<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 24, 1997
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------
ADVANCED FIBRE COMMUNICATIONS, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 3661 68-0277743
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) No.)
</TABLE>
1445 MCDOWELL BOULEVARD NORTH
PETALUMA, CA 94954
(707) 794-7700
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
---------------------
DONALD GREEN
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
ADVANCED FIBRE COMMUNICATIONS, INC.
1445 MCDOWELL BOULEVARD NORTH
PETALUMA, CA 94954
(707) 794-7700
(Name and address, including zip code, and telephone number, including area
code, of agent for service)
---------------------
COPIES TO:
<TABLE>
<S> <C>
SCOTT D. LESTER, ESQ. KENNETH M. SIEGEL, ESQ.
DAVID R. GILBERT, ESQ. TAMARA G. MATTISON, ESQ.
BROBECK, PHLEGER & HARRISON LLP WILSON SONSINI GOODRICH & ROSATI
ONE MARKET PROFESSIONAL CORPORATION
SPEAR STREET TOWER 650 PAGE MILL ROAD
SAN FRANCISCO, CA 94105 PALO ALTO, CA 94304-1050
(415) 442-0900 (415) 493-9300
</TABLE>
-------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS
PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
-------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION FEE
SECURITIES TO BE REGISTERED REGISTERED (1) PER SHARE (2) PRICE (2) (3)
<S> <C> <C> <C> <C>
Common Stock, $.01 par value..................... 2,990,000 $51.875 $155,106,250 $47,002
</TABLE>
(1) Includes 390,000 shares that the U.S. Underwriters have the option to
purchase to cover over-allotments, if any.
(2) The proposed maximum offering price per share is based on the average of the
high and low prices for a share of the Company's Common Stock as reported on
the Nasdaq National Market on January 22, 1997.
(3) Estimated pursuant to Rule 457(c) solely for the purpose of calculating the
amount of the registration fee.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
EXPLANATORY NOTE
This Registration Statement contains two forms of prospectus: (i) one to be
used in connection with an offering in the United States and Canada (the "U.S.
Prospectus") and (ii) the other to be used in connection with a concurrent
offering outside of the United States and Canada (the "International
Prospectus"). The U.S. Prospectus and the International Prospectus are identical
in all respects except for the front cover page of the International Prospectus,
which is included herein after the final page of the U.S. Prospectus and is
labeled "Alternate Page for International Prospectus." Final forms of each of
the Prospectuses will be filed with the Securities and Exchange Commission under
Rule 424(b).
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROSPECTUS (SUBJECT TO COMPLETION)
ISSUED JANUARY 24, 1997
2,600,000 SHARES
[LOGO]
COMMON STOCK
---------------------
OF THE 2,600,000 SHARES OF COMMON STOCK OFFERED, 2,080,000 SHARES ARE BEING
OFFERED INITIALLY IN THE UNITED STATES AND CANADA BY THE U.S. UNDERWRITERS AND
520,000 SHARES ARE BEING OFFERED INITIALLY OUTSIDE OF THE UNITED STATES AND
CANADA BY THE INTERNATIONAL UNDERWRITERS. SEE "UNDERWRITERS." OF THE
2,080,000 SHARES OF COMMON STOCK BEING OFFERED BY THE U.S.
UNDERWRITERS, 160,000 SHARES ARE BEING SOLD BY THE COMPANY AND
1,920,000 SHARES ARE BEING SOLD BY THE SELLING STOCKHOLDERS. SEE
"PRINCIPAL AND SELLING STOCKHOLDERS." THE COMPANY WILL NOT
RECEIVE ANY OF THE PROCEEDS FROM THE SALE OF SHARES BY THE
SELLING STOCKHOLDERS. THE COMPANY'S COMMON STOCK IS LISTED ON
THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL "AFCI." ON
JANUARY 23, 1997, THE LAST SALE PRICE OF THE COMMON
STOCK AS REPORTED ON THE NASDAQ NATIONAL MARKET WAS
$53 1/4 PER SHARE. SEE "PRICE RANGE OF COMMON
STOCK."
