunications networks is extremely
competitive. The Company's competitors range from small companies, both domestic
and international, to large multinational corporations. The Company's
competitors include Alcatel Alsthom Compagnie Generale d'Electricite, DSC, ECI
Telecom, Ltd., E/O Systems, Fujitsu America, Inc., Hitron Technology, Inc.,
Lucent Technologies, Inc., NEC America, Inc., Northern Telecom Ltd., Opnet
Technologies Co. Ltd., Siemens Corporation, Teledata Communications, Ltd. and
Vidar-SMS Co. Ltd. Many of these competitors have more extensive financial,
marketing and technical resources than the Company and enjoy superior name
recognition in the market. In addition, the Company has entered into an
agreement with ITRI which gives ITRI and its member companies certain rights to
manufacture and sell the UMC system outside of North America. Such entities
currently compete with the Company in international markets, primarily in China.
The Company may also face competition from new market entrants. The principal
competitive factors in the segment of the telecommunications equipment industry
in which the Company operates are total cost of solution, product quality and
performance, scalability, flexibility of configuration and range of system
capabilities available.
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The Company believes that it competes favorably with respect to these factors,
and that the ability of the UMC system to offer voice and data communication
over a variety of transmission media in a cost-effective package provides a
competitive advantage in the small line-size market. There can be no assurance
that the Company will be able to compete successfully in the future.
COMPLIANCE WITH REGULATORY AND INDUSTRY STANDARDS
The UMC system is required to comply with a large number of voice and data
regulations and standards, which vary domestically versus internationally and
may vary by the specific international market to which the Company sells its
products. The standards in the United States are determined by the FCC, by
Underwriters Laboratories and by Bellcore. The UMC technology is certified by
Underwriters Laboratories. In international markets, the Company's products must
comply with recommendations by the Consultative Committee on International
Telegraph and Telephony and with requirements established by the individual
regional carriers which specify how equipment that is connected to their local
networks must operate. In addition, the Company's products must comply with
standards issued by the European Telecommunications Standards Institute. These
standards are implemented and enforced by the Telecommunications Regulatory
Authority of each European nation. Standards for new services continue to
evolve, and the Company will be required to modify its products or develop and
support new versions of its products to meet these standards. The failure of the
Company's products to comply, or delays in meeting compliance, with the evolving
standards both in its domestic and international markets could have a material
adverse affect on the Company's business, financial condition and results of
operations.
In addition, the Company will need to ensure that its products are easily
integrated with the carriers' network management systems. The RBOCs, which
represent a large segment of the U.S. telecommunications market, require that
equipment integrated into their networks be tested by Bellcore, indicating that
the products are interoperable with the operations, administration, maintenance
and provisioning systems used by the RBOCs to manage their networks. Bellcore
testing requires significant investments in resources to achieve compliance. The
UMC system recently completed a Bellcore technical audit and was found to meet
applicable requirements. The failure to maintain such compliance and/or to
obtain it on new features released in the future could have a material adverse
affect on the Company's ability to sell the UMC system to the RBOCs, which
represent a large segment of the telecommunications market.
The Company has not received ISO certification, which certifies that design
and manufacturing processes adhere to certain established standards. Many
telecommunications service providers particularly in international markets, will
not purchase products from suppliers that have not received ISO certification.
Accordingly, until it is able to obtain ISO certification, the Company may be
precluded from selling its products to these service providers and its ability
to compete with other suppliers of communications equipment may be adversely
affected. Although the Company is seeking ISO-9001 certification, there can be
no assurance as to when or if the Company will obtain such certification.
The U.S. Congress recently passed new regulations that affect
telecommunications services, including changes to pricing, access by competitive
suppliers and many other broad changes to the data and telecommunications
networks and services. These changes will have a major impact on the pricing of
existing services, and may affect the deployment of future services. These
changes could cause greater consolidation in the telecommunications industry,
which in turn could disrupt existing customer relationships and have a material
adverse effect on the Company's business, financial condition and results of
operations. There can be no assurance that any regulatory changes will not have
an adverse effect on the demand for the UMC system. Uncertainty regarding future
policies combined with emerging new competition may also affect the demand for
telecommunications products such as the UMC system.
PROPRIETARY RIGHTS AND LICENSES
The Company attempts to protect its technology through a combination of
copyrights, trade secret laws and contractual obligations. The Company does not
presently hold any patents for its existing products and has no patent
applications pending. There can be no assurance that the Company's intellectual
property protection measures will be sufficient to prevent misappropriation of
the Company's technology or that the
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Company's competitors will not independently develop technologies that are
substantially equivalent or superior to the Company's technology. In addition,
the laws of many foreign countries do not protect the Company's intellectual
property rights to the same extent as the laws of the United States. The failure
of the Company to protect its proprietary information could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The increasing dependence of the telecommunications industry on proprietary
technology has resulted in frequent litigation based on allegations of the
infringement of patents and other intellectual property. The Company recently
settled litigation with DSC under which DSC had claimed proprietary rights in
the UMC technology. See ``-- Legal Proceedings." In the future the Company may
be subject to additional litigation to defend against claimed infringements of
the rights of others or to determine the scope and validity of the proprietary
rights of others. Future litigation also may be necessary to enforce and protect
trade secrets and other intellectual property rights owned by the Company. Any
such litigation could be costly and cause diversion of management's attention
either of which could have a material adverse effect on the Company's business,
financial condition and results of operations. Adverse determination in such
litigation could result in the loss of the Company's proprietary rights, subject
the Company to significant liabilities, require the Company to seek licenses
from third parties, or prevent the Company from manufacturing or selling its
products, any one of which could have a material adverse effect on the Company's
business, financial condition and results of operations. Furthermore, there can
be no assurance that any necessary licenses will be available on reasonable
terms.
In September 1992, AFC entered into an agreement (the "ITRI Agreement") with
the Industrial Technology Research Institute ("ITRI") and its member companies
of Taiwan to jointly develop products based on the UMC system. ITRI is a
government-sponsored research and development organization in the
telecommunications field. Under the ITRI Agreement, ITRI has the exclusive right
in Taiwan to use and develop the UMC technology, and to manufacture and sell the
UMC system through the member companies, but does not have the right to
manufacture and sell the Company's proprietary ASICs except in circumstances
where AFC has failed to provide the ASICs as required. The ASIC designs were
placed in escrow in order to be available to ITRI and its member companies
should the right to manufacture ASICs become effective. ITRI and its member
companies also have a non-exclusive right to sell or lease the UMC system in all
countries outside of North America. The ITRI Agreement requires ITRI to pay the
Company a royalty on sales or leases of the UMC system made through September
2002, at which time the license becomes fully-paid. ITRI's member companies
currently compete with the Company in international markets, primarily in China.
See ``-- Competition." In May 1996, a dispute arose among the Company, ITRI and
its member companies in which the Company claimed that ITRI and its member
companies were failing to pay royalties when due. As permitted by the ITRI
Agreement, in June 1996 the Company ceased delivering its proprietary ASICs to
ITRI and its member companies. ITRI and its member companies have sought access
to the ASIC technology held in escrow and the escrow agent has in turn initiated
legal proceedings against the Company seeking, among other things, a
determination that it may release the ASIC technology to ITRI and alleged
damages. The Company has entered into negotiations with ITRI and its member
companies to resolve the dispute and to clarify the relationship of the parties
going forward. Although the outcome of any litigation is uncertain, the Company
believes that the dispute will be resolved and the relationships restructured
without any material adverse effect on the Company's business, financial
condition or results or operations.
LEGAL PROCEEDINGS
DSC
From July 1993 until June 1996 the Company was involved in litigation with
DSC. DSC had alleged, among other things, that the UMC technology contained or
was derived from trade secrets and other proprietary technology of DSC. The
parties entered into a Settlement Agreement and Mutual Releases dated as of June
24, 1996 (the ``Settlement Agreement"), pursuant to which the litigation was
terminated.
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Under the terms of the Settlement Agreement, AFC maintains all rights to the UMC
technology free and clear of any claim by DSC. See ``Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Note 9 of Notes
to Consolidated Financial Statements.
OTHER
On June 20, 1995, two investment limited partnerships, Equity-Linked
Investors, L.P. and Equity-Linked Investors, L.P. II (the ``Plaintiffs"), filed
a complaint against the Company in the United States District Court for the
Southern District of New York. The Plaintiffs' complaint contains claims for
breach of contract, promissory estoppel, and specific performance related to an
alleged subordinated debt financing agreement. The Plaintiffs are affiliated
with Desai Capital Management Incorporated (``Desai"). From March to June 1995,
the Company was involved in negotiations with Desai regarding a proposed
subordinated debt financing of the Company. On June 13, 1995, the Company's
Board of Directors disapproved the proposed transaction. According to the
Plaintiff's complaint, the Company had a binding commitment to proceed with the
proposed financing. The complaint alleges that the Company committed to accept a
$10 million to $15 million loan from the Plaintiffs in exchange for interest
payments and warrants to purchase 350,000 shares of the Company's Series E
Preferred Stock at $12.50 per share (not taking into account a two-for-one stock
split in September 1995 and the further two-for-one stock split to be effected
in August 1996). The complaint alleges damages of ``at least the difference
between their exercisable $12.50 per share price on 350,000 shares and the per
share price of stock sold in any initial public offering."
On July 12, 1995, and September 8, 1995, the Company filed motions to
dismiss the case for lack of federal jurisdiction and failure to state a claim.
The Company's motions to dismiss the case remain pending and undecided. There
has been no discovery in the case, and no trial date is set.
The Company denies the allegations of the Plaintiffs' complaint,
specifically denies that there was any contract, and intends to contest the
claims vigorously.
EMPLOYEES
As of June 30, 1996, AFC had 315 full-time employees, including 53 in
marketing, sales and support services, 98 in research and development, 121 in
operations and 43 in general administrative positions. Substantially all of
AFC's employees are based at the Company's headquarters in Petaluma, California.
None of the Company's employees are represented by a labor union. The Company
believes its relationships with its employees are good and has never experienced
a strike or work stoppage.
PROPERTIES
The Company's administrative, sales and marketing, and product development
headquarters are located in Petaluma, California, where the Company leases
approximately 75,000 square feet under leases expiring beginning in March 2005.
The Company recently completed lease negotiations for approximately 90,000
square feet of additional space in two buildings, which is scheduled for
occupancy in the latter half of 1996 and early 1997. The Company believes its
facilities are adequate for its current needs and for its needs in the
foreseeable future.
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MANAGEMENT
EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS
The executive officers, key employees and directors of the Company, and
their respective ages as of June 30, 1996, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------------ --- ------------------------------------------------
<S> <C> <C>
EXECUTIVE OFFICERS
Donald Green.................................... 65 Chairman of the Board and Chief Executive
Officer
Carl J. Grivner................................. 42 President and Chief Operating Officer and
Director
Karen Godfrey................................... 42 Corporate Controller and Assistant Secretary
Glenn Lillich................................... 49 Vice President, Domestic Sales and Marketing
Dan E. Steimle.................................. 48 Vice President, Chief Financial Officer,
Treasurer and Secretary
KEY EMPLOYEES
James Hoeck..................................... 35 Vice President, Advanced Development
John Webley..................................... 38 Vice President, Advanced Development
David Arnold.................................... 46 Vice President, Engineering Development
Michael Hatfield................................ 33 Vice President, International and Product
Management
Peter Kilkus.................................... 51 Vice President, Quality
Greg Steele..................................... 35 Vice President, Operations
OUTSIDE DIRECTORS
B.J. Cassin (1)................................. 62 Director
Clifford H. Higgerson (1) (2)................... 56 Director
Brian Jackman (2)............................... 55 Director
Dan Rasdal (1).................................. 62 Director
</TABLE>
- ---------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
DONALD GREEN was a co-founder of the Company and has been the Company's
Chairman of the Board and Chief Executive Officer since May 1992. He founded
Optilink Corporation ("Optilink") in 1986 to develop a fiber NGDLC system called
the Litespan 2000. Mr. Green was the President and Chief Executive Officer of
Optilink from 1986 until its acquisition by DSC in 1990. From 1990 until the
founding of the Company, Mr. Green was Vice President and General Manager of the
Access Products division of DSC. Prior to founding Optilink, Mr. Green served
for 17 years as Chief Executive Officer of Digital Telephone Systems, a company
he founded in 1969 to develop, manufacture and market the D960 Digital Loop
Carrier system. Prior to founding Digital Telephone Systems, Mr. Green served as
Project Engineer and, subsequently, Vice President of Engineering for Lynch
Communication Inc., a telecommunications company ("Lynch"), as well as Design
Engineer for RCA Standard Telephone Cables (UK), a telecommunications company.
Mr. Green began his career with British Telecom, a telecommunications company,
and is a graduate of the British Institute of Electrical Engineers.
CARL J. GRIVNER has been the Company's President and Chief Operating Officer
since December 1995 and a Director since May 1996. From July 1995 to December
1995 he was the Company's Chief Operating Officer. From September 1994 to July
1995, he was President of Enhanced Business Services of Ameritech, an RBOC. From
1986 to September 1994, Mr. Grivner held various general management positions at
Ameritech, including President of Ameritech's Advertising Services (Yellow
Pages) Unit. From 1977 to 1986,
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he held a variety of technical and marketing positions at International Business
Machines, Inc. Mr. Grivner holds a Bachelor of Arts degree in Biology from
Lycoming College and an advanced degree from the University of Pennsylvania,
Wharton School of Business.
KAREN GODFREY has been the Company's Corporate Controller since May 1994 and
its Assistant Secretary since February 1995. From September 1992 to May 1994,
Ms. Godfrey was self-employed as a financial management consultant. Ms. Godfrey
was the Chief Financial Officer of Fortune's Almanac, Inc., a catalog company,
from September 1991 to September 1992 and the Chief Financial Officer and Vice
President of Operations of Paracomp, Inc., a software company, from 1989 to
September 1991. Ms. Godfrey held various financial management positions with
WordStar International Corporation, a software company, from 1984 to 1989,
including Corporate Controller. Ms. Godfrey started her professional career with
KPMG Peat Marwick. She is a C.P.A. and holds a Bachelor of Science degree in
Accountancy from the University of Illinois, Champaign-Urbana.
GLENN LILLICH has been the Company's Vice President, Domestic Sales and
Marketing since June 1996. From February 1993 to June 1996, Mr. Lillich was the
Company's Vice President, Sales. From January 1992 to December 1992, he served
as the Western Region Director of Sales for the Telecom Division of Stratus
Company, a manufacturer of computer systems. Mr. Lillich held various sales
positions at DSC from 1984 to December 1991, most recently as Vice President,
Sales; GTE Telenet Systems Corporation, a manufacturer of packet switch
hardware, from 1980 to 1983; and Northern Telecom Systems Corporation, a
manufacturer and distributor of data processing systems, from 1978 to 1979. Mr.
Lillich holds a Bachelor of Science degree in Accounting from Ohio State
University and an MBA in Behavioral Management from Pepperdine University.
DAN E. STEIMLE has been the Company's Vice President and Chief Financial
Officer since December 1993. He has also been the Company's Secretary and
Treasurer since July 1995. He was the Senior Vice President for Operations and
Chief Financial Officer and Treasurer for The Santa Cruz Operations, Inc., a
software company, from 1991 until joining AFC. Mr. Steimle served as Corporate
Director of Business Development at Mentor Graphics Corporation, a company
supplying engineering design software, from 1989 to September 1991 and held
various financial positions at Cipher Data Products, Inc., a manufacturer of
computer peripherals, from 1982 to 1989, including Corporate Vice President,
Chief Financial Officer and Treasurer. Mr. Steimle holds a Bachelor of Science
degree in Accounting from Ohio State University and an MBA in Marketing and
Management from the University of Cincinnati. Mr. Steimle is also a director of
Mitek Systems, Inc., a software company.
JAMES HOECK was a co-founder of the Company and served as Vice President,
Engineering from inception through January 1995 when he became Vice President,
Advanced Development. In November 1990, he co-founded Quadrium Research
Corporation, a design consulting company ("Quadrium"), and served as its
President until May 1992. Previously, Mr. Hoeck served as a manager of firmware
at DSC, a software engineer at Optilink and as a member of the technical staff
at Teradyne, Inc., a test and measurement equipment company. Mr. Hoeck holds a
Bachelor of Science degree in Electrical Engineering from Northwestern
University.
JOHN WEBLEY was a co-founder of the Company and served as Vice President,
Engineering from inception through January 1995 when he became Vice President,
Advanced Development. In November 1990, he co-founded Quadrium with Mr. Hoeck,
and served as its Vice President until June 1992. Previously, Mr. Webley served
as manager of systems interface hardware at DSC, as a member of the technical
staff at Rockwell International, a defense contractor, as a senior engineer at
Lynch and as a network systems engineer for the Department of Telecommunications
in Cape Town, South Africa. Mr. Webley holds a Bachelor of Science degree in
Electrical Engineering, an Hon. B.Sc. and a Master of Science degree in
Electrical Engineering from the University of Stellenbosch, South Africa.
DAVID ARNOLD has been the Company's Vice President, Engineering Development
since April 1996. From November 1993 to November 1995, he was senior director of
telephony products research at Ericsson Raynet, a provider of telecommunications
equipment. From 1989 to November 1993, he served as engineering director for
Alcatel Network Systems, a provider of telecommunications equipment. Previously,
from
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1978 to 1983, Mr. Arnold held a variety of engineering positions at Digital
Equipment Corporation, a provider of computer and data processing equipment. Mr.
Arnold holds a Bachelor of Science degree in Computer Science from the
University of California, Berkeley.
MICHAEL HATFIELD has been the Company's Vice President, International and
Product Management since June 1996. From September 1992 to June 1996 he was Vice
President, Marketing. From July 1992 to September 1992, he served as the
director of marketing for the synchronization products division of Telecom
Solutions, Inc., a telecommunications company. Previously, Mr. Hatfield held
various marketing positions at DSC from 1987 to July 1992. Mr. Hatfield holds a
Bachelor of Science degree in Electrical Engineering from the Rose-Hulman
Institute of Technology and an MBA in Finance from Indiana University.
PETER KILKUS has been the Company's Vice President, Quality Assurance since
March 1995. From 1990 to March 1995, he served as the Senior Director, Quality
Assurance, for DSC. From 1988 to 1990, he held various positions at Optilink,
most recently as Vice President; Operations. Mr. Kilkus holds an MA in Physics
from the University of California, Santa Barbara and a Bachelor of Arts degree
in Physics from St. Mary's University of Minnesota.
GREG STEELE has been the Company's Vice President, Operations since April
1995. Prior to joining the Company, from 1990 to November 1994, Mr. Steele held
various positions at DSC, including director of account marketing and senior
manager of manufacturing from 1990 to April 1993. Previously, from 1984 to 1990,
Mr. Steele held several manufacturing positions at Texas Instruments. Mr. Steele
holds a Bachelor of Science degree in Industrial Engineering from Oregon State
University.
B.J. CASSIN has been a director of the Company since January 1993. Since
1979, he has been a private venture capitalist. Previously, he co-founded Xidex
Corporation, a manufacturer of data storage media, in 1969, and served as Vice
President, Marketing. He is currently a director of six private companies.
CLIFFORD H. HIGGERSON has been a director of the Company since January 1993.
Mr. Higgerson has been a general partner of Vanguard Ventures Partners, a
venture capital firm and a stockholder of the Company, since July 1991 and
managing partner of Communications Ventures, a venture capital firm, since 1987.
Mr. Higgerson is also a director of Digital Microwave Corporation and eight
private companies, including
E/O Systems.
BRIAN JACKMAN has been a director of the Company since October 1993. Mr.
Jackman has been the Executive Vice President of Tellabs, Inc., a
telecommunications equipment company and a stockholder of the Company, and the
President of Tellabs Operations Inc., a subsidiary of Tellabs, Inc., since 1993.
From 1990 to 1993, Mr. Jackman was the Executive Vice President of Business
Operations of Tellabs. From 1989 to 1990, he was the Senior Vice
President/General Manager of the data communications division of Tellabs, Inc.
Mr. Jackman is also a director of Tellabs, Inc. and Universal Electronics, Inc.
DAN RASDAL has been a director of the Company since January 1993. Mr. Rasdal
has been Chairman of the Board of SymmetriComm, Inc., a telecommunications
company, since July 1989, and the President and Chief Executive Officer of
SymmetriComm since 1985.
The current directors have been elected pursuant to the terms of the
Company's certificate of incorporation and a voting agreement among certain
stockholders of the Company, whereby holders of Series A and Series B Preferred
Stock of the Company have the right to elect three directors in the aggregate
and the parties to the voting agreement agreed to vote for a director designated
in accordance with the voting agreement. Such arrangements will terminate upon
closing of this offering.
Upon closing of the offering, the Company's certificate of incorporation
will provide for a classified Board of Directors composed of seven directors.
Accordingly, the terms of the office of the Board of Directors will be divided
into three classes. Class I will expire at the annual meeting of the
stockholders to be held in 1997; Class II will expire at the annual meeting of
the stockholders to be held in 1998; and Class III will expire at the annual
meeting of the stockholders to be held in 1999. At each annual meeting of the
stockholders, beginning with the 1997 annual meeting, the successors to
directors whose terms will then expire will be elected to serve from the time of
election and qualification until the third annual meeting
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following election and until their successors have been duly elected and
qualified, or until their earlier resignation or removal, if any. Carl Grivner
and Clifford Higgerson will be designated as Class I directors. B.J. Cassin and
Brian Jackman will be designated as Class II directors. Donald Green and Dan
Rasdal will be designated as Class III directors. A seventh director will be
nominated as soon as practicable upon the closing of this offering. To the
extent there is an increase in the number of directors, additional directorships
resulting therefrom will be distributed among the three classes so that, as
nearly as possible, each class will consist of an equal number of directors.
Each executive officer and key employee serves at the discretion of the
Board of Directors. The Company does not have any existing employment agreements
with any executive officer or key employee. There are no family relationships
among any of the directors, executive officers and key employees of the Company.
BOARD COMMITTEES
The Board of Directors has two standing committees: an Audit Committee and a
Compensation Committee. The Audit Committee, currently consisting of Messrs.
Cassin, Higgerson and Rasdal, meets with the Company's financial management and
its independent accountants at various times during each year and reviews
internal control conditions, audit plans and results, and financial reporting
procedures. The Compensation Committee, currently consisting of Messrs.
Higgerson and Jackman, reviews and approves the Company's compensation
arrangements for key employees and administers the 1996 Stock Incentive Plan and
the Employee Stock Purchase Plan.
DIRECTOR COMPENSATION
Non-employee Board members will not receive any cash fees for their service
on the Board or any Board committee, but they will be entitled to reimbursement
of all reasonable out-of-pocket expenses incurred in connection with their
attendance at Board and Board committee meetings. In addition, non-employee
Board members will receive stock options pursuant to the automatic option grant
program in effect under the Company's 1996 Stock Incentive Plan. See `` -- Stock
Incentive Plan" for further information concerning this program.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's certificate of incorporation limits the liability of directors
to the maximum extent permitted by Delaware law. This provision is intended to
allow the Company's directors the benefit of Delaware General Corporation Law
which provides that directors of Delaware corporations may be relieved of
monetary liabilities for breach of their fiduciary duties as directors, except
under certain circumstances, including breach of their duty of loyalty, acts or
omissions not in good faith or involving intentional misconduct or a knowing
violation of law, unlawful payments or dividends or unlawful stock repurchases
or redemptions or any transaction from which the director derived an improper
personal benefit. As a result, the Company and its stockholders may be unable to
obtain monetary damages from a director for breach of duty of care. Although
stockholders may continue to seek injunctive or other equitable relief for an
alleged breach of fiduciary duty by a director, stockholders may not have any
effective remedy against the challenged conduct if equitable remedies are not
available. In addition, the Company's bylaws provide that the Company shall
indemnify its executive officers and directors to the fullest extent provided by
Delaware law. The bylaws authorize the use of indemnification agreements, and
the Company has entered into such agreements with each of its directors and
executive officers.
The Company intends to obtain officer and director liability insurance with
respect to liabilities arising out of certain matters, including matters arising
under the Securities Act.
There is no pending litigation or proceeding involving a director, officer,
employee or other agent of the Company as to which indemnification is being
sought, nor is the Company aware of any threatened litigation that may result in
claims for indemnification by any director, officer, employee or other agent.
40
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY OF CASH AND OTHER COMPENSATION. The following table sets forth the
compensation earned by the Company's Chief Executive Officer, three executive
officers who were serving as such at the end of 1995 and one former executive
officer (the ``Named Executive Officers"), each of whose aggregate compensation
for the year ended December 31, 1995 was in excess of $100,000 for services
rendered in all capacities to the Company for such fiscal year.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
-------------
NUMBER OF
ANNUAL COMPENSATION SECURITIES
---------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS COMPENSATION
- -------------------------------------------- ---------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
Donald Green (1) ........................... $ 185,000 $ 115,625 25,000 --
Chairman of the Board and Chief Executive
Officer
Carl J. Grivner (2) ........................ 102,115 48,894 212,000 $ 14,690(3)
President and Chief Operating Officer
Glenn Lillich .............................. 160,000 54,400 12,000 --
Vice President, Domestic Sales and
Marketing
Dan E. Steimle ............................. 160,000 54,400 12,000 --
Vice President, Chief Financial Officer,
Treasurer and Secretary
Carlos Baradello (4) ....................... 153,846 65,000 129,000 166,013 (3)
Vice President, Engineering Development
</TABLE>
- ---------
(1) On May 31, 1995, Mr. Green purchased 167,200 shares of Common Stock from the
Company in exchange for a note payable in the amount of $52,250, the fair
market value of such shares on such date, pursuant to a compensation
agreement approved by the Board of Directors. The Company has the right to
repurchase such shares at the original purchase price per share upon Mr.
Green's cessation of service prior to vesting in such shares and a right of
first refusal in connection with transfers of such shares prior to the
Company's initial public offering. See ``Certain Transactions."
(2) Mr. Grivner joined the Company in July 1995 at an annual base salary of
$225,000.
(3) Represents relocation expenses paid by the Company.
(4) Mr. Baradello resigned from the Company effective May 1996.
In 1996, the Company instituted a bonus program pursuant to which bonuses
will be paid to executive officers based on Company performance targets. The
aggregate bonuses to be paid under this program are limited to 15% of the
Company's income before income taxes.
41
<PAGE>
STOCK OPTION GRANTS TO NAMED EXECUTIVE OFFICERS.The following table sets
forth certain information regarding stock option grants made to each of the
Named Executive Officers in 1995. No stock appreciation rights were granted to
the Named Executive Officers during such year.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS (1) POTENTIAL REALIZABLE
-------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF STOCK
SECURITIES PERCENT OF PRICE APPRECIATION
UNDERLYING TOTAL GRANTED PER SHARE FOR OPTION TERM (2)
OPTIONS TO EMPLOYEES IN EXERCISE EXPIRATION ---------------------
NAME GRANTED FISCAL YEAR BASE PRICE(3) DATE 5% 10%
- ----------------------------------- ----------- --------------- ------------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Donald Green....................... 25,000 2.0% $ 1.50 12/12/05 $ 23,584 $ 59,765
Carl J. Grivner.................... 200,000 15.7 0.625 08/15/05 78,612 199,218
12,000 0.9 1.50 12/12/05 11,320 28,687
Glenn Lillich...................... 12,000 0.9 1.50 12/12/05 11,320 28,687
Dan E. Steimle..................... 12,000 0.9 1.50 12/12/05 11,320 28,687
Carlos Baradello................... 120,000 9.4 0.3125 01/18/05 23,584 59,765
9,000 0.7 1.50 12/12/05 8,490 21,516
</TABLE>
- ---------
(1) Each option is immediately exercisable for all the option shares. However,
any shares purchased under the option will be subject to repurchase by the
Company, at the exercise price paid per share, in the event the optionee
terminates employment prior to vesting in those shares. Twenty percent of
the option shares will vest upon optionee's completion of one year of
service measured from the vesting date, and the balance will vest in
successive equal monthly installments over the next 48 months of service
thereafter. All the option shares will immediately vest in the event the
Company is acquired by merger or asset sale, unless the options are assumed
by the acquiring entity.
(2) Realizable values are reported net of the option exercise price. The dollar
amounts under these columns are the result of calculations based upon stock
price appreciation at the assumed 5% and 10% compounded annual rates (as
applied to the estimated fair market value of the option shares on the date
of grant, not the current fair market value of those shares) and are not
intended to forecast any actual or potential future appreciation, if any, in
the value of the Company's stock price. Actual gains, if any, on stock
option exercises will be dependent upon the future performance of the Common
Stock as well as the option holder's continued employment through the
vesting period. The potential realizable value calculation assumes that the
option holder waits until the end of the option term to exercise the option.
(3) The exercise price for the shares of Common Stock subject to option grants
made under the Plan may be paid in cash or in shares of Common Stock valued
at fair market value on the exercise date. The option may also be exercised
through a same-day sale program without any cash outlay by the optionee. In
addition, the Plan Administrator may provide financial assistance to one or
more optionees in the exercise of their outstanding options by allowing such
individuals to deliver a full-recourse, interest-bearing promissory note in
payment of the exercise price and any associated withholding taxes incurred
in connection with such exercise.
On June 25, 1996, non-qualified stock options exercisable for 184,902 shares
of Common Stock, with a per share exercise price of $12.50, were granted to Mr.
Green. Such options vest ratably on a monthly basis over a two year period from
the date of the grant.
42
<PAGE>
OPTION EXERCISES AND HOLDINGS. The following table sets forth certain
information with respect to the Named Executive Officers concerning their option
holdings for 1995. No options were exercised by the Named Executive Officers in
1995, and no stock appreciation rights were exercised or were outstanding at the
end of such year.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS IN-THE-MONEY OPTIONS
AT DECEMBER 31, 1995 (1) AT DECEMBER 31, 1995 (2)
-------------------------- ----------------------------
<S> <C> <C> <C> <C>
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------- ----------- ------------- ------------- -------------
Donald Green....................... 41,334 63,666 $ 60,968 $ 57,032
Carl Grivner....................... -- 212,000 -- 175,000
Glenn Lillich...................... 110,932 137,068 160,175 170,675
Dan E. Steimle..................... 77,334 134,666 111,768 165,832
Carlos Baradello................... -- 129,000 -- 142,500
</TABLE>
- ---------
(1) Although each option is immediately exercisable for all the option shares,
any shares purchased under the option are subject to repurchase by the
Company, at the exercise price paid per share, in the event the optionee
terminates employment prior to vesting in those shares. Twenty percent of
the option shares will vest upon optionee's completion of one year of
service measured from the vesting date, and the balance will vest in
successive equal monthly installments over the next 48 months of service
thereafter. All the option shares will immediately vest in the event the
Company is acquired by merger or asset sale, unless the options are assumed
by the acquiring entity. Accordingly, the table reflects such option shares
as to which the repurchase right has lapsed under the "exercisable" column
and such option shares subject to the repurchase right under the
"unexercisable" column.
(2) Based on the fair market value of the Company's Common Stock at December 31,
1995 ($1.50 per share as determined by the Board of Directors) less the
exercise price payable for such shares.
Mr. Steimle exercised options for 160,000 shares of Common Stock in June
1996 at an exercise price of $0.025 per share.
TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL ARRANGEMENTS
The Compensation Committee as Plan Administrator of the 1996 Stock Incentive
Plan has the authority to provide for the accelerated vesting of the shares of
Common Stock subject to outstanding options held by the Chief Executive Officer
and the Company's other executive officers or any unvested shares actually held
by those individuals under the 1996 Stock Incentive Plan, in the event the
Company is acquired by merger or asset sale or there is a hostile change in
control effected by a successful tender or exchange offer for more than 50% of
the Company's outstanding voting securities or a change in the majority of the
Board as a result of one or more contested elections for Board membership.
Alternatively, the Compensation Committee may condition such accelerated vesting
upon the individual's termination of service within a designated period
following the acquisition or hostile change in control. See `` -- Stock
Incentive Plan."
STOCK INCENTIVE PLAN
The Company's 1996 Stock Incentive Plan (the ``1996 Plan") is intended to
serve as the successor equity incentive program to the Company's 1993 Stock
Option/Stock Issuance Plan (the ``Predecessor Plan"). The 1996 Plan was adopted
by the Board of Directors on July 12, 1996 and is expected to be approved by the
stockholders in August 1996. A total of 7,175,676 shares of Common Stock have
initially been authorized for issuance under the 1996 Plan. This initial share
reserve is comprised of (i) the shares which remained available for issuance
under the Predecessor Plan, including the shares subject to outstanding options
thereunder, plus (ii) an additional increase of 1,000,000 shares. As of June 30,
1996, there were options to purchase 3,892,016 shares under the Predecessor
Plan. In addition, the share reserve will automatically be increased on the
first trading day of each calendar year, beginning with the 1997 calendar year,
by an amount equal to 3% of the number of shares of Common Stock outstanding on
the last trading day of the immediately preceding calendar year. However, in no
event may any one participant in the 1996 Plan receive option grants or direct
stock issuances for more than 400,000 shares in the aggregate per calendar year.
The 1996 Plan is administered by the Compensation Committee of the Board of
Directors (the ``Plan Administrator").
43
<PAGE>
Outstanding options under the Predecessor Plan will be incorporated into the
1996 Plan upon the closing of this offering, and no further option grants will
be made under the Predecessor Plan. The incorporated options will continue to be
governed by their existing terms, unless the Plan Administrator elects to extend
one or more features of the 1996 Plan to those options. However, except as
otherwise noted below, the outstanding options under the Predecessor Plan
contain substantially the same terms and conditions summarized below for the
Discretionary Option Grant Program in effect under the 1996 Plan.
The 1996 Plan is divided into five separate components: (i) the
Discretionary Option Grant Program, under which eligible individuals in the
Company's employ or service (including officers, non-employee Board members and
consultants) may, at the discretion of the Plan Administrator, be granted
options to purchase shares of Common Stock at an exercise price not less than
85% of their fair market value on the grant date; (ii) the Stock Issuance
Program under which such individuals may, in the Plan Administrator's
discretion, be issued shares of Common Stock directly through the purchase of
such shares at a price not less than 100% of their fair market value at the time
of issuance or as a bonus tied to the performance of services; (iii) the Salary
Investment Option Grant Program under which, if activated by the Plan
Administrator for a given year, executive officers and other highly compensated
employees may elect to apply a portion of their base salary for such year to the
acquisition of special below-market stock option grants; (iv) the Automatic
Option Grant Program under which option grants will automatically be made at
periodic intervals to eligible non-employee Board members to purchase shares of
Common Stock at an exercise price equal to 100% of their fair market value on
the grant date; and (v) the Director Fee Option Grant Program, if activated by
the Plan Administrator for a given year, pursuant to which the non-employee
Board members may apply all or a portion of the annual retainer fee, if any,
otherwise payable to them in cash each year to the acquisition of special
below-market option grants.
The Plan Administrator will have complete discretion to determine which
eligible individuals are to receive option grants or stock issuances under the
Discretionary Option Grant, Salary Investment Option Grant or Stock Issuance
Programs, the time or times when such option grants or stock issuances are to be
made, the number of shares subject to each such grant or issuance, the status of
any granted option as either an incentive stock option or a non-statutory stock
option under the Federal tax laws, the vesting schedule to be in effect for the
option grant or stock issuance and the maximum term for which any granted option
is to remain outstanding. Generally, options will be immediately exercisable for
all the option shares. However, any shares purchased under the option will be
subject to repurchase by the Company, at the exercise price paid per share, in
the event the optionee terminates employment prior to vesting in those shares.
The administration of the Automatic Option Grant and Director Fee Option Grant
Programs will be self-executing in accordance with the express provisions of
each such program.
The exercise price for the shares of Common Stock subject to option grants
made under the Plan may be paid in cash or in shares of Common Stock valued at
fair market value on the exercise date. The option may also be exercised through
a same-day sale program without any cash outlay by the optionee. In addition,
the Plan Administrator may provide financial assistance to one or more optionees
in the exercise of their outstanding options by allowing such individuals to
deliver a full-recourse, interest-bearing promissory note in payment of the
exercise price and any associated withholding taxes incurred in connection with
such exercise.
In the event that the Company is acquired by merger or asset sale, each
outstanding option under the Discretionary Option Grant Program which is not to
be assumed by the successor corporation will automatically accelerate in full,
and all unvested shares under the Stock Issuance Program will immediately vest,
except to the extent the Company's repurchase rights with respect to those
shares are to be assigned to the successor corporation. The Plan Administrator
will have the authority under the Discretionary Option Grant and Stock Issuance
Programs to grant options and to structure repurchase rights so that the shares
subject to those options or repurchase rights will automatically vest in the
event the individual's service is terminated, whether involuntarily or through a
resignation for good reason, within a specified period (not to exceed eighteen
(18) months) following (i) a merger or asset sale in which those options are
assumed or those repurchase rights are assigned or (ii) a hostile change in
control of the Company effected by a successful tender offer for more than 50%
of the outstanding voting stock or by proxy contest for the election of Board
44
<PAGE>
members. The Plan Administrator will also have the discretion to provide for the
automatic acceleration of outstanding options and the lapse of any outstanding
repurchase rights upon (i) a hostile change in control of the Company effected
by a successful tender offer for more than 50% of the Company's outstanding
voting stock or by proxy contest for the election of Board members or (ii) the
termination of the individual's service, whether involuntarily or through a
resignation for good reason, within a specified period (not to exceed eighteen
(18) months) following such a hostile change in control. Options currently
outstanding under the Predecessor Plan will accelerate upon an acquisition of
the Company by merger or asset sale, unless those options are assumed by the
acquiring entity, but such options are not subject to acceleration upon the
termination of the optionee's service following an acquisition in which those
options are assumed or a hostile change in control of the Company.
Stock appreciation rights are authorized for issuance under the
Discretionary Option Grant Program which provide the holders with the election
to surrender their outstanding options for an appreciation distribution from the
Company equal to the excess of (i) the fair market value of the vested shares of
Common Stock subject to the surrendered option over (ii) the aggregate exercise
price payable for such shares. Such appreciation distribution may be made in
cash or in shares of Common Stock. There are currently no outstanding stock
appreciation rights under the Predecessor Plan.
The Plan Administrator has the authority to effect the cancellation of
outstanding options under the Discretionary Option Grant Program (including
options incorporated from the Predecessor Plan) in return for the grant of new
options for the same or different number of option shares with an exercise price
per share based upon the fair market value of the Common Stock on the new grant
date.
In the event the Plan Administrator elects to activate the Salary Investment
Option Grant Program for one or more calendar years, each executive officer and
other highly compensated employee of the Company selected for participation may
elect, prior to the start of the calendar year, to reduce his or her base salary
for that calendar year by a specified dollar amount not less than $10,000 nor
more than $50,000. If such election is approved by the Plan Administrator, the
officer will be granted, as soon as practical following the start of the
calendar year for which the salary reduction is to be in effect, a non-statutory
option to purchase that number of shares of Common Stock determined by dividing
the salary reduction amount by two-thirds of the fair market value per share of
Common Stock on the grant date. The option will be exercisable at a price per
share equal to one-third of the fair market value of the option shares on the
grant date. As a result, the total spread on the option shares at the time of
grant will be equal to the amount of salary invested in that option. The option
will vest in a series of twelve (12) equal monthly installments over the
calendar year for which the salary reduction is in effect and will be subject to
full and immediate vesting upon certain changes in the ownership or control of
the Company.
Under the Automatic Option Grant Program, each individual who first joins
the Board after June 30, 1996 as a non-employee Board member will receive an
option grant for 20,000 shares of Common Stock at the time of his or her
commencement of Board service, provided such individual has not otherwise been
in the prior employ of the Company. In addition, at each annual meeting of
stockholders, beginning with the 1997 annual meeting, each individual who is to
continue to serve as a non-employee Board will receive an option grant to
purchase 6,000 shares of Common Stock, whether or not such individual has been
in the prior employ of the Company and whether or not such individual first
joined the Board after June 30, 1996, provided that such individual has served
as a non-employee Board member for at least six months.
Each automatic grant will have an exercise price equal to the fair market
value per share of Common Stock on the grant date and will have a maximum term
of 10 years, subject to earlier termination following the optionee's cessation
of Board service. Each automatic option will be immediately exercisable;
however, any shares purchased upon exercise of the option will be subject to
repurchase, at the option exercise price paid per share, should the optionee's
service as a non-employee Board member cease prior to vesting in the shares.
Each automatic option grant will vest in a series of installments over the
optionee's period of Board service as follows: one-third of the option shares
upon completion of one year of Board service, and the balance in twenty-four
(24) successive equal monthly installments upon the optionee's completion of
each
45
<PAGE>
additional month of Board service thereafter. However, each outstanding option
will immediately vest upon (i) certain changes in the ownership or control of
the Company or (ii) the death or disability of the optionee while serving as a
Board member.
Should the Director Fee Option Grant Program be activated in the future,
each non-employee Board member would have the opportunity to apply all or a
portion of the annual retainer fee, if any, otherwise payable in cash to the
acquisition of a below-market option grant. The option grant would automatically
be made on the first trading day in January in the year for which the retainer
fee would otherwise be payable in cash. The option will have an exercise price
per share equal to one-third of the fair market value of the option shares on
the grant date, and the number of shares subject to the option will be
determined by dividing the amount of the retainer fee applied to the program by
two-thirds of the fair market value per share of Common Stock on the grant date.
As a result, the total spread on the option (the fair market value of the option
shares on the grant date less the aggregate exercise price payable for those
shares) will be equal to the portion of the retainer fee invested in that
option. The option will become exercisable for the option shares in a series of
installments over the optionee's period of Board service as follows: one half of
the option shares will become exercisable upon the optionee's completion of six
(6) months of Board service during the calendar year of the option grant and the
balance will become exercisable in six (6) successive equal monthly installments
upon his or her completion of each additional month of Board service in such
calendar year. However, the option will become immediately exercisable for all
the option shares upon certain changes in the ownership or control of the
Company.
The Board may amend or modify the 1996 Plan at any time. The 1996 Plan will
terminate on June 30, 2006, unless sooner terminated by the Board.
On July 12, 1996, the Board granted options to purchase 72,100 shares of
Common Stock in the aggregate under the 1996 Plan to certain employees of the
Company. The options vest over a five-year period measured from the grant date
and have an exercise price of $4.70 per share. Such exercise price is equal to
the fair market value of the Common Stock on the grant date, as determined by
the Board on the basis of a number of factors, including the anticipated price
per share of Common Stock in this offering, and reflects the volatile nature of
the stock market and the uncertainty which existed at the time of grant as to
the ultimate completion of the Offering.
EMPLOYEE STOCK PURCHASE PLAN
The Company's Employee Stock Purchase Plan (the ``Purchase Plan") was
adopted by the Board of Directors on July 12, 1996 and is expected to be
approved by the stockholders in August 1996. The Purchase Plan is designed to
allow eligible employees of the Company and participating subsidiaries to
purchase shares of Common Stock, at semi-annual intervals, through their
periodic payroll deductions under the Purchase Plan, and a reserve of 1,500,000
shares of Common Stock has been established for this purpose.
The Purchase Plan will be implemented in a series of successive offering
periods, each with a maximum duration of 24 months. However, the initial
offering period will begin on the day the Underwriting Agreement is executed in
connection with this Offering and will end on the last business day in July
1998.
All individuals employed by the Company (or any current or future
participating subsidiary) will be eligible to participate in the Purchase Plan
if they are regularly scheduled to work more than twenty (20) hours per week for
more than five (5) calendar months per year.
Individuals who are eligible employees on the start date of any offering
period may enter the Purchase Plan on that start date or on any subsequent
semi-annual entry date (February 1 or August 1 each year). Individuals who
become eligible employees after the start date of the offering period may join
the Purchase Plan on any subsequent semi-annual entry date within that period.
Payroll deductions may not exceed 10% of the participant's base salary for
each semi-annual period of participation, and the accumulated payroll deductions
will be applied to the purchase of shares on the participant's behalf on each
semi-annual purchase date (January 31 and July 31 each year, with the first such
purchase date to occur on January 31, 1997) at a purchase price per share not
less than eighty-five percent
46
<PAGE>
(85%) of the LOWER of (i) the fair market value of the Common Stock on the
participant's entry date into the offering period or (ii) the fair market value
on the semi-annual purchase date. In no event, however, may any participant
purchase more than 1,500 shares on any one semi-annual purchase date. Should the
fair market value of the Common Stock on any semi-annual purchase date be less
than the fair market value of the Common Stock on the first day of the offering
period, then the current offering period will automatically end, and a new
twenty-four (24)-month offering period will begin, based on the lower fair
market value.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors established a Compensation Committee in May 1994.
During the last fiscal year, Messrs. Higgerson and Jackman served as members of
the Compensation Committee. Neither of these individuals has served at any time
as an officer or employee of the Company. Prior to the establishment of the
Compensation Committee, all decisions relating to executive compensation were
made by the Company's Board of Directors. For a description of the transactions
between the Company and members of the Compensation Committee and entities
affiliated with such members, see ``Business -- Strategic Relationships" and
``Certain Transactions." No executive officer of the Company serves as a member
of the board of directors or compensation committee of any entity which has one
or more executive officers serving as a member of the Company's Board of
Directors or Compensation Committee.
47
<PAGE>
CERTAIN TRANSACTIONS
Since its inception, the Company has issued and sold, in private placement
transactions, shares of Preferred Stock and warrants to purchase Common Stock to
the Company's executive officers, directors and/or greater than 5% stockholders
as follows:
<TABLE>
<CAPTION>
COMMON COMMON COMMON COMMON
EQUIVALENT EQUIVALENT EQUIVALENT EQUIVALENT
SHARES OF SHARES OF SHARES OF SHARES OF
SERIES A SERIES B SERIES C SERIES D COMMON
PREFERRED PREFERRED PREFERRED PREFERRED STOCK
INVESTOR (1) STOCK (2) STOCK (3) STOCK (4) STOCK (5) WARRANTS
- ----------------------------------------------------- ---------- ---------- ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
B.J. Cassin.......................................... 1,285,458 175,029 109,656 -- 339,908(6)
Coral Partners II.................................... 43,862 6,838 1,353,462 208,487 1,234,280(7)
Donald Green......................................... 681,552 -- -- -- 294,044(8)
Harris Corporation................................... -- -- 877,248 87,725 800,000(9)
Dan E. Steimle....................................... -- -- 5,483 -- 5,000(10)
St. Paul Venture Capital, Inc........................ 1,485,720 231,602 439,655 263,174 831,880(11)
Tellabs, Inc. (12)................................... -- 1,141,322 13,176 1,403,597 1,352,836(13)
Vanguard IV, L.P. (14)............................... 1,485,720 231,602 351,956 87,725 779,464(15)
</TABLE>
- ---------
(1) Shares held by all affiliated persons and entities have been aggregated.
See "Principal Stockholders" for more detail on shares held by these
purchasers.
(2) Shares of Series A Preferred Stock were issued in January and April 1993 at
an effective common equivalent per share price of $0.45597.
(3) Shares of Series B Preferred Stock were issued in October 1993 at an
effective common equivalent per share price of $2.27985.
(4) Shares of Series C Preferred Stock were issued in March and May 1994 at an
effective common equivalent per share price of $2.27985.
(5) Shares of Series D Preferred Stock were issued in October 1994 at an
effective common equivalent per share price of $2.84982.
(6) 80,292 of these Common Stock Warrants were exercised in February 1995, at
the following exercise prices: 6,472 at $0.025 per share and 73,820 at
$0.125 per share. The remaining 259,616 warrants have an exercise price of
$1.165 per share.
(7) These Common Stock Warrants have an exercise price of $1.165 per share.
(8) These Common Stock Warrants have the following exercise prices: 255,316 at
$0.025 per share and 38,728 at $0.125 per share.
(9) These Common Stock Warrants have an exercise price of $1.165 per share.
(10) These Common Stock Warrants were exercised in July 1995 at an exercise
price of $1.165 per share.
(11) These Common Stock Warrants have the following exercise prices: 6,472 at
$0.025 per share, 63,260 at $0.125 per share, 150,000 at $0.25 per share and
612,148 at $1.165 per share.
(12) Brian Jackman, an affiliate of Tellabs, is a director of the Company.
(13) 1,042,836 of these Common Stock Warrants were exercised in May 1995 at an
exercise price of $1.165 per share. The remaining 310,000 warrants have the
following exercise prices: 300,000 at $0.25 per share and 10,000 at $1.165
per share.
(14) Clifford H. Higgerson, an affiliate of Vanguard, is a director of the
Company.
(15) These Common Stock Warrants have the following exercise prices: 6,472 at
$0.025 per share, 70,820 at $0.125 per share, 150,000 at $0.25 per share and
552,172 at $1.165 per share.
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<PAGE>
The foregoing table has been adjusted to reflect the conversion of each
outstanding share of Series A, Series B, Series C and Series D Preferred Stock
of the Company into 1.09656 shares of Common Stock upon closing of this
offering. Each holder of such shares of Common Stock issued upon conversion of
Preferred Stock is entitled to certain registration rights. See ``Description of
Capital Stock -- Registration Rights."
In May 1995, the Company issued an aggregate of 563,600 shares of Common
Stock at $0.3125 per share to certain key employees pursuant to compensation
agreements approved by the Company's Board of Directors. In connection with such
issuance, each such employee paid for the restricted stock by issuing a secured
note payable to the Company. The Company has the right to repurchase such stock
at the original purchase price per share upon the purchaser's cessation of
service prior to vesting in such shares. The repurchase right lapses with
respect to the shares, and each purchaser vests in his shares, as follows: 20%
of the shares upon completion of one year of service measured from the date of
issuance, and the balance of the shares in a series of equal successive monthly
installments upon the purchaser's completion of each of the next 48 months of
service thereafter. Such stock is also subject to the Company's right of first
refusal, which is exercisable in the event the purchaser decides to sell or
otherwise transfer any of the shares purchased prior to the initial public
offering of Common Stock. Donald Green, the Company's Chief Executive Officer,
purchased 167,200 shares of Common Stock and issued a note payable to the
Company in the amount of $52,250. The note is secured by shares of Preferred
Stock owned by Mr. Green. Such note bears interest at the rate of 6.5% per annum
with the entire principal balance of the note, together with all accrued or
unpaid interest, due and payable on December 13, 2000.
In October 1995, the Company loaned to Carl Grivner, the President and Chief
Operating Officer of the Company, the sum of $100,000 to assist him in
relocating to Northern California. Such loan bears interest at the rate of 6.37%
per annum, with accrued interest due and payable annually on July 19 of each
year, and the principal of such loan is due and payable in three equal
installments on July 19 of 1996, 1997 and 1998. As of June 30, 1996, the entire
principal balance of this loan remains outstanding.
AFC and Harris, a stockholder of the Company, entered into an agreement in
1995 to form a joint venture to manufacture, distribute and support the UMC
system in India. The joint venture includes formation of a holding company in
Mauritius, owned 51% by AFC and 49% by Harris, which in turn intends to form a
joint venture in India with local Indian partners following receipt of certain
government approvals. To date, the parties have identified and selected two
Indian companies that will collectively own 33% of the Indian venture to be
located in Delhi.
AFC and Tellabs, a stockholder of the Company, entered into a general
partnership in 1994 to design, develop, manufacture and distribute a new product
line derived from the UMC system. AFC contributed a non-exclusive license to use
the UMC technology, Tellabs contributed cash to the joint venture, and each
received defined marketing rights for the developed technology. See ``Business
- -- Strategic Relationships."
The Company has granted options to certain of its directors and executive
officers. See ``Management -- Executive Compensation" and ``Principal
Stockholders."
The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. The Company intends that all future transactions,
including loans, between the Company and its officers, directors, principal
stockholders and their affiliates be approved by a majority of the Board of
Directors, including a majority of the independent and disinterested outside
directors on the Board of Directors, and be on terms no less favorable to the
Company than could be obtained from unaffiliated third parties.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of June 30, 1996 and as adjusted to
reflect the sale of shares of Common Stock offered hereby by (i) each person (or
group of affiliated persons) who is known by the Company to own beneficially
more than 5% of the outstanding shares of the Common Stock of the Company, (ii)
each executive officer of the Company, (iii) each director of the Company, and
(iv) all directors and executive officers of the Company as a group. The
following table has been adjusted to reflect the conversion of each outstanding
share of Series A, Series B, Series C and Series D Preferred Stock into 1.09656
shares of Common Stock, each outstanding share of Series E Preferred Stock into
1.02529 shares of Common Stock, and each outstanding share of Series F Preferred
Stock into 1 share of Common Stock.
<TABLE>
<CAPTION>
PERCENT OF TOTAL SHARES
NUMBER OF SHARES BENEFICIALLY OWNED (1)
BENEFICIALLY -----------------------------------
NAME OWNED BEFORE OFFERING AFTER OFFERING
- ----------------------------------------------------- ----------------- ----------------- ----------------
<S> <C> <C> <C>
Tellabs, Inc. (2) ................................... 3,889,965 15.5%
4951 Indiana Avenue
Lisle, IL 60532
Coral Partners II (3) ............................... 3,341,433 12.7%
60 South Sixth Street, Suite 3510
Minneapolis, MN 55402
St. Paul Venture Capital, Inc. (4)................... 3,252,032 12.7%
8500 Normandale Lake Blvd., Suite 1940
Bloomington, MN 55437
Vanguard IV, L.P. (5) ............................... 2,958,399 11.6%
525 University Avenue
Palo Alto, CA 94301
Harris Corporation (6) .............................. 1,764,973 6.9%
DTS Division
300 Bel Marin Keys Blvd.
Novato, CA 94944-1188
B.J. Cassin (7)...................................... 1,342,915 5.4%
Donald Green (8)..................................... 1,861,632 7.4%
Carl J. Grivner (9).................................. 218,000 *
Clifford H. Higgerson (10)........................... 2,958,399 11.6%
Brian Jackman (11)................................... 3,910,931 15.6%
Dan Rasdal (12)...................................... 63,000 *
Glenn Lillich (13)................................... 268,000 1.1%
Dan E. Steimle (14).................................. 255,407 1.0%
Carlos Baradello (15)................................ 60,000 *
All executive officers and directors as a group (10
persons) (16)....................................... 11,039,870 40.8%
</TABLE>
- ---------
* Less than 1%.
(1) 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. Shares of Common Stock subject
to options and warrants currently exercisable within 60 days are deemed to
be outstanding for computing the percentage of the person holding such
options but are not deemed
50
<PAGE>
outstanding for computing the percentage of any other person. Except as
indicated by footnote, and subject to community property laws where
applicable, the persons named in the table have sole voting and investment
power with respect to all shares of Common Stock shown as beneficially owned
by them.
(2) Includes 300,000 shares which may be acquired upon exercise of a warrant.
(3) Includes 1,445,716 shares which may be acquired upon exercise of warrants.
Also includes 2,193 shares held by Yuval Almog, 5,263 shares held in an IRA
by Dain Bosworth, Inc. as custodian for the benefit of Yuval Almog and 2,000
shares which may be acquired upon exercise of a warrant by Mr. Almog. Also
includes 2,193 shares held by Peter McNerney, 2,000 shares which may be
acquired upon exercise of a warrant by Mr. McNerney, 1,228 shares held by
Barbara Watchmaker, and 800 shares which may be acquired upon exercise of a
warrant by Ms. Watchmaker. Messrs. Almog and McNerney and Ms. Watchmaker are
the general partners of Coral Management Partners II, which is the general
partner of Coral Partners II, and may be deemed to be the beneficial owners
of such shares. Mr. Almog, Mr. McNerney and Ms. Watchmaker disclaim
beneficial ownership of such shares.
(4) St. Paul Venture Capital, Inc. is a wholly owned subsidiary of St. Paul
Fire and Marine Insurance Company, which is the record owner of the shares.
Includes 831,880 shares which may be acquired upon exercise of warrants.
(5) Includes 779,464 shares which may be acquired upon exercise of warrants.
(6) Includes 800,000 shares which may be acquired upon exercise of a warrant.
(7) Includes 255,433 shares held by Mr. Cassin as a conservator for Robert
Cassin, 43,380 of which shares may be acquired upon exercise of a warrant.
The remaining shares are held in trust by B.J. Cassin and Isabel B. Cassin,
Trustees of the Cassin Family Trust U/D/T, dated January 31, 1996.
(8) Includes 105,000 shares issuable upon exercise of options held by Mr.
Green, 52,000 of which shares will be vested as of 60 days from June 30,
1996. Also includes 294,044 shares which may be acquired by Mr. Green upon
exercise of warrants, and 24,248 shares which may be acquired upon exercise
of a warrant, held in an IRA by Cowen & Company as a custodian for the
benefit of Mr. Green. Excludes shares held by Mr. Green's adult children.
(9) Includes 212,000 shares issuable upon exercise of options held by Mr.
Grivner, 43,334 of which shares will be vested as of 60 days from June 30,
1996. Also includes 6,000 shares which may be acquired upon exercise of a
warrant.
(10) Includes 2,958,399 shares held by Vanguard IV, L.P., 779,464 of which
shares may be acquired upon exercise of warrants. Mr. Higgerson is a general
partner of Vanguard Venture Partners, which is a general partner of Vanguard
IV, L.P. and may be deemed to be the beneficial owner of such shares owned
by Vanguard IV, L.P. Mr. Higgerson disclaims beneficial ownership of such
shares.
(11) Includes 3,889,965 shares held by Tellabs, Inc., 300,000 of which shares
may be acquired upon exercise of a warrant. Mr. Jackman is the Executive
Vice President of Tellabs, Inc. and the President of Tellabs Operations,
Inc. and may be deemed to be the beneficial owner of such shares owned by
Tellabs. Mr. Jackman disclaims beneficial ownership of such shares. Also
includes 10,000 shares which may be acquired by Mr. Jackman upon exercise of
a warrant.
(12) Includes 63,000 shares issuable upon exercise of options held by Mr.
Rasdal, 33,600 of which shares will be vested as of 60 days from June 30,
1996.
(13) Includes 248,000 shares issuable upon exercise of options held by Mr.
Lillich, 142,400 of which shares will be vested as of 60 days from June 30,
1996. Also includes 20,000 shares which may be acquired upon exercise of a
warrant.
(14) 69,334 of such shares are subject to a right of repurchase by the Company.
Includes 52,000 shares issuable upon exercise of options held by Mr.
Steimle, 13,334 of which shares will be vested as of 60 days from June 30,
1996; 4,800 shares held in an IRA by Alex. Brown & Sons as a custodian for
the benefit of Mr. Steimle; and 4,000 shares held in an IRA by Alex. Brown &
Sons as a custodian for the benefit of Jessica Steimle.
(15) Includes 18,000 shares which may be acquired upon exercise of a warrant.
(16) 69,334 of such shares are subject to a right of repurchase by the Company.
Includes 765,200 shares issuable upon exercise of options, 333,402 of which
shares will be vested as of 60 days from June 30, 1996, and 1,495,136 shares
which may be acquired upon exercise of warrants.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the completion of this offering, the authorized capital stock of the
Company will consist of 100,000,000 shares of Common Stock, par value $0.01 per
share, and 5,000,000 shares Preferred Stock, par value $0.01 per share.
COMMON STOCK
As of June 30, 1996, there were 24,786,956 shares of Common Stock
outstanding, held of record by 147 stockholders. There will be shares, of
Common Stock outstanding after giving effect to the sale of the shares of Common
Stock offered hereby, assuming no exercise after June 30, 1996 of outstanding
stock options and warrants ( if the over-allotment option granted to the
Underwriters by the Company is exercised in full). Subject to the rights of the
holders of any Preferred Stock which may be outstanding, each holder of Common
Stock on the applicable record date is entitled to receive such dividends as may
be declared by the Board of Directors out of funds legally available therefor,
and, in the event of liquidation, to share pro rata in any distribution of the
Company's assets after payment or providing for the payment of liabilities and
the liquidation preference of any outstanding Preferred Stock. Each holder of
Common Stock is entitled to one vote for each share held of record on the
applicable record date on all matters presented to a vote of stockholders,
including the election of directors. Holders of Common Stock have no preemptive
rights to purchase or subscribe for any stock or other securities, and there are
no conversion rights or redemption or sinking fund provisions with respect to
such Common Stock. All outstanding shares of Common Stock are, and the shares of
Common Stock offered hereby will be when issued, fully paid and non-assessable.
PREFERRED STOCK
The Board of Directors is authorized, without further vote or action by
holders of Common Stock, to issue 5,000,000 shares of Preferred Stock in one or
more series and to designate the rights, preferences, limitations, restrictions
of and upon shares of each series, including voting, redemption and conversion
rights. The Board of Directors may also designate dividend rights and
preferences in liquidation. It is not possible to state the effect of the
authorization and issuance of any series of Preferred Stock upon the rights of
holders of Common Stock until the Board of Directors determines the specific
terms, rights and preferences of such a series of Preferred Stock. However, such
effects might include, among other things, restricting dividends on the Common
Stock, diluting the voting power of the Common Stock or impairing the
liquidation rights of such shares without further action by holders of Common
Stock. In addition, under certain circumstances, the issuance of Preferred Stock
may render more difficult or tend to discourage a merger, tender offer or proxy
contest, the assumption of control by a holder of a large block of the Company's
securities or the removal of incumbent management, which could thereby depress
the market price of the Company's Common Stock.
WARRANTS
As of June 30, 1996, the Company had issued warrants to purchase an
aggregate of 5,135,080 shares of Common Stock with the following per share
exercise prices: 541,048 at $0.025; 209,344 at $0.125; 600,000 at $0.25;
3,754,620 at $1.165; and 30,068 at $7.00. These warrants contain net exercise
provisions and expire at various dates between January 1, 1998 and September 30,
2000. See ``Certain Transactions."
ANTI-TAKEOVER PROVISIONS
DELAWARE LAW
Section 203 (``Section 203") of the Delaware General Corporation Law
(``DGCL") is applicable to corporate takeovers of Delaware corporations. Subject
to certain exceptions set forth therein, Section 203 provides that a corporation
shall not engage in any business combination with any ``interested stockholder"
for a three-year period following the date that such stockholder becomes an
interested stockholder unless (a) prior to such date, the board of directors of
the corporation approved either the business combination or the transaction
which resulted in the stockholder becoming an interested stockholder, (b) upon
consummation of the transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
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<PAGE>
commenced (excluding certain shares) or (c) on or subsequent to such date, the
business combination is approved by the board of directors of the corporation
and by the affirmative votes of at least two-thirds of the outstanding voting
stock which is not owned by the interested stockholder. Except as specified in
Section 203, an interested stockholder is generally defined to include any
person that is the owner of 15% or more of the outstanding voting stock of the
corporation, or is an affiliate or associate of the corporation and was the
owner of 15% or more of the outstanding voting stock of the corporation, or is
an affiliate or associate of the corporation and was the owner of 15% or more of
the outstanding voting stock of the corporation any time within three years
immediately prior to the relevant date, and the affiliates and associates of
such person. Under certain circumstances, Section 203 makes it more difficult
for an interested stockholder to effect various business combinations with a
corporation for a three-year period, although the stockholders may, by adopting
an amendment to the corporation's certificate of incorporation or bylaws, elect
not to be governed by this section, effective 12 months after adoption. The
Company's certificate of incorporation and the bylaws do not exclude the Company
from the restrictions imposed under Section 203. It is anticipated that the
provisions of Section 203 may encourage companies interested in acquiring the
Company to negotiate in advance with the Board of Directors of the Company since
the stockholder approval requirement would be avoided if a majority of the
directors then in office approve either the business combination or the
transaction which resulted in the stockholder becoming an interested
stockholder. These provisions may have the effect of deterring hostile takeovers
or delaying changes in control of the Company, which could depress the market
price of the Common Stock and which could deprive the stockholders of
opportunities to realize a premium on shares of the Common Stock held by them.
CHARTER AND BYLAW PROVISIONS
The Company's Certificate of Incorporation and Bylaws contain certain
provisions that could discourage potential takeover attempts and make more
difficult attempts by stockholders to change management. The Certificate of
Incorporation and the Bylaws provide for a classified Board of Directors and
permit the Board to create new directorships and to elect new directors to serve
for the full term of the class of director in which the new directorship was
created. The terms of the directors are staggered to provide for the election of
approximately one-third of the Board members each year, with each director
serving a three-year term. The Board (or its remaining members, even though less
than a quorum) is also empowered to fill vacancies on the Board occurring for
any reason for the remainder of the term of the class of directors in which the
vacancy occurred. Stockholders may remove a director or the entire Board, and
such removal requires the affirmative vote of two-thirds of the outstanding
voting stock. The Company's Certificate of Incorporation provides that
stockholders may not take action by written consent but only at a stockholders'
meeting, and that special meetings of the stockholders of the Company may only
be called by the Chairman of the Board or a majority of the Board.
The Company's Certificate of Incorporation provides that, in addition to the
requirements of the DGCL, any ``Business Combination" (as defined in the
Certificate of Incorporation) requires the affirmative vote of two-thirds of the
votes entitled to be cast by the holders of the Company's then outstanding
capital stock, voting together as a class, unless two-thirds of the directors
(excluding certain directors affiliated with persons interested in the Business
Combination) approve the proposed transaction.
A ``Business Combination," as defined in the Company's Certificate of
Incorporation, includes (i) a merger or consolidation of the Company or any of
its subsidiaries with an ``Interested Stockholder" (as defined in the
Certificate of Incorporation) or any other corporation which is, or after such
transaction would be, an ``Affiliate" or ``Associate" (as such terms are defined
in the Securities Exchange Act of 1934) of an Interested Stockholder; (ii) any
sale, lease, exchange, mortgage, pledge, transfer or other disposition to or
with, or proposed by or on behalf of, any Interested Stockholder or any
Affiliate or Associate of any Interested Stockholder involving any assets of the
Company or any subsidiary that constitute five percent or more of the total
assets of the Company; (iii) the issuance or transfer by the Company or any
subsidiary of any securities of the Company or any subsidiary to, or proposed by
on behalf of, an Interested Stockholder or any Affiliate or Associate of an
Interested Stockholder in exchange for cash, securities or other property that
constitute five percent or more of the total assets of the Company; (iv) the
adoption of any plan or proposal for the liquidation or dissolution of the
Company or any spin-off or split-up of any kind of the Company or
53
<PAGE>
any subsidiary, proposed by or on behalf of an Interested Stockholder or any
Affiliate or Associate of an Interested Stockholder; or (v) any
reclassification, recapitalization, or merger or consolidation of the Company
with any of its subsidiaries or any other transaction that has the effect,
directly or indirectly, of increasing the proportionate share of any class or
series of capital stock of the Company or any of its subsidiaries that is
beneficially owned by any Interested Stockholder or an Affiliate or Associate of
any Interested Stockholder.
The Company's Certificate of Incorporation defines an ``Interested
Stockholder" as (i) an individual, corporation or other entity (a ``person")
which is or was at any time within the two-year period preceding the date of the
transaction in question, the beneficial owner of 15% or more of the outstanding
voting securities of the Company; (ii) an Associate or Affiliate of the Company
who within the two-year period preceding the date of the transaction in question
was the beneficial owner of 15% or more of the outstanding voting securities of
the Company; or (iii) under certain circumstances, an assignee of any of the
foregoing persons. A person is a ``beneficial owner" of any stock of the Company
(a) which such person or any of its Affiliates and Associates beneficially owns,
directly or indirectly; (b) which such person or any of its Affiliates or
Associates has, directly or indirectly, (i) the right to acquire (whether such
right is exercisable immediately or subject only to the passage of time),
pursuant to any agreement, arrangement or understanding or upon the exercise of
conversion rights, exchange warrants or options, or otherwise, or (ii) the right
to vote pursuant to any agreement, arrangement or understanding; or (c) which
are beneficially owned, directly or indirectly, by any other person with which
such person or any of its Affiliates or Associates has any agreement,
arrangement or understanding for the purpose of acquiring, holding, voting or
disposing of any shares of capital stock.
The foregoing provisions of the Certificate of Incorporation and bylaws of
the Company may deter any potential unfriendly offers or other efforts to obtain
control of the Company that are not approved by the Board of Directors and could
thereby deprive the stockholders of opportunities to realize a premium on their
Common Stock and could make removal of incumbent directors more difficult. At
the same time, these provisions may have the effect of inducing any persons
seeking control of the Company or a business combination with the Company to
negotiate terms acceptable to the Board of Directors. Such provisions of the
Company's Certificate of Incorporation and Bylaws can be changed or amended only
by the affirmative vote of the holders of at least two-thirds of the Company's
then outstanding voting stock.
REGISTRATION RIGHTS
Following this offering, the holders of approximately 20,679,032 shares of
Common Stock and warrants to purchase approximately 5,135,080 shares of Common
Stock or their assignees (the ``Holders"), will be entitled to certain rights
with respect to the registration of such shares under the Securities Act. Under
the terms of an agreement between the Company and the Holders, if the Company
proposes to register any of its securities under the Securities Act, the Holders
are entitled to notice of such registration and are entitled to include shares
of such Common Stock therein; provided, among other conditions, that the
underwriters of any offering have the right to limit the number of such shares
included in such registration. In addition, upon the request of the Holders of
at least 50% of the registrable securities at any time after January 1, 1997,
the Holders may require the Company on not more than one occasion to file a
registration statement under the Securities Act with respect to such shares, and
the Company is required to use its best efforts to effect such registration,
subject to certain conditions and limitations. The Holders may require the
Company to register all or a portion of their shares with registration rights on
Form S-3 when such form becomes available to the Company, on not more than three
occasions, subject to certain conditions and limitations. If the Holders, by
exercising their demand registration rights, cause a large number of securities
to be registered and sold in the public market, such sales could have an adverse
effect on the market price for the Company's Common Stock. Moreover, if the
Company were to include in a Company initiated registration shares held by the
Holders pursuant to exercise of their piggyback registration rights, such sales
may have an adverse effect on the Company's ability to raise additional capital.
TRANSFER AGENT AND REGISTRAR
The Company has appointed Boston Equiserve as its transfer agent and
registrar of the Common Stock.
54
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for the Common Stock of the
Company. Future sales of substantial amounts of Common Stock in the public
market could adversely affect market prices prevailing from time to time. As
described below, no shares currently outstanding will be available for sale
immediately after this offering due to certain contractual restrictions on
resale. Sales of substantial amounts of Common Stock of the Company in the
public market after the lapse of such restrictions could adversely affect the
prevailing market price and the ability of the Company to raise equity capital
in the future.
Upon completion of this offering, the Company will have outstanding
shares of Common Stock, assuming no exercise after June 30, 1996 of
outstanding options or warrants. Of these shares, the shares sold in this
offering will be freely tradeable without restriction under the Securities Act,
unless purchased by ``affiliates" of the Company as that term is defined in Rule
144 under the Securities Act, which shares will be subject to the resale
limitations of Rule 144 adopted under the Securities Act (``Rule 144"). The
remaining 24,786,956 shares of Common Stock existing are ``restricted shares" as
defined in Rule 144 (``Restricted Shares"). Restricted Shares may be sold in the
public market only if registered or if they qualify for an exemption from
registration under Rules 144, 145 or 701 of the Securities Act. As a result of
contractual restrictions described below and the provisions of Rules 144, 145
and 701, additional shares will be available for sale in the public market as
follows: (i) no Restricted Share will be eligible for immediate sale on the date
of this Prospectus, (ii) 19,310,281 Restricted Shares will be eligible for sale
upon expiration of lock-up agreements (as described below) 180 days after the
date of this Prospectus, subject in certain cases to applicable Rule 144 volume
limitations, and (iii) the remaining 5,476,675 Restricted Shares will be
eligible for sale upon expiration of their two-year holding period. In addition,
upon expiration of lock-up agreements, an additional 4,076,918 shares subject to
stock options outstanding, if exercised, will be eligible for sale pursuant to
Rule 701 unless sold pursuant to an effective registration statement under the
Securities Act. As of June 30, 1996 there were outstanding warrants to purchase
5,135,080 shares of Common Stock. These warrants contain net exercise
provisions. Accordingly, any shares issued upon net exercise will be eligible
for sale immediately upon expiration of lock-up agreements pursuant to Rule 144.
Each officer, director, stockholder, optionholder and warrantholder of the
Company has agreed 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
similar agreement that transfers, in whole or in part, the economic risk of
ownership of the Common Stock, for a period of 180 days after the date of this
Prospectus, without the prior written consent of Morgan Stanley & Co.
Incorporated. Morgan Stanley & Co. Incorporated, in its sole discretion at any
time and without notice, may release any or all shares from the lock-up
agreements and permit holders of the shares to resell all or any portion of
their shares at any time prior to the expiration of the 180-day lock-up period.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned Restricted Shares for at least two years (including
the holding period of any prior owner except an affiliate) would be entitled to
sell within any three-month period a number of shares that does not exceed the
greater of: (i) one percent of the number of shares of Common Stock then
outstanding (which will equal approximately shares immediately after this
offering); of (ii) the average weekly trading volume of the Common stock during
the four calendar weeks preceding the filing of a Form 144 with respect to such
sale. Sales under Rule 144 are also subject to certain manner of sale provisions
and notice requirements and to the availability of current public information
about the Company. Under Rule 144(k), a person who is not deemed to have been an
affiliate of the Company at any time during the 90 days preceding a sale, and
who has beneficially owned the shares proposed to be sold for at least three
years (including the holding period of any prior owner except an affiliate), is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
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<PAGE>
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
the resale of securities originally purchased from the Company by its employees,
directors, officers, consultants or advisers prior to the closing of this
offering, pursuant to written compensatory benefit plans or written contracts
relating to the compensation of such persons. In addition, the Securities and
Exchange Commission has indicated that Rule 701 will apply to stock options
granted by the Company before this offering, along with the shares acquired upon
exercise of such options. Securities issued in reliance on Rule 701 are deemed
to be Restricted Shares and, beginning 90 days after the date of this Prospectus
(unless subject to the contractual restrictions described above), may be sold by
persons other than affiliates subject only to the manner of sale provisions of
Rule 144 and by affiliates under Rule 144 without compliance with its two-year
minimum holding period requirements.
Shortly after this offering, the Company intends to file a registration
statement under the Securities Act covering shares of Common Stock reserved for
issuance under the Company's 1996 Stock Incentive Plan and Employee Stock
Purchase Plan. Based on the number of shares reserved for issuance at June 30,
1996, under such plans, such registration statement would cover approximately
8,675,676 shares. Such registration statement will automatically become
effective upon filing. Accordingly, any vested shares registered under such
registration statement will, subject to Rule 144 volume limitations applicable
to affiliates of the Company, be available for sale in the open market
immediately after the 180-day lock-up agreements have lapsed.
In addition, after this offering, the holders of approximately 20,679,032
shares of Common Stock and warrants to purchase approximately 5,135,080 shares
of Common Stock will be entitled to certain rights with respect to registration
of such shares under the Securities Act. Registration of such shares under the
Securities Act would result in such shares becoming freely tradeable without
restriction under the Securities Act (except for shares purchased by affiliates
of the Company) immediately upon the effectiveness of such registration. See
``Description of Capital Stock -- Registration Rights."
56
<PAGE>
UNDERWRITERS
Under the terms and subject to conditions contained in an Underwriting
Agreement, the U.S. Underwriters named below, for whom Morgan Stanley & Co.
Incorporated, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Cowen &
Company and Hambrecht & Quist LLC are acting as U.S. Representatives (the ``U.S.
Underwriters"), have severally agreed to purchase, and the Company has agreed to
sell to them, and the International Underwriters named below, for whom Morgan
Stanley & Co. International Limited, Merrill Lynch International, Cowen &
Company and Hambrecht & Quist LLC are acting as International Representatives
(the ``International Underwriters"), have severally agreed to purchase, and the
Company has agreed to sell to them, the respective number of shares of Common
Stock set forth opposite their respective names below:
<TABLE>
<CAPTION>
NUMBER OF
NAME OF SHARES
- ------------------------------------------------------------------------------------------- ----------
<S> <C>
U.S. Underwriters:
Morgan Stanley & Co. Incorporated........................................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................................................
Cowen & Company..........................................................................
Hambrecht & Quist LLC....................................................................
----------
Subtotal...........................................................................
----------
International Underwriters:
Morgan Stanley & Co. International Limited...............................................
Merrill Lynch International..............................................................
Cowen & Company..........................................................................
Hambrecht & Quist LLC....................................................................
----------
Subtotal...........................................................................
----------
Total..........................................................................
----------
----------
</TABLE>
The U.S. Underwriters and the International Underwriters are collectively
referred to as the ``Underwriters." The Underwriting Agreement provides that the
obligations of the several Underwriters to pay for and accept delivery of the
shares of Common Stock offered hereby are subject to the approval of certain
legal matters by their counsel and to certain other conditions. The Underwriters
are obligated to take and pay for all of the shares of Common Stock offered
hereby (other than those covered by the over-allotment option described below),
if any are taken.
Pursuant to the Agreement Between U.S. and International Underwriters, each
U.S. Underwriter has represented and agreed that, with certain exceptions set
forth below, (a) it is not purchasing any of the U.S. Shares (as defined below)
for the account of anyone other than a United States or Canadian Person (as
defined below) and (b) it has not offered or sold, and will not offer or sell,
directly or indirectly, any of the U.S. Shares or distribute this Prospectus
outside the United States or Canada or to anyone other than a
57
<PAGE>
United States or Canadian Person. Pursuant to the Agreement Between U.S. and
International Underwriters, each International Underwriter has represented and
agreed that, with certain exceptions set forth below, (a) it is not purchasing
any of the International Shares (as defined below) for the account of any United
States or Canadian Person and (b) it has not offered or sold, and will not offer
or sell, directly or indirectly, any of the International Shares or distribute
this Prospectus in the United States or Canada or to any United States or
Canadian Person. The foregoing limitations do not apply to stabilization
transactions or to certain other transactions specified in the Agreement Between
U.S. and International Underwriters. As used herein, ``United States or Canadian
Person" means any national or resident of the United States or Canada or any
corporation, pension, profit-sharing or other trust or other entity organized
under the laws of the United States or Canada or of any political subdivision
thereof (other than a branch located outside of the United States and Canada of
any United States or Canadian Person) and includes any United States or Canadian
branch of a person who is not otherwise a United States or Canadian Person, and
``United States" means the United States of America, its territories, its
possessions and all areas subject to its jurisdiction. All shares of Common
Stock to be offered by the U.S. Underwriters and International Underwriters
under the Underwriting Agreement are referred to herein as the ``U.S. Shares"
and the ``International Shares," respectively.
Pursuant to the Agreement Between U.S. and International Underwriters, sales
may be made between the U.S. Underwriters and the International Underwriters of
any number of shares of Common Stock to be purchased pursuant to the
Underwriting Agreement as may be mutually agreed. The per share price and
currency settlement of any shares of Common Stock so sold shall be the public
offering price set forth on the cover page hereof, in United States dollars,
less an amount not greater than the per share amount of the concession to
dealers set forth below.
Pursuant to the Agreement Between U.S. and International Underwriters, each
U.S. Underwriter has represented that it has not offered or sold, and has agreed
not to offer or sell, any shares of Common Stock, directly or indirectly, in
Canada in contravention of the securities laws of Canada or any province or
territory thereof and has represented that any offer of such shares in Canada
will be made only pursuant to an exemption from the requirement to file a
prospectus in the province or territory of Canada in which such offer is made.
Each U.S. Underwriter has further agreed to send to any dealer who purchases
from it any shares of Common Stock a notice stating in substance that, by
purchasing such shares, such dealer represents and agrees that it has not
offered or sold and will not offer or sell, directly or indirectly, any of such
shares in Canada in contravention of the securities laws of Canada or any
province or territory thereof and that any offer of shares of Common Stock in
Canada will be made only pursuant to an exemption from the requirement to file a
prospectus in the province or territory of Canada in which such offer is made,
and that such dealer will deliver to any other dealer to whom it sells any of
such shares a notice to the foregoing effect.
Pursuant to the Agreement Between U.S. and International Underwriters, each
International Underwriter has represented that (i) it has not offered or sold
and 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
purposes 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 (the
``Regulations"); (ii) it has complied and will comply with all applicable
provisions of the Financial Services Act 1986 and the Regulations with respect
to anything done by it in relation to such shares in, from or otherwise
involving the United Kingdom; and (iii) it has only issued or passed on and will
only issue or pass on to any person in the United Kingdom any document received
by it in connection with the issue of such shares, if that person is of a kind
described in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1995, or is a person to whom such document
may otherwise lawfully be issued or passed on.
Pursuant to the Agreement Between U.S. and International Underwriters, each
International Underwriter has represented and agreed that it has not offered or
sold, and will not offer or sell, directly or indirectly, in Japan or to or for
the account of any resident thereof, any shares of Common Stock acquired in
connection with this offering, except for offers or sales to Japanese
International Underwriters or dealers and except pursuant to any exemption from
the registration requirements of the Securities and Exchange
58
<PAGE>
Law of Japan. Each International Underwriter has further agreed to send to any
dealer who purchases from it any of such shares of Common Stock a notice stating
in substance that such dealer may not offer or sell any of such shares, directly
or indirectly, in Japan or to or for the account of any resident thereof, except
pursuant to any exemption from the registration requirements of the Securities
and Exchange Law of Japan, and that such dealer will send to any other dealer to
whom it sells any of such shares a notice to the foregoing effect.
The Underwriters initially propose to offer part of the shares of Common
Stock directly to the public at the initial public offering price set forth on
the cover page hereof and part to certain dealers at a price which represents a
concession not in excess of $ a share under the initial public offering
price. Any Underwriter may allow, and such dealers may reallow, a concession not
in excess of $ a share to other Underwriters or to certain other
dealers.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to additional shares
of Common Stock at the initial public offering price set forth on the cover page
hereof, less underwriting discounts and commissions. The Underwriters may
exercise such option to purchase solely for the purpose of covering
over-allotments, if any, incurred in the sale of the shares of Common Stock
offered hereby.
The Representatives of the Underwriters have informed the Company that the
Underwriters do not intend sales to discretionary accounts to exceed five
percent of the total number of shares of Common Stock offered hereby.
The Company and the Underwriters have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act.
The Company has agreed 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 similar agreement that transfers, in whole or in part, the economic
risk of ownership of the Common Stock, for a period of 180 days after the date
of this Prospectus, without the prior written consent of Morgan Stanley & Co.
Incorporated, subject to certain limited exceptions.
See ``Shares Eligible for Future Sale" for a description of certain
arrangements by which all officers, directors and stockholders and optionholders
of the Company have agreed not to sell or otherwise dispose of the Common Stock
of the Company for a period of 180 days after the date of this Prospectus,
without the prior written consent of Morgan Stanley & Co. Incorporated.
The Underwriters have reserved for sale, at the initial public offering
price, up to % of the Common Stock offered hereby for employees and directors
of the Company and certain other individuals who have expressed an interest in
purchasing such shares of Common Stock in the offering. The number of shares
available for sale to the general public will be reduced to the extent such
persons purchase such reserved shares. Any reserved shares not so purchased will
be offered by the Underwriters to the general public on the same basis as other
shares offered hereby.
PRICING OF THE OFFERING
Prior to this offering, there has been no public market for the Company's
Common Stock. The initial public offering price will be determined by
negotiations among the Company and the Representatives of the Underwriters.
Among the factors to be considered in determining the initial public offering
price will be the future prospects of the Company and its industry in general;
sales, earnings and certain other financial and operating information of the
Company in recent periods; and the price-earnings ratios, price-sales ratios,
market prices of securities and certain financial and operating information of
companies engaged in activities similar to those of the Company. The estimated
initial public offering price range set forth on the cover page of this
Preliminary Prospectus is subject to change as a result of market conditions and
other factors.
59
<PAGE>
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Brobeck, Phleger & Harrison LLP, San Francisco, California. Certain
legal matters in connection with this offering will be passed upon for the
Underwriters by Wilson, Sonsini, Goodrich & Rosati, Professional Corporation,
Palo Alto, California.
EXPERTS
The consolidated financial statements of the Company as of December 31, 1994
and 1995, and for each of the years in the three-year period ended December 31,
1995, appearing in this Prospectus and Registration Statement have been audited
by KPMG Peat Marwick LLP as set forth in their reports thereon appearing
elsewhere herein and in the Registration Statement, and are included in reliance
upon such reports given upon the authority of such firm as experts in accounting
and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
``Commission") a registration statement on Form S-1 (together with all
amendments and exhibits thereto, the ``Registration Statement") under the
Securities Act with respect to the Common Stock offered hereby. This Prospectus,
which constitutes a part of the Registration Statement, does not contain all of
the information set forth in the Registration Statement, certain parts of which
are omitted in accordance with the Rules and Regulations of the Commission. For
further information with respect to the Company and the Common Stock offered
hereby, reference is made to the Registration Statement and to the exhibits and
schedules filed therewith. Statements contained in this Prospectus as to the
contents of any contract or other document 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. Copies of the Registration
Statement and the exhibits and schedules thereto may be inspected or copied at
the public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's regional offices located at Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661 and at Seven World Trade
Center, 13th Floor, New York, New York 10048. Copies of the Registration
Statement may also be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. The Commission also maintains a World Wide Web site that contains
reports, proxy and information statements and other information regarding
registrants, such as the Company, that file electronically with the Commission.
The address of the site is http://www.sec.gov.
60
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Form of Independent Auditors' Report....................................................................... F-2
Consolidated Balance Sheets as of December 31, 1994 and 1995, and June 30, 1996............................ F-3
Consolidated Statements of Operations for the years ended December 31, 1993, 1994 and 1995, and for the six
months ended June 30, 1995 and 1996....................................................................... F-4
Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders' Deficit for the years
ended December 31, 1993, 1994 and 1995, and for the six months ended June 30, 1996........................ F-5
Consolidated Statements of Cash Flow for the years ended December 31, 1993, 1994 and 1995, and for the six
months ended June 30, 1995 and 1996....................................................................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>
F-1
<PAGE>
FORM OF INDEPENDENT AUDITORS' REPORT
When the stock split referred to in Note 8 of the Notes to Consolidated
Financial Statements has been consummated, we will be in a position to render
the following report.
KPMG Peat Marwick LLP
The Board of Directors
Advanced Fibre Communications, Inc.:
We have audited the accompanying consolidated balance sheets of Advanced
Fibre Communications, Inc. and subsidiaries (the "Company") as of December 31,
1994 and 1995, and the related consolidated statements of operations, redeemable
convertible preferred stock and stockholders' deficit and cash flows for each of
the years in the three-year period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of December 31, 1994 and 1995, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1995, in
conformity with generally accepted accounting principles.
San Francisco, California
March 22, 1996, except for
Notes 7, 8 and 9, which
are as of July 25, 1996
F-2
<PAGE>
ADVANCED FIBRE COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, 1996
DECEMBER 31, ----------------------
-------------------- PRO
1994 1995 ACTUAL FORMA
--------- --------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
(NOTE 1)
Current assets:
Cash and cash equivalents, including restricted cash of $319,
$1,730, and $150 in 1994, 1995, and 1996, respectively............. $ 3,858 $ 11,118 $ 10,885 $ 10,885
Accounts receivable................................................. 5,192 10,993 20,996 20,996
Inventories......................................................... 4,620 10,149 19,328 19,328
Deferred income taxes............................................... -- -- 7,953 7,953
Prepaid expenses.................................................... 120 132 212 212
--------- --------- --------- -----------
Total current assets.............................................. 13,790 32,392 59,374 59,374
Property and equipment, net........................................... 1,042 1,828 3,610 3,610
Other assets.......................................................... 52 2,460 4,315 4,315
--------- --------- --------- -----------
Total assets.................................................... $ 14,884 $ 36,680 $ 67,299 $ 67,299
--------- --------- --------- -----------
--------- --------- --------- -----------
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Bank borrowings..................................................... $ -- $ -- $ 9,700 $ 16,806
Accounts payable.................................................... 2,605 7,121 11,346 11,346
Accrued liabilities................................................. 4,376 6,501 14,608 7,502
--------- --------- --------- -----------
Total current liabilities......................................... 6,981 13,622 35,654 35,654
Long-term liabilities................................................. 63 1,046 569 569
Redeemable convertible preferred stock, $0.01 par value; actual --
16,832,908, 35,345,816, and 35,565,816 shares authorized in 1994,
1995, and 1996, respectively; 15,432,908, 17,011,204, and 17,231,204
shares issued and outstanding in 1994, 1995, and 1996, respectively;
pro forma -- no shares authorized, issued, or outstanding............ 23,546 37,777 39,317 --
Commitments and contingencies.........................................
Stockholders' equity (deficit):
Preferred stock, $0.01 par value; pro forma -- 5,000,000 shares
authorized; no shares issued and outstanding....................... -- -- -- --
Common stock, $0.01 par value; actual -- 60,000,000, 84,654,184, and
84,654,184 shares authorized in 1994, 1995, and 1996, respectively;
3,092,724, 5,015,168, and 6,069,484 shares issued and outstanding
in 1994, 1995, and 1996, respectively; pro forma -- 100,000,000
shares authorized; 24,786,956 shares issued and outstanding........ 31 50 61 248
Additional paid-in capital.......................................... (5) (2,248) 6,806 45,936
Notes receivable from stockholders.................................. -- (176) (176) (176)
Accumulated deficit................................................. (15,732) (13,391) (14,932) (14,932)
--------- --------- --------- -----------
Total stockholders' equity (deficit).............................. (15,706) (15,765) (8,241) 31,076
--------- --------- --------- -----------
Total liabilities, redeemable convertible preferred stock, and
stockholders' equity (deficit)................................. $ 14,884 $ 36,680 $ 67,299 $ 67,299
--------- --------- --------- -----------
--------- --------- --------- -----------
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
ADVANCED FIBRE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- ---------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues.................................................. $ 620 $ 18,802 $ 54,287 $ 19,245 $ 53,772
Cost of revenues.......................................... 2,574 14,124 33,469 11,921 31,058
--------- --------- --------- --------- ----------
Gross profit (loss)................................... (1,954) 4,678 20,818 7,324 22,714
--------- --------- --------- --------- ----------
Operating expenses:
Research and development................................ 2,044 2,867 5,730 2,264 5,894
Selling, general, and administrative.................... 2,509 5,051 9,660 3,962 7,901
DSC litigation costs.................................... 784 4,551 1,623 750 18,947
--------- --------- --------- --------- ----------
Total operating expenses.............................. 5,337 12,469 17,013 6,976 32,742
--------- --------- --------- --------- ----------
Operating income (loss)............................... (7,291) (7,791) 3,805 348 (10,028)
Other income (expense):
Equity in loss of joint venture......................... -- -- (1,516) (542) (167)
Other income, net....................................... -- 26 149 41 66
--------- --------- --------- --------- ----------
Income (loss) before income taxes....................... (7,291) (7,765) 2,438 (153) (10,129)
Income taxes (benefit).................................... -- -- 97 2 (8,588)
--------- --------- --------- --------- ----------
Net income (loss)..................................... $ (7,291) $ (7,765) $ 2,341 $ (155) $ (1,541)
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
Pro forma net income (loss) per share..................... $ 0.09 $ (0.01) $ (0.06)
--------- --------- ----------
--------- --------- ----------
Shares used in per share computations..................... 27,329 23,800 24,711
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
ADVANCED FIBRE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE
CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 1993, 1994, AND 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
REDEEMABLE CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------------- ---------------------- PAID-IN NOTES RECEIVABLE ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL FROM STOCKHOLDERS DEFICIT
--------- ----------- --------- ----------- ----------- ----------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances as of December 31,
1992............................. -- $ -- 3,000,000 $ 30 $ (15) $ -- $ (676)
Conversion of notes payable to
preferred stock.................. 2,041,200 1,020 -- -- -- -- --
Issuance of preferred stock....... 6,070,888 3,035 -- -- -- -- --
Conversion of notes payable to
preferred stock.................. 400,000 1,000 -- -- -- -- --
Issuance of preferred stock....... 1,640,820 4,090 -- -- -- -- --
Exercise of common stock
warrants......................... -- -- 6,472 -- -- -- --
Net loss.......................... -- -- -- -- -- -- (7,291)
--------- ----------- --------- --- ----------- ----- ------------
Balances as of December 31,
1993............................. 10,152,908 9,145 3,006,472 30 (15) -- (7,967)
Issuance of preferred stock....... 3,000,000 7,436 -- -- -- -- --
Conversion of notes payable to
preferred stock.................. 200,000 500 -- -- -- -- --
Issuance of preferred stock....... 2,080,000 6,465 -- -- -- -- --
Exercise of common stock
warrants......................... -- -- 64,472 1 7 -- --
Exercise of common stock
options.......................... -- -- 21,780 -- 3 -- --
Net loss.......................... -- -- -- -- -- -- (7,765)
--------- ----------- --------- --- ----------- ----- ------------
Balances as of December 31,
1994............................. 15,432,908 23,546 3,092,724 31 (5) -- (15,732)
Issuance of preferred stock....... 2,193,540 14,539 -- -- -- -- --
Repurchase of preferred stock..... (615,244) (308) -- -- (3,848) -- --
Sale of common stock for notes
receivable....................... -- -- 563,600 6 170 (176) --
Exercise of common stock
warrants......................... -- -- 1,305,192 13 1,424 -- --
Exercise of common stock
options.......................... -- -- 53,652 -- 11 -- --
Net income........................ -- -- -- -- -- -- 2,341
--------- ----------- --------- --- ----------- ----- ------------
Balances as of December 31,
1995............................. 17,011,204 37,777 5,015,168 50 (2,248) (176) (13,391)
Issuance of preferred stock
(unaudited)...................... 220,000 1,540 -- -- -- -- --
Issuance of common stock in
settlement of litigation
(unaudited)...................... -- -- 719,424 7 8,986 -- --
Exercise of common stock warrants
(unaudited)...................... -- -- 86,000 1 46 -- --
Exercise of common stock options
(unaudited)...................... -- -- 248,892 3 22 -- --
Net income (unaudited)............ -- -- -- -- -- -- (1,541)
--------- ----------- --------- --- ----------- ----- ------------
Balances as of June 30, 1996
(unaudited)...................... 17,231,204 $ 39,317 6,069,484 $ 61 $ 6,806 $ (176) $ (14,932)
--------- ----------- --------- --- ----------- ----- ------------
--------- ----------- --------- --- ----------- ----- ------------
<CAPTION>
TOTAL
STOCKHOLDERS'
DEFICIT
-------------
<S> <C>
Balances as of December 31,
1992............................. $ (661)
Conversion of notes payable to
preferred stock.................. --
Issuance of preferred stock....... --
Conversion of notes payable to
preferred stock.................. --
Issuance of preferred stock....... --
Exercise of common stock
warrants......................... --
Net loss.......................... (7,291)
-------------
Balances as of December 31,
1993............................. (7,952)
Issuance of preferred stock....... --
Conversion of notes payable to
preferred stock.................. --
Issuance of preferred stock....... --
Exercise of common stock
warrants......................... 8
Exercise of common stock
options.......................... 3
Net loss.......................... (7,765)
-------------
Balances as of December 31,
1994............................. (15,706)
Issuance of preferred stock....... --
Repurchase of preferred stock..... (3,848)
Sale of common stock for notes
receivable....................... --
Exercise of common stock
warrants......................... 1,437
Exercise of common stock
options.......................... 11
Net income........................ 2,341
-------------
Balances as of December 31,
1995............................. (15,765)
Issuance of preferred stock
(unaudited)...................... --
Issuance of common stock in
settlement of litigation
(unaudited)...................... 8,993
Exercise of common stock warrants
(unaudited)...................... 47
Exercise of common stock options
(unaudited)...................... 25
Net income (unaudited)............ (1,541)
-------------
Balances as of June 30, 1996
(unaudited)...................... $ (8,241)
-------------
-------------
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
ADVANCED FIBRE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ (7,291) $ (7,765) $ 2,341 $ (155) $ (1,541)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Noncash portion of litigation settlement................ -- -- -- -- 12,807
Deferred income taxes................................... -- -- -- -- (8,588)
Depreciation and amortization........................... 111 199 547 136 321
Equity in loss of joint venture......................... -- -- 1,516 542 167
Changes in operating assets and liabilities:
Accounts receivable................................... (377) (4,815) (5,802) (5,197) (9,648)
Inventories........................................... (1,883) (2,513) (5,529) (1,642) (7,690)
Prepaid expenses and other assets..................... (54) (109) (169) 71 (274)
Accounts payable...................................... 1,270 1,266 4,516 2,657 4,029
Accrued liabilities................................... 1,124 3,215 1,626 439 3,226
Long-term liabilities................................. 94 (30) (17) (17) 22
--------- --------- --------- --------- ---------
Net cash used in operating activities............... (7,006) (10,552) (971) (3,166) (7,169)
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Acquisition of technology license......................... -- -- (1,000) -- --
Purchase of property and equipment........................ (676) (452) (1,084) (328) (1,886)
Advances to joint venture................................. -- -- (1,516) (542) (167)
Business acquisition, net of cash acquired................ -- -- -- -- (783)
--------- --------- --------- --------- ---------
Net cash used in investing activities............... (676) (452) (3,600) (870) (2,836)
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Proceeds from bank borrowings............................. -- -- 1,550 550 9,700
Repayment of bank borrowings.............................. -- -- (1,550) -- --
Proceeds from stockholder loans........................... 1,000 1,000 -- -- --
Repayment of stockholder loans............................ -- (500) -- -- --
Proceeds from issuance of redeemable convertible preferred
stock.................................................... 7,132 13,901 14,539 -- --
Repurchase of redeemable convertible preferred stock...... -- -- (4,156) -- --
Proceeds from exercise of common stock options and
warrants................................................. -- 11 1,448 1,234 72
--------- --------- --------- --------- ---------
Net cash provided by financing activities........... 8,132 14,412 11,831 1,784 9,772
--------- --------- --------- --------- ---------
Increase (decrease) in cash and cash equivalents............ 450 3,408 7,260 (2,252) (233)
Cash and cash equivalents, beginning of period.............. -- 450 3,858 3,858 11,118
--------- --------- --------- --------- ---------
Cash and cash equivalents, end of period.................... $ 450 $ 3,858 $ 11,118 $ 1,606 $ 10,885
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Noncash financing and investing activities:
Conversion of notes payable to redeemable convertible
preferred stock.......................................... $ 2,021 $ 500 -- -- --
Issuance of preferred stock for business acquisition...... -- -- -- -- $ 1,540
Issuance of common stock for notes receivable............. -- -- $ 176 $ 176 --
Deferred portion of technology license fee................ -- -- 1,500 -- --
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
ADVANCED FIBRE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Advanced Fibre Communications, Inc. (the "Company") operates in one business
segment and designs, develops, manufactures, markets, and supports the Universal
Modular Carrier 1000-TM- (the "UMC" system), a cost-effective, multi-feature
digital loop carrier system developed to serve small line-size markets. The
Company's UMC system is designed to enable telephone companies, cable companies,
and other service providers to connect subscribers to the central office switch
for voice and data communications over copper, fiber, coax and analog radio
networks.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany balances and transactions
have been eliminated. The Company's investments in 50% or less owned joint
ventures are accounted for under the equity method.
INTERIM FINANCIAL INFORMATION
The accompanying consolidated balance sheet as of June 30, 1996, the
consolidated statements of operations and cash flows for the six months ended
June 30, 1995 and 1996, and the consolidated statement of redeemable convertible
preferred stock and stockholders' deficit for the six months ended June 30, 1996
are unaudited and, in the opinion of management, include all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation of
the periods presented. The consolidated results of operations for the six months
ended June 30, 1996, are not necessarily indicative of the results for any
future period.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents. Cash and cash equivalents are
generally invested in money market funds, are classified as available-for-sale
securities and their cost approximates their market value. Included in cash and
cash equivalents is $319,000, $833,000, and $150,000 as of December 31, 1994 and
1995, and June 30, 1996, respectively, held in escrow as collateral for bonds on
certain contracts. Also included in cash and cash equivalents as of December 31,
1995, is $897,000 held in escrow related to sales to a particular customer
pending resolution of the litigation described in Note 9. This escrow released
upon the settlement of the litigation described in Note 9.
INVENTORIES
Inventories are valued at the lower of first-in, first-out cost or market.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives, generally five to
seven years, of the related assets.
REVENUE RECOGNITION
Revenue is generally recognized when products are shipped. Product returns
and uncollectible accounts have been insignificant to date.
WARRANTY
The Company provides for estimated warranty costs at the time of sale.
INCOME TAXES
The Company accounts for income taxes using the asset and liability method
of accounting. Under this method, deferred tax assets and liabilities are
recognized based on the future tax consequences attributable
F-7
<PAGE>
ADVANCED FIBRE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. The measurement of
deferred tax assets is reduced, if necessary, by a valuation allowance for any
tax benefits that are not expected to be realized.
PRO FORMA NET INCOME (LOSS) PER SHARE
Pro forma net income (loss) per share is computed using the weighted average
number of shares of common stock and redeemable convertible preferred stock, on
an as-if converted basis outstanding and common equivalent shares from options
and warrants to purchase common stock using the treasury stock method, when
dilutive. In accordance with certain Securities and Exchange Commission Staff
Accounting Bulletins, such computations included all common and common
equivalent shares issued within the 12 months preceding the initial public
offering ("IPO") date as if they were outstanding for all prior periods
presented using the treasury stock method and the estimated IPO price.
CONCENTRATION OF CREDIT RISK
Financial instruments potentially exposing the Company to concentrations of
credit risk consist primarily of cash and cash equivalents and trade accounts
receivable. Cash and cash equivalents are deposited in a single regional bank.
The Company manufactures and sells its products principally to telephone
companies. To reduce credit risk, the Company performs ongoing credit
evaluations of its customers' financial condition. The Company does not
generally require collateral.
USE OF ESTIMATES
The Company has made a number of estimates and assumptions that affect the
reported amount 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 period. Actual results could
differ from these estimates.
PRO FORMA BALANCE SHEET
Upon closing of the Company's proposed IPO, all outstanding shares of
redeemable convertible preferred stock will be converted into 18,717,472 shares
of common stock. The pro forma consolidated balance sheet as of June 30, 1996
reflects this conversion and also gives effect to the July 1996 bank borrowings
and the payment of the remaining obligations under the DSC Communications
Corporation ("DSC") litigation settlement (See Notes 7 and 9).
(2) JOINT VENTURES
ADVANCED ACCESS LABS
During fiscal 1994, the Company entered into a joint venture partnership,
Advanced Access Labs, with a stockholder. The joint venture designed and
developed a product to allow telephone services to be provided over existing
cable TV coaxial systems as well as other transmission media. The Company
contributed the right to use its technology in exchange for a 50% ownership in
the joint venture partnership. During 1995, the Company loaned $1,000,000 to the
joint venture. In addition, during 1995, and the six months ended June 30, 1996,
the Company made other net advances to the joint venture totaling $516,000 and
$167,000, respectively. The Company has recorded its proportionate share of the
joint venture's losses to the extent of the Company's loans and advances
therein. As a consequence, the Company's loans and advances to the joint venture
have been reduced to zero. During the first quarter of 1996, the Company and the
joint venture partner entered into discussions to dissolve the joint venture.
The joint venture partner would receive a development license and certain market
rights, principally in the cable television market, in
F-8
<PAGE>
ADVANCED FIBRE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED)
(2) JOINT VENTURES -- (CONTINUED)
exchange for which the Company would receive royalties and reimbursement of all
loans and advances made to the joint venture to date, which totaled $1,683,000
as of June 30, 1996. If a definitive agreement is signed on these proposed
terms, then the Company will record the reimbursement of loans and advances as a
gain.
Condensed unaudited financial information of Advanced Access Labs is
summarized below (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------------- --------------------
1994 1995 1995 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Total current assets........................................ $ 313 $ 1,045 $ 939 $ 635
Noncurrent assets........................................... 1,975 1,791 1,907 1,601
Current liabilities......................................... 318 4,891 2,476 5,616
Partner's equity (deficit).................................. 1,970 (2,055) (369) (3,380)
Net loss.................................................... 2,030 4,025 1,601 1,325
</TABLE>
In addition, the Company provided engineering and administrative support to
the joint venture for which it received reimbursement of $577,000 during 1994.
AFTEK HONG KONG
On April 11, 1996, the Company acquired all of the outstanding shares of
AFTEK Hong Kong, of which the Company had previously been a 49% stockholder.
AFTEK Hong Kong is a holding company that owns 60% of a joint venture that is
licensed to manufacture and sell the Company's telecommunications equipment in
China. Total consideration consisted of the following (in thousands):
<TABLE>
<S> <C>
Issuance of Series F preferred stock........................................ $ 1,540
Cash paid to retire note payable............................................ 939
Acquisition costs incurred.................................................. 79
---------
$ 2,558
---------
---------
</TABLE>
The acquisition has been accounted for using the purchase method of
accounting, and, accordingly, the purchase price has been allocated to the
assets purchased and the liabilities assumed based upon their fair values at the
date of acquisition. The excess of the purchase price over the fair values of
the net assets acquired was $932,000 and has been recorded as goodwill, which is
being amortized on a straight-line basis over 5 years.
Historical results of AFTEK Hong Kong and pro forma results of operations
giving effect to the acquisition have not been presented because such
information is immaterial in relation to the Company's results of operations.
During 1995 and the six months ended June 30, 1996, the Company had
$2,020,000 and $260,000, respectively, of sales to AFTEK Hong Kong.
F-9
<PAGE>
ADVANCED FIBRE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED)
(3) INVENTORIES
The major components of inventories are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- --------- JUNE 30,
1996
-----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials......................................................... $ 3,459 $ 5,155 $ 9,716
Work-in-progress...................................................... 236 899 874
Finished goods........................................................ 925 4,095 8,738
--------- --------- -----------
$ 4,620 $ 10,149 $ 19,328
--------- --------- -----------
--------- --------- -----------
</TABLE>
(4) PROPERTY AND EQUIPMENT
A summary of property and equipment follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- --------- JUNE 30,
1996
-----------
(UNAUDITED)
<S> <C> <C> <C>
Furniture and fixtures................................................. $ 226 $ 375 $ 649
Computer and office equipment.......................................... 708 1,204 2,183
Engineering equipment.................................................. 427 865 1,715
--------- --------- -----------
1,361 2,444 4,547
Less accumulated depreciation.......................................... 319 616 937
--------- --------- -----------
Net property and equipment......................................... $ 1,042 $ 1,828 $ 3,610
--------- --------- -----------
--------- --------- -----------
</TABLE>
(5) ACCRUED LIABILITIES
A summary of accrued liabilities follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- --------- JUNE 30,
1996
-----------
(UNAUDITED)
<S> <C> <C> <C>
DSC litigation costs................................................... $ 2,766 $ 2,674 $ 8,218
Warranty............................................................... 285 852 2,214
Other.................................................................. 1,325 2,975 4,176
--------- --------- -----------
$ 4,376 $ 6,501 $ 14,608
--------- --------- -----------
--------- --------- -----------
</TABLE>
F-10
<PAGE>
ADVANCED FIBRE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED)
(6) INCOME TAXES
A summary of the components of income taxes (benefit) follows (in
thousands):
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
----------- ---------- ---------
<S> <C> <C> <C>
Six months ended June 30, 1996 (unaudited):
Federal............................................................... $ -- $ (6,974) $ (6,974)
State................................................................. (1,614) (1,614)
--- ---------- ---------
$ -- $ (8,588) $ (8,588)
--- ---------- ---------
--- ---------- ---------
Year ended December 31, 1995:
Federal............................................................... $ 82 $ -- $ 82
State................................................................. 15 -- 15
--- ---------- ---------
$ 97 $ -- $ 97
--- ---------- ---------
--- ---------- ---------
</TABLE>
Income taxes (benefit) differs from the amount computed by applying the U.S.
federal statutory rate of 34% to income (loss) before income taxes as follows
(in thousands):
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE
------------------------------- 30,
1993 1994 1995 1996
--------- --------- --------- -----------
<S> <C> <C> <C> <C>
(UNAUDITED)
Income taxes (benefit) at statutory rate.................... $ (2,479) $ (2,640) $ 829 $ (3,444)
Current losses and temporary differences for which no
benefit was recognized..................................... 2,479 2,640 -- --
Alternative minimum tax..................................... -- -- 82 --
State taxes net of federal benefit.......................... -- -- 15 (629)
Change in valuation allowance............................... -- -- (847) (4,687)
Other....................................................... -- -- 18 172
--------- --------- --------- -----------
$ -- -- $ 97 $ (8,588)
--------- --------- --------- -----------
--------- --------- --------- -----------
</TABLE>
F-11
<PAGE>
ADVANCED FIBRE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED)
(6) INCOME TAXES -- (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1994 1995 1996
--------- --------- -----------
<S> <C> <C> <C>
(UNAUDITED)
Deferred tax assets:
Net operating loss carryforwards................................... $ 4,099 $ 3,316 $ 5,493
DSC settlement costs............................................... -- -- 1,267
Allowances and accruals............................................ 1,789 1,914 1,824
Research tax credit carryforwards.................................. 374 -- --
Other.............................................................. 52 6 4
--------- --------- -----------
6,314 5,236 8,588
--------- --------- -----------
Deferred tax liability -- investment in joint venture................ -- (549) --
--------- --------- -----------
6,314 4,687 8,588
Less valuation allowance............................................. (6,314) (4,687) --
--------- --------- -----------
Net deferred tax asset............................................... $ -- $ -- $ 8,588
--------- --------- -----------
--------- --------- -----------
</TABLE>
As of December 31, 1995, the Company had net operating loss carryforwards of
approximately $9,000,000 and $3,800,000 for federal and California income tax
purposes, respectively. The difference in the net operating loss carryforwards
between tax jurisdictions results primarily from a 50% limitation on
carryforwards for California purposes. Federal net operating loss carryforwards
expire from 2007 through 2010. California net operating loss carryforwards
expire from 1998 through 2000.
Federal and state tax laws impose restrictions on the utilization of net
operating losses in the event of an "ownership change" of a corporation. All net
operating loss carryforwards are subject to limitation as a result of these
restrictions; however, the ownership change restrictions are not expected to
impair the Company's ability to utilize the affected carryforward items.
(7) BANK BORROWINGS
The Company has a revolving line of credit with a bank providing for
borrowings up to $12,000,000 at an interest rate of prime plus 0.5%. Borrowings
under the line are secured by the Company's accounts receivable. The line of
credit expires on November 15, 1996. The line of credit contains covenants that
require the Company to maintain certain financial ratios. As of June 30, 1996,
the Company was in compliance with the covenants contained in the agreement. As
of December 31, 1994 and 1995, no borrowings were outstanding under the line of
credit. As of June 30, 1996, $9,700,000 was outstanding and $1,736,000 remained
available under the line of credit.
In July 1996, the Company borrowed approximately $7.1 million under a
six-month term loan. The proceeds from the loan were used to pay the remaining
obligations under the DSC litigation settlement (See Note 9). The loan bears
interest at 5.75% and has a $4.0 million compensating balance requirement.
F-12
<PAGE>
ADVANCED FIBRE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED)
(8) REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
REDEEMABLE CONVERTIBLE PREFERRED STOCK
As of December 31, 1994 and 1995, and June 30,1996, redeemable convertible
preferred stock consisted of the following:
<TABLE>
<CAPTION>
SHARES ISSUED AND OUTSTANDING
----------------------------------------
DECEMBER 31,
SHARES --------------------------
SERIES AUTHORIZED 1994 1995
------ ------------ ------------ ------------ JUNE 30,
1996
------------
(UNAUDITED)
<S> <C> <C> <C> <C>
A............................................. 16,224,176 8,112,088 7,496,844 7,496,844
B............................................. 4,081,640 2,040,820 2,040,820 2,040,820
C............................................. 6,400,000 3,200,000 3,200,000 3,200,000
D............................................. 4,160,000 2,080,000 2,080,000 2,080,000
E............................................. 4,480,000 -- 2,193,540 2,193,540
F............................................. 220,000 -- -- 220,000
------------ ------------ ------------ ------------
35,565,816 15,432,908 17,011,204 17,231,204
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
Redeemable convertible preferred stock has a liquidation preference equal to
the issue price and is entitled to dividends (if declared) in priority to common
stock on a noncumulative basis and is subject to a voting agreement. Redeemable
convertible preferred stock is convertible into common stock using a conversion
price formula and is redeemable by the Company, at the option of the Board of
Directors, or at the request of the holders, on or after January 1, 2000.
Each year, beginning in 1995, the Company is obligated to indemnify the
holders of redeemable convertible preferred stock, except for holders of Series
F preferred stock, for any costs, expenses, damages, or liabilities resulting
from the litigation described in Note 9. This indemnification is effected using
a formula that adjusts the conversion price of each redeemable convertible
preferred stock series. As of June 30, 1996, the number of shares convertible
after giving effect to the formula were 8,220,739, 2,237,882, 3,508,992,
2,280,845, and 2,249,015 for Series A, B, C, D, and E, respectively. Series F
redeemable convertible preferred stock had no indemnification provision.
In 1993, $1,000,000 was loaned to the Company by stockholders of the
Company. These loans were subsequently converted to Series A convertible
preferred stock.
In 1994, $1,000,000 was loaned to the Company by stockholders of the
Company. Loans totaling $500,000 were converted to Series C preferred stock and
$500,000 was repaid using proceeds from the issuance of preferred stock.
F-13
<PAGE>
ADVANCED FIBRE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED)
(8) REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(DEFICIT) -- (CONTINUED)
COMMON STOCK WARRANTS
Warrants to purchase shares of common stock were issued to investors as part
of the preferred stock agreements. The warrants expire beginning in 1999 and
ending in 2003 and are summarized as follows:
<TABLE>
<CAPTION>
EXERCISE
NUMBER PRICE
OF SHARES PER SHARE
----------- ----------------
<S> <C> <C>
Warrants outstanding as of December 31, 1993............................ 941,156 $ 0.03 -- 0.13
Issued................................................................ 5,619,520 0.25 -- 1.17
Exercised............................................................. (64,472) 0.03
-----------
Warrants outstanding as of December 31, 1994............................ 6,496,204 0.03 -- 1.17
Issued................................................................ 30,068 7.00
Exercised............................................................. (1,305,192) 0.03 -- 1.17
-----------
Warrants outstanding as of December 31, 1995............................ 5,221,080 0.03 -- 7.00
Issued................................................................ -- --
Exercised............................................................. (86,000) 0.03 -- 1.17
-----------
Warrants outstanding as of June 30, 1996................................ 5,135,080 0.03 -- 7.00
-----------
-----------
</TABLE>
COMMON STOCK OPTIONS
Under the Company's 1993 Stock Option/Stock Issuance Plan (the "Plan"),
options to purchase up to an aggregate of 6,500,000 shares of common stock may
be granted to key employees, directors, and consultants. The Plan provides for
issuing both incentive stock options, which must be granted at fair market value
at the date of grant, and nonqualified stock options, which must be granted at
not less than 85% of fair market value of the stock. All incentive stock options
to date have been granted at the fair market value of the stock as determined by
the Board of Directors (the "Board"). Options under the Plan are exercisable
immediately, but when exercised shares issued are subject to repurchase by the
Company at the exercise price. The Company's right to repurchase expires as to
20% after the first year and ratably thereafter over each of the next 48 months,
subject to continued employment. The options expire 10 years from the date of
grant and are normally canceled three months after termination of employment.
The Board administers the Plan.
F-14
<PAGE>
ADVANCED FIBRE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED)
(8) REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(DEFICIT) -- (CONTINUED)
The following summarizes activity in the Plan:
<TABLE>
<CAPTION>
EXERCISE
AVAILABLE NUMBER PRICE
FOR GRANT OF SHARES PER SHARE
----------- ----------- ----------------
<S> <C> <C> <C>
Options outstanding as of December 31, 1993............... 1,792,000 1,608,000 $ 0.03 -- 0.25
Granted................................................. (1,238,080) 1,238,080 0.25 -- 0.32
Exercised............................................... -- (21,780) 0.03 -- 0.25
Canceled................................................ 90,020 (90,020) 0.03 -- 0.25
----------- -----------
Options outstanding as of December 31, 1994............... 643,940 2,734,280 0.03 -- 0.32
Authorized.............................................. 1,600,000 -- --
Granted................................................. (1,274,036) 1,274,036 0.32 -- 1.50
Exercised............................................... -- (53,652) 0.03 -- 0.25
Canceled................................................ 64,648 (64,648) 0.03 -- 0.32
----------- -----------
Options outstanding as of December 31, 1995............... 1,034,552 3,890,016 0.03 -- 1.50
Authorized (unaudited).................................. 1,500,000 -- --
Granted (unaudited)..................................... (622,582) 622,582 0.32 -- 12.50
Exercised (unaudited)................................... -- (248,892) 0.03 -- 0.32
Canceled (unaudited).................................... 186,788 (186,788) 0.03 -- 1.50
----------- -----------
Options outstanding as of June 30, 1996 (unaudited)....... 2,098,758 4,076,918 0.03 -- 12.50
----------- -----------
----------- -----------
Exercisable as of December 31, 1995....................... 1,189,402 0.03 -- 1.50
-----------
-----------
</TABLE>
STOCK SPLIT AND REINCORPORATION
In September 1995, the Company's Board of Directors approved a two-for-one
stock split and reincorporation of the Company in the state of Delaware. In July
1996, the Company's Board of Directors approved a further two-for-one stock
split. The accompanying financial statements and notes have been restated to
give effect to the stock splits and reincorporation.
(9) COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases office space and certain equipment under operating
leases. Future minimum payments under operating leases with an initial term of
more than one year as of December 31, 1995 are summarized as follows (in
thousands):
<TABLE>
<S> <C>
1996....................................................................... $ 1,455
1997....................................................................... 1,657
1998....................................................................... 1,413
1999....................................................................... 1,046
Thereafter................................................................. 5,106
---------
Total minimum lease payments............................................... $ 10,677
---------
---------
</TABLE>
Total rent expense for all operating leases was $182,000, $462,000,
$887,000, and $1,019,000 for the years ended December 31, 1993, 1994, and 1995,
and the six months ended June 30, 1996, respectively.
F-15
<PAGE>
ADVANCED FIBRE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED)
(9) COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
LITIGATION
From July 1993 until June 1996 the Company was involved in litigation with
DSC. DSC alleged, among other things, that the Company's UMC technology
contained or was derived from trade secrets and other proprietary technology of
DSC. The parties entered into a Settlement Agreement and Mutual Releases dated
as of June 24, 1996 (the "Settlement Agreement"), pursuant to which the
litigation was terminated. Under the terms of the Settlement Agreement, the
Company paid DSC $3,000,000 in June 1996, agreed to pay DSC up to an additional
$8,500,000 through 2001, and issued 719,424 shares of common stock to DSC (see
Note 7). The settlement amount was recorded during the first six months of 1996
as a charge of $15,807,000. Under the terms of the Settlement Agreement, AFC
maintains all rights to the UMC technology free and clear of any claim by DSC.
EMPLOYEE BENEFITS
The Company has a 401(k) plan under which employees may contribute a portion
of their compensation on a tax deferred basis to the plan. The Company, at its
discretion, may contribute to the plan on a matching basis up to a maximum of
$5,000 per employee per year. The Company is the plan administrator. During 1995
and the first six months of 1996, the Company contributed $133,000 and $216,000
to the plan.
(10)COMPANY INFORMATION AND CERTAIN CONCENTRATIONS
During 1995 and the first six months of 1996, one customer accounted for
approximately 16% of revenues in each period. During 1994, one customer
accounted for 27% of revenues. During fiscal 1993, one customer accounted for
20% of revenues. Export sales were 19%, 13%, and 13% during 1994, 1995 and the
six months ended June 30, 1996, respectively.
The Company currently derives substantially all of its revenue from the UMC,
and expects that this concentration will continue for the foreseeable future. As
a result, any factor adversely affecting the demand for, or pricing of, the UMC
could have a material adverse effect on the Company's business and results of
operations.
The Company's manufacturing operations consist of the final assembly of
out-sourced parts and components, followed by testing. Although the Company's
product designs employ primarily industry standard hardware, certain components
are only available through limited sources of supply. The Company's proprietary
integrated circuits, codec components, and some surface mount technology
components and other components are available from limited sources. If the
Company cannot obtain essential components as required, the Company may be
unable to meet demand for its products, thereby adversely affecting its
operating results. In addition, scarcity of such components could result in cost
increases that adversely affect the Company's gross margin.
The Company's printed circuit board assemblies and channel bank assemblies
are provided by a limited number of outside turnkey suppliers. In the event
operations of these turnkey suppliers are impaired or they are unable to support
the manufacturing requirements of the Company, the Company's operating results
could be adversely affected.
F-16
<PAGE>
[LOGO]
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS
PROSPECTUS (SUBJECT TO COMPLETION)
ISSUED JULY 26, 1996
SHARES
[LOGO]
COMMON STOCK
---------------------
OF THE SHARES OF COMMON STOCK OFFERED, SHARES ARE BEING OFFERED
INITIALLY OUTSIDE OF THE UNITED STATES AND CANADA BY THE
INTERNATIONAL UNDERWRITERS AND SHARES ARE BEING OFFERED INITIALLY IN
THE UNITED STATES AND CANADA BY THE U.S.
UNDERWRITERS. SEE ``UNDERWRITERS." ALL OF THE SHARES OF COMMON STOCK
OFFERED HEREBY ARE BEING SOLD BY THE COMPANY. PRIOR
TO THIS OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR THE COMMON
STOCK OF THE COMPANY. IT IS CURRENTLY ESTIMATED THAT THE INITIAL
PUBLIC OFFERING PRICE PER SHARE WILL BE BETWEEN $ AND
$ . SEE ``UNDERWRITERS" FOR A DISCUSSION OF THE FACTORS
TO BE CONSIDERED IN DETERMINING THE INITIAL PUBLIC OFFERING
PRICE.
------------------------------
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE ``RISK FACTORS"
COMMENCING ON PAGE 5 HEREOF.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
PRICE $ A SHARE
------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS (1) COMPANY (2)
------------------ ------------------ ------------------
<S> <C> <C> <C>
PER SHARE................................................ $ $ $
TOTAL (3)................................................ $ $ $
</TABLE>
-------------------
(1) THE COMPANY HAS AGREED TO INDEMNIFY THE UNDERWRITERS AGAINST CERTAIN
LIABILITIES, INCLUDING LIABILITIES UNDER THE SECURITIES ACT OF 1933, AS
AMENDED.
(2) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY ESTIMATED AT
$ .
(3) THE COMPANY HAS GRANTED TO THE U.S. UNDERWRITERS AN OPTION, EXERCISABLE
WITHIN 30 DAYS OF THE DATE HEREOF, TO PURCHASE UP TO AN AGGREGATE OF
ADDITIONAL SHARES AT THE PRICE TO PUBLIC LESS UNDERWRITING
DISCOUNTS AND COMMISSIONS FOR THE PURPOSE OF COVERING OVER-ALLOTMENTS, IF
ANY. IF THE U.S. UNDERWRITERS EXERCISE SUCH OPTION IN FULL, THE TOTAL
PRICE TO PUBLIC, UNDERWRITING DISCOUNTS AND COMMISSIONS AND PROCEEDS TO
COMPANY WILL BE $ , $ AND $ , RESPECTIVELY.
SEE "UNDERWRITERS."
------------------------------
THE SHARES ARE OFFERED, SUBJECT TO PRIOR SALE, WHEN, AS AND IF ACCEPTED BY
THE UNDERWRITERS NAMED HEREIN AND SUBJECT TO APPROVAL OF CERTAIN LEGAL MATTERS
BY WILSON, SONSINI, GOODRICH & ROSATI, PROFESSIONAL CORPORATION, COUNSEL FOR THE
UNDERWRITERS. IT IS EXPECTED THAT DELIVERY OF THE SHARES WILL BE MADE ON OR
ABOUT , 1996 AT THE OFFICE OF MORGAN STANLEY & CO. INCORPORATED, NEW
YORK, N.Y., AGAINST PAYMENT THEREFOR IN IMMEDIATELY AVAILABLE FUNDS.
------------------------
MORGAN STANLEY & CO.
INTERNATIONAL
MERRILL LYNCH INTERNATIONAL
COWEN & COMPANY
HAMBRECHT & QUIST
, 1996
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses payable by the
Registrant in connection with the sale of Common Stock being registered, other
than underwriting discounts and commissions. All amounts are estimates except
the Securities and Exchange Commission registration fee, the NASD filing fee and
the Nasdaq National Market listing fee.
<TABLE>
<CAPTION>
AMOUNT
TO
BE PAID
----------
<S> <C>
Securities and Exchange Commission registration fee............................... $ 22,207
NASD filing fee................................................................... 6,940
Nasdaq National Market listing fee................................................ *
Printing and engraving expenses................................................... *
Legal fees and expenses........................................................... *
Accounting fees and expenses...................................................... *
Blue sky fees and expenses........................................................ *
Transfer agent and registrar fees................................................. *
Director and officer insurance premiums........................................... *
Miscellaneous expenses............................................................ *
----------
Total....................................................................... $ *
----------
----------
</TABLE>
- ---------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of the state of Delaware (the
``Delaware Law") empowers a Delaware corporation to indemnify any persons who
are, or are threatened to be made, parties to any threatened, pending or
completed legal action, suit or proceedings, whether civil, criminal,
administrative or investigative (other than action by or in the right of such
corporation), by reason of the fact that such person was an officer or director
of such corporation, or is or was serving at the request of such corporation as
a director, officer, employee or agent of another corporation or enterprise. The
indemnity may include expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding, provided that such officer or
director acted in good faith and in a manner he reasonably believed to be in or
not opposed to the corporation's best interests, and, for criminal proceedings,
had no reasonable cause to believe his conduct was illegal. A Delaware
corporation may indemnify officers and directors in an action by or in the right
of the corporation under the same conditions, except that no indemnification is
permitted without judicial approval if the officer or director is adjudged to be
liable to the corporation in the performance of his duty. Where an officer or
director is successful on the merits or otherwise in the defense of any action
referred to above, the corporation must indemnify him against the expenses which
such officer or director actually and reasonably incurred.
In accordance with the Delaware Law, the Certificate of Incorporation of the
Company contains a provision to limit the personal liability of the directors of
the Registrant for violations of their fiduciary duty. This provision eliminates
each director's liability to the Registrant or its stockholders for monetary
damages except (i) for any breach of the director's duty of loyalty to the
Registrant or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the Delaware Law providing for liability of directors for
unlawful payment of dividends or unlawful stock purchases or redemptions, or
(iv) for any transaction from which a director derived an
II-1
<PAGE>
improper personal benefit. The effect of this provision is to eliminate the
personal liability of directors for monetary damages for actions involving a
breach of their fiduciary duty of care, including any such actions involving
gross negligence.
Article five of the Bylaws of the Registrant provide for indemnification of
the officers and directors of the Registrant to the fullest extent permitted by
applicable law.
In connection with the incorporation of the Registrant in the State of
Delaware, the Registrant entered into indemnification agreements with each
director and certain officers, a form of which is attached as Exhibit 10.1
hereto and incorporated herein by reference. The Indemnification Agreements
provide indemnification to such directors and officers under certain
circumstances for acts or omissions which may not be covered by directors' and
officers' liability insurance. The Company intends to obtain directors and
officers liability insurance, which will insure against liabilities that
directors or officers of the Company may incur in such capacities. Reference is
also made to Section 7 of the Underwriting Agreement contained in Exhibit 1.1
hereto, indemnifying officers and directors of the Registrant against certain
liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since July 26, 1993, the Registrant has sold and issued the following
securities which were not registered under the Securities Act (all numbers take
into account the stock splits effected in September 1995 and August 1996):
(i) Since July 26, 1993, the Registrant has granted stock options to its
employees under its stock option plans covering an aggregate of 3,303,296 shares
of the Registrant's Common Stock, at exercise prices ranging from $0.025 to
$4.70 per share. The Registrant has issued 404,644 shares upon exercise of these
stock options.
(ii) In October 1993, the Registrant issued and sold an aggregate of
2,040,820 shares of Series B Preferred Stock (convertible into 2,237,882 shares
of Common Stock) at $2.50 per share to 26 investors, and warrants to purchase an
aggregate of 347,636 shares of Common Stock at $0.125 per share to six
investors.
(iii) In March and May 1994, the Registrant issued and sold an aggregate of
3,200,000 shares of Series C Preferred Stock (convertible into 3,508,992 shares
of Common Stock) at $2.50 per share to 31 investors, and warrants to purchase an
aggregate of 600,000 shares of Common Stock at $0.25 per share to three
investors, and warrants to purchase an aggregate of 5,019,520 shares of Common
Stock at $1.165 per share to 31 investors.
(iv) In October 1994, the Registrant issued and sold an aggregate of
2,080,000 shares of Series D Preferred Stock (convertible into 2,280,845 shares
of Common Stock) at $3.125 per share to 13 investors.
(v) In May 1995, the Registrant issued and sold an aggregate of 563,600
shares of Common Stock at $0.3125 per share to Donald Green, James Hoeck, Henri
Sulzer and John Webley pursuant to a restricted stock issuance program approved
by the Company's Board of Directors.
(vi) In September 1995, the Registrant issued and sold an aggregate of
2,193,540 shares of Series E Preferred Stock (convertible into 2,249,015 shares
of Common Stock) at $7.00 per share to 10 investors, and warrants to purchase an
aggregate of 30,068 shares of Common Stock at $7.00 per share to Hambrecht &
Quest and AFC Investors, L.P.
(vii) In April 1996, the Registrant issued and sold an aggregate of 220,000
shares of Series F Preferred Stock (convertible into 220,000 shares of Common
Stock) at an effective price of $7.00 per share to Elec and Eltek Communication
Holdings Limited. The Registrant purchased all of the stock of AFTEK-Hong Kong
that had not previously been owned by the Registrant in exchange for 220,000
Shares of such shares of Series F Preferred Stock and approximately $939,000 in
cash.
(viii) Between September 1993 and April 1996, the Registrant has issued and
sold 197,236 shares of Common Stock upon exercise of warrants to 9 individuals.
II-2
<PAGE>
(ix) Between May 1994 and February 1996, the Registrant has issued and sold
1,264,900 shares of Common Stock upon exercise of warrants to 10 individuals.
The sales and issuances of securities in the transactions described above
were deemed to be exempt from registration under the Securities Act in reliance
upon Section 4(2) of the Securities Act, or Regulation D promulgated thereunder,
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 compensatory benefit plans and contracts relating to compensations
as provided under Rule 701. The recipients of securities in each such
transaction represented their intentions to acquire the securities for
investments only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the securities
issued in such transactions. All recipients had adequate access, through their
relationships with the Company, to information about the Registrant.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.*
3.1 Second Amended and Restated Certificate of Incorporation of the Registrant.
3.2 Form of Third Amended and Restated Certificate of Incorporation of the Registrant.*
3.3 Form of Fourth Amended and Restated Certificate of Incorporation of the Registrant.*
3.4 Bylaws of the Registrant.
3.5 Form of Amended and Restated Bylaws of the Registrant.*
4.1 Specimen Certificate of Common Stock.*
4.2 Series E Preferred Stock Purchase Agreement, dated September 29, 1995, between the Registrant and
certain purchasers of the Registrant's Series E Preferred Stock.
4.3 Certificate of Incorporation of the Registrant (included in Exhibit 3.1).
5.1 Opinion of Brobeck, Phleger & Harrison LLP.*
10.1 Form of Warrant Issued In Connection with the Sale of the Registrant's Series A Preferred Stock on
January 6, 1993.
10.2 Form of Warrant Issued In Connection with the Sale of the Registrant's Series B Preferred Stock on
October 5, 1993.
10.3 Form of Warrant Issued in Connection with the Sale of the Registrant's Series C Preferred Stock on March
16, 1994.
10.4 Form of Performance Warrant Issued in Connection with the Sale of the Registrant's Series C Preferred
Stock on March 16, 1994 and May 4, 1994.
10.5 Warrant Issued in Connection with the Sale of the Registrant's Series E Preferred Stock on September 29,
1995.
10.6 Restricted Stock Issuance Agreement, dated May 19, 1995, between the Registrant, Donald Green and
Maureen Green.
10.7 Compensation Agreement, dated May 19, 1995, between the Registrant and Donald Green.
10.8 Promissory Note Secured by Pledge Agreement, dated May 31, 1995, by Donald Green in favor of the
Registrant.
10.9 Stock Pledge Agreement, dated June 16, 1995, between the Registrant and Donald Green.
10.10 Promissory Note issued by Carl Grivner, dated October 5, 1995, in favor of the Registrant.
10.11 Shareholder and Joint Venture Agreement, dated December 28, 1995, between the Registrant and Harris
Corporation, acting for the purposes of the agreement through its Digital Telephone Systems Division.+
10.12 Joint Venture & Partnership Agreement, dated April 11, 1994, between the Registrant and Tellabs
Operations, Inc.+
10.13 License, Joint Development, Supply and Authorized Manufacturing Agreement, dated September 25, 1992,
between the Registrant and Industrial Technology Research Institute of the Republic of China.*
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.14 Hangzhou Aftek Communication Registrant Ltd. Contract, dated June 18, 1994, between Advanced Fibre
Technology Communication (Hong Kong) Limited and Hangzhou Communication Equipment Factory of the MPT.,
HuaTong Branch.+
10.15 1445 & 1455 McDowell Boulevard North Net Lease, dated February 1, 1993, between the Registrant and G &
W/ Redwood Associates Joint Venture, for the premises located at 1445 McDowell Boulevard North.
10.16 Redwood Business Park Net Lease, dated July 9, 1995, between the Registrant and G & W/ Redwood
Associates Joint Venture, for the premises located at 1455 McDowell Boulevard North.
10.17 Redwood Business Park Net Lease, dated July 10, 1995, between the Registrant and G & W/ Redwood
Associates Joint Venture, for the premises located at 1440 McDowell Boulevard North.
10.18 Redwood Business Park Net Lease, dated June 3, 1996, between the Registrant and G & W/ Redwood
Associates Joint Venture, for the premises located at Buildings 1 & 9 of Willowbrook Court.
10.19 Second Amended and Restated Loan and Security Agreement, dated December 7, 1995, between the Registrant
and Bank of the West.
10.20 Form of Indemnification Agreement for Executive Officers and Directors of the Registrant.
10.21 The Registrant's 1993 Stock Option/Stock Issuance Plan as amended (the ``1993 Plan").
10.22 Form of Stock Option Agreement pertaining to the 1993 Plan.
10.23 Form of Notice of Grant of Stock Option pertaining to the 1993 Plan.
10.24 Form of Stock Purchase Agreement pertaining to the 1993 Plan.
10.25 The Registrant's 1996 Stock Incentive Plan (the ``1996 Plan").*
10.26 Form of Stock Option Agreement pertaining to the 1996 Plan.*
10.27 Form of Notice of Grant of Stock Option pertaining to the 1996 Plan.*
10.28 Form of Stock Purchase Agreement pertaining to the 1996 Plan.*
10.29 The Registrant's Employee Stock Purchase Plan.*
11.1 Statement regarding computation of per share earnings.
21.1 Subsidiaries of the Registrant.
23.1 Form of Consent of KPMG Peat Marwick LLP, Independent Auditors.
23.2 Consent of Brobeck, Phleger & Harrison LLP (included in Exhibit 5.1).
24.1 Power of Attorney (see page II-6).
</TABLE>
- ---------
* To be filed by amendment
+ Portions of this Exhibit have been deleted pursuant to a Confidential
Treatment Request filed with the Commission.
(b) Financial Statement Schedules
Not applicable.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the Delaware General Corporation Law, the Certificate of
Incorporation or the Bylaws of Registrant, Indemnification Agreements entered
into between the Registrant and its directors and certain of its officers,
Underwriting Agreement, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the
II-4
<PAGE>
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 hereunder, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial BONA FIDE offering thereof.
II-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF PETALUMA, STATE OF
CALIFORNIA ON THIS 26TH DAY OF JULY, 1996.
ADVANCED FIBRE COMMUNICATIONS, INC.
/s/ DONALD GREEN
By
-----------------------------------------
Donald Green
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints jointly and severally, Donald Green and Daniel E.
Steimle, and each one of them, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any and all amendments
to this Registration Statement and to sign any registration statement for the
same offering covered by this Registration Statement that is to be effective
upon filing pursuant to Rule 462(b) promulgated under the Securities Act of
1933, and all post-effective amendments thereto, and to file the same, with all
exhibits thereto and all documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorneys-in-fact and agents, and
each of them full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming that each of said attorneys-in-fact and agents or any of them, or his
or their substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------- ------------------------------------------------------------- ---------------
<S> <C> <C>
/s/ DONALD GREEN
------------------------------- Chairman of the Board and Chief Executive Officer (principal July 26, 1996
Donald Green executive officer)
/s/ CARL J. GRIVNER
------------------------------- President, Chief Operating Officer and Director July 26, 1996
Carl J. Grivner
/s/ DANIEL E. STEIMLE
------------------------------- Vice President, Chief Financial Officer, Treasurer and July 26, 1996
Daniel E. Steimle Secretary (principal financial and accounting officer)
/s/ B.J. CASSIN
------------------------------- Director July 26, 1996
B.J. Cassin
/s/ CLIFFORD H. HIGGERSON
------------------------------- Director July 26, 1996
Clifford H. Higgerson
------------------------------- Director July , 1996
Brian Jackman
/s/ DAN RASDAL
------------------------------- Director July 26, 1996
Dan Rasdal
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.*
3.1 Second Amended and Restated Certificate of Incorporation of the Registrant.
3.2 Form of Third Amended and Restated Certificate of Incorporation of the Registrant.*
3.3 Form of Fourth Amended and Restated Certificate of Incorporation of the Registrant.*
3.4 Bylaws of the Registrant.
3.5 Form of Amended and Restated Bylaws of the Registrant.*
4.1 Specimen Certificate of Common Stock.*
4.2 Series E Preferred Stock Purchase Agreement, dated September 29, 1995, between the Registrant and
certain purchasers of the Registrant's Series E Preferred Stock.
4.3 Certificate of Incorporation of the Registrant (included in Exhibit 3.1).
5.1 Opinion of Brobeck, Phleger & Harrison LLP.*
10.1 Form of Warrant Issued In Connection with the Sale of the Registrant's Series A Preferred Stock on
January 6, 1993.
10.2 Form of Warrant Issued In Connection with the Sale of the Registrant's Series B Preferred Stock on
October 5, 1993.
10.3 Form of Warrant Issued in Connection with the Sale of the Registrant's Series C Preferred Stock on March
16, 1994.
10.4 Form of Performance Warrant Issued in Connection with the Sale of the Registrant's Series C Preferred
Stock on March 16, 1994 and May 4, 1994.
10.5 Warrant Issued in Connection with the Sale of the Registrant's Series E Preferred Stock on September 29,
1995.
10.6 Restricted Stock Issuance Agreement, dated May 19, 1995, between the Registrant, Donald Green and
Maureen Green.
10.7 Compensation Agreement, dated May 19, 1995, between the Registrant and Donald Green.
10.8 Promissory Note Secured by Pledge Agreement, dated May 31, 1995, by Donald Green in favor of the
Registrant.
10.9 Stock Pledge Agreement, dated June 16, 1995, between the Registrant and Donald Green.
10.10 Promissory Note issued by Carl Grivner, dated October 5, 1995, in favor of the Registrant.
10.11 Shareholder and Joint Venture Agreement, dated December 28, 1995, between the Registrant and Harris
Corporation, acting for the purposes of the agreement through its Digital Telephone Systems Division.+
10.12 Joint Venture & Partnership Agreement, dated April 11, 1994, between the Registrant and Tellabs
Operations, Inc.+
10.13 License, Joint Development, Supply and Authorized Manufacturing Agreement, dated September 25, 1992,
between the Registrant and Industrial Technology Research Institute of the Republic of China.*
10.14 Hangzhou Aftek Communication Registrant Ltd. Contract, dated June 18, 1994, between Advanced Fibre
Technology Communication (Hong Kong) Limited and Hangzhou Communication Equipment Factory of the MPT.,
HuaTong Branch.+
10.15 1445 & 1455 McDowell Boulevard North Net Lease, dated February 1, 1993, between the Registrant and G &
W/ Redwood Associates Joint Venture, for the premises located at 1445 McDowell Boulevard North.
10.16 Redwood Business Park Net Lease, dated July 9, 1995, between the Registrant and G & W/ Redwood
Associates Joint Venture, for the premises located at 1455 McDowell Boulevard North.
10.17 Redwood Business Park Net Lease, dated July 10, 1995, between the Registrant and G & W/ Redwood
Associates Joint Venture, for the premises located at 1440 McDowell Boulevard North.
10.18 Redwood Business Park Net Lease, dated June 3, 1996, between the Registrant and G & W/ Redwood
Associates Joint Venture, for the premises located at Buildings 1 & 9 of Willowbrook Court.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.19 Second Amended and Restated Loan and Security Agreement, dated December 7, 1995, between the Registrant
and Bank of the West.
10.20 Form of Indemnification Agreement for Executive Officers and Directors of the Registrant.
10.21 The Registrant's 1993 Stock Option/Stock Issuance Plan as amended (the ``1993 Plan").
10.22 Form of Stock Option Agreement pertaining to the 1993 Plan.
10.23 Form of Notice of Grant of Stock Option pertaining to the 1993 Plan.
10.24 Form of Stock Purchase Agreement pertaining to the 1993 Plan.
10.25 The Registrant's 1996 Stock Incentive Plan (the ``1996 Plan").*
10.26 Form of Stock Option Agreement pertaining to the 1996 Plan.*
10.27 Form of Notice of Grant of Stock Option pertaining to the 1996 Plan.*
10.28 Form of Stock Purchase Agreement pertaining to the 1996 Plan.*
10.29 The Registrant's Employee Stock Purchase Plan.*
11.1 Statement regarding computation of per share earnings.
21.1 Subsidiaries of the Registrant.
23.1 Form of Consent of KPMG Peat Marwick LLP, Independent Auditors.
23.2 Consent of Brobeck, Phleger & Harrison LLP (included in Exhibit 5.1).
24.1 Power of Attorney (see page II-6).
</TABLE>
- ---------
* To be filed by amendment
+ Portions of this Exhibit have been deleted pursuant to a Confidential
Treatment Request filed with the Commission.
<PAGE>
Exhibit 3.1
SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
ADVANCED FIBRE COMMUNICATIONS, INC.
The undersigned, Carl Grivner and Daniel Steimle, hereby certify that:
ONE: They are the duly elected and acting President and Secretary,
respectively, of said corporation.
TWO: The Certificate of Incorporation of said corporation was
originally filed in the Office of the Secretary of State of the State of
Delaware on July 20, 1995.
THREE: The Certificate of Incorporation of said corporation shall be
amended and restated to read in full as follows:
* * *
FIRST. The name of the Corporation is Advanced Fibre Communications,
Inc. (the "Corporation").
SECOND. The address of its registered office in the State of Delaware
is 1013 Centre Road, Wilmington, New Castle County, Delaware 19805. The name of
its registered agent at such address is The Prentice-Hall Corporation System,
Inc.
THIRD. The nature of the business or purpose of the Corporation is to
engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of the State of Delaware.
FOURTH. A. CLASSES OF STOCK. This Corporation is authorized to
issue two classes of stock to be designated, respectively, "Common Stock" and
"Preferred Stock." The total number of shares which this Corporation is
authorized to issue is 60,220,000 shares, of which 42,437,092 shares shall be
Common Stock and 17,782,908 shares shall be Preferred Stock. The Common Stock
and the Preferred Stock shall have a par value of $.01 per share.
B. RIGHTS, PREFERENCES AND RESTRICTIONS OF PREFERRED STOCK. The
Preferred Stock shall consist of eleven series, designated Series A Preferred
Stock, consisting of 4,056,044 shares, Series A-1 Preferred Stock, consisting of
4,056,044 shares, Series B Preferred Stock, consisting of 1,020,410 shares,
Series B-1 Preferred Stock, consisting of 1,020,410 shares, Series C Preferred
Stock, consisting of 1,600,000 shares, Series C-1 Preferred Stock, consisting of
1,600,000 shares, Series D Preferred Stock, consisting of 1,040,000 shares,
Series D-1 Preferred Stock, consisting of 1,040,000 shares, Series E
1.
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Preferred Stock, consisting of 1,120,000 shares, and Series E-1 Preferred Stock,
consisting of 1,120,000 shares, and Series F Preferred Stock, consisting of
110,000 shares (together, the "Preferred Stock"). The rights, preferences,
privileges, and restrictions granted to and imposed on the Preferred Stock are
as set forth below in this Article FOURTH (B).
(1) DIVIDEND PROVISIONS. The holders of shares of Series A, Series
A-1, Series B, Series B-1, Series C, Series C-1, Series D, Series D-1, Series E,
Series E-1 and Series F Preferred Stock shall be entitled to receive dividends,
out of any assets legally available therefor, prior and in preference to any
declaration or payment of any dividend (payable other than in Common Stock or
other securities and rights convertible into or entitling the holder thereof to
receive, directly or indirectly, additional shares of Common Stock of this
Corporation) on the Common Stock of this Corporation. Dividends shall be
payable at a rate of $.08 per annum on each share of Series A and Series A-1
Preferred Stock, $.40 per annum on each share of Series B and Series B-1
Preferred Stock, $.40 per annum on each share of Series C and Series C-1
Preferred Stock, $.50 per annum on each share of Series D and Series D-1
Preferred Stock and $1.12 per annum on each share of Series E, Series E-1 and
Series F Preferred Stock when and if declared by the Board of Directors.
Dividends may only be paid jointly on the Series A, Series A-1, Series B, Series
B-1, Series C, Series C-1, Series D, Series D-1, Series E, Series E-1 and
Series F Preferred Stock and may not be paid to one series of Preferred Stock
without making the appropriate payment to the other series of Preferred Stock
simultaneously based on the respective dividend preferences of the Preferred
Stock. Dividends shall not be cumulative. The Preferred Stock shall
participate in dividends declared on the Common Stock pro rata based on the
number of shares of Common Stock issuable upon conversion of such Preferred
Stock as of the record date for such dividend.
(2) LIQUIDATION PREFERENCE.
(a) In the event of any liquidation, dissolution or winding up
of this Corporation, either voluntary or involuntary, the holders of shares of
Series A, Series A-1, Series B, Series B-1, Series C, Series C-1, Series D,
Series D-1, Series E and Series E-1 Preferred Stock shall be entitled to
receive, prior and in preference to any distribution of any of the assets of
this Corporation to the holders of Series F Preferred Stock or Common Stock by
reason of their ownership thereof, an amount per share equal to the sum of (i)
$1.00 for each outstanding share of Series A and Series A-1 Preferred Stock (the
"Series A Preferred Issue Price"), $5.00 for each outstanding share of Series B
andSeries B-1 Preferred Stock (the "Series B Preferred Issue Price"), $5.00 for
each outstanding share of Series C and Series C-1 Preferred Stock (the "Series C
Preferred Issue Price"), $6.25 for each outstanding share of Series D and Series
D-1 Preferred Stock (the "Series D Preferred Issue Price") and $14.00 for each
outstanding share of Series E and Series E-1 Preferred Stock (the "Series E
Preferred Issue Price"), (ii) an amount equal to 8%, compounded annually, of the
Series A Preferred Issue Price, the Series B Preferred Issue Price, the Series C
Preferred Issue Price, the Series D Preferred Issue Price and the Series E
Preferred Issue Price for each outstanding share of Series A and Series A-1
Preferred Stock, for each outstanding share of Series B and
2.
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Series B-1 Preferred Stock, for each outstanding share of Series C and Series
C-1 Preferred Stock, for each outstanding share of Series D and Series D-1
Preferred Stock, and for each outstanding share of Series E and Series E-1
Preferred Stock, respectively, for each 12 months that has passed since the
respective dates of first issuance of the Series A, Series B, Series C,
Series D and Series E Preferred Stock, and (iii) any declared but unpaid
dividends on such share. If upon the occurrence of such event, the assets
and funds thus distributed among the holders of the Series A, Series B,
Series C, Series D and Series E Preferred Stock shall be insufficient to
permit the payment to such holders of the full aforesaid preferential
amounts, then the entire assets and funds of this Corporation legally
available for distribution shall be distributed ratably among the holders of
the Series A, Series B, Series C, Series D and Series E Preferred Stock in
proportion to the amount of the aggregate liquidation preference of the stock
owned by each such holder.
(b) After the distributions described in subsection (a) above
have been paid, the holders of shares of Series F Preferred Stock shall be
entitled to receive, prior and in preference to any distribution of any of the
assets of this Corporation to the holders of Common Stock by reason of their
ownership thereof, an amount per share equal to the sum of (i) $14.00 for each
outstanding share of Series F Preferred Stock (the "Series F Preferred Issue
Price"), (ii) an amount equal to 8%, compounded annually, of the Series F
Preferred Issue Price for each outstanding share of Series F Preferred Stock for
each 12 months that has passed since the date of first issuance of the Series F
Preferred Stock and (iii) any declared but unpaid dividends on such share. If
upon the occurrence of such event, the assets and funds thus distributed among
the holders of the Series F Preferred Stock shall be insufficient to permit the
payment of the full aforesaid preferential amounts, then the entire assets and
funds of this Corporation legally available for distribution (following the
distributions described in subsection (a) above) shall be distributed ratably
among the holders of the Series F Preferred Stock in proportion to the amount of
the aggregate liquidation preference of the stock owned by each such holder.
(c) After the distributions described in subsections (a) and (b)
above have been paid, the remaining assets of this Corporation available for
distribution to stockholders shall be distributed among the holders of the
Series A, Series A-1, Series B, Series B-1, Series C, Series C-1, Series D,
Series D-1, Series E, Series E-1 and Series F Preferred Stock and Common Stock
pro rata based on the number of shares of Common Stock held by each (assuming
conversion into Common Stock of all such Preferred Stock).
(d) A sale, conveyance or disposition of all or substantially
all of the assets of this Corporation, or a consolidation or merger of this
Corporation with or into any other corporation or corporations or other similar
transaction or series of related similar transactions in which more than 50% of
the voting power of this Corporation is disposed of, shall be deemed to be a
liquidation, dissolution or winding up within the meaning of this Section 2.
3.
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(3) REDEMPTION.
(a) On or at any time after January 1, 2000, this Corporation
may at any time it may lawfully do so, at the option of the Board of Directors,
redeem in whole or in part the Preferred Stock by paying in cash therefor (i) to
the holders of Series A and Series A-1 Preferred Stock a sum per share equal to
$1.00 plus an amount equal to 8%, compounded annually, of the Series A Preferred
Issue Price for each 12 months that has passed since the date of first issuance
of the Series A Preferred Stock together with all dividends declared, but
unpaid, with respect to such share to the date fixed for any redemption of
Preferred Stock (the "Redemption Date"); (ii) to the holders of Series B and
Series B-1 Preferred Stock a sum per share equal to $5.00 plus an amount equal
to 8%, compounded annually, of the Series B Preferred Issue Price for each 12
months that has passed since the date of first issuance of the Series B
Preferred Stock together with all dividends declared, but unpaid, with respect
to such share to the Redemption Date; (iii) to the holders of Series C and
Series C-1 Preferred Stock a sum per share equal to $5.00 plus an amount equal
to 8%, compounded annually, of the Series C Preferred Issue Price for each 12
months that has passed since the date of first issuance of the Series C
Preferred Stock together with all dividends declared, but unpaid, with respect
to such share to the Redemption Date; (iv) to the holders of Series D and Series
D-1 Preferred Stock a sum per share equal to $6.25 plus an amount equal to 8%,
compounded annually, of the Series D Preferred Issue Price for each 12 months
that has passed since the date of first issuance of the Series D Preferred Stock
together with all dividends declared, but unpaid, with respect to such share to
the Redemption Date and (v) to the holders of Series E, Series E-1 and Series F
Preferred Stock a sum per share equal to $14.00 plus an amount equal to 8%,
compounded annually, of the Series E and Series F Preferred Issue Price for each
12 months that has passed since the date of first issuance of the Series E and
Series F Preferred Stock, respectively, together with all dividends declared,
but unpaid, with respect to such share to the Redemption Date (collectively,
such total amount is hereinafter referred to as the "Redemption Price").
(b) On or at any time after January 1, 2000, within thirty (30)
days after the receipt by this Corporation of the written request of the holders
of not less than fifty percent (50%) of the then outstanding Preferred Stock
(the "Redemption Notification"), this Corporation shall redeem the percentage of
the Preferred Stock specified in such request (or, if less, the maximum amount
it may lawfully redeem) by paying in cash therefor a sum equal to the Redemption
Price for such shares; provided, however that this Corporation may, at its sole
option, redeem such Preferred Stock during the two-year period commencing upon
receipt of the Redemption Notification, in which case this Corporation shall
redeem fifty percent (50%) of the Preferred Stock to be redeemed pursuant to the
Redemption Notification in each year of the two-year period. In connection with
any redemption under this subsection 3(b) the Company shall mail a Redemption
Notice (as defined below) in accordance with subsection 3(d) below, and the
Redemption Date shall be the date which is thirty (30) days after receipt by
this corporation of the Redemption Notification or, if this Corporation elects
to redeem the Preferred stock over the two-year period as provided in the
previous sentence, the
4.
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Redemption Dates shall be the first and second anniversary of the date this
Corporation receives the Redemption Notification.
(c) In the event of any redemption of only a part of the then
outstanding Preferred Stock, this Corporation shall effect such redemption pro
rata among all outstanding series of Preferred Stock. The Corporation shall not
redeem any shares of the Series A, Series A-1, Series B, Series B-1, Series C,
Series C-1, Series D, Series D-1, Series E, Series E-1 or Series F Preferred
Stock without a proportionate redemption of the shares of the other series of
Preferred Stock, based on the number of shares of each series held by each
holder thereof.
(d) At least 20 but no more than 60 days prior to the Redemption
Date, written notice shall be mailed, first class postage prepaid, to each
holder of record (at the close of business on the business day next preceding
the day on which notice is given) of the Preferred Stock to be redeemed, at the
address last shown on the records of this Corporation for such holder or given
by the holder to this Corporation for the purpose of notice or if no such
address appears or is given at the place where the principal executive office of
this Corporation is located, notifying such holder of the redemption to be
effected, specifying the number of shares to be redeemed from such holder, the
Redemption Date, the Redemption Price applicable to the shares to be redeemed,
the place at which payment may be obtained and the date on which such holder's
Conversion Rights (as hereinafter defined) as to such shares terminate and
calling upon such holder to surrender to this Corporation, in the manner and at
the place designated, his certificate or certificates representing the shares to
be redeemed (the "Redemption Notice"). Except as provided in subsection 3(e),
on or after the Redemption Date, each holder of Preferred Stock to be redeemed
shall surrender to this Corporation the certificate or certificates representing
such shares, in the manner and at the place designated in the Redemption Notice,
and thereupon the Redemption Price applicable to the shares to be redeemed shall
be payable to the order of the person whose name appears on such certificate or
certificates as the owner thereof and each surrendered certificate shall be
cancelled. In the event less than all the shares represented by any such
certificate are redeemed, a new certificate shall be issued representing the
unredeemed shares.
(e) From and after the Redemption Date, unless there shall have
been a default in payment of the Redemption Price, all rights of the holders of
such shares as holders of Preferred Stock (except the right to receive the
Redemption Price without interest upon surrender of their certificate or
certificates) shall cease with respect to such shares, and such shares shall not
thereafter be transferred on the books of this Corporation or be deemed to be
outstanding for any purpose whatsoever. If the funds of this Corporation
legally available for redemption of shares of Preferred Stock on any Redemption
Date are insufficient to redeem the total number of shares of Preferred Stock to
be redeemed on such date, those funds which are legally available will be used
to redeem the maximum possible number of such shares ratably among the holders
of such shares to be redeemed in accordance with Section 3(c). The shares of
Preferred Stock not redeemed shall remain outstanding and entitled to all the
rights and
5.
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preferences provided herein. At any time thereafter when additional funds of
this Corporation are legally available for the redemption of shares of Preferred
Stock, such funds will immediately be used to redeem the balance of the shares
which this Corporation has become obligated to redeem on any Redemption Date but
which it has not redeemed.
(4) CONVERSION. The holders of the Preferred Stock shall have
conversion rights as follows (the "Conversion Rights"):
(a) RIGHT TO CONVERT.
(i) Subject to subsection (c), each share of Preferred
Stock shall be convertible, at the option of the holder thereof, at any time
after the date of issuance of such share and prior to the close of business on
any Redemption Date as may have been fixed in any Redemption Notice with respect
to such share, at the office of this Corporation or any transfer agent for the
Preferred Stock. Each share of Series A Preferred Stock and Series A-1
Preferred Stock shall be convertible into the number of fully paid and
nonassessable shares of Common Stock which results from dividing the Series A
Preferred Issue Price by the conversion price (the "Conversion Price") per share
in effect for the Series A Preferred Stock and the Series A-1 Preferred Stock,
respectively, at the time of conversion. Each share of Series B Preferred Stock
and Series B-1 Preferred Stock shall be convertible into the number of fully
paid and nonassessable shares of Common Stock which results from dividing the
Series B Preferred Issue Price by the Conversion Price per share in effect for
the Series B Preferred Stock and the Series B-1 Preferred Stock, respectively,
at the time of conversion. Each share of Series C Preferred Stock and Series
C-1 Preferred Stock shall be convertible into the number of fully paid and
nonassessable shares of Common Stock which results from dividing the Series C
Preferred Issue Price by the Conversion Price per share in effect for the Series
C Preferred Stock and the Series C-1 Preferred Stock, respectively, at the time
of conversion. Each share of Series D Preferred Stock and Series D-1 Preferred
Stock shall be convertible into the number of fully paid and nonassessable
shares of Common Stock which results from dividing the Series D Preferred Issue
Price by the Conversion Price per share in effect for the Series D Preferred
Stock and the Series D-1 Preferred Stock, respectively, at the time of
conversion. Each share of Series E Preferred Stock and Series E-1 Preferred
Stock shall be convertible into the number of fully paid and nonassessable
shares of Common Stock which results from dividing the Series E Preferred Issue
Price by the Conversion Price per share in effect for the Series E Preferred
Stock and the Series E-1 Preferred Stock, respectively, at the time of
conversion. Each share of Series F Preferred Stock shall be convertible into
the number of fully paid and nonassessable shares of Common Stock which results
from dividing the Series F Preferred Issue Price by the conversion price per
share in effect for the Series F Preferred Stock at the time of conversion. The
Conversion Price per share for shares of Series A Preferred Stock and Series A-1
Preferred Stock shall be $.935, the Conversion Price per share for shares of
Series B Preferred Stock and Series B-1 Preferred Stock shall be
$4.695, the Conversion Price per share for shares of Series C Preferred Stock
and Series C-1 Preferred Stock shall be
6.
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$4.695, the Conversion Price per share
for shares of Series D Preferred Stock and Series D-1 Preferred Stock shall be
$5.87 and the Conversion Price per share for shares of Series E Preferred Stock,
Series E-1 Preferred Stock and Series F Preferred Stock shall be $14.00;
provided, however, that the Conversion Price for the Preferred Stock shall be
subject to adjustment from time to time as set forth in subsection 4(c).
(ii) In the event of a call for redemption of any shares of
Preferred Stock pursuant to Section 3 hereof, the Conversion Rights shall
terminate as to the shares designated for redemption at the close of business on
the Redemption Date, unless default is made in payment of the Redemption Price.
(iii) Each share of Preferred Stock shall automatically
be converted into shares of Common Stock at the Conversion Price at the time in
effect for such Preferred Stock immediately upon the earlier of (A) the
consummation of this Corporation's sale of its Common Stock in a bona fide, firm
commitment underwriting pursuant to a registration statement on Form S-1 under
the Securities Act of 1933, as amended, the public offering price of which is
not less than $15.00 per share (adjusted to reflect subsequent stock dividends,
stock splits or recapitalization) and $15,000,000 in the aggregate or (B) the
date upon which this Corporation obtains the consent of the holders of two-
thirds of the then outstanding shares of Preferred Stock.
(b) MECHANICS OF CONVERSION. Before any holder of Preferred
Stock shall be entitled to convert the same into shares of Common Stock, such
holder shall surrender the certificate or certificates therefor, duly endorsed,
at the office of this Corporation or of any transfer agent for the Preferred
Stock, and shall give written notice by mail, postage prepaid, to this
Corporation at its principal corporate office, of the election to convert the
same and shall state therein the name or names in which the certificate or
certificates for shares of Common Stock are to be issued. This Corporation
shall, as soon as practicable thereafter, issue and deliver at such office to
such holder of Preferred Stock, or to the nominee or nominees of such holder, a
certificate or certificates for the number of shares of Common Stock to which
such holder shall be entitled as aforesaid. Such conversion shall be deemed to
have been made immediately prior to the close of business on the date of such
surrender of the shares of Preferred Stock to be converted, and the person or
persons entitled to receive the shares of Common Stock issuable upon such
conversion shall be treated for all purposes as the record holder or holders of
such shares of Common Stock as of such date. If the conversion is in connection
with an underwritten offer of securities registered pursuant to the Securities
Act of 1933, the conversion may, at the option of any holder tendering Preferred
Stock for conversion, be conditioned upon the closing with the underwriter of
the sale of securities pursuant to such offering, in which event the person(s)
entitled to receive the Common Stock issuable upon such conversion of the
Preferred Stock shall not be deemed to have converted such Preferred Stock until
immediately prior to the closing of such sale of securities.
7.
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(c) CONVERSION PRICE ADJUSTMENTS OF PREFERRED STOCK. The
Conversion Price of each series of Preferred Stock shall be subject to
adjustment from time to time as follows:
(i) A. Upon each issuance by this Corporation of any
Additional Stock (as defined below), after the date upon which any shares
of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock or Series E Preferred Stock were first
issued (the "Purchase Date" with respect to such series), without
consideration or for a consideration per share less than the Conversion
Price for such series in effect immediately prior to the issuance of such
Additional Stock, the Conversion Price for such series and only such series
in effect immediately prior to each such issuance shall forthwith (except
as otherwise provided in this clause (i)) be adjusted to a price determined
by dividing (X) an amount equal to the sum of (a) the product derived by
multiplying such Conversion Price in effect immediately prior to such issue
or sale times the number of shares of Common Stock Deemed Outstanding (as
hereinafter defined) immediately prior to such issue or sale, plus (b) the
consideration, if any, received or deemed to be received by this
Corporation upon such issue or sale, by (Y) the number of shares of Common
Stock Deemed Outstanding immediately after such issue or sale.
The number of shares of "Common Stock Deemed Outstanding" shall equal
the sum of the number of shares of Common Stock then outstanding plus the number
of shares of Common Stock then obtainable pursuant to (i) options to purchase or
warrants or rights to subscribe for Common Stock, (ii) securities by their terms
convertible into or exchangeable for Common Stock and (iii) options to purchase
or warrants or rights to subscribe for such convertible or exchangeable
securities.
B. No adjustment of the Conversion Price for any
series of Preferred Stock shall be made in an amount less than one cent per
share, provided that any adjustments which are not required to be made by
reason of this sentence shall be carried forward and shall be either taken
into account in any subsequent adjustment made prior to 3 years from the
date of the event giving rise to the adjustment being carried forward, or
shall be made at the end of 3 years from the date of the event giving rise
to the adjustment being carried forward. Except to the limited extent
provided for in subsections (E)(3) and (E)(4) and subsection 4(c)(iv), no
adjustment of such Conversion Price pursuant to this subsection 4(c)(i)
shall have the effect of increasing the Conversion Price above the
Conversion Price in effect immediately prior to such adjustment.
C. In the case of the issuance of Common Stock for
cash, the consideration shall be deemed to be the amount of cash paid
therefor before deducting any reasonable discounts, commissions or other
expenses allowed, paid or incurred by this Corporation for any underwriting
or otherwise in connection with the issuance and sale thereof.
8.
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D. In the case of the issuance of Common Stock for a
consideration in whole or in part other than cash, the consideration other
than cash shall be deemed to be the fair value thereof as determined by the
Board of Directors irrespective of any accounting treatment.
E. In the case of the issuance of options to purchase
or rights to subscribe for Common Stock, securities by their terms
convertible into or exchangeable for Common Stock or options to purchase or
rights to subscribe for such convertible or exchangeable securities, the
following provisions shall apply for all purposes of this
subsection 4(c)(i) and subsection 4(c)(ii):
1. The aggregate maximum number of shares of
Common Stock deliverable upon exercise of such options to purchase or
rights to subscribe for Common Stock shall be deemed to have been
issued at the time such options or rights were issued and for a
consideration equal to the consideration (determined in the manner
provided in subsections 4(c)(i)(C) and 4(c)(i)(D)), if any, received
by this Corporation upon the issuance of such options or rights plus
the exercise price provided in such options or rights for the Common
Stock covered thereby.
2. The aggregate maximum number of shares of
Common Stock deliverable upon conversion of or in exchange for any
such convertible or exchangeable securities or upon the exercise of
options to purchase or rights to subscribe for such convertible or
exchangeable securities and subsequent conversion or exchange thereof
shall be deemed to have been issued at the time such securities were
issued or such options or rights were issued and for a consideration
equal to the consideration, if any, received by this Corporation for
any such securities and related options or rights (excluding any cash
received on account of accrued interest or accrued dividends), plus
the additional consideration, if any, to be received by this
Corporation upon the conversion or exchange of such securities or the
exercise of any related options or rights (the consideration in each
case to be determined in the manner provided in subsections 4(c)(i)(C)
and 4(c)(i)(D)).
3. In the event of any change in the number of
shares of Common Stock deliverable or in the consideration payable to
this Corporation upon exercise of such options or rights or upon
conversion of or in exchange for such convertible or exchangeable
securities, other than a change resulting from the antidilution
provisions thereof, the Conversion Price, to the extent in any way
affected by or computed using such options, rights or securities,
shall be recomputed to reflect such change, but no further adjustment
shall be made for the actual issuance of
9.
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Common Stock or any payment of such consideration upon the exercise of
any such options or rights or the conversion or exchange of such
securities.
4. Upon the expiration of any such options or
rights, the termination of any such rights to convert or exchange or
the expiration of any options or rights related to such convertible or
exchangeable securities, the Conversion Price, to the extent in any
way affected by or computed using such options, rights or securities
or options or rights related to such securities, shall be recomputed
to reflect the issuance of only the number of shares of Common Stock
(and convertible or exchangeable securities which remain in effect)
actually issued upon the exercise of such options or rights, upon the
conversion or exchange of such securities or upon the exercise of the
options or rights related to such securities.
