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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the quarter ended June 30, 1997
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from to
---- ----
Commission file number:
0-28734
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ADVANCED FIBRE COMMUNICATIONS, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 68-0277743
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Willow Brook Court
Petaluma, California 94954
(707) 794-7700
(Address, including zip code, of Registrant's principal
executive offices and telephone number, including area code)
------------------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Outstanding as of
Class July 25, 1997
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Common Stock, $0.01 par value 35,811,645
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ADVANCED FIBRE COMMUNICATIONS, INC.
REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1997
TABLE OF CONTENTS
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
June 30, 1997 and December 31, 1996...................... 3
Condensed Consolidated Statements of Operations
Three and six months ended June 30, 1997 and 1996...... 4
Condensed Consolidated Statements of Cash Flows
Six months ended June 30, 1997 and 1996................. 5
Notes to Condensed Consolidated Financial Statements........ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 19
Item 2. Changes in Securities.......................................... 21
Item 3. Defaults upon Senior Securities................................ 21
Item 4. Submission of Matters to a Vote of Security Holders............ 21
Item 5. Other Information.............................................. 21
Item 6. Exhibits and Reports on Form 8-K............................... 21
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ADVANCED FIBRE COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
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(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 12,489 $ 24,942
Marketable securities 99,008 83,488
Accounts receivable 52,986 32,779
Inventories, net 27,854 17,349
Other current assets 5,973 3,631
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Total current assets 198,310 162,189
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Property and equipment, net 17,820 9,589
Other assets 3,509 3,901
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TOTAL ASSETS $219,639 $175,679
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 17,253 $ 8,799
Accrued liabilities 12,777 8,052
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Total current liabilities 30,030 16,851
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Long-term liabilities 967 805
Stockholders' equity:
Preferred stock, $0.01 par value; 5,000,000 shares authorized
in 1997 and 1996; no shares issued and outstanding -- --
Common stock, $0.01 par value; 100,000,000 shares authorized
in 1997 and 1996, 35,627,934 and 32,649,607 shares issued
and outstanding in 1997 and 1996, respectively 355 326
Additional paid-in capital 181,637 164,002
Notes receivable from stockholders (151) (151)
Retained earnings (accumulated deficit) 6,801 (6,154)
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Total stockholders' equity 188,642 158,023
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $219,639 $175,679
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</TABLE>
See accompanying notes to condensed consolidated financial statements
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ADVANCED FIBRE COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months Ended
Ended June 30, June 30,
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1997 1996 1997 1996
------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $61,207 $ 29,651 $105,612 $ 53,772
Cost of revenues 33,535 16,957 58,512 31,058
------- -------- -------- --------
Gross profit 27,672 12,694 47,100 22,714
------- -------- -------- --------
Operating expenses:
Research and development 6,440 3,275 11,290 5,894
Selling, general, and administrative 9,830 4,356 17,628 7,901
DSC litigation costs -- 18,256 -- 18,947
------- -------- -------- --------
Total operating expenses 16,270 25,887 28,918 32,742
------- -------- -------- --------
Operating income (loss) 11,402 (13,193) 18,182 (10,028)
Other income (expense), net 1,385 (18) 2,381 (101)
------- -------- -------- --------
Income (loss) before income taxes 12,787 (13,211) 20,563 (10,129)
Income taxes (benefit) 4,731 (9,498) 7,608 (8,588)
------- -------- -------- --------
Net income (loss) $ 8,056 $ (3,713) $ 12,955 $ (1,541)
------- -------- -------- --------
------- -------- -------- --------
Net income per share $ 0.21 $ 0.33
------- --------
------- --------
Pro forma net loss per share $ (0.15) $ (0.06)
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Shares used in per share computations 39,253 24,432 38,832 24,255
------- -------- -------- --------
------- -------- -------- --------
</TABLE>
See accompanying notes to condensed consolidated financial statements
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ADVANCED FIBRE COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
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1997 1996
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 12,955 $(1,541)
Adjustments to reconcile net income to net cash provided from
(used in) operating activities:
Noncash portion of litigation settlement -- 12,807
Deferred income taxes (1,324) (8,588)
Depreciation and amortization 1,112 321
Changes in operating assets and liabilities:
Accounts receivable (20,203) (9,648)
Inventories (10,505) (7,690)
Accounts payable 8,454 4,029
Other, including other current assets and liabilities 13,254 3,141
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NET CASH PROVIDED (USED) IN OPERATING ACTIVITIES 3,743 (7,169)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Net purchases of marketable securities (15,520) --
Purchase of property and equipment (9,343) (1,886)
Business acquisition, net of cash acquired -- (783)
Other -- (167)
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NET CASH USED IN INVESTING ACTIVITIES (24,863) (2,836)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank borrowing -- 9,700
Proceeds from secondary offering of common stock 7,843 --
Proceeds from other stock issuances and exercise of options and warrants 824 72
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NET CASH PROVIDED BY FINANCING ACTIVITIES 8,667 9,772
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DECREASE IN CASH AND CASH EQUIVALENTS (12,453) (233)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 24,942 11,118
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 12,489 $10,885
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NONCASH FINANCING AND INVESTING ACTIVITIES:
Issuance of preferred stock for business acquisition $ -- $ 1,540
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</TABLE>
See accompanying notes to condensed consolidated financial statements
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ADVANCED FIBRE COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and pursuant
to the rules and regulations of the Securities and Exchange
Commission. While these financial statements reflect all adjustments
of a normal and recurring nature which are, in the opinion of
management, necessary to present fairly the results of the interim
period, they do not include all information and footnotes required by
generally accepted accounting principles for complete financial
statements. These financial statements and notes should be read in
conjunction with the financial statements and notes thereto, for the
period ended December 31, 1996, contained in the Company's annual
report on Form 10-K.
The consolidated financial statements include Advanced Fibre
Communications, Inc., and its wholly owned subsidiaries (the
"Company"). Significant intercompany transactions and accounts have
been eliminated.
The Company operates on 13-week fiscal quarters ending on the last
Saturday of each fiscal period. For presentation purposes only, its
fiscal periods are shown as ending on the last day of the month of
the respective fiscal period. The results for the three and six
months ended June 30, 1997 are not necessarily indicative of the
operating results for the full year.
NOTE 2 INVENTORIES
Inventories are valued at the lower of first-in, first-out cost or
market and consisted of the following (in thousands):
June 30, December 31,
1997 1996
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Raw materials $ 12,646 $ 7,631
Work-in-progress 299 155
Finished goods 14,909 9,563
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$ 27,854 $ 17,349
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NOTE 3 COMMITMENTS AND CONTINGENCIES
ITRI
In September 1992, the Company entered into agreements (the "ITRI
Agreements") with the Industrial Technology Research Institute
("ITRI"), a Taiwanese government-sponsored research and development
organization, that granted to ITRI certain license rights to the
European Telecommunications Standards Institute ("ETSI") version
of the Universal Modular Carrier 1000-TM- ("UMC"). See "Item 2
Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Certain Factors that Might Affect Future
Operating Results -- Competition." In 1995, a dispute arose among
the Company, ITRI, and certain of ITRI's member companies (the
"Member Companies") in which the Company claimed that ITRI and the
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Member Companies were, among other things, failing to pay royalties
when due under the ITRI Agreements. In reliance upon certain
provisions of the ITRI Agreements, in April 1996, the Company ceased
delivering to the Member Companies certain proprietary application
specific integrated circuits ("ASICs") used in manufacturing the UMC
system.
Pursuant to agreements with ITRI reached in 1994, the design
documentation for these ASICs are held in a trust account, with
directions that the designs can be made available to ITRI on the
occurrence of specified conditions. On July 9, 1996, the trustee
custodian of the ASIC designs filed suit against the Company in the
United States District Court, Eastern District of New York, alleging
that the Company had not supplied all required documentation to the
trustees, and wrongfully discontinued the sale of the ASICs to the
Member Companies. Among other things, the complaint seeks
unspecified damages on behalf of the trustee, and a determination
that the trustee can release the ASIC designs to ITRI. On July 31,
1996, the Company filed a counterclaim against the trustee claiming,
among other things, that the trustee improperly disclosed the design
documentation to third parties. Discovery in the case has been
ongoing since October 1996. No trial date is currently set.
On July 30, 1996, the Company filed suit against ITRI and others in
the United States District Court, Northern District of California,
for breach of the ITRI Agreements, breach of covenants of good
faith, trade secret misappropriation, tortious interference, and
related claims. The complaint alleges that ITRI breached the ITRI
Agreements, among other ways, by failing to collect royalties owed
to the Company, by developing UMC-based products not shared with the
Company, by transferring UMC technology to an unauthorized company,
and by misappropriating the Company's trade secrets and that the
ITRI Agreements have been terminated. The Company seeks recovery for
lost profits and unjust enrichment, punitive damages, and
declaratory and injunctive relief. On September 13, 1996, ITRI
filed a demand for arbitration of the dispute and claimed, among
other things, that the Company has breached the ITRI Agreements and
is liable for unspecified royalties and punitive damages, and
claiming proprietary rights in certain UMC technology. On September
30, 1996, the Company amended the complaint in its suit against ITRI
to add the Member Companies and Taiwan based Acer Netxus, Inc., as
parties to the suit.
On August 27, 1996, the Member Companies filed suit against the
Company in United States District Court, Northern District of
California, alleging breach of contract and unfair competition based
on the Company's discontinuation of ASIC sales and alleged failure
to provide certain other UMC technology to the Member Companies.
The complaint filed by the Member Companies alleges that the Company
lacked justification to discontinue the sale of ASICs and that its
failure to sell ASICs to the Member Companies constituted unfair
competition. The complaint seeks court-ordered arbitration,
unspecified damages, punitive damages and an injunction requiring
further sales of the ASICs to the Member Companies. On September 6,
1996, the court granted a temporary restraining order pursuant to
which the Company supplied the Member Companies with a specified
number of ASICs on the terms and conditions set forth in the ITRI
Agreements. The court's order was granted as an interim measure to
preserve the status quo pending adjudication on the merits. On
September 16, 1996, the Company filed counterclaims seeking
declaratory and injunctive relief and damages against Member
Companies for, among other things, breach of contract, fraud and
misappropriation of trade secrets. On September 23, 1996, the Member
Companies filed a demand for arbitration of the dispute and claimed,
among other things, actual damages in excess of $60 million, legal
fees and expenses and punitive damages.
The parties conducted discovery with respect to the royalty and ASIC
supply issues during September and October, 1996. A hearing on
ITRI's motion for a preliminary injunction to require the Company to
continue supplying ASICs and ITRI's motion to compel arbitration was
held on November 22, 1996. On January 23, 1997, the Court granted
the ITRI parties' motion to compel arbitration, and granted, in
part, the Member Companies' motion for a preliminary injunction.
Under the Court's Order, the case was directed to arbitration under
the auspices of the American Arbitration Association, the litigation
was stayed, and the Company was
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directed to continue supplying ASICs to the Member Companies as
under the prior temporary restraining order.
On or about April 8, 1997, ITRI and the Member Companies filed
amended demands for arbitration with the American Arbitration
Association. On April 28, 1997, the Company filed an answer and
counterclaim in the arbitration proceeding against ITRI, the Member
Companies, and Acer Netxus, Inc., a Taiwanese company to which ITRI
purportedly assigned member company rights under the ITRI Agreements
without the Company's consent. Document discovery is scheduled to
occur in August 1997. The date for commencement of the evidentiary
hearing has not been set.
The Company believes that it has meritorious defenses to the claims
asserted by the trustee, ITRI and the Member Companies and it
intends to defend the litigation vigorously. Moreover, the Company
believes that the damages claims of the trustee, ITRI, and the
Member Companies are without merit. The Company further believes
that its claims against the trustee, ITRI, the Member Companies, and
Acer Netxus are meritorious and the Company intends to vigorously
pursue such claims. However, due to the nature of the claims and
because the proceedings are in the discovery stage, the Company
cannot determine the total expense or possible loss, if any, that
may ultimately be incurred either in the context of a trial,
arbitration or as a result of a negotiated settlement. Regardless
of the ultimate outcome of the proceedings, it could result in
significant diversion of time by the Company's management. After
consideration of the nature of the claims and the facts relating to
the proceedings, the Company believes that the resolution of this
matter will not have a material adverse effect on the Company's
business, financial condition and results of operations; however,
the results of these proceedings, including any potential
settlement, are uncertain and there can be no assurance to that
effect.
DESAI
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 contained 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 Plaintiffs' complaint, the
Company had a binding commitment to proceed with the proposed
financing and caused the Plaintiffs damage by not concluding the
transaction.
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 motions remained pending, with no discovery or
other proceedings in the case, through April 1997. In April 1997,
the parties entered into a settlement agreement to terminate the
litigation. Under the terms of the settlement agreement, and as
provided in the original Summary Of Proposed Terms for this
transaction, a $100,000 commitment fee that had been in an escrow
account since March 1995 was released to the Plaintiffs and the
accrued interest was released to the Company. Pursuant to the
settlement, stipulated dismissals with prejudice of all related
litigation were filed in May 1997, and the litigation is now
concluded.
DSC
From July 1993 until June 1996 the Company was involved in litigation
with DSC Communications Corporation ("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
and $7,106,000 in July 1996, and issued 725,787 shares of common
stock to DSC. The full settlement amount was recorded during the
second quarter of 1996 as a charge of $15,807,000. Under the
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terms of the Settlement Agreement, the Company maintains all rights
to the UMC technology free and clear of any claim by DSC.
NOTE 4 NET INCOME PER SHARE
Net income per common share is computed using the weighted average
number of common and dilutive common equivalent shares outstanding
during the period. Dilutive common equivalent shares consist of
stock options and warrants.
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share."
SFAS No. 128 requires the presentation of basic net income per share
and, for companies with complex capital structures, diluted net
income per share. SFAS No. 128 is effective for annual and interim
periods ending after December 31, 1997. The Company expects that
basic net income per share will be higher than fully diluted net
income per share as presented in the accompanying condensed
consolidated financial statements and that diluted net income per
share will not differ materially from fully diluted net income per
share as presented in the accompanying condensed consolidated
financial statements.
NOTE 5 COMMON STOCK SPLIT
The Company announced a special meeting of stockholders scheduled for
September 22, 1997 to obtain stockholder approval of an increase in
the number of shares of its authorized common stock. The Company
intends to declare a two-for-one stock split at the special meeting
immediately after obtaining stockholder approval of the increase in
the number of shares of its authorized common stock.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Except for the historical financial information contained herein, the
following discussion and analysis may contain "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended. Such
statements include declarations regarding the intent, belief or current
expectations of the Company and its management. Prospective investors are
cautioned that any such forward-looking statements are not guarantees of
future performance and involve a number of risks and uncertainties; actual
results could differ materially from those indicated by such forward-looking
statements. Among the important factors that could cause actual results to
differ materially from those indicated by such forward-looking statements, as
set forth below under "Certain Factors That Might Affect Future Operating
Results," are: (i) the limited history of operations and profitability of the
Company, (ii) potential fluctuations in future operating results and
seasonality, (iii) dependence on the telecommunications industry and small
line-size market, (iv) risks associated with a concentrated product line, new
products and rapid technological change, (v) dependence on sole-source and
other key suppliers, (vi) dependence on a limited number of third party
manufacturers and support organizations, (vii) risks associated with
competition, (viii) risks associated with pending litigation, (ix) risks
associated with limited protection of proprietary technology and risk of
third-party claims of infringement, (x) risk of failure to manage expanding
operations, (xi) customer concentration, (xii) risks associated with
international markets, (xiii) dependence on key personnel, (xiv) compliance
with regulations and industry standards and (xv) other risks identified from
time to time in the Company's reports and registration statements filed with
the Securities and Exchange Commission.
The following discussion should be read in conjunction with the Financial
Statements and Notes thereto.
GENERAL
AFC designs, develops, manufactures, markets and supports the UMC system, a
cost-effective, multi-feature digital loop carrier system developed to serve
low density 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 narrow band, wide band, and
broad band 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 sells its product worldwide, primarily through its direct sales force
in the domestic market, and through direct sales, joint ventures,
distributors and agents in international markets.
RESULTS OF OPERATIONS
REVENUES. For the three months ended June 30, 1997, revenues increased 106%
to $61.2 million compared with $29.7 million for the same period of 1996.
International revenues increased to $14.6 million in the second quarter of
1997, compared with $2.2 million for the same period of 1996, and represented
23.8% and 7.4% of total revenues during the respective periods.
For the six months ended June 30, 1997, revenues increased 96% to $105.6
million from $53.8 million for the comparable period of 1996. International
revenues increased to $28.3 million for the six months ended 1997 compared
with $6.8 million for the same period of 1996, and represented 26.8% and
12.6% of total revenues during the respective periods. The improvement in
revenues for the three month and six month periods of 1997 was primarily due
to the introduction of new features of the UMC system, the expansion of the
Company's customer base and higher international revenues.