--------------------------
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE ``RISK FACTORS"
COMMENCING ON PAGE 4 HEREOF.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
PRICE $ A SHARE
------------------------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS (1) COMPANY (2) STOCKHOLDERS
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
PER SHARE........................... $ $ $ $
TOTAL (3)........................... $ $ $ $
</TABLE>
- ------------
(1) THE COMPANY AND THE SELLING STOCKHOLDERS HAVE AGREED TO INDEMNIFY THE
UNDERWRITERS AGAINST CERTAIN LIABILITIES, INCLUDING LIABILITIES UNDER THE
SECURITIES ACT OF 1933, AS AMENDED.
(2) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY ESTIMATED AT $450,000.
(3) CERTAIN SELLING STOCKHOLDERS HAVE GRANTED TO THE U.S. UNDERWRITERS AN
OPTION, EXERCISABLE WITHIN 30 DAYS OF THE DATE HEREOF, TO PURCHASE UP TO
AN AGGREGATE OF 390,000 ADDITIONAL SHARES AT THE PRICE TO PUBLIC LESS
UNDERWRITING DISCOUNTS AND COMMISSIONS FOR THE PURPOSE OF COVERING
OVER-ALLOTMENTS, IF ANY. IF THE U.S. UNDERWRITERS EXERCISE SUCH OPTION IN
FULL, THE TOTAL PRICE TO PUBLIC, UNDERWRITING DISCOUNTS AND COMMISSIONS
AND PROCEEDS TO SELLING STOCKHOLDERS WILL BE $ , $
AND $ , RESPECTIVELY. SEE "UNDERWRITERS."
------------------------------
THE SHARES ARE OFFERED, SUBJECT TO PRIOR SALE, WHEN, AS AND IF ACCEPTED BY
THE UNDERWRITERS NAMED HEREIN AND SUBJECT TO APPROVAL OF CERTAIN LEGAL MATTERS
BY WILSON SONSINI GOODRICH & ROSATI, PROFESSIONAL CORPORATION, COUNSEL FOR THE
UNDERWRITERS. IT IS EXPECTED THAT DELIVERY OF THE SHARES WILL BE MADE ON OR
ABOUT , 1997 AT THE OFFICE OF MORGAN STANLEY & CO. INCORPORATED, NEW
YORK, N.Y., AGAINST PAYMENT THEREFOR IN IMMEDIATELY AVAILABLE FUNDS.
--------------------------
MORGAN STANLEY & CO.
INCORPORATED
MERRILL LYNCH & CO.
COWEN & COMPANY
HAMBRECHT & QUIST
, 1997
<PAGE>
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY BY ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL FOR SUCH PERSON TO
MAKE SUCH AN OFFERING OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCE IMPLY THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE
HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary................................................................................................. 3
Risk Factors....................................................................................................... 4
The Company........................................................................................................ 13
Use of Proceeds.................................................................................................... 14
Dividend Policy.................................................................................................... 14
Price Range of Common Stock........................................................................................ 14
Capitalization..................................................................................................... 15
Selected Consolidated Financial Data............................................................................... 16
Management's Discussion and Analysis of Financial Condition and Results of Operations.............................. 17
Business........................................................................................................... 24
Management......................................................................................................... 38
Certain Transactions............................................................................................... 48
Principal and Selling Stockholders................................................................................. 51
Description of Capital Stock....................................................................................... 54
Shares Eligible for Future Sale.................................................................................... 57
Underwriters....................................................................................................... 59
Legal Matters...................................................................................................... 62
Experts............................................................................................................ 62
Additional Information............................................................................................. 62
Glossary of Terms.................................................................................................. 63
Index to Financial Statements...................................................................................... F-l
</TABLE>
------------------------
The Universal Modular Carrier 1000-TM- is a trademark of the Company. All
other trademarks or trade names referred to in this Prospectus are the property
of their respective owners.
------------------------
EXCEPT AS OTHERWISE NOTED HEREIN, INFORMATION IN THIS PROSPECTUS ASSUMES NO
EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. THE COMPANY OPERATES ON A
13-WEEK FISCAL QUARTER, COMPRISED OF FOUR, FOUR AND FIVE WEEK MONTHS ENDING ON
THE LAST SATURDAY OF THE LAST WEEK OF THE FIVE-WEEK MONTH. FOR PRESENTATION
PURPOSES ONLY, THE COMPANY HAS SHOWN ITS FIRST THREE FISCAL QUARTERS AS ENDING
ON MARCH 31, JUNE 30, AND SEPTEMBER 30 AND ITS FOURTH FISCAL QUARTER AND FISCAL
YEAR AS ENDING ON DECEMBER 31.