5. The number of shares of Common Stock deemed
issued and the consideration deemed paid therefor pursuant to
subsections 4(c)(i)(E)(1) and (2) shall be appropriately adjusted to
reflect any change, termination or expiration of the type described in
either subsection 4(c)(i)(E)(3) or (4).
(ii) "Additional Stock" shall mean any shares of Common
Stock issued (or deemed to have been issued pursuant to subsection 4(c)(i)(E))
by this Corporation after the Purchase Date other than:
A. shares of Common Stock issued pursuant to a
transaction described in subsection 4(c)(iii) hereof,
B. shares of Common Stock issuable or issued to
employees, consultants or directors of this Corporation directly or
pursuant to a stock option plan or restricted stock plan, in all cases,
whether direct or pursuant to a plan, approved by the Board of Directors of
this Corporation,
C. shares of Common Stock issued or issuable in a
public offering before or in connection with which all outstanding shares
of Preferred Stock will be converted to Common Stock,
D. shares of Common Stock issued or issuable upon
conversion of Preferred Stock,
E. warrants to purchase an aggregate of up to 300,000
shares of Common Stock and the shares of Common Stock issued or issuable
upon exercise thereof, which warrants were issued in connection with this
Corporation's sale of Series A Preferred Stock,
10.
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F. warrants to purchase an aggregate of up to 200,000
shares of Common Stock and the shares of Common Stock issued or issuable
upon exercise thereof, which warrants were issued in connection with this
Corporation's sale of Series B Preferred Stock,
G. warrants to purchase an aggregate of up to
2,809,760 shares of Common Stock and the shares of Common Stock issued or
issuable upon exercise thereof, which warrants were issued in connection
with this Corporation's sale of Series C Preferred Stock,
H. shares of Common Stock issuable or issued to
holders of shares of Preferred Stock in a single transaction or series of
related similar transactions pursuant to any indemnification arrangement or
plan approved by all of the directors elected by the holders of the shares
of Preferred Stock pursuant to Section 5(b) of Article FOURTH hereof,
I. warrants to purchase an aggregate of up to 22,000
shares of Series E Preferred Stock and the shares of Common Stock issued or
issuable upon conversion thereof, which warrants were issued in connection
with this Corporation's sale of Series E Preferred Stock.
(iii) In the event this Corporation should at any time
or from time to time after the Purchase Date fix a record date for the
effectuation of a split or subdivision of the outstanding shares of Common Stock
or the determination of holders of Common Stock entitled to receive a dividend
or other distribution payable in additional shares of Common Stock or other
securities or rights convertible into, or entitling the holder thereof to
receive directly or indirectly, additional shares of Common Stock (hereinafter
referred to as "Common Stock Equivalents") without payment of any consideration
by such holder for the additional shares of Common Stock or the Common Stock
Equivalents (including the additional shares of Common Stock issuable upon
conversion or exercise thereof), then, as of such record date (or the date of
such dividend distribution, split or subdivision if no record date is fixed),
the Conversion Prices of the Series A Preferred Stock, Series A-1 Preferred
Stock, Series B Preferred Stock, Series B-1 Preferred Stock, Series C Preferred
Stock, Series C-1 Preferred Stock, Series D Preferred Stock, Series D-1
Preferred Stock, Series E Preferred Stock, Series E-1 Preferred Stock and
Series F Preferred Stock shall be appropriately decreased so that the number of
shares of Common Stock issuable on conversion of each share of such series shall
be increased in proportion to such increase of the aggregate of shares of Common
Stock outstanding and those issuable with respect to such Common Stock
Equivalents with the number of shares issuable with respect to Common Stock
Equivalents determined from time to time in the manner provided for deemed
issuances in subsection 4(c)(i)(E).
(iv) If the number of shares of Common Stock outstanding at
any time after the Purchase Date is decreased by a combination of the
outstanding shares of Common Stock, then, following the record date of such
combination, the
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Conversion Prices for the Series A, Series A-1, Series B, Series B-1, Series C,
Series C-1, Series D, Series D-1, Series E, Series E-1 and Series F Preferred
Stock shall be appropriately increased so that the number of shares of Common
Stock issuable on conversion of each share of such series shall be decreased in
proportion to such decrease in outstanding shares.
(d) SHADOW PREFERRED.
(i) SPECIAL DEFINITIONS. For purposes of this
Section 4(d), the following definitions shall apply:
A. "DILUTIVE ISSUANCE" with respect to the Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series
D Preferred Stock or Series E Preferred Stock shall mean an issuance of
Additional Stock for a consideration per share less than the Conversion
Price of such Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock or Series E Preferred Stock,
respectively, in effect on the date of and immediately prior to such issue.
B. "PARTICIPATING INVESTOR" shall mean any holder of
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock or Series E Preferred Stock that purchases
at least its Pro Rata Share of a Dilutive Issuance.
C. "NON-PARTICIPATING INVESTOR" shall mean any holder
of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock or Series E Preferred Stock that is not a
Participating Investor.
D. "PRO RATA SHARE" with respect to each holder of
Series A Preferred Stock shall mean that portion of the total dollar amount
of the Dilutive Issuance equal to (i) the amount of the Dilutive Issuance
actually offered to all holders of Series A Preferred Stock by this
Corporation pursuant to the Issuance Notice (as hereinafter defined)
(ii) multiplied by a fraction, the numerator of which is the number of
shares of Series A Preferred Stock then held by such holder, and the
denominator of which is the total number of shares of Series A Preferred
Stock then outstanding; and with respect to each holder of Series B
Preferred Stock shall mean that portion of the total dollar amount of the
Dilutive Issuance equal to (i) the amount of the Dilutive Issuance actually
offered to all holders of Series B Preferred Stock by this Corporation
pursuant to the Issuance Notice (ii) multiplied by a fraction, the
numerator of which is the number of shares of Series B Preferred Stock then
held by such holder, and the denominator of which is the total number of
shares of Series B Preferred Stock then outstanding; and with respect to
each holder of Series C Preferred Stock shall mean that portion of the
total dollar amount of the Dilutive Issuance equal to (i) the amount of the
Dilutive Issuance actually offered to all holders of
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Series C Preferred Stock by this Corporation pursuant to the Issuance
Notice (ii) multiplied by a fraction, the numerator of which is the number
of shares of Series C Preferred Stock then held by such holder, and the
denominator of which is the total number of shares of Series C Preferred
Stock then outstanding; and with respect to each holder of Series D
Preferred Stock shall mean that portion of the total dollar amount of the
Dilutive Issuance equal to (i) the amount of the Dilutive Issuance actually
offered to all holders of Series D Preferred Stock by this Corporation
pursuant to the Issuance Notice (ii) multiplied by a fraction, the
numerator of which is the number of shares of Series D Preferred Stock then
held by such holder, and the denominator of which is the total number of
shares of Series D Preferred Stock then outstanding; and with respect to
each holder of Series E Preferred Stock shall mean that portion of the
total dollar amount of the Dilutive Issuance equal to (i) the amount of the
Dilutive Issuance actually offered to all holders of Series E Preferred
Stock by this Corporation pursuant to the Issuance Notice (ii) multiplied
by a fraction, the numerator of which is the number of shares of Series E
Preferred Stock then held by such holder, and the denominator of which is
the total number of shares of Series E Preferred Stock then outstanding.
(ii) In the event this Corporation proposes to undertake a
Dilutive Issuance, it shall give each holder of the Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and
Series E Preferred Stock a written notice (the "Issuance Notice") of its
intention, describing the type of securities, the price and number of shares and
the general terms upon which this Corporation proposes to issue the same, at
least twenty (20) days prior to the date of such Dilutive Issuance. The
Issuance Notice shall also include the amount of the Dilutive Issuance offered
to all holders of Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock and Series E Preferred Stock, as
applicable; provided, however, that in no event shall the amount of the Dilutive
Issuance offered pursuant to this Section 4(d) to all holders of a series of
Preferred Stock exceed the total dollar amount of the Dilutive Issuance
multiplied by a fraction, the numerator of which is the total number of shares
of such series of Preferred Stock then outstanding and the denominator of which
is the total number of shares of all series of Preferred Stock then outstanding.
Each holder of the Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock or Series E Preferred Stock, as the
case may be, may, within ten (10) days from the date of the Issuance Notice,
provide written notice to this Corporation that such holder agrees to become a
Participating Investor for the price and upon the terms specified in the
Issuance Notice. In the event that such holder fails to give such notice within
said ten-day period, or fails to actually purchase its Pro Rata Share of the
Dilutive Issuance (other than as a result of this Corporation refusing to allow
such holder to so purchase its Pro Rata Share), such holder shall be deemed to
be a Non-Participating Investor.
(iii) To the extent of the percentage of the Pro Rata
Share not purchased (the "Refused Percentage") by each Non-Participating
Investor, the number of outstanding shares of Series A Preferred Stock, Series B
Preferred Stock,
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Series C Preferred Stock, Series D Preferred Stock or Series E Preferred Stock,
as the case may be, held by such Non-Participating Investor determined by
multiplying the number of such shares held by the Refused Percentage shall be
converted automatically on the date (the "Closing Date") of the applicable
Dilutive Issuance (provided that this Corporation gave the Issuance Notice to
such holder of Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock or Series E Preferred Stock, as the
case may be) into an equal number of fully paid and non-assessable shares of
Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred
Stock, Series D-1 Preferred Stock or Series E-1 Preferred Stock, as the case may
be; provided, however, that prior to the Closing Date each Non-Participating
Investor shall have the right to convert such shares of Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock or Series E Preferred Stock, as the case may be, into shares of Common
Stock at the Conversion Price in effect for such series as of the date of such
conversion.
(iv) Upon the conversion of Series A Preferred Stock, Series
B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or Series
E Preferred Stock, held by a Non-Participating Investor into shares of Series
A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock,
Series D-1 Preferred Stock or Series E-1 Preferred Stock, respectively, as set
forth herein, such shares of Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock or Series E Preferred Stock
shall no longer be outstanding on the books of this Corporation, and may not be
reissued and the Non-Participating Investor shall be treated for all purposes as
the record holder of such shares of Series A-1 Preferred Stock, Series B-1
Preferred Stock, Series C-1 Preferred Stock, Series D-1 Preferred Stock or
Series E-1 Preferred Stock, as the case may be, on the date of the closing of
the applicable Dilutive Issuance. No shares of Series A-1 Preferred Stock,
Series B-1 Preferred Stock, Series C-1 Preferred Stock, Series D-1 Preferred
Stock or Series E-1 Preferred Stock shall be issued except as set forth in this
Section 4(d) upon conversion of shares of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or Series E
Preferred Stock, respectively.
(v) No adjustment in the Conversion Price of the Series A-1
Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock, Series
D-1 Preferred Stock or Series E-1 Preferred Stock, shall be made in respect of
the issuance of Additional Stock, regardless of the issuance price of such
shares, except to the limited extent provided in subsections 4(c)(iii) and (iv)
and in Sections 4(e) and (f) hereof.
(e) OTHER DISTRIBUTIONS. In the event this Corporation shall
declare a distribution payable in securities of other persons, evidences of
indebtedness issued by this Corporation or other persons, assets (excluding cash
dividends) or options or rights not referred to in subsection 4(c)(iii), then,
in each such case for the purpose of this Section 4(e), the holders of the
Preferred Stock shall be entitled to a proportionate share of any such
distribution as though they were the holders of the number of shares of Common
Stock of this Corporation into which their shares of Preferred Stock are
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convertible as of the record date fixed for the determination of the holders of
Common Stock of this Corporation entitled to receive such distribution.
(f) RECAPITALIZATIONS. If at any time or from time to time
there shall be a recapitalization of the Common Stock (other than a subdivision,
combination or merger or sale of assets transaction provided for elsewhere in
this Section 4) provision shall be made so that the holders of the Preferred
Stock shall thereafter be entitled to receive upon conversion of the Preferred
Stock the number of shares of stock or other securities or property of this
Corporation or otherwise, to which a holder of Common Stock deliverable upon
conversion would have been entitled on such recapitalization. In any such case,
appropriate adjustment shall be made in the application of the provisions of
this Section 4 with respect to the rights of the holders of the Preferred Stock
after the recapitalization to the end that the provisions of this Section 4
(including adjustment of the Conversion Price then in effect and the number of
shares purchasable upon conversion of the Preferred Stock) shall be applicable
after that event as nearly equivalent as may be practicable.
(g) NO IMPAIRMENT. This Corporation will not, by amendment of
its Certificate of Incorporation or through any reorganization,
recapitalization, transfer of assets, consolidation, merger, dissolution, issue
or sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by this Corporation, but will at all times in good faith assist in the
carrying out of all the provisions of this Section 4 and in the taking of all
such action as may be necessary or appropriate in order to protect the
Conversion Rights of the holders of the Preferred Stock against impairment.
(h) NO FRACTIONAL SHARES AND CERTIFICATE AS TO ADJUSTMENTS.
(i) No fractional shares shall be issued upon conversion of
the Preferred Stock and the number of shares of Common Stock to be issued shall
be rounded to the nearest whole share. Whether or not fractional shares are
issuable upon such conversion shall be determined on the basis of the total
number of shares of Preferred Stock the holder is at the time converting into
Common Stock and the number of shares of Common Stock issuable upon such
aggregate conversion.
(ii) Upon the occurrence of each adjustment or readjustment
of the Conversion Price of Preferred Stock pursuant to this Section 4, this
Corporation, at its expense, shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and prepare and furnish to each
holder of Preferred Stock a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. This Corporation shall, upon the written request at any
time of any holder of Preferred Stock, furnish or cause to be furnished to such
holder a like certificate setting forth (A) such adjustment and readjustment,
(B) the Conversion Prices at the time in effect, and (C) the number of shares of
Common Stock and the amount, if any, of other property which at the time would
be received upon the conversion of a share of Series A, Series A-1, Series B,
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Series B-1, Series C, Series C-1, Series D, Series D-1, Series E, Series E-1 or
Series F Preferred Stock.
(i) NOTICES OF RECORD DATE. In the event of any taking by this
Corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution, any right to
subscribe for, purchase or otherwise acquire any shares of stock of any class or
any other securities or property, or to receive any other right, this
Corporation shall mail to each holder of Preferred Stock, at least 20 days prior
to the date specified therein, a notice specifying the date on which any such
record is to be taken for the purpose of such dividend, distribution or right,
and the amount and character of such dividend, distribution or right.
(j) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. This
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock solely for the purpose of effecting the
conversion of the shares of the Preferred Stock such number of its shares of
Common Stock as shall from time to time be sufficient to effect the conversion
of all outstanding shares of the Preferred Stock; and if at any time the number
of authorized but unissued shares of Common Stock shall not be sufficient to
effect the conversion of all then outstanding shares of the Preferred Stock, in
addition to such other remedies as shall be available to the holder of such
Preferred Stock, this Corporation will take such corporate action as may, in the
opinion of its counsel, be necessary to increase its authorized but unissued
shares of Common Stock to such number of shares as shall be sufficient for such
purposes.
(k) NOTICES. Any notice required by the provisions of this
Section 4 to be given to the holders of shares of Preferred Stock shall be
deemed given if deposited in the United States mail, postage prepaid, and
addressed to each holder of record at his address appearing on the books of this
Corporation.
(5) VOTING RIGHTS.
(a) GENERAL. Except as otherwise required by law or in
subsection (b) below, the holder of each share of Preferred Stock shall have the
right to one vote for each share of Common Stock into which such Preferred Stock
could then be converted (with any fractional share determined on an aggregate
conversion basis being rounded to the nearest whole share), and with respect to
such vote, such holder shall have full voting rights and powers equal to the
voting rights and powers of the holders of Common Stock, and shall be entitled,
notwithstanding any provision hereof, to notice of any stockholders' meeting in
accordance with the bylaws of this Corporation, and shall be entitled to vote,
together with holders of Common Stock, with respect to any question upon which
holders of Common Stock have the right to vote.
(b) ELECTION OF DIRECTORS. The holders of shares of Series A
Preferred Stock and Series A-1 Preferred Stock, voting separately as a class,
shall have
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the right to elect two directors; provided that such right to elect two
directors separately as a class shall cease at such time as the number of
outstanding shares of Series A Preferred Stock and Series A-1 Preferred Stock is
less than twenty-five percent (25%) of the total number of shares of Series A
Preferred Stock and Series A-1 Preferred Stock issued by this Corporation. The
holders of shares of Series B Preferred Stock and Series B-1 Preferred Stock,
voting separately as a class, shall have the right to elect one director;
provided that such right to elect one director separately as a class shall cease
at such time as the number of outstanding shares of Series B Preferred Stock and
Series B-1 Preferred Stock is less than twenty-five percent (25%) of the total
number of shares of Series B Preferred Stock and Series B-1 Preferred Stock
issued by this Corporation. If a vacancy on the Board is to be filled by the
Board, only directors elected by the same class of stockholders as those who
would be entitled to vote to fill such vacancy shall vote to fill such vacancy.
(6) PROTECTIVE PROVISIONS. So long as shares of Series A, Series A-1,
Series B, Series B-1, Series C, Series C-1, Series D, Series D-1, Series E or
Series E-1 Preferred Stock are outstanding, this Corporation shall not without
first obtaining the approval (by vote or written consent, as provided by law) of
the holders of at least a majority of the then outstanding shares of Series A,
Series A-1, Series B, Series B-1, Series C, Series C-1 Series D, Series D-1,
Series E and Series E-1 Preferred Stock, voting together as a single class and
in the case of subparagraphs (b) and (e), a majority of the then outstanding
shares of Series A Preferred Stock and Series A-1 Preferred Stock voting
separately as a class, a majority of the then outstanding shares of Series B
Preferred Stock and Series B-1 Preferred Stock voting separately as a class, a
majority of the then outstanding shares of Series C Preferred Stock and Series
C-1 Preferred Stock voting separately as a class, a majority of the then
outstanding shares of Series D Preferred Stock and Series D-1 Preferred Stock
voting separately as a class, and a majority of the then outstanding shares of
Series E Preferred Stock and Series E-1 Preferred Stock voting separately as a
class:
(a) sell, convey, or otherwise dispose of or encumber all or
substantially all of its property or business or merge into or consolidate with
any other corporation (other than a wholly owned subsidiary corporation) or
effect any transaction or series of related transactions in which more than 50%
of the voting power of this Corporation is disposed of; provided, however, that
any merger into or consolidation with any other corporation in which less than
50% of the voting power of this Corporation is disposed of and which adversely
affects the shares of one series of Preferred Stock in a different manner than
the shares of any of the other series of Preferred Stock shall require the
approval of a majority of the holders of the then outstanding shares of Series A
Preferred Stock and Series A-1 Preferred Stock voting separately as a class, a
majority of the then outstanding shares of Series B Preferred Stock and Series
B-1 Preferred Stock voting separately as a class, a majority of the then
outstanding shares of Series C Preferred Stock and Series C-1 Preferred Stock
voting separately as a class, a majority of the then outstanding shares of
Series D Preferred Stock and Series D-1 Preferred Stock voting separately as a
class, and a majority of the then outstanding shares of Series E Preferred Stock
and Series E-1 Preferred Stock voting separately as a class;
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(b) alter or change the rights, preferences or privileges of the
shares of Series A Preferred Stock, Series A-1 Preferred Stock, Series B
Preferred Stock, Series B-1 Preferred Stock, Series C Preferred Stock, Series
C-1 Preferred Stock, Series D Preferred Stock, Series D-1 Preferred Stock,
Series E Preferred Stock or Series E-1 Preferred Stock so as to affect such
shares materially and adversely;
(c) increase the authorized number of shares of Preferred Stock;
provided, however, that if such increase shall adversely affect the shares of
one series of Preferred Stock in a different manner than the shares of any of
the other series of Preferred Stock, then such increase shall require the
approval of the holders of a majority of the then outstanding shares of Series A
Preferred Stock and Series A-1 Preferred Stock voting separately as a class, a
majority of the then outstanding shares of Series B Preferred Stock and Series
B-1 Preferred Stock voting separately as a class, a majority of the then
outstanding shares of Series C Preferred Stock and Series C-1 Preferred Stock
voting separately as a class, a majority of the then outstanding shares of
Series D Preferred Stock and Series D-1 Preferred Stock voting separately as a
class, and a majority of the then outstanding shares of Series E Preferred Stock
and Series E-1 Preferred Stock voting separately as a class;
(d) create any new class or series of stock or any other
securities convertible into equity securities of this Corporation having a
preference over, or being on a parity with, the Series A, Series A-1, Series B,
Series B-1, Series C, Series C-1, Series D, Series D-1, Series E or Series E-1
Preferred Stock with respect to voting, dividends or upon liquidation; provided,
however, that if such creation of any new class or series of stock or any other
securities convertible into equity securities of this Corporation shall
adversely affect the shares of one of such series of Preferred Stock in a
different manner than the shares of any of the other of such series of Preferred
Stock, then such increase shall require the approval of the holders of a
majority of the then outstanding shares of Series A Preferred Stock and Series
A-1 Preferred Stock voting separately as a class, a majority of the then
outstanding shares of Series B Preferred Stock and Series B-1 Preferred Stock
voting separately as a class, a majority of the then outstanding shares of
Series C Preferred Stock and Series C-1 Preferred Stock voting separately as a
class, a majority of the then outstanding shares of Series D Preferred Stock and
Series D-1 Preferred Stock voting separately as a class, and a majority of the
then outstanding shares of Series E Preferred Stock and Series E-1 Preferred
Stock voting separately as a class;
(e) amend Section 5(b) of Article FOURTH; or
(f) increase the number of directors above five (5).
(7) STATUS OF CONVERTED OR REDEEMED STOCK. In the event any shares
of Preferred Stock shall be redeemed or converted pursuant to Section 3 or
Section 4 hereof, the shares so converted or redeemed shall be cancelled and
shall not be issuable by this Corporation. The Certificate of Incorporation of
this Corporation shall be
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appropriately amended to effect the corresponding reduction in this
Corporation's authorized capital stock.
C. COMMON STOCK.
(1) DIVIDEND RIGHTS. Subject to the prior rights of holders of all
classes of stock at the time outstanding having prior rights as to dividends,
the holders of the Common Stock shall be entitled to receive, when, if and as
declared by the Board of Directors, out of any assets of this Corporation
legally available therefor, such dividends as may be declared from time to time
by the Board of Directors.
(2) LIQUIDATION RIGHTS. Upon the liquidation, dissolution or winding
up of this Corporation, the assets of this Corporation shall be distributed as
provided in Section 2 of Division (B) of this Article FOURTH.
(3) REDEMPTION. The Common Stock is not redeemable.
(4) VOTING RIGHTS. The holder of each share of Common Stock shall
have the right to one vote, and shall be entitled to notice of any stockholders'
meeting in accordance with the Bylaws of this Corporation, and shall be entitled
to vote upon such matters and in such manner as may be provided by law.
FIFTH. Except as otherwise provided in this Certificate of
Incorporation, in furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to make, repeal, amend
and rescind any or all of the Bylaws of the Corporation.
SIXTH. The number of directors of the Corporation shall be fixed from
time to time by the Bylaws or a bylaw amendment thereof duly adopted by the
Board of Directors or by the stockholders.
SEVENTH. Elections of directors need not be by written ballot unless
the Bylaws of the Corporation so provide.
EIGHTH. A Director of the Corporation shall not be personally liable
to the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a Director, except for liability (i) for any breach of the
Director's duty of loyalty to the Corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the Delaware General
Corporation Law, or (iv) for any transaction from which the Director derived any
improper personal benefit. If the Delaware General Corporation Law is hereafter
amended to authorize, with the approval of a corporation's stockholders, further
reductions in the liability of a corporation's directors for breach of fiduciary
duty, then a Director of the Corporation shall not be liable for any such breach
to the fullest extent permitted by the Delaware General Corporation Law as so
amended.
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Any repeal or modification of the foregoing provisions of this Article
EIGHTH by the stockholders of the Corporation shall not adversely affect any
right or protection of a Director of the Corporation existing at the time of
such repeal or modification.
NINTH. This Corporation reserves the right to amend, alter, change
or repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred on
stockholders herein are granted subject to this reservation.
* * *
FOUR: The foregoing amendment and restatement has been duly adopted
by the Corporation's Board of Directors and stockholders in accordance with the
applicable provisions of Sections 242 and 245 of the Delaware General
Corporation Law.
IN WITNESS WHEREOF, the undersigned have executed this Second Amended
and Restated Certificate of Incorporation on April 5, 1996.
/s/ Carl Grivner
-----------------------------
Carl Grivner, President
/s/ Daniel E. Steimle
------------------------------
Daniel E. Steimle, Secretary
The undersigned certify under penalty of perjury that they have read
the foregoing Certificate of Amendment to Certificate of Incorporation and know
the contents thereof, and that the statements therein are true.
Executed in Petaluma, California, on April 5, 1996.
/s/ Carl Grivner
-----------------------------
Carl Grivner, President
/s/ Daniel E. Steimle
------------------------------
Daniel E. Steimle, Secretary
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Exhibit 3.4
BYLAWS
OF
ADVANCED FIBRE COMMUNICATIONS, INC.
ARTICLE 1 - STOCKHOLDERS
1.1 PLACE OF MEETINGS. All meetings of stockholders shall be held at
such place within or without the State of Delaware as may be designated from
time to time by the Board of Directors or the President or, if not so
designated, at the registered office of the corporation.
1.2 ANNUAL MEETING. The annual meeting of stockholders for the
election of directors and for the transaction of such other business as may
properly be brought before the meeting shall be held each year beginning in the
year 1996 on such date and at such time as the Board of Directors determines.
If this date shall fall upon a legal holiday at the place of the meeting, then
such meeting shall be held on the next succeeding business day at the same hour.
If no annual meeting is held in accordance with the foregoing provisions, the
Board of Directors shall cause the meeting to be held as soon thereafter as
convenient.
1.3 SPECIAL MEETINGS. Special meetings of stockholders, for any
purpose or purposes, unless otherwise prescribed by statute or by the
Certificate of Incorporation as it may be amended from time to time (the
"Certificate of Incorporation"), may be called by the President and shall be
called by the President or Secretary at the request in writing of a majority of
the Board of Directors, or at the request in writing of stockholders owning not
less than ten percent (10%) of the entire capital stock of the corporation
issued and outstanding and entitled to vote. Such request shall state the
purpose or purposes of the proposed meeting.
1.4 NOTICE OF MEETINGS. Except as otherwise provided by law, written
notice of each meeting of stockholders, whether annual or special, shall be
given not less than 10 nor more than 60 days before the date of the meeting to
each stockholder entitled to vote at such meeting. The notices of all meetings
shall state the place, date and hour of the meeting. The notice of a special
meeting shall state, in addition, the purpose or purposes for which the meeting
is called. If mailed, notice is given when deposited in the United States mail,
postage prepaid, directed to the stockholder at his address as it appears on the
records of the corporation.
1.5 VOTING LIST. The officer who has charge of the stock ledger of
the corporation shall prepare, at least 10 days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered
<PAGE>
in the name of each stockholder. Such list shall be open to the examination of
any stockholder, for any purpose germane to the meeting, during ordinary
business hours, for a period of at least 10 days prior to the meeting, at a
place within the city where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time of
the meeting, and may be inspected by any stockholder who is present.
1.6 QUORUM. Except as otherwise provided by law, the Certificate of
Incorporation or these Bylaws, the holders of a majority of the shares of the
capital stock of the corporation issued and outstanding and entitled to vote at
the meeting, present in person or represented by proxy, shall constitute a
quorum for the transaction of business.
1.7 ADJOURNMENTS. Any meeting of stockholders may be adjourned to
another time and to any other place at which a meeting of stockholders may be
held under these Bylaws by the stockholders present or represented at the
meeting and entitled to vote, although less than a quorum, or, if no stockholder
is present, by any officer entitled to preside at or to act as Secretary of such
meeting. It shall not be necessary to notify any stockholder of any adjournment
of less than 30 days if the time and place of the adjourned meeting are
announced at the meeting at which adjournment is taken, unless after the
adjournment a new record date is fixed for the adjourned meeting. At the
adjourned meeting, the corporation may transact any business which might have
been transacted at the original meeting.
1.8 VOTING AND PROXIES. Each stockholder shall have one vote for
each share of stock entitled to vote held of record by such stockholder and a
proportionate vote for each fractional share so held, unless otherwise provided
in the Certificate of Incorporation. Each stockholder of record entitled to
vote at a meeting of stockholders may vote in person or may authorize another
person or persons to vote or act for him by written proxy executed by the
stockholder or his authorized agent and delivered to the Secretary of the
corporation. No such proxy shall be voted or acted upon after three years from
the date of its execution, unless the proxy expressly provides for a longer
period.
1.9 ACTION AT MEETING. In all matters other than the election of
directors, when a quorum is present at any meeting, the holders of a majority of
the stock present or represented and entitled to vote on the subject matter (or
if there are two or more classes of stock entitled to vote as separate classes,
then in the case of each such class, the holders of a majority of the stock of
that class present or represented and entitled to vote on the subject matter)
shall decide any matter to be voted upon by the stockholders at such meeting,
except when a different vote is required by express provision of law, the
Certificate of Incorporation or these Bylaws. Any election of directors by
stockholders shall be determined by a plurality of the votes cast by the
stockholders entitled to vote at the election.
2.
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1.10 ACTION BY CONSENT. Unless otherwise provided in the
Certificate of Incorporation, any action required to be taken at any annual or
special meeting of stockholders of the corporation, or any action which may be
taken at any annual or special meeting of such stockholders, may be taken
without a meeting, without prior notice and without a vote, if a consent in
writing, setting forth the action so taken, shall be signed by the holders of
outstanding stock having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted. Prompt notice of the taking of
the corporate action without a meeting by less than unanimous written consent
shall be given to those stockholders who have not consented in writing.
ARTICLE 2 - DIRECTORS
3 2.1 GENERAL POWERS. The business and affairs of the corporation
shall be managed by or under the direction of a Board of Directors, who may
exercise all of the powers of the corporation except as otherwise provided by
law, the Certificate of Incorporation or these Bylaws. In the event of a
vacancy in the Board of Directors, the remaining directors, except as otherwise
provided by law, may exercise the powers of the full Board until the vacancy is
filled.
2.2 NUMBER; ELECTION; TENURE AND QUALIFICATION. The number of
Directors of the corporation shall be seven (7)(1), subject to amendment in
accordance with Article SIXTH of the Certificate of Incorporation. Except as
provided in Section 2.4 of this Article, the Directors shall be elected at the
annual meeting of the stockholders in accordance with the Certificate of
Incorporation, and each director elected shall hold office until his successor
is elected and qualified, unless he shall resign, become disqualified, disabled
or otherwise removed. Any reduction in the size of any class of Directors shall
not shorten the term of office of any incumbent Director. Directors need not be
stockholders of the corporation.
2.3 ENLARGEMENT OF THE BOARD. Subject to Section B.(6)(f) of
Article FOURTH of the Certificate of Incorporation, the number of the Board of
Directors may be increased at any time by vote of a majority of the directors
then in office.
2.4 VACANCIES. Unless and until filled by the stockholders, any
vacancy in the Board of Directors, however occurring, including a vacancy
resulting from an enlargement of the Board, may be filled by vote of a majority
of the directors then in office, although less than a quorum, or by a sole
remaining director, subject to Section B.(5)(b) of Article FOURTH of the
Certificate of Incorporation. Any director elected in accordance with the
preceding sentence shall hold office until the next annual
- ---------------------------
(1) Changed by an Amendment of the Board of Directors on May 13, 1996.
3.
<PAGE>
election and until their successors are duly elected and qualified or until his
earlier resignation or removal. If there are no directors in office, then an
election of directors may be held in the manner provided by statute.
2.5 RESIGNATION. Any director may resign by delivering their written
resignation to the corporation at its principal office or to the President or
Secretary. Such resignation shall be effective upon receipt unless it is
specified to be effective at some other time or upon the happening of some other
event.
2.6 REMOVAL. Any director or the entire Board of Directors may be
removed, only as permitted by applicable law.
2.7 REGULAR MEETINGS. Regular meetings of the Board of Directors may
be held without notice at such time and place, within or without the State of
Delaware, as shall be determined from time to time by the Board of Directors;
provided that any director who is absent when such a determination is made shall
be given notice of the determination. A regular meeting of the Board of
Directors may be held without notice immediately after and at the same place as
the annual meeting of stockholders.
2.8 SPECIAL MEETINGS. Special meetings of the Board of Directors may
be held at any time and place, within or without the State of Delaware,
designated in a call by the Chairman of the Board, President, two or more
directors, or by one director in the event that there is only a single director
in office.
2.9 NOTICE OF SPECIAL MEETINGS. Notice of any special meeting of
directors shall be given to each director by the Secretary or by the officer or
one of the directors calling the meeting. Notice shall be given to each
director in person, by telephone, by facsimile transmission or by telegram sent
to their business or home address at least 48 hours in advance of the meeting,
or by written notice mailed to his business or home address at least 72 hours in
advance of the meeting. A notice or waiver of notice of a meeting of the Board
of Directors need not specify the purposes of the meeting.
2.10 MEETINGS BY TELEPHONE CONFERENCE CALLS. Directors or any members
of any committee designated by the directors may participate in a meeting of the
Board of Directors or such committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and participation by such means shall constitute
presence in person at such meeting.
2.11 QUORUM. A majority of the number of directors fixed pursuant to
Section 2.2 shall constitute a quorum at all meetings of the Board of Directors.
In the event one or more of the directors shall be disqualified to vote at any
meeting, then the required quorum shall be reduced by one for each such director
so disqualified;
4.
<PAGE>
provided, however, that in no case shall less than one-third (1/3) of the number
so fixed constitute a quorum. In the absence of a quorum at any such meeting, a
majority of the directors present may adjourn the meeting from time to time
without further notice other than announcement at the meeting, until a quorum
shall be present.
2.12 ACTION AT MEETING. At any meeting of the Board of Directors at
which a quorum is present, the vote of a majority of those present shall be
sufficient to take any action, unless a different vote is specified by law, the
Certificate of Incorporation or these Bylaws.
2.13 ACTION BY CONSENT. Any action required or permitted to be taken
at any meeting of the Board of Directors or of any committee of the Board of
Directors may be taken without a meeting, if all members of the Board or
committee, as the case may be, consent to the action in writing, and the written
consents are filed with the minutes of proceedings of the Board or committee.
2.14 COMMITTEES. The Board of Directors may, by resolution passed by
a majority of the whole Board, designate one or more committees, each committee
to consist of one or more of the directors of the corporation. The Board may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee. In
the absence or disqualification of a member of a committee, the member or
members of the committee present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in the place of
any such absent or disqualified member. Any such committee, to the extent
provided in the resolution of the Board of Directors and subject to the
provisions of the General Corporation Law of the State of Delaware, shall have
and may exercise all the powers and authority of the Board of Directors in the
management of the business and affairs of the corporation and may authorize the
seal of the corporation to be affixed to all papers which may require it. Each
such committee shall keep minutes and make such reports as the Board of
Directors may from time to time request. Except as the Board of Directors may
otherwise determine, any committee may make rules for the conduct of its
business, but unless otherwise provided by the directors or in such rules, its
business shall be conducted as nearly as possible in the same manner as is
provided in these Bylaws for the Board of Directors.
2.15 COMPENSATION FOR DIRECTORS. Directors may be paid such
compensation for their services and such reimbursement for expenses of
attendance at meetings as the Board of Directors may from time to time
determine. No such payment shall preclude any director from serving the
corporation or any of its parent or subsidiary corporations in any other
capacity and receiving compensation for such service.
ARTICLE 3 - OFFICERS
5.
<PAGE>
3.1 ENUMERATION. The officers of the corporation shall consist of a
President, a Secretary, a Treasurer and such other officers with such other
titles as the Board of Directors shall determine, including without limitation a
Chairman of the Board, a Vice-Chairman of the Board, and one or more Vice
Presidents, Assistant Treasurers, and Assistant Secretaries. The Board of
Directors may appoint such other officers as it may deem appropriate.
3.2 ELECTION. The President, Treasurer and Secretary shall be
elected by the Board of Directors at its first meeting following the annual
meeting of stockholders. Other officers may be appointed by the Board of
Directors at such meeting or at any other meeting.
3.3 QUALIFICATION. The Chairman must be an officer of the
corporation. The President need not be a director. No officer need be a
stockholder. Any two or more offices may be held be the same person.
3.4 TENURE. Except as otherwise provided by law, by the Certificate
of Incorporation or by these Bylaws, each officer shall hold office until his
successor is elected and qualified, unless a different term is specified in the
vote choosing or appointing him, or until his earlier death, resignation or
removal.
3.5 RESIGNATION AND REMOVAL. Any officer may resign by delivering
his written resignation to the corporation at its principal office or to the
President or Secretary. Such resignation shall be effective upon receipt unless
it is specified to be effective at some other time or upon the happening of some
other event.
The Board of Directors, or a committee duly authorized to do so,
may remove any officer with or without cause. Except as the Board of Directors
may otherwise determine, no officer who resigns or is removed shall have any
right to any compensation as an officer for any period following his resignation
or removal, or any right to damages on account of such removal, whether his
compensation be by the month or by the year or otherwise, unless such
compensation is expressly provided in a duly authorized written agreement with
the corporation.
3.6 VACANCIES. The Board of Directors may fill any vacancy occurring
in any office for any reason and may, in its discretion, leave unfilled for such
period as it may determine any offices other than those of President, Treasurer
and Secretary. Each such successor shall hold office for the unexpired term of
his predecessor and until his successor is elected and qualified, or until his
earlier death, resignation or removal.
3.7 CHAIRMAN OF THE BOARD AND VICE-CHAIRMAN OF THE BOARD. If the
Board of Directors appoints a Chairman of the Board, he shall, when present,
preside at all meetings of the Board of Directors. He shall perform such duties
and possess such powers as are usually vested in the office of the Chairman of
the Board or as may be
6.
<PAGE>
vested in him by the Board of Directors. If the Board of Directors appoints a
Vice-Chairman of the Board, he shall, in the absence or disability of the
Chairman of the Board, perform the duties and exercise the powers of the
Chairman of the Board and shall perform such other duties and possess such other
powers as may from time to time be vested in him by the Board of Directors.
3.8 PRESIDENT. The President shall be the chief executive officer of
the corporation unless such title is assigned to a Chairman of the Board. The
President shall, subject to the direction of the Board of Directors, have
general supervision and control of the business of the corporation. Unless
otherwise provided by the directors, he shall preside at all meetings of the
stockholders and of the Board of Directors (except as provided in Section 3.7
above). The President shall perform such other duties and shall have such other
powers as the Board of Directors may from time to time prescribe.
3.9 VICE PRESIDENTS. Any Vice President shall perform such duties
and possess such powers as the Board of Directors or the President may from time
to time prescribe. In the event of the absence, inability or refusal to act of
the President, the Vice President (or if there shall be more than one, the Vice
Presidents in the order determined by the Board of Directors) shall perform the
duties of the President and when so performing shall have all the powers of and
be subject to all the restrictions upon the President. The Board of Directors
may assign to any Vice President the title of Executive Vice President, Senior
Vice President or any other title selected by the Board of Directors.
3.10 SECRETARY AND ASSISTANT SECRETARY. The Secretary shall perform
such duties and shall have such powers as the Board of Directors or the
President may from time to time prescribe. In addition, the Secretary shall
perform such duties and have such powers as are incident to the office of the
secretary, including without limitation the duty and power to give notices of
all meetings of stockholders and special meetings of the Board of Directors, to
attend all meetings of stockholders and the Board of Directors and keep a record
of the proceedings, to maintain a stock ledger and prepare lists of stockholders
and their addresses as required, to be custodian of corporate records and the
corporate seal and to affix and attest to the same on documents.
Any Assistant Secretary shall perform such duties and possess
such powers as the Board of Directors, the President or the Secretary may from
time to time prescribe. In the event of the absence, inability or refusal to
act of the Secretary, the Assistant Secretary (or if there shall be more than
one, the Assistant Secretaries in the order determined by the Board of
Directors) shall perform the duties and exercise the powers of the Secretary.
In the absence of the Secretary or any Assistant Secretary at any
meeting of stockholders or directors, the person presiding at the meeting shall
designate a temporary secretary to keep a record of the meeting.
7.
<PAGE>
3.11 TREASURER AND ASSISTANT TREASURER. The Treasurer shall perform
such duties and shall have such powers as may from time to time be assigned to
him by the Board of Directors or the President. In addition, the Treasurer
shall perform such duties and have such powers as are incident to the office of
treasurer, including without limitation the duty and power to keep and be
responsible for all funds and securities of the corporation, to deposit funds of
the corporation in depositories selected in accordance with these Bylaws, to
disburse such funds as ordered by the Board of Directors, to make proper
accounts of such funds, and to render as required by the Board of Directors
statements of all such transactions and of the financial condition of the
corporation.
The Assistant Treasurers shall perform such duties and possess
such powers as the Board of Directors, the President or the Treasurer may from
time to time prescribe. In the event of the absence, inability or refusal to
act of the Treasurer, the Assistant Treasurer (or if there shall be more than
one, the Assistant Treasurers in the order determined by the Board of Directors)
shall perform the duties and exercise the powers of the Treasurer.
3.12 CONTROLLER AND ASSISTANT CONTROLLERS. The Controller shall be
the chief accounting officer of the corporation. He shall keep full and
accurate accounts of receipts and disbursements in books belonging to the
corporation in accordance with accepted accounting methods and procedures. He
shall initiate periodic audits of the accounting records, methods and systems of
the corporation. He shall render to the Board of Directors, the Chairman and
the President, as and when required by them, or any of them, a statement of the
financial condition of the corporation.
The Assistant Controllers shall perform such duties and possess
such powers as the Board of Directors, the President or the Controller may from
time to time prescribe. In the event of the absence, inability or refusal to
act of the Controller, the Assistant Controller (or if there shall be more than
one, the Assistant Controllers in the order determined by the Board of
Directors) shall perform the duties and exercise the powers of the Controller.
3.13 BONDED OFFICERS. The Board of Directors may require any officer
to give the corporation a bond in such sum and with such surety or sureties as
shall be satisfactory to the Board of Directors upon such terms and conditions
as the Board of Directors may specify, including without limitation a bond for
the faithful performance of his duties and for the restoration to the
corporation of all property in his possession or under his control belonging to
the corporation.
3.14 SALARIES. Officers of the corporation shall be entitled to such
salaries, compensation or reimbursement as shall be fixed or allowed from time
to time by the Board of Directors.
8.
<PAGE>
ARTICLE 4 - CAPITAL STOCK
4.1 ISSUANCE OF STOCK. Unless otherwise voted by the stockholders
and subject to the provisions of the Certificate of Incorporation, the whole or
any part of any unissued balance of the authorized capital stock of the
corporation held in its treasury may be issued, sold, transferred or otherwise
disposed of by vote of the Board of Directors in such manner, for such
consideration and on such terms as the Board of Directors may determine.
4.2 CERTIFICATES OF STOCK. Every holder of stock of the corporation
shall be entitled to have a certificate, in such form as may be prescribed by
law and by the Board of Directors, certifying the number and class of shares
owned by him in the corporation. Each such certificate shall be signed by, or
in the name of the corporation by, the Chairman or Vice-Chairman, if any, of the
Board of Directors, or the President or a Vice President, and the Treasurer or
an Assistant Treasurer, or the Secretary or an Assistant Secretary of the
corporation. Any or all of the signatures on the certificate may be a
facsimile.
Each certificate for shares of stock which are subject to any
restriction on transfer pursuant to the Certificate of Incorporation, the
Bylaws, applicable securities laws or any agreement among any number of
stockholders or among such holders and the corporation shall have conspicuously
noted on the face or back of the certificate either the full text of the
restriction or a statement of the existence of such restriction.
4.3 TRANSFERS. Subject to the restrictions, if any, stated or noted
on the stock certificates, shares of stock may be transferred on the books of
the corporation by the surrender to the corporation or its transfer agent of the
certificate representing such shares properly endorsed or accompanied by a
written assignment or power of attorney properly executed, and with such proof
of authority or the authenticity of signature as the corporation or its transfer
agent may reasonably require. Except as may be otherwise required by law, by
the Certificate of Incorporation or by these Bylaws, the corporation shall be
entitled to treat the record holder of stock as shown on its books as the owner
of such stock for all purposes, including the payment of dividends and the right
to vote with respect to such stock, regardless of any transfer, pledge or other
disposition of such stock until the shares have been transferred on the books of
the corporation in accordance with the requirements of these Bylaws.
4.4 LOST, STOLEN OR DESTROYED CERTIFICATES. The corporation may
issue a new certificate of stock in place of any previously issued certificate
alleged to have been lost, stolen, or destroyed, upon such terms and conditions
as the Board of Directors may prescribe, including the presentation of
reasonable evidence of such loss, theft or destruction and the giving of such
indemnity as the Board of Directors may require for the protection of the
corporation or any transfer agent or registrar.
9.
<PAGE>
4.5 RECORD DATE. The Board of Directors may fix in advance a date as
a record date for the determination of the stockholders entitled to notice of or
to vote at any meeting of stockholders or to express consent (or dissent) to
corporate action in writing without a meeting, or entitled to receive payment of
any dividend or other distribution or allotment of any rights in respect of any
change, conversion or exchange of stock, or for the purpose of any other lawful
action. Such record date shall not be more than 60 nor less than 10 days before
the date of such meeting, nor more than 60 days prior to any other action to
which such record date relates.
If no record date is fixed, the record date for determining
stockholders entitled to notice of or to vote at a meeting of stockholders shall
be at the close of business on the day before the day on which notice is given,
or, if notice is waived, at the close of business on the day before the day on
which the meeting is held. The record date for determining stockholders
entitled to express consent to corporate action in writing without a meeting,
when no prior action by the Board of Directors is necessary, shall be the day on
which the first written consent is expressed. The record date for determining
stockholders for any other purpose shall be at the close of business on the day
on which the Board of Directors adopts the resolution relating to such purpose.
A determination of stockholders of record entitled to notice of
or to vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the Board of Directors may fix a new record
date for the adjourned meeting.
ARTICLE 5 - INDEMNIFICATION
The corporation shall, to the fullest extent permitted by Section 145
of the General Corporation Law of Delaware, as that Section may be amended and
supplemented from time to time, indemnify any director or executive officer
which it shall have power to indemnify under the Section against any expenses,
liabilities or other matters referred to in or covered by that Section. The
indemnification provided for in this Article (i) shall not be deemed exclusive
of any other rights to which those indemnified may be entitled under any bylaw,
agreement or vote of stockholders or disinterested directors or otherwise, both
as to action in their official capacities and as to action in another capacity
while holding such office, (ii) shall continue as to a person who has ceased to
be a director or executive officer and (iii) shall inure to the benefit of the
heirs, executors and administrators of such a person. The corporation's
obligation to provide indemnification under this Article shall be offset to the
extent of any other source of indemnification or any otherwise applicable
insurance coverage under a policy maintained by the corporation or any other
person.
Expenses incurred by a director of the corporation in defending a
civil or criminal action, suit or proceeding by reason of the fact that he is or
was a director of
10.
<PAGE>
the corporation (or was serving at the corporation's request as a director or
officer of another corporation) shall be paid by the corporation in advance of
the final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director to repay such amount if it shall
ultimately be determined that he is not entitled to be indemnified by the
corporation as authorized by relevant sections of the General Corporation Law of
Delaware.
To assure indemnification under this Article of all such persons who
are determined by the corporation or otherwise to be or to have been
"fiduciaries" of any employee benefit plan of the corporation which may exist
from time to time, such Section 145 shall, for the purposes of this Article, be
interpreted as follows: an "other enterprise" shall be deemed to include such
an employee benefit plan, including, without limitation, any plan of the
corporation which is governed by the Act of Congress entitled "Employee
Retirement Income Security Act of 1974," as amended from time to time; the
corporation shall be deemed to have requested a person to serve an employee
benefit plan where the performance by such person of his duties to the
corporation also imposes duties on, or otherwise involves services by, such
person to the plan or participants or beneficiaries of the plan; excise taxes
assessed on a person with respect to an employee benefit plan pursuant to such
Act of Congress shall be deemed "fines"; and action taken or omitted by a
person with respect to an employee benefit plan in the performance of such
person's duties for a purpose reasonably believed by such person to be in the
interest of the participants and beneficiaries of the plan shall be deemed to be
for a purpose which is not opposed to the best interests of the corporation.
ARTICLE 6 - GENERAL PROVISIONS
6.1 FISCAL YEAR. Except as from time to time otherwise designated by
the Board of Directors, the fiscal year of the corporation shall be the calendar
year.
6.2 CORPORATE SEAL. The corporate seal shall be in such form as
shall be approved by the Board of Directors.
6.3 EXECUTION OF INSTRUMENTS. The President, the Secretary or the
Treasurer shall have power to execute and deliver on behalf and in the name of
the corporation any instrument requiring the signature of an officer of the
corporation, except as otherwise provided in these Bylaws or by resolution of
the Board of Directors, or where the execution and delivery of such an
instrument shall be expressly delegated by the Board of Directors to some other
officer or agent of the corporation.
6.4 WAIVER OF NOTICE. Whenever any notice whatsoever is required to
be given by law, by the Certificate of Incorporation or by these Bylaws, a
waiver of such notice either in writing signed by the person entitled to such
notice or such person's duly authorized attorney, or by telegraph, cable or any
other available method, whether before, at or after the time stated in such
waiver, or the appearance of such person or
11.
<PAGE>
persons at such meeting in person or by proxy, shall be deemed equivalent to
such notice.
6.5 VOTING OF SECURITIES. Except as the directors may otherwise
designate, the President, any Vice President, the Secretary or Treasurer may
waive notice of, and act as, or appoint any person or persons to act as, proxy
or attorney-in-fact for this corporation (with or without power of substitution)
at, any meeting of stockholders or shareholders of any other corporation or
organization, the securities of which may be held by this corporation.
6.6 EVIDENCE OF AUTHORITY. A certificate by the Secretary, or an
Assistant Secretary, or a temporary Secretary, as to any action taken by the
stockholders, directors, a committee or any officer or representative of the
corporation shall as to all persons who rely on the certificate in good faith be
conclusive evidence of such action.
6.7 CERTIFICATE OF INCORPORATION. All references in these Bylaws to
the Certificate of Incorporation shall be deemed to refer to the Certificate of
Incorporation of the corporation, as amended and in effect from time to time.
These Bylaws are subject to the provisions of the Certificate of Incorporation
and applicable law.
6.8 TRANSACTIONS WITH INTERESTED PARTIES. No contract or transaction
between the corporation and one or more of the directors or officers, or between
the corporation and any other corporation, partnership, association, or other
organization in which one or more of the directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the director or officer is present at or
participates in the meeting of the Board of Directors or a committee of the
Board of Directors which authorizes the contract or transaction or solely
because his or their votes are counted for such purpose, if:
(1) The material facts as to his relationship or interest and as
to the contract or transaction are disclosed or are known to the Board of
Directors or the committee, and the Board or committee in good faith authorizes
the contract or transaction by the affirmative votes of a majority of the
disinterested directors, even though the disinterested directors be less than a
quorum;
(2) The material facts as to his relationship or interest and as
to the contract or transaction are disclosed or are known to the stockholders
entitled to vote thereon, and the contract or transaction is specifically
approved in good faith by vote of the stockholders; or
(3) The contract or transaction is fair as to the corporation as
of the time it is authorized, approved or ratified, by the Board of Directors, a
committee of the Board of Directors, or the stockholders.
12.
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Common or interested directors may be counted in determining the
presence of a quorum at a meeting of the Board of Directors or of a committee
which authorizes the contract or transaction.
6.9 SEVERABILITY. Any determination that any provision of these
Bylaws is for any reason inapplicable, illegal or ineffective shall not affect
or invalidate any other provision of these Bylaws.
6.10 PRONOUNS. All pronouns used in these Bylaws shall be deemed to
refer to the masculine, feminine or neuter, singular or plural, as the identity
of the person or persons may require.
ARTICLE 7 - AMENDMENTS
7.1 BY THE BOARD OF DIRECTORS. Subject to the provisions of the
Certificate of Incorporation, these Bylaws may be altered, amended or repealed
or new Bylaws may be adopted by the affirmative vote of a majority of the
directors present at any regular or special meeting of the Board of Directors at
which a quorum is present.
7.2 BY THE STOCKHOLDERS. Subject to the provisions of the
Certificate of Incorporation, these Bylaws may be altered, amended or repealed
or new Bylaws may be adopted by the affirmative vote of the holders of a
majority of the shares of the capital stock of the corporation issued and
outstanding and entitled to vote at any regular meeting of stockholders, or at
any special meeting of stockholders, provided notice of such alteration,
amendment, repeal or adoption of new bylaws shall have been stated in the notice
of such special meeting.
13.
<PAGE>
I, Amy M. Paul, Incorporator of Advanced Fibre Communications, Inc.,
a Delaware corporation, do hereby certify that the foregoing Bylaws are the duly
adopted Bylaws of said corporation as they are in effect on the date hereof.
IN WITNESS WHEREOF, I have hereunto subscribed my name this 28th day
of September, 1995.
/s/ Amy M. Paul
______________________________
Amy M. Paul
Incorporator
14.
<PAGE>
EXHIBIT 4.2
ADVANCED FIBRE COMMUNICATIONS, INC.
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- -------------------------------------------------------------------------------
SERIES E PREFERRED
STOCK PURCHASE AGREEMENT
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- -------------------------------------------------------------------------------
SEPTEMBER 29, 1995
<PAGE>
TABLE OF CONTENTS
Page
1. Purchase and Sale of Stock. . . . . . . . . . . . . . . . . . . . . . 1
1.1 Sale and Issuance of Series E Preferred Stock. . . . . . . . . . 1
1.2 Closing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.3 Subsequent Sale of Series E Preferred Stock. . . . . . . . . . . 1
2. Representations and Warranties of the Company . . . . . . . . . . . . 1
2.1 Organization, Good Standing and Qualification. . . . . . . . . . 1
2.2 Capitalization and Voting Rights . . . . . . . . . . . . . . . . 2
2.3 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.4 Authorization. . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.5 Valid Issuance of Preferred Stock, Common Stock and Warrants . . 3
2.6 Governmental Consents. . . . . . . . . . . . . . . . . . . . . . 3
2.7 Section 83(b) Elections. . . . . . . . . . . . . . . . . . . . . 3
2.8 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.9 Proprietary Information and Stockholder Agreements . . . . . . . 4
2.10 Patents and Trademarks . . . . . . . . . . . . . . . . . . . . . 4
2.11 Compliance with Other Instruments. . . . . . . . . . . . . . . . 4
2.12 Agreements; Action . . . . . . . . . . . . . . . . . . . . . . . 5
2.13 Related-Party Transactions . . . . . . . . . . . . . . . . . . . 5
2.14 Permits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.15 Environmental and Safety Laws. . . . . . . . . . . . . . . . . . 6
2.16 Manufacturing and Marketing Rights . . . . . . . . . . . . . . . 6
2.17 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.18 Business Plan. . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.19 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.20 Real Property Holding Company. . . . . . . . . . . . . . . . . . 6
2.21 Title to Property and Assets . . . . . . . . . . . . . . . . . . 6
2.22 Labor Agreements and Actions . . . . . . . . . . . . . . . . . . 6
2.23 Financial Statements . . . . . . . . . . . . . . . . . . . . . . 7
2.24 Changes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.25 Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . . 8
2.26 Tax Returns, Payments and Elections. . . . . . . . . . . . . . . 8
2.27 Minute Books . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.28 Registration Rights. . . . . . . . . . . . . . . . . . . . . . . 8
3. Representations and Warranties of the Investor. . . . . . . . . . . . 8
3.1 Authorization. . . . . . . . . . . . . . . . . . . . . . . . . . 8
3.2 Purchase Entirely for Own Account. . . . . . . . . . . . . . . . 8
3.3 Disclosure of Information. . . . . . . . . . . . . . . . . . . . 8
3.4 Investment Experience. . . . . . . . . . . . . . . . . . . . . . 8
3.5 Accredited Investor. . . . . . . . . . . . . . . . . . . . . . . 9
3.6 Restricted Securities. . . . . . . . . . . . . . . . . . . . . . 9
3.7 Further Limitations on Disposition . . . . . . . . . . . . . . . 9
3.8 Legends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
4. California Commissioner of Corporations . . . . . . . . . . . . . . . 10
4.1 Corporate Securities Law . . . . . . . . . . . . . . . . . . . . 10
i.
<PAGE>
5. Conditions of Investor's Obligations at Closing . . . . . . . . . . . 10
5.1 Representations and Warranties . . . . . . . . . . . . . . . . . 10
5.2 Performance. . . . . . . . . . . . . . . . . . . . . . . . . . . 10
5.3 Compliance Certificate . . . . . . . . . . . . . . . . . . . . . 10
5.4 Qualifications . . . . . . . . . . . . . . . . . . . . . . . . . 10
5.5 Proceedings and Documents. . . . . . . . . . . . . . . . . . . . 10
5.6 Proprietary Information Agreements . . . . . . . . . . . . . . . 10
5.7 Bylaws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
5.8 Board of Directors . . . . . . . . . . . . . . . . . . . . . . . 11
5.9 Opinion of Company Counsel . . . . . . . . . . . . . . . . . . . 11
5.10 Indemnity Agreement. . . . . . . . . . . . . . . . . . . . . . . 13
5.11 Certificate of the Secretary of the Company. . . . . . . . . . . 13
6. Conditions of the Company's Obligations at Closing. . . . . . . . . . 13
6.1 Representations and Warranties . . . . . . . . . . . . . . . . . 13
6.2 Payment of Purchase Price. . . . . . . . . . . . . . . . . . . . 13
6.3 California Qualification . . . . . . . . . . . . . . . . . . . . 13
7. Registration Rights . . . . . . . . . . . . . . . . . . . . . . . . . 13
7.1 Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . 13
7.2 Request for Registration . . . . . . . . . . . . . . . . . . . . 14
7.3 Company Registration . . . . . . . . . . . . . . . . . . . . . . 15
7.4 Obligations of the Company . . . . . . . . . . . . . . . . . . . 15
7.5 Furnish Information. . . . . . . . . . . . . . . . . . . . . . . 16
7.6 Expenses of Demand Registration. . . . . . . . . . . . . . . . . 16
7.7 Expenses of Company Registration . . . . . . . . . . . . . . . . 17
7.8 Underwriting Requirements. . . . . . . . . . . . . . . . . . . . 17
7.9 Delay of Registration. . . . . . . . . . . . . . . . . . . . . . 17
7.10 Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . 17
7.11 Reports Under Securities Exchange Act of 1934. . . . . . . . . . 19
7.12 Form S-3 Registration. . . . . . . . . . . . . . . . . . . . . . 19
7.13 Assignment of Registration Rights. . . . . . . . . . . . . . . . 20
7.14 "Market Stand-Off" Agreement . . . . . . . . . . . . . . . . . . 20
7.15 Amendment of Registration Rights . . . . . . . . . . . . . . . . 21
7.16 Termination of Registration Rights . . . . . . . . . . . . . . . 21
8. Covenants of the Company. . . . . . . . . . . . . . . . . . . . . . . 21
8.1 Delivery of Financial Statements . . . . . . . . . . . . . . . . 21
8.2 Inspection . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
8.3 Termination of Information and Inspection Covenants. . . . . . . 22
8.4 Assignment of Information and Inspection Rights. . . . . . . . . 22
8.5 Visitation Rights. . . . . . . . . . . . . . . . . . . . . . . . 22
8.6 Right of First Offer . . . . . . . . . . . . . . . . . . . . . . 22
8.7 Amendment to Covenants of Company. . . . . . . . . . . . . . . . 23
9. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
9.1 Survival of Warranties . . . . . . . . . . . . . . . . . . . . . 24
9.2 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . 24
9.3 Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . . 24
9.4 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . 24
9.5 Titles and Subtitles . . . . . . . . . . . . . . . . . . . . . . 24
ii.
<PAGE>
9.6 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
9.7 Finder's Fee . . . . . . . . . . . . . . . . . . . . . . . . . . 24
9.8 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
9.9 Amendments and Waivers . . . . . . . . . . . . . . . . . . . . . 25
9.10 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . 25
9.11 Aggregation of Stock . . . . . . . . . . . . . . . . . . . . . . 25
9.12 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . 25
SCHEDULE A - Schedule of Investors
EXHIBIT A - Restated Certificate of Incorporation
EXHIBIT B - Schedule of Exceptions
EXHIBIT C - Schedule of Common Stockholders
EXHIBIT D - Proprietary Information and Inventions Agreement
EXHIBIT E - Fifth Amended and Restated Indemnity Agreement
EXHIBIT F - Fourth Amended and Restated Voting Agreement
iii.
<PAGE>
ADVANCED FIBRE COMMUNICATIONS, INC.
SERIES E PREFERRED STOCK PURCHASE AGREEMENT
THIS SERIES E PREFERRED STOCK PURCHASE AGREEMENT is made as of
September 29, 1995, by and between Advanced Fibre Communications, Inc., a
Delaware corporation (the "Company"), and the investors listed on SCHEDULE A
hereto, each of which is herein referred to as an "Investor."
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. PURCHASE AND SALE OF STOCK.
1.1 SALE AND ISSUANCE OF SERIES E PREFERRED STOCK.
(a) The Company shall adopt and file with the Secretary of State of
Delaware on or before the Closing (as defined below) its Restated Certificate of
Incorporation (the "Certificate of Incorporation") in the form attached hereto
as EXHIBIT A.
(b) Subject to the terms and conditions of this Agreement, each
Investor agrees, severally, to purchase at the Closing and the Company agrees to
sell and issue to each Investor at the Closing that number of shares of the
Company's Series E Preferred Stock set forth opposite each Investor's name on
SCHEDULE A hereto for the purchase price of $14.00 per share, payable in cash or
cancellation of indebtedness.
1.2 CLOSING. The purchase and sale of the Series E Preferred
Stock shall take place at the offices of Brobeck, Phleger & Harrison, Spear
Street Tower, One Market, San Francisco, California 94105, at 10:00 a.m., on
September 29, 1995, or at such other time and place as the Company and Investors
acquiring in the aggregate more than half the shares of Series E Preferred Stock
sold pursuant hereto mutually agree upon orally or in writing (which time and
place are designated as the "Closing"). At the Closing the Company shall
deliver to each Investor a certificate representing the Series E Preferred Stock
which such Investor is purchasing against delivery to the Company by such
Investor of a check or wire transfer in the amount of the purchase price
therefor payable to the Company's order.
1.3 SUBSEQUENT SALE OF SERIES E PREFERRED STOCK. The Company may
sell up to the balance of the authorized number of shares of Series E Preferred
Stock not sold at the Closing to any Investor that did not purchase that number
of shares of Series E Preferred Stock set forth opposite such Investor's name on
SCHEDULE A, at a price not less than $14.00 per share, provided the purchase is
consummated not later than December 31, 1995. Any such Investor shall become a
party to this Agreement.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The
Company hereby represents and warrants to each Investor that, except as set
forth on the Schedule of Exceptions attached hereto as EXHIBIT B (the "Schedule
of Exceptions"), specifically identifying the relevant subparagraph hereof,
which exceptions shall be deemed to be representations and warranties as if made
hereunder:
2.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. The
Company is a corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware and has all requisite corporate power
and authority to carry on its business as now conducted and as proposed to be
conducted. The Company is duly qualified to transact business and is in good
standing in each jurisdiction in which the failure so to qualify would have a
material adverse effect on its business or properties.
1.
<PAGE>
2.2 CAPITALIZATION AND VOTING RIGHTS. The authorized capital of
the Company consists, or will consist prior to the Closing, of:
(i) PREFERRED STOCK. Seventeen Million Six Hundred Seventy
Two Thousand Nine Hundred Eight (17,672,908) shares of Preferred Stock, of which
Four Million Fifty Six Thousand Forty Four (4,056,044) shares have been
designated Series A Preferred Stock, Two Million Five Hundred Fifty Six Thousand
Forty Four (2,556,044) shares of which were issued and sold pursuant to that
certain Series A Preferred Stock Purchase Agreement dated January 6, 1993 (the
"First Series A Agreement") and One Million Five Hundred Thousand (1,500,000)
shares of which were issued and sold pursuant to that certain Series A Preferred
Stock Purchase Agreement dated April 23, 1993 (the "Second Series A Agreement");
Four Million Fifty Six Thousand Forty Four (4,056,044) shares have been
designated Series A-1 Preferred Stock, none of which are outstanding; One
Million Twenty Thousand Four Hundred Ten (1,020,410) shares have been designated
Series B Preferred Stock, all of which were issued and sold pursuant to that
certain Series B Preferred Stock Purchase Agreement dated October 5, 1993 (the
"Series B Agreement"); One Million Twenty Thousand Four Hundred Ten (1,020,410)
shares have been designated Series B-1 Preferred Stock, none of which are
outstanding; One Million Six Hundred Thousand (1,600,000) shares have been
designated Series C Preferred Stock, all of which were issued and sold pursuant
to that certain Series C Preferred Stock Purchase Agreement dated March 16, 1994
(the "Series C Agreement"); One Million Six Hundred Thousand (1,600,000) shares
have been designated Series C-1 Preferred Stock, none of which are outstanding;
One Million Forty Thousand (1,040,000) shares have been designated Series D
Preferred Stock, all of which were issued and sold pursuant to that certain
Series D Preferred Stock Purchase Agreement dated October 27, 1994 (the
"Series D Agreement"); One Million Forty Thousand (1,040,000) shares have been
designated Series D-1 Preferred Stock, none of which are outstanding; One
Million One Hundred Twenty Thousand (1,120,000) shares have been designated
Series E Preferred Stock, up to One Million Ninety Six Thousand Seven Hundred
Seventy Two (1,096,772) of which shall be issued and sold pursuant to this
Agreement; and One Million One Hundred Twenty Thousand (1,120,000) shares have
been designated Series E-1 Preferred Stock, none of which are outstanding.The
rights, privileges and preferences of the Series A Preferred Stock, the Series B
Preferred Stock, the Series C Preferred Stock, the Series D Preferred Stock and
the Series E Preferred Stock (collectively, the "Preferred Stock") and the
Series A-1 Preferred Stock, the Series B-1 Preferred Stock, the Series C-1
Preferred Stock, the Series D-1 Preferred Stock and the Series E-1 Preferred
Stock (collectively, the "Shadow Preferred Stock") will be as stated in the
Company's Certificate of Incorporation attached hereto as EXHIBIT A.
(ii) COMMON STOCK. Forty Two Million Three Hundred Twenty
Seven Thousand Ninety Two (42,327,092) shares of common stock ("Common Stock"),
of which Two Million Five Hundred Seven Thousand Three Hundred Sixty Four
(2,507,364) shares are issued and outstanding and are owned by the persons and
in the numbers specified in EXHIBIT C hereto.
(iii) Except for (A) warrants to purchase 296,760 shares of Common
Stock issued under the First Series A Agreement (the "Series A Warrants"),
(B) warrants to purchase 141,582 shares of Common Stock issued under the
Series B Agreement (the "Series B Warrants"), (C) warrants to purchase 2,809,760
shares of Common Stock issued under the Series C Agreement (the "Series C
Warrants"), (D) warrants to purchase 15,034 shares of Series E Preferred Stock
issued to Hambrecht & Quist LP in connection with this Agreement (the "Series E
Warrants") (the Series A Warrants, the Series B Warrants, the Series C Warrants,
and the Series E Warrants are collectively referred to as the "Warrants"),
(D) 2,462,504 shares of Common Stock reserved for issuance under the Company's
Stock Option Plan of which 1,655,590 shares have been granted pursuant to the
Stock Option Plan, (E) the conversion privileges of the Preferred Stock, (F) the
rights of first offer set forth in Section 8.7 hereof and Section 8.7 of the
First Series A Agreement, the Second Series A Agreement, the Series B Agreement,
the Series C Agreement and the Series C Agreement and Series D Agreement, and
(G) the rights of certain stockholders to receive additional shares of Series E
Preferred Stock under the terms of the Fifth Amended and Restated Indemnity
Agreement (the "Indemnity Agreement") in the form attached hereto as EXHIBIT E,
there are not outstanding
2.
<PAGE>
any options, warrants, rights (including conversion or preemptive rights) or
agreements for the purchase or acquisition from the Company of any shares of its
capital stock. The Company is not a party or subject to any agreement or
understanding, and, to the Company's knowledge, there is no agreement or
understanding between any persons and/or entities, which affects or relates to
the voting or giving of written consents with respect to any security or by a
director of the Company.
2.3 SUBSIDIARIES. The Company does not presently own or
control, directly or indirectly, any interest in any other corporation,
association, or other business entity.
2.4 AUTHORIZATION. All corporate action on the part of the
Company, its officers, directors and stockholders necessary for the
authorization, execution and delivery of this Agreement and the Indemnity
Agreement, the performance of all obligations of the Company hereunder and the
authorization, issuance (or reservation for issuance) and delivery of the
Series E Preferred Stock being sold hereunder, the Series E-1 Preferred Stock
and the Common Stock issuable upon conversion of the Preferred Stock has been
taken or will be taken prior to the Closing, and this Agreement and the
Indemnity Agreement constitute valid and legally binding obligations of the
Company, enforceable in accordance with their respective terms, except (i) as
limited by applicable bankruptcy, insolvency, reorganization, moratorium, and
other laws of general application affecting enforcement of creditors' rights
generally and (ii) as limited by laws relating to the availability of specific
performance, injunctive relief, or other equitable remedies.
2.5 VALID ISSUANCE OF PREFERRED STOCK, COMMON STOCK AND WARRANTS.
(a) The Series E Preferred Stock which is being purchased by the
Investors hereunder, when issued, sold and delivered in accordance with the
terms hereof for the consideration expressed herein, and the Series E Preferred
Stock issuable under the Indemnity Agreement, when issued in accordance with the
terms thereof, will be duly and validly issued, fully paid and nonassessable
and, based in part upon the representations of the Investors in this Agreement,
will be issued in compliance with all applicable federal and state securities
laws. Each of the Series E-1 Preferred Stock and the Common Stock issuable upon
conversion of the Series E Preferred Stock purchased under this Agreement has
been duly and validly reserved for issuance and, upon issuance in accordance
with the terms of the Certificate of Incorporation, shall be duly and validly
issued, fully paid and nonassessable, and issued in compliance with all
applicable securities laws, as presently in effect, of the United States and
each of the states whose securities laws govern the issuance of any of the
Preferred Stock hereunder.
(b) The outstanding shares of Common Stock are all duly and validly
authorized and issued, fully paid and nonassessable, and were issued in
compliance with all applicable federal and state securities laws.
2.6 GOVERNMENTAL CONSENTS. No consent, approval, order or
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state, local or provincial governmental authority on
the part of the Company is required in connection with the consummation of the
transactions contemplated by this Agreement, except for the filing pursuant to
Section 25102(f) of the California Corporate Securities Law of 1968, as amended,
and the rules thereunder, which filing will be effected within 15 days of the
sale of the Series E Preferred Stock hereunder.
2.7 SECTION 83(B) ELECTIONS. To the best of the Company's
knowledge, all elections and notices required by Section 83(b) of the Internal
Revenue Code and any analogous provisions of applicable state tax laws have been
timely filed by all individuals who have purchased shares of the Company's
Common Stock.
2.8 LITIGATION. There is no action, suit, proceeding or
investigation pending or currently threatened against the Company which
questions the validity of this Agreement or the right of the Company
3.
<PAGE>
to enter into it, or to consummate the transactions contemplated hereby, or
which might result, either individually or in the aggregate, in any material
adverse changes in the assets, condition, affairs or prospects of the Company,
financially or otherwise, or any change in the current equity ownership of the
Company. The foregoing includes, without limitation, actions pending or
threatened involving the prior employment of any of the Company's employees,
their use in connection with the Company's business of any information or
techniques allegedly proprietary to any of their former employers, or their
obligations under any agreements with prior employers. The Company is not a
party or subject to the provisions of any order, writ, injunction, judgment or
decree of any court or government agency or instrumentality. There is no
action, suit, proceeding or investigation by the Company currently pending or
which the Company intends to initiate.
2.9 PROPRIETARY INFORMATION AND STOCKHOLDER AGREEMENTS. Each
employee, officer and consultant of the Company has executed a Proprietary
Information and Inventions Agreement in the form attached hereto as EXHIBIT D.
The Company, after reasonable investigation, is not aware that any of its
employees, officers or consultant are in violation thereof, and the Company will
use its best efforts to prevent any such violation.
2.10 PATENTS AND TRADEMARKS. To the best of the Company's
knowledge, the Company has sufficient title and ownership of all patents,
trademarks, service marks, trade names, copyrights, trade secrets, information,
proprietary rights and processes necessary for its business as now conducted and
as proposed to be conducted without any conflict with or infringement of the
rights of others. There are no outstanding options, licenses, or agreements of
any kind relating to the foregoing, nor is the Company bound by or a party to
any options, licenses or agreements of any kind with respect to the patents,
trademarks, service marks, trade names, copyrights, trade secrets, licenses,
information, proprietary rights and processes of any other person or entity.
The Company has not received any communications alleging that the Company has
violated or, by conducting its business as proposed, would violate any of the
patents, trademarks, service marks, trade names, copyrights or trade secrets or
other proprietary rights of any other person or entity. The Company is not
aware that any of its employees is obligated under any contract (including
licenses, covenants or commitments of any nature) or other agreement, or subject
to any judgment, decree or order of any court or administrative agency, that
would interfere with the use of his/her best efforts to promote the interests of
the Company or that would conflict with the Company's business as proposed to be
conducted. Neither the execution nor delivery of this Agreement, nor the
carrying on of the Company's business by the employees of the Company, nor the
conduct of the Company's business as proposed, will, to the best of the
Company's knowledge, conflict with or result in a breach of the terms,
conditions or provisions of, or constitute a default under, any contract,
covenant or instrument under which any of such employees is now obligated, the
occurrence of which might result in a material adverse change in the assets,
condition or affairs of the Company.
2.11 COMPLIANCE WITH OTHER INSTRUMENTS. The Company is not in
violation or default of any provisions of its Certificate of Incorporation, as
amended, or Bylaws or of any instrument, judgment, order, writ, decree or
contract to which it is a party or by which it is bound or of any provision of
federal or state statute, rule or regulation applicable to the Company, the
violation or default of which might result in a material adverse change in the
assets, condition or affairs of the Company. The execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated hereby and thereby will not result in any such violation or be in
conflict with or constitute, with or without the passage of time and giving of
notice, either a default under any such provision, instrument, judgment, order,
writ, decree or contract or an event which results in the creation of any lien,
charge or encumbrance upon any assets of the Company or the suspension,
revocation, impairment, forfeiture, or nonrenewal of any material permit,
license, authorization, or approval applicable to the Company, its business or
operations or any of its assets or properties.
4.
<PAGE>
2.12 AGREEMENTS; ACTION.
(a) Except for agreements explicitly contemplated hereby, there are
no agreements, understandings or proposed transactions between the Company and
any of its officers, directors, affiliates, or any affiliate thereof.
(b) There are no agreements, understandings, instruments, contracts,
proposed transactions, judgments, orders, writs or decrees to which the Company
is a party or by which it is bound which may involve (i) obligations (contingent
or otherwise) of, or payments to the Company in excess of, $25,000; (ii) the
license of any patent, copyright, trade secret or other proprietary right to or
from the Company; (iii) provisions restricting or affecting the development,
manufacture or distribution of the Company's products or services; or (iv)
minimum purchase commitments by or from the Company.
(c) The Company has not (i) declared or paid any dividends, or
authorized or made any distribution upon or with respect to any class or series
of its capital stock; (ii) incurred any indebtedness for money borrowed or any
other liabilities individually in excess of $25,000 or, in the case of
indebtedness and/or liabilities individually less than $25,000, in excess of
$25,000 in the aggregate; (iii) made any loans or advances to any person, other
than ordinary advances for travel expenses; or (iv) sold, exchanged or otherwise
disposed of any of its assets or rights, other than the sale of its inventory in
the ordinary course of business.
(d) For the purposes of subsections (b) and (c) above, all
indebtedness, liabilities, agreements, understandings, instruments, contracts
and proposed transactions involving the same person or entity (including persons
or entities the Company has reason to believe are affiliated therewith) shall be
aggregated for the purpose of meeting the individual minimum dollar amounts of
such subsections.
(e) The Company is not a party to and is not bound by any contract,
agreement or instrument, or subject to any restriction under its Certificate of
Incorporation or Bylaws, which adversely affects its business as now conducted
or as proposed to be conducted, its assets, properties or financial condition.
(f) Since inception the Company has not engaged in any discussion
(i) with any representative of any corporation or corporations regarding the
consolidation or merger of the Company with or into any such corporation or
corporations, (ii) with any corporation, partnership, association or other
business entity or any individual regarding the sale, conveyance or disposition
of all or substantially all of the assets of the Company of a transaction or
series of related transactions in which more than fifty percent (50%) of the
voting power of the Company is disposed of, or (iii) regarding any other form of
acquisition, liquidation, dissolution or winding up of the Company.
2.13 RELATED-PARTY TRANSACTIONS. No employee, officer, or
director of the Company or member of his or her immediate family is indebted to
the Company, nor is the Company indebted (or committed to make loans or extend
or guarantee credit) to any of them. To the best of the Company's knowledge,
none of such persons has any direct or indirect ownership interest in any firm
or corporation with which the Company is affiliated or with which the Company
has a business relationship, or any firm or corporation that competes with the
Company, except that employees, officers, or directors of the Company and
members of their immediate families may own less than 1% of the stock in
publicly traded companies that may compete with the Company. No member of the
immediate family of any officer or director of the Company is directly or
indirectly interested in any material contract with the Company.
2.14 PERMITS. The Company has all franchises, permits, licenses,
and any similar authority necessary for the conduct of its business as now being
conducted by it, the lack of which could materially and adversely affect the
business, properties, prospects, or financial condition of the Company
5.
<PAGE>
and believes it can obtain, without undue burden or expense, any similar
authority for the conduct of its business as planned to be conducted. The
Company is not in default in any material respect under any of such franchises,
permits, licenses, or other similar authority.
2.15 ENVIRONMENTAL AND SAFETY LAWS. The Company is not in
violation of any applicable statute, law, or regulation relating to the
environment, storage of hazardous substances or occupational health and safety,
the violation of which might result in a material adverse change in the assets,
conditions or affairs of the Company, and to the best of its knowledge, no
material expenditures are or will be required in order to comply with any such
existing statute, law, or regulation.
2.16 MANUFACTURING AND MARKETING RIGHTS. The Company has not
granted rights to manufacture, produce, assemble, license, market, or sell its
products to any other person and is not bound by any agreement that affects the
Company's exclusive right to develop, manufacture, assemble, distribute, market,
or sell its products. No supplier of components to the Company is a sole source
of such components, except for those components that can be obtained from
another supplier at substantially the same cost and quantities in a similar time
frame.
2.17 DISCLOSURE. The Company has fully provided each Investor
with all the information which such Investor has requested for deciding whether
to purchase the Series E Preferred Stock and all information which the Company
believes is reasonably necessary to enable such Investor to make such decision.
Neither this Agreement nor any other statement or certificate made or delivered
in connection herewith or therewith contains any untrue statement of a material
fact or omits (when taken as a whole) to state a material fact necessary to make
the statements herein or therein not misleading in view of the circumstances
under which they were made.
2.18 BUSINESS PLAN. The Business Plan has been prepared in good
faith by the Company and does not contain any untrue statement of a material
fact nor does it omit to state a material fact necessary to make the statements
made therein not misleading, except that with respect to projections contained
in the Business Plan, the Company represents only that such projections were
prepared in good faith and that the Company reasonably believes there is a
reasonable basis for such projections.
2.19 INSURANCE. The Company has in full force and effect fire
and casualty insurance policies, with extended coverage, sufficient in amount
(subject to reasonable deductibles) to allow it to replace any of its properties
that might be damaged or destroyed. The Company has in full force and effect
products liability and errors and omissions insurance in amounts customary for
companies similarly situated.
2.20 REAL PROPERTY HOLDING COMPANY. The Company is not a real
property holding company within the meaning of Internal Revenue Code Section
897.
2.21 TITLE TO PROPERTY AND ASSETS. The Company owns its property
and assets free and clear of all mortgages, liens, loans and encumbrances,
except such encumbrances and liens which arise in the ordinary course of
business and do not materially impair the Company's ownership or use of such
property or assets. With respect to the property and assets it leases, the
Company is in compliance with such leases and, to the best of its knowledge,
holds a valid leasehold interest free of any liens, claims or encumbrances.
2.22 LABOR AGREEMENTS AND ACTIONS. The Company is not bound by or
subject to (and none of its assets or properties is bound by or subject to) any
written or oral, express or implied, contract, commitment or arrangement with
any labor union, and no labor union has requested or, to the knowledge of the
Company, has sought to represent any of the employees, representatives or agents
of the Company. There is no strike or other labor dispute involving the Company
pending, or to the knowledge of the Company threatened, which could have a
material adverse effect on the assets, properties, financial
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condition, operating results, or business of the Company (as such business is
presently conducted and as it is proposed to be conducted), nor is the Company
aware of any labor organization activity involving its employees. The Company
is not aware that any officer or key employee, or that any group of key
employees, intends to terminate their employment with the Company, nor does the
Company have a present intention to terminate the employment of any of the
foregoing. Subject to general principles related to wrongful termination of
employees, the employment of each officer and employee of the Company is
terminable at the will of the Company.
2.23 FINANCIAL STATEMENTS. The Company has delivered to each
Investor a copy of its audited balance sheet and profit and loss statement as of
and for the year ended December 31, 1994 and its unaudited balance sheet and
profit and loss statement as of and for the six months ended June 30, 1995
(collectively, the "Financial Statements"). The Financial Statements are
complete and correct in all material respects and have been prepared in
accordance with generally accepted accounting principles applied on a consistent
basis throughout the periods indicated and with each other, except that the
Financial Statements may not contain all footnotes required by generally
accepted accounting principles. The Financial Statements accurately set out and
describe the financial condition and operating results of the Company as of the
dates, and for the periods, indicated therein, subject to normal year-end audit
adjustments. Except as set forth in the Financial Statements, the Company has
no liabilities, contingent or otherwise, other than (i) liabilities incurred in
the ordinary course of business subsequent to June 30, 1995 and (ii) obligations
under contracts and commitments incurred in the ordinary course of business and
not required under generally accepted accounting principles to be reflected in
the Financial Statements, which, in both cases, individually or in the
aggregate, are not material to the financial condition or operating results of
the Company. The Company maintains and will continue to maintain a standard
system of accounting established and administered in accordance with generally
accepted accounting principles and has retained KPMG Peat Marwick, independent
certified public accountants, for the fiscal year ended December 31, 1995 to
audit the financial statements for such fiscal year.
2.24 CHANGES. Since June 30, 1995 there has not been:
(a) any change in the assets, liabilities, financial condition or
operating results of the Company from that reflected in the Financial
Statements, except changes in the ordinary course of business which have not
been, in the aggregate, materially adverse;
(b) any damage, destruction or loss, whether or not covered by
insurance, materially and adversely affecting the assets, properties, financial
condition, operating results or business of the Company;
(c) any waiver by the Company of a valuable right or of a material
debt owed to it;
(d) any satisfaction or discharge of any lien, claim or encumbrance
or payment of any obligation by the Company, except in the ordinary course of
business and which is not material to the assets, properties, financial
condition, operating results or business of the Company;
(e) any change or amendment to a material contract or arrangement by
which the Company or any of its assets or properties is bound or subject;
(f) any material change in any compensation arrangement or agreement
with any employee; or
(g) to the Company's knowledge, any other event or condition of any
character which might materially and adversely affect the assets, properties,
financial condition, operating results or business of the Company.
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2.25 EMPLOYEE BENEFIT PLANS. The Company does not have any
Employee Benefit Plan as defined in the Employee Retirement Income Security Act
of 1974.
2.26 TAX RETURNS, PAYMENTS AND ELECTIONS. The Company has
filed all tax returns and reports as required by law. These returns and reports
are true and correct in all material respects. The Company has paid all taxes
and other assessments due, except those contested by it in good faith which are
listed in the Schedule of Exceptions. The provision for taxes of the Company as
shown in the Financial Statements is adequate for taxes due or accrued as of the
date thereof. The Company has not elected pursuant to the Internal Revenue Code
of 1986, as amended ("Code"), to be treated as a Subchapter S corporation or a
collapsible corporation pursuant to Section 341(f) or Section 1362(a) of the
Code, nor has it made any other elections pursuant to the Code (other than
elections which relate solely to methods of accounting, depreciation or
amortization) which would have a material effect on the Company, its financial
condition, its business as presently conducted or proposed to be conducted or
any of its properties or material assets.
2.27 MINUTE BOOKS. The minute books of the Company provided to
counsel for the Investors contain a complete summary of all meetings of
directors and stockholders since the time of incorporation and reflect all
transactions referred to in such minutes accurately in all material respects.
2.28 REGISTRATION RIGHTS. The Company is under no obligation
to register with the Securities and Exchange Commission any of its securities
except as set forth in Section 7 of this Agreement.
3. REPRESENTATIONS AND WARRANTIES OF THE INVESTOR. Each
Investor hereby represents and warrants that:
3.1 AUTHORIZATION. This Agreement constitutes its valid and
legally binding obligation, enforceable in accordance with its terms.
3.2 PURCHASE ENTIRELY FOR OWN ACCOUNT. This Agreement is made
with each Investor in reliance upon such Investor's representation to the
Company, which by such Investor's execution of this Agreement such Investor
hereby confirms, that the Series E Preferred Stock to be received by such
Investor, the Series E-1 Preferred Stock and the Common Stock issuable upon
conversion thereof (collectively, the "Securities") will be acquired for
investment for such Investor's own account, not as a nominee or agent, and not
with a view to the resale or distribution of any part thereof, and that such
Investor has no present intention of selling, granting any participation in, or
otherwise distributing the same. By executing this Agreement, each Investor
further represents that such Investor does not have any contract, undertaking,
agreement or arrangement with any person to sell, transfer or grant
participations to such person or to any third person, with respect to any of the
Securities. Each investor represents that it has full power and authority to
enter into this Agreement.
3.3 DISCLOSURE OF INFORMATION. Each Investor believes it has
received all the information such Investor considers necessary or appropriate
for deciding whether to purchase the Series E Preferred Stock. Each Investor
further represents that it has had an opportunity to ask questions and receive
answers from the Company regarding the terms and conditions of the offering of
the Series E Preferred Stock. The foregoing, however, does not limit or modify
the representations and warranties of the Company in Section 2 of this Agreement
or the right of the Investors to rely thereon.
3.4 INVESTMENT EXPERIENCE. Each Investor has previously
invested in securities of companies in the development stage and acknowledges
that it is able to fend for itself, can bear the economic risk of its investment
and has such knowledge and experience in financial or business matters that it
is capable of evaluating the merits and risks of the investment in the Series E
Preferred Stock. If other than an individual, Investor also represents it has
not been organized for the purpose of acquiring the
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Series E Preferred Stock unless all of the equity owners of such Investor are
"accredited investors" within the meaning of SEC Rule 501 of Regulation D, as
presently in effect.
3.5 ACCREDITED INVESTOR. Each Investor is an "accredited
investor" within the meaning of SEC Rule 501 of Regulation D, as presently in
effect.
3.6 RESTRICTED SECURITIES. It understands that the shares of
Series E Preferred Stock it is purchasing are characterized as "restricted
securities" under the federal securities laws inasmuch as they are being
acquired from the Company in a transaction not involving a public offering and
that under such laws and applicable regulations such securities may be resold
without registration under the Securities Act of 1933, as amended (the "Act"),
only in certain limited circumstances. In this connection, each Investor
represents that it is familiar with SEC Rule 144, as presently in effect, and
understands the resale limitations imposed thereby and by the Act.
3.7 FURTHER LIMITATIONS ON DISPOSITION. Without in any way
limiting the representations set forth above, each Investor further agrees not
to make any disposition of all or any portion of the Series E Preferred Stock
(or the Series E-1 Preferred Stock or the Common Stock issuable upon the
conversion thereof) unless and until the transferee has agreed in writing for
the benefit of the Company to be bound by this Agreement, and:
(a) There is then in effect a Registration Statement under the Act
covering such proposed disposition and such disposition is made in accordance
with such Registration Statement; or
(b)(i) Such Investor shall have notified the Company of the
proposed disposition and shall have furnished the Company with a detailed
statement of the circumstances surrounding the proposed disposition, and (ii) if
reasonably requested by the Company, such Investor shall have furnished the
Company with an opinion of counsel, reasonably satisfactory to the Company, that
such disposition will not require registration of such shares under the Act. It
is agreed that the Company will not require opinions of counsel for transactions
made pursuant to Rule 144 except in unusual circumstances.
3.8 LEGENDS. It is understood that the certificates evidencing
the Series E Preferred Stock (and the Series E-1 Preferred Stock or the Common
Stock issuable upon conversion thereof) may bear one or all of the following
legends:
(a) "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN
THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES
UNDER SUCH ACT OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY
THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE 144 OF
SUCH ACT."
(b) "A STATEMENT OF ALL THE DESIGNATIONS, PREFERENCES, RIGHTS AND
QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS GRANTED TO OR IMPOSED UPON THE
RESPECTIVE CLASSES AND/OR SERIES OF SHARES OF STOCK OF THE COMPANY AND UPON THE
HOLDERS THEREOF MAY BE OBTAINED BY ANY STOCKHOLDER UPON REQUEST AND WITHOUT
CHARGE, AT THE PRINCIPAL OFFICE OF THE COMPANY."
(c) "THE SHARES EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO THE
TERMS AND CONDITIONS OF A CERTAIN STOCK PURCHASE AGREEMENT WHICH INCLUDES A
MARKET STAND-OFF AGREEMENT. COPIES OF THE AGREEMENT MAY BE OBTAINED UPON
WRITTEN REQUEST TO THE COMPANY'S SECRETARY."
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(d) "THE SHARES EVIDENCED HEREBY ARE SUBJECT TO A VOTING AGREEMENT (A
COPY OF WHICH MAY BE OBTAINED FROM THE ISSUER) AND BY ACCEPTING ANY INTEREST IN
SUCH SHARES THE PERSON ACQUIRING SUCH INTEREST SHALL BE DEEMED TO AGREE TO AND
SHALL BECOME BOUND BY ALL THE PROVISIONS OF SAID VOTING AGREEMENT."
(e) Any legends required by the laws of the State of California.
4. CALIFORNIA COMMISSIONER OF CORPORATIONS.
4.1 CORPORATE SECURITIES LAW. THE SALE OF THE SECURITIES
WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE
COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH
SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION FOR SUCH
SECURITIES PRIOR TO SUCH QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF
SECURITIES IS EXEMPT FROM QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF THE
CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE
EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS
SO EXEMPT.
5. CONDITIONS OF INVESTOR'S OBLIGATIONS AT CLOSING. The
obligations of each Investor under subsection 1.1(b) of this Agreement are
subject to the fulfillment on or before the Closing of each of the following
conditions, the waiver of which shall not be effective against any Investor who
does not consent thereto:
5.1 REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Company contained in Section 2 shall be true on and as of the
Closing with the same effect as though such representations and warranties had
been made on and as of the date of such Closing.
5.2 PERFORMANCE. The Company shall have PERFORMED and complied
with all agreements, obligations and conditions contained in this Agreement that
are required to be performed or complied with by it on or before the Closing.
5.3 COMPLIANCE CERTIFICATE. The President of the Company shall
deliver to each Investor at the Closing a certificate certifying that the
conditions specified in Sections 5.1 and 5.2 have been fulfilled and stating
that there shall have been no adverse change in the business, affairs,
operations, properties, assets or condition of the Company since June 30, 1995.
5.4 QUALIFICATIONS. The Commissioner of Corporations of the
State of California shall have issued a permit qualifying the offer and sale of
the Series E Preferred Stock and the underlying Series E-1 Preferred Stock and
Common Stock to the Investors pursuant to this Agreement, or such offer and sale
shall be exempt from such qualification under the California Corporate
Securities Law of 1968, as amended.
5.5 PROCEEDINGS AND DOCUMENTS. All corporate and other
proceedings in connection with the transactions contemplated at the Closing and
all documents incident thereto shall be reasonably satisfactory in form and
substance to Investors' counsel, and they shall have received all such
counterpart original and certified or other copies of such documents as they may
reasonably request.
5.6 PROPRIETARY INFORMATION AGREEMENTS. Each employee of the
Company shall have entered into a Proprietary Information and Inventions
Agreement in the form attached hereto as EXHIBIT D.
5.7 BYLAWS. The Bylaws of the Company shall provide that the
Board of Directors of the Company shall consist of five (5) persons which number
shall not be changed by an amendment to the
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Certificate of Incorporation or the Bylaws without consent of a majority of the
outstanding Preferred Stock voting together as one class.
5.8 BOARD OF DIRECTORS. The directors of the Company shall be
Donald Green, B.J. Cassin, Clifford Higgerson, Dan Rasdal and Brian Jackman.
5.9 OPINION OF COMPANY COUNSEL. Each Investor shall have
received from Brobeck, Phleger & Harrison, counsel for the Company, an opinion,
dated as of the Closing, in form and substance satisfactory to counsel to the
Investors, to the effect that:
(a) The Company is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware, and the Company has
the requisite corporate power and authority to own its properties and to conduct
its business.
(b) The Company is qualified to do business as a foreign corporation
in any state or jurisdiction of the United States where its failure to do so
would have a materially adverse effect on its business or properties.
(c) The Company has the requisite corporate power and authority to
execute, deliver and perform this Agreement and the Indemnity Agreement. This
Agreement and the Indemnity Agreement have been duly and validly authorized by
the Company, duly executed and delivered by an authorized officer of the Company
and constitute legal, valid and binding obligations of the Company, enforceable
against the Company according to their respective terms; provided that
enforceability of the Indemnity Agreement and the indemnity obligations of
Section 7.10 of this Agreement may be limited by public policy.
(d) The capitalization of the Company is as follows:
(i) PREFERRED STOCK. Seventeen Million Six Hundred
Seventy Two Thousand Nine Hundred Eight (17,672,908) shares of Preferred Stock,
of which Four Million Fifty Six Thousand Forty Four (4,056,044) shares have been
designated Series A Preferred Stock, Two Million Five Hundred Fifty Six Thousand
Forty Four (2,556,044) shares of which were purchased pursuant to the First
Series A Agreement and One Million Five Hundred Thousand (1,500,000) shares of
which were purchased pursuant to the Second Series A Agreement; Four Million
Fifty Six Thousand and Forty Four (4,056,044) shares have been designated
Series A-1 Preferred Stock, none of which are outstanding; One Million Twenty
Thousand Four Hundred Ten (1,020,410) shares have been designated Series B
Preferred Stock, all of which were purchased pursuant to the Series B Agreement;
One Million Twenty Thousand Four Hundred Ten (1,020,410) shares have been
designated Series B-1 Preferred Stock, none of which are outstanding; One
Million Six Hundred Thousand (1,600,000) shares have been designated Series C
Preferred Stock, all of which were issued and sold pursuant to the Series C
Agreement; One Million Six Hundred Thousand (1,600,000) shares have been
designated Series C-1 Preferred Stock, none of which are outstanding; One
Million Forty Thousand (1,040,000) shares have been designated Series D
Preferred Stock, all of which were issued and sold pursuant to Series D
Agreement; One Million Forty Thousand (1,040,000) shares have been designated
Series D-1 Preferred Stock, none of which are outstanding; One Million One
Hundred Twenty Thousand (1,120,000) shares have been designated Series E
Preferred Stock, up to One Million Ninety Six Thousand Seven Hundred Seventy Two
(1,096,772) of which shall be issued and sold pursuant to this Agreement; and
One Million One Hundred Twenty Thousand (1,120,000) shares have been designated
Series E-1 Preferred Stock, none of which are outstanding. The shares of
Series A Preferred Stock issued and purchased pursuant to the First Series A
Agreement and the Second Series A Agreement, the shares of Series B Preferred
Stock issued and purchased pursuant to the Series B Agreement, the shares of
Series C Preferred Stock issued and purchased pursuant to the Series C
Agreement, the shares of Series D Preferred Stock issued and purchased pursuant
to the Series D Agreement and the shares of Series E Preferred Stock issued
hereunder have been duly authorized, issued and delivered, are validly
outstanding, fully paid and
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nonassessable, and have been approved by all requisite stockholder action. The
respective rights, privileges and preferences of the Preferred Stock and the
Shadow Preferred Stock are as stated in the Company's Certificate of
Incorporation, attached as EXHIBIT A to this Agreement. The Series A-1
Preferred Stock and the Common Stock issuable upon the conversion of the
Series A Preferred Stock purchased under the First Series A Agreement and the
Second Series A Agreement, the Series B-1 Preferred Stock and the Common Stock
issuable upon the conversion of the Series B Preferred Stock purchased under the
Series B Agreement, the Series C-1 Preferred Stock and the Common Stock issuable
upon conversion of the Series C Stock purchased under the Series C Agreement,
the Series D-1 Preferred Stock and the Common Stock issuable upon conversion of
the Series D Stock purchased under the Series D Agreement, and the Series E-1
Preferred Stock and the Common Stock issuable upon conversion of the Series E
Stock purchased under this Agreement have been duly and validly reserved for
issuance and, when issued in accordance with the Company's Certificate of
Incorporation, will be validly issued, fully paid and nonassessable.
(ii) COMMON STOCK. Forty Two Million Three Hundred Twenty
Seven Thousand Ninety Two (42,327,092) shares of Common Stock, of which Two
Million Five Hundred Seven Thousand Three Hundred Sixty Four (2,507,364) shares
are validly outstanding, fully paid and nonassessable and were issued in
compliance with all applicable federal and state laws regarding the registration
or qualification of securities.
(iii) Except for (A) the Warrants, (B) the conversion privileges
of the Preferred Stock, (C) the rights of first offer set forth in Section 8.6
hereof and Section 8.7 of the First Series A Agreement, the Second Series A
Agreement, the Series B Agreement, the Series C Agreement and the Series D
Agreement, (D) options to purchase up to 1,655,590 shares of Common Stock
granted under the Company's Stock Option Plan and (E) the rights of certain
stockholders to receive additional shares of Series E Preferred Stock under the
terms of the Indemnity Agreement in the form attached hereto as EXHIBIT E, there
are no preemptive rights or, to the best of counsel's knowledge, options,
warrants, conversion privileges or other rights (or agreements for any such
rights) outstanding to purchase or otherwise obtain any of the Company's
securities.
(e) The execution, delivery, performance and compliance with the
terms of this Agreement and the Indemnity Agreement do not violate any provision
of any applicable federal, state or, to the best of such counsel's knowledge,
local law, rule or regulation or any provision of the Company's Certificate of
Incorporation or Bylaws and does not conflict with or constitute a default under
the provision of any judgment, writ, decree or order specifically identified in
the Schedule of Exceptions or the material provisions of any material agreement
specifically identified in the Schedule of Exceptions to which the Company is a
party or by which it is bound.
(f) All consents, approvals, orders or authorizations of, and all
qualifications, registrations, designations, declarations or filings with, any
federal or California state governmental authority on the part of the Company
required in connection with the consummation of the transactions contemplated by
this Agreement and the Indemnity Agreement have been obtained, and are
effective, as of the Closing or will be obtained and made after the Closing in
accordance with the requirements of such federal or state governmental authority
and such counsel is not aware of any proceedings, or threat thereof, which
question the validity thereof.
(g) Based in part upon the representations of the Investors, the
offer and sale of the Series E Preferred Stock to the Investors pursuant to the
terms of this Agreement are exempt from the registration requirements of
Section 5 of the Securities Act of 1933, as amended, by virtue of Section 4(2)
thereof and from the qualification requirements of the California Corporate
Securities Law of 1968, as amended, by virtue of Section 25102(f) thereof, and,
under such securities laws as they presently exist, the
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issuance of Series E-1 Preferred Stock and Common Stock upon conversion of the
Series E Preferred Stock would also be exempt from such registration and
qualification requirements.
(h) Such counsel is not aware that there is any action, proceeding or
investigation pending against the Company or any of its officers, directors or
employees, or that any of the foregoing has received any threat thereof, which
questions the validity of the Agreement or the right of the Company or its
officers, directors and employees to enter into such agreement or which might
result, either individually or in the aggregate, in any material adverse change
in the assets, condition or affairs of the Company, nor is such counsel aware of
any litigation pending, against the Company or any of its officers, directors or
employees, or that any of the foregoing has received any threat thereof, by
reason of the proposed activities of the Company, the past employment
relationships of its officers, directors or employees, which might result,
either individually or in the aggregate, in a material adverse change in the
assets, condition or affairs of the Company.
(i) Neither the Certificate of Incorporation nor the Bylaws of the
Company is in violation of any provision of the General Corporation Law of the
State of Delaware.
5.10 INDEMNITY AGREEMENT. The Company and Donald Green shall
have entered into the Indemnity Agreement in the form attached hereto as
EXHIBIT E.
5.11 CERTIFICATE OF THE SECRETARY OF THE COMPANY. The Secretary
of the Company shall deliver to each Investor at the Closing a certificate
certifying that the Certificate of Incorporation and the Bylaws attached thereto
are true and complete copies of the Certificate of Incorporation and the Bylaws
of the Company as in effect.
6. CONDITIONS OF THE COMPANY'S OBLIGATIONS AT CLOSING. The
obligations of the Company to each Investor under this Agreement are subject to
the fulfillment on or before the Closing of each of the following conditions by
that Investor:
6.1 REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Investor contained in Section 3 shall be true on and as of the
Closing with the same effect as though such representations and warranties had
been made on and as of the Closing.
6.2 PAYMENT OF PURCHASE PRICE. The Investor shall have
delivered the purchase price specified in Section 1.2.
6.3 CALIFORNIA QUALIFICATION. The Commissioner of
Corporations of the State of California shall have issued a permit qualifying
the offer and sale to the Investor of the Series E Preferred Stock and the
Common Stock issuable upon the conversion thereof or such offer and sale shall
be exempt from such qualification under the California Corporate Securities Law
of 1968, as amended.
7. REGISTRATION RIGHTS. The Company covenants and agrees as
follows:
7.1 DEFINITIONS. For purposes of this Section 7:
(a) The term "register", "registered," and "registration" refer to a
registration effected by preparing and filing a registration statement or
similar document in compliance with the Act, and the declaration or ordering of
effectiveness of such registration statement or document;
(b) The term "Registrable Securities" means (1) the Common Stock
issuable or issued upon conversion of any shares of the Company's Preferred
Stock or Shadow Preferred Stock; (2) any Common Stock of the Company issued as
(or issuable upon the conversion or exercise of any warrant, right
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or other security which is issued as) a dividend or other distribution with
respect to, or in exchange for or in replacement of, such Preferred Stock,
Shadow Preferred Stock or Common Stock; and (3) any Common Stock issuable or
issued upon exercise of the Warrants, excluding in all cases, however, any
Registrable Securities sold by a person in a transaction in which his/her rights
under this Section 7 are not assigned;
(c) The number of shares of "Registrable Securities then outstanding"
shall be determined by the number of shares of Common Stock outstanding which
are, and the number of shares of Common Stock issuable pursuant to then
exercisable or convertible securities which are, Registrable Securities;
(d) The term "Holder" means any person owning or having the right to
acquire Registrable Securities or any assignee thereof in accordance with
Section 7.13 hereof; and
(e) The term "Form S-3" means such form under the Act as in effect on
the date hereof or any comparable or successor form under the Act subsequently
adopted by the Securities and Exchange Commission ("SEC") which permits
inclusion or incorporation of substantial information by reference to other
documents filed by the Company with the SEC.
7.2 REQUEST FOR REGISTRATION.
(a) If the Company shall receive at any time after January 1, 1997, a
written request from the Holders of at least fifty percent (50%) of the
Registrable Securities then outstanding that the Company file a registration
statement under the Act covering the registration of Registrable Securities
having an anticipated aggregate offering price (net of discounts and
commissions) of at least five million dollars ($5,000,000), then the Company
shall, within ten (10) days of the receipt thereof, give written notice of such
request to all Holders and shall, subject to the limitations of subsection
7.2(b), effect as soon as practicable, and in any event shall use its best
efforts to effect within ninety (90) days of the receipt of such request, the
registration under the Act of all Registrable Securities which the Holders
request to be registered within twenty (20) days of the mailing of such notice
by the Company in accordance with Section 9.6.
(b) If the Holders initiating the registration request hereunder
("Initiating Holders") intend to distribute the Registrable Securities covered
by their request by means of an underwriting, they shall so advise the Company
as a part of their request made pursuant to this Section 7.2 and the Company
shall include such information in the written notice referred to in subsection
7.2(a). The underwriter will be selected by the Company and shall be reasonably
acceptable to a majority in interest of the Initiating Holders. In such event,
the right of any Holder to include his/her Registrable Securities in such
registration shall be conditioned upon such Holder's participation in such
underwriting and the inclusion of such Holder's Registrable Securities in the
underwriting (unless otherwise mutually agreed by a majority in interest of the
Initiating Holders and such Holder) to the extent provided herein. Holders
proposing to distribute their securities through such underwriting shall
(together with the Company as provided in subsection 7.4(e)) enter into an
underwriting agreement in customary form with the underwriter or underwriters
selected for such underwriting by the Company and reasonably acceptable to a
majority in interest of the Initiating Holders. Notwithstanding any other
provision of this Section 7.2, if the underwriter advises the Initiating Holders
in writing that marketing factors require a limitation of the number of shares
to be underwritten, the Initiating Holders shall so advise all Holders of
Registrable Securities which would otherwise be underwritten pursuant hereto,
and the number of shares of Registrable Securities that may be included in the
underwriting shall be allocated among all Holders thereof, including the
Initiating Holders, in proportion (as nearly as practicable) to the amount of
Registrable Securities of the Company owned by each Holder; provided, however,
that the number of shares of Registrable Securities to be included in such
underwriting shall not be reduced unless all other securities are first entirely
excluded from the underwriting.
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(c) The Company is obligated to effect only one (1) such registration
pursuant to this Section 7.2. Notwithstanding the foregoing, if Form S-3 is
available for the offering of Registrable Securities requested by the Holders,
then the demand right contained in this Section 7.2 shall not be available, and
the Holders must proceed with the demand rights, if any, contained in Section
7.12.
(d) Notwithstanding the foregoing, if the Company shall furnish to
Holders requesting a registration statement pursuant to this Section 7.2 a
certificate signed by the President of the Company stating that in the good
faith judgment of the Board of Directors of the Company, it would be seriously
detrimental to the Company and its stockholders for such registration statement
to be filed and it is therefore essential to defer the filing of such
registration statement, the Company shall have the right to defer such filing
for a period of not more than ninety (90) days after receipt of the request of
the Initiating Holders; provided, however, that the Company may not utilize this
right more than once in any twelve (12)-month period.
(e) Notwithstanding the foregoing, if at the time of any request to
register Registrable Securities pursuant to this Section 7.2 the Company is
engaged in, or has fixed plans to file a registration statement within sixty
(60) days of the time of the request for, a registered public offering, other
than a registration statement on Form S-8 or other comparable form, then the
Company may at its option direct that such request be delayed for a period not
in excess of six (6) months from the effective date of such registered offering.
7.3 COMPANY REGISTRATION. If (but without any obligation to
do so under this Agreement) the Company proposes to register any of its stock or
other securities under the Act in connection with the public offering of such
securities solely for cash (other than a registration relating solely to the
sale of securities to participants in a Company stock plan, or a registration on
any form which does not include substantially the same information as would be
required to be included in a registration statement covering the sale of the
Registrable securities), the Company shall, at such time, promptly give each
Holder written notice of such registration. Upon the written request of each
Holder given within twenty (20) days after mailing of such notice by the Company
in accordance with Section 9.6, the Company shall, subject to the provisions of
Section 7.8, cause to be registered under the Act all of the Registrable
Securities that each such Holder has requested to be registered.
7.4 OBLIGATIONS OF THE COMPANY. Whenever required under this
Section 7 to effect the registration of any Registrable securities, the Company
shall, as expeditiously as reasonably possible:
(a) Prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use its best efforts to cause such
registration statement to become effective, and, upon the request of the Holders
of a majority of the Registrable Securities registered thereunder, keep such
registration statement effective for up to ninety (90) days.
(b) Prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
Act with respect to the disposition of all securities covered by such
registration statement.
(c) Furnish to the Holders such numbers of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of the
Act, and such other documents as they may reasonably request in order to
facilitate the disposition of Registrable Securities owned by them.
(d) Use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or blue sky
laws of such jurisdictions as shall be reasonably requested by the Holders,
provided that the Company shall not be required in connection therewith or as a
condition
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thereto to qualify to do business or to file a general consent to service of
process in any such states or jurisdictions.
(e) In the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement, in usual and customary
form, with the managing underwriter of such offering. Each Holder participating
in such underwriting shall also enter into and perform its obligations under
such an agreement.
(f) Notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Act of the happening of any event as a result
of which the prospectus included in such registration statement, as then in
effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing.
(g) At the request of any such Holder (i) furnish to such Holder on
the effective date of the registration statement or, if such registration
includes an underwritten public offering, at the closing provided for in the
underwriting agreement, an opinion, dated such date, of the counsel representing
the Company for the purposes of such registration, addressed to the
underwriters, if any, and to the Holder or Holders making such request, covering
such matters with respect to the registration statement, the prospectus and each
amendment or supplement thereto, proceedings under state and federal securities
laws, other matters relating to the Company, the securities being registered and
the offer and sale of such securities as are customarily the subject of opinions
of issuer's counsel provided to underwriters in underwritten public offerings,
and (ii) use its best effort to furnish to such Holder letters dated each such
effective date and such closing date, from the independent certified public
accountants of the Company, addressed to the underwriters, if any, and to the
Holder or Holders making such request, stating that they are independent
certified public accountants within the meaning of the Act and dealing with such
matters as the underwriters may request, or, if the offering is not
underwritten, that in the opinion of such accountants the financial statements
and other financial data of the Company included in the registration statement
or the prospectus or any amendment or supplement thereto comply in all material
respects with the applicable accounting requirements of the Act, and
additionally covering such other financial matters, including information as to
the period ending not more than five (5) business days prior to the date of such
letter with respect to the registration statement and prospectus, as such
requesting Holder or Holders may reasonably request.
7.5 FURNISH INFORMATION.
(a) It shall be a condition precedent to the obligations of the
Company to take any action pursuant to this Section 7 with respect to the
Registrable Securities of any selling Holder that such Holder shall furnish to
the Company such information regarding itself, the Registrable Securities held
by it, and the intended method of disposition of such securities as shall be
required to effect the registration of such Holder's Registrable Securities.
(b) The Company shall have no obligation with respect to any
registration requested pursuant to Section 7.2 or Section 7.12 if, due to the
failure of sufficient Holders to satisfy the condition precedent set forth in
subsection 7.5(a), the number of shares or the anticipated aggregate offering
price of the Registrable Securities to be included in the registration does not
equal or exceed the number of shares or the anticipated aggregate offering price
required to originally trigger the Company's obligation to initiate such
registration as specified in subsection 7.2(a) or subsection 7.12(b)(2),
whichever is applicable.
7.6 EXPENSES OF DEMAND REGISTRATION. All expenses, other than
underwriting discounts and commissions incurred in connection with
registrations, filings or qualifications pursuant to Section 7.2, including
(without limitation) all registration, filing and qualification fees, printer's
and accounting
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fees, and fees and disbursements of counsel for the Company and the reasonable
fees and disbursements of one (but only one) counsel for all the selling
Holders, shall be borne by the Company; provided, however, that the Company
shall not be required to pay for any expenses of any registration proceeding
begun pursuant to Section 7.2 if the registration request is subsequently
withdrawn at the request of the Holders of a majority of the Registrable
Securities to be registered (in which case all participating Holders shall bear
such expenses), unless the Holders of a majority of the Registrable Securities
agree to forfeit their right to the one demand registration pursuant to
Section 7.2; provided further, however, that if at the time of such withdrawal,
the Holders have learned of a material adverse change in the condition or
business of the Company from that known to the Holders at the time of their
request and have withdrawn the request with reasonable promptness following
disclosure by the Company of such material adverse change, then the Holders
shall not be required to pay any of such expenses and shall retain their rights
pursuant to Section 7.2.
7.7 EXPENSES OF COMPANY REGISTRATION. The Company shall bear
and pay all expenses incurred in connection with any registration, filing or
qualification of Registrable Securities with respect to the registrations
pursuant to Section 7.3 for each Holder (which right may be assigned as provided
in Section 7.13), including (without limitation) all registration, filing, and
qualification fees, printer's and accounting fees relating or apportionable
thereto, and fees and disbursements of counsel for the Company, but excluding
the fees and disbursements of counsel for the selling Holders and underwriting
discounts and commissions relating to Registrable Securities.
7.8 UNDERWRITING REQUIREMENTS. In connection with any
offering involving an underwriting of shares of the Company's capital stock, the
Company shall not be required under Section 7.3 to include any of the Holders'
securities in such underwriting unless they accept the terms of the underwriting
as agreed upon between the Company and the underwriters selected by it (or by
other persons entitled to select the underwriters), and then only in such
quantity as will not, in the opinion of the underwriters, jeopardize the success
of the offering by the Company. If the total amount of securities, including
Registrable Securities, requested by stockholders to be included in such
offering exceeds the amount of securities sold other than by the Company that
the underwriters reasonably believe compatible with the success of the offering,
then the Company shall be required to include in the offering only that number
of such securities, including Registrable Securities, which the underwriters
believe will not jeopardize the success of the offering (the securities so
included to be apportioned pro-rata among the selling stockholders according to
the total amount of securities entitled to be included therein owned by each
selling stockholder or in such other proportions as shall mutually be agreed to
by such selling stockholders) but in no event shall the amount of securities of
the selling Holders included in the offering be reduced below twenty percent
(20%) of the total amount of securities included in such offering, unless such
offering is the initial public offering of the Company's securities in which
case the selling stockholders may be excluded if the underwriters make the
determination described above and no other stockholder's securities are
included. For purposes of the parenthetical in the preceding sentence
concerning apportionment, for any selling stockholder which is a Holder of
Registrable Securities and which is a partnership or corporation, the partners,
retired partners and stockholders of such Holder, or the estates and family
members of any such partners and retired partners and any trusts for the benefit
of any of the foregoing persons shall be deemed to be a single "selling
stockholder", and any pro-rata reduction with respect to such "selling
stockholder" shall be based upon the aggregate amount of shares carrying
registration rights owned by all entities and individuals included in such
"selling stockholder," as defined in this sentence.
7.9 DELAY OF REGISTRATION. No Holder shall have any right to
obtain or seek an injunction restraining or otherwise delaying any such
registration as the result of any controversy that might arise with respect to
the interpretation or implementation of this Section 7.
7.10 INDEMNIFICATION. In the event any Registrable Securities
are included in a registration statement under this Section 7:
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(a) To the extent permitted by law, the Company will indemnify and
hold harmless each Holder, any underwriter (as defined in the Act) for such
Holder and each person, if any, who controls such Holder or underwriter within
the meaning of the Act or the Securities Exchange Act of 1934, as amended (the
"1934 Act"), against any losses, claims, damages or liabilities (joint or
several) to which they may become subject under the Act or the 1934 Act or other
federal or state law, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any of the following
statements, omissions or violations (collectively a "Violation"): (i) any untrue
statement or alleged untrue statement of a material fact contained in such
registration statement, including any preliminary prospectus or final prospectus
contained therein or any amendments or supplements thereto, (ii) the omission or
alleged omission to state therein a material fact required to be stated therein,
or necessary to make the statements therein not misleading or (iii) any
violation or alleged violation by the Company of the Act, the 1934 Act, any
state securities law or any rule or regulation promulgated under the Act or the
1934 Act or any state securities law; and the Company will pay to each such
Holder, underwriter or controlling person, as incurred, any legal or other
expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability or action; provided, however,
that the indemnity agreement contained in this subsection 7.10(a) shall not
apply to amounts paid in settlement of any such loss, claim, damage, liability
or action if such settlement is effected without the consent of the Company
(which consent shall not be unreasonably withheld), nor shall the Company be
liable in any such case for any such loss, claim, damage, liability or action to
the extent that it arises out of or is based upon a Violation which occurs in
reliance upon and in conformity with written information furnished expressly for
use in connection with such registration by any such Holder, underwriter or
controlling person.
(b) To the extent permitted by law, each selling Holder will
indemnify and hold harmless the Company, each of its directors, each of its
officers who has signed the registration statement, each person, if any, who
controls the Company within the meaning of the Act, any underwriter, any other
Holder selling securities in such registration statement and any controlling
person of any such underwriter or other Holder, against any losses, claims,
damages or liabilities (joint or several) to which any of the foregoing persons
may become subject, under the Act or the 1934 Act or other federal or state law,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereto) arise out of or are based upon any Violation, in each case to the
extent (and only to the extent) that such Violation occurs in reliance upon and
in conformity with written information furnished by such Holder expressly for
use in connection with such registration; and each such Holder will pay, as
incurred, any legal or other expenses reasonably incurred by any person intended
to be indemnified pursuant to this subsection 7.10(b), in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided, however, that the indemnity agreement contained in this subsection
7.10(b) shall not apply to amounts paid in settlement of any such loss, claim,
damage, liability or action if such settlement is effected without the consent
of the Holder, which consent shall not be unreasonably withheld.
(c) Promptly after receipt by an indemnified party under this
Section 7.10 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 7.10, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party
(together with all other indemnified parties which may be represented without
conflict by one counsel) shall have the right to retain one separate counsel,
with the fees and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential differing
interests between such indemnified party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action, if prejudicial to its ability to defend such action, shall relieve such
indemnifying party to the extent of such prejudice of any liability to the
indemnified party under this
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Section 7.10, but the omission so to deliver written notice to the indemnifying
party will not relieve it of any liability that it may have to any indemnified
party otherwise than under this Section 7.10.
(d) No indemnifying party, in the defense of any claim arising out of
a Violation shall, except with the consent of each indemnified party, consent to
entry of any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
indemnified party of a release from all liability in respect to such claim or
litigation and, in the event the terms of such judgment or settlement include
any term other than the payment by the indemnifying party of money damages, the
indemnifying party shall not so consent or enter into such a settlement without
the consent of each indemnified party (which will not be unreasonably withheld)
whether or not the terms thereof include such a release.
(e) The obligations of the Company and Holders under this
Section 7.10 shall survive the completion of any offering of Registrable
Securities in a registration statement under this Section 7, and otherwise.
7.11 REPORTS UNDER SECURITIES EXCHANGE ACT OF 1934. With a
view to making available to the Holders the benefits of Rule 144 promulgated
under the Act and any other rule or regulation of the SEC that may at any time
permit a Holder to sell securities of the Company to the public without
registration or pursuant to a registration on Form S-3, the Company agrees to:
(a) make and keep public information available, as those terms are
understood and defined in SEC Rule 144, at all times after ninety (90) days
after the effective date of the first registration statement filed by the
Company for the offering of its securities to the general public;
(b) file with the SEC in a timely manner all reports and other
documents required of the Company under the Act and the 1934 Act; and
(c) furnish to any Holder, so long as the Holder owns any Registrable
Securities, forthwith upon request (i) a written statement by the Company that
it has complied with the reporting requirements of SEC Rule 144 (at any time
after ninety (90) days after the effective date of the first registration
statement filed by the Company), the Act and the 1934 Act (at any time after it
has become subject to such reporting requirements), or that it qualifies as a
registrant whose securities may be resold pursuant to Form S-3 (at any time
after it so qualifies), (ii) a copy of the most recent annual or quarterly
report of the Company and such other reports and documents so filed by the
Company, and (iii) such other information as may be reasonably requested in
availing any Holder of any rule or regulation of the SEC which permits the
selling of any such securities without registration or pursuant to such form.
7.12 FORM S-3 REGISTRATION. In case the Company shall receive
from the Holder or Holders of at least fifty percent (50%) of the Registrable
Securities, a written request or requests that the Company effect a registration
on Form S-3 and any related qualification or compliance with respect to all or a
part of the Registrable Securities owned by such Holder or Holders, the Company
will:
(a) promptly give written notice of the proposed registration, and
any related qualification or compliance, to all other Holders; and
(b) as soon as practicable, effect such registration and all such
qualifications and compliances as may be so requested and as would permit or
facilitate the sale and distribution of all or such portion of such Holder's or
Holders' Registrable Securities as are specified in such request, together with
all or such portion of the Registrable Securities of any other Holder or Holders
joining in such request as are specified in a written request given within
fifteen (15) days after receipt of such written notice from the Company;
provided, however, that the Company shall not be obligated to effect any such
registration,
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qualification or compliance, pursuant to this Section 7.12: (1) if Form S-3 is
not available for such offering by the Holders; (2) if the Holders, together
with the holders of any other securities of the Company entitled to inclusion in
such registration, propose to sell Registrable Securities and such other
securities (if any) at an aggregate price to the public of less than $500,000;
(3) if the Company shall furnish to the Holders a certificate signed by the
President of the Company stating that, in the good faith judgment of the Board
of Directors of the Company, it would be seriously detrimental to the Company
and its stockholders for such Form S-3 Registration to be effected at such time,
in which event the Company shall have the right to defer the filing of the
Form S-3 registration statement for a period of not more than ninety (90) days
after receipt of the request of the Holder or Holders under this Section 7.12;
provided, however, that the Company shall not utilize this right more than once
in any twelve (12) month period; (4) within six (6) months of the effective date
of any other registration statement relating to an underwritten public offering
filed by the Company with the SEC; (5) in any particular jurisdiction in which
the Company would be required to qualify to do business or to execute a general
consent to service of process in effecting such registration, qualification or
compliance; (6) more than twice in any twelve-month period, or (7) if the
Company has already effected three (3) registrations on Form S-3 for the Holders
pursuant to this Section 7.12.
(c) Subject to the foregoing, the Company shall file a registration
statement covering the Registrable Securities and other securities so requested
to be registered as soon as practicable after receipt of the request or requests
of the Holders. All expenses incurred in connection with any registration
requested pursuant to this Section 7.12, including (without limitation) all
registration, filing, qualification, printer's and accounting fees, and the
reasonable fees and disbursements up to $25,000 of one (but only one) counsel
for all the selling Holder or Holders, but excluding underwriting discounts and
commissions relating to Registrable Securities, shall be borne by the Company.
Registrations effected pursuant to this Section 7.12 shall not be counted as
demands for registration pursuant to Section 7.2.
7.13 ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause the
Company to register Registrable Securities pursuant to this Section 7 may be
assigned (but only with all related obligations) by a Holder to a transferee or
assignee of such securities who, after such assignment or transfer, holds (i) at
least 1% of the Registrable Securities then outstanding (subject to appropriate
adjustment for stock splits, stock dividends, combinations and other
recapitalizations), or (ii) all of the shares of Registrable Securities
initially issued to such Holder, provided that, within a reasonable time after
such transfer, the Company is furnished with written notice of the name and
address of such transferee or assignee and the securities with respect to which
such registration rights are being assigned; and provided, further, that such
assignment shall be effective only if immediately following such transfer the
further disposition of such securities by the transferee or assignee is
restricted under the Act. For the purposes of determining the number of shares
of Registrable Securities held by a transferee or assignee, the holdings of
transferees and assignees of a partnership who are partners or retired partners
of such partnership (including spouses and ancestors, lineal descendants and
siblings of such partners or spouses who acquire Registrable Securities by gift,
will or intestate succession) shall be aggregated together and with the
partnership; provided that all assignees and transferees who would not qualify
individually for assignment of registration rights shall have a single attorney-
in-fact for the purpose of exercising any rights, receiving notices or taking
any action under this Section 7.
7.14 "MARKET STAND-OFF" AGREEMENT. Each Investor hereby agrees
that during the period of duration specified by the Company and an underwriter
of common stock or other securities of the Company (not to exceed 180 days)
following the effective date of a registration statement of the Company filed
under the Act, it shall not, to the extent requested by the Company and such
underwriter, directly or indirectly sell, offer to sell, contract to sell
(including, without limitation, any short sale), grant any option to purchase or
otherwise transfer or dispose of (other than to donees who agree to be similarly
bound) any securities of the Company held by it at any time during such period
except common stock (or other securities) included in such registration;
provided, however, that:
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(a) such agreement shall be applicable only to the first such
registration statement effected by the Company which covers common stock (or
other securities) to be sold on its behalf to the public in an underwritten
offering; and
(b) all officers and directors of the Company, holders of more than
1% of the Company's outstanding capital stock (calculated on an as-converted
basis) and all other persons with registration rights (whether or not pursuant
to this Agreement) enter into similar agreements.
In order to enforce the foregoing covenant, the Company may impose
stop-transfer instructions with respect to the Registrable Securities of each
Investor (and the shares or securities of every other person subject to the
foregoing restriction) until the end of such period.
7.15 AMENDMENT OF REGISTRATION RIGHTS. Any provision of this
Section 7 may be amended and the observance thereof may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the Holders of
a majority of the Registrable Securities then outstanding. Any amendment or
waiver effected in accordance with this paragraph shall be binding upon each
Holder of any Registrable Securities then outstanding, each future holder of all
such Registrable Securities and the Company.
7.16 TERMINATION OF REGISTRATION RIGHTS. No Holder shall be
entitled to exercise any right provided for in this Section 7 if (i) such Holder
is eligible to sell, transfer or otherwise convey all of such Holder's
Registrable Securities pursuant to Rule 144 in any three-month period, or (ii)
after five years following the consummation of the sale of securities pursuant
to a registration statement filed by the Company under the Act in connection
with a firm commitment underwritten public offering of its securities, whichever
is earlier.
8. COVENANTS OF THE COMPANY.
8.1 DELIVERY OF FINANCIAL STATEMENTS.
(a) The Company shall furnish to each Investor who holds at least
300,000 shares of Preferred Stock (and/or the Common Stock issued upon
conversion thereof) (each a "Major Investor") as soon as practicable, but in any
event within ninety (90) days after the end of each fiscal year of the Company,
an income statement for such fiscal year, a balance sheet of the Company and
statement of stockholders' equity as of the end of such year, and a schedule as
to the sources and applications of funds for such year, such year-end financial
reports to be in reasonable detail, prepared in accordance with generally
accepted accounting principles ("GAAP"), and audited and certified by
independent public accountants of nationally recognized standing selected by the
Company.
(b) The Company shall deliver to each Major Investor as soon as
practicable, but in any event within forty-five (45) days after the end of each
of the first three (3) quarters of each fiscal year of the Company, an unaudited
income statement, schedule as to the sources and application of funds for such
fiscal quarter and an unaudited balance sheet as of the end of such fiscal
quarter.
(c) The Company shall furnish to each Major Investor as soon as
practicable, but in any event within thirty (30) days after the end of each
month, an unaudited income statement and balance sheet as of the end of such
month, in reasonable detail.
(d) The Company shall furnish to each Major Investor as soon as
practicable, but in any event thirty (30) days after the end of each fiscal
year, a budget and business plan for the next fiscal year.
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(e) Notwithstanding any provisions contained in this Section 8.1 to
the contrary, the Company shall not be obligated under this Section 8.1 to
provide information which it deems in good faith to be a trade secret or similar
confidential information.
8.2 INSPECTION. The Company shall permit each Major Investor,
at such Investor's expense, to visit and inspect the Company's properties, to
examine its books of account and records and to discuss the Company's affairs,
finances and accounts with its officers, all at such reasonable times as may be
requested by the Major Investor; provided, however, that the Company shall not
be obligated pursuant to this Section 8.2 to provide access to any information
which it reasonably considers to be a trade secret or similar confidential
information.
8.3 TERMINATION OF INFORMATION AND INSPECTION COVENANTS. The
covenants set forth in Section 8.1 and Section 8.2 shall terminate as to
Investors and be of no further force or effect when the sale of securities
pursuant to a registration statement filed by the Company under the Act in
connection with the firm commitment underwritten offering of its securities to
the general public is consummated, or when the Company first becomes subject to
the periodic reporting requirements of the 1934 Act pursuant to Sections 12(g)
or 15(d) of the 1934 Act, whichever event shall first occur.
8.4 ASSIGNMENT OF INFORMATION AND INSPECTION RIGHTS. The rights
granted pursuant to Section 8.1 and 8.2 may not be assigned or otherwise
conveyed by any Investor or by any subsequent transferee of any such rights
without the written consent of the Company, (i) other than to an entity or
person who is an affiliate (as defined in Rule 12b-12 under the 1934 Act) of
said Investor or subsequent transferee or (ii) unless the transferee of any such
rights is acquiring at least 300,000 shares of Preferred Stock (or Common Stock
issued upon conversion thereof) held by the transferring party immediately prior
to the transfer.
8.5 VISITATION RIGHTS. The Company shall give notice to and
permit the attendance (but not the participation) of one designee of each Major
Investor at each meeting of the Board of Directors and shall provide copies of
actions taken by written consent of the Board to each Major Investor promptly
after execution thereof. The rights set forth in this Section 8.5 shall
terminate as to each Major Investor and be of no further force or effect upon
the earlier to occur of (i) the disposition by such Investor of 50% or more of
such Investor's Preferred Stock (and/or the Common Stock issued upon conversion
thereof), (ii) the consummation of the sale of securities pursuant to a
registration statement filed by the Company under the Act in connection with the
firm commitment underwritten offering of its securities to the general public,
or (iii) when the Company first becomes subject to the periodic reporting
requirements of the 1934 Act pursuant to Sections 12(g) or 15(d) of the 1934
Act.
8.6 RIGHT OF FIRST OFFER. Subject to the terms and conditions
specified in this Section 8.6, the Company hereby grants to each Major Investor
a right of first offer with respect to future sales by the Company of its Shares
(as hereinafter defined). For purposes of this Section 8.6, Major Investor
includes any general partners and affiliates of a Major Investor. A Major
Investor shall be entitled to apportion the right of first offer hereby granted
it among itself and its partners and affiliates in such proportions as it deems
appropriate.
Each time the Company proposes to offer any shares of, or debt or
equity securities convertible into or exchangeable into or exercisable for any
shares of, any class of its capital stock ("Shares"), the Company shall first
make an offering of such Shares to each Major Investor in accordance with the
following provisions:
(a) The Company shall deliver a written notice ("Notice") to the
Major Investors stating (i) its bona fide intention to offer such Shares, (ii)
the number of such Shares to be offered, and (iii) the price and terms, if any,
upon which it proposes to offer such Shares.
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(b) By written notification received by the Company within 20
calendar days after giving of the Notice, the Major Investor may elect to
purchase or obtain, at the price and on the terms specified in the Notice, up to
that portion of such Shares which equals the proportion that the number of
shares of Common Stock issued and held, or issuable upon conversion of the
Preferred Stock then held, by such Major Investor bears to the total number of
shares of Preferred Stock of the Company then outstanding. The Company shall
promptly, in writing, inform each Major Investor which purchases all the shares
available to it ("Fully-Exercising Investor") of any other Major Investor's
failure to do likewise. During the ten-day period commencing after such
information is given, each Fully-Exercising Investor shall be entitled to obtain
that portion of the Shares for which Major Investors were entitled to subscribe
but which were not subscribed for by the Major Investors which is equal to the
proportion that the number of shares of Common Stock issued and held, or
issuable upon conversion of Preferred Stock then held, by such Fully-Exercising
Investor bears to the total number of shares of Preferred Stock then held, by
all Fully-Exercising Investors who wish to purchase some of the unsubscribed
shares. If necessary, the foregoing process shall be repeated so that Fully-
Exercising Investors will have the opportunity to purchase any and all remaining
unsubscribed shares.
(c) If all Shares which Major Investors are entitled to obtain
pursuant to subsection 8.6(b) are not elected to be obtained as provided in
subsection 8.6(b) hereof, the Company may, during the 90-day period following
the expiration of the periods provided in subsection 8.6(b) hereof, offer the
remaining unsubscribed portion of such Shares to any person or persons at a
price not less than, and upon terms no more favorable to the offeree than those
specified in the Notice. If the Company does not enter into an agreement for
the sale of the Shares within such period, or if such agreement is not
consummated within 30 days of the execution thereof, the right provided
hereunder shall be deemed to be revived and such Shares shall not be offered
unless first reoffered to the Major Investors in accordance herewith.
(d) The right of first offer in this Section 8.6 shall not be
applicable to (i) the issuance or sale of shares of Common Stock (or options or
convertible instruments therefor) to officers, directors or employees of, or
consultants, equipment lessors, commercial lending institutions or independent
contractors to, or persons having a business relationship with, the Company
pursuant to a stock purchase or option or bonus plan or agreement or other
equity incentive program or arrangement approved by the Board of Directors, (ii)
a bona fide, firmly underwritten public offering of shares of Common Stock,
(iii) the issuance of securities pursuant to the conversion, exchange or
exercise of convertible, exchangeable or exercisable securities, (iv) the
issuance of securities in connection with a bona fide business acquisition of or
by the Company, whether by merger, consolidation, sale of assets, sale or
exchange of stock or otherwise, (v) the issuance of securities pursuant to the
Indemnity Agreement, or (vi) the issuance of stock, warrants or other securities
or rights to persons or entities with which the Company has business
relationships provided such issuances are for other than primarily equity
financing purposes as determined by the Company's Board of Directors.
(e) The right of first offer contained in this Section 8.6 shall
terminate as to Major Investors and be of no further force or effect when the
sale of securities pursuant to a registration statement filed by the Company
under the Act in connection with the firm commitment underwritten offering of
its securities to the general public is consummated, or when the Company first
becomes subject to the periodic reporting requirements of the 1934 Act pursuant
to Sections 12(g) or 15(d) of the 1934 Act, whichever event shall first occur.
8.7 AMENDMENT TO COVENANTS OF COMPANY. Any provision of this
Section 8 may be amended and the observance thereof may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the Holders of
a majority of the Preferred Stock then outstanding and held by the Major
Investors, voting together as a single class; provided, however, that if such
amendment shall adversely affect the shares of one series of Preferred Stock in
a different manner than the shares of another series of Preferred Stock, then
such amendment shall
23.
<PAGE>
require the approval of the Major Investors holding a majority of the then
outstanding shares of Series A Preferred Stock and Series A-1 Preferred Stock
voting separately as a class; a majority of the then outstanding shares of
Series B Preferred Stock and Series B-1 Preferred Stock voting separately as a
class; a majority of the then outstanding Series C Preferred Stock and
Series C-1 Preferred Stock voting separately as a class; a majority of the then
outstanding Series D Preferred Stock and Series D-1 Preferred Stock voting
separately as a class; and a majority of the then outstanding Series E Preferred
Stock and Series E-1 Preferred Stock voting separately as a class. Any
amendment or waiver effected in accordance with this paragraph shall be binding
upon each holder of any shares of Preferred Stock then outstanding, each future
holder of all such shares and the Company.
9. MISCELLANEOUS.
9.1 SURVIVAL OF WARRANTIES. The warranties, representations and
covenants of the Company and Investors contained in or made pursuant to this
Agreement shall survive the execution and delivery of this Agreement and the
Closing and shall in no way be affected by any investigation of the subject
matter thereof made by or on behalf of the Investors or the Company.
9.2 SUCCESSORS AND ASSIGNS. Except as otherwise provided
herein, the terms and conditions of this Agreement shall inure to the benefit of
and be binding upon the respective successors and assigns of the parties
(including transferees of any shares of Series E Preferred Stock sold hereunder
or any Series E-1 Preferred or Common Stock issued upon conversion thereof).
Nothing in this Agreement, express or implied, is intended to confer upon any
party other than the parties hereto or their respective successors and assigns
any rights, remedies, obligations, or liabilities under or by reason of this
Agreement, except as expressly provided in this Agreement.
9.3 GOVERNING LAW. This Agreement shall be governed by and
construed under the laws of the State of Delaware.
9.4 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
9.5 TITLES AND SUBTITLES. The titles and subtitles used in
this Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
9.6 NOTICES. Unless otherwise provided, any notice required or
permitted under this Agreement shall be given in writing and shall be deemed
effectively given upon personal delivery to the party to be notified or upon
deposit with the United States Post Office, by registered or certified mail,
postage prepaid and addressed to the party to be notified at the address
indicated for such party on the signature page hereof, or at such other address
as such party may designate by ten (10) days' advance written notice to the
other parties.
9.7 FINDER'S FEE. Each party represents that it neither is nor
will be obligated for any finders' fee or commission in connection with this
transaction. Each Investor agrees to indemnify and to hold harmless the Company
from any liability for any commission or compensation in the nature of a
finders' fee (and the costs and expenses of defending against such liability or
asserted liability) for which the Investor or any of its officers, partners,
employees, or representatives is responsible.
The Company agrees to indemnify and hold harmless each Investor from
any liability for any commission or compensation in the nature of a finders' fee
(and the costs and expenses of defending against such liability or asserted
liability) for which the Company or any of its officers, employees or
representatives is responsible.
24.
<PAGE>
9.8 EXPENSES. Irrespective of whether the Closing is effected,
the Company shall pay all costs and expenses that it incurs with respect to the
negotiation, execution, delivery and performance of this Agreement. If any
action at law or in equity is necessary to enforce or interpret the terms of
this Agreement or the Certificate of Incorporation, the prevailing party shall
be entitled to reasonable attorney's fees, costs and necessary disbursements in
addition to any other relief to which such party may be entitled.
9.9 AMENDMENTS AND WAIVERS. Except as provided in Section 7.15
with respect to amendments to Section 7 and as provided in Section 8.7 with
respect to amendments to Section 8, any term of this Agreement may be amended
and the observance of any term of this Agreement may be waived (either generally
or in a particular instance and either retroactively or prospectively), only
with the written consent of the Company and the holders of a majority of the
Series E Preferred Stock and the Series E-1 Preferred Stock and Common Stock
issued or issuable upon conversion of the Series E Preferred Stock and the
Series E-1 Preferred Stock. Any amendment or waiver effected in accordance with
this paragraph shall be binding upon each holder of any securities purchased
under this Agreement at the time outstanding (including securities into which
such securities are convertible), each future holder of all such securities, and
the Company; provided, however, that no condition set forth in Section 5 hereof
may be waived with respect to any Investor who does not consent thereto.
9.10 SEVERABILITY. If one or more provisions of this Agreement
are held to be unenforceable under applicable law, such provision shall be
excluded from this Agreement and the balance of the Agreement shall be
interpreted as if such provision were so excluded and shall be enforceable in
accordance with its terms.
9.11 AGGREGATION OF STOCK. All shares of the Series E
Preferred Stock and Series E-1 Preferred Stock held or acquired by affiliated
entities or persons shall be aggregated together for the purpose of determining
the availability of any rights under this Agreement.
9.12 ENTIRE AGREEMENT. This Agreement and the documents
referred to herein constitute the entire agreement among the parties and no
party shall be liable or bound to any other party in any manner by any
warranties, representations, or covenants except as specifically set forth
herein or therein.
25.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
ADVANCED FIBRE COMMUNICATIONS
By: /s/ Donald Green
---------------------------------------
Donald Green, President
Address: P.O. Box 751239
1445 McDowell Boulevard North
Suite B
Petaluma, CA 94975-1239
INVESTOR:
--------------------------------------
By:
--------------------------------------
Address:
------------------------------------
------------------------------------
------------------------------------
SIGNATURE PAGE FOR SERIES E PREFERRED STOCK PURCHASE AGREEMENT
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
ADVANCED FIBRE COMMUNICATIONS
By: /s/ Donald Green
------------------------------------------
Donald Green, President
P.O. Box 751239
1445 McDowell Boulevard North, Suite B
Petaluma, CA 94975-1239
INVESTOR: JAFCO AND AFFILIATES
(collectively, one purchaser)
JAPAN ASSOCIATED FINANCE CO., LTD.
/s/ Kanji Oka
------------------------------------------------
By: Kanji Oka, Executive Vice President
Japan Associated Finance Co., Ltd.
JAFCO G-5 INVESTMENT ENTERPRISE PARTNERSHIP
/s/ Kanji Oka
------------------------------------------------
By: Kanji Oka, Executive Vice President
Japan Associated Finance Co., Ltd.
Its Executive Partner
JAFCO R-1(A) INVESTMENT ENTERPRISE PARTNERSHIP
/s/ Kanji Oka
------------------------------------------------
By: Kanji Oka, Executive Vice President
Japan Associated Finance Co., Ltd.
Its Executive Partner
JAFCO R-1(B) INVESTMENT ENTERPRISE PARTNERSHIP
/s/ Kanji Oka
------------------------------------------------
By: Kanji Oka, Executive Vice President
Japan Associated Finance Co., Ltd.
Its Executive Partner
U.S. INFORMATION TECHNOLOGY INVESTMENT ENTERPRISE
PARTNERSHIP
/s/ Kanji Oka
------------------------------------------------
By: Kanji Oka, Executive Vice President
Japan Associated Finance Co., Ltd.
Its Executive Partner
SIGNATURE PAGE FOR SERIES E PREFERRED STOCK PURCHASE AGREEMENT
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
ADVANCED FIBRE COMMUNICATIONS
By: /s/ Donald Green
------------------------------------------------
Donald Green, President
P.O. Box 751239
1445 McDowell Boulevard North, Suite B
Petaluma, CA 94975-1239
INVESTOR: NORWEST EQUITY PARTNERS V,
A MINNESOTA LIMITED LIABILITY PARTNERSHIP
By: Itasca Partners V, L.L.P.
General Partner
By: /s/ Promod Haque
------------------------------------------------
Name: Promod Haque
Title: Partner
SIGNATURE PAGE FOR SERIES E PREFERRED STOCK PURCHASE AGREEMENT
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
ADVANCED FIBRE COMMUNICATIONS
By: /s/ Donald Green
------------------------------------------------
Donald Green, President
P.O. Box 751239
1445 McDowell Boulevard North, Suite B
Petaluma, CA 94975-1239
INVESTOR: RAPTOR GLOBAL FUND L.P.
By: /s/ James J. Pallotta
------------------------------------------------
Name: James J. Pallotta
Title: Vice President of Corporate General Partner
INVESTOR: RAPTOR GLOBAL FUND LTD
By: /s/ James J. Pallotta
------------------------------------------------
Name: James J. Pallotta
Title: Vice President of Trading Advisor
INVESTOR: TUDOR BVI FUTURES, LTD
By: /s/ Patrick A. Keenan
------------------------------------------------
Name: Patrick A. Keenan
Title: Vice President and Chief Financial Officer
of Trading Advisor
INVESTOR: TUDOR ARBITRAGE PARTNERS, L.P.
By: /s/ Patrick A. Keenan
------------------------------------------------
Name: Patrick A. Keenan
Title:
SIGNATURE PAGE FOR SERIES E PREFERRED STOCK PURCHASE AGREEMENT
<PAGE>
SCHEDULE A
SCHEDULE OF INVESTORS
AFC SERIES E PREFERRED STOCK
$14.00 PER SHARE
<TABLE>
<CAPTION>
INVESTOR SHARES PROCEEDS
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
JAPAN ASSOCIATED FINANCE CO., LTD. 14,286 $200,004
- ----------------------------------------------------------------------------------------------------
JAFCO G-5 INVESTMENT ENTERPRISE 29,538 413,532
PARTNERSHIP
- ----------------------------------------------------------------------------------------------------
JAFCO R-1(A) INVESTMENT ENTERPRISE 13,802 193,228
PARTNERSHIP
- ----------------------------------------------------------------------------------------------------
JAFCO R-1(B) INVESTMENT ENTERPRISE 13,802 193,228
PARTNERSHIP
- ----------------------------------------------------------------------------------------------------
U.S. INFORMATION TECHNOLOGY 285,714 3,999,996
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
INVESTMENT ENTERPRISE PARTNERSHIP
- ----------------------------------------------------------------------------------------------------
JAFCO GROUP: 357,142 4,999,988
- ----------------------------------------------------------------------------------------------------
RAPTOR GLOBAL FUND L.P. 23,477 328,678
- ----------------------------------------------------------------------------------------------------
RAPTOR GLOBAL FUND LTD 31,645 443,030
- ----------------------------------------------------------------------------------------------------
TUDOR BVI FUTURES, LTD 148,402 2,077,628
- ----------------------------------------------------------------------------------------------------
TUDOR ARBITRAGE PARTNERS, L.P. 46,476 650,664
- ----------------------------------------------------------------------------------------------------
TUDOR GROUP: 250,000 3,500,000
- ----------------------------------------------------------------------------------------------------
NORWEST EQUITY PARTNERS V, A MINNESOTA 489,628 489,628 6,854,792 6,854,792
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
LIMITED LIABILITY PARTNERSHIP
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
TOTALS: 1,096,770 1,096,770 $15,354,780 $15,354,780
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
30.
<PAGE>
EXHIBIT 10.1
W-1
WARRANT TO PURCHASE
2- SHARES OF COMMON STOCK
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED
IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO
THE SECURITIES UNDER SUCH ACT OR AN OPINION OF COUNSEL SATISFACTORY TO
THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD
PURSUANT TO RULE 144 OF SUCH ACT.
ADVANCED FIBRE COMMUNICATIONS
INCORPORATED UNDER THE LAWS OF THE STATE OF CALIFORNIA
THIS CERTIFIES THAT, for value received, 3 (the "Investor") is entitled to
purchase, on the terms hereof,
(2) shares of Common Stock of Advanced Fibre Communications, a California
corporation (the "Company"), at a purchase price as set forth herein.
1. EXERCISE OF WARRANT
The terms and conditions upon which this Warrant may be exercised, and the
Common Stock covered hereby (the "Warrant Stock") may be purchased, are as
follows:
1.1 EXERCISE. This Warrant may be exercised in whole or in part at any
time after the date hereof, but in no case may this Warrant be exercised later
than the close of business on Janu
ary 1, 1999 (the "Termination Date"), after which time this Warrant shall
terminate and shall be void and of no further force or effect.
1.2 PURCHASE PRICE. The purchase price for the shares of Warrant Stock to
be issued upon exercise of this Warrant shall be $0.10 per share, subject to
adjustment as set forth herein.
1.3 METHOD OF EXERCISE. The exercise of the purchase rights evidenced by
this Warrant shall be effected by (a) the surrender of the Warrant, together
with a duly executed copy of the form of
<PAGE>
subscription attached hereto, to the Company at its principal offices and (b)
the delivery of the purchase price by check or bank draft payable to the
Company's order for the number of shares for which the purchase rights hereunder
are being exercised or any other form of consideration approved by the Com
pany's Board of Directors.
1.4. NET ISSUANCE.
(a) RIGHT TO CONVERT. In addition to and without limiting the rights
of the holder under the terms of this Warrant, the holder shall have the right
to convert this Warrant or any portion hereof (the "Conversion Right") into
shares of Common Stock as provided in this Section 1.4 at any time or from time
to time during the term of this Warrant. Upon exercise of the Conversion Right
with respect to a particular number of shares subject to this Warrant (the
"Converted Warrant Shares"), the Company shall deliver to the holder (without
payment by the holder of any exercise price or any cash or other consideration)
that number of shares of fully paid and nonassessable Common Stock computed
using the following formula:
X = Y (A - B)
A
Where X = the number of shares of Common Stock to be issued to the
holder
Y = the number of Converted Warrant Shares
A = the fair market value of one share of the Company's Common
Stock on the Conversion Date (as defined below)
B = the per share exercise price of the Warrant (as adjusted to
the Conversion Date)
The Conversion Right may only be exercised with respect to a whole number of
shares subject to this Warrant. No fractional shares shall be issuable upon
exercise of the Conversion Right, and if the number of shares to be issued
determined in accordance with the foregoing formula is other than a whole
number, the Company shall pay to the holder an amount in cash equal to the fair
market value of the resulting fractional share on the Conversion Date. Shares
issued pursuant to the Conversion Right shall be treated as if they were issued
upon the exercise of this Warrant.
(b) METHOD OF EXERCISE. The Conversion Right may be exercised by the
holder by the surrender of this Warrant at the principal office of the Company
together with a written statement specifying that the holder thereby intends to
exercise the Conversion Right and indicating the number of shares subject to
this Warrant which are being surrendered (referred to in subsection (a) hereof
as the Converted Warrant Shares) in exercise of the Conversion Right. Such
conversion shall be
2
<PAGE>
effective upon receipt by the Company of this Warrant together with the
aforesaid written statement, or on such later date as is specified therein (the
"Conversion Date"). Certificates for the shares issuable upon the exercise of
the Conversion Right and, if applicable, a new warrant evidencing the balance of
the shares remaining subject to this Warrant, shall be issued as of the
Conversion Date and shall be delivered to the holder promptly following the
Conversion Date.
(c) DETERMINATION OF FAIR MARKET VALUE. For purposes of this Section
1.4, fair market value of a share of Common Stock on the Conversion Date shall
mean:
(i) If traded on a stock exchange, the fair market value of the
Common Stock shall be deemed to be the average of the closing selling prices of
the Common Stock on the stock exchange determined by the Company's Board of
Directors to be the primary market for the Common Stock over the ten (10)
trading day period ending on the date prior to the Conversion Date, as such
prices are officially quoted in the composite tape of transactions on such
exchange;
(ii) If traded over-the-counter, the fair market value of the
Common Stock shall be deemed to be the average of the closing bid prices (or, if
such information is available, the closing selling prices) of the Common Stock
over the ten (10) trading day period ending on the date prior to the Conversion
Date, as such prices are reported by the National Association of Securities
Dealers through its NASDAQ system or any successor system; and
(iii) If there is no public market for the Common Stock, then the
fair market value shall be determined by mutual agreement of the holder of this
Warrant and the Company, and if the holder and the Company are unable to so
agree, by an investment banker of national reputation selected by the Company
and reasonably acceptable to the holder of this Warrant.
1.5 ISSUANCE OF SHARES. In the event the purchase rights evidenced by
this Warrant are exercised in whole or in part, a certificate or certificates
for the purchased shares shall be issued to the Investor as soon as practicable.
In the event the purchase rights evidenced by this Warrant are exercised in
part, the Company will also issue to the Investor a new warrant representing the
unexercised purchase rights.
2. CERTAIN ADJUSTMENTS
2.1 COMMON STOCK DIVIDENDS; SPLIT OR SUBDIVISION OF SHARES. If at any
time while this Warrant remains outstanding and unexpired, the Company should
effect a split or subdivision of the outstanding shares of Common Stock or pay a
dividend with respect to Common Stock payable in shares of Common Stock, or make
any other distribution with respect to Common Stock, then the purchase price
shall be correspondingly decreased and the number of shares of Common Stock
issuable upon exercise of the Warrant
3
<PAGE>
shall be increased to the product obtained by multiplying the number of Warrant
Shares purchasable immediately prior to such purchase price adjustment by a
fraction (A) the numerator of which shall be the purchase price immediately
prior to such adjustment, and (B) the denominator of which shall be the purchase
price immediately after such adjustment.
2.2 MERGERS, CONSOLIDATIONS OR SALE OF ASSETS. If at any time there shall
be a capital reorganization of the Common Stock (other than a combination,
reclassification, exchange or subdivision of Warrant Stock otherwise provided
for herein), or a merger or consolidation of the Company with or into another
corporation in which the Company is not the surviving corporation, or the sale
of the Company's properties and assets as, or substantially as, an entirety to
any other person, then, as a part of such reorganization, merger, consolidation
or sale, lawful provision shall be made so that the Investor shall thereafter be
entitled to receive upon exercise of this Warrant, during the period specified
in this Warrant and upon payment of the purchase price then in effect, the
number of shares of stock or other securities or property of the successor
corporation resulting from such reorganization, merger, consolidation or sale,
to which a holder of the Warrant Stock deliverable upon exercise of this Warrant
would have been entitled under the provisions of the agreement in such
reorganization, merger, consolidation or sale if this Warrant had been exercised
immediately before that reorganization, merger, consolidation or sale. In any
such case, appropriate adjustment (as determined in good faith by the Company's
Board of Directors) shall be made in the application of the provisions of this
Warrant with respect to the rights and interests of the Investor after the
reorganization, merger, consolidation or sale to the end that the provisions of
this Warrant (including adjustment of the purchase price then in effect and the
number of shares of Warrant Stock) shall be applicable after that event, as near
as reasonably may be, in relation to any shares or other property deliverable
after that event upon exercise of this Warrant.
2.3 RECLASSIFICATION. If the Company at any time shall, by subdivision,
combination or reclassification of securities or otherwise, change any of the
Warrant Stock into the same or a different number of securities of any other
class or classes, this Warrant shall thereafter represent the right to acquire
such number and kind of securities as would have been issuable as a result of
such change with respect to the Warrant Stock immediately prior to such
subdivision, combination, reclassification or other change.
2.4 COMBINATION OF SHARES. If at any time while this Warrant remains
outstanding and unexpired, the number of shares of Common Stock outstanding is
decreased by a combination of the outstanding shares of Common Stock, then the
purchase price shall be correspondingly increased and the number of shares of
Common Stock issuable upon exercise of the Warrant shall be decreased to the
product obtained by multiplying the number of Warrant Shares purchasable
immediately prior to such purchase price adjustment
4
<PAGE>
by a fraction (A) the numerator of which shall be the purchase price immediately
prior to such adjustment, and (B) the denominator of which shall be the purchase
price immediately after such adjustment.
2.5 CERTIFICATE AS TO ADJUSTMENTS. In the case of each adjustment or
readjustment of the purchase price pursuant to this Section 2, the Company will
promptly compute such adjustment or readjustment in accordance with the terms
hereof and cause a certificate setting forth such adjustment or readjustment and
showing in detail the facts upon which such adjustment or readjustment is based
to be delivered to the holder of this Warrant. The Company will, upon the
written request at any time of the holder of this Warrant, furnish or cause to
be furnished to such holder a certificate setting forth:
a) Such adjustments and readjustments;
b) The purchase price at the time in effect; and
c) The number of shares of Warrant Stock and the amount, if any, of other
property at the time receivable upon the exercise of the Warrant.
3. FRACTIONAL SHARES
No fractional shares shall be issued in connection with any exercise of
this Warrant. In lieu of the issuance of such fractional share, the Company
shall make a cash payment equal to the then fair market value of such fractional
share as determined by the Company's Board of Directors.
4. RESERVATION OF COMMON STOCK
The Company shall at all times reserve and keep available out of its
authorized but unissued shares of Common Stock, solely for the purpose of
effecting the exercise of this Warrant such number of its shares of Common Stock
as shall from time to time be sufficient to effect the exercise of this Warrant;
and if at any time the number of authorized but unissued shares of Common Stock
shall not be sufficient to effect the exercise of the entire Warrant, in
addition to such other remedies as shall be available to the holder of this
Warrant, the Company will use its reasonable best efforts to take such corporate
action as may, in the opinion of its counsel, be necessary to increase its
authorized but unissued shares of Common Stock to such number of shares as shall
be sufficient for such purposes.
5. PRIVILEGE OF STOCK OWNERSHIP
Prior to the exercise of this Warrant, the Investor shall not be entitled,
by virtue of holding this Warrant, to any rights of a stockholder of the
Company, including (without limitation) the right to vote, receive dividends or
other distributions, exercise preemptive rights or be notified of shareholder
meetings, and such holder shall not be entitled to any notice or other communi-
5
<PAGE>
cation concerning the business or affairs of the Company, except as required by
law.
6. LIMITATION OF LIABILITY
No provision hereof, in the absence of affirmative action by the holder
hereof to purchase the Warrant Stock, and no mere enumeration herein of the
rights or privileges of the holder hereof, shall give rise to any liability of
such holder for the purchase price or as a stockholder of the Company, whether
such liability is asserted by the Company or by creditors of the Company.
7. TRANSFERS AND EXCHANGES
7.1. Subject to compliance with applicable securities laws, this Warrant
and all rights hereunder are transferrable in whole or in part by the Investor.
The transfer shall be recorded on the books of the Company upon the surrender of
this Warrant, properly endorsed, to the Company at its principal offices and the
payment to the Company of all transfer taxes and other governmental charges
imposed on such transfer. In the event of a partial transfer, the Company shall
issue to the several holders one or more appropriate new warrants.
7.2 Each holder agrees that this Warrant when endorsed in blank shall be
negotiable and that when so endorsed the holder may be treated by the Company
and all other persons dealing with this Warrant as the absolute owner for all
purposes and as the person entitled to exercise the purchase rights evidenced
hereby; provided, however, that until such time as the transfer is recorded on
the books of the Company, the Company may treat the registered holder of this
Warrant as the absolute owner.
7.3 All new warrants issued in connection with transfers, exchanges or
partial exercises shall be identical in form and provision to this Warrant
except as to the number of shares.
8. PAYMENT OF TAXES
The Company shall pay all expenses in connection with, and all taxes and
other governmental charges (other than any thereof on, based on or measured by,
the net income of the holder thereof) that may be imposed in respect of, the
issue or delivery of the Warrant Stock. The Company shall not be required,
however, to pay any tax or other charge imposed in connection with any transfer
involved in the issue of any certificate for shares of the Warrant Stock in any
name other than that of the Investor, and in such case, the Company shall not be
required to issue or deliver any stock certificate until such tax or other
charge has
6.
<PAGE>
been paid or it has been established to the Company's satisfaction that no such
tax or other charge is due.
9. SUCCESSORS AND ASSIGNS
The terms and provisions of this Warrant shall be binding upon the Company
and the Investor and their respective successors and assigns.
10. LOSS, THEFT, DESTRUCTION OR MUTILATION OF WARRANT
Upon receipt by the Company of evidence reasonably satisfactory to it of
the loss, theft, destruction or mutilation of this Warrant, and in case of loss,
theft or destruction, of indemnity or security reasonably satisfactory to the
Company, and upon reimbursement to the Company of all reasonable expenses
incidental thereto, and upon surrender and cancellation of this Warrant, if
mutilated, the Company will make and deliver a new warrant of like tenor and
dated as of such cancellation, in lieu of this Warrant.
11. RESTRICTED SECURITIES
The holder understands that this Warrant and the Warrant Stock purchasable
hereunder constitute "restricted securities" under the federal securities laws
inasmuch as they are, or will be, acquired from the Company in transactions not
involving a public offering and accordingly may not, under such laws and
applicable regulations, be resold or transferred without registration under the
Securities Act of 1933 or an applicable exemption from registration. In this
connection, the holder acknowledges that Rule 144 of the Securities and Exchange
Commission is not now, and may not in the future be, available for resales of
this Warrant and the Warrant Stock purchased hereunder.
12. SATURDAYS, SUNDAYS, HOLIDAYS
If the last or appointed day for the taking of any action or the expiration
of any right required or granted herein shall be a Saturday or Sunday or shall
be a legal holiday, then such action may be taken or such right may be
exercised, except as to the purchase price, on the next succeeding day not a
legal holiday.
ADVANCED FIBRE COMMUNICATIONS
By
---------------------------------
Donald Green, President
Dated: January , 1993
---
7.
<PAGE>
SUBSCRIPTION
Advanced Fibre Communications
1260A Holm Road
P.O. Box 751239
Petaluma, CA 94975-1239
Gentlemen:
The undersigned, 3, hereby elects to purchase, pursuant to the
provisions of the January __, 1993 Warrant held by the undersigned, _______
shares of the Common Stock of Advanced Fibre Communications, a California
corporation.
Payment of the per share purchase price required under such Warrant
accompanies this Subscription.
The undersigned hereby represents and warrants that the undersigned is
acquiring such stock for its own account and not for resale or with a view to
distribution of any part thereof and accepts such shares subject to the terms
and conditions of the Warrant.
Dated: , 19
--------------- --
4-
By
----------------------------
Address:
-------------------------------
-------------------------------
<PAGE>
EXHIBIT 10.2
W-18~
WARRANT TO PURCHASE
2~ SHARES OF COMMON STOCK
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED
IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO
THE SECURITIES UNDER SUCH ACT OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED OR
UNLESS SOLD PURSUANT TO RULE 144 OF SUCH ACT.
ADVANCED FIBRE COMMUNICATIONS
INCORPORATED UNDER THE LAWS OF THE STATE OF CALIFORNIA
THIS CERTIFIES THAT, for value received, ~ (the "Investor") is entitled
to purchase, on the terms hereof, S~(2~) shares of Common Stock of Advanced
Fibre Communications, a California corporation (the "Company"), at a purchase
price as set forth herein.
1. EXERCISE OF WARRANT
The terms and conditions upon which this Warrant may be exercised, and the
Common Stock covered hereby (the "Warrant Stock") may be purchased, are as
follows:
1.1 EXERCISE. This Warrant may be exercised in whole or in part at any
time after the date hereof, but in no case may this Warrant be exercised later
than the close of business on October 4, 1999 (the "Termination Date"), after
which time this Warrant shall terminate and shall be void and of no further
force or effect.
1.2 PURCHASE PRICE. The purchase price for the shares of Warrant Stock to
be issued upon exercise of this Warrant shall be $0.50 per share, subject to
adjustment as set forth herein.
1.3 METHOD OF EXERCISE. The exercise of the purchase rights evidenced by
this Warrant shall be effected by (a) the surrender of the Warrant, together
with a duly executed copy of
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<PAGE>
the form of subscription attached hereto, to the Company at its principal
offices and (b) the delivery of the purchase price by check or bank draft
payable to the Company's order for the number of shares for which the purchase
rights hereunder are being exercised or any other form of consideration approved
by the Company's Board of Directors.
1.4 NET ISSUANCE.
(a) RIGHT TO CONVERT. In addition to and without limiting the rights
of the holder under the terms of this Warrant, the holder shall have the right
to convert this Warrant or any portion hereof (the "Conversion Right") into
shares of Common Stock as provided in this Section 1.4 at any time or from time
to time during the term of this Warrant. Upon exercise of the Conversion Right
with respect to a particular number of shares subject to this Warrant (the
"Converted Warrant Shares"), the Company shall deliver to the holder (without
payment by the holder of any exercise price or any cash or other consideration)
that number of shares of fully paid and nonassessable Common Stock computed
using the following formula:
X = Y (A - B)
---------
A
Where X = the number of shares of Common Stock to be issued to the
holder
Y = the number of Converted Warrant Shares
A = the fair market value of one share of the Company's Common
Stock on the Conversion Date (as defined below)
B = the per share exercise price of the Warrant (as adjusted to
the Conversion Date)
The Conversion Right may only be exercised with respect to a whole number of
shares subject to this Warrant. No fractional shares shall be issuable upon
exercise of the Conversion Right, and if the number of shares to be issued
determined in accordance with the foregoing formula is other than a whole
number, the Company shall pay to the holder an amount in cash equal to the fair
market value of the resulting fractional share on the Conversion Date. Shares
issued pursuant to the Conversion Right shall be treated as if they were issued
upon the exercise of this Warrant.
(b) METHOD OF EXERCISE. The Conversion Right may be exercised by the
holder by the surrender of this Warrant at the principal office of the Company
together with a written statement specifying that the holder thereby intends to
exercise the
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<PAGE>
Conversion Right and indicating the number of shares subject to this Warrant
which are being surrendered (referred to in subsection (a) hereof as the
Converted Warrant Shares) in exercise of the Conversion Right. Such conversion
shall be effective upon receipt by the Company of this Warrant together with the
aforesaid written statement, or on such later date as is specified therein (the
"Conversion Date"). Certificates for the shares issuable upon the exercise of
the Conversion Right and, if applicable, a new warrant evidencing the balance of
the shares remaining subject to this Warrant, shall be issued as of the
Conversion Date and shall be delivered to the holder promptly following the
Conversion Date.
(c) DETERMINATION OF FAIR MARKET VALUE. For purposes of this Section
1.4, fair market value of a share of Common Stock on the Conversion Date shall
mean:
(i) If traded on a stock exchange, the fair market value of the
Common Stock shall be deemed to be the average of the closing selling prices of
the Common Stock on the stock exchange determined by the Company's Board of
Directors to be the primary market for the Common Stock over the ten (10)
trading day period ending on the date prior to the Conversion Date, as such
prices are officially quoted in the composite tape of transactions on such
exchange;
(ii) If traded over-the-counter, the fair market value of the
Common Stock shall be deemed to be the average of the closing bid prices (or, if
such information is available, the closing selling prices) of the Common Stock
over the ten (10) trading day period ending on the date prior to the Conversion
Date, as such prices are reported by the National Association of Securities
Dealers through its NASDAQ system or any successor system; and
(iii) If there is no public market for the Common Stock, then the
fair market value shall be determined by mutual agreement of the holder of this
Warrant and the Company, and if the holder and the Company are unable to so
agree, by an investment banker of national reputation selected by the Company
and reasonably acceptable to the holder of this Warrant.
1.5 ISSUANCE OF SHARES. In the event the purchase rights evidenced by
this Warrant are exercised in whole or in part, a certificate or certificates
for the purchased shares shall be issued to the Investor as soon as practicable.
In the event the purchase rights evidenced by this Warrant are exercised in
part, the Company will also issue to the Investor a new warrant representing the
unexercised purchase rights.
3
<PAGE>
2. CERTAIN ADJUSTMENTS
2.1 COMMON STOCK DIVIDENDS; SPLIT OR SUBDIVISION OF SHARES. If at any
time while this Warrant remains outstanding and unexpired, the Company should
effect a split or subdivision of the outstanding shares of Common Stock or pay a
dividend with respect to Common Stock payable in shares of Common Stock, or make
any other distribution with respect to Common Stock, then the purchase price
shall be correspondingly decreased and the number of shares of Common Stock
issuable upon exercise of the Warrant shall be increased to the product obtained
by multiplying the number of Warrant Shares purchasable immediately prior to
such purchase price adjustment by a fraction (A) the numerator of which shall be
the purchase price immediately prior to such adjustment, and (B) the denominator
of which shall be the purchase price immediately after such adjustment.
2.2 MERGERS, CONSOLIDATIONS OR SALE OF ASSETS. If at any time there shall
be a capital reorganization of the Common Stock (other than a combination,
reclassification, exchange or subdivision of Warrant Stock otherwise provided
for herein), or a merger or consolidation of the Company with or into another
corporation in which the Company is not the surviving corporation, or the sale
of the Company's properties and assets as, or substantially as, an entirety to
any other person, then, as a part of such reorganization, merger, consolidation
or sale, lawful provision shall be made so that the Investor shall thereafter be
entitled to receive upon exercise of this Warrant, during the period specified
in this Warrant and upon payment of the purchase price then in effect, the
number of shares of stock or other securities or property of the successor
corporation resulting from such reorganization, merger, consolidation or sale,
to which a holder of the Warrant Stock deliverable upon exercise of this Warrant
would have been entitled under the provisions of the agreement in such
reorganization, merger, consolidation or sale if this Warrant had been exercised
immediately before that reorganization, merger, consolidation or sale. In any
such case, appropriate adjustment (as determined in good faith by the Company's
Board of Directors) shall be made in the application of the provisions of this
Warrant with respect to the rights and interests of the Investor after the
reorganization, merger, consolidation or sale to the end that the provisions of
this Warrant (including adjustment of the purchase price then in effect and the
number of shares of Warrant Stock) shall be applicable after that event, as near
as reasonably may be, in relation to any shares or other property deliverable
after that event upon exercise of this Warrant.