For the second quarter and first half of 1997, two customers accounted for
more than 10% of revenues. In the three and six months ended June 30, 1997,
GTE Communication Systems Corporation accounted for 17.4% and 15.5% of
revenues, respectively, and Sprint Corporation accounted for 14.1% and 10.4%
of revenues, respectively. In the second quarter and first half of 1996,
ALLTEL Supply Inc., an affiliate of ALLTEL, an independent domestic telephone
company, accounted for 18.2% and 15.6% of revenues, respectively. No other
customer accounted for 10% or more of
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revenues in any such 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 the cost of
materials, manufacturing and warranty costs. For the three months ended
June 30, 1997, gross profit increased to $27.7 million compared with $12.7
million for the same period of 1996, and represented gross margins (as a
percent of revenues) of 45.2% and 42.8%, respectively. For the six months
ended June 30, 1997, gross profit increased to $47.1 million from $22.7
million for the comparable period of 1996, and represented gross margin
percentages of 44.6% and 42.2%, respectively. The improvement in gross
margins for the three month and six month periods from 1996 to 1997 was due
to lower product costs resulting from engineering design improvements and
greater efficiencies achieved in the purchasing and manufacturing activities
related to the product as associated with higher unit volumes. In the future,
gross margins may fluctuate due to a wide variety of factors, including: the
mix between domestic and international sales; the customer mix; 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; and unit volume.
RESEARCH AND DEVELOPMENT. For the three months ended June 30, 1997, research
and development expenses increased 97% to $6.4 million compared with $3.3
million for the same period of 1996. Research and development expenses
represented 10.5% and 11.0% of revenues for the second quarter of 1997 and
1996, respectively.
For the six months ended June 30, 1997, research and development expenses
increased 92% to $11.3 million compared with $5.9 million for the same period
of 1996. As a percentage of revenues, research and development expenses were
10.7% and 11.0% for the first six months of 1997 and 1996, respectively.
The increase in research and development expenses for the three months and
six months ended June 30, 1997 resulted primarily from the hiring of
additional personnel, higher costs for material and test equipment used to
develop and test new products and features, and the use of outside services
for certain development and testing efforts. The number of employees in the
research and development departments increased 51% to 148 as of June 30, 1997
from 98 at June 30, 1996. 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. For the three months ended June 30,
1997, selling, general and administrative expenses increased to $9.8 million
compared with $4.4 million for the same period of 1996. Selling, general and
administrative expenses represented 16.1% and 14.7% of revenues for the
second quarter of 1997 and 1996, respectively.
For the six months ended June 30, 1997, selling, general and administrative
expenses increased to $17.6 million compared with $7.9 million for the same
period of 1996. As a percentage of revenues, selling, general and
administrative expenses were 16.7% and 14.7% for the first two quarters of
1997 and 1996, respectively.
The increase in sales and marketing expenses for the three months and six
months ended June 30, 1997 was primarily due to the addition of new
employees, commissions earned by outside international distributors and the
Company's sales force resulting from higher revenue levels, higher travel and
entertainment costs and increased advertising and trade show participation.
General and administrative expenses increased in the second quarter of 1997
as compared with the same period in 1996 due to legal costs associated with
the ITRI litigation, an increase in general and administrative staff
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and higher facilities costs. Selling, general and administrative headcount
increased 109% to 201 as of June 30, 1997 from 96 at June 30, 1996.
DSC LITIGATION. From July 1993 until June 1996 the Company was involved in
litigation with DSC Communications Corporation ("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 and $7,106,000 in July 1996, and issued 725,787 shares of common
stock to DSC. The full settlement amount was recorded during the second
quarter of 1996 as a charge of $15,807,000. Under the terms of the
Settlement Agreement, the Company maintains all rights to the UMC technology
free and clear of any claim by DSC.
INCOME TAXES (BENEFIT). For the three and six months ended June 30, 1997,
the Company recorded income taxes at an effective rate that approximated the
combined federal and state statutory rates. For the six months ended June
30, 1996, an income tax benefit of $8.6 million was recorded to reflect the
benefit of the DSC litigation settlement and the decrease in the valuation
allowance recorded against the Company's deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997, the Company's cash and marketable security balances totaled
$111.5 million compared with $108.4 million at December 31, 1996.
In February 1997, the company completed a secondary offering of 2,000,000
shares of Common Stock, 1,800,000 of which were sold by certain stockholders
and 200,000 of which were sold by the Company, generating approximately $7.8
million of net proceeds to the Company.
Net cash provided by operations in the first two quarters of 1997 totaled
$3.7 million. Investing activities during the same period included additions
to property and equipment of $9.3 million. The Company continues to invest
in capital equipment to support its employee and facility growth,
implementation of its new management and accounting system, and its research
and development and manufacturing activities.
The Company has a $12.0 million bank line with an interest rate of prime plus
0.5%. The line of credit expired on November 15, 1996, but automatically
renews for successive thirty day periods until terminated by written
agreement. 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 June 30, 1997, and December 31, 1996 no borrowings were
outstanding under the bank line, and the Company was in compliance with the
covenants contained in the agreement. At June 30, 1997, $1.3 million was
reserved under the line for letters of credit.
The Company also has lease lines totaling $12.8 million that are used for
equipment and furniture purchases. As of June 30, 1997, $6.5 million
remained available under the lease lines.
The Company believes that its existing cash and short-term investments and
available credit facilities will be adequate to support the Company's
financial resource needs, including working capital requirements, capital
expenditures, operating lease obligations and debt payments for the next
twelve months.
CERTAIN FACTORS THAT MIGHT AFFECT FUTURE OPERATING RESULTS
In addition to the other information in this Quarterly Report on Form 10-Q,
the following are important factors that should be considered in evaluating
the Company and its business.
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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. 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.
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 mix
between domestic and international sales; the customer mix; 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; and unit volume.
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 Company's 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 a portion of the UMC system in
outdoor locations. Shipments of the UMC system are 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.
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
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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.
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.
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 and feature
enhancements 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 diminish market acceptance of the UMC system or render the UMC system
obsolete and, thereby, materially 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 feature enhancements, 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 hardware
and 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 technical difficulties in certain UMC system installations. There
can be no assurance that despite significant testing by the Company, hardware
or software errors will not be found in the UMC system after commencement of
shipments, resulting in delays in, or cancellation of, customer orders or in
the loss of market acceptance, any of which could have a material adverse
effect on the Company's business, financial condition and results of
operations.
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
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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.
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.), and Shanghai Lucent Technologies
Transmission Equipment Co., Ltd., 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 San Jose, 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 the Company's current or alternative
manufacturers will be able to meet the Company's future requirements or that
such manufacturing services will continue to be available to the Company at
favorable prices, or at all.
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.
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 Networks, Fujitsu
America, Inc., Hitron Technology, Inc., Lucent Technologies, Inc., NEC
America, Inc., Northern Telecom Ltd., Opnet Technologies Co. Ltd., RELTEC
Corporation, Seiscor Technologies Inc., Siemens Corporation, Teledata
Communications Ltd., UT Starcom, Inc., 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 agreements with the Industrial
Technology Research Institute ("ITRI") to jointly develop products based on
the UMC system. ITRI is a Taiwanese government-sponsored research and
development organization in the telecommunications field. Such agreements
grant ITRI and certain of its member companies certain rights to manufacture
and sell the European Telecommunications Standards Institute ("ETSI") version
of the UMC system outside of North America. Such entities currently compete
with the Company in international markets, primarily in China. In addition,
upon termination of the agreements with ITRI in 2002, ITRI will have a
worldwide, non-exclusive, royalty-free, irrevocable license to use the ETSI
version of the UMC technology and, consequently, such member companies will
be able to compete with the Company worldwide at such time. There is an
ongoing dispute subject to litigation between the Company and ITRI and such
member companies as to, among other things, whether ITRI possesses the right
to grant such rights to manufacture and sell the ETSI version of the UMC
system to new member companies and whether AFC has terminated or may
terminate such agreements and the rights, if any, of the member companies
thereunder. Depending on the outcome of this dispute, the Company may face
competition from new member companies for the ETSI version of the UMC system.
Such companies may possess substantially greater financial, marketing and
technical resources than the Company. 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.
RISKS ASSOCIATED WITH PENDING LITIGATION. The Company is a party to certain
legal proceedings including the litigation between the Company and ITRI and
certain of its member companies arising primarily out of a dispute regarding
the payment of royalties and the supply of ASICs under the agreements between
the Company and ITRI. The Company is unable to determine the total expense
or possible loss, if any, that may ultimately be incurred in the resolution
of these
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proceedings. Regardless of the ultimate outcome of these proceedings, they
could result in significant diversion of time by the Company's management.
After consideration of the nature of the claims and the facts relating to
these proceedings, the Company believes that the resolution of these
proceedings will not have a material adverse effect on the Company's
business, financial condition and results of operations; however, the results
of these proceedings, including any potential settlements, are uncertain and
there can be no assurance to that effect.
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. In June 1996, the
Company settled litigation with DSC under which DSC had claimed proprietary
rights to the UMC technology. 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.
RISK OF FAILURE TO MANAGE EXPANDING OPERATIONS. The Company has 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.
In connection with the Company's recent growth, management evaluated and
purchased a new management and accounting system and is in the process of
implementing the system. There can be no assurance that the Company will
complete such implementation on a timely basis. 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.
CUSTOMER CONCENTRATION. For the six months ended June 30, 1997,
approximately 15.5% and 10.4% of the Company's revenues were derived from
sales to GTE Communication Systems Corporation and Sprint Corporation,
respectively. For the six months ended June 30, 1996, ALLTEL Supply, Inc.,
accounted for 15.6 % of the Company's revenues. For the six months ended
June 30, 1997 and 1996, the Company's five largest customers accounted for
approximately 43% and 37% of revenues, respectively. Although the Company's
largest customers have varied from period to period, the
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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.
RISKS ASSOCIATED WITH INTERNATIONAL MARKETS. International sales constituted
26.8% and 12.6% of the Company's total revenues for the six months ended June
30, 1997 and 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 relies on a number of
third-party distributors and agents to market and sell the UMC system outside
of North America. There can be no assurance that such distributors or agents
will provide the support and effort necessary to service international
markets effectively. 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's management has limited experience in international operations, and
there can be no assurance that the Company will successfully expand its
international operations. In addition, a successful expansion by the Company
of its international operations and sales in certain markets may depend on
the Company's ability to establish and maintain productive strategic
relationships. To date, the Company has formed three joint ventures to
pursue international markets, two of which have been or are in the process of
being terminated or liquidated due to differences with the joint venture
partners. There can be no assurance that the Company will be able to
identify suitable parties for joint ventures or strategic relationships or,
even if such parties are identified, that successful joint ventures or
strategic relationships will result. Moreover, there can be no assurance
that the Company will be able to increase international sales of the UMC
system through strategic relationships or joint ventures. The failure to do
so could significantly limit the Company's ability to expand its
international operations and could adversely affect 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 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.
DEPENDENCE ON KEY PERSONNEL. The Company's success depends to a significant
extent upon key technical and management employees. The loss of the services
of any of these 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
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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.
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. Standards setting and compliance verification in the United States
are determined by the Federal Communications Commission ("FCC"), by
Underwriters Laboratories, by independent telephone companies, by Bell
Communications Research ("Bellcore") and by other independent third-party
testing organizations. In international markets, the Company's products must
comply with recommendations issued 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 effect 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, in many cases 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 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 effect 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. The Company has initiated the formal
process of applying for ISO-9001 certification and expects to complete the
audit process during 1997. ISO-9001 addresses quality assurance in design,
development, production, installation and service. There can be no assurance
as to when or if the Company will receive such certification. The failure to
obtain such certification may preclude the Company from selling the UMC
system in certain markets.
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 a material 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.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITRI In September 1992, the Company entered into agreements (the "ITRI
Agreements") with the Industrial Technology Research Institute ("ITRI"), a
Taiwanese government-sponsored research and development organization, that
granted to ITRI certain license rights to the European Telecommunications
Standards Institute ("ETSI") version of the Universal Modular Carrier
1000-TM- ("UMC"). See "Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Certain Factors that Might
Affect Future Operating Results -- Competition." In 1995, a dispute arose
among the Company, ITRI, and certain of ITRI's member companies (the "Member
Companies") in which the Company claimed that ITRI and the Member Companies
were, among other things, failing to pay royalties when due under the ITRI
Agreements. In reliance upon certain provisions of the ITRI Agreements, in
April 1996, the Company ceased delivering to the Member Companies certain
proprietary application specific integrated circuits ("ASICs") used in
manufacturing the UMC system.
Pursuant to agreements with ITRI reached in 1994, the design documentation
for these ASICs are held in a trust account, with directions that the designs
can be made available to ITRI on the occurrence of specified conditions. On
July 9, 1996, the trustee custodian of the ASIC designs filed suit against
the Company in the United States District Court, Eastern District of New
York, alleging that the Company had not supplied all required documentation
to the trustees, and wrongfully discontinued the sale of the ASICs to the
Member Companies. Among other things, the complaint seeks unspecified
damages on behalf of the trustee, and a determination that the trustee can
release the ASIC designs to ITRI. On July 31, 1996, the Company filed a
counterclaim against the trustee claiming, among other things, that the
trustee improperly disclosed the design documentation to third parties.
Discovery in the case has been ongoing since October 1996. No trial date is
currently set.
On July 30, 1996, the Company filed suit against ITRI and others in the
United States District Court, Northern District of California, for breach of
the ITRI Agreements, breach of covenants of good faith, trade secret
misappropriation, tortious interference, and related claims. The complaint
alleges that ITRI breached the ITRI Agreements, among other ways, by failing
to collect royalties owed to the Company, by developing UMC-based products
not shared with the Company, by transferring UMC technology to an
unauthorized company, and by misappropriating the Company's trade secrets and
that the ITRI Agreements have been terminated. The Company seeks recovery
for lost profits and unjust enrichment, punitive damages, and declaratory and
injunctive relief. On September 13, 1996, ITRI filed a demand for
arbitration of the dispute and claimed, among other things, that the Company
has breached the ITRI Agreements and is liable for unspecified royalties and
punitive damages, and claiming proprietary rights in certain UMC technology.
On September 30, 1996, the Company amended the complaint in its suit against
ITRI to add the Member Companies and Taiwan based Acer Netxus, Inc., as
parties to the suit.
On August 27, 1996, the Member Companies filed suit against the Company in
United States District Court, Northern District of California, alleging
breach of contract and unfair competition based on the Company's
discontinuation of ASIC sales and alleged failure to provide certain other
UMC technology to the Member Companies. The complaint filed by the Member
Companies alleges that the Company lacked justification to discontinue the
sale of ASICs and that its failure to sell ASICs to the Member Companies
constituted unfair competition. The complaint seeks court-ordered
arbitration, unspecified damages, punitive damages and an injunction
requiring further sales of the ASICs to the Member Companies. On September
6, 1996, the court granted a temporary restraining order pursuant to which
the Company supplied the Member Companies with a specified number of ASICs on
the terms and conditions set forth in the ITRI Agreements. The court's order
was granted as an interim measure to preserve the status quo pending
adjudication on the merits. On September 16, 1996, the Company filed
counterclaims seeking declaratory and injunctive relief and damages against
Member Companies for, among other things, breach of contract, fraud and
misappropriation of trade secrets. On
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September 23, 1996, the Member Companies filed a demand for arbitration of
the dispute and claimed, among other things, actual damages in excess of $60
million, legal fees and expenses and punitive damages.
The parties conducted discovery with respect to the royalty and ASIC supply
issues during September and October 1996. A hearing on ITRI's motion for a
preliminary injunction to require the Company to continue supplying ASICs and
ITRI's motion to compel arbitration was held on November 22, 1996. On
January 23, 1997, the Court granted the ITRI parties' motion to compel
arbitration, and granted, in part, the Member Companies' motion for a
preliminary injunction. Under the Court's Order, the case was directed to
arbitration under the auspices of the American Arbitration Association, the
litigation was stayed, and the Company was directed to continue supplying
ASICs to the Member Companies as under the prior temporary restraining order.
On or about April 8, 1997, ITRI and the Member Companies filed amended
demands for arbitration with the American Arbitration Association. On April
28, 1997, the Company filed an answer and counterclaim in the arbitration
proceeding against ITRI, the Member Companies, and Acer Netxus, Inc., a
Taiwanese company to which ITRI purportedly assigned member company rights
under the ITRI Agreements without the Company's consent. Document discovery
is scheduled to occur in August 1997. The date for commencement of the
evidentiary hearing has not been set.