2.3 RECLASSIFICATION. If the Company at any time shall, by subdivision,
combination or reclassification of securities or otherwise, change any of the
Warrant Stock into the same or a different number of securities of any other
class or classes,
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<PAGE>
this Warrant shall thereafter represent the right to acquire such number and
kind of securities as would have been issuable as a result of such change with
respect to the Warrant Stock immediately prior to such subdivision, combination,
reclassification or other change.
2.4 COMBINATION OF SHARES. If at any time while this Warrant remains
outstanding and unexpired, the number of shares of Common Stock outstanding is
decreased by a combination of the outstanding shares of Common Stock, then the
purchase price shall be correspondingly increased and the number of shares of
Common Stock issuable upon exercise of the Warrant shall be decreased to the
product obtained by multiplying the number of Warrant Shares purchasable
immediately prior to such purchase price adjustment by a fraction (A) the
numerator of which shall be the purchase price immediately prior to such
adjustment, and (B) the denominator of which shall be the purchase price
immediately after such adjustment.
2.5 CERTIFICATE AS TO ADJUSTMENTS. In the case of each adjustment or
readjustment of the purchase price pursuant to this Section 2, the Company will
promptly compute such adjustment or readjustment in accordance with the terms
hereof and cause a certificate setting forth such adjustment or readjustment and
showing in detail the facts upon which such adjustment or readjustment is based
to be delivered to the holder of this Warrant. The Company will, upon the
written request at any time of the holder of this Warrant, furnish or cause to
be furnished to such holder a certificate setting forth:
a) Such adjustments and readjustments;
b) The purchase price at the time in effect; and
c) The number of shares of Warrant Stock and the amount, if any, of other
property at the time receivable upon the exercise of the Warrant.
3. FRACTIONAL SHARES
No fractional shares shall be issued in connection with any exercise of
this Warrant. In lieu of the issuance of such fractional share, the Company
shall make a cash payment equal to the then fair market value of such fractional
share as determined by the Company's Board of Directors.
4. RESERVATION OF COMMON STOCK
The Company shall at all times reserve and keep available out of its
authorized but unissued shares of Common Stock, solely for the purpose of
effecting the exercise of this Warrant such number of its shares of Common Stock
as shall from time to time
5
<PAGE>
be sufficient to effect the exercise of this Warrant; and if at any time the
number of authorized but unissued shares of Common Stock shall not be sufficient
to effect the exercise of the entire Warrant, in addition to such other remedies
as shall be available to the holder of this Warrant, the Company will use its
reasonable best efforts to take such corporate action as may, in the opinion of
its counsel, be necessary to increase its authorized but unissued shares of
Common Stock to such number of shares as shall be sufficient for such purposes.
5. PRIVILEGE OF STOCK OWNERSHIP
Prior to the exercise of this Warrant, the Investor shall not be entitled,
by virtue of holding this Warrant, to any rights of a stockholder of the
Company, including (without limitation) the right to vote, receive dividends or
other distributions, exercise preemptive rights or be notified of shareholder
meetings, and such holder shall not be entitled to any notice or other
communication concerning the business or affairs of the Company, except as
required by law.
6. LIMITATION OF LIABILITY
No provision hereof, in the absence of affirmative action by the holder
hereof to purchase the Warrant Stock, and no mere enumeration herein of the
rights or privileges of the holder hereof, shall give rise to any liability of
such holder for the purchase price or as a stockholder of the Company, whether
such liability is asserted by the Company or by creditors of the Company.
7. TRANSFERS AND EXCHANGES
7.1 Subject to compliance with applicable securities laws, this Warrant
and all rights hereunder are transferrable in whole or in part by the Investor.
The transfer shall be recorded on the books of the Company upon the surrender of
this Warrant, properly endorsed, to the Company at its principal offices and the
payment to the Company of all transfer taxes and other governmental charges
imposed on such transfer. In the event of a partial transfer, the Company shall
issue to the several holders one or more appropriate new warrants.
7.2 Each holder agrees that this Warrant when endorsed in blank shall be
negotiable and that when so endorsed the holder may be treated by the Company
and all other persons dealing with this Warrant as the absolute owner for all
purposes and as the person entitled to exercise the purchase rights evidenced
hereby; provided, however, that until such time as the transfer is recorded on
the books of the Company, the Company may treat the registered holder of this
Warrant as the absolute owner.
6
<PAGE>
7.3 All new warrants issued in connection with transfers, exchanges or
partial exercises shall be identical in form and provision to this Warrant
except as to the number of shares.
8. PAYMENT OF TAXES
The Company shall pay all expenses in connection with, and all taxes and
other governmental charges (other than any thereof on, based on or measured by,
the net income of the holder thereof) that may be imposed in respect of, the
issue or delivery of the Warrant Stock. The Company shall not be required,
however, to pay any tax or other charge imposed in connection with any transfer
involved in the issue of any certificate for shares of the Warrant Stock in any
name other than that of the Investor, and in such case, the Company shall not be
required to issue or deliver any stock certificate until such tax or other
charge has been paid or it has been established to the Company's satisfaction
that no such tax or other charge is due.
9. SUCCESSORS AND ASSIGNS
The terms and provisions of this Warrant shall be binding upon the Company
and the Investor and their respective successors and assigns.
10. LOSS, THEFT, DESTRUCTION OR MUTILATION OF WARRANT
Upon receipt by the Company of evidence reasonably satisfactory to it of
the loss, theft, destruction or mutilation of this Warrant, and in case of loss,
theft or destruction, of indemnity or security reasonably satisfactory to the
Company, and upon reimbursement to the Company of all reasonable expenses
incidental thereto, and upon surrender and cancellation of this Warrant, if
mutilated, the Company will make and deliver a new warrant of like tenor and
dated as of such cancellation, in lieu of this Warrant.
7
<PAGE>
11. RESTRICTED SECURITIES
The holder understands that this Warrant and the Warrant Stock purchasable
hereunder constitute "restricted securities" under the federal securities laws
inasmuch as they are, or will be, acquired from the Company in transactions not
involving a public offering and accordingly may not, under such laws and
applicable regulations, be resold or transferred without registration under the
Securities Act of 1933 or an applicable exemption from registration. In this
connection, the holder acknowledges that Rule 144 of the Securities and Exchange
Commission is not now, and may not in the future be, available for resales of
this Warrant and the Warrant Stock purchased hereunder.
12. SATURDAYS, SUNDAYS, HOLIDAYS
If the last or appointed day for the taking of any action or the expiration
of any right required or granted herein shall be a Saturday or Sunday or shall
be a legal holiday, then such action may be taken or such right may be
exercised, except as to the purchase price, on the next succeeding day not a
legal holiday.
ADVANCED FIBRE COMMUNICATIONS
By
---------------------------------
Donald Green, President
Dated: October , 1993
---
8
<PAGE>
SUBSCRIPTION
Advanced Fibre Communications
P.O. Box 751239
1445 McDowell Boulevard North
Suite B
Petaluma, CA 94975-1239
Gentlemen:
The undersigned, 3-, hereby elects to purchase, pursuant to the
provisions of the October ___, 1993 Warrant held by the undersigned, __________
shares of the Common Stock of Advanced Fibre Communications, a California
corporation.
Payment of the per share purchase price required under such Warrant
accompanies this Subscription.
The undersigned hereby represents and warrants that the undersigned is
acquiring such stock for its own account and not for resale or with a view to
distribution of any part thereof and accepts such shares subject to the terms
and conditions of the Warrant.
Dated: , 19
--------------- --
3-
By
----------------------------
Address:
-------------------------------
-------------------------------
9
<PAGE>
EXHIBIT 10.3
W-2-
WARRANT TO PURCHASE
5- SHARES OF COMMON STOCK
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED
IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO
THE SECURITIES UNDER SUCH ACT OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED OR
UNLESS SOLD PURSUANT TO RULE 144 OF SUCH ACT.
ADVANCED FIBRE COMMUNICATIONS
INCORPORATED UNDER THE LAWS OF THE STATE OF CALIFORNIA
THIS CERTIFIES THAT, for value received, 3- (the "Investor") is entitled to
purchase, on the terms hereof, 4- (5-) shares of Common Stock of Advanced Fibre
Communications, a California corporation (the "Company"), at a purchase price as
set forth herein.
1. EXERCISE OF WARRANT
The terms and conditions upon which this Warrant may be exercised, and the
Common Stock covered hereby (the "Warrant Stock") may be purchased, are as
follows:
1.1 EXERCISE. This Warrant may be exercised in whole or in part at any
time after the date hereof, but in no case may this Warrant be exercised later
than the close of business on March 15, 2000 (the "Termination Date"), after
which time this Warrant shall terminate and shall be void and of no further
force or effect.
1.2 PURCHASE PRICE. The purchase price for the shares of Warrant Stock to
be issued upon exercise of this Warrant shall be $1.00 per share, subject to
adjustment as set forth herein.
1.
<PAGE>
1.3 METHOD OF EXERCISE. The exercise of the purchase rights evidenced by
this Warrant shall be effected by (a) the surrender of the Warrant, together
with a duly executed copy of the form of subscription attached hereto, to the
Company at its principal offices and (b) the delivery of the purchase price by
check or bank draft payable to the Company's order for the number of shares for
which the purchase rights hereunder are being exercised or any other form of
consideration approved by the Company's Board of Directors.
1.4 NET ISSUANCE.
(a) RIGHT TO CONVERT. In addition to and without limiting the rights
of the holder under the terms of this Warrant, the holder shall have the right
to convert this Warrant or any portion hereof (the "Conversion Right") into
shares of Common Stock as provided in this Section 1.4 at any time or from time
to time during the term of this Warrant. Upon exercise of the Conversion Right
with respect to a particular number of shares subject to this Warrant (the
"Converted Warrant Shares"), the Company shall deliver to the holder (without
payment by the holder of any exercise price or any cash or other consideration)
that number of shares of fully paid and nonassessable Common Stock computed
using the following formula:
X = Y (A - B)
---------
A
Where X = the number of shares of Common Stock to be issued to the
holder
Y = the number of Converted Warrant Shares
A = the fair market value of one share of the Company's Common
Stock on the Conversion Date (as defined below)
B = the per share exercise price of the Warrant (as adjusted to
the Conversion Date)
The Conversion Right may only be exercised with respect to a whole number of
shares subject to this Warrant. No fractional shares shall be issuable upon
exercise of the Conversion Right, and if the number of shares to be issued
determined in accordance with the foregoing formula is other than a whole
number, the Company shall pay to the holder an amount in cash equal to the fair
market value of the resulting fractional share on the Conversion Date. Shares
issued pursuant to the Conversion Right
2.
<PAGE>
shall be treated as if they were issued upon the exercise of this Warrant.
(b) METHOD OF EXERCISE. The Conversion Right may be exercised by the
holder by the surrender of this Warrant at the principal office of the Company
together with a written statement specifying that the holder thereby intends to
exercise the Conversion Right and indicating the number of shares subject to
this Warrant which are being surrendered (referred to in subsection (a) hereof
as the Converted Warrant Shares) in exercise of the Conversion Right. Such
conversion shall be effective upon receipt by the Company of this Warrant
together with the aforesaid written statement, or on such later date as is
specified therein (the "Conversion Date"). Certificates for the shares issuable
upon the exercise of the Conversion Right and, if applicable, a new warrant
evidencing the balance of the shares remaining subject to this Warrant, shall be
issued as of the Conversion Date and shall be delivered to the holder promptly
following the Conversion Date.
(c) DETERMINATION OF FAIR MARKET VALUE. For purposes of this Section
1.4, fair market value of a share of Common Stock on the Conversion Date shall
mean:
(i) If traded on a stock exchange, the fair market value of the
Common Stock shall be deemed to be the average of the closing selling prices of
the Common Stock on the stock exchange determined by the Company's Board of
Directors to be the primary market for the Common Stock over the ten (10)
trading day period ending on the date prior to the Conversion Date, as such
prices are officially quoted in the composite tape of transactions on such
exchange;
(ii) If traded over-the-counter, the fair market value of the
Common Stock shall be deemed to be the average of the closing bid prices (or, if
such information is available, the closing selling prices) of the Common Stock
over the ten (10) trading day period ending on the date prior to the Conversion
Date, as such prices are reported by the National Association of Securities
Dealers through its NASDAQ system or any successor system; and
(iii) If there is no public market for the Common Stock, then the
fair market value shall be determined by mutual agreement of the holder of this
Warrant and the Company, and if the holder and the Company are unable to so
agree, by an investment banker of national reputation selected by the Company
and reasonably acceptable to the holder of this Warrant.
3.
<PAGE>
1.5 ISSUANCE OF SHARES. In the event the purchase rights evidenced by
this Warrant are exercised in whole or in part, a certificate or certificates
for the purchased shares shall be issued to the Investor as soon as practicable.
In the event the purchase rights evidenced by this Warrant are exercised in
part, the Company will also issue to the Investor a new warrant representing the
unexercised purchase rights.
2. CERTAIN ADJUSTMENTS
2.1 COMMON STOCK DIVIDENDS; SPLIT OR SUBDIVISION OF SHARES. If at any
time while this Warrant remains outstanding and unexpired, the Company should
effect a split or subdivision of the outstanding shares of Common Stock or pay a
dividend with respect to Common Stock payable in shares of Common Stock, or make
any other distribution with respect to Common Stock, then the purchase price
shall be correspondingly decreased and the number of shares of Common Stock
issuable upon exercise of the Warrant shall be increased to the product obtained
by multiplying the number of Warrant Shares purchasable immediately prior to
such purchase price adjustment by a fraction (A) the numerator of which shall be
the purchase price immediately prior to such adjustment, and (B) the denominator
of which shall be the purchase price immediately after such adjustment.
2.2 MERGERS, CONSOLIDATIONS OR SALE OF ASSETS. If at any time there shall
be a capital reorganization of the Common Stock (other than a combination,
reclassification, exchange or subdivision of Warrant Stock otherwise provided
for herein), or a merger or consolidation of the Company with or into another
corporation in which the Company is not the surviving corporation, or the sale
of the Company's properties and assets as, or substantially as, an entirety to
any other person, then, as a part of such reorganization, merger, consolidation
or sale, lawful provision shall be made so that the Investor shall thereafter be
entitled to receive upon exercise of this Warrant, during the period specified
in this Warrant and upon payment of the purchase price then in effect, the
number of shares of stock or other securities or property of the successor
corporation resulting from such reorganization, merger, consolidation or sale,
to which a holder of the Warrant Stock deliverable upon exercise of this Warrant
would have been entitled under the provisions of the agreement in such
reorganization, merger, consolidation or sale if this Warrant had been exercised
immediately before that reorganization, merger, consolidation or sale. In any
such case, appropriate adjustment (as determined in good faith by the Company's
Board of Directors) shall be made in the application of the provisions of this
Warrant with respect to the rights and interests of the Investor after the
reorganization, merger, consolida-
4.
<PAGE>
tion or sale to the end that the provisions of this Warrant (including
adjustment of the purchase price then in effect and the number of shares of
Warrant Stock) shall be applicable after that event, as near as reasonably may
be, in relation to any shares or other property deliverable after that event
upon exercise of this Warrant.
2.3 RECLASSIFICATION. If the Company at any time shall, by subdivision,
combination or reclassification of securities or otherwise, change any of the
Warrant Stock into the same or a different number of securities of any other
class or classes, this Warrant shall thereafter represent the right to acquire
such number and kind of securities as would have been issuable as a result of
such change with respect to the Warrant Stock immediately prior to such
subdivision, combination, reclassification or other change.
2.4 COMBINATION OF SHARES. If at any time while this Warrant remains
outstanding and unexpired, the number of shares of Common Stock outstanding is
decreased by a combination of the outstanding shares of Common Stock, then the
purchase price shall be correspondingly increased and the number of shares of
Common Stock issuable upon exercise of the Warrant shall be decreased to the
product obtained by multiplying the number of Warrant Shares purchasable
immediately prior to such purchase price adjustment by a fraction (A) the
numerator of which shall be the purchase price immediately prior to such
adjustment, and (B) the denominator of which shall be the purchase price
immediately after such adjustment.
2.5 CERTIFICATE AS TO ADJUSTMENTS. In the case of each adjustment or
readjustment of the purchase price pursuant to this Section 2, the Company will
promptly compute such adjustment or readjustment in accordance with the terms
hereof and cause a certificate setting forth such adjustment or readjustment and
showing in detail the facts upon which such adjustment or readjustment is based
to be delivered to the holder of this Warrant. The Company will, upon the
written request at any time of the holder of this Warrant, furnish or cause to
be furnished to such holder a certificate setting forth:
a) Such adjustments and readjustments;
b) The purchase price at the time in effect; and
c) The number of shares of Warrant Stock and the amount, if any, of other
property at the time receivable upon the exercise of the Warrant.
5.
<PAGE>
3. FRACTIONAL SHARES
No fractional shares shall be issued in connection with any exercise of
this Warrant. In lieu of the issuance of such fractional share, the Company
shall make a cash payment equal to the then fair market value of such fractional
share as determined by the Company's Board of Directors.
4. RESERVATION OF COMMON STOCK
The Company shall at all times reserve and keep available out of its
authorized but unissued shares of Common Stock, solely for the purpose of
effecting the exercise of this Warrant such number of its shares of Common Stock
as shall from time to time be sufficient to effect the exercise of this Warrant;
and if at any time the number of authorized but unissued shares of Common Stock
shall not be sufficient to effect the exercise of the entire Warrant, in
addition to such other remedies as shall be available to the holder of this
Warrant, the Company will use its reasonable best efforts to take such corporate
action as may, in the opinion of its counsel, be necessary to increase its
authorized but unissued shares of Common Stock to such number of shares as shall
be sufficient for such purposes.
5. PRIVILEGE OF STOCK OWNERSHIP
Prior to the exercise of this Warrant, the Investor shall not be entitled,
by virtue of holding this Warrant, to any rights of a stockholder of the
Company, including (without limitation) the right to vote, receive dividends or
other distributions, exercise preemptive rights or be notified of shareholder
meetings, and such holder shall not be entitled to any notice or other
communication concerning the business or affairs of the Company, except as
required by law.
6. LIMITATION OF LIABILITY
No provision hereof, in the absence of affirmative action by the holder
hereof to purchase the Warrant Stock, and no mere enumeration herein of the
rights or privileges of the holder hereof, shall give rise to any liability of
such holder for the purchase price or as a stockholder of the Company, whether
such liability is asserted by the Company or by creditors of the Company.
6.
<PAGE>
7. TRANSFERS AND EXCHANGES
7.1 Subject to compliance with applicable securities laws, this Warrant
and all rights hereunder are transferrable in whole or in part by the Investor.
The transfer shall be recorded on the books of the Company upon the surrender of
this Warrant, properly endorsed, to the Company at its principal offices and the
payment to the Company of all transfer taxes and other governmental charges
imposed on such transfer. In the event of a partial transfer, the Company shall
issue to the several holders one or more appropriate new warrants.
7.2 Each holder agrees that this Warrant when endorsed in blank shall be
negotiable and that when so endorsed the holder may be treated by the Company
and all other persons dealing with this Warrant as the absolute owner for all
purposes and as the person entitled to exercise the purchase rights evidenced
hereby; provided, however, that until such time as the transfer is recorded on
the books of the Company, the Company may treat the registered holder of this
Warrant as the absolute owner.
7.3 All new warrants issued in connection with transfers, exchanges or
partial exercises shall be identical in form and provision to this Warrant
except as to the number of shares.
8. PAYMENT OF TAXES
The Company shall pay all expenses in connection with, and all taxes and
other governmental charges (other than any thereof on, based on or measured by,
the net income of the holder thereof) that may be imposed in respect of, the
issue or delivery of the Warrant Stock. The Company shall not be required,
however, to pay any tax or other charge imposed in connection with any transfer
involved in the issue of any certificate for shares of the Warrant Stock in any
name other than that of the Investor, and in such case, the Company shall not be
required to issue or deliver any stock certificate until such tax or other
charge has been paid or it has been established to the Company's satisfaction
that no such tax or other charge is due.
9. SUCCESSORS AND ASSIGNS
The terms and provisions of this Warrant shall be binding upon the Company
and the Investor and their respective successors and assigns.
7.
<PAGE>
10. LOSS, THEFT, DESTRUCTION OR MUTILATION OF WARRANT
Upon receipt by the Company of evidence reasonably satisfactory to it of
the loss, theft, destruction or mutilation of this Warrant, and in case of loss,
theft or destruction, of indemnity or security reasonably satisfactory to the
Company, and upon reimbursement to the Company of all reasonable expenses
incidental thereto, and upon surrender and cancellation of this Warrant, if
mutilated, the Company will make and deliver a new warrant of like tenor and
dated as of such cancellation, in lieu of this Warrant.
8.
<PAGE>
11. RESTRICTED SECURITIES
The holder understands that this Warrant and the Warrant Stock purchasable
hereunder constitute "restricted securities" under the federal securities laws
inasmuch as they are, or will be, acquired from the Company in transactions not
involving a public offering and accordingly may not, under such laws and
applicable regulations, be resold or transferred without registration under the
Securities Act of 1933 or an applicable exemption from registration. In this
connection, the holder acknowledges that Rule 144 of the Securities and Exchange
Commission is not now, and may not in the future be, available for resales of
this Warrant and the Warrant Stock purchased hereunder.
12. SATURDAYS, SUNDAYS, HOLIDAYS
If the last or appointed day for the taking of any action or the expiration
of any right required or granted herein shall be a Saturday or Sunday or shall
be a legal holiday, then such action may be taken or such right may be
exercised, except as to the purchase price, on the next succeeding day not a
legal holiday.
ADVANCED FIBRE COMMUNICATIONS
By
--------------------------------
Donald Green, President
Dated: March ___, 1994
SIGNATURE PAGE TO WARRANT
<PAGE>
SUBSCRIPTION
Advanced Fibre Communications
P.O. Box 751239
1445 McDowell Boulevard North
Suite B
Petaluma, CA 94975-1239
Gentlemen:
The undersigned, 3-, hereby elects to purchase, pursuant to the
provisions of the March 16, 1994 Warrant held by the undersigned, 5- shares of
the Common Stock of Advanced Fibre Communications, a California corporation.
Payment of the per share purchase price required under such Warrant
accompanies this Subscription.
The undersigned hereby represents and warrants that the undersigned is
acquiring such stock for its own account and not for resale or with a view to
distribution of any part thereof and accepts such shares subject to the terms
and conditions of the Warrant.
Dated: _______________, 19__
3-
By
--------------------------------
Address:
-----------------------------------
-----------------------------------
10.
<PAGE>
EXHIBIT 10.4
PW-2-
PERFORMANCE WARRANT TO PURCHASE
5- SHARES OF COMMON STOCK
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED
IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO
THE SECURITIES UNDER SUCH ACT OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED OR
UNLESS SOLD PURSUANT TO RULE 144 OF SUCH ACT.
ADVANCED FIBRE COMMUNICATIONS
INCORPORATED UNDER THE LAWS OF THE STATE OF CALIFORNIA
THIS CERTIFIES THAT, for value received, 3- (the "Investor") is entitled to
purchase, on the terms hereof, 4- (5-) shares of Common Stock of Advanced Fibre
Communications, a California corporation (the "Company"); provided, that the
number of shares of Common Stock issuable upon exercise of this Warrant and the
purchase price thereof are subject to adjustment as set forth herein.
1. EXERCISE OF WARRANT
The terms and conditions upon which this Warrant may be exercised, and the
Common Stock covered hereby (the "Warrant Stock") may be purchased, are as
follows:
1.1 EXERCISE.
(a) This Warrant may be exercised as provided herein and for the
period specified herein after the Exercise Date, as defined below.
(b) PERFORMANCE TARGETS. The Company anticipates that for the year
ended December 31, 1994:
(i) its operating loss will not exceed $91,000.00; and
1.
<PAGE>
(ii) its ending cash balance will be no less than $1,359,000.00.
c. For the purpose of determining whether the Company has met the
performance targets described above,
(i) financial results from the Tellabs CATV joint venture or the
Hong Kong joint venture shall not be included, except for system
sales to China that are included in the Company's Business Plan
dated January 11, 1994; and
(ii) bank borrowings, or extension of accounts payable beyond 60
days, shall not be included.
d. The performance targets described above shall be calculated and
certified by the Company's independent accountants after their completion of the
audit of the Company's financial statements for 1994, no later than 90 days
after the year ended December 31, 1994.
e. In the event that the Company does not meet BOTH of the
performance targets described above, as calculated and certified by the
Company's independent accountants, then this Warrant shall, as of March 31, 1995
("the Exercise Date"), become exercisable. If both of the performance targets
described above are met, this Warrant shall expire and be of no further force or
effect.
f. On or before the Exercise Date, the Company will notify the
Investor in writing as to
(i) the amount of the operating loss, if any, for the year ended
December 31, 1994; and
(ii) the ending cash balance for the year ended December 31,
1994.
g. Should this Warrant become exercisable, it will thereafter remain
exercisable as to such shares until 5:00 p.m., California time, on May 4, 2000,
after which time this Warrant shall expire and terminate as to such shares of
Warrant Stock.
1.2 PURCHASE PRICE. The purchase price for the shares of Warrant Stock to
be issued upon exercise of this Warrant shall be $4.66 per share, subject to
adjustment as set forth herein.
1.3 METHOD OF EXERCISE. The exercise of the purchase rights evidenced by
this Warrant shall be effected by (a) the surrender of the Warrant, together
with a duly executed copy of the form of subscription attached hereto, to the
Company at its principal offices and (b) the delivery of the purchase price by
check or bank draft payable to the Company's order for the number of shares for
which the purchase rights hereunder are being
2.
<PAGE>
exercised or any other form of consideration approved by the Company's Board of
Directors.
1.4 NET ISSUANCE.
(a). RIGHT TO CONVERT. In addition to and without limiting the rights
of the holder under the terms of this Warrant, the Investor shall have the right
to convert this Warrant or any portion hereof (the "Conversion Right") into
shares of Common Stock as provided in this Section 1.4 at any time or from time
to time during the term of this Warrant, but only at such time when this Warrant
is then exercisable pursuant to the provisions of Section 1.1 hereof. Upon
exercise of the Conversion Right with respect to a particular number of shares
subject to this Warrant which are being surrendered (the "Converted Warrant
Shares"), the Company shall deliver to the Investor (without payment by the
Investor of any exercise price or any cash or other consideration) that number
of shares of fully paid and nonassessable Common Stock computed using the
following formula:
X = Y (A - B)
A
Where X = the number of shares of Common Stock to be issued to the
Investor
Y = the number of Converted Warrant Shares
A = the fair market value of one share of the Company's Common
Stock on the Conversion Date (as defined below)
B = the per share exercise price of the Warrant (as adjusted to
the Conversion Date)
The Conversion Right may only be exercised with respect to a whole number of
shares subject to this Warrant. No fractional shares shall be issuable upon
exercise of the Conversion Right, and if the number of shares to be issued
determined in accordance with the foregoing formula is other than a whole
number, the Company shall pay to the Investor an amount in cash equal to the
fair market value of the resulting fractional share on the Conversion Date.
Shares issued pursuant to the Conversion Right shall be treated as if they were
issued upon the exercise of this Warrant.
(b) METHOD OF EXERCISE. The Conversion Right may be exercised by the
Investor by the surrender of this Warrant at the principal office of the Company
together with a written statement specifying that the Investor thereby intends
to exercise the Conversion Right and indicating the number of shares subject to
this Warrant which are being surrendered (referred to in subsection (a) hereof
as the Converted Warrant Shares) in
3.
<PAGE>
exercise of the Conversion Right. Such conversion shall be effective upon
receipt by the Company of this Warrant together with the aforesaid written
statement, or on such later date as is specified therein (the "Conversion
Date"). Certificates for the shares issuable upon the exercise of the
Conversion Right and, if applicable, a new warrant evidencing the balance of the
shares remaining subject to this Warrant, shall be issued as of the Conversion
Date and shall be delivered to the Investor promptly following the Conversion
Date.
(c) DETERMINATION OF FAIR MARKET VALUE. For purposes of this Section
1.4, fair market value of a share of Common Stock on the Conversion Date shall
mean:
(i) If traded on a stock exchange, the fair market value of the
Common Stock shall be deemed to be the average of the closing selling prices of
the Common Stock on the stock exchange determined by the Company's Board of
Directors to be the primary market for the Common Stock over the ten (10)
trading day period ending on the date prior to the Conversion Date, as such
prices are officially quoted in the composite tape of transactions on such
exchange;
(ii) If traded over-the-counter, the fair market value of the
Common Stock shall be deemed to be the average of the closing bid prices (or, if
such information is available, the closing selling prices) of the Common Stock
over the ten (10) trading day period ending on the date prior to the Conversion
Date, as such prices are reported by the National Association of Securities
Dealers through its NASDAQ system or any successor system; and
(iii) If there is no public market for the Common Stock, then
the fair market value shall be determined by mutual agreement of the Investor
and the Company, and if the Investor and the Company are unable to so agree, by
Wilson Associates or such other independent appraiser as selected by the Company
and reasonably acceptable to the Investor.
1.5 ISSUANCE OF SHARES. In the event the purchase rights evidenced by
this Warrant are exercised in whole or in part, a certificate or certificates
for the purchased shares shall be issued to the Investor as soon as practicable.
In the event the purchase rights evidenced by this Warrant are exercised in
part, the Company will also issue to the Investor a new warrant representing the
unexercised purchase rights.
2. CERTAIN ADJUSTMENTS
2.1 COMMON STOCK DIVIDENDS; SPLIT OR SUBDIVISION OF SHARES. If at any
time while this Warrant remains outstanding and unexpired, the Company should
effect a split or subdivision of the outstanding shares of Common Stock or pay a
dividend with respect to Common Stock payable in shares of Common Stock, or make
any
4.
<PAGE>
other distribution with respect to Common Stock, then the purchase price shall
be correspondingly decreased and the number of shares of Common Stock issuable
upon exercise of the Warrant shall be increased to the product obtained by
multiplying the number of Warrant Shares purchasable immediately prior to such
purchase price adjustment by a fraction (A) the numerator of which shall be the
purchase price immediately prior to such adjustment, and (B) the denominator of
which shall be the purchase price immediately after such adjustment.
2.2 MERGERS, CONSOLIDATIONS OR SALE OF ASSETS. If at any time there shall
be a capital reorganization of the Common Stock (other than a combination,
reclassification, exchange or subdivision of Warrant Stock otherwise provided
for herein), or a merger or consolidation of the Company with or into another
corporation in which the Company is not the surviving corporation, or the sale
of the Company's properties and assets as, or substantially as, an entirety to
any other person, then, as a part of such reorganization, merger, consolidation
or sale, lawful provision shall be made so that the Investor shall thereafter be
entitled to receive upon exercise of this Warrant, during the period specified
in this Warrant and upon payment of the purchase price then in effect, the
number of shares of stock or other securities or property of the successor
corporation resulting from such reorganization, merger, consolidation or sale,
to which a holder of the Warrant Stock deliverable upon exercise of this Warrant
would have been entitled under the provisions of the agreement in such
reorganization, merger, consolidation or sale if this Warrant had been exercised
immediately before that reorganization, merger, consolidation or sale. In any
such case, appropriate adjustment (as determined in good faith by the Company's
Board of Directors) shall be made in the application of the provisions of this
Warrant with respect to the rights and interests of the Investor after the
reorganization, merger, consolidation or sale to the end that the provisions of
this Warrant (including adjustment of the purchase price then in effect and the
number of shares of Warrant Stock) shall be applicable after that event, as near
as reasonably may be, in relation to any shares or other property deliverable
after that event upon exercise of this Warrant.
2.3 RECLASSIFICATION. If the Company at any time shall, by subdivision,
combination or reclassification of securities or otherwise, change any of the
Warrant Stock into the same or a different number of securities of any other
class or classes, this Warrant shall thereafter represent the right to acquire
such number and kind of securities as would have been issuable as a result of
such change with respect to the Warrant Stock immediately prior to such
subdivision, combination, reclassification or other change.
2.4 COMBINATION OF SHARES. If at any time while this Warrant remains
outstanding and unexpired, the number of shares of Common Stock outstanding is
decreased by a combination of the
5.
<PAGE>
outstanding shares of Common Stock, then the purchase price shall be
correspondingly increased and the number of shares of Common Stock issuable upon
exercise of the Warrant shall be decreased to the product obtained by
multiplying the number of Warrant Shares purchasable immediately prior to such
purchase price adjustment by a fraction (A) the numerator of which shall be the
purchase price immediately prior to such adjustment, and (B) the denominator of
which shall be the purchase price immediately after such adjustment.
2.5 CERTIFICATE AS TO ADJUSTMENTS. In the case of each adjustment or
readjustment pursuant to this Section 2, the Company will promptly compute such
adjustment or readjustment in accordance with the terms hereof and cause a
certificate setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment is based to be delivered to
the holder of this Warrant. The Company will, upon the written request at any
time of the holder of this Warrant, furnish or cause to be furnished to such
holder a certificate setting forth:
a) Such adjustments and readjustments;
b) The purchase price at the time in effect; and
c) The number of shares of Warrant Stock and the amount, if any, of other
property at the time receivable upon the exercise of the Warrant.
3. FRACTIONAL SHARES
No fractional shares shall be issued in connection with any exercise of
this Warrant. In lieu of the issuance of such fractional share, the Company
shall make a cash payment equal to the then fair market value of such fractional
share as determined by the Company's Board of Directors.
4. RESERVATION OF COMMON STOCK
The Company shall at all times reserve and keep available out of its
authorized but unissued shares of Common Stock, solely for the purpose of
effecting the exercise of this Warrant such number of its shares of Common Stock
as shall from time to time be sufficient to effect the exercise of this Warrant;
and if at any time the number of authorized but unissued shares of Common Stock
shall not be sufficient to effect the exercise of the entire Warrant, in
addition to such other remedies as shall be available to the holder of this
Warrant, the Company will use its reasonable best efforts to take such corporate
action as may, in the opinion of its counsel, be necessary to increase its
authorized but unissued shares of Common Stock to such number of shares as shall
be sufficient for such purposes.
6.
<PAGE>
5. PRIVILEGE OF STOCK OWNERSHIP
Prior to the exercise of this Warrant, the Investor shall not be entitled,
by virtue of holding this Warrant, to any rights of a stockholder of the
Company, including (without limitation) the right to vote, receive dividends or
other distributions, exercise preemptive rights or be notified of shareholder
meetings, and such holder shall not be entitled to any notice or other
communication concerning the business or affairs of the Company, except as
required by law.
6. LIMITATION OF LIABILITY
No provision hereof, in the absence of affirmative action by the holder
hereof to purchase the Warrant Stock, and no mere enumeration herein of the
rights or privileges of the holder hereof, shall give rise to any liability of
such holder for the purchase price or as a stockholder of the Company, whether
such liability is asserted by the Company or by creditors of the Company.
7 TRANSFERS AND EXCHANGES
7.1 Subject to compliance with applicable securities laws, this Warrant
and all rights hereunder are transferrable in whole or in part by the Investor.
The transfer shall be recorded on the books of the Company upon the surrender of
this Warrant, properly endorsed, to the Company at its principal offices and the
payment to the Company of all transfer taxes and other governmental charges
imposed on such transfer. In the event of a partial transfer, the Company shall
issue to the several holders one or more appropriate new warrants.
7.2 Each holder agrees that this Warrant when endorsed in blank shall be
negotiable and that when so endorsed the holder may be treated by the Company
and all other persons dealing with this Warrant as the absolute owner for all
purposes and as the person entitled to exercise the purchase rights evidenced
hereby; provided, however, that until such time as the transfer is recorded on
the books of the Company, the Company may treat the registered holder of this
Warrant as the absolute owner.
7.3 All new warrants issued in connection with transfers, exchanges or
partial exercises shall be identical in form and provision to this Warrant
except as to the number of shares.
8. PAYMENT OF TAXES
The Company shall pay all expenses in connection with, and all taxes and
other governmental charges (other than any thereof on, based on or measured by,
the net income of the holder thereof) that may be imposed in respect of, the
issue or delivery of the Warrant Stock. The Company shall not be required,
however, to pay any tax or other charge imposed in connection with
7.
<PAGE>
any transfer involved in the issue of any certificate for shares of the Warrant
Stock in any name other than that of the Investor, and in such case, the Company
shall not be required to issue or deliver any stock certificate until such tax
or other charge has been paid or it has been established to the Company's
satisfaction that no such tax or other charge is due.
9. SUCCESSORS AND ASSIGNS
The terms and provisions of this Warrant shall be binding upon the Company
and the Investor and their respective successors and assigns.
10. LOSS, THEFT, DESTRUCTION OR MUTILATION OF WARRANT
Upon receipt by the Company of evidence reasonably satisfactory to it of
the loss, theft, destruction or mutilation of this Warrant, and in case of loss,
theft or destruction, of indemnity or security reasonably satisfactory to the
Company, and upon reimbursement to the Company of all reasonable expenses
incidental thereto, and upon surrender and cancellation of this Warrant, if
mutilated, the Company will make and deliver a new warrant of like tenor and
dated as of such cancellation, in lieu of this Warrant.
11. RESTRICTED SECURITIES
The Investor understands that this Warrant and the Warrant Stock
purchasable hereunder constitute "restricted securities" under the federal
securities laws inasmuch as they are, or will be, acquired from the Company in
transactions not involving a public offering and accordingly may not, under such
laws and applicable regulations, be resold or transferred without registration
under the Securities Act of 1933 or an applicable exemption from registration.
In this connection, the Investor acknowledges that Rule 144 of the Securities
and Exchange Commission is not now, and may not in the future be, available for
resales of this Warrant and the Warrant Stock purchased hereunder.
8.
<PAGE>
12. SATURDAYS, SUNDAYS, HOLIDAYS
If the last or appointed day for the taking of any action or the expiration
of any right required or granted herein shall be a Saturday or Sunday or shall
be a legal holiday, then such action may be taken or such right may be
exercised, except as to the purchase price, on the next succeeding day that is
not a legal holiday.
ADVANCED FIBRE COMMUNICATIONS
----------------------------------
By: Donald Green
President
Dated: August 5, 1994
SIGNATURE PAGE TO PERFORMANCE WARRANT
<PAGE>
SUBSCRIPTION
Advanced Fibre Communications
P.O. Box 751239
1445 McDowell Boulevard North
Suite B
Petaluma, CA 94975-1239
Ladies and Gentlemen:
The undersigned, 3-, hereby elects to purchase, pursuant to the
provisions of the August 5-, 1994 Warrant held by the undersigned, 5~
shares of the Common Stock of Advanced Fibre Communications, a California
corporation.
Payment of the per share purchase price required under such Warrant
accompanies this Subscription.
The undersigned hereby represents and warrants that the undersigned is
acquiring such stock for its own account and not for resale or with a view to
distribution of any part thereof and accepts such shares subject to the terms
and conditions of the Warrant.
Dated: , 199
----------------- --
3-
By
----------------------------
Address:
-------------------------------
-------------------------------
10.
<PAGE>
EXHIBIT 10.5
W-E-1
WARRANT TO PURCHASE
15,034 SHARES OF SERIES E PREFERRED STOCK
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933. THEY MAY NOT BE SOLD, OFFERED FOR
SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A
REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE
SECURITIES UNDER SUCH ACT OR AN OPINION OF COUNSEL
SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT
REQUIRED OR UNLESS SOLD PURSUANT TO RULE 144 OF SUCH ACT.
ADVANCED FIBRE COMMUNICATIONS, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFIES THAT, for value received, Hambrecht & Quist L.P. (the
"Investor") is entitled to purchase, on the terms hereof, 15,034 shares of
Series E Preferred Stock of Advanced Fibre Communications, Inc., a Delaware
corporation (the "Company"), at a purchase price as set forth herein.
1. EXERCISE OF WARRANT
The terms and conditions upon which this Warrant may be exercised, and the
Series E Preferred Stock covered hereby (the "Warrant Stock") may be purchased,
are as follows:
1.1 EXERCISE. This Warrant may be exercised in whole or in part at any
time after the date hereof, but in no case may this Warrant be exercised later
than the close of business on September 30, 2000 (the "Termination Date"), after
which time this Warrant shall terminate and shall be void and of no further
force or effect.
1.2 PURCHASE PRICE. The purchase price for the shares of Warrant Stock to
be issued upon exercise of this Warrant shall be $14.00 per share, subject to
adjustment as set forth herein.
1.3 METHOD OF EXERCISE. The exercise of the purchase rights evidenced by
this Warrant shall be effected by (a) the surrender of the Warrant, together
with a duly executed copy of the form of subscription attached hereto, to the
Company at its principal offices and (b) the delivery of the purchase price by
check or bank draft payable to the Company's order for the number of shares for
which the purchase rights hereunder are being exercised or any other form of
consideration approved by the Company's Board of Directors.
1.4 NET ISSUANCE.
(a) RIGHT TO CONVERT. In addition to and without limiting the rights
of the Investor under the terms of the Warrant, the Investor shall have the
right to convert the Warrant or any portion thereof (the "Conversion Right")
into shares of Series E Preferred Stock as provided in this Paragraph 1.4 at any
time or from time to time during the term of the Warrant. Upon exercise of the
Conversion Right with respect
1
<PAGE>
to a particular number of shares subject to the Warrant (the "Converted Warrant
Shares"), the Company shall deliver to the Investor (without payment by the
Investor of any exercise price or any cash or other consideration) that number
of shares of fully paid and nonassessable Series E Preferred Stock computed
using the following formula:
X = Y (A - B)
---------
A
Where X = the number of shares of Series E Preferred Stock to be
issued to the holder
Y = the number of Converted Warrant Shares
A = the fair market value of one share of the Company's Series E
Preferred Stock on the Conversion Date (as defined below)
B = the per share exercise price of the Warrant (as adjusted to
the Conversion Date)
The Conversion Right may only be exercised with respect to a whole number of
shares subject to the Warrant. No fractional shares shall be issuable upon
exercise of the Conversion Right, and if the number of shares to be issued
determined in accordance with the foregoing formula is other than a whole
number, the Company shall pay to the holder an amount in cash equal to the fair
market value of the resulting fractional share on the Conversion Date. Shares
issued pursuant to the Conversion Right shall be treated as if they were issued
upon the exercise of the Warrant.
(b) METHOD OF EXERCISE. The Conversion Right may be exercised by the
Investor by the surrender of the Warrant at the principal office of the Company
together with a written statement specifying that the Investor thereby intends
to exercise the Conversion Right and indicating the number of shares subject to
the Warrant which are being surrendered (referred to in subparagraph (a) hereof
as the Converted Warrant Shares) in exercise of the Conversion Right. Such
conversion shall be effective upon receipt by the Company of the Warrant
together with the aforesaid written statement, or on such later date as is
specified therein (the "Conversion Date"). Certificates for the shares issuable
upon exercise of the Conversion Right and, if applicable, a new warrant
evidencing the balance of the shares remaining subject to the Warrant, shall be
issued as of the Conversion Date and shall be delivered to the Investor promptly
following the Conversion Date.
(c) DETERMINATION OF FAIR MARKET VALUE. For purposes of this
Paragraph 1.4, fair market value of a share of Series E Preferred Stock on the
Conversion Date shall mean:
(i) If traded on a stock exchange, the fair market value of the
Series E Preferred Stock shall be deemed to be the average of the closing
selling prices of the Series E Preferred Stock on the stock exchange determined
by the Company's Board of Directors to be the primary market for the Series E
Preferred Stock over the ten (10) trading day period ending on the date prior to
the Conversion Date, as such prices are officially quoted in the composite tape
of transactions on such exchange;
(ii) If traded over-the-counter, the fair market value of the
Series E Preferred Stock shall be deemed to be the average of the closing bid
prices (or, if such information is available, the closing selling prices) of the
Series E Preferred Stock over the ten (10) trading day period ending on the date
prior to the Conversion Date, as such prices are reported by the National
Association of Securities Dealers through its NASDAQ system or any successor
system; and
(iii) If there is no public market for the Series E Preferred
Stock, then the fair market value shall be determined by mutual agreement of the
Investor and the Company, and if the Investor and
2
<PAGE>
the Company are unable to so agree, by an investment banker of national
reputation selected by the Company and reasonably acceptable to the Investor.
1.5 ISSUANCE OF SHARES. In the event the purchase rights evidenced by
this Warrant are exercised in whole or in part, a certificate or certificates
for the purchased shares shall be issued to the Investor as soon as practicable.
In the event the purchase rights evidenced by this Warrant are exercised in
part, the Company will also issue to the Investor a new warrant representing the
unexercised purchase rights.
2. CERTAIN ADJUSTMENTS
2.1 SERIES E PREFERRED STOCK DIVIDENDS; SPLIT OR SUBDIVISION OF SHARES.
If at any time while this Warrant remains outstanding and unexpired, the Company
should effect a split or subdivision of the outstanding shares of Series E
Preferred Stock or pay a dividend with respect to Series E Preferred Stock
payable in shares of Series E Preferred Stock, or make any other distribution
with respect to Series E Preferred Stock (including any adjustments made
pursuant to the Fifth Amended and Restated Indemnity Agreement dated as of
September 29, 1995), then the purchase price shall be correspondingly decreased
and the number of shares of Series E Preferred Stock issuable upon exercise of
the Warrant shall be increased to the product obtained by multiplying the number
of Warrant Shares purchasable immediately prior to such purchase price
adjustment by a fraction (A) the numerator of which shall be the purchase price
immediately prior to such adjustment, and (B) the denominator of which shall be
the purchase price immediately after such adjustment.
2.2 MERGERS, CONSOLIDATIONS OR SALE OF ASSETS. If at any time there shall
be a capital reorganization of the Series E Preferred Stock (other than a
combination, reclassification, exchange or subdivision of Warrant Stock
otherwise provided for herein), or a merger or consolidation of the Company with
or into another corporation in which the Company is not the surviving
corporation, or the sale of the Company's properties and assets as, or
substantially as, an entirety to any other person, then, as a part of such
reorganization, merger, consolidation or sale, lawful provision shall be made so
that the Investor shall thereafter be entitled to receive upon exercise of this
Warrant, during the period specified in this Warrant and upon payment of the
purchase price then in effect, the number of shares of stock or other securities
or property of the successor corporation resulting from such reorganization,
merger, consolidation or sale, to which a holder of the Warrant Stock
deliverable upon exercise of this Warrant would have been entitled under the
provisions of the agreement in such reorganization, merger, consolidation or
sale if this Warrant had been exercised immediately before that reorganization,
merger, consolidation or sale. In any such case, appropriate adjustment (as
determined in good faith by the Company's Board of Directors) shall be made in
the application of the provisions of this Warrant with respect to the rights and
interests of the Investor after the reorganization, merger, consolidation or
sale to the end that the provisions of this Warrant (including adjustment of the
purchase price then in effect and the number of shares of Warrant Stock) shall
be applicable after that event, as near as reasonably may be, in relation to any
shares or other property deliverable after that event upon exercise of this
Warrant.
2.3 RECLASSIFICATION. If the Company at any time shall, by subdivision,
combination or reclassification of securities or otherwise, change any of the
Warrant Stock into the same or a different number of securities of any other
class or classes, this Warrant shall thereafter represent the right to acquire
such number and kind of securities as would have been issuable as a result of
such change with respect to the Warrant Stock immediately prior to such
subdivision, combination, reclassification or other change.
2.4 COMBINATION OF SHARES. If at any time while this Warrant remains
outstanding and unexpired, the number of shares of Series E Preferred Stock
outstanding is decreased by a combination of the outstanding shares of Series E
Preferred Stock, then the purchase price shall be correspondingly increased and
the number of shares of Series E Preferred Stock issuable upon exercise of the
Warrant shall be decreased to the product obtained by multiplying the number of
Warrant Shares purchasable immediately prior to such purchase price adjustment
by a fraction (A) the numerator of which shall be the purchase price
3
<PAGE>
immediately prior to such adjustment, and (B) the denominator of which shall be
the purchase price immediately after such adjustment.
2.5 CERTIFICATE AS TO ADJUSTMENTS. In the case of each adjustment or
readjustment of the purchase price pursuant to this Section 2, the Company will
promptly compute such adjustment or readjustment in accordance with the terms
hereof and cause a certificate setting forth such adjustment or readjustment and
showing in detail the facts upon which such adjustment or readjustment is based
to be delivered to the holder of this Warrant. The Company will, upon the
written request at any time of the holder of this Warrant, furnish or cause to
be furnished to such holder a certificate setting forth:
a) Such adjustments and readjustments;
b) The purchase price at the time in effect; and
c) The number of shares of Warrant Stock and the amount, if any, of other
property at the time receivable upon the exercise of the Warrant.
3. FRACTIONAL SHARES
No fractional shares shall be issued in connection with any exercise or
conversion of this Warrant. In lieu of the issuance of such fractional share,
the Company shall make a cash payment equal to the then fair market value of
such fractional share as determined by the Company's Board of Directors.
4. RESERVATION OF SERIES E PREFERRED STOCK AND COMMON STOCK
The Company shall at all times during the period within which the rights
represented by this Warrant may be exercised, reserve and keep available a
sufficient number of shares of Series E Preferred Stock (and Common Stock
issuable upon conversion thereof) to provide for the exercise of the rights
represented by this Warrant.
5. PRIVILEGE OF STOCK OWNERSHIP
Prior to the exercise of this Warrant, the Investor shall not be entitled,
by virtue of holding this Warrant, to any rights of a stockholder of the
Company, including (without limitation) the right to vote, receive dividends or
other distributions, exercise preemptive rights or be notified of stockholder
meetings, and such holder shall not be entitled to any notice or other
communication concerning the business or affairs of the Company, except as
required by law.
6. LIMITATION OF LIABILITY
No provision hereof, in the absence of affirmative action by the holder
hereof to purchase the Warrant Stock, and no mere enumeration herein of the
rights or privileges of the holder hereof, shall give rise to any liability of
such holder for the purchase price or as a stockholder of the Company, whether
such liability is asserted by the Company or by creditors of the Company.
7. TRANSFERS AND EXCHANGES
7.1 Subject to compliance with applicable securities laws, this Warrant
and all rights hereunder are transferrable in whole or in part by the Investor.
The transfer shall be recorded on the books of the Company upon the surrender of
this Warrant, properly endorsed, to the Company at its principal offices and the
payment to the Company of all transfer taxes and other governmental charges
imposed on such transfer. In the event of a partial transfer, the Company shall
issue to the several holders one or more appropriate new warrants.
4
<PAGE>
7.2 Each holder agrees that this Warrant when endorsed in blank shall be
negotiable and that when so endorsed the holder may be treated by the Company
and all other persons dealing with this Warrant as the absolute owner for all
purposes and as the person entitled to exercise the purchase rights evidenced
hereby; provided, however, that until such time as the transfer is recorded on
the books of the Company, the Company may treat the registered holder of this
Warrant as the absolute owner.
7.3 All new warrants issued in connection with transfers, exchanges or
partial exercises shall be identical in form and provision to this Warrant
except as to the number of shares.
8. PAYMENT OF TAXES
The Company shall pay all expenses in connection with, and all taxes and
other governmental charges (other than any thereof on, based on or measured by,
the net income of the holder thereof) that may be imposed in respect of, the
issue or delivery of the Warrant Stock. The Company shall not be required,
however, to pay any tax or other charge imposed in connection with any transfer
involved in the issue of any certificate for shares of the Warrant Stock in any
name other than that of the Investor, and in such case, the Company shall not be
required to issue or deliver any stock certificate until such tax or other
charge has been paid or it has been established to the Company's satisfaction
that no such tax or other charge is due.
9. SUCCESSORS AND ASSIGNS
The terms and provisions of this Warrant shall be binding upon the Company
and the Investor and their respective successors and assigns.
10. LOSS, THEFT, DESTRUCTION OR MUTILATION OF WARRANT
Upon receipt by the Company of evidence reasonably satisfactory to it of
the loss, theft, destruction or mutilation of this Warrant, and in case of loss,
theft or destruction, of indemnity or security reasonably satisfactory to the
Company, and upon reimbursement to the Company of all reasonable expenses
incidental thereto, and upon surrender and cancellation of this Warrant, if
mutilated, the Company will make and deliver a new warrant of like tenor and
dated as of such cancellation, in lieu of this Warrant.
11. RESTRICTED SECURITIES
The holder understands that this Warrant and the Warrant Stock purchasable
hereunder constitute "restricted securities" under the federal securities laws
inasmuch as they are, or will be, acquired from the Company in transactions not
involving a public offering and accordingly may not, under such laws and
applicable regulations, be resold or transferred without registration under the
Securities Act of 1933 or an applicable exemption from registration. In this
connection, the holder acknowledges that Rule 144 of the Securities and Exchange
Commission is not now, and may not in the future be, available for resales of
this Warrant and the Warrant Stock purchased hereunder.
5
<PAGE>
12. SATURDAYS, SUNDAYS, HOLIDAYS
If the last or appointed day for the taking of any action or the expiration
of any right required or granted herein shall be a Saturday or Sunday or shall
be a legal holiday, then such action may be taken or such right may be
exercised, except as to the purchase price, on the next succeeding day not a
legal holiday.
ADVANCED FIBRE COMMUNICATIONS, INC.
By /s/ Daniel Steimle
--------------------------------
Daniel Steimle
Vice President,
Chief Financial Officer
Dated: September 29, 1995
6
<PAGE>
SUBSCRIPTION
Advanced Fibre Communications, Inc.
1445 McDowell Boulevard North
Suite B
Petaluma, CA 94954
Ladies and Gentlemen:
The undersigned, HAMBRECHT & QUIST L.P., hereby elects to purchase,
pursuant to the provisions of the September 29, 1995 Warrant held by the
undersigned, _____________ shares of the Series E Preferred Stock of Advanced
Fibre Communications, Inc., a Delaware corporation.
Payment of the per share purchase price required under such Warrant
accompanies this Subscription.
The undersigned hereby represents and warrants that the undersigned is
acquiring such stock for its own account and not for resale or with a view to
distribution of any part thereof and accepts such shares subject to the terms
and conditions of the Warrant.
Dated:
----------------------
HAMBRECHT & QUIST L.P.
By
----------------------------
Name:
Title:
Address:
-------------------------------
-------------------------------
-------------------------------
<PAGE>
EXHIBIT 10.6
ADVANCED FIBRE COMMUNICATIONS
RESTRICTED STOCK ISSUANCE AGREEMENT
AGREEMENT made as of this 19th day of May, 1995, by and among Advanced
Fibre Communications, a California corporation (the "Corporation"), Donald
Green, ("Purchaser") and Maureen Green, Purchaser's spouse.
I. PURCHASE OF SHARES
1.1 PURCHASE. Purchaser hereby purchases, and the Corporation hereby
sells to Purchaser, 41,800 shares (the "Shares") of the Corporation's common
stock ("Common Stock") at a purchase price of $1.25 per share (the "Purchase
Price").
1.2 PAYMENT. Concurrently with the execution of this Agreement,
Purchaser shall deliver to the Corporate Secretary of the Corporation (i) the
aggregate Purchase Price payable for the Shares in cash or cash equivalent and
(ii) a duly-executed blank Assignment Separate from Certificate (in the form
attached hereto as Exhibit A).
1.3 DELIVERY OF CERTIFICATES. The certificates representing the
Shares hereunder shall be held in escrow by the Secretary of the Corporation as
provided in Article VII hereof.
1.4 SHAREHOLDER RIGHTS. Until such time as the Corporation actually
exercises its repurchase right, rights of first refusal or special purchase
right under this Agreement, Purchaser (or any successor in interest) shall have
all the rights of a shareholder (including voting and dividend rights) with
respect to the Shares, including the Shares held in escrow under Article VII,
subject, however, to the transfer restrictions of Article IV.
II. SECURITIES LAW COMPLIANCE
2.1 EXEMPTION FROM REGISTRATION. The Shares have not been registered
under the Securities Act of 1933, as amended (the "1933 Act"), and are
accordingly being issued to Purchaser in reliance upon the exemption from such
registration provided by Rule 701 of the Securities and Exchange Commission
("SEC") for stock issuances under compensatory benefit arrangements. Purchaser
hereby acknowledges receipt of a copy of the documentation for such arrangement
in the form of Exhibit B attached hereto.
2.2 RESTRICTED SECURITIES.
A. Purchaser hereby confirms that Purchaser has been informed
that the Shares are restricted securities under the 1933 Act and may not be
resold or
<PAGE>
transferred unless the Shares are first registered under the Federal securities
laws or unless an exemption from such registration is available. Accordingly,
Purchaser hereby acknowledges that Purchaser is prepared to hold the Shares for
an indefinite period and that Purchaser is aware that Rule 144 of the SEC issued
under the 1933 Act is not presently available to exempt the sale of the Shares
from the registration requirements of the 1933 Act.
B. Upon the expiration of the ninety (90)-day period
immediately following the date on which the Corporation first becomes subject to
the reporting requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), the Shares, to the extent vested under Article V, may be
sold (without registration) pursuant to the applicable requirements of Rule 144.
If Purchaser is at the time of such sale an affiliate of the Corporation for
purposes of Rule 144 or was such an affiliate during the preceding three (3)
months, then the sale must comply with all the requirements of Rule 144
(including the volume limitation on the number of shares sold, the
broker/market-maker sale requirement and the requisite notice to the SEC);
however, the two (2)-year holding period requirement of the Rule will not be
applicable. If Purchaser is not at the time of the sale an affiliate of the
Corporation nor was such an affiliate during the preceding three (3) months,
then none of the requirements of Rule 144 (other than the broker/market-maker
sale requirement for Shares held for less than three (3) years following payment
in cash of the Purchase Price therefor) will be applicable to the sale.
C. Should the Corporation not become subject to the reporting
requirements of the Exchange Act, then Purchaser may, provided he/she is not at
the time an affiliate of the Corporation (nor was such an affiliate during the
preceding three (3) months), sell the Shares (without registration) pursuant to
paragraph (k) of Rule 144 after the Shares have been held for a period of three
(3) years following the payment in cash of the Purchase Price for such shares.
2.3 DISPOSITION OF SHARES. Purchaser hereby agrees that Purchaser
shall make no disposition of the Shares (other than a permitted transfer under
paragraph 4.1) unless and until there is compliance with all of the following
requirements:
(a) Purchaser shall have notified the Corporation of the
proposed disposition and provided a written summary of the terms and conditions
of the proposed disposition.
(b) Purchaser shall have complied with all requirements of this
Agreement applicable to the disposition of the Shares.
(c) Purchaser shall have provided the Corporation with written
assurances, in form and substance satisfactory to the Corporation, that (i)
the proposed disposition does not require registration of the Shares under
the 1933 Act or (ii) all appropriate action necessary for compliance with
the
2.
<PAGE>
registration requirements of the 1933 Act or of any exemption from
registration available under the 1933 Act (including Rule 144) has been
taken.
(d) Purchaser shall have provided the Corporation with written
assurances, in form and substance satisfactory to the Corporation, that the
proposed disposition will not result in the contravention of any transfer
restrictions applicable to the Shares pursuant to the provisions of state
securities laws.
The Corporation shall not be required (i) to transfer on its books any
Shares which have been sold or transferred in violation of the provisions of
this Article II NOR (ii) to treat as the owner of the Shares, or otherwise to
accord voting or dividend rights to, any transferee to whom the Shares have been
transferred in contravention of this Agreement.
2.4 RESTRICTIVE LEGENDS. In order to reflect the restrictions on
disposition of the Shares, the stock certificates for the Shares will be
endorsed with restrictive legends, including one or more of the following
legends:
(i) "The shares represented by this certificate have not been
registered under the Securities Act of 1933. The shares may not be sold or
offered for sale in the absence of (a) an effective registration statement for
the shares under such Act, (b) a 'no action' letter of the Securities and
Exchange Commission with respect to such sale or offer, or (c) satisfactory
assurances to the Corporation that registration under such Act is not required
with respect to such sale or offer."
(ii) "The shares represented by this certificate are unvested and
accordingly may not be sold, assigned, transferred, encumbered, or in any manner
disposed of except in conformity with the terms of a written agreement dated May
19, 1995, between the Corporation and the registered holder of the shares (or
the predecessor in interest to the shares). Such agreement grants certain
repurchase rights and rights of first refusal to the Corporation (or its
assignees) upon the sale, assignment, transfer, encumbrance or other disposition
of the Corporation's shares or upon termination of service with the Corporation.
The Corporation will upon written request furnish a copy of such agreement to
the holder hereof without charge."
2.5 EXEMPTION UNDER CALIFORNIA SECURITIES LAWS. The sale of the
shares has not been qualified with the Commissioner of Corporations of the state
of California, and the issuance of such shares or the payment or receipt of any
part of the consideration therefor prior to such qualification is unlawful
unless the sale of shares is exempt from qualification by section 25100, 25102
or 25105 of the California Corporations Code. The rights of all parties to this
agreement are expressly conditioned unless the sale is so exempt.
3.
<PAGE>
III. SPECIAL TAX PROVISIONS
3.1 SECTION 83(b) ELECTION. Purchaser understands that under Section
83 of the Code, the excess of the fair market value of the Shares on the date
any forfeiture restrictions applicable to such shares lapse over the Purchase
Price for such Shares will be reportable as ordinary income on such lapse date.
For this purpose, the term "forfeiture restrictions" includes the right of the
Corporation to repurchase the Shares pursuant to the Repurchase Right provided
under Article V of this Agreement. Purchaser understands that he/she may elect
under Section 83(b) of the Internal Revenue Code of 1986, as amended (the
"Code") to be taxed at the time the Shares are acquired hereunder, rather than
when and as such Shares cease to be subject to such forfeiture restrictions.
Such election must be filed with the Internal Revenue Service within thirty (30)
days after the date of this Agreement. Even if the fair market value of the
Shares on the date of this Agreement equals the Purchase Price paid (and thus no
tax is payable), the election must be made to avoid adverse tax consequences in
the future.
3.2 PURCHASER ACKNOWLEDGES THAT IT IS PURCHASER'S SOLE
RESPONSIBILITY, AND NOT THE CORPORATION'S, TO FILE A TIMELY ELECTION UNDER
SECTION 83(B), EVEN IF PURCHASER REQUESTS THE CORPORATION OR ITS REPRESENTATIVES
TO MAKE THIS FILING ON HIS/HER BEHALF. This filing should be made by registered
or certified mail, return receipt requested, and Purchaser must retain two (2)
copies of the completed form for filing with his/her Federal and state tax
returns for the current tax year and an additional copy for his/her personal
records.
IV. TRANSFER RESTRICTIONS
4.1 RESTRICTION ON TRANSFER. Purchaser shall not transfer, assign,
encumber or otherwise dispose of any of the Shares which are subject to the
Corporation's Repurchase Right under Article V. In addition, Shares which are
released from the Repurchase Right shall not be transferred, assigned,
encumbered or otherwise made the subject of disposition in contravention of the
Corporation's First Refusal Right under Article VI. Such restrictions on
transfer, however, shall NOT be applicable to (i) a gratuitous transfer of the
Shares PROVIDED AND ONLY IF Purchaser obtains the Corporation's prior written
consent to such transfer, (ii) a transfer of title to the Shares effected
pursuant to Purchaser's will or the laws of intestate succession or (iii) a
transfer to the Corporation in pledge as security for any purchase-money
indebtedness incurred by Purchaser in connection with the acquisition of the
Shares.
4.2 TRANSFEREE OBLIGATIONS. Each person (other than the Corporation)
to whom the Shares are transferred by means of one of the permitted transfers
specified in paragraph 4.1 must, as a condition precedent to the validity of
such transfer, acknowledge in writing to the Corporation that such person is
bound by the provisions of this Agreement and that the transferred shares are
subject to (i) both the Corporation's Repurchase Right and the Corporation's
First Refusal Right granted hereunder and (ii) the market stand-off
4.
<PAGE>
provisions of paragraph 4.4, to the same extent such Shares would be so subject
if retained by Purchaser.
4.3 DEFINITION OF OWNER. For purposes of Articles IV, V, VI and VII
of this Agreement, the term "Owner" shall include Purchaser and all subsequent
holders of the Shares who derive their chain of ownership through a permitted
transfer from Purchaser in accordance with paragraph 4.1.
4.4 MARKET STAND-OFF PROVISIONS.
A. In connection with any underwritten public offering by the
Corporation of its equity securities pursuant to an effective registration
statement filed under the 1933 Act, including the Corporation's initial public
offering, Owner shall not sell, make any short sale of, loan, hypothecate,
pledge, grant any option for the purchase of, or otherwise dispose or transfer
for value or otherwise agree to engage in any of the foregoing transactions with
respect to, any Shares without the prior written consent of the Corporation or
its underwriters. Such limitations shall be in effect for such period of time
from and after the effective date of such registration statement as may be
requested by the Corporation or such underwriters; PROVIDED, however, that in no
event shall such period exceed one hundred-eighty (180) days. The limitations
of this paragraph 4.4 shall remain in effect for the two (2)-year period
immediately following the effective date of the Corporation's initial public
offering and shall thereafter terminate and cease to have any force or effect.
B. Owner shall be subject to the market stand-off provisions of this
paragraph 4.4 PROVIDED AND ONLY IF the officers and directors of the Corporation
are also subject to similar arrangements.
C. In the event of any stock dividend, stock split, recapitalization
or other change affecting the Corporation's outstanding Common Stock effected
without receipt of consideration, then any new, substituted or additional
securities distributed with respect to the Shares shall be immediately subject
to the provisions of this paragraph 4.4, to the same extent the Shares are at
such time covered by such provisions.
D. In order to enforce the limitations of this paragraph 4.4, the
Corporation may impose stop-transfer instructions with respect to the Shares
until the end of the applicable stand-off period.
V. REPURCHASE RIGHT
5.1 GRANT. The Corporation is hereby granted the right (the
"Repurchase Right"), exercisable at any time during the sixty (60)-day period
following the date Purchaser ceases for any reason to remain in Service or (if
later) during the sixty (60)-day period following the execution date of this
Agreement, to repurchase at the Purchase Price all or any portion of the Shares
in which Purchaser has not acquired a vested interest in
5.
<PAGE>
accordance with the vesting provisions of paragraph 5.3 below (such shares to be
hereinafter called the "Unvested Shares"). For purposes of this Agreement,
Purchaser shall be deemed to remain in Service for so long as Purchaser
continues to render periodic services to the Corporation or any parent or
subsidiary corporation, whether as an employee, a non-employee member of the
board of directors, or a consultant.
5.2 EXERCISE OF THE REPURCHASE RIGHT. The Repurchase Right shall be
exercisable by written notice delivered to the Owner of the Unvested Shares
prior to the expiration of the applicable sixty (60)-day period specified in
paragraph 5.1. The notice shall indicate the number of Unvested Shares to be
repurchased and the date on which the repurchase is to be effected, such date to
be not more than thirty (30) days after the date of notice. To the extent one
or more certificates representing Unvested Shares may have been previously
delivered out of escrow to the Owner, then Owner shall, prior to the close of
business on the date specified for the repurchase, deliver to the Secretary of
the Corporation the certificates representing the Unvested Shares to be
repurchased, each certificate to be properly endorsed for transfer. The
Corporation shall, concurrently with the receipt of such stock certificates
(either from escrow in accordance with paragraph 7.3 or from Owner as herein
provided), pay to Owner in cash or cash equivalents (including the cancellation
of any purchase-money indebtedness), an amount equal to the Purchase Price
previously paid for the Unvested Shares which are to be repurchased.
5.3 TERMINATION OF THE REPURCHASE RIGHT. The Repurchase Right shall
terminate with respect to any Unvested Shares for which it is not timely
exercised under paragraph 5.2. In addition, the Repurchase Right shall
terminate, and cease to be exercisable, with respect to any and all Shares in
which Purchaser vests in accordance with the schedule below. Accordingly, as
Purchaser continues in Service, Purchaser shall acquire a vested interest in,
and the Repurchase Right shall lapse with respect to, the Shares in installments
in accordance with the following provisions:
(i) Purchaser shall not acquire any vested interest in, nor
shall the Repurchase Right lapse with respect to, any Shares unless and
until Purchaser has completed twelve (12) months of Service measured from
December 13, 1994.
(ii) Upon the completion of the twelve (12) month Service period
specified in subparagraph (i) above, Purchaser shall acquire a vested
interest in, and the Repurchase Right shall lapse with respect to, twenty
percent (20%) of the Shares.
(iii) Purchaser shall acquire a vested interest in, and the
Repurchase Right shall lapse with respect to, the remaining Shares in a
series of successive equal monthly installments over each of the next
forty-eight (48) months of Service completed by Purchaser after the initial
vesting date under subparagraph (ii) above.
6.
<PAGE>
All Shares as to which the Repurchase Right lapses shall, however,
continue to be subject to (i) the First Refusal Right and (ii) the market stand-
off provisions of paragraph 4.4.
5.4 FRACTIONAL SHARES. No fractional shares shall be repurchased by
the Corporation. Accordingly should the Repurchase Right extend to a fractional
share (in accordance with the vesting computation provisions of paragraph 5.3)
at the time Purchaser ceases Service, then such fractional share shall be added
to any fractional share in which Purchaser is at such time vested in order to
make one whole vested share no longer subject to the Repurchase Right.
5.5 ADDITIONAL SHARES OR SUBSTITUTED SECURITIES. In the event of any
stock dividend, stock split, recapitalization or other change affecting the
Corporation's outstanding Common Stock as a class effected without receipt of
consideration, then any new, substituted or additional securities or other
property (including money paid other than as a regular cash dividend) which is
by reason of any such transaction distributed with respect to the Shares shall
be immediately subject to the Repurchase Right, but only to the extent the
Shares are at the time covered by such right. Appropriate adjustments to
reflect the distribution of such securities or property shall be made to the
number of Shares at the time subject to the Repurchase Right hereunder and to
the price per share to be paid upon the exercise of the Repurchase Right in
order to reflect the effect of any such transaction upon the Corporation's
capital structure; PROVIDED, however, that the aggregate Purchase Price shall
remain the same.
5.6 CORPORATE TRANSACTION.
A. Immediately prior to the consummation of any of the following
shareholder-approved transactions (a "Corporate Transaction"):
(i) a merger or consolidation in which the Corporation is not
the surviving entity, except for a transaction the principal purpose of
which is to change the State of the Corporation's incorporation; or
(ii) the sale, transfer or other disposition of all or
substantially all of the assets of the Corporation in complete liquidation
or dissolution of the Corporation; or
(iii) any reverse merger in which the Corporation is the surviving
entity but in which all of the Corporation's outstanding voting stock is
transferred to the acquiring entity or its wholly-owned subsidiary,
the Repurchase Right shall automatically lapse in its entirety, except to the
extent the Repurchase Right is to be assigned to the successor corporation (or
its parent company) in connection with such Corporate Transaction.
7.
<PAGE>
B. To the extent the Repurchase Right remains in effect following
such Corporate Transaction, it shall apply to the new capital stock or other
property (including cash) received in exchange for the Shares in consummation of
the Corporate Transaction, but only to the extent the Shares are at the time
covered by such right. Appropriate adjustments shall be made to the price per
share payable upon exercise of the Repurchase Right to reflect the effect of the
Corporate Transaction upon the Corporation's capital structure; PROVIDED,
however, that the aggregate Purchase Price shall remain the same.
VI. RIGHT OF FIRST REFUSAL
6.1 GRANT. The Corporation is hereby granted the right of first
refusal (the "First Refusal Right"), exercisable in connection with any proposed
transfer of the Shares in which Purchaser has vested in accordance with the
vesting provisions of Article V. For purposes of this Article VI, the term
"transfer" shall include any sale, assignment, pledge, encumbrance or other
disposition for value of the Shares intended to be made by the Owner, but shall
not include any of the permitted transfers under paragraph 4.1.
6.2 NOTICE OF INTENDED DISPOSITION. In the event the Owner desires
to accept a bona fide third-party offer for any or all of the Shares (the shares
subject to such offer to be hereinafter called the "Target Shares"), Owner shall
promptly (i) deliver to the Corporate Secretary of the Corporation written
notice (the "Disposition Notice") of the terms and conditions of the offer,
including the purchase price and the identity of the third-party offeror and
(ii) provide satisfactory proof that the disposition of the Target Shares to
such third-party offeror would not be in contravention of the provisions set
forth in Articles II and IV of this Agreement.
6.3 EXERCISE OF RIGHT. The Corporation (or its assignees) shall, for
a period of twenty-five (25) days following receipt of the Disposition Notice,
have the right to repurchase any or all of the Target Shares specified in the
Disposition Notice upon substantially the same terms and conditions specified
therein or upon terms and conditions which do not materially vary from those
specified therein. Such right shall be exercisable by delivery of written
notice (the "Exercise Notice") to Owner prior to the expiration of the twenty-
five (25)-day exercise period. If such right is exercised with respect to all
the Target Shares specified in the Disposition Notice, then the Corporation (or
its assignees) shall effect the repurchase of the Target Shares, including
payment of the purchase price, not more than five (5) business days after
delivery of the Exercise Notice; and at such time Owner shall deliver to the
Corporation the certificates representing the Target Shares to be repurchased,
each certificate to be properly endorsed for transfer. To the extent any of the
Target Shares are at the time held in escrow under Article VII, the certificates
for such shares shall automatically be released from escrow and delivered to the
Corporation for purchase.
6.4 NON-EXERCISE OF RIGHT. In the event the Exercise Notice is not
given to Owner within twenty-five (25) days following the date of the
Corporation's receipt of the
8.
<PAGE>
Disposition Notice, Owner shall have a period of thirty (30) days thereafter in
which to sell or otherwise dispose of the Target Shares to the third-party
offeror identified in the Disposition Notice upon terms and conditions
(including the purchase price) no more favorable to such third-party offeror
than those specified in the Disposition Notice; PROVIDED, however, that any such
sale or disposition must not be effected in contravention of the provisions of
Article II of this Agreement. To the extent any of the Target Shares are at the
time held in escrow under Article VII, the certificates for such shares shall
automatically be released from escrow and surrendered to the Owner. The third-
party offeror shall acquire the Target Shares free and clear of the
Corporation's Repurchase Right under Article V and the Corporation's First
Refusal Right hereunder, but the acquired shares shall remain subject to (i) the
securities law restrictions of paragraph 2.2(a) and (ii) the market stand-off
provisions of paragraph 4.4. In the event Owner does not effect such sale or
disposition of the Target Shares within the specified thirty (30) day period,
the Corporation's First Refusal Right shall continue to be applicable to any
subsequent disposition of the Target Shares by Owner until such right lapses in
accordance with paragraph 6.7.
6.5 PARTIAL EXERCISE OF RIGHT. In the event the Corporation (or its
assignees) makes a timely exercise of the First Refusal Right with respect to a
portion, but not all, of the Target Shares specified in the Disposition Notice,
Owner shall have the option, exercisable by written notice to the Corporation
delivered within thirty (30) days after the date of the Disposition Notice, to
effect the sale of the Target Shares pursuant to one of the following
alternatives:
(i) sale or other disposition of all the Target Shares to the
third-party offeror identified in the Disposition Notice, but in full
compliance with the requirements of paragraph 6.4, as if the Corporation
did not exercise the First Refusal Right hereunder; or
(ii) sale to the Corporation (or its assignees) of the portion of
the Target Shares which the Corporation (or its assignees) has elected to
purchase, such sale to be effected in substantial conformity with the
provisions of paragraph 6.3.
Failure of Owner to deliver timely notification to the Corporation
under this paragraph 6.5 shall be deemed to be an election by Owner to sell the
Target Shares pursuant to alternative (i) above.
6.6 RECAPITALIZATION/MERGER
(a) In the event of any stock dividend, stock split, recapitalization
or other transaction affecting the Corporation's outstanding Common Stock as a
class effected without receipt of consideration, then any new, substituted or
additional securities or other property which is by reason of such transaction
distributed with respect to the Purchased
9.
<PAGE>
Shares shall be immediately subject to the Corporation's First Refusal Right
hereunder, but only to the extent the Purchased Shares are at the time covered
by such right.
(b) In the event of either of the following transactions:
(i) a merger or consolidation in which the Corporation is not
the surviving entity; or
(ii) any reverse merger in which the Corporation is the surviving
entity but in which all of the Corporation's outstanding voting stock is
transferred to the acquiring entity or its wholly-owned subsidiary,
the Corporation's First Refusal Right shall remain in full force and effect and
shall apply to the new capital stock or other property received in exchange for
the Purchased Shares in consummation of the transaction but only to the extent
the Purchased Shares are at the time covered by such right.
6.7 LAPSE. The First Refusal Right under this Article VI shall lapse
and cease to have effect upon the EARLIEST to occur of (i) the first date on
which shares of the Corporation's Common Stock are held of record by more than
five hundred (500) persons, (ii) a determination is made by the Corporation's
Board of Directors that a public market exists for the outstanding shares of the
Corporation's Common Stock, or (iii) a firm commitment underwritten public
offering pursuant to an effective registration statement under the 1933 Act,
covering the offer and sale of the Corporation's Common Stock in the aggregate
amount of at least Five Million Dollars ($5,000,000). However, the market
stand-off provisions of paragraph 4.4 shall continue to remain in full force and
effect following the lapse of the First Refusal Right hereunder.
VII. ESCROW
7.1 DEPOSIT. Upon issuance, the certificates for any Unvested Shares
purchased hereunder shall be deposited in escrow with the Corporation to be held
in accordance with the provisions of this Article VII. Each deposited
certificate shall be accompanied by a duly executed Assignment Separate from
Certificate in the form of Exhibit A. The deposited certificates, together with
any other assets or securities from time to time deposited with the Corporation
pursuant to the requirements of this Agreement, shall remain in escrow until
such time or times as the certificates (or other assets and securities) are to
be released or otherwise surrendered for cancellation in accordance with
paragraph 7.3. Upon delivery of the certificates (or other assets and
securities) to the Corporation, the Owner shall be issued an instrument of
deposit acknowledging the number of Unvested Shares (or other assets and
securities) delivered in escrow to the Corporation.
7.2 RECAPITALIZATION. All regular cash dividends on the Unvested
Shares (or other securities at the time held in escrow) shall be paid directly
to the Owner and shall
10
<PAGE>
not be held in escrow. However, in the event of any stock dividend, stock
split, recapitalization or other change affecting the Corporation's outstanding
Common Stock as a class effected without receipt of consideration or in the
event of a Corporate Transaction, any new, substituted or additional securities
or other property which is by reason of such transaction distributed with
respect to the Unvested Shares shall be immediately delivered to the Corporation
to be held in escrow under this Article VII, but only to the extent the Unvested
Shares are at the time subject to the escrow requirements of paragraph 7.1.
7.3 RELEASE/SURRENDER. The Unvested Shares, together with any other
assets or securities held in escrow hereunder, shall be subject to the following
terms and conditions relating to their release from escrow or their surrender to
the Corporation for repurchase and cancellation:
(i) Should the Corporation (or its assignees) elect to exercise
the Repurchase Right under Article V with respect to any Unvested Shares,
then the escrowed certificates for such Unvested Shares (together with any
other assets or securities issued with respect thereto) shall be delivered
to the Corporation, concurrently with the payment to the Owner, in cash or
cash equivalent (including the cancellation of any purchase-money
indebtedness), of an amount equal to the aggregate Purchase Price for such
Unvested Shares, and the Owner shall cease to have any further rights or
claims with respect to such Unvested Shares (or other assets or securities
attributable to such Unvested Shares).
(ii) Should the Corporation (or its assignees) elect to exercise
its First Refusal Right under Article VI with respect to any vested Target
Shares held at the time in escrow hereunder, then the escrowed certificates
for such Target Shares (together with any other assets or securities
attributable thereto) shall, concurrently with the payment of the paragraph
6.3 purchase price for such Target Shares to the Owner, be surrendered to
the Corporation, and the Owner shall cease to have any further rights or
claims with respect to such Target Shares (or other assets or securities).
(iii) Should the Corporation (or its assignees) elect NOT to
exercise its First Refusal Right under Article VI with respect to any
Target Shares held at the time in escrow hereunder, then the escrowed
certificates for such Target Shares (together with any other assets or
securities attributable thereto) shall be surrendered to the Owner for
disposition in accordance with the provisions of paragraph 6.4.
(iv) As the interest of Purchaser in the Unvested Shares (or any
other assets or securities attributable thereto) vests in accordance with
the provisions of Article V, the certificates for such vested shares (as
well as all
11.
<PAGE>
other vested assets and securities) shall be released from escrow and
delivered to the Owner in accordance with the following schedule:
a. The initial release of vested shares (or other vested
assets and securities) from escrow shall be effected within thirty
(30) days following the expiration of the initial twelve (12)-month
period measured from the initial vesting date under paragraph 5.3.
b. Subsequent releases of vested shares (or other vested
assets and securities) from escrow shall be effected at semi-annual
intervals thereafter, with the first such semi-annual release to occur
six (6) months after the initial paragraph 5.3 vesting date.
c. Upon Purchaser's cessation of Service, any escrowed
Shares (or other assets or securities) in which Purchaser is at the
time vested shall be promptly released from escrow.
d. Upon any earlier termination of the Corporation's
Repurchase Right in accordance with the applicable provisions of
Article V, the Shares (or other assets or securities) at the time held
in escrow hereunder shall promptly be released to the Owner as fully-
vested shares or other property.
(v) All Shares (or other assets or securities) released from escrow
in accordance with the provisions of subparagraph (iv) above shall nevertheless
remain subject to (I) the Corporation's First Refusal Right under Article VI
until such right lapses pursuant to paragraph 6.7, (II) the market stand-off
provisions of paragraph 4.4 until such provisions terminate in accordance
therewith and (III) the Special Purchase Right under Article VIII.
VIII. MARITAL DISSOLUTION OR LEGAL SEPARATION
8.1 GRANT. In connection with the dissolution of Purchaser's
marriage or the legal separation of Purchaser and Purchaser's spouse, the
Corporation shall have the right (the "Special Purchase Right"), exercisable at
any time during the thirty (30)-day period following the Corporation's receipt
of the required Dissolution Notice under paragraph 8.2, to purchase from
Purchaser's spouse, in accordance with the provisions of paragraph 8.3, all or
any portion of the Shares which would otherwise be awarded to such spouse in
settlement
12.
<PAGE>
of any community property or other marital property rights such spouse may have
in such shares.
8.2 NOTICE OF DECREE OR AGREEMENT. Purchaser shall promptly provide
the Secretary of the Corporation with written notice (the "Dissolution Notice")
of (i) the entry of any judicial decree or order resolving the property rights
of Purchaser and Purchaser's spouse in connection with their marital dissolution
or legal separation or (ii) the execution of any contract or agreement relating
to the distribution or division of such property rights. The Dissolution Notice
shall be accompanied by a copy of the actual decree of dissolution or settlement
agreement between Purchaser and Purchaser's spouse which provides for the award
to the spouse of one or more Shares in settlement of any community property or
other marital property rights such spouse may have in such shares.
8.3 EXERCISE OF SPECIAL PURCHASE RIGHT. The Special Purchase Right
shall be exercisable by delivery of the Purchase Notice to Purchaser and
Purchaser's spouse within thirty (30) days after the Corporation's receipt of
the Dissolution Notice. The Purchase Notice shall indicate the number of shares
to be purchased by the Corporation, the date such purchase is to be effected
(such date to be not less than five (5) business days, nor more than ten (10)
business days, after the date of the Purchase Notice), and the fair market value
to be paid for such Shares. Purchaser (or Purchaser's spouse, to the extent
such spouse has physical possession of the Shares) shall, prior to the close of
business on the date specified for the purchase, deliver to the Corporate
Secretary of the Corporation the certificates representing the shares to be
purchased, each certificate to be properly endorsed for transfer. To the extent
any of the shares to be purchased by the Corporation are at the time held in
escrow under Article VII, the certificates for such shares shall be promptly
delivered out of escrow to the Corporation. The Corporation shall, concurrently
with the receipt of the stock certificates, pay to Purchaser's spouse (in cash
or cash equivalents) an amount equal to the fair market value specified for such
shares in the Purchase Notice.
If Purchaser's spouse does not agree with the fair market value
specified for the shares in the Purchase Notice, then the spouse shall promptly
notify the Corporation in writing of such disagreement and the fair market value
of such shares shall thereupon be determined by an appraiser of recognized
standing selected by the Corporation and the spouse. If they cannot agree on an
appraiser within twenty (20) days after the date of the Purchase Notice, each
shall select an appraiser of recognized standing, and the two appraisers shall
designate a third appraiser of recognized standing whose appraisal shall be
determinative of such value. The cost of the appraisal shall be shared equally
by the Corporation and Purchaser's spouse. The closing shall then be held on
the fifth business day following the completion of such appraisal; PROVIDED,
however, that if the appraised value is more than fifteen percent (15%) greater
than the fair market value specified for the shares in the Purchase Notice, the
Corporation shall have the right, exercisable prior to the expiration of such
five (5) business-day period, to rescind the exercise of the Special
13.
<PAGE>
Purchase Right and thereby revoke its election to purchase the shares awarded to
the spouse.
8.4 LAPSE. The Special Purchase Right under this Article VIII shall
lapse and cease to have effect upon the EARLIER to occur of (i) the first date
on which the First Refusal Right under Article VI lapses or (ii) the expiration
of the thirty (30)-day exercise period specified in paragraph 8.3, to the extent
the Special Purchase Right is not timely exercised in accordance with such
paragraph.
IX. GENERAL PROVISIONS
9.1 ASSIGNMENT. The Corporation may assign its Repurchase Right
under Article V, its First Refusal Right under Article VI and/or its Special
Purchase Right under Article VIII to any person or entity selected by the
Corporation's Board of Directors, including (without limitation) one or more
shareholders of the Corporation.
9.2 DEFINITIONS. For purposes of this Agreement, the following
provisions shall be applicable in determining the parent and subsidiary
corporations of the Corporation:
(i) Any corporation (other than the Corporation) in an unbroken
chain of corporations ending with the Corporation shall be considered to be a
PARENT corporation of the Corporation, provided each such corporation in the
unbroken chain (other than the Corporation) owns, at the time of the
determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
(ii) Each corporation (other than the Corporation) in an unbroken
chain of corporations beginning with the Corporation shall be considered to be a
SUBSIDIARY of the Corporation, provided each such corporation (other than the
last corporation) in the unbroken chain owns, at the time of the determination,
stock possessing fifty percent (50%) or more of the total combined voting power
of all classes of stock in one of the other corporations in such chain.
9.3 NO EMPLOYMENT OR SERVICE CONTRACT. Nothing in this Agreement
shall confer upon Purchaser any right to continue in the Service of the
Corporation (or any parent or subsidiary corporation employing or retaining
Purchaser) for any period of specific duration or interfere with or otherwise
restrict in any way the rights of the Corporation (or any parent or subsidiary
corporation employing or retaining Purchaser) or Purchaser, which rights are
hereby expressly reserved by each, to terminate Purchaser's Service at any time
for any reason whatsoever, with or without cause.
14.
<PAGE>
9.4 NOTICES. Any notice required in connection with (i) the
Repurchase Right, the Special Purchase Right or the First Refusal Right or (ii)
the disposition of any Shares covered thereby shall be given in writing and
shall be deemed effective upon personal delivery or upon deposit in the United
States mail, registered or certified, postage prepaid and addressed to the party
entitled to such notice at the address indicated below such party's signature
line on this Agreement or at such other address as such party may designate by
ten (10) days advance written notice under this paragraph 9.4 to all other
parties to this Agreement.
9.5 NO WAIVER. The failure of the Corporation (or its assignees) in
any instance to exercise the Repurchase Right granted under Article V, or the
failure of the Corporation (or its assignees) in any instance to exercise the
First Refusal Right granted under Article VI, or the failure of the Corporation
(or its assignees) in any instance to exercise the Special Purchase Right
granted under Article VIII shall not constitute a waiver of any other repurchase
rights and/or rights of first refusal that may subsequently arise under the
provisions of this Agreement or any other agreement between the Corporation and
Purchaser or Purchaser's spouse. No waiver of any breach or condition of this
Agreement shall be deemed to be a waiver of any other or subsequent breach or
condition, whether of like or different nature.
9.6 CANCELLATION OF SHARES. If the Corporation (or its assignees)
shall make available, at the time and place and in the amount and form provided
in this Agreement, the consideration for the Shares to be repurchased in
accordance with the provisions of this Agreement, then from and after such time,
the person from whom such shares are to be repurchased shall no longer have any
rights as a holder of such shares (other than the right to receive payment of
such consideration in accordance with this Agreement), and such shares shall be
deemed purchased in accordance with the applicable provisions hereof and the
Corporation (or its assignees) shall be deemed the owner and holder of such
shares, whether or not the certificates therefor have been delivered as required
by this Agreement.
X. MISCELLANEOUS PROVISIONS
10.1 PURCHASER UNDERTAKING. Purchaser hereby agrees to take whatever
additional action and execute whatever additional documents the Corporation may
in its judgment deem necessary or advisable in order to carry out or effect one
or more of the obligations or restrictions imposed on either Purchaser or the
Shares pursuant to the express provisions of this Agreement.
10.2 AGREEMENT IS ENTIRE CONTRACT. This Agreement constitutes the
entire contract between the parties hereto with regard to the subject matter
hereof.
10.3 GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of California, as such laws
are applied to contracts entered into and performed in such State without resort
to that State's conflict-of-laws rules.
15.
<PAGE>
10.4 COUNTERPARTS. This Agreement may be executed in counterparts,
each of which shall be deemed to be an original, but all of which together shall
constitute one and the same instrument.
10.5 SUCCESSORS AND ASSIGNS. The provisions of this Agreement shall
inure to the benefit of, and be binding upon, the Corporation and its successors
and assigns and Purchaser and Purchaser's legal representatives, heirs,
legatees, distributees, assigns and transferees by operation of law, whether or
not any such person shall have become a party to this Agreement and have agreed
in writing to join herein and be bound by the terms and conditions hereof.
10.6 POWER OF ATTORNEY. Purchaser's spouse hereby appoints Purchaser
his or her true and lawful attorney in fact, for him or her and in his or her
name, place and stead, and for his or her use and benefit, to agree to any
amendment or modification of this Agreement and to execute such further
instruments and take such further actions as may reasonably be necessary to
carry out the intent of this Agreement. Purchaser's spouse further gives and
grants unto Purchaser as his or her attorney in fact full power and authority to
do and perform every act necessary and proper to be done in the exercise of any
of the foregoing powers as fully as he or she might or could do if personally
present, with full power of substitution and revocation, hereby ratifying and
confirming all that Purchaser shall lawfully do and cause to be done by virtue
of this power of attorney.
16.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the
day and year first indicated above.
ADVANCED FIBRE COMMUNICATIONS
By: /s/ Dan E. Steimle
----------------------------------
Title: Vice President, Chief Financial Officer
-----------------------------------------
Address: 1445 McDowell Boulevard North
Petaluma, CA 94954
/s/ Donald Green
-----------------------------
Purchaser (1)
Address: 5235 Vista Grande
--------------------------
Santa Rosa, CA 95403
----------------------------
The undersigned spouse of Purchaser has read and hereby approves the
foregoing Restricted Stock Issuance Agreement. In consideration of the
Corporation's granting Purchaser the right to acquire the Shares in accordance
with the terms of such Agreement, the undersigned hereby agrees to be
irrevocably bound by all the terms and provisions of such Agreement, including,
(specifically) the right of the Corporation (or its assignees) to purchase any
and all interest or right the undersigned may otherwise have in such shares
pursuant to community property laws or other marital property rights.
/s/ Maureen Green
-----------------------------
Purchaser's Spouse
Address:
-------------------------------
-----------------------------------
- -----------------------
(1) I have executed the Section 83(b) election that was attached hereto as
Exhibit C. As set forth in Article III, I understand that I, and NOT the
Corporation, will be responsible for completing the form and filing the election
with the appropriate offices of the Federal and state tax authorities and that
if such filing is not completed within thirty (30) days after the date of this
Agreement, I will not be entitled to the tax benefits provided by Section 83(b).
17.
<PAGE>
EXHIBIT A
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED, _________________________ hereby sell(s),
assign(s) and transfer(s) unto Advanced Fibre Communications (the "Corporation")
__________________________ (____________) shares of the Common Stock of the
Corporation standing in his/her name on the books of the Corporation represented
by Certificate No.___________ herewith and do hereby irrevocably constitute and
appoint ____________________ Attorney to transfer the said stock on the books of
the Corporation with full power of substitution in the premises.
Dated: _________________________
Signature /s/ Donald Green
-----------------------
Instruction: Please do not fill in any blanks other than the signature line.
The purpose of this assignment is to enable the Corporation to exercise the
Repurchase Right set forth in the Agreement without requiring additional
signatures on the part of Purchaser.
<PAGE>
EXHIBIT B
COMPENSATION AGREEMENT
<PAGE>
EXHIBIT C
SECTION 83(B) TAX ELECTION
This statement is being made under Section 83(b) of the Internal Revenue Code,
pursuant to Treas. Reg. Section 1.83-2.
(1) The taxpayer who performed the services is:
Name: Donald Green
Address: 5235 Vista Grande, Santa Rosa, CA 95403
Taxpayer Ident. No.: ###-##-####
(2) The property with respect to which the election is being made is 41,800
shares of the common stock of Advanced Fibre Communications.
(3) The property was issued on May 19, 1995.
(4) The taxable year in which the election is being made is the calendar year
1995.
(5) The property is subject to a repurchase right pursuant to which the issuer
has the right to acquire the property at the original purchase price if for
any reason taxpayer's employment with the issuer is terminated. The
issuer's repurchase right lapses in a series of annual and monthly
installments over a four (4)-year period ending on May 19, 2000.
(6) The fair market value at the time of transfer (determined without regard to
any restriction other than a restriction which by its terms will never
lapse) is $1.25 per share.
(7) The amount paid for such property is $1.25 per share.
(8) A copy of this statement was furnished to Advanced Fibre Communications for
whom taxpayer rendered the service underlying the transfer of property.
(9) This statement is executed as of: June 9, 1995.
/s/ Maureen Green /s/ Donald Green
- ---------------------- ---------------------------
Spouse (if any) Taxpayer
THIS FORM MUST BE FILED WITH THE INTERNAL REVENUE SERVICE CENTER WITH WHICH
TAXPAYER FILES HIS/HER FEDERAL INCOME TAX RETURNS. THE FILING MUST BE MADE
WITHIN THIRTY (30) DAYS AFTER THE EXECUTION DATE OF THE STOCK ISSUANCE
AGREEMENT.
<PAGE>
EXHIBIT 10.7
COMPENSATION AGREEMENT
Agreement dated as of the 19th day of May, 1995 by and between Donald
Green ("Purchaser") and Advanced Fibre Communications, a California corporation
("Company").
W I T N E S S E T H
WHEREAS, Purchaser provides services to the Company and the Company
wishes to reward Purchaser for such services.
NOW, THEREFORE, in consideration of the above premises, the parties
hereto agree as follows:
1. Purchaser shall hereby purchase 41,800 shares of the Company's
Common Stock (the "Stock") upon the terms and conditions set forth in the
Restricted Stock Issuance Agreement dated May 19, 1995 (the "Issuance
Agreement") and attached hereto as Exhibit A.
2. Company and Purchaser acknowledge and agree that the Stock was
granted as compensation for services and not for any capital-raising purposes or
in connection with any capital-raising activities.
3. The Stock is not assignable or transferable except in connection
with the Purchaser's death.
4. This agreement is intended to constitute a written compensation
contract within the meaning of Rule 701 of the Securities Act of 1933, as
amended.
5. Nothing herein or in the Issuance Agreement is intended to impair
the right of the Company or Purchaser to terminate Purchaser's service with the
Company at any time in accordance with applicable law.
IN WITNESS WHEREOF, the parties hereto have executed this agreement as
of the date FIRST ABOVE WRITTEN.
PURCHASER: ADVANCED FIBRE COMMUNICATIONS
/s/ Donald Green By:/s/ Daniel E. Steimle
- ------------------------ -----------------------
Address: Title: Vice President, Chief Financial Officer
<PAGE>
EXHIBIT 10.8
ADVANCED FIBRE COMMUNICATIONS
NOTE SECURED BY STOCK PLEDGE AGREEMENT
$52,250.00 May 31, 1995
Petaluma, California
FOR VALUE RECEIVED, the undersigned Maker promises to pay to the order
of ADVANCED FIBRE COMMUNICATIONS (the "Company"), at its corporate offices at
1445 McDowell Boulevard North, Suite B, Petaluma, California 94954, the
principal sum of Fifty-Two Thousand Two Hundred Fifty and no/100 Dollars
($52,250.00), together with all accrued interest thereon, upon the terms and
conditions specified below.
1. INTEREST. Interest shall accrue on the unpaid balance
outstanding from time to time under this Note at the rate of 6.5% per annum,
compounded semi-annually, and shall be payable annually in arrears.
2. PRINCIPAL. The entire principal balance of this Note, together
with all accrued and unpaid interest, shall become due and payable in one lump
sum on December 13, 2000.
3. APPLICATION OF PAYMENT. Payment shall be made in lawful tender
of the United States and shall be applied first to the payment of all accrued
and unpaid interest and then to the payment of principal. Prepayment of the
principal balance of this Note, together with all accrued and unpaid interest,
may be made in whole or in part at any time without penalty.
4. EVENTS OF ACCELERATION. The entire unpaid principal balance of
this Note, together with all accrued and unpaid interest, shall, at the election
of the holder of this Note, become immediately due and payable prior to the
specified due date of this Note upon the earliest of any one of the following
events to occur:
A. the failure of the Maker to pay when due any
installment of accrued interest under this Note and the continuation
of such default for a period of thirty (30) days or more; or
B. the expiration of the thirty (30)-day period following
the date the Maker ceases for any reason to remain in the Company's
employ; or
C. an acquisition of the Company (whether by merger or
acquisition of all or substantially all of the Company's assets or
outstanding voting stock) for consideration payable in cash or freely-
tradable securities; provided, however, that if the Pooling of Interest
Method, as described in Accounting Principles Board Opinion No. 16, is used
to account for the acquisition for financial reporting purposes,
acceleration shall not occur prior to the end of the sixty (60)-day period
immediately following the end of the applicable restriction period required
under Accounting Series Release Numbers 130 and 135; or
D. the expiration of the sixty (60)-day period immediately
following the end of any market standoff period applicable to the
Company's common stock which may be imposed by the underwriters in
connection with the initial underwritten public offering of such
common stock; or
<PAGE>
E. the insolvency of the Maker, the commission of any act
of bankruptcy by the Maker, the execution by the Maker of a general
assignment for the benefit of creditors, the filing by or against the
Maker of any petition in bankruptcy or any petition for relief under
the provisions of the Federal bankruptcy act or any other state or
Federal law for the relief of debtors and the continuation of such
petition without dismissal for a period of thirty (30) days or more,
the appointment of a receiver or trustee to take possession of any
property or assets of the Maker, or the attachment of or execution
against any property or assets of the Maker; or
F. the occurrence of any event of default under the Stock
Pledge Agreement securing this Note or any obligation secured thereby.
5. EMPLOYMENT. For purposes of applying the provisions of this
Note, the Maker shall be considered to remain in the Company's employ for so
long as the Maker renders services as an employee of the Company, any successor
entity or one or more of the Company's fifty percent (50%)-or-more owned
(directly or indirectly) subsidiaries.
6. SECURITY. This Note represents an obligation of the Maker
delivered in payment of the purchase price of the shares of the Company's common
stock acquired this day by the Maker under a written compensation agreement.
Payment of this Note shall be secured pursuant to the Stock Pledge Agreement to
be executed this date by the Maker. The Maker, however, shall remain personally
liable for payment of this Note, and assets of the Maker, in addition to the
collateral under the Stock Pledge Agreement, may be applied to the satisfaction
of the Maker's obligations hereunder.
7. COLLECTION. If action is instituted to collect this Note, the
Maker promises to pay all costs and expenses (including reasonable attorney
fees) incurred in connection with such action.
8. WAIVER. A waiver of any term of this Note, the Stock Pledge
Agreement or of any of the obligations secured thereby must be made in writing
and signed by a duly-authorized officer of the Company, and any such waiver
shall be limited to its express terms. No delay by the Company in acting with
respect to the terms of this Note or the Stock Pledge Agreement shall constitute
a waiver of any breach, default, or failure of condition under this Note, the
Stock Pledge Agreement or the obligations secured thereby.
The Maker waives presentment, demand, notice of dishonor, notice of
default or delinquency, notice of acceleration, notice of protest and
nonpayment, notice of costs, expenses or losses and interest thereon, notice of
interest on interest, and diligence in taking any action to collect any sums
owing under this Note or in proceeding against any of the rights or interests in
or to properties securing payment of this Note.
9. GOVERNING LAW. This Note shall be construed in accordance with
the laws of the State of California, without regard to that State's conflict-of-
laws rules.
/s/ Donald Green
----------------
MAKER:
2.
<PAGE>
EXHIBIT 10.9
ADVANCED FIBRE COMMUNICATIONS
STOCK PLEDGE AGREEMENT
In order to secure payment of that certain December 13, 1995
promissory note (the "Note") payable to the order of ADVANCED FIBRE
COMMUNICATIONS (the "Company") in the principal amount of Fifty-Two Thousand Two
Hundred Fifty and no/100 Dollars ($52,250.00), which the undersigned delivered
in payment of the purchase price of the 41,800 shares purchased this day from
the Company pursuant to written compensation agreements, the undersigned hereby
grants the Company a security interest in, and assigns, transfers to and pledges
with the Company, the following securities and other property:
(i) 15,400 shares of the Company's Preferred Series A
Stock ("Preferred Stock") acquired by the undersigned prior to this
date and delivered to and deposited with the Company as collateral for
the Note;
(ii) any and all new, additional or different
securities or other property subsequently distributed with respect to
the shares identified in subparagraph (i) which are to be delivered to
and deposited with the Company pursuant to the requirements of
paragraph 3 of this agreement;
(iii) any and all other property and money which is
delivered to or comes into the possession of the Company pursuant to
the terms and provisions of this agreement; and
(iv) the proceeds of any sale, exchange or disposition
of the property and securities described in subparagraphs (i), (ii) or
(iii) above.
All securities, property and money so assigned, transferred to and
pledged with the Company shall be herein referred to as the "Collateral" and
shall be accompanied by one or more stock power assignments properly endorsed by
the undersigned. The Company shall hold the Collateral in accordance with the
following terms and provisions:
1. WARRANTIES. The undersigned hereby warrants that the undersigned
is the owner of the Collateral and has the right to pledge the Collateral and
that the Collateral is free from all liens, adverse claims and other security
interests (other than those created hereby).
2. RIGHTS AND POWERS. The Company may, without obligation to do so,
exercise at any time and from time to time one or more of the following rights
and powers with respect to any or all of the Collateral:
A. accept in its discretion, but subject to the applicable
limitations of paragraphs 7.C and 7.E, other property of the
undersigned in exchange for all or part of the Collateral and release
Collateral to the undersigned to the extent necessary to effect such
exchange, and in such event the money, property or securities received
in the exchange shall be held by the Company as substitute security
for the Note and all other indebtedness secured hereunder;
B. perform such acts as are necessary to preserve and
protect the Collateral and the rights, powers and remedies granted
with respect to such Collateral by this agreement; and
<PAGE>
C. transfer record ownership of the Collateral to the
Company or its nominee and receive, endorse and give receipt for, or
collect by legal proceedings or otherwise, dividends or other
distributions made or paid with respect to the Collateral, PROVIDED
AND ONLY IF there exists at the time an outstanding event of default
under paragraph 8 of this agreement.
Any action by the Company pursuant to the provisions of this
paragraph 2 may be taken without notice to the undersigned. Expenses reasonably
incurred in connection with such action shall be payable by the undersigned and
form part of the indebtedness secured hereunder as provided in paragraph 10.
So long as there exists no event of default under paragraph 8 of this
agreement, the undersigned may exercise all shareholder voting rights and be
entitled to receive any and all regular cash dividends paid on the Collateral.
Accordingly, until such time as an event of default occurs under this agreement,
all proxy statements and other shareholder materials pertaining to the
Collateral shall be delivered to the undersigned at the address indicated below.
Any cash sums which the Company may receive in the exercise of its
rights and powers under paragraph 2.C above shall be applied to the payment of
the Note and any other indebtedness secured hereunder, in such order of
application as the Company deems appropriate. Any remaining cash shall be paid
over to the undersigned.
3. DUTY TO DELIVER. Any new, additional or different securities
which may now or hereafter become distributable with respect to the Collateral
by reason of (i) any stock dividend, stock split or reclassification of the
capital stock of the Company, or (ii) any merger, consolidation or other
reorganization affecting the capital structure of the Company shall, upon
receipt by the undersigned, be promptly delivered to and deposited with the
Company as part of the Collateral hereunder. Such securities shall be
accompanied by one or more properly-endorsed stock power assignments.
4. CARE OF COLLATERAL. The Company shall exercise reasonable care
in the custody and preservation of the Collateral, but shall have no obligation
to initiate any action with respect to, or otherwise inform the undersigned of,
any conversion, call, exchange right, preemptive right, subscription right,
purchase offer or other right or privilege relating to or affecting the
Collateral. The Company shall have no duty to preserve the rights of the
undersigned against adverse claims or to protect the Collateral against the
possibility of a decline in market value. The Company shall not be obligated to
take any action with respect to the Collateral requested by the undersigned
unless the request is made in writing and the Company determines that the
requested action will not unreasonably jeopardize the value of the Collateral as
security for the Note and other indebtedness secured hereunder.
The Company may at any time release and deliver all or part of the
Collateral to the undersigned, and the receipt thereof by the undersigned shall
constitute a complete and full acquittance for the Collateral so released and
delivered. The Company shall accordingly be discharged from any further
liability or responsibility for the Collateral, and the released Collateral
shall no longer be subject to the provisions of this agreement. However, any
and all releases of the Collateral shall be effected in compliance with the
applicable limitations of paragraphs 7.C and 7.E.
5. PAYMENT OF TAXES AND OTHER CHARGES. The undersigned shall pay,
prior to the delinquency date, all taxes, liens, assessments and other charges
against the Collateral, and in the event of the undersigned's failure to do so,
the Company may at its election pay any or all of such taxes and charges without
contesting the validity or legality thereof. The payments so made shall become
part of the indebtedness secured hereunder and until paid shall bear interest at
the minimum per annum rate,
2.
<PAGE>
compounded semi-annually, required to avoid the imputation of interest income to
the Company and compensation income to the undersigned under the Federal tax
laws.
6. TRANSFER OF COLLATERAL. In connection with the transfer or
assignment of the Note (whether by negotiation, discount or otherwise), the
Company may transfer all or any part of the Collateral, and the transferee shall
thereupon succeed to all the rights, powers and remedies granted the Company
hereunder with respect to the Collateral so transferred. Upon such transfer, the
Company shall be fully discharged from all liability and responsibility for the
transferred Collateral.
7. RELEASE OF COLLATERAL. Provided (i) all indebtedness secured
hereunder (other than payments not yet due and payable under the Note) shall at
the time have been paid in full and (ii) there does not otherwise exist any
event of default under paragraph 8, the pledged shares of Common Stock, together
with any additional Collateral which may hereafter be pledged and deposited
hereunder, shall be released from pledge and returned to the undersigned in
accordance with the following provisions:
A. Upon payment or prepayment of principal under the Note,
together with payment of all accrued interest to date, one or more
shares of the Common Stock held as Collateral hereunder shall (subject
to the applicable limitations of paragraphs 7.C and 7.E below) be
released to the undersigned within thirty (30) days after such payment
or prepayment. The number of the shares to be so released shall be
equal to the number obtained by multiplying (i) the total number of
shares of Common Stock held under this agreement at the time of the
payment or prepayment, by (ii) a fraction, the numerator of which
shall be the amount of the principal paid or prepaid and the
denominator of which shall be the unpaid principal balance of the Note
immediately prior to such payment or prepayment. In no event,
however, shall any fractional shares be released.
B. Any additional Collateral which may hereafter be
pledged and deposited with the Company (pursuant to the requirements
of paragraph 3) with respect to the shares of Common Stock pledged
hereunder shall be released at the same time the particular shares of
Common Stock to which the additional Collateral relates are to be
released in accordance with the applicable provisions of paragraph
7.A. Under no circumstances, however, shall any shares of Common
Stock or any other Collateral be released if previously applied to the
payment of any indebtedness secured hereunder.
C. In no event, however, shall any shares of Common Stock
be released pursuant to the provisions of paragraphs 7.A or 7.B if,
and to the extent, the fair market value of the Common Stock and all
other Collateral which would otherwise remain in pledge hereunder
after such release were effected would be less than the unpaid balance
(principal and accrued interest) at the time outstanding under the
Note.
D. For all valuation purposes under this agreement, the
fair market value per share of Common Stock on any relevant date shall
be determined in accordance with the following provisions:
(i) If the Common Stock is not at the time listed or
admitted to trading on any national securities exchange but is
traded on the Nasdaq National Market, the fair market value shall
be the closing selling price per share of Common Stock on the
date in question on the Nasdaq National Market. If there is no
reported closing selling price for the Common Stock on the date
in question, then the closing selling price on the last preceding
date for which such quotation exists shall be determinative of
fair market value.
3.
<PAGE>
(ii) If the Common Stock is at the time listed or
admitted to trading on any national securities exchange, then the
fair market value shall be the closing selling price per share of
Common Stock on the date in question on the securities exchange
serving as the primary market for the Common Stock, as such price
is officially quoted in the composite tape of transactions on
such exchange. If there is no reported sale of Common Stock on
such exchange on the date in question, then the fair market value
shall be the closing selling price on the exchange on the last
preceding date for which such quotation exists.
(iii) If the Common Stock is at the time neither listed
nor admitted to trading on any national securities exchange nor
traded on the Nasdaq National Market, the fair market value shall
be determined by the Company's Board of Directors after taking
into account such factors as the Board shall deem appropriate.
The fair market value of any property held as Collateral
hereunder shall be determined by the Company's Board of Directors
after taking into account such factors (including liquidity and
transferability) as the Board shall, in its sole discretion, deem
appropriate.
E. In the event the Collateral becomes in whole or in part
comprised of "margin securities" within the meaning of Section
207.2(i) of Regulation G of the Federal Reserve Board, then no
Collateral shall thereafter be substituted for any new Collateral
under the provisions of paragraph 2.A or be released under paragraph
7.A or 7.B, unless there is compliance with each of the following
additional requirements:
(i) The substitution or release must not increase the
amount by which the indebtedness secured hereunder exceeds the
maximum loan value of the shares of Common Stock and other
Collateral immediately prior to such substitution or release.
(ii) The substitution or release must not cause the
amount of indebtedness secured hereunder to exceed the maximum
loan value of the shares of Common Stock and any other Collateral
remaining after such substitution or release is effected.
(iii) For purposes of this paragraph 7.E, the maximum
loan value of each item of Collateral shall be determined on the
day the substitution or release is to be effected and shall, in
the case of the shares of Common Stock pledged hereunder and any
other Collateral (other than margin securities), equal the good
faith loan value thereof (as defined in Section 207.2(e)(1) of
Regulation G) and shall, in the case of all margin securities
(other than the Common Stock pledged hereunder), equal fifty
percent (50%) of the current market value of those securities.
8. EVENTS OF DEFAULT. The occurrence of one or more of the
following events shall constitute an event of default under this agreement:
A. the failure of the undersigned to pay, when due under
the Note, any installment of principal or accrued interest; or
4.
<PAGE>
B. the occurrence of any other acceleration event
specified in the Note; or
C. the failure of the undersigned to perform any
obligation imposed upon the undersigned by reason of this agreement;
or
D. the breach of any warranty of the undersigned contained
in this agreement.
Upon the occurrence of any such event of default, the Company may, at
its election, declare the Note and all other indebtedness secured hereunder to
become immediately due and payable and may exercise any or all of the rights and
remedies granted to a secured party under the provisions of the California
Uniform Commercial Code (as now or hereafter in effect), including (without
limitation) the power to dispose of the Collateral by public or private sale or
to accept the Collateral in full payment of the Note and all other indebtedness
secured hereunder.
Any proceeds realized from the disposition of the Collateral pursuant
to the foregoing power of sale shall be applied first to the payment of expenses
incurred by the Company in connection with the disposition, then to the payment
of the Note and finally to any other indebtedness secured hereunder. Any
surplus proceeds shall be paid over to the undersigned. However, in the event
such proceeds prove insufficient to satisfy all obligations of the undersigned
under the Note, then the undersigned shall remain personally liable for the
resulting deficiency.
9. OTHER REMEDIES. The rights, powers and remedies granted to the
Company pursuant to the provisions of this agreement shall be in addition to all
rights, powers and remedies granted to the Company under any statute or rule of
law. Any forbearance, failure or delay by the Company in exercising any right,
power or remedy under this agreement shall not be deemed to be a waiver of such
right, power or remedy. Any single or partial exercise of any right, power or
remedy under this agreement shall not preclude the further exercise thereof, and
every right, power and remedy of the Company under this agreement shall continue
in full force and effect unless such right, power or remedy is specifically
waived by an instrument executed by the Company.
10. COSTS AND EXPENSES. All costs and expenses (including reasonable
attorneys fees) incurred by the Company in the exercise or enforcement of any
right, power or remedy granted it under this agreement shall become part of the
indebtedness secured hereunder and shall constitute a personal liability of the
undersigned payable immediately upon demand and bearing interest until paid at
the minimum per annum rate, compounded semi-annually, required to avoid the
imputation of interest income to the Company and compensation income to the
undersigned under the Federal tax laws.
11. APPLICABLE LAW. This agreement shall be governed by and
construed in accordance with the laws of the State of California and shall be
binding upon the executors, administrators, heirs and assigns of the
undersigned.
12. SEVERABILITY. If any provision of this agreement is held to be
invalid under applicable law, then such provision shall be ineffective only to
the extent of such invalidity, and neither the remainder of such provision nor
any other provisions of this agreement shall be affected thereby.
5.
<PAGE>
IN WITNESS WHEREOF, this agreement has been executed by the
undersigned on this 16th day of June, 1995.
/s/ Donald Green
----------------
Address: 5235 Vista Grande
Santa Rosa, CA 95403
AGREED TO AND ACCEPTED BY:
ADVANCED FIBRE COMMUNICATIONS
By: /s/ Dan E. Steimle
------------------
Title: Vice President, Chief Financial Officer
---------------------------------------
Dated: May 31, 1995
6.
<PAGE>
PROMISSORY NOTE
AMOUNT: $100,000 (ONE HUNDRED THOUSAND DOLLARS)
DATE: OCTOBER 5, 1995
PETALUMA, CALIFORNIA
FOR VALUE RECEIVED, Carl Grivner ("Maker") promises to pay to the order of
Advanced Fibre Communications ("AFC") the principal sum of One Hundred Thousand
Dollars ($100,000).
Interest on this note accrues annually at a rate of 6.37%, and is due and
payable annually on the anniversary date of your employment with AFC, which is
July 19, 1995. The principal balance is due and payable in three equal
installments on July 19 of each of the next three years (1996, 1997 and 1998).
Based upon your continued performance and service, at the option of the Board of
Directors of AFC, all or a portion of the principal and interest due on this
loan may be forgiven over the next three years beginning with July 19, 1996.
The entire principal sum of this Note shall become immediately due and payable
upon the insolvency of the Maker, the commission of any act of bankruptcy by the
Maker, the execution by the Maker of a general assignment for the benefit of
creditors, the filing by or against the Maker of any petition in bankruptcy or
any petition for relief under the provisions of the federal bankruptcy act or
any other state or federal law for the relief of debtors and the continuation of
such petition without dismissal for a period of thirty (30) days or more, or the
appointment of a receiver or trustee to take possession of the property or
assets of the Maker.
This Note shall be construed in accordance with the laws of the State of
California.
By: /s/ Carl Grivner
---------------------------
Carl Grivner
Date: 10-5-95
---------------------------
<PAGE>
SHAREHOLDER AND JOINT VENTURE AGREEMENT
BETWEEN
ADVANCED FIBRE COMMUNICATIONS, INC. AND
ADVANCED FIBRE COMMUNICATIONS (HONG KONG) LIMITED
AND
HARRIS CORPORATION, THROUGH ITS DIGITAL TELEPHONE SYSTEMS
DIVISION
- ----------------------
[*] INDICATES CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
TABLE OF CONTENTS
1. Definitions
2. Principal Business and Principle of Cooperation
3. Incorporation, Capitalization, organization, and Management
4. Licenses and Rights and Exceptions
5. Closing
6. Material Breach
7. Representations, Warranties and Covenants
8. General Provisions
Exhibits
(A) Articles of Association and Bylaws
(B) Manufacturing License Agreement between AFCI and AHMCI
(C) Manufacturing and Technical Assistance Service Agreement between AFC and
AHMC
(D) Purchase Agreement between AFC and AHMC
(E) Price List for Parts and Components
(F) Master Escrow Agreement between AFC, AHMC and Fort-Knox
(G) Functional Specification of the Product
(H) Distributorship Agreement between AFC and AHMC
(I) Consent
(J) Software License Agreement between AFC and AHMC
2
<PAGE>
THIS SHAREHOLDER AND JOINT VENTURE AGREEMENT is entered into as of this 28th day
of December, 1995
BETWEEN:
ADVANCED FIBRE COMMUNICATIONS, INC., a Delaware corporation located at 1445
McDowell Boulevard North, Petaluma, California 94954 U.S.A., and ADVANCED FIBRE
COMMUNICATIONS (HONG KONG) LIMITED, a Hong Kong company wholly owned by Advanced
Fibre Communications, Inc., whose registered office is at 9th Floor, 106A
Lockhart Road, Wanchai, Hong Kong, with both companies acting jointly and
severally (hereafter collectively referred to as "AFC").
and
HARRIS CORPORATION, a Delaware corporation, acting for the purpose of this
Agreement through its Digital Telephone Systems Division at 300 Bel Marin Keys
Boulevard, Novato, California 94948 U.S.A. (hereafter referred to as "Harris").
based on the following facts:
(A) AFC is engaged in the business of manufacturing and distributing
telecommunications products worldwide and wishes to expand the market for the
Product (as defined below) in India.
(B) Harris is engaged in the business of manufacturing, distributing and
marketing communication products worldwide and wishes to expand its activities
in the Indian communications market.
(C) AFC and Harris wish to enter into a relationship by which they will seek to
manufacture, assemble, test, market, distribute, sell, install, maintain and
support the Product in India for the Indian market only.
(D) AFC and Harris wish to form a Mauritius corporation, having the name of
"AFC Harris Multimedia Communications Private Limited ("AHMC"), owned 51% by AFC
and 49% by Harris.
(E) AFC and Harris anticipate that AHMC will enter into joint venture
agreements or other relationships with Designated Indian Entities (as defined
below) to manufacture, assemble, test, market, distribute, sell, install,
maintain and support the Product in India.
3
<PAGE>
NOW THEREFORE, the Parties agree as follows:
1. DEFINITIONS
In this Agreement, except to the extent the context otherwise requires, the
following terms shall have the following meanings and when used in the plural
form, their meanings shall mean the plural of the singular meaning:
1.1 "Agreement" shall mean this Shareholder and Joint Venture Agreement and all
the exhibits to this Agreement.
1.2 "AHMC" shall mean AFC Harris Multimedia communications Private Limited to
be established pursuant to this Agreement.
1.3 "Articles" shall mean the Articles of Association of AHMC.
1.4 "Board" shall mean the Board of Directors of AHMC.
1.5 "Business Plan" shall mean the business plan of AHMC to be
approved by the Board pursuant to Section 3.10 of this Agreement.
1.6 "Chairman" shall mean the chairman of the Board.
1.7 "Closing" shall mean the closing of the transfer of the Technical
Documentation, delivery of Licensed Software and the completion of the events
under Section 5.2.
1.8 "Director" shall mean a director on the Board.
1.9 "Designated Indian Entity" shall mean a legal entity existing under the
laws of India with which AHMC may, with the unanimous approval by the Board,
enter into a joint venture agreement or other relationship to manufacture and
market the Product in India.
1.10 "Effective Date" shall mean the date upon which this Agreement shall
become effective, which shall be the first day upon which all the following
events shall have occurred:
a) The Parties have by their authorized representatives duly executed
this Agreement and the agreements attached as exhibits to this Agreement;
b) Harris obtains all desired and necessary corporate approvals for
entering into this Agreement and the agreements attached hereto as exhibit;
c) AFC obtains all desired and necessary corporate approvals for entering
into this Agreement and the agreements attached hereto as exhibits and the
required approvals from the United States Government for exporting and
transferring the Product, the proprietary components, the Technical
Documentation, and Licensed Software to India;
4
<PAGE>
and
d) Each Party notifies the other that it has obtained the required
approvals and licenses stated in paragraphs a) and b) above.
1.11 "Fiscal Year" shall have the meaning given that term in Section 3.7.
1.12 "Licensed Software" shall have meaning given that term in the Software
License Agreement attached as Exhibit J.
1.13 "Manufacturing Licenses" shall mean the licenses granted by AFCI to AHMCI
for the manufacture and marketing of the Product pursuant to Section 4.1 of this
Agreement and Section 2.1 of Exhibit B to this Agreement.
1.14 "Manufacturing Rights" shall mean the manufacturing rights granted under
and pursuant to the Manufacturing Licenses with respect to the Product in and
for the Indian market.
1.15 "Material Breach" shall mean any breach by either Shareholder of any of
the provisions of this Agreement or the agreements attached hereto which
breach affects a right, or denies a benefit, or imposes a cost of or on the
other Shareholder or alters the purposes of this Agreement or the agreements
attached hereto to a material extent.
1.16 "Net Book Value" shall mean the value equal to the total assets of AHMC
reduced by the amount of its total liabilities as determined according to the
generally accepted accounting principles in the United States.
1.17 "Party" shall mean either AFC or Harris, and "Parties" shall mean both
AFC and Harris.
1.18 "Product" or "Licensed Product" shall mean the Advanced Fibre
Communications digital loop carrier system currently known as the UMC-1000E
including the upgrades to and improvements on the UMC-1000E as further specified
in the Functional Specification attached as Exhibit G, but shall not include
Licensed Software.
1.19 "Share" shall mean a share in the authorized common stock of AHMC.
1.20 "Shareholder" shall mean any holder of a Share.
1.21 "Software Licenses" shall mean the licenses to be granted or caused to be
granted by AFC to AHMC pursuant to the Software License Agreement attached as
Exhibit J to this Agreement.
1.22 "Technical Documentation" shall mean the documents listed under Section
5.1.
5
<PAGE>
2. PRINCIPAL BUSINESS AND PRINCIPLE OF COOPERATION.
2.1 PRINCIPAL BUSINESS.
(a) The principal business of AHMC shall be to enter into joint
venture agreements or other relationships with Designated Indian Entities to
manufacture, assemble, test, market, distribute , sell, install, maintain and
support the Product under the tradename "UMC 1000E" in India.
(b) The Parties anticipate that the first such joint venture may be
with S.M. Creative Electronics Limited and ARM Limited.
(c) Subject to the unanimous approval by the Board, AHMC may enter
into other contractual arrangements and relationships with other Designated
Indian Entities for the purposes of manufacturing and/or marketing the Product
and the related services in India.
2.2 PRINCIPLE OF COOPERATION.
(a) The Parties are entering into this Agreement on the basis that
both Parties will work earnestly to maximize the earnings of AHMC. AHMC shall,
and the Parties in their capacity as Shareholders shall cause AHMC to, transact
its business in a manner so as to optimize its value and earnings.
(b) In order to attain sound management and efficient operation of
AHMC and for the benefit and furtherance of its business, each Party shall
utilize its best efforts to ensure that the provisions as well as the spirit and
intent of this Agreement and the agreements attached hereto are followed as
fully and as consistently as possible. Each Party shall instruct the Directors
and the corporate officers over whom that Party may have influence to endeavor
to act at all times toward giving full force and effect to the provisions,
spirit, and intent of this Agreement and agreements attached hereto.
(c) The Parties intend for AHMC to take full advantage of their
experience, technology, knowledge, and available resources in implementing
actions that will maximize the growth, sales, and profits of AHMC.
(d) The Parties intend to adhere and resort to the principles of
friendly consultation and cooperation to their utter most ability in attempting
to resolve all conflicts and disputes with respect to this Agreement.
3. INCORPORATION, CAPITALIZATION, ORGANIZATION, AND MANAGEMENT
3.1 INCORPORATION. AFC and Harris shall cause to be incorporated in
Mauritius a corporation having the name of "AFC
6
<PAGE>
Harris Multimedia Communications Private Limited", subject to the laws of
Mauritius, as soon as practical after the signing of this Agreement, having
Articles of Association and Bylaws substantially in the form attached as Exhibit
A to this Agreement.
3.2 CAPITALIZATION. The total authorized common stock of AHMC shall be
five million Shares, each with the respective rights and restrictions specified
in the Articles, of which two million Shares shall be issued at the time of
Closing. AFC shall subscribe and pay for 1,020,000 Shares, and Harris shall
subscribe and pay for 980,000 Shares.
3.3 DOCUMENTATION. All documents necessary for the incorporation and
registration of AHMC shall be prepared by Harris and paid for by AHMC and shall
be subject to approval by Harris and AFC. All such documents not required to be
prepared in the language of the country of incorporation shall be prepared and
executed in English. All documents required to be executed in the official
language of the country of incorporation shall be translated into English and
certified as to the translation. A copy of each translated document shall be
delivered to every Shareholder.
3.4 MANAGEMENT AND OFFICERS
(a) AFC shall be entitled to nominate a candidate for the Chairman.
Harris and AFC in their respective capacity as Shareholders shall cause their
Directors to elect as Chairman the candidate so nominated by AFC.
(b) Harris shall be entitled to nominate a candidate for the Managing
Director to the Chairman. The Managing Director shall be the chief executive
officer of AHMC. The Chairman shall appoint as the Managing Director the
candidate so nominated by Harris.
(c) The Chairman shall appoint the chief financial officer and/or the
treasurer, and the corporate secretary for the Board's approval. The Managing
Director shall appoint other corporate officers of AHMC for the Board's
approval.
(d) The Managing Director shall report to the Chairman and other
officers of AHMC shall report to the Managing Director and shall be responsible
for the operation and day to day management of AHMC.
3.5 BOARD OF DIRECTORS
(a) The Board shall be comprised of seven Directors, two of whom
shall be residents of Mauritius. Each Director shall serve a term of three
years.
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<PAGE>
(b) Harris shall be entitled to nominate candidates for three
Directors, one of whom shall be a resident of Mauritius and AFC shall be
entitled to nominate candidates for three Directors, one of whom shall be a
resident of Mauritius. Harris and AFC shall jointly nominate a candidate for an
outside Director. In the event AFC and Harris fail to nominate an outside
Director by mutual agreement, AFC shall nominate the candidate for the seventh
Director. Harris and AFC in their respective capacity as Shareholders shall
elect to the Board the candidates so nominated.
(c) Unless otherwise provided under the laws of the country of
incorporation, each Shareholder having the right to nominate a Director shall
have the right to remove that Director at any time without cause and appoint a
replacement therefor in its sole discretion. The outside Director may be
removed and replaced only by mutual consent of AFC and Harris.
(d) The Chairman shall decide when to hold Board meetings, provided
that the Board meets at least once every three months for the first year
following the incorporation of AHMC and at least once every year thereafter.
(e) AHMC shall bear all reasonable travel costs of the Directors
attending a Board meeting or a Shareholder meeting.
(f) Except for the outside Director and, if required by the laws of
the country of incorporation, the resident Directors in Mauritius, all other
Directors shall not be entitled to any remuneration from AHMC by reason of being
a Director.
(g) The quorum for a Board meeting shall be three Directors, of whom
one shall be a Director nominated by Harris other than its resident Director and
the other shall be a Director nominated by AFC other than its resident Director.
No Board meeting shall be convened and, if convened, no Board resolution at such
meeting shall be valid, unless a 10-day written notice is given to every
Director other than the resident Directors (if such notice to resident Directors
is not required under the applicable laws) by regular mail or confirmed
facsimile. Each Director may waive in writing his right to receive such notice.
A Director may attend a Board meeting either physically or through telephone
conference and either personally or by proxy.
(h) The Board is the highest decision making body of AHMC. Except as
otherwise provided under Section 3.6, the Board shall have the power to adopt a
resolution with respect to all matters of AHMC by an affirmative majority vote
of the Directors present at the Board meeting in person or by proxy. Every
Board decision shall be adopted by a Board resolution and every Board meeting
shall be recorded in the Board minutes.
8
<PAGE>
(i) Harris and AFC warrant to each other that AHMC is an independent
company and is not and shall not be construed to be an agent or representative
of either Harris or AFC and that neither Party shall do any act or cause AHMC to
do any act on behalf of or for such Party or cause AHMC to bind Harris or AFC.
3.6 RESERVED MATTERS. The Shareholders shall cause AHMC not to do any of
the following acts and not to pass any resolution with respect to any of the
following matters without first obtaining unanimous consent of all the
Shareholders:
(a) amending the Articles;
(b) entering into any agreement or transaction with a Shareholder or
any of its affiliates other than the transactions specifically authorized
herein;
(c) Commencing or settling any litigation concerning the intellectual
and technology property rights of AFC in the Product;
(d) Amending any material term or condition in the agreements
attached hereto as Exhibit B, Exhibit C, Exhibit D, Exhibit E, F and Exhibit J;
(e) Entering into a contractual agreement or business relationship
with a Designated Indian Entity
(f) Entering into a new line of business not contemplated by this
Agreement;
(g) Declaring or distributing dividend, except as provided in section
3.15;
(h) Acquiring, transferring, or otherwise disposing of any technology
or capital assets of, or on behalf of, AHMC;
(i) Any spending in excess of $200,000 for any quarterly accounting
period not in an adopted Business Plan;
(j) Adopting a Business Plan; and
(k) Entering into a significant business relationship with an entity
in India.
(l) Determining or adjusting the duplication fee to be charged by
AHMC to any Designated Indian Entity for the duplication license with respect to
the Licensed Software.
3.7 FINANCIAL STATEMENTS AND ACCOUNTING RECORDS. The fiscal year of AHMC
shall commence on April 1 and shall end on March 31 of each year. AHMC shall
prepare and submit to the Shareholders financial statements of AHMC, including a
balance sheet and income statement, within 30 days after the end of each
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quarter and within 45 days after the end of the fiscal year. Such quarterly and
annual statements and AHMC"s internal accounting shall be prepared and conducted
in accordance with the laws of the country of incorporation and with the U.S.
generally accepted accounting principles.
3.8 RIGHT OF INSPECTION. During office hours of AHMC, AFC and Harris shall
have full access to, and right to make copies of, all books of account, records
and the like of AHMC. Any information obtained by either Party through exercise
of this right of access shall (i) be used by such Party only for purposes which
are consistent with its status as a Shareholder and not for the pursuit of
business interests outside that of AHMC and (ii) be subject to the
confidentiality provisions of Section 8.3.
3.9 DEALINGS WITH PARTIES AND ASSOCIATED COMPANIES. AHMC shall at all
times be managed and operated as an independent enterprise for the benefit of
AHMC and its Shareholders. Except as expressly authorized in this Agreement,
AHMC shall not at any time engage in dealings or transactions with any
Shareholder or its affiliates on terms more favorable than would be accorded an
independent, non-affiliated person or company. Any such dealings and
transactions shall be approved by a unanimous Board.
3.10 BUSINESS PLAN. The Managing Director shall propose and the Board shall
adopt a proforma Business Plan for AHMC"s first two years of operation as soon
as practical after the execution of this Agreement in accordance with Section
3.6. The Business Plan shall include, but shall not be limited to, the
following matters of AHMC:
(a) Profit and Loss Projection;
(b) Income Projection including projected total annual sales;
(c) Cash flow; and
(d) Total annual operating expenses and capital expenditure.
The Managing Director shall revise the Business Plan annually, subject to
approval by the Board.
3.11 VOTING. Each Shareholder shall be entitled to cast one vote for each
Share it holds.
3.12 FUTURE FINANCING. Unless the Shareholders otherwise agree in writing,
if the Board determines that AHMC requires financing in excess of the capital
provided pursuant to Sections 3.2 and 5.2, AHMC shall obtain additional
financing in the following order priority:
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(a) Third party debt or equipment lease financing without guarantees
by the Shareholders;
(b) Third party debt or equipment lease financing with guarantees by
the Shareholders in proportion to their respective then equity positions in
AHMC;
(c) Loans by the Shareholders;
(d) Equity investments by the Shareholders; and
(e) Equity investments by third parties.
3.13 SHAREHOLDER MEETINGS. At the request of at least two Directors, the
Chairman may convene a shareholder meeting upon a 10-day written notice
delivered by regular mail or confirmed facsimile to all the Shareholders. A
quorum for a Shareholder meeting of AHMC shall require the presence of persons
holding as Shareholders or proxies in aggregate no less than 66.66% of the
outstanding Shares. Every resolution at a Shareholder meeting shall require the
affirmative vote of no less than 66.66% of all the Shares present and entitled
to vote at such a Shareholder meeting.
3.14 PREEMPTIVE RIGHT. Without prejudice to the Parties' rights under
Article 7 and Section 8.6, no Shareholder shall be entitled to transfer its
Shares or any right to subscribe to any Shares being issued without first
offering the other Shareholders the right to acquire such Shares or the right to
subscribe to new shares at the same price and under the same terms as those
proposed by a bona fide third party. This right of first refusal shall be valid
for 30 days after receipt of such offer, and if not exercised by the offeree
Shareholder, the offering Shareholder shall have the right to transfer such
Shares or the right to subscribe to new Shares to a bona fide third party within
the subsequent 60 days, but only upon the same terms proposed by such bona fide
third party and rejected by the offeree Shareholder.
3.15 DISTRIBUTION OF PROFIT AND DIVIDEND. All profits and losses of AHMC
shall accrue to each Shareholder according to its proportional ownership in
AHMC. Unless otherwise provided under the applicable law or decided by the
Board pursuant to Section 3.6, AHMC shall, and AFC as the majority Shareholder
shall cause AHMC to, declare and distribute as dividend AHMC's total retained
earnings or the maximum amount allowed under the laws of the country of
incorporation, whichever is lower.
4. LICENSES AND RIGHTS AND EXCEPTIONS
AFC and Harris represent to each other that adequate protection of AFC's
technology and licenses granted herein is in the best interest of AHMC and its
Shareholders. AFC and Harris shall endeavor to secure adequate protection
through all
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available and practical means. Procurement of such protection may require
subsequent adjustment in the licensing structure herein but shall not alter the
nature and the purpose of, and the Parties' intent and expectations under, this
Agreement, including but not limited to the Parties' expectations with respect
to their respective equity positions in AHMC and AHMC's receipt of the royalty
income from sublicensees. Solely for the purpose of protecting its technology,
AFC shall exercise its best effort in good faith and at its own expense to
reach, and notify Harris of, a decision on the best available and practical
means of according adequate protection to AFC's technology at the earliest
possible time, but no later than March 31, 1996. If Harris finds AFC's such
decision unacceptable, then Harris shall have the option to declare this
Agreement null and void within 45 days after receipt of notice of AFC's
decision. In the interim, to facilitate the undertaking of the principal
business of AHMC without undue delay, AFC and Harris, on behalf of AHMC, shall
execute the Distributorship Agreement of limited scope and duration in the form
attached hereto as Exhibit H. Subject to the foregoing, AFC and Harris agree as
follows with respect to the Software Licenses and the Manufacturing Licenses and
the Manufacturing Rights.
4.l EXCLUSIVE LICENSES AND RIGHTS.
(a) AFC shall undertake to cause an Indian entity wholly owned and
controlled by AFC (hereafter "AFCI") to be fully authorized to grant and to
grant to the first Designated Indian Entity selected by AHMC (this and only this
first Designated Indian Entity hereafter referred to as "AHMCI")and other
Designated Indian Entities selected by AHMC in accordance with Section 3.6, and
AHMC shall cause AHMCI to accept from AFCI, subject to Section 4.2:
(i) a license for AHMCI and any of such other Designated Indian
Entities to be a holder of the right to manufacture, assemble, test, market,
distribute, sell, install, service and maintain the Product in India;
(ii) a license for AHMCI and any of such other Designated Indian
Entities to be a holder of the right to grant sublicenses to Designated Indian
Entities for such entities to grant further a sublicense to their distributors
and end users to distribute, market, sell, install, use, operate, service and
maintain the Product in India; and
(iii)a license for AHMCI and any of such other Designated Indian
Entities to use the Technical Documentation for the purposes of exercising the
licenses and rights granted in Sections 4.1(a)(i) and (ii).
AFC shall undertake, cause, and do all things necessary to ensure that AFCI
itself does not engage in, and shall be restricted from engaging in,
manufacturing, assembling, testing, marketing, distributing, selling,
installing, servicing, and maintaining the
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Product in India, and in the granting of any sublicense with respect to the
Product to any third person except to Designated Indian Entities selected by
AHMC in accordance with Section 3.6.
(b) AFC shall grant to AHMC and AHMC shall accept from AFC, subject
to Section 4.2 of the Joint Venture Agreement:
(i) license for AHMC to be the exclusive holder of the right to
use, operate, test, maintain, duplicate, make copy of, install and embed,
distribute and market the Licensed Software in connection with the Licensed
Product in India;
(ii) a license for AHMC to be the exclusive holder of the right
to grant sublicenses to Designated Indian Entities including AHMCI for such
entities to use, operate, test, maintain, duplicate, make copy of, install and
embed, distribute and market the Licensed Software in connection with the
Licensed Product in India;
(iii) a license for AHMC to be the exclusive holder of the
right to grant sublicenses to Designated Indian Entities including AHMCI for
such entities to grant further the sublicense to their distributors and end
users to use, operate, and maintain the Licensed Software solely for the purpose
of operating the Licensed Product in the Territory.
(c) AFC shall, for the term of this Agreement offer to sell to AHMC
and/or any Designated Indian Entity, and AHMC and/or any Designated Indian
Entity shall have the right to purchase from AFC the Products, the Proprietary
and Custom Parts and Components at the prices and on the terms set forth
hereunder and under the agreements attached hereto. In the event AFC for
whatever reason, decides to cease to manufacture or to maintain and support the
Product, AFC shall continue to supply or support and maintain the Proprietary
Parts and Components to AHMC for a period of two years from the date upon which
AFC ceases to supply or support and maintain the Product.
(d) The licenses and rights granted under Sections 4.1(a), (b) and
(c) shall become effective upon the Effective Date, and shall remain in full
force and effect for so long as the Joint Venture Agreement is in effect or AHMC
legally exists.
(e) In the event of termination of this Agreement resulting in
dissolution of AHMC, the licenses and rights granted hereunder and sublicenses
granted pursuant to this Agreement shall remain and continue in full effect,
from the effective date of the termination, for two years or a period of time
sufficient to allow AHMC and AHMCI and their sublicensed Designated Indian
Entities to obtain and procure the alternative licenses and technology, material
supply and technical support so as to continue the principal business of AHMC
contemplated under this Agreement and the agreements attached hereto as
exhibits, whichever is longer.
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(f) Notwithstanding any other provision to the contrary, under no
circumstance shall termination or expiration of this Agreement or the licenses
under this Agreement terminate or otherwise affect the effectiveness of the
sublicenses already granted prior to such termination or expiration by AHMC or
AHMCI to Designated Indian Entities pursuant to AHMC's and AHMCI's licenses and
rights under Sections 4.1(a), (b)and (c).
(g) Without limiting the generality of Sections 4.1(a), (b) and (c),
in case of any inconsistency between Sections 4.1(a), (b) and (c) and the
provisions under Section 4.2, Sections 4.1(a), (b) and (c) shall be construed to
allow AHMC and AHMCI to do all things, with respect to the Product, the
Technical Documentation, and Licensed Software in India, which AFC is not
expressly prohibited from doing worldwide under its prior and existing
agreements with other entities.
4.2 AFC'S OTHER MANUFACTURING JOINT VENTURES
(a) AFC represents that it has entered into a joint venture with
Tellabs (the "Tellabs Agreement"), as evidenced in Exhibit I attached to this
Agreement, under which AFC granted to Tellabs, with respect to the Indian
market, a non-exclusive license for Tellabs to market, distribute, and sell in
India the products covered under the Tellabs Agreement, which products are based
on the same technology upon which the Product is based. (the Tellabs License").
The Tellabs License does not include, and Tellabs does not and shall not have,
any license or right with respect to the Licensed Software in India, or any
license or right to manufacture, assemble, make, produce in India the Product or
any other product that is based on AFC"s digital loop carrier technology.
(b) AFC represents that AFC has entered into a technology transfer
agreement with Industrial Technology Research Institute ("ITRI") of Republic of
China under which AFC granted to ITRI:
(i) a license for ITRI exclusively to manufacture, or to have
manufactured, the Product in Taiwan and to sublicense ITRI"s subsidiaries or
affiliates to manufacture, or to have manufactured, the Product in Taiwan;
(ii) a license for ITRI to be a non-exclusive distributor to
sell, install and maintain the Products when manufactured by ITRI or its
subsidiaries or affiliates in all the countries in the world except countries in
the North American continent; and
(iii) a license for ITRI to grant sublicenses to its subsidiaries
or affiliates for such subsidiaries or affiliates to arrange for the
manufacturing or assembly of the Product only in such sublicensed subsidiaries'
or affiliates'
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wholly owned and controlled manufacturing facilities located in any country in
Southeast Asia, which does not include India, provided that the Product as
manufactured by ITRI or its subsidiaries or affiliates pursuant to the right
described this Section 4.2(b)(iii) may only be sold and shipped to ITRI, or the
subsidiaries or affiliates in Taiwan which wholly own and control such
manufacturing facilities.
(c) Tellabs' and ITRI's rights, if any, with respect to the Licensed
Software are expressly provided for only in the Tellabs' Joint Venture Agreement
and the technology transfer agreement with ITRI and are limited to the same
scope and subject to the same restrictions as set forth in Sections 4.2 (a) and
(b).
(d) AFC represents that except as expressly provided for in this
Section 4.2, AFC has not granted, shall not grant, and shall not allow any of
its affiliates or subsidiaries to grant, for the term of this Agreement or the
period during which the licenses and rights granted to AHMC and AHMCI under
Section 4.1 remain effective, whichever is longer, either by themselves or
through any of their respective associates or agents or licensees, any license
or right with respect to the Licensed Software or any license or right with
respect to the Products or the Technical Documentation in India or for the
Indian market.
4.3 INTELLECTUAL PROPERTY. Except for the licenses granted hereunder, AFC
shall at all times retain all rights to the Technical Documentation and the
Licensed Software, the intellectual property, technology, know-how, proprietary
processes, source code, manufacturing drawings and information integral to the
manufacture of the Product. AFC shall defend these rights where AHMC or AHMCI
or their sublicensees have manufactured the Product to the design and
specification provided by AFC, except to the extent of any unauthorized
modification by AHMC or AHMCI or their sublicensees. AFC warrants to Harris
that any change of ownership in AFC or in the technology or in the Licensed
Software in the Technical Documentation shall not in any way invalidate or
otherwise affect the licenses and rights granted herein.
4.4 INDIAN GOVERNMENT APPROVALS AND MARKET NEED. The Parties acknowledge
that the Product has not been certified or type approved under the relevant
Indian government"s specifications, nor has the Product been modified to adapt
to the Indian market"s specific needs. AFC shall modify the Product solely for
the purpose of receiving the necessary type approval from the government of
India, AFC shall assist AHMC and AHMCI or their Designated Indian Entities in
obtaining other necessary approvals from the government of India. In the event
that obtaining of such approvals or the adaptation to the market specific needs
shall require product modification or development, AFC and Harris shall, and AFC
shall cause AFCI to, negotiate with AHMC and/or AHMCI in good faith to reach a
joint development
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agreement for such purposes upon terms and-conditions acceptable to both
Parties.
4.5 SUPPLY AND PRICING FOR CUSTOM AND PROPRIETARY COMPONENTS BY AFC. AFC
shall supply to AHMC and its Designated Indian Entities, during the term of this
Agreement, custom and proprietary parts and components necessary for the
manufacture of the Product upon the terms and conditions set forth in Exhibit D
and at the prices that shall equal [*]
4.6 UNREASONABLE PRICE INCREASE. In case of shortage in the supply of
these parts and components, [*]
4.7 UNREASONABLE DELAY OR SHORTAGE. AFC warrants to AHMC that it shall use
its best effort to meet AHMC"s reasonable projected demand for custom components
and proprietary components. AFC warrants to AHMC that it shall use its best
effort to ship AHMC"s or a Designated Indian Entity"s orders by the scheduled
shipment date.
4.8 FIRST RIGHT OF REFUSAL FOR NEW PRODUCT. Whenever AFC develops a new
product that is complementary or supplementary to the Product, except a product
specifically developed by AFC for the exclusive benefit of Tellabs under the
Tellabs Agreement, AFC shall not grant any license for the Indian market with
respect to such new product to any third person unless and until AFC has offered
to AHMC, and AHMC has had at least 45 days to consider, the opportunity of
obtaining the license and right with respect to such new product upon the same
terms and conditions AFC proposes and offers to a bona fide third party, and
thereafter if AHMC decides not to exercise this first right of refusal, AFC may
grant a license to the bona fide third party but only upon the same terms and
conditions offered to and rejected by AHMC.
5. CLOSING
5.1 TECHNICAL DOCUMENTATION AND LICENSED SOFTWARE.
(a) TECHNICAL DOCUMENTATION. Technical Documentation shall mean and
include the following documents, but does not include the Licensed Software:
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(i) all uncosted bills of materials for the Product;
(ii) a list of the suppliers and vendors of the parts and
components and other materials listed in (a) above;
(iii) all manufacturing drawings for mechanical assemblies and
subassemblies for use in manufacturing the Product;
(iv) a list of all unique manufacturing test equipment, including
design, layout and the purchase prices of the necessary test stations;
(v) all test software necessary for final manufacturing and
testing of the Product. AFC shall periodically provide and update the test
software but shall not be required to provide AHMC with any right or access to
its source code;
(vi) a price list determined on the principle expressed in
Section 4.5, for the custom or proprietary chips and components to be provided
by AFC for the manufacture of the Product; and
(vii) all other information which may be deemed necessary to
establish manufacturing capability of the Product in India. This information
will be similar to what AFC provides to its other international joint venture
partners.
(b) LICENSED SOFTWARE. AFC shall license and deliver the Licensed
Software to AHMC in accordance with the provisions set forth in Exhibit J. AFC
and Harris in their capacity as shareholders shall cause AHMC to charge each
sublicensed Designated Indian Entity a duplication fee which shall approximate
[*]
5.2 CLOSING.
(a) CLOSING DATE, The Closing shall be held in Petaluma, California
on a mutually agreed on date, which shall not be later than March 31, 1996.
(b) DELIVERIES BY AFC. At or before the Closing, AFC shall deliver
to:
(i) AHMCI or its designated personnel the Technical
Documentation in accordance with the provisions set forth in Exhibit B;
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(ii) AHMC or its designated personnel the Licensed Software in
accordance with the provisions set forth in Exhibit J.
(c) CONTRIBUTION BY AFC. AFC shall contribute to AHMC: [*]
(d) CAPITAL CONTRIBUTION BY HARRIS. Harris shall contribute
to AHMC: [*]
(e) SHARE CERTIFICATES. At the Closing, the Shareholders shall cause
AHMC to issue: (i) to AFC a share certificate of 1,020,000 Shares, and (ii) to
Harris a share certificate of 980,000 Shares.
(f) EXECUTION OF AGREEMENTS. At the Closing, AFC on behalf of itself
and AFCI and Harris on behalf of AHMC and AHMCI shall execute the following
agreements:
(i) the Manufacturing License Agreement in the form attached as
Exhibit B between AFCI and AHMCI;
(ii) the Manufacturing and Technical Assistance Service Agreement
in the form attached as Exhibit C between AFC or AFC and AFCI severally and
jointly and AHMCI.
(iii) the Purchase Agreement in the form attached as Exhibit D
between AFC and AHMC;
(iv) the Distributorship Agreement in the form attached as
Exhibit H between AFC and AHMC.
(v) the Software License Agreement in the form attached as
Exhibit J between AFC and AHMC.
(vi) The Master Escrow Agreement between AFC, AHMC, and Fort Knox
in the form attached as Exhibit F.
(g) ESCROW ACCOUNT. At the Closing, AFC shall deliver and deposit a
complete copy of the Technical Documentation and the source code of the Licensed
Software, manufacturing drawings, designs, schematics, proprietary processes and
information integral to the manufacture, assembly, testing, installation, and
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maintenance of the Product to the escrow account under the Master Escrow
Agreement in the form attached as Exhibit F between AFC, AFCI, AHMC, and Fort
Knox. AFC shall periodically update the content of the account. The content of
such escrow account shall be released and made available only to AHMC in
accordance with the terms and conditions set forth in the Master Escrow
Agreement, and AHMC shall have, and AFC in its capacity as a Shareholder shall
cause AHMC to have, the irrevocable right to make full use of the content
deposited in the escrow account to enable AHMC and AHMCI to continue to conduct
its business upon the occurrence of any of the following events:
(i) AFC initiates voluntary, or has initiated against it
involuntary, bankruptcy proceedings; or
(ii) AFC commits a Material Breach of any provision of this
Agreement or the agreements attached hereto as exhibits that precludes,
prevents, impedes AHMC or any Designated Indian Entity from manufacturing and
marketing the Product in India or otherwise conducting its business in its
normal course contemplated under this Agreement.
6. MATERIAL BREACH
6.l RIGHT TO ACQUIRE OR SELL. In the event either Party commits a
Material Breach and such breach has not been cured within 60 days after the
receipt of notice of breach from the non-breaching Party, then, without
prejudice to section 3.14, and subject to the terms and conditions of Sections
6.2, 6.3 and 6.4, the other Party or its respective assignee may:
(a) terminate this Agreement and wind up AHMC and liquidate and
distribute AHMC' assets pursuant to Section 8.6(c) and dissolve AHMC, or
(b) acquire the breaching Party's Shares or sell its own Share to the
breaching Party as provided below:
(i) The non-breaching Party may elect to purchase and, upon
which election, the breaching Party shall sell all its Shares and assign all its
rights hereunder to the non-breaching Party at the Shares' pro rata Net Book
Value as of the date upon which the next following monthly accounting period
closes. The purchase shall be consummated on a date selected by the
nonbreaching Party on not less than forty-five (45) days notice to the breaching
Party.
(ii) The non-breaching Party may elect to sell all its Shares and
assign all its rights hereunder to the breaching Party and, upon which election,
the breaching Party shall purchase all of the non-breaching Party's Shares at
the Shares' pro rata Net Book Value as of the date upon which the next following
monthly accounting period closes. The sale shall be consummated on a date
selected by the non-breaching Party on
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not less than forty-five (45) days notice to the breaching Party.
6.2 PURCHASE PROCEDURES. If the date of purchase of the selling Party"s
Shares as specified in Section 6.1 is postponed due to the process of
calculating the purchase price, then the purchase and sale shall occur no later
than fifteen (15) days following determination of the Net Book Value. The
purchase price shall be paid in US. dollars in cash.
6.3 CONTINUATION OF BUSINESS. During any period in which the purchasing
Party has the right to purchase or is purchasing the other Party's Shares
pursuant to this Article 6, AFC and Harris shall use their best efforts to
maintain and preserve the business and the best interest of AHMC.
6.4 REMEDY NOT AFFECTED. The foregoing sections of Article 6 shall not
limit the ability of a Party to seek legal and equitable remedies related to a
material breach by a Party or the failure of a Party to perform any other duty
or obligation under this Agreement.
7. REPRESENTATIONS, WARRANTIES AND COVENANT
7.l WARRANTIES OF AFC. AFC represents and warrants to Harris and to AHMC
that as of the Effective Date and the closing, the following statements are and
shall be true and correct in all material respects:
(a) ORGANIZATION AND GOOD STANDING OF AFC. Advanced Fibre
communications is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware of the United States of America
and has the corporate power and authority to enter into this Agreement and to
perform its obligations hereunder. Advanced Fibre Communications Hong Kong
Limited is a corporation duly organized, validly existing and in good standing
under the laws of Hong Kong and has a registered office in Hong Kong and has the
corporate power and authority to engage in its-current business, and to enter
into this Agreement and to perform its obligations hereunder. AFCI is a company
duly organized, validly existing and in good standing under the laws of India
and has a registered office in India and has the corporate power and authority
to engage in its current business, and to enter into the agreement in the form
attached as Exhibit B and to perform its obligations thereunder.
(b) AUTHORIZATION. All corporate actions on the part of officers and
directors of AFC necessary for the authorization, execution and delivery of this
Agreement and agreements attached hereto by AFC and for the performance of all
of its obligations hereunder have been taken. This Agreement constitutes valid,
legally binding and enforceable obligations of AFC.
(c) BROKERS, FINDERS. AFC has not retained any person to act on
their behalf or to act as their broker, finder or agent
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in connection with this Agreement.
(d) ADDITIONAL REPRESENTATIONS.
(i) Except the pending legal dispute between AFC and DSC
Communications Corporation, AFC is the sole absolute unencumbered legal and
beneficial owner of all licenses and rights granted or covenanted to be granted
to AHMC and AHMCI hereunder. The Product, except any modification without AFC's
authorization, is and shall be original to AFC and does not and shall not
infringe on any third person"s copy right, patent, technology, know-how,
trademarks, trade secrets, goodwill or any other rights of any nature.
(ii) Except the pending legal dispute between AFC and DSC
Communications Corporation, notwithstanding even the provisions in Section 4.2,
no impediment whatever presently exists or in the future will exist that will
prevent, restrict, or otherwise impede AHMC or AHMCI from attaining the full
benefits of the Software Licenses and the Manufacturing Licenses and the
Manufacturing Rights under this Agreement. AFC further warrants that none of
its prior and existing agreements, including the Tellabs Agreement, shall
prevent or restrict AHMC or any of the Designated Indian Entities from
manufacturing, marketing and selling the Products, pursuant to the licenses and
rights granted hereunder, to the Department of Telecommunication (DOT) of India,
Mahanagar Telephone Nigam Limited (MTNL), and the newly emerging telephone
companies that will be licensed by the government of India to operate and
provide basis telephone services throughout India as overlay network providers.
(iii) AFCI is a AFC wholly owned and controlled subsidiary in
India. Its sole purpose, business, and right with respect to the Product and
the Technical Documentation is to transfer the Technical Documentation and grant
the Manufacturing Licenses and Manufacturing Rights to AHMCI and, subject to
Section 3.6, other Designated Indian Entities on behalf of AFC. AFC has not
granted and shall not grant to AFCI, and AFCI does not and shall not ever have,
any license or right whatsoever with respect to the Licensed Software. AFC
shall ensure that AFCI shall not engage in any act inconsistent with the
purposes contemplated under this Agreement.
(e) DISCLOSURE. AFC has not knowingly and intentionally withheld any
material and relevant information with respect to the subject matter of this
Agreement which information Harris has informed AFC would have materially
altered Harris" intent or course of action with respect to its entering into
this Agreement, had it been made known to Harris.
7.2 WARRANTIES OF HARRIS. Harris represents and warrants to AFC and AHMC
that as of the Effective Date and the Closing, the following statements are and
shall be true and correct in all material respects:
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(a) ORGANIZATION AND GOOD STANDING OF HARRIS. Harris is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and has the corporate power and authority to engage in
this Agreement and to perform its obligations hereunder.
(b) AUTHORIZATION. All corporate action on the part of Harris and
its officers and directors necessary for the authorization, execution and
delivery of this Agreement and for the performance of all of its obligations
hereunder has been taken. This Agreement constitutes a valid, legally binding
and enforceable obligation of Harris.
(c) BROKERS, FINDERS. Harris has not retained any person to act on
its behalf or to act as its broker, finder or agent in connection with this
joint venture.
(d) DISCLOSURE. Harris has not knowingly and intentionally withheld
any material and relevant information with respect to the subject matter of this
Agreement which information AFC has informed Harris would have materially
altered AFC's intent and course of action with respect to its entering into this
Agreement, had it been made known to AFC.
(e) NON-COMPETITION. The Digital Telephone Systems Division of
Harris Corporation is not currently negotiating with any Indian entity to enter
into a joint venture and manufacturing license agreement to manufacture and
market a digital loop carrier product competitive to the Product in Indian
except as contemplated under this Agreement.
8. GENERAL PROVISIONS
8.1 TERM. This Agreement shall be binding on all Parties as of the
Effective Date. This Agreement shall continue in full force and effect for a
term of fifteen (15) years after the Effective Date unless sooner terminated by
written agreement of the Parties.
8.2 IMPORT AND EXPORT CONTROLS.
(a) Harris and AFC each understands and acknowledges that the other
is subject to regulation by agencies of the United States government, including
the US Department of Commerce, which prohibit export or diversion of certain
products and technology to certain countries. AFC and Harris warrant to each
other that they shall comply and shall cause AHMC to comply in all respects with
the Export Administration Regulations and other United States laws and
regulations in effect from time to time. Harris as the Shareholder responsible
for the day-to-day management of AHMC warrants that it shall cause AHMC to
advise, urge, and, to the extent within its control, cause every Designated
Indian Entity to comply with the same United States export laws and
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regulations
(b) AFC warrants that it has already obtained the necessary approval
from the United States government for the export and transfer of the Product and
the related Technical Documentation from the U.S.A. to India.
(c) AFC warrants that it shall use its best efforts to maintain all
necessary approvals from the US. government for the export of the Product and
the Technical Documentation to India.
(d) Harris warrants that it shall advise, urge, and, to the extent
within its control, prevent each Designated Indian Entity from exporting the
Product out of India without prior consent from AFC.
8.3 CONFIDENTIALITY. The Parties acknowledge that it will be necessary
for each Party to disclose to the other party certain information which the
disclosing party deems confidential ("Confidential Information"). The
Confidential Information may include, without limitation, Technical
Documentation, software and firmware, engineering designs, architecture and
other technical data, as well as business plans and financial data, all trade
secrets and all know-how, data and other information not in the public domain
that relate to, are embodied in, or are associated with, the Products,
technology, services, business, customers, affairs of the Parties or their
affiliates. The Parties shall handle the exchange and the use of Confidential
Information in the following manner:
(a) To be protected hereunder, Confidential Information must be
disclosed in written or graphic form conspicuously labeled as "Confidential" or
"Proprietary". Oral disclosures for which protection is sought must be
identified as proprietary or confidential at time of disclosure and confirmed in
writing within 30 business days of such oral disclosure.
(b) Recipient agrees to receive and hold all such Confidential
Information acquired from Discloser in strict confidence and to disclose same
within its own organization only, and only to those of its employees who have
agreed in writing (under Recipient"s own blanket or specific agreement form) to
protect and preserve the confidentiality of such disclosures and who are
designated by Recipient to use the Confidential Information for the
aforementioned purposes. Without affecting the generality of the foregoing,
Recipient will exercise no less care to safeguard the Confidential Information
acquired from Discloser than Recipient exercises in safeguarding its own
confidential or proprietary information.
(c) The foregoing restrictions on Recipient's disclosure and use of
Confidential Information acquired from Discloser shall not apply to the extent
of information (1) known
23
<PAGE>
to Recipient prior to receipt from Discloser, (2) of public knowledge without
breach of Recipient's obligations hereunder, (3) rightfully acquired by
Recipient from a third party without restriction on disclosure or use, (4) as to
which Recipient has received express written consent from an authorized officer
of Discloser to disclose or use, (5) independently developed by Recipient.
Recipient shall have the burden of proof respecting any of the aforementioned
events on which Recipient relies as relieving it of the restrictions hereunder
on disclosure or use of such Confidential Information. In the case of any events
(2), or (3), the removal of restrictions shall be effective only from and after
the date of occurrence of the applicable event.
8.4 INDEMNITY
(a) AFC shall indemnify, hold harmless, and defend AHMC against any
and all claims, suits, actions, proceedings, and judgments for loss and damages
including reasonable attorney fees and costs brought against AHMC and/or AHMCI
based on a claim:
(i) that the manufacture, distribution, marketing, sale,
operation, and use of the Product or use of the Confidential Information,
Technical Documentation, or the Licensed Software as provided herein infringes
upon a third party's intellectual property right; and
(ii) that the licenses and rights granted to AHMC or AHMCI
violates or infringes upon a third party's legal, equitable, or contractual
right.
(b) AFC as the majority Shareholder shall cause AHMC, and through
AHMC shall cause AHMCI, to seek and obtain the full benefit of the
indemnification of Section 8.4(a).
(c) AFC's obligation under Section 8.4(a) shall not arise to the
extent the failure by AHMC and AHMCI to do the following results in material
prejudice to AFC:
(i) notify AFC of such claims, action, suits, loss, and damages
promptly, and
(ii) afford AFC full control over the defense of such claims,
actions, suits and proceeding, including the decision to settle or appeal;
(iii) provide AFC, at AFC's cost, with all necessary and
appropriate assistance and cooperation; and
(iv) obtain authorization for any modification to the Product and
the Licensed Software.
8.5 ARBITRATION.
(a) All disputes, controversies, differences, or
24
<PAGE>
claims of a general business nature between the Shareholders arising out of this
Agreement, or the breach thereof, shall be finally settled by binding
arbitration in San Francisco pursuant to the rules of the International Chamber
of Commerce. The Arbitration shall take place before one arbitrator appointed
in accordance with such rules. Judgment on the award rendered by the arbitrator
may be entered into any court having jurisdiction over the Parties. The
arbitrator shall apply the laws of the State of California to the merits of any
dispute or claim, without reference to rules of conflict of law. The
arbitration proceedings and all pleadings and written evidence shall be in the
English language. Any written evidence originally in a language other than
English shall be submitted in English translation accompanied by the original or
true copy thereof. The costs of the arbitration, including administrative,
legal and arbitrator fees, shall be born by the losing Party.
(b) Notwithstanding the foregoing, the Parties may apply to any court
of competent jurisdiction for a temporary restraining order, preliminary
injunction, or other interim or conservatory relief, as necessary, and without
any abridgment of the powers of the arbitrators.
8.6 TERMINATION.
(a) This Agreement may be terminated by either Party upon a 60-day
written notice to the other Party upon the happening of any of the following
events:
(i) The laws, regulations or the government policies and actions
in the United States of America or in India render the performance of a material
obligation under this Agreement by a Party objectively impossible or
impractical; or
(ii) The applicable laws of India change such that the protection
of AFC"s technology provided under this Agreement is no longer legally
enforceable; or
(iii) The other Party files, or has filed against it, a
bankruptcy proceeding; or
(iv) The non-breaching Party makes the election pursuant to
Section 6.1(a).
(b) In case of termination of this Agreement under Sections 8.6
(a)(i), or (ii) or (iii), either Party may elect to purchase the Shares of the
other Party or sell its Share to the other Party at their pro rata Net Book
Value,
(c) In case of termination of this Agreement under Sections 8.6
(a)(i), or (ii) or (iii) and neither Party elects to purchase or sell its
Shares, AHMC shall be wound-up; its assets shall be liquidated and the proceeds
shall be distributed to the Shareholders pro rata to their respective equity
positions in
25
<PAGE>
AHMC; whereupon AHMC shall be dissolved.
8.7 LAW TO GOVERN. This Agreement shall be interpreted and enforced in
accordance with the laws of the State of California.
8.8 NOTICES AND OTHER COMMUNICATIONS. Every notice or other communication
required or contemplated by this Agreement by any Party shall be in writing and
delivered either by personal delivery, or by express courier service, or by
registered or certified mail, postage prepaid, addressed to the Party for whom
the notice is intended at its address set forth above, or at such other address
as the intended recipient previously shall have designated by written notice to
the other Party. All notices and other communications shall be effective upon
receipt. All communications and notices to be made or given pursuant to this
Agreement shall be in the English language.
8.9 ENTIRE AGREEMENT
(a) This Agreement and the agreements attached hereto as exhibits set
forth the entire agreement between the Shareholders and supersedes all prior and
contemporaneous agreements, understandings and representations, written and
oral, on the subject matter hereof.
(b) In case of any inconsistency between this Agreement and its
exhibits, this Agreement shall prevail.
8.10 NO WAIVER OF RIGHTS. All waivers hereunder must be made in writing,
and failure of either Party at any time to require the other Party to perform
any obligation under this Agreement shall not affect that Party"s right
subsequently to require the other Party to perform that obligation. No waiver
of any breach of any provision of this Agreement shall be construed as a waiver
of any continuing or succeeding breach of such provision or a waiver or
modification of such provision.
8.11 SEVERABILITY AND SURVIVAL.
(a) Whenever possible, each provision of this Agreement shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement should be prohibited or invalid under
applicable law, such provision shall be ineffective to the extent of such
prohibition or invalidity without invalidating the remainder of such provision
or the remaining provisions of this Agreement. In such event, the Parties shall
negotiate, in good faith, a valid and legally enforceable substitute provision
which most nearly effects the Parties" intent in setting forth that invalidated
provision.
(b) Sections 4.1(d), 4.3, 8.2, 8.3, and, whenever possible, other
provision shall survive the termination of this Agreement where the purpose and
the text of such provision
26
<PAGE>
clearly indicates the intent to survive.
8.12 FURTHER ASSURANCES. The Parties shall each perform such acts, execute
and deliver such instruments and documents, and do all such other things as may
be reasonably necessary to accomplish the transactions contemplated in this
Agreement.
8.13 ASSIGNMENT. This Agreement shall inure to the benefit of, and shall
be binding upon, the Parties and their respective successors and assigns.
Either Party may assign this Agreement upon giving a 60-day written notice to
the other Party, provided the proposed assignee shall assume without reservation
whatsoever all the obligations of the assignor under this Agreement.
8.14 EXTENSION AND AMENDMENT. The Parties shall within 60 days prior to
the expiration of this Agreement pursuant to Section 8.1 convene a Shareholder
meeting to review and discuss the issue of extension of this Agreement and the
agreements attached hereto as exhibits, but no extension of the term of this
Agreement or the agreements attached as exhibits shall be effective, and no
provision of this Agreement or the agreements attached as exhibits may be
modified or amended unless evidenced in writing signed by the duly authorized
representatives of the Parties and the parties to such agreements.