The Company believes that it has meritorious defenses to the claims asserted
by the trustee, ITRI and the Member Companies and it intends to defend the
litigation vigorously. Moreover, the Company believes that the damages
claims of the trustee, ITRI, and the Member Companies are without merit. The
Company further believes that its claims against the trustee, ITRI, the
Member Companies, and Acer Netxus are meritorious and the Company intends to
vigorously pursue such claims. However, due to the nature of the claims and
because the proceedings are in the discovery stage, the Company cannot
determine the total expense or possible loss, if any, that may ultimately be
incurred either in the context of a trial, arbitration or as a result of a
negotiated settlement. Regardless of the ultimate outcome of the
proceedings, it could result in significant diversion of time by the
Company's management. After consideration of the nature of the claims and the
facts relating to the proceedings, the Company believes that the resolution
of this matter will not have a material adverse effect on the Company's
business, financial condition and results of operations; however, the results
of these proceedings, including any potential settlement, are uncertain and
there can be no assurance to that effect.
DESAI
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 contained 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 Plaintiffs' complaint, the Company had a binding commitment to proceed
with the proposed financing and caused the Plaintiffs damage by not
concluding the transaction.
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
motions remained pending, with no discovery or other proceedings in the case,
through April 1997. In April 1997, the parties entered into a settlement
agreement to terminate the litigation. Under the terms of the settlement
agreement, and as provided in the original Summary Of Proposed Terms for this
transaction, a $100,000 commitment fee that had been in an escrow account
since March 1995 was released to the Plaintiffs and the accrued interest was
released to the Company. Pursuant to the settlement, stipulated dismissals
with prejudice of all related litigation were filed in May 1997, and the
litigation is now concluded.
20
<PAGE>
ITEM 2. CHANGES IN SECURITIES:
Between April 1, 1997 and June 30, 1997 the Company issued and sold the
following securities which were not registered under the Securities Act of
1933 ("Securities Act"): (i) the Company granted stock options to its
employees and a non-employee director under its 1996 Stock Incentive Plan,
covering an aggregate of 367,995 shares of the Company's Common Stock, at
exercise prices ranging from $31.88 to $60.63 per share and (ii) the Company
issued and sold an aggregate of 1,353,857 shares of Common Stock upon the net
exercise of warrants to 6 persons or entities for aggregate consideration of
38,358 shares of Common Stock.
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.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES: None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
The Company's 1997 Annual Meeting of Stockholders (the "Annual Meeting") was
held on May 14, 1997. The following matters were voted on by the
stockholders:
1. Election of two Class I Directors. Carl Grivner and Clifford H.
Higgerson were elected to the Company's Board of Directors as Class I
Directors to serve for terms extending until the Annual Meeting
of Stockholders to be held in the year 2000 and until their successors
have been duly elected and qualified, or until their resignation or
removal, if any. The result of the voting was as follows: 27,159,169
votes in favor of Carl Grivner, with 25,224 votes withheld and
27,159,219 votes in favor of Clifford Higgerson, with 25,174 votes
withheld. The terms of office of the Company's other directors, B.J.
Cassin, Don Green, Brian Jackman and Dan Rasdal, continued after the
Annual Meeting.
2. Ratification of selection of KPMG Peat Marwick LLP as independent public
accountants for the Company for the fiscal year ending December 31, 1997.
The result of the vote was 27,166,042 shares in favor, 3,537 shares
against, 14,814 shares abstaining and 0 broker non-votes.
ITEM 5. OTHER INFORMATION: None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
<TABLE>
<CAPTION>
Exhibit
Number Document Description
- ------- --------------------
<S> <C>
3.3 Fourth Amended and Restated Certificate of Incorporation of the Registrant.*
3.5 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 3.3).*
10.1 Form of Warrant Issued In Connection with the Sale of the Registrant's Series A Preferred Stock on January 6, 1993.*
</TABLE>
21
<PAGE>
<TABLE>
<S> <C>
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.*
10.4.1 Form of Amendment to Warrants and Performance Warrants.*
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.*+
10.13 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.*
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.*
10.26.1 Form of Automatic Stock Option Agreement pertaining to the 1996 Plan.*
10.27 Form of Notice of Grant of Stock Option pertaining to the 1996 Plan.*
10.27.1 Form of Notice of Grant of Non-Employee Director Automatic Stock Option pertaining to the 1996 Plan.*
10.28 Form of Stock Issuance Agreement pertaining to the 1996 Plan.*
10.29 The Registrant's Employee Stock Purchase Plan.*
10.30 Termination Agreement of Joint Venture and Partnership Agreement, dated December 23, 1996, between the
Registrant and Tellabs Operations, Inc.**
10.31 License and Marketing Agreement, dated December 23, 1996, between the Registrant and Tellabs Operations, Inc.**
10.32 OEM Agreement, dated December 23, 1996, between the Registrant and Tellabs Operations, Inc.**
10.33 Stock Issuance Agreement, dated June 30, 1997, between the Registrant and Peter A. Darbee.
10.34 Note secured by Stock Pledge Agreement, dated June 30, 1997, by Peter A. Darbee in favor of the Registrant.
10.35 Stock Pledge Agreement, dated June 30, 1997, between the Registrant and Peter A. Darbee.
10.36 Consulting Agreement, dated May 19, 1997, between the Registrant and Peter A. Darbee.
11.1 Schedule re: computation of net income (loss) per share.
21.1 Subsidiaries of the Registrant.*
27.1 Financial data schedule.
</TABLE>
22
<PAGE>
* Incorporated by reference from the Registrant's Registration Statement on
Form S-1 (no. 333-8921) filed with the Securities and Exchange Commission on
July 26, 1996, as amended, and declared effective September 30, 1996.
** Incorporated by reference from the Registrant's Registration Statement on
Form S-1 (no. 333-20369) filed with the Securities and Exchange Commission on
January 24, 1997, as amended, and declared effective February 12, 1997.
+ Portions of this Exhibit have been granted Confidential Treatment.
(b) REPORTS ON FORM 8-K: NONE
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant had duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
ADVANCED FIBRE COMMUNICATIONS, INC.
(Registrant)
Dated: August 8, 1997 By: /s/ Peter A. Darbee
-----------------------------------
Name: Peter A. Darbee
Title: Vice President, Chief Financial Officer
and Secretary
24
<PAGE>
ADVANCED FIBRE COMMUNICATIONS, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Document Description
- ------- --------------------
<S> <C>
3.5 Amended and restated bylaws of the registrant.
10.33 Stock Issuance Agreement, dated June 30, 1997, between the Registrant and Peter A. Darbee.
10.34 Note secured by Stock Pledge Agreement, dated June 30, 1997, by Peter A. Darbee in favor of the Registrant.
10.35 Stock Pledge Agreement, dated June 30, 1997, between the Registrant and Peter A. Darbee.
10.36 Consulting Agreement, dated May 19, 1997, between the Registrant and Peter A. Darbee.
11.1 Schedule re: computation of net income (loss) per share.
27.1 Financial data schedule.
</TABLE>
25
<PAGE>
AMENDED AND RESTATED
BYLAWS
OF
ADVANCED FIBRE COMMUNICATIONS, INC.
(A Delaware corporation)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
ARTICLE I
OFFICES . . . . . . . . . . . . . . . . . . 1
Section 1. Registered Office. . . . . . . . . . . . . . . . . . . . . . . 1
Section 2. Other Offices. . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE II
CORPORATE SEAL . . . . . . . . . . . . . . . . 1
Section 3. Corporate Seal. . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE III
MEETINGS OF STOCKHOLDERS AND VOTING RIGHTS . . . . . . . . . 1
Section 4. Place of Meetings . . . . . . . . . . . . . . . . . . . . . . . 1
Section 5. Annual Meeting. . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 6. Postponement of Annual Meeting. . . . . . . . . . . . . . . . . 2
Section 7. Special Meetings. . . . . . . . . . . . . . . . . . . . . . . . 2
Section 8. Notice of Meetings. . . . . . . . . . . . . . . . . . . . . . . 2
Section 9. Manner of Giving Notice . . . . . . . . . . . . . . . . . . . . 3
Section 10. Quorum and Transaction of Business. . . . . . . . . . . . . . . 3
Section 11. Adjournment and Notice of Adjourned Meetings. . . . . . . . . . 5
Section 12. Waiver of Notice, Consent to Meeting or Approval of Minutes . . 5
Section 13. Action by Written Consent Without a Meeting . . . . . . . . . . 6
Section 14. Voting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 15. Persons Entitled to Vote or Consent . . . . . . . . . . . . . . 6
Section 16. Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 17. Inspectors of Election. . . . . . . . . . . . . . . . . . . . . 7
ARTICLE IV
BOARD OF DIRECTORS . . . . . . . . . . . . . . . 7
Section 18. Powers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 19. Number of Directors . . . . . . . . . . . . . . . . . . . . . . 7
Section 20. Election Of Directors, Term, Qualifications . . . . . . . . . . 7
Section 21. Resignations. . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 22. Removal . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 23. Vacancies . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 24. Regular Meetings. . . . . . . . . . . . . . . . . . . . . . . . 9
Section 25. Participation by Telephone. . . . . . . . . . . . . . . . . . . 9
Section 26. Special Meetings. . . . . . . . . . . . . . . . . . . . . . . . 9
i.
<PAGE>
Section 27. Notice of Meetings. . . . . . . . . . . . . . . . . . . . . . . 9
Section 28. Place of Meetings . . . . . . . . . . . . . . . . . . . . . . . 10
Section 29. Action by Written Consent Without a Meeting . . . . . . . . . . 10
Section 30. Quorum and Transaction of Business. . . . . . . . . . . . . . . 10
Section 31. Adjournment . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 32. Organization. . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 33. Compensation. . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 34. Committees. . . . . . . . . . . . . . . . . . . . . . . . . . . 11
ARTICLE V
OFFICERS. . . . . . . . . . . . . . . . . . 11
Section 35. Officers. . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 36. Appointment . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 37. Inability to Act. . . . . . . . . . . . . . . . . . . . . . . . 12
Section 38. Resignation . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 40. Vacancies . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 41. Chairman of the Board . . . . . . . . . . . . . . . . . . . . . 12
Section 42. President . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 43. Vice Presidents . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 44. Secretary and Assistant Secretary . . . . . . . . . . . . . . . 13
Section 45. Chief Financial Officer . . . . . . . . . . . . . . . . . . . . 14
Section 46. Compensation. . . . . . . . . . . . . . . . . . . . . . . . . . 15
ARTICLE VI
CONTRACTS, LOANS, BANK ACCOUNTS, CHECKS AND DRAFTS . . . . . . . 15
Section 47. Execution of Contracts and Other Instruments. . . . . . . . . . 15
Section 48. Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 49. Bank Accounts . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 50. Checks, Drafts, Etc.. . . . . . . . . . . . . . . . . . . . . . 16
ARTICLE VII
CERTIFICATES FOR STOCK AND THEIR TRANSFER. . . . . . . . . . 16
Section 51. Certificate for Stock . . . . . . . . . . . . . . . . . . . . . 16
Section 52. Transfer on the Books . . . . . . . . . . . . . . . . . . . . . 17
Section 53. Lost, Destroyed and Stolen Certificates . . . . . . . . . . . . 17
Section 54. Issuance, Transfer and Registration of Shares . . . . . . . . . 17
ARTICLE VIII
INSPECTION OF CORPORATE RECORDS . . . . . . . . . . . . 18
Section 55. Inspection by Directors . . . . . . . . . . . . . . . . . . . . 18
Section 56. Inspection by Stockholders. . . . . . . . . . . . . . . . . . . 18
Section 57. Written Form. . . . . . . . . . . . . . . . . . . . . . . . . . 18
ii.
<PAGE>
ARTICLE IX
MISCELLANEOUS. . . . . . . . . . . . . . . . . 19
Section 58. Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Section 59. Annual Report . . . . . . . . . . . . . . . . . . . . . . . . . 19
Section 60. Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Section 61. Bylaw Amendments. . . . . . . . . . . . . . . . . . . . . . . . 20
Section 62. Construction and Definition . . . . . . . . . . . . . . . . . . 20
Section 63. Registered Stockholders . . . . . . . . . . . . . . . . . . . . 20
Section 64. Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
ARTICLE X
INDEMNIFICATION . . . . . . . . . . . . . . . . 21
Section 65. Indemnification of Directors, Officers, Employees And Other
Agents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
ARTICLE XI
RIGHT OF FIRST REFUSAL . . . . . . . . . . . . . . 22
Section 66. Right of First Refusal. . . . . . . . . . . . . . . . . . . . . 22
ARTICLE XII
LOANS OF OFFICERS AND OTHERS. . . . . . . . . . . . . 25
Section 67. Certain Corporate Loans and Guaranties. . . . . . . . . . . . . 25
</TABLE>
iii.
<PAGE>
AMENDED AND RESTATED
BYLAWS
OF
ADVANCED FIBRE COMMUNICATIONS, INC.
(A Delaware corporation)
ARTICLE I
OFFICES
SECTION 1. REGISTERED OFFICE. The registered office shall be in
the City of Wilmington, County of New Castle, State of Delaware.
SECTION 2. OTHER OFFICES. Additional offices of the corporation
shall be located at such place or places, within or outside the State of
Delaware, as the Board of Directors may from time to time authorize or the
business of the corporation may require.
ARTICLE II
CORPORATE SEAL
SECTION 3. CORPORATE SEAL. The Board of Directors may adopt a
corporate seal having inscribed thereon the name of the corporation, the year of
its organization and the words "Corporate Seal, Delaware." If and when a seal
is adopted by the Board of Directors, such seal may be used by causing it or a
facsimile thereof to be engraved, lithographed, printed, stamped, impressed upon
or affixed to any contract, conveyance, certificate for stock or other
instrument executed by the corporation.
ARTICLE III
MEETINGS OF STOCKHOLDERS AND VOTING RIGHTS
SECTION 4. PLACE OF MEETINGS. All meetings of the stockholders
for the election of directors shall be held at such place as may be fixed from
time to time by the Board of Directors, or at such other place either within or
without the State of Delaware as shall be designated from time to time by the
Board of Directors and stated in the notice of the meeting. Meetings of
stockholders for any other purpose may be held at such time and place, within or
without the State of Delaware, as shall be stated in the notice of the meeting
or in a duly executed waiver of notice thereof.
1
<PAGE>
SECTION 5. ANNUAL MEETING. Annual meetings of stockholders,
commencing with the year 1997, shall be held at such date and time as shall be
designated from time to time by the Board of Directors and stated in the notice
of the meeting. At such annual meeting, directors shall be elected and any
other business may be transacted which may properly come before the meeting.
SECTION 6. POSTPONEMENT OF ANNUAL MEETING. The Board of Directors
and the President shall each have authority to hold at an earlier date and/or
time, or to postpone to a later date and/or time, the annual meeting of
stockholders.
SECTION 7. SPECIAL MEETINGS.
(a) Special meetings of the stockholders, for any purpose or
purposes, may be called by the Board of Directors, or the Chairman of the Board
of Directors.
(b) Upon written request to the Chairman of the Board of
Directors, the President, any vice president or the Secretary of the corporation
by any person or persons (other than the Board of Directors) entitled to call a
special meeting of the stockholders, such officer forthwith shall cause notice
to be given to the stockholders entitled to vote, that a meeting will be held at
a time requested by the person or persons calling the meeting, such time to be
not less than 10 nor more than 60 days after receipt of such request. If such
notice is not given within 20 days after receipt of such request, the person or
persons calling the meeting may give notice thereof in the manner provided by
law or in these bylaws. Nothing contained in this Section 7 shall be construed
as limiting, fixing or affecting the time or date when a meeting of stockholders
called by action of the Board of Directors may be held.
SECTION 8. NOTICE OF MEETINGS. Except as otherwise may be
required by law and subject to subsection 7(b) above, written notice of each
meeting of stockholders shall be given to each stockholder entitled to vote at
that meeting (see Section 15 below), by the Secretary, assistant secretary or
other person charged with that duty, not less than 10 nor more than 60 days
before such meeting.
Notice of any meeting of stockholders shall state the date, place and
hour of the meeting and,
(a) in the case of a special meeting, the general nature of the
business to be transacted;
(b) in the case of an annual meeting, the general nature of
matters which the Board of Directors, at the time the notice is given, intends
to present for action by the stockholders; and
2
<PAGE>
(c) in the case of any meeting at which directors are to be
elected, the names of the nominees intended at the time of the notice to be
presented by management for election.
At a special meeting, notice of which has been given in accordance
with this Section, action may not be taken with respect to business, the general
nature of which has not been stated in such notice. At an annual meeting,
action may be taken with respect to business stated in the notice of such
meeting and any other business as may properly come before the meeting.