27
<PAGE>
IN WITNESS WHEREOF, the Parties by their duly authorized representatives
have executed this Agreement on the day first above written.
HARRIS CORPORATION ADVANCED FIBRE COMMUNICATIONS, INC.
Digital Telephone Systems
Division
By: /s/ G.L. Doyle By: /s/ Donald Green
-------------------------- -----------------------------
Name: G.L. Doyle Name: Donald Green
------------------------- ---------------------------
Title: VP -- Genl. Mgr. Title: President & CEO
------------------------ --------------------------
ADVANCED FIBRE COMMUNICATIONS
(HONG KONG) LIMITED
By: /s/ DONALD GREEN
-----------------------------
Name: Donald Green
---------------------------
Title: Chairman of the Board
--------------------------
28
<PAGE>
NO. 448786
(COPY)
CERTIFICATE OF INCORPORATION
----------------
I HEREBY CERTIFY THAT
ADVANCED FIBRE COMMUNICATIONS
(HK) LIMITED
[CHINESE CHARACTERS OMITTED]
is this day incorporated in Hong Kong under the Companies Ordinance, and that
this Company is limited.
Given under my hand this Ninth day of September One Thousand Nine Hundred and
Ninety-Three.
(Sd.) MRS. K. Y. KWAN
-------------------------
p. Registrar of Companies
Hong Kong.
<PAGE>
THE COMPANIES ORDINANCE (Chapter 32)
------------------
PRIVATE COMPANY LIMITED BY SHARES
-------------------
MEMORANDUM OF ASSOCIATION
OF
ADVANCED FIBRE COMMUNICATIONS
(HK) LIMITED
[CHINESE CHARACTERS OMITTED]
------------------
First:- The name of the Company is "ADVANCED FIBRE COMMUNICATIONS (HK)
LIMITED [CHINESE CHARACTERS OMITTED]".
Second:- The Registered Office of the Company will be situated in Hong
Kong.
Third:- The objects for which the Company is established are to carry on
any or all of the following businesses in any part of the world:-
(1) To carry on the trades or businesses of a telephone, telegraph, cable
and wireless communications company and to establish; work, manage,
sell, hire out, and maintain telephone exchanges, cable
communications, telegraph offices and radio and television receiving
and transmitting stations and any other systems for communications
whether consisting of sounds, visual images, electrical impulses or
otherwise either alone or in any combination.
(2) To invest in, and to hold, sell and deal with the stock, shares,
bonds, debentures, debenture stock, obligations, notes and securities
of any government, state, company, corporation or other body or
authority; and to raise and borrow money by the issue of shares,
stock, debentures, debenture stock, howsoever and to underwrite any
such issue.
(3) To acquire by purchase or otherwise lands and buildings and to erect
and maintain warehouses, hotels, cinema halls, tenement house,
commercial flats, factory buildings, office block or other buildings.
(4) To provide halls and other suitable rooms, buildings and places, and
to permit the same or any part thereof to be used on such terms as the
company shall think fit, for any purposes, public or private, and in
particular for public meetings, exhibitions, concerts, lectures,
dinners, theatrical performances, cinematographs and other
entertainments.
(5) To build, establish, maintain, acquire, operate and own factories of
all kinds.
- 1 -
<PAGE>
(6) To carry on all or any of the business of packing, general
warehousemen, godown and ice cold storage operators.
(7) To carry on all or any of the business of manufacturers, importers,
exporters merchants, wholesalers and retailers of all kinds and any
yarn textile fabrics, and garments worsted stuff manufacturers,
milliners, dress makers, tailors, hatters, clothiers, shirt makers,
trouser makers, garment makers, glovers, lace manufacturers, dealers
in leather, boot and shoe manufacturers, importers, exporters and
merchants of any other articles or commodities in personal or
household use and generally all and any manufactured goods, materials,
provisions and produce.
(8) To carry on all or any of the business usually carried on by land
companies, land investment companies, land and building mortgage
companies and building and estate companies in their several branches.
(9) To construct and maintain, or contribute to, or procure the
construction and maintenance of piers, wharves, embankments, bridges,
sewers, drains, ways, markets, reservoirs, walls, reading rooms and
such other buildings, works and conveniences as the company may think
directly or indirectly conducive to the development of any land or
hereditaments, messuages, or tenements, or any estate or interest
therein respectively in which it is for the time being interested.
(10) To carry on all or any of the businesses of general contractors,
engineering contractors, civil engineers, site formation and plant
layout advisers and consultants (whether civil, mechanical, electrical
structural, chemical, aeronautical, marine or otherwise).
(11) To purchase, dispose, sell, charter, hire, accept mortgage or finance
the purchase of ships and other vessels of any class, buses, taxis,
hire-cars, and other motor vehicles of any class, or aircraft, as
owners, agents, managers or trustees, or on the authority or on behalf
of any third party.
(12) To purchase or otherwise acquire and to carry on the business or
businesses of ship owners, stevedores, wharfingers, carriers,
forwarding agents, storage keepers, warehousemen, ship builders,
drydock keepers, marine engineers, engineers, ship keeper, boat
builders, ship and boat repairers, ship and boat outfitters, ship
brokers, ship agents, salvors, wreck raisers, divers, auctioneers,
valuers and assessors.
(13) To enter into, take over, negotiate or otherwise acquire, any contract
or contracts for the construction, building, equipping, fitting out,
storing, gearing or otherwise relating to any ship, carrier, boat, or
other vessel whatsoever.
(14) To carry on the business of a transportation company by means of
vehicles of whatever kind and howsoever propelled for the carriage of
passengers, animals, fish, food-stuffs and goods of whatsoever kind
and description.
(15) To carry on all or any of the businesses of travel agents, ticket and
booking agents, charter-flight travel contractors, and to facilitate
tours and travel and to arrange hotel and accommodation booking and
travellers-cheque and credit-card facilities and other facilities for
tourists and travellers and to engage in all aspects of the travel and
tourist industry.
(16) To carry on the business of garage, service-station or filling-station
proprietors, licencees or operators; or as vehicle manufacturers,
assemblers, finishers or repairers; or as dealers in oil, petroleum
products or motor accessories of all kinds; or as motor, mechanical or
electrical engineers.
- 2 -
<PAGE>
(17) To carry on all or any of the businesses of publishers, stationers,
type-founders, bookbinders, printers, photographers, film-processors,
cine-film producers, and cartographers and to do all things necessary
or convenient for carrying out such businesses or businesses of a
character similar or analogous to the foregoing or any of them or
connected herewith.
(18) To establish, found, operate, own, support, or aid in the
establishment, founding, operating, owning and support of schools,
colleges, institutions or other educational establishments of
whatsoever kind connected with or incidental to the promotion of any
form of education, learning, cultural activity, sport or pastime
amongst members of the public.
(19) To carry on all or any of the businesses of proprietors or licencees
of restaurants, refreshment and tea rooms, hotels, bars for the sale
of liquor, clubs, dance halls, cafes and milk and snack bars, and as
caterers and contractors, in all their respective branches.
(20) To carry on business as dealers in, and producers, whether as farmers,
market gardeners or processors, of fish, dairy farm, and garden
produce of all kinds, including milk, cream, butter, cheese, poultry,
eggs, fruit and vegetables.
(21) To acquire mines, mining rights, quarries and mineral lands, timber
and forestry estates and property and land of every description
developed or intended to be developed for the production of raw
materials, crops, animal products or agricultural products anywhere
throughout the whole world and any interest or concession therein and
to explore, work, exercise, develop and turn the same to account.
(22) To carry on in any part of the world all or any of businesses of
financiers, capitalists, concessionaires, commercial agents, mortgage
and bullion brokers, discount brokers of financial agents and
advisers.
(23) Generally to carry on and undertake any business, undertaking,
transaction or operation whether mercantile, commercial, industrial,
financial, manufacturing, trading or otherwise as an individual
capitalist may lawfully undertake and carry on.
(24) To carry on all or any of the business of manufacturers, installers,
maintainers, repairers of and dealers in electrical and electronic
articles, instruments, appliances and apparatus of every description,
and of and in radio, television and telecommunication requisites,
supplies, equipment and stores of all kinds, including condensers and
resistors.
(25) To draw, make, accept, endorse, discount, execute and issue bills of
exchange, promissory notes, debentures and other negotiable or
transferable instruments.
(26) To purchase or otherwise acquire and undertake all or any part of the
business, property and liabilities of any person, company, society, or
partnership, formed for all or any part of the purposes within the
objects of this company or carrying on or possessed of property
suitable to the purposes of the company and to conduct and carry on or
liquidate and wind up any such business and to amalgamate with any
other company having objects altogether or in part similar to those of
this company.
(27) To borrow or raise and lend money, to give any guarantee for the
payment of money or for the performance of any other undertaking or
obligation whatsoever, to make and issue notes, bonds, debentures,
obligations and evidence of indebtedness of all kinds, and generally
to mortgage and charge the undertaking and all or any of the immovable
and movable property, present and future, and all or any of the
uncalled capital for the time being of the company.
- 3 -
<PAGE>
(28) To originate, purchase or by any other lawful means acquire and
protect, prolong, renew develop and improve, throughout the world, any
patents, patent rights, copyrights, trade-marks, trade-names,
processes, protections, licences and concessions concerned with
inventions, exclusive or non-exclusive, or limited right to use any
secret or any device, emblem, name or motto or any knowhow or any
secret information and to sell, let, charge, dispose of, use and turn
to account and to manufacture under or grant licences or privileges in
respect of the same.
(29) To enter into any arrangements for profit-sharing with any of the
directors or employees of the company or of any company in which the
company may for the time being hold a share or shares (subject to the
consent and approval of such company) and to grant sums by way of
bonus or allowance to any such directors or employees or their
dependents or connections, and to establish or support, or aid in the
establishment and support of, provident and gratuity funds,
associations, institutions, schools or conveniences calculated to
benefit directors or employees of the company or its predecessors in
business or any companies in which the company owns a share or shares
or the dependents or connections of such persons, and to grant
pensions and make payments towards insurance.
(30) To become a member of any partnership or a party to any lawful
agreement for sharing profits or to any union of interests, agreements
for reciprocal concessions, joint ventures or co-operative or mutual
trade agreements, or marketing restrictions, with any person,
association, partnership, co-partnership, firm or corporation within
the objects of the company or any business capable of being conducted
so as directly or indirectly to benefit this company.
(31) To sell and accept payment for the business or undertaking of the
company or any part thereof, including any shares, stock, bonds,
debentures, mortgages, or other obligations or securities, or any or
either of them, patents, trade marks, trade names, copy-rights,
licences or authorities or any estate, rights, property, privileges or
assets of any kind; whether real or personal, movable or immovable.
(32) To pay the cost, charges and expenses preliminary and incidental to
the formation, establishment and registration of the company and to
procure the company to be registered or recognised in any country or
place outside Hong Kong.
(33) To obtain any Order of the Governor of Hong Kong or any Act or
Ordinance of any Parliament or of any Legislative Assembly or Council
or any Provisional or other Order of any proper authority in the
world, for enabling the company to carry any of its objects into
effect, or for dissolving the company and re-incorporating its members
as a new company for any of the objects specified in this Memorandum,
or for effecting any modification in the company's constitution.
(34) To distribute any of the property of the company amongst the Members
in specie or otherwise, but so that no distribution amounting to a
reduction of capital be made except with the sanction (if any) for the
time being required by law.
(35) To carry on any other business of a similar nature or any business
which may in the opinion of the Directors be conveniently carried on
by the company and to carry on any other business which may seem to
the company capable of being conveniently carried on in connection
with the above or calculated directly or indirectly to enhance the
value of or render profitable any of the company's property or rights.
(36) To do all such things as are incidental or conducive to the above
objects or any of them, in any part of the world, and as principals,
artisans agents contractors, trustees, attorneys, concessionaires,
factors, licencees or otherwise and as manufacturers, wholesalers,
retailers, distributors or otherwise and either alone or in
conjunction with others.
- 4 -
<PAGE>
(37) To act as directors, general managers, managers, advisers, nominees,
consultants, accountants, secretaries, and to register companies
incorporated by law or societies or organizations (whether
incorporated or not) and in particular to organize, maintain, and
supervise the registers of members of companies incorporated by law
and to pass for transfer or transmission the transfer of shares of any
such companies.
(38) To carry on, as brokers and agents, all kinds of insurance business
and against every and any contingency.
(39) To guarantee or otherwise support or secure, either with or without
the Company receiving any consideration or advantage and whether by
personal covenant or by mortgaging or charging all or part of the
undertaking, property, assets land rights (present and future) and
uncalled capital of the Company or by both such methods or by any
other means whatsoever, the liabilities and obligations of and the
payment of any monies whatsoever (including but not limited to
capital, principal, premiums, interest, dividends, costs and expenses
on any stocks, shares or securities) by any person, firm or company
whatsoever including but not limited to any company which is for the
time being a holding company or a subsidiary (both as defined by
Section 2 of the Companies Ordinance (Cap. 32)) of the Company or of
the Company's holding company or is otherwise associated with the
Company in its business.
AND IT IS HEREBY DECLARED that the words "company" and "corporation" in this
clause when not applied to this company shall be deemed to include any
partnership or other body of persons whether incorporated or not incorporated
and whether domiciled in Hong Kong or elsewhere and whether existing or
hereafter to be formed and the intention is that each object specified in each
paragraph of this clause shall unless otherwise therein provided be regarded as
an independent object and shall be in nowise limited or restricted by reference
to or inference from the terms of any other paragraph or the name of the Company
and notwithstanding the use of the words "and" and "or", shall be capable of
being pursued as an independent object and either alone or in conjunction with
any one or more of the objects specified in the same or in any other paragraph
or paragraphs.
Fourth:- The liability of the Members is limited.
Fifth:- The capital of the company is HK$10,000.00 divided into 10,000
shares of HK$1.00 each. Upon any increase of capital the company is to be at
liberty to issue any new shares either in Hong Kong Dollars or in any other
currency or partly in one currency and partly in another and with any
preferential, deferred, qualified or special rights, privileges or conditions
attached thereto. The rights for the time being attached to any shares having
preferential, deferred, qualified, or special rights, privileges or conditions
attached thereto may be altered or dealt with in accordance with the
accompanying Articles of Association but not otherwise.
- 5 -
<PAGE>
We, the several persons, whose names, addresses and descriptions are hereto
subscribed, are desirous of being formed into a Company in pursuance of this
Memorandum of Association, and we respectively agree to take the number of
shares in the capital of the Company set opposite to our respective names:-
- ---------------------------------------------------------------------------
Number of Shares
Names, Addresses and Descriptions of Subscriber taken by each
Subscriber
- ---------------------------------------------------------------------------
(Sd.) CHAN PING SHING, RICHARD
MR, CHAN PING SHING, RICHARD [CHINESE CHARACTERS OMITTED] One
9/F., Flat F,
106A Lockhart Road,
Wanchai, Hong Kong.
Merchant
(Sd.) MR. HO TAK KWONG
For and on behalf of
JOYSCENE INVESTMENTS LIMITED One
[CHINESE CHARACTERS OMITTED]
MR. HO TAK KWONG
4B, 21/F., Greenville Gardens,
15 Shiu Fai Terrace,
Stubbs Road, Hong Kong.
Limited Company
- ---------------------------------------------------------------------------
Total Number of Shares Taken Two
- ---------------------------------------------------------------------------
Dated the 25th day of August, 1993.
WITNESS to the above signatures:
(Sd.) MAK KAM LAI
MAK KAM LAI
Secretary
Room 902-903, Chao's Building,
143-145 Bonham Strand East, Sheung Wan, H.K.
- 6 -
<PAGE>
THE COMPANIES ORDINANCE (CHAPTER 32)
------------------
PRIVATE COMPANY LIMITED BY SHARES
------------------
ARTICLES OF ASSOCIATION
OF
ADVANCED FIBRE COMMUNICATIONS
(HK) LIMITED
[CHINESE CHARACTERS OMITTED]
------------------
PRELIMINARY
1. The regulations contained in Table "A" in the First Schedule to the
Companies Ordinance (Chapter 32) shall apply to the Company save in so far as
they are hereby expressly excluded or modified. In case of conflict between the
provisions of Table "A" and these presents, the provisions herein contained
shall prevail.
2. The Company is a private company and accordingly:-
(a) the right to transfer shares is restricted in manner hereinafter
prescribed;
(b) the number of members of the company (exclusive of persons who are in
the employment of the company and of persons who having been formerly
in the employment of the company were while in such employment and
have continued after the determination of such employment to be
members of the company) is limited to 50. Provided that where 2 or
more persons hold one or more shares in the company jointly they shall
for the purpose of this regulations be treated as a single member;
(c) any invitation to the public to subscribe for any shares or debentures
of the company is prohibited;
TRANSFER OF SHARES
3. The Directors may decline to register any transfer of shares to any
person without giving any reason therefor. The Directors may suspend the
registration of transfers during the twenty-one days immediately preceding the
Annual General Meeting in each year. The Directors may decline to register any
instrument of transfer, unless (a) a fee not exceeding two dollars is paid to
the Company in respect thereof, and (b) the instrument of transfer is
accompanied by the Certificate of the shares to which it relates, and such other
evidence as the Directors may reasonably require to show the right of the
transferor to make the transfer.
- 7 -
<PAGE>
CHAIRMAN OF DIRECTORS
4. The Directors may elect a chairman of their meetings, and determine
the period for which he is to hold office, and unless otherwise determined the
chairman shall be elected annually. If no chairman is elected, or if at any
meeting the chairman is not present within half an hour of the time appointed
for holding the same, the Directors present shall choose someone of their member
to be the chairman of such meeting.
5. Unless and until the Company in General Meeting shall otherwise
determine, the number of Directors shall not be less than two. The first
Directors of the Company shall be nominated in writing by the subscribers to the
Memorandum of Association.
6. A Director who is about to go away from or is absent from Hong Kong
may with the approval of the majority of the other Directors nominate any
person to be his substitute and such substitute whilst he holds office as such
shall be entitled to notice of Meetings of the Directors and to attend and vote
thereat accordingly and he shall ipso facto vacate office if and when the
appointor returns to Hong Kong or vacate office as a Director or removes the
substitute from office and any appointment and removal under this Article shall
be effected by notice in writing under the hand of or by cable from the Director
making the same. A Director may appoint (subject as above provided) one of the
other Directors to be his substitute who shall thereupon be entitled to exercise
(in addition to his own right of voting as a Director) such appointor's rights
at Meetings of the Directors.
7. At the Annual General Meeting to be held next after the adoption of
these Articles and at every succeeding Annual General Meeting all Directors,
except Permanent Directors if any are appointed, shall retire from office and
shall be eligible for re-election.
8. A Director shall not require any qualification shares.
9. The office of a Director shall be vacated if the Director:-
(a) resigns his office by notice in writing to the Company; or
(b) becomes bankrupt or makes any arrangement or composition with his
creditors generally; or
(c) becomes of unsound mind.
10. (a) No Director shall be disqualified by his office from contracting
with the Company, nor shall any such contract or any contract entered into by or
on behalf of the Company in which any Director shall be in any way interested be
avoided, nor shall any Director so contracting or being so interested be liable
to account to the Company for any profit realised by any such contract by reason
only of such Director holding that office, or of the fiduciary relations thereby
established but it is declared that the nature of his interest must be disclosed
by him at the meeting of the Directors at which the contract is determined on if
his interest then exists, or, in any other case, at the first meeting of the
Directors after the acquisition of his interest. A Director may vote in respect
of any contract or arrangement in which he is interested.
(b) A Director of the Company may be or become a Director of any
company promoted by this Company or in which it may be interested as a vendor,
shareholder or otherwise and no such Director shall be accountable for any
benefits received as a Director or shareholder of such company.
11. The Directors may meet together for the dispatch of business, adjourn
and otherwise regulate their Meetings as they think fit and determine the quorum
necessary for the transaction of business. Until otherwise determined, two
Directors shall constitute a quorum.
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12. Any casual vacancy occurring in the Board of Directors may be filled
up by the Directors, but the person so chosen shall be subject to retirement at
the same time as if he had become a Director on the day on which the Director in
whose place he is appointed was last elected a Director.
13. Subject to the provisions of Article 6 hereof, the Directors shall
have power at any time, and from time to time, to appoint a person as an
additional Director who shall retire from office at the next following Annual
General Meeting, but shall be eligible for election by the Company at that
meeting as an additional Director.
14. The Company may by a special resolution remove any Director and may by
an ordinary resolution appoint another person in his stead. The person so
appointed shall be subject to retirement at the same time as if he had become a
Director on the day on which the Director in whose place he is appointed was
last elected a Director.
15. Any Resolution of the Board of Directors in writing signed by the
majority of the Directors, in whatever part of the world they may be, shall be
valid and binding as a resolution of the Directors provided that notice shall
have been given to all the Directors of the Company capable of being
communicated with conveniently according to the last notification of address by
each such Director given to the Registered Office of the Company.
16. Where any notice is required either by these Articles, by Table "A",
by the Ordinance or otherwise, to be given to any Director or to any Member of
the Company, such shall be valid if given by cable and where any consent,
agreement, signature, notice by or authority from any Director or Member of the
Company such shall be good and valid if given by cable in spite of the fact that
neither the cable nor the document by which the cable is sent bears a written
signature. This clause shall not apply to Special Resolutions.
POWERS OF DIRECTORS
17. The Directors, in addition to the powers and authorities by these
Articles or otherwise expressly conferred upon them, may exercise all such
powers and do all such acts and things as may be exercised or done by the
Company in General Meeting subject nevertheless to the provisions of the
Companies Ordinance, (Chapter 32), to these Articles, and to any regulations
from time to time made by the Company in General Meetings, provided that no such
regulation so made shall invalidate any prior act of the Directors which would
have been valid if such regulations had not been made.
18. Without prejudice to the general powers conferred by the preceding
Article and the other powers conferred by these Articles, it is hereby expressly
declared that the Directors shall have the following powers, that is to say,
power: -
(1) To pay the costs, charges and expenses preliminary and incidental to
the promotion, formation, establishment and registration of the
Company.
(2) To purchase or otherwise acquire for the Company or sell or otherwise
dispose of any property, rights or privileges which the Company is
authorised to acquire at such price and generally on such terms and
conditions as they shall think fit.
(3) To engage, suspend or dismiss the employees of the Company, and to fix
and vary their salaries or emoluments.
(4) To institute, conduct, defend, compromise or abandon any legal
proceedings by or against the Company or its officers, or otherwise
concerning the affairs of the Company, and also to compound and allow
time for payment or satisfaction of any debts due and of any claims or
demands by or against the Company.
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<PAGE>
(5) To refer any claims or demands. by or against the Company to
arbitration and observe and perform the awards.
(6) To make and give receipts, releases and other discharges for moneys
payable to the Company, and for claims and demands of the Company.
(7) To invest, lend or otherwise deal with any of the moneys or property
of the Company in such manner as they think fit having regard to the
Company's Memorandum of Association and from time to time to vary or
realise any such investment.
(8) To borrow money on behalf of the Company, and to pledge, mortgage or
hypothecate any of the property of the Company.
(9) To open a current account with themselves for the Company and to
advance any money to the Company with or without interest and upon
such terms and conditions as they shall think fit.
(10) To enter into all such negotiations and contracts and rescind and vary
all such contracts and execute and do all such acts, deeds and things
in the name and on behalf of the Company as they may consider
expedient for, or in relation to, any of the matters aforesaid, or
otherwise for the purposes of the Company.
(11) To give to any Director, officer or other person employed by the
Company a commission on the profits of any particular business or
transaction, and such commission shall be treated as part of the
working expenses of the Company, and to pay commissions and make
allowances (either by way of a share in the general profits of the
Company or otherwise) to any person introducing business to the
Company or otherwise promoting or serving the interest thereof.
(12) To sell, improve, manage, exchange, lease, let, mortgage or turn to
account all or any part of the land, property, rights and privileges
of the Company.
(13) To employ, invest or otherwise deal with any Reserve Fund or Reserve
Funds in such manner and for such purposes as the Directors may think
fit.
(14) To execute, in the name and on behalf of the Company, in favour of any
Director or other person who may incur or be about to incur any
personal liability for the benefit of the Company, such mortgages of
the Company's property (present or future) as they think fit, and any
such mortgage may contain a power of sale and such other powers,
convenants, and provision as shall be agreed upon.
(15) From time to time to provide for the management of the affairs of the
Company abroad in such manner as they think fit, and in particular to
appoint any person to be the attorneys or agents of the Company with
such powers (including power to sub-delegate) and upon such terms as
they think fit.
(16) From time to time to make, vary or repeal rules and by-laws for the
regulation of the business of the Company, its officers and servants.
(17) To delegate any or all of the powers herein to any Director or other
person or persons as the Directors may at any time think fit.
19. Clause 81 of Table "A" shall not apply.
BORROWING POWERS
20. The Directors may raise or borrow for the purposes of the Company's
business
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such sum or sums of money as they think fit. The Directors may secure the
repayment of or raise any such sum or sums as aforesaid by mortgage or charge
upon the whole or any part of the property and assets of the Company, present
and future, including its uncalled or unissued Capital, or by the issue, at such
price as they may think fit, of Bonds or Debentures, either charged upon the
whole or any part of the property and assets of the Company or not so charged,
or in such other way as the Directors may think expedient.
SEAL AND CHEQUES
21. The Seal of the Company shall be kept by the Board of Directors and
shall not be used except with their authority.
22. Every document required to be sealed with the Seal of the Company
shall be deemed to be properly executed if sealed with the Seal of the Company
and signed by the Chairman of the Board of Directors, or such person or persons
as the Board may from time to time authorise for such purpose.
23. All cheques, promissory notes, drafts, bills of exchange, and other
negotiable instruments, shall be made, signed, drawn, accepted and endorsed, or
otherwise executed by the person or persons from time to time authorised by a
resolution of the Board of Directors.
GENERAL MEETINGS
24. For all purposes, the quorum for all general meetings shall be two
members personally present and holding either in his own right or by proxy at
least fifty-one per cent of the paid up capital of the Company, and no business
shall be transacted at any General Meeting unless the requisite quorum be
present at the commencement of the business.
25. A resolution in writing signed by all the shareholders shall be as
valid and effectual as a resolution passed at a general meeting duly convened
and held.
VOTES OF MEMBERS
26. All voting of members in respect of any matter or matters shall be by
poll and every member present in person or by proxy shall have one vote for each
share of which he is the holder.
DIVISIONS OF PROFITS
27. The net profits of the Company in each year shall be applied in or
towards the formation of such reserve fund or funds and in or towards the
payment of such dividends and bonuses as the Directors subject to the approval
of the Company in General Meeting may direct.
28. No dividend shall be payable except out of the profits of the Company,
and no
dividend shall carry interest as against the Company
29. A transfer of shares shall not pass the right to any dividend declared
thereon before the registration of the transfer.
30. If two or more persons are registered as joint holders of any share,
any one of such persons may give effectual receipts for any dividends or for
other moneys payable in respect of such share.
31. The Directors may retain any dividends payable on shares on which the
Company has a lien, and may apply the same in or towards satisfaction of the
debts, liabilities or engagements in respect of which the lien exists.
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<PAGE>
32. All dividends unclaimed for one year after having been declared may be
invested or otherwise made use of by the Directors for benefit for the Company
until claimed.
SECRETARY
33. The first Secretary of the Company shall be TKH MANAGEMENT CONSULTANTS
LIMITED who may resign from this office upon giving notice to Company of such
intention and such resignation shall take effect upon the expiration of such
notice or its earlier acceptance.
NOTICE
34. Any notice required to be given to the shareholders under these
Articles shall be in the English language.
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<PAGE>
Names, Addresses and Descriptions of Subscribers
- ---------------------------------------------------------------------------
(Sd.) CHAN PING SHING, RICHARD
MR. CHAN PING SHING, RICHARD [CHINESE CHARACTERS OMITTED]
9/F., Flat F,
106A Lockhart Road,
Wanchai, Hong Kong.
Merchant
(Sd.) HO TAK KWONG
For and on behalf of
JOYSCENE INVESTMENTS LIMITED
[CHINESE CHARACTERS OMITTED]
MR. HO TAK KWONG
4B, 21/F. Greenville Gardens,
15 Shiu Fai Terrace,
Stubbs Road, Hong Kong.
Limited Company
- ---------------------------------------------------------------------------
Dated the 25th day of August, 1993.
WITNESS to the above signatures:
(Sd.) MAK KAM LAI
MAK KAM LAI
Secretary
Room 902-903, Chao's Building,
143-145 Bonham Strand East, Sheung Wan, H.K.
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<PAGE>
EXHIBIT B
MANUFACTURING LICENSE AGREEMENT
by and between
ADVANCED FIBRE COMMUNICATIONS (INDIA) PRIVATE LIMITED
AND
AHMCI, REPRESENTED BY HARRIS CORPORATION THROUGH ITS DIGITAL
TELEPHONE SYSTEMS DIVISION
<PAGE>
TABLE OF CONTENT
Article 1 Definitions
Article 2 Grant of Manufacturing Licensees and Rights
Article 3 Noncompetition
Article 4 Proprietary Rights and Confidentiality
Article 5 Compensation and Royalties
Article 6 Obligations of AFCI
Article 7 Responsibilities of AHMCI
Article 8 Independent Contractors
Article 9 Term and Termination
Article 10 Assignment
Article 11 Compliance with Laws
Article 12 Warranties
Article 13 Indemnification
Article 14 General Provisions
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This Manufacturing License Agreement is entered into as of DECEMBER 28, 1995, by
and between
ADVANCED FIBRE COMMUNICATIONS (INDIA) PRIVATE LIMITED, a company organized under
the laws of India with its registered office in India (hereafter "AFCI")
and
AHMCI, an Indian company with a registered office in India (hereafter "AHMCI"),
based on the following:
1. AFCI is engaged in the business of granting manufacturing licenses
with respect to the Product as defined in Article 1, in India and for the Indian
market pursuant to the terms and conditions set forth in the Joint Venture
Agreement as defined below.
2. AHMCI is engaged in the business of manufacturing and distributing and
arranging for the manufacture and distribution of telecommunications products
and services for the Indian market.
In consideration of the mutual promises, representations, warranties, and
covenants set forth herein, the Parties agree as follows:
ARTICLE 1
DEFINITIONS
For the purpose of this Agreement, the following terms shall have the
respective meanings and, when used in the plural form, their meanings shall mean
the plural of the singular meaning:
1.1 "Confidential Information" shall have the meaning given that term in the
Joint Venture Agreement.
1.2 "Designated Indian Entity" shall have the meaning given that term in the
Joint Venture Agreement.
1.3 "Intellectual Property Rights" shall mean and include all of the following
(whether or not registered in any jurisdiction) that relate to, are embodied in,
or are associated with, the Product: (a) copyrights, patents, trade secrets,
logos, trademarks, trade names and service marks; (b) all English and non-
English language phonetic and/or visual approximations of logos, trademarks,
trade names, service marks, and all substitutions for such approximations; (c)
all drawings, designs, schematics and information necessary to manufacture or
have
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manufactured the product; (d) all other proprietary rights recognized under
applicable law; and (e) all applications and registrations, and the right to
file all applications and registrations, for, or relating to, all of the
foregoing.
1.4 "Joint Venture Agreement" shall mean the Joint Venture and Shareholder
Agreement between Harris and AFCI dated DECEMBER 28, 1995.
1.5 "Manufacturing Licenses" and "Manufacturing Rights" shall mean the licenses
and rights granted in Section 2.1 below..
1.6 "Party" shall AHMCI or AFCI, as the case may be, and "Parties" shall mean
both AHMCI and AFCI.
1.7 "Product" shall have the meaning given that term in the Joint Venture
Agreement and Exhibit G thereto.
1.8 "Technical Documentation" shall have the meaning given that term in the
Joint Venture Agreement.
1.9 "Territory" shall mean INDIA.
1.10 "This Agreement" shall mean this Manufacturing License Agreement.
ARTICLE 2
GRANT OF MANUFACTURING LICENSES AND RIGHTS
2.1 AFCI shall grant to AHMCI and AHMCI shall accept from AFCI, subject to
Section 4.2 of the Joint Venture Agreement:
(a) license for AHMCI to be the holder of the right to manufacture,
assemble, test, market, distribute, sell, install, service and maintain the
Product in India;
(b) a license for AHMCI to be the holder of the right to grant sublicenses
to Designated Indian Entities for such entities to manufacture, assemble, test,
market, distribute, sell, install, service and maintain the Product in India;
(c) a license for AHMCI to be the holder of the right to grant sublicenses
to Designated Indian Entities for such entities to grant further the sublicense
to their distributors and end users to distribute, market, sell, install, use,
operate, service and maintain the Product in India;
2.2 Notwithstanding any provision to contrary, the licenses and rights granted
under Section 2.1 shall become effective upon the Effective Date of the Joint
Venture Agreement, and shall remain in full force and effect for as long as
provided for in the Joint Venture Agreement.
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2.3 In the event of termination of the Joint Venture Agreement resulting in
dissolution of the company established pursuant to the Joint Venture Agreement,
the licenses granted hereunder and sublicenses granted pursuant to this
Agreement shall remain and continue in full effect, from the effective date of
such termination, for two years or a period of time sufficient to allow AHMCI
and its sublicensed Designated Indian Entities to obtain and procure the
alternative licenses and technology, material supply and technical support so as
to continue the principal business of AHMCI contemplated under the Joint Venture
Agreement and the agreements attached thereto as exhibits, whichever is longer.
2.4 Notwithstanding any other provision to the contrary, under no circumstance
shall termination or expiration of the Joint Venture Agreement or the licenses
under this Agreement terminate or otherwise affect the effectiveness of the
sublicenses already granted prior to such termination or expiration by AHMCI to
Designated Indian Entities pursuant to AHMCI's licenses and rights under Section
2.1
2.5 Without limiting the generality of Section 2.1, in case of any
inconsistency between AHMCI's Manufacturing Licenses and Manufacturing Rights
under Section 2.1 and the provisions under Section 4.2 of the Joint Venture,
Section 2.1 shall be construed to allow AHMCI to do all things, with respect to
manufacture, assembly, testing, marketing, distribution, sale, installation,
maintenance and support of the Product in India, which AFCI is not expressly
prohibited from doing worldwide under its prior and existing agreements with
other entities.
2.6 AHMCI shall not distribute the Products, manuals, or system software
separately from each other, apart from the normal replacement or exchange of
defective Product components.
2.7 AFCI shall notify AHMCI of its return, credit, and update policy with
regard to Product revisions, as it applies to AHMCI.
2.8 AFCI shall transfer to AHMCI two sets of hard copies of the Technical
Documentation and, if available, a disk containing all content of the Technical
Documentation within thirty (30) days after the Effective Date.
2.9 Delivery of the Technical Documentation shall be deemed complete when AFCI
delivers the Technical Documentation in the manner set forth in Section 2.8 to
AHMCI's designated personnel in Petaluma, California and such personnel executes
a certificate of delivery.
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ARTICLE 3
NONCOMPETITION
3.1 During the term of this Agreement, AHMCI shall not, and shall not grant any
sublicense to any Designated Indian Entities to, manufacture the Product outside
the Territory. AHMCI shall also refrain, outside the Territory and in relation
to the Product(s), from soliciting orders and from establishing or maintaining
outside the Territory any branch, distribution depot, or office at which
Products are distributed outside the Territory.
3.2 So long as the Joint Venture Agreement remains effective, or the joint
venture company established pursuant to the Joint Venture Agreement is legally
in existence, or the Manufacturing Licenses and Manufacturing Rights remain
effective, AFCI shall not grant, and shall not permit any granting of, any
license or right with respect to the Product, directly or indirectly, to any
person except to a Designated Indian Entity in accordance with the provisions
set forth in the Joint Venture Agreement.
ARTICLE 4
PROPRIETARY RIGHTS AND CONFIDENTIALITY
4.1 Except as expressly provided in the Joint Venture Agreement and this
Agreement, AHMCI expressly acknowledges and agrees that at no time shall it
acquire or retain any right, title or interest whatsoever in or to, or
appropriate for its own use, any of the Intellectual Property rights. AHMCI
shall not take any action that might impair in any way any right, title or
interest of AFCI or to any of the Intellectual Property rights.
4.2 AHMCI may identify itself as an independent contractor of AFCI for the sole
purpose of attaining and performing its rights and duties hereunder, but shall
not use any logo, name, trademark, trade name or service mark, including,
without limitation, any non-English language phonetic and/or visual
approximation (or substitution) for any such logo, name or mark (collectively,
"Name or Mark") of which AFCI is the beneficial owner without the prior written
consent of AFCI.
4.3 The exchange and use of Confidential Information shall be governed by the
provisions under the Joint Venture Agreement.
ARTICLE 5
COMPENSATION AND ROYALTIES
[*]
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[*]
ARTICLE 6
OBLIGATIONS OF AFCI
6.l AFCI shall promptly notify AHMCI upon detection of any faults and errors in
the Product, including both hardware and system software or Technical
Documentation, and shall supply corrections to such faults and errors when
available. AFCI shall also promptly notify AHMCI of any changes in the
manufacturing process in relation to the Products and provide such updated
information in respect thereof.
6.2 AHMCI represents to AFCI and AFCI acknowledges that the Product has not
been type approved by the government of India. It shall be AHMCI's primary
responsibility to apply for and obtain such required approval. AFCI shall
provide AHMCI the necessary assistance in obtaining such approval. In the event
the procurement of such approval requires modification of the Product, AHMCI
shall be financially responsible for funding such modification, and AHMCI and
AFCI shall negotiate and reach a Product Modification and Development Agreement
upon terms mutually acceptable to the Parties.
6.3 AFCI acknowledges that the market specific needs in India may require
additional Product modification and development. In the event such modification
is necessary or desirable, AHMCI shall be financial responsible for funding such
modification, and AFCI and AHMCI shall negotiate and reach a Product
Modification and Development Agreement upon terms mutually acceptable to the
Parties.
6.4 AFCI reaffirms its covenant under Section 3.2
6.5 AFCI hereby reaffirms to AHMCI all the representations and
warranties made by its parent company Advanced Fibre communications, Inc. in the
Joint Venture Agreement.
ARTICLE 7
RESPONSIBILITIES OF AHMCI
7.1 AHMCI shall use its best efforts to devote such time as may be necessary
for the manufacture and distribution of the Product in the Territory.
7.2 AHMCI shall conduct all of its own business in its own name and for its own
account and in such a manner as it may see fit so long as it is not in conflict
with the provisions of this Agreement.
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7.3 AHMCI shall not make representations, warranties or guarantees regarding
the Product, if AHMCI shall decide to use the UMC-1000E product name, unless
approved by AFCI in advance.
7.4 All expenses and costs of AHMCI's doing business with respect to the
Product in the Territory shall be the sole responsibility of, and paid by,
AHMCI.
7.5 Any required or desired modification shall be funded by AHMCI upon mutual
agreement in writing.
ARTICLE 8
INDEPENDENT CONTRACTORS
8.1 Nothing in this Agreement shall be construed to constitute either party as
the partner, joint venturer, agent, representative, or employee of the other;
nor shall either party have any power or authority to bind the other in any
respect.
ARTICLE 9
TERM AND TERMINATION
9.1 Subject to the provisions of the Joint Venture Agreement, this Agreement
shall take effect on the Effective Date of the Joint Venture Agreement and shall
continue in force for a term of fifteen (15) term after this Agreement becomes
effective, subject to the terms an conditions set forth in the Joint Venture
Agreement.
9.2 This Agreement shall terminate, if and only if the purposes and intent of
the parties to, and the spirit and the text of the relevant provisions of, the
Joint Venture Agreement clearly compel the termination this Agreement.
9.3 In the event of termination of this Agreement pursuant to Section 9.2, all
the provisions of this Agreement, where the purposes and the text indicate such
an intent, shall survive for as long as necessary to effectuate their purposes
and intent and shall bind the Parties and their representatives, successors and
assigns.
9.4 AHMCI's material breach of its obligation under Section 3.1 shall
constitute a Material Breach as that term is defined in the Joint Venture
Agreement and shall entitle AFCI to all remedies provided hereunder and under
the Joint Venture Agreement.
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ARTICLE 10
ASSIGNMENT
10.1 This Agreement shall inure to the benefit of, and shall be binding upon,
the Parties and their respective successors and assigns. Either Party may assign
this Agreement upon giving a 60-day written notice to the other Party, provided
the proposed assignee shall assume in writing without reservation whatsoever all
the obligations of the assignor under this Agreement,
ARTICLE 11
COMPLIANCE WITH LAWS
11.1 Each party shall at all times and at its own expense (a) strictly comply
with all applicable laws, rules, regulations and governmental orders, now or
hereafter in effect, relating to its performance of this Agreement, (b) pay all
fees and other charges required by such laws, rules, regulations and orders and
(c) maintain in full force and effect all licenses, permits, authorizations,
registrations and qualifications from all applicable governmental departments
and agencies to the extent necessary to perform its obligations hereunder.
11.2 AHMCI understands and acknowledges that AFCI may be subject to regulation
by agencies of the U.S. Government, including the U.S. Department of Commerce,
which prohibit export or diversion of certain products and technology to certain
countries, AHMCI warrants that to the extent within its control it will comply
in all respects with the export and re-export restrictions set forth in any
applicable AFCI license(s) for every item shipped to India and will otherwise
comply with the Export Administration Regulations or other United States laws
and regulations. AHMCI shall endeavor to advise, urge, and cause its
sublicensees to adhere to these laws and regulations.
11.3 AFCI warrants that AFCI has already obtained a General Approval for the
Product and Technical Documentation regarding the Product to be exported from
the U.S.A. to India.
11.4 AFCI shall use its best efforts to obtain and maintain all necessary
approvals from the U.S. Government for the export of the Product to India.
ARTICLE 12
WARRANTIES
12.1 AFCI hereby reaffirms to AHMCI all the representations and warranties
contained Section 7.1(d) of the Joint Venture Agreement, which are hereby
incorporated to and made part of this Agreement by reference.
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ARTICLE 13
INDEMNIFICATION
13.l AFCI shall indemnify, hold harmless, and defend AHMCI against any and all
claims, suits, actions, proceedings, and judgments for loss and damages
including reasonable attorney fees and costs brought against AHMCI based on a
claim:
(a) that he manufacture, distribution, marketing, sale, operation, and use
of the Product or use of the Confidential Information as provided herein
infringes upon a third party's intellectual property right;
(b) that the licenses and rights granted to AHMCI violate or infringe upon
a third party's legal, equitable, or contractual right.
13.2 AFCI represents and warrants that it shall seek, and its parent company
Advanced Fibre Communications, Inc. shall cause AFCI to seek and obtain the full
benefit of the indemnification of Section 13.1.
13.3 AFCI's obligation under Section 13.1 shall not apply to the extent the
failure by AHMCI to do the following results in actual damage to AFCI:
(a) notifies AFCI of such claims, action, suits, loss, and damages
promptly;
(b) affords AFCI full control over the defense of such claims, actions,
suits and proceeding, including the decision to settle or appeal;
(c) provides AFCI, at AFCI's cost, with all necessary and appropriate
assistance and cooperation; and
(d) obtains authorization for any modification to the Product from AFCI.
ARTICLE 14
GENERAL PROVISIONS
14.1 The failure of either Party to assert any of its rights under this
Agreement shall not be deemed to constitute a waiver of that Party's right
thereafter to enforce each and every provision of this Agreement in accordance
with its terms.
14.2 Notwithstanding any provision in
this Agreement to the contrary, neither Party shall be liable to the other Party
for any failure to perform, or delay in the performance of, that party's
obligations hereunder, when such failure to perform or delay in performance is
caused by an
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event of FORCE MAJEURE; provided, however, that the Party whose performance is
prevented or delayed by such event of FORCE MAJEURE shall give prompt notice
thereof to the other Party. For purposes of this Section, the term "FORCE
MAJEURE" shall include war, rebellion, civil disturbance, earthquake, fire,
flood, strike, lockout, labor unrest, acts of governmental authorities, shortage
of materials, acts of God, acts of the public enemy, and, in general, any other
causes or conditions beyond the reasonable control of the Parties. If any event
of FORCE MAJEURE continues for more than ninety (90) days, either Party may
terminate this Agreement upon notice to the other Party.
15.3 All notices required or permitted by, or made pursuant to, this Agreement
shall be in writing and shall be sent by facsimile or by international air
courier to the following addresses:
If to AFCI: Advanced Fibre Communications, Inc.
1445 McDowell Boulevard North,
Petaluma, California, 94954
If to AHMCI To its registered office in India.
15.4 The subject headings of this Agreement are included for purposes of
convenience only and shall not affect the construction or interpretation of any
of its provisions.
15.5 This Agreement shall be interpreted in accordance with the laws of India.
15.6 Subject to the provisions of the Joint Venture Agreement, this Agreement,
including all of the Schedules, if any, attached hereto and incorporated herein
by this reference, embodies the entire agreement of AFCI and AHMCI respecting
the subject matter of this Agreement and supersedes all prior agreements,
understandings and communications, whether written or oral, between the parties
or by either of them with respect to the subject matter hereof. No modification
or amendment of this Agreement shall be effective unless executed in writing by
the duly authorized representatives of Parties.
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IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed
by their duly authorized representatives
Advanced Fibre Communications (India) Private Limited:
By: --------------------------------
Name: ------------------------------
Title: -----------------------------
AHMCI:
By: --------------------------------
Name: ------------------------------
Title: -----------------------------
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EXHIBIT C
MANUFACTURING AND TECHNICAL ASSISTANCE
SERVICE AGREEMENT
BY AND BETWEEN
ADVANCED FIBRE COMMUNICATIONS, INC.
AND
ADVANCED FIBRE COMMUNICATIONS (HK) LIMITED
AND
ADVANCED FIBRE COMMUNICATIONS (INDIA) PRIVATE LIMITED
(SEVERALLY AND JOINTLY AS ONE PARTY)
AND
AFC HARRIS MULTIMEDIA COMMUNICATIONS PRIVATE LIMITED, REPRESENTED
BY HARRIS CORPORATION THROUGH ITS DIGITAL TELEPHONE SYSTEMS
DIVISION
(AS THE OTHER PARTY)
<PAGE>
TABLE OF CONTENT
Article 1 Definition
Article 2 Engagement of AFC
Article 3 Report of Services
Article 4 Consideration
Article 5 Proprietary Rights and Confidentiality
Article 6 Term and Termination
Article 7 General Provisions
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This MANUFACTURING AND TECHNICAL ASSISTANCE SERVICE AGREEMENT is entered into as
of December 28, 1995, by and between
ADVANCED FIBRE COMMUNICATIONS, INC., a Delaware corporation located at 1445
McDowell Boulevard North, Petaluma, California 94954 U.S.A., and ADVANCED FIBRE
COMMUNICATIONS (HK) LIMITED, a Hong Kong company wholly owned by Advanced Fibre
Communications, Inc., whose registered office is at 9th Floor, 106A Lockhart
Road, Wanchai, and ADVANCED FIBRE COMMUNICATION (INDIA) PRIVATE LIMITED, with a
registered office in India, all acting jointly and severally (hereafter
collectively referred to as "AFC')
and
AFC HARRIS MULTIMEDIA COMMUNICATIONS PRIVATE LIMITED, a Mauritius corporation
with a registered office in Mauritius, represented for the purposes of this
Agreement by AHMC's minority shareholder, Harris Corporation, a Delaware
corporation, acting through its Digital Telephone Systems Division at 300 Bel
Marin Keys Boulevard, Novato, California 94948 U.S.A. (hereafter referred to as
"AHMC"), based on the following:
l. AFC is engaged in the business of manufacture and distribution of
certain telecommunications products worldwide and wishes to expand the market
for its products, including the Product as defined in Article 1, into India;
2. AHMC is engaged in the business of manufacture and distribution and
arranging for the manufacture and distribution of telecommunications products
and services for the Indian market;
3. AFC and Harris Corporation executed a Joint Venture and Shareholder
Agreement dated December 28, 1995 (the "Joint Venture Agreement"), and pursuant
to that agreement, AFC on behalf of itself and AHMC represented by Harris
Corporation executed a Software License Agreement in the form attached as
Exhibit J of the Joint Venture (the "Software License Agreement"); and Advanced
Communications, Inc, intends to cause its wholly owned Indian subsidiary,
Advanced Fibre Communications (India) Private Limited, and AHMC intends to cause
its majority owned Indian subsidiary, AHMCI, to execute, the Manufacturing
License Agreement in the form attached as Exhibit B of the Joint Venture;
4. AHMC intends to arrange for the manufacture and marketing and
distribution of the Product as defined below in India and to duplicate,
sublicense and distribute the Licensed Software as defined below in connection
with the Product and wishes to engage AFC to perform certain manufacturing and
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technical support services with respect to the Product and the Licensed
Software;
5. AFC wishes to provide such support services to assist AHMC or its sub-
licensees in procuring the necessary expertise, skills, and knowledge with
respect to the manufacture, assembly, testing, quality control, installation,
and maintenance, process flow, material sourcing and other related materials of
the Product and the Licensed Software; and
6. This Agreement sets forth the terms and conditions under which AFC
will provide such services directly or indirectly through Advanced Fibre
Communications (India) Private Limited to AHMC's sublicensed Designated Indian
entities.
NOW, THEREFORE, AFC and AHMC hereby agree as follows;
ARTICLE 1
DEFINITION
For purposes of this Agreement, the following terms shall have the
following meanings:
1.1 "Commencement Date" shall have the meaning given that term in Section
4.1.
1.2 "CONFIDENTIAL INFORMATION" shall mean and include Technical
Documentation all trade secrets and all know-how, data and other information not
in the public domain that relate to, are embodied in, or associated with, the
Product or revisions and improvements thereto, technology, services, business,
customers and affairs of AHMC and AFC, and any affiliate of either party.
Confidential Information may be disclosed orally, in writing or in any other
recorded or tangible form. Trade secrets, know-how, data and information shall
be considered to be Confidential Information hereunder (a) if they have been
marked as such, (b) if the Receiving Party has been advised orally or in writing
of their confidential nature or (c) if, due to their character or nature, a
reasonable person in a like position and under like circumstances as the
Receiving Party would treat them as confidential.
1.3 "INTELLECTUAL PROPERTY RIGHTS" shall mean and include all of the
following (whether or not registered in any jurisdiction) that relate to, are
embodied in, or are associated with, the Product and the Licensed Software: (a)
copyrights, patents, trade secrets, logos, trademarks, trade names and service
marks; (b) all non-English language phonetic and/or visual approximations of
logos, trademarks, trade names, service marks, and all substitutions for such
approximations; (c) all other proprietary rights recognized under applicable
law; (d)
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all manufacturing processes and techniques; (e) all test processes and test
parameters; and, (f) all applications and registrations, and the right to file
all applications and registrations, for, or relating to, all of the foregoing.
1.4 "Licensed Software" shall have the meaning given that term in the
Software License Agreement.
1.5 "Product" shall have the meaning given that term in the Joint Venture
Agreement.
1.6 "SERVICES" shall mean and include any and all of the
following:
(a) providing comprehensive advice, information and other technical
support regarding the specifications, capabilities, performance, operation,
application and maintenance of the Product;
(b) providing manufacturing advice and assistance, including but not
limited to manufacturing sourcing programs, component pricing, production layout
and process flow, test process design, test fixture acquisition and setup, test
process and verification, and component qualification and testing;
(c) training of employees of AHMC or of a Designated Indian Entity as
provided for in the Joint Venture Agreement; and
(d) such other services as may reasonably be requested by AHMC or
suggested by AFC and accepted by AHMC.
1.7 "Service Fees" shall have the meaning given that term in Section 3.2.
1.8 "Service Report" shall have the meaning given that term in Section
3.1.
1.9 "This Agreement" shall mean this Manufacturing and Technical
Assistance Service Agreement.
ARTICLE 2
ENGAGEMENT OF AFC
2.1 SERVICES. AHMC hereby engages AFC, and AFC hereby agrees, to provide
the Services to AHMC, on the terms and conditions set forth in this Agreement,
in a timely and efficient manner, but in no event later than forty-five (45)
days after AHMC makes such written request.
2.2 INDEPENDENT CONTRACTOR. The relationship of AHMC and AFC established
by this Agreement is that between independent
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contractors, and nothing in this Agreement shall be construed; (a) to give
either party the right or power to direct or control the daily activities of the
other party; (b) to constitute the parties as principal and agent, employer and
employee partners, joint venturers, joint owners or otherwise as participants in
a joint undertaking; or (c) to allow either party (i) to create or assume any
obligation on behalf of the other party for any purpose whatsoever or (ii) to
represent to any person, firm or entity that such party has any right or power
to enter into any binding obligation on the other party's behalf.
ARTICLE 3
REPORT OF SERVICES
3.1 SERVICES REPORT. Within fifteen (15) calendar days after the end of
each month in which this Agreement is in effect and AFC has rendered any
Services, AFC shall furnish AHMC with a written report summarizing the Services
performed by AFC and the Service Fees (as defined in Section 3.2 below) payable
by AHMC to AFC during such month pursuant to this Agreement.
3.2 SERVICE FEES. Service fees shall mean [*]
3.3 REASONABLENESS OF EXPENSES AND CONFIDENTIALITY. All costs and
expenses reported by AFC pursuant to this Agreement shall be reasonable,
customary, and necessary costs and expenses incurred by AFC in the performance
of the Services requested by AHMC under this Agreement. Unless otherwise
directed by AHMC , each report prepared pursuant to this Agreement shall be
deemed Confidential Information for purposes of this Agreement.
3.4 EXAMINATION OF RECORDS. AFC shall provide AHMC with original receipts
and other documentation as maybe reasonably necessary for AHMC to verify the
amount, nature, and basis of the Service Fees.
ARTICLE 4
CONSIDERATION
4.1 INITIAL SERVICES. Within [*] after the date on which AHMC
makes the first request for the Services in writing (the "Commencement Date"),
AFC shall provide AHMC or its sublicensees with the Service for a maximum period
of [*]. ("Initial Services"). AHMC shall use the Initial
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[*] AHMC shall pay to AFC Service fees as outlined in Section 3.2
for any additional Services.
4.2 PAYMENT. AHMC shall pay the Service Fees for any additional
Services rendered within [*] following AHMC's receipt of AFC's invoice and
Services Report. All Service Fees shall be payable in U.S. Dollars.
ARTICLE 5
PROPRIETARY RIGHTS AND CONFIDENTIALITY
5.1 INTELLECTUAL PROPERTY RIGHTS. Nothing in this Agreement shall be
construed to give AHMC any right, title or interest whatsoever in or to any of
the AFC Intellectual Property Rights. AHMC shall not take any action that might
impact in any way any right, title or interest of AFC or to any of AFC
Intellectual Property Rights.
5.2 USE OF CONFIDENTIAL INFORMATION. From time to time, either party
hereto may disclose and make available (the "Disclosing Party") to the other
party (the "Receiving Party") information and materials embodying or conveying
certain Confidential Information for the sole purpose of enabling the Receiving
Party to attain and perform its rights and duties hereunder. Without the prior
written authorization of the Disclosing Party, the Receiving Party may not use
or copy any Confidential Information for any purpose other than as specifically
authorized by this Agreement, and shall not transfer or disclose any
Confidential Information to any person, firm or entity, except to the Receiving
Party's authorized employees, agents, representatives, independent contractor,
and sub-licensees for the performance of this Agreement. The Receiving Party
shall take all steps necessary or appropriate to protect Confidential
Information against unauthorized disclosure or use, including, without
limitations causing each of its employees with access to Confidential
Information to enter a confidentiality agreement as provided for in the
Shareholder Agreement. The Receiving Party shall immediately notify the
Disclosing Party of any unauthorized disclosure or use of any of Confidential
Information that comes to the Receiving Party's attention, and shall take all
action that the Disclosing Party reasonably requests to prevent any further
unauthorized use or disclosure thereof, The obligation set forth in this Section
5.2 shall not apply to the extent, but only to the extent, that any of
Confidential Information (a) becomes generally available to the public through
no fault of the Receiving Party; (b) is or has
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been disclosed to the Receiving Party without the restrictions set forth in this
Article 5); (c) is required to be disclosed under any applicable law, rule,
regulation or governmental order, or (d) is independently developed by the
Receiving Party without the benefit of the Confidential Information disclosed
hereunder.
ARTICLE 6
TERM AND TERMINATION
6.1 TERM. This Agreement shall become effective on the Effective Date of
the Joint Venture Agreement and shall continue in full force and effect as
provided in the Joint Venture Agreement, unless terminated pursuant to Section
6.2.
6.2 TERMINATION. This Agreement may be terminated:
(a) by either party pursuant to the pertinent provisions of the
Joint Venture Agreement; or
(b) by AFC upon a 30-day written notice if AHMC, within thirty
(30) days of receipt of a demand to pay the Service Fees, fails to make such
payment.
6.3 LIMITATION OF REMEDIES. Termination of this Agreement for any reason
whatsoever shall be in addition to, not in limitation of, any rights and
remedies available to either party at law or equity.
6.5 SURVIVAL. In the event of termination of this Agreement for any reason
whatsoever, Article 5 hereof shall survive for as long as necessary to
effectuate purpose and shall bind the parties and their representatives,
successors and assigns.
ARTICLE 7
GENERAL PROVISIONS
7.1 ASSIGNMENT. Neither party shall have the right or power to assign any
of its rights, or delegate the performance of any of its duties under this
Agreement without the prior written consent of the other party, which consent
shall be not unreasonably withheld, except that either party may, without the
prior consent of the other party, assign any of its rights to its subsidiaries,
affiliates, and sub-licensees.
7.2 COMPLIANCE WITH LAWS. Each party at all times and at its own expense
shall (a) strictly comply with all applicable laws, rules, regulations and
governmental orders, now or
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hereafter in effect, relating to its performance of this Agreement; (b) pay all
fees and other charges required by such laws, rules, regulations and orders; and
(c) maintain in full force and effect all licenses, permits, authorizations,
registrations, and qualifications from all applicable governmental departments
and agencies to the extent necessary to perform its obligations hereunder.
7.3 WAIVER. The failure of either party to assert any of its rights under
this Agreement shall not be deemed to constitute a waiver of that party's right
thereafter to enforce each and every provision of this Agreement in accordance
with its terms.
7.4 NOTICES. All notices required or permitted by, or made pursuant to,
this Agreement shall be in writing and shall be sent by facsimile or by
registered, airmail, return receipt requested and postage prepaid, to the
following addresses:
If to AFC: Advanced Fibre Communication
(HK) Limited
9th Floor
106A Lockhart Road
Wanchai, Hong Kong
If to AHMC: To its registered office in Mauritius
7.5 GOVERNING LAW. This Agreement shall be interpreted and enforced in
accordance with the laws of California.
7.6 ENTIRE AGREEMENT. Subject to the Joint Venture Agreement, this
Agreement embodies the entire Agreement of AFC and AHMC with respect to the
Services and supersedes all prior agreements, understandings and communications,
whether written or oral, between the parties with respect to the subject matter
hereof. No modification or amendment of this Agreement shall be effective
unless evidenced in writing signed by the duly authorized representatives of
both party.
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IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their duly authorized representatives on the date first above written.
ADVANCED FIBRE COMMUNICATIONS, INC.
By: /s/ Donald Green
---------------------------------
Name: Donald Green
-------------------------------
Title: President & CEO
------------------------------
ADVANCED FIBRE COMMUNICATIONS (HK) LIMITED
By: /s/ Donald Green
---------------------------------
Name: Donald Green
-------------------------------
Title: Chairman of the Board
------------------------------
AFC HARRIS MULTIMEDIA COMMUNICATIONS PRIVATE LIMITED
By: /s/ G. L. Doyle
---------------------------------
Name: G. L. Doyle
-------------------------------
Title: VP Gen'l Mgr
------------------------------
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EXHIBIT D
PURCHASE AGREEMENT
by and among
ADVANCED FIBRE COMMUNICATIONS, INC.
and
ADVANCED FIBRE COMMUNICATIONS (HK) LIMITED
(as one party)
AND
AFC HARRIS MULTIMEDIA COMMUNICATIONS PRIVATE LIMITED,
REPRESENTED BY HARRIS CORPORATION THROUGH ITS DIGITAL TELEPHONE
SYSTEMS DIVISION
(as the other party)
<PAGE>
TABLE OF CONTENT
Article 1 Definitions
Article 2 Purchase and Supply
Article 3 Delivery
Article 4 Terms and Conditions
Article 5 Term and Termination
Article 6 General Provision
Appendix 1 Capital Equipment
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<PAGE>
This Purchase Agreement is entered into as of December 28, 1995, by and between
ADVANCED FIBRE COMMUNICATIONS, INC., a Delaware corporation located at 1445
McDowell Boulevard North, Petaluma, California 94954 U.S.A., and ADVANCED FIBRE
COMMUNICATIONS (HK) LIMITED, a Hong Kong company wholly owned by Advanced Fibre
Communications, Inc., whose registered office is at 9th Floor, 106A Lockhart
Road, Wanchai, with both companies acting jointly and severally (hereafter
collectively referred to as "AFC")
and
AFC HARRIS MULTIMEDIA COMMUNICATIONS PRIVATE LIMITED, a Mauritius corporation
with a registered office in Mauritius, represented for the purposes of this
Agreement by AHMC's minority shareholder, Harris Corporation, a Delaware
corporation, acting through its Digital Telephone Systems Division at 300 Bel
Marin Keys Boulevard, Novato, California 94948 U.S.A. (hereafter referred to as
"AHMC"), based on the following:
1. AFC is engaged in the business of manufacture and distribution of
certain telecommunications products worldwide and wishes to expand the market
for its products, including the Product as defined in Article 1, into India.
2. AHMC is engaged in the business of manufacture and distribution and
arranging for the manufacture and distribution of telecommunications products
and services for the Indian market.
3. AFC and Harris Corporation executed a Joint Venture and Shareholder
Agreement dated December 28, 1995 (the "Joint Venture Agreement"), and pursuant
to that agreement, AFC on behalf of itself and AHMC represented by Harris
Corporation executed a Software License Agreement in the form attached as
Exhibit J of the Joint Venture Agreement(the "Software License Agreement"); and
4. AHMC desires to purchase from AFC, and AFC desires to supply to AHMC,
the Product, certain custom made components of the Product ("Custom
Components"), and certain proprietary components of the Product ("Proprietary
Components"), and certain standard parts and components on the terms and
conditions set forth in this Agreement.
NOW THEREFORE, AFC and AHMC agree as follows:
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ARTICLE I
DEFINITION
For purposes of this Agreement, the following terms shall have the
following meanings:
1.1 "Custom and Proprietary Components" shall mean the parts and
components whether specifically designed by AFC or procured by AFC, which
are unique to, and custom designed or manufactured for inclusion in, the
Product.
1.2 "Designated Indian Entity" shall have the meaning given that term
in the Joint Venture Agreement.
1.3 "Joint Venture Agreement" shall mean the Shareholder and Joint
Venture Agreement between AFC and Harris Corporation for the establishment
of AHMC dated December 28, 1995.
1.4 "Licensed Software" shall have the meaning given that term in
Software License Agreement.
1.5 "Manufacturing License Agreement" shall the Manufacturing License
Agreement contained in Exhibit B of the Joint Venture Agreement
1.5 "PRODUCT" shall mean the Licensed Product having the meaning
given that term in the Joint Venture Agreement as further specified in
Exhibit G of the Joint Venture Agreement.
1.6 "Software License Agreement" shall mean the Software License
Agreement contained in Exhibit J of the Joint Venture.
1.7 "Territory" shall mean and include India.
1.8 "This Agreement" shall mean this Purchase Agreement.
ARTICLE 2
PURCHASE AND SUPPLY
2.1 CAPITAL EQUIPMENT. Subject to the Joint Venture Agreement, AFC
shall offer to sell to AHMC, and AHMC may purchase from AFC, the test
equipment and other capital equipment necessary for the manufacture,
assembly, installation, testing, quality control, and maintenance of the
Product in India in accordance with the Manufacturing License Agreement,
and the equipment and tools necessary for duplicating, testing,
distributing, and operating the Licensed Software in connection with the
Product in India, as further described, and at the prices listed, in
Appendix 1.
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2.2 PRODUCT PURCHASE. Subject to the Joint Venture Agreement and Software
License Agreement, AFC shall offer to sell to AHMC, and AHMC may purchase from
AFC, the Products on the terms and conditions set forth below for distribution
and resale in the Territory.
2.3 CUSTOM AND PROPRIETARY COMPONENTS. Subject to the Joint Venture
Agreement and the Software License Agreement, AFC shall offer to sell to AHMC,
and AHMC may purchase from AFC, Custom and Proprietary Components necessary for
the manufacture of the Product upon the terms and conditions set forth in this
Agreement and at the prices that shall equal [*]
2.4 PRICE LIST. The prices as determined pursuant to Section 2.3 shall be
listed in the Price List for Parts and Components attached as Exhibit E to the
Joint Venture Agreement.
2.5 TAX. All prices under this Agreement shall be [*]
ARTICLE 3
DELIVERY
3.1 DELIVERY. Delivery of the items purchased hereunder shall be made
ExWorks, Petaluma, California. AHMC may identify its preferred carriers from a
list of carriers provided by AHMC to AFC. AHMC may update and amend such a list
from time to time.
3.3 SUPPLY OF CUSTOM AND PROPRIETARY COMPONENTS. AFC warrants that in
case of a shortage in the supply of these parts and components, AFC shall make
them available to AHMC or Designated Indian Entities on a fair and equitable
basis. AFC shall not increase the prices because of such shortage except for the
increase in prices AFC's suppliers impose on AFC because of such shortage.
ARTICLE 4
TERMS AND CONDITIONS
4.1 PURCHASE ORDERS. AHMC shall submit written purchase orders for all
Products, Custom Components, and Proprietary Components it wishes to purchase to
AFC at its facility in Petaluma, California and shall properly indicate the
product
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and/or component description, part number and quantity and the prices and
discount as determined under Article 2 and Article 3. AFC shall, within ten (10)
business days after receipt of the purchase order, accept or reject the purchase
order by sending to AHMC an acknowledgment or rejection.
4.2 METHOD OF PAYMENT. AHMC shall pay for the items purchased hereunder
within net [*] after receipt of invoice for the same from AFC.
4.3 TAXES. AHMC shall be responsible for all import fees, taxes, license
fees and other taxes or fees imposed by the government of India.
4.4 RISK OF LOSS AND PASSAGE OF TITLE. Delivery shall be deemed completed
when shipment is made Exworks, Petaluma, California, as evidenced by a bill of
lading or airway bill. Title to and risk of loss in the goods purchased
hereunder shall pass to AHMC or its sub-licensees when delivery is complete.
4.5 PRODUCT WARRANTY. AFC warrants to AHMC and its sub-licensees:
(a) that the items purchased hereunder shall conform to the
Functional Specification attached to the Joint Venture Agreement as Exhibit G
and other applicable specifications, and shall be free from defects in material
and workmanship under normal use for a period of twelve (12) months from the
date of delivery by AFC to AHMC or its sub-licensees ("Product Warranty"). In
the event that any items purchased hereunder do not conform to this warranty,
AFC shall, at the request of AHMC or its sub-licensees, either (i) repair the
defect at AFC's cost; (ii) replace the defective items free of charge; or (iii)
accept return of the defective items and refund or credit the invoice price paid
by AHMC or its sub-licensees for such items.
(b) that, except as provided in Section 4.5(c) below, for the term of
this Agreement the Product and the components shall not fail to perform as a
result of a design defect (the "Design Warranty"). For purposes of this Article
4, a design defect occurs when a Product or an item fails to perform and that
failure is capable of recurring when tested in a laboratory under such
conditions as gave rise to the failure. For purposes of such testing, the party
claiming under the Design Warranty must be able to demonstrate the conditions
under which said design defect is alleged to occur. For purpose of this Section
4.5(b), design defects are intended to include defects in the Product or the
components as a whole that do not perform in accordance with specifications and
such nonperformance can be proved with a reasonable degree of regularity in a
laboratory.
(c) that the Design Warranty under Section 4.5(b) shall not apply to
situations where the performance failure or non-conformance, which would have
entitled AHMC or its sub-
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licensees to the warranty under Section 4.5(b) but for this Section 4.5(c), is
paused by or the direct result of the existence of a condition that is unique to
the Indian telecommunication market not contemplated in the original design and
development of the Product. AFC shall bear the burden of proof in claiming the
benefit of the exception under this Article.
ARTICLE 5
TERM AND TERMINATION
5.1 TERM. This Agreement shall become effective on the Effective Date of
the Joint Venture Agreement and shall continue in full force and effect as
provided in the Joint Venture Agreement, unless terminated earlier pursuant to
Section 5.2.
5.2 TERMINATION. This Agreement may be terminated:
(a) pursuant to the relevant provisions in the joint Venture
Agreement;
(b) by AFC upon a 45-day written notice if AHMC fail to make any
payment hereunder and such failure is not cured with 30 days after AHMC's
receipt of written notice and demand of cure from AFC; or
(c) by AFC upon a 45-day written notice if AHMC exports and attempts
to export the Product or the Licensed Software outside of the Territory either
in violation of any U.S. export control laws or without AFC written consent.
5.3 CONTINUED OBLIGATION. Termination of this Agreement under Section 5.2
shall not relieve AFC of the obligation to continue to supply and support the
Product, Custom Components, and Proprietary Components as provided in the Joint
Venture Agreement.
ARTICLE 6
GENERAL PROVISIONS
6.1 ASSIGNMENT. Neither party shall have the right or power to assign any
of its rights, or delegate the performance of any of its duties under this
Agreement without the prior written authorization of the other party, provided
that either party may, without the prior authorization of the other party,
assign any of its rights to its subsidiaries, affiliates, and sublicensees
including any duly authorized Designated Indian Entity.
6.2 COMPLIANCE WITH LAWS. Each party at all times and at its own expense
shall (a) strictly comply with all applicable laws, rules, regulations and
governmental orders, now or hereafter in effect, relating to its performance of
this
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Agreement; (b) pay all fees and other charges required by such laws, rules,
regulations and orders; and, (c) maintain in full force and effect all licenses,
permits, authorizations registrations, and qualifications from all applicable
governmental departments and agencies to the extent necessary to perform its
obligations hereunder.
6.3 WAIVER. The failure of either party to assert any of its rights under
this Agreement shall not be deemed to constitute a waiver of that party's right
thereafter to enforce each and every provision of this Agreement in accordance
with its terms.
6.4 NOTICES. All notices required or permitted by, or made pursuant to,
this Agreement shall be in writing and shall be sent by facsimile or by
registered airmail, return receipt requested and postage prepaid, to the
following addresses:
If to AFC: Advanced Fibre Communications
1445 McDowell Blvd. North
Petaluma, California 94954
If to AHMC: To its registered office in Mauritius.
6.5 GOVERNING LAW. This Agreement shall be interpreted and enforced in
accordance with the laws of California.
6.6 ENTIRE AGREEMENT. Subject to the Joint Venture Agreement and Software
License Agreement, this Agreement embodies the entire agreement between AFC and
AHMC with respect to the subject matter of this Agreement, and supersedes all
prior agreements, understandings and communications, whether written or oral,
between the parties or by either of them with respect to the subject matter
hereof. No modification or amendment of this Agreement shall be effective
unless in writing and executed by a duly authorized representative of each
party.
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<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement
to be executed by their duly authorized representatives on the
date first above written.
ADVANCED FIBRE COMMUNICATIONS ADVANCED FIBRE
(HK) LIMITED COMMUNICATIONS, INC.
By: /s/ Donald Green By: /s/ Donald Green
Name: /s/ Donald Green Name: /s/ Donald Green
Title: Chairman of the Board Title: President & CEO
AFC Harris Multimedia Communications Private Limited
By: /s/ G.L. Doyle
Name: G.L. Doyle
Title: V.P. General Manager
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APPENDIX 1
CAPITAL EQUIPMENT
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<PAGE>
COST: LINECARD TEST FIXTURE
[*]
LINECOST.XLS 12/20/95
<PAGE>
COST: E1T1 TEST FIXTURE
[*]
ElTlCOST.XLS 12/20/95
<PAGE>
COST: CPU TEST FIXTURE
[*]
CPUCOST.XLS 12/20/95
<PAGE>
COST: PSU TEST FIXTURE
[*]
PSUCOST.XLS 12/20/95
<PAGE>
EXHIBIT E
[*]
<PAGE>
[*]
<PAGE>
EXHIBIT F
MASTER ESCROW AGREEMENT
Among
ADVANCED FIBRE COMMUNICATIONS, INC. and ADVANCED FIBRE
COMMUNICATIONS (HK) LIMITED,
AND
FORT KNOX ESCROW SERVICES, INC.,
AND
AFC HARRIS MULTIMEDIA COMMUNICATIONS PRIVATE LIMITED
<PAGE>
This Master Escrow Agreement (this Agreement') is entered into as of this
28th day of December, 1995, by and among
ADVANCED FIBRE COMMUNICATIONS, INC., a Delaware corporation located at 1445
McDowell Boulevard North, Petaluma, California 94954 U.S.A., and ADVANCED FIBRE
COMMUNICATIONS (HK) LIMITED, a Hong Kong company wholly owned by Advanced Fibre
Communications, Inc., whose registered office is at 9th Floor, 106A Lockhart
Road, Wanchai, with both companies acting jointly and severally (hereafter
collectively referred to as Producer'),
FORT KNOX ESCROW SERVICES, INC. ("Fort Knox"), and
AFC HARRIS MULTIMEDIA COMMUNICATIONS PRIVATE LIMITED, a Mauritius company with
its registered office in Mauritius ("Licensee").
PRELIMINARY STATEMENT. Producer intends to deliver to Fort Knox a sealed
package containing the Technical Documentation of the Licensed Product as these
terms are defined in the Joint Venture and Shareholder Agreement and its Exhibit
G between Producer and Licensees minority shareholder, Harris Corporation dated
December 28, 1995, and a sealed package containing magnetic tapes, disks, disk
packs, or other forms of media (in machine readable form and human readable
source code form) of, and the written documentation prepared in connection
therewith, and any subsequent updates or changes to the Licensed Software as
that term is defined in the Software License Agreement between Producer and
Licensee attached as Exhibit J of the Joint Venture Agreements (the "Deposit
Materials"). The entire content of the Deposit Materials is listed in Appendix
B hereto, which shall be periodically updated. Producer desires for Fort Knox to
hold the Deposit Materials, and, upon certain events, deliver the Deposit
Materials (or a copy thereof) to Licensee, in accordance with the terms of this
Agreement, The parties hereto agree that Licensee shall be the sole and
exclusive third party beneficiary recipient of Technical Documentation under
Section 4.1.
Now, therefore, in consideration of the foregoing, the mutual promises
hereinafter set forth, and for other valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. DELIVERY BY PRODUCER. Producer shall be solely responsible for
delivering to Fort Knox the Deposit Materials as soon as practicable, but no
later than two months after this Agreement takes effect. Fort Knox shall hold
the Deposit Materials in strict compliance with the terms hereof. Fort Knox
shall have no obligation to verify the completeness or accuracy of the Deposit
Materials.
2
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2. DUPLICATION; UPDATES.
(a) If performance of any duty by Fort Knox under this Agreement requires
to duplicate the Deposit Materials, Fort Knox may duplicate the Deposit
Materials by any means in order to comply with the terms and provisions of this
Agreement, provided that Licensee shall bear the expense of duplication.
Alternatively, Fort Knox, by notice to Producer, may require Producer to
reasonably promptly duplicate the Deposit Materials.
(b) Producer shall deposit with Fort Knox any modifications, updates, new
releases or documentation related to the Deposit Materials by delivering to Fort
Knox an updated version of the Deposit Materials ("Additional Deposit") as soon
as practicable after the modifications, updates, new releases and documentation
have been developed by Producer. Fort Knox shall have no obligation to verify
the accuracy or completeness of any Additional Deposit or to verify that any
Additional Deposit is in fact a copy of the Deposit Materials or any
modification, update, or new release thereof.
3. NOTIFICATION OF DEPOSITS. Simultaneous with the delivery to Fort Knox
of the Deposit-Materials or any Additional Deposit, as the case may be, Producer
shall deliver to Fort Knox and to Licensee a written statement specifically
stating that all items required to be deposited have been deposited and that the
Deposit Materials or any Additional Deposit, as the case may be, so deposited
have been inspected by Producer and are complete and accurate.
4. DELIVERY BY FORT KNOX
4.1 DELIVERY BY FORT KNOX TO LICENSEE. Fort Knox shall deliver the
Deposit Materials and Additional Deposit, or a copy thereof, only to Licensee
and only in the event that:
(a) Producer notifies Fort Knox to effect such delivery to Licensee at a
specific address, the notification being accompanied by a check payable to Fort
Knox in the amount of one hundred dollars ($100.00); or
(b) Fort Knox receives from Licensee:
(i) written notification to the effect that Producer has committed a
Material Breach, or defaulted in a material respect, or Licenses
is entitled to release under any of the written agreements
between Producer and Licensee ("Producer Default");
(ii) evidence satisfactory to Fort Knox that Licensee has previously
notified Producer of such Producer Default in writing;
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(iii) a written demand that the Deposit Materials be released
and delivered to Licensee;
(iv) a written undertaking from the Licensee that the Deposit
Materials being supplied to the Licensee will be used only as
permitted under the terms of the written agreements between
Producer and Licensee;
(v) specific instructions from the Licensee for this delivery; and
(vi) a check payable to Fort Knox in the amount of one hundred dollars
($100.00).
(c) If the provisions of Section 4.1 (a) are satisfied, Fort Knox shall,
within five (5) business days after receipt of the notification and check
specified in Section 4.1 (a), deliver the Deposit Materials in accordance with
the applicable instructions.
(d) If the provisions of Section 4.1(b) are met, Fort Knox shall, within
five (5) business days after receipt of all the documents specified in Section
4.1(b), send by certified mail to Producer a photostatic copy of all such
documents. 'Producer shall have thirty (30) days from the date an which
Producer receives such documents ("Objection Period") to notify Fort Knox of its
objection ("Objection Notice") to the release of the Deposit Materials to
Licensee and to request that the issue of Licensee's entitlement to a copy of
the Deposit Materials be submitted to arbitration in accordance with the
following provisions:
(i) If Producer shall send an Objection Notice to Fort Knox during
the Objection Period, the matter shall be submitted to, and
settled by arbitration by, a panel of three (3) arbitrators
chosen by the Atlanta Regional Office of the American Arbitration
Association in accordance with the rules of the American
Arbitration Association. The arbitrators shall apply Georgia
law. At least one (1) arbitrator shall be reasonably familiar
with the computer software industry. The decision of the
arbitrators shall be binding and conclusive on all parties
involved, and judgment upon their decision may be entered in a
court of competent jurisdiction. All costs of the arbitration
incurred by Fort Knox, including reasonable attorneys' fees and
costs, shall be paid by the party which does not prevail in the
arbitration; provided, however, if the arbitration is settled
prior to a decision by the arbitrators, the Producer and Licensee
shall each pay 50% of all such costs,
4
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(ii) Producer may, at any time prior to the commencement of
arbitration proceedings, notify Fort Knox that Producer has
withdrawn the Objection Notice. Upon receipt of any such notice
from Producer, Fort Knox shall reasonably promptly deliver the
Deposit Materials to Licensee in accordance with the instructions
specified in Section 4.1 (b)(v).
(e) If, during the Objection Period, Fort Knox has not received an
Objection Notice from Producer, then Fort Knox shall reasonably promptly deliver
the Deposit Materials to Licensee in accordance with the instructions specified
in Section 4.1 (b)(v).
4.2 DELIVERY BY FORT KNOX TO PRODUCER. Fort Knox shall release and
deliver the Deposit Materials to Producer upon termination of this Agreement in
accordance with Section 7(a) hereof.
5. INDEMNITY. Producer and Licensee shall, jointly and severally,
indemnify and hold harmless Fort Knox and each of its directors, officers,
agents, employees and stockholders ("Fort Knox Indemnities") absolutely and
forever, from and against any and all claims, actions, damages, suits,
liabilities, obligations, costs, fees, charges, and any other expenses
whatsoever, including reasonable attorneys' fees and costs, that may be asserted
against any Fort Knox Indemnities in connection with this Agreement or the
performance of Fort Knox or any Fort Knox Indemnities hereunder, except for any
liability based upon a claim of Fort Knox's or its Indemnities' criminal conduct
or actionable negligence.
6. DISPUTES AND INTERPLEADER,
(a) In the event of any dispute, except a dispute based upon a claim if
Fort Knox's or its Indemnities' criminal conduct or actionable negligence,
between any of Fort Knox, Producer and/or Licensee relating to delivery of the
Deposit Materials by Fort Knox or to any other matter arising out of this
Agreement, Fort Knox may submit the matter to any court of competent
jurisdiction in an interpleader or similar action. Any and all costs incurred
by Fort Knox in connection therewith, including reasonable attorneys' fees and
costs, shall be borne 50% by each of Producer and Licensee.
(b) Fort Knox shall perform any acts ordered by any court of competent
jurisdiction, without any liability or obligation to any party hereunder by
reason of such act.
7. TERM AND RENEWAL.
(a) The initial term of this Agreement shall be one year, commencing on
the date hereof (the "Initial Term"). This Agreement shall be automatically
extended for an additional term
5
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of one year ("Additional Term") at the end of the Initial Term and at the end of
each Additional Term hereunder unless, on or before ninety (90) days prior to
the end of the Initial Term or an Additional Term, as the case may be, any party
notifies the other parties that it wishes to terminate the Agreement at the end
of such term.
(b) In the event of termination of this Agreement in accordance with
Section 7(a) hereof, Licensee shall pay all fees due Fort Knox and Fort Knox
shall promptly notify Licensee and Producer that this Agreement has been
terminated and that Fort Knox shall return to Producer all copies of the Deposit
Materials then in its possession.
8. FEES. Producer and Licensee shall pay to Fort Knox the applicable
fees in accordance with Appendix A as compensation for Fort Knox's services
under this Agreement.
(a) PAYMENT. Fort Knox shall issue an invoice to Licensee following
execution of this Agreement ( Initial Invoice'), on the commencement of any
Additional Term hereunder, and in connection with the performance of any
additional services hereunder. Payment is due upon receipt of invoice. All
fees and charges are exclusive of, and Licensee is responsible for the payment
of, all sales, use and like taxes. Fort Knox shall have no obligations under
this Agreement until the Initial Invoice has been paid in full by Licensee.
(b) NONPAYMENT. In the event of non-payment of any fees or charges
invoiced by Fort Knox, Fort Knox shall give notice of non-payment of any fee due
and payable hereunder to the Licensee and, in such an event, the Licensee shall
have the right to pay the unpaid fee within ten (10) days after receipt of
notice from Fort Knox. If Licensee fails to pay in full all fees due during such
ten (10) day period, Fort Knox shall give notice of nonpayment of any fee due
and payable hereunder to Producer and, in such event, Producer shall have the
right to Pay the unpaid fee within ten (10) days of receipt of such notice from
Fort Knox. Upon payment of the unpaid fee by either the Producer or Licensee, as
the case may be, this Agreement shall continue in full force and effect until
the end of the applicable term. Failure to pay the unpaid fee under this
Section 8 (b) by both Producer and Licensee shall result in termination of this
Agreement.
9. OWNERSHIP OF DEPOSIT MATERIALS. The parties recognize and acknowledge
that ownership of the Deposit Materials shall remain with Producer at all times.
10. AVAILABLE VERIFICATION SERVICES. Upon receipt of a written request
from Licensee, Fort Knox and Licensee may enter into a separate agreement
pursuant to which Fort Knox will agree, upon certain terms and conditions, to
inspect the Deposit Materials for the purpose of verifying its relevance,
6
<PAGE>
completeness, currency, accuracy and functionality ("Technical Verification
Agreement"). Upon written request from Producer, Fort Knox will issue to
Producer a copy of any written technical verification report rendered in
connection with such engagement. If Fort Knox and Licensee enter into such
Technical Verification Agreement, Producer shall reasonably cooperate with Fort
Knox by providing its facilities, computer systems, and technical and support
personnel for technical verification whenever reasonably necessary. If requested
by Licensee, Producer shall permit one employee of Licensee to be present at
Producer's facility during any such verification of the Deposit Materials.
11. BANKRUPTCY. Producer and Licensee acknowledge that this Agreement is
an "agreement supplementary to" the Software License Agreement between Producer
and License as provided in Section 365 (n) of Title 11, United States Code (the
"Bankruptcy Code"). Producer acknowledges that if Producer as a debtor in
possession or a trustee in Bankruptcy in a case under the Bankruptcy Code
rejects the Software License Agreement or this Agreement, Licensee may elect to
retain its rights under the Software License Agreement and this Agreement as
provided in Section 365 (n) of the Bankruptcy Code. Upon written request of
Licensee to Producer or the Bankruptcy Trustee, Producer or such Bankruptcy
Trustee shall not interfere with the rights of Licensee as provided in the
Software License Agreement and this Agreement, including the right to obtain the
Deposit Material from Fort Knox.
12. MISCELLANEOUS.
(a) REMEDIES. Except for fraud, misrepresentation, actionable negligence
or intentional misconduct, Fort Knox shall not be liable to Producer or to
Licensee for any act, or failure to act, by Fort Knox in connection with this
Agreement. Any liability of Fort Knox regardless of the cause shall be limited
to the actual cost of new blank magnetic media. Fort Knox will not be liable for
special, indirect, incidental or consequential damages hereunder.
(b) NATURAL DEGENERATION; Updated Version. In addition, the parties
acknowledge that as a result of the passage of time alone, the Deposit Materials
are susceptible to loss of quality ("Natural Degeneration"). It is further
acknowledged that Fort Knox shall have no liability or responsibility to any
person or entity for any Natural Degeneration. For the purpose of reducing the
risk of Natural Degeneration, Producer shall deliver to Fort Knox a new copy of
the Deposit Materials at least once every three years.
(c) PERMITTED RELIANCE AND ABSTENTION. Fort Knox may rely and shall be
fully protected in acting or refraining from acting upon any notice or other
document believed by Fort Knox in good faith to be genuine and to have been
signed or presented by the
7
<PAGE>
proper person or entity. Fort Knox shall have no duties or responsibilities
except those expressly set forth herein.
(d) INDEPENDENT CONTRACTOR. Fort Knox is an independent contractor, and
is not an employee or agent of either the Producer or Licensee.
(e) AMENDMENTS. This Agreement shall not be modified or amended except by
another agreement in writing executed by the parties hereto.
(f) ENTIRE AGREEMENT. This Agreement, including all appendices hereto,
supersedes all prior discussions, understandings and agreements between the
parties on, , and constitutes the entire agreement between the parties with
respect to, the subject matter of this Agreement. All appendices attached hereto
are by this reference incorporated in, and made a part of, this Agreement.
(g) COUNTERPARTS; GOVERNING LAW. This Agreement may be executed in
counterparts, each of which when so executed shall be deemed to be an original
and all of which when taken together shall constitute one and the same
Agreement. This Agreement shall be construed and enforced in accordance with
the laws of the State of California.
(h) CONFIDENTIALITY. Fort Knox will hold and release the Deposit
Materials only in accordance with the terms and conditions hereof, and will
maintain the confidentiality of the Deposit Materials.
(I) NOTICES. All notices, requests, demands or other communications
required or permitted to be given or made under this Agreement shall be in
writing and shall be delivered by hand or by commercial overnight delivery
service which provides for evidence of receipt, or mailed by certified mail,
return receipt requested, postage prepaid, and addressed as follows:
(I) If to Producer:
to the address listed on the signature page hereof
(ii) If to Licensee;
to the address listed on the signature page hereof
(iii) If to Fort Knox:
Fort Knox Escrow Services, Inc.
3539-A Church Street
Clarkston, Georgia 30021-1717
Attn: Contracts Administrator
Copy: Michael A. Payne, Vice President
8
<PAGE>
If delivered personally or by commercial overnight delivery service, the
date on which the notice, request, instruction or document is delivered shall be
the date on which delivery is deemed to be made, and if delivered by mail, the
date on which such notice, request, instruction or document is received shall be
the date on which delivery is deemed to be made. Any party may change its
address for the purpose of this Agreement by notice in writing to the other
parties as provided herein.
(j) SURVIVAL. Sections 5, 6, 8, 9 and 11 shall survive any termination of
this Agreement.
(k) NO WAIVER. No failure on the part of any party hereto to exercise,
and no delay in exercising any right, power or single or partial exercise of any
right, power or remedy by any party will preclude any other or further exercise
thereof or the exercise of any other right, power or remedy. No express waiver
or assent by any party hereto to any breach of or default in any term or
condition of this Agreement shall constitute a waiver of or an assent to any
succeeding breach of or default in the same or any other term or condition
hereof.
9
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused its duly authorized officer
to execute this Agreement as of the date and year first above written.
FORT KNOX ESCROW SERVICES, INC.:
By:
-----------------------------------
Title:
--------------------------------
Print Name:
---------------------------
ADVANCED FIBRE COMMUNICATIONS, INC.:
By: /s/ Donald Green
-----------------------------------
Title: Donald Green
--------------------------------
Print Name: President and CEO
---------------------------
AFC HARRIS MULTIMEDIA COMMUNICATIONS PRIVATE LIMITED
By: /s/ G.L. Doyle
-----------------------------------
Title: V.P. Gen'l Mgr
--------------------------------
Print Name: G.L. Doyle
---------------------------
10
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APPENDIX A
ESCROW FEES
11
<PAGE>
FEE SCHEDULE
THE FOLLOWING FEES APPLY TO BOTH THE THREE PARTY AND TWO PARTY AGREEMENTS:
Initialization Fee (one time) $850
Covers all costs associated with establishing an escrow agreement:
provisions of agreements, all correspondence changes, including
certified mail and overnight fees, deposit container, Fort Knox staff
time, and notification of the establishment of the agreement.
Maintenance Fee (annual) $ 900
Covers all yearly costs associated with the agreement: storage of
1 cubic ft., toll free support lines, certified mail charges,
annual account report, client support activities and
all administrative charges.
Also includes two free product updates and the first licensee free
on a Two Party Agreement.
Surcharges: for firm outside the United States $100
for storage in the London vault facility $300
for customized billing to separate parties $100
Each Additional Update $ 150
Covers all deposit additions or replacements and all related costs
including administrative charges.
The Two-Party Agreement allows a developer to deposit one or more products for
multiple end-users, under a single agreement.
UNDER THE TWO PARTY AGREEMENT, EACH LICENSEE WILL BE REGISTERED UNDER ONE OF THE
FOLLOWING:
Registration per end-user (annual)
Covers all client support, administrative charges, $ 150
notification of all updates, customer service calls,
and account reports. The end-user may be listed
under an unlimited number of products. The developer
is copied on all notices and major correspondence.
Economy Registration per end user (annual) $ 30
Covers notification of initial listing on account only
Verification of Deposit Materials
Level 1 Verification beginning at $ 450
Level 2 and Level 3 call for quote
- --------------------------------------------------------------------------------
The typical fees for a Three Party Agreement are $1750 for the first year and
$900 for each year thereafter. When establishing a Two Party Agreement, the base
charge ($1750) is the same with additional costs depending on the number of
products deposited and end-users added to the agreement.
- --------------------------------------------------------------------------------
Discounts
Repeat customers receive discounts ranging from ten to thirty percent.
Significant volume discounts are available for corporate agreements.
- --------------------------------------------------------------------------------
<PAGE>
APPENDIX B
DESCRIPTION OF DEPOSIT MATERIALS
A. Technical Documentation
B. The Licensed Software
12
<PAGE>
EXHIBIT G
FUNCTIONAL SPECIFICATION OF THE LICENSED PRODUCT
"Product" or "Licensed Product" shall mean the UMC 1000E digital loop
carrier system, but shall not include Licensed Software. The functional
specification of Licensed Product is described below as well as in the System
Data Sheets dated March 1995 attached hereto:
1. List of Existing Technology Items:
Hardware:
CPU, MTU, L_PSU, EBC, ELU, FO-XCVR, FOE-XCVR, E1-XCVR, E1X-XCVR, LI-
POTS, RI-POTS, LI-APOTS, RI-APOTS, LIBPOTS, RI-BPOTS, L-UVG, R-UVG, ElA, ElAX,
E&M
Mechanical:
FAA, CBA, RSC/48, RSC/120, RSC/240, RSC/672
2. List of Future Technology Items:
Hardware:
ADU, SDU, DL-XCVR, IATO, P-EPP, P-EPRE, P-EPS, P-ACI, P-ACR, P-FD,
E1HD-XCVR, L-ISDN, R-ISDN
Mechanical:
UPA
3. The following technology items, if and when developed by AFC, shall become
part of Licensed Product under this Agreement:
Hardware:
E2-XCVR, E3-XCVR, DLP
<PAGE>
Section 4
System Data Sheets
March 1995
4.1.1. CHANNEL BANK ASSEMBLY CBA
- --------------------------------------------------------------------------------
General Description
The Universal Modular Carrier (UMC) System 1000E is a modern and flexible
digital loop carrier system capable of economically serving from as few as six
to more than six hundred subscribers. It utilizes a modular building block
approach, to provide service in a variety of network topologies, using a wide
range of transmission media. The UMC uses state-of-the-art technologies to
provide both traditional and forward-looking subscriber services.
The UMC is economically optimized across a wide range of applications. Its
advanced, high density architecture makes it the ideal digital loop carrier for
current as well as future applications. The UMC is perfect for new growth
deployments, or upgrades to existing service in urban, suburban, and rural
environments.
The UMC's system architecture is comprised of two basic network elements. These
include the Local Exchange Terminal(LET), located in the central office, and one
or more Remote Subscriber Terminals(RST), located at the end of various
transport media. By utilizing various configurations of the basic elements, it
is possible to provide POTS and enhanced telephone services, over fiber optic,
El, ISDN, and analog (radio or copper) transport media. Subscriber services may
be provisioned utilizing Point-to-Point, Star, Drop & Insert, and Tree
configurations. Universal configurations, as well as integrated (V5.1 & V5.2)
configurations are supported.
An RST may be rack mounted inside a remote switch building, built into an indoor
cabinet, or configured along side outside plant facilities in a number of
environmentally sealed and hardened outdoor cabinets. These range in size from
as few as 30, to as many as 672 lines.
Subscriber services may consist of any combination of POTS, Pay phone,
Electronic Business Set, ISDN, Ground Start, E&M, E1, Fractional El, and Data
(analog or digital) lines.
The LET and RST are composed of identical, twenty-six slot Channel Bank
Assemblies (CBA). Each CBA consists of two Central Processing Unit slots, two
Power Supply Unit slots, and twenty-two general purpose card. slots on a 98 Mbps
backplane. The CBA has incorporated several unique design features which make
it especially flexible and cost effective. One shelf provides all common control
and distribution of services. There is no need for a separate common control
shelf, allowing the UMC to have extremely low start-up costs. Any service card
may be plugged into any general purpose card slot. All cards designed for the
UMC are the same physical size, from the six DSO (64 Kbps) POTS card to the 50
Mbps Fiber Optic Transceiver.
Expansion of the UMC is accomplished quickly and easily by adding one or more
CBA's linked to the primary shelf by fiber optic cable, Each UMC system may be
configured for up to 672, 64 Kbps channels. or a maximum of eight CBA's.
The Channel Bank Assembly (CBA) is the principal component of any UMC
configuration. It consists of a pre. formed cold rolled steel, powder coated
card cage, metal rear covers, printed circuit board backpanel, and mounting
hardware. The CBA contains all the hardware necessary for installation,
excluding cabling for voice, data and power. The customer may chose to wire-
wrap directly to the UMC backpanel or use a custom wiring harness which is pre-
wrapped to the backpanel with connectors.
Continued on the next page...
[photo]
Figure 4.1.1. Two (2) Channel Bank Assemblies
4-5
<PAGE>
Section 4
System Data Sheets
March 1995
4.1.1. CHANNEL BANK ASSEMBLY CBA
- --------------------------------------------------------------------------------
SPECIFICATIONS
TRANSMISSION E1 2.048 Mbps + 32 ppm
Fiber 49.152 Mbps + 50 ppm
COMMANDING Micro-Law 8 bits/times lot
DC SUPERVISORY Exchange Off Hook 900 Ohms
On Hook 25 KOhms
Remote DC Supervisory
Range: 1800 Ohms25 mA
(including telephone) 1930 Ohms @ 23 MA
Idle Circuit Voltage, Less Than 55 volts
(Battery feed) Greater Than volts
IMPEDANCE 900 W+2.16 uF
600 W+2.16 uF
FREQUENCY RESPONSE 300 KHz - 3.4 KHz (+0.5, -1.0 dB)
RINGING GENERATION Software Programmable (20 Hz or 30 Hz)
RINGING VOLTAGE 93 Vrms (Sine)
RING CADENCE Ring Following
ON HOOK TRANSMISSION Between Ring bursts, 5 seconds after call
completion
SYSTEM SYNCHRONIZATION 2.048 Mbps external + 50 ppm (DSX-1)
64.0 Kbps external + @ 50 ppm Composite Clock
POWERING LET -42 to -63 VDC @ 4 Amps maximum
RST Local AC(22OV-11OV) or DC -130 or +130V
TEMPERATURE RANGE Inside (Rack Mounted) Controlled Environment: 0
DEG.C (32 DEG.F) to 50 DEG.C: (122 DEG. F)
Inside Ambient Temperature, 10% to 80% Relative
Humidity
Outside (Remote Subscriber Cabinet) Environment:
-40 DEG. C (-40 DEG. F) to 50 DEG. (122 DEG. F)
Outside Ambient Temperature with full sunlight,
5% to 95% Relative Humidity
Plug-in Units (LET and RST): -40 DEG. C
(-40 DEG. F) to 65 DEG. C (149 DEG. F)
5% to 95% Relative Humidity
DIMENSIONS Height 17.8 cm (7")
Width 48.2 cm (19")
Depth 30.5 cm (12")
WEIGHT 20 lbs. (9 Kilograms)
4-7
<PAGE>
System Data Sheets
March 1995
4.1.2. FUSE & ALARM ASSEMBLY FAA
- --------------------------------------------------------------------------------
General Description
The Fuse and Alarm Assembly (FAA) consists of a preformed mild-steel enclosure,
wire wrap termination field, fuse block and mounting hardware. The FAA is used
at the LET for connection of multiple LET UMC terminals to the exchange power
plant. The FAA allows connection of exchange battery (nominal -48 volts). The
fuses are rated at 5 Amps and have a contact closure alarm which is wired across
the fuse block to generate an exchange alarm (normally open). In addition, the
FAA also supports a wire wrap field where multiple UMC alarm points may be wired
from the systems in the rack. These include Major. minor audible and visual
alarms as well as discrete contact closures which are software definable. System
alarms are also indicated with LED's.
The enclosure consists of a pre-formed steel, powder coated mounting bracket, 2'
tall by 19' wide by 11' deep, and holds the power distribution fuses and wire-
wrap field. The enclosure is designed to allow the FAA to be flush mounted with
the equipment rack, but it can also be adapted for front mounting, or mounting
in a 23' rack, or both. The FAA rear cover is used to prevent accidental
electrical shorts on the exchange battery.
Features
- - LED System Alarm display
- - Order Wire Interface
- - Alarm Contact closure wire-wrap posts
[PHOTO]
Figure 4.1.2. Fuse & Alarm Assembly
4-9
<PAGE>
Section 4
System Data Sheets
March 1995
4.1.5. 672 Line Remote
Subscriber Cabinet RSC/672
- --------------------------------------------------------------------------------
General Description
The UMC Remote Subscriber Cabinet (RSC/672) is an environmentally controlled
enclosure supporting as many as eight Channel Bank Assemblies (CBA's). The
RSC/672 has a total capacity of 672 lines.
The RSC/672 enclosure is constructed of 1/8' powder coated aluminum and designed
to provide a secure environment for UMC 1000 and related equipment, even during
inclement weather. The RSC/672 is also designed to meet NEMA 4 electrical
standards. The RSC/672 may be equipped with 48V battery strings to provide 8
hours backup in the case local power failure. The battery trays are located in
the rear of the cabinet. Battery heaters are available for use in regions with
colder climates.
The cabinet has front, rear and side access doors. The front door allows access
to the equipment side of the cabinet. The equipment side of the RSC/672 may
contain some or all of the following:
- Channel Bank Assemblies (Front)
- Protection Panels Main & Branch Circuit Breakers
- Convenience Outlets
The rear door allows access to the splice side of me cabinet the splice side of
the RSC/672 may contain some or all of the following:
- Channel Bank Assembly (Rear)
- Battery String(s)
- 48 Volt DC Power Supply
- Fiber Distribution Panels
- Battery Heaters
- E I /El Wire Wrap Field
- MS2 Connectors
The side door allows access to the splice area of the cabinet. The splice area
of the RSC/672 contains the following:
- Fiber Splicing Area
- Cable Splicing Area
The RSC/672 is designed for pedestal mounting on a concrete pad. Ail doors are
equipped with a key lock and pad lock tab.
The RSC/672 is capable of providing Express Power to multiple RSC/120's and
RSC/48's. See Data Sheets 1 -007 & 1-008 for details on the smaller UMC
equipment housings.
Features
- Environmental Alarms
- Cabinet Designed To NEMA 4 Standards - Prevents
Contaminants From Entering Equipment Area
- DC Powered Fans
- 672 Lines Of Capacity
- Capable of providing Express Power
[photo]
Figure 4.1.5. RSC/672
4-15
<PAGE>
Section 4
System Data Sheets
March 1995
4.1.6. 240 Line Remote
Subscriber Cabinet RSC/240
- --------------------------------------------------------------------------------
General Description
The UMC Remote Subscriber Cabinet (RSC/240) is an environmentally controlled
enclosure supporting one or two Channel Bank Assemblies (CBA). The RSC/240 has
a total capacity of 240 lines.
The RSC/240 enclosure is constructed of 1/8' powder coated aluminum. The
cabinet is cooled by utilizing a double wall heat exchanger in addition to DC
powered fans. The heat exchanger allows air to circulate between the inner and
outer walls allowing the UMC equipment compartment to maintain a favor
temperature range, even during the most inclement weather. The DC powered fan
is immune to AC power failures. The combination of these design features
provides the UMC equipment with a technologically advanced sealed enclosure, and
prevents contaminants from entering the equipment area.
The RSC/240 may be equipped with up to two 48V battery strings which provide 8
hours backup capacity. The battery tray is located in the bottom of the
cabinet. Battery heaters are available for use in regions with colder climates.
The cabinet has front and rear access doors. The front door allows access to
the equipment side of the cabinet The equipment side of the RSC/240 may contain
some or all of the following:
- Channel Bank Assembly (Front)
- Main & Branch Circuit Breakers
- 48 V DC Power Supply
- Battery String(s)
- Twelve (12) Position Fiber Distribution Panel(s) (Fusion or Mechanical)
The front door is equipped with a key lock and pad lock tab.
The rear door allows access to the splice side of the cabinet The splice side of
the RSC/240 may contain some or all of the following:
- Channel Bank Assembly (Rear)
- Main Ground Bus Bar
- Fiber Splicing Area and Tray(s) Cable Splicing Area
- E1/E1 Wire Wrap Field
- MS Connectors
- AC Power Protection With Outlet
The rear door, like the front, is equipped with a key lock and pad lock tab.
As an option, the RSC/240 may be equipped with a fully integrated cross connect
which utilizes tool-less, punch down blocks. The RSC/240 may be locally powered
via 110 or 220 VAC.
The RSC/240 is designed for pedestal mounting on a precast concrete pad.
Features
- Environmental Alarms
- Cabinet Designed To NEMA 4 Standards -- Prevents
Contaminants From Entering Equipment Area
- DC Powered Fans
- 240 Lines Of Capacity
Please find all technical specifications and drawings of the RSC/240 on the
reverse side of this page.
[PHOTO]
Figure 4.1.6. RSC/240
4-17
<PAGE>
Section 4
System Data Sheets
March 1995
4.1.7. 120 Line Remote
Subscriber Cabinet RSC/120
- --------------------------------------------------------------------------------
General Description
The UMC Remote Subscriber Cabinet (RSC/120) is an environmentally controlled
enclosure supporting one Channel Bank Assembly (CBA). The RSC/120 has a total
capacity of 120 lines.
The RSC/120 enclosure is constructed of 1/8" powder coated aluminum. The
cabinet is cooled by utilizing a double wall heat exchanger in addition to a DC
powered fan. The heat exchanger allows air to circulate between the, inner and
outer walls allowing the UMC equipment compartment to maintain a favorable
temperature range, even during the most inclement weather. The DC powered fan
is immune to AC power failures. The combination of these design features
provides the UMC equipment with a technologically advanced sealed enclosure, and
prevents contaminants from entering the equipment area.
The RSC/120 may be equipped with batteries to provide 8 hours of backup power or
more. The battery tray is located in the cabinet base (plinth) completely
separate from the UMC equipment compartment. The plinth is vented to prevent
battery overheating. A battery heater is available for use in regions with
colder climates. The cabinet has front and rear access doors. The front door
allows access to the equipment side of the cabinet. The equipment side of the
RSC/120 may contain some or all of the following:
- Channel Bank Assembly (Front)
- 5 Pin Protector Panel
- Twelve (12) Position Fiber Distribution Panel (Fusion or Mechanical)
- Charger (Front)
- DC Power Distribution
- Front Door Equipped with Key Lock and Pad Lock Tab
The rear door allows access to the splice side of the cabinet The splice side of
the RSC/120 may contain some or all of the following:
- Channel Bank Assembly (Rear)
- Main Ground Bus Bar
- Fiber Splicing Area and Tray
- Cable Splicing Area
- E1/E1 Wire Wrap Field
- MS' Connectors
- AC Power Distribution
- Express Power Distribution (for Express "Out") or,
- Express Power Center (for Express "In")
- Rear Door Equipped with Key Lock and Pad Lock Tab
The AC Power Protection consists of the main breaker, emergency power transfer
switch, battery charger breaker, surge protection, convenience outlet, DC power
breaker and battery heater (optional). As an option, the RSC/120 may be
equipped with a fully integrated cross connect which utilizes tool-less, punch
down blocks. The RSC/120 may be locally powered (110 or 220 VAC) or Express
Power fed (+l30 or -130 VDC). The RSC/120 may also provide Express Power to
other UMC Cabinets. The RSC/6120 is designed for pedestal mounting on a pre-
cast fiber glass pad or concrete pad. It may also be pole, H-frame, or wall
mounted.
Features
- Environmental Alarms
- Cabinet Designed to NEMA 4 Standards - Prevents
Contaminants From Entering Equipment Area
- DC Powered Fan
- Batteries Housed In Base -- Separated From Equipment and Vented
- Pad, Pole, H-frame, or Wall Mounting Options
- Small Size for Low Profile
Please Find all technical specifications and drawings of the RSC/ 1 20 on the
reverse side of this page.
[PHOTO]
Figure 4.1.7. RSC/120
4-19
Copyright 1995. Advanced Fibre Communication
<PAGE>
SECTION 4
SYSTEM DATA SHEETS
MARCH 1995
4.1.8. 48 LINE REMOTE
SUBSCRIBER CABINET RSC/48
- --------------------------------------------------------------------------------
GENERAL DESCRIPTION
The UMC 48 line Remote Subscriber Cabinet (RSC/48) is an environmentally
controlled enclosure that supports a single, reduced size Channel Bank Assembly
(CBA-5). The RSC/48 has a total capacity of 48 lines.
The RSC/48 enclosure is constructed of 1/8" powder coated aluminum. The cabinet
is cooled by utilizing a double wall heat exchanger in addition to a DC powered
fan. The heat exchanger allows air to circulate between the inner and outer
walls allowing the UMC equipment compartment to maintain a favorable temperature
range, even during the most inclement weather. The DC powered fan is immune to
AC power failures. These design features combine to provide the UMC equipment
with a technologically advanced, sealed enclosure, and prevent contaminants from
entering the equipment area.
Like other AFC Remote Subscriber Cabinets, The RSC/48 may be equipped with all
types of digital and analog services. The CBA-5 utilizes the same service units
and transceivers as the standard UMC Channel Bank Assembly. Fiber, copper, or
radio may be utilized as transport facilities to and from the RSC/48. The
RSC/48 is ideal for Fiber-In-The-Loop and Fiber-to-the-curb applications. The
RSC/48 may be deployed in Star, Drop & Insert, and Tree & Branch network
topologies with other RSC/48's and/or larger UMC terminals.
The RSC/48 provides much more flexibility than a typical Optical Network Unit
(ONU). It may be configured initially to utilize copper E1 facilities for
transport, while allowing plug-in, non-service affecting upgradability to fiber
facilities at the customer's convenience.
The RSC/48 may be equipped with batteries to provide eight (8) or more hours of
backup power. The battery tray is located in the cabinet base completely
separate from the UMC equipment compartment. The base is vented to prevent
battery overheating. A battery heater is available for use in colder climates.
The cabinet has a single door, equipped with a key lock and pad lock tab. It
allows access to all RSC/48 electronics, power and protection equipment. The
RSC/48 also has a shelf built into the base for optional batteries and battery
warmer. The RSC/48 is equipped with the following:
- Channel Bank Assembly - Small (CBA-5)
- 5 Pin Protector Panel
- Eight (8) Position Fiber Distribution Panel (Optional)
- Twelve (12) Position Fiber Splice Tray (Optional)
- DC Power Distribution
- Main Ground Bus Bar
- Fiber Splicing Area
- Cable Splicing Area
- E1/E1 Wire Wrap Field
- MS(1) Connectors
- AC Power Distribution Center with Outlet, or Express Power Distribution
Center
The RSC/48 may be equipped with a fully integrated cross connect to outside
plant facilities (150 pairs) which utilizes tool-less, punch down blocks. The
cross connect is accessible through its own door and is completely separated
from the electronics compartment.
The RSC/48 may be locally AC powered (110 or 220 VAC) or Express Powered
(plus or minus 130 or -130 VDC).
The RSC/48 is designed for pedestal mounting on a pre-cast fiberglass or
concrete pad. It may also be mounted on a pole, H-frame, or wall.
For specifications and drawings please see next page...
[PHOTO]
Figure 4.1.8. RSC/48
4-21
Copyright 1995, Advanced Fibre Communication
<PAGE>
SECTION 4
SYSTEM DATA SHEETS
MARCH 1995
4.2.1. CENTRAL PROCESSING UNIT CPU
- --------------------------------------------------------------------------------
GENERAL DESCRIPTION
The Central Processing Unit (CPU) is responsible for the overall control of the
UMC. Identical CPU's are used at both the LET and all RST's. The CPU performs
system initialization, provisioning, alarm reporting, Maintenance, diagnostics,
and fault detection. In addition, it performs timing source selection,
synchronization to external timing sources. It also provides a high stability
internal timing reference. The faceplate is featured on this page (actual
size).
The CPU controls call processing for the UMC system. The CPU allocates time
slots for subscribers who have gone off-hook, cancels time slots for terminated
calls, relays provisioning information to and from subscriber interfaces and
provides automatic concentration during span failures.
The CPU also runs the Craft Interface. It is accessed either through the
standard RS232-C port located on the Air Ramp portion of the Channel Bank
Assembly, or on wire wrap pins on the backplane. Connecting to the Craft
Interface port with a simple terminal, such as a VT 100, allows administration,
Maintenance, testing, and provisioning to be performed using the UMC's menu-
driven Craft Interface.
One CPU is located at the Local Exchange Terminal and one at each RST. In an
optional redundant configuration, an additional CPU may be equipped at each
terminal.
There are nine LEDs on the face plate of the CPU. One is a two color
green/yellow ACTV/STBY LED that indicates which CPU is active and which CPU is
in standby when a terminal is equipped with redundant CPU's. A red FAIL LED
indicates when the CPU is not functioning properly. A blue SYNC LED indicates
when the active unit has acquired synchronization. A yellow NE LED provides
indication that a near end alarm is active in the system. A yellow FE LED
indicates the presence of a far end alarm in the system. A red CRIT LED
indicates the presence of an critical alarm in the system. A red MAJOR LED
provides indication of a Major alarm in the system. A yellow MINOR alarm
indicates a minor alarm is present. Finally, a green ACO LED indicates that the
audible alarm has been silenced but that the alarm has not yet cleared.
In addition to these LEDs the faceplate also houses the alarm cutoff (ACO)
switch.
FEATURES
- Provides common control for the entire UMC system.
- Craft Interface
- Provides access to all remote terminals
- Alarm generation and prioritization
- System Maintenance and Administration
- Non-volatile provisioning data storage
- Diagnostics and Fault localization
- Timing source selection and synchronization
[CPU DIAGRAM]
4-23
Copyright 1995. Advanced Fibre Communication
<PAGE>
SECTION 4
SYSTEM DATA SHEETS
MARCH 1995
4.2.2. EXPANSION BANK CONTROL EBC
- --------------------------------------------------------------------------------
GENERAL DESCRIPTION
The Expansion Bank Control (EBC) provides the micro-processor based monitoring
and control for the Expansion shelf it is installed in. It provides the
interface to the system for each of the cards in the shelf via a fiber optic
connection to the Primary shelf based Expansion Link Unit. The EBC distributes
system commands as well as monitors the performance of each card. The EBC
resides in the Expansion shelf in the slots utilized by the CPU in the Primary
Shelf. A second common control slot is available for redundancy. Its faceplate
(actual size) is shown on this page.
The connection between the ELU and the EBC operates at 49.152 Mbps to ensure
full non-blocking access to the transmission facility regardless of the types of
channel cards used in the Expansion CBA. The EBC provides front access for the
fiber connection to the ELU.
The fiber optic cable used between the EBC (in the expansion shelf) and the ELU
(in the primary shelf) is plastic. Plastic is used because it is more durable.
LED's located on the ELU front panel indicate ACTV (green), FAIL (red), and SYNC
(blue). The unit also provides alarm interface to the CPU via the ELU.
FEATURES
- Straight forward system expansion
- Interface to ELU in Primary Shelf
- Shelf Control for Expansion Shelves
- Generates Status updates to the CPU via the ELU
- CRC protection on the expansion link
[EBC DIAGRAM]
4-25
Copyright 1995, Advanced Fibre Communication
<PAGE>
SECTION 4
SYSTEM DATA SHEETS
MARCH 1995
4.2.3. EXPANSION LINK UNIT ELU
- --------------------------------------------------------------------------------
GENERAL DESCRIPTION
The Expansion Link Unit (ELU) provides the system connection from the Primary
shelf to each of the Expansion shelves. One ELU (two for redundancy) is
dedicated to each expansion shelf. It provides the fiber optic connection to
the Expansion shelf based EBC. It transmits system commands from the CPU to its
dedicated Expansion shelf. It likewise receives information from the EBC and
relays it to the CPU. The ELU may reside in any of the 22 general purpose slots
in the Primary shelf. Its faceplate actual size is shown on this page.
The connection between the ELU and the EBC operates at 49.152 Mbps to ensure
full non-blocking access to the transmission facility regardless of the types of
channel cards used in the Expansion CBA. The ELU Provides front access for the
fiber connection.
LED's located on the ELU front panel indicate ACTV (green), FAIL (red), and SYNC
(blue). The unit also provides alarm status from the Expansion CBA to the CPU.
FEATURES
- Straight forward system expansion
- Interface to Expansion shelves
- Communications gateway between the CPU and the Expansion Shelves
- Microprocessor controlled
- Non-blocking inter-shelf connection
[ELU DIAGRAM]
4-27
Copyright 1995, Advanced Fibre Communication
<PAGE>
SECTION 4
SYSTEM DATA SHEETS
MARCH 1995
4.2.4. LOCAL EXCHANGE TERMINAL
POWER SUPPLY UNIT L-PSU
- --------------------------------------------------------------------------------
GENERAL DESCRIPTION
The Local Exchange Terminal Power Supply Unit (L-PSU) converts the exchange
battery input into the voltages required by the UMC Local Exchange Terminal
common control equipment and line cards. It uses a DC to DC switching converter
for high efficiency and low thermal dissipation. Only one L-PSU is required to
power each LET shelf; however, an additional card slot is provided for a
redundant L-PSU. Its faceplate (actual size) is shown on this page.
The L-PSU's provide a load sharing capability so that the system can operate
when a failure occurs on either of the L-PSU's.
LEDs located on the PSU front panel indicate ACTV (green), FUSE (red), and FAIL
(red). The unit also provides alarm and status indications to the CPU. Test
jacks on the front panel allow the monitoring of system voltages.
FEATURES
- High Efficiency Switching DC-DC converter
- Reverse polarity protection
- Over-voltage / Over-Current shutdown
- Low Voltage alarm
- Low thermal dissipation
- Low voltage disconnect
[L-PSU DIAGRAM]
4-29
Copyright 1995. Advanced Fibre Communication
<PAGE>
SECTION 4
SYSTEM DATA SHEETS
March 1995
4.2.5. REMOTE SUBSCRIBER TERMINAL
POWER SUPPLY UNIT R-PSU
- --------------------------------------------------------------------------------
GENERAL DESCRIPTION
The Remote Subscriber Terminal Power Supply Unit (R-PSU) converts the -48V
rectifier input into the voltages required by the common control equipment and
line cards located at the RST. In addition, the R-PSU generates sine wave
ringing voltage for use by the subscriber interfaces. The output frequency is
software provisionable. The R-PSU uses a DC to DC switching converter for high
efficiency and low thermal dissipation. Only one R-PSU is required to power an
RST shelf, however, an additional card slot is provided for a redundant R-PSU.
Its faceplate (actual size) is shown on this page.
The R-PSU uses active load sharing to provide uninterrupted service if one unit
should fail. The ringing generator provides single ended inquiry.
LEDs located on the R-PSU front panel indicate ACTV (green), FUSE (red), and
FAIL (red). The unit also provides alarm and status indications to the CPU.
Test jacks on the front panel allow the monitoring of system voltages.
FEATURES
- High Efficiency Switching DC-DC converter
- Software Provisionable ringing frequency (20 or 30 Hz)
- Reverse polarity protection
- Over-Voltage / Over-Current shutdown
- Low voltage alarm
- Low thermal dissipation
- Low voltage disconnect
[R-PSU DIAGRAM]
4-31
Copyright 1995. Advanced Fibre Communication
<PAGE>
SECTOPM 4
SYSTEM DATA SHEETS
MARCJ 1995
4.2.8. METALLIC TEST UNIT MTU
- --------------------------------------------------------------------------------
GENERAL DESCRIPTION
The Metallic Test Unit is an optional plug-in assembly which may be used to
provide enhanced testing and diagnostic capabilities for the UMC. The MTU allows
metallic Maintenance access to both the facility and equipment side of a
customer's line for craft access. Drop side (facility) testing is also
performed by the MTU. The MTU may be run in either a continuous (automatic or
"routine") mode or be operated via the craft access terminal to test specific
circuits. Its face plate (actual size) is shown on this page.
The MTU is used to test outdoor cable and has the capacity to test all channel
units at an RST. The MTU provides basic metallic access, an orderwire
interface, a remote line test head, and extensive internal diagnostics
measurement capabilities. The MTU eliminates the need for a remote test head.
The internal test capabilities of the MTU include the ability to test for
hazardous voltages, open circuit, short circuit, and 3 terminal complex
impedance (Resistance and Capacitance) Dimensions. In addition to this, the
MTU can test level frequency, idle channel noise, echo return loss, ringing,
ringtrip, off-hook, loop current and bit-error rate as part of its internal
diagnostic capability. The MTU's ability to test a customer's drop allows the
unit to be used as an economic alternative to expensive Remote Test and
diagnostic equipment.
LED's located on the MTU front panel indicate ACTV (green) TEST (blue), CAL
(yellow), and FAIL (red). The unit also provides alarm and test status
indications to the CPU. Test jacks on the front panel allow the monitoring of
the facility and equipment pairs under test.
The MTU also provides faceplate bantam jacks which provide metallic loop access
and access into the system.
The MTU also provides, as an option, The Telemetry Byte Oriented Serial
Interface (TBOS) for alarm reporting to Central Office switches supporting this
interface
Features
- Customer line testing (open shorts, hazardous voltages, impedance)
- Channel testing (level frequency, noise, signaling)
- Programmable test intervals
- Ringtrip and ringing detection
- Office or remote battery monitoring
- Interface for External Test Systems
- Metallic Bypass (MLT) or Pair Gain Test Controller (PGTC) support
- Provides front jack access to metallic loop facility and equipment
- TBOS interface for serial alarm reporting
[MTU CHART]
4-37
Copyright 1995. Advanced Fibre Communication
<PAGE>
Section 4
System Data Sheets
March l995
4.3.1. Line Powering E1 Transceiver El-XCVR
- --------------------------------------------------------------------------------
General Description
The UMC Line Powering E1 Transceiver provides a E1 cable interface, transmitting
and receiving up to 30 Basic 64 Kbps channels of voice or data originating from
either the channel units in the subscriber slots or another E1 transceiver. The
E1-XCVR may be used at either the Local Exchange Terminal or Remote Subscriber
Terminals. It operates at the CCITT rate of 2.048 Mbps. It has an Automatic
Line Build Out (Attenuation) function on its receive side and four discrete Line
Build Out settings on its transmit side. These settings are provisionable
through software using the UMC craft interface. Its face-plate (actual size) is
shown on this page. [Diagram Omitted]
The Line Powering E1 Transceiver performs signaling conversion and data link
termination. The line coding is HDB3. The transceiver has selectable alarm
thresholds, BER calculation, performance monitoring statistics, and alarm
history.
The E1-XCVR may also be used in any RST as a service card which provides a
single, channelized, line-powering E1 to a customer via OSP facilities.
The Line Powering E1 Transceiver has a power feed system (60 mA constant current
source) to power span line repeaters in any of several power feed options.
These include end-to-end, midspan or span terminating (sink) powering
configurations. The number of repeaters powered is a function of the repeater
voltage and wire gauge used between repeaters. The external power feed
resistance of the E1 should not exceed a 2000 Ohms equivalent resistance.
Assuming a 7 volt drop across repeaters and .6 mm (22 gauge) cable at
approximately 1.8 km between repeaters, the E1-XCVR will power up to seven
repeaters. The EI-XCVR also provides loop back and sealing current.
There are four LED indicators on the Line Powering E1 Transceiver front panel.
A green ACTV LED indicates the unit is busy and must not be unplugged without
first removing traffic. A red FAIL LED indicates that the unit has failed. An
amber REM LED indicates that the unit is in Far End Alarm, and another amber LOC
LED indicates that the unit is in Near End alarm. The transceiver features
front panel jack access for testing and monitoring.
Features
- One, Line Powering E1 Interface per card
- Double frame, CRC multi frame formats
- Extensive Loopback Diagnostics
- Front panel jack access for test and monitoring
- Low power dissipation
- May be used to deliver fractional E1 to customers
or for groomed services
[E1XCVR CHART]
4-39
Copyright 1995. Advanced Fibre Communication
<PAGE>
Section 4
System Data Sheets
March 1995
4.3.2. E1 Transceiver (G.703) E1X-XCVR
- --------------------------------------------------------------------------------
General Description
The UMC E1 Transceiver provides an indoor E1 (CG.703) level interface,
transmitting and receiving up to 30 Basic 64 Kbps channels of voice or data
originating from either the channel units in the subscriber slots or another E1
transceiver. It operates at the E1 rate of 2.0-48 Mbps. The E1X-XCVR is
intended for use in applications requiring interface to multiplexors or other
co-located office equipment. Its faceplate (actual size) is shown on this page.
[Diagram Omitted]
The E1X-XCVR Transceiver performs signaling conversion and data link
termination. Line coding is HDB3. The transceiver has selectable alarm
thresholds, BER calculation, performance monitoring statistics, and alarm
history.
The EIX-XCVR may also be used as a service card, to drop off a single
channelized E1 circuit to a customer's G.703 equipment.
There are four LED indicators on the E1X-XCVR Transceiver front panel. A green
ACTV LED indicates the unit is busy and must not be unplugged without first
removing traffic. A red FAIL LED indicates that the unit has failed. An amber
REM LED indicates that the unit is in Far End Alarm, and another amber LOC LED
indicates that the unit is in New End alarm. The transceiver features front
panel jack access for testing and monitoring.
Features
- One CCITT/El 2.048 Mbps Interface per card
- Double frame, CRC multi frame formats
- Extensive Loopback Diagnostics
- Front Panel Jack Access for Test and monitoring
- Remote Test Access to Metallic Tip and Ring
- Low Power Dissipation
- May be used to deliver fractional E1 to customers
or for groomed services
[E1X-XCVR CHART]
4-41
Copyright 1995. Advanced Fibre Communication
<PAGE>
Section 4
System Data Sheets
March 1995
4.3.3. E1 HDSL Transceiver ElHD-XCVR
- --------------------------------------------------------------------------------
General Description
The UMC HDSL Transceiver provides E1 rate interface, transmitting and receiving
up to 30 basic 64 Kbps channels of voice or data originating from either the
channel units in the subscriber slots or another E1 transceiver. It operates at
the E1 rate of 2.048 Mbps. The ElHD-XCVR is intended for use in applications
where non-repeatered E1 spans will be utilized as the transport medium for the
UMC. The E1HD-XCVR is capable of providing a single E1 rate interface
approximately 3.5 km over non-repeatered copper facilities. Its faceplate
(actual size) is shown on this page. [Diagram Omitted]
The HDSL E1 Transceiver performs signaling conversion and data link termination.
Line coding is HDB3. The transceiver has selectable alarm thresholds, BER
calculation, performance monitoring statistics, and alarm history.
There are four LED indicators on the HDSL Transceiver front panel. A green ACTV
LED indicates the unit is busy and must not be unplugged without first removing
traffic. A red FAIL LED indicates that the unit has failed. An amber REM LED
indicates that the unit is in Far End Alarm, and another amber LOC LED indicates
that the unit is in Near End alarm. The transceiver features front panel jack
access for testing and monitoring.
Features
- One non-repeatered HDSL E1 2.0-48 Mbps Interface per card
- Double frame, CRC multi frame
- Up to 3.5 km non-repeatered EI transmission
- Extensive Loopback diagnostics
- Front panel jack access for test and monitoring
- Low power dissipation
[E1HS-XCVR CHART]
4-3
Copyright 1995. Advanced Fibre Communication
<PAGE>
Section 4
System Data Sheets
March 1995
4.3.4. Fiber Optic Transceiver FO-XCVR
- --------------------------------------------------------------------------------
General Description
The UMC Fiber Optic Transceiver interfaces to a single mode Fiber Span,
transmitting and receiving the voice or data originating from the channel units
in the subscriber slots of the Local Exchange Terminal (LET) and Remote
Subscriber Terminal (RST) as well as E1 metallic transceiver data. The FO-
XCVR's transmission rate is 49.152 Mbps. The unit contains both transmitter and
receiver on a single card, each connecting to a fiber-optic cable. Its
faceplate (actual size) is shown on this page. [Diagram Omitted]
The FO-XCVR uses a single mode fiber with a laser operating at 1310 nm and
Pinfet receiver to allow un-repeatered span lengths of up to 40 kilometers (25
miles). The FO-XCVR may be used on multimode cable with a decreased span
length. Single mode "FCPC" connectors are used for their compact size. The FO-
XCVR uses compact hybrid micro-electronic circuitry to improve operating
reliability.
There are three LED, indicators on the Fiber Optic Transceiver front panel. The
green ACTV LED indicates that the unit is in service and should not be removed.
A red FAIL LED indicates that the unit has failed. A blue SYNC LED provides
indication of locked synchronization.
Features
- Single Fiber-Optic Interface per unit
- 1310 nm Single mode laser
- Pinfet receiver (-34 dBm sensitivity)
- Capable of transmitting and receiving over fiber
span distances of approximately 40 km (25 miles)
- Temperature/age compensated
- Micro processor controlled and monitored
- Link performance monitor
- Alarm retrieval
- Low Power Dissipation
- Automatic Attenuation (no pads required)
[FO-XCVR CHART]
4-5
Copyright 1995, Advanced Fibre Communication
<PAGE>
Section 4
System Data Sheets
March l995
4.3.5. Extended Range
Fiber Optic Transceiver FOE-XCVR
- --------------------------------------------------------------------------------
General Description
The UMC Extended Range Fiber Optic Transceiver interfaces to a single mode Fiber
Span, transmitting and receiving the voice or data originating from the channel
units in the subscriber slots of the Local Exchange Terminal (LET) and Remote
Subscriber Terminal (RST) as well as E1 metallic transceiver data. The FOE-
XCVR's transmission rate is 49.152 Mbps. The unit contains both transmitter and
receiver on a single card, each connecting to a fiber-optic cable. Its
faceplate (actual size) is shown on this page. [Diagram Omitted]
The FOE-XCVR uses a single mode fiber with a laser operating at 1550 nm and
PINFET receiver to allow un-repeatered span lengths of up to 75 kilometers (45
miles). The FOE-XCVR may be used on multi-mode cable with a decreased span
length. Single mode "FCPC" connectors are used for their compact size. The
FOE-XCVR uses compact hybrid micro-electronic circuitry to improve operating
reliability.
There are three LED indicators on the Extended Range Fiber Optic Transceiver
front panel. The green ACTV LED indicates that the unit is in service and
should not be removed. A red FAIL LED indicates that the unit has failed. A
blue SYNC LED provides indication of locked synchronization.
Features
- Single Fiber-Optic Interface per unit
- 1550 nm Single mode laser
- Pinfet receiver (-38 dBm sensitivity)
- Capable of transmitting and receiving over
fiber span distances of approximately 75 km (45 miles)
- Temperature/age compensated
- Micro processor controlled and monitored
- Link performance monitoring
- Alarm retrieval
- Low Power Dissipation
- Automatic Attenuation (no pads required)
[FOE-XCVR CHART]
4-47
Copyright 1995. Advanced Fibre Communication
<PAGE>
Section 4
System Data Sheets
March 1995
4.3.6. Datalink Transceiver DL-XCVR
- --------------------------------------------------------------------------------
General Description
The UMC Datalink Transceiver (DL-XCVR) provides a digital or analog
communications link between two terminals. The card provides an improved grade
of service in applications where the number of lines far exceeds the channel
capacity between terminals. The card also provides dynamic local and end-to-end
time slot assignment, DTMF or dial pulse digit collection and re-origination,
recognition and generation of all tones necessary to ensure accurate Central
Office billing and maintenance of a self-learning local number database for
local call routing.
The Central Office billing and maintenance function allows a remote Subscriber
Terminal (RST) to function as a local switch in the event of facility failure to
the local switch and also to efficiently use limited analog facilities between
the Central Office and the RST. This function may also be utilized when using
E1 transport media by equipping the RST with both E1 and Datalink Transceivers.
The Datalink Transceiver may be used with either digital or analog transmission
trunks. The DL-XCVR is used in unison with the International Transmission Only
(ITO) Channel Unit for indoor applications. It is used with the International
Advanced Transmission Only (IATO) Channel Unit for outdoor applications. Both
channel units are discussed later in this section.
The UMC Datalink Transceiver provides an analog or digital communications link
between the LET and RST(s). This link is used to establish end-to-end cross-
connect information, signaling for voice grade interfaces and to relay alarm and
provisioning messages between the two terminals. The analog link utilizes an
adaptively equalized 2400 baud modem which may be used directly on copper pair
facilities to outside plant. To prevent corrosion, sealing current generation
and termination is provided. The modem interface is designed for use over
analog transmission facilities and uses an autobaud protocol when transmission
performance is poor.
There are three LED indicators on the Datalink Transceiver front panel. A green
ACTV LED indicates the unit is active and must not be unplugged without first
removing traffic. A blue SYNC LED indicates the unit is synchronized with its
counterpart in another terminal. A red FAIL LED indicates the unit has failed.
Features
- Improved grade of service for concentrated and
non-concentrated radio applications
- Analog or Digital communication link between the
LET and RST(S) supported
- Dynamic local and end-to-end time slot assignment
- DTMF or Dial pulse digit collection and re-origination
- Local dial tone, all trunks busy tone, trace tone and all tone
recognition to ensure correct Central Office billing
- Maintains a self learning database of local numbers for local call
routing
- Re-routes datalink in case of facility failure. [Diagram Omitted]
[DL-XCVR CHART]
4-49
Copyright 1995. Advanced Fibre Communication
<PAGE>
Section 4
System Data Sheets
March 1995
4.4.1. Local Exchange
International POTS Channel Unit LI-POTS
- --------------------------------------------------------------------------------
General Description
The UMC International POTS Channel Unit (LI-POTS) provides six trunk terminating
loop start "Plain Old Telephone Service" circuits. [Diagram Omitted]
UMC LI-POTS cards provide loop start only signaling with ring cadence following,
on-hook transmission between ring bursts and forward disconnect.
The LI-POTS unit also provide a high on-hook DC resistance as well as a
universal ringing detector. Its face late actual size is shown on this a
The LI-POTS card is ordinarily equipped in the Local Exchange Terminal (LET);
its counterpart, the RI-POTS card, is usually equipped in the Remote Subscriber
Terminal (RST). The cards have been environmentally hardened to accommodate
special applications, when the LI-POTS card may be located at the RST.
A green BUSY LED indicator, when lit, indicates that the corresponding RI-POTS
circuit is busy or is being tested. A red FAIL LED indicates that the unit has
failed. The LI-POTS features front panel jack access for testing and monitoring
of all six circuits in addition to backplane metallic tip-ring access to enable
testing using the Metallic Test Unit.
Features
- Six, Two-Wire, POTS Circuits per Card
- Forward Disconnect
- 600 Ohm Local Exchange Impedance
- Transient Protection for Outdoor Bridging
- Remote Test Access to Metallic Tip and Ring
- Low Power Dissipation
- One CODEC per line
[LI-POTS CHART]
4-51
Copyright 1995. Advanced Fibre Communication
<PAGE>
Section 4
System Data Sheets
March 1995
4.4.2. REMOTE SUBSCRIBER
INTERNATIONAL POTS CHANNEL UNIT RI-POTS
- --------------------------------------------------------------------------------
GENERAL DESCRIPTION
The UMC RI-POTS Channel Unit is the Remote Subscriber Terminal (RST) loop start
counterpart to the loop terminating LI-POTS Channel Unit. It provides six
circuits of standard loop start "Plain Old Telephone Service."
UMC RI-POTS cards provide ring cadence following, local ring trip, on-hook
transmission between ring-bursts and forward disconnect Its faceplate (actual
size) is shown on this page.
The RI-POTS card is ordinarily equipped in the RST, its counterpart, the LI-POTS
card, is usually equipped in the Local Exchange Terminal (LET).
A green BUSY LED indicator, when lit, indicates that the RI-POTS circuit is busy
or is being tested and should not be removed from service. A red FAIL LED
indicates that the unit has failed. The RI-POTS features backplane metallic
tip-ring access to enable testing using the Metallic Test Unit.
FEATURES
- Six, Two-Wire POTS Circuits per Card
- Forward Disconnect
- Terminating impedance of 600 Ohms
- Transient Protection
- Remote Test Access to Metallic Tip and Ring
- Low Power Dissipation
[RI-POTS CHART]
4-53
Copyright 1995. Advanced Fibre Communication
<PAGE>
Section 4
System Data Sheets
March 1995
4.4.3. LOCAL EXCHANGE
INTERNATIONAL ADVANCED POTS CHANNEL UNIT LI-APOTS
- --------------------------------------------------------------------------------
GENERAL DESCRIPTION
The UMC International Advanced POTS Channel Unit (LI-APOTS) provides six trunk
terminating loop start "Plain Old Telephone Service" circuits like the LI-POTS.
The LI-APOTS provides two capabilities not supported on the LI-POTS. These are
battery reversal and pulse metering which are used for special POTS
applications.
Loop start signaling with ring cadence following, on-hook transmission between
ring bursts and forward disconnect are also provided.
The LI-APOTS unit provide a high on-hook DC resistance as well as a universal
ringing detector. Its faceplate (actual size) is shown on this page.
The LI-APOTS cord is ordinarily equipped in to Local Exchange Terminal (LET);
its counterpart, the RI-APOTS card, is usually equipped in the Remote Subscriber
Terminal (RST). The cards have been environmentally hardened to accommodate
special applications, when the LI-APOTS card may be located at the RST.
A green BUSY LED indicator, when lit, indicates that the corresponding RI-APOTS
circuit is busy or is being tested. At red FAIL LED indicates that the unit has
failed. The LI-APOTS features front panel jack access for testing and
monitoring of all six circuits in addition to backplane metallic tip-ring access
to enable testing using the Metallic Test Unit
FEATURES
- Six, Two-Wire, POTS Circuits per Card
- Forward Disconnect
- Battery Reversal
- Pulse Metering
- 600 Ohm Local Exchange Impedance
- Transient Protection for Outdoor Bridging
- Remote Test Access to Metallic Tip and Ring
- Low Power Dissipation
- One CODEC per line
[LI-APOTS CHART]
4-55
Copyright 1995, Advanced Fibre Communication
<PAGE>
Section 4
System Data Sheets
March 1995
4.4.4. REMOTE SUBSCRIBER
INTERNATIONAL ADVANCED POTS CHANNEL UNIT RI-APOTS
- --------------------------------------------------------------------------------
GENERAL DESCRIPTION
The UMC RI-APOTS Channel Unit is the Remote Subscriber Terminal (RST) loop start
counterpart to the loop terminating LI-APOTS Channel Unit. It provides six
circuits of standard loop start "Plain Old Telephone Service" with pulse
metering and battery reversal.
UMC RI-APOTS cards provide ring cadence following, local ring trip, on-hook
transmission between ring-bursts and forward disconnect. Its faceplate (actual
size) is shown on this page. [Diagram]
The RI-APOTS card is ordinarily equipped in the RST, its counterpart the LI-
APOTS card, is usually equipped in the Local Exchange Terminal (LET).
A green BUSY LED indicator, when lit, indicates that the RI-APOTS circuit is
busy or is being tested and should not be removed from service. A red FAIL LED
indicates that the unit has failed. The RI-APOTS features backplane metallic
tip-ring access to enable testing using the Metallic Test Unit.
FEATURES
- Six, Two-Wire POTS Circuits per Card
- Pulse Metering
- Battery Reversal
- Terminating Impedance of 600 Ohms
- Forward Disconnect
- Transient Protection
- Remote Test Access to Metallic Tip and Ring
- Low Power Dissipation
[RI-APOTS CHART]
4-57
Copyright 1995. Advanced Fibre Communication
<PAGE>
Section 4
System Data Sheets
March 1995
4.4.5. LOCAL EXCHANGE
UNIVERSAL VOICE GRADE CHANNEL UNIT L-UVG
- --------------------------------------------------------------------------------
GENERAL DESCRIPTION
The Local Exchange Terminal Universal Voice Grade (L-UVG) Channel Unit is the
UMC counterpart to the R-UVG card. It provides six, two-wire circuits to
support ground Start, loop Start and reverse battery signaling for applications
such as PBX trunks. Its faceplate (actual size) is shown on this page.
UMC cards provide ring cadence following, including ring-ping, on-hook
transmission between ring burst and forward disconnect. They also support
precision gain adjustment in 0.1 dB steps over a 14.0 dB range. The L-UVG can
be located at the Remote Subscriber Terminal (RST) for Direct Inward Dialing
(DID) applications.
The L-UVG may also be utilized for international Coin (Payphone) service.
A green BUSY LED indicator, when lit, indicates that the L-UVG circuit is busy
or is being tested and should not be removed from service. A red FAIL LED
indicates that the unit has failed. The L-UVG features front panel jack access
for testing and monitoring of all six circuits in addition to backplane metallic
tip-ring access to enable testing using the Metallic Test Unit.
FEATURES
- Six, Two-Wire, Switched, Analog UVG Circuits per Card
- Software Selectable Transmission Gain 0.1 dB Steps
- u Law companding
- Ground Start/Loop-Start Capability
- Reverse Battery (Quiet)
- Wide ring voltage/frequency detection window
- 600/900 Ohm Impedance
- On-Hook Transmission Capability
- Forward Disconnect
- Remote Test Access to Metallic Tip and Ring
- Low Power Dissipation
- Provisionable/Automatic Gain Adjustment
[L-UVG CHART]
4-59
Copyright 1995. Advanced Fibre Communication
<PAGE>
Section 4
System Data Sheets
March 1995
4.4.6. Remote Subscriber
Universal Voice Grade Channel Unit R-UVG
- --------------------------------------------------------------------------------
General Description
The Remote Subscriber Universal Voice Grade (R-UTVG) Channel Unit is the UMC
counterpart to the L-UVG card. Ground Start, loop Start and reverse battery
signaling are supported for applications such as PBX trunks. The R-UVG is
typically used at the RST, although it may be employed at the LET for Direct-
Inward-Dial (DID) applications. Its faceplate (actual size) is shown on this
page. [Diagram Omitted]
The L-UVG may also be utilized for international Coin (Pay phone) service.
UMC UVG cards provide ring cadence following, on-hook transmission between ring
bursts and forward disconnect. They also support precision gain adjustment in
0.1 dB steps over a 14.0 dB range in addition to automatic transmission loss
switching with loop length (four steps of 1 dB each).
A green BUSY LED indicator, when lit, indicates that the R-UVG circuit is busy
or is being tested and should not be removed from service. A red FAIL LED
indicates that the unit has failed. The R-UVG features backplane metallic tip-
ring access to enable testing using the Metallic Test Unit.
Features
- Six, Two-Wire, Switched, Analog UVG Circuits per Card
- Automatic or Provisionable Transmission Gain in 0.1 dB Steps
- u Law commanding
- Ground-Start/Loop-Start Capability
- Reverse Battery Signaling (Quiet)
- 600 Ohm Impedance
- Forward Disconnect
- Remote Test Access to Metallic Tip and Ring
- Low Power Dissipation
[R-UVG]
4-61
Copyright 1995. Advanced Fibre Communication
<PAGE>
Section 4
System Data Sheets
March 1995
4.4.8. E&M CHANNEL UNIT E&M
- --------------------------------------------------------------------------------
GENERAL DESCRIPTION
The E&M Channel Unit is one of the UMC's Special Services channel units. It
provides two subscriber line circuits configured for operation in E&M Modes I or
V, and one subscriber line circuit for E&M Modes II, III and IV.
The E&M channel unit also supports DX signaling. It can be used to provide
subscriber line circuits for Tandem Types I and II and PLR (Pulse Link Repeater)
Types I and II. In addition, it may be used in a transmission only mode. The
E&M channel unit can provide either two or four wire service. Its faceplate
(actual size) is shown on this page.
The E&M channel unit his a fixed impedance of 600 ohms. Voice frequency gain is
provisionable in 0.1 dB increments within a 24.5 dB range.
There are two LED indicators on the E&M front panel The green BUSY LED indicates
that the E&M Channel Unit is busy or is being tested and should not be removed
from service. A red LED indicates that the unit has failed.
Access to the line circuits is provided on the backplane to enable testing with
the Metallic Test Unit.
FEATURES
- Provides E&M circuits - one or two circuits per card depending on Mode.
- E&M, Tandem, PLR Signaling, and DX Signaling (software provisionable)
- Provisionable Transmit and Receive Gain
- Remote Test Access to Metallic Tip-Ring Pair
- Low Power Dissipation
[E&M CHART]
4-65
Copyright 1995. Advanced Fibre Communication
<PAGE>
Section 4
System Data Sheets
March 1995
4.4.9. International Transmission
Only Channel Unit ITO
- --------------------------------------------------------------------------------
General Description
The International Transmission Only (ITO) Channel Unit provides either three
four-wire or six two-wire circuits per card for analog voice transmission. It
is designed for applications requiring analog, non-switched, voice or data
transmission. This includes use with the DL-XCVR, as an interface to analog
transport facilities (radio), or to provide analog, non-switched services.
Each ITO circuit provides two or four-wire, analog interface. The two or four-
wire configuration is software provisionable depending on application
requirements.
A green ACTV LED indicator, when lit indicates the TO Channel Unit is engaged. a
red FAIL/ LED indicates the unit has failed. The TO card features backplane
metallic tip-ring access to enable testing using the Metallic Test Unit.
Features
- Three four-wire circuits or six two-wire, non-switched,
analog circuits per card
- May be used as a service card or for transmission
channels with the DL-XCVR
[ITO CHART]
4-67
Copyright 1995 Advanced Fibre Communication
<PAGE>
Section 4
System Data Sheets
March 1995
4.4.10. International Advanced
Transmission Only Channel Unit IATO
- --------------------------------------------------------------------------------
General Description
The International Advanced Transmission Only (IATO) Channel Unit provides either
four-wire or two-wire circuits. If provisioned in the four-wire mode, the IATO
is capable of providing up to three (3) circuits for analog voice transmission.
If provisioned in the two-wire mode, the IATO is capable of providing up to six
(6) circuits for analog voice transmission. [Diagram Omitted]
The IATO is designed for indoor or outdoor applications requiring analog, non-
switched voice or data transmission. This includes use with the DL-XCVR as an
interface to analog copper or radio facilities, or to provide analog, non-
switched services.
Each IATO circuit provides two or four-wire, analog interface. The two or four-
wire configuration is software provisionable depending on application
requirements. The IATO card may be placed in either the LET or the RST(s). The
IATO provides scaling current and adjustable gain.
A green ACTV LED indicator, when lit, indicates the IATO channel unit is
engaged. A red FAIL LED indicates the unit has failed. The IATO card features
backplane metallic tip-ring access to enable testing using the Metallic Test
Unit.
Features
- Up to three four-wire circuits or six two-wire circuits per card
- Gain adjustment
- Sealing Current
- Utilized with DL-XCVR as well as being a service card
- Flexible Input Impedance, provisionable
at 150 Ohms, 300 Ohms, 600 Ohms, or 1150 Ohms.
[IATO CHART]
4-69
Copyright 1995. Advanced Fibre Communication
<PAGE>
Section 4
System Data Sheets
March 1995
4.5.1. Asynchronous Data
Channel Unit ADU
- --------------------------------------------------------------------------------
General Description
The UMC Asynchronous Data Channel Unit (ADU) provides low bit rate asynchronous
interfaces to the UMC for point-to-multi point service. The ADU is equipped in
both the LET and RST(s). It operates at 1200, 2400, 4800, 9600 and 19,200 bits
per second.
The ADU supports one or two data channels per unit using CCITT V.28, CCITT
V.11/X.21 or CCITT V.35 electrical interfaces. Its faceplate (actual size) is
shown an this page. [Diagram Omitted]
The ADU provides optional error correction through the craft interface terminal
when very low bit error rate transmission is required. The ADU may also be
provisioned to optimize E1 capacity by multiplexing several low rate asynch data
interfaces into a single 6.4 Kbps E1 times lot.
The ADU provides alarm indication, testing via the Metallic Test Unit, and rate
provisioning from a remote site using a craft interface terminal.
There are four LED indicators on the ADU front panel. A green ACTV LED
indicates the unit is active. An red FAIL LED indicates that the unit has
failed. An amber LBPK LED indicates loop back. The LOS LED indicates loss of
signal.
The channel unit features backplane metallic tipring access to enable testing
using the Metallic Test Unit.
Features
- One or Two, Multi Bit Rate Circuits Per Card
- V.1 I/X.21, V.35 or V.28 Electrical Interfaces
- Multiple Error Correction Protocols
- 1200, 24009 4800, 9600, or 19,200 bps Asynch
- Times lot Multiplexing For Bandwidth Optimization
- Point-To-Multi point Asynch Customer Applications
- Optional Baseband Interface
- LET Or RST Applications Supported
- Remote Test Access To Metallic Tip and Ring
- Low Power Dissipation
[ADU CHART]
4-75
Copyright 1995, Advanced Fibre Communication
<PAGE>
Section 4
System Data Sheets
March 1995
4.5.2. Synchronous Data
Channel Unit SDU
- --------------------------------------------------------------------------------
General Description
The UMC Synchronous Data Channel Unit (SDU) provides medium bit rate Synchronous
or Asynchronous interfaces to the UMC for point-to-multi point service. The SDU
is equipped in both the LET and RST(s). It operates at 48, 56, or 64 Kbps.
[Diagram Omitted]
The SDU supports one or two data channels per unit using CCITT G.703, CCITT
V.11/X.21 or CCIT V.35 electrical interfaces. Its faceplate (actual size) is
shown on this page.
The SDU may be used in all types of public and private data networks where
synchronous and asynchronous data with minimum delay is requited.
When used in its synchronous mode, synchronization is achieved by locking the
system clock to an external 2 Mbps reference which is terminated on be LET
backplane or using one of the E1 streams as a reference clock.
The SDU may be provisioned to optimize E1 capacity by multiplexing 48 or 56 Kbps
data interfaces into a single 64 Kbps E1 times lot using V.1 10.
The SDU provides alarm indication, testing via the Metallic Test Unit, and rate
provisioning from a remote site using a craft interface terminal.
There are four LED indicators on the SDU front panel. A green ACTV LED
indicates the unit is active. A red FAIL LED) indicates that the unit has
failed. An amber LBPK LED indicates loop back. The LOS LED indicates loss of
signal.
The channel unit features backplane metallic tipring access to enable testing
using the Metallic Test Unit.
Features
- One or two, Multi Bit Rate Circuit per card
- V.11/X.21, V.35 Or G.703 Electrical Interfaces Multiple Error Correction
Protocols
- 48, 56, Or 64 Kbps Sync Or Async Data Rates
- Times lot Multiplexing For Bandwidth Optimization At 48 Or 56 Kbps
- Point-To-Multi point Synch Customer Applications
- LET Or RST Applications Supported
- Remote Test Access To Metallic Tip And Ring
- Low Power Dissipation
[SDU CHART]
4-77
Copyright 1995, Advanced Fibre Communication
<PAGE>
Section 4
System Data Sheets
March 1995
4.5.3. E1 Asynchronous Channel Unit E1AX
- --------------------------------------------------------------------------------
General Description
The UMCE1 Asynchronous Transceiver provides a G.703 E1 rate interface. It
operates at the E1 rate of 2.048 Mbps.
The E1AX is intended for use in applications that require transport of intact E1
signals from customer premise to the local exchange.
The E1AX provides an intact (asynchronous)E1 signal for transport throughout the
network.
The E1AX can be used to deliver intact E1 services to a customer's G.703
signaling equipment.
The E1AX does not provide scaling current. Its faceplate (actual size) is shown
on this page. [Diagram Omitted]
The E1AX performs no signaling conversion or data link termination, only intact
E I transport. Line coding is HDB3. The transceiver has selectable alarm
thresholds, BER calculation, performance monitoring statistics, and alarm
history.
There are four LED indicators on the E1AX front panel. A green ACTV LED
indicates the unit is active and must not be unplugged without first removing
traffic. A red FAIL LED indicates that the unit has failed. A red LOC LED
indicates a failure of the incoming signal. A blue AIS (Alarm Indication
Signal) indicates that a piece of telecommunications equipment linked, directly
or indirectly, to this card has failed. The transceiver features front panel
jack access for testing and monitoring.
Features
- One Asynchronous, Non Line-Powering E1 Circuit per card
- Intact E1 Transport
- Customer E1 service capability
- Extensive Loopback Diagnostics
- Front Panel Jack Access for Testing and monitoring
- Low Power Dissipation
[E1AX CHART]
4-79
Copyright 1995. Advanced Fibre Communication
<PAGE>
EXHIBIT H
DISTRIBUTORSHIP AGREEMENT
THIS AGREEMENT is entered as of the day of , 199 , by and
between ADVANCED FIBRE COMMUNICATIONS, INC. ("AFC"), a corporation duly
organized under the laws of the state of Delaware located at 1445 McDowell
Boulevard North, Petaluma, CA 94954, U.S.A., and AFC HARRIS MULTIMEDIA
COMMUNICATIONS PRIVATE LIMITED (the "Distributor), a corporation duly organized
under the laws of Mauritius located at ___________________________________.
RECITALS
A. AFC is engaged in the manufacture and distribution of the
communications equipment described in Exhibit A attached hereto (the
"Equipment").
B. The Distributor is, among other things, engaged in the business of
manufacturing, marketing, distributing and selling telecommunications equipment
in India for the Indian market.
C. AFC and Harris Corporation, a corporation organized under the laws of
the state of Delaware ("Harris"), are parties to that certain Shareholder and
Joint Venture Agreement dated December 28, 1995 (the "Joint Venture Agreement"),
whereby AFC and Harris formed Distributor, owned 51% by AFC and 49% by Harris,
with Distributor's purpose, in part, being to distribute the Equipment in India
for the Indian market only.
D. It is a condition of the Joint Venture Agreement that AFC and Harris
enter into this Distributorship Agreement as an interim procedure to last only
until the Distributor is commercially producing the Equipment itself.
E. AFC wishes to further the sale and distribution of the Equipment, and
the Distributor wishes to purchase the Equipment from AFC, and to promote,
market, distribute and service the Equipment in the Territory as herein defined.
F. Distributor represents that it possesses the facilities, equipment,
resources, ability, and knowledge necessary and desirable to successfully sell,
service and market the Equipment.
G. The parties wish to provide in this Agreement for the promotion,
marketing, distribution and service of the Equipment by Distributor in
designated territories.
1
<PAGE>
NOW. THEREFORE. in consideration of the foregoing and the mutual agreements and
promises contained in this Agreement, AFC and Distributor hereby agree as
follows:
1. APPOINTMENT AS DISTRIBUTOR. On the terms and conditions set forth in
this Agreement, AFC agrees to sell the Equipment to Distributor and AFC appoints
the Distributor as its distributor of the Equipment in the Territory hereinafter
defined in Paragraph 3.
2. AGREEMENT OF PURCHASE AND SALE. On the terms and conditions set forth
in this Agreement, the Distributor agrees to purchase the Equipment from AFC and
to use its best efforts to promote, market and distribute Equipment in the
Territory.
3. TERRITORY. As used herein, the "Territory" shall mean and include the
geographic areas set forth in EXHIBIT B. The Distributor shall only sell and
market the Equipment within this territory and shall not directly or indirectly
offer, represent or sell into any other territory. The Distributor will employ
its best efforts to ensure the Equipment it sells will remain in the Territory
and agrees not to solicit any sales outside the Territory.
4. NO SUB-DISTRIBUTORS. The Distributor shall have no right to appoint
sub-distributors in the Territory without the prior written consent of AFC.
Distributor shall ensure that any sub-distributor it may appoint shall enter
into a written sub-distribution agreement imposing the same obligations on the
sub-distributor as are imposed on Distributor under this Agreement. In
addition, Distributor shall be responsible for the performance by any sub-
distributors of Distributor's obligations under this Agreement. The Distributor
may sub-contract for supportive services, such as installation, maintenance and
engineering with the prior written consent of AFC, but shall retain
responsibility for the performance of the Equipment as installed.
5. EXCLUSIVE DISTRIBUTOR. Except as defined in Paragraph 6 hereafter,
AFC shall not appoint other distributors in the Territory for the Equipment
described in EXHIBIT A within twelve (12) months following the execution of this
Agreement.
6. EXCEPTIONS TO EXCLUSIVITY.
6.1. AFC reserves the right to sell Equipment to system engineering
companies or end-users not having their principal place of business in the
Territory even if such end-users are established in the Territory, or to sell
Equipment or part of the Equipment, which will be used with other equipment as
part of a system in the Territory, to original equipment manufacturers (OEMs).
In such cases, Distributor will carry out the service and support activities
defined in Paragraph 22 hereunder for the Equipment sold. In consideration
therefor, AFC shall pay to distributor [*]
2
<PAGE>
6.3. Distributor acknowledges that AFC has granted manufacturing rights to
certain Taiwanese companies with rights to sell the equipment they manufacture
under license in European countries. However, such equipment is sold under the
manufacturer's name. and not AFC's name.
6.4. Distributor acknowledges that AFC has granted exclusive distribution
rights to Tellabs Inc. to sell the UMC-1000 to cable television companies and
alternative access providers, unless these companies are also wireless
telecommunication companies. Tellabs Inc. does not have the right to sell to
telephone companies, and sells the Equipment under the name "Cablespan."
7. USE OF AFC NAME; LABELING.
A. Distributor may refer to itself as an "Authorized Distributor of
Advanced Fibre Communications" in advertising, signs, trade listing, directories
and similar items. Distributor shall not obtain or attempt to obtain any right,
title or interest by registration or otherwise, in or to the trade name
"Advanced Fibre Communications", "UMC 1000" or any combination of such name with
other names or with any other trade mark, trade name or designation used or
owned by AFC.
B. In no event shall Distributor remove or conceal any labeling on
or packaging of the Equipment which bears the name of AFC or its affiliates.
After termination of this Agreement, Distributor shall not use the name of AFC
or any trade marks, trade names or designation used or owned by AFC for any
purpose whatsoever. AFC shall not obtain or attempt to obtain any right, title
or interest by registration or otherwise, in or to the trade name or designation
used or owned by Distributor.
C. Use of any advertising, packaging, marketing brochures and other
promotional material by Distributor shall be subject to specific prior written
approval by AFC.
8. INDEPENDENT CONTRACTOR.
A. The Distributor is not granted any right or authority to assume
or to create any obligation or responsibility, express or implied, on behalf of
or in the name of AFC or to bind AFC in any manner. Distributor shall conduct
all of its business in its own name and the relationship of Distributor to AFC
shall not be that of an agent or legal representative. Distributor shall not
represent itself as the agent of AFC or as having any authority to bind AFC.
B. Distributor hereby declares that it is engaged in an independent
business, and that it will furnish the services (as described in Paragraphs 1
and 2 hereunder) as an independent contractor and not as the agent, employee or
servant of AFC. Distributor shall have complete control over the employment,
direction, compensation, and discharge of any person assisting it in furnishing
these services. Distributor agrees that it will be solely responsible for a
matters relating to the payment of its employees including compliance with all
pertinent income tax, social security and other withholding and a other
regulations governing such matters. Distributor shall be fully and completely
responsible for its own acts and those of its subordinates, employees, sub-
distributors and subcontractors in connection with its performance under this
Agreement.
3
<PAGE>
C. The Distributor shall comply with all applicable laws in the
Territory; in particular, Distributor shall provide workers compensation
insurance coverage as required by applicable law in the Territory for
Distributor's employees and agents and agrees to hold harmless and indemnify AFC
for any and all claims arising out of any injury, disability. or death of any of
Distributor's employees or agents. If such claims arise from manufacturing
defects of the Equipment AFC's responsibility shall be as defined in Paragraph
31 below.
9. GOVERNMENTAL FILINGS. The Distributor shall comply with all
applicable laws in the Territory. If, under the laws of the Territory,
distributorship agreements are required to be filed with governmental
authorities, Distributor shall. upon full disclosure to AFC and with AFC's prior
approval, prepare and make such filing at its own cost and furnish AFC with a
copy of same.
10. TRADEMARKS. Distributor acknowledges the validity of all trademark
registrations in the United States and the Territory owned by AFC during the
term of this Agreement. Distributor further acknowledges that AFC is the sole
owner of the entire right, title, and interest in the trademarks covered by
these registrations, hereinafter called "Marks," both in the United States and
elsewhere in the world. Distributor shall not do any thing or commit any act
which might prejudice or adversely affect the validity of the marks or the
ownership by AFC thereof, and shall cease to use the Marks, or any similar
marks, in any manner on the expiration or other termination of this Agreement.
11. NON-DISCLOSURE OF PROPRIETARY INFORMATION.
A. It is contemplated by both parties that pursuant to the rendering
of services hereunder, information and data of a confidential and/or proprietary
nature may be disclosed to Distributor. Such information and data could include
all past, present, and/or future plans, provisions, designs, forms, formats,
procedures, methods, trade secrets, information concerning the design or
manufacture of the Equipment and other AFC products and other information
relating to AFC's technology, technical data, product, patent and copyright
data, know-how, research and development data and programs, financial data,
legal data, marketing data, customer lists and any other technical and business
data.
B. Distributor agrees to accept such confidential and/or proprietary
data in confidence, not to disclose such data to others and to refrain from
using such data for purposes other than those directed hereunder by AFC.
Distributor's obligations under this Paragraph 11 shall survive the termination
of this Agreement for a period of five (5) years.
12. PRICES AND SHIPMENT.
A. For each item of Equipment purchased, Distributor shall pay or
cause to be paid to AFC, in United States Dollars, a price determined from the
price list and the discount schedule(s), attached hereto as EXHIBITS C AND D, as
in effect from time to time by AFC. All prices shall be F.O.B. AFC's plant in
Petaluma, California.
B. The Distributor will post at its own expense all bid and
performance bonds, or other guarantees, required by a customer in the Territory.
If the Distributor is unable to post a bid or
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[*]
13. TAXES. Prices are [*]
14. METHOD OF PAYMENT. Payment of the invoice price for the Equipment
shall be by cash in advance or by an irrevocable commercial documentary letter
of credit payable on sight confirmed by a United States bank, and in form and
substance satisfactory to AFC, against presentation of shipping documents.
Payments of other charges imposed by AFC (for repairs. travel, etc.) shall be
made in freely exportable U.S. Dollars and shall be due upon receipt of invoices
therefore.
15. PURCHASE ORDERS. Distributor shall submit written purchase orders for
all items of the Equipment it wishes to purchase. All purchase orders are
subject to written acceptance by AFC. AFC shall sell to Distributor items of
the Equipment in quantities as Distributor shall reasonably require, to the
extent that AFC has such quantities available, AFC shall make every reasonable
effort to meet the shipping dates Distributor may request. Requested shipping
dates are subject to review, revision and approval by AFC on the basis of AFC's
other commitments. Requested shipping dates shall not be approved by AFC until
it receives all necessary information from Distributor regarding such purchase
order.
16. ORDER POSTPONEMENT/CANCELLATIONS. The Distributor can postpone any
order or any portion of an order for a period of up to 45 days without penalty
provided that AFC is advised of the postponement by a minimum of 30 days prior
to the original scheduled ship date. Once an order has been postponed, such
order may not be postponed again. Orders canceled prior to shipment shall be
subject to restocking charges to be paid by Distributor in accordance with the
following schedule and are applied based on the day AFC receives the
cancellation notice. If an order has been postponed and then subsequently
canceled,
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the cancellation charge shall be based on the number of days prior to the
original scheduled ship date that notice of cancellation is received:
[*]
17. COMMON CARRIERS AGENTS OF DISTRIBUTOR. Whenever AFC shall deliver or
cause to be delivered to a common carrier any goods ordered by Distributor,
regardless of whether the particular carrier shall have been designated in the
shipping or routing instructions of Distributor, AFC shall not be responsible
for any delays or damages in shipment and the common carrier, to which AFC shall
deliver goods shipped to Distributor, is declared to be the agent of the
Distributor.
18. RETURN OF PRODUCTS OR SERVICE PARTS FOR REPAIR OR CREDIT. Subject to
the provisions of Paragraph 31, unless AFC shall have authorized or permitted
the return of any products or parts, AFC shall not be obligated to accept from
Distributor any products or parts returned, nor to make any exchange thereof,
nor to credit Distributor therefor.
19. DELIVERY. Delivery of the Equipment to Distributor shall be deemed
completed when shipment is made F.O.B. AFC's Petaluma, California plant in the
presence of an authorized representative of Distributor, as evidenced by a
record of acceptance of the bill of lading. AFC shall advise Distributor at
least two (2) weeks in advance of the date of shipment. If Distributor's
representative is not present at the date of shipment, delivery shall be deemed
complete when shipment is made FOB AFC's Petaluma, California plant, as
evidenced by a bill of lading. Title and risk of loss shall pass to Distributor
when the items have been delivered to the carrier designated by Distributor in
EXHIBIT E or a reasonable substitute carrier.
20. MARKETING. Distributor shall devote its best efforts to the
promotion, marketing, distribution and servicing of the Equipment in the
Territory, shall use all reasonable means and diligence to further the sale of
the Equipment in the Territory, and shall generally do all things necessary or
proper to further and promote the goodwill and reputation of AFC. Distributor
shall maintain at its own cost and expense a sales office in the Territory
suitable for displaying and demonstrating the Equipment therein. With prior
notice to Distributor, and with the presence of Distributor's representative, if
available, AFC shall have the right to communicate directly with Distributor's
customers. Distributor shall provide AFC with all
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pertinent customer information reasonably necessary to facilitate AFC's
communication with said customers.
21. DEMONSTRATION AND APPROVAL SYSTEM. Within one (1) month of the
execution of this Agreement, Distributor shall purchase one demonstration unit
of the Equipment, for which AFC shall grant a special discounted price. This
unit will be configured in such way as to allow it to be used as a type approval
system, should such an approval be required by the Telecommunication Authority
in the Territory. AFC is in no way responsible for any costs associated with
obtaining a type approval. It is also understood that the Distributor will bear
the cost, if any, for the installation of a demo or approval system.
22. SERVICING. Distributor shall service, or arrange for the servicing,
of the Equipment it markets or distributes. Distributor shall ensure that such
servicing is conducted in accordance with reasonable standards AFC deems
necessary to preserve the reputation of AFC products and to preserve good
customer relations. Distributor shall maintain competent service personnel in
sufficient numbers and adequate service facilities to provide users of the
Equipment in the Territory with proper training installation and with such
preventive maintenance and special services as may be required from time to
time. Distributor shall purchase and maintain an inventory of supplies and
spare parts and handle only such supplies and parts as are manufactured by AFC,
or standard commercial items approved by AFC as property meeting AFC's
specifications. In the event of termination of this Agreement, AFC shall assume
the responsibility for servicing the pre-existing customers of Distributor and
Distributor shall supply AFC with all necessary information to adequately and
completely carry out such servicing.
23. REPORTING. Distributor shall make such reports concerning the
operation of its business and the marketing, distribution and servicing of the
Equipment as AFC may reasonably request. AFC shall have the right to make such
inspections as AFC may deem reasonably necessary to satisfy itself that the
Equipment is being distributed, sold and serviced in accordance with this
Agreement.
24. NON-INTEGRATION. Distributor shall not market or distribute any
products as genuine AFC products that are not, in fact, genuine AFC products.
The Distributor shall not incorporate any components into any item of the
Equipment or sub-assembly other than those components specifically -approved
and/or supplied by AFC to Distributor.
25. NO COMPETING PRODUCTS. Distributor agrees that it would not be
capable of fulfilling in obligations under this Agreement if, during the term of
this Agreement, either directly or indirectly, it offered for sale or lease or
acted as distributor, dealer, representative, sales agent or in any other
capacity with regard to equipment or products manufactured. leased or sold by
any person, firm, corporation or organization other than AFC, if such equipment
or products are competitive in any way to the AFC Equipment described in EXHIBIT
A. Distributor shall not undertake to do the acts described in this Paragraph 25
without the prior written agreement of AFC.