SECTION 9. MANNER OF GIVING NOTICE. Notice of any meeting of
stockholders shall be given either personally or by first-class mail,
telegraphic or other written communication, addressed to the stockholder at the
address of that stockholder appearing on the books of the corporation or given
by the stockholder to the corporation for the purpose of notice. If no such
address appears on the corporation's books or is given, notice shall be deemed
to have been given if sent to that stockholder by first-class mail or
telegraphic or other written communication to the corporation's principal
executive office, or if published at least once in a newspaper of general
circulation in the county where that office is located. Notice shall be deemed
to have been given at the time when delivered personally or deposited in the
mail or sent by telegram or other means of written communication.
If any notice addressed to a stockholder at the address of that
stockholder appearing on the books of the corporation is returned to the
corporation by the United States Postal Service marked to indicate that the
United States Postal Service is unable to deliver the notice to the stockholder
at that address, all future notices shall be deemed to have been duly given
without further mailing if these shall be available to the stockholder on
written demand by the stockholder at the principal executive office of the
corporation for a period of one year from the date of the giving of the notice.
An affidavit of mailing of any notice or report in accordance with the
provisions of this Section 9, executed by the Secretary, Assistant Secretary or
any transfer agent, shall be prima facie evidence of the giving of the notice.
SECTION 10. QUORUM AND TRANSACTION OF BUSINESS.
(a) At any meeting of the stockholders, a majority of the shares
entitled to vote, represented in person or by proxy, shall constitute a quorum.
If a quorum is present, the affirmative vote of the majority of shares
represented at the meeting and entitled to vote on any matter shall be the act
of the stockholders, unless the vote of a greater number or voting by classes is
required by law or by the Certificate of Incorporation, and except as provided
in subsection (c) below.
3
<PAGE>
(b) At any meeting of the stockholders, only such business shall
be conducted as shall have been brought before the meeting (1) pursuant to the
corporation's notice of meeting, (2) by or at the direction of the Board of
Directors or (3) by any stockholder of the corporation who is a stockholder of
record at the time of giving of the notice provided for in this Bylaw, who shall
be entitled to vote at such meeting and who complies with the notice procedures
set forth in this Bylaw.
For business to be properly brought before any meeting by a
stockholder pursuant to clause (3) of this Section 10(b), the stockholder must
have given timely notice thereof in writing to the Secretary of the corporation.
To be timely, a stockholder's notice must be delivered to or mailed and received
at the principal executive offices of the corporation not less than 20 days nor
more than 60 days prior to the date of the meeting. A stockholder's notice to
the Secretary shall set forth as to each matter the stockholder proposes to
bring before the meeting (a) a brief description of the business desired to be
brought before the meeting and the reasons for conducting such business at the
meeting, (b) the name and address, as they appear on the corporation's books, of
the stockholder proposing such business, and the name and address of the
beneficial owner, if any, on whose behalf the proposal is made, (c) the class
and number of shares of the corporation which are owned beneficially and of
record by such stockholder of record and by the beneficial owner, if any, on
whose behalf of the proposal is made and (d) any material interest of such
stockholder of record and the beneficial owner, if any, on whose behalf the
proposal is made in such business.
Notwithstanding anything in these Bylaws to the contrary, no
business shall be conducted at a meeting except in accordance with the
procedures set forth in this Section 10(b). The presiding officer of the
meeting shall, if the facts warrant, determine and declare to the meeting that
business was not properly brought before the meeting and in accordance with the
procedures prescribed by this Section 10(b), and if such person should so
determine, such person shall so declare to the meeting and any such business not
properly brought before the meeting shall not be transacted. Notwithstanding
the foregoing provisions of this Section 10(b), a stockholder shall also comply
with all applicable requirements of the Securities Exchange Act of 1934, as
amended, and the rules and regulations thereunder with respect to the matters
set forth in this Section 10(b).
(c) The stockholders present at a duly called or held meeting of
the stockholders at which a quorum is present may continue to do business until
adjournment, notwithstanding the withdrawal of enough stockholders to leave less
than a quorum, provided that any action taken (other than adjournment) is
approved by at least a majority of the shares required to constitute a quorum.
(d) In the absence of a quorum, no business other than
adjournment may be transacted, except as described in subsection (c) above.
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SECTION 11. ADJOURNMENT AND NOTICE OF ADJOURNED MEETINGS. Any
meeting of stockholders may be adjourned from time to time, whether or not a
quorum is present, by the affirmative vote of a majority of shares represented
at such meeting either in person or by proxy and entitled to vote at such
meeting.
In the event any meeting is adjourned, it shall not be necessary to
give notice of the time and place of such adjourned meeting pursuant to Sections
8 and 9 of these bylaws; provided that if any of the following three events
occur, such notice must be given:
(1) announcement of the adjourned meeting's time and place is
not made at the original meeting which it continues or
(2) such meeting is adjourned for more than 30 days from the
date set for the original meeting or
(3) 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.
SECTION 12. WAIVER OF NOTICE, CONSENT TO MEETING OR APPROVAL OF
MINUTES.
(a) Subject to subsection (b) of this Section, the transactions
of any meeting of stockholders, however called and noticed, and wherever held,
shall be as valid as though made at a meeting duly held after regular call and
notice, if a quorum is present either in person or by proxy, and if, either
before or after the meeting, each of the persons entitled to vote but not
present in person or by proxy signs a written waiver of notice or a consent to
holding of the meeting or an approval of the minutes thereof.
(b) A waiver of notice, consent to the holding of a meeting or
approval of the minutes thereof need not specify the business to be transacted
or transacted at nor the purpose of the meeting.
(c) All waivers, consents and approvals shall be filed with the
corporate records or made a part of the minutes of the meeting.
(d) A person's attendance at a meeting shall constitute waiver
of notice of and presence at such meeting, except when such person objects at
the beginning of the meeting to transaction of any business because the meeting
is not lawfully called or convened and except that attendance at a meeting is
not a waiver of any right to object to the consideration of matters which are
required by law or these bylaws to be in such notice (including those matters
described in subsection (d) of Section 8 of these bylaws), but are
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not so included if such person expressly objects to consideration of such
matter or matters at any time during the meeting.
SECTION 13. ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Effective
upon the closing of the corporation's initial public offering of securities
pursuant to a registration statement filed under the Securities Act of 1933, as
amended, the stockholders of the Corporation may not take action by written
consent without a meeting but must take any such actions at a duly called annual
or special meeting.
SECTION 14. VOTING. The stockholders entitled to vote at any
meeting of stockholders shall be determined in accordance with the provisions of
Section 15 of these bylaws.
Unless otherwise provided in the Certificate of Incorporation each
stockholder shall at every meeting of the stockholders be entitled to one vote
in person or by proxy for each share of the capital stock having voting power
held by such stockholder.
Any stockholder may vote part of such stockholder's shares in favor of
a proposal and refrain from voting the remaining shares or vote them against the
proposal, other than elections to office, but, if the stockholder fails to
specify the number of shares such stockholder is voting affirmatively, it will
be conclusively presumed that the stockholder's approving vote is with respect
to all shares such stockholder is entitled to vote.
SECTION 15. PERSONS ENTITLED TO VOTE OR CONSENT. The officer who
has charge of the stock ledger of the corporation shall prepare and make, at
least ten 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
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 ten days prior to the meeting, either
at a place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or, if not so specified, at the place
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 thereof, and may be
inspected by any stockholder who is present.
SECTION 16. PROXIES. Every person entitled to vote or execute
consents may do so either in person or by one or more agents authorized to act
by a written proxy executed by the person or such person's duly authorized agent
and filed with the Secretary of the corporation; provided that no such proxy
shall be valid after the expiration of three years from the date of its
execution, unless the proxy provides for a longer period. The manner of
execution, suspension, revocation, exercise and effect of proxies is governed by
law.
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SECTION 17. INSPECTORS OF ELECTION. Before any meeting of
stockholders, the Board of Directors may appoint any persons, other than
nominees for office, to act as inspectors of election at the meeting or its
adjournment. If no inspectors of election are so appointed, the chairman of the
meeting may, and on the request of any stockholder or a stockholder's proxy
shall, appoint inspectors of election at the meeting. The number of inspectors
shall be either one or three. If inspectors are appointed at a meeting on the
request of one or more stockholders or proxies, the majority of shares
represented in person or proxy shall determine whether one or three inspectors
are to be appointed. If any person appointed as inspector fails to appear or
fails or refuses to act, the chairman of the meeting may, and upon the request
of any stockholder or a stockholder's proxy shall, appoint a person to fill that
vacancy.
These inspectors shall: (a) determine the number of shares outstanding
and the voting power of each, the shares represented at the meeting, the
existence of a quorum, and the authenticity, validity, and effect of proxies;(b)
receive votes, ballots, or consents;(c) hear and determine all challenges and
questions in any way arising in connection with the right to vote;(d) count and
tabulate all votes or consents;(e) determine when the polls shall close;(f)
determine the result; and (g) do any other acts that may be proper to conduct
the election or vote with fairness to all stockholders.
ARTICLE IV
BOARD OF DIRECTORS
SECTION 18. POWERS. The business of the corporation shall be
managed by or under the direction of its board of directors which may exercise
all such powers of the corporation and do all such lawful acts and things as are
not by statute or by the certificate of incorporation or by these bylaws
directed or required to be exercised or done by the stockholders.
SECTION 19. NUMBER OF DIRECTORS. The authorized number of
directors of this corporation shall be not less than a minimum of seven nor more
than a maximum of nine, and the number presently authorized is seven. The exact
number of directors shall be set within these limits from time to time by
resolution of the Board of Directors or by the stockholders at the annual
meeting of the stockholders. No reduction in the number of directors shall
remove any director prior to the expiration of such director's term of office.
SECTION 20. ELECTION OF DIRECTORS, TERM, QUALIFICATIONS. The
directors shall be elected at each annual meeting of stockholders, in accordance
with the Certificate of Incorporation, to hold office until the next annual
meeting. Each director elected shall hold office until his or her successor is
elected and qualified, or until his death, resignation or removal.
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Nominations for election to the Board of Directors must be made by the
Board of Directors or by any stockholder of any outstanding class of capital
stock of the corporation entitled to vote for the election of directors.
Nominations, other than those made by the Board of Directors of the corporation,
must be preceded by notification in writing received by the Secretary of the
corporation not less than twenty (20) days nor more than 60 days prior to any
meeting of stockholders called for the election of directors. Such notification
shall contain the written consent of each proposed nominee to serve as a
director if so elected and the following information as to each proposed nominee
and as to each person, acting alone or in conjunction with one or more other
persons as a partnership, limited partnership, syndicate or other group, who
participates or is expected to participate in making such nomination or in
organizing, directing or financing such nomination or solicitation of proxies to
vote for the nominee:
(a) the name, age, residence, address, and business address of
each proposed nominee and of each such person;
(b) the principal occupation or employment, the name, type of
business and address of the corporation or other organization in which such
employment is carried on of each proposed nominee and of each such person;
(c) the amount of stock of the corporation owned beneficially,
either directly or indirectly, by each proposed nominee and each such person;
and
(d) a description of any arrangement or understanding of each
proposed nominee and of each such person with each other or any other person
regarding future employment or any future transaction to which the corporation
will or may be a party.
The presiding officer of the meeting shall have the authority to
determine and declare to the meeting that a nomination not preceded by
notification made in accordance with the foregoing procedure shall be
disregarded.
SECTION 21. RESIGNATIONS. Any director of the corporation may
resign effective upon giving written notice to the Chairman of the Board, the
President, the Secretary or the Board of Directors of the corporation, unless
the notice specifies a later time for the effectiveness of such resignation. If
the resignation specifies effectiveness at a future time, a successor may be
elected pursuant to Section 23 of these bylaws to take office on the date that
the resignation becomes effective.
SECTION 22. REMOVAL. The Board of Directors may declare vacant the
office of a director who has been declared of unsound mind by an order of court
or who has been convicted of a felony. The entire Board of Directors or any
individual director may be
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removed from office without cause by the affirmative vote of a majority of
the outstanding shares entitled to vote on such removal.
SECTION 23. VACANCIES. A vacancy or vacancies on the Board of
Directors shall be deemed to exist in case of the death, resignation or removal
of any director, or upon increase in the authorized number of directors or if
stockholders fail to elect the full authorized number of directors at an annual
meeting of stockholders or if, for whatever reason, there are fewer directors on
the Board of Directors, than the full number authorized. Such vacancy or
vacancies may be filled by a majority of the remaining directors, though less
than a quorum, or by a sole remaining director, and the directors so chosen
shall hold office until the next annual 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.
SECTION 24. REGULAR MEETINGS. Regular meetings of the Board of
Directors shall be held at such times, places and dates as fixed in these bylaws
or by the Board of Directors; provided, however, that if the date for such a
meeting falls on a legal holiday, then the meeting shall be held at the same
time on the next succeeding full business day. Regular meetings of the Board of
Directors held pursuant to this Section 24 may be held without notice.
SECTION 25. PARTICIPATION BY TELEPHONE. Members of the Board of
Directors may participate in a meeting through use of conference telephone or
similar communications equipment, so long as all members participating in such
meeting can hear one another. Such participation constitutes presence in person
at such meeting.
SECTION 26. SPECIAL MEETINGS. Special meetings of the Board of
Directors for any purpose may be called by the Chairman of the Board or the
President or any vice president or the Secretary of the corporation or any two
directors.
SECTION 27. NOTICE OF MEETINGS. Notice of the date, time and place
of all meetings of the Board of Directors, other than regular meetings held
pursuant to Section 24 above shall be delivered personally, orally or in
writing, or by telephone, telegraph or facsimile to each director, at least 48
hours before the meeting, or sent in writing to each director by first-class
mail, charges prepaid, at least four days before the meeting. Such notice may be
given by the Secretary of the corporation or by the person or persons who called
a meeting. Such notice need not specify the purpose of the meeting. Notice of
any meeting of the Board of Directors need not be given to any director who
signs a waiver of notice of such meeting, or a consent to holding the meeting or
an approval of the minutes thereof, either before or after the meeting, or who
attends the meeting without protesting prior thereto or at its commencement such
director's lack of notice. All such waivers, consents and approvals shall be
filed with the corporate records or made a part of the minutes of the meeting.
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SECTION 28. PLACE OF MEETINGS. Meetings of the Board of
Directors may be held at any place within or without the state which has been
designated in the notice of the meeting or, if not stated in the notice or
there is no notice, designated in the bylaws or by resolution of the Board of
Directors.
SECTION 29. ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Any
action required or permitted to be taken by the Board of Directors may be taken
without a meeting, if all members of the Board of Directors individually or
collectively consent in writing to such action. Such written consent or
consents shall be filed with the minutes of the proceedings of the Board of
Directors. Such action by written consent shall have the same force and effect
as a unanimous vote of such directors.
SECTION 30. QUORUM AND TRANSACTION OF BUSINESS. A majority of the
authorized number of directors shall constitute a quorum for the transaction of
business. Every act or decision done or made by a majority of the authorized
number of directors present at a meeting duly held at which a quorum is present
shall be the act of the Board of Directors, unless the law, the Certificate of
Incorporation or these bylaws specifically require a greater number. A meeting
at which a quorum is initially present may continue to transact business,
notwithstanding withdrawal of directors, if any action taken is approved by at
least a majority of the number of directors constituting a quorum for such
meeting. In the absence of a quorum at any meeting of the Board of Directors, a
majority of the directors present may adjourn the meeting, as provided in
Section 31 of these bylaws.
SECTION 31. ADJOURNMENT. Any meeting of the Board of Directors,
whether or not a quorum is present, may be adjourned to another time and place
by the affirmative vote of a majority of the directors present. If the meeting
is adjourned for more than 24 hours, notice of such adjournment to another time
or place shall be given prior to the time of the adjourned meeting to the
directors who were not present at the time of the adjournment.
SECTION 32. ORGANIZATION. The Chairman of the Board shall preside
at every meeting of the Board of Directors, if present. If there is no Chairman
of the Board or if the Chairman is not present, a Chairman chosen by a majority
of the directors present shall act as chairman. The Secretary of the corporation
or, in the absence of the Secretary, any person appointed by the Chairman shall
act as secretary of the meeting.
SECTION 33. COMPENSATION. Unless otherwise restricted by the
certificate of incorporation or these bylaws, the Board of Directors shall have
the authority to fix the compensation of directors. The directors may be paid
their expenses, if any, of attendance at each meeting of the Board of Directors
and may be paid a fixed sum for attendance at each meeting of the Board of
Directors or a stated salary as director. No such payment shall preclude any
director from serving the corporation in any other capacity and receiving
compensation therefor. Members of special or standing committees may be allowed
like compensation for attending committee meetings.
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SECTION 34. 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 of disqualification of a member of a committee, the
member or members thereof 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, 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 that may require it; but no such committee shall have the power or
authority in reference to amending the certificate of incorporation, adopting an
agreement of merger or consolidation, recommending to the stockholders the sale,
lease or exchange of all or substantially all of the corporation's property and
assets, recommending to the stockholders a dissolution of the corporation or a
revocation of a dissolution, or amending the bylaws of the corporation; and,
unless the resolution or the certificate of incorporation expressly so provide,
no such committee shall have the power or authority to declare a dividend or to
authorize the issuance of stock. Such committee or committees shall have such
name or names as may be determined from time to time by resolution adopted by
the Board of Directors.
Each committee shall keep regular minutes of its meetings and report
the same to the Board of Directors when required.
ARTICLE V
OFFICERS
SECTION 35. OFFICERS. The officers of the corporation shall be a
President, Treasurer and a Secretary. The Board of Directors may elect from
among its members a Chairman of the Board and a Vice Chairman of the Board. The
Board of Directors may also choose one or more Vice-Presidents, Assistant
Secretaries and Assistant Treasurers. Any number of offices may be held by the
same person, unless the certificate of incorporation or these bylaws otherwise
provide.
SECTION 36. APPOINTMENT. All officers shall be chosen and
appointed by the Board of Directors. The Board of Directors at its first
meeting after each annual meeting of stockholders shall choose a President, a
Treasurer, and a Secretary and may choose Vice Presidents. The Board of
Directors may appoint such other officers and agents as it shall
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deem necessary who shall hold their offices for such terms and shall exercise
such powers and perform such duties as shall be determined from time to time
by the board.
SECTION 37. INABILITY TO ACT. In the case of absence or inability
to act of any officer of the corporation or of any person authorized by these
bylaws to act in such officer's place, the Board of Directors may from time to
time delegate the powers or duties of such officer to any other officer, or any
director or other person whom it may select, for such period of time as the
Board of Directors deems necessary.
SECTION 38. RESIGNATION. Any officer may resign at any time upon
written notice to the corporation, without prejudice to the rights, if any, of
the corporation under any contract to which such officer is a party. Such
resignation shall be effective upon its receipt by the Chairman of the Board,
the President, the Secretary or the Board of Directors, unless a different time
is specified in the notice for effectiveness of such resignation. The acceptance
of any such resignation shall not be necessary to make it effective unless
otherwise specified in such notice.
SECTION 39. REMOVAL. Any officer may resign at any time upon
written notice to the corporation, without prejudice to the rights, if any, of
the corporation under any contract to which such officer is a party. Such
resignation shall be effective upon its receipt by the Chairman of the Board,
the President, the Secretary or the Board of Directors, unless a different time
is specified in the notice for effectiveness of such resignation. The acceptance
of any such resignation shall not be necessary to make it effective unless
otherwise specified in such notice.
Any officer may be removed from office at any time, with or without
cause, but subject to the rights, if any, of such officer under any contract of
employment, by the Board of Directors or by any committee to whom such power of
removal has been duly delegated, or, with regard to any officer who has been
appointed by the chief executive officer pursuant to Section 36 above, by the
chief executive officer or any other officer upon whom such power of removal may
be conferred by the Board of Directors.
SECTION 40. VACANCIES. A vacancy occurring in any office for
any cause may be filled by the Board of Directors, in the manner prescribed by
this Article of the bylaws for initial appointment to such office.
SECTION 41. CHAIRMAN OF THE BOARD. The Chairman of the Board, if
any, shall preside at all meetings of the Board of Directors and of the
stockholders at which he shall be present. He/she shall have and may exercise
such powers as are, from time to time, assigned to him by the Board and as may
be provided by law. In the absence of the Chairman of the Board, the Vice
Chairman of the Board, if any, shall preside at all meetings of the Board of
Directors and of the stockholders at which he shall be present. He shall have
and may exercise such powers as are, from time to time, assigned to him by the
Board and as may be provided by law.
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SECTION 42. PRESIDENT. Subject to such powers, if any, as may be
given by the Board of Directors to the Chairman of the Board, if there be such
an officer, the President shall be the general manager and chief executive
officer of the corporation and shall have general supervision, direction, and
control over the business and affairs of the corporation, subject to the control
of the Board of Directors. The President may sign and execute, in the name of
the corporation, any instrument authorized by the Board of Directors, except
when the signing and execution thereof shall have been expressly delegated by
the Board of Directors or by these bylaws to some other officer or agent of the
corporation. The President shall have all the general powers and duties of
management usually vested in the president of a corporation, and shall have such
other powers and duties as may be prescribed from time to time by the Board of
Directors or these bylaws. The President shall have discretion to prescribe the
duties of other officers and employees of the corporation in a manner not
inconsistent with the provisions of these bylaws and the directions of the Board
of Directors.
SECTION 43. VICE PRESIDENTS. In the absence or disability of the
President, in the event of a vacancy in the office of President, or in the event
such officer refuses to act, the Vice President shall perform all the duties of
the President and, when so acting, shall have all the powers of, and be subject
to all the restrictions on, the President. If at any such time the corporation
has more than one vice president, the duties and powers of the President shall
pass to each vice president in order of such vice president's rank as fixed by
the Board of Directors or, if the vice presidents are not so ranked, to the vice
president designated by the Board of Directors. The vice presidents shall have
such other powers and perform such other duties as may be prescribed for them
from time to time by the Board of Directors or pursuant to Sections 35 and 36 of
these bylaws or otherwise pursuant to these bylaws.
SECTION 44. SECRETARY AND ASSISTANT SECRETARY. The Secretary
shall:
(a) Keep, or cause to be kept, minutes of all meetings of the
corporation's stockholders, Board of Directors, and committees of the Board of
Directors, if any. Such minutes shall be kept in written form.
(b) Keep, or cause to be kept, at the principal executive office
of the corporation, or at the office of its transfer agent or registrar, if any,
a record of the corporation's stockholders, showing the names and addresses of
all stockholders, and the number and classes of shares held by each. Such
records shall be kept in written form or any other form capable of being
converted into written form.
(c) Keep, or cause to be kept, at the principal executive office
of the corporation, copies of the corporation's corporate records, including its
Certificate of Incorporation and these bylaws.
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(d) Give, or cause to be given, notice of all meetings of
stockholders, directors and committees of the Board of Directors, as required by
law or by these bylaws.
(e) Keep the seal of the corporation, if any, in safe custody.
(f) Exercise such powers and perform such duties as are usually
vested in the office of secretary of a corporation, and exercise such other
powers and perform such other duties as may be prescribed from time to time by
the Board of Directors or these bylaws.
If any assistant secretaries are appointed, the assistant secretary,
or one of the assistant secretaries in the order of their rank as fixed by the
Board of Directors or, if they are not so ranked, the assistant secretary
designated by the Board of Directors, in the absence or disability of the
Secretary or in the event of such officer's refusal to act or if a vacancy
exists in the office of Secretary, shall perform the duties and exercise the
powers of the Secretary and discharge such duties as may be assigned from time
to time pursuant to these bylaws or by the Board of Directors.
SECTION 45. CHIEF FINANCIAL OFFICER. The Chief Financial Officer
shall:
(a) Be responsible for all functions and duties of the treasurer
of the corporation.
(b) Keep and maintain, or cause to be kept and maintained,
adequate and correct books and records of account for the corporation.
(c) Receive or be responsible for receipt of all monies due and
payable to the corporation from any source whatsoever; have charge and custody
of, and be responsible for, all monies and other valuables of the corporation
and be responsible for deposit of all such monies in the name and to the credit
of the corporation with such depositaries as may be designated by the Board of
Directors or a duly appointed and authorized committee of the Board of
Directors.
(d) Disburse or be responsible for the disbursement of the funds
of the corporation as may be ordered by the Board of Directors or a duly
appointed and authorized committee of the Board of Directors.
(e) Render to the chief executive officer and the Board of
Directors a statement of the financial condition of the corporation if called
upon to do so.
(f) Exercise such powers and perform such duties as are usually
vested in the office of chief financial officer of a corporation, and exercise
such other powers and perform such other duties as may be prescribed by the
Board of Directors or these bylaws.
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If any assistant financial officer is appointed, the assistant
financial officer, or one of the assistant financial officers, if there are more
than one, in the order of their rank as fixed by the Board of Directors or, if
they are not so ranked, the assistant financial officer designated by the Board
of Directors, shall, in the absence or disability of the Chief Financial Officer
or in the event of such officer's refusal to act, perform the duties and
exercise the powers of the Chief Financial Officer, and shall have such powers
and discharge such duties as may be assigned from time to time pursuant to these
bylaws or by the Board of Directors.
SECTION 46. COMPENSATION. The compensation of the officers shall
be fixed from time to time by the Board of Directors, and no officer shall be
prevented from receiving such compensation by reason of the fact that such
officer is also a director of the corporation.
ARTICLE VI
CONTRACTS, LOANS, BANK ACCOUNTS, CHECKS AND DRAFTS
SECTION 47. EXECUTION OF CONTRACTS AND OTHER INSTRUMENTS. Except
as these bylaws may otherwise provide, the Board of Directors or its duly
appointed and authorized committee may authorize any officer or officers, agent
or agents, to enter into any contract or execute and deliver any instrument in
the name of and on behalf of the corporation, and such authorization may be
general or confined to specific instances. Except as so authorized or otherwise
expressly provided in these bylaws, no officer, agent, or employee shall have
any power or authority to bind the corporation by any contract or engagement or
to pledge its credit or to render it liable for any purpose or in any amount.
SECTION 48. LOANS. No loans shall be contracted on behalf of the
corporation and no negotiable paper shall be issued in its name, unless and
except as authorized by the Board of Directors or its duly appointed and
authorized committee. When so authorized by the Board of Directors or such
committee, any officer or agent of the corporation may effect loans and advances
at any time for the corporation from any bank, trust company, or other
institution, or from any firms, corporation or individual, and for such loans
and advances may make, execute and deliver promissory notes, bonds or other
evidences of indebtedness of the corporation and, when authorized as aforesaid,
may mortgage, pledge, hypothecate or transfer any and all stocks, securities and
other property, real or personal, at any time held by the corporation, and to
that end endorse, assign and deliver the same as security for the payment of any
and all loans, advances, indebtedness, and liabilities of the corporation. Such
authorization may be general or confined to specific instances.
SECTION 49. BANK ACCOUNTS. The Board of Directors or its duly
appointed and authorized committee from time to time may authorize the opening
and keeping of general and/or special bank accounts with such banks, trust
companies, or other depositaries
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as may be selected by the Board of Directors, its duly appointed and
authorized committee or by any officer or officers, agent or agents, of the
corporation to whom such power may be delegated from time to time by the
Board of Directors. The Board of Directors or its duly appointed and
authorized committee may make such rules and regulations with respect to said
bank accounts, not inconsistent with the provisions of these bylaws, as are
deemed advisable.
SECTION 50. CHECKS, DRAFTS, ETC. All checks, drafts or other
orders for the payment of money, notes, acceptances or other evidences of
indebtedness issued in the name of the corporation shall be signed by such
officer or officers, agent or agents, of the corporation, and in such manner, as
shall be determined from time to time by resolution of the Board of Directors or
its duly appointed and authorized committee. Endorsements for deposit to the
credit of the corporation in any of its duly authorized depositaries may be
made, without counter-signature by the President or any vice president or the
Chief Financial Officer or any assistant financial officer or by any other
officer or agent of the corporation to whom the Board of Directors or its duly
appointed and authorized committee, by resolution, shall have delegated such
power or by hand-stamped impression in the name of the corporation.
ARTICLE VII
CERTIFICATES FOR STOCK AND THEIR TRANSFER
SECTION 51. CERTIFICATE FOR STOCK. Every holder of shares in the
corporation shall be entitled to have a certificate signed in the name of the
corporation by the Chairman or Vice Chairman of the Board or the President or a
Vice President and by the Chief Financial Officer or an assistant financial
officer or by the Secretary or an assistant secretary, certifying the number of
shares and the class or series of shares owned by the stockholder. Any or all of
the signatures on the certificate may be facsimile. In case any officer,
transfer agent or registrar who has signed or whose facsimile signature has been
placed upon a certificate shall have ceased to be such officer, transfer agent
or registrar before such certificate is issued, it may be issued by the
corporation with the same effect as if such person were an officer, transfer
agent or registrar at the date of issue.
In the event that the corporation shall issue any shares as only
partly paid, the certificate issued to represent such partly paid shares shall
have stated thereon the total consideration to be paid for such shares and the
amount paid thereon.
If the corporation shall be authorized to issue more than one class of
stock or more than one series of any class, the powers, designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualification, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock, provided that, except as
otherwise provided in
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section 202 of the General Corporation Law of Delaware, in lieu of the
foregoing requirements, there may be set forth on the face or back of the
certificate that the corporation shall issue to represent such class or
series of stock, a statement that the corporation will furnish without charge
to each stockholder who so requests the powers, designations, preferences and
relative, participating, optional or other special rights of each class of
stock or series thereof and the qualifications, limitations or restrictions
of such preferences and/or rights.
SECTION 52. TRANSFER ON THE BOOKS. Upon surrender to the Secretary
or transfer agent (if any) of the corporation of a certificate for shares of the
corporation duly endorsed, with reasonable assurance that the endorsement is
genuine and effective, or accompanied by proper evidence of succession,
assignment or authority to transfer and upon compliance with applicable federal
and state securities laws and if the corporation has no statutory duty to
inquire into adverse claims or has discharged any such duty and if any
applicable law relating to the collection of taxes has been complied with, it
shall be the duty of the corporation, by its Secretary or transfer agent, to
cancel the old certificate, to issue a new certificate to the person entitled
thereto and to record the transaction on the books of the corporation.
SECTION 53. LOST, DESTROYED AND STOLEN CERTIFICATES. The holder of
any certificate for shares of the corporation alleged to have been lost,
destroyed or stolen shall notify the corporation by making a written affidavit
or affirmation of such fact. Upon receipt of said affidavit or affirmation the
Board of Directors, or its duly appointed and authorized committee or any
officer or officers authorized by the Board so to do, may order the issuance of
a new certificate for shares in the place of any certificate previously issued
by the corporation and which is alleged to have been lost, destroyed or stolen.
However, the Board of Directors or such authorized committee, officer or
officers may require the owner of the allegedly lost, destroyed or stolen
certificate, or such owner's legal representative, to give the corporation a
bond or other adequate security sufficient to indemnify the corporation and its
transfer agent and/or registrar, if any, against any claim that may be made
against it or them on account of such allegedly lost, destroyed or stolen
certificate or the replacement thereof. Said bond or other security shall be in
such amount, on such terms and conditions and, in the case of a bond, with such
surety or sureties as may be acceptable to the Board of Directors or to its duly
appointed and authorized committee or any officer or officers authorized by the
Board of Directors to determine the sufficiency thereof. The requirement of a
bond or other security may be waived in particular cases at the discretion of
the Board of Directors or its duly appointed and authorized committee or any
officer or officers authorized by the Board of Directors so to do.
SECTION 54. ISSUANCE, TRANSFER AND REGISTRATION OF SHARES. The
Board of Directors may make such rules and regulations, not inconsistent with
law or with these bylaws, as it may deem advisable concerning the issuance,
transfer and registration of certificates for shares of the capital stock of the
corporation. The Board of Directors may
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appoint a transfer agent or registrar of transfers, or both, and may require
all certificates for shares of the corporation to bear the signature of
either or both.
ARTICLE VIII
INSPECTION OF CORPORATE RECORDS
SECTION 55. INSPECTION BY DIRECTORS. Every director shall have the
absolute right at any reasonable time to inspect and copy all books, records,
and documents of every kind of the corporation and any of its subsidiaries and
to inspect the physical properties of the corporation and any of its
subsidiaries. Such inspection may be made by the director in person or by agent
or attorney, and the right of inspection includes the right to copy and make
extracts.
SECTION 56. INSPECTION BY STOCKHOLDERS.
(a) INSPECTION OF CORPORATE RECORDS. Any stockholder, in person
or by attorney or other agent, shall, upon written demand under oath stating the
purpose thereof, have the right during the usual hours for business to inspect
for any proper purpose the corporation's stock ledger, a list of its
stockholders, and its other books and records, and to make copies or extracts
therefrom. A proper purpose shall mean a purpose reasonably related to such
person's interest as a stockholder. In every instance where an attorney or
other agent shall be the person who seeks the right to inspection, the demand
under oath shall be accompanied by a power of attorney or such other writing
which authorizes the attorney or other agent to so act on behalf of the
stockholder. The demand under oath shall be directed to the corporation at is
registered office in the State of Delaware or at its principal place of
business.
(b) INSPECTION OF BYLAWS. The original or a copy of these
bylaws shall be kept as provided in Section 44 of these bylaws and shall be open
to inspection by the stockholders at all reasonable times during office hours.
A current copy of these bylaws shall be furnished to any stockholder upon
written request.
SECTION 57. WRITTEN FORM. If any record subject to inspection
pursuant to Section 56 above is not maintained in written form, a request for
inspection is not complied with unless and until the corporation at its expense
makes such record available in written form.