26. COMPLIANCE WITH U.S. TRADE LAWS. Distributor shall use its best
efforts to ensure that none of the Equipment shall reach any country or
territory wherein United States law would forbid AFC to market
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<PAGE>
or distribute the Equipment. If any such violation shall occur, Distributor
shall defend, indemnify and hold harmless AFC from the consequences of such
violation.
27. TECHNICAL ASSISTANCE. AFC shall provide Distributor free of charge
with such promotional literature, moderate proposal assistance and technical
assistance in California, as Distributor shall reasonably request. Distributor
shall be responsible at its expense for all translations, however, AFC reserves
the right to review such translated documents for accuracy and completeness.
Distributor shall pay for time, travel and living expenses of AFC personnel or
AFC subcontractors where the provision of technical assistance requires their
travel provided such travel was requested or approved in advance by Distributor.
28. TRAINING. AFC will provide periodic training classes conducted in
English at its facilities in Petaluma, California for Distributor's personnel.
AFC shall pay the cost of providing for training instructors and course
materials. Distributor shall pay salaries travel and living expenses for its
own personnel.
29. TERM AND TERMINATION OF AGREEMENT. This Agreement shall last only up
to the date when the Distributor has the ability to manufacture the Equipment as
provided and contemplated in the Joint Venture Agreement, unless terminated
earlier pursuant to Paragraph 30 hereunder. Distributor represents that it has
negotiated and agreed to all aspects of the termination provisions contained in
these Paragraphs 29 and 30 herein. Distributor represents that it has not paid
any consideration for the right to become a distributor of AFC Equipment or
products. Distributor further represents that the parties have made no oral or
any other agreement regarding the term of this Agreement or Distributor's
performance hereunder except as set forth herein. The parties agree and state
that all notice periods specified hereunder are reasonable. Distributor
represents that it has considered and shall continue to consider the termination
provisions herein when determining its budget and expenditures for the promotion
of AFC Equipment and products. The right of termination provided herein is
absolute and neither party shall be liable to the other for damages or otherwise
by reason of such termination. Each party hereby waives any claim it might have
against me other party to this agreement for any damages whatsoever by reason of
termination hereunder.
30. ADDITIONAL GROUNDS FOR TERMINATION BY AFC AND DISTRIBUTOR
A. In the event that the Distributor shall become liquidated,
dissolved, bankrupt or insolvent, or shall take any action to be so declared, or
shall suffer any such action brought by another, AFC shall have the right to
terminate this Agreement and a orders immediately, and may stop shipment of any
Equipment in transit. In such event, Distributor shall immediately return to
AFC via prepaid air freight any Equipment in Distributor's possession for which
AFC has not received full and complete payment.
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B. AFC may terminate this Agreement immediately upon notice in
writing to Distributor if Distributor shall breach any provision of this
Agreement in any respect and such breach remains unremedied thirty (30) days
after receiving notice thereof from AFC.
C. Distributor may terminate this Agreement immediately upon
notice in writing to AFC if AFC shall breach any provision of this Agreement in
any respect and such breach remains unremedied thirty (30) days after notice
thereof from Distributor.
D. AFC may terminate this Agreement immediately upon thirty
(30) days notice in writing to Distributor in the event that type approval of
AFC equipment is required by the Telecommunication Authority in the Territory,
and that such type approval has not been obtained by Distributor within six (6)
months of execution of this Agreement. In such a case, Distributor shall return
to AFC any demonstration equipment acquired by Distributor under Paragraph 21
above, and shall be entitled to reimbursement of any monies paid or advanced to
AFC for said equipment, However, Distributor shall return said equipment to AFC
with shipment costs to be borne by Distributor.
E. In the event of any termination of this Agreement by AFC or
Distributor under Paragraph 29 or subparagraph 30(B) or 30(C) above, AFC will
honor all outstanding orders of Distributor accepted by AFC.
31. AFC'S WARRANTIES. AFC warrants that each item of its own manufacture
delivered hereunder shall, at the time of delivery and for a period of two (2)
years thereafter, be free from defects in materials and workmanship, and if any
such item supplied hereunder shall prove to be defective in material or
workmanship under normal intended usage and maintenance during the warranty
period, and is so found upon examination by AFC, then AFC shall repair or
replace, at its sole option, such defective item at its own expense.
Distributor shall be required to ship each such defective item, freight prepaid,
to AFC's plant in Petaluma, California, and AFC shall ship all repaired or
replaced items freight prepaid to the Distributor. Liability of AFC for breach
of any and a wan-antics hereunder is expressly limited to the repair or
replacement of defective items set forth in this Paragraph 3 1, and in no event
shall AFC be liable for special, incidental or consequential damages by reason
of any breach of warranty or defect in material or workmanship. AFC shall not
be responsible for the repair or replacement of items which have been subjected
to neglect, accident or improper use, or which have been altered by other than
authorized AFC personnel. Upon expiration of the warranty period, Distributor
shall pay for the repair and/or replacement of defective parts. Distributor
shall be required to ship each such defective item, freight prepaid, to AFC's
plant in Petaluma, California, and AFC shall ship all repaired or replaced items
freight prepaid to the Distributor. THE EXPRESS WARRANTY CONTAINED IN PARAGRAPH
31 HEREOF SHALL EXTEND TO DISTRIBUTOR ONLY, AND IS IN LIEU OF ALL OTHER
WARRANTIES, EXPRESS (OR IMPLIED, INCLUDING THE IMPLIED WARRANTIES OF FITNESS FOR
A PARTICULAR PURPOSE AND OF MERCHANTABILITY. THERE ARE NO WARRANTIES EXPRESS OR
IMPLIED EXCEPT AS APPEAR IN THIS PARAGRAPH 31.
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32. WARRANTIES OF OTHER MANUFACTURERS. Warranty coverage on certain
equipment which is furnished by AFC. but not manufactured by AFC, is limited to
the coverage provided by the manufacturer of that equipment. AFC will make
every reasonable effort to pass on the manufacturer-supplied warranty
information to Distributor. This coverage will not necessarily coincide with
the warranty provided by AFC on equipment of AFC's manufacture.
33. WARRANTIES OF DISTRIBUTOR. Distributor shall warrant the Equipment to
its own customers to at least the same extent as AFC warrants the Equipment to
Distributor. Distributor, and not AFC. shall be liable to its customers for any
defect in the Equipment, and in no event shall Distributor's customers have any
right against AFC arising out of matters in any way related to the Equipment.
34. DISTRIBUTOR'S DUTY TO INDEMNIFY. Distributor shall defend, indemnify
and hold harness AFC against any and all liability, Loss or damages AFC may
suffer as a result of claims, demands, costs or judgments against it for
personal injury or property damage or otherwise arising out of or in connection
with the Equipment or the condition, maintenance, possession, operation or use
of the Equipment, regardless of whether any such liability, loss or damage is
direct or indirect, consequential or special, or arises from principles of tort
or contract law or otherwise.
35. TENDER OF DEFENSE. Upon receipt of information regarding any claim
for which Distributor has a duty to indemnify under Paragraph 34 above, AFC
shall notify Distributor of such claim, in writing, within ten (10) days of
AFC's receipt of such claim. Distributor, upon written request by AFC, shall
promptly defend such at Distributor's expense. AFC agrees to provide reasonable
cooperation to Distributor, at Distributor's expense, in the defense or
settlement of any such claim. If Distributor fails to undertake and continue
such defense, AFC shall have the right (but not the obligation) to make and
continue such defense as it considers appropriate, and the expenses and costs
thereof, including but not limited to attorney's fees, together with the amounts
of any judgment rendered against AFC shall be paid by Distributor upon demand.
36. USE OF LICENSED SOFTWARE. AFC hereby grants to Distributor a
non-xclusive, royalty-free License to use, but not to copy in any way, the
software incorporated in the Equipment (hereinafter called "Licensed Software")
in and with the Equipment only. Distributor agrees to maintain the
confidentiality of the Licensed Software and not to make available the Licensed
Software to any third party without prior written approval of AFC, except for
sub-licenses to purchasers of Equipment. This sub-license shall emend only to
copies of the Licensed Software supplied to Distributor by AFC. The
restrictions contained in this License shall be imposed upon such sub-licensees.
In the event AFC determines that the Licensed Software being used in a
particular piece of Equipment was copied and not provided by AFC with the
Equipment, AFC reserves the right to suspend all support and/or maintenance of
such Equipment until software fees applicable to such Licensed Software have
been paid.
The License granted hereunder shall terminate concurrently with this
Agreement.
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37. GOVERNING LAW. The validity, interpretation, and performance of this
Agreement shall be controlled by and construed in accordance with the laws of
the State of California. United States of America, the state in which this
Agreement is being executed.
38. JURISDICTION. For any litigation, action, or dispute arising of or in
connection with this Agreement, each party hereto shall, at the request of the
other party, submit to the jurisdiction of an appropriate court in the State of
California, United States of America.
39. LICENSES. AFC shall obtain any U.S. export licenses required -for
shipment of Equipment or Licensed Software to Distributor. Distributor shall
ensure that none of the Equipment, Licensed Software or any other technical data
pertaining thereto are reexported or transmitted to a person or destination
proscribed by U.S. export control law, regulations or rulings. Distributor
shall comply with all other U.S. Export Administration regulations, including
the provisions of Section 373.3, a copy of which is attached as EXHIBIT G.
Copies of Section 387 concerning records and Section 374 concerning re-exports
are available from AFC upon request.
40. DAMAGES NOT COVERED. In no event shall AFC be liable for special,
incidental or consequential damages. AFC shall have no liability whatsoever for
delays in shipment or-failure to ship caused by fires, strikes, embargoes,
transportation delays, earthquakes, storms, wars, acts of war, governmental or
state regulations or any contingencies beyond the reasonable control of AFC.
41. AGREEMENT GOVERNS. Where there exists any conflict between this
Agreement and the standard terms and conditions of sale shown on the AFC invoice
form, this Agreement shall govern.
42. NON-WAIVER. The failure of either party at any time to require
performance by the other party of any portion hereof shall not affect in any way
the other party's full right to require such performance at any time thereafter,
nor shall the waiver by either party of a breach of any provision hereof be
taken or be held to be a waiver of the provision itself.
43. CAPTIONS. Captions and paragraph headings used herein are for
convenience only and are not a part of this Agreement and shall not be used in
construing it.
44. NO THIRD PARTY BENEFICIARIES. This Agreement is made and entered
solely for the benefit and protection of the parties hereto and their
successors, and no other person or entity shall have any right or right of
action hereunder.
45. BINDING. The terms of this Agreement shall be binding upon and inure
to the benefit of the successors and assigns of the parties hereto, provided,
however, that Distributor shall not assign any of its rights or obligations
hereunder without the prior written consent of AFC, and any such assignment
without such consent shall be void.
46. NO FURTHER RIGHTS Granted. The entry into this Agreement, or the sale
of any item by AFC pursuant hereto, does not convey to Distributor any license,
by implication, estoppel or otherwise, under patent claims or rights of AFC
covering the item or items, or any combination thereof with or without other
devices or elements.
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47. NOTICES. All notices required or contemplated under this Agreement
shall be deemed given ten (10)days after being sent via registered express mail
or facsimile, where the latter is followed by mailing the original cop addressed
to the parties as follows:
To AFC:
ADVANCED FIBRE COMMUNICATIONS, INC.
1445 McDowell Boulevard North
Petaluma, CA 94954, U.S.A.
To Distributor:
At the address set forth at the beginning of this
Agreement.
Either party may change the address at which it will receive notice upon
the giving, as provided above, of reasonable notice to the other party.
48. ENTIRE AGREEMENT. This Agreement contains all of the agreements,
understandings, representations, conditions, Warranties, and covenants made
between the parties hereto. Unless set forth herein, neither party shall be
liable for any representations made to the other party, and all modifications
and amendments hereto must be set forth in writing and signed by both parties.
49. ATTORNEYS FEES. In the event of litigation or any claim arising under
this Agreement, the prevailing party shall be entitled to reasonable attorneys'
fees and costs in addition to any other relief awarded by a court of competent
jurisdiction.
50. ENGLISH VERSION GOVERNS. In the event that this Agreement is
translated into any other language, the English language version hereof shall
govern in the event of any ambiguity.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first above written.
'AFC'
ADVANCED FIBRE COMMUNICATIONS, INC.
By Date:
----------------------------------- -----------------------------
"DISTRIBUTOR"
By Date:
----------------------------------- -----------------------------
Attachments:
EXHIBIT A- Equipment Subject to Agreement
EXHIBIT B- Territory
EXHIBIT C- Price List
EXHIBIT D- Discount Schedule
EXHIBIT E- Distributor's Preferred Carriers
EXHIBIT F- Price Change Policy
EXHIBIT G- U.S. Export Administration Regulations
Section 773.3 (1)
13
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EXHIBIT A
EQUIPMENT SUBJECT TO AGREEMENT
THE UNIVERSAL MODULAR CARRIER UMC-1000 E
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EXHIBIT B
TERRITORY
INDIA
15
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EXHIBIT C
PRICE LIST
[*]
16
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EXHIBIT D
DISCOUNT SCHEDULE
[*]
17
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EXHIBIT E
DISTRIBUTOR'S PREFERRED CARRIERS
[*]
18
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EXHIBIT F
PRICE CHANGE POLICY
[*]
19
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EXHIBIT G
U.S. EXPORT ADMINISTRATION REGULATIONS
SECTION 773.3 (1)
ATTACHED
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EXHIBIT I
Excerpt from the minutes of the September 14, 1995 AAL Partners' Meeting (dated
October 11, 1995):
MARKET RIGHTS
Ken Craft, Jon Grunes, Carl Grivner, Mike Hartfield, Glenn Lillich and
Ellen Schwab participated in a discussion on Market Rights. It was agreed to let
both Tellabs and AFC participate in the India market unrestricted. To eliminate
channel conflict, the group also agreed to evaluate a proposal where some
portion of the international market is divided country by country. In general,
the proposal would be based on the following:
- Pairs of countries with comparable markets would be listed; AFC and
Tellabs would alternatively pick a country in a pair.
- Unrestricted market rights would be granted for the selection of a
sales channel (AFC or Tellabs). The non-selecting sales channel would agree not
to sell in the other sales channel's selected countries.
- Exceptions to this proposal would be listed separately.
<PAGE>
SECRETARY'S CERTIFICATE
I, Dan E. Steimle, secretary of Advanced Fibre Communications, Inc.
("AFC"), do hereby attest that the attached "Exhibit I" to the Shareholder and
Joint Venture Agreement dated as of December 28, 1995 between AFC and Advanced
Fibre Communications (Hong Kong) Limited, and Harris Corporation, is a true and
correct excerpt of the minutes of the September 14, 1995 AAL Partners' Meeting
(dated October 11, 1995).
/s/ Dan E. Steimle
-----------------------------------
Dan E. Steimle
Secretary
<PAGE>
EXHIBIT J
SOFTWARE LICENSE AGREEMENT
by and between
Advanced Fibre Communications, Inc. and
Advanced Fibre Communications (Hong Kong) Limited
And
AFC Harris Multimedia Communications Private Limited
<PAGE>
TABLE OF CONTENT
Article 1 Definitions
Article 2 License Grant
Article 3 Delivery and Training
Article 4 Acceptance
Article 5 Consideration
Article 6 Warranty
Article 7 Duplication Fee Reports
Article 8 Rights of AFC
Article 9 Confidentiality
Article 10 Infringement
Article 11 Limitation of Liability
Article 12 Termination
Article 13 Assignment
Article 14 Export Controls
Article 15 Notices
Article 16 General Provisions
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This Software License Agreement is entered into as of December 28, 1995, by and
between
ADVANCED FIBRE COMMUNICATIONS, INC., a Delaware corporation located at 1445
McDowell Boulevard North, Petaluma, California 94954 U.S.A., and ADVANCED FIBRE
COMMUNICATIONS (HK) LIMITED, a Hong Kong company wholly owned by Advanced Fibre
Communications, Inc., whose registered office is at 9th Floor, 106A Lockhart
Road, Wanchai, with both companies acting jointly and severally (hereafter
collectively referred to as "AFC")
and
AFC Harris Multimedia Communications Private Limited, a Mauritius corporation
with a registered office in Mauritius, represented for the purposes of this
Agreement by AHMC's minority shareholder, Harris Corporation, a Delaware
corporation, acting through its Digital Telephone Systems Division at 300 Bel
Marin Keys Boulevard, Novato, California 94948 U.S.A. (hereafter referred to as
"AHMC"), based on the following:
1. AFC is engaged in the business of manufacture and distribution of
certain telecommunications products worldwide and wishes to expand the market
for its products, including the Product as defined in Article 1, into India;
2. AFC and Harris Corporation executed a Joint Venture and Shareholder
Agreement dated December 28, 1995 for the establishment of AHMC;
3. AHMC is engaged in the business of manufacture and distribution and
arranging for the manufacture and distribution of telecommunications products
and services for the Indian market; and
4. Pursuant to the above referenced Joint Venture and Shareholder
Agreement, AHMC desires to obtain from AFC, and AFC desires to grant to AHMC,
certain licenses and right with respect to the Licensed Software, as defined
below, in connection with the Licensed Product, as defined below, on the terms
and conditions set forth in this Agreement.
NOW THEREFORE, AFC and AHMC agree as follows:
1 DEFINITIONS
For purposes of this Agreement, the following terms shall have the following
meanings:
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1.1 "Confidential Information" shall mean the Technical Documentation, the
Licensed Software, and any information in whatever form which is related to
the Technical Documentation or the Licensed Software or designated as
confidential.
1.2 "Designated Indian Entity" shall have the meaning given that term in the
Joint Venture Agreement.
1.3 "Duplication Fee" shall have the meaning defined in Section 5.2.
1.4 "Duplication Fee Reporting Period" shall mean any of the four quarters
ending on December 31st, March 31st, June 30th, and September 30th of each
year.
1.5 "Duplication Fee Due Day" shall mean the 10th day following each
Duplication Fee Report Due Day.
1.6 "Duplication Fee Report Due Day" shall mean the 30th day following the
last day of each Duplication Fee Reporting Periods.
1.7 "Effective Date" shall mean the Effective Date as that term is defined in
the Joint Venture Agreement.
1.8 "End User Sublicense Agreement" shall mean a written end user sublicense
agreement with an end user or purchaser of the Licensed Product containing
terms not less stringent than the those contained in this Agreement for such
end users to use the Object Form on the Licensed Product.
1.9 "Joint Venture Agreement" shall mean the Joint Venture and Shareholder
Agreement between AFC and Harris Corporation acting through its Digital
Telephone Systems Division dated December 28, 1995.
1.10 "Licensed Product" shall have the meaning given that term in the Joint
Venture Agreement and Exhibit G to the Joint Venture Agreement.
1.11 "Licensed Software" shall mean the programs in Object Form which is
necessary to operate the Licensed Product with all its full functions and
features up to but not beyond Release 2.1EE, as specified in Appendix 1 to
this Agreement including future additions thereto approved in writing by AFC
and all documentation and related materials needed by AHMC to utilize them.
1.12 "List Prices of the Licensed Software" shall mean the published list prices
of the License Software expressed in US Dollars net of any sales, tax, excise
tax, withholding tax.
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duties, and any other fees and charges and periodically adjusted in
accordance with Section 5.3.
1.13 "Object Form" shall mean any machine translated version of the Licensed
Software which can be made executable by computer equipment.
1.14 "Source Form" shall mean the original human readable form on any media of
the Licensed Software.
1.15 "Specifications" shall mean the specifications of the Licensed Software
provided by AFC to AHMC, a copy of which is attached to, and forms part of,
this Agreement.
1.16 "Technical Documentation" shall have the meaning given that term in the
Joint Venture Agreement.
1.17 "Third Party Manufacturer" shall mean any entity which manufactures,
assembles, or supplies the parts and components of, the Licensed Product for
or on behalf of AHMC.
1.18 "Update" shall mean an enhancement, change or error correction in or to the
Licensed Software provided by AFC to AHMC pursuant to this Agreement or
required to be provided by AFC to AHMC under the Joint Venture Agreement.
2 LICENSE GRANT
2.1 LICENSE GRANT. AFC grants to AHMC and AHMC accepts from AFC, subject to
Section 4.2 of the Joint Venture Agreement:
(a) a license for AHMC to be the exclusive holder of the right to use,
operate, test, maintain, duplicate, make copy of, install and embed,
distribute and market the Licensed Software in connection with the Licensed
Product in the Territory in India;
(b) a license for AHMC to be the exclusive holder of the right to grant
sublicenses to Designated Indian Entities for such entities to use, operate,
test, maintain, duplicate, make copy of, install and embed, distribute and
market the Licensed Software in connection with the Licensed Product in the
Territory;
(c) a license for AHMC to be the exclusive holder of the right to grant
sublicenses to Designated Indian Entities for such entities to grant further
the sublicense to their distributors and end users to use, operate, and
maintain the Licensed Software solely for the purpose of operating the
Licensed Product in the Territory.
2.2 THIRD PARTY MANUFACTURERS. The licenses granted in section 2.1 except for
the license to grant any sublicense shall
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extend to any Third Party Manufacturer approved in writing by the board of
AHMC who agrees to be bound by terms not less stringent than the relevant
terms in this Agreement.
2.3 THIRD PARTY CONTRACTORS. The License granted in Section 2.1 except for the
license to grant sublicense shall extend to any Third Party Contractor
approved in writing by AFC who agrees in writing to be bound by this
Agreement to the same extent as he would be bound if he were an employee of
AHMC. only those Third Party Contractors who will work with the Source Form
of the Licensed Software shall require prior written approval by AFC. AFC
shall not unreasonably deny or delay such approval.
2.4 Not withholding any provision to contrary, the licenses and rights granted
under Section 2.1 shall become effective upon the Effective Date, and shall
remain in full force and effect for as long as provided for in the Joint
Venture Agreement.
2.5 In the event of termination of the Joint Venture Agreement resulting in
dissolution of AHMC, the licenses granted hereunder and sublicenses granted
pursuant to this Agreement shall remain and continue in full effect, from the
effective date of such termination, for two years or a period of time
sufficient to allow AHMC and its sublicensed Designated Indian Entities to
obtain and procure the alternative licenses and technology, material supply
and technical support so as to continue the principal business of AHMC
contemplated under the Joint Venture Agreement and the agreements attached
thereto as exhibits, whichever is longer.
2.6 Notwithstanding any other provision to the contrary, under no circumstance
shall termination or expiration of the Joint Venture Agreement or the
licenses under this Agreement terminate or otherwise affect the effectiveness
of the sublicenses already granted prior to such termination or expiration by
AHMC to Designated Indian Entities pursuant to AHMC's licenses and rights
under Section 2.1.
2.7 Without limiting the generality of Section 2.1, in case of any
inconsistency between AHMC's licenses and rights under Section 2.1 hereof and
the provisions under Section 4.2 of the Joint Venture, Section 2.1 shall be
construed to allow AHMC to do all things, with respect to the Licensed
Software in India, which AFC is not expressly prohibited from doing worldwide
under its prior and existing agreements with other entities.
2.8 Sublicense Enforcement. AHMC agrees to inform AFC of any breach of any
sublicense granted by AHMC under this Agreement and to take reasonable steps
to enforce any sublicense granted by AHMC under this Agreement.
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2.9 MODIFICATION. AHMC may modify the Licensed Software to meet the Indian
government requirements or the Indian market needs and maintain modified
Licensed Software for AHMC's use.
2.10 SOURCE CODE. AFC does not grant, and nothing in this Agreement shall be
construed to constitute granting of, the Source Code to AHMCI.
3 DELIVERY AND TRAINING
3.1 DELIVERY. AFC will deliver to AHMC, within two months or such time as AFC
and AHMC shall otherwise agree in writing, two mater copies of the Licensed
Software and sufficient documentation for a complete technical understanding
of the Licensed Software. The master copies shall in delivered in such a form
and on such media as shall allow AHMC to duplicate and embed the Licensed
Software into the Licensed Product in the same or substantially similar
manner as is used currently used by AFC. The documentation may be in printed
or machine readable form. The media used for delivery of machine readable
items shall be in the form currently existing at AFC's facilities in
California.
3.2 TRAINING AND TECHNICAL SUPPORT. Any training or technical assistance shall
be provided in accordance with the Manufacturing and Technical Assistance
Service Agreement between AFC and AHMC substantially in form attached as Exhibit
C of the Joint Venture Agreement.
4 ACCEPTANCE
4.1 ACCEPTANCE. The sole criterion for acceptance of the Licensed Software
shall be a written certificate executed by AHMC certifying conformance of the
delivered Licensed Software to the Specifications. If no written notice is
received by AFC within 60 days of delivery, the Licensed Software shall be
deemed accepted.
4.2 REJECTION. If AHMC rejects a delivered Licensed Software, then AHMC shall
so notify AFC in writing specifying the reason(s) for rejection. AFC will
have 30 days from the date of rejection to cure any deficiencies. AFC will
redeliver the Licensed Software or a written statement providing the cure to
AHMC after which the provisions of Section 4.1 will again apply, until such
time as AFC shall have fulfilled its obligation to deliver.
5 CONSIDERATION
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[*]
6 DUPLICATION FEE REPORTS
6.1 AHMC represents and covenants to AFC as a party to this Agreement and to
AFC and Harris Corporation as shareholders in AHMC that AHMC shall not grant
any sublicense to any Designated Indian Entity unless such the latter
executes a written sublicense agreement with AHMC containing, among other
terms and conditions, the provisions in Sections 6.2 through 6.8.
6.2 The sublicensed Designated Indian Entity shall send to AHMC a quarterly
Duplication Fee report on or before each Duplication Fee Report Due Day. Such
reports shall indicate the number of copies of the Licensed Software
duplicated and the number of the Licensed Product sold or otherwise disposed
of during each Duplication Fee Reporting Period.
6.3 The sublicensed Designated Indian Entity shall keep the records of the
Licensed Software duplicated and the Licensed Products sold, or otherwise
disposed of and other related
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information in sufficient detail to enable AHMC to verify that the
Duplication Fee payments are correct.
6.4 The sublicensed Designated Indian Entity shall make its records available
for inspection by AHMC, or if requested by the Designated Indian Entity, by
an independent accountant selected by mutual agreement (the "Accountant"),
during reasonable business hours for purposes of verification of the
correctness of Duplication Fee reports and payments, including determinations
of which sales by such Designated Indian Entity are or are not Duplication
Fee bearing. In order for AHMC or the Accountant to conduct such inspection,
the Designated Indian Entity shall maintain adequate records of the financial
data relevant to and sufficient for a meaningful inspection and observe at
least the same standards as it observes in keeping its financial records of
its own products.
6.5 Except by agreement between them or upon a court order showing appropriate
cause, the Accountant shall report to AHMC and the Designated Indian Entity
only that in his judgment the records, reports, and Duplication Fee payments
are or are not in accord with the agreement between them, indicating the
nature and extent of any error or irregularity observed or believed to have
occurred. Except for such reports by the Accountant and subject to any other
agreement between them or a court order showing appropriate cause, the
Accountant shall keep fully confidential all the information respecting the
Designated Indian Entity and its business acquired in the course of his
inspection.
6.6 AHMC may pay the cost of the Accountant's inspection, but if a Designated
Indian Entity is found in any such inspection to have failed to comply
adequately with the material provisions of the agreement between them, or
that Duplication Fee is not paid correctly, then the Designated Indian Entity
to bear the cost of such inspection and reimburse AHMC for any such costs, if
paid by AHMC, within thirty (30) days after the date of invoice by AHMC.
6.7 The Designated Indian Entity shall keep the records required to be made
available to AHMC or the Account under this Article, for three years.
6.8 AHMC may dispute every Duplication Fee report at any time during the first
three years after it is submitted by the Designated Indian Entity. In AHMC
does not dispute a Duplication Fee report within this period, then such a
report shall be conclusively presumed correct.
7 WARRANTY
7.1 EXTENT OF WARRANTY. AFC warrants to AHMC that the master copies of the
Licensed Software delivered hereunder shall
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conform to the Specification and shall enable AHMC to duplicate and embed the
Licensed Software into the Licensed Product so long as AHMC receives the
necessary and appropriate technical assistance and training from AFC under
the Manufacturing and Technical Assistance Service Agreement. AFC and AHMC
shall always endeavor to work together in good faith to maintain and upgrade
AHMC's or its sublicensed Designated Indian Entity's duplication capability
in India.
7.2 EXCEPTIONS FOR MODIFICATION. The provisions of Section 6.1 shall not apply
in the case of modifications by AHMC to the Source Form where the
modifications deviate from those permitted by the Specifications or
documentation for the Licensed Software.
7.3 LIMITATION. AFC MAKES NO OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING
WITHOUT LIMITATION, WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE WITH REGARD TO ANY PRODUCT, SERVICE OR RELATED MATERIALS PROVIDED
UNDER THIS AGREEMENT.
8 RIGHTS OF AFC
8.1 RIGHTS RETAINED BY AFC. AFC may use, develop, market, license, or
otherwise dispose of the Licensed Software or concepts embodied therein
anywhere in the world. Nothing herein shall be construed to grant to AHMC or
any of its sublicensees any rights in or to any present or future products of
AFC, whether or not similar to the Licensed Software, except for the rights
in respect of the Licensed Software and updates expressly granted by this
Agreement.
8.2 PROPRIETARY RIGHTS. AFC represents that the Licensed Software are owned by
AFC and are proprietary in nature. AHMC shall respect AFC' claim of
proprietary right and shall not use the Licensed Software or any component
thereof except for the purposes for which it is made available under this
Agreement.
8.3 PROHIBITED USE OF AFC' NAME. AHMC agrees not to use AFC' name in any
fashion that would imply that AFC endorsed any product of AHMC or directly
participated in its manufacture unless such is provided in a written
agreement between AFC and AHMC.
9 CONFIDENTIALITY
9.1 CONFIDENTIALITY. AHMC shall not reproduce, duplicate, copy or otherwise
disclose, distribute or disseminate any Confidential Information in any
media, other than as provided for in this Agreement.
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9.2 SAFEGUARD OF AFC, INFORMATION. AFC represents that the Licensed Software
is confidential and proprietary to AFC and AHMC agrees to receive and
maintain the Licensed Software and the information regarding its design and
implementation as Confidential Information, using at a minimum the same
degree of care as is used by AHMC for its own confidential information. AHMC
shall not disclose any confidential information of AFC to any third party
without AFC' prior written consent other than as provided for herein for the
purposes of this Agreement.
9.3 RECIPROCAL NON-DISCLOSURE. During the term of the Agreement and for five
(5) years thereafter, AFC and AHMC (i) shall treat as confidential and
proprietary all information which is disclosed by one party to another and
which is clearly identified is confidential or proprietary, or in the case of
unpublished information not so identified, each party shall treat that
information as confidential unless it obtains a written release from the
other party; (ii) shall not disclose such information to any employee,
Affiliate, Third Party Contractor, Third Party Manufacturer or other third
party who has not executed a confidentiality agreement, employment agreement
or other contract having terms no less stringent than those contained
herein;(iii) shall disclose such information only to any employee, Third
Party Contractor or Third Party Manufacturer having a specific need to know
such information for the purpose of this Agreement; and (iv) shall use
reasonable efforts to ensure that such employee, Third Party Contractor or
Third Party Manufacturer shall use such information only in the furtherance
of the purpose of this Agreement.
9.4 EXCEPTION. The foregoing shall not apply to any information that:
(a) is already in the possession of both parties, other than as result of
the breach of a legal obligation by one of them;
(b) is or becomes a part of the public knowledge or literature through no
wrongful act of either party;
(c) is approved for release in writing by the party to whom the
confidential or proprietary information belongs;
(d) is or was developed independently;
(e) is or becomes the subject matter of a patent application which is
later abandoned;
(f) is disclosed pursuant to the lawful requirement or request of a
governmental agency.
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9.5 ORAL DISCLOSURE. Information disclosed orally shall be considered
confidential only if it is (i) designated as confidential by the discloser at
the time of disclosure, and (ii) summarized and clearly identified as being
confidential in a writing, which is received by the recipient of the
confidential information within thirty (30) days after the disclosure.
10 INFRINGEMENT
10.1 INDEMNITY. AFC represents that except for the pending legal dispute between
AFC and DSC Communications corporation, it has sufficient right, title and
interest in the Licensed Software to enter into this Agreement. AFC agrees,
at its own expense, to defend AHMC and hold AHMC harmless against any suit,
claim, or proceeding brought against AHMC by a third party alleging that any
use of the Licensed Software infringes the United States copyright, patent,
trademark, or trade secrets of such third party, provided that AHMC (i)
promptly notifies AFC in writing of such suit, claim or proceeding, (ii)
allows AFC, at its own expense, to direct the defense f such suit, claim or
proceeding, (iii) gives AFC all information and assistance necessary to
defend such suit, claim or proceeding, and (iv) does not enter into any
settlement of any such suit, claim or proceeding without AFC' written
consent.
10.2 NON-INFRINGEMENT KNOWLEDGE REPRESENTATION. AFC represents to the best of
its knowledge that except for the pending legal dispute between AFC and DSC
communications corporation, the Licensed Software does not infringe any valid
patent right, copyright or trade secret right in the geographic territory of
the license granted by this Agreement.
10.3 LIMITED INDEMNITY FOR MODIFICATION. AFC shall have no liability for any
claim that AFC lacks right, title or interest to the Licensed Software or any
claim of infringement if it is proven that the claim arises directly out of
AHMC's use of the Licensed Software and the claim would be avoided or
defeated if the Licensed Software had not been modified by AHMC or combined
or integrated by AHMC with non-AFC's software programs except to the extent
that (i) AFC approved the modification in writing or (ii) the combination or
integration is a direct contemplated use of the Licensed Software and is
required to utilize the Licensed Software in accordance with the
Specifications.
11 LIMITATION OF LIABILITY
11.1 MUTUAL LIMIT. In no event shall AFC and AHMC be liable to each other for
any indirect, special, or consequential damages in connection with or arising
out of its performance or failure to perform pursuant to this Agreement.
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12 TERMINATION
12.1 TERMINATION FOR DEFAULT. Upon breach of any obligations under this
Agreement by either party, the other party may terminate this Agreement upon
thirty (30) days written notice to the party defaulting. Termination will
become effective upon expiration of the 30 day period unless the defaulting
party cures the default prior thereto.
12.2 TERMINATION FOR INSOLVENCY. If either party: (a) becomes insolvent; (b)
makes a general assignment for the benefit of its creditors (c) files or has
filed against it a petition in bankruptcy or seeks reorganization; (d) has a
receiver appointed over any of its assets; or (e) institutes any proceedings
for liquidation or winding up; then the other party may, in addition to other
rights and remedies it may have, terminate this Agreement immediately by
written notice.
12.3 TERMINATION BY AFC. AFC may terminate this Agreement upon a 30-day written
notice if AHMC fails to fulfill its covenant under Section 5.2
12.4 TERMINATION UNDER JOINT VENTURE AGREEMENT. This Agreement shall terminate
as provided for in the Joint Venture Agreement.
12.5 EFFECT OF TERMINATION. The effect of termination of this Agreement and the
continued force or termination of the licenses granted hereunder shall be
governed as provided for in the Joint Venture,
12.6 SURVIVAL OF OBLIGATIONS. The following obligations shall survive
termination of this Agreement:
Section 5.2 (Covenant to Charge Duplication Fee as pertains to Duplication
Fees accrued before termination);
Article 6 (Duplication Fee Reports, as pertains to Duplication Fees accrued
before termination);
Article 7 (Warranty as pertains the Licensed Software duplicated and
distributed before termination)
Article 8 (Rights of AFC);
Article 9 (Confidentiality);
Article 10 (Infringement);
Article 11 (Limitation of Liability); and
other provisions whenever their spirit and intent in effecting such provisions
compel survival;
13 ASSIGNMENT
13.1 ASSIGNMENT. This Agreement may not be assigned by either party without
prior written consent from the other party, which consent shall not be
unreasonably withheld.
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13.2 ASSIGNEES BOUND. Subject to Section 13.1, this Agreement will inure to the
benefit of and be binding upon either party's successors and assignees.
14 EXPORT CONTROLS
14.1 EXPORT CONTROLS IN GENERAL. In compliance with U.S. Export Administration
Regulations, AHMC assures AFC that unless prior authorization is obtained
from the U.S. Department of Commerce Office of Export Administration where
applicable, it shall not intend to and will not knowingly export or reexport,
directly or indirectly through its affiliates or sublicensees, any of the
Licensed Software, documentation or confidential information provided
hereunder or under any ancillary agreements hereto, to any country to which
such exports or reexports are prohibited by the Export Administration
regulations of the U.S. Department of Commerce.
15 NOTICES
15.1 Notices. All notices, requests and demands, and other communications
required or permitted under this Agreement shall be in writing and shall be
deemed to have been duly given, made, and received only (i) upon delivery, if
delivered personally to a party; (ii) on the following business day, if by
facsimile transmission; or (iii) three (3) business days after deposit, if
delivered to a internationally recognized courier service offering express
delivery. All notices shall be sent to the following addresses or facsimile
numbers, (or to such other addresses or facsimile numbers as one party
notifies the other of in writing in accordance with the foregoing):
If to AFC:
To Advanced Fibre Communications, Inc.'s address first above written.
If to AHMC:
To its registered office.
16 GENERAL PROVISOS
16.1 JOINT VENTURE AGREEMENT PREVAILS. In the event that any provision of this
Agreement is inconsistent with the provisions of the Joint Venture Agreement,
then the terms of the Joint Venture Agreement will prevail.
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16.2 FORCE MAJEURE. Neither party shall be responsible for delays or failures
in performance resulting from acts beyond the control of such party. Such
acts shall include but not be limited to acts of God, labor conflicts, acts
of war or civil disruption, governmental regulations imposed after the fact,
public utility out failures, industry wide shortages of labor or material, or
natural disasters.
16.3 COMPLIANCE WITH LAWS. AFC and AHMC each agree that it will perform its
obligations under this Agreement in accordance with all applicable laws,
rules and regulations now or hereafter in effect.
16.4 SEVERABILITY. If any term or provision of the Agreement shall be found to
be illegal or unenforceable therein, this Agreement shall remain in full
force and effect and such term or provision shall be deemed stricken.
16.5 ATTORNEY'S FEES. If either party employs attorneys to enforce any rights
arising out of or relating to this Agreement, the prevailing party in such
disputes shall be entitled, in addition to its other rights hereunder, to
recover reasonable attorney's fees and related expenses, including the fees
and expenses of any appeal.
16.6 GOVERNING LAW. Except for that body of laws relating to conflict of laws,
this Agreement shall be governed in all respects by the laws of the State of
California, excluding its choice of law provisions. AFC and AHMC agree that
any judicial dispute shall be resolved by a trial judge as trier of fact in
the Federal District Court in the Northern District of the State of
California or the California State Court in Marin County. AFC and AHMC
hereby agree in advance to waive the right to trial by jury.
16.7 TERM. This Agreement shall become effective on the Effective Date, and
shall remain in full force and effect for so long as provided for in the
Joint Venture Agreement.
16.8 ENTIRE AGREEMENT. This Agreement and the Joint Venture Agreement supersede
all prior agreements regarding the Licensed Software and constitutes the
entire understanding between the parties with respect to the subject matter
thereof. No amendment to this Agreement shall be effective unless it is in
writing, dated subsequent hereto, and is signed on behalf of AHMC and AFC by
their duly authorized representatives.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by their respective duly authorized representatives. All copies of this
Agreement, signed by both parties, shall be deemed originals.
Advanced Fibre Communications, Inc.
By: /s/ Donald Green
---------------------------------
Name: Donald Green
---------------------------------
Title: President & CEO
---------------------------------
Advanced Fibre Communications Hong Kong Limited
By: /s/ Donald Green
---------------------------------
Name: Donald Green
---------------------------------
Title: Chairman of the Board
---------------------------------
AFC Harris Multimedia Communications Private Limited
By: /s/ G.L. Doyle
---------------------------------
Name: G.L. Doyle
---------------------------------
Title: V.P. Gen'l. Mgr.
---------------------------------
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APPENDIX I
LICENSED SOFTWARE
"Licensed Software" shall mean the software programs in object form which are
necessary to operate and maintain Licensed Product. The functional
specification and features of Licensed Software are described below as well as
in the System Data Sheets dated March 1995 attached to Exhibit G of this
Agreement:
1. Current Release:
Release 2.1EE
2. Future Release
Release 3.OEE
Estimated date of commercial release is _________________________ .
3. The following releases, functions, or features, if and when developed by
AFC, shall become part of Licensed Software under this Agreement:
V5.1 Interface
V5.2 Interface
<PAGE>
TELLABS CONTRACT NO.: JDL940399LEG-00
JOINT VENTURE AND PARTNERSHIP AGREEMENT
This Joint Venture and Partnership Agreement ("Agreement") is entered into as of
April 11, 1994 by and between Advanced Fibre Communications, a California
corporation located at 1445 McDowell Boulevard North, Petaluma, California 94975
("AFC") and Tellabs Operations, Inc. a Delaware corporation, located at 4951
Indiana Avenue, Lisle, Illinois 60532 ("Tellabs").
WHEREAS, both Tellabs and AFC are in the business of manufacturing, marketing
and distributing telecommunications products throughout the world;
WHEREAS, Tellabs, either directly or through a wholly-owned subsidiary, and AFC,
either directly or through a wholly-owned subsidiary, wish to enter into a joint
venture in the form of a general partnership to design, develop, manufacture and
distribute a product line and its derivatives, which will allow telephone
services to be provided over existing cable television ("CATV") installed
coaxial systems as well as other transmission media.
In consideration of the mutual promises and covenants set forth herein, AFC and
Tellabs agree as follows:
SECTION 1
DEFINITIONS
1.1 AFFILIATE
The term "Affiliate" shall mean an individual or entity that directly
or indirectly controls, is controlled by, or is under common control
with, the entity specified. For purposes of this definition, "control"
shall mean beneficial ownership of more than 50% of the voting stock
of, or more than 50% interest in the income of, such entity.
1.2 ALTERNATE PROVIDERS
The term "Alternate Providers" shall mean competitive access
providers, alternate local transport service providers, alternate
local access carriers, multiple system operators, or any company,
subsidiary, partnership, co-venture, or other entity providing
alternate telephony services. "Alternate Provider" does not include
wireless service providers except those affiliated with an Alternate
Provider entity ("Wireless Affiliates").
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TELLABS CONTRACT NO.: JDL940399LEG-00
1.3 BUSINESS PLAN
The term, "Business Plan" shall mean the business plan approved by the
Partners' Committee pursuant to Section 2.8 hereof including but not
limited to revenue and income projections, cash flow plans,
manufacturing plans, and high-level development plans. The Business
Plan shall detail the Company's activities during the development and
distribution of the Product and shall contain such other matters as
the Partners' Committee shall determine.
1.4 DESIGN COMMITTEE
The term "Design Committee" shall mean a Design Committee established
pursuant to Section 3.2 hereof.
1.5 DISTRIBUTOR
The term "Distributor" shall mean any person or entity who has been
granted the right to distribute any products of AFC or its
Affiliate(s) and/or Tellabs or its Affiliate(s), either directly by
such party or indirectly under authority granted by such party,
subject to the restrictions set forth in Section 6.1.
1.6 EFFECTIVE DATE
The term "Effective Date" shall mean the date first set forth above in
this Agreement.
1.7 END USER
The term "End User" shall mean any person or entity who has been
granted the right to use, but not to distribute, any products sold by
AFC and/or Tellabs, either directly by such party or indirectly under
authority granted by such party.
1.8 ENHANCEMENTS
The term "Enhancements" shall mean revisions to a product (Hardware
and/or Software) which materially alter and/or add to its architecture
or fundamental functionality.
1.9 ENGINEERING DESIGN PACKAGE
The term "Engineering Design Package" shall mean the set of
documentation for the design of the J.V. Product, and shall include,
but may not be limited to, engineering design specifications,
engineering test specifications, costed bill of materials, parts list,
board lay-outs and schematics. The Engineering Design Package shall
be designed to comply with the design standards set forth in the MRD,
and shall include, at a minimum, the same level and types of
documentation developed by AFC for the UMC 1000.
1.10 HARDWARE
The term "Hardware" shall mean equipment, modules, assemblies and
subassemblies but does not include Software.
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TELLABS CONTRACT NO.: JDL940399LEG-00
1.11 IMPROVEMENTS
The term "Improvements" shall mean fixes, corrections or work-arounds
to errors in a product as well as any other improvements in system
performance, modifications or revisions which do not materially alter
the original functional characteristics of such product.
1.12 INITIAL DESIGN AND DEVELOPMENT PHASE
The term "Initial Design and Development Phase" shall mean the period
of time beginning on the Effective Date and ending on the date that
the J.V. Product first becomes generally available, which is defined
as the validation review (VR) date.
1.13 J.V. COMPANY
The term "J.V. Company" shall mean the general partnership formed by
the Partners pursuant to the terms of this Agreement.
1.14 J.V. PRODUCT(S)
The term "J.V. Product(s)" shall mean product components (both
Hardware and Software) and their derivatives to be developed by the
J.V. Company. Without limiting the generality of the foregoing, J.V.
Products do not include UMC 1000 System Components with or without
minor modifications as referred to in Section 1.32.
1.15 J.V. PRODUCT TECHNOLOGY
The term "J.V. Product Technology" shall mean all technical
information and know-how developed by or for the J.V. Company and
embodied in the J.V. Product(s) including without limitation, Software
related thereto, together with all patents and applications for
patents throughout the world, all copyrights, all trade secrets, and
all other forms of intellectual property relating thereto. Unless
otherwise agreed in writing by the Partners, the J.V. Product
Technology does not include any other AFC or Tellabs technology
including but not limited to the UMC 1000 Technology developed by AFC.
1.16 LICENSED ENHANCEMENTS
The term "Licensed Enhancements" shall mean Enhancements to the UMC
1000 which are licensed to the J.V. Company hereunder.
1.17 MANUFACTURING RELEASE PACKAGE
The term "Manufacturing Release Package" shall mean the set of
documentation developed by or for the J.V. Company necessary and
sufficient to manufacture the J.V. Product, and shall include, but may
not be limited to, in-process manufacturing documentation and
manufacturing test specifications. The Manufacturing Release Package
shall be designed to comply with the manufacturability standards set
forth in the MRD, and shall include, at a minimum, the same level and
types of documentation used by other joint venture manufacturers of
the UMC 1000.
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TELLABS CONTRACT NO.: JDL940399LEG-00
1.18 MARKET STUDY
The term "Market Study" shall mean that market information which was
developed by Tellabs prior to the Effective Date relating to the J.V.
Product(s).
1.19 MRD
The term "MRD" shall mean the Marketing Requirements Document to be
developed pursuant to Section 3.1 hereof, as the same may be amended
from time to time. Deliverables to be specified in the MRD shall
include, at a minimum, an Engineering Design Package and a
Manufacturing Release Package.
1.20 NET CUMULATIVE REVENUE
The term "Net Cumulative Revenue" shall mean the aggregate Net Selling
Price for all UMC 1000 System Components sold by Tellabs or its
Affiliates.
1.21 NET SELLING PRICE
The term "Net Selling Price" shall mean invoice price less credits,
returns, shipping costs, taxes and discounts actually paid or allowed
but not less fees or commissions to agents, representatives or others,
and, where applicable, shall include license fees.
1.22 PARTNER(S)
The term "Partner" or "Partners" shall mean either Tellabs or AFC, or
a wholly-owned subsidiary designated by either or both of them.
1.23 PRE-EXISTING PRODUCT
The term "Pre-existing Product" shall mean the UMC 1000 product
developed by or for AFC as described in Exhibit A hereto. Exhibit A
will be agreed upon by the Partners' Committee and attached to this
Agreement by April 29, 1994, as provided in Section 3.1 hereof. The
Pre-existing Product shall also include those Enhancements listed on
Exhibit A, which AFC hereby agrees to develop.
1.24 PRE-EXISTING TECHNOLOGY
The term "Pre-existing Technology" shall mean all technical
information and know-how developed by or for AFC and embodied in the
Pre-existing Product (as defined in Section 1.23) whether developed
prior to or after the date thereof, including but not limited to
Software, together with all patents and applications for patents
throughout the world, all copyrights, all trade secrets, and all other
forms of intellectual property relating thereto. Without limiting the
generality of the foregoing, AFC shall be obligated to ensure that the
Pre-existing Technology includes documentation substantially
equivalent to that described in Sections 1.9 and 1.17, whether
available directly from AFC or a third party such as the manufacturer
thereof.
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TELLABS CONTRACT NO.: JDL940399LEG-00
1.25 PRODUCT(S)
The term "Product(s)" shall mean the complete system level product
(both Hardware and Software) and its derivatives sold pursuant to this
Agreement and shall include both J.V. Product(s) and UMC 1000 System
Components. The parties intend that the Product(s) will allow
telephone services to be provided over existing CATV installed coaxial
systems as well as other transmission media.
1.26 PRODUCT SUPPORT PLAN
The term "Product Support Plan" shall mean the product support plan
referred to in Section 7.2, as such plan may be amended from time to
time.
1.27 SOFTWARE
The term "Software" shall mean computer programs, procedures, rules
and associated documentation designed to make use of and extend the
capabilities of Hardware. Software includes, but is not limited to
source codes, object codes for control programs, operating system
programs, general application programs, special application programs,
programming aids, routines, subroutine translations, compilers,
diagnostics, firmware, proprietary VLSI devices, databases,
documentation to maintain, describe and use any of the foregoing, and
other related programs.
1.28 TERM
The term "Term" shall mean the term of this Agreement as set forth in
Section 11.
1.29 TRANSFER
The term "Transfer" shall mean to sell, transfer or otherwise assign.
1.30 UMC 1000
The term "UMC 1000" shall mean the AFC product which is currently
called the UMC 1000, including any Improvements and Licensed
Enhancements embodied therein during the Term of this Agreement.
1.31 UMC 1000 TECHNOLOGY
The term "UMC 1000 Technology" shall mean all technical information
and know-how owned by, licensed to, or developed by or for AFC
relating to the UMC 1000, including any Improvements and Licensed
Enhancements thereto developed during the Term hereof and offered to
and accepted by the J.V. Company, including without limitation,
Software related thereto, together with all patents and applications
for patent throughout the world, all copyrights, all trade secrets,
and all other forms of intellectual property relating thereto.
Without limiting the generality of the foregoing, the UMC Technology
shall include documentation substantially equivalent to that described
in Sections 1.9 and 1.17, whether available directly from AFC or a
third party such as the manufacturer thereof.
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1.32 UMC 1000 SYSTEM COMPONENTS
The term "UMC 1000 System Components" shall mean the modules, Software
and system assemblies and subassemblies which are substantially
identical to those in the UMC 1000, except for any minor
modifications, including but not limited to private labeling and
software modifications which do not substantially change or supplement
their functionality.
SECTION 2
FORMATION, ORGANIZATION AND MANAGEMENT OF THE J.V. COMPANY
2.1 FORMATION
Effective as of the Effective Date, the Partners hereby cause the J.V.
Company to be formed as a partnership. Each Partner shall own a 50%
interest in the J.V. Company.
2.2 CONTRIBUTIONS
The Partners agree to contribute the following consideration to the
J.V. Company:
a. Within [*] days of the Effective Date, Tellabs (or a wholly-
owned subsidiary which has been designated as the Partner) will
contribute [*] the J.V. Company, [*] of which will
be in the form of a cash contribution and the balance of which
will be [*].
b. Within [*] days of the Effective Date and subject to the
terms of the rights set forth in Section 4.1, AFC will make the
Pre-existing Technology (except those Licensed Enhancements not
yet available) available to the J.V. Company. The Pre-existing
Technology is valued at [*]. Thereafter, subject to
subsection (c) below, AFC will make available to the J.V. Company
(i) the Licensed Enhancements defined in Exhibit A as being part
of the Pre-existing Technology; (ii) all Improvements relating to
the UMC 1000 which become available during the Term hereof; and
(iii) such other Enhancements as are agreed upon by the Partners,
pursuant to subsection (c) below. In the event that a Software
release which contains Improvements for the UMC 1000 also
contains Enhancements which are not being licensed to the J.V.
Company, AFC agrees to provide a separate unbundled fully tested
release containing all such Improvements.
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c. The Partners intend that the basic functionality of the Product
be kept as close as possible to the basic functionality of the
UMC 1000. Accordingly, AFC will offer all other Enhancements to
the UMC 1000 to the J.V. Company subject to agreement by the
Partners' Committee as to (i) the valuation of such Enhancement
and; (ii) a mechanism for maintaining both Partners' equal
ownership rights in the J.V. Company.
2.3 MANAGEMENT
a. PARTNERS' COMMITTEE
The J.V. Company will be managed by a Partners' Committee
composed of four members. Each Partner shall appoint two (2)
members to the Partners' Committee. All Partners' Committee
decisions will require the approval of a majority of the members.
The number of members on the Partners' Committee shall not be
increased or decreased without the prior written consent of both
Tellabs and AFC. The J.V. Company shall bear all reasonable
travel expenses of any member attending a Partners' Committee
meeting.
The Partners will designate one Partners' Committee member as
Chairman of the Committee. The Chairman will be responsible for
calling and conducting meetings The Chairman shall change on a
semi-annual basis and shall be designated first by Tellabs, then
by AFC on an alternating basis.
Partners' Committee meetings shall be held at least quarterly
during the Initial Design and Development Phase at times and
places to be determined by the Partners' Committee, and notice of
such meetings (including agenda items to be discussed) shall be
given by the Chairman not less than 20 days in advance (which 20-
day period may be shortened by written waiver of the members or
actual attendance at a special committee meeting).
b. GENERAL MANAGER
If the Partners' Committee decides to hire a full-time general
manager for the J.V. Company, the Partners shall jointly agree
upon the individual selected. If agreed by both Partners, the
general manager may be added to the Partners' Committee of the
J.V. Company. In such an event, any decision requiring majority
approval of the Partners' Committee will require the vote of at
least one AFC appointed Partners' Committee member and one
Tellabs appointed member.
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c. MANAGEMENT STRUCTURE
The J.V. Company shall have managers with such responsibilities
and reporting relationships as shall be determined by the
Partners" Committee.
2.4 MATTERS SUBJECT TO PARTNERS' COMMITTEE APPROVAL
a. All decisions of the J.V. Company are subject to approval by the
Partners through the Partners' Committee unless expressly
delegated to the Design Committee pursuant to Section 3.2 hereof.
The Partners' Committee, by majority vote, shall have the power
to delegate to other managers of the J.V. Company any decisions
within the ordinary course of business of the J.V. Company.
Without limiting the generality of the foregoing, the following
actions require Partners' approval:
i. The distribution or reinvestment of profits or any
other payment of any kind with respect to the Partners,
subject to the terms of Section 2.4b below;
ii. The investment or allocation of surplus funds;
iii. The transfer of any amount to reserves;
iv. The organization of, or the acquisition or disposition
of any interest in the legal or beneficial ownership
of, any other company or business organization;
v. Except as expressly authorized in this Agreement, any
sale, assignment, transfer, license or other
disposition of any manufacturing rights, know-how,
technology, trademarks, trade secrets or good will, or
the grant of any license or sublicense to manufacture
the J.V. Product;
vi. Any agreement or transactions with any party hereto or
any of their Affiliates, other than purchases, licenses
or sales of product specifically authorized herein;
vii. The selection or change of the manufacturer for the
J.V. Products;
viii. The adoption or any material revision of the MRD;
ix. Any change in the transfer prices charged by the J.V.
Company;
x. The adoption of and amendments to the Product Support
Plan referred to in Section 7.2;
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xi. Any material change in the J.V. Company's organization
(including reorganizations of departments or
reallocation of responsibilities of key employees);
xii. Approval of any financial statements of the J.V.
Company;
xiii. Appointment of and any change in the J.V. Company's
public accounting firm/auditor;
xiv. Any material change in accounting principles or
procedures to be applied to the J.V. Company;
xv. Any acquisition, sale or lease of the J.V. Company's
assets or business or any capital improvement not
contemplated by the then current MRD;
xvi. Any purchase, sale or lease of real property;
xvii. The acquisition of any patent rights, technology,
know-how, trademarks, trade secrets or good will, or
of a license thereunder, except as specifically provided
in this Agreement;
xviii. Any establishment or material revisions of plans to
develop or commercialize new products or services, of
project priorities or of allocation of resources to
projects (including localization of software and
porting projects) other than as specified in the MRD;
xix. Borrowing of any funds or entry into any capital
leases;
xx. Adoption of and amendments to the Business Plan;
xxi. Any member of the Partners' Committee engaging in or
planning to enter into any of the following types of
transactions; (i) business that competes with the
business of the J.V. Company; (ii) transactions between
the J.V. Company and either the member or a third party
on whose behalf the member is acting, and (iii) any
other transaction between the J.V. Company and a third
party, in which the member has an interest contrary to
that of the J.V. Company; and
xxii. The adoption of and amendments to Exhibits A, B, C and
E to this Agreement.
[*]
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[*]
2.5 PUBLIC ACCOUNTING FIRM/AUDITOR/LEGAL
The J.V. Company shall have one auditor to be determined by the
Partners' Committee by May 15, 1994. Any changes to the auditor must
be approved by the Partners' Committee. In the event that the J.V.
Company requires legal services, the Partners' Committee shall select
an outside law firm, not currently representing either Partner.
2.6 FINANCIAL STATEMENTS AND ACCOUNTING RECORDS
During the Term, financial statements for the J.V. Company, including,
without limitation, a balance sheet and income statement, shall be
submitted by the J.V. Company to the Partners within twenty (20) days
after the end of each quarter and within thirty (30) days after the
end of the fiscal year for such year. Each of the annual statements
shall be audited and certified by the auditor retained by the J.V.
Company. Each of the quarterly statements shall be reviewed by the
auditor. Such quarterly and annual statements shall be prepared on an
accrual basis in accordance with U.S. generally accepted accounting
principles. Additionally, and in any event, the J.V. Company shall
provide monthly financial statements to the Partners as they may
request from time to time. Notwithstanding the foregoing, estimated
balance sheets and income statements for the J.V. Company shall be
made available to Tellabs as soon as possible after the end of each
Tellabs quarter, but no later than three (3) business days after the
end of each Tellabs quarter and four (4) business days after the end
of Tellabs' fiscal year.
2.7 RIGHT OF INSPECTION
Both Partners shall have full access to all properties, books and
account records and the like of the J.V. Company and the J.V. Company
shall furnish to each Partner all information concerning the same
which such Partner may reasonably require in connection with
completing an examination thereof, and each Partner shall have the
right to make copies from the books and records of the J.V. Company at
any reasonable time. Any information obtained through exercise of
said right of access shall (i) be used by such Partner only for
purposes which are consistent with its status as a partner in the J.V.
Company and not for the pursuit of business interest outside the J.V.
Company (except to the extent such Partner shall otherwise have rights
for access to such information or to the extent used to determine
compliance with this Agreement) and (ii) be subject to the
confidentiality provisions of Section 8.4 and 8.5.
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2.8 BUSINESS PLAN
Prior to the beginning of each calendar year during the Term, the
Partners' Committee shall determine and approve the Business Plan for
the J.V. Company, for such year. The Business Plan may be amended
only by the Partners' Committee.
2.9 FUTURE FINANCINGS
Unless the Partners otherwise agree in writing, if the Partners'
Committee determines that the J.V. Company requires financing in
excess of that provided pursuant to Section 2.2, the J.V. Company
shall seek to obtain additional funding in the following priorities:
a. loans by the Partners;
b. third party debt with or without guarantees by the Partners;
c. further equity investments by the Partners; or
d. equity investments by third parties.
If loans are made by the Partners, the interest rate will be a
competitive rate set by the Partners' Committee. For any loans by the
Partners during the first year, the rate shall be [*].
In the event that the Partners' Committee decides to require
additional equity investments by the Partners, the investment shall
take such form as is agreed upon by the Partners' Committee including
but not limited to cash, technology rights or royalty adjustments.
Unless the Partners otherwise agree in writing, all guarantees of debt
or equipment lease financings, loans or additional investments
provided by the Partners shall be provided in proportion to their
ownership interests in the J.V. Company. Each Partner shall be
entitled to purchase a pro rata share of any issuances of partnership
interests in the J.V. Company to retain its percentage interest
relative to the other Partner and the other Partner's Affiliates In
the event that the Partners' Committee approves the investment by any
third parties in the J.V. Company, the dilution caused thereby shall
be shared equally by the Partners. If the additional investment is
made by either Partner or an Affiliate of such Partner, the other
Partner shall be entitled to increase it; investment in order to
maintain its pro rata partnership interest.
2.10 PERMITTED TRANSFERS/ RIGHT OF FIRST REFUSAL
The Partners agree not to Transfer their rights or interests in the
J.V. Company except in accordance with each of the following
restrictions:
(a) Before January 1, 1997, neither Partner shall be permitted to
Transfer its ownership interest in the J.V. Company without the
prior written consent of the other Partner.
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(b) If a Partner wishes to Transfer its ownership interest on or
after January 1, 1997, the offering Partner shall first give
written notice to the other Partner stating its intention to
transfer, the name of the proposed transferee and the price,
terms and conditions of the proposed Transfer.
(c) The other, non-offering Partner shall have the right to purchase
all (but not less than all) of the ownership interest offered,
which right shall be exercisable by written notice to the
offering Partner not later than the expiration of thirty (30)
days after delivery of the written notice of intention to sell.
The price and terms shall be the price and terms stated in the
notice.
(d) If the (other Partner does not exercise its right to purchase all
of the offered interest within such thirty (30) day period, the
offering Partner may within Sixty (60) days after expiration of
such right, Transfer its interest to the transferee named in the
notice; provided that (i) such Transfer is not at a lower price
or on terms more favorable to the transferee than those specified
in the written notice; (ii) prior to such Transfer, such
transferee agrees in writing to undertake all the applicable
rights and obligations of the offering Partner under this
Agreement.
(e) The restrictions and other provisions of this Section 2.10 shall
apply to any other J.V. Company ownership interest (or options,
warrants or other rights to acquire the J.V. Company ownership
interest) acquired by a Partner during the Term.
(f) The right of first refusal provided by this Section 2.10 shall
not apply to a Transfer by both Partners to a third party pro
rata with respect to their respective interest in the J.V.
Company or to a transfer by a Partner to any Affiliate of the
Partner, provided that prior to such Transfer the Affiliate
agrees in writing to undertake all the rights and obligations of
the Partner under this Agreement.
2.11 CASH MANAGEMENT, DISBURSEMENT AND INVESTMENT POLICIES
All cash (including the initial cash contribution by Tellabs),
disbursements and investments of the J.V. Company shall be handled in
accordance with the terms of Exhibit F to this Agreement. Any
amendments to Exhibit F must be agreed upon by the Partners'
Committee.
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SECTION 3
DESIGN AND DEVELOPMENT PROGRAM
3.1 FINALIZATION OF MRD, INITIAL BUSINESS PLAN, AND EXHIBITS A, B, C AND E
By April 22, 1994, the MRD, the initial Business Plan and Exhibits A.
(as referred to in Section 1.23), B (as referred to in Section 3.4), C
(as referred to in Section 5.2) and E (as referred to in Section 7.1)
will be completed and submitted to the Partners' Committee for
approval. If the Partners" Committee has not approved the MRD, the
initial Business Plan and Exhibits A, B, C and E by April 29,1994 (as
such date may be extended by written agreement of the Partners) then,
at the option of either Partner, this Agreement shall be terminated
with the effect detailed in Section 13. 3(a) hereof.
3.2 DESIGN COMMITTEE
The Partners' Committee of the J.V. Company will establish a Design
Committee whose purpose will be to establish design and development
direction for the Product. This Design Committee will be comprised of
two individuals each from Tellabs and AFC, including one engineering/
design and one marketing person from each Partner. In addition,
Tellabs will assign a key program manager, who will reside in
Petaluma, California throughout the Initial Design and Development
Phase of the project, and will report to the Partners' Committee or
general manager of the J.V. Company as well as serve as the fifth
member of the Design Committee. The Design Committee will be
responsible for developing and reporting to the Partners' Committee,
for its approval (prior to any execution) any material changes to the
MRD relating to design definition, development plan, market plan and
budget for development of the Product.
3.3 DEVELOPMENT RESPONSIBILITIES
The J.V. Company shall develop the J.V. Product in accordance with the
MRD. Any material changes to the MRD which are identified by the
Design Committee will be submitted to the Partners' Committee and are
subject to Partners' Committee approval. AFC will provide general
architectural consulting for the UMC 1000. Both AFC and Tellabs will
design the architecture for the J.V. Product. Tellabs shall provide
the systems engineering and hardware and software design engineers to
perform the design and development. During the preliminary stages of
the development, AFC will provide, at no charge, reasonable technical
assistance to assist Tellabs" engineers in understanding the UMC 1000
Technology not to exceed 500 staff-hours unless agreed by AFC. Unless
otherwise agreed by the Partners, the development work during the
Initial Design and Development Phase will be conducted at AFC's
facilities in Petaluma, California.
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The J.V. Company will develop the Product as two distinct products
with unique features designed in to protect the individual market
rights of the respective Partners, as described in Section 6. These
features will include both physical and functional differences
designed to prevent the migration of the Product into markets for
which rights have not been granted.
3.4 COMPENSATION FOR RESOURCES PROVIDED BY PARTNERS
Tellabs and AFC shall be compensated by the J.V. Company for resources
provided by such Partner as set forth in Exhibit B to this Agreement,
as such exhibit may be amended from time to time. Exhibit B will be
agreed upon by the Partners' Committee and attached to this Agreement
by April 29, 1994, as provided in Section 3.1 hereof
SECTION 4
RIGHTS TO USE
4.1 RIGHT TO USE UMC 1000 TECHNOLOGY
Subject to the terms and conditions of this Agreement; AFC hereby
grants to the J.V. Company a non-exclusive, irrevocable, perpetual,
royalty-free, worldwide right to use the Pre-existing Technology for
the purpose of developing the J.V. Product and making Improvements and
Enhancements to the J.V. Product. The rights granted herein shall
also include the right to have the Product manufactured for the J.V.
Company, subject to the terms and conditions hereof. AFC shall offer
and grant to the J.V. Company equivalent rights (i) to an Improvements
to the UMC 1000 developed by AFC during the Term of this Agreement and
(ii) all Enhancements which are agreed upon pursuant to Section 2.2
hereof. The rights granted herein shall also include the right to
make minor modifications to the UMC 1000 System Components including
but not limited to private labeling and software modifications which
do not substantially change or supplement their functionality. Except
as set forth in Section 4.1 of Exhibit D hereto, during the Term of
this Agreement, AFC agrees not to grant a license or right to any
third party to use the UMC 1000 Technology to develop, have developed,
manufacture, have manufactured, sell, market or distribute a product
having functional characteristics and capacities which are similar to
the UMC 1000 and/or the J.V. Product unless such license or right
expressly prohibits the sale, marketing and distribution of such
product to Alternate Providers, both directly and indirectly. Prior
to entering into a relationship with any third party which involves
the license of or right to use the UMC 1000 Technology, AFC will
review the terms of such relationship with the Partners' Committee.
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4.2 RIGHTS TO MARKET STUDY
Subject to the terms and conditions of this Agreement, Tellabs hereby
grants to the J.V. Company a non-exclusive, irrevocable, perpetual,
royalty-free, worldwide right to use the Market Study for the purpose
of developing the J.V. Product and making decisions relating to future
features and markets for the Product.
SECTION 5
MANUFACTURING AND SUPPLY
5.1 MANUFACTURING RIGHTS
The J.V. Company will procure assemblies, subassemblies and final
system products for the Product from the most cost effective source,
provided, however, that Tellabs shall be given preference as the
manufacturer provided that its price and quality to the J.V. Company
for the Product is substantially competitive with alternate
manufacturers. AFC shall have the right to direct the J.V. Company to
subcontract the manufacture of AFC's requirements for the J.V. Product
to another party, provided that AFC demonstrates to the Partners'
Committee that the cost thereof is competitive with the then current
manufacturer and provided that AFC continues to purchase all of its
requirements for the J.V. Product from the J.V. Company. Proposed
manufacturers will be obligated to provide complete details on costs,
including materials, assembly, and overhead, for finished/tested
assemblies or product to allow for an effective evaluation and
selection of the lowest cost manufacturer.
5.2 TRANSFER PRICE
The Product(s) will be sold from the manufacturer to the J.V. Company
at an agreed upon price. Prices for the Product from the J.V. Company
shall be determined by the Partners' Committee and set forth on
Exhibit C to this Agreement by April 29, 1994, as provided in Section
3.1. Any amendments to Exhibit C shall be approved by the Partners'
Committee.
5.3 PURCHASE AND SALE OF PRODUCT
a. During the Term of this Agreement the J.V. Company will sell and
supply to Tellabs (and its Affiliates) and, Tellabs (and its
Affiliates) will be required to purchase from the J.V. Company,
all of its requirements for the Products, including any
Improvements and Licensed Enhancements thereto, on the terms and
conditions set forth in this Agreement.
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b. During the Term of this Agreement, the J.V. Company will also
sell and supply Products including any Improvements and Licensed
Enhancements thereto, to the AFC Partner, on terms and conditions
set forth in this Agreement. The AFC Partner will be required to
purchase only its requirements for the J.V. Product from the J.V.
Company.
5.4 PURCHASES FROM AFC'S THIRD PARTY MANUFACTURERS
Unless and until the J.V. Company selects another manufacturing
source, the J.V. Company shall have the right to purchase Products
(including UMC 1000 System Components) from AFC's third party
manufacturers. AFC will authorize such manufacturers to sell directly
to the J.V. Company at prices no higher than those offered to AFC for
the same components for the UMC 1000 at the same time. The J.V.
Company shall be responsible for any additional costs charged by the
manufacturers for changes made to the UMC 1000 System Components for
the J.V. Company.
SECTION 6
MARKETING RIGHTS
[*]
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[*]
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SECTION 7
SERVICES
7.1 GENERAL SERVICES
AFC agrees to provide accounting, engineering services (CAD design,
etc.), personnel, manufacturing (MRP, sourcing, etc.), facilities and
general management/ administration services to the J.V. Company
pursuant to the terms of the Services Agreement to be agreed upon by
the Partners' Committee and attached as Exhibit E to this Agreement by
April 29, 1994, as provided in Section 3.1 hereof. Any amendments
to Exhibit E shall be agreed upon by the Partners' Committee. In the
event the Partners' Committee determines that certain of such
services will be provided by Tellabs, a similar Services Agreement
will be signed with Tellabs.
7.2. PRODUCT SUPPORT PLAN
As soon as possible following the Effective Date, the Partners will
jointly develop, and submit to the Partners' Committee for approval, a
Product Support Plan for handling responsibility for Product support,
including but not limited to sustaining engineering. Any amendments to
the Product Support Plan shall be agreed upon by the Partner's
Committee.
SECTION 8
INTELLECTUAL PROPERTY OWNERSHIP AND RIGHTS IN CONFIDENTIAL INFORMATION
8.1 OWNERSHIP OF J.V. PRODUCT TECHNOLOGY
Subject to the rights granted under this Agreement, all right, title
and interest in and to the proprietary rights in the J.V. Product
Technology including any Improvements and Enhancements thereto
developed by the J.V. Company, shall be vested in and shall remain in
the J.V. Company and both Partners will have joint ownership thereof,
subject to the various restrictions on use set forth herein.
8.2 OWNERSHIP OF UMC 1000 TECHNOLOGY
Subject to the rights granted by AFC under this Agreement and subject
to the matters disclosed in Section 8.2 of Exhibit D, all right, title
and interest in and to the proprietary rights in UMC 1000 Technology
shall be vested in and shall remain in AFC and/or its Affiliates.
Notwithstanding the foregoing, any minor modifications to the UMC 1000
Technology made by the J.V. Company including but not limited to
private labeling and software modifications which do not
substantially change or supplement its functionality, shall be deemed
to be
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owned by the J.V. Company and both Partners will have joint ownership
thereof, subject to the various restrictions on use set forth herein.
8.3 OWNERSHIP OF THE MARKET STUDY
Subject to the rights granted by Tellabs under this Agreement, all
right, title and interest in and to the proprietary rights in the
Market Study shall be vested in and shall remain in Tellabs and/or its
Affiliates.
8.4 TELLABS CONFIDENTIAL INFORMATION
AFC acknowledges that Tellabs claims that certain information to be
disclosed by Tellabs to AFC under this Agreement is confidential and
proprietary information of Tellabs ("Tellabs Confidential
Information"). No information shall be considered Tellabs
Confidential Information unless (a) for information disclosed in
writing, the writing is marked "confidential" or "proprietary," or
with words of similar import, at the time of disclosure to AFC, or (b)
for information disclosed orally, the confidential nature of the
information is indicated at the time of disclosure and the information
is summarized in a writing indicating its confidential nature that is
delivered to AFC within twenty (20) days after disclosure. AFC
agrees, during the term of this Agreement and for five (5) years after
its termination for any reason, to protect Tellabs Confidential
Information against disclosure or dissemination using the same
standard of care and procedures which it uses to protect its own
proprietary information of a similar nature. Information shall not be
considered to be Tellabs Confidential Information if it can be
demonstrated by written record that it (a) was already known by AFC
without restriction; (b) was or became publicly known through no
wrongful act of AEC; (c) was received from third parties subject to no
restriction of confidentiality; (d) was independently developed by
AFC; or (e) was disclosed by Tellabs to any third party without an
obligation of confidentiality. Nothing contained herein shall
prohibit AFC from disclosing Tellabs Confidential Information to the
extent (but only to the extent) such disclosure is required by law or
government regulation, provided that AFC shall use all reasonable
efforts to give Tellabs advance written notice of such mandated
disclosure. AFC has or will secure a written agreement containing
substantially these terms from each employee of AFC who will have
access to Tellabs Confidential Information.
8.5 AFC CONFIDENTIAL INFORMATION
Tellabs acknowledges that AFC claims that certain information to be
disclosed by AFC to Tellabs under this Agreement is confidential and
proprietary information of AFC ("AFC Confidential Information"). No
information shall be considered AFC Confidential Information unless
(a) for information disclosed in writing, the writing is marked
"confidential" or "proprietary," or with words of similar import, at
the time of disclosure to Tellabs, or (b) for information disclosed
orally, the confidential nature of the information is indicated at the
time of disclosure and the information is summarized in a writing
indicating its confidential nature that is delivered to Tellabs, within
twenty (20) days after
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disclosure. Tellabs agrees during the term of this Agreement and for
five (5) years after its termination for any reason, to protect AFC
Confidential Information against disclosure or dissemination using the
same standard of care and procedures which it uses to protect its own
proprietary information of a similar nature. Information shall not be
considered to be AFC Confidential Information if it can be
demonstrated by written record that it (a) was already known by
Tellabs without restriction; (b) was or became publicly known through
no wrongful act of Tellabs (c) was received from third parties subject
to no restriction of confidentiality; (d) was independently developed
by Tellabs; or (e) was disclosed by AFC to any third party without an
obligation of confidentiality. Nothing contained herein shall prohibit
Tellabs from disclosing AFC Confidential Information to the extent
(but only to the extent) such disclosure is required by law or
government regulation, provided that Tellabs shall use all reasonable
efforts to give AFC advance written notice of such mandated
disclosure. Tellabs has or will secure a written agreement containing
substantially these terms from each employee of Tellabs who will have
access to AFC Confidential Information.
8.6 INDEPENDENT DEVELOPMENT
Nothing contained in this Agreement shall be construed as a
restriction on either Partner's right independently to develop,
manufacture, acquire and sell or otherwise distribute, for itself or
others, any product whether or not it is similar in function to the
Product, the J.V. Product or the UMC 1000, provided that such
development, manufacture, acquisition, sale or other distribution does
not violate any of the provisions of this Agreement. No payment shall
be due to either party by reason of such independent development,
manufacture and/or sale or other distribution. Notwithstanding the
foregoing, if after the Effective Date hereof, Tellabs develops or
acquires a similar or functionally equivalent product and thereafter
sells such product in the Alternate Provider market in territories in
which Tellabs has exclusively for the Products, the J.V. Products and
the UMC 1000 System Components, the exclusivity provided for in
Section 6 for such territories will be deemed deleted. None of the
products being marketed by Tellabs or any of its Affiliates as of the
Effective Date, including any future Enhancements and Improvements
thereto, will be deemed to be "similar or functionally equivalent
products."
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TELLABS CONTRACT NO.: JDL940399LEG-00
SECTION 9
9.1 GENERAL
Tellabs agrees to pay royalties to AFC for all UMC System
Components sold, licensed or otherwise distributed by Tellabs [*] according
to the following schedule: [*]
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TELLABS CONTRACT NO.: JDL940399LEG-00
9.3 AUDIT
AFC shall be entitled to have an independent third party auditor,
reasonably acceptable to Tellabs, audit compliance with this Section 9
no more frequently than once each calendar year. In the event the
auditor finds that royalties have been underpaid by more than 10% of
the corrected total royalty for the period audited, Tellabs shall pay
the audit fees. Otherwise, AFC shall bear the cost of the audit.
SECTION 10
WARRANTY AND INDEMNIFICATION
10.1 OWNERSHIP WARRANTY AS TO UMC 1000 TECHNOLOGY
AFC represents and warrants to Tellabs and the J.V. Company that (i)
the UMC 1000 Technology is original with and is owned solely by AFC;
(ii) the UMC 1000 Technology does not infringe any patent, copyright,
trade secret or other proprietary rights of any third party; (iii) AFC
is the sole and exclusive developer of the UMC 1000 Technology; (iv)
AFC has not previously or otherwise granted any other right in UMC
1000 Technology to any third party which may conflict with the rights
granted herein to Tellabs; and (v) AFC has the full power to enter into
this Agreement, to carry out its obligations contained herein, and to
grant the rights in the UMC 1000 Technology granted herein to the J.V.
Company. The disclosures set forth in Section 8.2 of Exhibit D shall
in no way limit the warranties contained in this Section 10.1 or the
indemnification rights contained in Section 10.2.
10.2 INDEMNIFICATION FOR BREACHES OF OWNERSHIP WARRANTY
Notwithstanding any other provision contained in the Agreement, AFC
shall defend at its sole expense any claim, demand, or suit against
the J.V. Company, or Tellabs, its Affiliates, Distributors, or End
Users alleging a breach of any of the warranties set forth in the
preceding Section 10.1 and shall pay the full amount of any settlement
or judgment resulting from any such claim, demand or suit, including
reasonable costs and attorney's fee, provided that Tellabs promptly
informs AFC in writing of any such claim, demand or suit, and, at
AFC's request and expense, provides AFC with all reasonably available
information, assistance and authority to enable AFC to defend the
same. Tellabs shall not settle any such claim, demand or suit without
AFC's prior consent. In addition, following notice of a claim or
demand or a threatened or actual suit, AFC shall, at its own expense,
either procure for Tellabs, its Affiliates, Distributors and End Users
the right to continue full enjoyment of the rights and licenses
granted under this Agreement with respect to any licensed subject
matter that is subject to such claim, demand or suit, or replace or
modify the same to make them non-infringing. If AFC elects to replace
or modify such subject matter, the
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TELLABS CONTRACT NO.: JDL940399LEG-00
replacement or modification shall substantially meet the performance
specifications of the replaced material and shall be usable by
Tellabs, its Affiliates, Distributors, and End Users as a direct
replacement for the replaced material without any need for
modification thereof. AFC agrees further to pay all costs incurred by
Tellabs in connection with such replacement or modification. If
Tellabs reasonably concludes that AFC may not be able to satisfy a
potential judgment or that AFC is not adequately protecting Tellabs'
interests in such claim, demand or suit, Tellabs may control the
defense of such claim, demand or suit at AFC's expense. AFC agrees
that it will not enter into any settlement of such claim, demand or
suit without the consent of Tellabs, which consent will not be
unreasonably withheld. AFC shall have no liability hereunder to the
extent that such liability results from modifications to the UMC 1000
or the UMC 1000 Technology which were made by the J.V. Company,
Tellabs, or any of their agents or distributors.
10.3 LIMITATION OF LIABILITY
NEITHER PARTNER SHALL BE LIABLE TO THE OTHER OR TO THE J.V. COMPANY
FOR ANY LOST PROFITS, LOSS OF DATA OR FOR ANY OTHER INDIRECT, SPECIAL,
OR CONSEQUENTIAL DAMAGES, ARISING OUT OF THIS AGREEMENT OR THE
TRANSACTIONS CONTEMPLATED HEREBY, EVEN IF ADVISED OF THE POSSIBILITY
OR LIKELIHOOD OF SUCH DAMAGES, EXCEPT AS EXPRESSLY LIMITED BY LAW.
EXCEPT AS EXPRESSLY PROVIDED HEREIN, THE PARTNERS DISCLAIM ANY AND ALL
WARRANTIES, EXPRESSED OR IMPLIED, INCLUDING, WITHOUT LIMITATION, THE
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
10.4 INSURANCE
Each of the Partners shall deliver to the other and to the J.V.
Company, and shall keep current at all times during the Term hereof,
Certificates of Insurance evidencing insurance coverages satisfactory
to the Partners' Committee.
10.5 PRODUCT LIABILITY, PERSONAL INJURY AND PROPERTY DAMAGE
Notwithstanding anything to the contrary herein, AFC shall indemnify
and save harmless Tellabs and the J.V. Company from any loss or
damages (including reasonable attorney's fees) incurred by Tellabs or
the J.V. Company because of claims, suits, or demands resulting from
personal injury or property damage, to the extent such loss or damage
is caused by or results from defects in the UMC 1000 Product or the
UMC 1000 Technology or the negligent or willful acts or omissions of
AFC or its employees or agents provided: (i) AFC is promptly notified
in writing of any suits, claims, or demands for which AFC is
responsible under this indemnity; (ii) AFC is given full opportunity
and authority to assume the sole defense of and settlement of such
suits; and (iii) AFC is furnished upon request, with all information
and reasonable assistance available to Tellabs and the J.V. Company
for defense against any such suit, claim or demand. To the extent
that the injury or damage results from the negligent or willful acts
or
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TELLABS CONTRACT NO.: JDL940399LEG-00
omissions of Tellabs or its employees or agents, Tellabs shall
indemnify and defend AFC and the J.V. Company in accordance with the
same terms. Nothwithstanding the foregoing to the extent that the
injury or damage results from (i) defects in the J.V. Product or J.V.
Product Technology, (ii) modifications to the UMC 1000 made by the
J.V. Company; or (iii) the integration of the J.V. Product with the
UMC 1000, the J.V. Company shall be liable therefor.
SECTION 11
TERM OF AGREEMENT
11.1 TERM
The Term of this Agreement shall be fifteen (15) years from the date
first set forth above, unless sooner terminated as provided herein.
11.2 TERMINATION
This Agreement and the J.V. Company created hereby shall be subject to
termination prior to the end of the Term for the reasons set forth in
Section 13.
SECTION 12
DEFAULT
12.1 DEFAULT OF TELLABS
Tellabs shall be deemed to be in material default under this Agreement
upon the occurrence of any of the following:
a. In the event that Tellabs fails to perform or comply with any
material term or condition of this Agreement and fails to cure
such failure within thirty (30) days after receipt of written
notice; provided, however, that an alleged default in making
payments hereunder shall not be deemed a material default if and
while Tellabs reasonably disputes the obligation to make such
payments or the amount due.
b. In the event that Tellabs or any of its Affiliates (i)attempts to
assign, mortgage, transfer, sublicense or otherwise encumber its
rights hereunder to the J.V. Product Technology (or any
Improvements thereof) or the UMC 1000 Technology (or any
Improvements thereto), or to grant rights to any third party
which are prohibited by the terms of this Agreement except in
each case, as expressly authorized hereby; and (ii) fails to cure
such default within thirty (30) days after receipt of written
notice thereof.
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TELLABS CONTRACT NO.: JDL940399LEG-00
c. In the event that Tellabs ceases to do business, becomes
insolvent, becomes subject to a receiver or trustee, becomes
subject to a voluntary or involuntary petition under the United
States Bankruptcy Laws, or attempts to make any assignment for
the benefit of creditors.
12.2 DEFAULT OF AFC
AFC shall be deemed to be in material default under this Agreement
upon the occurrence of any of the following:
a. In the event that AFC fails to perform or comply with any
material term or condition of this Agreement and fails to cure
such failure within thirty (30) days after receipt of written
notice; provided, however, that an alleged default in making
payments hereunder shall not be deemed a material default if and
while AFC reasonably disputes the obligation to make such
payments or the amount due.
b. In the event that AFC or any of its Affiliate (i) attempts to
assign, mortgage, transfer, sublicense or otherwise encumber its
rights hereunder to the J.V. Product Technology (or any
Improvements thereto), or to grant rights to any third party
which are prohibited by the terms of this Agreement except, in
each case, as expressly authorized hereby; and (ii) fails to cure
such default within thirty (30) days after receipt of written
notice thereof.
c. In the event that AFC ceases to do business, becomes insolvent,
becomes subject to a receiver or trustee, becomes subject to a
voluntary or involuntary petition under the United States
Bankruptcy Laws, or attempts to make any assignment for the
benefit of creditors.
12.3 DEFAULT REMEDIES
Upon a material default by either party hereunder, the other party
may, at its election, seek any remedies available to it, including
termination of this Agreement and the J.V. Company, as provided in
Section 13.
SECTION 13
TERMINATION
13.1 TERMINATION RIGHTS
This Agreement may be terminated:
a. Under the circumstances described in Section 3.1;
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TELLABS CONTRACT NO.: JDL940399LEG-00
b. If the Partners' Committee determines that the J.V. Product or
market concept is not achievable from either an economic or
technological perspective; and/or
c. By written notice for any event of material default specified in
Section 12.1 or Section 12.2.
13.2 SURVIVAL OF RIGHTS AND OBLIGATIONS
The rights and obligations of any of the provisions hereof which, by
their terms involve continuing obligations, shall be deemed to survive
termination or expiration of this Agreement, in accordance with their
terms.
13.3 EFFECT OF TERMINATION ON LICENSE RIGHTS
a. In the event that the Agreement is terminated as provided in
Sections 13.1(a) or (b) then, unless otherwise agreed, the
Partners agree to liquidate the J.V. Company first by having any
excess but not committed cash distributed back to Tellabs and AFC
in such proportions as such Partner's total cash contributions to
the J.V. Company bears to the total of all cash contribution made
to the J.V. Company by both Partners (up to the full amount of
such Partners cash contribution to the J.V. Company). Any
remaining cash shall be split equally and the remaining assets
distributed in a fair and equitable manner, and, in addition, all
licenses will terminate and each Partner shall receive back full
rights in the respective technology and/or market information
supplied by it.
b. In the event that the Agreement is terminated by one party due to
the material default of the other as provided in Section 13.1(c),
the licenses granted to the J.V. Company in Sections 4.1 and 4.2
will be convened to licenses to the non-defaulting party.
Furthermore, in such event, and subject only to the payment of
any applicable royalties pursuant to Section 9, the license shall
be unrestricted and shall not be subject to the market
restrictions set forth in Section 6. In order to secure the
rights hereunder, each Partner shall be entitled to maintain, at
its principal place of business and in the custody of its Legal
Department, one duplicate copy of all UMC 1000 Technology and
J.V. Product Technology, which shall be kept current at all
times. Such duplicate copies shall not be used unless and until
the rights under this subsection b are granted.
c. In the event of a termination, the Partners will be obligated to
agree upon terms and conditions which provide for continuing
support for each Partner's embedded customer base.
Page 26 of 30
<PAGE>
TELLABS CONTRACT No.: JDL940399LEG-00
SECTION 14
MISCELLANEOUS
14.1 GOVERNING LAW
This Agreement shall be governed by the law of the State of California
excluding its conflicts of laws provisions.
14.2 EXPORT
The parties acknowledge that the materials made available to them
hereunder and the direct product(s) produced through use thereof may
be subject to the Export Administration Regulations of the United
States Department of Commerce and other United States Government
regulations relating to the export of technical data and equipment and
product(s) produced therefrom. The parties are familiar with and
agree to comply with all such regulations, including any future
modifications thereof.
14.3 ENTIRE AGREEMENT
This Agreement, including the Exhibits hereto, which are hereby
expressly incorporated herein, and any other document incorporated by
reference herein, constitutes the complete, final and exclusive
understanding between Tellabs and AFC with respect to the subject
matter hereof and supersedes any prior negotiations, discussions or
agreements including but not limited to the Memorandum of
Understanding dated January 13,1994.
14.4 WAIVER AND AMENDMENT
No waiver, amendment or modification of any provision hereof shall be
effective unless in writing and signed by the party against whom such
waiver, amendment or modification is sought to be enforced. No
failure or delay by either party in exercising any right, power or
remedy hereunder shall operate as a waiver of any such right, power or
remedy.
14.5 NOTICES
All notices, demands or consents required or permitted hereunder shall
be in writing and shall be delivered by overnight delivery, facsimile
(with confirmation copy by mail) or mailed to the respective parties
at the addresses first set forth above or at such other address as
shall have been given to the other party in writing for the purposes
of its clause. Notices to AFC shall be sent to Attention: Daniel
Steimle (Fax: 707-794-7777), with a copy to Attention: Michael
Hatfield (Fax: 707-794-7777), at the same address. Notices to Tellabs
shall be sent to Attention: Jon C. Grimes (Fax: 708-378-6721), with a
copy to Attention: Legal Department (Fax: 708-512-7293), at the same
address. Such notices and other communications shall be deemed
effective upon the earliest to occur of (i) actual delivery, (ii) five
days after mailing, addressed and postage prepaid, return receipt
requested, as aforesaid, (iii) one (1) business day after transmission
by
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TELLABS CONTRACT NO.: JDL940399LEG-00
overnight delivery, or (iv) the day of receipt after transmission by
facsimile where receipt has been confirmed.
14.6 SEVERABILITY
In the event that any provision of this Agreement is held to be
unenforceable or illegal, such provision shall be severed; and the
entire Agreement shall not fail, but the balance of the Agreement
shall continue in full force and effect. In such event, the parties
agree to negotiate in good faith a substitute enforceable and legal
provision which most nearly effects the intent of the parties in
entering into this Agreement.
14.7 ASSIGNMENT/CHANGE IN CONTROL
Except as expressly permitted by the terms of this Agreement, neither
Tellabs nor AFC (or their Affiliates) shall be entitled to assign any
of their rights or obligations hereunder without the express prior
written consent of the other. In the event that either Tellabs or AFC
(or either Partner, if different) become subject to an actual or
potential change in ownership (or an actual or potential sale of
substantially all of such parties' assets) ("Change in Control"), the
party subject to such Change in Control shall be obligated to provide
written notice to the other and shall obtain the other party's prior
written consent to such Change in Control, which consent shall not be
unreasonably withheld.
14.8 LEGAL EXPENSES
The parties shall bear their own legal expenses and fees incurred on
their respective behalfs with respect to this Agreement and the
transactions contemplated hereby.
14.9 ATTORNEY'S FEES
The prevailing party in any action arising out of this Agreement or
the transactions contemplated hereby shall be entitled to recover its
costs and its reasonable attorney's fees incurred therein.
14.10 RIGHTS AND REMEDIES CUMULATIVE
The rights and remedies herein provided shall be cumulative and not
exclusive of any other rights or remedies provided by law or
otherwise.
14.11 PUBLICITY
The parties shall maintain the terms of this Agreement in confidence
and neither party may originate any publicity, news release or other
public announcement relating to this Agreement or die terms hereof
without the prior written approval of the other party, except as
otherwise required by law or governmental regulation (in which event
reasonable prior notice shall be given to the other party).
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TELLABS CONTRACT NO.: JDL940399LEG-00
14.12 TIME OF ESSENCE
Time is of the essence in all terms and conditions hereof. In
determining any time period herein, the day upon which action is taken
to start the period shall not be counted and the period shall end on
the last designated day of the period.
14.13 FORCE MAJEURE
Neither party shall be responsible for delays or failures in the
performance resulting from acts of God, labor strikes, acts of war of
civil disruption, governmental regulations imposed after the fact,
public utility failures, industry-wide shortages of labor or material
or natural disasters.
14.14 COMPLIANCE WITH LAWS
In performing under this Agreement, each party shall comply with all
federal, state, and local laws, ordinances, rules and regulations. A
party violating or alleged, to have violated any federal, state, or
local law, ordinance, rule or regulation shall defend and hold
harmless the other party and the other party's Affiliates,
Distributors, and End Users from any loss, damages or costs arising
from or caused in any way by any such violation or alleged violation.
14.15 COUNTERPARTS
This Agreement may be executed in any number of counterparts, each of
which shall be deemed to be an original, but all of which together
shall constitute but one instrument.
IN WITNESS WHEREOF, This Agreement has been duly executed and delivered by the
parties as of the date first above written.
ADVANCED FIBRE COMMUNICATIONS TELLABS OPERATIONS, INC.
By: /s/Donald Green By: /s/Brian J. Jackman
-------------------------- ---------------------
Name: Donald Green Name: Brian J. Jackman
------------------------ -------------------
Title: President & CEO Title: President
----------------------- ------------------
Date: 4/18/94 Date: 4/21/94
------------------------ -------------------
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<PAGE>
TELLABS CONTRACT NO.: JDL940399LEG-00
EXHIBIT INDEX
Exhibit
A. Pre-existing Technology and Licensed Enhancements
B. Compensation for Resources
C. Formula for Determining Prices for the Product
D. Schedule of Exceptions
E. Services Agreement
F. Cash Management, Disbursement, and Investment Policies
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<PAGE>
TELLABS CONTRACT NO.: JDL940399LEG-00
EXHIBIT D
SCHEDULE OF EXCEPTIONS
This Schedule of Exceptions is provided pursuant to the Joint Venture and
Partnership Agreement dated as of April 11, 1994, between Advanced Fibre
Communications ("AFC" or the "Company") and Tellabs Operations, Inc.
("Tellabs"). Unless otherwise indicated, defined terms used herein have the
same meaning as set forth in the Agreement The Section references below
correspond to the sections in the agreement modified hereby.
SECTION 4.1
1. The Company has been in discussions with Harris Corporation
which, in addition to other items, could result in Harris and AFC
entering into an agreement to develop a version of the UMC 1000
integrated with the Harris product known as the Harris 20/20
switch. AFC warrants that the Harris agreement will prohibit the
inclusion of integrated RF capability in any product developed
between Harris and AFC during the period under which AFC and
Tellabs are operating under the exclusivity of their agreement.
SECTION 6.1
1. The product noted in 1. above, if developed, would include
exclusive rights for Harris to market this product worldwide,
except for North America.
2. The Company is in the process of forming a joint venture in Hong
Kong with Elec & Eltek, a Hong Kong publicly traded company,
whose purpose will be for the manufacture and distribution of the
Company's product within the PRC. Subject to certain performance
milestones, this agreement provides the joint venture with
exclusive marketing rights for the UMC 1000E within the PRC for
an initial period of 18 months, with the right for 24 month
extensions.
3. The Company has signed an exclusive distribution agreement with
PT Diavox Nusantara relating to the distribution, marketing and
service of the Company's UMC 1000E in Indonesia. AFC reserved
the right to sell equipment into the territory to systems
engineering companies, end-users or OEM's. The agreement
requires that certain minimum performance levels be met.
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TELLABS CONTRACT NO.: JDL940399LEG-00
4. The Company has signed an exclusive distribution agreement with
Intelcom, S.A. de C.V. relating to the distribution, marketing and
service of the Company's UMC 1000E in Mexico. The agreement requires
that certain minimum performance levels be met.
5. The Company entered into two License, Joint Development, Supply and
Authorized Manufacturing Agreements with Industrial Technology
Research Institute ("ITRI") dated September 25, 1992 related to the
joint development of products based upon the Company's technology.
These agreements provide for the transfer of certain of the Company's
technology to ITRI.
6. The Company entered into an exclusive distribution agreement in
September 1993 with Amruss International Marketing Corporation to
market the UMC 1000E in the Commonwealth of Independent States. The
exclusive rights require certain minimum performance levels to be
met and allows for AFC to sell to systems engineering companies or
end-users not headquartered in the Territory.
7. The Company entered into an exclusive distribution agreement in March
1994 with Amtelcom KFT to market the UMC 1000E in Hungary. The
exclusive rights require certain minimum performance levels to be met
and allows for AFC to sell to systems engineering companies, OEM's or
end-users not headquartered in the Territory.
SECTION 8.2
1. On April 15,1993, Donald Green filed a complaint in the Superior Court
of the State of California in and for the County of Sonoma against DSC
Communications Corporation et al. alleging breach of contact. The
defendants answered the complaint on June 4, 1993 by generally denying
each allegation therein.
2. On July 20, 1993, DSC Communications Corporation ("DSC") and DSC
Technologies Corporation (collectively the "Plaintiffs") filed a
complaint against the Company, Alan Negrin, Henri Sulzer and Quadrium
Corporation in the United States District Court, Eastern District of
Texas, alleging, among other things, tortious interference with
contractual relations against the Company, tortious interference with
prospective contracts and business relationships against the Company,
and civil conspiracy against all the defendants (Civil Action No.
2-93CV126).
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TELLABS CONTRACT NO.: JDL940399LEG-00
On August 26, 1993, the Plaintiffs' filed a First Amended Complaint,
restating certain of the allegations in the original complaint and
also seeking a judicial declaration that, among other, things, the
Company's proprietary technology and products are property of
Plaintiffs. The complaint, as amended, also seeks an injunction
prohibiting the Company from using, transferring or disclosing certain
proprietary information, products and property that the Plaintiffs
allege belong to them. The complaint as amended, seeks punitive
damages and attorneys' fees.
Since August 26, 1993, numerous motions have been made, the defendants
have filed counterclaims, discovery has begun, a trial date has been
set, and an Offer of Judgement has been made to the Plaintiffs.
The Company vigorously denies the allegations made by the Plaintiffs
and intends to continue to contest the actions. In the opinion of
management the allegations contained in the complaints are without
merit, but the outcome of this litigation or the impact of such
outcome on the Company cannot be predicted at this time, other than
the impact from acceptance by the Offer of Judgement.
Page 3 of 3
<PAGE>
EXHIBIT F.
CASH MANAGEMENT, DISBURSEMENT, AND INVESTMENT POLICIES
CASH MANAGEMENT AND DISBURSEMENT POLICIES
The partnership shall establish a main account and a zero disbursement account
at a bank approved by both parties.
An approved bank must satisfy the following minimum criteria:
- Minimum asset size of $3 billion.
- Satisfactory rating from Thompson's Bank Watch and an "A" rating or
better from Standard and Poor's.
The partnership will issue checks drawn against the zero disbursement account
which will be funded, on an as needed basis, by the main account.
Signature authority and approval limits with respect to partnership
disbursements are summarized below:
[*]
INVESTMENT POLICY
Cash investments are limited to investments satisfying the criteria per the
Tellabs Inc. Investment Policy, attached as Exhibit F.1.
The investment strategy shall be mutually agreed upon by Dan Steimle and Chris
Birck or Robert Settles on a quarterly basis prior to investing available cash.
<PAGE>
EXHIBIT F1
TELLABS, INC.
INVESTMENT POLICY
[*]
<PAGE>
HANGZHOU AFTEK COMMUNICATION COMPANY LTD. CONTRACT
CHAPTER 1. GENERAL PROVISIONS
In accordance with the "Law of the People's Republic of China on Chinese-Foreign
Equity Joint Ventures" and other relevant Chinese laws and regulations, Advanced
Fibre Technology Communication (Hong Kong)Limited and Hangzhou Communication
Equipment Factory of the MPT., HuaTong Branch, adhering to the principle of
equality and mutual benefit and through friendly consultations, agree to jointly
invest to set up a joint venture enterprise in Hangzhou, Zhejiang Province, the
People's Republic of China. The contract hereunder is concluded.
CHAPTER 2. PARTIES TO THE JOINT VENTURE
ARTICLE 1. Parties to this contract are as follows:
Advanced Fibre Technology Communication (Hong Kong) Limited (hereinafter
refereed to as Party A), registered with Hong Kong, with legal address being:
8 Luk Hop Street, Sanpokong, Kowloon, Hong Kong.
Legal representative: Name: Donald Green
Position: President
Nationality: British
Hangzhou Communication Equipment Factory of the MPT., HuaTong Branch
(hereinafter refereed to as Party B), registered with Hangzhou, with legal
address being:
TianMuShan GuDangWan 9#, Hangzhou,
Zhejiang Province, 310023
Legal representative: Name: Jiang Suo Zheng
Position: Director
Nationality: People's Republic of China
CHAPTER 3. ESTABLISHMENT OF THE JOINT VENTURE COMPANY
ARTICLE 2. In accordance with the "Law of the People's Republic of China on
Chinese Foreign Equity Joint Ventures" and other relevant Chinese laws and
regulations, both parties to the joint venture agree to set up the joint venture
limited liability company within Chinese territory.
ARTICLE 3. The name of the joint venture limited liability company is
Hangzhou Aftek Communication Company Ltd.(hereinafter referred to as the joint
venture company).
The name in English is: Hangzhou Aftek Communication Co., Ltd.
The legal address of the joint venture company is: TianMuShan GuDangWan 9#,
hangzhou, Zhejiang Province, 310023.
ARTICLE 4. All activities of the joint venture company shall be governed by
the laws and pertinent rules and regulations of the People's Republic of China.
ARTICLE 5. The organization form of the joint venture company is a limited
liability company. Each party to the joint venture company is liable to the
joint venture company within the limit
- ----------------------------------------------
[*] INDICATES CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
of the capital subscribed by it. The profits, risks and losses of the joint
venture company shall be shared by the parties in proportion to their
contributions of the registered capital.
CHAPTER 4. THE PURPOSE, SCOPE AND SCALE OF PRODUCTION AND BUSINESS
ARTICLE 6. The purpose of the parties to the joint venture is: with the
wish of enhancing economic cooperation and technical exchanges, to employ
advanced and appropriate technology and scientific operation and managerial
methodology, improve product quality, continuously develop new products, build
up competitiveness in the world market in quality and pricing so that the
economic benefits will be enchanced and both parties will obtain satisfactory
economic benefits.
ARTICLE 7. The business scope of the joint venture company is: transmission
equipment, telephone switching equipment and communication components and
devices.
ARTICLE 8. The production scale of the joint venture company is to
ultimately reach an annual field of 600,000 lines of UMC1000E equipment.
CHAPTER 5. TOTAL AMOUNT OF INVESTMENT AND THE REGISTERED CAPITAL,
CONTRIBUTIONS BY EACH PARTY AND INVESTMENT FORM
ARTICLE 9. Total amount of investment of the joint venture company is
[*].
ARTICLE 10. Investment contributed by the parties is [*] which
will be the registered capital of the joint venture company.
Of which: Party A shall pay [*], accounts for [*];
Party B shall pay [*], accounts for [*].
ARTICLE 11. Investment contributed by each party is as follows:
Party A: cash [*]
Party B: cash [*] (The [*] contributed by Party
B shall be converted into corresponding amount of RenMinBi per the exchange mid-
rate on the contribution date at the Foreign Currency Exchange Market at issued
by the State Administration of Exchange Control of the People's Republic of
China.)
ARTICLE 12. The registered capital of the joint venture company shall be
paid in two installments by party A and Party B according to their respective
proportion of their investment.
Each installment shall be as follows:
First installment : Party A [*]; Party B : [*]
Second installment: Party A [*]; Party B : [*].
ARTICLE 13. In case any party to the joint venture intends to assign all
or part of his investment to a third party, consent shall be obtained from the
other party to the joint venture, and approval from the examination and approval
authority is required.
<PAGE>
When one party to the joint venture assigns all or part of his investment,
the other party has preemptive right.
CHAPTER 6. RESPONSIBILITIES OF EACH PARTY TO THE JOINT VENTURE
ARTICLE 14. Party A and Party B shall be respectively responsible for the
following matters:
Responsibilities of Party A:
Assisting in providing cash in accordance with the stipulations in Chapter
5;
Assisting in handling the matters entrusted by the joint venture company,
such as selecting and purchasing machinery and equipment outside China, etc.;
Assisting in providing the needed technical personnel for installation and
testing to help the setup of the production line;
Assisting the training of the engineering personnel and the technical
personnel and workers for production and inspection of the joint venture
company;
Handling other matters entrusted by the joint venture company.
Responsibilities of Party B:
Assisting in handling the applications for approval, registration, business
license and other matters concerning the establishment of the joint venture
company from relevant departments in charge of China;
Organizing the design and construction of the premises and other
engineering facilities of the joint venture company;
Providing cash in accordance with the stipulations in Chapter 5;
Assisting the processing of import customs declaration for the machinery
and equipment purchased by the joint venture company and arranging the
transportation within the Chinese territory.
Assisting the joint venture company in purchasing or leasing in China
equipment, materials, raw materials, articles for office use, means of
transportation and communication facilities etc.;
Assisting the joint venture company in contacting and settling the
infrastructure facilities such as water, electricity, transportation etc.;
Assisting the joint venture in recruiting Chinese management personnel,
technical personnel, workers and other personnel needed;
Assisting foreign workers and staff applying for the entry visa, work
license etc.;
Handling other matters entrusted by the joint venture company.
CHAPTER 7. TECHNOLOGY
ARTICLE 15. Party A agrees to provide the joint venture company the
relevant technology for manufacturing the UCM1000E SLC equipment. The relevant
training fees and traveling fees for the Hong Kong and American technical
personnel traveling to Hangzhou and the Hangzhou personnel traveling to Hong
Kong and America shall be borne by [*].
ARTICLE 16. Party A shall provide the following source product technology:
1. Party A guarantees that the overall technology such as technology of
manufacturing, technological process, testing, inspection of UMC1000 SLC product
and material-purchasing standards will meet the requirement of the joint
venture's final purpose of manufacturing and marketing the product. The
technology transfer fee will not exceed [*]. The
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payment details will be mutually agreed by Party A and the joint venture
company. A contract for transfer fee will be signed by Party A and the joint
venture company.
2. Party A shall provide the joint venture company with the improvement of
the technology and the information and technological materials of improvement in
time, [*];
3. Any fees in connection with the training arranged by Party A for the
technical personnel and workers of the joint venture company to master the
technology shall be borne by [*]: The training fee will
not exceed [*]. The payment details will be mutually agreed by Party A
and the joint venture company. A contract for training fee will be signed by
Party A and the joint venture company.
ARTICLE 17. Party B and the joint venture company shall not be liable for
any disputes concerning property rights arising from the transfer of UMC1000 SLC
product technology. Party B and the joint venture company shall not disclose or
transfer the UMC1000 SLC product technology to any third party without Party A's
approval. If either party wishes to open a company to produce a similar product
then they must give prior written to the other party.
CHAPTER 8. SELLING OF PRODUCTS
ARTICLE 18. When the joint venture company reaches its production scale
[*], its products shall be sold both in Chinese market and
international market. The sales proportion is as follows: [*] for export, [*]
for Chinese domestic market.
The joint venture company may entrust Party A to sell its products in
international markets, which shall account for [*]. The joint venture company
may directly sell its products in the international market, which shall account
for [*].
ARTICLE 19. The joint venture's products to be sold in China may be
handled by the Chinese materials and commercial departments by means of agency
or exclusive sales, or may be directly sold by the joint venture company.
ARTICLE 20. In order to provide maintenance service to the products sold
both in China and abroad, the joint venture company may set up sales branches
for maintenance service both in China and abroad subject to the approval of the
relative Chinese department.
ARTICLE 21. The trade mark of the joint venture's products shall be
decided by the board of directors and shall get registered.
CHAPTER 9. THE BOARD OF DIRECTORS
ARTICLE 22. The date of registration of the joint venture company shall be
the date of the establishment of the board of directors of the joint venture
company.
ARTICLE 23. The board of directors are composed of seven directors, of
which four shall be appointed by Party A, three by Party B. The chairman of the
board shall be appointed by Party B, and its vice-chairman by Party A. The term
of office for the directors, chairman and vice-chairman is four years. Their
term of office may be renewed if continuously appointed by the relevant party.
<PAGE>
ARTICLE 24. The highest authority of the joint venture company shall be
its board of directors. It shall decide all major issues. Unanimous approval
shall be required before any decisions are made concerning the following issues:
1. The modification of the joint venture company's articles of association.
2. The termination, discharge and extension of the duration of the period
of the joint venture company.
3. The increase and assignment of the registered capital of the joint
venture company.
4. The merging of the joint venture company into other economic
association.
All other issues shall be decided by the directors present at the board
meeting by a simple majority with at least one appointed director or his proxy
representing each of Party A and Party B.
CHAPTER 10. BUSINESS MANAGEMENT OFFICE
ARTICLE 25. The joint venture company shall establish a management office
which shall be responsible for its daily management. The management office
shall have a general manager nominated by Party A, a deputy general manager
nominated by Party B, and appointed by the board of directors. Their terms of
office are four years.
ARTICLE 26. The responsibility of the general manager is to carry out the
decisions of the board meeting, organize and conduct the daily management of the
joint venture company. The deputy general manager shall assist the general
manager in his work.
Several department managers may be appointed by the management office.
They shall be responsible for the work in their respective departments and
handle the matters handed over by the general manager and deputy general manager
and shall be responsible for them.
ARTICLE 27. In case of graft or serious dereliction of duty on the part of
the general manager and deputy general manager, the board of directors shall
have the right to dismiss them at any time.
CHAPTER 11. PURCHASE OF EQUIPMENT AND MATERIALS
ARTICLE 28. In is purchase of required raw materials, fuels, parts, means
of transportation and articles for office use, etc., the joint venture company
shall give first priority to purchase them in China where conditions are the
same.
ARTICLE 29. The joint venture company may entrust Party A to purchase
equipment and a large quantity of raw materials, persons appointed by Party B
shall be invited to take part in the purchasing.
CHAPTER 12. LABOUR MANAGEMENT
ARTICLE 30. Labour contract covering the employment, dismissal and
resignation, wages, labour insurance, welfare, rewards, penalty and other
matters concerning the staff and workers
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of the joint venture company shall be drawn up between the joint venture company
and the Trade Union of the joint venture company as a whole or individual
employees in accordance with the "Regulations of the People's Republic of China
on Labour Management in Chinese-Foreign Equity Joint Ventures and its
Implementation Rules."
The labor contract shall, after being signed, be filed with the local labor
management department.
ARTICLE 31. The appointment of high-ranking managerial personnel
recommended by both parties, their salaries, social insurance, welfare and the
standard of traveling expenses, etc., shall be decided by the meeting of the
board of directors.
CHAPTER 13. TAXES, FINANCE, AUDIT AND FOREIGN EXCHANGE
ARTICLE 32. The joint venture company and its workers and staff shall pay
taxes in accordance with the stipulations of Chinese laws and other relative
regulations.
ARTICLE 33. Allocations for various funds of the joint venture company
shall be set aside in accordance with the stipulations in "The Accounting
Standards and General Finance Provisions for Business Enterprises of the
People's Republic of China". The annual proportion of allocations shall be
decided by the board of directors according to the business situations of the
joint venture company.
ARTICLE 34. The fiscal year of the joint venture company shall be from
January 1 to December 31. All vouchers, receipts, statistic statements and
reports, account books shall be written in Chinese with reference to the
international accounting standards and regulations.
ARTICLE 35. Financial checking and examination of the joint venture
company shall be conducted by an auditor registered in China and reports shall
be submitted to the board of directors and the general manager.
In case either party considers it necessary to employ other auditor or
accountant to undertake annual financial checking and examination, the joint
venture company shall give its consent. All the expenses thereof shall be borne
by that party.
ARTICLE 36. The joint venture company within 12 days from the end of each
month and each quarter to deliver the financial statement of that month or that
quarter to Party A and in the first twenty days of each fiscal year, the general
manager shall prepare previous year's balance sheet, profit and loss statement
and proposal regarding the disposal of profits, and submit them to the board of
directors for examination and approval.
ARTICLE 37. All the matters regarding the joint venture's foreign exchange
shall be handled in accordance with the pertinent regulations of the People's
Republic of China on the administration of foreign exchange.
<PAGE>
CHAPTER 14. DURATION OF THE JOINT VENTURE
ARTICLE 38. The duration of the joint venture company is twelve years.
The establishment of the joint venture company shall start from the date on
which the business license of the joint venture company is issued.
An application for the extenuation of the duration, proposed by one party
and unanimously approved by the board of directors, shall be submitted to the
original examination and approval authority 180 days prior to the expiry date of
the joint venture.
CHAPTER 15. THE DISPOSAL OF ASSETS AFTER THE EXPIRATION OF THE DURATION
ARTICLE 39. Upon the expiration of the duration or termination before the
date of expiration of the joint venture liquidation shall be carried out
according to the relevant law. The surplus amount of the liquidated assets
after deduction of the original contributions by both parties and after paying
taxes shall be distributed in accordance with the proportion of investment
contributed by Party A and Party B.
CHAPTER 16. INSURANCE
ARTICLE 40. Insurance policies of the joint venture company on various
kinds of risks shall be underwritten within the People's Republic of China.
Types, the value and duration of insurance shall be decided by the board of
directors in accordance with the regulations of the insurance department within
the People's Republic of China.
CHAPTER 17. THE AMENDMENT, ALTERATION. AND DISCHARGE OF THE CONTRACT
ARTICLE 41. The amendment of the contract or its appendices shall come
into force only after the written agreement is signed by Party A and Party B and
approved by the examination and approval department.
ARTICLE 42. In case of inability to fulfill the contract or to continue
operation due to heavy losses in successive years as a result of force majeure,
the duration of the joint venture and the contract shall be terminated before
the time of expiration after unanimously agreed upon by the board of directors
and approved by the examination and approval authority.
ARTICLE 43. Should the joint venture company be unable to continue its
operations or achieve the business purpose stipulated in the contract due to the
fact that one of the contracting parties fails to fulfill the obligations
prescribed by the contract and articles of association, or seriously violate the
stipulations of the contract and articles of association, that party shall be
deemed as unilaterally terminates the contract. The other party shall have the
right to terminate the contract in accordance with the provisions of the
contract after approved by the examination and approval authority as well as to
claim damages. In case Party A and Party B of the joint venture company agree
to continue the operation, the party who fails to fulfill the obligations shall
be liable to the losses thus caused to the joint venture company.
<PAGE>
CHAPTER 18. LIABILITIES FOR BREACH OF CONTRACT
ARTICLE 44. Should either Party A or Party B fails to pay on schedule the
contributions in accordance with the provisions defined in Chapter 5 of this
contract, the breaching party shall pay to the other party 5% of the
contribution for each month starting from the first month after exceeding the
time limit. Should the breaching party fails to pay after 3 months, a
cumulative 15% of the contribution shall be paid to the other party, who shall
have the right to terminate the contract after approved by the relevant
authority and to claim damages to the breaching party in accordance with the
stipulations in Article 49 of the contract.
ARTICLE 45. Should all or part of the contract and its appendices be
unable to be fulfilled owing to the fault of one party, the breaching party
shall bear the responsibilities thus caused. Should it be the fault of both
parties, they shall bear their respective responsibilities according to actual
situations.
CHAPTER 19. FORCE MAJEURE
ARTICLE 46. Should either of the parties to the contract be prevented from
executing the contract by force majeure, such as earthquake, typhoon, flood,
fire and war and other unforeseen events, and their happening and consequences
are unpreventable and unavoidable, the prevented party shall notify the other
party by cable without any delay, and within 15 days thereafter provide the
detailed information of the events and a valid document for evidence issued by
the relevant public notary organization for explaining the reason of its
inability to execute or delay the execution of all or part of the contract.
Both parties shall, through consultations, decide whether to terminate the
contract or to delay the execution of the contract according to the effects of
the events on the performance of the contract.
CHAPTER 20. APPLICABLE LAW
ARTICLE 47. The formation of this contract, its validity, interpretation,
execution and settlement of the disputes shall be governed by the related laws
of the People's Republic of China.
CHAPTER 21. SETTLEMENT OF DISPUTES
ARTICLE 48. Any disputes arising from the execution of, or in connection
with the contract shall be settled through friendly consultations between both
parties. In case no settlement can be reached through consultations, the
disputes shall be submitted to the Foreign Economic and Trade Arbitration
Commission of China for arbitration in accordance with its rules of procedure.
The arbitral award is final and binding upon both parties.
ARTICLE 49. During the arbitration, the contract shall be executed
continuously by both parties except for the part in disputes.
CHAPTER 22. LANGUAGE
ARTICLE 50. The contract shall be written in Chinese.
CHAPTER 23. EFFECTIVENESS OF THE CONTRACT AND MISCELLANEOUS
<PAGE>
ARTICLE 51. The appendices drawn up in accordance with the principles of
this contract are integral part of this contract, including:
1. Articles of association of Hangzhou Aftek Communication Co. Ltd.;
2. Import equipment list of the joint venture company;
3. Exportation agreement of the joint venture's products;
ARTICLE 52. The contract and its appendices shall come into force
beginning from the date of approval by the examination and approval authority.
ARTICLE 53. Should notices in connection with any party's rights and
obligations be sent by either Party A or Party B by telegram or telex, etc.,
written letter notices shall be also required afterwards. The legal addresses
of Party A and Party B listed in this contract shall be the posting addresses.
ARTICLE 54. The contract is signed as of June 18, 1994 in Hangzhou by the
authorized representatives of both parties.
PARTY A :Advanced Fibre Technology Communication (Hong Kong) Limited
Legal representative and Chairman: Donald Green
Signature:
/s/ Donald Green
PARTY A :Advanced Fibre Technology Communication (Hong Kong) Limited
Vice-Chairman: David So
Signature:
/s/ David So
PARTY B: Hangzhou Communication Equipment Factory of the MPT.
Legal representative: Shi Ji Xing
Signature:
/s/ Shi Ji Xing
PARTY B: Hangzhou Communication Equipment Factory of the MPT., HuaTong Branch
Legal representative: Jiang Suo Zheng
Signature:
/s/ Jiang Suo Zheng
<PAGE>
1445 & 1455 MCDOWELL BOULEVARD NORTH
NET LEASE
THIS LEASE, dated February 1, 1993, is made and entered into by and
between G & W/Redwood Associates Joint Venture, a California general partnership
("Landlord"), and Advanced Fibre Communications a CALIFORNIA
CORPORATION, ("Tenant").
1. PREMISES.
Landlord hereby leases to Tenant, and Tenant hereby leases from Landlord
for the term of this Lease and at the rent and upon the conditions set forth
below, the Premises described in the Basic Lease Information and identified on
the floor plan attached hereto as Exhibit A. The Premises are located within the
building (the "Building") as described in the Basic Lease Information and part
of a two building complex, 1445 & 1455 McDowell Boulevard North (the "Project").
All areas and facilities outside the Building and within the exterior boundaries
of the Project that are provided and designated by Landlord from time to time
for the general nonexclusive use and convenience of the tenants of the Project,
shall be known as "Common Areas".
2. TERM.
(a) The term of this Lease shall commence on the date specified in
the Basic Lease Information ("Commencement Date") unless commencement is
postponed due to a delay in delivering the Premises as provided in subparagraph
(b) of this section. A "Lease Year" is a period of 12 consecutive calendar
months. A "Lease Month" is a calendar month. The initial term of this Lease
shall be determined as follows:
(i) If the Commencement Date of this Lease occurs on the first
calendar day of a calendar month, the term shall be for a period of Lease Years
and Months as specified in the Basic Lease Information, unless terminated sooner
as provided in this Lease.
(ii) If the Commencement Date of this Lease occurs on other than
the first calendar day of a calendar month, the term shall be for a period of
Lease Years and Months as specified in the Basic Lease information, plus the
number of days remaining in the calendar month in which the Commencement Date
occurs, unless terminated sooner as provided in this Lease.
(b) If Landlord is unable to deliver to Tenant possession of the
Premises on the Commencement Date as set forth in the Basic Lease Information,
whether as a result of the failure of Landlord to substantially complete the
Tenant Improvements or for any other reason, Landlord shall not be liable for
any damage caused thereby. In such event if Landlord is unable to deliver the
Premises before one (1) year from the date of this Lease, then Tenant may, at
Tenant's option, by notice in writing to Landlord within thirty (30) days
thereafter, cancel this Lease, in which event; (i) this Lease shall be deemed
null and void and have no further force or effect, (ii) all security or other
deposits made herewith shall be promptly returned to Tenant, and (iii) the
parties shall have no further obligation to each other; provided
further, however, that if
1
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such written notice of Tenant is not received by Landlord within said ten
(10) day period, Tenants right to cancel this Lease hereunder shall terminate
and be of no further force or effect. The one (1) year time limit to complete
construction of the premises shall be extended due to acts of God, war, labor
strikes, and other occurrences beyond the control of Landlord, plus any
period of time due to delays caused by Tenant. In the event of such late
delivery of the Premises, the commencement of the term of this Lease shall be
postponed until Landlord delivers possession of the Premises.
3. RENT.
(a) Tenant shall pay to Landlord as rent the amount specified in the
Basic Lease Information as the Base Rent, payable in advance on the commencement
of the term and on or before the first day of each and every successive calendar
month during the term. If the term commences on other than the first day of a
calendar month, the first payment of rent shall be appropriately prorated on the
basis of a 30-day month.
(b) Tenant shall pay, as additional rent, all amounts of money
required to be paid to Landlord by Tenant under this Lease in addition to
monthly Base Rent, whether or not the same be designated "additional rent." If
such amounts are not paid at the time provided in this Lease, they shall
nevertheless be collectable as additional rent with the next installment of
monthly Base Rent thereafter falling due, but nothing herein contained shall be
deemed to suspend or delay the payment of any amount of money at the time the
same becomes due and payable hereunder, or limit any other remedy of Landlord.
(c) Tenant hereby acknowledges that late payment by Tenant to
Landlord of rent and other amounts due hereunder after the expiration of any
applicable grace period will cause Landlord to incur costs not contemplated by
this Lease, the exact amount of which will be extremely difficult to ascertain.
Such costs include, but are not limited to, processing and accounting charges,
and late charges which may be imposed on Landlord by the terms of any trust deed
covering the Premises. Accordingly, if any installment of rent or any other
sums due from Tenant shall not be received by Landlord when due, Tenant shall
pay to Landlord a late charge equal to 2% of such overdue amount. The parties
hereby agree that such late charge represents a fair and reasonable estimate of
the costs Landlord will incur by reason of late payment by Tenant. Acceptance
of such late charge by Landlord shall in no event constitute a waiver of
Tenant's default with respect to such overdue amount, nor prevent Landlord from
exercising any of the other rights and remedies granted hereunder.
(d) Any amount due to Landlord, if not paid when due, shall bear
interest from the date due until paid at the rate of 10% per annum or, if a
higher rate is legally permissible, at the highest rate legally permitted.
Payment of interest shall not excuse or cure any default hereunder by Tenant.
(e) All payments due from Tenant to Landlord hereunder shall be made
to Landlord without deduction or offset, in lawful money of the United States of
America at Landlord's address for notices hereunder, or to such other person or
at such other place as Landlord may from time to time designate in writing to
Tenant.
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4. TAXES AND OPERATING EXPENSES.(See Addendum No. 1 Paragraph 7 )
(a) In addition to the Base Rent, Tenant shall pay its percentage
share, as specified in the Basic Lease Information, of all Property Taxes
assessed with respect to the Building and Common Areas during the term, and its
percentage share of all Operating Expenses paid or incurred by Landlord during
the term. For the purposes hereof, "Property Taxes" shall mean all real
property taxes and assessments and governmentally imposed fees or charges (and
any tax levied wholly or partly in lieu thereof) levied, assessed, confirmed,
imposed or which have become a lien against the Building (which for the purposes
of defining "Property Taxes" shall include the land underlying the Building) and
Common Area. "Operating Expenses" shall mean (1) all reasonable costs of
management, operation, maintenance and repair of the Building and Common Areas,
(2) the reasonable cost of all insurance maintained by Landlord with respect to
the Building and Common Areas and (3) the share allocable to the Building of
dues and assessments payable under any reciprocal easement or common area
maintenance agreements or declarations or by any owners' associations affecting
the Building. Operating Expenses for any calendar year shall be adjusted to
equal Landlord's reasonable estimate of Operating Expenses had the total
rentable area of the Project been occupied. Management expenses for Building and
Common Area management shall be limited as follows: (1) Building Management fees
shall be 3% of Tenant's annual Base Rent (2) Common Area Management fees shall
be 10% of the common area expenses including any charges, dues or assessments
under any reciprocal easement agreement, common area maintenance agreement,
or by any owners' association affecting the Building.
(b) In the event the Building is not separately assessed for tax
purposes, then the Property Taxes to be paid by Tenant shall be Tenant's
percentage share of the product obtained by multiplying the total of the real
property taxes and assessments levied against the tax parcel of which the
Building is a part by a fraction, the numerator of which is the rentable area of
the Premises and the denominator of which is total rentable area of all
improvements located within the tax parcel of which the Premises are a part.
Landlord may cause the Common Areas of the Project to be separately assessed
from other areas and buildings of the Project. In such case, Tenant's
percentage share of real property taxes attributable to the Common Areas shall
be determined by the ratio that the total rentable square feet in the Premises
bears to the total number of square feet of rentable area included in the
Project.
(c) Tenant shall pay to Landlord each month at the same time and in
the same manner as monthly Base Rent 1/12th of Landlord's estimate of Property
Taxes and Operating Expenses for the then current calendar year. The initial
monthly amount shall be as set forth in the Basic Lease Information. Within 120
days after the close of each calendar year, or as soon after such 120-day period
as practicable, Landlord shall deliver to Tenant a statement of actual Property
Taxes and Operating Expenses for such calendar year. However, Landlord's
failure to provide such statement within such 120 day period shall not act as a
waiver and shall not excuse Tenant or Landlord from making the adjustments to
reflect actual costs as provided herein. If on the basis of such statement
Tenant owes an amount that is less than the estimated payments for such calendar
year previously made by Tenant, Landlord shall credit such excess to Tenant
against future additional rent due under this Article. If on the basis of such
statement Tenant owes an amount that is more than the estimated payments for
such calendar year previously made by Tenant, Tenant shall pay the deficiency to
Landlord within fifteen (15) days after delivery of the statement. The
obligations of Landlord and Tenant under this subparagraph with respect to
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<PAGE>
the reconciliation between estimated payments and actual Property Taxes and
Operating Expenses for the last year of the term shall survive the termination
of the Lease. When the final determination is made of Tenant's percentage share
of actual Property Taxes and Operating Expenses for the year in which this Lease
terminates, Tenant shall immediately pay any increase due over the estimated
payments and conversely any overpayment shall be immediately rebated by Landlord
to Tenant.
5. OTHER TAXES.
Tenant shall pay or reimburse Landlord for (1) any taxes upon,
measured by or reasonably attributable to the cost or value of Tenant's
equipment, furniture, fixtures, and other personal property located in the
Premises or leasehold improvements made in or to the Premises at Tenant's
expense, (2) for taxes, if any, measured by or reasonably attributable to Tenant
Improvements paid for by Tenant in excess of $23.00 per square foot; (3) for any
taxes, assessments, fees, or charges imposed by any public authority or
private community maintenance association upon or by reason of the development,
possession, use or occupancy of the Premises or the parking facilities used by
Tenant in connection with the Premises; and for any gross receipts tax imposed
with respect to the rent payable hereunder.
6. USE.
6.1 PROHIBITED USES. The Premises shall be used and occupied by
Tenant solely for the use set forth in the Basic Lease Information. Tenant
shall, at Tenant's expense, comply promptly with all applicable statutes,
ordinances, rules, regulations, orders, and requirements in effect during the
term regulating Tenant's activities or the use by Tenant of the Premises.
Tenant shall not use or permit the use of the Premises in any manner that will
tend to create waste or a nuisance, or that unreasonably disturbs other tenants
of the Building or Redwood Business Park, nor shall Tenant place or maintain any
signs, antennas, awnings, lighting or plumbing fixtures, loudspeakers, exterior
decoration or similar devises on or visible from the exterior of the Premises
without Landlord's prior written consent. Tenant shall not use any corridors,
sidewalks, or other areas outside of the Premises for storage or any purpose
other than access to the Premises. Except as provided in Paragraph 6.4 below,
Tenant shall not use, keep, or permit to be used or kept on the Premises any
foul or noxious gas or substance, nor shall Tenant do or permit to be done
anything in and about the Premises, either in connection with activities
hereunder expressly permitted or otherwise, which would cause an increase in
premiums for or a cancellation of any policy of insurance (including fire
insurance) maintained by Landlord in connection with the Premises or the
Building or which would violate the terms of any covenants, conditions, or
restrictions, or the design guidelines, or the sign guidelines affecting the
Building or the land on which it is located.
6.2 SUITABILITY. Tenant acknowledges that neither Landlord nor any
agent of Landlord has made any representation or warranty with respect to the
Premises or the Building or with respect to the suitability or fitness of either
for the conduct of Tenant's business or for any other purpose. Nor has Landlord
agreed to undertake any modification, alteration or improvement to the Premises
except as provided in this Lease. Tenant hereby acknowledges that the Premises
are located in a 100 year flood zone and that the finished floor elevations of
the Building are designed to be two (2) feet above the federal government's
estimate of the 100 year flood level at the time of initial construction.
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<PAGE>
6.3 USE OF COMMON AREAS.
(a) Tenant's Right to Use. Landlord gives Tenant and its
authorized employees, agents, customers, representatives, and invitees the
nonexclusive right to use the Common Areas, with others who are entitled to use
the Common Areas, subject to Landlord's rights as set forth in this paragraph
6.3.
(b) Rules and Regulations Regarding Use. All Common Areas
shall be subject to the exclusive control and management of Landlord or such
other person or nominee as Landlord may delegate or assign to exercise such
management or control, in whole or in part, and Landlord and Landlord's nominees
and assignees shall have the right to establish, modify, amend, and enforce
reasonable rules and regulations with respect to the Common Areas. Tenant
acknowledges receipt of a copy of the current rules and regulations, attached
hereto as Exhibit C, and agrees that they may be modified or amended by Landlord
(the "Rules"). Tenant agrees to abide by and conform with such Rules; to cause
its concessionaires and its and their employees and agents to abide by such
Rules; and to use its best efforts to cause its customers, invitees, and
licensees to abide by such Rules.
(c) Landlord's Rights. Landlord shall have the right to close
temporarily any portion of the Common Areas to discourage non-customer use; to
use portions of the Common Areas while engaged in making additional improvements
or repairs or alterations to the Property; and to do and perform such acts in,
to, and with respect to the Common Areas as in the use of good business judgment
Landlord shall determine to be appropriate for the project.
(d) Right to Increase or Decrease Common Areas. Landlord shall
have the unqualified right to increase or reduce the Common Areas, provided the
Project meets the parking requirement under Paragraph 6.5 of this Lease.
6.4 ENVIRONMENTAL MATTERS.
(a) (i) Compliance with Environmental Laws. "Hazardous
Materials" as used herein, refers to any petroleum products, asbestos,
polychlorinated biphenyls, P.C.B.'s, or other hazardous, toxic, contaminated or
polluting materials, substances or wastes. Tenant shall not use, manufacture,
store, release, dispose, or transport any Hazardous Materials on or in the
proximity of the Premises or the Building or the Project, with the exception of
those Hazardous Materials listed on Exhibit F attached to this Lease, and such
Hazardous Materials as may be added to Exhibit F on an annual review basis.
Landlord shall at all times have the sole and absolute discretion, exercised in
good faith, to disapprove a Hazardous Material from being listed in Exhibit F.
Where Hazardous Materials are permitted, Tenant shall at all times and in all
respects comply with all federal, state, and local laws, ordinances and
regulations ("Hazardous Materials Laws") relating to industrial hygiene,
environmental protection or the use, analysis, generation, manufacture, storage,
release, disposal, or transportation of Hazardous Materials.
(ii) Hazardous Materials Handling. Tenant shall at its
own expense procure, maintain in effect, and comply with all conditions of any
and all permits, licenses, and other governmental and regulatory approvals
required in connection with Tenant's
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generation use, storage, disposal and transportation of Hazardous Materials.
Except as discharged into the sanitary sewer in strict accordance and conformity
with all applicable Hazardous Materials Laws, Tenant shall cause any and all
Hazardous Materials removed from the Premises to be removed and transported
solely by duly licensed haulers to duly licensed facilities for final disposal
of such materials and wastes. Regardless whether permitted or under the
Hazardous Materials Laws, Tenant shall not maintain in, on, under, or about the
Premises, the Building or the Project any above or below ground storage tanks,
clarifiers, or sumps, nor shall any wells for the monitoring of ground water,
soils, or subsoils be allowed without prior notice given to Landlord and the
written consent of the Landlord obtained, which consent may be withheld in the
Landlord's good faith and subjectively reasonable discretion.
(iii) Notices. Tenant shall immediately notify Landlord in
writing of: (a) any enforcement, cleanup, removal or other governmental or
regulatory action instituted, completed or threatened pursuant to any Hazardous
Materials Law; (b) any claim made or threatened by any person against Tenant,
the Premises, the Building or the Project relating to damage, contribution,
cost, recovery, compensation, loss or injury resulting from or claimed to result
from any Hazardous Materials; and (c) any reports made to any environmental
agency arising out of or in connection with any Hazardous Materials in or
removed from the Premises, the Building, or the Project including any
complaints, notices, warnings or asserted violations in connection therewith and
supply Landlord with copies thereof.
(b) Indemnification of Landlord. Tenant shall indemnify, defend (by
counsel reasonably acceptable to Landlord), protect, and hold Landlord, and each
of Landlord's partners, employees, agents attorneys, successors and assigns,
free and harmless from and against any and all claims, liabilities, fines,
penalties, forfeitures, losses or expenses (including attorneys' fees) or death
of or injury to any person or damage to any property whatsoever, arising from or
caused in whole or in part, directly or indirectly, by (i) Tenant's use,
analysis, generation, manufacture, storage, release, disposal, or transportation
of Hazardous Materials by Tenant, Tenant's agents, employees, contractors,
licensees or invitees to, in, on, under, about or from the Premises, the
Building, or the Project or (ii) Tenant's failure to comply with any Hazardous,
Materials Law. Tenant's obligations hereunder shall include, without
limitation, and whether foreseeable or unforeseeable, all costs of any required
or necessary repair, cleanup, detoxification or decontamination of the Premises,
the Building, or the Project and the preparation and implementation of any
closure, remedial action or other required plans in connection therewith, and
shall survive the expiration or earlier termination of the term of this Lease.
(c) Landlord all have the right but not the obligation to enter upon
the Premises at all times during the term of this Lease for the purposes of
ascertaining compliance by the Tenant with all applicable Hazardous Materials
Laws.
(d) Landlord shall have the option to declare a default of this Lease
for the release or discharge of Hazardous Materials on the Premises, Building or
Project or in violation of law or in deviation from prescribed procedures in
Tenant's use or storage of Hazardous Materials.
6.5 PARKING. Landlord hereby grants to Tenant and Tenant's customers,
suppliers, employees and invitees, a nonexclusive license to use unassigned
parking spaces in the Common Areas for the use of motor vehicles during the term
of this Lease subject to rights
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reserved to Landlord as specified in this Paragraph 6.5. Landlord reserves the
right to grant similar nonexclusive and unassigned use to other tenants; to
promulgate rules and regulations relating to the use of the Common Areas
including parking by tenants and employees of tenants; to make changes in the
parking layout from time to time; and to do and perform any other acts in and to
these areas and improvements as Landlord determines to be advisable. Tenant
agrees not to overburden the parking facilities and to abide by and conform with
the rules and regulations and to cause its employees and agents to abide by and
conform to the rules and regulations. Upon request, Tenant shall provide
Landlord with license plate numbers of all vehicles driven by its employees and
to cause Tenant's employees to park only in spaces specifically designated for
tenant parking. Landlord shall have the unqualified right to rearrange or
reduce the number of parking spaces; provided, however, the ratio of the number
of parking spaces available to Tenant will be no less than four (4) spaces per
1,000 square feet of the Premises.
7. UTILITIES.
(a) Tenant shall pay for all water, sewer, gas, electricity, heat,
cooling, telephone, refuse collection, and other utility-type services furnished
to Tenant or the Premises, together with all related installation or connection
charges or deposits. Wherever it is practical to do so such services shall be
separately metered or charged to Tenant by the provider thereof and paid for
directly by Tenant. To the extent any of the foregoing services are provided by
Landlord, Tenant shall reimburse Landlord for all costs incurred by Landlord in
connection with the provision of such services based on Landlord's reasonable
estimate of the level of Tenant's use or consumption of such services. Landlord
shall bill Tenant on a monthly or other periodic basis for such services and
payment shall be made by Tenant within ten (10) days after submittal of
Landlord's statement.
(b) Landlord shall not be in default hereunder or be liable for any
damages or personal injuries to any person directly or indirectly resulting
from, nor shall there be any rent abatement by reason of, any interruption or
curtailment whatsoever in utility services unless the damage or injury is caused
by Landlord's sole negligence or willful misconduct.
8. MAINTENANCE, REPAIRS AND ALTERATIONS.
(a) Subject to the provisions of Paragraph 11 below, and except for
damages caused by Tenant, its agents or invitees, Landlord shall keep in good
condition and repair the foundations, exterior walls and roof of the Building
and all areas within the Building not leased to tenants. Tenant expressly waives
the benefits of any statute, including Civil Code Sections 1941 and 1942, which
would afford Tenant the right to make repairs at Landlord's expense or to
terminate this Lease due to Landlord's failure to keep the Premises or the
Building in good order, condition and repair. Landlord shall have no liability
to Tenant for any damage, inconvenience, or interference with the use of the
Premises by Tenant as the result of performing any such maintenance and repair
work.
(b) Tenant shall, at Tenant's expense, maintain the interior portion
of the Premises (including, but not limited to, all plumbing and electrical
connections, outlets and lightbulbs) in good condition and repair. If Tenant
fails to do so, Landlord may, but shall not be required to, enter the Premises
and put them in good condition, and Landlord's costs thereof
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shall automatically become due and payable as additional rent Tenant shall
obtain janitorial services for the Premises, including restroom janitorial
services, if applicable, and pay directly to the provider thereof for such
janitorial expenses. Tenant shall at its expense, also cause to be maintained
in good operating condition and repair, all heating, ventilating, and air
conditioning equipment installed in the Premises. Tenant shall keep in force a
preventive maintenance contract with a qualified maintenance company covering
all heating, ventilating and air conditioning equipment and shall provide
Landlord a copy of this contract. At the expiration of the term, Tenant shall
surrender possession of the Premises in good condition and repair, only ordinary
wear and tear excepted.
(c) Tenant shall not, without Landlord's prior written consent, make any
alterations, improvements, or additions in or about the Premises over $2,500 in
cost or which in any way puncture or involve the roof membrane. In requesting
Landlord's consent, Tenant shall submit to Landlord complete drawings and
specifications describing such work and the identity of the proposed contractor
at least ten (10) business days prior to the commencement of any work. Landlord
may up to sixty (60) days prior to the expiration of the term require that
Tenant remove any such alterations, improvements or additions at the expiration
of the term, and restore the Premises to their prior condition. Before
commencing any work relating to alterations, additions, or improvements
affecting the Premises, Tenant shall notify Landlord of the expected date of
commencement thereof and of the anticipated cost thereof, and shall furnish such
information as shall reasonably be requested by Landlord substantiating Tenant's
ability to pay for such work. Landlord shall then have the right at any time
and from time to time to post and maintain on the Premises such notices as
Landlord reasonably deems necessary to protect the Premises and Landlord from
mechanics' liens or any other liens. In any event, Tenant shall pay when due
all claims for labor or materials furnished to or for Tenant at or for use in
the Premises. Tenant shall not permit any mechanics' liens or any other liens
to be levied against the Premises for any labor or materials furnished to Tenant
or claimed to have been furnished to Tenant or to Tenant's agents or contractors
in connection with work of any character performed or claimed to have been
performed on the Premises by or at the direction of Tenant. Tenant shall
indemnify, hold harmless and defend Landlord (by counsel reasonably satisfactory
to Landlord) from any liens and encumbrances arising out of any work performed
or materials furnished by or at the direction of Tenant. In the event that
Tenant shall not, within twenty (20) days following the imposition of any such
lien, cause such lien to be released of record by payment or posting of a proper
bond, Landlord shall have, in addition to all other remedies provided herein by
law, the right, but not the obligation, to cause the same to be released by such
means as it shall deem proper, including payment of the claim giving rise to
such lien. All such sums paid by Landlord and all expenses incurred by it in
connection therewith, including attorneys' fees and costs, shall be payable to
Landlord by Tenant on demand with interest at the maximum rate allowable by law.
All alterations, improvements or additions in or about the Premises performed by
or on behalf of Tenant shall be done in a first-class, workmanlike manner, shall
not unreasonably lessen the value of leasehold improvements in the Premises, and
shall be completed in compliance with all applicable laws, ordinances,
regulations and orders of any governmental authority having jurisdiction
thereover, as well as the requirements of insurers of the Premises and the
Building. Upon Landlord's request, Tenant shall remove any contractor,
subcontractor or material supplier from the Premises and the Building if the
work or presence of such person or entity results in labor disputes in or about
the Building or the Redwood-Business Park or damage to the Premises, Building or
Project. Unless Landlord requires their removal, as set forth above, all
alterations, improvements, or additions which may be made on the
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Premises shall become the property of Landlord and remain upon and be
surrendered with the Premises upon the expiration of the term; provided,
however, that Tenant's machinery, equipment, and trade fixtures, other than any
which may be affixed to the Premises so that they cannot be removed without
material damage to the Premises, shall remain the property of Tenant and may be
removed by Tenant.
9. CONSTRUCTION OF TENANT IMPROVEMENTS.
Landlord shall be responsible for constructing the tenant improvements
on the premises, as provided in Exhibit B, Work Letter Agreement, attached to
this Lease and incorporated by this reference.
10. INSURANCE AND INDEMNITY.
10.1 INSURANCE.
(a) Tenant shall obtain and maintain during the term of this
Lease comprehensive general liability insurance with a combined single limit for
personal injury and property damage in a form and with carriers acceptable to
Landlord in an amount not less than $2,000,000 and employer's liability and
workers' compensation insurance as required by law. The insurance carrier shall
be authorized to do business in the State of California, with a policyholders
and financial rating of at least A:IX Class status as rated in the most recent
edition of Best's Key-Rating guide. Any deductible amount required hereunder
shall be subject to Landlord's prior written approval, in any event deductibles
shall not exceed 5% of the coverage. Tenant's comprehensive general liability
insurance policy shall be endorsed to provide that (i) it may not be canceled or
altered in such a manner as to adversely affect the coverage afforded thereby
without 30 days' prior written notice to Landlord, (ii) Landlord is named as an
additional insured, (iii) the insurer acknowledges acceptance of the mutual
waiver of claims by Landlord and Tenant pursuant to subparagraph (b) below, and
(iv) such insurance is primary with respect to Landlord and that any other
insurance maintained by Landlord is excess and noncontributing with such
insurance. If, in the reasonable opinion of Landlord's lender or Landlord's
insurance adviser, based on an increase in recovered liability claims generally,
the specified amounts of coverage are no longer adequate, such coverage shall be
appropriately increased. Prior to the commencement of the term, Tenant shall
deliver to Landlord a duplicate of such policy or certificate thereof to
Landlord for retention by it, with endorsements, and at least thirty (30) days
prior to the expiration of such policy or any renewal thereof, Tenant shall
deliver to Landlord a replacement or renewal binder, followed by a duplicate
policy or certificate within a reasonable time thereafter. If Tenant fails
to obtain such insurance or to furnish Landlord any such duplicate policy or
certificate as herein required, Landlord may, at its election, without notice to
Tenant and without any obligation to do so, procure and maintain such coverage
and Tenant shall reimburse Landlord on demand as additional rent for any premium
so paid by Landlord.
(b) Landlord hereby waives all claims against Tenant, and
Tenant's officers, directors, partners, employees, agents and representatives
for loss or damage to the extent that such loss or damage is insured against
under any valid and collectable insurance policy insuring Landlord or would have
been insured against but for any deductible amount under any such policy, and
Tenant waives all claims against Landlord including Landlord's officers,
directors, partners, employees, agents, and representatives for loss or damage
to the extent such
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loss or damage is insured against under any valid and collectable insurance
policy insuring Tenant or required to be maintained by Tenant under this Lease,
or would have been insured against but for any deductible amount under any such
policy. The insuring party shall, upon obtaining the policies of insurance
required under this Lease, give notice to the insurance carrier or carriers that
the foregoing mutual waiver of subrogation is contained in this Lease. Tenant
agrees that in the event of a sale of the Premises by Landlord, this waiver of
subrogation shall continue in favor of the original Landlord hereunder and any
subsequent Landlord.
(c) Tenant shall at its own cost maintain on all its personal
property, Tenant's improvements, and alterations, in, on, or about the Premises,
a policy of standard fire and extended coverage insurance, with vandalism and
malicious mischief endorsements, to the extent of at least 100% of their full
replacement value. The proceeds from any such policy shall be used by Tenant
for the replacement of personal property or the restoration of Tenant's
improvements or alterations.
(d) Casualty Insurance. During the term hereof, Landlord shall
keep the Building and improvements within which the Premises are contained
insured against loss or damage by (i) fire, with extended coverage and
vandalism, malicious mischief and special extended perils (all risk)
endorsements or their equivalents, in amounts not less than one hundred percent
(100%) of the replacement cost of the Building and structures insured and; (ii)
flood, in the maximum amount provided for by FEMA under its flood loss insurance
program, with loss payable thereunder to Landlord and to any authorized
encumbrancer of Landlord (with standard mortgagee loss payable clause) in
accordance with their respective interests. Landlord may maintain rent
insurance, for the benefit of Landlord, equal to at least one year's rent
hereunder. If the Lease is terminated as a result of damage by fire, casualty
or earthquake as set forth in Paragraph 10 hereof, all insurance proceeds shall
be paid to and retained by Landlord, subject to the rights of any authorized
encumbrancer of Landlord.
(e) Earthquake Insurance. Tenant acknowledges that Landlord
does not, at the time of the signing of this Lease, insure the Building for
earthquake damage. Landlord may, when Landlord deems the premiums to be
reasonable, insure the Building fully or partially for earthquake damage. At
such time, the premium for earthquake insurance will be added to Operating
Expenses for purposes of determining additional rent.
10.2 INDEMNITY.
(a) Tenant hereby waives all claims against Landlord for damage to
any property or injury to or death of any person in, upon or about the Premises
or any other portion of the Project arising at any time and from any cause other
than Landlord's willful or grossly negligent acts. Tenant shall hold Landlord
harmless from and defend (by counsel reasonably satisfactory to Landlord)
Landlord against all claims (except such as arise from the sole negligence or
willful misconduct of Landlord, its agents, employees or contractors) (i) for
damage to any property or injury to or death of any person arising from the use
of the Premises and other portions of the Project by Tenant, or (ii) arising
from the negligence or willful misconduct of Tenant, its employees, agents, or
contractors in, upon or about the Premises or any other portion of the Project.
The foregoing indemnity obligation of Tenant shall include reasonable-attorneys'
fees, investigation cost, and all other reasonable costs and expenses incurred
by Landlord from the first notice that any claim or demand is to be made. The
provisions of this Paragraph 10.2 shall survive the termination of this Lease
with respect to
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any damage, injury, or death occurring prior to such termination.
(b) Neither party shall be liable to the other for any unauthorized
or criminal entry of third parties into the Premises, Building, Project, Common
Areas, or parking facilities, or for any damage to person or property, or loss
of property in and about the Premises, Building, Project, Common Areas, parking
facilities and the approaches, entrances, streets, sidewalks or corridors
thereto, by or from any unauthorized or criminal acts of third parties,
regardless of any breakdown, malfunction or insufficiency of any security
measures, practices or equipment provided by Landlord or Tenant. Tenant shall
immediately notify Landlord in writing of any breakdown or malfunction of any
security measures, practices or equipment provided by Landlord as to which
Tenant has knowledge.
(c) Landlord shall not be liable to Tenant for interference with the
light, view or other intangible property rights or for any damage therefrom to
Tenant or Tenant's property from any cause beyond Landlord's reasonable control.
Tenant hereby agrees that in no event shall Landlord be liable for consequential
damages, including injury to Tenant's business or any loss of income therefrom.
(d) Tenant expressly agrees that so long as Landlord is a
corporation, trust, partnership, joint venture, unincorporated association or
other form of business entity, (i) the obligations of Landlord shall not
constitute personal obligations of the officers, directors, trustees, partners,
joint venturers, members, owners, stockholders or other principals or
representatives of such business entity ("Member of Landlord"), and (ii) Tenant
shall have recourse only to the interest of such business entity in the Building
of which the Premises are a part for the satisfaction of such obligations and
not against the assets of such Member of Landlord other than to the extent of
their respective interests in the Building. In this regard, Tenant agrees that
in the event of any actual or alleged failure, breach or default by Landlord of
its obligations under this Lease, that (i) no Member of Landlord shall be sued
or named as a party in any suit or action (except as may be necessary to secure
jurisdiction of Landlord), (ii) no Member of Landlord shall be required to
answer or otherwise plead to any service of process, (iii) no judgment will be
taken against any Member of Landlord, (iv) any judgment taken against any Member
of Landlord may be vacated and set aside at any time without hearing, (v)no writ
of execution will ever be levied against the assets of any Member of Landlord,
and (vi) these agreements by Tenant are enforceable both by Landlord and by any
Member of Landlord.
11. DAMAGE OR DESTRUCTION.
(a) Subject to the provisions of Paragraph 11 (b) and 11 (c) below,
if, during the term of this Lease, the Premises are totally or partially
destroyed from any insured casualty, Landlord shall restore the Premises to
substantially the same condition as they were in immediately before the
destruction. Landlord's obligation shall not include repair or replacement of
Tenant alterations or Tenant's equipment, furnishings, fixtures and personal
property. Such destruction shall not terminate this Lease. If the existing
laws do not permit the Premises to be restored to substantially the same
condition as they were in immediately before destruction, Landlord shall have 90
days to get a variance to such laws to permit the restoration of the Premises.
If Landlord is unable to get such rights to restore within such 90 day period,
either party may terminate this Lease by giving notice to the other party within
thirty (30) days after such 90 day period.
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(b) The provisions of Paragraph 11 (a) to the contrary
notwithstanding, if as a result of such destruction Landlord decides to demolish
the Building rather than rebuild it or if the damage is uninsured, Landlord
shall have the election to terminate this Lease as of the date of the
destruction. Such election shall be made by Landlord within ninety (90) days
after such destruction.
(c) If any destruction occurs to the Premises during the last twelve
(12) months of the initial term of this Lease or during the last twelve (12)
months of any extension period, regardless of the nature and extent of the
destruction, Landlord can elect to terminate this Lease within sixty (60) days
after the destruction occurs, otherwise the provisions of paragraph 11 (a) shall
apply.
(d) In the event of destruction or damage to the Premises which
materially interferes with Tenant's use of the Premises, if this Lease is not
terminated as above provided, there shall be an abatement or reduction of rent
between the date of destruction and the date Landlord substantially completes
its reconstruction obligations, based upon the extent to which the destruction
interferes with Tenant's use of the Premises, but all other obligations of
Tenant under this Lease shall remain in full force and effect. Except for
abatement of rent, Tenant shall have no claim against Landlord for any loss
suffered by Tenant due to damage or destruction of the Premises or any work of
repair undertaken as herein provided.
(e) The provisions of California Civil Code Sections 1932(2) and
1933(4), and any successor statutes, are inapplicable with respect to any
destruction of the Premises, such sections providing that a lease terminates
upon the destruction of the Premises unless otherwise agreed between the parties
to the contrary.
12. EMINENT DOMAIN.
If all or any part of the Premises shall be taken as a result of the
exercise of the power of eminent domain, this Lease shall terminate as to the
part so taken as of the date of taking, and, in the case of a partial taking of
greater than 50% of the rentable area of the Premises, either Landlord or Tenant
shall have the right to terminate this Lease as to the balance of the Premises
by notice to the other within thirty (30) days after such date. In the event of
any taking, Landlord shall be entitled to any and all compensation, damages,
income, rent, awards, or any interest therein whatsoever which may be paid or
made in connection therewith, and Tenant shall have no claim against Landlord
for the value of any unexpired term of this Lease or otherwise. In the event of
a partial taking of the Premises which does not result in a termination of this
Lease, the monthly Base Rent thereafter to be paid shall be equitably reduced on
a square footage basis.
13. ASSIGNMENT AND SUBLETTING.
(a) Tenant shall not assign or sublet this Lease or any interest
herein or sublet the Premises or any part thereof without the prior written
consent of Landlord, which consent shall not be unreasonably withheld; Tenant
shall not hypothecate this Lease or any interest herein or permit the use of the
Premises by any party other than Tenant without the prior written consent of
Landlord, which consent may be withheld by Landlord in its absolute discretion.
This Lease shall not, nor shall any interest herein, be assignable as to the
interest of Tenant by
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operation of law without the written consent of Landlord. Any of the foregoing
acts without such consent shall be void and shall, at the option of Landlord,
terminate this Lease. In connection with each consent requested by Tenant,
Tenant shall submit to Landlord the terms of the proposed transaction, the
identity of the parties to the transaction, the proposed documentation for the
transaction, current financial statements of any proposed assignee or sublessee
and all other information reasonably requested by Landlord concerning the
proposed transaction and the parties involved therein.
(b) Without limiting the other instances in which it may be
reasonable for Landlord to withhold its consent to an assignment or subletting,
Landlord and Tenant acknowledge that it shall be reasonable for Landlord to
withhold its consent in the following instances:
(1) if the proposed assignee or sublessee is a governmental
agency;
(2) if, in Landlord's reasonable judgment, the use of the
Premises by the proposed assignee or sublessee would entail any alterations
which would lessen the value of the leasehold improvements in the Premises or
would require increased services by Landlord;
(3) if, in Landlord's reasonable judgment, the financial worth
of the proposed assignee or sublessee does not meet the credit standards applied
by Landlord for other tenants under leases with comparable terms, or the
character, reputation or business of the proposed assignee or sublessee is not
consistent with the quality of the other tenancies in Redwood Business Park;
(4) if the subletting would result in the division of the
Premises into more than two subparcels, would create a subparcel of a
configuration that is not suitable for normal leasing purposes, or would require
access to be provided through space leased or held for lease to another tenant
or improvements to be made outside of the Premises; or
(5) if at the time consent is requested or at any time prior to
the granting of consent, Tenant is in default under the Lease or would be in
default under the Lease but for the pendency of any grace or cure period under
Paragraph 14 below.
(c) If at any time or from time to time during the term of this Lease
Tenant desires to sublet all or any part of the Premises, Tenant shall give
notice to Landlord setting forth the terms of the proposed subletting and the
space so proposed to be sublet. Landlord shall have the option, exercisable by
notice given to Tenant within 10 days after Tenant's notice is given, either to
sublet from Tenant such space at the rent and other terms set forth in Tenant's
notice, or, if the proposed subletting is for the entire Premises for a sublet
term ending within the last year of the term of this Lease, to terminate this
Lease. If Landlord does not exercise such option, Tenant shall be free to
sublet such space to any third party on the same terms as set forth in the
notice given to Landlord, subject to obtaining Landlord's prior written consent
as hereinabove provided.
(d) As used in this Paragraph 13, the term "assign" or "assignment"
shall include, without limitation, any sale, transfer, or other disposition of
all or any position of Tenant"s estate under this Lease, whether voluntary or
involuntary, and whether by operation of
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law or otherwise, including any of the following:
(1) if Tenant is a corporation: (i) any dissolution, merger,
consolidation, or other reorganization of Tenant, or (ii) a sale of more than
50% of the value of the assets of Tenant, or (iii) if Tenant is a corporation
with fewer than 500 shareholders, sale or other transfer of a controlling
percentage of the capital stock of Tenant. The phrase "controlling percentage"
means the ownership of, and the right to vote, stocks possessing at least 50% of
the total combined voting power of all classes of Tenant's stock issues,
outstanding and permitted to vote for the election of directors;
(2) if Tenant is a trust the transfer of more than 50% of the
beneficial interest of Tenant, or the dissolution of the trust;
(3) if Tenant is a partnership or joint venture, the withdrawal,
or the transfer of the interest of any general partner or joint venturer or the
dissolution of the partnership or joint venture;
(4) if Tenant is composed of tenants-in-common, the transfer of
interest of any cotenants or the partition or dissolution of the cotenancy.
(e) No sublessee (other than Landlord if it exercises its option
pursuant to subparagraph (c) above) shall have a right further to sublet, and
any assignment by a sublessee of its sublease shall be subject to Landlord's
prior consent in the same manner as if Tenant were entering into a new sublease.
(f) In the case of an assignment, one-half of all sums or other
economic consideration received by Tenant as a result of such assignment shall
be paid to Landlord after first deducting the unamortized cost of leasehold
improvements paid for by Tenant, and the cost of any real estate commissions
incurred in connection with such assignment. In the event such consideration is
received by Tenant in installments, the portion of each installment to be paid
to Landlord shall be determined by multiplying the installment by a fraction,
the numerator of which is the total consideration receivable by Tenant less the
amount of the foregoing permitted deductions and the denominator of which is the
total consideration receivable by Tenant as a result of such assignment.
(g) In the case of a subletting, one-half of all sums or other
economic consideration received by Tenant as a result of such subletting
shall be paid to Landlord after first deducting (i) the rent due hereunder,
prorated to reflect only rent allocable to the sublet portion of the Premises,
(ii) the cost of leasehold improvements made to the sublet portion of the
Premises at Tenant's cost, amortized over the term of this Lease except for
leasehold improvements made for the specific benefit of the sublessee, which
shall be amortized over the term of the sublease, and (iii) the cost of any real
estate commissions incurred in connection with such subletting, amortized over
the term of the sublease.
(h) Regardless of Landlord's consent, no subletting or assignment
shall release Tenant of Tenant's obligation or alter the primary liability of
Tenant to pay the rent and to perform all other obligations to be performed by
Tenant hereunder. The acceptance of rent by Landlord from any other person
shall not be deemed to be a waiver by Landlord of any
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provisions hereof. Consent to one assignment or sublettting shall not be deemed
consent to any subsequent assignment or subletting. In the event of default by
any assignee of Tenant or any successor of Tenant in the performance of any of
the terms hereof, Landlord may proceed directly against Tenant without the
necessity of exhausting remedies against such assignee or successor. Landlord
may consent to subsequent assignments or subletting of this Lease or amendments
or modifications to this Lease with assignees of Tenant, without notifying
Tenant, or any successor of Tenant, and without obtaining its or their consent
thereto, and such action shall not relieve Tenant of liability under this Lease.
(i) In the event Tenant shall assign or sublet the Premises or
request the consent of Landlord to any assignment or subletting, then Tenant
shall pay Landlord's reasonable attorneys' fees incurred in connection
therewith.
14. DEFAULT BY TENANT.
(a) The following events shall constitute events of default under
this Lease:
(1) a failure by Tenant in the payment of any rent or other sum
payable hereunder for a period of ten (10) days after the same is due, provided
that if Tenant has failed one or more times in any twelve-month period to pay
any rent or other sum within ten (10) days after the due date, no grace period
shall thereafter be applicable hereunder;
(2) a failure by Tenant in the performance of any of the other
terms, covenants, agreements, or conditions contained herein and, if the
default is curable, the continuation of such default for a period of ten (10)
days after written notice by Landlord or beyond the time reasonably necessary
for cure if the default is of the nature to require more than ten (10) days to
remedy, provided that if Tenant has failed in the performance of the same
obligation. one or more times in any twelve-month period and notice of such
default has been given by Landlord in each instance, no cure period shall
thereafter be applicable hereunder;
(3) the bankruptcy or insolvency of Tenant, any transfer by
Tenant to defraud creditors, any assignment by Tenant for the benefit of
creditors, or the commencement of any proceedings of any kind by or against
Tenant under any provision of the Federal Bankruptcy Act or under any other
insolvency, bankruptcy or reorganization act unless, in the event any such
proceedings are involuntary, Tenant is discharged from the same within sixty
(60) days thereafter; the appointment of a receiver for a substantial part of
the assets of Tenant; or the levy upon this Lease or any estate of Tenant
hereunder by any attachment or execution; and
(4) the abandonment or vacation of the Premises.
(b) In the event of any material default or breach by Tenant, Landlord
may at any time thereafter, without limiting Landlord in the exercise of any
right or remedy at law or in equity which Landlord may have by reason of such
default or breach:
(1) Pursue the remedy described in California Civil Code Section
1951.4 whereby Landlord may continue this Lease in full force and effect after
Tenant's breach and abandonment and recover the rent and any other monetary
charges as they become due, without terminating Tenant's right to sublet or
assign this Lease, subject only to reasonable limitations
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as herein provided. During the period Tenant is in default, Landlord shall have
the right to do all acts necessary to preserve and maintain the Premises as
Landlord deems reasonable and necessary, including removal of all persons and
property from the Premises, and Landlord can enter the Premises and relet them,
or any part of them, to third parties for Tenant's account. Tenant shall be
liable immediately to Landlord for all costs Landlord incurs in reletting the
Premises, including, without limitation, brokers' commissions, expenses of
remodeling the Premises required by the reletting, and like costs. Reletting
can be for a period shorter or longer than the remaining term of this Lease.
(2) Terminate Tenant's rights to possession by any lawful means,
in which case this Lease shall terminate and Tenant shall immediately surrender
possession of the Premises to Landlord. In such event Landlord shall be
entitled to recover from Tenant all damages incurred by Landlord by reason of
Tenant's default, including, without limitation thereto, the following: (i) the
worth at the time of award of any unpaid rent which had been earned at the time
of such termination; plus (ii) the worth at the time of award of the amount by
which the unpaid rent which would have been earned after termination until the
time of award exceeds the amount of such rent loss that is proved could have
been reasonably avoided; plus (iii) the worth at the time of award of the amount
by which the unpaid rent for the balance of the term after the time of award
exceeds the amount of such rent loss that is proved could be reasonably avoided;
plus (iv) any other amount necessary to compensate Landlord for all the
detriment proximately caused by Tenant's failure to perform is obligations under
this Lease or which in the ordinary course of events would be likely to result
therefrom; plus (v) at Landlord's election, such other amounts in addition to or
in lieu of the foregoing as may be permitted from time to time by applicable
State law. Upon any such re-entry, Landlord shall have the right to make any
reasonable repairs, alterations or modifications to the Premises which Landlord
in its sole discretion deems reasonable and necessary. The "worth at the time
of award" of the amounts referred to in subparagraphs (i) and (ii) above is
computed by allowing interest at the maximum rate an individual is permitted by
law to charge. The worth at the time of award of the amount referred to in
subparagraph (iii) above is computed by discounting such amount at the discount
rate of the Federal Reserve Bank of San Francisco at the time of award plus 1%.
(3) Pursue any other legal or equitable remedy available to
Landlord. Unpaid installments of rent and other unpaid monetary obligations of
Tenant under the terms of this Lease shall bear interest from the date due at
the maximum rate an individual is permitted by law to charge.
(c) In the event Tenant is evicted or Landlord takes possession of
the Premises by reason of any default by Tenant hereunder, Tenant hereby waives
any right of redemption or relief from forfeiture as provided by law.
(d) Even though Tenant has breached this Lease and abandoned the
Premises, this Lease shall continue in effect for so long as Landlord does not
terminate Tenant's right to possession, and Landlord may enforce all its rights
and remedies under this Lease, including the right to recover rent as it becomes
due under this Lease. Acts of maintenance or preservation, efforts to relet the
Premises, or the appointment of a receiver upon initiative of Landlord to
protect Landlord's interest under this Lease, shall not constitute a termination
of Tenant's right to possession.
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15. DEFAULT BY LANDLORD, NOTICE TO MORTGAGEE.
Landlord shall not be in default unless Landlord, or the holder of any
mortgage, deed of trust or ground lease covering the Premises, fails to perform
obligations required of Landlord within a reasonable time, but in no event later
than thirty (30) days after written notice by Tenant to Landlord certified mail,
postage prepaid, and to the holder of any first mortgage, deed of trust or
ground lease covering the Premises whose name and address shall have theretofore
been furnished to Tenant in writing, specifying wherein Landlord has failed to
perform such obligations; provided, however, that if the nature of Landlord's
obligation is such that more than thirty (30) days are required for performance
then Landlord shall not be in default if Landlord or the holder of any such
mortgage, deed of trust or ground lease commences performance within such 30-day
period and thereafter diligently prosecutes the same to completion. However, in
no event shall Tenant be entitled to terminate this Lease by reason of
Landlord's default, and Tenant's remedies shall be limited to an action for
monetary damages at law.
16. SECURITY DEPOSIT.
On execution of this Lease, Tenant shall deposit with Landlord the sum
specified in the Basic Lease Information (the "deposit"). The deposit shall be
held by Landlord as security for the performance by Tenant of all of the
provisions of this Lease. If Tenant fails to pay rent or other charges due
hereunder, or otherwise defaults with respect to any provision of this Lease,
Landlord may use, apply, or retain all or any portion of the deposit for the
payment of any rent or other charge in default, or the payment of any other sum
to which Landlord may become obligated by reason of Tenant's default, or to
compensate Landlord for any loss or damage which Landlord may suffer thereby.
If Landlord so uses or applies all or any portion of the deposit, then within
ten (10) days after demand therefor Tenant shall deposit cash with Landlord in
an amount sufficient to restore the deposit to the full amount thereof, and
Tenant's failure to do so shall be a material breach of this Lease. Landlord
shall not be required to keep the deposit separate from its general accounts.
If Tenant performs all of Tenant's obligations hereunder, the deposit, or so
much thereof as has not theretofore been applied by Landlord, shall be returned,
without payment of interest for its use, to Tenant (or, at Landlord's option to
the last assignee, if any, of Tenant's interest hereunder) at the expiration of
the term hereof, and after Tenant has vacated the Premises.
17. ESTOPPEL CERTIFICATE.
(a) Tenant shall within ten (10) days of notice from Landlord
execute, acknowledge and deliver to Landlord a statement certifying (i) that
this Lease is unmodified and in full force and effect (or, if modified, stating
the nature of such modification and certifying that this Lease, as so modified,
is in full force and effect) (ii) the date to which the rent, security deposit,
and other sums payable hereunder have been paid, (iii) acknowledging that there
are not, to Tenant's knowledge, any uncured defaults on the part of Landlord
hereunder, or specifying such defaults, if any are claimed, and (iv) such other
matters as may reasonably be requested by Landlord. Any such statement may be
conclusively relied upon by any prospective purchaser or encumbrancer of the
Building.