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ARTICLE IX
MISCELLANEOUS
SECTION 58. FISCAL YEAR. Unless otherwise freed by resolution of
the Board of Directors, the fiscal year of the corporation shall end on the 31st
day of December in each calendar year.
SECTION 59. ANNUAL REPORT.
(a) Subject to the provisions of Section 59(b) below, the Board
of Directors shall cause an annual report to be sent to each stockholder of the
corporation in the manner provided in Section 9 of these bylaws not later than
120 days after the close of the corporation's fiscal year. Such report shall
include a balance sheet as of the end of such fiscal year and an income
statement and statement of changes in financial position for such fiscal year,
accompanied by any report thereon of independent accountants or, if there is no
such report, the certificate of an authorized officer of the corporation that
such statements were prepared without audit from the books and records of the
corporation. Such report shall be sent to stockholders at least 15 (or, if sent
by third-class mail, 35) days prior to the next annual meeting of stockholders
after the end of the fiscal year to which it relates.
(b) If and so long as there are fewer than 100 holders of record
of the corporation's shares, the requirement of sending of an annual report to
the stockholders of the corporation is hereby expressly waived.
SECTION 60. RECORD DATE. The Board of Directors may fix a time in
the future as a record date for the determination of the stockholders entitled
to notice of or to vote at any meeting or entitled to receive payment of any
dividend or other distribution or allotment of any rights or entitled to
exercise any rights in respect of any change, conversion or exchange of shares
or entitled to exercise any rights in respect of any other lawful action. The
record date so fixed shall not be more than 60 days nor less than 10 days prior
to the date of the meeting nor more than 60 days prior to any other action or
event for the purpose of which it is fixed. If no record date is fixed, the
provisions of Section 15 of these bylaws shall apply with respect to notice of
meetings, votes, and consents and 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 resolutions relating thereto, or the 60th day
prior to the date of such other action or event, whichever is later.
Only stockholders of record at the close of business on the record
date shall be entitled to notice and to vote or to receive the dividend,
distribution or allotment of rights or to exercise the rights, as the case may
be, notwithstanding any transfer of any shares on the books of the corporation
after the record date, except as otherwise provided in the Certificate of
Incorporation, by agreement or by law.
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SECTION 61. BYLAW AMENDMENTS. Except as otherwise provided by law
or the Certificate of Incorporation, these bylaws may be amended or repealed by
the Board of Directors or by the affirmative vote of a majority of the
outstanding shares entitled to vote, including, if applicable, the affirmative
vote of a majority of the outstanding shares of each class or series entitled by
law or the Certificate of Incorporation to vote as a class or series on the
amendment or repeal or adoption of any bylaw or bylaws; provided, however, after
issuance of shares, a bylaw specifying or changing a fixed number of directors
or the maximum or minimum number or changing from a fixed to a variable board or
vice versa may only be adopted by approval of the outstanding shares as provided
herein.
SECTION 62. CONSTRUCTION AND DEFINITION. Unless the context
requires otherwise, the general provisions, rules of construction, and
definitions contained in the Delaware General Corporation Law shall govern the
construction of these bylaws. Without limiting the foregoing, "shall" is
mandatory and "may" is permissive.
SECTION 63. REGISTERED STOCKHOLDERS. The corporation shall be
entitled to recognize the exclusive right of a person registered on its books as
the owner of shares to receive dividends, and to vote as such owner, and to hold
liable for calls and assessments a person registered on its books as the owner
of shares and shall not be bound to recognize any equitable or other claim to or
interest in such share or shares on the part of any other person, whether or not
it shall have express or other notice thereof, except as otherwise provided by
the laws of Delaware.
SECTION 64. DIVIDENDS. Dividends upon the capital stock of the
corporation, subject to the provisions of the certificate of incorporation, if
any, may be declared by the Board of Directors at any regular or special
meeting, pursuant to law. Dividends may be paid in cash, in property, or in
shares of the capital stock, subject to the provisions of the certificate of
incorporation.
Before payment of any dividend, there may be set aside out of any
funds of the corporation available for dividends such sum or sums as the
directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the corporation, or for such other
purposes as the directors shall think conducive to the interest of the
corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
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ARTICLE X
INDEMNIFICATION
SECTION 65. INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND
OTHER AGENTS. The corporation shall, to the fullest extent authorized under the
laws of the State of Delaware, as those laws may be amended and supplemented
from time to time, indemnify any director made, or threatened to be made, a
party to an action or proceeding, whether criminal, civil, administrative or
investigative, by reason of being a director of the corporation or a predecessor
corporation or, at the corporation's request, a director or officer of another
corporation, provided, however, that the corporation shall indemnify any such
agent in connection with a proceeding initiated by such agent only if such
proceeding was authorized by the Board of Directors of the corporation. The
indemnification provided for in this Section 65 shall: (i) 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) continue as to a person who has
ceased to be a director, and (iii) inure to the benefit of the heirs, executors
and administrators of such a person. The corporation's obligation to provide
indemnification under this Section 65 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 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. Notwithstanding the foregoing, the
corporation shall not be required to advance such expenses to an agent who is a
party to an action, suit or proceeding brought by the corporation and approved
by a majority of the Board of Directors of the corporation which alleges willful
misappropriation of corporate assets by such agent, disclosure of confidential
information in violation of such agent's fiduciary or contractual obligations to
the corporation or any other willful and deliberate breach in bad faith of such
agent's duty to the corporation or its stockholders.
The foregoing provisions of this Section 65 shall be deemed to be a
contract between the corporation and each director who serves in such capacity
at any time while this bylaw is in effect, and any repeal or modification
thereof shall not affect any rights or obligations then existing with respect to
any state of facts then or theretofore existing or any action, suit or
proceeding theretofore or thereafter brought based in whole or in part upon any
such state of facts.
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The Board of Directors in its discretion shall have power on behalf of
the corporation to indemnify any person, other than a director, made a party to
any action, suit or proceeding by reason of the fact that he, his testator or
intestate, is or was an officer or employee of the corporation.
To assure indemnification under this Section 65 of all directors,
officers and employees 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, Section 145 of the General Corporation Law of
Delaware shall, for the purposes of this Section 65, 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."
ARTICLE XI
RIGHT OF FIRST REFUSAL
SECTION 66. RIGHT OF FIRST REFUSAL. No stockholder shall sell,
assign, pledge, or in any manner transfer any of the shares of stock of the
corporation or any right or interest therein, whether voluntarily or by
operation of law, or by gift or otherwise, except by a transfer which meets the
requirements hereinafter set forth in this bylaw:
(a) If the stockholder desires to sell or otherwise transfer any
of his shares of stock, then the stockholder shall first give written notice
thereof to the corporation. The notice shall name the proposed transferee and
state the number of shares to be transferred, the proposed consideration, and
all other terms and conditions of the proposed transfer.
(b) For 30 days following receipt of such notice, the
corporation shall have the option to purchase all (but not less than all) of the
shares specified in the notice at the price and upon the terms set forth in such
notice; provided, however, that, with the consent of the stockholder, the
corporation shall have the option to purchase a lesser portion of the shares
specified in said notice at the price and upon the terms set forth therein. In
the event of a gift, property settlement or other transfer in which the proposed
transferee is not paying the full price for the shares, and that is not
otherwise exempted from the provisions of this Section 66, the price shall be
deemed to be the fair market value of the stock at such time as determined in
good faith by the Board of Directors. In the event the corporation elects to
purchase all of the shares or, with consent of the stockholder, a
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lesser portion of the shares, it shall give written notice to the
transferring stockholder of its election and settlement for said shares shall
be made as provided below in paragraph (d).
(c) The corporation may assign its rights hereunder.
(d) In the event the corporation and/or its assignee(s) elect to
acquire any of the shares of the transferring stockholder as specified in said
transferring stockholder's notice, the Secretary of the corporation shall so
notify the transferring stockholder and settlement thereof shall be made in cash
within 30 days after the Secretary of the corporation receives said transferring
stockholder's notice; provided that if the terms of payment set forth in said
transferring stockholder's notice were other than cash against delivery, the
corporation and/or its assignee(s) shall pay for said shares on the same terms
and conditions set forth in said transferring stockholder's notice.
(e) In the event the corporation and/or its assignees(s) do not
elect to acquire all of the shares specified in the transferring stockholder's
notice, said transferring stockholder may, within the 60-day period following
the expiration of the option rights granted to the corporation and/or its
assignees(s) herein, transfer the shares specified in said transferring
stockholder's notice which were not acquired by the corporation and/or its
assignees(s) as specified in said transferring stockholder's notice. All shares
so sold by said transferring stockholder shall continue to be subject to the
provisions of this bylaw in the same manner as before said transfer.
(f) Anything to the contrary contained herein notwithstanding,
the following transactions shall be exempt from the provisions of this bylaw:
(1) A stockholder's transfer of any or all shares held
either during such stockholder's lifetime or on death by will or intestacy to
such stockholder's immediate family or to any custodian or trustee for the
account of such stockholder or such stockholder's immediate family. "Immediate
family" as used herein shall mean spouse, lineal descendant, father, mother,
brother, or sister of the stockholder making such transfer.
(2) A stockholder's bona fide pledge or mortgage of any
shares with a commercial lending institution, provided that any subsequent
transfer of said shares by said institution shall be conducted in the manner set
forth in this bylaw.
(3) A stockholder's transfer of any or all of such
stockholder's shares to the corporation or to any other stockholder of the
corporation.
(4) A stockholder's transfer of any or all of such
stockholder's shares to a person who, at the time of such transfer, is an
officer or director of the corporation.
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(5) A corporate stockholder's transfer of any or all of its
shares pursuant to and in accordance with the terms of any merger,
consolidation, reclassification of shares or capital reorganization of the
corporate stockholder, or pursuant to a sale of all or substantially all of the
stock or assets of a corporate stockholder.
(6) A corporate stockholder's transfer of any or all of its
shares to any or all of its stockholders.
(7) A transfer by a stockholder which is a limited or
general partnership to any or all of its partners or former partners.
In any such case, the transferee, assignee, or other recipient shall
receive and hold such stock subject to the provisions of this bylaw, and there
shall be no further transfer of such stock except in accord with this bylaw.
(g) The provisions of this bylaw may be waived with respect to
any transfer either by the corporation, upon duly authorized action of its Board
of Directors, or by the stockholders, upon the express written consent of the
owners of a majority of the voting power of the corporation (excluding the votes
represented by those shares to be transferred by the transferring stockholder).
This bylaw may be amended or repealed either by a duly authorized action of the
Board of Directors or by the stockholders, upon the express written consent of
the owners of a majority of the voting power of the corporation.
(h) Any sale or transfer, or purported sale or transfer, of
securities of the corporation shall be null and void unless the terms,
conditions, and provisions of this bylaw are strictly observed and followed.
(i) The foregoing right of first refusal shall terminate on
either of the following dates, whichever shall first occur:
(1) On October 1, 2006; or
(2) Upon the date securities of the corporation are first
offered to the public pursuant to a registration statement filed with, and
declared effective by, the United States Securities and Exchange Commission
under the Securities Act of 1933, as amended.
(j) The certificates representing shares of stock of the
corporation shall bear on their face the following legend so long as the
foregoing right of first refusal remains in effect:
"The shares represented by this certificate are subject to a right of
first refusal option in favor of the corporation and/or its assignee(s), as
provided in the bylaws of the corporation."
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ARTICLE XII
LOANS OF OFFICERS AND OTHERS
SECTION 67. CERTAIN CORPORATE LOANS AND GUARANTIES. If the
corporation has outstanding shares held of record by 100 or more persons on the
date of approval by the Board of Directors, the corporation may make loans of
money or property to, or guarantee the obligations of, any officer of the
corporation or its parent or any subsidiary, whether or not a director of the
corporation or its parent or any subsidiary, or adopt an employee benefit plan
or plans authorizing such loans or guaranties, upon the approval of the Board of
Directors alone, by a vote sufficient without counting the vote of any
interested director or directors, if the Board of Directors determines that such
a loan or guaranty or plan may reasonably be expected to benefit the
corporation. Notwithstanding the foregoing, the corporation shall have the power
to make loans permitted by the Delaware General Corporations Law.
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CERTIFICATE OF SECRETARY
I hereby certify that:
I am the duly elected and acting Secretary of Advanced Fibre
Communications, Inc., a Delaware corporation (the "Company"); and
Attached hereto is a complete and accurate copy of the Bylaws of the
Company as duly adopted by the Board of Directors at a Meeting held on July 12,
1996 and said Bylaws are presently in effect.
IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed the
seal of the Company this 4th day of October, 1996.
/s/ Dan E. Steimle
------------------------------------
Dan E. Steimle, Secretary
<PAGE>
ADVANCED FIBRE COMMUNICATIONS, INC.
STOCK ISSUANCE AGREEMENT
------------------------
AGREEMENT made as of this 30th day of June 1997, by and between
Advanced Fibre Communications, Inc., a Delaware corporation, and Peter Darbee, a
Participant in the Corporation's 1996 Stock Incentive Plan.
All capitalized terms in this Agreement shall have the meaning
assigned to them in this Agreement or in the attached Appendix.
A. PURCHASE OF SHARES
1. PURCHASE. Participant hereby purchases 2,484 shares of Common
Stock (the "Purchased Shares") pursuant to the provisions of the Stock Issuance
Program at the purchase price of $60.375 per share (the "Purchase Price").
2. PAYMENT. Concurrently with the delivery of this Agreement to the
Corporation, Participant shall deliver to the Corporation a full recourse
promissory note in full payment of the Purchase Price and shall deliver a
duly-executed blank Assignment Separate from Certificate (in the form attached
hereto as Exhibit I) with respect to the Purchased Shares.
3. STOCKHOLDER RIGHTS. Until such time as the Corporation exercises
the Repurchase Right, Participant (or any successor in interest) shall have all
the rights of a stockholder (including voting, dividend and liquidation rights)
with respect to the Purchased Shares, subject, however, to the transfer
restrictions of this Agreement.
4. ESCROW. The Corporation shall have the right to hold the
Purchased Shares in escrow until those shares have vested in accordance with the
Vesting Schedule.
5. COMPLIANCE WITH LAW. Under no circumstances shall shares of
Common Stock or other assets be issued or delivered to Participant pursuant to
the provisions of this Agreement unless, in the opinion of counsel for the
Corporation or its successors, there shall have been compliance with all
applicable requirements of Federal and state securities laws, all applicable
listing requirements of any stock exchange (or the Nasdaq National Market, if
applicable) on which the Common Stock is at the time listed for trading and all
other requirements of law or of any regulatory bodies having jurisdiction over
such issuance and delivery.
<PAGE>
B. TRANSFER RESTRICTIONS
1. RESTRICTION ON TRANSFER. Except for any Permitted Transfer,
Participant shall not transfer, assign, encumber or otherwise dispose of any of
the Purchased Shares which are subject to the Repurchase Right.
2. RESTRICTIVE LEGEND. The stock certificate for the Purchased
Shares shall be endorsed with the following restrictive legend:
"The shares represented by this certificate are unvested and
subject to certain repurchase rights granted to the Corporation 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 June 30, 1997 between the Corporation and the registered
holder of the shares (or the predecessor in interest to the shares). A
copy of such agreement is maintained at the Corporation's principal
corporate offices."
3. TRANSFEREE OBLIGATIONS. Each person (other than the Corporation)
to whom the Purchased Shares are transferred by means of a Permitted Transfer
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 the Repurchase Right to
the same extent such shares would be so subject if retained by Participant.
C. REPURCHASE RIGHT
1. GRANT. The Corporation is hereby granted the right (the
"Repurchase Right"), exercisable at any time during the ninety (90)-day period
following the date Participant ceases for any reason to remain in Service, to
repurchase at the Purchase Price all or any portion of the Purchased Shares in
which Participant is not, at the time of his or her cessation of Service, vested
in accordance with the Vesting Schedule (such shares to be hereinafter referred
to as the "Unvested Shares").
2. EXERCISE OF THE REPURCHASE RIGHT. The Repurchase Right shall be
exercisable by written notice delivered to each Owner of the Unvested Shares
prior to the expiration of the ninety (90)-day exercise period. 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 such notice. The certificates representing the
Unvested Shares to be repurchased shall be delivered to the Corporation prior to
the close of business on the date specified for the repurchase. Concurrently
with the receipt of such stock certificates, the Corporation shall pay to Owner,
in cash or cash equivalent (including the cancellation of any purchase-money
indebtedness), an amount equal to the Purchase Price previously paid for the
Unvested Shares to be repurchased from Owner.
3. TERMINATION OF THE REPURCHASE RIGHT. The Repurchase Right shall
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terminate with respect to any Unvested Shares for which it is not timely
exercised under Paragraph C.2. In addition, the Repurchase Right shall
terminate and cease to be exercisable with respect to any and all Purchased
Shares in which Participant vests in accordance with the following Vesting
Schedule:
(i) Upon Participant's completion of one (1) year of Service
measured from June 30, 1997, Participant shall acquire a vested interest in, and
the Repurchase Right shall lapse with respect to, twenty-five percent (25%) of
the Purchased Shares.
(ii) Participant shall acquire a vested interest in, and the
Repurchase Right shall lapse with respect to, the remaining Purchased Shares in
a series of thirty six (36) successive equal monthly installments upon
Participant's completion of each additional month of Service over the thirty-six
(36)-month period measured from the initial vesting date under subparagraph (i)
above.
4. RECAPITALIZATION. Any new, substituted or additional securities
or other property (including cash paid other than as a regular cash dividend)
which is by reason of any Recapitalization 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 such distribution shall be made to the number
and/or class of securities subject to this Agreement 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 Recapitalization upon the Corporation's capital structure;
PROVIDED, however, that the aggregate purchase price shall remain the same.
5. CORPORATE TRANSACTION.
(a) Immediately prior to the consummation of any Corporate
Transaction, the Repurchase Right shall automatically lapse in its entirety and
the Purchased Shares shall vest in full, except to the extent the Repurchase
Right is to be assigned to the successor corporation (or parent thereof) in
connection with the Corporate Transaction.
(b) To the extent the Repurchase Right remains in effect
following a Corporate Transaction, such right shall apply to the new capital
stock or other property (including any cash payments) 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. The new securities or other
property (including cash payments) issued or distributed with respect to the
Purchased Shares in consummation of the Corporate Transaction shall immediately
be deposited in escrow with the Corporation (or the successor entity) and shall
not be released from escrow until Participant vests in such securities or other
property in accordance with the same Vesting Schedule
3.
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in effect for the Purchased Shares.
(c) The Repurchase Right may also be subject to termination in
whole or in part on an accelerated basis, and the Purchased Shares subject to
immediate vesting, in accordance with the terms of any special Addendum attached
to this Agreement.
D. SPECIAL TAX ELECTION
1. SECTION 83(b) ELECTION . Under Code Section 83, the excess of
the fair market value of the Purchased Shares on the date any forfeiture
restrictions applicable to such shares lapse over the Purchase Price paid for
such shares will be reportable as ordinary income on the 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.
Participant may elect under Code Section 83(b) to be taxed at the time the
Purchased Shares are acquired, 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 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. THE FORM FOR MAKING THIS ELECTION IS ATTACHED AS EXHIBIT II HERETO.
PARTICIPANT UNDERSTANDS THAT FAILURE TO MAKE THIS FILING WITHIN THE APPLICABLE
THIRTY (30)-DAY PERIOD WILL RESULT IN THE RECOGNITION OF ORDINARY INCOME AS THE
FORFEITURE RESTRICTIONS LAPSE.
2. FILING RESPONSIBILITY. PARTICIPANT ACKNOWLEDGES THAT IT IS
PARTICIPANT'S SOLE RESPONSIBILITY, AND NOT THE CORPORATION'S, TO FILE A TIMELY
ELECTION UNDER CODE SECTION 83(b), EVEN IF PARTICIPANT REQUESTS THE CORPORATION
OR ITS REPRESENTATIVES TO MAKE THIS FILING ON HIS OR HER BEHALF.
E. GENERAL PROVISIONS
1. ASSIGNMENT. The Corporation may assign the Repurchase Right to
any person or entity selected by the Board, including (without limitation) one
or more stockholders of the Corporation.
2. NO EMPLOYMENT OR SERVICE CONTRACT. Nothing in this Agreement or
in the Plan shall confer upon Participant any right to continue in Service 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 employing or
retaining Participant) or of Participant, which rights are hereby expressly
reserved by each, to terminate Participant's Service at any time for any reason,
with or without cause.
4.
<PAGE>
3. NOTICES. Any notice required to be given under this Agreement
shall be in writing and shall be deemed effective upon personal delivery or upon
deposit in the U.S. mail, registered or certified, postage prepaid and properly
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
to all other parties to this Agreement.
4. NO WAIVER. The failure of the Corporation in any instance to
exercise the Repurchase Right shall not constitute a waiver of any other
repurchase rights that may subsequently arise under the provisions of this
Agreement or any other agreement between the Corporation and Participant. 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.
5. CANCELLATION OF SHARES. If the Corporation 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). Such shares shall be deemed
purchased in accordance with the applicable provisions hereof, and the
Corporation shall be deemed the owner and holder of such shares, whether or not
the certificates therefor have been delivered as required by this Agreement.
6. PARTICIPANT UNDERTAKING. Participant hereby agrees to take
whatever additional action and execute whatever additional documents the
Corporation may deem necessary or advisable in order to carry out or effect one
or more of the obligations or restrictions imposed on either Participant or the
Purchased Shares pursuant to the provisions of this Agreement.
7. 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 terms of the Plan.
8. GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Delaware without resort
to that State's conflict-of-laws rules.
9. 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. 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 upon
5.
<PAGE>
Participant, Participant's assigns and the legal representatives, heirs and
legatees of Participant's estate, 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 hereof.
IN WITNESS WHEREOF, the parties have executed this Agreement on the
day and year first indicated above.
ADVANCED FIBRE COMMUNICATIONS, INC.
By: /s/ Carl Grivner
------------------------------------------
Title: President, Chief Executive Officer and
--------------------------------------
Chief Operating Officer
--------------------------------------
Address: One Willow Brook Court
------------------------------------
Petaluma, CA 94954
---------------------------------------------
/s/ Peter A. Darbee
---------------------------------------------
PARTICIPANT
Address: One Willow Brook Court
------------------------------------
Petaluma, CA 94954
---------------------------------------------
6.
<PAGE>
EXHIBIT I
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED ______________________ hereby sell(s), assign(s)
and transfer(s) unto Advanced Fibre Communications, Inc. (the "Corporation"),
___________________(_______) shares of the Common Stock of the Corporation
standing in his or her name on the books of the Corporation represented by
Certificate No. ___________________ herewith and do(es) 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: ________________, 199__.
Signature
-----------------------------------
INSTRUCTION: Please do not fill in any blanks other than the signature line.
Please sign exactly as you would like your name to appear on the issued stock
certificate. The purpose of this assignment is to enable the Corporation to
exercise the Repurchase Right without requiring additional signatures on the
part of Participant.
7.
<PAGE>
EXHIBIT II
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
(3) The property was issued on .
(4) The taxable year in which the election is being made is the calendar year .
(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 .
(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,
Inc. for whom taxpayer rendered the services underlying the transfer of
property.
(9) This statement is executed on .
___________________________________ _____________________________________
Spouse (if any) Taxpayer
THIS ELECTION MUST BE FILED WITH THE INTERNAL REVENUE SERVICE CENTER WITH WHICH
TAXPAYER FILES HIS OR HER FEDERAL INCOME TAX RETURNS AND MUST BE MADE WITHIN
THIRTY (30) DAYS AFTER THE EXECUTION DATE OF THE STOCK ISSUANCE AGREEMENT. THIS
FILING SHOULD BE MADE BY REGISTERED OR CERTIFIED MAIL, RETURN RECEIPT REQUESTED.
PARTICIPANT 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.
8.
<PAGE>
APPENDIX
--------
The following definitions shall be in effect under the Agreement:
A. AGREEMENT shall mean this Stock Issuance Agreement.
B. BOARD shall mean the Corporation's Board of Directors.
C. CODE shall mean the Internal Revenue Code of 1986, as amended.
D. COMMON STOCK shall mean the Corporation's common stock.
E. CORPORATE TRANSACTION shall mean either of the following
stockholder-approved transactions:
(i) a merger or consolidation in which securities possessing
more than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or persons
different from the persons holding those securities immediately prior to such
transaction, or
(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete liquidation or
dissolution of the Corporation.
F. CORPORATION shall mean Advanced Fibre Communications, Inc., a Delaware
corporation.
G. OWNER shall mean Participant and all subsequent holders of the
Purchased Shares who derive their chain of ownership through a Permitted
Transfer from Participant.
H. PARENT shall mean any corporation (other than the Corporation) in an
unbroken chain of corporations ending with the Corporation, provided each
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.
I. PARTICIPANT shall mean the person to whom the Purchased Shares are
issued under the Stock Issuance Program.
A-1.
<PAGE>
J. PERMITTED TRANSFER shall mean (i) a gratuitous transfer of the
Purchased Shares, PROVIDED AND ONLY IF Participant obtains the Corporation's
prior written consent to such transfer, (ii) a transfer of title to the
Purchased Shares effected pursuant to Participant's will or the laws of
intestate succession following Participant's death or (iii) a transfer to the
Corporation in pledge as security for any purchase-money indebtedness incurred
by Participant in connection with the acquisition of the Purchased Shares.
K. PLAN shall mean the Corporation's 1996 Stock Incentive Plan.
L. PLAN ADMINISTRATOR shall mean either the Board or a committee of the
Board acting in its administrative capacity under the Plan.
M. PURCHASE PRICE shall have the meaning assigned to such term in
Paragraph A.1.
N. PURCHASED SHARES shall have the meaning assigned to such term in
Paragraph A.1.
O. RECAPITALIZATION shall mean any stock split, stock dividend,
recapitalization, combination of shares, exchange of shares or other change
affecting the Corporation's outstanding Common Stock as a class without the
Corporation's receipt of consideration.
P. REORGANIZATION shall mean any of the following transactions:
(i) a merger or consolidation in which the Corporation is not
the surviving entity,
(ii) a sale, transfer or other disposition of all or
substantially all of the Corporation's assets,
(iii) a reverse merger in which the Corporation is the surviving
entity but in which the Corporation's outstanding voting securities are
transferred in whole or in part to a person or persons different from the
persons holding those securities immediately prior to the merger, or
(iv) any transaction effected primarily to change the state in
which the Corporation is incorporated or to create a holding company structure.
Q. REPURCHASE RIGHT shall mean the right granted to the Corporation in
accordance with Article C.
R. SERVICE shall mean the Participant's performance of services for the
Corporation (or any Parent or Subsidiary) in the capacity of an employee,
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, a non-employee member
of the board of directors or a consultant.
A-2.
<PAGE>
S. STOCK ISSUANCE PROGRAM shall mean the Stock Issuance Program under the
Plan.
T. SUBSIDIARY shall mean any corporation (other than the Corporation) in
an unbroken chain of corporations beginning with the Corporation, provided each
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.
U. VESTING SCHEDULE shall mean the vesting schedule specified in
Paragraph C.3, subject to the acceleration provisions of Paragraph C.5.
V. UNVESTED SHARES shall have the meaning assigned to such term in
Paragraph C.1.
A-3.
<PAGE>
ADVANCED FIBRE COMMUNICATIONS, INC.
-----------------------------------
NOTE SECURED BY STOCK PLEDGE AGREEMENT
--------------------------------------
$149,972 June 30, 1997
Petaluma, California
FOR VALUE RECEIVED, Peter A. Darbee ("Maker") promises to pay to the
order of Advanced Fibre Communications, Inc. (the "Corporation"), at its
corporate offices at 1 Willow Brook Court, Petaluma, California 94954, the
principal sum of One Hundred Forty-Nine Thousand Nine Hundred Seventy-Two
Dollars ($149,972), 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 6.80% per annum,
compounded annually.
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 July 1, 2002. However, should any or all of the Purchased Shares be sold
before such date, then this Note shall become immediately due and payable in an
amount equal to (i) the portion of the principal balance of this Note
attributable to the Purchased Shares which are the subject of such sale and (ii)
the accrued and unpaid interest on that principal portion. Accordingly, Maker
shall immediately apply the gross proceeds realized from the sale of those
Purchased Shares to the payment of the accelerated balance of this Note.
Failure to do so shall result in the immediate acceleration of the entire unpaid
balance (principal and accrued interest) at the time outstanding under this
Note.
3. 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 become
immediately due and payable prior to the specified due date of this Note upon
the occurrence of one or more of the following events:
A. the failure of the Maker to pay when due the accrued
interest on this Note and the continuation of such default for more
than thirty (30) days; or
B. the expiration of the thirty (30)-day period following
the date the Maker ceases for any reason to remain in the
Corporation's employ; or
C. the sale, transfer, assignment, encumbrance or other
<PAGE>
conveyance, whether voluntarily or involuntarily or by operation of law or
otherwise, of any of the Purchased Shares in contravention of the
provisions of the Stock Issuance Agreement of even date herewith between
the Maker and the Company pursuant to which the Maker has acquired the
Purchased Shares; or
D. 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
E. 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 Corporation's employ for so
long as the Maker renders services as a full-time employee of the Corporation,
any successor entity or one or more of the Corporation's fifty percent
(50%)-or-more owned (directly or indirectly) subsidiaries.
6. SECURITY. The proceeds of the loan evidenced by this Note shall
be applied solely to the payment of the purchase price of 2,484 shares of the
Corporation's common stock and payment of this Note shall be secured by a pledge
of those shares with the Corporation 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 Corporation and any such waiver
shall be limited to its express terms. No delay by the Corporation 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 a 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
2.
<PAGE>
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. CONFLICTING AGREEMENTS. In the event of any inconsistencies
between the terms of this Note and the terms of any other document related to
the loan evidenced by the Note, the terms of this Note shall prevail.
10. GOVERNING LAW. This Note shall be construed in accordance with
the laws of the State of California.
/s/ Peter A. Darbee
------------------------------
MAKER:
3.
<PAGE>
ADVANCED FIBRE COMMUNICATIONS, INC.
STOCK PLEDGE AGREEMENT
AGREEMENT made as of this 30th day of June, 1997 by and between
Advanced Fibre Communications, Inc., a Delaware corporation (the "Corporation")
and Peter A. Darbee ("Pledgor").
RECITALS
A. In connection with the purchase of 2,484 shares of the
Corporation's Common Stock (the "Purchased Shares") on the date of this
Agreement from the Corporation, Pledgor has issued that certain promissory note
(the "Note") dated June 30, 1997 payable to the order of the Corporation in the
principal amount of One Hundred Forty-Nine Thousand Nine Hundred Seventy-Two
Dollars ($149,972).
B. Such Note is secured by the Purchased Shares and other collateral
upon the terms set forth in this Agreement.
NOW, THEREFORE, it is hereby agreed as follows:
1. GRANT OF SECURITY INTEREST. Pledgor hereby grants the
Corporation a security interest in, and assigns, transfers to and pledges with
the Corporation, the following securities and other property (collectively, the
"Collateral"):
(i) the Purchased Shares delivered to and deposited
with the Corporation as collateral for the Note;
(ii) any and all new, additional or different
securities or other property subsequently distributed with respect to
the Purchased Shares which are to be delivered to and deposited with the
Corporation 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 Corporation pursuant to
the terms 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.
2. WARRANTIES. Pledgor hereby warrants that Pledgor is the
owner of the Collateral and has the right to pledge the Collateral and that the
Collateral is free from all liens,
<PAGE>
adverse claims and other security interests (other than those created hereby).
3. DUTY TO DELIVER. Any new, additional or different
securities or other property (other than regular cash dividends) which may now
or hereafter become distributable with respect to the Collateral by reason of
(i) any stock split, stock dividend, recapitalization, combination of shares,
exchange of shares or other change affecting the Common Stock as a class without
the Corporation's receipt of consideration or (ii) any merger, consolidation or
other reorganization affecting the capital structure of the Corporation shall,
upon receipt by Pledgor be promptly delivered to and deposited with the
Corporation as part of the Collateral hereunder. Any such securities shall be
accompanied by one or more properly-endorsed stock power assignments.
4. PAYMENT OF TAXES AND OTHER CHARGES. Pledgor shall pay,
prior to the delinquency date, all taxes, liens, assessments and other charges
against the Collateral, and in the event of Pledgor's failure to do so, the
Corporation may at its election pay any or all of such taxes and other 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, compounded semi-annually, required to
avoid the imputation of interest income to the Corporation and compensation
income to Pledgor under the Federal tax laws.
5. STOCKHOLDER RIGHTS. So long as there exists no event of
default under Paragraph 10 of this Agreement, Pledgor may exercise all
stockholder voting rights and be entitled to receive any and all regular cash
dividends paid on the Collateral and all proxy statements and other stockholder
materials pertaining to the Collateral.
6. RIGHTS AND POWERS OF CORPORATION. The Corporation 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:
(i) subject to the applicable limitations of
Paragraph 9, accept in its discretion other property of Pledgor in
exchange for all or part of the Collateral and release Collateral to
Pledgor to the extent necessary to effect such exchange, and in such
event the other property received in the exchange shall become part of
the Collateral hereunder;
(ii) 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
(iii) transfer record ownership of the Collateral to
the Corporation 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 10 of this Agreement. Any cash sums
2.
<PAGE>
which the Corporation may so receive shall be applied to the payment of
the Note and any other indebtedness secured hereunder, in such order of
application as the Corporation deems appropriate. Any remaining cash
shall be paid over to Pledgor.