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(b) Tenant's failure to deliver such statement within such time shall
be conclusive upon Tenant, (i) that this Lease is in full force and effect,
without modification except as may be represented by Landlord, (ii) that there
are no uncured defaults in Landlord's performance, and (iii) that not more than
one month's rent has been paid in advance.
See 24. b.
18. SUBORDINATION.
This Lease, at Landlord's option, shall be subordinate to any ground
lease, mortgage, deed of trust, or any other hypothecation for security now or
hereafter placed upon the Building and to any and all advances made on the
security thereof and to all renewals, modifications, consolidations,
replacements and extensions thereof. Notwithstanding such subordination,
Tenant's right to quiet possession of the Premises shall not be disturbed if
Tenant is not in default and so long as Tenant shall pay the rent and observe
and perform all of the provisions of this Lease, unless this Lease is otherwise
terminated pursuant to its terms. If any mortgagee, trustee, or ground lessor
shall elect to have this Lease prior to the lien of its mortgage, deed of trust
or ground lease, and shall give notice thereof to Tenant, this Lease shall be
deemed prior to such mortgage, deed of trust, or ground lease, whether this
Lease is dated prior to or subsequent to the date of said mortgage, deed of
trust or ground lease or the date of recording thereof. If any mortgage or deed
of trust to which this Lease is subordinate is foreclosed or a deed in lieu of
foreclosure is given to the mortgagee or beneficiary, Tenant shall attorn to the
purchaser at the foreclosure sale or to the grantee under the deed in lieu of
foreclosure; if any ground lease to which this Lease is subordinate is
terminated, Tenant shall attorn to the ground lessor. Tenant agrees to execute
any documents required to effectuate such subordination or to make this Lease
prior to the lien of any mortgage, deed of trust or ground lease, as the case
may be, or to evidence such attornment.
19. ATTORNEYS' FEES.
If as a result of any breach or default in the performance of any of
the provisions of this Lease, Landlord uses the services of an attorney in order
to secure compliance with such provisions or recover damages therefor, Tenant
shall reimburse Landlord upon demand for any and all attorneys' fees and
expenses so incurred by Landlord. In the event legal action is instigated by
either party, the prevailing party shall be entitled to recover its reasonable
attorneys' fees including attorneys' fees on appeal, if any.
20. NOTICES.
All notices, consents, demands, and other communications from one
party to the other given pursuant to the terms of this Lease shall be in writing
and shall be deemed to have been fully given when personally delivered,
delivered by courier service or deposited in the United States mail, certified
or registered, postage prepaid, and addressed as follows: To Tenant at the
address specified in the Basic Lease Information or to such other place as
Tenant may from time to time designate in a notice to Landlord; to Landlord at
the address specified in the Basic Lease Information, or to such other place and
to such other parties as Landlord may from time to time designate in a notice to
Tenant.
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21. GENERAL PROVISIONS.
(a) This Lease shall be governed by and construed in accordance with
the laws of the State of California.
(b) The invalidity of any provision of this Lease, as determined by a
court of competent jurisdiction, shall in no way affect the validity of any
other provision hereof.
(c) This Lease including attached Exhibits, Addenda, and Basic Lease
Information contains all agreements of the parties with respect to any matter
mentioned herein and may be modified only in writing, signed by the parties.
(d) No waiver by either party of any provision hereof shall be deemed
a waiver of any other provision or of any subsequent breach by the other party
of the same or any other provision. The party's consent to or approval of any
act shall not be deemed to render unnecessary the obtaining of the other
party's consent to or approval of any subsequent act by the other party. The
acceptance of rent hereunder by Landlord shall not be a waiver of any preceding
breach by Tenant of any provision hereof than the failure of Tenant to pay the
particular rent accepted, regardless of Landlord's knowledge of such preceding
breach at the time of acceptance of such rent.
(e) If Tenant remains in possession of the Premises or any part
thereof after the expiration of the term with the consent of Landlord, such
occupancy shall be a tenancy from month-to-month at a rent in the amount of 125%
the last month's rent during the term plus all other charges payable hereunder,
and upon all of the terms of this Lease.
(f) Subject to the provisions of this Lease restricting assignment or
subletting by Tenant, this Lease shall bind the parties, their personal
representatives, successors, and assigns.
(g) Landlord and Landlord's agents shall have the right to enter the
Premises at reasonable times and with reasonable notice for the purpose of
inspecting the same, showing the same to prospective purchasers or lenders, and
making such alterations, repairs, improvements, or additions to the Premises or
to the Building as Landlord may deem necessary or desirable. Landlord may at
any time during the last 120 days of the term place on or about the Premises any
ordinary "For Lease" sign. Landlord may at anytime place on or about the
Premises any ordinary "For Sale" sign.
(h) Tenant shall not conduct any auction at the Premises without
Landlord's prior consent.
(i) The voluntary or other surrender of this Lease by Tenant, the
mutual cancellation thereof or the termination of this Lease by Landlord as a
result of Tenant's default shall, at the option of Landlord, terminate all or
any existing subtenancies or may, at the option of Landlord, operate as an
assignment to Landlord of any or all of such subtenancies.
(j) If Tenant is a corporation, each individual executing this Lease
on behalf of Tenant represents and warrants that he is duly authorized to
execute and deliver this Lease on behalf of the corporation in accordance with a
duly adopted resolution of the Board of Directors and that this Lease is binding
upon the corporation in accordance with its articles of incorporation and
bylaws.
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(k) The term "Landlord" as used herein means the then owner of the
Building and in the event of a sale of the Building the selling owner shall be
automatically relieved of all obligations of Landlord hereunder, except for acts
or omissions of Landlord occurring prior to such sale.
(1) The term "day" as used herein means a calendar day.
(m) On request by Landlord, Tenant shall furnish Landlord with
satisfactory evidence of payment of Tenant's business personal property taxes
and deliver copies of such business personal property tax bills to Landlord.
22. EXHIBITS.
The exhibits and addendum, if any, specified in the Basic Lease
Information are attached to this Lease and by this reference made a put hereof.
23. BROKER'S FEE.
Each party represents that it has not had dealings with any real
estate broker, finder, or other person, with respect to this lease in any
manner, except the brokerage firm(s) specified in the Basic Lease Information.
Each party shall hold harmless the other party from all damages resulting from
any claim that may be asserted against the other party by any broker, finder, or
other person with whom the other party has or purportedly has dealt. Landlord
shall pay any commissions or fees that are payable to the above-named broker or
finder with respect to this Lease in accordance with the provisions of a
separate commission contract.
24. FINANCIAL STATEMENT.
(a) It is acknowledged by all parties hereto that the attached
financial declaration of Tenant is incorporated as a part of this Lease as
Exhibit E, that the information contained therein is true and correct in all
respects, and that the accuracy of the information is a significant fact upon
which Landlord has relied in the granting of this Lease.
(b) If Landlord desires to sell, finance or refinance the Building,
or renew the lease or review a prospective subtenant, Tenant agrees to deliver
to Landlord or to any lender designated by Landlord such financial statements of
Tenant as may be reasonably required by such lender. All such financial
statements shall be received by Landlord in confidence and shall be used for the
purposes herein set forth.
IN WITNESS WHEREOF, the parties have executed this Lease on the
respective dates indicated below.
TENANT: LANDLORD:
ADVANCED FIBRE COMMUNICATIONS G & W REDWOOD ASSOCIATES J.V.,
A CALIFORNIA GENERAL PARTNERSHIP
By: G & W/McDowell Associates: 1985
By: /s/ Donald Green By: /s/ William C. White,
-------------------------- -------------------------------
William C. White,
Its: President Managing General Partner
-------------------------
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[GRAPHIC]
EXHIBIT A
<PAGE>
EXHIBIT B
WORK LETTER AGREEMENT
(Turn Key)
This Work Letter Agreement supplements that certain Lease dated February 2,
1993, executed concurrently herewith by G & W/Redwood Associates Joint Venture,
a California General Partnership, as Landlord, and Advanced Fibre
Communications, a California Corporation as Tenant.
1. Within thirty (30) days of execution of this lease agreement by both
parties, Landlord shall provide Tenant with detailed architectural plans and
drawings of Tenant's improvements. Said plans and drawings shall indicate the
specific requirements of Tenant's space, outlining in detail, interior
partitions, floor coverings, reflected ceiling plan, plumbing fixtures, and
electrical plans, setting forth all electrical requirements of Tenant, all in
conformity with the floor plan to be agreeed upon by Landlord and Tenant
Exhibit-B-l and Standard Specifications outlined in this Exhibit B. Said plans
shall include full energy calculations as required by California and Petaluma
agencies.
2. Tenant shall devote such time as may be necessary to enable Landlord
to promptly complete the final layout plans and specifications for the Premises
("Construction Drawings") and obtain Tenant's written approval of the floor plan
and Construction Drawings. Tenant acknowledges that the Construction Drawings
are subject to the approval of the appropriate government authorities. Tenant
shall be responsible for the suitability for the Tenant's needs and business of
the design and function of all Tenant Improvements. All real property
improvements to be constructed by Landlord as shown on the Construction
Drawings, standard or special, shall be defined as "Tenant Improvements" and
shall be in accordance with building standards.
3. Landlord shall complete the construction of the Tenant Improvements as
described in this Exhibit B using Landlord's contractor in a good and
workmanlike manner.
The cost of the Tenant Improvements ("Tenant Improvement Costs") to be
paid by Landlord shall include:
(a) The costs of preliminary space planning (including one revision)
and final Construction Drawings for the Tenant Improvements, and engineering
costs associated with completion of the State of California energy utilization
calculations under Title 24 legislation;
(b) All costs of obtaining building permits and other necessary
authorizations from the City of Petaluma, County of Sonoma, and the State of
California;
(c) All costs of interior design and finish schedule plans and
specifications including as-built drawings;
(d) All direct and indirect costs of procuring and installing Tenant
Improvements in the Premises, including the construction fee for overhead and
profit and the cost of all on-site supervisory and administrative staff, office,
equipment and temporary services rendered by Landlord's contractor in connection
with construction of the Tenant Improvements; and
In no event shall the Tenant Improvement Costs include any costs of
procuring or
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installing in the Premises any trade fixtures, equipment, furniture,
furnishings, telephone equipment or other personal property ("Personal
Property") to be used in the Premises by Tenant. The cost of such Personal
Property shall be paid by Tenant.
4. Tenant shall have fifteen (15) days to approve the plans and drawings
and/or make modifications to them in accordance with this Exhibit B. The cost of
any modifications or changes not in accordance with this Exhibit B shall be
borne by the Tenant. An estimate of the costs for items not covered by this
Exhibit B shall be provided to Tenant by Landlord and if accepted by Tenant
shall be paid one-half (1/2) by check with Tenant's written authorization and
one-half (1/2) prior to occupancy by Tenant. If such written authorization and
check are not received by Landlord, Landlord shall not be obligated to commence
work on the Premises, and Tenant shall be chargeable for any delay in the
completion of the Premises.
5. If Tenant shall request any change, addition or alteration in the
approved Construction Drawings, Landlord shall promptly give Tenant a written
estimate of (a) the cost of engineering and design services to prepare a change
order (the "Change Order") in accordance with such request, (b) the cost of work
to be performed pursuant to such Change Order, and (c) the time delay expected
because of such requested Change Order. Within three (3) business days
following Tenant's receipt of the foregoing written estimate, Tenant shall
notify Landlord in writing whether it approves such written estimate. If Tenant
approves such written estimate, Tenant shall accompany such approval with a good
check made payable to Landlord in the amount of the estimated cost of preparing
the Change Order and performing the work thereto, and the foregoing shall
constitute Landlord's authorization to proceed. If such written authorization,
and check if required, are not received by Landlord within such three (3)
business day period, Landlord shall not be obligated to prepare the Change Order
or perform any work in connection therewith. Upon completion of the work of the
Change Order and submission of the final cost thereof by Landlord to Tenant,
Tenant shall promptly pay to Landlord any such additional amounts in excess of
Tenant's initial payment for the estimated cost of the change order.
6. If the completion of the Tenant Improvements in the Premises is
delayed (i) at the request of Tenant, (ii) by Tenant's failure to comply with
the foregoing provisions, (iii) by changes in the work ordered by Tenant or by
extra work ordered by Tenant, or (iv) because Tenant chooses to have additional
work performed by Landlord, then Tenant shall be responsible for all costs and
any expenses occasioned by such delay including, without limitation, any costs
and expenses attributable to increases in labor or materials; and there shall be
no delay in the commencement of Tenant's obligation to pay rent because of
Landlord's failure to complete the Tenant Improvements on time.
7. Tenant may, with Landlord's written consent, enter the Premises prior
to the Commencement Date solely for the purpose of installing Tenant's Personal
Property and equipment as long as such entry will not interfere with the orderly
construction and completion of the Premises (Tenant's Work). Tenant shall
notify Landlord of its desired time(s) of entry and shall submit for Landlord's
approval the scope of the work to be performed and the name(s) of the
contractor(s) who will perform such work. Tenant hereby indemnifies and agrees
to protect, defend and hold Landlord, any mortgagee, ground lessor or
beneficiary of a deed of trust incumbering, secured by or affecting the Premises
or the Building, harmless from and against any and all suits, claims, actions,
losses, costs or expenses (including claims for worker's compensation) of any
nature whatsoever, and from attorneys' fees, costs and expenses incurred as a
result of any such claim, action or proceeding brought against Landlord, arising
out of or in connection with the installation of Tenant's Personal Property or
equipment (including but not limited to claims for breach of warranty, personal
injury or property damage.)
8. During the course of construction, Tenant agrees at Tenant's expense
to obtain or maintain public liability and worker's compensation insurance
adequate to fully protect Landlord as well
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as Tenant from and against any and all liability for death of or injury to
person or damage to property caused in or about or by reason of the construction
of Tenant's Work.
9. Tenant agrees that upon substantial completion of the Premises Tenant
will accept the Premises in the condition which it may then be and waives any
right or claim against Landlord for any cause directly or indirectly arising out
of the condition of the Premises, appurtenances thereto, the improvements
thereon, and the equipment therein; and Tenant shall thereafter save and hold
harmless Landlord from liability as proved in Article 10.2 of this Lease.
Landlord shall be liable for any latent or patent defects therein for a period
of one (1) year from substantial completion. Landlord warrants the building
against latent and patent defects for a period of one (1) year from substantial
completion.
10. Tenant hereby releases Landlord from any claim whatsoever for damages
against Landlord for any delay in the date on which the Premises shall be ready
for occupancy by Tenant.
11. Tenant shall immediately prior to occupancy inspect the Premises and
compile an initial punch list of any missing or deficient tenant improvements.
Tenant shall submit this list to Landlord promptly after the inspection. Tenant
shall within the first two weeks after taking occupancy make a final punch list
and submit this list to Landlord. Landlord shall make best efforts to complete
corrective work in a prompt and workman like fashion.
Punch list item corrections shall not delay the commencement of the
Lease nor shall delay in making corrections be grounds for the delay or
reduction in any rent payments that are due.
12. Although the demising partitions may be on the column center line, the
column, being thicker than the wall, extends slightly into the area of the
Premises. The floor area calculations are from the center line of demising
partitions and the outside line of exterior and hall walls and no deduction is
allowed for the columns, sprinkler risers, roof drains, or air conditioning
units serving Tenant and located within Tenant's Premises.
13. As to all building materials and equipment which Landlord is obligated
to supply under the agreed upon description of Landlord's work, Landlord shall
select the manufacturer thereof.
14. Tenant understands that Landlord's budgeted allowance for the
improvements is $23.00 per square foot. Tenant shall work with Landlord on a
best effort's basis to plan new improvements that can be built within this
budget in accordance with Paragraph 11 of Addendum Number 1 to this Lease.
LANDLORD: TENANT:
By: G&W/Redwood Associates Joint Venture Advanced Fibre Communications
a California General Partnership a California Corporation
By: G&W/McDowell Associates: 1985 By: /s/ Donald Green
a California General Partnership --------------------------
Its: President & CEO
By: /s/ William C. White -------------------------
-----------------------------------
William C. White, its Managing
General Partner
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Description of Tenant Improvements
Which Will be Provided by Landlord
The following is a description of tenant improvements and limitations of same,
relating to that certain Floor Plan dated 1/22/93 Rev.: 1/26/93 for Advanced
Fibre Communications a copy of which is attached as Exhibit B-1.
1. PARTITIONS AND WALLS:
a. Interior demising partitions shall be of steel studs at 16' on center
to roof height with taped drywall.
b. All other interior partitions shall be of steel studs at 16' on center
with taped drywall to ceiling height, excepting as specified on Exhibit B-1.
c. All interior partitions shall be finished with one coat of acrylic
latex paint.
d. Partitions and doors shall be installed by Landlord in accordance with
the floor plan attached as Exhibit B-1.
2. FLOOR COVERINGS:
a. Floor coverings shall be carpet or vinyl tile throughout.
b. Landlord shall, at Landlord's option, provide Tenant with a range of
color alternatives for carpeting and floor tile.
3. WINDOW COVERINGS:
a. Landlord to install building standard mini-blinds or equivalent for
all exterior windows.
4. CEILING:
a. Landlord to provide suspended acoustical ceiling throughout at a
height of nine(9) feet.
5. ELECTRICAL AND TELEPHONE.
a. Landlord will supply and install 110 volt perimeter wall plugs as per
local building code in accordance with the floor plan to be agreed upon by
Landlord and Tenant.
Landlord will install additional outlets and switches at the following unit
costs:
(1) standard duplex outlet $ 75.00 each
(2) fourplex outlet 85.00 each
(3) electrical outlets on dedicated circuits 200.00 each
(4) standard switch 100.00 each
(5) three-way switch 200.00 each
(6) power poles 300.00 each
<PAGE>
Costs of additional circuitry or sub panels necessitated by the adding
of outlets and or switches shall be billed to tenant based on actual cost
breakdown by electrical contractor.
b. Landlord will supply and install recessed fluorescent light fixtures
throughout the Premises.
c. Landlord will supply and install___________________individual
telephone outlets in accordance with the Floor Plan to be agreed upon by
Landlord and Tenant shown as Exhibit B-1. Outlets will be conduit only with
pullstrings. Additional outlets will be installed at a cost of $40 each.
d. Within ten (10) days of the floor plan be agreed to by Landlord and
Tenant, Tenant shall provide Landlord with any of Tenant's additional electrical
requirements to be installed by Landlord. Tenant shall pay for all electrical
and telephone work except for work stated herein to be done by Landlord.
6. HEATING, VENTILATING AND AIR CONDITIONING (HVAC):
a. Landlord will supply HVAC throughout the Premises.
b. Additional requirements for HVAC created by additional partitions not
shown on the Floor Plan attached as Exhibit B- 1 shall be paid for by Tenant at
the costs as charged to Landlord for additional ducting and capacity
requirements.
7. FIRE PROTECTION:
a. Premises to fire sprinklered throughout.
b. Fire extinguishers to be installed per requirements of Petaluma City
Fire Marshall.
<PAGE>
EXHIBIT C
RULES AND REGULATIONS
It is further agreed that the following Rules and Regulations shall be and are
hereby made a part of this Lease, and Tenant agrees that Tenant's employees and
agents, or any others permitted by Tenant to occupy or enter the Premises, will
at all times abide by said Rules and Regulations, unless otherwise specified or
provided for in the Lease, to wit:
1. The driveways, entrances and exits to the Property, sidewalks, passages,
building entries, lobbies, corridors, stairways, and elevators of the Building
shall not be obstructed by Tenant, or Tenant's agents or employees, or used for
any purpose other than ingress and egress to and from the Premises. Tenant or
Tenant's agents or employees shall not loiter on the lawn areas or other common
areas of the Property.
(a) Furniture, freight equipment and supplies will be moved in or out of
the Building only through the rear service entrances or other entrances
designated by Landlord and then only during such hours and in such manner as may
be reasonably prescribed by Landlord. Tenant shall cause its movers to use only
the loading facilities, and entrances designated by Landlord. In the event
Tenant's movers damage any part of the Building or Property, Tenant shall
forthwith pay to Landlord the amount required to repair said damage.
(b) No safe or article, the weight of which may in the opinion of Landlord
constitute a hazard to or damage to the Building or the Building's equipment,
shall be moved into the Premises without Landlord's prior written approval, but
such consent or approval shall not be unreasonably withheld, conditioned or
delayed. Landlord and Tenant shall mutually agree to the location of such
articles in the Premises. All damage done to the Property, Building or Premises
by putting in, taking out or maintaining extra heavy equipment shall be repaired
at the expense of Tenant.
(c) Tenants are required to observe all security regulations issued by the
Landlord and to comply with instructions and/or directions of any duly
authorized security personnel for the protection of the Property and all tenants
therein. Landlord reserves the right to close and keep locked any and all
entrances and exits of the Building and Property and gates or doors closing the
parking areas thereof during such hours as Landlord may deem advisable for the
adequate protection of the Property and all tenants therein.
2. Except as otherwise provided for in the Lease, no sign, advertisement or
notice shall be inscribed, painted or affixed on any part of the inside or
outside of the Building unless of such color, size and style and in such place
upon or in the Building as shall be first approved in writing by Landlord. No
furniture or other materials shall be placed in front of the Building or in any
lobby or corridor, without the prior written consent of Landlord. Landlord
shall have the right to remove all non permitted signs and furniture, without
notice to Tenant.
1
<PAGE>
3. Tenant shall not employ any person or persons other than the janitor or
cleaning contractor of Landlord for the purpose of cleaning or taking care of
the Premises without the prior written consent of Landlord, which shall not be
unreasonably withheld, conditioned or delayed. Except as otherwise provided in
the Lease, Landlord shall in no way be responsible to Tenant for any loss of
property from the Premises, however occurring. The janitor of the Building may
at all times keep a pass key, and other agents of Landlord shall at all times be
allowed admittance to the Premises in accordance with the provisions set forth
in the Lease.
4. Water closets and other water fixtures shall not be used for any purpose
other than that for which the same are intended, and any damage resulting to the
same from misuse on the part of Tenant or Tenant's agents or employees, shall be
paid for by Tenant. No person shall waste water by tying back or wedging the
faucets or in any other manner.
5. No animals except seeing-eye dogs or other animals necessary to the
functioning of handicapped personnel shall be allowed on the lawns or sidewalks
or in the offices, halls, and corridors of the Building.
6. No persons shall disturb the occupants of this or adjoining buildings or
premises by the use of any radio, sound equipment or musical instrument or by
the making of loud or improper noises, nor interfere in any way with the other
tenants or those having business with them. Should sound mitigation measures be
required due to sounds originating in the Premiss, the costs of such measures
shall be paid for by Tenant.
7. Bicycles or other vehicles, other than wheel chairs, shall not be permitted
in the offices, halls, corridors and lobbies in the Building nor shall any
obstruction of sidewalks or entrances of the Building by such be permitted.
8. Tenant shall not allow anything to be placed on the outside of the
Building, nor shall anything be thrown by Tenant or Tenant's agents or
employees, out of the windows or doors, or down the corridors, ventilation ducts
or shafts of the Building. Tenant, except in case of fire or other emergency,
shall not open any outside window.
9. No awnings shall be place over any window or entrance.
10. All garbage, including wet garbage, refuse or trash shall be placed by
Tenant in the receptacles designated by Landlord for that purpose. Tenant shall
not burn any trash or garbage at any time in or about the leased Premises or any
area of the Property. Tenant and Tenant's officers, agents, and employees shall
not throw cigar or cigarette butts or other substances or litter of any kind in
or about the Property.
11. Tenant shall not install or operate any steam or gas engine or boiler, or
other machinery or carry on any mechanical business, other than such mechanical
business which normally is identified with general office use in the Premises.
Explosives or other articles of an extra hazardous nature shall not be brought
into the Building complex.
2
<PAGE>
12. Any painting or decorating as may be agreed to be done by and at the
expense of Landlord shall be done during regular weekday working hours. Should
Tenant desire such work on Saturdays, Sundays, holidays or outside or regular
working hours, Tenant shall pay for the extra cost thereof, if any.
13. Tenant and Tenant's agents and employees shall park their vehicles in areas
designated from time-to-time for employee parking.
14. Tenant shall not do anything in the Premises, or bring or keep anything
therein, which will in any way increase or tend to increase the risk of fire or
the rate of fire insurance, or which shall conflict with the regulations of the
Fire Department, of the law or with any insurance policy covering the Premises
or any part thereof.
15. Tenant shall not mark, drive nails, screw, bore, or drill into, paint
or in any way deface the common area walls, exterior walls, roof, foundations,
bearing walls, or pillars without the prior written consent of Landlord. The
expense of repairing any breakage, stoppage or damage resulting from a
violation of this rule shall be borne by Tenant.
16. No waiver of any rule or regulation by Landlord shall be effective unless
expressed in writing and signed by Landlord or his authorized agent.
17. In the event of any conflict between these rules and regulations or any
further or modified rules and regulations from time to time issued by Landlord,
and the lease provisions, the lease provisions shall govern and control.
18. Landlord reserves the right at any time to change or rescind any one or
more of these rules and regulations, or to make such other and further
reasonable rules and regulations as in Landlord's judgment may from time to time
be necessary for the management, safety, care and cleanliness of the Premises,
and for the preservation of good order therein, as well as for the convenience
of other tenants of the Property. Landlord shall not be responsible to Tenant
or to any other person for the non- observance or violation of the rules and
regulations by any other tenant or person. Tenant shall be deemed to have read
these rules and to have agreed to abide by them as a condition to its occupancy
of the space herein leased, and Tenant shall abide by any additional rules and
regulations which are ordered or requested by Landlord or by any governmental
authority.
19. Tenant shall be responsible for cleaning up any trash blowing around their
facility that may have been left by their customers.
20. Garbage and recycle bins are shared among the tenants in Redwood Business
Park. Tenant shall cooperate with the recycling program established for the
project in an effort to recycle waste paper and cardboard, and consequently
reduce trash collection costs.
3
<PAGE>
ADDENDUM NO. 1
1. TERM.
The initial term of the lease is six (6) years six (6) months from the
Commencement Date of the Lease. Should Tenant exercise its option to expand as
per Paragraph 8 of this Addendum and the expansion space is delivered to Tenant
for occupancy on or before the end of the first lease year then the lease term
shall remain the same. If the expansion space is delivered to Tenant for
occupancy after the first lease year then the initial lease term shall be
extended to the last date of the calendar month six (6) years and six (6) months
from the date the expansion space is delivered to Tenant for occupancy. In
either case the expiration date for the original space and the expansion space
will be the same.
2. CONDITIONAL EXCUSE FROM PAYMENT OF BASE RENT.
As consideration for Tenant's performance of all obligations to be
performed by Tenant under the Lease, Landlord hereby excuses Tenant from the
payment of Base Rent for the initially occupied Premises for the first six
months of the term of this Lease; provided, Tenant shall not be in default
hereunder. Should Tenant at any time during the term hereof be in default under
this Lease, then the total sum of such Base Rent so conditionally excused shall
become immediately due and payable by Tenant to Landlord. If at the date of
expiration of the term of this Lease, including any option period, Tenant is not
in default hereunder, Landlord shall waive any payment of all such Base Rent so
excused.
3. FURNITURE, TELEPHONE AND MOVING ALLOWANCE.
Within thirty (30) calendar days after the Tenant's occupancy and
acceptance of the Premises, Landlord shall make to Tenant a one-time payment in
the amount of $13,200 as a Furniture, Telephone and Moving Allowance.
4. EXTENSION OPTIONS.
Landlord hereby grants Tenant one five-year extension option, the term of
which shall begin after the expiration of the initial lease term as potentially
extended under Paragraph 1 of this Addendum. Tenant shall have no right to
extend the term beyond this one five-year option. Tenant shall exercise the
option by giving Landlord written notice of at least (9) months prior to the
expiration date of the initial lease term. The Base Rent for the extended term
shall be as determined in Paragraphs 5, 6 and 8 of this Addendum.
5. BASE RENT FOR INITIAL AND EXTENDED TERM.
The Base Rent shall be paid based upon the amount of Rentable Square Feet
occupied. The Rentable Square Feet shall be defined as the Usable Square Feet,
plus a load factor of 76 sq.ft. for the initial premises and a total of 115
sq.ft for the expanded premises. The load factor represents Tenant's share of
the Building's electrical room. Thus, the Rentable Square Feet is 11,092
sq.ft. before expansion and 16,788 sq.ft. after expansion. The rents before
expansion are set forth below, the rents after expansion are set forth in
Paragraph 8:
1
<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------------------------
NNN RENT/S.F. RENTABLE BASE RENT INITIAL
AREA PREMISES
-------------------------------------------------------------
-------------------------------------------------------------
11,092 S.F. RENTABLE
--------------------------------
<S> <C> <C> <C> <C>
Year 1
Months 1-6 $0.80 conditionally excused per PARA 2
Months 7-12 $0.80 $8,874
- -----------------------------------------------------------------------------------------------------
Years 2-4 $1.00 $11,092
- -----------------------------------------------------------------------------------------------------
Years 5-7 $1.05 $11,645
- -----------------------------------------------------------------------------------------------------
Years 8-9 adjusted as per PARA 6 hereof See PARA 6
- -----------------------------------------------------------------------------------------------------
Years 10-12 adjusted as per PARA 6 hereof See PARA 6
</TABLE>
6. BASE RENT ADJUSTMENT.
Should the lease term be extended under either the provisions of Paragraph
1 or 4 hereof, the Base Rent shall be adjusted at the start of the eighth and
tenth lease years based upon the percentage increase of the Consumer Price Index
For All Urban Consumers, San Francisco-Oakland-San Jose, All Items (1982-1984 =
100), as published by the U.S. Bureau of Labor Statistics ("Index"). The
Adjustment Dates shall be 84 and 108 calendar months following the Commencement
Date. The Index published most immediately preceding the start of the last Base
Rent adjustment ("Beginning Index") and the Index published most immediately
preceding the Adjustment Date ("Adjustment Index") are to be used in determining
the amount of the adjustment. The monthly Base Rent until the next Base Rent
adjustment shall be determined by multiplying the initial monthly Base Rent
hereunder by a fraction, the numerator of which is the Adjustment Index and
denominator of which is the Beginning Index. However, in no event will the
monthly Base Rent be increased by an amount less than 4% per year or more than
6% per year. If the 1982-1984 base of the Index is changed, the new base shall
be converted to the 1982-1984 base in accordance with the U.S. Department of
Labor's conversion factor, and the base as so converted shall be used. If the
U.S. Department of Labor ceases to publish the Index, then the successor index
designated by the U.S. Department of Labor or, if no successor index is so
designated, the most nearly comparable index shall be used.
For example:
The first adjustment will be for 3 years (Lease years 5, 6 & 7) assuming an
April 1, 1993 commencement date and assuming the Index is 173.7 for March 1997
(Beginning Index) and 201.1 for March 2000 (Adjustment Index) the calculation
would be as follows:
Prior Base Rent for Expanded Premises x Adjustment Index / Beginning Index = New
Base Rent $17,627 x 201.1/173.7 = $20,408
Since the increase is 15.77% which is greater than 12.49% (4%/year for 3
years) and less than 19.10% (6%/year for 3 years) no additional adjustment would
be required.
2
<PAGE>
7. ASSESSMENTS.
Landlord anticipates working with the City of Petaluma to create an
Assessment District to acquire the bridge and road improvements constructed in
the Phase of Redwood Business Park in which the Building is located. Tenant
shall pay its prorata share of such assessments assigned to the Building and
Project provided Tenant's share not exceed in the first four lease years $0.03
per square foot of Tenant's Rentable Area per month. Thereafter, Tenant's share
shall not exceed $0.06 per square foot of Tenant's Rentable Area per month.
8. OPTION TO EXPAND.
The Expansion Space shown in Exhibit A, contains 5,657 square feet of
Usable Area and 5,696 square feet of Rentable Area and shall be reserved for
Tenant's use for one year following the Commencement Date of the Lease. Tenant
may lease this space by giving Landlord six (6) months written notice. Tenant
shall not receive a conditional excuse from payment of rent on the expansion
space and will not receive any additional Furniture, Telephone and Moving
Allowance.
The Base Rent for the expanded Premises will be as set forth below:
<TABLE>
<CAPTION>
-----------------------------------------------------
NNN RENT/S.F. RENTABLE BASE RENT AFTER
AREA EXPANSION
-----------------------------------------------------
-----------------------------------------------------
<S> <C> <C> <C> <C>
16,788 S.F. RENTABLE
----------------------
Year 1
Months 1-6. on expansion space only $0.80 $ 4,557
Months 7-12 $0.80 $13,430
- -------------------------------------------------------------------------------------------
Years 2-4 $1.00 $16,788
- -------------------------------------------------------------------------------------------
Years 5-7 $1.05 $17,627
- -------------------------------------------------------------------------------------------
Years 8-9 adjusted as per PARA 6 hereof See PARA 6
- -------------------------------------------------------------------------------------------
Years 10-12 adjusted as per PARA 6 hereof See PARA 6
</TABLE>
Tenant shall have an allowance to demise and improve the expansion space of
$131,008 ($23 per square foot). Such allowance shall cover all items listed in
the Work Letter Agreement, Exhibit B to this Lease, including architectural and
permit costs. This allowance will not include the cost of filling in the truck
dock and moving the exterior wall as shown in Exhibit A. Landlord need not do or
pay for these modifications to the building until Tenant exercises its option to
expand.
3
<PAGE>
Landlord shall install no improvements in the expansion space until Tenant
exercises its right to lease the expansion space or until the period for
Tenant's notice to exercise the expansion option expires.
9. RIGHT OF FIRST OFFER TO LEASE.
Landlord grants to Tenant a right of first offer to lease additional space
within the Building as such space becomes available upon the vacation thereof by
the then-current tenant. As such space becomes available to lease, Landlord
shall notify Tenant thereof and offer such space to Tenant for lease. Tenant
shall have ten (10) days in which to notify Landlord in writing of its intention
to lease such space. Landlord and Tenant area free to agree on the rent term
and interior improvements for such additional space and shall not be bound by
the terms of this lease. If Landlord and Tenant can not agree on the terms for
such a lease within ten (10) days of Tenants notice of intent to lease such
space, Landlord shall be free to lease the space to another tenant.
10. SIGNAGE.
Tenant may have a facia sign, at least (14) fourteen to (18) eighteen
inches - See sign enclosure - with lettering nine inches high and a three inch
high entry door sign as per the approved Redwood Business Park Sign Guidelines.
Tenants logo may be on the fascia sign at same height as letters, high and the
same color as the lettering. All such signage to be at Tenant's cost.
11. TENANT IMPROVEMENTS.
Landlord's and Tenant's intention to improve the initial Premises without
additional cost to Tenant for a budget of $255,116 ($23 per square foot)
including architecture and permit costs as outlined in Exhibit B. Should the
estimated cost for the construction of the initial agreed upon plan exceed this
budget, Tenant shall agree to such changes as reasonably requested by Landlord
to modify the plan to reduce the cost within the budget. Should Tenant not wish
to make such changes, Tenant shall have the option to reimburse Landlord for the
estimated cost savings of any changes to which Tenant does not agree. Such
payment shall be made half prior to construction and half prior to occupancy.
4
<PAGE>
ADDENDUM #2 TO
OFFICE LEASE AGREEMENT
This Addendum #2 to Office Lease Agreement is made and entered into this 30th
day of August 1993, by and between G & W/Redwood Associates Joint Venture
(hereinafter "Landlord") and Advanced Fibre Communications (hereinafter
"Tenant").
RECITALS
A. Landlord and Tenant entered into that certain Office Lease Agreement dated
February 1, 1993, ("the Lease") concerning the premises located at 1445
McDowell Boulevard North, Suite B Petaluma, California, consisting of
approximately 11,092 rentable square feet ("Existing Space").
B. Space adjacent to such premises consisting of approximately 12,435 rentable
square feet is available for lease ("Expansion Space").
C. Landlord and Tenant desire to expand into such adjacent space, extend the
term, and add tenant improvements to the premises as hereinbelow provided.
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
the parties agree as follows:
1. THE PREMISES.
The premises currently leased by Landlord to Tenant consisting of that
certain space located in 1445 McDowell Boulevard North, Suite B, Petaluma,
California containing approximately 11,092 rentable square feet shall be
expanded to include the adjacent 12,435 rentable square feet as outlined on
the in red on the floor plan attached hereto as Exhibit A and made a part
hereof for a total of 23,527 rentable square feet.
2. EXTENSION OF TERM.
The term of the Lease for both the Expansion and the Existing space will be
six (6) years, eight (8) months commencing October 1, 1993. Base Rent for
any extension of this Lease term shall be as calculated in paragraphs 5 and
6 of Addendum #1 to the Lease.
3. RENT.
The rent payable for the Expansion Space shall be as follows:
EXPANSION SPACE BASE RENT (12,435 RENTABLE S.F.)
NNN Rent S.F. Monthly Base Rent
------------------------------------------------
------------------------------------------------
Year 1 * $0.80 $9,948
----------------------------------------------------------------
Years 2 - 4 $0.94 $11,689
----------------------------------------------------------------
Years 5 - 7 $0.99 $12,311
1
<PAGE>
Rent for the Existing Space (11,992 s.f.) and any extensions thereof, will
continue at the rate stated in the Lease.
4. TENANT IMPROVEMENTS.
The Premises shall be build-out in accordance with the floor plan attached
as Exhibit B, and in accordance with the Work Letter (Exhibit B) of the
Lease. No computer or telephone wiring is included in Landlord's work.
Additional work not covered in Exhibit B will be paid by Tenant, except
Landlord, at Landlord's sole cost and expense, will install a hydraulic
dock leveler on one side of the dock area.
5. SECURITY DEPOSIT.
One (1) month's security deposit in the amount of $11,689 will be required
upon execution of this Lease Addendum in addition to the initial security
deposit.
6. OTHER TERMS AND CONDITIONS.
Except as otherwise provided in this Addendum to the contrary, each and
every term, condition, exhibits and covenant of the Lease shall remain in
full force and effect.
Executed on the date above first mentioned in Petaluma, California.
LANDLORD: TENANT:
G & W/REDWOOD ASSOCIATES, J.V. ADVANCED FIBRE COMMUNICATIONS
By: /S/ William C. White By: /s/ Donald Green
-------------------- ------------------------
William C. White,
Managing General Partner Its: President
-----------------------
* CONDITIONAL EXCUSE FROM PAYMENT OF BASE RENT.
As consideration for Tenant's performance of all obligations to be
performed by Tenant under the Lease, Landlord hereby excuses Tenant from the
payment of Base Rent for the first two full months of the term of this Lease;
provided, Tenant shall not be in default hereunder. Should Tenant at any time
during the term hereof be in default under this Lease, then the total sum of
such Base Rent so conditionally excused shall become immediately due and payable
by Tenant to Landlord. If at the date of expiration of the term of this Lease,
including any option period, Tenant is not in default hereunder, Landlord shall
waive any payment of all such Base Rent so excused.
2
<PAGE>
[FLOOR PLAN OMITTED]
EXHIBIT A -COMPOSITE FLOOR PLAN
<PAGE>
ADDENDUM #3 TO
OFFICE LEASE AGREEMENT
This Addendum #3 to Office Lease Agreement is made and entered into this 31st
day of July 1994, by and between G & W/Redwood Associates Joint Venture
(hereinafter "Landlord") and Advanced Fibre Communications (hereinafter
"Tenant").
RECITALS
A. Landlord and Tenant entered into that certain Office Lease Agreement dated
February 1, 1993, ("the Lease") concerning the premises located at 1445
McDowell Boulevard North, Suite B Petaluma, California, consisting of
approximately 11,092 rentable square feet and Addendum #2 to Office Lease
Agreement dated August 30, 1993 concerning the adjacent premises consisting
of 12,435 rentable square feet for a total of 23,527 rentable square feet
("Existing Space").
B. Space adjacent to such premises consisting of approximately 11,376 rentable
square feet is available for lease ("Expansion Space").
C. Landlord and Tenant a desire to expand into such adjacent space, extend the
term, and add tenant improvements to the premises as hereinbelow provided.
NOW, THEREFORE, in consideration of the mutual covenants herein contained, the
parties agree as follows:
1. THE PREMISES.
The premises currently leased by Landlord to Tenant consisting of that
certain space located in 1445 McDowell Boulevard North, Suite B, Petaluma,
California containing approximately 23,527 rentable square feet shall be
expanded to include the adjacent 11,376 rentable square feet as outlined in
red on the floor plan attached hereto as Exhibit A and made a part hereof
for a total of 34,903 rentable square feet.
2. TERM
The term of the Lease for the Expansion Space will be seven (7) years, six
(6) months commencing September 15, 1994. The term of the Lease for the
Existing Space shall be extended to be coterminous with the term for the
Expansion Space.
3. RENT.
The base rent payable for the Expansion Space 11,376 rentable s.f. shall be
as follows:
NNN Rent S.F.Monthly Base Rent
-------------------------------------------------
-------------------------------------------------
Year 1 $0.80 $9,100
--------------------------------------------------------------------------
Years 2 - 4 $0.99 $11,263
--------------------------------------------------------------------------
Years 5 - 7 $1.04 $11,832
--------------------------------------------------------------------------
Year 8 ( 6 months) $1.04 $11,832
1
<PAGE>
Base Rent for the Existing Space (23,527 s.f.) and any extensions thereof,
will continue at the rate stated in Addendum #1 of the original Lease
paragraphs 5 and 6.
4. CONDITIONAL EXCUSE FROM PAYMENT OF BASE RENT.
As consideration for Tenant's performance of all obligations to be
performed by Tenant under the Lease, Landlord hereby excuses Tenant from
the payment of Base Rent on the Expansion Space for the first three (3)
months of the term of this Lease Addendum; provided, Tenant shall not be in
default hereunder. Should Tenant at any time during the term hereof be in
default under this Lease, then the total sum of such Base Rent so
conditionally excused shall become immediately due and payable by Tenant to
Landlord. If at the date of expiration of the term of this Lease,
including any option period, Tenant is not in default hereunder, Landlord
shall waive any payment of all such Base Rent so excused. However, during
the period in which the Base Rent is conditionally excused, Tenant shall
nonetheless be liable for the cost of its prorata share of Taxes and
Operating Expenses and other costs and expenses as herein provided.
5. TENANT IMPROVEMENTS.
Landlord shall, at Landlord's sole cost and expense build-out the premises
in accordance with the floor plan attached as Exhibit B, and in accordance
with the Work Letter (Exhibit B) of the Lease. No computer or telephone
wiring is included in Landlord's work. Additional work not covered in
Exhibit B will be paid by Tenant.
6. OTHER TERMS AND CONDITIONS.
Except as otherwise provided in this Addendum to the contrary, each and
every term, condition, exhibits and covenant of the Lease shall remain in
full force and effect.
Executed on the date above first mentioned in Petaluma, California.
LANDLORD: TENANT:
G & W/REDWOOD ASSOCIATES, J. V. ADVANCED FIBRE COMMUNICATIONS
By: /s/ William C. White By: /s/ Daniel E. Steimle
--------------------- ------------------------
William C. White,
Managing General Partner Its: VP, CFO
------------------------
2
<PAGE>
2[FLOOR PLAN OMITTED]
Exhibit A - COMPOSITE FLOOR PLAN
<PAGE>
ADDENDUM NO. 4
TO
1445 MCDOWELL BOULEVARD NORTH NET LEASE
THIS ADDENDUM NO. 4 TO 1445 McDowell Boulevard North Net Lease ("Addendum No.
4") is entered into as of______________________________, 1995, by and between
G & W/Redwood Associates Joint Venture, a California general partnership
("Landlord"), and Advanced Fibre Communications, a California corporation
("Tenant"). Terms which are capitalized in this Addendum No. 4 but not defined
herein shall have the meanings stated in the Lease.
This Addendum No. 4 is entered into on the basis of the following facts,
intentions and understandings of the parties:
A. Landlord and Tenant entered into that certain 1445 McDowell Boulevard North
Net Lease and Addendum No. 1 on February 1, 1993 and Addendum No. 2 on
August 30, 1993 and Addendum No. 3 on July 3, 1994 collectively ("1445
Lease").
B. Landlord and Tenant have also entered into that certain 1440 McDowell
Boulevard North Net Lease and Addendum No. 1 ("1440 Lease") as of the
execution date of this Addendum No. 4.
C. As partial consideration for Landlord leasing to Tenant the space subject
to the terms of the 1440 Lease, Tenant is willing to extend the term of the
Lease so that it becomes coterminous with the term of the 1440 Lease.
NOW, THEREFORE, in consideration of the mutual covenants and promises of the
parties, the parties agree as follows:
1. TERM.
The term of the 1445 Lease shall be extended so that it is coterminous with
the term of the 1440 Lease, such that the term of the Lease shall expire
eight (8) years and ten (10) months after the commencement date of the 1440
Lease. The commencement date of the 1445 Lease shall remain unchanged.
2. REMAINDER UNCHANGED.
This Amendment shall supersede and cancel all prior and contemporaneous
written and oral agreements, correspondence and communications between the
parties regarding the subject matter hereof. Except as provided in this
Addendum No. 4, the 1445 Lease shall remain in full force and effect and
unamended.
IN WITNESS WHEREOF, this Addendum No. 4 is executed by the parties on the date
first written and shall be deemed effective as of the execution date of the 1445
Lease.
TENANT: LANDLORD
Advanced Fibre Communications, G & W/Redwood Associates Joint Venture,
a California Corporation a California General Partnership
By: G & W/McDowell Associates: 1985
By: /s/ Daniel E. Steimle a California General Partnership
------------------------
Its: VP,CFO By: /s/ William S. White
------------------------ -------------------------------
William C. White
Managing General Partner
<PAGE>
REDWOOD BUSINESS PARK
NET LEASE
THIS LEASE, dated July 9th, 1995 is made and entered into by and between G
& W/Redwood Associates Joint Venture, a California general partnership
("Landlord"), and Advanced Fibre Communications, a California Corporation
("Tenant").
1. PREMISES.
Landlord leases to Tenant, and Tenant hereby leases from Landlord for
the term of this Lease ("Term") and at the rent and upon the conditions set
forth below, the Premises described in the Basic Lease Information and
identified on the floor plan attached hereto as Exhibit A. The Premises are
located within the Building described in the Basic Lease Information, and
constitute part of the Project described in the Basic Lease Information and as
shown in Exhibit A-1 attached hereto, at the Redwood Business Park, located in
Petaluma, California. All areas and facilities outside the Buildings and within
the exterior boundaries of the Project that are provided and designated by
Landlord from time to time for the general nonexclusive use and convenience of
the tenants of the Project shall be known as "Common Areas".
2 TERM.
(a) The Term shall commence upon the date ("Commencement Date") which
is the earlier of: (i) substantial completion of the Premises, as the term
"substantial completion" is defined in the Work Letter Agreement, attached
hereto as Exhibit B; or (ii) the date substantial completion would have occurred
but for Tenant Delays (as the term is defined in the Work Letter Agreement).
The Estimated Commencement Date is set forth in the Basic Lease Information,
which date may be postponed due to a delay in delivering the Premises as
provided in Paragraph 2(b) below. A "Lease Year" is a period of twelve (12)
consecutive calendar months. A "Lease Month" is a calendar month. The initial
Term of this Lease shall be determined as follows:
(1) If the Commencement Date of this Lease occurs on the first
calendar day of a calendar month, the Term shall be for a period of Lease Years
and Months as specified in the Basic Lease Information, unless terminated sooner
as provided in this Lease.
(2) If the Commencement Date of this Lease occurs on other than
the first calendar day of a calendar month, the Term shall be for a period of
Lease Years and Months as specified in the Basic Lease Information, plus the
number of days remaining in the calendar month in which the Commencement Date
occurs, unless terminated sooner as provided in this Lease.
(b) Subject to the provisions of Paragraph 22 below, in the event the
Premises are not substantially completed (in accordance with the Work Letter
Agreement) on or within six (6) months after the Estimated Commencement Date,
then Tenant may, at Tenant's option, by notice in writing to Landlord within ten
(10) days thereafter, cancel this Lease, in which event, (i) this Lease shall be
deemed null and void and have no further force or effect, (ii) all security or
other deposits made herewith shall be promptly returned to Tenant, and (iii) the
parties shall have no further obligation to each other; provided further,
however, that if such written notice of Tenant is not received by Landlord
within said 10-day period, Tenant's right to cancel this Lease hereunder shall
terminate and be of no further force or effect.
3. RENT.
(a) For purposes of this Lease, the term "Rent" shall mean the Base
Rent, Advanced Base Rent, all additional rent, and all of the other monetary
obligations of Tenant under this Lease. Upon execution of this Lease, Tenant
shall pay to Landlord the Advanced
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Base Rent set forth in the Basic Lease Information. Tenant shall pay to Landlord
the Base Rent specified in the Basic Lease Information, payable on or before the
first day of each and every successive calendar month following the Commencement
Date. If the Term commences on other than the first day of a calendar month,
the first payment of Base Rent shall be appropriately prorated, on the basis of
a 30-day month. Tenant's payment of any Advanced Base Rent (excluding that
portion attributable to last month's rent, if any) shall be credited against
Tenant's obligation to pay Base Rent beginning as of the Commencement Date.
(b) Tenant shall pay, as additional rent, all amounts of money
required to be paid to Landlord by Tenant under this Lease in addition to
monthly Base Rent, whether or not the same be designated "additional rent". If
such amounts are not paid at the time provided in this Lease, they shall
nevertheless be collectable as additional rent with the next installment of
monthly Base Rent thereafter falling due, but nothing herein contained shall be
deemed to suspend or delay the payment of any amount of money at the time the
same becomes due and payable hereunder, or limit any other remedy of Landlord.
(c) Tenant acknowledges that late payment by Tenant to Landlord of
Rent after the expiration of any applicable grace period will cause Landlord to
incur costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited to,
processing and accounting charges, and late charges which may be imposed on
Landlord by the terms of any trust deed covering the Premises. Accordingly, if
any installment of Rent or any other sums due from Tenant shall not be received
by Landlord when due, Tenant shall pay to Landlord a late charge equal to two
percent (2%) of such overdue amount. The parties agree that such late charge
represents a fair and reasonable estimate of the costs Landlord will incur by
reason of late payment by Tenant. Acceptance of such late charge by Landlord
shall in no event constitute a waiver of Tenant's default with respect to such
overdue amount, nor prevent Landlord from exercising any of the other rights and
remedies granted hereunder.
(d) Any amount due to Landlord, if not paid when due, shall bear
interest from the date due until paid at the rate of ten percent (10%) per
annum. Payment of interest shall not excuse or cure any default hereunder by
Tenant.
(e) All payments due from Tenant to Landlord hereunder shall be made
to Landlord without deduction or offset, in lawful money of the United States of
America at Landlord's address for notices hereunder, or to such other person or
at such other place as Landlord may from time to time designate in writing to
Tenant.
4. TAXES AND OPERATING EXPENSES.
(a) In addition to the Base Rent, Tenant shall pay (i) Tenant's
Percentage Share of Property Taxes (according to the percentage set forth in the
Basic Lease Information) relating to those Property Taxes (as the term is
defined under Paragraph 4(a)(1) below) which are assessed during the Term, and
(ii) Tenant's Percentage Share of Operating Expenses (according to the
percentage set forth in the Basic Lease Information) relating to those Operating
Expenses (as the term is defined under Paragraph 4(a)(2) below) which are paid
or incurred by Landlord during the Term.
(1) "Property Taxes" shall mean all real property taxes, bonds
and assessments and governmentally imposed fees or charges (and any tax levied
wholly or partly in lieu thereof) levied, assessed, confirmed, imposed or which
have become a lien against the Building (which for the purposes of defining
"Property Taxes" shall include the tax parcel of which the Building is a part)
and Common Areas.
(2) "Operating Expenses" shall mean the following: (A) all costs
of management, operation, maintenance and repair of the Building and Common
Areas, including, without limitation, property management expenses, maintenance
and repair materials, supplies and
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equipment; (B) all costs of water, power, electricity, refuse collection,
parking lot sweeping, landscaping, and other services relating to the Common
Areas; (C) all costs of alterations or improvements to the Building or Common
Areas made to achieve compliance with federal, state and local law including,
without limitation, the Americans with Disabilities Act (42 U.S.C. Section 12101
et seq.), which costs will be amortized over the useful life of each alteration
or improvement; (D) all costs of public liability and casualty insurance
maintained by Landlord with respect to the Building and Common Areas; (E) all
costs incurred by Landlord for making any capital improvements, structural
repairs or modifications to the Building or Common Areas or making any
improvements or modifications to reduce the operating expenses, which costs will
be amortized over the useful life of each capital improvement, structural repair
or modification; (F) all costs of maintaining machinery, equipment and
directional signage or other markers; and (G) the share allocable to the
Building of dues and assessments payable under any reciprocal easement or common
area maintenance agreements or declarations or by any owners' associations
affecting the Building. That portion of the Operating Expenses relating to the
property management expenses for the Building and Common Areas which shall be
charged to Tenant shall be four percent (4%) of both Tenant's annual Base Rent
and the subtotal of Tenant's share of Operating Expenses of the Building. In the
event that Landlord calculates the Operating Expenses based upon the Project
instead of the Building, as indicated on the Basic Lease Information, then the
term "Project" shall be substituted in the place of all references to the term
"Building" in this paragraph.
(b) The Property Taxes to be paid by Tenant shall be determined by
multiplying the total amount of the Property Taxes by Tenant's Percentage Share
of Property Taxes (which percentage is determined by multiplying 100% by a
fraction, the numerator of which is the rentable area of the Premises and the
denominator of which is the total rentable area of all improvements located
within the tax parcel of which the Premises are a part). Landlord may cause the
Common Areas of the Project to be separately assessed from other areas and
buildings of the Project. In such case, Tenant's Percentage Share of Property
Taxes attributable to the Common Areas shall be determined by the ratio that the
total rentable square feet in the Premises bears to the total number of square
feet of rentable area which is included in the property subject to the
assessment.
(c) Operating Expenses for each calendar year shall be adjusted to
equal Landlord's reasonable estimate of Operating Expenses as though ninety-five
percent (95%) of the total rentable area of the Building had been occupied.
When the Building is one hundred percent (100%) occupied, the Operating Expenses
shall be adjusted to reflect a 100% occupied building. The Operating Expenses to
be paid by Tenant shall be determined by multiplying the total amount of the
Operating Expenses as adjusted above by Tenant's Percentage Share of Operating
Expenses (which percentage is determined by multiplying 100% by a fraction, the
numerator of which is the rentable area of the Premises and the denominator of
which is the total rentable area located within the Building, if the Operating
Expenses are calculated for the Building, or within the Project, if the
Operating Expenses are calculated for the Project).
(d) Tenant shall pay to Landlord each month at the same time and in
the same manner as monthly Base Rent one-twelfth (1/12th) of Landlord's
estimate of the amount of Property Taxes and one-twelfth (1/12th) of Landlord's
estimate of Operating Expenses payable by Tenant for the then-current calendar
year. The initial monthly amount shall be as set forth in the Basic Lease
Information. Within one hundred twenty (120) days after the close of each
calendar year, or as soon after such 120-day period as practicable, Landlord
shall deliver to Tenant a statement in reasonable detail of the actual amount of
Property Taxes and Operating Expenses payable by Tenant in accordance with this
Paragraph 4 for such calendar year. Tenant may request further information if
desired. Landlord's failure to provide such statement to Tenant within the
120-day period shall not act as a waiver and shall not excuse Tenant or Landlord
from making the adjustments to reflect actual costs as provided herein. If on
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the basis of such statement Tenant owes an amount that is less than the
estimated payments for such calendar year previously made by Tenant, Landlord
shall credit such excess to Tenant against future additional rent due under this
Paragraph 4. If on the basis of such statement Tenant owes an amount that is
more than the estimated payments for such calendar year previously made by
Tenant, Tenant shall pay the deficiency to Landlord within fifteen (15) days
after delivery of the statement. The obligations of Landlord and Tenant under
this Paragraph 4(d) with respect to the reconciliation between the estimated and
actual amounts of Property Taxes and Operating Expenses payable by Tenant for
the last year of the Term shall survive the termination of the Lease. When the
final determination is made of the actual amounts of Property Taxes and
Operating Expenses payable by Tenant for the year in which this Lease
terminates, Tenant shall immediately pay any increase due over the estimated
payments and, conversely, any overpayment made by Tenant shall be immediately
reimbursed to Tenant by Landlord.
5. OTHER TAXES.
In addition to Tenant's obligations under Paragraph 4 above, Tenant
shall pay or reimburse Landlord for (i) any taxes upon, measured by or
reasonably attributable to the cost or value of Tenant's equipment, furniture,
fixtures, and other personal property located in the Premises or leasehold
improvements made in or to the Premises at Tenant's expense, (ii) for taxes, if
any, measured by or reasonably attributable to tenant improvements paid for by
Tenant, and (iii) for any taxes, assessments, fees, or charges imposed by any
public authority or private community maintenance association upon or by reason
of the development, possession, use or occupancy of the Premises or the parking
facilities used by Tenant in connection with the Premises. On request by
Landlord, Tenant shall furnish Landlord with satisfactory evidence of payment of
Tenant's business personal property taxes and deliver copies of such business
personal property tax bills to Landlord.
6. USE.
6.1 PROHIBITED USES.
(a) The Premises shall be used and occupied by Tenant solely for the
use set forth in the Basic Lease Information. Tenant shall, at Tenant's expense,
comply promptly with all applicable federal, state and local laws, regulations,
ordinances, rules, orders, and requirements in effect during the Term relating
to the condition, use or occupancy of the Premises. Tenant shall not use or
permit the use of the Premises in any manner that will tend to create waste or a
nuisance, or that unreasonably disturbs other tenants of the Building or
Project, nor shall Tenant place or maintain any signs, antennas, awnings,
lighting or plumbing fixtures, loudspeakers, exterior decoration or similar
devises on or visible from the exterior of the Premises, without Landlord's
prior written consent, which may be withheld in Landlord's sole discretion.
Tenant shall not use any corridors, sidewalks, stairs, elevators, or other areas
outside of the Premises for storage or any purpose other than access to the
Premises. Tenant shall not use, keep, or permit to be used or kept on the
Premises any foul or noxious gas or substance, nor shall Tenant do or permit to
be done anything in and about the Premises, either in connection with activities
hereunder expressly permitted or otherwise, which would cause an increase in
premiums for or a cancellation of any policy of insurance (including fire
insurance) maintained by Landlord in connection with the Premises or the
Building or which would violate the terms of any covenants, conditions, or
restrictions, or the design guidelines, or the sign guidelines affecting the
Building or the land on which it is located, or the Rules (as the term is
defined under Paragraph 6.3(b) below).
(b) Tenant shall not attach any signage to or on any part of the
outside of the Premises, the Building or the Project, or in the halls, lobbies,
windows or elevator banks of the Building without Landlord's prior written
consent, which consent may be withheld in Landlord's sole discretion. Any
signage so permitted shall be subject to prior approval of and conformance with
the
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requirements of the design review committee of the Project and the design review
agency of the city. At Tenant's expense, Tenant shall (i) maintain all
permitted signage, and (ii) upon the expiration or termination of this Lease,
remove such signage and repair any damage caused by their removal. If Tenant
fails to do so, Landlord may maintain, repair or remove such signage without
notice to Tenant and at Tenant's expense, the cost of which shall be payable by
Tenant as additional rent in accordance with Paragraph 14(b)(2) below.
6.2 SUITABILITY. Tenant acknowledges that neither Landlord nor any
agent of Landlord has made any representation or warranty with respect to the
Premises or the Building or with respect to the suitability or fitness of either
for the conduct of Tenant's business or for any other purpose. Nor has Landlord
agreed to undertake any modification, alteration or improvement to the Premises
except as provided in this Lease. Tenant acknowledges that the Premises are
located in a 100-year flood zone and that the finished floor elevations of the
Building are designed to be at least one (1) foot above the federal government's
estimate of the 100-year flood level at the time of initial construction.
6.3 USE OF COMMON AREAS.
(a) Landlord gives Tenant and its authorized employees, agents,
customers, representatives, and invitees the nonexclusive right to use the
Common Areas, with others who are entitled to use the Common Areas, subject to
Landlord's rights as set forth in this Paragraph 6.3.
(b) All Common Areas shall be subject to the exclusive control
and management of Landlord and Landlord shall have the right to establish,
modify, amend, and enforce reasonable rules and regulations with respect to the
Common Areas. Tenant acknowledges receipt of a copy of the current rules and
regulations, attached hereto as Exhibit C, and agrees that they may, from time
to time, be modified or amended by Landlord in a commercially reasonable manner
(the "Rules").Tenant agrees to abide by and conform with such Rules; to cause
its concessionaires and its and their employees and agents to abide by such
Rules; and to use its best efforts to cause its customers, invitees, and
licensees to abide by such Rules.
(c) Landlord shall have the right to close temporarily any
portion of the Common Areas for the purpose of discouraging use by parties who
are not tenants or customers of tenants;to use portions of the Common Areas
while engaged in making additional improvements or repairs or alterations to the
Property; to use or permit the use of the Common Areas by others to whom
Landlord may grant or have granted such rights; and to do and perform such acts
in, to, and with respect to, the Common Areas as in the use of good business
judgment Landlord shall determine to be appropriate for the Project.
(d) Landlord shall have the unqualified right to increase or
reduce the Common Areas, provided the Project meets the parking requirement
under Paragraph 6.5 below.
(e) Tenant shall cooperate with Landlord and other tenants in
the Project in recycling waste paper, cardboard, or such other materials
identified under any trash recycling program that may be established in order to
reduce trash collection costs.
6.4 ENVIRONMENTAL MATTERS.
(a) (1) The term "Hazardous Materials" as used herein means any
petroleum products, asbestos, polychlorinated biphenyls, P.C.B.'s, chemicals,
compounds, materials, mixtures or substances that are now or hereafter defined
or listed in, or otherwise classified as a "hazardous substance", "hazardous
material", "hazardous waste", "extremely hazardous waste", "infectious waste",
"toxic substance", "toxic pollutant" or any other formulation intended to
define, list or classify substances by reason of deleterious properties such as
ignitability, corrosivity, reactivity, carcinogenicity or toxicity pursuant to
any federal, state or local
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environmental law, regulation, ordinance, resolution, order or decree relating
to industrial hygiene, environmental protection or the use, analysis,
generation, manufacture, storage, release, disposal or transportation of the
same ("Hazardous Materials Laws").
(2) Except for ordinary office supplies and janitorial
cleaning materials which in common business practice are customarily and
lawfully used, stored and disposed of in small quantities, and except for those
Hazardous Materials listed on Exhibit D attached hereto, Tenant shall not use,
manufacture, store, release, dispose or transport any Hazardous Materials in,
on, under or about the Premises, the Building or the Project without giving
prior written notice to Landlord and obtaining Landlord's prior written consent,
which consent Landlord may withhold in its sole discretion. Subject to
Landlord's prior written consent, Hazardous Materials may be added to Exhibit D
on an annual review basis; any such amendments to Exhibit D shall be signed by
each party and attached hereto. Tenant shall at its own expense procure,
maintain in effect, and comply with all conditions of any and all permits,
licenses, and other governmental and regulatory approvals required in connection
with Tenant's generation, use, storage, disposal and transportation of Hazardous
Materials. Except as discharged into the sanitary sewer in strict accordance
and conformity with all applicable Hazardous Materials Laws, Tenant shall cause
any and all Hazardous Materials removed from the Premises to be removed and
transported solely by duly licensed haulers to duly licensed facilities for
final disposal of such materials and wastes. Regardless whether permitted under
the Hazardous Materials Laws, Tenant shall not maintain in, on, under, or about
the Premises, the Building or the Project any above or below ground storage
tanks, clarifiers, or sumps, nor shall any wells for the monitoring of ground
water, soils, or subsoils be allowed.
(3) Tenant shall immediately notify Landlord in writing
of:(a) any enforcement, cleanup, removal or other governmental or regulatory
action instituted, completed or threatened pursuant to any Hazardous Materials
Law; (b) any claim made or threatened by any person or entity against Tenant or
the Premises relating to damage, contribution, cost, recovery, compensation,
loss or injury resulting from or claimed to result from any Hazardous Materials;
and (c) any reports, information, inquiries or demands made, ordered, or
received by or on behalf of Tenant which arise out of or in connection with the
existence or potential existence of any Hazardous Materials in, on, under or
about the Premises, the Building, or the Project, including, without limitation,
any complaints, notices, warnings, asserted violations, or mandatory or
voluntary informational filings with any governmental agency in connection
therewith, and immediately supply Landlord with copies thereof.
(b) Tenant shall indemnify, defend (by counsel reasonably
acceptable to Landlord), protect, and hold Landlord, and each of Landlord's
partners, officers, directors, partners, employees, affiliates, joint venturers,
members, trustees, owners, shareholders, principals, agents, representatives,
attorneys, successors and assigns, free and harmless from and against any and
all claims, liabilities, damages, fines, penalties, forfeitures, losses, cleanup
and remediation costs or expenses (including attorneys' fees) or death of or
injury to any person or damage to any property whatsoever, arising from or
caused in whole or in part, directly or indirectly, by (i) Tenant's use,
analysis, generation, manufacture, storage, release, disposal, or transportation
of Hazardous Materials by Tenant, Tenant's agents, employees, contractors,
licensees or invitees to, in, on, under, about or from the Premises, the
Building, or the Project, or (ii) Tenant's failure to comply with any Hazardous
Materials Law. Tenant's obligations hereunder shall include, without limitation,
and whether foreseeable or unforeseeable, all costs of any required or necessary
repair, cleanup, detoxification or decontamination of the Premises, the
Building, or the Project and the preparation and implementation of any closure,
remedial action or other required plans in connection therewith, and shall
survive the expiration or earlier termination of this Lease.
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(c) Landlord shall have the right to enter the Premises during
regular business hours upon reasonable prior notice at all times for the
purposes of ascertaining compliance by Tenant with all applicable Hazardous
Materials Laws, provided, however, that in the instance of an emergency
Landlord's entry onto the Premises shall not be restricted to regular business
hours nor shall notice be required.
(d) Landlord shall have the option to declare a default of this
Lease for the release or discharge of Hazardous Materials by Tenant, Tenant's
employees, agents, contractors, or invitees on the Premises, Building or Project
or in violation of law or in deviation from prescribed procedures in Tenant's
use or storage of Hazardous Materials. If Tenant fails to comply with any of
the provisions under this Paragraph 6.4, Landlord shall have the right (but not
the obligation) to remove or otherwise cleanup any Hazardous Materials from the
Premises, the Building or the Project. In such case, the costs of any Hazardous
Materials investigation, removal or other cleanup (including, without
limitation, transportation, storage, disposal and attorneys' fees and costs)
will be additional rent due under this Lease, whether or not a court has ordered
the cleanup, and will become due and payable on demand by Landlord.
6.5 PARKING. Landlord grants to Tenant and Tenant's customers,
suppliers, employees and invitees a nonexclusive license to use unassigned and
unreserved parking spaces in the Common Areas for the use of motor vehicles
during the Term is subject to rights reserved to Landlord as specified in this
Paragraph 6.5. Landlord reserves the right to grant similar nonexclusive and
unassigned and unreserved use to other tenants; to promulgate rules and
regulations relating to the use of the Common Areas including parking by tenants
and employees of tenants; to make changes in the parking layout from time to
time; and to do and perform any other acts in and to these areas and
improvements as Landlord determines to be advisable. Tenant agrees not to
overburden the parking facilities and to abide by and conform with the rules and
regulations and to cause its employees and agents to abide by and conform to the
rules and regulations. Upon request, Tenant shall provide Landlord with license
plate numbers of all vehicles driven by its employees and to cause Tenant's
employees to park only in spaces specifically designated for tenant parking.
Landlord shall have the unqualified right to rearrange or reduce the number of
parking spaces; provided, however, the ratio of the number of parking spaces
available to Tenant will be no less than three point five (3.5) spaces per 1,000
usable square feet of the Premises.
7. SERVICES.
(a) Tenant shall pay for all water, sewer, gas, electricity, heat,
cooling, telephone, refuse collection, and other utility-type services furnished
to Tenant or the Premises, together with all related installation or connection
charges or deposits. Wherever it is practical to do so such services shall be
separately metered or charged to Tenant by the provider thereof and paid for
directly by Tenant. To the extent any of the foregoing services are provided by
Landlord, Tenant shall reimburse Landlord for all costs incurred by Landlord in
connection with the provision of such services based on Landlord's reasonable
estimate of the level of Tenant's use or consumption of such services. Landlord
shall bill Tenant on a monthly or other periodic basis for such services and
payment shall be made by Tenant within ten (10) days after submittal of
Landlord's statement.
(b) Landlord shall not be in default hereunder or be liable for any
damages or personal injuries to any person directly or indirectly resulting
from, nor shall there be any Rent abatement by reason of, any interruption or
curtailment whatsoever in utility services.
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8. MAINTENANCE, REPAIRS AND ALTERATIONS.
(a) Tenant shall, at Tenant's expense, maintain every part of the
Premises in good order, condition and repair, including without limitation, (i)
all interior surfaces, ceilings, walls, door frames, window frames, floors,
carpets, draperies, window coverings and fixtures, (ii) all windows, doors,
locks and closing devices, entrances, plate glass, and signs, (iii) all plumbing
and sewage pipes, fixtures and fittings, (iv) all phone lines, electrical
wiring, equipment, switches, outlets, and lightbulbs, (v) any fire detection,
fire sprinkler or extinguisher equipment, (vi) all of Tenant's personal
property, improvements and alterations, and (vii) all other fixtures and special
items installed by or for the benefit of, or at the expense of Tenant. Tenant
shall, at its expense, cause to be maintained in good operating condition and
repair, all heating, ventilating, and air conditioning equipment installed in,
or on the roof of the Premises. Tenant shall keep in force a preventive
maintenance contract with a qualified maintenance company covering all heating,
ventilating and air conditioning equipment and shall annually provide Landlord
with a copy of this contract.Tenant shall not enter onto the roof area of the
Building, except for the purpose of maintaining the heating, ventilating, and
air conditioning equipment and provided that Tenant shall repair any damage to
the roof area caused by its entry. Tenant shall be responsible for its own
janitorial service. Landlord shall incur no expense (nor have any obligation)
of any kind whatsoever in connection with the maintenance of the Premises.
(b) Landlord shall keep in good condition and repair the foundation,
roof structure, exterior walls and other structural parts of the Building, and
all other portions of the Building not the obligation of Tenant or any other
tenant in the Building. Tenant expressly waives the benefits of any statute,
including Civil Code Sections 1941 and 1942, which would afford Tenant the right
to make repairs at Landlord's expense or to terminate this Lease due to
Landlord's failure to keep the Building in good order, condition and repair.
Landlord shall have no liability to Tenant for any damage, inconvenience, or
interference with the use of the Premises by Tenant as the result of Landlord
performing any such maintenance and repair work.
(c) In the event Tenant fails to perform Tenant's obligations under
this Paragraph 8, Landlord may, but shall not be required to, give Tenant notice
to do such acts as are reasonably required to so maintain the Premises. If
Tenant shall fail to commence such work and diligently prosecute it to
completion, then Landlord shall have the right (but not the obligation) to do
such acts and expend such funds at the expense of Tenant as are reasonably
required to perform such work. Any amounts so expended by Landlord will be
additional rent due under this Lease, and such amounts will become due and
payable on demand by Landlord. Landlord shall have no liability to Tenant for
any such damages, inconvenience, or interference with the use of the Premises by
Tenant as a result of performing such work.
(d) Upon the expiration or earlier termination of this Lease, Tenant
shall surrender the Premises in good condition and repair, only ordinary wear
and tear excepted. Tenant, at its sole cost and expense, agrees to repair any
damages to the Premises caused by or in connection with the removal of any
articles of personal property, business or trade fixtures, signs, machinery,
equipment, cabinetwork, furniture, moveable partitions, or permanent
improvements or additions, including without limitation thereto, repairing the
floor and patching and painting the walls where required by Landlord, to
Landlord's reasonable satisfaction. Tenant shall indemnify Landlord against any
loss or liability resulting from delay by Tenant in so surrendering the
Premises, including without limitation, any claims made by any succeeding tenant
resulting from such delay.
(e) Tenant shall not make any alterations, improvements, or additions
in, on, or about the Premises without Landlord's prior written consent, except
that Tenant may make alterations, improvements, or additions without Landlord's
prior written consent where (i) the reasonably estimated cost does not exceed
$2,500, and
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(ii) such alterations, improvements, or additions do not affect or involve
the structural integrity, roof membrane, exterior areas, building systems, or
water-tight nature of the Premises, the Building or the Project. In requesting
Landlord's consent, Tenant shall, at Tenant's sole cost, submit to Landlord
complete drawings and specifications describing such work and the identity of
the proposed contractor at least ten (10) business days prior to the
commencement of any work.
With respect to any alterations, improvements or additions made
to the Premises by Tenant:
(1) Before commencing any work relating to alterations,
additions, or improvements affecting the Premises, Tenant shall notify Landlord
of the expected date of commencement thereof and of the anticipated cost
thereof. Landlord shall then have the right at any time and from time to time to
post and maintain on the Premises such notices as Landlord reasonably deems
necessary to protect the Premises and Landlord from mechanics' liens or any
other liens.
(2) Tenant shall pay when due all claims for labor or materials
furnished to Tenant for use in the Premises. Tenant shall not permit any
mechanics' liens or any other liens to be levied against the Premises for any
labor or materials furnished to Tenant in connection with work performed on the
Premises by or at the direction of Tenant. Tenant shall indemnify, hold
harmless and defend Landlord (by counsel reasonably satisfactory to Landlord)
from any liens and encumbrances arising out of any work performed or materials
furnished by, or at the direction of Tenant. In the event that Tenant shall not,
within twenty (20) days following the imposition of any such lien, cause such
lien to be released of record by payment or posting of a proper bond, Landlord
shall have, in addition to all other remedies provided herein by law, the right,
but not the obligation, to cause the same to be released by such means as it
shall deem proper, including payment of the claim giving rise to such lien. All
such sums paid by Landlord and all expenses incurred by it in connection
therewith, including attorneys' fees and costs, shall be payable to Landlord by
Tenant on demand with interest at the rate of ten percent (10%) per annum.
(3) All alterations, improvements or additions in or about the
Premises performed by or on behalf of Tenant shall be done in a first-class,
workmanlike manner, shall not unreasonably lessen the value of leasehold
improvements in the Premises, and shall be completed in compliance with all
applicable laws, ordinances, regulations and orders of any governmental
authority having jurisdiction thereover, as well as the requirements of insurers
of the Premises and the Building.
(4) Upon Landlord's request, Tenant shall remove any contractor,
subcontractor or material supplier from the Premises and the Building if the
work or presence of such person or entity results in labor disputes in or about
the Building or Project or damage to the Premises, Building or Project.
(5) Landlord, at Landlord's sole discretion, may refuse to grant
Tenant permission for alterations, improvements or additions which require,
because of application of Americans with Disabilities Act or other laws,
substantial improvements or alterations to be made to the Common Areas.
(6) Landlord may, up to sixty (60) days prior to the expiration
of the Term, require that Tenant, at Tenant's expense, remove any such
alterations, improvements or additions prior to or upon the expiration of this
Lease, and restore the Premises to their condition prior to such alterations,
improvements or additions.
(7) Unless Landlord requires their removal, as set forth above,
all alterations, improvements, or additions made to the Premises shall become
the property of Landlord and remain upon and be surrendered with the Premises
upon the expiration of this Lease; provided, however, that Tenant's machinery,
equipment, and trade fixtures, other than any which may be affixed to the
Premises so that
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they cannot be removed without material damage to the Premises, shall remain the
property of Tenant and may be removed by Tenant subject to the provisions of
Paragraph 8(d) above.
9. CONSTRUCTION OF TENANT IMPROVEMENTS.
Landlord shall be responsible for constructing the tenant improvements
("Tenant Improvements") in the Premises, as provided in the Work Letter
Agreement, attached hereto as Exhibit B.
10. INSURANCE AND INDEMNITY.
10.1 INSURANCE.
(a) Tenant shall obtain and maintain during the Term
comprehensive general liability insurance with a combined single limit for
personal injury and property damage in an amount of not less than $2,000,000 (in
a form, with a deductible amount, and with carriers reasonably acceptable to
Landlord) and employer's liability and workers' compensation insurance as
required by law. The insurance carrier shall be authorized to do business in
the State of California, with a policyholders and financial rating of at least
A:IX Class status as rated in the most recent edition of Best's Key-Rating
guide. Tenant's comprehensive general liability insurance policy shall be
endorsed to provide that (i) it may not be canceled or altered in such a manner
as to adversely affect the coverage afforded thereby without thirty (30) days'
prior written notice to Landlord, (ii) Landlord is designated as an additional
insured, (iii) the insurer acknowledges acceptance of the mutual waiver of
claims by Landlord and Tenant pursuant to Paragraph 10.2(b) below, and (iv) such
insurance is primary with respect to Landlord and that any other insurance
maintained by Landlord is excess and noncontributing with such insurance. If,
in the reasonable opinion of Landlord's lender or in the commercially reasonable
opinion of Landlord's insurance adviser, the specified amounts of coverage are
no longer adequate, such coverage shall, within 30 days written notice to
Tenant, be appropriately increased. Prior to the commencement of the Term,
Tenant shall deliver to Landlord a duplicate of such policy or a certificate
thereof to Landlord for retention by it, with endorsements. At least thirty
(30) days prior to the expiration of such policy or any renewal or modification
thereof, Tenant shall deliver to Landlord a replacement or renewal binder,
followed by a duplicate policy or certificate within a reasonable time
thereafter. If Tenant fails to obtain such insurance or to furnish Landlord any
such duplicate policy or certificate as herein required, Landlord may, at its
election, without notice to Tenant and without any obligation to do so, procure
and maintain such coverage and Tenant shall reimburse Landlord on demand as
additional rent for any premium so paid by Landlord.
(b) Landlord waives all claims against Tenant, and Tenant's
officers, directors, partners, employees, agents and representatives for loss or
damage to the extent that such loss or damage is insured against under any valid
and collectable insurance policy insuring Landlord or would have been insured
against but for any deductible amount under any such policy. Tenant waives all
claims against Landlord, and Landlord's officers, directors, partners,
employees, affiliates, joint venturers, members, trustees, owners, shareholders,
principals, agents, representatives, successors and assigns, for loss or damage
to the extent such loss or damage is insured against under any valid and
collectable insurance policy insuring Tenant or required to be maintained by
Tenant under this Lease, or would have been insured against but for any
deductible amount under any such policy. The insuring party shall, upon
obtaining the policies of insurance required under this Lease, give notice to
the insurance carrier or carriers that the foregoing mutual waiver of
subrogation is contained in this Lease. Tenant agrees that in the event of a
sale, assignment or transfer of the Premises by Landlord, this waiver of
subrogation shall continue in favor of the original Landlord and any subsequent
Landlord.
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(c) Tenant shall at its own cost maintain on all its personal
property, Tenant's improvements, and alterations, in, on, or about the Premises,
a policy of standard fire and extended coverage insurance, with vandalism and
malicious mischief endorsements, to the extent of at least one hundred percent
(100%) of their full replacement value. The proceeds from any such policy shall
be used by Tenant for the replacement of personal property and the restoration
of Tenant's improvements or alterations. Notwithstanding any other provisions of
the Lease, Landlord shall have no liability for damage to or destruction of
Tenant's personal property, regardless of whether the damage or destruction
results from the acts or omissions of Landlord.
(d) During the Term, Landlord shall keep the Building, and
improvements within which the Premises are located, insured against loss or
damage by (i) fire, with extended coverage and vandalism, malicious mischief and
special extended perils (all risk) endorsements or their equivalents, in amounts
not less than one hundred percent (100%) of the replacement cost of the Building
and structures insured, and (ii) flood, in the maximum amount provided for by
FEMA under its flood loss insurance program, with loss payable thereunder to
Landlord and to any authorized encumbrancer of Landlord (with standard mortgagee
loss payable clause) in accordance with their respective interests. Landlord
may maintain rent insurance, for the benefit of Landlord, equal to at least one
year's Base Rent hereunder. If the Lease is terminated as a result of damage by
fire, casualty or earthquake as set forth in this Paragraph 10, all insurance
proceeds shall be paid to and retained by Landlord, subject to the rights of any
authorized encumbrancer of Landlord.
(e) Tenant acknowledges that Landlord does not, at the time of
the signing of this Lease, insure the Building for earthquake damage. Landlord
may, when Landlord deems the premiums to be reasonable, insure the Building
fully or partially for earthquake damage. At such time, the premium for
earthquake insurance will be added to the Operating Expenses for purposes of
determining additional rent.
10.2 INDEMNITY.
(a) Tenant waives all claims against Landlord for damage to any
property or injury to or death of any person in, on, or about the Premises, the
Building, or any other portion of the Project arising at any time and from any
cause, unless caused by the active negligence or willful misconduct of Landlord,
its agents, employees, or contractors. Tenant shall indemnify, defend (by
counsel reasonably satisfactory to Landlord) and hold harmless Landlord, and
Landlord's officers, directors, partners, employees, affiliates, joint
venturers, members, trustees, owners, shareholders, principals, agents,
representatives, successors and assigns, from and against all claims, costs,
damages, actions, indebtedness and liabilities (except such as may arise from
the active negligence or willful misconduct of Landlord, and Landlord's
officers, directors, partners, employees, affiliates, joint venturers, members,
trustees, owners, shareholders, principals, agents, representatives, successors
and assigns) arising by reason of any death, bodily injury, personal injury,
property damage or any other injury or damage in connection with (i) any
condition or occurrence in or about or resulting from any condition or
occurrence in or about the Premises during the Term, or (ii) any act or omission
of Tenant, or Tenant's agents, representatives, officers, directors,
shareholders, partners, employees, successors and assigns, wherever it occurs.
The foregoing indemnity obligation of Tenant shall include reasonable attorneys'
fees, and all other reasonable costs and expenses incurred by Landlord from the
first notice that any claim or demand is to be made. The provisions of this
Paragraph 10.2 shall survive the termination or expiration of this Lease with
respect to any damage, injury, or death occurring prior to such expiration or
termination.
(b) Neither party shall be liable to the other for any
unauthorized or criminal entry of third parties into the Premises, Building,
Project, Common Areas, or parking facilities, or for any damage to person or
property, or loss of property in and about the
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Premises, Building, Project, Common Areas, parking facilities and the
approaches, entrances, streets, sidewalks, stairs, elevators, restrooms, or
corridors thereto, by or from any unauthorized or criminal acts of third
parties, regardless of any breakdown, malfunction or insufficiency of any
security measures, practices or equipment provided by Landlord or Tenant. Tenant
shall immediately notify Landlord in writing of any breakdown or malfunction of
any security measures, practices or equipment provided by Landlord as to which
Tenant has knowledge.
(c) Any diminution or interference with light, air or view by
any structure which may be erected on land adjacent to the Building or resulting
from any other cause shall in no way alter this Lease or impose any liability on
Landlord.
(d) Tenant agrees that in no event shall Landlord be liable for
consequential damages, including injury to Tenant's business or any loss of
income therefrom.
(e) In the event that Landlord or any successor owner of the
Building sells or conveys the Building, then all liabilities and obligations of
Landlord or the successor owner under this Lease accruing after the sale or
conveyance shall terminate and become binding on the new owner, and Tenant shall
release Landlord from all liability under this Lease (including, without
limitation, the Security Deposit, as defined under Paragraph 16 below), except
for acts or omissions of Landlord occurring prior to such sale or conveyance.
(f) Tenant expressly agrees that so long as Landlord is a
corporation, limited liability company, trust, partnership, joint venture,
unincorporated association or other form of business entity, (i) the obligations
of Landlord shall not constitute personal obligations of the officers,
directors, partners, employees, affiliates, joint venturers, members, trustees,
owners, shareholders, or other principals, agents or representatives of such
business entity ("Member of Landlord"), and (ii) Tenant shall have recourse only
to the interest of such business entity in the Building of which the Premises
are a part for the satisfaction of such obligations and not against the assets
of such Member of Landlord other than to the extent of their respective
interests in the Building. In this regard, Tenant agrees that in the event of
any actual or alleged failure, breach or default by Landlord of its obligations
under this Lease, that (i) no Member of Landlord shall be sued or named as a
party in any suit or action (except as may be necessary to secure jurisdiction
of Landlord), (ii) no judgment will be taken against any Member of Landlord, and
any judgment taken against any Member of Landlord may be vacated and set aside
at any time without hearing, (iii) no writ of execution will ever be levied
against the assets of any Member of Landlord, and (iv) these agreements by
Tenant are enforceable both by Landlord and by any Member of Landlord.
11. DAMAGE OR DESTRUCTION.
(a) Subject to the provisions of Paragraphs 11(b) and 11(c) below,
if, during the Term, the Premises are totally or partially destroyed from any
insured casualty, Landlord shall, within ninety (90) days after the destruction,
commence to restore the Premises to substantially the same condition as they
were in immediately before the destruction and prosecute the same diligently to
completion. Such destruction shall not terminate this Lease. Landlord's
obligation shall not include repair or replacement of Tenant's alterations or
Tenant's equipment, furnishings, fixtures and personal property. If the
existing laws do not permit the Premises to be restored to substantially the
same condition as they were in immediately before destruction, and Landlord is
unable to get a variance to such laws to permit the commencement of restoration
of the Premises within the 90-day period, then either party may terminate this
Lease by giving written notice to the other party within thirty (30) days after
expiration of the 90-day period.
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(b) Despite the provisions of Paragraph 11(a) above, Landlord may
decide within ninety (90) days after such destruction to demolish the Building
rather than rebuild it, in which case this Lease will terminate as of the date
of the destruction. Landlord shall give Tenant written notice of its intention
within ninety (90) days after the destruction.
(c) If any destruction occurs to the Premises during the last six (6)
months of the initial Term or during the last six (6) months of any extension
period, regardless of the nature and extent of the destruction, either party can
elect to terminate this Lease within thirty (30) days after the destruction
occurs. If this Lease does not terminate pursuant to this Paragraph 11(c), the
provisions of Paragraph 11(a) above shall apply.
(d) If the Premises are damaged from any uninsured casualty to any
extent whatsoever, Landlord may within ninety (90) days following the date of
such damage: (i) commence to restore the Premises to substantially the same
condition as they were in immediately before the destruction and prosecute the
same diligently to completion, in which event this Lease shall continue in full
force and effect; or (ii) within the 90-day period Landlord may elect not to so
restore the Premises, in which event this Lease shall cease and terminate. In
either such event, Landlord shall give Tenant written notice of its intention
within the 90-day period.
(e) In the event of destruction or damage to the Premises which
materially interferes with Tenant's use of the Premises, if this Lease is not
terminated as above provided, there shall be an abatement or reduction of Base
Rent between the date of destruction and the date Landlord substantially
completes its reconstruction obligations, based upon the extent to which the
destruction materially interferes with Tenant's use of the Premises. All other
obligations of Tenant under this Lease shall remain in full force and effect.
Except for abatement of Base Rent, Tenant shall have no claim against Landlord
for any loss suffered by Tenant due to damage or destruction of the Premises or
any work of repair undertaken as herein provided.
(f) The provisions of California Civil Code Sections 1932(2) and
1933(4), and any successor statutes, are inapplicable with respect to any
destruction of the Premises, such sections providing that a lease terminates
upon the destruction of the Premises unless otherwise agreed between the parties
to the contrary.
12. EMINENT DOMAIN.
(a) If all or any part of the Premises shall be taken as a result of
the exercise of the power of eminent domain, this Lease shall terminate as to
the part so taken as of the date of taking. In the case of a partial taking of
greater than fifty percent (50%) of the rentable area of the Premises, either
Landlord or Tenant shall have the right to terminate this Lease as to the
balance of the Premises by notice to the other within thirty (30) days after the
date of the taking. In the event of a partial taking of the Premises which does
not result in a termination of this Lease, the monthly Base Rent thereafter to
be paid shall be equitably reduced on a square footage basis. If the continued
occupancy of Tenant is materially interfered with for any time during the
partial taking, notwithstanding the partial taking does not terminate this Lease
as to the part not so taken, the Base Rent shall proportionately abate so long
as Tenant is not able to continuously occupy the part remaining and not so
taken.
(b) All compensation awarded or paid upon a total or partial taking
of the fee title shall belong to Landlord whether such compensation be awarded
or paid as compensation for diminution in value of the leasehold or of the fee
except: Tenant shall retain and have a claim for the following, to the extent
specifically designated by the condemning authority: (i) the unamortized value
over the Term of Tenant's leasehold improvements (to the extent Landlord has not
contributed to the cost thereof); (ii) that portion (if any) of the award made
to Landlord as a result of removing fixtures, removable by
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Tenant herein, under the terms of this Lease but which are required to be taken
by the condemnor or are so acquired by the condemnor; and (iii) all relocation
assistance, moving and relocation expenses to the extent (if any) provided by
the condemning authority directly to Tenant.
13. ASSIGNMENT AND SUBLETTING.
(a) Tenant shall not assign, sublet or hypothecate this Lease or any
interest herein or sublet the Premises or any part thereof or permit the use of
the Premises by any party other than Tenant without the prior written consent of
Landlord, which consent shall not be unreasonably withheld. Any of the
foregoing acts without Landlord's consent shall be void and shall, at the option
of Landlord, terminate this Lease. In connection with each consent requested by
Tenant, Tenant shall submit to Landlord the terms of the proposed transaction,
the identity of the parties to the transaction, the proposed documentation for
the transaction, current financial statements of any proposed assignee or
sublessee and all other information reasonably requested by Landlord concerning
the proposed transaction and the parties involved therein. NOTWITHSTANDING THE
ABOVE, TENANT MAY ASSIGN THAT PORTION OF THE LEASE RELATING TO THE ENTIRE
IMPROVED OFFICE SPACE (CONSISTING OF APPROXIMATELY 3,780 RENTABLE SQUARE FEET)
AND/OR THE ENTIRE WAREHOUSE SPACE (CONSISTING OF APPROXIMATELY 4,728 RENTABLE
SQUARE FEET) TO ADVANCE ACCESS LABS (A CORPORATION IN WHICH TENANT AND TELABS
ARE FIFTY (50%) PERCENT SHAREHOLDERS) UPON PRIOR WRITTEN NOTICE TO LANDLORD.
(b) As used in this Paragraph 13, the term "assign" or "assignment"
shall include, without limitation, any sale, transfer, or other disposition of
all or any portion of Tenant's estate under this Lease, whether voluntary or
involuntary, and whether by operation of law or otherwise, including any of the
following:
(1) if Tenant is a corporation or a limited liability company:
(A) any dissolution, merger, consolidation, or other reorganization of Tenant;
or (B) a sale or other transfer of more than fifty percent (50%) of the value of
the assets of Tenant; or (C) if Tenant is a corporation with fewer than 500
shareholders, a sale or other transfer of a controlling percentage of the
capital stock of Tenant; or (D) if Tenant is a limited liability company, a sale
or other transfer of a controlling percentage of the interest in Tenant. The
phrase "controlling percentage" means the ownership of, and the right to vote,
stocks or interests possessing at least fifty percent (50%) of the total
combined voting power of the limited liability company or, in the case of a
corporation, of all classes of Tenant's stock issues, outstanding and permitted
to vote for the election of directors of the corporation;
(2) if Tenant is a trust, the transfer of more than fifty
percent (50%) of the beneficial interest of Tenant, or the dissolution of the
trust;
(3) if Tenant is a partnership or joint venture, the withdrawal,
or the transfer of the interest, of any general partner or joint venturer or the
dissolution of the partnership or joint venture; and
(4) if Tenant is composed of tenants-in-common, the transfer of
interest of any cotenants or the partition or dissolution of the cotenancy.
(c) No sublessee shall have a right further to sublet, and any
assignment by a sublessee of its sublease shall be subject to Landlord's prior
written consent in the same manner as if Tenant were entering into a new
sublease.
(d) Regardless of Landlord's consent, no subletting or assignment
shall release Tenant of Tenant's obligation, or alter the primary liability of
Tenant to pay the Rent and to perform all other obligations to be performed by
Tenant hereunder. The acceptance of Rent by Landlord from any other person
shall not be deemed to be a waiver by Landlord of any provisions hereof.
Consent to one
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assignment or subletting shall not be deemed consent to any subsequent
assignment or subletting. In the event of default by any assignee of Tenant or
any successor of Tenant in the performance of any of the terms hereof, Landlord
may proceed directly against Tenant without the necessity of exhausting remedies
against such assignee or successor.
(e) In the event Tenant shall assign or sublet the Premises or
request the consent of Landlord to any assignment or subletting, then Tenant
shall reimburse Landlord for reasonable costs and attorneys' fees incurred in
connection therewith in an amount not to exceed $1,000,00.
14. DEFAULT BY TENANT.
(a) The following events shall constitute events of default under
this Lease:
(1) a failure by Tenant to pay any Rent or to deliver an
estoppel certificate (as provided in Paragraph 17 below) where such failure
continues for five (5) days after written notice by Landlord to Tenant;
(2) the bankruptcy or insolvency of Tenant, any transfer by
Tenant to defraud creditors, any assignment by Tenant for the benefit of
creditors, or the commencement of any proceedings of any kind by or against
Tenant under any provision of the Federal Bankruptcy Act or under any other
insolvency, bankruptcy or reorganization act unless, in the event any such
proceedings are involuntary, Tenant is discharged from the same within sixty
(60) days thereafter; the appointment of a receiver for a substantial part of
the assets of Tenant; or the levy upon this Lease or any estate of Tenant
hereunder by any attachment or execution;
(3) the abandonment or vacation of the Premises;
(4) the discovery by Landlord that any financial statement given
to Landlord by Tenant, any assignee of Tenant, any subtenant of Tenant, any
successor in interest of Tenant or any guarantor of Tenant's obligation
hereunder, and any of them, was materially false; and
(5) a failure by Tenant to perform any of the terms, covenants,
agreements or conditions of this Lease to be observed or performed by Tenant
(excluding any event of default under Paragraph 14(a)(1) above), where such
failure continues for thirty (30) days after written notice thereof by Landlord
to Tenant; provided, however, that if the nature of the default is such that the
same cannot reasonably be cured within the 30-day period, Tenant shall not be
deemed to be in default if Tenant shall within such period commence such cure
and thereafter diligently prosecute the same to completion.
(b) In the event of any material default or breach by Tenant,
Landlord may at any time thereafter, without limiting Landlord in the exercise
of any right or remedy at law or in equity which Landlord may have by reason of
such default or breach:
(1) Pursue the remedy described in California Civil Code Section
1951.4 whereby Landlord may continue this Lease in full force and effect after
Tenant's breach and abandonment and recover the Rent and any other monetary
charges as they become due, without terminating Tenant's right to sublet or
assign this Lease, subject only to reasonable limitations as herein provided.
During the period Tenant is in default, Landlord shall have the right to do all
acts necessary to preserve and maintain the Premises as Landlord deems
reasonable and necessary, including removal of all persons and property from the
Premises, and Landlord can enter the Premises and relet them, or any part of
them, to third parties for Tenant's account. Tenant shall be liable immediately
to Landlord for all costs Landlord incurs in reletting the Premises, including,
without limitation, brokers' commissions, expenses of remodeling the Premises
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required by the reletting, and like costs. Reletting can be for a period
shorter or longer than the remaining Term.
(2) Pay or perform such obligation due (but shall not be
obligated to do so), if Tenant fails to pay or perform any obligations when due
under this Lease within the time permitted for their payment or performance. In
such case, the costs incurred by Landlord in connection with the performance of
any such obligation will be additional rent due under this Lease and will become
due and payable on demand by Landlord.
(3) Terminate Tenant's rights to possession by any lawful means,
in which case this Lease shall terminate and Tenant shall immediately surrender
possession of the Premises to Landlord. In such event Landlord shall be
entitled to recover from Tenant all damages incurred by Landlord by reason of
Tenant's default, including, without limitation, the following: (A) the worth at
the time of award of any unpaid Rent which had been earned at the time of such
termination; plus (B) the worth at the time of award of the amount by which the
unpaid Rent which would have been earned after termination until the time of
award exceeds the amount of such Rent loss that is proved could have been
reasonably avoided; plus (C) the worth at the time of award of the amount by
which the unpaid Rent for the balance of the Term after the time of award
exceeds the amount of such Rent loss that is proved could be reasonably avoided;
plus (D) any other amount necessary to compensate Landlord for all the detriment
proximately caused by Tenant's failure to perform its obligations under this
Lease or which in the ordinary course of events would be likely to result
therefrom; plus (E) at Landlord's election, such other amounts in addition to or
in lieu of the foregoing as may be permitted from time to time by applicable
State law. Upon any such termination of Tenant's possessory interest in and to
the Premises, Tenant (and at Landlord's sole election, Tenant's sublessees)
shall no longer have any interest in the Premises, and Landlord shall have the
right to make any reasonable repairs, alterations or modifications to the
Premises which Landlord in its sole discretion deems reasonable and necessary.
The "worth at the time of award" of the amounts referred to in subparagraphs (A)
and (B) above is computed by allowing interest at the maximum rate an individual
is permitted by law to charge. The worth at the time of award of the amount
referred to in subparagraph (C) above is computed by discounting such amount at
the discount rate of the Federal Reserve Bank of San Francisco at the time of
award plus one percent (1%).
(4) Pursue any other legal or equitable remedy available to
Landlord. Unpaid installments of Rent and other unpaid monetary obligations of
Tenant under the terms of this Lease shall bear interest from the date due at
the rate of ten percent (10%) per annum.
(c) In the event Tenant is evicted or Landlord takes possession of
the Premises by reason of any default by Tenant hereunder, Tenant hereby waives
any right of redemption or relief from forfeiture as provided by law.
(d) Even though Tenant has breached this Lease and abandoned the
Premises, this Lease shall continue in effect for so long as Landlord does not
terminate Tenant's right to possession, and Landlord may enforce all its rights
and remedies under this Lease, including the right to recover Rent as it becomes
due under this Lease. Acts of maintenance or preservation, efforts to relet the
Premises, or the appointment of a receiver upon initiative of Landlord to
protect Landlord's interest under this Lease, shall not constitute a termination
of Tenant's right to possession.
(e) In the event Tenant is in material default under any provision of
this Lease then, at Landlord's sole election: (i) Tenant shall not have the
right to exercise any available right, option or election under this Lease
("Tenant's Exercise Rights") if at such time Tenant is in default hereunder,
(ii) Tenant shall not have the right to consummate any transaction or event
triggered by
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the exercise of any of Tenant's Exercise Rights if at such time Tenant is in
default hereunder, and (iii) Landlord shall not be obligated to give Tenant any
required notices or information relating to the exercise of any of Tenant's
Exercise Rights hereunder.
15. DEFAULT BY LANDLORD, NOTICE TO MORTGAGEE.
Landlord shall not be in default unless Landlord, or the holder of any
mortgage, deed of trust or ground lease covering the Premises, fails to perform
obligations required of Landlord within a reasonable time, but in no event later
than thirty (30) days after written notice by Tenant to Landlord certified mail,
postage prepaid, and to the holder of any first mortgage, deed of trust or
ground lease covering the Premises whose name and address shall have been
furnished to Tenant in writing, specifying wherein Landlord has failed to
perform such obligations; provided, however, that if the nature of Landlord's
obligation is such that more than thirty (30) days are required for performance
then Landlord shall not be in default if Landlord or the holder of any such
mortgage, deed of trust or ground lease commences performance within such 30-day
period and thereafter diligently prosecutes the same to completion. In no event
shall Tenant be entitled to terminate this Lease by reason of Landlord's
default, and Tenant's remedies shall be limited to an action for monetary
damages at law.
16. SECURITY DEPOSIT.
On execution of this Lease, Tenant shall deposit with Landlord the sum
specified in the Basic Lease Information (the "Security Deposit"). The Security
Deposit shall be held by Landlord as security for the performance by Tenant of
all of the provisions of this Lease. If Tenant fails to pay Rent or other
charges due hereunder, or otherwise defaults with respect to any provision of
this Lease, Landlord may use, apply, or retain all or any portion of the
Security Deposit for the payment of any Rent or other charge in default, or the
payment of any other sum to which Landlord may become obligated by reason of
Tenant's default, or to compensate Landlord for any loss or damage which
Landlord may suffer thereby. If Landlord so uses or applies all or any portion
of the Security Deposit, then within ten (10) days after demand therefor Tenant
shall deposit cash with Landlord in an amount sufficient to restore the deposit
to the full amount thereof, and Tenant's failure to do so shall be a material
breach of this Lease. Landlord shall not be required to keep the Security
Deposit separate from its general accounts. If Tenant performs all of Tenant's
obligations hereunder, the Security Deposit, or so much thereof as has not
theretofore been applied by Landlord, shall be returned, without payment of
interest for its use, to Tenant (or, at Landlord's option to the last assignee,
if any, of Tenant's interest hereunder) at the expiration of the Term, and after
Tenant has vacated the Premises. No trust relationship is created herein
between Landlord and Tenant with respect to the Security Deposit.
17. ESTOPPEL CERTIFICATE.
(a) Tenant shall within ten (10) days of notice from Landlord
execute, acknowledge and deliver to Landlord a statement certifying (i) that
this Lease is unmodified and in full force and effect (or, if modified, stating
the nature of such modification and certifying that this Lease, as so modified,
is in full force and effect), (ii) the amount of the Security Deposit, (iii) the
date to which the Renthas been paid, (iv) acknowledging that there are not, to
Tenant's knowledge, any uncured defaults on the part of Landlord hereunder, or
specifying such defaults, if any are claimed, and (v) such other matters as may
reasonably be requested by Landlord. Any such statement may be conclusively
relied upon by any prospective purchaser or encumbrancer of the Building.
(b) Tenant's failure to deliver such statement within such time shall
be conclusive upon Tenant, (i) that this Lease is in full force and effect,
without modification except as may be represented by Landlord, (ii) that there
are no uncured defaults in Landlord's
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performance, and (iii) that not more than one month's Base Rent has been paid in
advance.
(c) If Landlord desires to finance or refinance the Building, Tenant
agrees to deliver to any lender designated by Landlord such financial statements
of Tenant as may be reasonably required by such lender. All such financial
statements shall be received by Landlord in confidence and shall be used for the
purposes herein set forth.
18. SUBORDINATION.
This Lease, at Landlord's sole option, shall be subordinate to any
ground lease, mortgage, deed of trust, or any other hypothecation for security
now or hereafter placed upon the Building and to any and all advances made on
the security thereof and to all renewals, modifications, consolidations,
replacements, refinancings and extensions thereof. Notwithstanding such
subordination, Tenant's right to quiet possession of the Premises shall not be
disturbed if Tenant is not in default and so long as Tenant shall pay the Rent
and observe and perform all of the provisions of this Lease, unless this Lease
is otherwise terminated pursuant to its terms. If any mortgagee, trustee, or
ground lessor shall elect to have this Lease prior to the lien of its mortgage,
deed of trust or ground lease, and shall give notice thereof to Tenant, this
Lease shall be deemed prior to such mortgage, deed of trust, or ground lease,
whether this Lease is dated prior to or subsequent to the date of said mortgage,
deed of trust or ground lease or the date of recording thereof. If any mortgage
or deed of trust to which this Lease is subordinate is foreclosed or a deed in
lieu of foreclosure is given to the mortgagee or beneficiary, Tenant shall
attorn to the purchaser at the foreclosure sale or to the grantee under the deed
in lieu of foreclosure; if any ground lease to which this Lease is subordinate
is terminated, Tenant shall attorn to the ground lessor. Tenant agrees to
execute any documents required to effectuate such subordination or to make this
Lease prior to the lien of any mortgage, deed of trust or ground lease, as the
case may be, or to evidence such attornment. Any such document of attornment
shall also provide that the successor shall not disturb Tenant in its use of the
Premises in accordance with this Lease.
19. ATTORNEYS' FEES.
In the event legal action is initiated by either party, the prevailing
party shall be entitled to recover all costs and expenses incurred in such
action, including, without limitation, reasonable attorneys' fees and costs,
including attorneys' fees incurred at trial and on appeal, if any.
20. NOTICES.
All notices, consents, demands, and other communications from one
party to the other given pursuant to the terms of this Lease shall be in writing
and shall be deemed to have been fully given when personally delivered,
delivered by courier service, sent via facsimile (confirmation receipt
required), or forty-eight (48) hours after the same is deposited in the United
States mail, certified or registered, postage prepaid, and addressed as follows:
To Tenant at the address specified in the Basic Lease Information or to such
other place as Tenant may from time to time designate in a notice to Landlord;
to Landlord at the address specified in the Basic Lease Information, or to such
other place and to such other parties as Landlord may from time to time
designate in a notice to Tenant.
21. GENERAL PROVISIONS.
(a) This Lease shall be governed by and construed in accordance with
the internal laws of the State of California, notwithstanding any choice of law
statutes, regulations, provisions or requirements to the contrary.
(b) The invalidity of any provision of this Lease, as determined
by a court of competent jurisdiction, shall in no way
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affect the validity of any other provision hereof.
(c) This Lease including attached Exhibits, Addenda, and Basic Lease
Information contains all agreements and understandings of the parties and
supersedes and cancels any and all prior or contemporaneous written or oral
agreements, instruments, understandings, and communications of the parties with
respect to the subject matter herein. This Lease, including the attached
Exhibits, Addenda, and Basic Lease Information, may be modified only in a
writing signed by each of the parties.
(d) No waiver of any provision hereof by either party shall be deemed
by the other party to be a waiver of any other provision, or of any subsequent
breach of the same provision. Landlord's or Tenant's consent to, or approval
of, any act shall not be deemed to render unnecessary the obtaining of
Landlord's or Tenant's consent to, or approval of, any subsequent act by the
other party.
(e) If Tenant remains in possession, with the expressed consent of
Landlord, of all or any part of the Premises after the expiration of the
Term, such tenancy shall be from month to month only, and not a renewal hereof
or an extension for any further term, and in such case, Rent shall be payable in
the amount of the last month's Base Rent and all other charges under the Lease
and such month-to-month tenancy shall be subject to every other term, covenant
and agreement contained herein.
(f) Subject to the provisions of this Lease restricting assignment or
subletting by Tenant, this Lease shall bind the parties, their personal
representatives, successors, and assigns.
(g) Upon reasonable prior notice to Tenant (which notice shall not be
required in the event of an emergency), Landlord and Landlord's representatives
and agents shall have the right to enter the Premises during regular business
hours for the purpose of inspecting the same, showing the same to prospective
purchasers or lenders, and making such alterations, repairs, improvements, or
additions to the Premises, the Building or the Common Areas as Landlord may deem
necessary or desirable. Landlord may at any time during the last one hundred
twenty (120) days of the Term place on or about the Premises any ordinary "For
Lease" sign. Landlord may at any time place on or about the Premises any
ordinary "For Sale" sign.
(h) The voluntary or other surrender of this Lease by Tenant, the
mutual cancellation thereof or the termination of this Lease by Landlord as a
result of Tenant's default shall, at the option of Landlord, terminate all or
any existing subtenancies or may, at the option of Landlord, operate as an
assignment to Landlord of any or all of such subtenancies.
(i) If Tenant is a corporation, limited liability company or
partnership, each individual executing this Lease on behalf of Tenant represents
and warrants that he is duly authorized to execute and deliver this Lease on
behalf of the corporation, company or partnership in accordance with, where
applicable, a duly adopted resolution of the board of directors of the
corporation, the vote of the members of the limited liability company or the
vote of the partners within the partnership, and that this Lease is binding upon
the corporation, company or partnership in accordance with its respective
articles of incorporation and bylaws, operating agreement or partnership
agreement.
(j) Time is expressly declared to be of the essence of this Lease and
of each and every covenant, term, condition, and provision hereof, except as to
the conditions relating to the delivery of possession of the Premises to Tenant.
(k) If there is more than one party comprising Tenant, the
obligations imposed on Tenant shall be joint and several.
(l) The language in all parts of this Lease shall be in all cases
construed as a whole according to its fair meaning and not
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strictly for nor against either Landlord or Tenant.
(m) As used in this Lease and whenever required by the context
thereof, each number, both singular and plural, shall include all numbers and in
each gender shall include all genders. Landlord and Tenant, as used in this
Lease or in any other instrument referred to in or made a part of this Lease,
shall likewise include both the singular and the plural, a corporation, limited
liability company, partnership, individual or person acting in any fiduciary
capacity as executor, administrator, trustee or in any other representative
capacity.
(n) The Exhibits and Addendum, if any, specified in the Basic Lease
Information are attached to this Lease and by this reference made a part hereof.
22. FORCE MAJEURE.
Any delay in construction, repairs, or rebuilding any building,
improvement or other structure herein shall be excused and the time limit
extended to the extent that the delay is occasioned by reason of acts of God,
labor troubles, laws or regulations of general applicability, acts of Tenant or
Tenant Delays (as the term is defined in the Work Letter Agreement attached
hereto as Exhibit B), or other occurrences beyond the reasonable control of
Landlord. Accordingly, Landlord's obligation to perform shall be excused for
the period of the delay and the period for performance shall be extended for a
period equal to the period of such delay.
23. BROKER'S FEE.
Each party represents that it has not had dealings with any real
estate broker, finder, or other person, with respect to this Lease in any
manner, except the brokerage firm(s) specified in the Basic Lease Information.
Each party shall hold harmless the other party from all damages resulting from
any claim that may be asserted against the other party by any broker, finder, or
other person with whom the other party has or purportedly has dealt. Landlord
shall pay any commissions or fees that are payable to the broker or finder
specified in the Basic Lease Information, with respect to this Lease in
accordance with the provisions of a separate commission contract.
24. FINANCIAL STATEMENT.
It is acknowledged by all parties hereto that the attached financial
declaration of Tenant is incorporated as a part of this Lease as Exhibit E, that
the information contained therein is true and correct in all material respects,
and that the accuracy of the information is a significant fact upon which
Landlord has relied in the granting of this Lease.
IN WITNESS WHEREOF, the parties have executed this Lease on the date
first mentioned above.
Tenant Landlord
Advanced Fibre Communications G & W/Redwood Associates J.V.
a California Corporation
By: /s/ Daniel E. Steimle By: G & W/McDowell Associates: 1985
a California general partnership
Its: /s/ VP, CFO
By: /s/ William C. White
William C. White
Its: Managing General Partner
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ADDENDUM #1
1. PREMISES:
The Premises will consist of 3780 s.f. of improved office ("Improved
Office") and 4728 s.f. of warehouse ("Warehouse") space for a total of
8,508 square feet as per the floor plan, Exhibit B-1.
2. COMMENCEMENT OF THE TERM:
The term of the Lease shall commence on August 1, 1995, or upon substantial
completion of the tenant improvements for the Improved Office space if such
space is not substantially completed by August 1, 1995. Tenant may occupy
the Warehouse space prior to the commencement date of the Lease, provided
that during such period of occupancy (i) Tenant shall pay base rent for the
Warehouse space in the amount of $0.45 per rentable square foot, (ii)
Tenant shall be subject to the terms and conditions of the Lease, and (iii)
the term of the Lease for the Premises shall not change or commence earlier
as a result of Tenant's early occupancy of the Warehouse space.
2. NNN RENTAL RATE:
The NNN rental rate will be as follows:
Lease $/s.f. Total Monthly $/s.f. Total Monthly
Year (Improved Office) Base Rent (Warehouse) Base Rent
(Improved Office) (Warehouse)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
1 $0.80 $3,024 $0.45 $2,128
--------------------------------------------------------------------------
2 & 3 $1.00 $3,780 $0.50 $2,364
--------------------------------------------------------------------------
4 & 5 $1.05 $3,969 $0.50 $2,364
3. LEASE CANCELLATION:
Three (3) years after the commencement date of the Lease, Tenant may cancel
that portion of the Lease relating to the Improved Office space and/or the
Warehouse space by giving Landlord written notice thereof no less than six
(6) months prior to the date of cancellation and at the same time paying to
Landlord a lease cancellation fee equal to what Tenant would pay in rent
(including both base rent and estimated operating expenses) for the six (6)
month period following the date of cancellation of the particular lease
space. Tenant shall pay the cancellation fee at the time written notice is
given to Landlord.
4. TENANT IMPROVEMENTS:
Landlord shall construct in the Improved Space on a turn-key basis the
improvements as per the attached Exhibit B-1 to the lease. Tenant shall
take the Warehouse space in "as is" condition.
<PAGE>
[Image omitted]
EXHIBIT A
The Premises
(8508 s.f.)
<PAGE>
[Image omitted]
EXHIBIT A-1
Site Plan
<PAGE>
EXHIBIT B
WORK LETTER AGREEMENT
(Turn Key - Single Story)
THIS WORK LETTER AGREEMENT supplements that certain Net Lease dated July
9th, 1995 ("Lease"), executed by G & W / Redwood Associates Joint Venture, a
California general partnership, as Landlord, and Advanced Fibre Communications,
a Corporation, as Tenant. All capitalized terms not otherwise defined herein
shall have the same meaning as those capitalized terms contained in the Lease.
1. Landlord shall be responsible for constructing within the Premises the
tenant improvements ("Tenant Improvements") described in the preliminary space
plan attached hereto as Exhibit B-1 ("Preliminary Space Plan"). The Tenant
Improvements for the Premises will be more particularly described in the plans
and construction drawings ("Construction Drawings") as approved below. Any
additional work ("Tenant Extra Improvements") required under the approved
Construction Drawings shall be at Tenant"s expense.
2. Landlord and Tenant shall diligently finalize the Preliminary Space
Plan for construction of the Tenant Improvements and Tenant Extra Improvements
so that, within thirty (30) days after execution of the Lease, Landlord can
provide Tenant with the Construction Drawings. The Construction Drawings shall
indicate the specific requirements of Tenant's lease space, outlining in detail
interior partitions, floor coverings, a reflected ceiling plan, plumbing
fixtures, and electrical plans (setting forth the electrical requirements of
Tenant), all in conformity with the Preliminary Space Plan. The Construction
Drawings shall include full energy calculations as required by the State of
California and the city agencies.
3. Within three (3) days after receipt of the Construction Drawings,
Tenant shall approve the drawings and/or request changes or modifications
thereto. Any such request for changes or modifications shall be subject to
Landlord's approval and, thereafter, the Construction Drawings shall be
resubmitted for Tenant's approval in accordance with the preceding sentence.
Tenant acknowledges that the Construction Drawings are subject to the approval
of the appropriate government authorities. It shall be Tenant's responsibility
to ensure that the design and function of the Tenant Improvements and Tenant
Extra Improvemments are suitable for Tenant's business and needs. The
improvements shall be constructed in accordance with current building standards,
laws, regulations, ordinances and codes. Landlord shall not be required to
install any Tenant Improvements or Tenant Extra Improvements which do not
conform to the Construction Drawings.
4. Landlord shall furnish and install the units and quantities of Tenant
Improvements as set forth on Exhibit B-1. The Tenant Improvements to be paid by
Landlord shall include:
(a) The costs of the Preliminary Space Plan (including one revision
thereto) and final Construction Drawings and engineering costs associated with
completion of the State of California energy utilization calculations under
Title 24 legislation; and
(b) The costs of obtaining building permits and other necessary
authorizations from the city, county and the State of California.
Any additional units, quantities or costs of the Tenant Improvements
required in accordance with the approved Construction Drawings shall be deemed
Tenant Extra Improvements and shall be paid for by Tenant at the unit cost set
forth in a summary of unit costs to be provided by Landlord.
5. In no event shall the Tenant Improvements payable by Landlord include
(i) the costs of procuring or installing any trade fixtures, equipment,
furniture, furnishings, telephone or computer equipment or wiring or other
personal property ("Personal Property"), or (ii) any Change Orders (as the term
is defined in Paragraph 6 below). Such items shall be paid by Tenant.
6. Following Tenant's approval of the Construction Drawings, Tenant may
request changes or modifications thereto ("Change Order"), however, the cost of
any Change Order(s) shall be borne by Tenant. If Tenant shall request any
Change Order, then Landlord shall promptly give Tenant a written estimate of (a)
the cost of engineering and design services to prepare the Change Order, (b) the
cost of work to be performed pursuant to the Change Order, and (c) the time
delay expected because of such requested Change Order. Within three (3) days
after Tenant's receipt of the written estimate, Tenant shall notify Landlord in
writing whether it approves the written estimate. If Tenant approves the
written
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estimate, then Tenant shall accompany its approval with a check made payable to
Landlord in the amount of the estimated cost of the Change Order. Upon
Landlord's completion of the Change Order and submission of the final cost
thereof to Tenant, Tenant shall promptly pay to Landlord any additional amounts
incurred in excess of the written estimate. If such written authorization and
check are not received by Landlord, then Landlord shall not be obligated to
commence work on the Premises and Tenant shall be chargeable for any delay in
the completion of the Premises in accordance with Paragraph 7 below.
7. If the Commencement Date of the Lease has not occurred on or before
the Estimated Commencement Date, and if the cause of the delay in the occurrence
of the Commencement Date is attributable to Tenant, then the Lease shall begin
on the date the Commencement Date otherwise would have occurred but for the
Tenant delays. Delays attributable to Tenant ("Tenant Delays") shall include,
without limitation, those caused by (a) delays by Tenant in approving the
Construction Drawings and costs, (b) Tenant's request for special materials not
available when needed for construction in accordance with the construction
schedule, (c) Change Orders, and (d) interference with Landlord's work caused by
Tenant or Tenant's agents. All costs and expenses occasioned by a Tenant Delay,
including, without limitation, increases in labor or materials, shall be borne
by Tenant.
8. Tenant may, with Landlord's written consent, enter the Premises prior
to the Commencement Date solely for the purpose of installing its Personal
Property as long as such entry will not interfere with the orderly construction
and completion of the Premises ("Tenant"s Work"). Tenant shall notify Landlord
of its desired time(s) of entry and shall submit for Landlord's written approval
the scope of the Tenant's Work to be performed and the name(s) of the
contractor(s) who will perform such work. Tenant agrees to indemnify, defend
and hold harmless Landlord, any mortgagee, ground lessor or beneficiary of a
deed of trust encumbering, secured by or affecting the Premises or the Building,
from and against any and all claims, actions, losses, liabilities, damages,
costs or expenses (including, without limitation, reasonable attorneys' fees and
claims for worker's compensation) of any nature whatsoever, arising out of or in
connection with the Tenant's Work (including, without limitation, claims for
breach of warranty, personal injury or property damage).
9. During the course of construction, at Tenant's expense, Tenant shall
obtain or maintain public liability and worker's compensation insurance, in
amounts acceptable to Landlord, and which name Landlord and Tenant as parties
insured from and against any and all liability for death of or injury to person
or damage to property caused in or about or by reason of the construction of the
Tenant's Work.
10. Upon substantial completion of the Premises in accordance with the
Construction Drawings, Tenant agrees to accept the Premises in the condition
which it may then be and waives any right or claim against Landlord for any
cause directly or indirectly arising out of the condition of the Premises,
appurtenances thereto, improvements thereon, and equipment therein. Tenant
shall hold harmless Landlord from and against any liability or damage as
provided under Paragraph 10.2 of the Lease. Landlord shall not be liable for
any latent or patent defects therein, except that Landlord warrants the Building
against latent defects for a period of one (1) year from the date of substantial
completion.
11. Tenant releases Landlord from any claim whatsoever for damages against
Landlord for any delay in the date on which the Premises shall be ready for
occupancy by Tenant.
12. The Premises shall be deemed "substantially completed" as of the date
that all of the following conditions are satisfied:
(a) The Tenant Improvements have been substantially completed in
accordance with the approved Construction Drawings (except for those punch list
items referenced in Paragraph 12 below), such that Tenant can reasonably conduct
business within the Premises; and
(b) A certificate of occupancy and/or finalized building permit has
been issued for the Premises.
13. Tenant shall immediately prior to occupancy inspect the Premises and
compile and furnish Landlord with an initial punch list of any missing or
deficient Tenant Improvements. Within the first thirty (30) days after delivery
of the Premises, Tenant shall make a final punch list and submit this list to
Landlord. Landlord shall use its best efforts to complete the corrective work
in a prompt, good and workman-like manner. Punch list corrections shall not
delay the Commencement Date, nor shall a delay in making corrections be grounds
for a delay or reduction in any rent payments due Landlord.
14. All floor area calculations are from the center line of the partitions
and the
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outside line of the exterior and hall walls. No deduction is allowed for the
columns, sprinkler risers, roof drains, or air conditioning units serving Tenant
and located within the Premises.
15. Landlord shall select the manufacturer and vendor of all building
materials and equipment with respect to the Tenant Improvements and Tenant Extra
Improvements to be constructed hereunder.
TENANT: LANDLORD:
Advanced Fibre Communications G & W/Redwood Associates Joint Venture,
a California general partnership
By:___________________________ By: G & W/McDowell Associates: 1985,
a California general partnership
Its:__________________________
By:/s/ William C. White
-------------------------------
William C. White
Its: Managing General Partner
3
<PAGE>
EXHIBIT C
RULES AND REGULATIONS
It is further agreed that the following Rules and Regulations shall be and are
hereby made a part of this Lease, and Tenant agrees that Tenant's employees and
agents, or any others permitted by Tenant to occupy or enter the Premises, will
at all times abide by said Rules and Regulations, unless otherwise specified or
provided for in the Lease, to wit:
1. The driveways, entrances and exits to the Property, sidewalks,
passages, building entries, lobbies, corridors, stairways, and elevators of the
Building shall not be obstructed by Tenant, or Tenant's agents or employees, or
used for any purpose other than ingress and egress to and from the Premises.
Tenant or Tenant's agents or employees shall not loiter on the lawn areas or
other common areas of the Property.
(a) Furniture, freight equipment and supplies will be moved in or out
of the Building only through the rear service entrances or other entrances
designated by Landlord and then only during such hours and in such manner as may
be reasonably prescribed by Landlord. Tenant shall cause its movers to use only
the loading facilities, and entrances designated by Landlord. In the event
Tenant's movers damage any part of the Building or Property, Tenant shall
forthwith pay to Landlord the amount required to repair said damage.
(b) No safe or article, the weight of which may in the opinion of
Landlord constitute a hazard to or damage to the Building or the Building's
equipment, shall be moved into the Premises without Landlord's prior written
approval, but such consent or approval shall not be unreasonably withheld,
conditioned or delayed. Landlord and Tenant shall mutually agree to the
location of such articles in the Premises. All damage done to the Property,
Building or Premises by putting in, taking out or maintaining extra heavy
equipment shall be repaired at the expense of Tenant.
(c) Landlord reserves the right to close and keep locked any and all
entrances and exits of the Building and Property and gates or doors closing the
parking areas thereof during such hours as Landlord may deem advisable for the
adequate protection of the Property and all tenants therein.
2. Except as otherwise provided for in the Lease, no sign, advertisement
or notice shall be inscribed, painted or affixed on any part of the inside or
outside of the Building unless of such color, size and style and in such place
upon or in the Building as shall be first approved in writing by Landlord. No
furniture or other materials shall be placed in front of the Building or in any
lobby or corridor, without the prior written consent of Landlord. Landlord
shall have the right to remove all non permitted signs and furniture, without
notice to Tenant.
3. Tenant shall not employ any person or persons other than the janitor
or cleaning contractor of Landlord for the purpose of cleaning or taking care of
the Premises without the prior written consent of Landlord, which shall not be
unreasonably withheld, conditioned or delayed. Except as otherwise provided in
the Lease, Landlord shall in no way be responsible to Tenant for any loss of
property from the Premises, however occurring. The janitor of the Building may
at all times keep a pass key, and other agents of Landlord shall at all times be
allowed admittance to the Premises in accordance with the provisions set forth
in the Lease.
4. Water closets and other water fixtures shall not be used for any
purpose other than that for which the same are intended, and any damage
resulting to the same from misuse on the part of Tenant or Tenant's agents or
employees, shall be paid for by Tenant. No person shall waste water by tying
back or wedging the faucets or in any other manner.
5. No animals except seeing-eye dogs or other animals necessary to the
functioning of handicapped personnel shall be allowed on the lawns or sidewalks
or in the offices, halls, and corridors of the Building.
6. No persons shall disturb the occupants of this or adjoining buildings
or premises
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by the use of any radio, sound equipment or musical instrument or by the making
of loud or improper noises, nor interfere in any way with the other tenants or
those having business with them. Should sound mitigation measures be required
due to sounds originating in the Premiss, the costs of such measures shall be
paid for by Tenant.
7. Bicycles or other vehicles, other than wheel chairs, shall not be
permitted in the offices, halls, corridors and lobbies in the Building nor shall
any obstruction of sidewalks or entrances of the Building by such be permitted.
8. Tenant shall not allow anything to be placed on the outside of the
Building, nor shall anything be thrown by Tenant or Tenant's agents or
employees, out of the windows or doors, or down the corridors, ventilation ducts
or shafts of the Building. Tenant, except in case of fire or other emergency,
shall not open any outside window.
9. No awnings shall be place over any window or entrance.
10. All garbage, including wet garbage, refuse or trash shall be placed by
Tenant in the receptacles designated by Landlord for that purpose. Tenant shall
not burn any trash or garbage at any time in or about the leased Premises or any
area of the Property. Tenant and Tenant's officers, agents, and employees shall
not throw cigar or cigarette butts or other substances or litter of any kind in
or about the Property.
11. Tenant shall not install or operate any steam or gas engine or boiler,
or other machinery or carry on any mechanical business, other than such
mechanical business which normally is identified with general office use in the
Premises. Explosives or other articles of an extra hazardous nature shall not
be brought into the Building complex.
12. Any painting or decorating as may be agreed to be done by and at the
expense of Landlord shall be done during regular weekday working hours. Should
Tenant desire such work on Saturdays, Sundays, holidays or outside of regular
working hours, Tenant shall pay for the extra cost thereof, if any.
13. Tenant and Tenant's agents and employees shall park their vehicles in
areas designated from time-to-time for employee parking.
14. Tenant shall not mark, drive nails, screw, bore, or drill into, paint
or in any way deface the common area walls, exterior walls, roof, foundations,
bearing walls, or pillars without the prior written consent of Landlord. The
expense of repairing any breakage, stoppage or damage resulting from a violation
of this rule shall be borne by Tenant.
15. No waiver of any rule or regulation by Landlord shall be effective
unless expressed in writing and signed by Landlord or his authorized agent.
16. Tenant shall be responsible for cleaning up any trash blowing around
their facility that may have been left by their customers or employees.
17. In the event of any conflict between these rules and regulations or
any further or modified rules and regulations from time to time issued by
Landlord, and the lease provisions, the lease provisions shall govern and
control.
18. Landlord reserves the right at any time to change or rescind any one
or more of these rules and regulations, or to make such other and further
reasonable rules and regulations as in Landlord's judgment may from time to time
be necessary for the management, safety, care and cleanliness of the Premises,
and for the preservation of good order therein, as well as for the convenience
of other tenants of the Property. Landlord shall not be responsible to Tenant
or to any other person for the non- observance or violation of the rules and
regulations by any other tenant or person. Tenant shall be deemed to have read
these rules and to have agreed to abide by them as a condition to its occupancy
of the space herein leased, and Tenant shall abide by any additional rules and
regulations which are ordered or requested by Landlord or by any governmental
authority.
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REDWOOD BUSINESS PARK
NET LEASE
THIS LEASE, dated July 10, 1995 is made and entered into by and between G &
W/Redwood Associates Joint Venture, a California general partnership
("Landlord"), and Advanced Fibre Communications, a California Corporation
("Tenant").
1. PREMISES.
Landlord leases to Tenant, and Tenant hereby leases from Landlord for the
term of this Lease ("Term") and at the rent and upon the conditions set forth
below, the Premises described in the Basic Lease Information and identified on
the floor plan attached hereto as Exhibit A. The Premises are located within the
Building described in the Basic Lease Information, and constitute part of the
Project described in the Basic Lease Information and as shown in Exhibit A-1
attached hereto, at the Redwood Business Park, located in Petaluma, California.
All areas and facilities outside the Buildings and within the exterior
boundaries of the Project that are provided and designated by Landlord from time
to time for the general nonexclusive use and convenience of the tenants of the
Project shall be known as "Common Areas".
2. TERM.
(a) The Term shall commence upon the date ("Commencement Date")
which is the earlier of: (i) substantial completion of the Premises, as the
term "substancial completion" is defined in the Work Letter Agreement,
attached hereto as Exhibit B; or (ii) the date substantial completion would
have occurred but for Tenant Delays (as the term is defined in the Work
Letter Agreement). The Estimated Commencement Date is set forth in the Basic
Lease Information, which date may be postponed due to a delay in delivering
the Premises as provided in Paragraph 2(b) below. A "Lease Year" is a period
of twelve (12) consecutive calendar months. A "Lease Month" is a
calendar month. The initial Term of this Lease shall be determined as follows:
(1) If the Commencement Date of this Lease occurs on the first
calendar day of a calendar month, the Term shall be for a period of Lease Years
and Months as specified in the Basic Lease Information, unless terminated sooner
as provided in this Lease.
(2) If the Commencement Date of this Lease occurs on other than
the first calendar day of a calendar month, the Term shall be for a period of
Lease Years and Months as specified in the Basic Lease Information, plus the
number of days remaining in the calendar month in which the Commencement Date
occurs, unless terminated sooner as provided in this Lease.
(b) Subject to the provisions of Paragraph 22 below, in the event the
Premises are not substantially completed (in accordance with the Work Letter
Agreement) on or within six (6) months after the Estimated Commencement Date,
then Tenant may, at Tenant's option, by notice in writing to Landlord within ten
(10) days thereafter, cancel this Lease, in which event, (i) this Lease shall be
deemed null and void and have no further force or effect, (ii) all security or
other deposits made herewith shall be promptly returned to Tenant, and (iii) the
parties shall have no further obligation to each other; provided further,
however, that if such written notice of Tenant is not received by Landlord
within said 10-day period, Tenant's right to cancel this Lease hereunder shall
terminate and be of no further force or effect.
3. RENT.
(a) For purposes of this Lease, the term "Rent" shall mean the Base
Rent, Advanced Base Rent, all additional rent, and all of the other monetary
obligations of Tenant under this Lease. Upon execution of this Lease, Tenant
shall pay to Landlord the Advanced
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Base Rent set forth in the Basic Lease Information. Tenant shall pay to Landlord
the Base Rent specified in the Basic Lease Information, payable on or before the
first day of each and every successive calendar month following the Commencement
Date. If the Term commences on other than the first day of a calendar month, the
first payment of Base Rent shall be appropriately prorated, on the basis of a
30-day month. Tenant's payment of any Advanced Base Rent (excluding that
portion attributable to last month s rent, if any) shall be credited against
Tenant's obligation to pay Base Rent beginning as of the Commencement Date.
(b) Tenant shall pay, as additional rent, all amounts of money
required to be paid to Landlord by Tenant under this Lease in addition to
monthly Base Rent, whether or not the same be designated "additional rent." If
such amounts are not paid at the time provided in this Lease, they shall
nevertheless be collectable as additional rent with the next installment of
monthly Base Rent thereafter falling due, but nothing herein contained shall be
deemed to suspend or delay the payment of any amount of money at the time the
same becomes due and payable hereunder, or limit any other remedy of Landlord.
(c) Tenant acknowledges that late payment by Tenant to Landlord of
Rent after the expiration of any applicable grace period will cause Landlord to
incur costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited to,
processing and accounting charges, and late charges which may be imposed on
Landlord by the terms of any trust deed covering the Premises. Accordingly, if
any installment of Rent or any other sums due from Tenant shall not be received
by Landlord when due, Tenant shall pay to Landlord a late charge equal to two
percent (2%) of such overdue amount. The parties agree that such late charge
represents a fair and reasonable estimate of the costs Landlord will incur by
reason of late payment by Tenant. Acceptance of such late charge by Landlord
shall in no event constitute a waiver of Tenant's default with respect to such
overdue amount, nor prevent Landlord from exercising any of the other rights and
remedies granted hereunder.
(d) Any amount due to Landlord, if not paid when due, shall bear
interest from the date due until paid at the rate of ten percent (10%) per
annum. Payment of interest shall not excuse or cure any default hereunder by
Tenant.
(e) All payments due from Tenant to Landlord hereunder shall be made
to Landlord without deduction or offset, in lawful money of the United
States of America at Landlord's address for notices hereunder, or to such
other person or at such other place as Landlord may from time to time designate
in writing to Tenant.
4. TAXES AND OPERATING EXPENSES.
(a) In addition to the Base Rent, Tenant shall pay (i) Tenant's
Percentage Share of Property Taxes (according to the percentage set forth in the
Basic Lease Information) relating to those Property Taxes (as the term is
defined under Paragraph 4(a)(1) below) which are assessed during the Term, and
(ii) Tenant's Percentage Share of Operating Expenses (according to the
percentage set forth in the Basic Lease Information) relating to those Operating
Expenses (as the term is defined under Paragraph 4(a)(2) below) which are paid
or incurred by Landlord during the Term.
(1) "Property Taxes" shall mean all real property taxes, bonds
and assessments and governmentally imposed fees or charges (and any tax levied
wholly or partly in lieu thereof) levied, assessed, confirmed, imposed or which
have become a lien against the Building (which for the purposes of defining
"Property Taxes" shall include the tax parcel of which the Building is a part)
and Common Areas.
(2) "Operating Expenses" shall mean the following: (A) all costs
of management, operation, maintenance and repair of the Building and Common
Areas, including, without limitation, property management expenses, maintenance
and repair materials, supplies and
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equipment; (B) all costs of water, power, electricity, refuse collection,
parking lot sweeping, landscaping, and other services relating to the Common
Areas; (C) all costs of alterations or improvements to the Building or Common
Areas made to achieve compliance with federal, state and local law including,
without limitation, the Americans with Disabilities Act (42 U.S.C. Section
12101 et seq.), which costs will be amortized over the useful life of each
alteration or improvement; (D) all costs of public liability and casualty
insurance maintained by Landlord with respect to the Building and Common Areas;
(E) all costs incurred by Landlord for making any capital improvements,
structural repairs or modifications to the Building or Common Areas or making
any improvements or modifications to reduce the operating expenses, which costs
will be amortized over the useful life of each capital improvement, structural
repair or modification; (F) all costs of maintaining machinery, equipment and
directional signage or other markers; and (G) the share allocable to the
Building of dues and assessments payable under any reciprocal easement or common
area maintenance agreements or declarations or by any owners' associations
affecting the Building. That portion of the Operating Expenses relating to the
property management expenses for the Building and Common Areas which shall be
charged to Tenant shall be four percent (4%) of both Tenant's annual Base Rent
and the subtotal of Tenant's share of Operating Expenses of the Building. In
the event that Landlord calculates the Operating Expenses based upon the Project
instead of the Building, as indicated on the Basic Lease Information, then the
term "Project" shall be substituted in the place of all references to the term
"Building" in this paragraph.
(b) The Property Taxes to be paid by Tenant shall be determined by
multiplying the total amount of the Property Taxes by Tenant's Percentage Share
of Property Taxes (which percentage is determined by multiplying 100% by a
fraction, the numerator of which is the rentable area of the Premises and the
denominator of which is the total rentable area of all improvements located
within the tax parcel of which the Premises are a part). Landlord may cause the
Common Areas of the Project to be separately assessed from other areas and
buildings of the Project. In such case, Tenant's Percentage Share of Property
Taxes attributable to the Common Areas shall be determined by the ratio that the
total rentable square feet in the Premises bears to the total number of square
feet of rentable area which is included in the property subject to the
assessment.
(c) Operating Expenses for each calendar year shall be adjusted to
equal Landlord's reasonable estimate of Operating Expenses as though ninety-five
percent (95%) of the total rentable area of the Building had been occupied.
When the Building is one hundred percent (100%) occupied, the Operating Expenses
shall be adjusted to reflect a 100% occupied building. The Operating Expenses
to be paid by Tenant shall be determined by multiplying the total amount of the
Operating Expenses as adjusted above by Tenant's Percentage Share of Operating
Expenses (which percentage is determined by multiplying 100% by a fraction, the
numerator of which is the rentable area of the Premises and the denominator of
which is the total rentable area located within the Building, if the Operating
Expenses are calculated for the Building, or within the Project, if the
Operating Expenses are calculated for the Project).
(d) Tenant shall pay to Landlord each month at the same time and in
the same manner as monthly Base Rent one-twelfth (1/12th) of Landlord's estimate
of the amount of Property Taxes-and one-twelfth (1/12th) of Landlord's estimate
of Operating Expenses payable by Tenant for the then-current calendar year. The
initial monthly amount shall be as set forth in the Basic Lease Information.
Within one hundred twenty (120) days after the close of each calendar year, or
as soon after such 120-day period as practicable, Landlord shall deliver to
Tenant a statement in reasonable detail of the actual amount of Property Taxes
and Operating Expenses payable by Tenant in accordance with this Paragraph 4 for
such calendar-year. Tenant may request further information if desired.
Landlord's failure to provide such statement to Tenant within the 120-day period
shall not act as a waiver and shall not excuse Tenant or Landlord from making
the adjustments to reflect actual costs as provided herein. If on
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the basis of such statement Tenant owes an amount that is less than the
estimated payments for such calendar year previously made by Tenant, Landlord
shall credit such excess to Tenant against future additional rent due under this
Paragraph 4. If on the basis of such statement Tenant owes an amount that is
more than the estimated payments for such calendar year previously made by
Tenant, Tenant shall pay the deficiency to Landlord within fifteen (15) days
after delivery of the statement. The obligations of Landlord and Tenant under
this Paragraph 4(d) with respect to the reconciliation between the estimated and
actual amounts of Property Taxes and Operating Expenses payable by Tenant for
the last year of the Term shall survive the termination of the Lease. When the
final determination is made of the actual amounts of Property Taxes and
Operating Expenses payable by Tenant for the year in which this Lease
terminates, Tenant shall immediately pay any increase due over the estimated
payments and, conversely, any overpayment made by Tenant shall be immediately
reimbursed to Tenant by Landlord.
5. OTHER TAXES.
In addition to Tenant's obligations under Paragraph 4 above,
Tenant shall pay or reimburse Landlord for (i) any taxes upon, measured by or
reasonably attributable to the cost or value of Tenant's equipment, furniture,
fixtures, and other personal property located in the Premises or leasehold
improvements made in or to the Premises at Tenant's expense, (ii) for taxes, if
any, measured by or reasonably attributable to tenant improvements paid for by
Tenant, and (iii) for any taxes, assessments, fees, or charges imposed by any
public authority or private community maintenance association upon or by reason
of the development, possession, use or occupancy of the Premises or the parking
facilities used by Tenant in connection with the Premises. On request by
Landlord, Tenant shall furnish Landlord with satisfactory evidence of payment of
Tenant's business personal property taxes and deliver copies of such business
personal property tax bills to Landlord.
6. USE.
6.1 PROHIBITED USE.
(a) The Premises shall be used and occupied by Tenant solely for
the use set forth in the Basic Lease Information. Tenant shall, at Tenant's
expense, comply promptly with all applicable federal, state and local laws,
regulations, ordinances, rules, orders, and requirements in effect during the
Term relating to the condition, use or occupancy of the Premises. Tenant shall
not use or permit the use of the Premises in any manner that will tend to create
waste or a nuisance, or that unreasonably disturbs other tenants of the Building
or Project, nor shall Tenant place or maintain any signs, antennas, awnings,
lighting or plumbing fixtures, loudspeakers, exterior decoration or similar
devises on or visible from the exterior of the Premises, without Landlord's
prior written consent, which may be withheld in Landlord's sole discretion.
Tenant shall not use any corridors, sidewalks, stairs, elevators, or other areas
outside of the Premises for storage or any purpose other than access to the
Premises. Tenant shall not use, keep, or permit to be used or kept on the
Premises any foul or noxious gas or substance, nor shall Tenant do or permit to
be done anything in and about the Premises, either in connection with activities
hereunder expressly permitted or otherwise, which would cause an increase in
premiums for or a cancellation of any policy of insurance (including fire
insurance) maintained by Landlord in connection with the Premises or the
Building or which would violate the terms of any covenants, conditions, or
restrictions, or the design guidelines, or the sign guidelines affecting the
Building or the land on which it is located, or the Rules (as the term is
defined under Paragraph 6.3(b) below).
(b) Tenant shall not attach any signage to or on any part of the
outside of the Premises, the Building or the Project, or in the halls, lobbies,
windows or elevator banks of the Building without Landlord's prior written
consent, which consent may be withheld in Landlord's sole discretion. Any
signage so permitted shall be subject to prior approval of and conformance with
the
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requirements of the design review committee of the Project and the design review
agency of the city. At Tenant's expense, Tenant shall (i) maintain all permitted
signage, and (ii) upon the expiration or termination of this Lease, remove such
signage and repair any damage caused by their removal. If Tenant fails to do
so, Landlord may maintain, repair or remove such signage without notice to
Tenant and at Tenant's expense, the cost of which shall be payable by Tenant as
additional rent in accordance with Paragraph 14(b)(2) below.
6.2 SUITABILITY. Tenant acknowledges that neither Landlord nor any
agent of Landlord has made any representation or warranty with respect to the
Premises or the Building or with respect to the suitability or fitness of
either for the conduct of Tenant's business or for any other purpose. Nor
has Landlord agreed to undertake any modification, alteration or improvement
to the Premises except as provided in this Lease. Tenant acknowledges that
the Premises are located in a 100-year flood zone and that the finished floor
elevations of the Building are designed to be at least one (1) foot above the
federal government's estimate of the 100-year flood level at the time of
initial construction.
6.3 USE OF COMMON AREAS.
(a) Landlord gives Tenant and its authorized employees, agents,
customers, representatives, and invitees the nonexclusive right to use the
Common Areas, with others who are entitled to use the Common Areas, subject to
Landlord's rights as set forth in this Paragraph 6.3.
(b) All Common Areas shall be subject to the exclusive control
and management of Landlord and Landlord shall have the right to establish,
modify, amend, and enforce reasonable rules and regulations with respect to the
Common Areas. Tenant acknowledges receipt of a copy of the current rules and
regulations, attached hereto as Exhibit C, and agrees that they may, from time
to time, be modified or amended by Landlord in a commercially reasonable manner
(the "Rules"). Tenant agrees to abide by and conform with such Rules; to cause
its concessionaires and its and their employees and agents to abide by such
Rules; and to use its best efforts to cause its customers, invitees, and
licensees to abide by such Rules.
(c) Landlord shall have the right to close temporarily any
portion of the Common Areas for the purpose of discouraging use by parties who
are not tenants or customers of tenants;.to use portions of the Common Areas
while engaged in making additional improvements or repairs or alterations to the
Property; to use or permit the use of the Common Areas by others to whom
Landlord may grant or have granted such rights; and to do and perform such acts
in, to, and with respect to, the Common Areas as in the use of good business
judgment Landlord shall determine to be appropriate for the Project.
(d) Landlord shall have the unqualified right to increase or
reduce the Common Areas, provided the Project meets the parking requirement
under Paragraph 6.5 below.
(e) Tenant shall cooperate with Landlord and other tenants in
the Project in recycling waste paper, cardboard, or such other materials
identified under any trash recycling program that may be established in order to
reduce trash collection costs.
6.4 ENVIRONMENTAL MATTERS.
(a) (1) The term "Hazardous Materials as used herein means
any petroleum products, asbestos, polychlorinated biphenyls, P.C.B.'s,
chemicals, compounds, materials, mixtures or substances that are now or
hereafter defined or listed in, or otherwise classified as a "hazardous
substance", "hazardous material", "hazardous waste", "extremely hazardous
waste", "infectious waste", "toxic substance", "toxic pollutant" or any other
formulation intended to define, list or classify substances by reason of
deleterious properties such as ignitability, corrosivity, reactivity,
carcinogenicity or toxicity pursuant to any federal, state or local
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environmental law, regulation, ordinance, resolution, order or decree relating
to industrial hygiene, environmental protection or the use, analysis,
generation, manufacture, storage, release, disposal or transportation of the
same ("Hazardous Materials Laws").
(2) Except for ordinary office supplies and janitorial
cleaning materials which in common business practice are customarily and
lawfully used, stored and disposed of in small quantities, and except for
those Hazardous Materials listed on Exhibit D attached hereto, Tenant shall
not use, manufacture, store, release, dispose or transport any Hazardous
Materials in, on, under or about the Premises, the Building or the Project
without giving prior written notice to Landlord and obtaining Landlord's
prior written consent, which consent Landlord may withhold in its sole
discretion. Subject to Landlord's prior written consent, Hazardous Materials
may be added to Exhibit D on an annual review basis; any such amendments to
Exhibit D shall be signed by each party and attached hereto. Tenant shall at
its own expense procure, maintain in effect, and comply with all conditions
of any and all permits, licenses, and other governmental and regulatory
approvals required in connection with Tenant's generation, use, storage,
disposal and transportation of Hazardous Materials. Except as discharged into
the sanitary sewer in strict accordance and conformity with all applicable
Hazardous Materials Laws, Tenant shall cause any and all Hazardous Materials
removed from the Premises to be removed and transported solely by duly
licensed haulers to duly licensed facilities for final disposal of such
materials and wastes. Regardless whether permitted under the Hazardous
Materials Laws, Tenant shall not maintain in, on, under, or about the
Premises, the Building or the Project any above or below ground storage
tanks, clarifiers, or sumps, nor shall any wells for the monitoring of ground
water, soils, or subsoils be allowed.
(3) Tenant shall immediately notify Landlord in writing of:
(a) any enforcement, cleanup, removal or other governmental or regulatory action
instituted, completed or threatened pursuant to any Hazardous Materials Law; (b)
any claim made or threatened by any person or entity against Tenant or the
Premises relating to damage, contribution, cost, recovery, compensation, loss or
injury resulting from or claimed to result from any Hazardous Materials; and (c)
any reports, information, inquiries or demands made, ordered, or received by or
on behalf of Tenant which arise out of or in connection with the existence or
potential existence of any Hazardous Materials in, on, under or about the
Premises, the Building, or the Project, including, without limitation, any
complaints, notices, warnings, asserted violations, or mandatory or voluntary
informational filings with any governmental agency in connection therewith, and
immediately supply Landlord with copies thereof.
(b) Tenant shall indemnify, defend (by counsel reasonably
acceptable to Landlord), protect, and hold Landlord, and each of Landlord's
partners, officers, directors, partners, employees, affiliates, joint venturers,
members, trustees, owners, shareholders, principals, agents, representatives,
attorneys, successors and assigns, free and harmless from and against any and
all claims, liabilities, damages, fines, penalties, forfeitures, losses, cleanup
and remediation costs or expenses (including attorneys' fees) or death of or
injury to any person or damage to any property whatsoever, arising from or
caused in whole or in part, directly or indirectly, by (i) Tenant's use,
analysis, generation, manufacture, storage, release, disposal, or transportation
of Hazardous Materials by Tenant, Tenant's agents, employees, contractors
licensees or invitees to, in, on, under, about or from the Premises, the
Building, or the Project, or (ii) Tenant's failure to comply with any Hazardous
Materials Law. Tenant's obligations hereunder shall include, without limitation,
and whether foreseeable or unforeseeable, all costs of any required or necessary
repair, cleanup, detoxification or decontamination of the Premises, the
Building, or the Project and the preparation and implementation of any closure,
remedial action or other required plans in connection therewith, and shall
survive the expiration or earlier termination of this Lease.
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(c) Landlord shall have the right to enter the Premises during
regular business hours upon reasonable prior notice at all times for the
purposes of ascertaining compliance by Tenant with all applicable Hazardous
Materials Laws, provided, however, that in the instance of an emergency
Landlord's entry onto the Premises shall not be restricted to regular business
hours nor shall notice be required.
(d) Landlord shall have the option to declare a default of this
Lease for the release or discharge of Hazardous Materials by Tenant, Tenant's
employees, agents, contractors, or invitees on the Premises, Building or Project
or in violation of law or in deviation from prescribed procedures in Tenant's
use or storage of Hazardous Materials. If Tenant fails to comply with any of the
provisions under this Paragraph 6.4, Landlord shall have the right (but not the
obligation) to remove or otherwise cleanup any Hazardous Materials from the
Premises, the Building or the Project. In such case, the costs of any Hazardous
Materials investigation, removal or other cleanup (including, without
limitation, transportation, storage, disposal and attorneys' fees and costs)
will be additional rent due under this Lease, whether or not a court has
ordered the cleanup, and will become due and payable on demand by Landlord.
6.5 PARKING. Landlord grants to Tenant and Tenant's customers,
suppliers, employees and invitees a nonexclusive license to use unassigned and
unreserved parking spaces in the Common Areas for the use of motor vehicles
during the Termsubject to rights reserved to Landlord as specified in this
Paragraph 6.5. Landlord reserves the right to grant similar nonexclusive and
unassigned and unreserved use to other tenants; to promulgate rules and
regulations relating to the use of the Common Areas including parking by tenants
and employees of tenants; to make changes in the parking layout from time to
time; and to do and perform any other acts in and to these areas and
improvements as Landlord determines to be advisable. Tenant agrees not to
overburden the parking facilities and to abide by and conform with the rules and
regulations and to cause its employees and agents to abide by and conform to the
rules and regulations. Upon request, Tenant shall provide Landlord with license
plate numbers of all vehicles driven by its employees and to cause Tenant's
employees to park only in spaces specifically designated for tenant parking.
Landlord shall have the unqualified right to rearrange or reduce the number of
parking spaces; provided, however, the ratio of the number of parking spaces
available to Tenant will be no less than three point five (3.5) spaces per 1,000
usable square feet of the Premises.
7. SERVICES.
(a) Tenant shall pay for all water, sewer, gas, electricity, heat,
cooling, telephone, refuse collection, and other utility-type services furnished
to Tenant or the Premises, together with all related installation or connection
charges or deposits. Wherever it is practical to do so such services shall be
separately metered or charged to Tenant by the provider thereof and paid for
directly by Tenant. To the extent any of the foregoing services are provided by
Landlord, Tenant shall reimburse Landlord for all costs incurred by Landlord in
connection with the provision of such services based on Landlord's reasonable
estimate of the level of Tenant's use or consumption of such services. Landlord
shall bill Tenant on a monthly or other periodic basis for such services and
payment shall be made by Tenant within ten (10) days after submittal of
Landlord's statement.
(b) Landlord shall not be in default hereunder or be liable for any
damages or personal injuries to any person directly or indirectly resulting
from, nor shall there be any Rent abatement by reason of, any interruption or
curtailment whatsoever in utility services.
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8. MAINTENANCE, REPAIRS AND ALTERATIONS.
(a) Tenant shall, at Tenant's expense, maintain every part of the
Premises in good order, condition and repair, including without limitation, (i)
all interior surfaces, ceilings, walls, door frames, window frames, floors,
carpets, draperies, window coverings and fixtures, (ii) all windows, doors,
locks and closing devices, entrances, plate glass, and signs, (iii) all plumbing
and sewage pipes, fixtures and fittings, (iv) all phone lines, electrical
wiring, equipment, switches, outlets, and lightbulbs, (v) any fire detection,
fire sprinkler or extinguisher equipment, (vi) all of Tenant's personal
property, improvements and alterations, and (vii) all other fixtures and special
items installed by or for the benefit of, or at the expense of Tenant. Tenant
shall, at its expense, cause to be maintained in good operating condition and
repair, all heating, ventilating, and air conditioning equipment installed in,
or on the roof of the Premises. Tenant shall keep in force a preventive
maintenance contract with a qualified maintenance company covering all heating,
ventilating and air conditioning equipment and shall annually provide Landlord
with a copy of this contract. Tenant shall not enter onto the roof area of the
Building, except for the purpose of maintaining the heating, ventilating, and
air conditioning equipment and provided that Tenant shall repair any damage to
the roof area caused by its entry. Tenant shall be responsible for its own
janitorial service. Landlord shall incur no expense (nor have any obligation)
of any kind whatsoever in connection with the maintenance of the Premises.
(b) Landlord shall keep in good condition and repair the foundation,
roof structure, exterior walls and other structural parts of the Building, and
all other portions of the Building not the obligation of Tenant or any other
tenant in the Building. Tenant expressly waives the benefits of any statute,
including Civil Code Sections 1941 and 1942, which would afford Tenant the right
to make repairs at Landlord's expense or to terminate this Lease due to
Landlord's failure to keep the Building in good order, condition and repair.
Landlord shall have no liability to Tenant for any damage, inconvenience, or
interference with the use of the Premises by Tenant as the result of Landlord
performing any such maintenance and repair work.
(c) In the event Tenant fails to perform Tenant's obligations under
this Paragraph 8, Landlord may, but shall not be required to, give Tenant notice
to do such acts as are reasonably required to so maintain the Premises. If
Tenant shall fail to commence such work and diligently prosecute it to
completion, then Landlord shall have the right (but not the obligation) to do
such acts and expend such funds at the expense of Tenant as are reasonably
required to perform such work. Any amounts so expended by Landlord will be
additional rent due under this Lease, and such amounts will become due and
payable on demand by Landlord. Landlord shall have no liability to Tenant for
any such damages, inconvenience, or interference with the use of the Premises by
Tenant as a result of performing such work.
(d) Upon the expiration or earlier termination of this Lease, Tenant
shall surrender the Premises in good condition and repair, only ordinary wear
and tear excepted. Tenant, at its sole cost and expense, agrees to repair any
damages to the Premises caused by or in connection with the removal of any
articles of personal property, business or trade fixtures, signs, machinery,
equipment, cabinetwork, furniture, moveable partitions, or permanent
improvements or additions, including without limitation thereto, repairing
the floor and patching and painting the walls where required by Landlord, to
Landlord's reasonable satisfaction. Tenant shall indemnify Landlord against
any loss or liability resulting from delay by Tenant in so surrendering the
Premises, including without limitation, any claims made by any succeeding
tenant resulting from such delay.
(e) Tenant shall not make any alterations, improvements, or additions
in, on, or about the Premises without Landlord's prior written consent, except
that Tenant may make alterations, improvements, or additions without Landlord's
prior written consent where (i) the reasonably estimated cost does not exceed
$2,500, and
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(ii) such alterations, improvements, or additions do not affect or involve the
structural integrity, roof membrane, exterior areas, building systems, or water-
tight nature of the Premises, the Building or the Project. In requesting
Landlord's consent, Tenant shall, at Tenant's sole cost, submit to Landlord
complete drawings and specifications describing such work and the identity of
the proposed contractor at least ten (10) business days prior to the
commencement of any work.
With respect to any alterations, improvements or additions made
to the Premises by Tenant:
(1) Before commencing any work relating to alterations,
additions, or improvements affecting the Premises, Tenant shall notify Landlord
of the expected date of commencement thereof and of the anticipated cost
thereof, Landlord shall then have the right at any time and from time to time to
post and maintain on the Premises such notices as Landlord reasonably deems
necessary to protect the Premises and Landlord from mechanics' liens or any
other liens.
(2) Tenant shall pay when due all claims for labor or materials
furnished to Tenant for use in the Premises. Tenant shall not permit any
mechanics' liens or any other liens to be levied against the Premises for any
labor or materials furnished to Tenant in connection with work performed on the
Premises by or at the direction of Tenant. Tenant shall indemnify, hold
harmless and defend Landlord (by counsel reasonably satisfactory to Landlord)
from any liens and encumbrances arising out of any work performed or materials
furnished by, or at the direction of Tenant. In the event that Tenant shall not,
within twenty (20) days following the imposition of any such lien, cause such
lien to be released of record by payment or posting of a proper bond, Landlord
shall have, in addition to all other remedies provided herein by law, the right,
but not the obligation, to cause the same to be released by such means as it
shall deem proper, including payment of the claim giving rise to such lien. All
such sums paid by Landlord and all expenses incurred by it in connection
therewith, including attorneys" fees and costs, shall be payable to Landlord by
Tenant on demand with interest at the rate of ten percent (10%) per annum.
(3) All alterations, improvements or additions in or about the
Premises performed by or on behalf of Tenant shall be done in a first-class,
workmanlike manner, shall not unreasonably lessen the value of leasehold
improvements in the Premises, and shall be completed in compliance with all
applicable laws, ordinances, regulations and orders of any governmental
authority having jurisdiction thereover, as well as the requirements of insurers
of the Premises and the Building.
(4) Upon Landlord's request, Tenant shall remove any contractor,
subcontractor or material supplier from the Premises and the Building if the
work or presence of such person or entity results in labor disputes in or about
the Building or Project or damage to the Premises, Building or Project.
(5) Landlord, at Landlord's sole discretion, may refuse to grant
Tenant permission for alterations, improvements or additions which require,
because of application of Americans with Disabilities Act or other laws,
substantial improvements or alterations to be made to the Common Areas.
(6) Landlord may,up to sixty (60) days prior to the expiration
of the Term, require that Tenant, at Tenant's expense, remove any such
alterations, improvements or additions prior to or upon the expiration of this
Lease, and restore the Premises to their condition prior to such alterations,
improvements or additions.
(7) Unless Landlord requires their removal, as set forth above,
all alterations, improvements, or additions made to the Premises shall become
the property of Landlord and remain upon and be surrendered with the Premises
upon the expiration of this Lease; provided, however, that Tenant's machinery,
equipment, and trade fixtures, other than any which may be affixed to the
Premises so that
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they cannot be removed without material damage to the Premises, shall remain the
property of Tenant and may be removed by Tenant subject to the provisions of
Paragraph 8(d) above.
9. CONSTRUCTION OF TENANT IMPROVEMENTS.
Landlord shall be responsible for constructing the tenant improvements
("Tenant Improvements") in the Premises, as provided in the Work Letter
Agreement, attached hereto as Exhibit B.
10. INSURANCE AND INDEMNITY.
10.1 INSURANCE.
(a) Tenant shall obtain and maintain during the Term
comprehensive general liability insurance with a combined single limit for
personal injury and property damage in an amount of not less than $2,000,000 (in
a form, with a deductible amount, and with carriers reasonably acceptable to
Landlord) and employer's liability and workers compensation insurance as
required by law. The insurance carrier shall be authorized to do business in
the State of California, with a policyholders and financial rating of at least
A:IX Class status as rated in the most recent edition of Best's Key-Rating
guide. Tenant's comprehensive general liability insurance policy shall be
endorsed to provide that (i) it may not be canceled or altered in such a manner
as to adversely affect the coverage afforded thereby without thirty (30) days"
prior written notice to Landlord, (ii) Landlord is designated as an additional
insured, (iii) the insurer acknowledges acceptance of the mutual waiver of
claims by Landlord and Tenant pursuant to Paragraph 10.2(b) below, and (iv) such
insurance is primary with respect to Landlord and that any other insurance
maintained by Landlord is excess and noncontributing with such insurance. If,
in the reasonable opinion of Landlord's lender or in the commercially reasonable
opinion of Landlord's insurance adviser, the specified amounts of coverage are
no longer adequate, such coverage shall, within 30 days written notice to
Tenant, be appropriately increased. Prior to the commencement of the Term,
Tenant shall deliver to Landlord a duplicate of such policy or a certificate
thereof to Landlord for retention by it, with endorsements. At least thirty
(30) days prior to the expiration of such policy or any renewal or modification
there of, Tenant shall deliver to Landlord a replacement or renewal binder,
followed by a duplicate policy or certificate within a reasonable time
thereafter. If Tenant fails to obtain such insurance or to furnish Landlord any
such duplicate policy or certificate as herein required, Landlord may, at its
election, without notice to Tenant and without any obligation to do so, procure
and maintain such coverage and Tenant shall reimburse Landlord on demand as
additional rent for any premium so paid by Landlord.
(b) Landlord waives all claims against Tenant, and Tenant's
officers, directors, partners, employees, agents and representatives for loss or
damage to the extent that such loss or damage is insured against under any valid
and collectable insurance policy insuring Landlord or would have been insured
against but for any deductible amount under any such policy, Tenant waives all
claims against Landlord, and Landlord's officers, directors, partners,
employees, affiliates, joint venturers, members, trustees, owners, shareholders,
principals, agents, representatives, successors and assigns, for loss or damage
to the extent such loss or damage is insured against under any valid and
collectable insurance policy insuring Tenant or required to be maintained by
Tenant under this Lease, or would have been insured against but for any
deductible amount under any such policy. The insuring party shall, upon
obtaining the policies of insurance required under this Lease, give notice to
the insurance carrier or carriers that the foregoing mutual waiver of
subrogation is contained in this Lease. Tenant agrees that in the event of a
sale, assignment or transfer of the Premises by Landlord, this waiver of
subrogation shall continue in favor of the original Landlord and any subsequent
Landlord.
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(c) Tenant shall at its own cost maintain on all its personal
property, Tenant's improvements, and alterations, in, on, or about the Premises,
a policy of standard fire and extended coverage insurance, with vandalism and
malicious mischief endorsements, to the extent of at least one hundred percent
(100%) of their full replacement value. The proceeds from any such policy shall
be used by Tenant for the replacement of personal property and the restoration
of Tenant's improvements or alterations. Notwithstanding any other provisions of
the Lease, Landlord shall have no liability for damage to or destruction of
Tenant's personal property, regardless of whether the damage or destruction
results from the acts or omissions of Landlord.
(d) During the Term, Landlord shall keep the Building, and
improvements within which the Premises are located, insured against loss or
damage by (i) fire, with extended coverage and vandalism, malicious mischief
and special extended perils (all risk) endorsements or their equivalents, in
amounts not less than one hundred percent (100%) of the replacement cost of the
Building and structures insured, and (ii) flood, in the maximum amount provided
for by FEMA under its flood loss insurance program, with loss payable thereunder
to Landlord and to any authorized encumbrancer of Landlord (with standard
mortgagee loss payable clause) in accordance with their respective interests.
Landlord may maintain rent insurance, for the benefit of Landlord, equal to at
least one year's Base Rent hereunder. If the Lease is terminated as a result of
damage by fire, casualty or earthquake as set forth in this Paragraph 10, all
insurance proceeds shall be paid to and retained by Landlord, subject to the
rights of any authorized encumbrancer of Landlord.
(e) Tenant acknowledges that Landlord does not, at the time of
the signing of this Lease, insure the Building for earthquake damage. Landlord
may, when Landlord deems the premiums to be reasonable, insure the Building
fully or partially for earthquake damage. At such time, the premium for
earthquake insurance will be added to the Operating Expenses for purposes of
determining additional rent.
10.2 INDEMNITY.
(a) Tenant waives all claims against Landlord for damage to any
property or injury to or death of any person in, on, or about the Premises, the
Building, or any other portion of the Project arising at any time and from any
cause, unless caused by the active negligence or willful misconduct of Landlord,
its agents, employees, or contractors. Tenant shall indemnify, defend (by
counsel reasonably satisfactory to Landlord) and hold harmless Landlord, and
Landlord's officers, directors, partners, employees, affiliates, joint
venturers, members, trustees, owners, shareholders, principals, agents,
representatives, successors and assigns, from and against all claims, costs,
damages, actions, indebtedness and liabilities (except such as may arise from
the active negligence or willful misconduct of Landlord, and Landlord's
officers, directors, partners, employees, affiliates, joint venturers, members,
trustees, owners, shareholders, principals, agents, representatives, successors
and assigns) arising by reason of any death, bodily injury, personal injury,
property damage or any other injury or damage in connection with (i) any
condition or occurrence in or about or resulting from any condition or
occurrence in or about the Premises during the Term, or (ii) any act or omission
of Tenant, or Tenant's agents, representatives, officers, directors,
shareholders, partners, employees, successors and assigns, wherever it occurs.
The foregoing indemnity obligation of Tenant shall include reasonable attorneys
fees, and all other reasonable costs and expenses incurred by Landlord from the
first notice that any claim or demand is to be made. The provisions of this
Paragraph 10.2 shall survive the termination or expiration of this Lease with
respect to any damage, injury, or death occurring prior to such expiration or
termination.
(b) Neither party shall be liable to the other for any
unauthorized or criminal entry of third parties into the Premises, Building,
Project, Common Areas, or parking facilities, or for any damage to person or
property, or loss of property in and about the
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Premises, Building, Project, Common Areas, parking facilities and the
approaches, entrances, streets, sidewalks, stairs, elevators, restrooms, or
corridors thereto, by or from any unauthorized or criminal acts of third
parties, regardless of any breakdown, malfunction or insufficiency of any
security measures, practices or equipment provided by Landlord or Tenant.
Tenant shall immediately notify Landlord in writing of any breakdown or
malfunction of any security measures, practices or equipment provided by
Landlord as to which Tenant has knowledge.
(c) Any diminution or interference with light, air or view by
any structure which may be erected on land adjacent to the Building or resulting
from any other cause shall in no way alter this Lease or impose any liability on
Landlord.
(d) Tenant agrees that in no event shall Landlord be liable for
consequential damages, including injury to Tenant's business or any loss of
income therefrom.
(e) In the event that Landlord or any successor owner of the
Building sells or conveys the Building, then all liabilities and obligations of
Landlord or the successor owner under this Lease accruing after the sale or
conveyance shall terminate and become binding on the new owner, and Tenant shall
release Landlord from all liability-under this Lease (including, without
limitation, the Security Deposit, as defined under Paragraph 16 below), except
for I acts or omissions of Landlord occurring prior to such sale or conveyance.
(f) Tenant expressly agrees that so long as Landlord is a
corporation, limited liability company, trust, partnership, joint venture,
unincorporated association or other form of business entity, (i) the obligations
of Landlord shall not constitute personal obligations of the officers,
directors, partners, employees, affiliates, joint venturers, members, trustees,
owners, shareholders, or other principals, agents or representatives of such
business entity ("Member of Landlord") and (ii) Tenant shall have recourse only
to the interest of such business entity in the Building of which the Premises
are a part for the satisfaction of such obligations and not against the assets
of such Member of Landlord other than to the extent of their respective
interests in the Building. In this regard, Tenant agrees that in the event of
any actual or alleged failure, breach or default by Landlord of its obligations
under this Lease, that (i) no Member of Landlord shall be sued or named as a
party in any suit or action (except as may be necessary to secure jurisdiction
of Landlord), (ii) no judgment will be taken against any Member of Landlord, and
any judgment taken against any Member of Landlord may be vacated and set aside
at any time without hearing, (iii) no writ of execution will ever be levied
against the assets of any Member of Landlord, and (iv) these agreements by
Tenant are enforceable both by Landlord and by any Member of Landlord.
11. DAMAGE OR DESTRUCTION.
(a) Subject to the provisions of Paragraphs 11(b) and 11(c) below,
if, during the Term, the Premises are totally or partially destroyed from any
insured casualty, Landlord shall, within ninety (90) days after the destruction,
commence to restore the Premises to substantially the same condition as they
were in immediately before the destruction and prosecute the same diligently to
completion. Such destruction shall not terminate this Lease. Landlord's
obligation shall not include-repair or replacement of Tenant's alterations or
Tenant's equipment, furnishings, fixtures and personal property. If the existing
laws do not permit the Premises to be restored to substantially the same
condition as they were in immediately before destruction, and Landlord is unable
to get a variance to such laws to permit the commencement of restoration of the
Premises within the 90-day period, then either party may terminate this Lease by
giving written notice to the other party within thirty (30) days after
expiration of the 90-day period.
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(b) Despite the provisions of Paragraph 11(a) above, Landlord may
decide within ninety (90) days after such destruction to demolish the Building
rather than rebuild it, in which case this Lease will terminate as of the date
of the destruction. Landlord shall give Tenant written notice of its intention
within ninety (90) days after the destruction.
(c) If any destruction occurs to the Premises during the last six (6)
months of the initial Term or during the last six (6) months of any extension
period, regardless of the nature and extent of the destruction, either party can
elect to terminate this Lease within thirty (30) days after the destruction
occurs. If this Lease does not terminate pursuant to this Paragraph 11(c), the
provisions of Paragraph 11(a) above shall apply.
(d) If the Premises are damaged from any uninsured casualty to any
extent whatsoever, Landlord may within ninety (90) days following the date of
such damage: (i) commence to restore the Premises to substantially the same
condition as they were in immediately before the destruction and prosecute the
same diligently to completion, in which event this Lease shall continue in full
force and effect; or (ii) within the 90-day period Landlord may elect not to so
restore the Premises, in which event this Lease shall cease and terminate. In
either such event, Landlord shall give Tenant written notice of its intention
within the 90-day period.
(e) In the event of destruction or damage to the Premises which
materially interferes with Tenant's use of the Premises, if this Lease is not
terminated as above provided, there shall be an abatement or reduction of Base
Rent between the date of destruction and the date Landlord substantially
completes its reconstruction obligations, based upon the extent to which the
destruction materially interferes with Tenant's use of the Premises. All other
obligations of Tenant under this Lease shall remain in full force and effect.
Except for abatement of Base Rent, Tenant shall have no claim against Landlord
for any loss suffered by Tenant due to damage or destruction of the Premises or
any work of repair undertaken as herein provided.
(f) The provisions of California Civil Code Sections 1932(2) and
1933(4), and any successor statutes, are inapplicable with respect to any
destruction of the Premises, such sections providing that a lease terminates
upon the destruction of the Premises unless otherwise agreed between the parties
to the contrary.
12. EMINENT DOMAIN.
(a) If all or any part of the Premises shall be taken as a result of
the exercise of the power of eminent domain, this Lease shall terminate as to
the part so taken as of the date of taking. In the case of a partial taking of
greater than fifty percent (50%) of the rentable area of the Premises, either
Landlord or Tenant shall have the right to terminate this Lease as to the
balance of the Premises by notice to the other within thirty (30) days after the
date of the taking. In the event of a partial taking of the Premises which does
not result in a termination of this Lease, the monthly Base Rent thereafter to
be paid shall be equitably reduced on a square footage basis. If the continued
occupancy of Tenant is materially interfered with for any time during the
partial taking, notwithstanding the partial taking does not terminate this Lease
as to the part not so taken, the Base Rent shall proportionately abate so long
as Tenant is not able to continuously occupy the part remaining and not so
taken.
(b) All compensation awarded or paid upon a total or partial taking
of the fee title shall belong to Landlord whether such compensation be awarded
or paid as compensation for diminution in value of the leasehold or of the fee
except: Tenant shall retain and have a claim for the following, to the extent
specifically designated by the condemning authority: (i) the unamortized value
over the Term of Tenant's leasehold improvements (to the extent Landlord has not
contributed to the cost thereof); (ii) that portion (if any) of the award made
to Landlord as a result of removing fixtures, removable by
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Tenant herein, under the terms of this Lease but which are required to be taken
by the condemnor or are so acquired by the condemnor; and (iii) all relocation
assistance, moving and relocation expenses to the extent (if any) provided by
the condemning authority directly to Tenant.
13. ASSIGNMENT AND SUBLETTING.
(a) Tenant shall not assign, sublet or hypothecate this Lease or any
interest herein or sublet the Premises or any part thereof or permit the use of
the Premises by any party other than Tenant without the prior written consent of
Landlord, which consent shall not be unreasonably withheld. Any of the
foregoing acts without Landlord's consent shall be void and shall, at the option
of Landlord, terminate this Lease. In connection with each consent requested by
Tenant, Tenant shall submit to-Landlord the terms of the proposed transaction,
the identity of the parties to the transaction, the proposed documentation for
the transaction, current financial statements of any proposed assignee or
sublessee and all other information reasonably requested by Landlord concerning
the proposed transaction and the parties involved therein.
(b) As used in this Paragraph 13, the term "assign" or "assignment"
shall include, without limitation, any sale, transfer, or other disposition of
all or any portion of Tenant's estate under this Lease, whether voluntary or
involuntary, and whether by operation of law or otherwise, including any of the
following:
(1) if Tenant is a corporation or a limited liability company:
(A) any dissolution, merger, consolidation, or other reorganization of
Tenant; or (B) a sale or other transfer of more than fifty percent (50%) of
the value of the assets of Tenant; or (C) if Tenant is a corporation with
fewer than 500 shareholders, a sale or other transfer of a controlling
percentage of the capital stock of Tenant; or (D) if Tenant is a limited
liability company, a sale or other transfer of a controlling percentage of
the interest in Tenant. The phrase "controlling percentage means the
ownership of, and the right to vote, stocks or interests possessing at least
fifty percent (50%) of the total combined voting power of the limited
liability company or, in the case of a corporation, of all classes of
Tenant's stock issues, outstanding and permitted to vote for the election of
directors of the corporation;
(2) if Tenant is a trust, the transfer of more than fifty
percent (50%) of the beneficial interest of Tenant, or the dissolution of the
trust;
(3) if Tenant is a partnership or joint venture, the withdrawal,
or the transfer of the interest, of any general partner or joint venturer or the
dissolution of the partnership or joint venture; and
(4) if Tenant is composed of tenants-in-common, the transfer of
interest of any cotenants or the partition or dissolution of the cotenancy.
(c) No sublessee shall have a right further to sublet, and any
assignment by a sublessee of its sublease shall be subject to Landlord's prior
written consent in the same manner as if Tenant were entering into a new
sublease.
(d) Regardless of Landlord's consent, no subletting or assignment
shall release Tenant of Tenant's obligation, or alter the primary liability of
Tenant to pay the Rent and to perform all other obligations to be performed by
Tenant hereunder. The acceptance of Rent by Landlord from any other person
shall not be deemed to be a waiver by Landlord of any provisions hereof. Consent
to one assignment or subletting shall not be deemed consent to any subsequent
assignment or subletting. In the event of default by any assignee of Tenant or
any successor of Tenant in the performance of any of the terms hereof, Landlord
may proceed directly against Tenant without the necessity of exhausting remedies
against such assignee or successor.
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(e) In the event Tenant shall assign or sublet the Premises or
request the consent of Landlord to any assignment or subletting, then Tenant
shall reimburse Landlord for reasonable costs and attorneys' fees incurred in
connection therewith in an amount not to exceed $1,000.00.
14. DEFAULT BY TENANT.
(a) The following events shall constitute events of default under
this Lease:
(1) a failure by Tenant to pay any Rent or to deliver an
estoppel certificate (as provided in Paragraph 17 below) where such failure
continues for five (5) days after written notice by Landlord to Tenant;
(2) the bankruptcy or insolvency of Tenant, any transfer by
Tenant to defraud creditors, any assignment by Tenant for the benefit of
creditors, or the commencement of any proceedings of any kind by or against
Tenant under any provision of the Federal Bankruptcy Act or under any other
insolvency, bankruptcy or reorganization act unless, in the event any such
proceedings are involuntary, Tenant is discharged from the same within sixty
(60)days thereafter; the appointment of a receiver for a substantial part of
the assets of Tenant; or the levy upon this Lease or any estate of Tenant
hereunder by any attachment or execution;
(3) the abandonment or vacation of the Premises;
(4) the discovery by Landlord that any financial statement given
to Landlord by Tenant, any assignee of Tenant, any subtenant of Tenant, any
successor in interest of Tenant or any guarantor of Tenant's obligation
hereunder, and any of them, was materially false; and
(5) a failure by Tenant to perform any of the terms, covenants,
agreements or conditions of this Lease to be observed or performed by Tenant
(excluding any event of default under Paragraph 14(a)(1) above), where such
failure continues for thirty (30) days after written notice thereof by Landlord
to Tenant; provided, however, that if the nature of the default is such that the
same cannot reasonably be cured within the 30-day period, Tenant shall not be
deemed to be in default if Tenant shall within such period commence such cure
and thereafter diligently prosecute the same to completion.
(b) In the event of any material default or breach by Tenant,
Landlord may at any time thereafter, without limiting Landlord in the exercise
of any right or remedy at law or in equity which Landlord may have by reason of
such default or breach:
(1) Pursue the remedy described in California Civil Code Section
1951.4 whereby Landlord may continue this Lease in full force and effect after
Tenant's breach and abandonment and recover the Rent and any other monetary
charges as they become due, without terminating Tenant's right to sublet or
assign this Lease, subject only to reasonable limitations as herein provided.
During the period Tenant is in default, Landlord shall have the right to do all
acts necessary to preserve and maintain the Premises as Landlord deems
reasonable and necessary, including removal of all persons and property from the
Premises, and Landlord can enter the Premises and relet them, or any part of
them, to third parties for Tenant's account. Tenant shall be liable immediately
to Landlord for all costs Landlord incurs in reletting the Premises, including,
without limitation, brokers, commissions, expenses of remodeling the Premises
required by the reletting, and like costs. Reletting can be for a period
shorter or longer than the remaining Term.
(2) Pay or perform such obligation due (but shall not be
obligated to do so), if Tenant fails to pay or perform any obligations when due
under this Lease within the time permitted for their payment or performance. In
such case, the costs incurred by
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Landlord in connection with the performance of any such obligation will be
additional rent due under this Lease and will become due and payable on demand
by Landlord.
(3) Terminate Tenant's rights to possession by any lawful means,
in which case this Lease shall terminate and Tenant shall immediately surrender
possession of the Premises to Landlord. In such event Landlord shall be
entitled to recover from Tenant all damages incurred by Landlord by reason of
Tenant's default, including, without limitation, the following: (A) the worth at
the time of award of any unpaid Rent which had been earned at the time of such
termination; plus (B) the worth at the time of award of the amount by which the
unpaid Rent which would have been earned after termination until the time of
award exceeds the amount of such Rent loss that is proved could have been
reasonably avoided; plus (C) the worth at the time of award of the amount by
which the unpaid Rent for the balance of the Term after the time of award
exceeds the amount of such Rent loss that is proved could be reasonably avoided;
plus (D) any other amount necessary to compensate Landlord for all the detriment
proximately caused by Tenant's failure to perform its obligations under this
Lease or which in the ordinary course of events would be likely to result
therefrom; plus (E) at Landlord's election, such other amounts in addition to or
in lieu of the foregoing as may be permitted from time to time by applicable
State law. Upon any such termination of Tenant's possessory interest in and to
the Premises, Tenant (and at Landlord's sole election, Tenant's sublessees)
shall no longer have any interest in the Premises, and Landlord shall have the
right to make any reasonable repairs, alterations or modifications to the
Premises which Landlord in its sole discretion deems reasonable and necessary.
The "worth at the time of award" of the amounts referred to in subparagraphs (A)
and (B) above is computed by allowing interest at the maximum rate an individual
is permitted by law to charge. The worth at the time of award of the amount
referred to in subparagraph (C) above is computed by discounting such amount at
the discount rate of the Federal Reserve Bank of San Francisco at the time of
award plus one percent (1%).
(4) Pursue any other legal or equitable remedy available to
Landlord. Unpaid installments of Rent and other unpaid monetary obligations of
Tenant under the terms of this Lease shall bear interest from the date due at
the rate of ten percent (10%) per annum.
(c) In the event Tenant is evicted or Landlord takes possession of
the Premises by reason of any default by Tenant hereunder, Tenant hereby waives
any right of redemption or relief from forfeiture as provided by law.
(d) Even though Tenant has breached this Lease and abandoned the
Premises, this Lease shall continue in effect for so long as Landlord does not
terminate Tenant's right to possession, and Landlord may enforce all its rights
and remedies under this Lease, including the right to recover Rent as it becomes
due under this Lease. Acts of maintenance or preservation, efforts to relet the
Premises, or the appointment of a receiver upon initiative of Landlord to
protect Landlord's interest under this Lease, shall not constitute a termination
of Tenant's right to possession.
(e) In the event Tenant is in material default under any provision of
this Lease then, at Landlord's sole election: (i) Tenant shall not have the
right to exercise any available right, option or election under this Lease
("Tenant's Exercise Rights") if at such time Tenant is in default hereunder,
(ii) Tenant shall not have the right to consummate any transaction or event
triggered by the exercise of any of Tenant's Exercise Rights if at such time
Tenant is in default hereunder, and (iii) Landlord shall not be obligated to
give Tenant any required notices or information relating to the exercise of any
of Tenant's Exercise Rights hereunder.
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15. DEFAULT BY LANDLORD, NOTICE TO MORTGAGEE.
Landlord shall not be in default unless Landlord, or the holder of any
mortgage deed of trust or ground lease covering the Premises, fails to perform
obligations required of Landlord within a reasonable time, but in no event later
than thirty (30) days after written notice by Tenant to Landlord certified mail,
postage prepaid, and to the holder of any first mortgage, deed of trust or
ground lease covering the Premises whose name and address shall have been
furnished to Tenant in writing, specifying wherein Landlord has failed to
perform such obligations; provided, however, that if the nature of Landlord's
obligation is such that more than thirty (30) days are required for performance
then Landlord shall not be in default if Landlord or the holder of any such
mortgage, deed of trust or ground lease commences performance within such 30-day
period and thereafter diligently prosecutes the same to completion. In no event
shall Tenant be entitled to terminate this Lease by reason of Landlord's
default, and Tenant's remedies shall be limited to an action for monetary
damages at law.
16. SECURITY DEPOSIT.
On execution of this Lease, Tenant shall deposit with Landlord
the sum specified in the Basic Lease Information (the "Security Deposit"), The
Security Deposit shall be held by Landlord as security for the performance by
Tenant of all of the provisions of this Lease. If Tenant fails to pay Rent or
other charges due hereunder, or otherwise defaults with respect to any provision
of this Lease, Landlord may use, apply, or retain all or any portion of the
Security Deposit for the payment of any Rent or other charge in default, or the
payment of any other sum to which Landlord may become obligated by reason of
Tenant's default, or to compensate Landlord for any loss or damage which
Landlord may suffer thereby. If Landlord so uses or applies all or any portion
of the Security Deposit, then within ten (10) days after demand therefor Tenant
shall deposit cash with Landlord in an amount sufficient to restore the deposit
to the full amount thereof, and Tenant's failure to do so shall be a material
breach of this Lease. Landlord shall not be required to keep the Security
Deposit separate from its general accounts. If Tenant performs all of Tenant's
obligations hereunder, the Security Deposit, or so much thereof as has not
theretofore been applied by Landlord, shall be returned, without payment of
interest for its use, to Tenant (or, at Landlord's option to the last assignee,
if any, of Tenant's interest hereunder) at the expiration of the Term, and after
Tenant has vacated the Premises. No trust relationship is created herein between
Landlord and Tenant with respect to the Security Deposit.
17. ESTOPPEL CERTIFICATE.
(a) Tenant shall within ten (10) days of notice from Landlord
execute, acknowledge and deliver to Landlord a statement certifying (i) that
this Lease is unmodified and in full force and effect (or, if modified, stating
the nature of such modification and certifying that this Lease, as so modified,
is in full force and effect), (ii) the amount of the Security Deposit, (iii) the
date to which the Rent has been paid, (iv) acknowledging that there are not, to
Tenant's knowledge, any uncured defaults on the part of Landlord hereunder, or
specifying such defaults, if any are claimed, and (v) such other matters as may
reasonably be requested by Landlord. Any such statement may be conclusively
relied upon by any prospective purchaser or encumbrancer of the Building.
(b) Tenant's failure to deliver such statement within such time shall
be conclusive upon Tenant, (i) that this Lease is in full force and effect,
without modification except as may be represented by Landlord, (ii) that there
are no uncured defaults in Landlord's performance, and (iii) that not more than
one month s Base Rent has been paid in advance.
(c) If Landlord desires to finance or refinance the Building, Tenant
agrees to deliver to any lender designated by Landlord such financial statements
of Tenant as may be reasonably required by such
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lender. All such financial statements shall be received by Landlord in
confidence and shall be used for the purposes herein set forth.
18. SUBORDINATION.
This Lease, at Landlord's sole option, shall be subordinate to any
ground lease, mortgage, deed of trust, or any other hypothecation for security
now or hereafter placed upon the Building and to any and all advances made on
the security thereof and to all renewals, modifications, consolidations,
replacements, refinancings and extensions thereof. Notwithstanding such
subordination, Tenant's right to quiet possession of the Premises shall not be
disturbed if Tenant is not in default and so long as Tenant shall pay the Rent
and observe and perform all of the provisions of this Lease, unless this Lease
is otherwise terminated pursuant to its terms. If any mortgagee, trustee, or
ground lessor shall elect to have this Lease prior to the lien of its mortgage,
deed of trust or ground lease, and shall give notice thereof to Tenant, this
Lease shall be deemed prior to such mortgage, deed of trust, or ground lease,
whether this Lease is dated prior to or subsequent to the date of said mortgage,
deed of trust or ground lease or the date of recording thereof. If any mortgage
or deed of trust to which this Lease is subordinate is foreclosed or a deed in
lieu of foreclosure is given to the mortgagee or beneficiary, Tenant shall
attorn to the purchaser at the foreclosure sale or to the grantee under the deed
in lieu of foreclosure; if any ground lease to which this Lease is subordinate
is terminated, Tenant shall attorn to the ground lessor. Tenant agrees to
execute any documents required to effectuate such subordination or to make this
Lease prior to the lien of any mortgage, deed of trust or ground lease, as the
case may be, or to evidence such attornment. Any such document of attornment
shall also provide that the successor shall not disturb Tenant in its use of the
Premises in accordance with this Lease.
19. ATTORNEYS FEES.
In the event legal action is initiated by either party, the prevailing
party shall be entitled to recover all costs and expenses incurred in such
action, including, without limitation, reasonable attorneys fees and costs,
including attorneys' fees incurred at trial and on appeal, if any.
20. NOTICES.
All notices, consents, demands, and other communications from one
party to the other given pursuant to the terms of this Lease shall be in writing
and shall be deemed to have been fully given when personally delivered,
delivered by courier service, sent via facsimile (confirmation receipt
required), or forty-eight (48) hours after the same is deposited in the United
States mail, certified or registered, postage prepaid, and addressed as follows:
To Tenant at the address specified in the Basic Lease Information or to such
other place as Tenant may from time to time designate in a notice to Landlord;
to Landlord at the address specified in the Basic Lease Information, or to such
other place and to such other parties as Landlord may from time to time
designate in a notice to Tenant.
21. GENERAL PROVISIONS.
(a) This Lease shall be governed by and construed in accordance with
the internal laws of the State of California, notwithstanding any choice of law
statutes, regulations, provisions or requirements to the contrary.
(b) The invalidity of any provision of this Lease, as determined by
a court of competent jurisdiction, shall in no way affect the validity of any
other provision hereof.
(c) This Lease including attached Exhibits, Addenda, and Basic Lease
Information contains all agreements and understandings of the parties and
supersedes and cancels any and all prior or contemporaneous written or oral
agreements, instruments, understandings, and communications of the parties with
respect to the
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<PAGE>
subject matter herein. This Lease, including the attached Exhibits, Addenda,
and Basic-Lease Information, may be modified only in a writing signed by each of
the parties.
(d) No waiver of any provision hereof by either party shall be deemed
by the other party to be a waiver of any other provision, or of any subsequent
breach of the same provision. Landlord's or Tenant's consent to, or approval
of, any act shall not be deemed to render unnecessary the obtaining of
Landlord's or Tenant's consent to, or approval of, any subsequent act by the
other party.
(e) If Tenant remains in possession, with the expressed consent of
Landlord, of all or any part of the Premises after the expiration of the Term,
such tenancy shall be from month to month only, and not a renewal hereof or an
extension for any further term, and in such case, Rent shall be payable in the
amount of the last month's Base Rent and all other charges under the Lease and
such month-to-month tenancy shall be subject to every other term, covenant and
agreement contained herein.
(f) Subject to the provisions of this Lease restricting assignment or
subletting by Tenant, this Lease shall bind the parties, their personal
representatives, successors, and assigns.
(g) Upon reasonable prior notice to Tenant (which notice shall not be
required in the event of an emergency), Landlord and Landlord's representatives
and agents shall have the right to enter the Premises during regular business
hours for the purpose of inspecting the same, showing the same to prospective
purchasers or lenders, and making such alterations, repairs, improvements, or
additions to the Premises, the Building or the Common Areas as Landlord may deem
necessary or desirable. Landlord may at any time during the last one hundred
twenty (120) days of the Term place on or about the Premises any ordinary "For
Lease" sign. Landlord may at any time place on or about the Premises any
ordinary "For Sale" sign.
(h) The voluntary or other surrender of this Lease by Tenant, the
mutual cancellation thereof or the termination of this Lease by Landlord as a
result of Tenant's default shall, at the option of Landlord, terminate all or
any existing subtenancies or may, at the option of Landlord, operate as an
assignment to Landlord of any or all of such subtenancies.
(i) If Tenant is a corporation, limited liability company or
partnership, each individual executing this Lease on behalf of Tenant represents
and warrants that he is duly authorized to execute and deliver this Lease on
behalf of the corporation, company or partnership in accordance with, where
applicable, a duly adopted resolution of the board of directors of the
corporation, the vote of the members of the limited liability company or the
vote of the partners within the partnership, and that this Lease is binding upon
the corporation, company or partnership in accordance with its respective
articles of incorporation and bylaws, operating agreement or partnership
agreement.
(j) Time is expressly declared to be of the essence of this Lease and
of each and every covenant, term, condition, and provision hereof, except as to
the conditions relating to the delivery of possession of the Premises to Tenant.
(k) If there is more than one party comprising Tenant, the
obligations imposed an Tenant shall be joint and several.
(l) The language in all parts of this Lease shall be in all cases
construed as a whole according to its fair meaning and not strictly for nor
against either Landlord or Tenant.
(m) As used in this Lease and whenever required by the context
thereof, each number, both singular and plural, shall include all numbers and in
each gender shall include all genders. Landlord and Tenant, as used in this
Lease or in any other instrument referred to in or made a part of this Lease,
shall likewise include both the singular and the plural, a corporation, limited
liability company,
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partnership, individual or person acting in any fiduciary capacity as executor,
administrator, trustee or in any other representative capacity.
(n) The Exhibits and Addendum, if any, specified in the Basic Lease
Information are attached to this Lease and by this reference made a part hereof.
22. FORCE MAJEURE.
Any delay in construction, repairs, or rebuilding any building,
improvement or other structure herein shall be excused and the time limit
extended to the extent that the delay is occasioned by reason of acts of God,
labor troubles, laws or regulations of general applicability, acts of Tenant or
Tenant Delays (as the term is defined in the Work Letter Agreement attached
hereto as Exhibit B), or other occurrences beyond the reasonable control of
Landlord. Accordingly Landlord's obligation to perform shall be excused for the
period of the delay and the period for performance shall be extended for a
period equal to the period of such delay.
23. BROKER'S FEE.
Each party represents that it has not had dealings with any real
estate broker, finder, or other person, with respect to this Lease in any
manner, except the brokerage firm(s) specified in the Basic Lease Information,
Each party shall hold harmless the other party from all damages resulting from
any claim that may be asserted against the other party by any broker, finder, or
other person with whom the other party has or purportedly has dealt. Landlord
shall pay any commissions or fees that are payable to the broker or finder
specified in the Basic Lease Information, with respect to this Lease in
accordance with the provisions of a separate commission contract.
24. FINANCIAL STATEMENT.
It is acknowledged by all parties hereto that the attached financial
declaration of Tenant is incorporated as a part of this Lease as Exhibit E, that
the information contained therein is true and correct in all material respects,
and that the accuracy of the information is a significant fact upon which
Landlord has relied in the granting of this Lease.
IN WITNESS WHEREOF, the parties have executed this Lease on the date first
mentioned above,
TENANT: LANDLORD:
Advanced Fibre Communications G & W/Redwood Associates Joint Venture,
a California general partnership
By: G & W/McDowell Associates: 1985,
California general partnership
- -----------------------------
- ----------------------------- By: /s/ William C. White
William C. White
Managing General Partner
By: /s/ Daniel E. Steimle
-----------------------
Its:/s/ VP, CFO
-----------------------
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ADDENDUM NO. 1
l. BASE NNN RENTAL RATE:
LEASE YEAR $ PER SQ.FT. MONTHLY BASE RENT
(20,9904 S.F)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1 $0.80 $16,724
- --------------------------------------------------------------------------------
2 & 3 $1.00 $20,904
- --------------------------------------------------------------------------------
4 & 5 $1.05 $21,950
- --------------------------------------------------------------------------------
6 - 9 $1.10 $22,995
2. RIGHT OF FIRST OFFER TO LEASE.
Landlord grant to Tenant a right of first offer to lease additional space
within the Building as such space becomes available upon the vacation
thereof by the then current tenant, As such space becomes available to
lease, Landlord shall notify Tenant thereof and offer such space to Tenant
for lease. Tenant shall have ten (10)days in which to notify Landlord in
writing of its intention to lease such space. Landlord and Tenant are free
to agree on the rent term and interior improvements for such additional
space and shall not be bound by the terms of this lease. If Landlord and
Tenant can not agree on the terms for such a lease within ten (10) days of
Tenants notice of intent to lease such space, Landlord shall be free to
lease the space to another tenant.
3. TENANT IMPROVEMENTS.
Landlord's and Tenant's intention to improve the initial Premises without
additional cost to Tenant for a budget of ($23 per square foot) including
architecture and permit costs as outlined in Exhibit B. Should the
estimated cost for the construction of the initial agreed upon plan exceed
this budget, Tenant shall agree to such changes as reasonably requested by
Landlord to modify the plan to reduce the cost within the budget. Should
Tenant not wish to make such changes, Tenant shall have the option to
reimburse Landlord for the estimated cost savings of any changes to which
Tenant does not agree. Such payment shall be made half prior to
construction and half prior to occupancy.
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[OMITTED FLOOR PLAN]
EXHIBIT A
PREMISES,
(20,904 S.F.)
<PAGE>
[OMITTED SITE PLAN]
EXHIBIT A-1 SITE PLAN
<PAGE>
EXHIBIT B
WORK LETTER AGREEMENT
(Turn Key - Single Story)
THIS WORK LETTER AGREEMENT supplements that certain Net Lease dated July
10, 1995 ("Lease"), executed by G & W / Redwood Associates Joint Venture, a
California general partnership, as Landlord, and Advanced Fibre Communications ,
a California Corporation, as Tenant. All capitalized terms not otherwise
defined herein shall have the same meaning as those capitalized terms contained
in the Lease.
1. Landlord shall be responsible for constructing within the Premises the
tenant improvements ("Tenant Improvements") described in the preliminary space
plan attached hereto as Exhibit B-1 ("Preliminary Space Plan"). The Tenant
Improvements for the Premises will be more particularly described in the plans
and construction drawings ("Construction Drawings") as approved below. Any
additional work ("Tenant Extra Improvements") required under the approved
Construction Drawings shall be at Tenant's expense.
2. Landlord and Tenant shall diligently finalize the Preliminary Space
Plan for construction of the Tenant Improvements and Tenant Extra Improvements
so that, within thirty (30) days after execution of the Lease, Landlord can
provide Tenant with the Construction Drawings. The Construction Drawings shall
indicate the specific requirements of Tenant's lease space, outlining in detail
interior partitions, floor coverings, a reflected ceiling plan, plumbing
fixtures, and electrical plans (setting forth the electrical requirements of
Tenant), all in conformity with the Preliminary Space Plan. The Construction
Drawings shall include full energy calculations as required by the State of
California and the city agencies.
3. Within three (3) days after receipt of the Construction Drawings,
Tenant shall approve the drawings and/or request changes or modifications
thereto. Any such request for changes or modifications shall be subject to
Landlord's approval and, thereafter, the Construction Drawings shall be
resubmitted for Tenant's approval in accordance with the preceding sentence.
Tenant acknowledges that the Construction Drawings are subject to the approval
of the appropriate government authorities. It shall be Tenant's responsibility
to ensure that the design and function of the Tenant Improvements and Tenant
Extra Improvements are suitable for Tenant's business and needs. The
improvements shall be constructed in accordance with current building standards,
laws, regulations, ordinances and codes. Landlord shall not be required to
install any Tenant Improvements or Tenant Extra Improvements which do not
conform to the Construction Drawings.
4. Landlord shall furnish and install the units and quantities of Tenant
Improvements as set forth on Exhibit B-1. The Tenant Improvements to be paid by
Landlord shall not exceed twenty-three Dollars ($23.00) per usable square foot
of lease space within the Premises and shall include:
(a) The costs of the Preliminary Space Plan (including one revision
thereto) and final Construction Drawings and engineering costs associated with
completion of the State of California energy utilization calculations under
Title 24 legislation; and
(b) The costs of obtaining building permits and other necessary
authorizations from the city, county and the State of California.
Any additional units, quantities or costs of the Tenant Improvements
required in accordance with the approved Construction Drawings shall be deemed
Tenant Extra Improvements and shall be paid for by Tenant at the unit cost set
forth in a summary of unit costs to be provided by Landlord.
5. In no event shall the Tenant Improvements payable by Landlord include
(i) the costs of procuring or installing any trade fixtures, equipment,
furniture, furnishings, telephone or computer equipment or wiring or other
personal property ("Personal Property"), or (ii) any Change Orders (as the term
is defined in Paragraph 6 below). Such items shall be paid by Tenant.
6. Following Tenant's approval of the Construction Drawings, Tenant may
request changes or modifications thereto ("Change Order"), however, the cost of
any Change Order(s) shall be borne by Tenant. If Tenant shall request any
Change Order, then Landlord shall promptly give Tenant a written estimate of (a)
the cost of engineering and design services to prepare the Change Order, (b) the
cost of work to be performed pursuant to the Change Order, and (c) the time
delay expected because of such requested Change Order. Within three (3) days
after Tenant's receipt of the written estimate, Tenant shall notify
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<PAGE>
Landlord in writing whether it approves the written estimate. If Tenant approves
the written estimate, then Tenant shall accompany its approval with a check made
payable to Landlord in the amount of the estimated cost of the Change Order.
Upon Landlord's completion of the Change Order and submission of the final cost
thereof to Tenant, Tenant shall promptly pay to Landlord any additional amounts
incurred in excess of the written estimate. If such written authorization and
check are not received by Landlord, then Landlord shall not be obligated to
commence work on the Premises and Tenant shall be chargeable for any delay in
the completion of the Premises in accordance with Paragraph 7 below.
7. If the Commencement Date of the Lease has not occurred on or before
the Estimated Commencement Date, and if the cause of the delay in the occurrence
of the Commencement Date is attributable to Tenant, then the Lease shall begin
on the date the Commencement Date otherwise would have occurred but for the
Tenant delays. Delays attributable to Tenant ("Tenant Delays") shall include,
without limitation, those caused by (a) delays by Tenant in approving the
Construction Drawings and costs, (b) Tenant's request for special materials not
available when needed for construction in accordance with the construction
schedule, (c) Change Orders, and (d) interference with Landlord's work caused by
Tenant or Tenant's agents. All costs and expenses occasioned by a Tenant Delay,
including, without limitation, increases in labor or materials, shall be borne
by Tenant.
8. Tenant may, with Landlord's written consent, enter the Premises prior
to the Commencement Date solely for the purpose of installing its Personal
Property as long as such entry will not interfere with the orderly construction
and completion of the Premises ("Tenant's Work"). Tenant shall notify Landlord
of its desired time(s) of entry and shall submit for Landlord's written approval
the scope of the Tenant's Work to be performed and the name(s) of the
contractor(s) who will perform such work. Tenant agrees to indemnify, defend
and hold harmless Landlord, any mortgagee, ground lessor or beneficiary of a
deed of trust encumbering, secured by or affecting the Premises or the Building,
from and against any and all claims, actions, losses, liabilities, damages,
costs or expenses (including, without limitation, reasonable attorneys fees and
claims for worker's compensation) of any nature whatsoever, arising out of or in
connection with the Tenant's Work (including, without limitation, claims for
breach of warranty, personal injury or property damage).
9. During the course of construction, at Tenant's expense, Tenant shall
obtain or maintain public liability and worker's compensation insurance, in
amounts acceptable to Landlord, and which name Landlord and Tenant as parties
insured from and against any and all liability for death of or injury to person
or damage to property caused in or about or by reason of the construction of the
Tenant's Work.
10. Upon substantial completion of the Premises in accordance with the
Construction Drawings, Tenant agrees to accept the Premises in the condition
which it may then be and waives any right or claim against Landlord for any
cause directly or indirectly arising out of the condition of the Premises,
appurtenances thereto, improvements thereon, and equipment therein. Tenant
shall hold harmless Landlord from and against any liability or damage as
provided under Paragraph 10.2 of the Lease. Landlord shall not be liable for
any latent or patent defects therein, except that Landlord warrants the Building
against latent defects for a period of one (1) year from the date of substantial
completion.
11. Tenant releases Landlord from any claim whatsoever for damages against
Landlord for any delay in the date on which the Premises shall be ready for
occupancy by Tenant.
12. The Premises shall be deemed "substantially completed" as of the date
that all of the following conditions are satisfied:
(a) The Tenant Improvements have been substantially completed in
accordance with the approved Construction Drawings (except for those punch list
items referenced in Paragraph 12 below), such that Tenant can reasonably conduct
business within the Premises; and
(b) A certificate of occupancy and/or finalized building permit has
been issued for the Premises.
13. Tenant shall immediately prior to occupancy inspect the Premises and
compile and furnish Landlord with an initial punch list of any missing or
deficient Tenant Improvements. Within the first thirty (30) days after delivery
of the Premises, Tenant shall make a final punch list and submit this list to
Landlord. Landlord shall use its best efforts to complete the corrective work
in a prompt, good and workman-like manner. Punch list corrections shall not
delay the Commencement Date, nor shall a delay in making corrections be grounds
for a delay or reduction in any rent payments due Landlord.
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<PAGE>
14. All floor area calculations are from the center line of the partitions
and the outside line of the exterior and hall walls. No deduction is allowed
for the columns, sprinkler risers, roof drains, or air conditioning units
serving Tenant and located within the Premises.
15. Landlord shall select the manufacturer and vendor of all building
materials and equipment with respect to the Tenant Improvements and Tenant Extra
Improvements to be constructed hereunder.
TENANT: LANDLORD:
Advanced Fibre Communications G & W/Redwood Associates Joint Venture,
a California general partnership
By: /s/ Daniel E. Steimle By: G & W/McDowell Associates: 1985,
------------------------ a California general partnership
Its:/s/ VP, CFO
------------------------
By: /s/ William C. White
-------------------
William C. White
Its: Managing General Partner
3
<PAGE>
EXHIBIT B-1
(To be mutually agreed upon between Landlord and Tenant prior to lease
execution)
<PAGE>
EXHIBIT C
RULES AND REGULATIONS
It is further agreed that the following Rules and Regulations shall be and are
hereby made a part of this Lease, and Tenant agrees that Tenant's employees and
agents, or any others permitted by Tenant to occupy or enter the Premises, will
at all times abide by said Rules and Regulations, unless otherwise specified or
provided for in the Lease, to wit:
1. The driveways, entrances and exits to the Property, sidewalks,
passages, building entries, lobbies, corridors, stairways, and elevators of the
Building shall not be obstructed by Tenant, or Tenant's agents or employees, or
used for any purpose other than ingress and egress to and from the Premises.
Tenant or Tenant's agents or employees shall not loiter on the lawn areas or
other common areas of the Property.
(a) Furniture, freight equipment and supplies will be moved in or out
of the Building only through the rear service entrances or other entrances
designated by Landlord and then only during such hours and in such manner as may
be reasonably prescribed by Landlord. Tenant shall cause its movers to use only
the loading facilities, and entrances designated by Landlord. In the event
Tenant's movers damage any part of the Building or Property, Tenant shall
forthwith pay to Landlord the amount required to repair said damage.
(b) No safe or article, the weight of which may in the opinion of
Landlord constitute a hazard to or damage to the Building or the Building's
equipment, shall be moved into the Premises without Landlord's prior written
approval, but such consent or approval shall not be unreasonably withheld,
conditioned or delayed. Landlord and Tenant shall mutually agree to the
location of such articles in the Premises. All damage done to the Property,
Building or Premises by putting in, taking out or maintaining extra heavy
equipment shall be repaired at the expense of Tenant.
(c) Landlord reserves the right to close and keep locked any and all
entrances and exits of the Building and Property and gates or doors closing the
parking areas thereof during such hours as Landlord may deem advisable for the
adequate protection of the Property and all tenants therein.
2. Except as otherwise provided for in the Lease, no sign, advertisement
or notice shall be inscribed, painted or affixed on any part of the inside or
outside of the Building unless of such color, size and style and in such place
upon or in the Building as shall be first approved in writing by Landlord. No
furniture or other materials shall be placed in front of the Building or in any
lobby or corridor, without the prior written consent of Landlord. Landlord
shall have the right to remove all non permitted signs and furniture, without
notice to Tenant.
3. Tenant shall not employ any person or persons other than the janitor
or cleaning contractor of Landlord for the purpose of cleaning or taking care of
the Premises without the prior written consent of Landlord, which shall not be
unreasonably withheld, conditioned or delayed. Except as otherwise provided in
the Lease, Landlord shall in no way be responsible to Tenant for any loss of
property from the Premises, however occurring. The janitor of the Building may
at all times keep a pass key, and other agents of Landlord shall at all times be
allowed admittance to the Premises in accordance with the provisions set forth
in the Lease.
4. Water closets and other water fixtures shall not be used for any
purpose other than that for which the same are intended, and any damage
resulting to the same from misuse on the part of Tenant or Tenant's agents or
employees, shall be paid for by Tenant. No person shall waste water by tying
back or wedging the faucets or in any other manner.
5. No animals except seeing-eye dogs or other animals necessary to the
functioning of handicapped personnel shall be allowed on the lawns or sidewalks
or in the offices, halls, and corridors of the Building.
6. No persons shall disturb the occupants of this or adjoining buildings
or premises
1
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by the use of any radio, sound equipment or musical instrument or by the making
of loud or improper noises, nor interfere in any way with the other tenants or
those having business with them. Should sound mitigation measures be required
due to sounds originating in the Premiss, the costs of such measures shall be
paid for by Tenant.
7. Bicycles or other vehicles, other than wheel chairs, shall not be
permitted in the offices, halls, corridors and lobbies in the Building nor shall
any obstruction of sidewalks or entrances of the Building by such be permitted.
8. Tenant shall not allow anything to be placed on the outside of the
Building, nor shall anything be thrown by Tenant or Tenant's agents or
employees, out of the windows or doors, or down the corridors, ventilation ducts
or shafts of the Building. Tenant, except in case of fire or other emergency,
shall not open any outside window.
9. No awnings shall be place over any window or entrance.
10. All garbage, including wet garbage, refuse or trash shall be placed by
Tenant in the receptacles designated by Landlord for that purpose. Tenant shall
not burn any trash or garbage at any time in or about the leased Premises or any
area of the Property. Tenant and Tenant's officers, agents, and employees shall
not throw cigar or cigarette butts or other substances or litter of any kind in
or about the Property.
11. Tenant shall not install or operate any steam or gas engine or boiler,
or other machinery or carry on any mechanical business, other than such
mechanical business which normally is identified with general office use in the
Premises. Explosives or other articles of an extra hazardous nature shall not
be brought into the Building complex.
12. Any painting or decorating as may be agreed to be done by and at the
expense of Landlord shall be done during regular weekday working hours. Should
Tenant desire such work on Saturdays, Sundays, holidays or outside of regular
working hours, Tenant shall pay for the extra cost thereof, if any.
13. Tenant and Tenant's agents and employees shall park their vehicles in
areas designated from time-to-time for employee parking.
14. Tenant shall not mark, drive nails, screw, bore, or drill into, paint
or in any way deface the common area walls, exterior walls, roof, foundations,
bearing walls, or pillars without the prior written consent of Landlord. The
expense of repairing any breakage, stoppage or damage resulting from a violation
of this rule shall be borne by Tenant.
15. No waiver of any rule or regulation by Landlord shall be effective
unless expressed in writing and signed by Landlord or his authorized agent.
16. Tenant shall be responsible for cleaning up any trash blowing around
their facility that may have been left by their customers or employees.
17. In the event of any conflict between these rules and regulations or
any further or modified rules and regulations from time to time issued by
Landlord, and the lease provisions, the lease provisions shall govern and
control.
18. Landlord reserves the right at any time to change or rescind any one
or more of these rules and regulations, or to make such other and further
reasonable rules and regulations as in Landlord's judgment may from time to time
be necessary for the management, safety, care and cleanliness of the Premises,
and for the preservation of good order therein, as well as for the convenience
of other tenants of the Property. Landlord shall not be responsible to Tenant
or to any other person for the non- observance or violation of the rules and
regulations by any other tenant or person, Tenant shall be deemed to have read
these rules and to have agreed to abide by them as a condition to its occupancy
of the space herein leased, and Tenant shall abide by any additional rules and
regulations which are ordered or requested by Landlord or by any governmental
authority.
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EXHIBIT D
MATERIALS QUANTITIES
Tenant agrees that:
(a) None of the above materials will be used, held or stored on or about
the Premises in quantities of greater than one (1) gallon each, or twenty (20)
pounds each in the case of non-liquid materials; provided, however, that used or
excess materials may be stored together in a fifty-five (55) gallon drum while
awaiting transport off the Premises for disposal.
(b) The materials listed on Page 1 to this Exhibit D shall be stored in
fire-proof lockers on the Premises in accordance with applicable laws,
regulations and ordinances. No storage outside the Premises will be permitted.
(c) No used or excess materials will be disposed of in, on, under or about
the Premises or Redwood Business Park. Instead, such materials shall be
transported off-site, no less often than every one hundred eighty (180) days, by
a duly licensed hazardous materials transporter. While waiting for transport
off-site for disposal, used or excess materials shall be stored in a safe
location on the Premises in secure containers which are appropriately labeled.
(d) No materials listed on Page 1 to this Exhibit D, regardless of
whether they are water-soluable, shall be flushed down any sanitary sewer drains
on or about the Premises or Redwood Business Park.
<PAGE>
REDWOOD BUSINESS PARK
NET LEASE
THIS LEASE, dated June 3, 1996, is made and entered into by and between G
& W/Redwood Associates Joint Venture, a California general partnership
("Landlord"), and ADVANCED FIBRE COMMUNICATIONS, A DELAWARE
CORPORATION ("Tenant").
1. PREMISES.
Landlord leases to Tenant, and Tenant hereby leases from Landlord for
the term of this Lease ("Term") and at the rent and upon the conditions set
forth below, the Premises described in the Basic Lease Information and
identified on the floor plan attached hereto as Exhibit A. The Premises are
located within the Building described in the Basic Lease Information, and
constitute part of the Project described in the Basic Lease Information and as
shown in Exhibit A-1 attached hereto, at the Redwood Business Park, located in
Petaluma, California. All areas and facilities outside the Buildings and within
the exterior boundaries of the Project that are provided and designated by
Landlord from time to time for the general nonexclusive use and convenience of
the tenants of the Project shall be known as "Common Areas".
2. TERM.
(a) The Term shall commence upon the date ("Commencement Date") which
is the earlier of: (i) substantial completion of the Premises, as the term
"substantial completion" is defined in the Work Letter Agreement, attached
hereto as Exhibit B; or (ii) the date substantial completion would have occurred
but for Tenant Delays (as the term is defined in the Work Letter Agreement).
The Estimated Commencement Date is set forth in the Basic Lease Information,
which date may be postponed due to a delay in delivering the Premises as
provided in Paragraph 2(b) below. A "Lease Year" is a period of twelve (12)
consecutive calendar months. A "Lease Month" is a calendar month. The initial
Term of this Lease shall be determined as follows:
(1) If the Commencement Date of this Lease occurs on the first
calendar day of a calendar month, the Term shall be for a period of Lease Years
and Months as specified in the Basic Lease Information, unless terminated sooner
as provided in this Lease.
(2) If the Commencement Date of this Lease occurs on other than
the first calendar day of a calendar month, the Term shall be for a period of
Lease Years and Months as specified in the Basic Lease Information, plus the
number of days remaining in the calendar month in which the Commencement Date
occurs, unless terminated sooner as provided in this Lease.
(b) Subject to the provisions of Paragraph 22 below, in the event the
Premises are not substantially completed (in accordance with the Work Letter
Agreement) on or within six (6) months after the Estimated Commencement Date,
then Tenant may, at Tenant's option, by notice in writing to Landlord within ten
(10) days thereafter, cancel this Lease, in which event, (i) this Lease shall be
deemed null and void and have no further force or effect, (ii) all security or
other deposits made herewith shall be promptly returned to Tenant, and (iii) the
parties shall have no further obligation to each other; provided further,
however, that if such written notice of Tenant is not received by Landlord
within said 10-day period, Tenant's right to cancel this Lease hereunder shall
terminate and be of no further force or effect.
3. RENT.
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(a) For purposes of this Lease, the term "Rent" shall mean the
Base Rent, Advanced Base Rent, all additional rent, and all of the other
monetary obligations of Tenant under this Lease. Upon execution of this
Lease, Tenant shall pay to Landlord the Advanced Base Rent set forth in the
Basic Lease Information. Tenant shall pay to Landlord the Base Rent
specified in the Basic Lease Information, payable on or before the first day
of each and every successive calendar month following the Commencement Date.
If the Term commences on other than the first day of a calendar month, the
first payment of Base Rent shall be appropriately prorated, on the basis of a
30-day month. Tenant's payment of any Advanced Base Rent (excluding that
portion attributable to last month's rent, if any) shall be credited against
Tenant's obligation to pay Base Rent beginning as of the Commencement Date.
(b) Tenant shall pay, as additional rent, all amounts of money
required to be paid to Landlord by Tenant under this Lease in addition to
monthly Base Rent, whether or not the same be designated "additional rent".
If such amounts are not paid at the time provided in this Lease, they shall
nevertheless be collectable as additional rent with the next installment of
monthly Base Rent thereafter falling due, but nothing herein contained shall
be deemed to suspend or delay the payment of any amount of money at the time
the same becomes due and payable hereunder, or limit any other remedy of
Landlord.
(c) Tenant acknowledges that late payment by Tenant to Landlord of Rent
after the expiration of any applicable grace period will cause Landlord to
incur costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited
to, processing and accounting charges, and late charges which may be imposed
on Landlord by the terms of any trust deed covering the Premises.
Accordingly, if any installment of Rent or any other sums due from Tenant
shall not be received by Landlord when due, Tenant shall pay to Landlord a
late charge equal to TWO PERCENT (2%) of such overdue amount. The parties
agree that such late charge represents a fair and reasonable estimate of the
costs Landlord will incur by reason of late payment by Tenant. Acceptance of
such late charge by Landlord shall in no event constitute a waiver of
Tenant's default with respect to such overdue amount, nor prevent Landlord
from exercising any of the other rights and remedies granted hereunder.
(d) Any amount due to Landlord, if not paid when due, shall bear
interest from the date due until paid at the rate of ten percent (10%) per
annum. Payment of interest shall not excuse or cure any default hereunder by
Tenant.
(e) All payments due from Tenant to Landlord hereunder shall be made to
Landlord without deduction or offset, in lawful money of the United States of
America at Landlord's address for notices hereunder, or to such other person
or at such other place as Landlord may from time to time designate in writing
to Tenant.
4. TAXES AND OPERATING EXPENSES.
(a) In addition to the Base Rent, Tenant shall pay (i) Tenant's
Percentage Share of Property Taxes (according to the percentage set forth in
the Basic Lease Information) relating to those Property Taxes (as the term is
defined under Paragraph 4(a)(1) below) which are assessed during the Term,
and (ii) Tenant's Percentage Share of Operating Expenses (according to the
percentage set forth in the Basic Lease Information) relating to those
Operating Expenses (as the term is defined under Paragraph 4(a)(2) below)
which are paid or incurred by Landlord during the Term.
(1) "Property Taxes" shall mean all real property taxes, bonds
and assessments and governmentally imposed fees or charges (and any tax
levied wholly or partly in lieu thereof) levied, assessed, confirmed,
imposed or which have become a lien against the Building
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(which for the purposes of defining "Property Taxes" shall include the tax
parcel of which the Building is a part) and Common Areas.
(2) "Operating Expenses" shall mean the following: (A) all
costs of management, operation, maintenance and repair of the Building and
Common Areas, including, without limitation, property management expenses,
maintenance and repair materials, supplies and equipment; (B) all costs of
water, power, electricity, refuse collection, parking lot sweeping,
landscaping, and other services relating to the Common Areas; (C) all costs
of alterations or improvements to the Building or Common Areas made to
achieve compliance with federal, state and local law including, without
limitation, the Americans with Disabilities Act (42 U.S.C. Section 12101 et
seq.), which costs will be amortized over the useful life of each alteration
or improvement; (D) all costs of public liability and casualty insurance
maintained by Landlord with respect to the Building and Common Areas; (E) all
costs incurred by Landlord for making any capital improvements, structural
repairs or modifications to the Building or Common Areas or making any
improvements or modifications to reduce the operating expenses, which costs
will be amortized over the useful life of each capital improvement,
structural repair or modification; (F) all costs of maintaining machinery,
equipment and directional signage or other markers; and G) the share
allocable to the Building of dues and assessments payable under any
reciprocal easement or common area maintenance agreements or declarations or
by any owners' associations affecting the Building. That portion of the
Operating Expenses relating to the property management expenses for the
Building and Common Areas which shall be charged to Tenant shall be four
percent (4%) of both Tenant's annual Base Rent and the subtotal of Tenant's
share of Operating Expenses of the Building. In the event that Landlord
calculates the Operating Expenses based upon the Project instead of the
Building, as indicated on the Basic Lease Information, then the term
"Project" shall be substituted in the place of all references to the term
"Building" in this paragraph.
(b) The Property Taxes to be paid by Tenant shall be determined by
multiplying the total amount of the Property Taxes by Tenant's Percentage Share
of Property Taxes (which percentage is determined by multiplying 100% by a
fraction, the numerator of which is the rentable area of the Premises and the
denominator of which is the total rentable area of all improvements located
within the tax parcel of which the Premises are a part). Landlord may cause the
Common Areas of the Project to be separately assessed from other areas and
buildings of the Project. In such case, Tenant's Percentage Share of Property
Taxes attributable to the Common Areas shall be determined by the ratio that the
total rentable square feet in the Premises bears to the total number of square
feet of rentable area which is included in the property subject to the
assessment.
(c) Operating Expenses for each calendar year shall be adjusted to
equal Landlord's reasonable estimate of Operating Expenses as though ninety-five
percent (95%) of the total rentable area of the Building had been occupied.
When the Building is one hundred percent (100%) occupied, the Operating Expenses
shall be adjusted to reflect a 100% occupied building. The Operating Expenses
to be paid by Tenant shall be determined by multiplying the total amount of the
Operating Expenses as adjusted above by Tenant's Percentage Share of Operating
Expenses (which percentage is determined by multiplying 100% by a fraction, the
numerator of which is the rentable area of the Premises and the denominator of
which is the total rentable area located within the Building, if the Operating
Expenses are calculated for the Building, or within the Project, if the
Operating Expenses are calculated for the Project).
(d) Tenant shall pay to Landlord each month at the same time and in
the same manner as monthly Base Rent one-twelfth (1/12th) of Landlord's estimate
of the amount of Property Taxes and one-twelfth (1/12th) of Landlord's estimate
of Operating Expenses payable by Tenant for the then-current calendar year. The
initial monthly amount shall be as set forth in the Basic Lease Information.
Within
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one hundred twenty (120) days after the close of each calendar year, or as soon
after such 120-day period as practicable, Landlord shall deliver to Tenant a
statement in reasonable detail of the actual amount of Property Taxes and
Operating Expenses payable by Tenant in accordance with this Paragraph 4 for
such calendar year. Tenant may request further information if desired.
Landlord's failure to provide such statement to Tenant within the 120-day period
shall not act as a waiver and shall not excuse Tenant or Landlord from making
the adjustments to reflect actual costs as provided herein. If on the basis of
such statement Tenant owes an amount that is less than the estimated payments
for such calendar year previously made by Tenant, Landlord shall credit such
excess to Tenant against future additional rent due under this Paragraph 4. If
on the basis of such statement Tenant owes an amount that is more than the
estimated payments for such calendar year previously made by Tenant, Tenant
shall pay the deficiency to Landlord within fifteen (15) days after delivery of
the statement. The obligations of Landlord and Tenant under this Paragraph 4(d)
with respect to the reconciliation between the estimated and actual amounts of
Property Taxes and Operating Expenses payable by Tenant for the last year of the
Term shall survive the termination of the Lease. When the final determination
is made of the actual amounts of Property Taxes and Operating Expenses payable
by Tenant for the year in which this Lease terminates, Tenant shall immediately
pay any increase due over the estimated payments and, conversely, any
overpayment made by Tenant shall be immediately reimbursed to Tenant by
Landlord.
5. OTHER TAXES.
In addition to Tenant's obligations under Paragraph 4 above, Tenant shall
pay or reimburse Landlord for (i) any taxes upon, measured by or reasonably
attributable to the cost or value of Tenant's equipment, furniture, fixtures,
and other personal property located in the Premises or leasehold improvements
made in or to the Premises at Tenant s expense, (ii) for taxes, if any, measured
by or reasonably attributable to tenant improvements paid for by Tenant, and
(iii) for any taxes, assessments, fees, or charges imposed by any public
authority or private community maintenance association upon or by reason of the
development, possession, use or occupancy of the Premises or the parking
facilities used by Tenant in connection with the Premises. On request by
Landlord, Tenant shall furnish Landlord with satisfactory evidence of payment of
Tenant's business personal property taxes and deliver copies of such business
personal property tax bills to Landlord.
6. USE
6.1 PROHIBITED USES.
(a) The Premises shall be used and occupied by Tenant solely for the
use set forth in the Basic Lease Information. Tenant shall, at Tenant's
expense, comply promptly with all applicable federal, state and local laws,
regulations, ordinances, rules, orders, and requirements in effect during the
Term relating to the condition, use or occupancy of the Premises. Tenant shall
not use or permit the use of the Premises in any manner that will tend to create
waste or a nuisance, or that unreasonably disturbs other tenants of the Building
or Project, nor shall Tenant place or maintain any signs, antennas, awnings,
lighting or plumbing fixtures, loudspeakers, exterior decoration or similar
devises on or visible from the exterior of the Premises, without Landlord's
prior written consent, which may be withheld in Landlord's sole discretion.
Tenant shall not use any corridors, sidewalks, stairs, elevators, or other areas
outside of the Premises for storage or any purpose other than access to the
Premises. Tenant shall not use, keep, or permit to be used or kept on the
Premises any foul or noxious gas or substance, nor shall Tenant do or permit to
be done anything in and about the Premises, either in connection with activities
hereunder expressly permitted or otherwise, which would cause an increase in
premiums for or a cancellation of any policy of insurance (including fire
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insurance) maintained by Landlord in connection with the Premises or the
Building or which would violate the terms of any covenants, conditions, or
restrictions, or the design guidelines, or the sign guidelines affecting the
Building or the land on which it is located, or the Rules (as the term is
defined under Paragraph 6.3(b) below).
(b) Tenant shall not attach any signage to or on any part of the
outside of the Premises, the Building or the Project, or in the halls, lobbies,
windows or elevator banks of the Building without Landlord's prior written
consent, which consent may be withheld in Landlord's sole discretion. Any
signage so permitted shall be subject to prior approval of and conformance with
the requirements of the design review committee of the Project and the design
review agency of the city. At Tenant's expense, Tenant shall (i) maintain all
permitted signage, and (ii) upon the expiration or termination of this Lease,
remove such signage and repair any damage caused by their removal. If Tenant
fails to do so, Landlord may maintain, repair or remove such signage without
notice to Tenant and at Tenant's expense, the cost of which shall be payable by
Tenant as additional rent in accordance with Paragraph 14(b)(2) below.
6.2 SUITABILITY. Tenant acknowledges that neither Landlord nor any agent
of Landlord has made any representation or warranty with respect to the Premises
or the Building or with respect to the suitability or fitness of either for the
conduct of Tenant's business or for any other purpose. Nor has Landlord agreed
to undertake any modification, alteration or improvement to the Premises except
as provided in this Lease. Tenant acknowledges that the Premises are located in
a 100-year flood zone and that the finished floor elevations of the Building are
designed to be at least one (1) foot above the federal government's estimate of
the 100-year flood level at the time of initial construction.
6.3 USE OF COMMON AREAS.
(a) Landlord gives Tenant and its authorized employees, agents,
customers, representatives, and invitees the nonexclusive right to use the
Common Areas, with others who are entitled to use the Common Areas, subject to
Landlord's rights as set forth in this Paragraph 6.3.
(b) All Common Areas shall be subject to the exclusive control and
management of Landlord and Landlord shall have the right to establish, modify,
amend, and enforce reasonable rules and regulations with respect to the Common
Areas. Tenant acknowledges receipt of a copy of the current rules and
regulations, attached hereto as Exhibit C, and agrees that they may, from time
to time, be modified or amended by Landlord in a commercially reasonable manner
(the "Rules"). Tenant agrees to abide by and conform with such Rules; to cause
its concessionaires and its and their employees and agents to abide by such
Rules; and to use its best efforts to cause its customers, invitees, and
licensees to abide by such Rules.
(c) Landlord shall have the right to close temporarily any portion of
the Common Areas for the purpose of discouraging use by parties who are not
tenants or customers of tenants; to use portions of the Common Areas while
engaged in making additional improvements or repairs or alterations to the
Property; to use or permit the use of the Common Areas by others to whom
Landlord may grant or have granted such rights; and to do and perform such acts
in, to, and with respect to, the Common Areas as in the use of good business
judgment Landlord shall determine to be appropriate for the Project.
(d) Landlord shall have the unqualified right to increase or reduce
the Common Areas, provided the Project meets the parking requirement under
Paragraph 6.5 below.
(e) Tenant shall cooperate with Landlord and other tenants in the
Project in recycling waste paper, cardboard, or such
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other materials identified under any trash recycling program that may be
established in order to reduce trash collection costs.
6.4 ENVIRONMENTAL MATTERS.
(a) (1) The term "Hazardous Materials" as used herein means any
petroleum products, asbestos, polychlorinated biphenyls, P.C.B.'s, chemicals,
compounds, materials, mixtures or substances that are now or hereafter defined
or listed in, or otherwise classified as a "hazardous substance", "hazardous
material", "hazardous waste", "extremely hazardous waste", "infectious waste",
"toxic substance", "toxic pollutant" or any other formulation intended to
define, list or classify substances by reason of deleterious properties such as
ignitability, corrosivity, reactivity, carcinogenicity or toxicity pursuant to
any federal, state or local environmental law, regulation, ordinance,
resolution, order or decree relating to industrial hygiene, environmental
protection or the use, analysis, generation, manufacture, storage, release,
disposal or transportation of the same ("Hazardous Materials Laws").
(2) Except for ordinary office supplies and janitorial cleaning
materials which in common business practice are customarily and lawfully used,
stored and disposed of in small quantities, and except for those Hazardous
Materials listed on Exhibit D attached hereto, Tenant shall not use,
manufacture, store, release, dispose or transport any Hazardous Materials in,
on, under or about the Premises, the Building or the Project without giving
prior written notice to Landlord and obtaining Landlord's prior written consent,
which consent Landlord may withhold in its sole discretion. Subject to
Landlord s prior written consent, Hazardous Materials may be added to Exhibit D
on an annual review basis; any such amendments to Exhibit D shall be signed by
each party and attached hereto. Tenant shall at its own expense procure,
maintain in effect, and comply with all conditions of any and all permits,
licenses, and other governmental and regulatory approvals required in connection
with Tenant's generation, use, storage, disposal and transportation of Hazardous
Materials. Except as discharged into the sanitary sewer in strict accordance
and conformity with all applicable Hazardous Materials Laws, Tenant shall cause
any and all Hazardous Materials removed from the Premises to be removed and
transported solely by duly licensed haulers to duly licensed facilities for
final disposal of such materials and wastes. Regardless whether permitted under
the Hazardous Materials Laws, Tenant shall not maintain in, on, under, or about
the Premises, the Building or the Project any above or below ground storage
tanks, clarifiers, or sumps, nor shall any wells for the monitoring of ground
water, soils, or subsoils be allowed.
(3) Tenant shall immediately notify Landlord in writing of: (a)
any enforcement, cleanup, removal or other governmental or regulatory action
instituted, completed or threatened pursuant to any Hazardous Materials Law; (b)
any claim made or threatened by any person or entity against Tenant or the
Premises relating to damage, contribution, cost, recovery, compensation, loss or
injury resulting from or claimed to result from any Hazardous Materials; and (c)
any reports, information, inquiries or demands made, ordered, or received by or
on behalf of Tenant which arise out of or in connection with the existence or
potential existence of any Hazardous Materials in, on, under or about the
Premises, the Building, or the Project, including, without limitation, any
complaints, notices, warnings, asserted violations, or mandatory or voluntary
informational filings with any governmental agency in connection therewith, and
immediately supply Landlord with copies thereof.
(b) Tenant shall indemnify, defend (by counsel reasonably acceptable
to Landlord), protect, and hold Landlord, and each of Landlord's partners,
officers, directors, employees, affiliates, joint venturers, members, trustees,
owners, shareholders, principals, agents, representatives, attorneys, successors
and
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assigns, free and harmless from and against any and all claims, liabilities,
damages, fines, penalties, forfeitures, losses, cleanup and remediation costs
or expenses (including attorneys' fees) or death of or injury to any person
or damage to any property whatsoever, arising from or caused in whole or in
part, directly or indirectly, by (i) Tenant's use, analysis, generation,
manufacture, storage, release, disposal, or transportation of Hazardous
Materials by Tenant, Tenant's agents, employees, contractors, licensees or
invitees to, in, on, under, about or from the Premises, the Building, or the
Project, or (ii) Tenant's failure to comply with any Hazardous Materials Law.
Tenant's obligations hereunder shall include, without limitation, and whether
foreseeable or unforeseeable, all costs of any required or necessary repair,
cleanup, detoxification or decontamination of the Premises, the Building, or
the Project and the preparation and implementation of any closure, remedial
action or other required plans in connection therewith, and shall survive the
expiration or earlier termination of this Lease.
(c) Landlord shall have the right to enter the Premises during
regular business hours upon reasonable prior notice at all times for the
purposes of ascertaining compliance by Tenant with all applicable Hazardous
Materials Laws, provided, however, that in the instance of an emergency
Landlord's entry onto the Premises shall not be restricted to regular business
hours nor shall notice be required.
(d) Landlord shall have the option to declare a default of this Lease
for the release or discharge of Hazardous Materials by Tenant, Tenant's
employees, agents, contractors, or invitees on the Premises, Building or Project
or in violation of law or in deviation from prescribed procedures in Tenant's
use or storage of Hazardous Materials. LANDLORD SHALL HAVE THE OPTION TO
CONDUCT A HAZARDOUS MATERIALS INVESTIGATION IF IT HAS A REASONABLE BELIEF THAT
THERE HAS BEEN A DISCHARGE OR RELEASE, OR POTENTIAL OF DISCHARGE OR RELEASE, OF
HAZARDOUS MATERIALS BY TENANT, TENANT'S EMPLOYEES, AGENTS, CONTRACTORS, OR
INVITEES ON THE PREMISES, BUILDING OR PROJECT IN VIOLATION OF LAW OR IN
DEVIATION FROM PRESCRIBED PROCEDURES IN TENANT'S USE OR STORAGE OF HAZARDOUS
MATERIALS. If Tenant fails to comply with any of the provisions under this
Paragraph 6.4, Landlord shall have the right (but not the obligation) to remove
or otherwise cleanup any Hazardous Materials from the Premises, the Building or
the Project. In such case, the costs of any Hazardous Materials investigation,
removal or other cleanup (including, without limitation, transportation,
storage, disposal and attorneys' fees and costs) will be additional rent due
under this Lease, whether or not a court has ordered the cleanup, and will
become due and payable on demand by Landlord.
6.5 PARKING. Landlord grants to Tenant and Tenant's customers, suppliers,
employees and invitees a nonexclusive license to use unassigned and unreserved
parking spaces in the Common Areas for the use of motor vehicles during the Term
subject to rights reserved to Landlord as specified in this Paragraph 6.5.
Landlord reserves the right to grant similar nonexclusive and unassigned and
unreserved use to other tenants; to promulgate rules and regulations relating to
the use of the Common Areas including parking by tenants and employees of
tenants; to make changes in the parking layout from time to time; and to do and
perform any other acts in and to these areas and improvements as Landlord
determines to be advisable. Tenant agrees not to overburden the parking
facilities and to abide by and conform with the rules and regulations and to
cause its employees and agents to abide by and conform to the rules and
regulations. Upon request, Tenant shall provide Landlord with license plate
numbers of all vehicles driven by its employees and to cause Tenant's employees
to park only in spaces specifically designated for tenant parking. Landlord
shall have the unqualified right to rearrange or reduce the number of parking
spaces; provided, however, the ratio of the number of parking spaces available
to Tenant will be no less than three point five (3.5) spaces per 1,000 usable
square feet of the Premises.
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7. SERVICES.
(a) Tenant shall pay for all water, sewer, gas, electricity, heat,
cooling, telephone, refuse collection, and other utility-type services furnished
to Tenant or the Premises, together with all related installation or connection
charges or deposits. Wherever it is practical to do so such services shall be
separately metered or charged to Tenant by the provider thereof and paid for
directly by Tenant. To the extent any of the foregoing services are provided by
Landlord, Tenant shall reimburse Landlord for all costs incurred by Landlord in
connection with the provision of such services based on Landlord's reasonable
estimate of the level of Tenant's use or consumption of such services. Landlord
shall bill Tenant on a monthly or other periodic basis for such services and
payment shall be made by Tenant within ten (10) days after submittal of
Landlord's statement.
(b) Landlord shall not be in default hereunder or be liable for any
damages or personal injuries to any person directly or indirectly resulting
from, nor shall there be any Rent abatement by reason of, any interruption or
curtailment whatsoever in utility services.
8. MAINTENANCE, REPAIRS AND ALTERATIONS.
(a) Tenant shall, at Tenant's expense, maintain every part of the
Premises in good order, condition and repair, including without limitation, (i)
all interior surfaces, ceilings, walls, door frames, window frames, floors,
carpets, draperies, window coverings and fixtures, (ii) all windows, doors,
locks and closing devices, entrances, plate glass, and signs, (iii) all plumbing
and sewage pipes, fixtures and fittings, (iv) all phone lines, electrical
wiring, equipment, switches, outlets, and light bulbs, (v) any fire detection,
fire sprinkler or extinguisher equipment, (vi) all of Tenant's personal
property, improvements and alterations, and (vii) all other fixtures and special
items installed by or for the benefit of, or at the expense of Tenant. Tenant
shall, at its expense, cause to be maintained in good operating condition and
repair, all heating, ventilating, and air conditioning equipment installed in,
or on the roof of the Premises. Tenant shall keep in force a preventive
maintenance contract with a qualified maintenance company covering all heating,
ventilating and air conditioning equipment and shall annually provide Landlord
with a copy of this contract. Tenant shall not enter onto the roof area of the
Building, except for the purpose of maintaining the heating, ventilating, and
air conditioning equipment and provided that Tenant shall repair any damage to
the roof area caused by its entry. Tenant shall be responsible for its own
janitorial service. Landlord shall incur no expense (nor have any obligation)
of any kind whatsoever in connection with the maintenance of the Premises.
(b) Landlord shall keep in good condition and-repair the foundation,
roof structure, exterior walls and other structural parts. of the Building, and
all other portions of the Building not the obligation of Tenant or any other
tenant in the Building. Tenant expressly waives the benefits of any statute,
including Civil Code Sections 1941 and 1942, which would afford Tenant the right
to make repairs at Landlord's expense or to terminate this Lease due to
Landlord's failure to keep the Building in good order, condition and repair.
Landlord shall have no liability to Tenant for any damage, inconvenience, or
interference with the use of the Premises by Tenant as the result of Landlord
performing any such maintenance and repair work.
(c) In the event Tenant fails to perform Tenant's obligations under
this Paragraph 8, Landlord may, but shall not be required to, give Tenant notice
to do such acts as are reasonably required to so maintain the Premises. If
Tenant shall fail to commence such work and diligently prosecute it to
completion, then Landlord shall have the right (but not the obligation) to do
such acts and expend such
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funds at the expense of Tenant as are reasonably required to perform such work.
Any amounts so expended by Landlord will be additional rent due under this
Lease, and such amounts will become due and payable on demand by Landlord.
Landlord shall have no liability to Tenant for any such damages, inconvenience,
or interference with the use of the Premises by Tenant as a result of performing
such work.
(d) Upon the expiration or earlier termination of this Lease, Tenant
shall surrender the Premises in good condition and repair, only ordinary wear
and tear excepted. Tenant, at its sole cost and expense, agrees to repair any
damages to the Premises caused by or in connection with the removal of any
articles of personal property, business or trade fixtures, signs, machinery,
equipment, cabinetwork, furniture, moveable partitions, or permanent
improvements or additions, including without limitation thereto, repairing the
floor and patching and painting the walls where required by Landlord, to
Landlord's reasonable satisfaction. Tenant shall indemnify Landlord against any
loss or liability resulting from delay by Tenant in so surrendering the
Premises, including without limitation, any claims made by any succeeding tenant
resulting from such delay.
(e) Tenant shall not make any alterations, improvements, or additions
in, on, or about the Premises without Landlord's prior written consent, except
that Tenant may make alterations, improvements, or additions without Landlord's
prior written consent where (i) the reasonably estimated cost does not exceed
$2,500, and (ii) such alterations, improvements, or additions do not affect or
involve the structural integrity, roof membrane, exterior areas, building
systems, or water-tight nature of the Premises, the Building or the Project. In
requesting Landlord's consent, Tenant shall, at Tenant's sole cost, submit to
Landlord complete drawings and specifications describing such work and the
identity of the proposed contractor at least ten (10) business days prior to the
commencement of any work.
With respect to any alterations, improvements or additions made
to the Premises by Tenant:
(1) Before commencing any work relating to alterations,
additions, or improvements affecting the Premises, Tenant shall notify Landlord
of the expected date of commencement thereof and of the anticipated cost
thereof. Landlord shall then have the right at any time and from time to time
to post and maintain on the Premises such notices as Landlord reasonably deems
necessary to protect the Premises and Landlord from mechanics' liens or any
other liens.
(2) Tenant shall pay when due all claims for labor or materials
furnished to Tenant for use in the Premises. Tenant shall not permit any
mechanics' liens or any other liens to be levied against the Premises for any
labor or materials furnished to Tenant in connection with work performed on the
Premises by or at the direction of Tenant. Tenant shall indemnify, hold
harmless and defend Landlord (by counsel reasonably satisfactory to Landlord)
from any liens and encumbrances arising out of any work performed or materials
furnished by, or at the direction of Tenant. In the event that Tenant shall not,
within twenty (20) days following the imposition of any such lien, cause such
lien to be released of record by payment or posting of a proper bond, Landlord
shall have, in addition to all other remedies provided herein by law, the right,
but not the obligation, to cause the same to be released by such means as it
shall deem proper, including payment of the claim giving rise to such lien. All
such sums paid by Landlord and all expenses incurred by it in connection
therewith, including attorneys, fees and costs, shall be payable to Landlord by
Tenant on demand with interest at the rate of ten percent (10%) per annum.
(3) All alterations, improvements or additions in or about the
Premises performed by or on behalf of Tenant shall be done in a first-class,
workmanlike manner, shall not unreasonably lessen the value of leasehold
improvements in the Premises, and shall be
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completed in compliance with all applicable laws, ordinances, regulations and
orders of any governmental authority having jurisdiction thereover, as well as
the requirements of insurers of the Premises and the Building.
(4) Upon Landlord's request, Tenant shall remove any contractor,
subcontractor or material supplier from the Premises and the Building if the
work or presence of such person or entity results in labor disputes in or about
the Building or Project or damage to the Premises, Building or Project.
(5) Landlord, at Landlord's sole discretion, may refuse to grant
Tenant permission for alterations, improvements or additions which require,
because of application of Americans with Disabilities Act or other laws,
substantial improvements or alterations to be made to the Common Areas.
(6) Landlord may, up to sixty (60) days prior to the expiration
of the Term, require that Tenant, at Tenant's expense, remove any such
alterations, improvements or additions prior to or upon the expiration of this
Lease, and restore the Premises to their condition prior to such alterations,
improvements or additions.
(7) Unless Landlord requires their removal, as set forth above,
all alterations, improvements, or additions made to the Premises shall become
the property of Landlord and remain upon and be surrendered with the Premises
upon the expiration of this Lease; provided, however, that Tenant's machinery,
equipment, and trade fixtures, other than any which may be affixed to the
Premises so that they cannot be removed without material damage to the Premises,
shall remain the property of Tenant and may be removed by Tenant subject to the
provisions of Paragraph 8(d) above.
9. CONSTRUCTION OF TENANT IMPROVEMENTS.
Landlord shall be responsible for constructing the tenant improvements
("Tenant Improvements") in the Premises, as provided in the Work Letter
Agreement, attached hereto as Exhibit B.
10. INSURANCE AND INDEMNITY.
10.1 INSURANCE.
(a) Tenant shall obtain and maintain during the Term
comprehensive general liability insurance with a combined single limit for
personal injury and property damage in an amount of not less than $2,000,000 (in
a form, with a deductible amount, and with carriers reasonably acceptable to
Landlord) and employer's liability and workers, compensation insurance as
required by law. The insurance carrier shall be authorized to do business in
the State of California, with a policyholders and financial rating of at least
A:IX Class status as rated in the most recent edition of Best's Key-Rating
guide. Tenant's comprehensive general liability insurance policy shall be
endorsed to provide that (i) it may not be canceled or altered in such a manner
as to adversely affect the coverage afforded thereby without thirty (30) days'
prior written notice to Landlord, (ii) Landlord is designated as an additional
insured, (iii) the insurer acknowledges acceptance of the mutual waiver of
claims by Landlord and Tenant pursuant to Paragraph 10.2(b) below, and (iv) such
insurance is primary with respect to Landlord and that any other insurance
maintained by Landlord is excess and noncontributing with such insurance. If,
in the COMMERCIALLY REASONABLE opinion of Landlord's lender or in the
commercially reasonable opinion of Landlord's insurance adviser, the specified
amounts of coverage are no longer adequate, such coverage shall, within 30 days
written notice to Tenant, be appropriately increased. Prior to the commencement
of the Term, Tenant shall deliver to Landlord a duplicate of such policy or a
certificate thereof to Landlord for retention by it, with endorsements. At
least thirty (30) days prior to the expiration of such policy or any renewal or
modification
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thereof, Tenant shall deliver to Landlord a replacement or renewal binder,
followed by a duplicate policy or certificate within a reasonable time
thereafter. If Tenant fails to obtain such insurance or to furnish Landlord any
such duplicate policy or certificate as herein required, Landlord may, at its
election, without notice to Tenant and without any obligation to do so, procure
and maintain such coverage and Tenant shall reimburse Landlord on demand as
additional rent for any premium so paid by Landlord.
(b) Landlord waives all claims against Tenant, and Tenant's
officers, directors, partners, employees, agents and representatives for loss or
damage to the extent that such loss or damage is insured against under any valid
and collectable insurance policy insuring Landlord or would have been insured
against but for any deductible amount under any such policy. Tenant waives all
claims against Landlord, and Landlord's officers, directors, partners,
employees, affiliates, joint venturers, members, trustees, owners, shareholders,
principals, agents, representatives, successors and assigns, for loss or damage
to the extent such loss or damage is insured against under any valid and
collectable insurance policy insuring Tenant or required to be maintained by
Tenant under this Lease, or would have been insured against but for any
deductible amount under any such policy. The insuring party shall, upon
obtaining the policies of insurance required under this Lease, give notice to
the insurance carrier or carriers that the foregoing mutual waiver of
subrogation is contained in this Lease. Tenant agrees that in the event of a
sale, assignment or transfer of the Premises by Landlord, this waiver of
subrogation shall continue in favor of the original Landlord and any subsequent
Landlord.
(c) Tenant shall at its own cost maintain on all its personal
property, Tenant's improvements, and alterations, in, on, or about the Premises,
a policy of standard fire and extended coverage insurance, with vandalism and
malicious mischief endorsements, to the extent of at least one hundred percent
(100%) of their full replacement value. The proceeds from any such policy shall
be used by Tenant for the replacement of personal property and the restoration
of Tenant's improvements or alterations. Notwithstanding any other provisions
of the Lease, Landlord shall have no liability for damage to or destruction of
Tenant's personal property, regardless of whether the damage or destruction
results from the acts or omissions of Landlord.
(d) During the Term, Landlord shall keep the Building, and
improvements within which the Premises are located, insured against loss or
damage by (i) fire, with extended coverage and vandalism, malicious mischief and
special extended perils (all risk) endorsements or their equivalents, in amounts
not less than one hundred percent (100%) of the replacement cost of the Building
and structures insured, and (ii) flood, in the maximum amount provided for by
FEMA under its flood loss insurance program, with loss payable thereunder to
Landlord and to any authorized encumbrancer of Landlord (with standard mortgagee
loss payable clause) in accordance with their respective interests. Landlord
may maintain rent insurance, for the benefit of Landlord, equal to at least one
year's Base Rent hereunder. If the Lease is terminated as a result of damage by
fire, casualty or earthquake as set forth in this Paragraph 10, all insurance
proceeds shall be paid to and retained by Landlord, subject to the rights of any
authorized encumbrancer of Landlord.
(e) Tenant acknowledges that Landlord does not, at the time of
the signing of this Lease, insure the Building for earthquake damage. Landlord
may, when Landlord deems the premiums to be reasonable, insure the Building
fully or partially for earthquake damage. At such time, the premium for
earthquake insurance will be added to the operating Expenses for purposes of
determining additional rent.
10.2 INDEMNITY.
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(a) Tenant waives all claims against Landlord for damage to any
property or injury to or death of any person in, on, or about the Premises, the
Building, or any other portion of the Project arising at any time and from any
cause, unless caused by the active negligence or willful misconduct of Landlord,
its agents, employees, or contractors. Tenant shall indemnify, defend (by
counsel reasonably satisfactory to Landlord) and hold harmless Landlord, and
Landlord's officers, directors, partners, employees, affiliates, joint
venturers, members, trustees, owners, shareholders, principals, agents,
representatives, successors and assigns, from and against all claims, costs,
damages, actions, indebtedness and liabilities (except such as may arise from
the active negligence or willful misconduct of Landlord, and Landlord's
officers, directors, partners, employees, affiliates, joint venturers, members,
trustees, owners, shareholders, principals, agents, representatives, successors
and assigns) arising by reason of any death, bodily injury, personal injury,
property damage or any other injury or damage in connection with (i) any
condition or occurrence in or about or resulting from any condition or
occurrence in or about the Premises during the Term, or (ii) any act or omission
of Tenant, or Tenant's agents, representatives, officers, directors,
shareholders, partners, employees, successors and assigns, wherever it occurs.
The foregoing indemnity obligation of Tenant shall include reasonable attorneys'
fees, and all other reasonable costs and expenses incurred by Landlord from the
first notice that any claim or demand is to be made. The provisions of this
Paragraph 10.2 shall survive the termination or expiration of this Lease with
respect to any damage, injury, or death occurring prior to such expiration or
termination.
(b) Neither party shall be liable to the other for any
unauthorized or criminal entry of third parties into the Premises, Building,
Project, Common Areas, or parking facilities, or for any damage to person or
property, or loss of property in and about the Premises, Building, Project,
Common Areas, parking facilities and the approaches, entrances, streets,
sidewalks, stairs, elevators, restrooms, or corridors thereto, by or from any
unauthorized or criminal acts of third parties, regardless of any breakdown,
malfunction or insufficiency of any security measures, practices or equipment
provided by Landlord or Tenant. Tenant shall immediately notify Landlord in
writing of any breakdown or malfunction of any security measures, practices or
equipment provided by Landlord as to which Tenant has knowledge.
(c) Any diminution or interference with light, air or view by
any structure which may be erected on land adjacent to the Building or resulting
from any other cause shall in no way alter this Lease or impose any liability on
Landlord.
(d) Tenant agrees that in no event shall Landlord be liable for
consequential damages, including injury to Tenant's business or any loss of
income therefrom.
(e) in the event that Landlord or any successor owner of the
Building sells or conveys the Building, then all liabilities and obligations of
Landlord or the successor owner under this Lease accruing after the sale or
conveyance shall terminate and become binding on the new owner, and Tenant shall
release Landlord from all liability under this Lease (including, without
limitation, the Security Deposit, as defined under Paragraph 16 below), except
for acts or omissions of Landlord occurring prior to such sale or conveyance.
(f) Tenant expressly agrees that so long as Landlord is a
corporation, limited liability company, trust, partnership, joint venture,
unincorporated association or other form of business entity, (i) the obligations
of Landlord shall not constitute personal obligations of the officers,
directors, partners, employees, affiliates, joint venturers, members, trustees,
owners, shareholders, or other principals, agents or representatives of such
business entity ( Member of Landlord ), and (ii) Tenant shall have recourse
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only to the interest of such business entity in the Building of which the
Premises are a part for the satisfaction of such obligations and not against the
assets of such Member of Landlord other than to the extent of their respective
interests in the Building. In this regard, Tenant agrees that in the event of
any actual or alleged failure, breach or default by Landlord of its obligations
under this Lease, that (i) no member of Landlord shall be sued or named as a
party in any suit or action (except as may be necessary to secure jurisdiction
of Landlord), (ii) no judgment will be taken against any Member of Landlord, and
any judgment taken against any Member of Landlord may be vacated and set aside
at any time without hearing, (iii) no writ of execution will ever be levied
against the assets of any Member of Landlord, and (iv) these agreements by
Tenant are enforceable both by Landlord and by any Member of Landlord.
11. DAMAGE OR DESTRUCTION.
(a) Subject to the provisions of Paragraphs 11(b) and 11(c) below,
if, during the Term, the Premises are totally or partially destroyed from any
insured casualty, Landlord shall, within ninety (90) days after the destruction,
commence to restore the Premises to substantially the same condition as they
were in immediately before the destruction and prosecute the same diligently to
completion. Such destruction shall not terminate this Lease. Landlord's
obligation shall not include repair or replacement of Tenant's alterations or
Tenant's equipment, furnishings, fixtures and personal property. If the
existing laws do not permit the Premises to be restored to substantially the
same condition as they were in immediately before destruction, and Landlord is
unable to get a variance to such laws to permit the commencement of restoration
of the Premises within the 90-day period, then either party may terminate this
Lease by giving written notice to the other party within thirty (30) days after
expiration of the 90-day period.
(b) Despite the provisions of Paragraph 11(a) above, Landlord may
decide within ninety (90) days after such destruction to demolish the Building
rather than rebuild it, in which case this Lease will terminate as of the date
of the destruction. Landlord shall give Tenant written notice of its intention
within ninety (90) days after the destruction.
(c) If any destruction occurs to the Premises during the last six (6)
months of the initial Term or during the last six (6) months of any extension
period, regardless of the nature and extent of the destruction, either party can
elect to terminate this Lease within thirty (30) days after the destruction
occurs. If this Lease does not terminate pursuant to this Paragraph 11(c), the
provisions of Paragraph 11(a) above shall apply.
(d) If the Premises are damaged from any uninsured casualty to any
extent whatsoever, Landlord may within ninety (90) days following the date of
such damage: (i) commence to restore the Premises to substantially the same
condition as they were in immediately before the destruction and prosecute the
same diligently to completion, in which event this Lease shall continue in full
force and effect; or (ii) within the 90-day period Landlord may elect not to so
restore the Premises, in which event this Lease shall cease and terminate. In
either such event, Landlord shall give Tenant written notice of its intention
within the 90-day period.
(e) In the event of destruction or damage to the Premises which
materially interferes with Tenant's use of the Premises, if this Lease is not
terminated as above provided, there shall be an abatement or reduction of Base
Rent between the date of destruction and the date Landlord substantially
completes its reconstruction obligations, based upon the extent to which the
destruction materially interferes with Tenant's use of the Premises. All other
obligations of Tenant under this Lease shall remain in full force and effect.
Except for abatement of Base Rent, Tenant shall have no claim against Landlord
for any loss suffered by Tenant due to damage
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or destruction of the Premises or any work of repair undertaken as herein
provided.
(f) The provisions of California Civil Code Sections 1932(2) and
1933(4), and any successor statutes, are inapplicable with respect to any
destruction of the Premises, such sections providing that a lease terminates
upon the destruction of the Premises unless otherwise agreed between the parties
to the contrary.
12. EMINENT DOMAIN.
(a) If all or any part of the Premises shall be taken as a result of
the exercise of the power of eminent domain, this Lease shall terminate as to
the part so taken as of the date of taking. In the case of a partial taking of
greater than fifty percent (50%) of the rentable area of the Premises, either
Landlord or Tenant shall have the right to terminate this Lease as to the
balance of the Premises by notice to the other within thirty (30) days after the
date of the taking. In the event of a partial taking of the Premises which does
not result in a termination of this Lease, the monthly Base Rent thereafter to
be paid shall be equitably reduced on a square footage basis. If the continued
occupancy of Tenant is materially interfered with for any time during the
partial taking, notwithstanding the partial taking does not terminate this Lease
as to the part not so taken, the Base Rent shall proportionately abate so long
as Tenant is not able to continuously occupy the part remaining and not so
taken.
(b) All compensation awarded or paid upon a total or partial taking
of the fee title shall belong to Landlord whether such compensation be awarded
or paid as compensation for diminution in value of the leasehold or of the fee
except: Tenant shall retain and have a claim for the following, to the extent
specifically designated by the condemning authority: (i) the unamortized value
over the Term of Tenant's leasehold improvements (to the extent Landlord has not
contributed to the cost thereof); (ii) that portion (if any) of the award made
to Landlord as a result of removing fixtures, removable by Tenant herein, under
the terms of this Lease but which are required to be taken by the condemnor or
are so acquired by the condemnor; and (iii) all relocation assistance, moving
and relocation expenses to the extent (if any) provided by the condemning
authority directly to Tenant.
13. ASSIGNMENT AND SUBLETTING.
(a) Tenant shall not assign, sublet or hypothecate this Lease or any
interest herein or sublet the Premises or any part thereof or permit the use of
the Premises by any party other than Tenant without the prior written consent of
Landlord, which consent shall not be unreasonably withheld. Any of the
foregoing acts without Landlord's consent shall be void and shall, at the option
of Landlord, terminate this Lease. In connection with each consent requested by
Tenant, Tenant shall submit to Landlord the terms of the proposed transaction,
the identity of the parties to the transaction, the proposed documentation for
the transaction, current financial statements of any proposed assignee or
sublessee and all other information reasonably requested by Landlord concerning
the proposed transaction and the parties involved therein.
(b) As used in this Paragraph 13, the term assign or assignment
shall include, without limitation, any sale, transfer, or other disposition of
all or any portion of Tenant's estate under this Lease, whether voluntary or
involuntary, and whether by operation of law or otherwise, including any of the
following:
(1) if Tenant is a corporation or a limited liability company:
(A) any dissolution, merger, consolidation, or other reorganization of Tenant;
or (B) a sale or other transfer of more than fifty percent (50%) of the value of
the assets of Tenant; or (C) if Tenant is a corporation with fewer than 500
shareholders, a sale
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or other transfer of a controlling percentage of the capital stock of Tenant; or
(D) if Tenant is a limited liability company, a sale or other transfer of a
controlling percentage of the interest in Tenant. The phrase "controlling
percentage" means the ownership of, and the right to vote, stocks or interests
possessing at least fifty percent (50%) of the total combined voting power of
the limited liability company or, in the case of a corporation, of all classes
of Tenant's stock issues, outstanding and permitted to vote for the election of
directors of the corporation;
(2) if Tenant is a trust, the transfer of more than fifty
percent (50%) of the beneficial interest of Tenant, or the dissolution of the
trust;
(3) if Tenant is a partnership or joint venture, the withdrawal,
or the transfer of the interest, of any general partner or joint venturer or the
dissolution of the partnership or joint venture; and
(4) if Tenant is composed of tenants-in-common, the transfer of
interest of any cotenants or the partition or dissolution of the cotenancy.
(c) No sublessee shall have a right further to sublet, and any
assignment by a sublessee of its sublease shall be subject to Landlord's prior
written consent in the same manner as if Tenant were entering into a new
sublease.
(d) Regardless of Landlord's consent, no subletting or assignment
shall release Tenant of Tenant's obligation, or alter the primary liability of
Tenant to pay the Rent and to perform all other obligations to be performed by
Tenant hereunder. The acceptance of Rent by Landlord from any other person
shall not be deemed to be a waiver by Landlord of any provisions hereof.
Consent to one assignment or subletting shall not be deemed consent to any
subsequent assignment or subletting. In the event of default by any assignee of
Tenant or any successor of Tenant in the performance of any of the terms hereof,
Landlord may proceed directly against Tenant without the necessity of exhausting
remedies against such assignee or successor.
(e) In the event Tenant shall assign or sublet the Premises or
request the consent of Landlord to any assignment or subletting, then Tenant
shall reimburse Landlord for reasonable costs and attorneys' fees incurred in
connection therewith in an amount not to exceed $1,000.00.
14. DEFAULT BY TENANT.
(a) The following events shall constitute events of default under
this Lease:
(1) a failure by Tenant to pay any Rent or to deliver an
estoppel certificate (as provided in Paragraph 17 below) where such failure
continues for five (5) days after written notice by Landlord to Tenant;
(2) the bankruptcy or insolvency of Tenant, any transfer by
Tenant to defraud creditors, any assignment by Tenant for the benefit of
creditors, or the commencement of any proceedings of any kind by or against
Tenant under any provision of the Federal Bankruptcy Act or under any other
insolvency, bankruptcy or reorganization act unless, in the event any such
proceedings are involuntary, Tenant is discharged from the same within sixty
(60) days thereafter; the appointment of a receiver for a substantial part of
the assets of Tenant; or the levy upon this Lease or any estate of Tenant
hereunder by any attachment or execution;
(3) the abandonment or vacation of the Premises;
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(4) the discovery by Landlord that any financial statement given
to Landlord by Tenant, any assignee of Tenant, any subtenant of Tenant, any
successor in interest of Tenant or any guarantor of Tenant's obligation
hereunder, and any of them, was materially false; and
(5) a failure by Tenant to perform any of the terms, covenants,
agreements or conditions of this Lease to be observed or performed by Tenant
(excluding any event of default under Paragraph 14(a)(1) above), where such
failure continues for thirty (30) days after written notice thereof IS RECEIVED
BY TENANT FROM LANDLORD VIA CERTIFIED MAIL, POSTAGE PREPAID; provided, however,
that if the nature of the default is such that the same cannot reasonably be
cured within the 30-day period, Tenant shall not be deemed to be in default if
Tenant shall within such period commence such cure and thereafter diligently
prosecute the same to completion.
(b) In the event of any material default or breach by Tenant,
Landlord may at any time thereafter, without limiting Landlord in the exercise
of any right or remedy at law or in equity which Landlord may have by reason of
such default or breach:
(1) Pursue the remedy described in California Civil Code Section
1951.4 whereby Landlord may continue this Lease in full force and effect after
Tenant's breach and abandonment and recover the Rent and any other monetary
charges as they become due, without terminating Tenant's right to sublet or
assign this Lease, subject only to reasonable limitations as herein provided.
During the period Tenant is in default, Landlord shall have the right to do all
acts necessary to preserve and maintain the Premises as Landlord deems
reasonable and necessary, including removal of all persons and property from the
Premises, and Landlord can enter the Premises and relet them, or any part of
them, to third parties for Tenant's account. Tenant shall be liable immediately
to Landlord for all costs Landlord incurs in reletting the Premises, including,
without limitation, brokers' commissions, expenses of remodeling the Premises
required by the reletting, and like costs. Reletting can be for a period
shorter or longer than the remaining Term.
(2) Pay or perform such obligation due (but shall not be
obligated to do so), if Tenant fails to pay or perform any obligations when due
under this Lease within the time permitted for their payment or performance. In
such case, the costs incurred by Landlord in connection with the performance of
any such obligation will be additional rent due under this Lease and will become
due and payable on demand by Landlord.
(3) Terminate Tenant's rights to possession by any lawful means,
in which case this Lease shall terminate and Tenant shall immediately surrender
possession of the Premises to Landlord. In such event Landlord shall be
entitled to recover from Tenant all damages incurred by Landlord by reason of
Tenant's default, including, without limitation, the following: (A) the worth at
the time of award of any unpaid Rent which had been earned at the time of such
termination; plus (B) the worth at the time of award of the amount by which the
unpaid Rent which would have been earned after termination until the time of
award exceeds the amount of such Rent loss that is proved could have been
reasonably avoided; plus (C) the worth at the time of award of the amount by
which the unpaid Rent for the balance of the Term after the time of award
exceeds the amount of such Rent loss that is proved could be reasonably avoided;
plus (D) any other amount necessary to compensate Landlord for all the detriment
proximately caused by Tenant's failure to perform its obligations under this
Lease or which in the ordinary course of events would be likely to result
therefrom; plus (E) at Landlord's election, such other amounts in addition to or
in lieu of the foregoing as may be permitted from time to time by applicable
State law. Upon any such termination of Tenant's possessory interest in
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and to the Premises, Tenant (and at Landlord's sole election, Tenant's
sublessees) shall no longer have any interest in the Premises, and Landlord
shall have the right to make any reasonable repairs, alterations or
modifications to the Premises which Landlord in its sole discretion deems
reasonable and necessary. The "worth at the time of award" of the amounts
referred to in subparagraphs (A) and (B) above is computed by allowing interest
at the maximum rate an individual is permitted by law to charge. The worth at
the time of award of the amount referred to in subparagraph (C) above is
computed by discounting such amount at the discount rate of the Federal Reserve
Bank of San Francisco at the time of award plus one percent (1%).
(4) Pursue any other legal or equitable remedy available to
Landlord. Unpaid installments of Rent and other unpaid monetary obligations of
Tenant under the terms of this Lease shall bear interest from the date due at
the rate of ten percent (10%) per annum.
(c) In the event Tenant is evicted or Landlord takes possession of
the Premises by reason of any default by Tenant hereunder, Tenant hereby waives
any right of redemption or relief from forfeiture as provided by law.
(d) Even though Tenant has breached this Lease and abandoned the
Premises, this Lease shall continue in effect for so long as Landlord does not
terminate Tenant's right to possession, and Landlord may enforce all its rights
and remedies under this Lease, including the right to recover Rent as it becomes
due under this Lease. Acts of maintenance or preservation, efforts to relet the
Premises, or the appointment of a receiver upon initiative of Landlord to
protect Landlord's interest under this Lease, shall not constitute a termination
of Tenant's right to possession.
(e) In the event Tenant is in material default under any provision of
this Lease then, at Landlord's sole election: (i) Tenant shall not have the
right to exercise any available right, option or election under this Lease
("Tenant's Exercise Rights") if at such time Tenant is in default hereunder,
(ii) Tenant shall not have the right to consummate any transaction or event
triggered by the exercise of any of Tenant's Exercise Rights if at such time
Tenant is in default hereunder, and (iii) Landlord shall not be obligated to
give Tenant any required notices or information relating to the exercise of any
of Tenant's Exercise Rights hereunder.
15. DEFAULT BY LANDLORD, NOTICE TO MORTGAGEE.
Landlord shall not be in default unless Landlord, or the
holder of any mortgage, deed of trust or ground lease covering the Premises,
fails to perform obligations required of Landlord within a reasonable time, but
in no event later than thirty (30) days after written notice IS RECEIVED BY
LANDLORD FROM TENANT VIA certified mail, postage prepaid, and to the holder of
any first mortgage, deed of trust or ground lease covering the Premises whose
name and address shall have been furnished to Tenant in writing, specifying
wherein Landlord has failed to perform such obligations; provided, however, that
if the nature of Landlord's obligation is such that more than thirty (30) days
are required for performance then Landlord shall not be in default if Landlord
or the holder of any such mortgage, deed of trust or ground lease commences
performance within such 30-day period and thereafter diligently prosecutes the
same to completion. In no event shall Tenant be entitled to terminate this
Lease by reason of Landlord's default, and Tenant's remedies shall be limited to
an action for monetary damages at law.
16. SECURITY DEPOSIT.
On execution of this Lease, Tenant shall deposit with Landlord the sum
specified in the Basic Lease Information (the "Security
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Deposit"). The Security Deposit shall be held by Landlord as security for
the performance by Tenant of all of the provisions of this Lease. If Tenant
fails to pay Rent or other charges due hereunder, or otherwise defaults with
respect to any provision of this Lease, Landlord may use, apply, or retain
all or any portion of the Security Deposit for the payment of any Rent or
other charge in default, or the payment of any other sum to which Landlord
may become obligated by reason of Tenant's default, or to compensate Landlord
for any loss or damage which Landlord may suffer thereby. If Landlord so
uses or applies all or any portion of the Security Deposit, then within ten
(10) days after demand therefor Tenant shall deposit cash with Landlord in an
amount sufficient to restore the deposit to the full amount thereof, and
Tenant's failure to do so shall be a material breach of this Lease. Landlord
shall not be required to keep the Security Deposit separate from its general
accounts. If Tenant performs all of Tenant's obligations hereunder, the
Security Deposit, or so much thereof as has not theretofore been applied by
Landlord, shall be returned, without payment of interest for its use, to
Tenant (or, at Landlord's option to the last assignee, if any, of Tenant's
interest hereunder) at the expiration of the Term, and after Tenant has
vacated the Premises. No trust relationship is created herein between
Landlord and Tenant with respect to the Security Deposit.
17. ESTOPPEL CERTIFICATE.
(a) Tenant shall within ten (10) days of notice from Landlord
execute, acknowledge and deliver to Landlord a statement certifying (i) that
this Lease is unmodified and in full force and effect (or, if modified, stating
the nature of such modification and certifying that this Lease, as so modified,
is in full force and effect), (ii) the amount of the Security Deposit, (iii) the
date to which the Rent has been paid, (iv) acknowledging that there are not, to
Tenant's knowledge, any uncured defaults on the part of Landlord hereunder, or
specifying such defaults, if any are claimed, and (v) such other matters as may
reasonably be requested by Landlord. Any such statement may be conclusively
relied upon by any prospective purchaser or encumbrancer of the Building.
(b) Tenant's failure to deliver such statement within such time shall
be conclusive upon Tenant, (i) that this Lease is in full force and effect,
without modification except as may be represented by Landlord, (ii) that there
are no uncured defaults in Landlord's performance, and (iii) that not more than
one month's Base Rent has been paid in advance.
(c) If Landlord desires to finance or refinance the Building, Tenant
agrees to deliver to any lender designated by Landlord such financial statements
of Tenant as may be reasonably required by such lender. All such financial
statements shall be received by Landlord in confidence and shall be used for the
purposes herein set forth.
18. SUBORDINATION.
This Lease, at Landlord's sole option, shall be subordinate to any
ground lease, mortgage, deed of trust, or any other hypothecation for security
now or hereafter placed upon the Building and to any and all advances made on
the security thereof and to all renewals, modifications, consolidations,
replacements, refinancings and extensions thereof. Notwithstanding such
subordination, Tenant's right to quiet possession of the Premises shall not be
disturbed if Tenant is not in default and so long as Tenant shall pay the Rent
and observe and perform all of the provisions of this Lease, unless this Lease
is otherwise terminated pursuant to its terms. If any mortgagee, trustee, or
ground lessor shall elect to have this Lease prior to the lien of its mortgage,
deed of trust or ground lease, and shall give notice thereof to Tenant, this
Lease shall be deemed prior to such mortgage, deed of trust, or ground lease,
whether this Lease is dated prior to or subsequent to the date of said mortgage,
deed of trust or ground lease or the date of recording thereof. If any
18
<PAGE>
mortgage or deed of trust to which this Lease is subordinate is foreclosed or a
deed in lieu of foreclosure is given to the mortgagee or beneficiary, Tenant
shall attorn to the purchaser at the foreclosure sale or to the grantee under
the deed in lieu of foreclosure; if any ground lease to which this Lease is
subordinate is terminated, Tenant shall attorn to the ground lessor. Tenant
agrees to execute any documents required to effectuate such subordination or to
make this Lease prior to the lien of any mortgage, deed of trust or ground
lease, as the case may be, or to evidence such attornment. Any such document of
attornment shall also provide that the successor shall not disturb Tenant in its
use of the Premises in accordance with this Lease.
19. ATTORNEYS' FEES.
In the event legal action is initiated by either party, the prevailing
party shall be entitled to recover all costs and expenses incurred in such
action, including, without limitation, reasonable attorneys' fees and costs,
including attorneys' fees incurred at trial and on appeal, if any.
20. NOTICES
All notices, consents, demands, and other communications from one
party to the other given pursuant to the terms of this Lease shall be in writing
and shall be deemed to have been fully given when personally delivered,
delivered by courier service, sent via facsimile (confirmation receipt
required), or forty-eight (48) hours after the same is deposited in the United
States mail, certified or registered, postage prepaid, and addressed as follows:
To Tenant at the address specified in the Basic Lease Information or to such
other place as Tenant may from time to time designate in a notice to Landlord;
to Landlord at the address specified in the Basic Lease Information, or to such
other place and to such other parties as Landlord may from time to time
designate in a notice to Tenant.
21. GENERAL PROVISIONS.
(a) This Lease shall be governed by and construed in accordance with
the internal laws of the State of California, notwithstanding any choice of law
statutes, regulations, provisions or requirements to the contrary.
(b) The invalidity of any provision of this Lease, as determined by a
court of competent jurisdiction, shall in no way affect the validity of any
other provision hereof.
(c) This Lease including attached Exhibits, Addenda, and Basic Lease
Information contains all agreements and understandings of the parties and
supersedes and cancels any and all prior or contemporaneous written or oral
agreements, instruments, understandings, and communications of the parties with
respect to the subject matter herein. This Lease, including the attached
Exhibits, Addenda, and Basic Lease Information, may be modified only in a
writing signed by each of the parties.
(d) No waiver of any provision hereof by either party shall be deemed
by the other party to be a waiver of any other provision, or of any subsequent
breach of the same provision. Landlord's or Tenant's consent to, or approval
of, any act shall not be deemed to render unnecessary the obtaining of
Landlord's or Tenant's consent to, or approval of, any subsequent act by the
other party.
(e) If Tenant remains in possession, with the expressed consent of
Landlord, of all or any part of the Premises after the expiration of the Term,
such tenancy shall be from month to month only, and not a renewal hereof or an
extension for any further term, and in such case, Rent shall be payable in the
amount of the last month's Base Rent and all other charges under the Lease and
such
19
<PAGE>
month-to-month tenancy shall be subject to every other term, covenant and
agreement contained herein.
(f) Subject to the provisions of this Lease restricting assignment or
subletting by Tenant, this Lease shall bind the parties, their personal
representatives, successors, and assigns.
(g) Upon reasonable prior notice to Tenant (which notice shall not be
required in the event of an emergency), Landlord and Landlord's representatives
and agents shall have the right to enter the Premises during regular business
hours for the purpose of inspecting the same, showing the same to prospective
purchasers or lenders, and making such alterations, repairs, improvements, or
additions to the Premises, the Building or the Common Areas as Landlord may deem
necessary or desirable. Landlord may at any time during the last one hundred
twenty (120) days of the Term place on or about the Premises any ordinary "For
Lease" sign. Landlord may at any time place on or about the Premises any
ordinary "For Sale" sign.
(h) The voluntary or other surrender of this Lease by Tenant, the
mutual cancellation thereof or the termination of this Lease by Landlord as a
result of Tenant's default shall, at the option of Landlord, terminate all or
any existing subtenancies or may, at the option of Landlord, operate as an
assignment to Landlord of any or all of such subtenancies.
(i) If Tenant is a corporation, limited liability company or
partnership, each individual executing this Lease on behalf of Tenant represents
and warrants that he is duly authorized to execute and deliver this Lease on
behalf of the corporation, company or partnership in accordance with, where
applicable, a duly adopted resolution of the board of directors of the
corporation, the vote of the members of the limited liability company or the
vote of the partners within the partnership, and that this Lease is binding upon
the corporation, company or partnership in accordance with its respective
articles of incorporation and bylaws, operating agreement or partnership
agreement.
(j) Time is expressly declared to be of the essence of this Lease and
of each and every covenant, term, condition, and provision hereof, except as to
the conditions relating to the delivery of possession of the Premises to Tenant.
(k) If there is more than one party comprising Tenant, the
obligations imposed on Tenant shall be joint and several.
(1) The language in all parts of this Lease shall be in all cases
construed as a whole according to its fair meaning and not strictly for nor
against either Landlord or Tenant.
(m) As used in this Lease and whenever required by the context
thereof, each number, both singular and plural, shall include all numbers and in
each gender shall include all genders. Landlord and Tenant, as used in this
Lease or in any other instrument referred to in or made a part of this Lease,
shall likewise include both the singular and the plural, a corporation, limited
liability company, partnership, individual or person acting in any fiduciary
capacity as executor, administrator, trustee or in any other representative
capacity.
(n) The Exhibits and Addendum, if any, specified in the Basic Lease
Information are attached to this Lease and by this reference made a part hereof.
22. FORCE MAJEURE.
Any delay in construction, repairs, or rebuilding any building,
improvement or other structure herein shall be excused and the time limit
extended to the extent that the delay is occasioned by
20
<PAGE>
reason of acts of God, labor troubles, laws or regulations of general
applicability, acts of Tenant or Tenant Delays (as the term is defined in the
Work Letter Agreement attached hereto as Exhibit B), or other occurrences beyond
the reasonable control of Landlord. Accordingly, Landlord's obligation to
perform shall be excused for the period of the delay and the period for
performance shall be extended for a period equal to the period of such delay.
23. BROKER'S FEE.
Each party represents that it has not had dealings with any real estate
broker, finder, or other person, with respect to this Lease in any manner,
except the brokerage firm(s) specified in the Basic Lease Information. Each
party shall hold harmless the other party from all damages resulting from any
claim that may be asserted against the other party by any broker, finder, or
other person with whom the other party has or purportedly has dealt. Landlord
shall pay any commissions or fees that are payable to the broker or finder
specified in the Basic Lease Information, with respect to this Lease in
accordance with the provisions of a separate commission contract.
24. FINANCIAL STATEMENT.
It is acknowledged by all parties hereto that the attached financial
declaration of Tenant is incorporated as a part of this Lease as Exhibit E, that
the information contained therein is true and correct in all material respects,
and that the accuracy of the information is a significant fact upon which
Landlord has relied in the granting of this Lease. SUCH FINANCIAL INFORMATION IS
CONFIDENTIAL AND SHALL NOT BE DISCUSSED BY LANDLORD TO ANY THIRD PARTY. TENANT
SHALL COOPERATE WITH LANDLORD'S LENDERS REQUEST FOR FINANCIAL INFORMATION.
IN WITNESS WHEREOF, the parties have executed this Lease on the date first
mentioned above.
TENANT: LANDLORD:
ADVANCED FIBRE COMMUNICATIONS, G & W/REDWOOD ASSOCIATES JOINT VENTURE,
A DELAWARE CORPORATION A CALIFORNIA GENERAL PARTNERSHIP
BY: G & W/MCDOWELL ASSOCIATES: 1985,
A CALIFORNIA GENERAL PARTNERSHIP
BY:/s/ Daniel E. Steimle
------------------------
ITS: VP, CFO BY: /s/ William C. White
------- --------------------
WILLIAM C. WHITE
ITS: MANAGING GENERAL PARTNER
21
<PAGE>
ADDENDUM #1
1. PREMISES:
The Premises consist of the entire building of Nine Willowbrook Court,
approximately 48,136 rentable square feet ("Initial Space") and the entire
building of One Willowbrook Court, approximately 41,467 rentable square
feet ("Secondary Space"). The term "Premises" shall refer to both the
Initial Space and the Secondary Space.
2. LEASE TERM AND COMMENCEMENT:
The term of the Lease shall be for Ten (10) years beginning as of the
Commencement Date. The Commencement Date shall begin upon substantial
completion of the Tenant Improvements within the Initial Space, however, in
no event shall the commencement date begin earlier than August 1, 1996.
Landlord shall use its best efforts to improve the Premises such that the
Commencement Date will begin on August 1, 1996. The lease term for the
Secondary Space shall commence on January 1, 1997 or upon substantial
completion of the tenant improvements within the Secondary Space if the
Tenant Improvements have not been substantially completed prior to January
1, 1997. The term for the Secondary Space shall run coterminous with the
term of the Initial Space.
3. NNN RENTAL RATE:
The NNN rental rate for the Initial Space shall be as follows:
LEASE YEAR OFFICE/MANUF. WHSE MONTHLY RENT
(26,475 S.F.) (21,661 S.F.)
08/01/96 - 07/31/98 $0.95 $0.50 $35,982
08/01/98 - 07/31/2000 $1.00 $0.55 $38,389
08/01/2000-07/31/2006 Bi-Annual CPI adjustment as provided below.
The NNN rental rate for the Secondary Space shall be as follows:
LEASE YEAR RENT PER SQ. FT. MONTHLY RENT
(41,167 S.F.)
01/01/97 - 05/31/97 $0.00 $0.00
06/01/97 - 12/31/97 $0.32 $13,270
01/01/98 - 03/31/98 $0.79 $32,760
04/01/98 - 01/31/99 $1.05 $43,541
02/01/99 - 07/31/2000 $1.08 $44,785
08/01/2000 - 07/31/2006 Bi-Annual CPI adjustment as provided below.
At the start of the fifth, seventh, and ninth lease years of the term of
the lease, as based on the term of the Initial Space, there will be a
rental adjustment based on the percentage increase in the Consumer Price
Index For All Urban Consumers, San Francisco-Oakland-San Jose, All Items
(1982-1984=100), as published by the U.S. Bureau of Labor Statistics
("Index"). The "Beginning Index" shall be the Index published most
immediately preceding the last Base Rent adjustment. The "Adjustment
Index" shall be the Index published most immediately proceeding the
Adjustment Date. The monthly Base Rent until the next Base Rent adjustment
shall be determined by multiplying the base rent in effect immediately
preceding the adjustment date (without regard to any temporary abatement of
base rent then or previously in effect under the lease) by a fraction, the
numerator of which is the Adjustment Index and the denominator of which is
the
<PAGE>
Beginning Index. However, in no event will the monthly Base Rent be
increased by an amount less than 3% per year or more than 5% per year. If
the 1982-1984 base of the Index is changed, the new base shall be converted
to the 1982-1984 base in accordance with the U.S. Department of Labor's
conversion factor, and the base as so converted shall be used. If the U.S.
Department of Labor ceases to publish the Index, then the successor index
designated by the U.S. Department of Labor or, if no successor index is so
designated, the most nearly comparable index shall be used.
4. TENANT IMPROVEMENTS:
Landlord shall construct the tenant improvements for the Initial Space as
outlined on Exhibit B-1 on a turn-key basis provided Landlord shall be
obligated to spend an amount up to but not exceeding One Hundred Five
Thousand Nine Hundred Dollars ($105,9900.00) ($4.00/s.f. for office space).
Tenant shall be responsible for payment of any and all costs of the Tenant
Improvements which exceed $105,900.00, payment of which shall be due one-
half at the time the excess expense is incurred and the remaining one-half
upon the commencement date of the respective Lease space. This amount is
estimated at this time to be $71,575.00. The amount payable by Landlord for
Tenant Improvements shall not include those costs and expenses payable by
Landlord for space planning and engineering, pursuant to Paragraph 5 below.
Tenant shall accept the Secondary Space in "as is" condition except
Landlord, at Landlord's sole cost and expense, shall remove the center core
of offices on the 1st and 2nd floors as indicated on Exhibit B-1 and
repaint and recarpet throughout.
5. SPACE PLANNING AND ENGINEERING:
Landlord, at Landlord's sole cost and expense, shall provide all space
planning, including architectural, working drawings, electrical, mechanical
and structural engineering plans (collectively, "Space Plans"), and
permits, licenses and fees relative to the development of the Premises
(collectively, "Space Plan Fees"). The Space Plan Fees shall be payable by
Landlord in addition to Landlord's allowance for the Tenant Improvements.
<PAGE>
[Graphic]
EXHIBIT A
NINE WILLOWBROOK COURT
FLOOR PLAN BLDG. 5
<PAGE>
[Graphic Floorplan]
EXHIBIT A
ONE WILLOWBROOK COURT
1st Floor
<PAGE>
[Graphic Floorplan]
EXHIBIT A
ONE WILLOWBROOK COURT
2nd Floor
<PAGE>
[Graphic Floorplan]
EXHIBIT A-1
SITE PLAN
<PAGE>
EXHIBIT B
WORK LETTER AGREEMENT
(Turn Key - Multi-Story)
THIS WORK LETTER AGREEMENT supplements that certain Lease dated June 3,
1996 ("Lease"), executed by G & W / Redwood Associates Joint Venture, a
California general partnership, as Landlord, and Advanced Fibre Communications,
a Delaware corporation, as Tenant. All capitalized terms not otherwise defined
herein shall have the same meaning as those capitalized terms contained in the
Lease.
1. Landlord shall be responsible for constructing within the
Premises the tenant improvements ("Tenant Improvements") described in the
preliminary space plan attached hereto as Exhibit B-1 ("Preliminary Space
Plan"). The Tenant Improvements for the Premises will be more particularly
described in the plans and construction drawings ("Construction Drawings")
as approved below. Any additional work ("Tenant Extra Improvements")
required under the approved Construction Drawings shall be at Tenant's
expense.
2. Landlord and Tenant shall diligently finalize the Preliminary
Space Plan for construction of the Tenant Improvements and Tenant Extra
Improvements so that, within thirty (30) days after execution of the Lease,
Landlord can provide Tenant with the Construction Drawings. The
Construction Drawings shall indicate the specific requirements of Tenant's
lease space, outlining in detail interior partitions, floor coverings, a
reflected ceiling plan, plumbing fixtures, and electrical plans (setting
forth the electrical requirements of Tenant), all in conformity with the
Preliminary Space Plan. The Construction Drawings shall include full
energy calculations as required by the State of California and the city
agencies.
3. Within three (3) days after receipt of the Construction Drawings,
Tenant shall approve the drawings and/or request changes or modifications
thereto. Any such request for changes or modifications shall be subject to
Landlord's approval and, thereafter, the Construction Drawings shall be
resubmitted for Tenant's approval in accordance with the preceding
sentence. Tenant acknowledges that the Construction Drawings are subject
to the approval of the appropriate government authorities. It shall be
Tenant's responsibility to ensure that the design and function of the
Tenant Improvements and Tenant Extra Improvements are suitable for Tenant's
business and needs. The improvements shall be constructed in accordance
with current building standards, laws, regulations, ordinances and codes.
Landlord shall not be required to install any Tenant Improvements or Tenant
Extra Improvements which do not conform to the Construction Drawings.
4. Landlord shall furnish and install the units and quantities of
Tenant Improvements as set forth in the Addendum and Exhibit B-1. The
Tenant Improvements to be paid by Landlord on Nine Willowbrook Court shall
not exceed One Hundred Five Thousand Nine Hundred Dollars ($105,900.00)
shall include:
(a) The costs of the Preliminary Space Plan (including one
revision thereto) and final Construction Drawings and engineering costs
associated with completion of the State of California energy utilization
calculations under Title 24 legislation; and
(b) The costs of obtaining building permits and other necessary
authorizations from the city, county and the State of California.
Any additional units, quantities or costs of the Tenant Improvements
required in accordance with the approved Construction Drawings shall be
deemed Tenant Extra Improvements and shall be paid for by Tenant at the
unit cost set forth in a summary of unit costs to be provided by Landlord.
5. In no event shall the Tenant Improvements payable by Landlord
include (i) the costs of procuring or installing any trade fixtures,
equipment, furniture, furnishings, telephone or computer equipment or
wiring or other personal property ("Personal Property"), or (ii) any
<PAGE>
Change Orders (as the term is defined in Paragraph 6 below). Such items shall
be paid by Tenant.
6. Following Tenant's approval of the Construction Drawings, Tenant
may request changes or modifications thereto ("Change Order"), however, the
cost of any Change Order(s) shall be borne by Tenant. If Tenant shall
request any Change Order, then Landlord shall promptly give Tenant a
written estimate of (a) the cost of engineering and design services to
prepare the Change Order, (b) the cost of work to be performed pursuant to
the Change Order, and (c) the time delay expected because of such requested
Change Order. Within three (3) days after Tenant's receipt of the written
estimate, Tenant shall notify Landlord in writing whether it approves the
written estimate. If Tenant approves the written estimate, then Tenant
shall accompany its approval with a check made payable to Landlord in the
amount of the estimated cost of the Change Order. Upon Landlord's
completion of the Change Order and submission of the final cost thereof to
Tenant, Tenant shall promptly pay to Landlord any additional amounts
incurred in excess of the written estimate. If such written authorization
and check are not received by Landlord, then Landlord shall not be
obligated to commence work on the Premises and Tenant shall be chargeable
for any delay in the completion of the Premises in accordance with
Paragraph 7 below.
7. If the Commencement Date of the Lease has not occurred on or
before the Estimated Commencement Date, and if the cause of the delay in
the occurrence of the Commencement Date is attributable to Tenant, then the
Lease shall begin on the date the Commencement Date otherwise would have
occurred but for the Tenant delays. Delays attributable to Tenant ("Tenant
Delays") shall include, without limitation, those caused by (a) delays by
Tenant in approving the Construction Drawings and costs, (b) Tenant's
request for special materials not available when needed for construction in
accordance with the construction schedule, (c) Change Orders, and (d)
interference with Landlord's work caused by Tenant or Tenant's agents. All
costs and expenses occasioned by a Tenant Delay, including, without
limitation, increases in labor or materials, shall be borne by Tenant.
8. Tenant may, with Landlord's written consent, enter the Premises
prior to the Commencement Date solely for the purpose of installing its
Personal Property as long as such entry will not interfere with the orderly
construction and completion of the Premises ("Tenant's Work"). Tenant
shall notify Landlord of its desired time(s) of entry and shall submit for
Landlord's written approval the scope of the Tenant's Work to be performed
and the name(s) of the contractor(s) who will perform such work. Tenant
agrees to indemnify, defend and hold harmless Landlord, any mortgagee,
ground lessor or beneficiary of a deed of trust encumbering, secured by or
affecting the Premises or the Building, from and against any and all
claims, actions, losses, liabilities, damages, costs or expenses
(including, without limitation, reasonable attorneys' fees and claims for
worker's compensation) of any nature whatsoever, arising out of or in
connection with the Tenant's Work (including, without limitation, claims
for breach of warranty, personal injury or property damage).
9. During the course of construction, at Tenant's expense, Tenant
shall obtain or maintain public liability and worker's compensation
insurance, in amounts acceptable to Landlord, and which name Landlord and
Tenant as parties insured from and against any and all liability for death
of or injury to person or damage to property caused in or about or by
reason of the construction of the Tenant's Work.
10. Upon substantial completion of the Premises in accordance with
the Construction Drawings, Tenant Agrees to accept the Premises in the
condition which it may then be and waives any right or claim against
Landlord for any cause directly or indirectly arising out of the condition
of the Premises, appurtenances thereto, improvements thereon, and
equipment therein. Tenant shall hold harmless Landlord from and against
any liability or damage as provided under Paragraph 10.2 of the Lease.
Landlord shall not be liable for any latent or patent defects therein,
except that Landlord warrants the Building against latent defects for a
period of one (1) year from the date of substantial completion.
11. Tenant releases Landlord from any claim whatsoever for damages
against Landlord for any delay in the date on which the Premises shall be
ready for occupancy by
<PAGE>
Tenant.
12. The Premises shall be deemed "substantially completed" as of the
date that all of the following conditions are satisfied:
(a) The Tenant Improvements have been substantially completed in
accordance with the approved Construction Drawings (except for those punch
list items referenced in Paragraph 12 below), such that Tenant can
reasonably conduct business within the Premises; and
(b) A certificate of occupancy and/or finalized building permit
has been issued for the Premises.
(c) All base building facilities shall be in good operating
order and shall comply and conform with the design specifications furnished
by Tenant; the base building includes the following items: restrooms, a
first floor lobby and elevator cabs, HVAC units on the roof which are
distributed to each floor, sprinkler systems which are distributed around
each floor (but with no drop heads), electrical equipment in the first
floor electrical room and electrical panels on each floor, and a card-key
security system for access to all Building common area exterior doors.
13. Tenant shall immediately prior to occupancy inspect the Premises
and compile and furnish Landlord with an initial punch list of any missing
or deficient Tenant Improvements. Within the first thirty (30) days after
delivery of the Premises, Tenant shall make a final punch list and submit
this list to Landlord. Landlord shall use its best efforts to complete the
corrective work in a prompt, good and workman-like manner. Punch list
corrections shall not delay the Commencement Date, nor shall a delay in
making corrections be grounds for a delay or reduction in any rent payments
due Landlord.
14. All floor area calculations are from the center line of the
partitions and the outside line of the exterior and hall walls. No
deduction is allowed for the columns, sprinkler risers, roof drains, or air
conditioning units serving Tenant and located within the Premises.
15. Landlord shall select the manufacturer and vendor of all building
materials and equipment with respect to the Tenant Improvements and Tenant
Extra Improvements to be constructed hereunder.
TENANT: LANDLORD:
G & W/REDWOOD ASSOCIATES JOINT VENTURE,
A CALIFORNIA GENERAL PARTNERSHIP
BY: /s/ BY: G & W/MCDOWELL ASSOCIATES: 1985,
------------------------ A CALIFORNIA GENERAL PARTNERSHIP
ITS: VP, CFO
-------
BY: /s/ William C. White
--------------------
WILLIAM C. WHITE
ITS: MANAGING GENERAL PARTNER
<PAGE>
[Graphic]
EXHIBIT B-1
ONE WILLOWBROOK COURT
1st Floor
<PAGE>
[Graphic Floorplan]
EXHIBIT B-1
ONE WILLOWBROOK COURT
2nd Floor
<PAGE>
EXHIBIT C
RULES AND REGULATIONS
It is further agreed that the following Rules and Regulations shall be and are
hereby made a part of this Lease, and Tenant agrees that Tenant's employees and
agents, or any others permitted by Tenant to occupy or enter the Premises, will
at all times abide by said Rules and Regulations, unless otherwise specified or
provided for in the Lease, to wit:
1. The driveways, entrances and exits to the Property, sidewalks,
passages, building entries, lobbies, corridors, stairways, and elevators of the
Building shall not be obstructed by Tenant, or Tenant's agents or employees, or
used for any purpose other than ingress and egress to and from the Premises.
Tenant or Tenant's agents or employees shall not loiter on the lawn areas or
other common areas of the Property.
(a) Furniture, freight equipment and supplies will be moved in or out
of the Building only through the rear service entrances or other entrances
designated by Landlord and then only during such hours and in such manner as may
be reasonably prescribed by Landlord. Tenant shall cause its movers to use only
the loading facilities, and entrances designated by Landlord. In the event
Tenant's movers damage any part of the Building or Property, Tenant shall
forthwith pay to Landlord the amount required to repair said damage.
(b) No safe or article, the weight of which may in the opinion of
Landlord constitute a hazard to or damage to the Building or the Building's
equipment, shall be moved into the Premises without Landlord's prior written
approval, but such consent or approval shall not be unreasonably withheld,
conditioned or delayed. Landlord and Tenant shall mutually agree to the
location of such articles in the Premises. All damage done to the Property,
Building or Premises by putting in, taking out or maintaining extra heavy
equipment shall be repaired at the expense of Tenant.
(c) Landlord reserves the right to close and keep locked any and all
entrances and exits of the Building and Property and gates or doors closing the
parking areas thereof during such hours as Landlord may deem advisable for the
adequate protection of the Property and all tenants therein.
2. Except as otherwise provided for in the Lease, no sign, advertisement
or notice shall be inscribed, painted or affixed on any part of the inside or
outside of the Building unless of such color, size and style and in such place
upon or in the Building as shall be first approved in writing by Landlord. No
furniture or other materials shall be placed in front of the Building or in any
lobby or corridor, without the prior written consent of Landlord. Landlord
shall have the right to remove all non permitted signs and furniture, without
notice to Tenant.
3. Tenant shall not employ any person or persons other than the janitor
or cleaning contractor of Landlord for the purpose of cleaning or taking care of
the Premises without the prior written consent of Landlord, which shall not be
unreasonably withheld, conditioned or delayed. Except as otherwise provided in
the Lease, Landlord shall in no way be responsible to Tenant for any loss of
property from the Premises, however occurring. The janitor of the Building may
at all times keep a pass key, and other agents of Landlord shall at all times be
allowed admittance to the Premises in accordance with the provisions set forth
in the Lease.
4. Water closets and other water fixtures shall not be used for any
purpose other than that for which the same are intended, and any damage
resulting to the same from misuse on the part of Tenant or Tenant's agents or
employees, shall be paid for by Tenant. No person shall waste water by tying
back or wedging the faucets or in any other manner.
5. No animals except seeing-eye dogs or other animals necessary to the
functioning of handicapped personnel shall be allowed on the lawns or
sidewalks or in the offices, halls, and corridors of the Building.
6. No persons shall disturb the occupants of this or adjoining buildings
or premises by the use of any radio, sound equipment or musical instrument or by
the making of loud or improper noises, nor interfere in any way with the other
tenants or those having business with them. Should
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sound mitigation measures be required due to sounds originating in the Premises,
the costs of such measures shall be paid for by Tenant.
7. Bicycles or other vehicles, other than wheel chairs, shall not be
permitted in the offices, halls, corridors and lobbies in the Building nor shall
any obstruction of sidewalks or entrances of the Building by such be permitted.
8. Tenant shall not allow anything to be placed on the outside of the
Building, nor shall anything be thrown by Tenant or Tenant's agents or
employees, out of the windows or doors, or down the corridors, ventilation ducts
or shafts of the Building. Tenant, except in case of fire or other emergency,
shall not open any outside window.
9. No awnings shall be place over any window or entrance.
10. All garbage, including wet garbage, refuse or trash shall be placed by
Tenant in the receptacles designated by Landlord for that purpose. Tenant
shall not burn any trash or garbage at any time in or about the leased
Premises or any area of the Property. Tenant and Tenant's officers, agents,
and employees shall not throw cigar or cigarette butts or other substances or
litter of any kind in or about the Property.
11. Tenant shall not install or operate any steam or gas engine or boiler,
or other machinery or carry on any mechanical business, other than such
mechanical business which normally is identified with general use in the
Premises. Explosives or other articles of an extra hazardous nature shall not
be brought into the Building complex.
12. Any painting or decorating as may be agreed to be done by and at the
expense of Landlord shall be done during regular weekday working hours. Should
Tenant desire such work on Saturdays, Sundays, holidays or outside of regular
working hours, Tenant shall pay for the extra cost thereof, if any.
13. Tenant and Tenant's agents and employees shall park their vehicles in
areas designated from time-to-time for employee parking.
14. Tenant shall not mark, drive nails, screw, bore, or drill into, paint
or in any way deface the common area walls, exterior walls, roof, foundations,
bearing walls, or pillars without the prior written consent of Landlord. The
expense of repairing any breakage, stoppage or damage resulting from a violation
of this rule shall be borne by Tenant.
15. No waiver of any rule or regulation by Landlord shall be effective
unless expressed in writing and signed by Landlord or his authorized agent.
16. Tenant shall be responsible for cleaning up any trash blowing around
their facility that may have been left by their customers or employees.
17. In the event of any conflict between these rules and regulations or
any further or modified rules and regulations from time to time issued by
Landlord, and the lease provisions, the lease provisions shall govern and
control.
18. Landlord reserves the right at any time to change or rescind any one
or more of these rules and regulations, or to make such other and further
reasonable rules and regulations as in Landlord's judgment may from time to time
be necessary for the management, safety, care and cleanliness of the Premises,
and for the preservation of good order therein, as well as for the convenience
of other tenants of the Property. Landlord shall not be responsible to Tenant
or to any other person for the non-observance or violation of the rules and
regulations by any other tenant or person. Tenant shall be deemed to have read
these rules and to have agreed to abide by them as a condition to its occupancy
of the space herein leased, and Tenant shall abide by any additional rules and
regulations which are ordered or requested by Landlord or by any governmental
authority.
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EXHIBIT D
MATERIALS QUANTITIES
- --------- ----------
Tenant agrees that:
(a) None of the above materials will be used, held or stored on or about
the Premises in quantities of greater than one (1) gallon each, or twenty (20)
pounds each in the case of non-liquid materials; provided, however, that used or
excess materials may be stored together in a fifty-five (55) gallon drum while
awaiting transport off the Premises for disposal.
(b) The materials listed on Page 1 to this Exhibit D shall be stored in
fire-proof lockers on the Premises in accordance with applicable laws,
regulations and ordinances. No storage outside the Premises will be permitted.
(c) No used or excess materials will be disposed of in, on, under or about
the Premises or Redwood Business Park. Instead, such materials shall be
transported off-site, no less often than every one hundred eighty (180) days, by
a duly licensed hazardous materials transporter. While waiting for transport
off-site for disposal, used or excess materials shall be stored in a safe
location on the Premises in secure containers which are appropriately labeled.
(d) No materials listed on Page 1 to this Exhibit D, regardless of whether
they are water-soluble, shall be flushed down any sanitary sewer drains on or
about the Premises or Redwood Business Park.
<PAGE>
SECOND AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
(Domestic Accounts, Lines of Credit and FX Subfacility)
BOW6482
RJG-7/93
THIS AGREEMENT, dated as of December 7, 1995, is entered into between
ADVANCED FIBRE COMMUNICATIONS, INC., a Delaware corporation and successor by
merger to ADVANCED FIBRE COMMUNICATIONS, INC., a California corporation,
(hereinafter called "Borrower"), whose sole place of business (if Borrower has
only one), chief executive office (if Borrower has more than one place of
business), or residence (if a sole proprietorship) is at the address set forth
in section 1.5 hereinbelow, and Bank.
The parties agree as follows:
1. DEFINITIONS
As used in this Agreement, the following terms shall have the following
definitions:
1.1 ACCOUNTS. The term "Account(s)" means all presently existing and
hereafter arising accounts, contract rights, instruments, documents, chattel
paper, and all other forms of obligations owing to Borrower arising out of the
sale or lease of goods or the rendition of services by Borrower whether or not
earned by performance, and any and all credit insurance, guaranties and other
security therefor, as well as all merchandise returned to or reclaimed by
Borrower.
1.2 AGREEMENT. The term "this Agreement" means this Loan and Security
Agreement, any concurrent or subsequent rider to this Loan and Security
Agreement and any extensions, supplements, amendments or modifications to this
Loan and Security Agreement and/or to any such rider.
1.3 BANK. The term "Bank" shall mean and refer to BANK OF THE WEST, a
California banking corporation, with a place of business located at 50 West San
Fernando Street, Second Floor, Technology Industries Group, San Jose, California
95113.
1.4 BANK EXPENSES. The term "Bank Expenses" means: all costs and
expenses incurred by Bank in connection with this Agreement or the transactions
contemplated hereby, including, without limitation, all costs or expenses
required to be paid by Borrower under this Agreement which are paid or advanced
by Bank; taxes and insurance premiums of every nature and kind of Borrower paid
by Bank; filing, recording, publication, search fees, appraiser fees, auditor
fees, title insurance premiums paid or incurred by Bank in connection with
Bank's transactions with Borrower; costs and expenses incurred by Bank in
collecting or realizing upon the Collateral (with or without suit), to correct
any default or enforce any provision of this Agreement, or in gaining possession
of, maintaining, handling, preserving, storing, shipping, selling, preparing for
sale and/or advertising to sell the Collateral, whether or not a sale is
consummated; costs and expenses of suit incurred by Bank in enforcing or
defending this Agreement or any portion hereof; and reasonable attorneys' fees
and expenses incurred by Bank in advising, structuring, drafting, reviewing,
amending, terminating, enforcing, defending or concerning this Agreement, any
portion hereof, any agreement related hereto, or any of the transactions
contemplated hereby, whether or not suit is brought, and including, but not
limited to, any expenses incurred in relation to opposing or seeking to obtain
relief from any stay or restraining order prohibiting Bank from exercising its
rights as a secured creditor, foreclosing upon or disposing of Collateral, or
such related matters.
1.5 BORROWER. The term "Borrower" shall mean and refer to the party
first named above, whose address is 1445 McDowell Boulevard, Petaluma,
California 94975-1239.
1.6 BORROWER'S BOOKS. The term "Borrower's Books" means all of
Borrower's books and records including, but not limited to: minute books;
ledgers, records indicating, summarizing or evidencing Borrower's assets,
liabilities, the Collateral, the Obligations, and all information relating
thereto; records indicating, summarizing or evidencing Borrower's business
operations or financial condition; and all computer programs, disc or tape
files, printouts, runs, and other computer prepared information and the
equipment containing such information.
1.7 BORROWING BASE. The term "Borrowing Base" means the sum of: (a)
eighty percent (80%) of the net amount of Eligible Accounts and (b) the amount
of the advances agreed to be made pursuant to any rider, amendment or
modification to this Agreement that may now or hereafter be entered into by Bank
and Borrower (less all payments, adjustments and credits applicable to the
Eligible Accounts).
1.8 CODE. The term "the Code" means the California Uniform Commercial
Code, and any and all terms used in this Agreement which are defined in the Code
and not specifically defined herein shall be construed and defined in accordance
with the meaning and definition ascribed to such terms under the Code.
1.9 COLLATERAL. The term "Collateral" means each and all of the
following: the Accounts, the General Intangibles; the Negotiable Collateral; the
Inventory; the Equipment; any money or deposit Accounts; any other assets of
Borrower in which Bank receives a security interest, or which hereafter come
into the possession, custody or control of Bank; and the Proceeds of any of the
foregoing, and Borrower's Books. Notwithstanding anything to the contrary
contained herein, Collateral shall not include any materials designated by Bank
as toxic or hazardous waste materials.
1.10 CREDIT. The term "Credit" means all Obligations in respect of
amounts actually paid or advanced by Bank under this Agreement.
1.11 DAILY BALANCE. The term "Daily Balance" shall mean the amount
determined by taking the amount of the Credit owed at the beginning of a given
day, adding any new credit advanced to or incurred by Borrower on such date, and
subtracting any payments or collections which are deemed to be paid and are
applied by Bank in reduction of the Credit on that date under the provisions of
this Agreement.
1.12 ELIGIBLE ACCOUNTS. The term "Eligible Accounts" means and includes
those accounts of Borrower which are due and payable within forty-five (45) days
(or less) from the date of invoice, have been validly assigned to Bank and
strictly comply with all of Borrower's warranties and representations to Bank;
but Eligible Accounts shall not include the following: (a) accounts with respect
to which the account debtor is an officer, employee, partner, joint venturer or
agent of Borrower; (b) accounts with respect to which goods are placed on
consignment, guarantied sale or other terms by reason of which the payment by
the account debtor may be conditional; (c) accounts with respect to which the
account debtor is not a resident of the United States of America; (d) accounts
with respect to which the account debtor is the United States of America or any
department, agency or instrumentality thereof; (e) accounts with respect to
which the account debtor is a subsidiary of, related to, affiliated or has
common shareholders, officers or directors with Borrower; (f) accounts with
respect to which Borrower is or may become liable to the account debtor for
goods sold or services rendered by the account debtor to Borrower; (g) accounts
not paid by an account debtor within ninety (90) days from the date of the
invoice; (h) accounts with respect to which account debtors dispute liability or
make any claim, or have any defense, crossclaim, counterclaim or offset; (i)
accounts with respect to which an Insolvency Proceeding is filed by or against
the account debtor, or if an account debtor becomes insolvent, fails or goes out
of business; (j) all accounts owed by an account debtor when fifty percent (50%)
or more of all outstanding accounts owed by the account debtor to Borrower have
not been paid within ninety (90) days after the date of invoice; (k) accounts
owed by Alltel which exceed twenty-five percent (25%) of all of the Eligible
Accounts; and (l) accounts owed by any other single account debtor which exceed
twenty percent (20%) of all of the Eligible Accounts.
1.13 EQUIPMENT. The term "Equipment" means all of Borrower's ownership
and/or lessee's interest in any presently existing and hereafter acquired
equipment, wherever located, which is either owned by Borrower or is leased by
Borrower under an equipment lease, including without limitation all machinery,
machine tools, motors, controls, attachments, parts, tools, and accessories
incidental thereto, computer and office equipment, furniture, furnishings,
fixtures, motor vehicles, trailers and rolling stock and all substitutions,
replacements, accessories, additions, attachments, improvements, accessions,
Proceeds and products of the foregoing.
1.14 EVENT OF DEFAULT. The term "Event of Default" shall have the
meaning set forth in Article 11 of this Agreement.
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1.15 GENERAL INTANGIBLES. The term "General Intangibles" means and
includes all of Borrower's present and future general intangibles and other
personal property (including, without limitation, any and all choses or things
in action, goodwill, patents, copyrights, trade names, trademarks, trade
secrets, blueprints, drawings, purchase orders, computer programs, software,
computer discs, computer tapes, literature, reports, catalogs, deposit accounts
and tax refunds) other than goods and accounts.
1.16 INSOLVENCY PROCEEDING. The term "Insolvency Proceeding" means any
proceeding commenced by or against any person or entity, including Borrower,
under any provision of the federal Bankruptcy Code, as amended, or under any
other bankruptcy or insolvency law, including, but not limited to, assignments
for the benefit or creditors, formal or informal moratoriums, compositions or
extensions with some or all creditors.
1.17 INVENTORY. The term "Inventory" means all present and hereafter
acquired inventory in which Borrower has any interest, wherever located,
including, but not limited to, goods hold by Borrower for the sale or lease or
to be furnished under a contract of service, new or raw product and materials,
components, work-in-process, finished goods, labels and other package dress,
advertising material and packing and shipping materials, any documents of title
representing any of the above, and any equipment, fixtures, or other property
used in the storing, moving, preserving, identifying, accounting for and
shipping or preparing for the shipping of Inventory.
1.18 JUDICIAL OFFICER OR ASSIGNEE. The term "Judicial Officer or
Assignee" means any trustee, receiver, controller, custodian, assignee for the
benefit of creditors or any other person or entity having powers or duties like
or similar to the powers and duties of a trustee, receiver, controller,
custodian or assignee for the benefit of creditors.
1.19 NEGOTIABLE COLLATERAL. The term "Negotiable Collateral" shall have
the meaning set forth in Section 5.1 of this Agreement.
1.20 OBLIGATIONS. The term "Obligations" means any and all obligations,
loans, advances, overdrafts, debts, liabilities (including, without limitation,
any and all amounts charged to Borrower's account pursuant to any agreement
authorizing Bank to charge Borrower's account), lease and other contractual
obligations, guaranties, covenants, promises and duties owing by Borrower to
Bank of any kind and description (whether advanced pursuant to or evidenced by
this Agreement; by any note or other instrument; or by any other agreement
between Bank and Borrower and whether or not for the payment of money), whether
direct or indirect, absolute or contingent, due or to become due, now existing
or hereafter arising, and including, without limitation, any debt, liability or
obligation owing from Borrower to others which Bank may have obtained by
assignment, participation, operation of law, or otherwise, and further
including, without limitation, all interest not paid when due and all Bank
Expenses.
1.21 OVER ADVANCE. The term "Over Advance" shall have the meaning set
forth in Section 2.1 of this Agreement.
1.22 OVERLINE. The term "Overline" shall have the meaning set forth in
section 3.1 of this Agreement.
1.23 PRIME RATE. The term "Prime Rate" means the variable rate of
interest, per annum, most recently announced by Bank at its headquarters office
in San Francisco, California as its "prime rate", with the understanding that
Bank's "prime rate" is only one of Bank's base rates and serves as a basis upon
which effective rates of interest are calculated for loans making reference
thereto and may not be the lowest of Bank's base rates.
1.24 PROCEEDS. The term "Proceeds" means whatever is received upon the
sale, lease, exchange, collection or other disposition of Collateral or
proceeds, including, without limitation, proceeds of insurance covering
Collateral, tax refunds, and any and all Accounts, General Intangibles,
Negotiable Collateral, Inventory, Equipment, money, deposit accounts, goods, or
other tangible and intangible property of Borrower resulting from the sale or
other disposition of the Collateral, and the proceeds thereof.
1.25 RATE. The term "Rate" shall have the meaning set forth in Section
2.3 of this Agreement.
1.26 TANGIBLE NET WORTH. The term "Tangible Net Worth" means net worth
as determined in accordance with generally accepted accounting principles
consistently applied, increased by debt subordinated to Bank and decreased by
the following: patents, licenses, goodwill, capitalized research and
development costs, subscription lists, organization expenses and monies due from
affiliates (including officers, directors, shareholders, parents, partners,
joint venturers, subsidiaries and commonly held companies). For the purpose of
this Agreement, the term "debt subordinated to Bank" shall mean any loans,
debts, or other obligations ("Third Party Debt") owing by Borrower to any third
parties (including, without limitation, shareholders and affiliates of Borrower)
and/or any security interest ("Third Party Security Interests") in any of
Borrower's assets (including, without limitation, the Collateral) in favor of
third parties (including, without limitation, shareholder's or affiliates of
Borrower), which has or have been subordinated on terms and conditions
acceptable to Bank in its sole and absolute discretion. With respect to Third
Party Debt, such subordination shall include (at a minimum) forbearance in
payment of any principal, interest or any other amount owing by Borrower to such
third party on such Third Party Debt until all of Borrower's Obligations to Bank
have been satisfied. With respect to Third Party Security Interests, such
subordination shall include (at a minimum) an agreement by the third party not
to exercise any rights or remedies in connection with the property encumbered or
hypothecated by such Third Party Security Agreement until all of Borrower's
Obligations to Bank have been satisfied.
1.27 ACCOUNTING TERMS. All accounting terms and computations shall be
based upon generally accepted accounting principles consistently applied.
2. LOANS AND TERMS OF PAYMENT
2.1 REVOLVING LOANS. Upon the request of Borrower, made at any time and
from time to time during the term hereof, and so long as no Event of Default has
occurred, Bank shall lend to Borrower an amount equal to the Borrowing Base;
provided, however, that in no event shall Bank be obligated to make advances to
Borrower under this Section 2.1 whenever the Daily Balance, when added to the
total of Borrower's Obligations in respect of all letters of credit outstanding
under Section 3.1 of this Agreement and the amount deemed an advance against the
Credit under Section 14.2, exceeds, at any time, either the Borrowing Base or
the sum of Twelve Million Dollars ($12,000,000).
All loans made pursuant to this Section 2.1 shall be added to and
deemed part of the Credit when made. If, at any time and for any reason, the
Daily Balance exceeds the amount of the loans and advances for which Borrower is
eligible based upon the above limitations, or if the advances made pursuant to
any rider to this Agreement exceed the percentage or dollar limitations
contained in such rider (an "Over Advance"), then Borrower shall immediately pay
to Bank, in cash, the amount of such Over Advance.
2.2 NOTICE AND METHOD OF BORROWING. Bank is hereby authorized to make
the loans and the extensions of credit provided for in this Agreement based upon
telephonic or other instructions received from anyone purporting to be an
authorized representative of Borrower or, at the discretion of Bank, if said
loans are necessary to satisfy any Obligation of Borrower to Bank. Bank shall
have no duty to make inquiry or verify the authority of any such party and
Borrower shall hold Bank harmless from any damages, claims, or liability by
reason of Bank's honor of, or failure to honor, any such instructions. Bank
reserves the right to withhold advancing any loan and/or issuing any letter of
credit under this Agreement pending: (a) presentation by Borrower to Bank of a
certificate of borrowing base, in form and content satisfactory to Bank, and the
verification of the contents thereof by Bank; and (b) receipt of such additional
information as Bank may, from time to time, request. Bank reserves the right to
recompute the Eligible Accounts, and any other elements of the base upon which
Borrower computes the loans and letters of credit to which Borrower is eligible,
based upon such information and verification as Bank, in its discretion, deems
relevant.
2.3 REVOLVING LOANS INTEREST RATE. Except as hereinbelow provided, all
Credit shall bear interest, on the Daily Balance owing, at a per annum rate one-
half of one percent (0.50%) above the Prime Rate (the "Rate"). The Prime Rate
as of the date of this Agreement is _____ percent (______%) per annum. In the
event that the Prime Rate announced is, from time to time hereafter, changed,
adjustment in the rate of interest payable by
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Borrower shall be made on the effective date of the change in the Prime Rate.
The rate of interest, as adjusted, shall apply to all Credit until the Prime
Rate is adjusted again. All interest chargeable under this Agreement on a per
annum basis shall be computed on a basis of a 360-day year for actual days
elapsed.
Interest payable by Borrower under this Section 2.3 shall be due and
payable on the fifth (5th) day of each calendar month during the term of this
Agreement, and Bank may, at its option, elect to treat any due but unpaid
interest and Bank Expenses as advances under the Credit, and all such advances
shall bear interest on the daily balance thereof, at a per annum rate applicable
to the Credit under the terms of this Agreement. The receipt of any check or
other item of payment by Bank shall not be considered a payment until such check
or other item of payment is honored when presented for payment, in which event,
said check or other item of payment shall be deemed to have been paid to Bank in
accordance with Bank's rules and regulations relating to credits to deposit
accounts or, in Bank's discretion, two (2) calendar days after the date Bank
actually receives possession of such check or other item of payment.
2.4 OVER ADVANCE INTEREST RATE. Without affecting Borrower's
obligations to repay immediately any Over Advance in accordance with Section 2.1
hereof, all Over Advances shall bear additional interest on the amount thereof
at the rate of two percent (2%) per month payable from the date incurred and for
each month thereafter, until repaid in full.
2.5 DEFAULT INTEREST RATE. Notwithstanding anything to the contrary
contained in Article 2 of this Agreement, the Credit shall bear interest, from
and after any Event of Default and without constituting a waiver of any such
Event of Default, on the Daily Balance owing, at a per annum rate five (5)
percentage points above the Rate.
2.6 ACCOUNT STATED. Bank shall render monthly statement of the Credit
owing by Borrower to Bank, including statements of all principal, interest and
Bank Expenses owing, and such statement shall be conclusively presumed to be
correct and accurate and constitute an account stated between Borrower and Bank
unless, within thirty (30) days after receipt thereof by Borrower, Borrower
shall deliver to Bank, by registered or certified mail, at Bank's place of
business indicated above, written objection thereto specifying the error or
errors, if any, contained in any such statement.
2.7 FEES. On or before the execution of this Agreement, Borrower shall
pay to Bank an fee in an amount equal to Twenty Thousand Dollars ($20,000),
which fee shall represent an unconditional and nonrefundable payment to Bank in
consideration or Bank's agreement to enter into this Agreement.
3. LETTER OF CREDIT FACILITY
3.1 REVOLVING LETTERS OF CREDIT. Upon the request of Borrower, made at
any time and from time to time during the term hereof, and so long as no Event
of Default has occurred, Bank, on a revolving basis, will, subject to the
limitations set forth below, issue commercial letters of credit for Borrower's
account to facilitate the importation of merchandise by Borrower for resale by
Borrower and issue standby letters of credit or Borrower's account for purposes
acceptable to Bank; provided, however, that in no event shall Bank be obligated
to issue any letters of credit under this Section 3.1 whenever the total of
Borrower's Obligations in respect to all letters of credit outstanding under
this Section 3.1, when added to the Daily Balance and the amount deemed an
advance against the Credit under Section 14.2, exceeds, at any time, the
Borrowing Base; provided, further, however that the aggregate total of
Borrower's Obligations in respect to all commercial letters of credit and all
standby letters of credit outstanding may not exceed at any one time Ten Million
Dollars ($10,000,000.00).
If, any time and for any reason, the total of Borrower's Obligations
in respect to all letters of credit outstanding under this Section 3.1, when
added to the Daily Balance, exceed the Borrowing Base (an "Overline") or if, at
any time and for any reason, the aggregate total of Borrower's Obligations in
respect to all commercial letters of credit and all standby letters of credit
outstanding hereunder exceeds the amount for which Borrower is eligible under
this Section 3.1 (a "L/C Overline), then Borrower shall immediately pay to
Bank, in cash, the amount of such Overline or L/C Overline. Bank may, in its
sole discretion, elect to treat a L/C Overline as an advance under the Credit.
3.2 ADVANCE RE: LETTERS OF CREDIT. All amounts actually paid or
advanced by Bank to or for the benefit of Borrower under or in respect to
letters of credit issued under Section 3.1 above shall, when made, constitute
advances under the Credit and shall be payable and bear interest as provided in
this Agreement, and shall otherwise be subject to all terms and conditions
hereof.
3.3 APPLICATION AND AGREEMENT RE: COMMERCIAL LETTERS OF CREDIT. Each
commercial letter of credit issued under Section 3.1 above shall be issued
pursuant to the terms and conditions hereof and of a Bank standard form
Application For Commercial Letter of Credit and Agreement (Commercial Letter of
Credit) executed by Borrower and shall:
(a) Expire on or before one hundred eighty (180) days after the
date such letter of credit is issued;
(b) Require drafts payable at sight; and
(c) Be otherwise in form and substance and in favor of
beneficiaries satisfactory to Bank.
Borrower shall pay Bank issuance fees, negotiation fees and such
other fees at the times and in the amounts Bank advises Borrower from time to
time as being applicable to commercial letters of credit. In the event of any
inconsistency between the terms of this Agreement and the terms of such
Application For Commercial Letter of Credit and Agreement (Commercial Letter of
Credit), the terms of such Application For Commercial Letter of Credit and
Agreement (Commercial Letter of Credit), the terms of such Application For
Commercial Letter of Credit) shall control.
3.4 APPLICATION AND AGREEMENT RE: STANDBY LETTERS OF CREDIT. Each
standby letter of credit issued under Section 3.1 above shall be issued pursuant
to the terms and conditions hereof and of a Bank standard form Application For
Standby Letter or Credit and Agreement (Standby Letter of Credit) executed by
Borrower and shall:
(a) Expire on or before three hundred sixty (360) days after the
date such letter of credit is issued; and
(b) Be otherwise in form and substance and in favor of
beneficiaries satisfactory to Bank.
Borrower shall pay to Bank issuance fees and other fees at the times
and in the amounts Bank advises Borrower from time to time as being applicable
to standby letters of credit. In the event of any inconsistency between the
terms of this Agreement and the terms of such Application For Standby Letter of
Credit and Agreement (Standby Letter of Credit), the terms of such Application
For Standby Letter of Credit and Agreement (Standby Letter of Credit) shall
control.
3.5 OBLIGATIONS RE: LETTERS OF CREDIT. All advances made, letters of
credit issued and other financial accommodations extended by Bank to or for the
account or benefit of Borrower under Article 3 of this Agreement shall be added
to and deemed part of the Obligations when made, issued, created and/or
extended.
4. TERM
4.1 TERM AND TERMINATION. This Agreement shall commence on the date
hereof and shall remain in full force and effect until November 15, 1996 and
shall continue on a month-to-month basis thereafter until terminated by either
party. Any termination under this section shall be effectuated by the mailing
of a registered or certified letter of notice to the other party to its address
set forth herein. Notwithstanding the foregoing, upon the occurrence of an
Event of Default, Bank may terminate its obligations under this Agreement
without notice.
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On the date of termination, all Obligations owed by Borrower to Bank
shall become immediately due and payable without notice or demand and shall be
repaid to Bank in cash or by a wire transfer of immediately available funds.
Notwithstanding termination, until all Obligations have been fully repaid and
performed, Bank shall retain its security interest in all existing Collateral
and Collateral arising thereafter, and Borrower shall continue to perform all
Obligations.
4.2 TERMINATION OF SECURITY INTEREST. After termination and when Bank
has received payment and performance in full of all Obligations, and upon the
execution by Borrower and delivery to Bank of a general release in favor of
Bank, Bank shall execute a termination of all security agreements and security
interests given by Borrower to Bank.
5. CREATION OF SECURITY INTEREST
5.1 GRANT OF SECURITY INTEREST. Borrower hereby grants to Bank a
continuing security interest in the Collateral in order to secure prompt
repayment and performance of all Obligations. Bank's security interest in the
Collateral shall attach to the Collateral without further act on the part of
Bank or Borrower. In the event that any Collateral is evidenced by or consists
of a letter of credit, advice of credit, instrument, money, document, negotiable
document, chattel paper or any similar property (collectively the "Negotiable
Collateral"), Borrower shall, immediately upon receipt thereof, endorse and
assign such Negotiable Collateral over to Bank, and deliver actual physical
possession of the Negotiable Collateral to Bank.
5.2 SECURITY DOCUMENT: ATTORNEY-IN-FACT. Borrower shall execute and
deliver, or cause to be executed and delivered, to Bank, concurrent with
Borrower's execution of this Agreement, and at any time or times hereafter at
the request of Bank, all financing statements, continuation financing
statements, fixture filings, landlord waivers, security agreements, chattel
mortgages, assignments, deeds of trust, assignments of leases, endorsements of
certificates of title, affidavits, reports, notices, schedules of Accounts,
schedules of Inventory, and letters of authority and all other documents that
Bank may reasonably request, in form satisfactory to Bank, to perfect and
maintain perfected Bank's security interests in the Collateral and in order to
fully consummate all of the transactions contemplated under this Agreement.
Borrower hereby irrevocably makes, constitutes and appoints Bank (and any of
Bank's officers, employees or agents designated by Bank to act on Bank's behalf)
as Borrower's true and lawful attorney with power to sign the name of Borrower
on any of the above-described documents or on any other similar documents which
need to be executed, recorded, and/or filed in order to perfect or continue
perfected Bank's security interest in the Collateral. In addition, following
the occurrence of an Event of Default, Borrower hereby appoints Bank (and any of
Bank's officers, employees, or agents designated by Bank) as Borrower's
attorney, with power: to endorse Borrower's name on any checks, notes,
acceptances, money orders, drafts or other forms of payment or security that may
come into Bank's possession; to sign Borrower's name on any invoice or bill of
lading relating to any Accounts, on drafts against account debtors, on schedules
and assignments of Accounts, on verifications of Accounts, and on notices to
account debtors; to establish a lock box arrangement and/or to notify the post
office authorities to change the address for delivery of Borrower's mail to an
address designated by Bank, to receive and open all mail addressed to Borrower,
and to retain all mail relating to the Collateral and forward all other mail to
Borrower; to send, whether in writing or by telephone, requests for verification
of Accounts; and to do all things necessary to carry out this Agreement.
Borrower ratifies and approves all acts of the attorney, and neither Bank nor
its attorney will be liable for any acts or omissions or for any error of
judgment or mistake of fact or law made in good faith. The appointment of Bank
as Borrower's attorney, and each and every one of Bank's rights and powers,
being coupled with an interest, are irrevocable so long as any Obligations
remain unpaid or unperformed.
To protect or perfect any security interest granted to Bank
hereunder, Bank may, in its sole discretion, discharge any lien or encumbrance,
or bond the same, pay any insurance, fees or charges, maintain guards,
warehousemen or any personnel to protect the Collateral, pay any service bureau
or obtain any records, and all costs for the same shall be Bank Expenses.
6. CONDITIONS PRECEDENT
As conditions precedent to the making of the loans and the extension of the
financial accommodations hereunder, Borrower shall execute and deliver, or cause
to be executed and delivered, to Bank, in form and substance satisfactory to
Bank and its counsel, each of the following:
6.1 AGREEMENT. This Agreement, the Fee, and all supplemental security
agreements, chattel mortgages, riders and other documents required by Bank;
6.2 FINANCING STATEMENT. Financing statements (Form UCC-1) in form
acceptable for filing and recording with the appropriate governmental
authorities;
6.3 RESOLUTIONS. If Borrower is a corporation, certified extracts from
the minutes of the meetings of Borrower's board of directors, authorizing the
borrowings and the granting of the security interests provided for herein and
authorizing specific officers to execute and deliver the agreements provided for
herein;
6.4 CERTIFICATES. If Borrower is a corporation, a certificate of good
standing showing that Borrower is in good standing under the laws of the state
of its incorporation, and certificates indicating that Borrower has qualified to
transact business and is in good standing in any other state in which Borrower
conducts business;
6.5 PARTNERSHIP AGREEMENT. If Borrower is a partnership, then a copy of
Borrower's partnership agreement certified by each general partner of Borrower;
6.6 SEARCH RESULTS. UCC, tax lien, litigation, judgment and other
searches, title reports, fictitious business name statement filings, insurance
certificates, notices or other similar documents which Bank may require and in
such form as Bank may require, in order to reflect Bank's first priority
security interest in the Collateral and in order to fully consummate all of the
transactions contemplated under this Agreement;
6.7 WAIVERS. Waivers executed by landlords and mortgagees of any real
property on which the Collateral is located;
6.8 OFFICERS' WARRANTIES AND REPRESENTATIONS. An executed form
warranties and representations of officers; and
6.9 INSURANCE. Evidence satisfactory to Bank that Borrower has obtained
insurance policies or binders, in such amounts as may be acceptable to Bank,
respecting the tangible assets of Borrower which are to serve as Collateral and
naming Bank as a loss payee on a 438-BFU endorsement and/or additional insured
(at Bank's discretion). At Bank's option Borrower shall also provide evidence
of sufficient insurance coverage respecting worker's compensation liability,
products liability claims and other liability claims and naming Bank as an
additional insured in connection therewith.
6.10 AUDITORS CERTIFICATE. Letters, certifications, approvals or other
writings from Borrower's accountants authorizing Bank to rely (and acknowledging
the Bank's reliance) on any audits, balance sheets, profit and loss statements,
income statements, and other financial statements and reports prepared by such
accountants and delivered to Bank by Borrower, such accountant, or any other
third party prior to the date of full execution of this Agreement.
6.11 INITIAL AUDIT. An audit report (either by Bank's in-house auditors
or outside consultants) confirming the location, quantity, quality, and value of
the Collateral.
7. MANAGEMENT AND STATUS 0F COLLATERAL
7.1 MANAGEMENT OF ACCOUNTS.
(a) ASSIGNMENTS OF ACCOUNTS. From time to time, and at Bank's
request, Borrower shall provide Bank with schedules describing all Accounts
created or acquired by Borrower and shall execute and deliver written
assignments of such Accounts to Bank, whether or not Bank makes advances against
such Accounts; provided, however, that Borrower's failure to execute and deliver
such schedules and/or assignments shall not impair or limit Bank's security
interest and other rights in and to the Accounts. At Bank's request, Borrower
shall furnish Bank with copies of Borrower's sales journals or invoices, and, if
requested by Bank, copies of customers' purchase orders, or the equivalent,
delivery receipts, shipping instructions, bills of lading and other evidence of
shipping arrangements, and Borrower
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warrants the genuineness thereof. Absent a request, Borrower shall maintain all
such documents as custodian for Bank. Bank shall have the right, now and at all
times hereafter, during Borrower's usual business hours, or at the regular
business hours of any third party in possession of the Borrower's Books, to
inspect and examine the Borrower's Books and to make inquires of the Borrower's
account debtors concerning the status of their account and the quality of the
goods and services provided by Borrower to such account debtors, and Borrower
agrees to reimburse Bank for its reasonable costs and expenses in so doing.
(b) COLLECTION OF ACCOUNTS. At any time (with or without the
occurrence of an Event of Default), Bank or Bank's designee may notify customers
or account debtors of Borrower that the Accounts have been assigned to Bank and
that Bank has a security interest therein. Following the occurrence of an Event
of Default, Bank (or its designee) may also notify all account debtors to pay
their Accounts directly to Bank, may take whatever other steps Bank deems
necessary to collect the Accounts directly, may exercise any other remedies
provided or authorized by this Agreement, and may charge the collection costs
and expenses to Borrower as part of the Obligations. Unless and until an Event
of Default occurs hereunder, Borrower may collect all Accounts directly. Any
Accounts directly collected by Borrower shall be received in trust by Borrower
as Bank's trustee and, immediately upon the occurrence of any Event of Default,
Borrower shall deliver said payments to Bank in their original form as received
from the account debtor and, if any sale of Collateral is made for cash,
Borrower shall concurrently deliver such cash to Bank. Bank shall be entitled,
in its discretion, to apply all payments and collections to the Obligations.
(c) WARRANTIES AND DISPUTES RE: ACCOUNTS. If any warranty, promise
or covenant is breached as to any account, or if any part of the amount of the
accounts owing by an account debtor shall be other than Eligible Accounts, then
Bank may deem ineligible any or all accounts owing by that account debtor, and
reduce the amount of Eligible Accounts by the amount thereof. Bank shall retain
its security interest in all Accounts, whether they are Eligible Accounts or
not, until all Obligations have been fully repaid and performed.
(d) RETURNS AND ALLOWANCES. Returns and allowances, if any, as
between Borrower and Borrower's customers, will be on the same basis and in
accordance with the usual customary practices of Borrower, as they exist at this
time. Immediately upon written request by Bank, and continuing thereafter until
such time as Bank may indicate, (a) any goods which are returned by an account
debtor, or any account debtor which Bank may indicate, or which is otherwise
recovered by Borrower from such account debtor shall be set aside and marked
with Bank's name, and Bank shall retain a security interest therein, (b)
Borrower shall promptly notify Bank of all prior returns and recoveries by such
account debtor to the extent indicated by Bank, and all such returns and
recoveries thereafter, (c) Borrower shall promptly deliver any such returned or
recovered goods to Bank to the extent Bank shall indicate, and (d) Borrower
shall promptly notify Bank of any dispute or claim which is then pending and
shall not settle or adjust any such dispute or claim without Bank's prior
written approval. After an Event of Default, no discount, credit or allowance
shall be granted by Borrower to any account debtor and no return of merchandise
shall be accepted by Borrower without Bank's written consent. Bank may, after
an Event of Default, settle or adjust disputes and claims directly with account
debtors for amounts and upon terms which Bank considers advisable and, in such
cases, Bank will credit Borrower's account with only the net amounts received by
Bank in payment of such disputed Accounts after deducting all Bank Expenses
incurred or expanded in connection therewith.
7.2 MANAGEMENT OF EQUIPMENT.
(a) EQUIPMENT RECORDS. Borrower shall maintain a comprehensive and
up-to-date list of all Equipment, showing the date of purchase, any identifying
descriptions and numbers, and records of maintenance. Borrower shall deliver a
copy of such list to Bank upon execution of this Agreement, and at such time or
times thereafter as Bank may request.
(b) CONDITION OF EQUIPMENT. Borrower shall keep and maintain the
Equipment in good operating condition and repair and make all necessary
replacements thereto so that the value and operating efficiency thereof shall at
all times be maintained and preserved. Borrower shall not permit any items of
Equipment to become a fixture to real estate or an occasion to other property,
and the Equipment is now and shall at all times remain and be personal property.
(c) CERTIFICATE OF TITLE. Upon Bank's request, Borrower shall
immediately deliver to Bank, properly endorsed, any and all evidences or
ownership, certificates of title or applications for titles to any or all items
of Equipment.
(d) INSPECTION OF EQUIPMENT. Bank shall have the right, now and at
all times hereafter, during Borrower's usual business hours, or at the regular
business hours of any third party in possession of Equipment, to inspect and
examine the Equipment and to check and test the same as to quality, quantity,
value and condition, and Borrower agrees to reimburse Bank for its reasonable
costs and expense in so doing; provided, however, that prior to the occurrence
of an Event of Default Borrower shall not be obligated to reimburse for more
than one (1) such inspection and examination during any twelve (12) month
period.
7.3 MANAGEMENT OF INVENTORY.
(a) INVENTORY RECORDS. Borrower does now keep and hereafter at all
times shall keep correct and accurate records itemizing and describing the kind,
type, quality and quantity of the Inventory, Borrower's cost therefor and
selling price thereof, and the daily withdrawals therefrom and additions
thereto, all of which records shall be available upon demand to any of Bank's
officers, agents and employees for inspection and copying.
(b) INVENTORY DESIGNATIONS. Borrower, immediately upon demand by
Bank therefor, shall now and from time to time hereafter, at such intervals as
are requested by Bank, deliver to Bank designations of Inventory specifying
Borrower's cost of Inventory, the wholesale market value thereof and such other
matters and information relating to the Inventory as Bank may request.
(c) STORAGE OF INVENTORY. Inventory is not now and shall not at
any time or times hereafter be located or stored with a bailee, warehouseman or
other third party without Bank's prior written consent, and, in such event,
Borrower will concurrently therewith cause any such bailee, warehouseman or
other third party to issue and deliver to Bank, in a form acceptable to Bank,
warehouse receipts in Bank's name evidencing the storage of Inventory or other
evidence of Bank's prior rights in the Inventory. In any event, Borrower shall
instruct any third party to hold all such Inventory for Bank's account subject
to Bank's security interest and its instructions.
(d) DELIVERY OF INVENTORY TO BANK. Upon the occurrence of an Event
of Default, Borrower will, at Bank's request and at Borrower's expense, pledge,
assemble and deliver such Inventory to Bank or to a third party as Bank's
bailee; or hold the same in trust for Bank's account; or store the same in a
warehouse in Bank's name; or deliver to Bank documents of title representing,
said Inventory or evidencing Bank's security interest in some other manner
acceptable to Bank.
(e) INVENTORY INSPECTIONS. Bank shall have the right, at all
times, during Borrower's normal business hours, or at the regular business hours
of any third party having custody of or control over Inventory, to inspect and
examine the Inventory and to check and test the same as to quality, quantity,
value and condition, and Borrower agrees to reimburse Bank for its reasonable
costs and expenses in so doing; provided, however, that prior to the occurrence
of an Event of Default Borrower shall be obligated to reimburse for more than
one (1) such inspection and examination during any twelve (12) month period.