Any action by the Corporation pursuant to the provisions of this
Paragraph 6 may be taken without notice to Pledgor. Expenses reasonably
incurred in connection with such action shall be payable by Pledgor and form
part of the indebtedness secured hereunder as provided in Paragraph 12.
7. CARE OF COLLATERAL. The Corporation shall exercise
reasonable care in the custody and preservation of the Collateral. However, the
Corporation shall have no obligation to (i) initiate any action with respect to,
or otherwise inform Pledgor of, any conversion, call, exchange right, preemptive
right, subscription right, purchase offer or other right or privilege relating
to or affecting the Collateral, (ii) preserve the rights of Pledgor against
adverse claims or protect the Collateral against the possibility of a decline in
market value or (iii) take any action with respect to the Collateral requested
by Pledgor unless the request is made in writing and the Corporation determines
that the requested action will not unreasonably jeopardize the value of the
Collateral as security for the Note and other indebtedness secured hereunder.
Subject to the limitations of Paragraph 9, the Corporation may at any
time release and deliver all or part of the Collateral to Pledgor, and the
receipt thereof by Pledgor shall constitute a complete and full acquittance for
the Collateral so released and delivered. The Corporation 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.
8. TRANSFER OF COLLATERAL. In connection with the transfer or
assignment of the Note (whether by negotiation, discount or otherwise), the
Corporation may transfer all or any part of the Collateral, and the transferee
shall thereupon succeed to all the rights, powers and remedies granted the
Corporation hereunder with respect to the Collateral so transferred. Upon such
transfer, the Corporation shall be fully discharged from all liability and
responsibility for the transferred Collateral.
9. RELEASE OF COLLATERAL. Provided 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 there does not otherwise exist any event of
default under Paragraph 10, the Purchased Shares, together with any additional
Collateral which may hereafter be pledged and deposited hereunder, shall be
released from pledge and returned to Pledgor in accordance with the following
provisions:
(i) If one or more of Purchased Shares are to be
sold, then those shares shall be released from pledge hereunder upon
Maker's undertaking to apply the gross proceeds realized from the sale
of such shares immediately to the payment of (i) the portion of the
principal balance of this Note
3.
<PAGE>
attributable to those Purchased Shares which are the subject of such
sale and (ii) the accrued and unpaid interest under the Note on that
principal portion.
(ii) Upon payment or prepayment of principal under
the Note, together with payment of all accrued interest to date, one or
more of the Purchased Shares held as Collateral hereunder shall (subject
to the applicable limitations of Paragraphs 9(iii) and 9(v) below) be
released to Pledgor 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 Purchased
Shares 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.
(iii) Any additional Collateral which may hereafter
be pledged and deposited with the Corporation (pursuant to the
requirements of Paragraph 3) with respect to the Purchased Shares 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 9(i).
(iv) Under no circumstances, however, shall any
Purchased Shares or any other Collateral be released if previously
applied to the payment of any indebtedness secured hereunder. In
addition, in no event shall any Purchased Shares or other Collateral be
released pursuant to the provisions of Paragraph 9(i) or 9(ii) 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 principal and
accrued interest under the Note.
(v) 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:
(A) If the Common Stock is at the time 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
prices are reported by the National Association of Securities Dealers on
its Nasdaq system or any successor system. 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.
4.
<PAGE>
(B) If the Common Stock is at the time listed on the
American Stock Exchange or the New York 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 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.
(C) If the Common Stock is at the time neither
listed on any securities exchange nor traded on the Nasdaq National
Market, the fair market value shall be determined by the Corporation's
Board of Directors after taking into account such factors as the Board
shall deem appropriate.
(vi) 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 Collateral under the
provisions of Paragraph 6(i) or be released under Paragraph 9(i) or
(ii), unless there is compliance with each of the following additional
requirements:
(A) The substitution or release must not increase
the amount by which the indebtedness secured hereunder at the time of
such substitution or release exceeds the maximum loan value (as defined
below) of the Collateral immediately prior to such substitution or
release.
(B) The substitution or release must not cause the
amount of indebtedness secured hereunder at the time of such
substitution or release to exceed the maximum loan value of the
Collateral remaining after such substitution or release is effected.
(C) For purposes of this Paragraph 9(v), 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 and any additional 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), equal fifty percent
(50%) of the current market value of such securities.
10. EVENTS OF DEFAULT. The occurrence of one or more of the
following events shall constitute an event of default under this Agreement:
5.
<PAGE>
(i) the failure of Pledgor to pay, when due under
the Note, any installment of principal or accrued interest; or
(ii) the occurrence of any other acceleration event
specified in the Note; or
(iii) the failure of Pledgor to perform any
obligation imposed upon Pledgor by reason of this Agreement; or
(iv) the sale, transfer, assignment, encumbrance or
other conveyance, whether voluntarily or involuntarily or by operation
of law or otherwise, of any of the Purchased Shares in contravention of
the provisions of the Stock Issuance Agreement of even date herewith
between the Pledgor and the Corporation pursuant to which the Pledgor
has acquired the Purchased Shares; or
(v) the breach of any warranty of Pledgor contained
in this Agreement.
Upon the occurrence of any such event of default, the Corporation 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 Corporation 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 Pledgor. However, in the event such
proceeds prove insufficient to satisfy all obligations of Pledgor under the
Note, then Pledgor shall remain personally liable for the resulting deficiency.
11. OTHER REMEDIES. The rights, powers and remedies granted to
the Corporation pursuant to the provisions of this Agreement shall be in
addition to all rights, powers and remedies granted to the Corporation under any
statute or rule of law. Any forbearance, failure or delay by the Corporation 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 Corporation
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
Corporation.
12. COSTS AND EXPENSES. All costs and expenses (including
reasonable
6.
<PAGE>
attorneys fees) incurred by the Corporation 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
Pledgor 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 Corporation and compensation income to
Pledgor under the Federal tax laws.
13. APPLICABLE LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of California without resort
to that State's conflict-of-laws rules.
14. SUCCESSORS. This Agreement shall be binding upon the
Corporation and its successors and assigns and upon Pledgor and the executors,
heirs and legatees of Pledgor's estate.
15. 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.
IN WITNESS WHEREOF, this Agreement has been executed by Pledgor and
the Corporation on this 30th day of June, 1997.
ADVANCED FIBRE COMMUNICATIONS, INC.
- --------------------------
PLEDGOR
By: /s/ Carl Grivner /s/ Peter A. Darbee
---------------------- -------------------------
Title: President, Chief Address: One Willow Brook Court
--------------------- -------------------------
Executive Officer and Petaluma, CA 94954
--------------------- -------------------------
Chief Operating
---------------------
Officer
---------------------
Dated: June 30, 1997 Dated: June 30, 1997
--------------------- ------------------------
7.
<PAGE>
CONSULTING AGREEMENT
--------------------
This Agreement is entered into as of the date set forth below between
Advanced Fibre Communications, Inc. ("AFC") and the consultant named below
("Contractor").
In consideration of the mutual covenants set forth herein, AFC hereby
retains Contractor on the terms set forth below:
1. SERVICES TO BE RENDERED. Contractor will perform services as
described in Attachment A. AFC is contracting with Contractor solely for the
end product produced by such services and does not manage the means by which
such services are to be provided.
2. PAYMENT FOR CONTRACTOR'S SERVICES. AFC will pay Contractor according
to the terms specified in Attachment A.
3. LOCATION OF WORK. Contractor's principal place of work shall be
determined by him, except that it will not be at the offices of AFC.
4. CONTRACTOR'S INDEPENDENT CONTRACTOR STATUS. Contractor will provide
services as an independent contractor, and is not authorized to act as AFC's
agent. Contractor will not be an employee of AFC, and will not be entitled to
Workmen's Compensation Coverage, Unemployment Insurance or any other type of
insurance or benefit normally provided by AFC to its employees. AFC will not
withhold income or Social Security taxes from Contractor's fee. AFC shall have
no financial liability to Contractor as a result of this Agreement, except as
provided in paragraph one above.
5. EXPENSES. Expenses incurred by Contractor in connection with
performing services to be provided herein shall be borne exclusively by
Contractor and will not be reimbursed by AFC, except as may be set forth herein.
6. OTHER SERVICES. This Agreement shall not be construed to preclude or
limit Contractor from performing services similar to those provided to AFC to
other
<PAGE>
persons or entities, provided the confidentiality provisions set forth below are
complied with, and provided such other services do not present a conflict of
interest.
7. CONFIDENTIAL INFORMATION OF OTHERS. Contractor represents that he
will not use, disclose to AFC, or induce AFC to use any confidential information
or documents belonging to others, which he has in his possession. Contractor
represents that this Agreement will not cause Contractor to violate any
copyright or other intellectual property right of any third party.
8. DEFINITION OF PROPRIETARY INFORMATION. As used herein, the term
"Proprietary Information" refers to any and all information of a confidential,
proprietary or secret nature which is or may be either applicable to, or related
in any way to (i) the business, present or future, of AFC, (ii) the research and
development or investigations of AFC, or (iii) the business of any customer of
AFC. Proprietary Information includes, for example and without limitation,
trade secrets, processes, formulae, data, algorithms, source codes, object
codes, know-how, improvements, inventions, techniques, marketing plans and
strategies, information concerning volume of sales, profits and losses, and any
information regarding current or potential customers. Proprietary Information
shall also include all information of a like nature owned by any other person
and furnished to AFC by such other person pursuant to an undertaking by AFC to
maintain the same in confidence.
9. PROPRIETARY INFORMATION TO BE KEPT IN CONFIDENCE. Contractor
acknowledges that Proprietary Information is a special, valuable and unique
asset of AFC and/or its customers or licensors, and Contractor agrees at all
times during the period of this Agreement, and thereafter, to keep in confidence
and trust all Proprietary Information. Contractor agrees that during the period
of this Agreement and thereafter, Contractor will not directly or indirectly use
the Proprietary Information other than in the course of performing duties for
AFC, nor will Contractor directly or indirectly disclose any Proprietary
Information or anything relating thereto to any person or entity, except in the
course of performing services under this Agreement and with the consent of AFC.
Contractor will abide by AFC's policies and regulations as may be established
from time to time for the protection of its Proprietary Information.
<PAGE>
10. RETURN OF MATERIALS. At the request of AFC or in the event of any
termination of this Agreement for whatever reason, Contractor will promptly
deliver to AFC all documents, data, records and other information pertaining to
this Agreement, including information created by Contractor as a result of this
Agreement. Contractor shall not take with him any documents or data, or any
reproductions or excerpt of any document or data, containing or pertaining to
any Proprietary Information.
11. DISCLOSURE TO AFC; INVENTIONS AS SOLE PROPERTY OF AFC. Contractor
agrees promptly to disclose to AFC any and all inventions, discoveries,
improvements, trade secrets, copyrights, formulae, techniques, processes and
know-how, whether or not patentable or whether or not reduced to practice,
conceived or learned by Contractor during the period of his work on behalf of
AFC, either alone or jointly with others, which relate to or result from the
actual or anticipated scope of this Agreement, or which result, to any
extent, from use of AFC's premises or property (the work being hereinafter
collectively referred to as the "Inventions").
Contractor acknowledges and agrees that all such Inventions shall be the
sole property of AFC and/or any other person or entity designated by it, and
Contractor hereby assigns to AFC his entire right and interest in and to all
Inventions; provided, however, that such assignment does not apply to any
invention which qualifies for protection under California Labor Code Section
2870. Upon request by AFC, Contractor shall execute any required documents and
furnish all reasonable assistance to AFC in order to vest all rights to the
Inventions in AFC. All data and reports prepared as a result of this Agreement
shall be the exclusive property of AFC and shall be used by Contractor solely in
his work for AFC. If any preexisting materials are contained in the deliverable
items, Contractor hereby grants a royalty free license to AFC to use such
materials.
12. INJUNCTION. Contractor agrees that it would be difficult to measure
damage to AFC from any breach by Contractor of the agreements set forth in
Paragraphs 6, 7 ,8 and 9 herein, and that injury to AFC from any such breach
would be impossible to calculate, and that money damages would therefore be an
inadequate remedy. Accordingly, Contractor agrees that if he should breach any
provision of Paragraphs 6, 7, 8 and 9, or any of them, AFC shall be entitled, in
addition to all other remedies it may
<PAGE>
have, to an injunction or other appropriate orders to restrain any such breach
by Contractor without showing or proving any actual damage sustained by AFC.
13. TERM OF THIS AGREEMENT. Either party may terminate this Agreement
with no further obligation for unperformed work ten (10) days after written
notice is mailed or given to the other party.
14. INDEMNIFICATION. Contractor agrees to indemnify and defend AFC and
its employees from any liability for claims arising as a result of services
performed under this Agreement, except for liability occasioned by the
negligence of AFC or its employees.
15. OTHER OBLIGATIONS. Contractor is not currently obligated, nor will
Contractor assume any obligations which interfere with or are inconsistent with
the services to be performed under this Agreement.
16. GENERAL.
(a) To the extent that any of the promises set forth herein, or
any word, phrase, clause, or sentence thereof shall be found to be illegal or
unenforceable for any reason, such agreement, word, clause, phrase or sentence
shall be modified or deleted in such manner so as to make the Agreement as
modified legal and enforceable under applicable laws, and the balance of the
Agreement, or parts thereof, shall not be affected thereby, the balance being
construed as severable and independent.
(b) This Agreement shall be binding upon Contractor and his
heirs, executors, assigns, and administrators and shall inure to the benefit of
AFC, its successors and assigns and any Subsidiary or Parent of AFC.
(c) This Agreement shall be governed by and construed in
accordance with the laws of the State of California.
(d) This Agreement may be signed in counterparts, each of which
shall be deemed an original and which together shall constitute one instrument.
(e) The use of the singular in this Agreement includes the
plural, as appropriate.
(f) This Agreement and Attachment A represent the entire
agreement between Contractor and AFC with respect to the subject matter hereof,
<PAGE>
superseding all previous oral or written communications, representations or
agreements. This Agreement may be modified only by a duly authorized and
executed writing, signed by Contractor and the Manager and approved by the
President.
Dated: May 19, 1997 Dated: May 19, 1997
Contractor: ADVANCED FIBRE
COMMUNICATIONS, INC.
Peter A. Darbee
By /s/ Peter A. Darbee By /s/ Carl Grivner
-------------------------- ---------------------------
<PAGE>
ATTACHMENT A
AFC estimates that Contractor will perform consulting services for AFC from
May 19, 1997 through June 27, 1997. Contractor will become an AFC employee
beginning June 30, 1997. Subject to board approval, Contractor will be granted
an option on 150,000 shares of common stock at an exercise price equal to the
market close on May 19, 1997. Such option shares will be non-qualified stock
options and will be granted to Contractor effective May 19, 1997 in
consideration for his services as a consultant and an employee.
<PAGE>
EXHIBIT 11.1
ADVANCED FIBRE COMMUNICATIONS, INC.
SCHEDULE RE: COMPUTATION OF NET INCOME (LOSS) PER SHARE
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Six Months Ended
Ended June 30, June 30,
----------------- -----------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income (loss) $ 8,056 $(3,713) $12,955 $(1,541)
------- ------- ------- -------
Weighted average common shares outstanding 34,966 5,447 34,069 5,270
Redeemable convertible preferred stock, on an
as-if converted basis -- 18,717 -- 18,607
Common stock equivalents--stock options and
warrants 4,287 -- 4,763 --
Staff Accounting Bulletin No. 83 issuances
and grants:
Stock options -- 229 -- 300
Redeemable convertible preferred stock
issued -- 39 -- 78
------- ------- ------- -------
Shares used in per share computations 39,253 24,432 38,832 24,255
------- ------- ------- -------
Net income per share $ 0.21 $ 0.33
------- -------
------- -------
Pro forma net loss per share $ (0.15) $ (0.06)
------- -------
------- -------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 12,489
<SECURITIES> 99,008
<RECEIVABLES> 52,986
<ALLOWANCES> 0
<INVENTORY> 27,854
<CURRENT-ASSETS> 198,310
<PP&E> 20,418
<DEPRECIATION> (2,598)
<TOTAL-ASSETS> 219,639
<CURRENT-LIABILITIES> 30,030
<BONDS> 0
0
0
<COMMON> 355
<OTHER-SE> 188,287
<TOTAL-LIABILITY-AND-EQUITY> 219,639
<SALES> 104,848
<TOTAL-REVENUES> 105,612
<CGS> 55,467
<TOTAL-COSTS> 58,512
<OTHER-EXPENSES> 28,720
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2,183)
<INCOME-PRETAX> 20,563
<INCOME-TAX> 7,608
<INCOME-CONTINUING> 12,955
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,955
<EPS-PRIMARY> 0.33
<EPS-DILUTED> 0.33
</TABLE>