(f) SALES IN ORDINARY COURSE. Until the occurrence of an Event of
Default, Borrower may, subject to the provisions hereof and consistent herewith,
sell the Inventory, but only in the ordinary course of Borrower's business and
for full and fair consideration. A sale of Inventory in Borrower's ordinary
course of business does not include an exchange or a transfer in partial or
total satisfaction of a debt owing by Borrower. After an Event of Default,
Borrower shall not sell any Inventory without Bank's written consent.
7.4 BORROWER'S BOOKS. Bank shall have the right, at all times, during
Borrower's normal business hours, or at the regular business hours of any third
party having custody of or control over Borrower's Books, to inspect, examine,
review and audit Borrower's Books and to and to make summaries and photocopies
thereof. Borrower agrees to reimburse Bank for its reasonable costs and
expenses in conducting such review, examination, inspection and audit and in
making such summaries and photocopies.
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8. WARRANTIES AND REPRESENTATIONS
In order to induce Bank to enter into this Agreement and to make the loans
and/or issue the letters of credit contemplated hereby, Borrower warrants,
represents and agrees that, until all Obligations are fully paid and performed:
8.1 TITLE TO PROPERTIES. On or about September 28, 1995, Borrower
merged with ADVANCED FIBRE COMMUNICATIONS, INC., a California corporation,
succeeded to all rights and property of ADVANCED FIBRE COMMUNICATIONS, INC., a
California corporation, and assumed and became subject to all debts and
liabilities of ADVANCED FIBRE COMMUNICATIONS, INC., a California corporation, by
operation of law the same as if Borrower had incurred them directly. By
executing and delivering this Agreement to Bank, Borrower hereby confirms,
ratifies and acknowledges that it assumes and is directly liable for all
Obligations owing by ADVANCED FIBRE COMMUNICATIONS, INC., a California
corporation, to Bank including (without limitation) the Obligations. Borrower
has and at all times will have good, marketable and indefeasible title to the
Collateral; the Collateral is and at all times shall remain free and clear of
all liens, claims, encumbrances, and purchase money or other security interests
(except as held by Bank or as may be consented to, in writing, by Bank), and the
Collateral is and shall, at all times, remain of good and of merchantable
quality, free from defects.
8.2 VALIDITY OF ACCOUNTS. The accounts are and will, at all times
pertinent hereto, be bona fide existing obligations created by the sale or lease
of goods or the rendition of services to account debtors in the ordinary course
of Borrower's business, and are and will be unconditionally owed to Borrower
without rights of return or cancellation. At the time each account is generated
and/or assigned to Bank: (a) all accounts will be due and payable in accordance
with the terms set forth in Section 1.12 of this Agreement, or on such other
terms approved in writing by Bank in advance of the creation of accounts, and
such terms shall be expressly set forth on the face of all invoices; (b) all
property giving rise to accounts shall have been delivered to the account debtor
or to the agent of the account debtor for immediate shipment to and
unconditional acceptance by the account debtor; (c) no account will be past due;
(d) all accounts shall be unconditionally owed to Borrower without defense,
offset or counterclaim dispute; and (e) Borrower shall have received no notice
of actual or imminent Insolvency Proceeding of any account debtor.
8.3 PLACE OF BUSINESS. Borrower's sole place of business or chief
executive office or residence is located at the address set forth in Section 1.5
hereinabove, and Borrower covenants and agrees that Borrower will not, during
the term of this Agreement, without prior written notification to Bank, relocate
said sole place of business or chief executive office or residence.
8.4 LEGAL STATUS. Borrower, if incorporated, is and shall at all times
hereafter be duly organized and existing and in good standing under the laws of
the state of its corporation, and qualified or licensed to do business, and in
good standing as a foreign corporation, if applicable, in all jurisdictions in
which such qualification or licensing is required.
8.5 AUTHORIZATION AND VALIDITY. This Agreement and each other document,
contract and instrument required by or at any time delivered to Bank in
connection with this Agreement have been duly authorized, and upon their
execution and delivery in accordance with the provisions hereof will constitute
legal, valid and binding agreements and obligations of Borrower or the party
which executes the same, enforceable in accordance with their respective terms.
8.6 NO VIOLATION. The execution, delivery and performance by Borrower
of this Agreement shall not: (a) violate any law or regulation, (b) constitute a
breach of any provision contained in the Articles of Incorporation, Bylaws or
other organization papers of Borrower, or (c) constitute an event of default
under any agreement to which Borrower is now or hereafter becomes a party or by
which Borrower may be bound.
8.7 PAYMENT OF TAXES. All assessments and taxes, whether real, personal
or otherwise, due or payable by, or imposed, levied or assessed against
Borrower, or any of Borrower's property, have been paid in full before
delinquency.
8.8 NO LITIGATION. Except for that certain litigation entitled DSC
COMMUNICATIONS CORPORATION, ET AL. VS. NEGRIN, ET AL. Federal District Court
docket number 93CV126 and EQUITY - LINKED INVESTORS LP, ET AL. VS. ADVANCED
FIBRE COMMUNICATIONS, INC., ET AL., there are not presently, nor will there
be at any time during the term of this Agreement, any actions or proceedings
pending by or against Borrower, any guarantor of the Obligations (or any
portion thereof) or any general partner of Borrower before any court or
administrative agency, and Borrower has no knowledge of any pending,
threatened or imminent litigation, governmental investigations or claims,
complaints, actions or prosecutions involving Borrower, any such guarantor or
general partner, except for ongoing collection matters and except as
heretofore disclosed in writing to Bank. If any of the foregoing do arise
during the term of this Agreement, Borrower shall immediately notify Bank in
writing.
8.9 FINANCIAL STATEMENTS AND CONDITION. All financial statements and
information relating to Borrower which have been or may hereafter be delivered
by Borrower to Bank are true and correct and have been prepared in accordance
with generally accepted accounting principles consistently applied, and there
has been no material adverse change in the financial condition of Borrower since
the submission of such financial information to Bank.
8.10 PERMITS, FRANCHISES. Borrower possesses, and will hereafter
possess, all permits, memberships, franchises, contracts and licenses required
and all trademark rights, trade names, trade name rights, patents, patent rights
and fictitious name rights necessary to enable Borrower to conduct the business
in which Borrower is now engaged without conflict with the rights of others.
8.11 ERISA WARRANTY. Borrower has not withdrawn from (and no
termination, partial termination or other event has occurred with respect to)
any deferred compensation plan maintained for the benefit of Borrower's
employees, and has not withdrawn from any multi-employer plan described in
Section 4001(a)(3) of ERISA (as defined in Section 8.9 of this Agreement).
8.12 ENVIRONMENTAL MATTERS. Borrower is now and at all times hereafter
shall remain in compliance with all federal, state and municipal laws,
regulations and ordinances relating to the handling, treatment and disposal of
toxic substances, wastes and hazardous material and shall maintain all necessary
authorizations and permits. None of the operations of Borrower is now nor shall
hereafter be the subject of any federal, state or municipal investigation
evaluating whether any remedial action is needed to respond to a release of any
toxic or hazardous waste or substance into the environment.
8.13 SOLVENCY. Borrower is now and shall be at all times hereafter
solvent and able to pay Borrower's debts (including trade debts) as they mature.
8.14 LIEN PRIORITY. The liens and security interests of Bank in the
Collateral are and shall remain first priority, except as expressly agreed to,
in writing, by Bank.
8.15 WARRANTIES AND REPRESENTATIONS CUMULATIVE. Each warranty,
representation and agreement contained in this Agreement shall be automatically
deemed repeated with each loan and/or advance and shall be true, accurate and
correct at each such time and shall be conclusively presumed to have been relied
on by Bank regardless of any investigation made or information possessed by
Bank. The warranties, representations and agreements set forth herein shall be
cumulative and in addition to any and all other warranties, representations and
agreements which Borrower shall give, or cause to be given, to Bank, either now
or hereafter.
9. NEGATIVE COVENANTS
Borrower will not, without Bank's prior written consent, during the term
hereof and so long as any Obligation remains unpaid or unperformed:
9.1 CHANGE IN IDENTITY. Change Borrower's name, business structure, or
identity, or add any new fictitious name, or relocate Borrower's sole place of
business or chief executive office or residence.
9.2 ACQUISITIONS AND MERGERS. Acquire, merge or consolidate with or
into any other business organization or enter into any partnership, joint
venture or other combination.
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9.3 ORDINARY COURSE OF BUSINESS. Enter into any transaction not in the
usual course of Borrower's business.
9.4 CHANGE IN FINANCIAL STRUCTURE. Make any change in Borrower's
financial structure or in any of Borrower's business objectives, purposes, or
operations.
9.5 SUSPENSION OF BUSINESS. Suspend or go out of business.
9.6 DIVIDENDS AND DISTRIBUTIONS. If Borrower is a corporation, make any
distribution or declare or pay any dividends (in cash or stock) on, or purchase,
acquire, redeem or retire any of its capital stock, of any class, whether now or
hereafter outstanding.
9.7 LIENS AND ENCUMBRANCES. Grant a security interest in or permit a
lien, claim or encumbrance upon all or any portion of Borrower's assets or the
Collateral, except in favor of Bank.
9.8 INVESTMENT IN SECURITIES. Make any investment in securities, other
than the securities of the United States of America.
9.9 ERISA/COVENANT. Withdraw from participation in, permit the
termination or partial termination of, or permit the occurrence of any other
event with respect to any deferred compensation plan maintained for the
benefit of Borrower's employees under circumstances that could result in
liability to the Pension Benefit Guaranty Corporation, or any of its
successors or assigns, or to any entity which provides funds for such
deferred compensation plan, or withdraw from any multi-employer plan
described in Section 4001(a)(3) of the Employee Retirement Income Security
Act ("ERISA") of 1974, as amended, which may cover Borrower's employees.
9.10 RELOCATION AND SALE OF ASSETS. Other than in the ordinary course of
Borrower's business, sell, lease, or otherwise dispose of, move, relocate, or
transfer, whether by sale or otherwise, any of Borrower's assets or the
Collateral.
9.11 GUARANTEES. Guaranty or otherwise become in any way liable with
respect to the obligations of any third party, except by endorsement of
instruments or items of payment for deposit to the general account of Borrower
or which are transmitted or turned over to Bank.
9.12 INDEBTEDNESS. Incur any debts outside the ordinary course of
Borrower's business except for renewals or extensions of existing debts.
9.13 LOANS. Make any advance or loan to any person or entity.
9.14 REPURCHASE OF STOCK. Repurchase or otherwise reacquire any
outstanding capital stock of Borrower.
10. AFFIRMATIVE COVENANTS
Borrower hereby covenants and agrees that during the term hereof and until
all Obligations are fully paid and performed:
10.1 LOCATION OF EQUIPMENT/INVENTORY. Borrower shall keep the Equipment
and Inventory only at 1440, 1445, and 1455 McDowell Boulevard, Petaluma,
California and, upon request by Bank, will provide Bank with the name and
address of the landlord and/or mortgagee of said premises.
10.2 VALUE OF COLLATERAL. Bank shall not in any way or manner be liable
or responsible for: (a) the safekeeping of the Collateral; (b) any loss or
damage to the Collateral or occurring or arising in any manner or fashion
from any cause; (c) any diminution in the value of the Collateral; or (d) any
act or default by any carrier, warehouseman, bailee, forwarding agency or any
other person or entity whomsoever. All risk of loss, damage, destruction or
lose of value of the Collateral shall be borne by Borrower, whether or not
Borrower shall be in possession or control of the Collateral.
10.3 NOTICE OF LITIGATION, ENVIRONMENTAL INVESTIGATIONS. Promptly after
the commencement thereof, Borrower shall notify Bank in writing of: (a) any
litigation pending or threatened against Borrower, any guarantor of the
Obligations (or any portion thereof) or any general partner of Borrower, and (b)
any federal, state or municipal investigation evaluating whether any remedial
action is needed by Borrower to respond to a release of any toxic or hazardous
waste or substance into the environment.
10.4 TAXES. Borrower shall make due and timely payment or deposit of all
federal, state and local taxes, assessments or contributions required of
Borrower by law, and will execute and deliver to Bank, on demand, appropriate
certificates attesting to the payment or deposit thereof. Borrower will make
timely payment or deposit of all F.I.C.A. payments and withholding taxes
required of Borrower by applicable laws, and will, upon request, furnish Bank
with proof satisfactory to Bank that Borrower has made such payments or
deposits. If Borrower falls to pay any such assessment, tax, contribution, or
make such deposit, or furnish the required proof, Bank may, in Bank's sole and
absolute discretion and without notice to Borrower: (a) make payment of the same
or any part thereof, or (b) set up such reserves against the Credit, or
otherwise reduce the loans and advances for which Borrower is eligible under
this Agreement, as Bank deems necessary to satisfy the liability therefor, or
both. Bank may conclusively rely on the usual statements of the amount owing or
other official statements issued by the appropriate governmental agency. Each
amount paid or deposited by Bank shall constitute Bank Expenses and an advance
to Borrower. Nothing herein contained shall preclude Borrower from contesting,
diligently, in good faith, and by appropriate proceedings, the imposition of any
assessments and taxes and to withhold payment of such contested amounts pending
the resolution of such proceedings.
10.5 COMPLIANCE. Borrower shall maintain all licenses, permits,
governmental approvals, rights, privileges and franchises necessary for the
conduct of Borrower's business; conduct Borrower's business in an orderly and
regular manner; and comply with the provisions of all documents pursuant to
which Borrower is organized and/or which govern Borrower's continued existence
and with the requirements of all laws, rules, regulations and orders of any
governmental authority applicable to Borrower or Borrower's business.
10.6 INSURANCE.
(a) ACQUISITION AND MAINTENANCE. Borrower, at Borrower's expense,
shall keep and maintain the Collateral insured against loss or damage by fire,
theft, explosion, sprinklers and all other hazards and risks ordinarily insured
against by other owners who use such properties in similar businesses for the
full insurable value thereof. Borrower shall also keep and maintain business
interruption insurance and public liability and property damage insurance
relating to Borrower's ownership and use of the Collateral. All such policies
of insurance shall be in such form, with such companies, and in such amounts and
with such deductibles as may be satisfactory to Bank. Borrower shall deliver to
Bank certified copies or such policies or insurance and evidence of the payments
of all premiums therefor.
(b) LOSS PAYEE ENDORSEMENT AND ADDITIONAL INSURED. All such
policies of insurance (except those of public liability) shall contain an
endorsement in a form satisfactory to Bank showing Bank as a loss payee thereof,
with a waiver of warranties (Form 438-BFU), and all proceeds payable thereunder
shall be payable to Bank and, upon receipt by Bank, shall be applied on account
of the Obligations, in Bank's discretion. To further secure the payment and
full performance of the Obligations, Borrower grants Bank a security interest in
and to all such policies of insurance (except those of public liability) and the
proceeds thereof, and Borrower shall direct all insurers under such policies of
insurance to pay all proceeds thereof directly to Bank. All public liability
and property damage policies of Insurance shall name Bank as an additional
insured thereunder.
(c) SETTLEMENT OF CLAIMS. Prior to the occurrence of an Event of
Default, Borrower shall have the right to make, settle and adjust any and all
claims under such policies of insurance; provided, however, that Borrower shall
not legally conclude the settlement or adjustment of any claim which in amount
exceeds five percent (5%) of Borrower's total assets without Bank's prior
written consent. Following the occurrence of an Event of Default, Bank (and any
of its employees, officers or designated agents) is and shall be irrevocably
appointed as Borrower's lawful attorney-in-fact with fail power to make, settle
and adjust all claims under
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such policies of insurance, to endorse the name of Borrower on any check, draft,
instrument or other item of payment for the proceeds of such policies of
insurance, and to make all determinations and decisions with respect to such
policies of insurance.
(d) NOTICE AND CANCELLATION. Borrower will not cancel any of such
policies without Bank's prior written consent. Each such insurer shall agree by
endorsement upon the policy or policies of insurance issued by it to Borrower as
required above, or by independent instruments furnished to Bank, that it will
give Bank at least ten (10) days written notice before any such policy or
policies of insurance shall be altered or canceled, and that no act or default
of Borrower, or any other person, shall affect the right of Bank to recover
under such policy or policies of insurance required above or to pay any premium
in whole or in part relating thereto. Bank, without waiving or releasing any
Obligations or Event of Default, may, but shall have no obligation to do so,
obtain and maintain such policies of insurance and pay such premiums and take
any other action with respect to such policies which Bank deems advisable. All
sums so disbursed by Bank, as well as reasonable attorneys' fees, court costs,
expenses and other charges relating thereto, shall constitute Bank Expenses,
when disbursed, and shall be payable on demand.
10.7 BANK ACCOUNTS. Except for permitted investments, Borrower shall
keep all of Borrower's principal bank accounts with Bank and shall open no bank
account, deposit account or other account into which money can be deposited
without the written consent of Bank.
10.8 ERISA/COVENANT. Borrower shall furnish to Bank: (a) as soon as
possible, but in no event later than thirty (30) days after Borrower knows or
has reason to know that any reportable event with respect to any deferred
compensation plan has occurred, a statement of the chief financial officer of
Borrower setting forth the details concerning such reportable event and the
action which Borrower proposes to take with respect thereto, together with a
copy of the notice of such reportable event given to the Pension Benefit
Guaranty Corporation, if a copy of such notice is available to Borrower; (b)
promptly after the filing thereof with the United States Secretary of Labor or
the Pension Benefit Guaranty Corporation, copies of each annual report with
respect to each deferred compensation plan; (c) promptly after receipt thereof,
a copy of any notice Borrower may receive from the Pension Benefit Guaranty
Corporation or the Internal Revenue Service with respect to any deferred
compensation plan; provided, however, this subsection shall not apply to notice
of general application issued by the Pension Benefit Guaranty Corporation or the
Internal Revenue Service; and (d) when the same is made available to
participants in the deferred compensation plan, all notices and other forms of
information from time to time disseminated to the participants by the
administrator of the deferred compensation plan.
10.9 REIMBURSEMENTS. Borrower shall immediately and without demand
reimburse Bank for all sums expanded by Bank which constitute Bank Expenses and
Borrower hereby authorizes and approves all advances and payments by Bank for
items constituting Bank Expenses.
10.10 ACCOUNTING METHODS. Borrower shall maintain a standard and modern
system of accounting in accordance with generally accepted accounting principles
consistently applied with ledger and account cards and/or computer tapes, discs,
printouts, and records pertaining to the Collateral which contain information as
may from time to time be requested by Bank. Borrower shall permit Bank and any
of Bank's employees, officers or agents, upon demand, during Borrower's usual
business hours, or the usual business hours of third persons having control
thereof, to have access to and examine all of Borrower's Books relating to the
Collateral, the Obligations, Borrower's financial condition, and the results of
Borrower's operations, and, in connection therewith, permit Bank or any of
Bank's agents, employees or officers to copy and make extracts therefrom, and to
inspect the properties of Borrower.
10.11 FINANCIAL STATEMENTS. Borrower agrees to deliver to Bank the
following within the time periods specified: (i) within fifteen (15) days after
the end of each calendar month, an aging of all accounts receivable and accounts
payable, prepared by the treasurer or chief financial officer of Borrower,
certified by such person to full, true, complete, and accurate, and in a form
and content satisfactory to Bank; (ii) within thirty (30) days after the end of
each calendar month, a balance sheet and profit and loss statement, prepared by
the treasurer or chief financial officer of Borrower, certified by such person
to full, true, complete, and accurate, and in a form and content satisfactory to
Bank, covering Borrower's operations during such period; (iii) within ninety
(90) days after the end of each of Borrower's fiscal years, a statement of the
financial condition of Borrower for each such fiscal year, including, but not
limited to, a long-form balance sheet and profit and loss statement, prepared or
audited by certified public accountants acceptable to Bank; and (iv) any other
report requested by Bank relating to the Collateral and the financial condition
of Borrower, together with a certificate signed by an authorized employee of
Borrower to the effect that all reports, statements, computer disc or tape
files, printouts, runs, or other computer prepared information of any kind or
nature relating to the foregoing, or documents delivered or caused to be
delivered to Bank under this Section 10.11, are complete, correct, and
thoroughly present the financial condition of Borrower and that there exists on
the date of delivery to Bank no condition or event which constitutes a breach of
or Event of Default under this Agreement. If Borrower is required hereunder to
deliver fiscal year-end statements of Borrower's financial condition which are
prepared on an audited basis by independent certified public accountants, then,
contemporaneously therewith, Borrower shall also deliver to Bank an unqualified
opinion thereon by said accountants. Borrower shall comply with any request and
shall treat any written request as a continuing obligation until expressly
modified or terminated in writing.
10.12 NOTIFICATIONS. Borrower shall promptly supply and cause any
guarantor of the Obligations (or any portion thereof) and/or any general partner
of Borrower to supply Bank with such other information, including tax returns,
concerning Borrower's, any such guarantor's and/or general partner's affairs as
Bank may request from time to time hereafter. Borrower shall promptly notify
Bank of any material adverse change in Borrower's financial condition and of any
condition or event which constitutes a breach of or Event of Default under this
Agreement.
10.13 FINANCIAL COVENANTS. At all times during the term of this Agreement,
Borrower shall:
(a) Have established and maintained a ratio of (i) the sum of cash,
cash equivalents, and accounts receivable to (ii) current liabilities of one and
one-half (1.50) to one (1) or greater;
(b) Have established and maintain a ratio of total debt (less debt
subordinated to Bank) to Tangible Net Worth of not greater than one (1.0) to one
(1);
(c) Maintain a Tangible Net Worth in an amount not less than
Eighteen Million Dollars ($18,000,000.00) increased by: (i) seventy-five percent
(75%) of the amount of all net after tax profit earned and (ii) one hundred
percent (100%) of the amount of all net cash proceeds received upon the issuance
of any of Borrower's capital stock or otherwise invested as equity in Borrower;
(d) Earn a net before tax profit from operations for each of
Borrower's fiscal quarters and fiscal years. For purposes of this computation
"net before tax profit from operations" means net before tax profit from
operations as determined in accordance with generally accepted accounting
principles consistently applied (a) increased by extraordinary losses, capital
losses from the sale of assets outside the ordinary course of business, and
litigation related expenses and (b) decreased by interest income, extraordinary
gains, capital gains from the sale of assets outside the ordinary course of
business and investment income earned outside the ordinary course of business.
11. EVENTS OF DEFAULT
The occurrence of any one or more of the following events shall constitute
an Event of Default under this Agreement:
11.1 FAILURE TO MAKE PAYMENT. If Borrower fails to pay when due and
payable, or when declared due and payable, all or any portion of the
Obligations.
11.2 BREACH. If Borrower fails or neglects to perform, keep or observe
any term, provision, condition, covenant, agreement, warranty or representation
contained in this Agreement or any other present or future agreement between
Borrower and Bank.
11.3 MATERIAL IMPAIRMENT. If there is a material impairment of the
prospect of repayment of all or any portion of the Obligations, or a material
impairment of the value of the Collateral or the priority of Bank's security
interests therein.
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11.4 SEIZURE OF ASSETS. If all or any of the assets of Borrower, any
guarantor of the Obligations (or any portion thereof) or any general partner of
Borrower are attached, seized, subjected to a writ or distress warrant, or are
levied upon, or come into the possession of any Judicial Officer or Assignee.
11.5 VOLUNTARY INSOLVENCY. If an Insolvency Proceeding is commenced by
Borrower or any general partner of Borrower.
11.6 INVOLUNTARY INSOLVENCY. If an Insolvency Proceeding is commenced
against Borrower or any general partner of Borrower.
11.7 INJUNCTION. If Borrower is enjoined, restrained or in any way
prevented by court order from continuing to conduct all or any material part of
Borrower's business affairs.
11.8 LIEN, LEVY. If a notice of lien, levy or assessment is filed of
record with respect to any or all of the assets of Borrower, any guarantor of
the Obligations (or any portion thereof) or any general partner of Borrower by
the United States Government, or any department, agency or instrumentality
thereof, or by any state, county, municipal or other governmental agency, or if
any taxes or debts owing at any time hereafter to any one or more of such
entities becomes a lien, whether choate or otherwise, upon any or all of the
assets of Borrower or any such guarantor or general partner and the same is not
paid on the payment date thereof.
11.9 JUDGMENT LIEN. If one or more judgments and/or one or more other
claims becomes liens or encumbrances upon any or all of the assets of Borrower,
any guarantor of the Obligations, or any general partner of Borrower in an
aggregate amount in excess of Twenty-Five Thousand Dollars ($25,000.00).
11.10 THIRD PARTY AGREEMENTS. If there is a default in any material
agreement to which Borrower, any guarantor of the Obligations (or any portion
thereof) or any general partner of Borrower is a party with third parties
resulting in a right by such third parties to accelerate the maturity of
Borrower's, any such guarantor's or general partner's indebtedness.
11.11 PAYMENT OF SUBORDINATED DEBT. If Borrower makes any payment on
account of indebtedness which his been subordinated to the Obligations, of any
portion thereof.
11.12 MISREPRESENTATIONS. If any misrepresentation exists in any warranty
or representation made to Bank by Borrower or any officer, director or partner
of Borrower, or if any warranty or representation is withdrawn by Borrower or
any officer, director or partner of Borrower.
11.13 DEATH, INCAPACITY. If Borrower or any general partner of Borrower is
an individual and Borrower or any such general partner dies or becomes
incapacitated.
11.14 WITHDRAWAL, DISSOLUTION OF GENERAL PARTNER. If any general partner
of Borrower withdraws from Borrower, dissolves or liquidates, or if the
directors, shareholders or members of any such general partner take action to
effect such general partner's dissolution or liquidation.
11.15 IMPAIRMENT OF GUARANTIES, PLEDGES, SUBORDINATIONS. If any party
subordinating its claims to those of Bank or pledging collateral to secure any
of the Obligations, or if any guarantor of or indemnitor regarding Borrower's
Obligations (or any portion thereof) dies, terminates that subordination,
pledge, guaranty or indemnity agreement or becomes the subject of an Insolvency
Proceeding, or if any such agreement becomes ineffective or unenforceable for
any reason, or if any such party defaults under any agreement between said party
and Bank.
11.16 CHANGE OF OWNERSHIP. If there is a change of ownership or control of
ten percent (10%) or more of the issued and outstanding stock of Borrower (if
Borrower is a corporation), or if any one or more of the general partners of
Borrower with an aggregate ownership interest in Borrower of ten percent (10%)
or more resigns or is expelled.
11.17 INSECURITY. If Bank for any reason deems itself insecure, which
insecurity may include (without limitation) developments in the litigation
described in Section 8.8.
11.18 ADDITIONAL DEFAULTS. If an event occurs which with the passage of
time would constitute an Event of Default.
Notwithstanding anything contained in this Article 10 to the contrary, upon
the occurrence of an Event of Default, Bank at Bank's discretion, may cease
advancing monies or extending loans or other credit accommodations under this
Agreement or any other agreement between Bank and Borrower provided, however,
that Bank shall refrain from further exercising its rights and remedies and an
Event of Default shall thereafter be deemed not to have occurred by reason of
the occurrence of any of the events set forth in Sections 10.6, 10.8 and 10.9 of
this Agreement if, within ten (10) days from the date of such occurrence, the
subject event or action is released, discharged, dismissed, bonded against or
satisfied.
12. BANK'S RIGHTS AND REMEDIES
12.1 RIGHTS AND POWERS. If an Event of Default shall have occurred and
not been cured or waived in accordance with the terms hereof, Bank shall have
the following rights and powers and may, at its election, without notice of its
election and without demand, do any one or more of the following, all of which
are authorized by Borrower:
(a) Declare all Obligations immediately due and payable;
(b) Cease advancing money or extending credit to or for the benefit
of Borrower under this Agreement, or any other agreement between Borrower and
Bank;
(c) Terminate this Agreement as to any future liability or
obligation of Bank, but without effecting Bank's rights and security interest in
the Collateral and without effecting the Obligations;
(d) Without notice to or demand upon Borrower or any guarantor,
make such payments and do such acts as Bank considers necessary or reasonable to
protect its security interest in the Collateral. Borrower agrees to assemble
the Collateral if Bank so requires, and to make the Collateral available to Bank
as Bank may designate. Borrower authorizes Bank to enter the premises where the
Collateral is located, take and maintain possession of the Collateral and the
premises, or any part thereof, for so long as is required by Bank, and at no
cost to Bank, and to pay, purchase, contest or compromise any encumbrance,
charge or lien which in the opinion of Bank appears to be prior or superior to
Bank's security interest and to pay all expenses incurred in connection
therewith;
(e) Without constituting a retention of Collateral in satisfaction
of an Obligation within the meaning of Section 9505 of the Code or an action
under California Code of Civil Procedure Section 726, Bank may apply any and all
amounts maintained by Borrower with Bank as deposit accounts (as that term is
defined under Section 9105 of the Code) or other accounts against the
Obligations;
(f) Ship, reclaim, recover, store, finish, maintain, repair,
prepare for sale, advertise for sale and sell or dispose of (in the manner
provided for herein) the Collateral;
(g) Sell or dispose of the Collateral at either public or private
sales, or both, by way of one or more contracts or transactions, for cash or on
terms, in such manner and at such places (including Borrower's premises) as is
commercially reasonable in the opinion of Bank. It is not necessary that the
Collateral be present at any such sale;
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(h) Bank shall give the Borrower and each holder of a security
interest in the Collateral who has filed with Bank a written request for
notice, a notice in writing of the time and place of public sale, or, if the
sale is a private sale or some other disposition other than a public sale is to
be made of the Collateral, the time on or after which the private sale or other
disposition is to be made. The notice shall be personally delivered or mailed,
postage prepaid, to Borrower as provided in Section 13.3 of this Agreement, at
least five (3) calendar days before the date fixed for the sale, or at least
five (5) calendar days before the date on or after which the private sale or
other disposition is to be made, unless the Collateral is perishable or
threatens to decline speedily in value. Notice to parties other than Borrower
claiming an interest in the Collateral shall be sent to such addresses as they
have furnished to Bank. If the sale is to be a public sale, Bank shall also
give notice of the time and place by publishing a notice one time at least five
(5) calendar days before the date of the sale in a newspaper of general
circulation in the county in which the sale is to be held;
(i) Bank may credit bid and purchase at any public sale;
(j) Borrower shall pay all Bank Expenses incurred in connection
with Bank's enforcement and exercise of any of Bank's rights and remedies as
herein provided, whether or not suit is commenced by Bank;
(k) Any deficiency which exists after disposition of the Collateral
as provided above will be paid immediately by Borrower. Any excess will be
returned, without interest and subject to the rights of third parties, to
Borrower by Bank, or, in Bank s discretion, to any party who Bank believes, in
good faith, is entitled to such excess;
(l) Bank is hereby granted a license or other right to use, without
charge, Borrower's labels, patents, copyrights, rights of use of any name, trade
secrets, trade names, trademarks and advertising matter, or any property of a
similar nature, as it pertains to the Collateral or any disposition thereof, and
Borrower's rights under all general intangibles, licenses and franchise
agreements shall inure to Bank's benefit, and Bank shall have the right and
power to enter into sublicense agreements with respect to all such rights with
third parties on terms acceptable to Bank.
12.2 REMEDIES CUMULATIVE. Bank's rights and remedies under this
Agreement and all other agreements shall be cumulative. Bank shall have all
other rights and remedies not inconsistent herewith as provided under the Code,
by law, or in equity. No exercise by Bank of one right or remedy shall be
deemed an election, and no waiver by Bank of any default on Borrower's part
shall be deemed a continuing waiver. No delay by Bank shall constitute a
waiver, election or acquiescence by Bank.
13. MISCELLANEOUS
13.1 TAXES AND OTHER EXPENSES REGARDING THE COLLATERAL. If borrower
fails to pay promptly when due to any person or entity, monies which Borrower is
required to pay by reason of any provision in this Agreement, Bank may, but
need not, pay the same and any such payment shall immediately constitute an
advance under and pursuant to the Credit. and Borrower shall promptly reimburse
Bank therefor. All such sums shall be Bank Expenses hereunder. Any payments
made by Bank shall not constitute: (a) an agreement by Bank to make similar
payments in the future, or (b) a waiver by Bank of any default under this
Agreement. Bank need not inquire as to, or contest the validity of, any such
expense, tax, security interest, encumbrance or lien and the receipt of the
usual official notice for the payment thereof shall be conclusive evidence that
the same was validly due and owing.
13.2 WAIVERS.
(a) APPLICATION OF PAYMENTS. Borrower waives the right to direct
the application of any and all payments or collections at any time or times
hereafter received by Bank on account of any Obligations, and Borrower agrees
that Bank shall have the continuing exclusive right to apply and reapply such
payments or collections to the Obligations in any manner as Bank may deem
advisable.
(b) NOTICES OF DEMAND, ETC. Borrower waives demand, protest,
notice of protest, notice of default or dishonor, notice of payment and
nonpayment, notice of any default, nonpayment at maturity, release, compromise,
settlement, extension or renewal of any or all commercial paper, accounts,
documents, instruments, chattel paper, and guaranties at any time held by Bank
on which Borrower may in any way be liable.
(c) CONFIDENTIALITY OF ACCOUNTING. Borrower waives the right to
assert a confidential relationship, if any, Borrower may have with any
accounting firm and/or service bureau in connection with any information
requested by Bank pursuant to or in accordance with this Agreement, and agrees
that Bank may contact directly any such accounting firm and/or service bureau in
order to obtain such information.
13.3 NOTICES. Unless otherwise provided in this Agreement, all notices
or demands by any party relating to this Agreement shall be in writing and sent
by regular United States mail, postage prepaid, properly addressed to Borrower
at Borrower's address set forth in Section 1.5 of this Agreement or to Bank at
Bank's address set forth in Section 1.3 hereinabove, or to such other addresses
as Borrower or Bank may from time to time specify to the other in writing.
13.4 DESTRUCTION OF BORROWER S DOCUMENTS. Any documents, schedules,
invoices or other papers delivered to Bank may be destroyed or otherwise
disposed of by Bank six (6) months after they are delivered to or received by
Bank unless Borrower does request, in writing, the return of the said documents,
schedules, invoices or other papers and makes arrangements, at Borrower's
expense, for their return.
13.5 CHOICE OF LAW. The validity of this Agreement, its construction,
interpretation and enforcement, and the rights of the parties hereunder and
concerning the Collateral, shall be determined under, governed by and construed
in accordance with the laws of the State of California. The parties agree that
all actions or proceedings arising in connection with this Agreement shall be
tried and litigated only in the state courts located in the County of San
Francisco, State of California, or the County of Santa Clara, State of
California, or the federal courts located in the Northern District of
California. Borrower waives any right Borrower may have to assert the doctrine
of forum non conveniens or to object to such venue and hereby consents to any
court-ordered relief.
13.6 CONTINUITY OF SECURITY INTEREST. The obligations shall be secured
by all other security interests, liens or encumbrances heretofore, now, or at
any time hereafter granted by Borrower to Bank.
13.7 AGREEMENT BINDING; ASSIGNMENT. This Agreement shall be binding and
deemed effective when executed by Borrower and accepted and executed by Bank.
This Agreement shall bind and inure to the benefit of the respective successors
and assigns of each of the parties; provided, however, that Borrower may not
assign this Agreement or any rights hereunder without Bank's prior written
consent and any prohibited assignment shall be absolutely void. No consent to
an assignment by Bank shall release Borrower or any guarantor from their
obligations to Bank. Bank may assign this Agreement and its rights and duties
hereunder. Bank reserves the right to sell, assign, transfer, negotiate or
grant participation in all or any part of, or any interest in, Bank's rights and
benefits hereunder. In connection therewith, Bank may disclose all documents
and information which Bank now has or hereafter may have relating to Borrower or
Borrower's business.
13.8 ARTICLE AND SECTION HEADINGS. Article and section headings and
article and section numbers have been set forth herein for convenience only.
Unless the contrary is computed by the context, everything contained in each
article and section applies equally to this entire Agreement.
13.9 CONSTRUCTION. Neither this Agreement nor any uncertainty or
ambiguity herein shall be construed or resolved against Bank or Borrower,
whether under any rule of construction or otherwise. On the contrary, this
Agreement has been reviewed by all parties and shall be construed and
interpreted according to the ordinary meaning of the words used so as to fairly
accomplish the purposes and intentions of all parties hereto.
13.10 SEVERABILITY. Each provision of this Agreement shall be severable
from every other provision of this Agreement for the purpose of determining the
legal enforceability of any specific provision.
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13.11 INTEGRATION. This Agreement cannot be changed or terminated orally.
No modification or amendment to this Agreement shall be effective unless in
writing, executed by Bank. Except as to currently existing obligations of
Borrower to Bank, all prior agreements, understandings, representations,
warranties, and negotiations between the parties, if any, are merged into this
Agreement.
13.12 WAIVER OF JURY TRIAL. BANK AND BORROWER HEREBY WAIVE, TO THE EXTENT
PERMITTED BY APPLICABLE LAW, TRIAL BY JURY IN ANY LITIGATION IN ANY COURT WITH
RESPECT TO, IN CONNECTION WITH, OR ARISING OUT OF THIS AGREEMENT OR THE
OBLIGATIONS, OR ANY INSTRUMENT OR DOCUMENT DELIVERED IN CONNECTION WITH THIS
AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY, OR THE VALIDITY, PROTECTION,
INTERPRETATION, COLLECTION OR ENFORCEMENT THEREOF, OR ANY OTHER CLAIM OR DISPUTE
HOWSOEVER ARISING (INCLUDING TORT AND CLAIMS FOR BREACH OF DUTY), BETWEEN BANK
AND BORROWER.
14. FX SUBFACILITY
14.1 REVOLVING FX SUBFACILITY. At the request of Borrower, made during
Bank's normal business hours from time to time during the term of this
Agreement, and so long as no Event of Default has occurred, Bank will create
foreign exchange contracts for Borrower's account (the "FX Subfacility")
provided, however, that in no event shall the aggregate amount on all foreign
exchange contracts outstanding at any time exceed Five Million Dollars
($5,000,000.00) (the "Maximum Exposure") and provided further, however, that in
no event shall the Bank be obligated to issue any foreign exchange contracts
under this Section 14.1 when the amount deemed an advance against a Credit under
Section 14.2, when added to the Daily Balance and the total amount of Borrower's
Obligations with respect to all letters of credit outstanding under Section 3.1
of this Agreement, exceeds (at any time) the Borrowing Base. If, at any time
and for any reason, the aggregate amount on all foreign exchange contracts
outstanding at any time exceeds the Maximum Exposure (an "FX Overadvance"),
Borrower shall immediately pay to Bank, in cash, the amount of such FX
Overadvance.
14.2 TERMS AND CONDITIONS. Except to the extent described by any
separate agreement between Borrower and Bank (a "Foreign Exchange Contract"),
the terms and conditions governing any Foreign Exchange Contract entered into
under this FX Subfacility shall be governed by this Agreement and the Bank's
standard terms of business in effect on the Contract Date (as hereinafter
defined). Borrower agrees to execute and deliver to Bank such documents as Bank
deems necessary in connection with the FX Subfacility. Subject to the
limitations prescribed by this Agreement, any Foreign Exchange Contract shall
obligate the Bank to exchange domestic currency for foreign currency (or vice
versa) and shall obligate Borrower to purchase such exchanged currency at a
prices in the currency and on a data agreed upon by Borrower and Bank. Bank
shall have the right, but not the obligation, to charge any amounts owing by
Borrower to Bank under any Foreign Exchange Contract against any accounts
maintained by Borrower with Bank.
Bank is hereby authorized to enter into any Foreign Exchange Contract
provided for in this Agreement based upon telephonic or other instructions
received from anyone purporting to be an authorized representative or Borrower
or, at the discretion of Bank, if said contracts are necessary to satisfy any
Obligation of Borrower to Bank. Bank shall have no duty to make inquiry or
verify the authority of any such party and Borrower shall hold Bank harmless
from any damages, claims, or liability by reason of Bank's honor of, or failure
to honor, any such instructions.
The date upon which Borrower and Bank shall exchange their currency shall
be referred to as the "Settlement Date." The date upon which Borrower agree
upon the price to be paid, the currency to be exchanged by the respective
parties, and the date which shall constitute the Settlement Date shall be
referred to as the "Contract Date." In no event shall the Settlement Date under
any foreign exchange contract exceed twelve (12) months from the Contract Date.
Following the Contract Date, Bank shall have the right, but not the obligation,
to forward a confirmation statement to Borrower confirming the terms of such
Foreign Exchange Contract. If Borrower fails to object to the information
contained in the confirmation within the shorter of (i) the period sated therein
or (ii) ten (10) days after the date of such notification, than the information
contained in such confirmation shall be binding on Borrower.
On the Contract Date, ten percent of the amount of such Foreign Exchange
Contract (in United States Dollars) shall be deemed part of the Credit and shall
reduce Borrower's availability under Section 2.1 of this Agreement in a like
amount. The amount of any Foreign Exchange Contract (in United States Dollars)
shall not be deemed part of the Credit after the Settlement Data if and only if
Borrower satisfied and discharges its obligations under such Foreign Exchange
Contract on the Settlement Date. Notwithstanding the reduction in the credit
authorized by this Section 14.2, Borrower's duty to satisfy and discharge its
obligations under any Foreign Exchange Contract shall constitute part of the
Obligations and shall be secured by the Collateral. If Borrower fails to
discharge and satisfy its obligations under a Foreign Exchange Contract on the
Settlement Date, such failure shall constitute an Event of Default under this
Agreement.
15. PRIOR AGREEMENTS
15.1 PRIOR LOAN AND SECURITY AGREEMENT. The total Credit and the total
of Borrower's Obligations in respect to all letters of credit outstanding under
that certain Loan and Security Agreement by and between Bank and Borrower s
predecessor in interest ADVANCED FIBRE COMMUNICATIONS, INC., a California
corporation, dated as of June 5, 1994, that certain First Amended and Restated
Loan and Security Agreement by and between Bank and Borrower's predecessor in
interest ADVANCED FIBRE COMMUNICATIONS, INC., a California corporation, dated as
of June 7, 1995, any concurrent or subsequent rider to any of the foregoing, and
any extensions, supplements, amendments or modifications thereto and/or to any
such rider (collectively the "Prior Agreement"), from and after the date of this
Agreement, shall be deemed to have been incurred pursuant to this Agreement
which amends and restates the Prior Agreement in its entirely.
11
<PAGE>
IN WITNESS WHEREOF, Borrower has executed and delivered this Agreement on
the date first hereinabove written.
"Borrower"
ADVANCED FIBRE COMMUNICATIONS,
a Delaware corporation and successor
by merger to ADVANCED COMMUNICATIONS,
INC., a California corporation
By: /s/ Donald Green
--------------------------------------
Title: Chairman and CEO
-----------------------------------
By: /s/ Daniel E. Steimle
--------------------------------------
Title: VP, CFO
-----------------------------------
ATTEST:
By: ------------------------------------
Title: ---------------------------------
Accepted and effective this ___________ day of ____________, 19____, at
Bank's place of business in the City of San Jose, State of California.
"Bank"
BANK OF THE WEST, a
California banking corporation
By: --------------------------------------
Title: -----------------------------------
12
<PAGE>
EXHIBIT 10.20
ADVANCED FIBRE COMMUNICATIONS, INC.
D & O INDEMNIFICATION AGREEMENT
THIS AGREEMENT is made and entered into this ____ day of _________________
between Advanced Fibre Communications, Inc., a Delaware corporation
("Corporation"), and ____________ ("Indemnitee").
RECITALS:
A. Indemnitee, an executive officer or a member of the Board of
Directors of Corporation, performs a valuable service in such capacity for
Corporation; and
B. The stockholders of Corporation have adopted Bylaws (the
"Bylaws") providing for the indemnification of the officers, directors, agents
and employees of Corporation to the maximum extent authorized by Section 145 of
the Delaware Corporations Code, as amended ("Code"); and
C. The Bylaws and the Code, by their non-exclusive nature, permit
contracts between Corporation and the members of its Board of Directors and
executive officers with respect to indemnification of such directors and
executive officers; and
D. In accordance with the authorization as provided by the Code,
Corporation may purchase and maintain a policy or policies of Directors and
Officers Liability Insurance ("D & O Insurance"), covering certain liabilities
which may be incurred by its directors and executive officers in the performance
as directors of Corporation; and
E. As a result of developments affecting the terms, scope and
availability of D & O Insurance there exists general uncertainty as to the
extent of protection afforded members of the Board of Directors and executive
officers by such D & O Insurance and by statutory and bylaw indemnification
provisions; and
F. In order to induce Indemnitee to continue to serve as a member of
the Board of Directors or executive officer of Corporation, Corporation has
determined and agreed to enter into this contract with Indemnitee;
NOW, THEREFORE, in consideration of Indemnitee's continued service as
a director or executive officer after the date hereof, the parties hereto agree
as follows:
1. INDEMNITY OF INDEMNITEE. Corporation hereby agrees to hold
harmless and indemnify Indemnitee to the fullest extent authorized or permitted
by the provisions of the Code, as may be amended from time to time.
2. ADDITIONAL INDEMNITY. Subject only to the exclusions set forth
in Section 3 hereof, Corporation hereby further agrees to hold harmless and
indemnify Indemnitee:
(a) against any and all expenses (including attorneys' fees),
witness fees, judgments, fines and amounts paid in settlement actually and
reasonably incurred by Indemnitee in connection with any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (including an action by or in the right of Corporation) to which
Indemnitee is, was or at any time becomes a party, or is threatened to be made a
party, by reason of the fact that Indemnitee is, was or at any time becomes a
director, officer, employee or agent of Corporation, or is or was serving or at
any time serves at the request of Corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise; and
1.
<PAGE>
(b) otherwise to the fullest extent as may be provided to
Indemnitee by Corporation under the non-exclusivity provisions of Article V of
the Bylaws of Corporation and the Code.
3. LIMITATIONS ON ADDITIONAL INDEMNITY. No indemnity pursuant to
Section 2 hereof shall be paid by Corporation:
(a) except to the extent the aggregate of losses to be
indemnified thereunder exceeds the sum of such losses for which the Indemnitee
is indemnified pursuant to Section 1 hereof or pursuant to any D & O Insurance
purchased and maintained by Corporation;
(b) in respect to remuneration paid to Indemnitee if it shall be
determined by a final judgment or other final adjudication that such
remuneration was in violation of law;
(c) on account of any suit in which judgment is rendered against
Indemnitee for an accounting of profits made from the purchase or sale by
Indemnitee of securities of Corporation pursuant to the provisions of Section
16(b) of the Securities Exchange Act of 1934 and amendments thereto or similar
provisions of any federal, state or local statutory law;
(d) on account of Indemnitee's conduct which is finally adjudged
to have been knowingly fraudulent or deliberately dishonest, or to constitute
willful misconduct;
(e) on account of Indemnitee's conduct which is the subject of
an action, suit or proceeding described in Section 7(c)(ii) hereof;
(f) on account of any action, claim or proceeding (other than a
proceeding referred to in Section 8(b) hereof) initiated by the Indemnitee
unless such action, claim or proceeding was authorized in the specific case by
action of the Board of Directors; or
(g) if a final decision by a Court having jurisdiction in the
matter shall determine that such indemnification is not lawful (and, in this
respect, both Corporation and Indemnitee have been advised that the Securities
and Exchange Commission believes that indemnification for liabilities arising
under the federal securities laws is against public policy and is, therefore,
unenforceable and that claims for indemnification should be submitted to
appropriate courts for adjudication).
4. CONTRIBUTION. If the indemnification provided in Sections 1 and
2 hereof is unavailable by reason of a Court decision described in subsection
3(g) hereof based on grounds other than any of those set forth in paragraphs (b)
through (f) of Section 3 hereof, then in respect of any threatened, pending or
completed action, suit or proceeding in which Corporation is jointly liable with
Indemnitee (or would be if joined in such action, suit or proceeding),
Corporation shall contribute to the amount of expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred and paid or payable by Indemnitee in such proportion as is appropriate
to reflect (i) the relative benefits received by Corporation on the one hand and
Indemnitee on the other hand from the transaction from which such action, suit
or proceeding arose, and (ii) the relative fault of Corporation on the one hand
and of Indemnitee on the other in connection with the events which resulted in
such expenses, judgments, fines or settlement amounts, as well as any other
relevant equitable considerations. The relative fault of Corporation on the one
hand and of Indemnitee on the other shall be determined by reference to, among
other things, the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent the circumstances resulting in such expenses,
judgments, fines or settlement amounts. Corporation agrees that it would not be
just and equitable if contribution pursuant to this Section 4 were determined by
pro rata allocation or any other method of allocation which does not take
account of the foregoing equitable considerations.
2.
<PAGE>
5. CONTINUATION OF OBLIGATIONS. All agreements and obligations of
Corporation contained herein shall continue during the period Indemnitee is a
director, officer, employee or agent of Corporation (or is or was serving at the
request of Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise) and shall continue thereafter so long as Indemnitee shall be subject
to any possible claim or threatened, pending or completed action, suit or
proceeding, whether civil, criminal or investigative, by reason of the fact that
Indemnitee was a director of Corporation or serving in any other capacity
referred to herein.
6. NOTIFICATION AND DEFENSE OF CLAIM. Not later than thirty (30)
days after receipt by Indemnitee of notice of the commencement of any action,
suit or proceeding, Indemnitee will, if a claim in respect thereof is to be made
against Corporation under this Agreement, notify Corporation of the commencement
thereof; but the omission so to notify Corporation will not relieve it from any
liability which it may have to Indemnitee otherwise than under this Agreement.
With respect to any such action, suit or proceeding as to which Indemnitee
notifies Corporation of the commencement thereof:
(a) Corporation will be entitled to participate therein at its
own expense;
(b) except as otherwise provided below, to the extent that it
may wish, Corporation jointly with any other indemnifying party similarly
notified will be entitled to assume the defense thereof, with counsel reasonably
satisfactory to Indemnitee. After notice from Corporation to Indemnitee of its
election so as to assume the defense thereof, Corporation will not be liable to
Indemnitee under this Agreement for any legal or other expenses subsequently
incurred by Indemnitee in connection with the defense thereof other than
reasonable costs of investigation or as otherwise provided below. Indemnitee
shall have the right to employ its counsel in such action, suit or proceeding
but the fees and expenses of such counsel incurred after notice from Corporation
of its assumption of the defense thereof shall be at the expense of Indemnitee
unless (i) the employment of counsel by Indemnitee has been authorized by
Corporation, (ii) Indemnitee shall have reasonably concluded that there may be a
conflict of interest between Corporation and Indemnitee in the conduct of the
defense of such action or (iii) Corporation shall not in fact have employed
counsel to assume the defense of such action, in each of which cases the fees
and expenses of Indemnitee's separate counsel shall be at the expense of
Corporation. Corporation shall not be entitled to assume the defense of any
action, suit or proceeding brought by or on behalf of Corporation or as to which
Indemnitee shall have made the conclusion provided for in (ii) above; and
(c) Corporation shall not be liable to indemnify Indemnitee
under this Agreement for any amounts paid in settlement of any action or claim
effected without its written consent. Corporation shall be permitted to settle
any action except that it shall not settle any action or claim in any manner
which would impose any penalty or limitation on Indemnitee without Indemnitee's
written consent. Neither Corporation nor Indemnitee will unreasonably withhold
its consent to any proposed settlement.
7. ADVANCEMENT AND REPAYMENT OF EXPENSES.
(a) In the event that Indemnitee employs his own counsel
pursuant to Section 6(b)(i) through (iii) above, Corporation shall advance to
Indemnitee, prior to any final disposition of any threatened or pending action,
suit or proceeding, whether civil, criminal, administrative or investigative,
any and all reasonable expenses (including legal fees and expenses) incurred in
investigating or defending any such action, suit or proceeding within ten (10)
days after receiving copies of invoices presented to Indemnitee for such
expenses.
(b) Indemnitee agrees that Indemnitee will reimburse Corporation
for all reasonable expenses paid by Corporation in defending any civil or
criminal action, suit or proceeding against Indemnitee in the event and only to
the extent it shall be ultimately determined by a final judicial decision (from
which there is no right of appeal) that Indemnitee is not entitled, under the
provisions of the Code, the Bylaws, this Agreement or otherwise, to be
indemnified by Corporation for such expenses.
3.
<PAGE>
(c) Notwithstanding the foregoing, Corporation shall not be
required to advance such expenses to Indemnitee if Indemnitee (i) commences any
action, suit or proceeding as a plaintiff unless such advance is specifically
approved by a majority of the Board of Directors or (ii) is a party to an
action, suit or proceeding brought by Corporation and approved by a majority of
the Board which alleges willful misappropriation of corporate assets by
Indemnitee, disclosure of confidential information in violation of Indemnitee's
fiduciary or contractual obligations to Corporation, or any other willful and
deliberate breach in bad faith of Indemnitee's duty to Corporation or its
stockholders.
8. ENFORCEMENT.
(a) Corporation expressly confirms and agrees that it has
entered into this Agreement and assumed the obligations imposed on Corporation
hereby in order to induce Indemnitee to continue as a director or executive
officer of Corporation, and acknowledges that Indemnitee is relying upon this
Agreement in continuing in such capacity.
(b) In the event Indemnitee is required to bring any action to
enforce rights or to collect moneys due under this Agreement and is successful
in such action, the Corporation shall reimburse Indemnitee for all Indemnitee's
reasonable fees and expenses in bringing and pursuing such action.
9. SUBROGATION. In the event of payment under this Agreement,
Corporation shall be subrogated to the extent of such payment to all of the
rights of recovery of Indemnitee, who shall execute all documents required and
shall do all acts that may be necessary to secure such rights and to enable
Corporation effectively to bring suit to enforce such rights.
10. NON-EXCLUSIVITY OF RIGHTS. The rights conferred on Indemnitee by
this Agreement shall not be exclusive of any other right which Indemnitee may
have or hereafter acquire under any statute, provision of Corporation's
Certificate of Incorporation or Bylaws, agreement, vote of stockholders or
directors, or otherwise, both as to action in his official capacity and as to
action in another capacity while holding office.
11. SURVIVAL OF RIGHTS. The rights conferred on Indemnitee by this
Agreement shall continue after Indemnitee has ceased to be a director, officer,
employee or other agent of Corporation and shall inure to the benefit of
Indemnitee's heirs, executors and administrators.
12. SEPARABILITY. Each of the provisions of this Agreement is a
separate and distinct agreement and independent of the others, so that if any or
all of the provisions hereof shall be held to be invalid or unenforceable for
any reason, such invalidity or unenforceability shall not affect the validity or
enforceability of the other provisions hereof or the obligation of the
Corporation to indemnify the Indemnitee to the full extent provided by the
Bylaws or the Code.
13. GOVERNING LAW. This Agreement shall be interpreted and enforced
in accordance with the laws of the State of Delaware.
14. BINDING EFFECT. This Agreement shall be binding upon Indemnitee
and upon Corporation, its successors and assigns, and shall inure to the benefit
of Indemnitee, his heirs, personal representatives and assigns and to the
benefit of Corporation, its successors and assigns.
4.
<PAGE>
15. AMENDMENT AND TERMINATION. No amendment, modification,
termination or cancellation of this Agreement shall be effective unless in
writing signed by both parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
and as of the day and year first above written.
ADVANCED FIBRE COMMUNICATIONS, INC.,
a Delaware corporation
By:
-----------------------------------------
Carl Grivner,
Chief Operating Officer
--------------------------------------
Name:
Indemnitee
5.
<PAGE>
EXHIBIT 10.21
ADVANCED FIBRE COMMUNICATIONS
1993 STOCK OPTION/STOCK ISSUANCE PLAN
(AS AMENDED THROUGH SEPTEMBER 15, 1994)
ARTICLE I
GENERAL PROVISIONS
1. PURPOSE
A. This 1993 Stock Option/Stock Issuance Plan, as amended ("Plan")
is intended to promote the interests of Advanced Fibre Communications, a
California corporation (the "Corporation"), by providing eligible individuals
who are responsible for the management, growth and financial success of the
Corporation or who otherwise render valuable services to the Corporation with
the opportunity to acquire a proprietary interest, or increase their proprietary
interest, in the Corporation and thereby provide them with an incentive to
remain in the service of the Corporation (or any parent or subsidiary
corporation).
B. For purposes of the Plan, the following provisions shall be
applicable in determining the parent and subsidiary corporations of the
Corporation:
(i) Any corporation (other than the Corporation) in an unbroken
chain of corporations ending with the Corporation shall be considered to be a
PARENT corporation of the Corporation, provided each such corporation in the
unbroken chain (other than the Corporation) owns, at the time of the
determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
(ii) Each corporation (other than the Corporation) in an unbroken
chain of corporations beginning with the Corporation shall be considered to be a
SUBSIDIARY of the Corporation, provided each such corporation (other than the
last corporation) in the unbroken chain owns, at the time of the determination,
stock possessing fifty percent (50%) or more of the total combined voting power
of all classes of stock in one of the other corporations in such chain.
2. STRUCTURE OF THE PLAN
A. The Plan shall be divided into two (2) separate components: the
Option Grant Program specified in Article II and the Stock Issuance Program
specified in Article III. Under the Option Grant Program, eligible individuals
may, at the discretion of the Plan Administrator, be granted options to purchase
shares of the Common Stock (as defined below) at a discount of up to fifteen
percent (15%) of the Fair Market Value of such shares on the grant date. Such
securities may be fully vested when issued or may vest
<PAGE>
over time. Under the Stock Issuance Program, eligible individuals may effect
immediate purchases of the Common Stock (as defined below) at discounts from the
Fair Market Value of such shares of up to fifteen percent (15%). Such shares
may be fully vested when issued or may vest over time.
B. The provisions of Articles I and IV of the Plan shall apply to
both the Option Grant Program and the Stock Issuance Program and shall
accordingly govern the interests of all individuals under the Plan.
3. ADMINISTRATION OF THE PLAN
A. The Plan shall be administered by the Corporation's Board of
Directors (the "Board"). The Board, however, may at any time appoint a
committee ("Committee") of two (2) or more Board members and delegate to such
Committee one or more of the administrative powers allocated to the Board
pursuant to the provisions of the Plan. Members of the Committee shall serve
for such period of time as the Board may determine and shall be subject to
removal by the Board at any time. The Board may also at any time terminate the
functions of the Committee and reassume all powers and authority previously
delegated to the Committee.
B. The Plan Administrator (either the Board or the Committee, to the
extent the Committee is at the time responsible for the administration of the
Plan) shall have full power and authority (subject to the express provisions of
the Plan) to establish such rules and regulations as it may deem appropriate for
proper plan administration and to make such determinations under, and issue such
interpretations of, the Plan and any outstanding option grants or share
issuances as it may deem necessary or advisable. Decisions of the Plan
Administrator shall be final and binding on all parties who have an interest
under the Plan or any outstanding option or share issuance.
4. OPTION GRANTS AND SHARE ISSUANCES
A. The persons eligible to receive option grants pursuant to the
Option Grant Program ("Optionee") and/or share issuances under the Stock
Issuance Program ("Participant") are limited to the following:
(i) employees (including officers and directors) of the
Corporation (or its parent or subsidiary corporations) who are responsible for
the management, growth and financial success of the Corporation (or its parent
or subsidiary corporations);
(ii) non-employee members of the Board or the non-employee
members of the board of directors of any parent or subsidiary corporations; and
(iii) consultants who provide valuable services to the Corporation
(or its parent or subsidiary corporations).
2.
<PAGE>
B. The Plan Administrator shall have full authority to determine,
(I) with respect to the option grants made under the Plan, which eligible
individuals are to receive option grants, the number of shares to be covered by
each such grant, the status of the granted option as either an incentive stock
option ("Incentive Option") which satisfies the requirements of Section 422 of
the Internal Revenue Code or a non-statutory option not intended to meet such
requirements, the time or times at which each granted option is to become
exercisable and the maximum term for which the option may remain outstanding,
and (II) with respect to share issuances under the Stock Issuance Program, the
number of shares to be issued to each Participant, the vesting schedule (if any)
to be applicable to the issued shares, and the consideration to be paid by the
individual for such shares.
C. The Plan Administrator shall have the absolute discretion either
to grant options in accordance with Article II of the Plan or to effect share
issuances in accordance with Article III of the Plan.
5. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of the
Corporation's authorized but unissued or reacquired common stock ("Common
Stock"). The maximum number of shares which may be issued over the term of the
Plan shall not exceed 850,000 shares. The total number of shares issuable under
the Plan shall be subject to adjustment from time to time in accordance with the
provisions of Section 5.C of this Article I.
B. Shares subject to the unexercised portion of any outstanding
options under the Plan which expire or terminate prior to exercise in full or
which are otherwise cancelled in accordance with the cancellation-regrant
provisions of Section 4 of Article II will be available for subsequent option
grants or stock issuances under the Plan. Shares issued under either the Option
Grant Program or the Stock Issuance Program (whether as vested or unvested
shares) and repurchased by the Corporation shall NOT be available for subsequent
option grants or stock issuances under the Plan.
C. In the event any change is made to the Common Stock issuable
under the Plan by reason of any stock dividend, stock split, recapitalization,
combination of shares, exchange of shares or other change affecting the
outstanding Common Stock as a class without receipt of consideration, then
appropriate adjustments shall be made to (i) the aggregate number and/or class
of shares issuable under the Plan and (ii) the aggregate number and/or class of
shares and the option price per share in effect under each outstanding option in
order to prevent the dilution or enlargement of benefits thereunder. The
adjustments determined by the Plan Administrator shall be final, binding and
conclusive.
D. Common Stock issuable under the Plan, whether under the Option
Grant Program or the Stock Issuance Program, may be subject to such restrictions
on transfer, repurchase rights or other restrictions as may be determined by the
Plan Administrator.
3.
<PAGE>
ARTICLE II
OPTION GRANT PROGRAM
1. TERMS AND CONDITIONS OF OPTIONS
Options granted pursuant to the Plan shall be authorized by action of
the Plan Administrator and may, at the Plan Administrator's discretion, be
either Incentive Options or nonstatutory options. Individuals who are not
Employees (as defined in subsection (c) below) may only be granted non-statutory
options. Each granted option shall be evidenced by one or more instruments in
the form approved by the Plan Administrator; PROVIDED, however, that each such
instrument shall comply with the terms and conditions specified in Sections 1
and 3 of this Article II. Each instrument evidencing an Incentive Option shall,
in addition, be subject to the applicable provisions of Section 2 of this
Article II.
A. OPTION PRICE.
(1) The option price per share shall be fixed by the Plan
Administrator. In no event, however, shall the option price per share be less
than eighty-five percent (85%) of the Fair Market Value of a share of Common
Stock on the date of the option grant.
(2) If the individual to whom the option is granted is the owner
of stock (as determined under Section 424(d) of the Internal Revenue Code)
possessing ten percent (10%) or more of the total combined voting power of all
classes of stock of the Corporation or any parent or subsidiary corporation
(such individual to be designated a "10% Shareholder"), then the option price
per share shall not be less than one hundred ten percent (110%) of the Fair
Market Value of one share of Common Stock on the date of the option grant.
(3) The option price shall become immediately due upon exercise
of the option and shall, subject to the provisions of Article IV, Section 1, be
payable in cash or check drawn to the Corporation's order.
Should the Corporation's outstanding Common Stock be registered under
Section 12(g) of the Securities Exchange Act of 1934, as amended (the "1934
Act") at the time the option is exercised, then the option price may also be
paid as follows:
a. in shares of Common Stock held by Optionee for the
requisite period necessary to avoid a charge to the Corporation's earnings
for financial reporting purposes and valued at Fair Market Value on the
exercise date; or
b. through a special sale and remittance procedure
pursuant to which Optionee is to concurrently provide irrevocable written
instructions (I) to
4.
<PAGE>
a Corporation-designated brokerage firm to effect the immediate sale of the
purchased shares and remit to the Corporation, out of the sale proceeds
available on the settlement date, an amount sufficient to cover the
aggregate option price payable for the purchased shares plus all applicable
Federal, state, and local income and employment taxes required to be
withheld by the Corporation by reason of such purchase and (II)
concurrently to the Corporation to deliver the certificates for the
purchased shares directly to such brokerage firm in order to effect the
sale transaction.
Except to the extent such sale and remittance procedure is
utilized, payment of the option price must occur at the time the option is
exercised.
(4) The Fair Market Value of a share of Common Stock on any
relevant date under the Plan shall be determined in accordance with the
following provisions:
a. If the Common Stock is not at the time listed or
admitted to trading on any stock exchange but is traded on the Nasdaq
National Market, the Fair Market Value shall be the closing selling price
per share of Common Stock on the date in question, as such price is
reported by the National Association of Securities Dealers through its
Nasdaq system or any successor system. If there is no closing selling
price for the Common Stock on the date in question, then the Fair Market
Value shall be the closing selling price on the last preceding date for
which such quotation exists.
b. If the Common Stock is at the time listed or admitted
to trading on any stock exchange, then the Fair Market Value shall be the
closing selling price per share of Common Stock on the date in question on
the stock exchange determined by the Plan Administrator to be the primary
market for the Common Stock, as such price is officially quoted in the
composite tape of transactions on such exchange. If there is no closing
selling price for the Common Stock on the date in question, then the Fair
Market Value shall be the closing selling price on the last preceding date
for which such quotation exists.
c. If the Common Stock is at the time neither listed nor
admitted to trading on any stock exchange nor traded on the Nasdaq National
Market, then such Fair Market Value shall be determined by the Plan
Administrator after taking into account such factors as the Plan
Administrator shall deem appropriate.
B. TERM AND EXERCISE OF OPTIONS. Each option granted under the Plan
shall be exercisable at such time or times, during such period, and for such
number of shares as shall be determined by the Plan Administrator and set forth
in the stock option agreement evidencing such option. However, no option
granted under the Plan shall have a term in excess of ten (10) years from the
grant date, and no option granted to a 10% Shareholder shall have a term in
excess of five (5) years from the grant date. During the
5.
<PAGE>
lifetime of Optionee, the option shall be exercisable only by Optionee and shall
not be assignable or transferable by Optionee otherwise than by will or by the
laws of descent and distribution following Optionee's death.
C. TERMINATION OF SERVICE.
(1) Except to the extent otherwise provided pursuant to this
subsection, the following provisions shall govern the exercise period applicable
to any options held by Optionee at the time of cessation of Service or death:
a. Should Optionee cease to remain in Service for any
reason other than death or Disability, then the period during which each
outstanding option held by such Optionee is to remain exercisable shall be
limited to the three (3)-month period following the date of such cessation
of Service.
b. Should such Service terminate by reason of Disability,
then the period during which each outstanding option held by the optionee
is to remain exercisable shall be limited to the six (6)-month period
following the date of such cessation of Service. However, should such
Disability be deemed to constitute Permanent Disability, then the period
during which each outstanding option held by the optionee is to remain
exercisable shall be extended by an additional six (6) months so that the
exercise period shall be limited to the twelve (12)-month period following
the date of the optionee's cessation of Service by reason of such Permanent
Disability.
c. Should Optionee die while holding one or more
outstanding options, then the period during which each such option is to
remain exercisable shall be limited to the twelve (12)-month period
following the date of Optionee's death. During such limited period, the
option may be exercised by the personal representative of Optionee's estate
or by the person or persons to whom the option is transferred pursuant to
Optionee's will or in accordance with the laws of descent and distribution.
d. Under no circumstances, however, shall any such option
be exercisable after the specified expiration date of the option term.
e. During the applicable post-Service exercise period, the
option may not be exercised in the aggregate for more than the number of
vested shares for which the option is exercisable on the date of Optionee's
cessation of Service. Upon the expiration of the applicable exercise
period or (if earlier) upon the expiration of the option term, the option
shall terminate and cease to be exercisable for any vested shares for which
the option has not been exercised. However, the option shall, immediately
upon Optionee's cessation of Service, terminate and cease to be outstanding
with respect to any option shares for which the option is not at that time
exercisable or in which Optionee is not otherwise at that time vested.
6.
<PAGE>
(2) The Plan Administrator shall have full power and authority
to extend the period of time for which the option is to remain exercisable
following Optionee's cessation of Service or death from the limited period in
effect under this Article II to such greater period of time as the Plan
Administrator shall deem appropriate; PROVIDED, that in no event shall such
option be exercisable after the specified expiration date of the option term.
For purposes of the Plan, SERVICE shall mean the provision of services
to the Corporation (or one or more of its parent or subsidiary corporations) by
an individual in the capacity of an Employee, a non-employee member of the board
of directors, or a consultant. Optionee shall be considered to be an EMPLOYEE
for so long as such individual remains in the employ of the Corporation (or one
or more of its parent or subsidiary corporations).
For purposes of the Plan, DISABILITY shall mean the inability of an
individual to engage in any substantial gainful activity by reason of any
medically determinable physical or mental impairment and shall be determined by
the Plan Administrator on the basis of such medical evidence as the Plan
Administrator deems warranted under the circumstances. Disability shall be
deemed to constitute PERMANENT DISABILITY in the event that such Disability is
expected to result in death or has lasted or can be expected to last for a
continuous period of not less than twelve (12) months.
D. SHAREHOLDER RIGHTS. An Optionee shall have none of the rights of
a shareholder with respect to any shares covered by the option until such
Optionee shall have exercised the option and paid the option price.
E. REPURCHASE RIGHTS. The shares of Common Stock issued under the
Plan shall be subject to certain repurchase rights of the Corporation in
accordance with the following provisions:
(1) UNVESTED SHARES. The Plan Administrator shall have the
discretion to authorize the issuance of unvested shares of Common Stock under
the Plan. Should Optionee cease Service while holding such unvested shares, the
Corporation shall have the right to repurchase, at the option price paid per
share, all or (at the discretion of the Corporation and with the consent of
Optionee) any of those unvested shares. The terms and conditions upon which
such repurchase right shall be exercisable (including the period and procedure
for exercise and the appropriate vesting schedule for the purchased shares)
shall be established by the Plan Administrator and set forth in the instrument
evidencing such repurchase right. In no event, however, may the Plan
Administrator impose a vesting schedule upon any option granted under the Plan
or any shares of Common Stock issued under the Plan which is more restrictive
than twenty percent (20%) per year annual vesting, beginning one year after the
grant date of the option.
All outstanding repurchase rights under the Plan shall terminate
automatically upon the occurrence of any Corporate Transaction under Section 3
of this Article II, except
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to the extent the repurchase rights are to be assigned to the successor
corporation (or parent thereof) in connection with the Corporate Transaction.
(2) FIRST REFUSAL RIGHTS. Until such time as the Corporation's
outstanding shares of Common Stock are first registered under Section 12(g) of
the 1934 Act, the Corporation shall have the right of first refusal with respect
to any proposed sale or other disposition by Optionee (or any successor in
interest by reason of purchase, gift or other mode of transfer) of any shares of
Common Stock issued under the Plan. Such right of first refusal shall be
exercisable by the Corporation (or its assignees) in accordance with the terms
and conditions established by the Plan Administrator and set forth in the
instrument evidencing such right.
2. INCENTIVE OPTIONS
The terms and conditions specified below shall be applicable to all
Incentive Options granted under the Plan. Incentive Options may only be granted
to individuals who are Employees. Options which are specifically designated as
"nonstatutory" options when issued under the Plan shall NOT be subject to such
terms and conditions.
A. OPTION PRICE. The option price per share of the Common Stock
subject to an Incentive Option shall in no event be less than one hundred
percent (100%) of the Fair Market Value of a share of Common Stock on the grant
date.
B. DOLLAR LIMITATION. The aggregate Fair Market Value (determined
as of the respective date or dates of grant) of the Common Stock for which one
or more options granted to any Employee under this Plan (or any other option
plan of the Corporation or any parent or subsidiary corporation) may for the
first time become exercisable as incentive stock options under the Federal tax
laws during any one calendar year shall not exceed the sum of One Hundred
Thousand Dollars ($100,000). To the extent the Employee holds two or more such
options which become exercisable for the first time in the same calendar year,
the foregoing limitation on the exercisability of such options as Incentive
Options under the Federal tax laws shall be applied on the basis of the order in
which such options are granted.
Except as modified by the preceding provisions of this Section 2, all
the provisions of the Plan shall be applicable to the Incentive Options granted
hereunder.
3. CORPORATE TRANSACTION
A. In the event of one or more of the following shareholder-approved
transactions ("Corporate Transaction"):
(i) a merger or consolidation in which the Corporation is not the
surviving entity, except for a transaction the principal purpose of which is to
change the State of the Corporation's incorporation;
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(ii) the sale, transfer or other disposition of all or substantially
all of the assets of the Corporation in complete liquidation or dissolution of
the Corporation; or
(iii) any reverse merger in which the Corporation is the surviving
entity but in which all of the Corporation's outstanding voting stock is
transferred to the acquiring entity or its wholly-owned subsidiary,
then each option outstanding under the Plan shall terminate upon the
consummation of such Corporate Transaction and cease to be exercisable, unless
assumed by the successor corporation or parent thereof.
B. Each outstanding option which is assumed in connection with the
Corporate Transaction or is otherwise to continue in effect shall be
appropriately adjusted, immediately after such Corporate Transaction, to apply
and pertain to the number and class of securities which would be issuable, in
consummation of such Corporate Transaction, to an actual holder of the same
number of shares of Common Stock as are subject to such option immediately prior
to such Corporate Transaction, and appropriate adjustments shall also be made to
the option price payable per share, provided the aggregate option price payable
for such securities shall remain the same. Appropriate adjustments shall also
be made to the class and number of securities available for issuance under the
Plan following the consummation of such Corporate Transaction.
C. The grant of options under this Plan shall in no way affect the
right of the Corporation to adjust, reclassify, reorganize or otherwise change
its capital or business structure or to merge, consolidate, dissolve, liquidate
or sell or transfer all or any part of its business or assets.
4. CANCELLATION AND NEW GRANT OF OPTIONS
The Plan Administrator shall have the authority to effect, at any time
and from time to time, with the consent of the affected Optionees, the
cancellation of any or all outstanding options under the Plan and to grant in
substitution therefor new options under the Plan covering the same or different
numbers of shares of Common Stock but having an option price per share not less
than eighty-five percent (85%) of the Fair Market Value per share of Common
Stock on the new grant date (or one hundred percent (100%) of such Fair Market
Value in the case of an Incentive Option or, in the case of an option grant to a
10% Shareholder, not less than one hundred and ten percent (110%) of such Fair
Market Value).
5. EXTENSION OF EXERCISE PERIOD
The Plan Administrator shall have full power and authority to extend
(either at the time the option is granted or at any time while the option
remains outstanding) the period of time for which the option is to remain
exercisable following Optionee's cessation of Service, from the limited period
otherwise applicable under subsection 1(c) of Article II, to such greater period
of time as the Plan Administrator may deem appropriate under the
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circumstances. In no event, however, shall such option be exercisable after the
specified expiration date of the option term.
6. CASH-OUT OF OPTIONS
A. One or more Optionees may, in the Plan Administrator's sole
discretion, be granted limited cash-out rights to operate in tandem with their
outstanding options under the Plan; such limited cash-out rights shall be
exercisable only if the Corporation's outstanding Common Stock is registered
under Section 12(g) of the 1934 Act and Optionee is subject to the short-swing
profit restrictions of the Federal securities laws. Any option with such a
limited right in effect for at least six (6) months shall automatically be
cancelled upon the acquisition of fifty percent (50%) or more of the
Corporation's outstanding Common Stock (excluding for purposes of calculating
such percent the Common Stock holdings of officers and directors of the
Corporation who are subject to the short-swing profit restrictions of the
Federal securities laws) pursuant to a tender or exchange offer made by a person
or group of related persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by or is under common control
with the Corporation) which the Board does not recommend the Corporation's
shareholders to accept. In return for the cancelled option, Optionee shall be
entitled to a cash distribution from the Corporation in an amount equal to the
excess of (i) the Cash-Out Price of the shares of Common Stock in which Optionee
is vested under the cancelled option over (ii) the aggregate option price
payable for such vested shares. The cash distribution payable upon such
cancellation shall be made within five (5) days following the completion of such
tender or exchange offer, and neither the approval of the Plan Administrator nor
the consent of the Board shall be required in connection with such cancellation
and distribution.
B. For purposes of calculating the cash distribution, the Cash-Out
Price per share of the vested Common Stock subject to the cancelled option shall
be deemed to be equal to the GREATER of (i) the value per share on the date of
surrender, as determined in accordance with the valuation provisions of
subsection 1(a)(4) of Article II, or (ii) the highest reported price per share
paid in effecting the tender or exchange offer. However, if the cancelled
option is an Incentive Option, then the Cash-Out Price shall not exceed the
value per share determined under clause (i) above.
C. The shares of Common Stock subject to any option cancelled for an
appreciation distribution in accordance with this Section 6 shall NOT be
available for subsequent option grants or share issuances under the Plan.
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ARTICLE III
STOCK ISSUANCE PROGRAM
1. TERMS AND CONDITIONS OF STOCK ISSUANCES
Shares of Common Stock shall be issuable under the Stock Issuance
Program through direct and immediate issuances without any intervening stock
option grants. Each such stock issuance shall be evidenced by a Stock Issuance
Agreement ("Issuance Agreement") which complies with each of the terms and
conditions of this Article III.
A. ISSUE PRICE.
(1) The purchase price per share shall be fixed by the Plan
Administrator, but in no event shall it be less than eighty-five percent (85%)
of the Fair Market Value of a share of Common Stock at the time of issuance.
However, if any individual to whom a share issuance is made hereunder is a 10%
Shareholder (as defined in subsection 1(a)(2) of Article II), then the purchase
price per share shall not be less than one hundred ten percent (110%) of the
Fair Market Value of a share of Common Stock at the time of issuance. Fair
Market Value shall be determined in accordance with Article II, Section 1(A)(4).
(2) Shares shall be issued under the Plan for such consideration
as the Plan Administrator shall from time to time determine, provided that,
except as set forth in Article IV, Section 1, in no event shall shares be issued
for consideration other than
(A) cash or check payable to the Corporation, or
(B) past services rendered to the Corporation (or any
parent or subsidiary corporation).
B. VESTING SCHEDULE.
(1) The interest of a Participant in the shares of Common Stock
issued to him/her under the Plan may, in the absolute discretion of the Plan
Administrator, be fully and immediately vested upon issuance or may vest in one
or more installments in accordance with the vesting provisions of subsection
(B)(4). Except as otherwise provided in subsection (B)(2), the Participant may
not transfer any purchased shares in which he/she does not have a vested
interest. Accordingly, all unvested shares issued under the Plan shall bear the
restrictive legend specified in subsection (C)(1), until such legend is removed
in accordance with subsection (C)(2). The Participant, however, shall have all
the rights of a shareholder with respect to the shares of Common Stock issued to
him/her hereunder, whether or not his/her interest in such shares is vested.
Accordingly, the Participant shall have the right to vote such shares and to
receive any cash dividends or other distributions paid or made with respect to
such shares. Any new, additional or different shares of stock
11.
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or other property (including money paid other than as a regular cash dividend)
which the holder of unvested Common Stock may have the right to receive by
reason of a stock dividend, stock split, reclassification or other change
affecting the outstanding Common Stock as a class without the Corporation's
receipt of consideration shall be issued subject to (i) the same vesting
requirements under subsection (B)(4) applicable to the unvested Common Stock and
(ii) such escrow arrangements as the Plan Administrator shall deem appropriate.
(2) As used in this Article III, the term "transfer" shall
include (without limitation) any sale, pledge, encumbrance, gift or other
disposition of such shares. However, the Participant shall have the right to
make a gift of unvested shares acquired under the Stock Issuance Program to
his/her spouse, parents or issue or to a trust established for such spouse,
parents or issue, provided the transferee of such shares delivers to the
Corporation a written agreement to be bound by all the provisions of the Plan
and the Issuance Agreement executed by the Participant at the time of his/her
acquisition of the gifted shares.
(3) Should the Participant cease Service for any reason while
his/her interest in the Common Stock remains unvested, then the Corporation
shall have the right to repurchase, at the original purchase price paid by the
Participant, all or (at the discretion of the Corporation and with the consent
of the Participant) any shares in which the Participant is not at the time
vested, and the Participant shall thereafter cease to have any further
shareholder rights with respect to the repurchased shares.
(4) Any shares of Common Stock issued under the Stock Issuance
Program which are not vested at the time of such issuance shall vest in one or
more installments thereafter. The elements of the vesting schedule, namely the
performance or service objectives to be completed or achieved, the number of
installments in which the shares are to vest, the interval or intervals (if any)
which are to lapse between installments and the effect which death, Disability
or other event designated by the Plan Administrator is to have upon the vesting
schedule, shall be determined by the Plan Administrator and specified in the
Issuance Agreement. In no event, however, may the Plan Administrator impose a
vesting schedule upon any stock issuance effected under the Stock Issuance
Program which is more restrictive than twenty percent (20%) per year annual
vesting, beginning one year after the issue date of the Common Stock.
(5) The Plan Administrator may in its discretion elect not to
exercise, in whole or in part, its repurchase rights with respect to any
unvested Common Stock or other assets which would otherwise at the time be
subject to repurchase pursuant to the provisions of subsection (B)(3).
(6) No shares of Common Stock or other assets shall be issued or
delivered under this Plan unless and until, in the opinion of counsel for the
Corporation (or its successor in the event of any Corporate Transaction), there
shall have been compliance with all applicable requirements of the Federal and
state securities laws and all other applicable legal and regulatory
requirements.
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C. STOCK LEGENDS.
(1) Each certificate representing unvested shares of Common
Stock (or other securities) issued under the Stock Issuance Program shall bear a
restrictive legend substantially as follows:
"The securities represented by this certificate are unvested and
are accordingly subject to repurchase by the Corporation pursuant to
the provisions of the Issuance Agreement between the Corporation and
the registered holder of the securities (or his/her predecessor in
interest). Such agreement imposes restrictions on the transferability
of the securities represented by this certificate and grants certain
repurchase rights to the Corporation in the event the registered
holder (or predecessor in interest) terminates his/her employment or
service with the Corporation. A copy of such agreement is on file at
the principal office of the Corporation."
(2) As the interest of the Participant vests with respect to any
stock certificate representing shares acquired under the Stock Issuance Program,
the Corporation shall, upon the Participant's delivery of such certificate
during the period or periods designated each year by the Plan Administrator,
issue a new certificate for the vested shares without the restrictive legend of
subsection (c)(1) and a second certificate for the balance of the shares with
such legend. If the Corporation repurchases any unvested shares of the
Participant pursuant to the provisions of subsection (b)(3), the Corporation
shall at the time the repurchase is effected deliver a new certificate, without
the restrictive legend of subsection (c)(1), representing the number of shares
(if any) in which the Participant is vested and which are accordingly no longer
subject to repurchase by the Corporation.
D. RIGHT OF FIRST REFUSAL. Until such time as the Corporation's
outstanding shares of Common Stock are first registered under Section 12(g) of
the 1934 Act, the Corporation shall have a right of first refusal with respect
to any proposed disposition by the Participant (or any successor in interest by
reason of purchase, gift or other mode of transfer) of one or more shares of
such Common Stock. Such right of first refusal shall be exercisable by the
Corporation (or its assignees) in accordance with the terms and conditions
specified in the instrument evidencing such right.
2. CORPORATE TRANSACTION
All of the Corporation's outstanding repurchase rights under this
Article III shall automatically terminate upon the occurrence of a Corporate
Transaction (as defined in Section 3 of Article II), except to the extent the
Corporation's outstanding repurchase rights are to be assigned to the successor
corporation (or parent thereof) in connection with the Corporate Transaction.
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ARTICLE IV
MISCELLANEOUS
1. LOANS
A. The Plan Administrator may assist any Optionee or Participant
(including an Optionee or Participant who is an officer or director of the
Corporation) in the exercise of one or more options granted to such Optionee
under Article II or the purchase of one or more shares issued to such
Participant under Article III, including the satisfaction of any Federal, state
and local income and employment tax obligations arising therefrom, by:
(i) authorizing the extension of a loan from the Corporation to
such Optionee or Participant, or
(ii) permitting Optionee or Participant to pay the option price
or purchase price for the purchased Common Stock in installments over a period
of years.
B. The terms of any loan or installment method of payment (including
the interest rate and terms of repayment) shall be established by the Plan
Administrator in its sole discretion. Loans or installment payments may be
granted with or without security or collateral. However, any loan made to a
consultant or other non-employee advisor must be secured by property other than
the purchased shares of Common Stock. In all events the maximum credit
available to each Optionee or Participant may not exceed the SUM of (i) the
aggregate option price or purchase price payable for the purchased shares plus
(ii) any Federal, state and local income and employment tax liability incurred
by Optionee or Participant in connection with such exercise or purchase.
C. The Plan Administrator may, in its absolute discretion, determine
that one or more loans extended under the financial assistance program shall be
subject to forgiveness by the Corporation in whole or in part upon such terms
and conditions as the Board in its discretion deems appropriate.
2. NO EMPLOYMENT OR SERVICE RIGHTS
Nothing under the Plan shall confer upon Optionee or the Participant
any right to continue in the service or employ of the Corporation (or any parent
or subsidiary corporation of the Corporation employing or retaining such
Optionee or Participant) for any period of specific duration or interfere with
or otherwise restrict in any way the rights of the Corporation (or any parent or
subsidiary corporation of the Corporation employing or retaining such Optionee
or Participant) or of Optionee or the Participant, which rights are hereby
expressly reserved by each, to terminate the Service of Optionee or Participant
at any time for any reason whatsoever, with or without cause.
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3. AMENDMENT OF THE PLAN AND AWARDS
A. The Board shall have complete and exclusive power and authority
to amend or modify the Plan in any or all respects whatsoever. However, no such
amendment or modification shall adversely affect the rights and obligations of
an Optionee with respect to options at the time outstanding under the Plan, nor
adversely affect the rights of any Participant with respect to Common Stock
issued under the Plan prior to such action, unless Optionee or Participant
consents to such amendment. In addition, the Board shall not, without the
approval of the Corporation's shareholders, amend the Plan to (i) materially
increase the maximum number of shares issuable under the Plan (except for
permissible adjustments under Article I, Section 5(C), (ii) materially increase
the benefits accruing to individuals who participate under the Plan, or (iii)
materially modify the eligibility requirements for participation under the Plan.
B. (i) Options to purchase shares of Common Stock may be granted
under the Option Grant Program and (ii) shares of Common Stock may be issued
under the Stock Issuance Program, which are in both instances in excess of the
number of shares then available for issuance under the Plan, provided any excess
shares actually issued under the Option Grant Program or the Stock Issuance
Program are held in escrow until there is obtained shareholder approval of an
amendment sufficiently increasing the number of shares of Common Stock available
for issuance under the Plan. If such shareholder approval is not obtained
within twelve (12) months after the date the initial excess issuances are made,
whether as stock option grants or direct stock issuances, then (I) any
unexercised options representing such excess shall terminate and cease to be
exercisable and (II) the Corporation shall promptly refund to Optionees and
Participants the option or purchase price paid for any excess shares issued
under the Plan and held in escrow, together with interest (at the applicable
Short Term Federal Rate) for the period the shares were held in escrow, and such
shares shall thereupon be automatically cancelled and cease to be outstanding.
4. EFFECTIVE DATE AND TERM OF PLAN
A. The Plan was initially adopted by the Board on February 9, 1993
and was approved by the Corporation's shareholders on April 12, 1993. On
September 14, 1993 the Board approved an amendment to the Plan ("the 1993
Amendment") to authorize an increase in the aggregate number of shares of Common
Stock available for issuance under the Plan from 450,000 to 650,000 shares. The
increase was approved by the Corporation's shareholders on September 27, 1993.
The Board further amended the Plan, effective September 15, 1994 ("the 1994
Amendment"), to increase the aggregate number of shares authorized for issuance
thereunder by an additional 200,000 shares to 850,000 shares. The increase was
approved by the Corporation's shareholders on October 14, 1994. In connection
with both the 1993 and 1994 Amendments, minor technical revisions were made to
the Plan to bring it into compliance with the current requirements of the
California Corporations Commissioner.
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B. The provisions of the 1993 and 1994 Amendments shall apply only
to options granted under the Plan from and after the date such Amendments were
adopted by the Board. Each option issued and outstanding under the Plan
immediately prior to adoption of each such Amendment shall continue to be
governed by the terms and conditions of the Plan (and the instrument evidencing
such grant) as in effect on the date each such option was previously granted,
and nothing in the 1993 or 1994 Amendments shall be deemed to affect or
otherwise modify the rights or obligations of the holders of such prior options
with respect to the acquisition of shares of Common Stock thereunder.
C. The Plan shall terminate upon the EARLIER of (i) February 8, 2003
or (ii) the date on which all shares available for issuance under the Plan have
been issued pursuant to the exercise of options granted under Article II or the
issuance of shares under Article III. If the date of termination is determined
under clause (i) above, then no options outstanding on such date under Article
II and no shares issued and outstanding on such date under Article III shall be
affected by the termination of the Plan, and such securities shall thereafter
continue to have force and effect in accordance with the provisions of the stock
option agreements evidencing such options and the stock issuance agreements
evidencing the issuance of such shares.
5. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the issuance of
shares of Common Stock under the Plan shall be used for general corporate
purposes.
6. WITHHOLDING
The Corporation's obligation to deliver shares upon the exercise of
any options granted under Article II or upon the purchase of any shares issued
shall be subject to the satisfaction of all applicable Federal, state and local
income and employment tax withholding requirements.
7. REGULATORY APPROVALS
The implementation of the Plan, the granting of any options under the
Option Grant Program, the issuance of any shares under the Stock Issuance
Program, and the issuance of Common Stock upon the exercise of the option grants
made hereunder shall be subject to the Corporation's procurement of all
approvals and permits required by regulatory authorities having jurisdiction
over the Plan, the options granted under it, and the Common Stock issued
pursuant to it.
8. FINANCIAL REPORTS
The Corporation shall deliver a balance sheet and an income statement
at least annually to each individual holding an outstanding option under and
each participant in the Plan, unless such Optionee or participant is a key
employee whose duties in connection with the Corporation assure such individual
access to equivalent information.
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EXHIBIT 10.22
ADVANCED FIBRE COMMUNICATIONS
STOCK OPTION AGREEMENT
WITNESSETH:
RECITALS
A. The Board of Directors of the Corporation has adopted the
Advanced Fibre Communications 1993 Stock Option/Stock Issuance Plan, as amended
(the "Plan") for the purpose of attracting and retaining the services of
selected key employees (including officers and directors), non-employee members
of the Board of Directors and consultants who contribute to the financial
success of the Corporation or its parent or subsidiary corporations.
B. Optionee is an individual who is to render valuable services to the
Corporation or its parent or subsidiary corporations, and this Agreement is
executed pursuant to, and is intended to carry out the purposes of, the Plan in
connection with the Corporation's grant of a stock option to Optionee.
NOW, THEREFORE, it is hereby agreed as follows:
1. GRANT OF OPTION. Subject to and upon the terms and conditions
set forth in this Agreement, the Corporation hereby grants to Optionee, as of
the grant date (the "Grant Date") specified in the accompanying Notice of Grant
of Stock Option (the "Grant Notice"), a stock option to purchase up to that
number of shares of the Corporation's Common Stock (the "Option Shares") as is
specified in the Grant Notice. The Option Shares shall be purchasable from time
to time during the option term at the option price per share (the "Option
Price") specified in the Grant Notice.
2. OPTION TERM. This option shall have a maximum term of ten (10)
years measured from the Grant Date and shall expire at the close of business on
the expiration date (the "Expiration Date") specified in the Grant Notice,
unless sooner terminated in accordance with Paragraph 5, 6 or 18.
3. LIMITED TRANSFERABILITY. This option shall be neither
transferable nor assignable by Optionee other than by will or by the laws of
descent and distribution following Optionee's death and may be exercised, during
Optionee's lifetime, only by Optionee.
4. DATES OF EXERCISE. This option shall become exercisable for the
Option Shares in one or more installments as is specified in the Grant Notice.
As the option
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becomes exercisable in one or more installments, the installments shall
accumulate and the option shall remain exercisable for such installments until
the Expiration Date or the sooner termination of the option term under
Paragraphs 5, 6 or 18 of this Agreement.
5. TERMINATION OF OPTION TERM. The option term specified in
Paragraph 2 shall terminate (and this option shall cease to be exercisable)
prior to the Expiration Date should any of the following provisions become
applicable:
(i) Should Optionee cease to remain in Service for any
reason (other than death or Disability) while this option is outstanding, then
the period for exercising this option shall be reduced to a three (3)-month
period commencing with the date of such cessation of Service, but in no event
shall this option be exercisable at any time after the Expiration Date. Upon
the expiration of such three (3)-month period or (if earlier) upon the
Expiration Date, this option shall terminate and cease to be outstanding.
(ii) Should Optionee die while this option is outstanding,
then the personal representative of Optionee's estate or the person or persons
to whom the option is transferred pursuant to Optionee's will or in accordance
with the laws of descent and distribution shall have the right to exercise this
option. Such right shall lapse and this option shall cease to be exercisable
upon the EARLIER of (a) the expiration of the twelve (12)-month period measured
from the date of Optionee's death or (b) the Expiration Date. Upon the
expiration of such twelve (12)-month period or (if earlier) upon the Expiration
Date, this option shall terminate and cease to be outstanding.
(iii) Should Optionee cease Service by reason of Disability
while this option is outstanding, then Optionee shall have a period of six (6)
months (commencing with the date of such cessation of Service) during which to
exercise this option. However, should such Disability be deemed to constitute
Permanent Disability, then the period during which this option is to remain
exercisable shall be extended by an additional six (6) months so that the
exercise period shall be limited to the twelve (12)-month period following the
date of Optionee's cessation of Service by reason of such Permanent Disability.
In no event shall this option be exercisable at any time after the Expiration
Date. Upon the expiration of the applicable six (6) or twelve (12)-month period
or (if earlier) upon the Expiration Date, this option shall terminate and cease
to be outstanding.
NOTE: Exercise of this option on a date later than three (3)
months following cessation of Service due to Disability will
result in loss of favorable incentive stock option treatment,
UNLESS such Disability constitutes Permanent Disability. In the
event that incentive stock option treatment is not available,
this option will be taxed as a non-statutory option upon
exercise.
2.
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(iv) During the limited period of post-Service
exercisability applicable under subparagraph (i), (ii) or (iii) above, this
option may not be exercised in the aggregate for more than the number of Option
Shares in which Optionee is, at the time of his/her cessation of Service, vested
in accordance with the vesting schedule specified in the Grant Notice. To the
extent Optionee is not vested in the Option Shares at the time of his/her
cessation of Service, this option shall immediately terminate and cease to be
outstanding with respect to those shares.
(v) For purposes of this Paragraph 5 and for all other
purposes under this Agreement:
A. DISABILITY shall mean the inability of an individual to engage in
any substantial gainful activity by reason of any medically determinable
physical or mental impairment and shall be determined by the Plan Administrator
on the basis of such medical evidence as the Plan Administrator deems warranted
under the circumstances. PERMANENT DISABILITY shall mean the inability to
engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment which can be expected to result in
death or which has lasted or can be expected to last for a continuous period of
not less than twelve (12) months.
B. Optionee shall be deemed to remain in SERVICE for so long as
Optionee continues to render periodic services to the Corporation or any parent
or subsidiary corporation, whether as an Employee, a non-employee member of the
board of directors, or a consultant.
C. Optionee shall be deemed to be an EMPLOYEE of the Corporation and
to continue in the Corporation's employ for so long as Optionee remains in the
employ of the Corporation or one or more of its parent or subsidiary
corporations, subject to the control and direction of the employer entity as to
both the work to be performed and the manner and method of performance.
D. A corporation shall be considered to be a SUBSIDIARY corporation
of the Corporation if it is a member of an unbroken chain of corporations
beginning with the Corporation, provided each such corporation in the chain
(other than the last corporation) owns, at the time of determination, stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain.
E. A corporation shall be considered to be a PARENT corporation of
the Corporation if it is a member of an unbroken chain ending with the
Corporation, provided each such corporation in the chain (other than the
Corporation) owns, at the time of determination, stock possessing 50% or more of
the total combined voting power of all classes of stock in one of the other
corporations in such chain.
3.
<PAGE>
6. SPECIAL TERMINATION OF OPTION.
A. In the event of one or more of the following stockholder-approved
transactions (a "Corporate Transaction"):
(i) a merger or consolidation in which the Corporation is not
the surviving entity, except for a transaction the principal purpose of
which is to change the State of the Corporation's incorporation; or
(ii) the sale, transfer or other disposition of all or
substantially all of the assets of the Corporation in complete liquidation
or dissolution of the Corporation; or
(iii) any reverse merger in which the Corporation is the surviving
entity but in which all of the Corporation's outstanding voting stock is
transferred to the acquiring entity or its wholly-owned subsidiary,
then this option, to the extent not previously exercised, shall terminate upon
the consummation of the Corporate Transaction and cease to be exercisable,
unless it is expressly assumed by the successor corporation or parent thereof.
B. This Agreement shall not in any way affect the right of the
Corporation to adjust, reclassify, reorganize or otherwise make changes in its
capital or business structure or to merge, consolidate, dissolve, liquidate or
sell or transfer all or any part of its business or assets.
7. ADJUSTMENT IN OPTION SHARES.
A. In the event any change is made to the Corporation's outstanding
Common Stock by reason of any stock split, stock dividend, combination of
shares, exchange of shares, or other change affecting the outstanding Common
Stock as a class without receipt of consideration, then appropriate adjustments
shall be made to (i) the total number of Option Shares subject to this option,
(ii) the number of Option Shares for which this option is to be exercisable from
and after each installment date specified in the Grant Notice and (iii) the
Option Price payable per share in order to reflect such change and thereby
preclude a dilution or enlargement of benefits hereunder.
B. If this option is to be assumed in connection with a Corporate
Transaction described in Paragraph 6 or is otherwise to remain outstanding, then
this option shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply and pertain to the number and class of securities which
would have been issuable to Optionee in the consummation of such Corporate
Transaction had the option been exercised immediately prior to such Corporate
Transaction, and appropriate adjustments shall also be
4.
<PAGE>
made to the Option Price payable per share, PROVIDED the aggregate Option Price
payable hereunder shall remain the same.
8. PRIVILEGE OF STOCK OWNERSHIP. The holder of this option shall
not have any of the rights of a shareholder with respect to the Option Shares
until such individual shall have exercised the option and paid the Option Price.
9. MANNER OF EXERCISING OPTION.
A. In order to exercise this option with respect to all or any part
of the Option Shares for which this option is at the time exercisable, Optionee
(or in the case of exercise after Optionee's death, Optionee's executor,
administrator, heir or legatee, as the case may be) must take the following
actions:
(i) Execute and deliver to the Secretary of the Corporation a
stock purchase agreement (the "Purchase Agreement") in substantially the
form of Exhibit B to the Grant Notice.
(ii) Pay the aggregate Option Price for the purchased shares in
one or more of the following alternative forms:
1. full payment in cash or check; or
2. any other form which the Plan Administrator may,
in its discretion, approve at the time of exercise in accordance
with the provisions of paragraph 15 of this Agreement.(1)
Should the Corporation's outstanding Common Stock be registered
under Section 12(g) of the Securities Exchange Act of 1934, as amended (the
"1934 Act") at the time the option is exercised, then the Option Price may
also be paid as follows:
3. in shares of Common Stock held by Optionee for the
requisite period necessary to avoid a charge to the Corporation's
earnings for financial reporting purposes and valued at Fair
Market Value (as defined below) on the Exercise Date; or
4. to the extent exercised for vested Option Shares,
through a special sale and remittance procedure pursuant to which
- --------------------
(1) Authorization of a loan or installment payment method under such
provisions may, under currently proposed Treasury Regulations, result in the
loss of incentive stock option treatment under the Federal tax laws.
5.
<PAGE>
Optionee is to provide irrevocable written instructions (a) to a
Corporation-designated brokerage firm to effect the immediate
sale of the purchased shares and remit to the Corporation, out of
the sale proceeds available on the settlement date, sufficient
funds to cover the aggregate Option Price payable for the
purchased shares plus all applicable Federal, state and local
income and employment taxes required to be withheld by the
Corporation by reason of such purchase and (b) to the Corporation
to deliver the certificates for the purchased shares directly to
such brokerage firm in order to effect the sale transaction.
(iii) Furnish to the Corporation appropriate documentation that
the person or persons exercising the option, if other than Optionee, have
the right to exercise this option.
Except to the extent the sale and remittance procedure is
utilized in connection with the exercise of the option, payment of the
Option Price must accompany the Purchase Agreement delivered to the
Corporation.
B. For purposes of this Agreement, the Exercise Date shall be the
date on which the executed Purchase Agreement shall have been delivered to the
Corporation, and the Fair Market Value of a share of Common Stock on any
relevant date shall be determined in accordance with subparagraphs (i) through
(iii) below:
(i) If the Common Stock is not at the time listed or admitted to
trading on any stock exchange but is traded on the Nasdaq National Market
System, the Fair Market Value shall be the closing selling price per share
of Common Stock on the date in question, as the price is reported by the
National Association of Securities Dealers through the Nasdaq National
Market System or any successor system. If there is no closing selling
price for the Common Stock on the date in question, then the Fair Market
Value shall be the closing selling price on the last preceding date for
which such quotation exists.
(ii) If the Common Stock is at the time listed or admitted to
trading on any stock exchange, then the Fair Market Value shall be the
closing selling price per share of Common Stock on the date in question on
the stock exchange determined by the Plan Administrator to be the primary
market for the Common Stock, as such price is officially quoted in the
composite tape of transactions on such exchange. If there is no closing
selling price for the Common Stock on the date in question, then the Fair
Market Value shall be the closing selling price on the last preceding date
for which such quotation exists.
(iii) If the Common Stock is at the time neither listed nor
admitted to trading on any stock exchange nor traded on the Nasdaq National
Market System,
6.
<PAGE>
then such Fair Market Value shall be determined by the Plan Administrator after
taking into account such factors as the Plan Administrator shall deem
appropriate.
C. As soon after the Exercise Date as practical, the Corporation
shall mail or deliver to Optionee or to the other person or persons exercising
this option a certificate or certificates representing the shares so purchased
and paid for, with the appropriate legends affixed thereto.
D. In no event may this option be exercised for any fractional
shares.
10. REPURCHASE RIGHTS. THE OPTIONEE HEREBY AGREES THAT ALL OPTION
SHARES ACQUIRED UPON THE EXERCISE OF THIS OPTION SHALL BE SUBJECT TO CERTAIN
RIGHTS OF THE CORPORATION AND ITS ASSIGNS TO REPURCHASE SUCH SHARES IN
ACCORDANCE WITH THE TERMS AND CONDITIONS SPECIFIED IN THE PURCHASE AGREEMENT.
11. COMPLIANCE WITH LAWS AND REGULATIONS.
A. The exercise of this option and the issuance of Option Shares
upon such exercise shall be subject to compliance by the Corporation and the
Optionee with all applicable requirements of law relating thereto and with all
applicable regulations of any stock exchange on which shares of the
Corporation's Common Stock may be listed at the time of such exercise and
issuance.
B. In connection with the exercise of this option, Optionee shall
execute and deliver to the Corporation such representations in writing as may be
requested by the Corporation in order for it to comply with the applicable
requirements of Federal and state securities laws.
12. SUCCESSORS AND ASSIGNS. Except to the extent otherwise provided
in Paragraph 3 or 6, the provisions of this Agreement shall inure to the benefit
of, and be binding upon, the successors, administrators, heirs, legal
representatives and assigns of Optionee and the successors and assigns of the
Corporation.
13. LIABILITY OF CORPORATION.
A. If the Option Shares covered by this Agreement exceed, as of the
Grant Date, the number of shares of Common Stock which may without shareholder
approval be issued under the Plan, then this option shall be void with respect
to such excess shares, unless shareholder approval of an amendment sufficiently
increasing the number of shares of Common Stock issuable under the Plan is
obtained in accordance with the provisions of Article IV, Section 3 of the Plan.
7.
<PAGE>
B. The inability of the Corporation to obtain approval from any
regulatory body having authority deemed by the Corporation to be necessary to
the lawful issuance and sale of any Common Stock pursuant to this option shall
relieve the Corporation of any liability with respect to the non-issuance or
sale of the Common Stock as to which such approval shall not have been obtained.
The Corporation, however, shall use its best efforts to obtain all such
approvals.
14. NOTICES. Any notice required to be given or delivered to the
Corporation under the terms of this Agreement shall be in writing and addressed
to the Corporation in care of the Corporate Secretary at its principal corporate
offices. Any notice required to be given or delivered to Optionee shall be in
writing and addressed to Optionee at the address indicated below Optionee's
signature line on the Grant Notice. All notices shall be deemed to have been
given or delivered upon personal delivery or upon deposit in the U.S. mail,
postage prepaid and properly addressed to the party to be notified.
15. LOANS. The Plan Administrator may, in its absolute discretion
and without any obligation to do so, assist the Optionee in the exercise of this
option by (i) authorizing the extension of a loan to the Optionee from the
Corporation or (ii) permitting the Optionee to pay the exercise price for the
purchased Common Stock in installments over a period of years. The terms of any
such loan or installment method of payment (including the interest rate, the
requirements for collateral and the terms of repayment) shall be established by
the Plan Administrator in its sole discretion.
16. CONSTRUCTION. This Agreement and the option evidenced hereby are
made and granted pursuant to the Plan and are in all respects limited by and
subject to the express terms and provisions of the Plan. All decisions of the
Plan Administrator with respect to any question or issue arising under the Plan
or this Agreement shall be conclusive and binding on all persons having an
interest in this option.
17. GOVERNING LAW. The interpretation, performance, and enforcement
of this Agreement shall be governed by the laws of the State of California
without resort to that State's conflict-of-laws rules.
18. SHAREHOLDER APPROVAL.
If the Option Shares covered by this Agreement exceed, as of the
Grant Date, the number of shares of Common Stock which may without shareholder
approval be issued under the Plan, then this option shall be void with respect
to such excess shares, unless shareholder approval of an amendment sufficiently
increasing the number of shares of Common Stock issuable under the Plan is
obtained in accordance with the provisions of the Plan.
8.
<PAGE>
19. ADDITIONAL TERMS APPLICABLE TO AN INCENTIVE STOCK OPTION. In the
event this option is designated an incentive stock option in the Grant Notice,
the following terms and conditions shall also apply to the grant:
A. This option shall cease to qualify for favorable tax treatment as
an incentive stock option under the Federal tax laws if (and to the extent) this
option is exercised for one or more Option Shares: (i) more than three (3)
months after the date Optionee ceases to be an Employee for any reason other
than death or Permanent Disability (as defined in Paragraph 5) or (ii) more than
one (1) year after the date Optionee ceases to be an Employee by reason of
Permanent Disability.
B. Should this option be designated as immediately exercisable in
the Grant Notice, then this option shall not become exercisable in the calendar
year in which granted if (and to the extent) the aggregate Fair Market Value
(determined at the Grant Date) of the Corporation's Common Stock for which this
option would otherwise first become exercisable in such calendar year would,
when added to the aggregate Fair Market Value (determined as of the respective
date or dates of grant) of the Corporation's Common Stock for which this option
or one or more other incentive stock options granted to the Optionee prior to
the Grant Date (whether under the Plan or any other option plan of the
Corporation or its parent or subsidiary corporations) first become exercisable
during the same calendar year, exceed One Hundred Thousand Dollars ($100,000) in
the aggregate. To the extent the exercisability of this option is deferred by
reason of the foregoing limitation, the deferred portion will first become
exercisable in the first calendar year or years thereafter in which the One
Hundred Thousand Dollar ($100,000) limitation of this Paragraph 19.B would not
be contravened, but such deferral shall in all events end immediately prior to
the effective date of a Corporate Transaction in which this option is not to be
assumed, whereupon the option shall become exercisable as a non-statutory option
for the balance of the Option Shares.
C. Should this option be designated as exercisable in installments
in the Grant Notice, then no installment under this option (whether annual or
monthly) shall qualify for favorable tax treatment as an incentive stock option
under the Federal tax laws if (and to the extent) the aggregate Fair Market
Value (determined at the Grant Date) of the Corporation's Common Stock for which
such installment first becomes exercisable hereunder will, when added to the
aggregate Fair Market Value (determined as of the respective date or dates of
grant) of the Corporation's Common Stock for which one or more other incentive
stock options granted to the Optionee prior to the Grant Date (whether under the
Plan or any other option plan of the Corporation or any parent or subsidiary
corporation) first become exercisable during the same calendar year, exceed One
Hundred Thousand Dollars ($100,000) in the aggregate. Should such One Hundred
Thousand Dollar ($100,000) limitation be exceeded in any calendar year, this
option shall nevertheless become exercisable for the excess shares in such
calendar year as a non-statutory option.
9.
<PAGE>
20. WITHHOLDING. Optionee hereby agrees to make appropriate
arrangements with the Corporation or parent or subsidiary corporation employing
Optionee for the satisfaction of all Federal, state or local income tax
withholding requirements and Federal social security employee tax requirements
applicable to the exercise of this option.
10.
<PAGE>
EXHIBIT 10.23
ADVANCED FIBRE COMMUNICATIONS
NOTICE OF GRANT OF STOCK OPTION
Notice is hereby given of the following stock option grant (the
"Option") to purchase shares of the Common Stock of ADVANCED FIBRE
COMMUNICATIONS (the "Corporation"):
OPTIONEE: ____________________________________________________________
GRANT DATE: __________________________________________________________
GRANT NUMBER: ________ OPTION PRICE: $ _____________________ per share
VESTING COMMENCEMENT DATE: ___________________________________________
NUMBER OF OPTION SHARES: ______________________________________ shares
EXPIRATION DATE: _____________________________________________________
TYPE OF OPTION: _____ Incentive Stock Option
_____ Non-Statutory Stock Option
DATE EXERCISABLE: Immediately Exercisable
VESTING SCHEDULE: The Option Shares shall be unvested and subject to
repurchase by the Corporation at the Option Price paid per share. As
Optionee remains in Service (as defined in the attached Stock Purchase
Agreement), the Optionee shall acquire a vested interest in, and the
Corporation's Repurchase Right will accordingly lapse with respect to,
(i) 25% of the Option Shares one (1) year after the Vesting
Commencement Date and (ii) the balance of the Option Shares in equal
successive monthly installments over each of the next thirty-six (36)
months of Service thereafter. In no event will any additional Option
Shares vest after the Optionee's cessation of Service.
Optionee understands that the Option is granted pursuant to the
Corporation's 1993 Stock Option/Stock Issuance Plan, as amended (the "Plan").
By signing below, optionee agrees to be bound by the terms and conditions of the
Plan and the terms and conditions of the Option as set forth in the Stock Option
Agreement attached hereto as Exhibit A. Optionee understands that any Option
Shares purchased under the Option will
<PAGE>
be subject to the terms and conditions set forth in the Stock Purchase Agreement
attached hereto as Exhibit B.
Optionee hereby acknowledges receipt of a copy of the Plan in the form
attached hereto as Exhibit C.
REPURCHASE RIGHTS. THE OPTIONEE HEREBY AGREES THAT ALL OPTION SHARES
ACQUIRED UPON THE EXERCISE OF THE OPTION SHALL BE SUBJECT TO CERTAIN REPURCHASE
RIGHTS AND RIGHTS OF FIRST REFUSAL EXERCISABLE BY THE CORPORATION AND ITS
ASSIGNS UPON ANY PROPOSED SALE, ASSIGNMENT, TRANSFER, ENCUMBRANCE OR OTHER
DISPOSITION OF THE OPTION SHARES OR UPON TERMINATION OF SERVICE WITH THE
CORPORATION. THE TERMS AND CONDITIONS OF SUCH RIGHTS ARE SPECIFIED IN THE
ATTACHED STOCK PURCHASE AGREEMENT.
NO EMPLOYMENT OR SERVICE CONTRACT. Nothing in this Agreement or in
the Plan shall confer upon the Optionee any right to continue in the Service of
the Corporation for any period of specific duration or interfere with or
otherwise restrict in any way the rights of the Corporation or the Optionee,
which rights are hereby expressly reserved by each, to terminate Optionee's
Service at any time for any reason whatsoever, with or without cause.
___________________, 199__
Date
ADVANCED FIBRE COMMUNICATIONS
By: ________________________________________
Title: _____________________________________
____________________________________________
Optionee
Address: ____________________________________________
____________________________________________
Exhibit A: Stock Option Agreement
Exhibit B: Stock Purchase Agreement
Exhibit C: 1993 Stock Option/Stock Issuance Plan
<PAGE>
EXHIBIT A
STOCK OPTION AGREEMENT
<PAGE>
EXHIBIT B
STOCK PURCHASE AGREEMENT
<PAGE>
EXHIBIT C
1993 STOCK OPTION/STOCK ISSUANCE PLAN
<PAGE>
EXHIBIT 10.24
REPURCHASE RIGHT
RIGHT OF FIRST REFUSAL
ADVANCED FIBRE COMMUNICATIONS
STOCK PURCHASE AGREEMENT
AGREEMENT made as of this ___ day of _________, 19__, by and among
Advanced Fibre Communications, a California corporation (the "Corporation"),
_____________________________, the holder of a stock option (the "Optionee")
under the Corporation's 1993 Stock Option/Stock Issuance Plan and _____________
____________, the Optionee's spouse.
I. EXERCISE OF OPTION
1.1 EXERCISE. Optionee hereby purchases ________________ shares
("Purchased Shares") of the Corporation's common stock ("Common Stock") pursuant
to that certain option ("Option") granted Optionee on _____________, 19___
("Grant Date") to purchase up to ____________ shares of the Common Stock ("Total
Purchasable Shares") under the Corporation's 1993 Stock Option/Stock Issuance
Plan, as amended (the "Plan") at an exercise price of $__________ per share
("Option Price").
1.2 PAYMENT. Concurrently with the delivery of this Agreement to the
Corporate Secretary of the Corporation, Optionee shall pay the Option Price for
the Purchased Shares in accordance with the provisions of the agreement between
the Corporation and Optionee evidencing the Option (the "Option Agreement") and
shall deliver whatever additional documents may be required by the Option
Agreement as a condition for exercise, together with a duly-executed blank
Assignment Separate from Certificate (in the form attached hereto as Exhibit I)
with respect to the Purchased Shares.
1.3 DELIVERY OF CERTIFICATES. The certificates representing the
Purchased Shares hereunder shall be held in escrow by the Corporate Secretary of
the Corporation in accordance with the provisions of Article VII.
1.4 SHAREHOLDER RIGHTS. Until such time as the Corporation actually
exercises its repurchase right, rights of first refusal or special purchase
right under this Agreement, Optionee (or any successor in interest) shall have
all the rights of a shareholder (including voting and dividend rights) with
respect to the Purchased Shares, including the Purchased Shares held in escrow
under Article VII, subject, however, to the transfer restrictions of Article IV.
<PAGE>
II. SECURITIES LAW COMPLIANCE
2.1 EXEMPTION FROM REGISTRATION. The Purchased Shares have not been
registered under the Securities Act of 1933, as amended (the "1933 Act"), and
are accordingly being issued to Optionee in reliance upon the exemption from
such registration provided by Rule 701 of the Securities and Exchange Commission
(the "SEC") for stock issuances under compensatory benefit plans such as the
Plan. Optionee hereby acknowledges previous receipt of a copy of the
documentation for such Plan in the form of Exhibit C to the Notice of Grant of
Stock Option (the "Grant Notice") accompanying the Option Agreement.
2.2 RESTRICTED SECURITIES.
A. Optionee hereby confirms that Optionee has been informed that the
Purchased Shares are restricted securities under the 1933 Act and may not be
resold or transferred unless the Purchased Shares are first registered under the
Federal securities laws or unless an exemption from such registration is
available. Accordingly, Optionee hereby acknowledges that Optionee is prepared
to hold the Purchased Shares for an indefinite period and that Optionee is aware
that Rule 144 of the SEC issued under the 1933 Act is not presently available to
exempt the sale of the Purchased Shares from the registration requirements of
the 1933 Act.
B. Upon the expiration of the ninety (90)-day period immediately
following the date on which the Corporation first becomes subject to the
reporting requirements of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), the Purchased Shares, to the extent vested under Article V, may
be sold (without registration) pursuant to the applicable requirements of Rule
144. If Optionee is at the time of such sale an affiliate of the Corporation
for purposes of Rule 144 or was such an affiliate during the preceding three (3)
months, then the sale must comply with all the requirements of Rule 144
(including the volume limitation on the number of shares sold, the
broker/market-maker sale requirement and the requisite notice to the SEC);
however, the two (2)-year holding period requirement of the Rule will not be
applicable. If Optionee is not at the time of the sale an affiliate of the
Corporation nor was such an affiliate during the preceding three (3) months,
then none of the requirements of Rule 144 (other than the broker/market-maker
sale requirement for Purchased Shares held for less than three (3) years
following payment in cash of the Option Price therefor) will be applicable to
the sale.
C. Should the Corporation not become subject to the reporting
requirements of the Exchange Act, then Optionee may, provided he/she is not at
the time an affiliate of the Corporation (nor was such an affiliate during the
preceding three (3) months), sell the Purchased Shares (without registration)
pursuant to paragraph (k) of Rule 144 after the Purchased Shares have been held
for a period of three (3) years following the payment in cash of the Option
Price for such shares.
2.
<PAGE>
2.3 DISPOSITION OF SHARES. Optionee hereby agrees that Optionee
shall make no disposition of the Purchased Shares (other than a permitted
transfer under paragraph 4.1) unless and until there is compliance with all of
the following requirements:
(a) Optionee shall have notified the Corporation of the proposed
disposition and provided a written summary of the terms and conditions of
the proposed disposition.
(b) Optionee shall have complied with all requirements of this
Agreement applicable to the disposition of the Purchased Shares.
(c) Optionee shall have provided the Corporation with written
assurances, in form and substance satisfactory to the Corporation, that (i)
the proposed disposition does not require registration of the Purchased
Shares under the 1933 Act or (ii) all appropriate action necessary for
compliance with the registration requirements of the 1933 Act or of any
exemption from registration available under the 1933 Act (including Rule
144) has been taken.
(d) Optionee shall have provided the Corporation with written
assurances, in form and substance satisfactory to the Corporation, that the
proposed disposition will not result in the contravention of any transfer
restrictions applicable to the Purchased Shares pursuant to the provisions
of the Commissioner Rules identified in paragraph 2.5.
The Corporation shall NOT be required (i) to transfer on its books any
Purchased Shares which have been sold or transferred in violation of the
provisions of this Article II NOR (ii) to treat as the owner of the Purchased
Shares, or otherwise to accord voting or dividend rights to, any transferee to
whom the Purchased Shares have been transferred in contravention of this
Agreement.
2.4 RESTRICTIVE LEGENDS. In order to reflect the restrictions on
disposition of the Purchased Shares, the stock certificates for the Purchased
Shares will be endorsed with restrictive legends, including one or more of the
following legends:
(i) "The shares represented by this certificate have not been
registered under the Securities Act of 1933. The shares may not be sold or
offered for sale in the absence of (a) an effective registration statement for
the shares under such Act, (b) a 'no action' letter of the SEC with respect to
such sale or offer, or (c) satisfactory assurances to the Corporation that
registration under such Act is not required with respect to such sale or offer."
3.
<PAGE>
(ii) "It is unlawful to consummate a sale or transfer of this
security, or any interest therein, or to receive any consideration therefor,
without the prior written consent of the Commissioner of Corporations of the
State of California, except as permitted in the Commissioner's Rules."
(iii) "The shares represented by this certificate are unvested and
accordingly may not be sold, assigned, transferred, encumbered, or in any manner
disposed of except in conformity with the terms of a written agreement dated
________________, 19__ between the Corporation and the registered holder of the
shares (or the predecessor in interest to the shares). Such agreement grants
certain repurchase rights and rights of first refusal to the Corporation (or its
assignees) upon the sale, assignment, transfer, encumbrance or other disposition
of the Corporation's shares or upon termination of service with the Corporation.
The Corporation will upon written request furnish a copy of such agreement to
the holder hereof without charge."
2.5 RECEIPT OF COMMISSIONER RULES. Optionee hereby acknowledges
receipt of a copy of Section 260.141.11 of the Rules of the California
Corporations Commissioner, a copy of which is attached as Exhibit II to this
Agreement.
III. SPECIAL TAX ELECTION
3.1 SECTION 83(B) ELECTION APPLICABLE TO THE EXERCISE OF A NON-
STATUTORY STOCK OPTION. If the Purchased Shares are acquired hereunder pursuant
to the exercise of a NON-STATUTORY STOCK OPTION, as specified in the Grant
Notice, then the Optionee understands that under Section 83 of the Internal
Revenue Code of 1986, as amended (the "Code"), the excess of the fair market
value of the Purchased Shares on the date any forfeiture restrictions applicable
to such shares lapse over the Option Price paid for such shares will be
reportable as ordinary income on such lapse date. For this purpose, the term
"forfeiture restrictions" includes the right of the Corporation to repurchase
the Purchased Shares pursuant to the Repurchase Right provided under Article V
of this Agreement. Optionee understands that he/she may elect under Section
83(b) of the Code to be taxed at the time the Purchased Shares are acquired
hereunder, rather than when and as such Purchased Shares cease to be subject to
such forfeiture restrictions. Such election must be filed with the Internal
Revenue Service within thirty (30) days after the date of this Agreement. Even
if the fair market value of the Purchased Shares at the date of this Agreement
equals the Option Price paid (and thus no tax is payable), the election must be
made to avoid adverse tax consequences in the future. THE FORM FOR MAKING THIS
ELECTION IS ATTACHED AS EXHIBIT III HERETO. OPTIONEE UNDERSTANDS THAT FAILURE
TO MAKE THIS FILING WITHIN THE THIRTY (30)-DAY PERIOD WILL RESULT IN THE
RECOGNITION OF ORDINARY INCOME BY THE OPTIONEE AS THE FORFEITURE RESTRICTIONS
LAPSE.
3.2 CONDITIONAL SECTION 83(B) ELECTION APPLICABLE TO THE EXERCISE OF
AN INCENTIVE STOCK OPTION. If the Purchased Shares are acquired hereunder
pursuant to the
4
<PAGE>
exercise of an INCENTIVE STOCK OPTION under the Federal tax laws, as specified
in the Grant Notice, then the following tax principles shall be applicable to
the Purchased Shares:
A. For regular tax purposes, no taxable income will be
recognized at the time the Option is exercised.
B. The excess of (i) the fair market value of the
Purchased Shares on the date the Option is exercised or (if later) on
the date any forfeiture restrictions applicable to the Purchased
Shares lapse over (ii) the Option Price paid for the Purchased Shares
will be includible in the Optionee's taxable income for alternative
minimum tax purposes.
C. If the Optionee makes a disqualifying disposition of
the Purchased Shares, then the Optionee will recognize ordinary income
in the year of such disposition equal in amount to the excess of (i)
the fair market value of the Purchased Shares on the date the Option
is exercised or (if later) on the date any forfeiture restrictions
applicable to the Purchased Shares lapse over (ii) the Option Price
paid for the Purchased Shares. Any additional gain recognized upon
the disqualifying disposition will be either short-term or long-term
capital gain depending upon the period for which the Purchased Shares
are held prior to the disposition.
D. For purposes of the foregoing, the term "forfeiture
restrictions" will include the right of the Corporation to repurchase
the Purchased Shares pursuant to the Repurchase Right provided under
Article V of this Agreement. The term "disqualifying disposition"
means any sale or other disposition(1) of the Purchased Shares within
two (2) years after the Grant Date or within one (1) year after the
execution date of this Agreement.
E. In the absence of final Treasury Regulations relating
to incentive stock options, it is not certain whether the Optionee
may, in connection with the exercise of the Option for any Purchased
Shares at the time subject to forfeiture restrictions, file a
protective election under Section 83(b) of the Code which would limit
(I) the Optionee's alternative minimum taxable income upon exercise
and (II) the Optionee's ordinary income upon a disqualifying
disposition, to the excess of (i) the fair market value of the
Purchased Shares on the date the Option is exercised over (ii) the
Option
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(1) Generally, a disposition of shares purchased under an incentive stock
option includes any transfer of legal title, including a transfer by sale,
exchange or gift, but does not include a transfer to the Optionee's spouse, a
transfer into joint ownership with right of survivorship if Optionee remains one
of the joint owners, a pledge, a transfer by bequest or inheritance or certain
tax free exchanges permitted under the Code.
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Price paid for the Purchased Shares. THE APPROPRIATE FORM FOR MAKING SUCH
A PROTECTIVE ELECTION IS ATTACHED AS EXHIBIT III TO THIS AGREEMENT AND MUST
BE FILED WITH THE INTERNAL REVENUE SERVICE WITHIN THIRTY (30) DAYS AFTER
THE DATE OF THIS AGREEMENT. HOWEVER, SUCH ELECTION IF PROPERLY FILED WILL
ONLY BE ALLOWED TO THE EXTENT THE FINAL TREASURY REGULATIONS PERMIT SUCH A
PROTECTIVE ELECTION.
3.3 OPTIONEE ACKNOWLEDGES THAT IT IS OPTIONEE'S SOLE RESPONSIBILITY,
AND NOT THE CORPORATION'S, TO FILE A TIMELY ELECTION UNDER SECTION 83(B), EVEN
IF OPTIONEE REQUESTS THE CORPORATION OR ITS REPRESENTATIVES TO MAKE THIS FILING
ON HIS/HER BEHALF. This filing should be made by registered or certified mail,
return receipt requested, and Optionee must retain two (2) copies of the
completed form for filing with his or her Federal and state tax returns for the
current tax year and an additional copy for his or her records.
IV. TRANSFER RESTRICTIONS
4.1 RESTRICTION ON TRANSFER. Optionee shall not transfer, assign,
encumber or otherwise dispose of any of the Purchased Shares which are subject
to the Corporation's Repurchase Right under Article V. In addition, Purchased
Shares which are released from the Repurchase Right shall not be transferred,
assigned, encumbered or otherwise made the subject of disposition in
contravention of the Corporation's First Refusal Right under Article VI. Such
restrictions on transfer, however, shall NOT be applicable to (i) a gratuitous
transfer of the Purchased Shares, PROVIDED AND ONLY IF the Optionee obtains the
Corporation's prior written consent to such transfer, (ii) a transfer of title
to the Purchased Shares effected pursuant to the Optionee's will or the laws of
intestate succession or (iii) a transfer to the Corporation in pledge as
security for any purchase-money indebtedness incurred by the Optionee in
connection with the acquisition of the Purchased Shares.
4.2 TRANSFEREE OBLIGATIONS. Each person (other than the Corporation)
to whom the Purchased Shares are transferred by means of one of the permitted
transfers specified in paragraph 4.1 must, as a condition precedent to the
validity of such transfer, acknowledge in writing to the Corporation that such
person is bound by the provisions of this Agreement and that the transferred
shares are subject to (i) both the Corporation's Repurchase Right and the
Corporation's First Refusal Right granted hereunder and (ii) the market stand-
off provisions of paragraph 4.4, to the same extent such shares would be so
subject if retained by the Optionee.
4.3 DEFINITION OF OWNER. For purposes of Articles IV, V, VI and VII
of this Agreement, the term "Owner" shall include the Optionee and all
subsequent holders of the Purchased Shares who derive their chain of ownership
through a permitted transfer from the Optionee in accordance with paragraph 4.1.
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4.4 MARKET STAND-OFF PROVISIONS.
A. In connection with any underwritten public offering by the
Corporation of its equity securities pursuant to an effective registration
statement filed under the 1933 Act, including the Corporation's initial public
offering, Owner shall not sell, make any short sale of, loan, hypothecate,
pledge, grant any option for the purchase of, or otherwise dispose or transfer
for value or otherwise agree to engage in any of the foregoing transactions with
respect to, any Purchased Shares without the prior written consent of the
Corporation or its underwriters. Such limitations shall be in effect for such
period of time from and after the effective date of such registration statement
as may be requested by the Corporation or such underwriters; PROVIDED, however,
that in no event shall such period exceed one hundred-eighty (180) days. The
limitations of this paragraph 4.4 shall remain in effect for the two-year period
immediately following the effective date of the Corporation's initial public
offering and shall thereafter terminate and cease to have any force or effect.
B. Owner shall be subject to the market stand-off provisions of this
paragraph 4.4 PROVIDED AND ONLY IF the officers and directors of the Corporation
are also subject to similar arrangements.
C. In the event of any stock dividend, stock split, recapitalization
or other change affecting the Corporation's outstanding Common Stock effected as
a class without receipt of consideration, then any new, substituted or
additional securities distributed with respect to the Purchased Shares shall be
immediately subject to the provisions of this paragraph 4.4, to the same extent
the Purchased Shares are at such time covered by such provisions.
D. In order to enforce the limitations of this paragraph 4.4, the
Corporation may impose stop-transfer instructions with respect to the Purchased
Shares until the end of the applicable stand-off period.
V. REPURCHASE RIGHT
5.1 GRANT. The Corporation is hereby granted the right (the
"Repurchase Right"), exercisable at any time during the sixty (60)-day period
following the date the Optionee ceases for any reason to remain in Service or
(if later) during the sixty (60)-day period following the execution date of this
Agreement, to repurchase at the Option Price all or (at the discretion of the
Corporation and with the consent of the Optionee) any portion of the Purchased
Shares in which the Optionee has not acquired a vested interest in accordance
with the vesting provisions of paragraph 5.3 (such shares to be hereinafter
called the "Unvested Shares"). For purposes of this Agreement, the Optionee
shall be deemed to remain in Service for so long as the Optionee continues to
render periodic services to the Corporation or any parent or subsidiary
corporation, whether as an employee, a non-employee member of the board of
directors, or a consultant.
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5.2 EXERCISE OF THE REPURCHASE RIGHT. The Repurchase Right shall be
exercisable by written notice delivered to the Owner of the Unvested Shares
prior to the expiration of the applicable sixty (60)-day period specified in
paragraph 5.1. The notice shall indicate the number of Unvested Shares to be
repurchased and the date on which the repurchase is to be effected, such date to
be not more than thirty (30) days after the date of notice. To the extent one
or more certificates representing Unvested Shares may have been previously
delivered out of escrow to the Owner, then Owner shall, prior to the close of
business on the date specified for the repurchase, deliver to the Secretary of
the Corporation the certificates representing the Unvested Shares to be
repurchased, each certificate to be properly endorsed for transfer. The
Corporation shall, concurrently with the receipt of such stock certificates
(either from escrow in accordance with paragraph 7.3 or from Owner as herein
provided), pay to Owner in cash or cash equivalents (including the cancellation
of any purchase-money indebtedness), an amount equal to the Option Price
previously paid for the Unvested Shares which are to be repurchased.
5.3 TERMINATION OF THE REPURCHASE RIGHT. The Repurchase Right shall
terminate with respect to any Unvested Shares for which it is not timely
exercised under paragraph 5.2. In addition, the Repurchase Right shall
terminate, and cease to be exercisable, with respect to any and all Purchased
Shares in which the Optionee vests in accordance with the vesting schedule
specified in the Grant Notice. All Purchased Shares as to which the Repurchase
Right lapses shall, however, continue to be subject to (i) the First Refusal
Right of the Corporation and its assignees under Article VI, (ii) the market
stand-off provisions of paragraph 4.4 and (iii) the Special Purchase Right under
Article VIII.
5.4 AGGREGATE VESTING LIMITATION. If the Option is exercised in more
than one increment so that the Optionee is a party to one or more other Stock
Purchase Agreements ("Prior Purchase Agreements") which are executed prior to
the date of this Agreement, then the total number of Purchased Shares as to
which the Optionee shall be deemed to have a fully-vested interest under this
Agreement and all Prior Purchase Agreements shall not exceed in the aggregate
the number of Purchased Shares in which the Optionee would otherwise at the time
be vested, in accordance with the vesting provisions of paragraph 5.3, had all
the Purchased Shares been acquired exclusively under this Agreement.
5.5 FRACTIONAL SHARES. No fractional shares shall be repurchased by
the Corporation. Accordingly, should the Repurchase Right extend to a
fractional share (in accordance with the vesting provisions of paragraph 5.3) at
the time the Optionee ceases Service, then such fractional share shall be added
to any fractional share in which the Optionee is at such time vested in order to
make one whole vested share no longer subject to the Repurchase Right.
5.6 ADDITIONAL SHARES OR SUBSTITUTED SECURITIES. In the event of any
stock dividend, stock split, recapitalization or other change affecting the
Corporation's outstanding Common Stock as a class effected without receipt of
consideration, then any new,
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substituted or additional securities or other property (including money paid
other than as a regular cash dividend) which is by reason of any such
transaction distributed with respect to the Purchased Shares shall be
immediately subject to the Repurchase Right, but only to the extent the
Purchased Shares are at the time covered by such right. Appropriate adjustments
to reflect the distribution of such securities or property shall be made to the
number of Purchased Shares and Total Purchasable Shares hereunder and to the
price per share to be paid upon the exercise of the Repurchase Right in order to
reflect the effect of any such transaction upon the Corporation's capital
structure; PROVIDED, however, that the aggregate purchase price shall remain the
same.
5.7 CORPORATE TRANSACTION.
A. Immediately prior to the consummation of any of the following
shareholder-approved transactions (a "Corporate Transaction"):
(i) a merger or consolidation in which the Corporation is not
the surviving entity, except for a transaction the principal purpose of
which is to change the State of the Corporation's incorporation, or
(ii) the sale, transfer or other disposition of all or
substantially all of the assets of the Corporation in complete liquidation
or dissolution of the Corporation; or
(iii) any reverse merger in which the Corporation is the surviving
entity but in which all of the Corporation's outstanding voting stock is
transferred to the acquiring entity or its wholly-owned subsidiary,
the Repurchase Right shall automatically lapse in its entirety except to the
extent the Repurchase Right is to be assigned to the successor corporation (or
its parent company) in connection with such Corporate Transaction.
B. To the extent the Repurchase Right remains in effect following
such Corporate Transaction, such right shall apply to the new capital stock or
other property (including cash) received in exchange for the Purchased Shares in
consummation of the Corporate Transaction, but only to the extent the Purchased
Shares are at the time covered by such right. Appropriate adjustments shall be
made to the price per share payable upon exercise of the Repurchase Right to
reflect the effect of the Corporate Transaction upon the Corporation's capital
structure; PROVIDED, however, that the aggregate purchase price shall remain the
same.
VI. RIGHT OF FIRST REFUSAL
6.1 GRANT. The Corporation is hereby granted the right of first
refusal (the "First Refusal Right"), exercisable in connection with any proposed
transfer of the Purchased
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Shares in which the Optionee has vested in accordance with the vesting
provisions of Article V. For purposes of this Article VI, the term "transfer"
shall include any sale, assignment, pledge, encumbrance or other disposition for
value of the Purchased Shares intended to be made by the Owner, but shall not
include any of the permitted transfers under paragraph 4.1.
6.2 NOTICE OF INTENDED DISPOSITION. In the event the Owner desires
to accept a bona fide third-party offer for the transfer of any or all of the
Purchased Shares (the shares subject to such offer to be hereinafter called the
"Target Shares"), Owner shall promptly (i) deliver to the Corporate Secretary of
the Corporation written notice (the "Disposition Notice") of the terms and
conditions of the offer, including the purchase price and the identity of the
third-party offeror, and (ii) provide satisfactory proof that the disposition of
the Target Shares to such third-party offeror would not be in contravention of
the provisions set forth in Articles II and IV of this Agreement.
6.3 EXERCISE OF RIGHT. The Corporation (or its assignees) shall, for
a period of twenty-five (25) days following receipt of the Disposition Notice,
have the right to repurchase any or all of the Target Shares specified in the
Disposition Notice upon the same terms and conditions specified therein or upon
terms and conditions which do not materially vary from those specified therein.
Such right shall be exercisable by delivery of written notice (the "Exercise
Notice") to Owner prior to the expiration of the twenty-five (25)-day exercise
period. If such right is exercised with respect to all the Target Shares
specified in the Disposition Notice, then the Corporation (or its assignees)
shall effect the repurchase of the Target Shares, including payment of the
purchase price, not more than five (5) business days after delivery of the
Exercise Notice; and at such time Owner shall deliver to the Corporation the
certificates representing the Target Shares to be repurchased, each certificate
to be properly endorsed for transfer. To the extent any of the Target Shares
are at the time held in escrow under Article VII, the certificates for such
shares shall automatically be released from escrow and delivered to the
Corporation for purchase.
Should the purchase price specified in the Disposition Notice be
payable in property other than cash or evidences of indebtedness, the
Corporation (or its assignees) shall have the right to pay the purchase price in
the form of cash equal in amount to the value of such property. If the Owner
and the Corporation (or its assignees) cannot agree on such cash value within
ten (10) days after the Corporation's receipt of the Disposition Notice, the
valuation shall be made by an appraiser of recognized standing selected by the
Owner and the Corporation (or its assignees) or, if they cannot agree on an
appraiser within twenty (20) days after the Corporation's receipt of the
Disposition Notice, each shall select an appraiser of recognized standing and
the two appraisers shall designate a third appraiser of recognized standing,
whose appraisal shall be determinative of such value. The cost of such
appraisal shall be shared equally by the Owner and the Corporation. The closing
shall then be held on the LATER of (i) the fifth business day following delivery
of the Exercise Notice or (ii) the fifth business day after such cash valuation
shall have been made.
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6.4 NON-EXERCISE OF RIGHT. In the event the Exercise Notice is not
given to Owner within twenty-five (25) days following the date of the
Corporation's receipt of the Disposition Notice, Owner shall have a period of
thirty (30) days thereafter in which to sell or otherwise dispose of the Target
Shares to the third-party offeror identified in the Disposition Notice upon
terms and conditions (including the purchase price) no more favorable to such
third-party offeror than those specified in the Disposition Notice; PROVIDED,
however, that any such sale or disposition must not be effected in contravention
of the provisions of Article II of this Agreement. To the extent any of the
Target Shares are at the time held in escrow under Article VII, the certificates
for such shares shall automatically be released from escrow and surrendered to
the Owner. The third-party offeror shall acquire the Target Shares free and
clear of the Corporation's Repurchase Right under Article V and the
Corporation's First Refusal Right hereunder, but the acquired shares shall
remain subject to (i) the securities law restrictions of paragraph 2.2(a) and
(ii) the market stand-off provisions of paragraph 4.4. In the event Owner does
not effect such sale or disposition of the Target Shares within the specified
thirty (30)-day period, the Corporation's First Refusal Right shall continue to
be applicable to any subsequent disposition of the Target Shares by Owner until
such right lapses in accordance with paragraph 6.7.
6.5 PARTIAL EXERCISE OF RIGHT. In the event the Corporation (or its
assignees) makes a timely exercise of the First Refusal Right with respect to a
portion, but not all, of the Target Shares specified in the Disposition Notice,
Owner shall have the option, exercisable by written notice to the Corporation
delivered within thirty (30) days after the date of the Disposition Notice, to
effect the sale of the Target Shares pursuant to one of the following
alternatives:
(i) sale or other disposition of all the Target Shares to the
third-party offeror identified in the Disposition Notice, but in full
compliance with the requirements of paragraph 6.4, as if the Corporation
did not exercise the First Refusal Right hereunder; or
(ii) sale to the Corporation (or its assignees) of the portion of
the Target Shares which the Corporation (or its assignees) has elected to
purchase, such sale to be effected in substantial conformity with the
provisions of paragraph 6.3.
Failure of Owner to deliver timely notification to the Corporation
under this paragraph 6.5 shall be deemed to be an election by Owner to sell the
Target Shares pursuant to alternative (i) above.
6.6 RECAPITALIZATION/MERGER
(a) In the event of any stock dividend, stock split, recapitalization
or other transaction affecting the Corporation's outstanding Common Stock as a
class effected without receipt of consideration, then any new, substituted or
additional securities or other
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property which is by reason of such transaction distributed with respect to the
Purchased Shares shall be immediately subject to the Corporation's First Refusal
Right hereunder, but only to the extent the Purchased Shares are at the time
covered by such right.
(b) In the event of either of the following shareholder-approved
transactions:
(i) a merger or consolidation in which the Corporation is
not the surviving entity, or
(ii) any reverse merger in which the Corporation is the
surviving entity but in which all of the Corporation's outstanding voting
stock is transferred to the acquiring entity or its wholly-owned
subsidiary,
the Corporation's First Refusal Right shall remain in full force and
effect and shall apply to the new capital stock or other property received in
exchange for the Purchased Shares in consummation of the transaction, but only
to the extent the Purchased Shares are at the time covered by such right.
6.7 LAPSE. The First Refusal Right under this Article VI shall lapse
and cease to have effect upon the EARLIEST to occur of (i) the first date on
which shares of the Corporation's Common Stock are held of record by more than
five hundred (500) persons, (ii) a determination is made by the Corporation's
Board of Directors that a public market exists for the outstanding shares of the
Corporation's Common Stock or (iii) a firm commitment underwritten public
offering, pursuant to an effective registration statement under the 1933 Act,
covering the offer and sale of the Corporation's Common Stock in the aggregate
amount of at least $5,000,000. However, the market stand-off provisions of
paragraph 4.4 shall continue to remain in full force and effect following the
lapse of the First Refusal Right hereunder.
VII. ESCROW
7.1 DEPOSIT. Upon issuance, the certificates for any Unvested Shares
purchased hereunder shall be deposited in escrow with the Corporate Secretary of
the Corporation to be held in accordance with the provisions of this Article
VII. Each deposited certificate shall be accompanied by a duly-executed
Assignment Separate from Certificate in the form of Exhibit I. The deposited
certificates, together with any other assets or securities from time to time
deposited with the Corporate Secretary pursuant to the requirements of this
Agreement, shall remain in escrow until such time or times as the certificates
(or other assets and securities) are to be released or otherwise surrendered for
cancellation in accordance with paragraph 7.3. Upon delivery of the
certificates (or other assets and securities) to the Corporate Secretary of the
Corporation, the Owner shall be issued an instrument of deposit acknowledging
the number of Unvested Shares (or other assets and securities) delivered in
escrow.
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7.2 RECAPITALIZATION. All regular cash dividends on the Unvested
Shares (or other securities at the time held in escrow) shall be paid directly
to the Owner and shall not be held in escrow. However, in the event of any
stock dividend, stock split, recapitalization or other change affecting the
Corporation's outstanding Common Stock as a class effected without receipt of
consideration or in the event of a Corporate Transaction, any new, substituted
or additional securities or other property which is by reason of such
transaction distributed with respect to the Unvested Shares shall be immediately
delivered to the Corporate Secretary to be held in escrow under this Article
VII, but only to the extent the Unvested Shares are at the time subject to the
escrow requirements of paragraph 7.1.
7.3 RELEASE/SURRENDER. The Unvested Shares, together with any other
assets or securities held in escrow hereunder, shall be subject to the following
terms and conditions relating to their release from escrow or their surrender to
the Corporation for repurchase and cancellation:
(i) Should the Corporation (or its assignees) elect to exercise
the Repurchase Right under Article V with respect to any Unvested Shares,
then the escrowed certificates for such Unvested Shares (together with any
other assets or securities issued with respect thereto) shall be delivered
to the Corporation concurrently with the payment to the Owner, in cash or
cash equivalent (including the cancellation of any purchase-money
indebtedness), of an amount equal to the aggregate Option Price for such
Unvested Shares, and the Owner shall cease to have any further rights or
claims with respect to such Unvested Shares (or other assets or securities
attributable to such Unvested Shares).
(ii) Should the Corporation (or its assignees) elect to exercise
its First Refusal Right under Article VI with respect to any vested Target
Shares held at the time in escrow hereunder, then the escrowed certificates
for such Target Shares (together with any other assets or securities
attributable thereto) shall, concurrently with the payment of the paragraph
6.3 purchase price for such Target Shares to the Owner, be surrendered to
the Corporation, and the Owner shall cease to have any further rights or
claims with respect to such Target Shares (or other assets or securities).
(iii) Should the Corporation (or its assignees) elect NOT to
exercise its First Refusal Right under Article VI with respect to any
Target Shares held at the time in escrow hereunder, then the escrowed
certificates for such Target Shares (together with any other assets or
securities attributable thereto) shall be surrendered to the Owner for
disposition in accordance with provisions of paragraph 6.4.
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(iv) As the interest of the Optionee in the Unvested Shares (or
any other assets or securities attributable thereto) vests in accordance
with the provisions of Article V, the certificates for such vested shares
(as well as all other vested assets and securities) shall be released from
escrow and delivered to the Owner in accordance with the following
schedule:
a. The initial release of vested shares (or other
vested assets and securities) from escrow shall be effected
within thirty (30) days following the expiration of the initial
twelve (12)-month period measured from the Grant Date.
b. Subsequent releases of vested shares (or other
vested assets and securities) from escrow shall be effected at
semi-annual intervals thereafter, with the first such semi-annual
release to occur eighteen (18) months after the Grant Date.
c. Upon the Optionee's cessation of Service, any
escrowed Purchased Shares (or other assets or securities) in
which the Optionee is at the time vested shall be promptly
released from escrow.
d. Upon any earlier termination of the Corporation's
Repurchase Right in accordance with the applicable provisions of
Article V, any Purchased Shares (or other assets or securities)
at the time held in escrow hereunder shall promptly be released
to the Owner as fully-vested shares or other property.
(v) All Purchased Shares (or other assets or securities)
released from escrow in accordance with the provisions of subparagraph (iv)
above shall nevertheless remain subject to (I) the Corporation's First
Refusal Right under Article VI until such right lapses pursuant to
paragraph 6.7, (II) the market stand-off provisions of paragraph 4.4 until
such provisions terminate in accordance therewith and (III) the Special
Purchase Right under Article VIII.
VIII. MARITAL DISSOLUTION OR LEGAL SEPARATION
8.1 GRANT. In connection with the dissolution of the Optionee's
marriage or the legal separation of the Optionee and the Optionee's spouse, the
Corporation shall have the right (the "Special Purchase Right"), exercisable at
any time during the thirty (30)-day period following the Corporation's receipt
of the required Dissolution Notice under paragraph 8.2, to purchase from the
Optionee's spouse, in accordance with the provisions
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of paragraph 8.3, all or any portion of the Purchased Shares which would
otherwise be awarded to such spouse in settlement of any community property or
other marital property rights such spouse may have in such shares.
8.2 NOTICE OF DECREE OR AGREEMENT. The Optionee shall promptly
provide the Secretary of the Corporation with written notice (the "Dissolution
Notice") of (i) the entry of any judicial decree or order resolving the property
rights of the Optionee and the Optionee's spouse in connection with their
marital dissolution or legal separation or (ii) the execution of any contract or
agreement relating to the distribution or division of such property rights. The
Dissolution Notice shall be accompanied by a copy of the actual decree of
dissolution or settlement agreement between the Optionee and the Optionee's
spouse which provides for the award to the spouse of one or more Purchased
Shares in settlement of any community property or other marital property rights
such spouse may have in such shares.
8.3 EXERCISE OF SPECIAL PURCHASE RIGHT. The Special Purchase Right
shall be exercisable by delivery of written notice (the "Purchase Notice") to
the Optionee and the Optionee's spouse within thirty (30) days after the
Corporation's receipt of the Dissolution Notice. The Purchase Notice shall
indicate the number of shares to be purchased by the Corporation, the date such
purchase is to be effected (such date to be not less than five (5) business
days, nor more than ten (10) business days, after the date of the Purchase
Notice), and the fair market value to be paid for such Purchased Shares. The
Optionee (or the Optionee's spouse, to the extent such spouse has physical
possession of the Purchased Shares) shall, prior to the close of business on the
date specified for the purchase, deliver to the Corporate Secretary of the
Corporation the certificates representing the shares to be purchased, each
certificate to be properly endorsed for transfer. To the extent any of the
shares to be purchased by the Corporation are at the time held in escrow under
Article VII, the certificates for such shares shall be promptly delivered out of
escrow to the Corporation. The Corporation shall, concurrently with the receipt
of the stock certificates, pay to the Optionee's spouse (in cash or cash
equivalents) an amount equal to the fair market value specified for such shares
in the Purchase Notice.
If the Optionee's spouse does not agree with the fair market value
specified for the shares in the Purchase Notice, then the spouse shall promptly
notify the Corporation in writing of such disagreement and the fair market value
of such shares shall thereupon be determined by an appraiser of recognized
standing selected by the Corporation and the spouse. If they cannot agree on an
appraiser within twenty (20) days after the date of the Purchase Notice, each
shall select an appraiser of recognized standing, and the two appraisers shall
designate a third appraiser of recognized standing whose appraisal shall be
determinative of such value. The cost of the appraisal shall be shared equally
by the Corporation and the Optionee's spouse. The closing shall then be held on
the fifth business day following the completion of such appraisal; PROVIDED,
however, that if the appraised value is more than fifteen percent (15%) greater
than the fair market value specified for the shares in the Purchase Notice, the
Corporation shall have the right, exercisable prior to the
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expiration of such five (5)-business-day period, to rescind the exercise of the
Special Purchase Right and thereby revoke its election to purchase the shares
awarded to the spouse.
8.4 LAPSE. The Special Purchase Right under this Article VIII shall
lapse and cease to have effect upon the EARLIER to occur of (i) the first date
on which the First Refusal Right under Article VI lapses or (ii) the expiration
of the thirty (30)-day exercise period specified in paragraph 8.3, to the extent
the Special Purchase Right is not timely exercised in accordance with such
paragraph.
IX. GENERAL PROVISIONS
9.1 ASSIGNMENT. The Corporation may assign its Repurchase Right
under Article V, its First Refusal Right under Article VI and/or its Special
Purchase Right under Article VIII to any person or entity selected by the
Corporation's Board of Directors, including (without limitation) one or more
shareholders of the Corporation.
If the assignee of the Repurchase Right is other than a one hundred
percent (100%) owned subsidiary corporation of the Corporation or the parent
corporation owning one hundred percent (100%) of the Corporation, then such
assignee must make a cash payment to the Corporation, upon the assignment of the
Repurchase Right, in an amount equal to the excess (if any) of (i) the fair
market value of the Unvested Shares at the time subject to the assigned
Repurchase Right over (ii) the aggregate repurchase price payable for the
Unvested Shares thereunder.
9.2 DEFINITIONS. For purposes of this Agreement, the following
provisions shall be applicable in determining the parent and subsidiary
corporations of the Corporation:
(i) Any corporation (other than the Corporation) in an
unbroken chain of corporations ending with the Corporation shall be
considered to be a parent corporation of the Corporation, provided each
such corporation in the unbroken chain (other than the Corporation) owns,
at the time of the determination, stock possessing fifty percent (50%) or
more of the total combined voting power of all classes of stock in one of
the other corporations in such chain.
(ii) Each corporation (other than the Corporation) in an
unbroken chain of corporations beginning with the Corporation shall be
considered to be a subsidiary of the Corporation, provided each such
corporation (other than the last corporation) in the unbroken chain owns,
at the time of the determination, stock possessing fifty percent (50%) or
more of the total combined voting power of all classes of stock in one of
the other corporations in such chain.
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9.3 NO EMPLOYMENT OR SERVICE CONTRACT. Nothing in this Agreement or
in the Plan shall confer upon the Optionee any right to continue in the Service
of the Corporation (or any parent or subsidiary corporation of the Corporation
employing or retaining Optionee) for any period of specific duration or
interfere with or otherwise restrict in any way the rights of the Corporation
(or any parent or subsidiary corporation of the Corporation employing or
retaining Optionee) or the Optionee, which rights are hereby expressly reserved
by each, to terminate the Optionee's Service at any time for any reason
whatsoever, with or without cause.
9.4 NOTICES. Any notice required in connection with (i) the
Repurchase Right, the Special Purchase Right or the First Refusal Right or (ii)
the disposition of any Purchased Shares covered thereby shall be given in
writing and shall be deemed effective upon personal delivery or upon deposit in
the United States mail, registered or certified, postage prepaid and addressed
to the party entitled to such notice at the address indicated below such party's
signature line on this Agreement or at such other address as such party may
designate by ten (10) days advance written notice under this paragraph 9.4 to
all other parties to this Agreement.
9.5 NO WAIVER. The failure of the Corporation (or its assignees) in
any instance to exercise the Repurchase Right granted under Article V, or the
failure of the Corporation (or its assignees) in any instance to exercise the
First Refusal Right granted under Article VI, or the failure of the Corporation
(or its assignees) in any instance to exercise the Special Purchase Right
granted under Article VIII shall not constitute a waiver of any other repurchase
rights and/or rights of first refusal that may subsequently arise under the
provisions of this Agreement or any other agreement between the Corporation and
the Optionee or the Optionee's spouse. No waiver of any breach or condition of
this Agreement shall be deemed to be a waiver of any other or subsequent breach
or condition, whether of like or different nature.
9.6 CANCELLATION OF SHARES. If the Corporation (or its assignees)
shall make available, at the time and place and in the amount and form provided
in this Agreement, the consideration for the Purchased Shares to be repurchased
in accordance with the provisions of this Agreement, then from and after such
time, the person from whom such shares are to be repurchased shall no longer
have any rights as a holder of such shares (other than the right to receive
payment of such consideration in accordance with this Agreement), and such
shares shall be deemed purchased in accordance with the applicable provisions
hereof and the Corporation (or its assignees) shall be deemed the owner and
holder of such shares, whether or not the certificates therefor have been
delivered as required by this Agreement.
17.
<PAGE>
X. MISCELLANEOUS PROVISIONS
10.1 OPTIONEE UNDERTAKING. Optionee hereby agrees to take whatever
additional action and execute whatever additional documents the Corporation may
in its judgment deem necessary or advisable in order to carry out or effect one
or more of the obligations or restrictions imposed on either the Optionee or the
Purchased Shares pursuant to the express provisions of this Agreement.
10.2 AGREEMENT IS ENTIRE CONTRACT. This Agreement constitutes the
entire contract between the parties hereto with regard to the subject matter
hereof. This Agreement is made pursuant to the provisions of the Plan and shall
in all respects be construed in conformity with the express terms and provisions
of the Plan.
10.3 GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of California, as such laws
are applied to contracts entered into and performed in such State without resort
to that State's conflict-of-laws rules.
10.4 COUNTERPARTS. This Agreement may be executed in counterparts,
each of which shall be deemed to be an original, but all of which together shall
constitute one and the same instrument.
10.5 SUCCESSORS AND ASSIGNS. The provisions of this Agreement shall
inure to the benefit of, and be binding upon, the Corporation and its successors
and assigns and the Optionee and the Optionee's legal representatives, heirs,
legatees, distributees, assigns and transferees by operation of law, whether or
not any such person shall have become a party to this Agreement and have agreed
in writing to join herein and be bound by the terms and conditions hereof.
10.6 POWER OF ATTORNEY. Optionee's spouse hereby appoints Optionee
his or her true and lawful attorney in fact, for him or her and in his or her
name, place and stead, and for his or her use and benefit, to agree to any
amendment or modification of this Agreement and to execute such further
instruments and take such further actions as may reasonably be necessary to
carry out the intent of this Agreement. Optionee's spouse further gives and
grants unto Optionee as his or her attorney in fact full power and authority to
do and perform every act necessary and proper to be done in the exercise of any
of the foregoing powers as fully as he or she might or could do if personally
present, with full power of substitution and revocation, hereby ratifying and
confirming all that Optionee shall lawfully do and cause to be done by virtue of
this power of attorney.
18.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the
day and year first indicated above.
ADVANCED FIBRE COMMUNICATIONS
By:
-------------------------------------
Title:
----------------------------------
Address:
----------------------------------------
----------------------------------------
----------------------------------------
Optionee(*/)
Address:
----------------------------------------
----------------------------------------
The undersigned spouse of Optionee has read and hereby approves the
foregoing Stock Purchase Agreement. In consideration of the Corporation's
granting the Optionee the right to acquire the Purchased Shares in accordance
with the terms of such Agreement, the undersigned hereby agrees to be
irrevocably bound by all the terms and provisions of such Agreement, including
(specifically) the right of the Corporation (or its assignees) to purchase any
and all interest or right the undersigned may otherwise have in such shares
pursuant to community property laws or other marital property rights.
----------------------------------------
Optionee's Spouse
Address:
----------------------------------------
----------------------------------------
- --------------------
(*/) I have executed the Section 83(b) election that was attached hereto as an
Exhibit. As set forth in Article III, I understand that I, and NOT the
Corporation, will be responsible for completing the form and filing the election
with the appropriate office of the Federal and State tax authorities and that if
such filing is not completed within thirty (30) days after the date of this
Agreement, I will not be entitled to the tax benefits provided by Section 83(b).
19.
<PAGE>
EXHIBIT I
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED ____________________ hereby sell(s), assign(s) and
transfer(s) unto Advanced Fibre Communications (the "Corporation"), ____________
(________) shares of the Common Stock of the Corporation standing in his\her
name on the books of the Corporation represented by Certificate No. ___________
herewith and do hereby irrevocably constitute and appoint ______________________
Attorney to transfer the said stock on the books of the Corporation with full
power of substitution in the premises.
Dated: ____________________
Signature
-----------------------------------
INSTRUCTION: Please do not fill in any blanks other than the signature line.
The purpose of this assignment is to enable the Corporation to exercise its
Repurchase Right set forth in the Agreement without requiring additional
signatures on the part of the Optionee.
<PAGE>
EXHIBIT II
SECTION 260.141.11
TITLE 10, CALIFORNIA ADMINISTRATIVE CODE
260.141.11 Restriction on Transfer. (a) The issuer of any security
upon which a restriction on transfer has been imposed pursuant to Sections
260.102.6, 260.141.10 or 260.534 shall cause a copy of this section to be
delivered to each issuee or transferee of such security at the time the
certificate evidencing the security is delivered to the issuee or transferee.
(b) It is unlawful for the holder of any such security to consummate
a sale or transfer of such security, or any interest therein, without the prior
written consent of the Commissioner (until this condition is removed pursuant to
Section 260.141.12 of these rules), except:
(1) to the issuer;
(2) pursuant to the order or process of any court;
(3) to any person described in Subdivision (i) of Section 25102 of
the Code or Section 260.105.14 of these rules;
(4) to the transferor's ancestors, descendants or spouse, or any
custodian or trustee for the account of the transferor or the transferor's
ancestors, descendants, or spouse; or to a transferee by a trustee or custodian
for the account of the transferee or the transferee's ancestors, descendants or
spouse;
(5) to holders of securities of the same class of the same issuer;
(6) by way of gift or donation inter vivos or on death;
(7) by or through a broker-dealer licensed under the Code (either
acting as such or as a finder) to a resident of a foreign state, territory or
country who is neither domiciled in this state to the knowledge of the broker-
dealer, nor actually present in this state if the sale of such securities is not
in violation of any securities law of the foreign state, territory or country
concerned;
(8) to a broker-dealer licensed under the Code in a principal
transaction, or as an underwriter or member of an underwriting syndicate or
selling group;
(9) if the interest sold or transferred is a pledge or other lien
given by the purchaser to the seller upon a sale of the security for which the
Commissioner's written consent is obtained or under this rule not required;
<PAGE>
(10) by way of a sale qualified under Sections 25111, 25112, 25113 or
25121 of the Code, of the securities to be transferred, provided that no order
under Section 25140 or Subdivision (a) of Section 25143 is in effect with
respect to such qualification;
(11) by a corporation to a wholly owned subsidiary of such
corporation, or by a wholly owned subsidiary of a corporation to such
corporation;
(12) by way of an exchange qualified under Section 25111, 25112 or
25113 of the Code, provided that no order under Section 25140 or Subdivision (a)
of Section 25143 is in effect with respect to such qualification;
(13) between residents of foreign states, territories or countries who
are neither domiciled nor actually present in this state;
(14) to the State Controller pursuant to the Unclaimed Property Law or
to the administrator of the unclaimed property law of another state; or
(15) by the State Controller pursuant to the Unclaimed Property Law or
by the administrator of the unclaimed property law of another state if, in
either such case, such person (i) discloses to potential purchasers at the sale
that transfer of the securities is restricted under this rule, (ii) delivers to
each purchaser a copy of this rule, and (iii) advises the Commissioner of the
name of each purchaser;
(16) by a trustee to a successor trustee when such transfer does not
involve a change in the beneficial ownership of the securities;
(17) by way of an offer and sale of outstanding securities in an
issuer transaction that is subject to the qualification requirement of Section
25110 of the Code but exempt from that qualification requirement by subdivision
(f) of Section 25102; provided that any such transfer is on the condition that
any certificate evidencing the security issued to such transferee shall contain
the legend required by this section.
(c) The certificates representing all such securities subject to such
a restriction on transfer, whether upon initial issuance or upon any transfer
thereof, shall bear on their face a legend, prominently stamped or printed
thereon in capital letters of not less than 10-point size, reading as follows:
"IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY
INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR
WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA,
EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES."
2.
<PAGE>
REPURCHASE RIGHTS
EXHIBIT III
SECTION 83(B) TAX ELECTION
This statement is being made under Section 83(b) of the Internal Revenue Code,
pursuant to Treas. Reg. Section 1.83-2.
(1) The taxpayer who performed the services is:
Name:
--------------------------------------------------------------------
Address:
-----------------------------------------------------------------
Taxpayer Ident. No.:
-----------------------------------------------------
(2) The property with respect to which the election is being made is _________
shares of the common stock of Advanced Fibre Communications
(3) The property was issued on __________________, 19__.
(4) The taxable year in which the election is being made is the calendar year
19__.
(5) The property is subject to a repurchase right pursuant to which the issuer
has the right to acquire the property at the original purchase price if for
any reason taxpayer's employment with the issuer is terminated. The
issuer's repurchase right lapses in a series of annual and monthly
installments over a four year period ending on __________________, 19__.
(6) The fair market value at the time of transfer (determined without regard to
any restriction other than a restriction which by its terms will never
lapse) is $___________ per share.
(7) The amount paid for such property is $___________ per share.
(8) A copy of this statement was furnished to Advanced Fibre Communications for
whom taxpayer rendered the services underlying the transfer of property.
(9) This statement is executed as of: ___________________, 199_.
- ------------------------------ ------------------------------
Spouse (if any) Taxpayer
THIS FORM MUST BE FILED WITH THE INTERNAL REVENUE SERVICE CENTER WITH WHICH
TAXPAYER FILES HIS/HER FEDERAL INCOME TAX RETURNS. THE FILING MUST BE MADE
WITHIN 30 DAYS AFTER THE EXECUTION DATE OF THE STOCK PURCHASE AGREEMENT.
<PAGE>
SPECIAL PROTECTIVE ELECTION PURSUANT TO SECTION 83(b) OF THE INTERNAL
REVENUE CODE WITH RESPECT TO PROPERTY ACQUIRED UPON EXERCISE OF AN
INCENTIVE STOCK OPTION
The property described in the above Section 83(b) election is comprised of
shares of common stock acquired pursuant to the exercise of an incentive stock
option under Section 422 of the Code. Accordingly, it is the intent of the
Taxpayer to utilize this election to achieve the following tax results:
1. The purpose of this election is to have the alternative minimum
taxable income attributable to the purchased shares measured by the amount by
which the fair market value of such shares at the time of their transfer to the
Taxpayer exceeds the purchase price paid for the shares. In the absence of this
election, such alternative minimum taxable income would be measured by the
spread between the fair market value of the purchased shares and the purchase
price which exists on the various lapse dates in effect for the forfeiture
restrictions applicable to such shares. The election is to be effective to the
full extent permitted under the Internal Revenue Code.
2. Section 421(a)(1) of the Code expressly excludes from income any
excess of the fair market value of the purchased shares over the amount paid for
such shares. Accordingly, this election is also intended to be effective in the
event there is a "disqualifying disposition" of the shares, within the meaning
of Section 421(b) of the Code, which would otherwise render the provisions of
Section 83(a) of the Code applicable at that time. Consequently, the Taxpayer
hereby elects to have the amount of disqualifying disposition income measured by
the excess of the fair market value of the purchased shares on the date of
transfer to the Taxpayer over the amount paid for such shares. Since Section
421(a) presently applies to the shares which are the subject of this Section
83(b) election, no taxable income is actually recognized for regular tax
purposes at this time, and no income taxes are payable, by the Taxpayer as a
result of this election.
This form should be filed with the Internal Revenue Service Center with which
taxpayer files his/her Federal income tax returns. The filing must be made
within 30 days after the execution date of the Stock Purchase Agreement.
NOTE: THIS PAGE SHOULD BE ATTACHED ONLY IF YOU ARE EXERCISING AN INCENTIVE
STOCK OPTION.
<PAGE>
EXHIBIT 11.1
ADVANCED FIBRE COMMUNICATIONS, INC.
STATEMENT REGARDING COMPUTATION OF PRO FORMA NET INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, --------------------
1995 1995 1996
------------ --------- ---------
<S> <C> <C> <C>
Net income (loss)............................................................ $ 2,341 $ (155) $ (1,541)
------------ --------- ---------
Weighted average common shares outstanding................................... 4,373 4,283 5,670
Redeemable convertible preferred stock, on an as-if converted basis.......... 17,448 16,922 18,663
Common stock equivalents -- stock options and warrants....................... 3,521 -- --
Staff Accounting Bulletin No. 83 issuances and grants:
Stock options and warrants................................................. 1,070 1,278 300
Redeemable convertible preferred stock..................................... 917 1,317 78
------------ --------- ---------
Shares used in per share computations........................................ 27,329 23,800 24,711
------------ --------- ---------
Pro forma net income (loss) per share........................................ $ 0.09 $ (0.01) $ (0.06)
------------ --------- ---------
------------ --------- ---------
</TABLE>
<PAGE>
Exhibit 21.1
SUBSIDIARIES OF THE COMPANY
1. Advanced Fibre Communications Hong Kong Ltd.
2. Advanced Fibre Communications India (Private) Ltd.
3. Advanced Fibre Technology Communications (Hong Kong) Limited
<PAGE>
EXHIBIT 23.1
FORM OF CONSENT OF INDEPENDENT AUDITORS
When the stock split referred to in Note 8 of the Notes to Consolidated
Financial Statements has been consummated, we will be in a position to render
the following report.
KPMG Peat Marwick LLP
The Board of Directors
Advanced Fibre Communications, Inc.:
We consent to the use of our report included herein and to the reference to
our firm under the headings "Selected Consolidated Financial Data" and "Experts"
in the prospectus.
San Francisco, California
July 25, 1996