------------------------
SEE "GLOSSARY OF TERMS" COMMENCING ON PAGE 63 FOR DEFINITIONS OF VARIOUS
ACRONYMS AND TECHNICAL TERMS USED IN THIS PROSPECTUS.
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
------------------------
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN PASSIVE
MARKET MAKING TRANSACTIONS IN THE COMMON STOCK OF THE COMPANY ON THE NASDAQ
NATIONAL MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT
OF 1934. SEE "UNDERWRITERS."
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO APPEARING
ELSEWHERE IN THIS PROSPECTUS.
THE COMPANY
Advanced Fibre Communications, Inc. ("AFC" or the "Company") designs,
develops, manufactures, markets and supports the Universal Modular Carrier
1000-TM- (the "UMC" system), a cost-effective, multi-feature digital loop
carrier system developed to serve small line-size markets. The Company's UMC
system is designed to enable telephone companies, cable companies and other
service providers to connect subscribers to the central office switch for voice
and data communications over copper wire, fiber optic cable, coaxial cable and
analog radio networks. The Company believes that the UMC system is the only
digital loop carrier that can operate simultaneously over a variety of
transmission media. The UMC system meets the service needs of subscribers,
including analog services such as plain old telephone service, universal voice
grade service and analog switched data service, and digital services such as
high speed digital data service, ISDN and asynchronous and synchronous data
channel services.
The UMC system has been sold to more than 450 independent telephone
companies in the United States, is being initially deployed by Ameritech and
GTE, and is in laboratory or field trials at Pacific Bell and BellSouth. The
Company has also sold the UMC system to telephone companies in Hong Kong,
France, Brazil, Canada, China, Mexico, the Netherlands Antilles and the
Dominican Republic. The UMC system is distributed and serviced worldwide through
its direct sales force in the domestic market and through its direct sales
force, distributors and agents in international markets.
RECENT DEVELOPMENTS
Revenues for the quarter ended December 31, 1996 increased 112% to $41.4
million from $19.5 million for the quarter ended December 31, 1995. Operating
income in the quarter increased 218% to $6.2 million from $1.9 million and net
income in the quarter increased 258% to $5.6 million from $1.6 million in the
quarter ended December 31, 1995. The Company continued to expand its penetration
of international markets, completing sales to its first customers in Brazil and
increasing sales in China. The Company has begun working with Flextronics, one
of the Company's contract manufacturers, to manufacture UMC assemblies at a
Flextronics facility in China.
THE OFFERING
<TABLE>
<S> <C> <C>
U.S. Offering....................................... 2,080,000 Shares
International Offering.............................. 520,000 Shares
Total........................................... 2,600,000 Shares (including 200,000 Shares by the Company and
2,400,000 Shares by the Selling Stockholders)
Common Stock to be outstanding after the offering... 33,157,535 Shares (1)
Use of proceeds..................................... For general corporate purposes, including working capital
Nasdaq National Market symbol....................... AFCI
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1993 1994 1995 1996 (2)
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues.................................................................... $ 620 $ 18,802 $ 54,287 $ 130,193
Gross profit (loss)......................................................... (1,954) 4,678 20,818 56,243
Operating income (loss)..................................................... (7,291) (7,791) 3,805 1,695
Net income (loss)........................................................... (7,291) (7,765) 2,341 7,237
Pro forma net income per share (3).......................................... $ 0.09 $ 0.21
Shares used in per share computations (3)................................... 27,329 34,282
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------
ACTUAL AS ADJUSTED (4)
--------- ---------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents and marketable securities.................................... $ 108,430 $ 118,456
Working capital........................................................................ 145,338 155,364
Total assets........................................................................... 175,679 185,705
Total stockholders' equity............................................................. 158,023 168,049
</TABLE>
- ------------
(1) Based on the number of shares outstanding as of December 31, 1996 and the
number of shares issuable upon the exercise of warrants by certain Selling
Stockholders in connection with this offering. Excludes 7,008,142 shares of
Common Stock reserved for issuance under the Company's stock option plans,
under which options to purchase 4,313,544 shares were outstanding as of
December 31, 1996, and 1,500,000 shares reserved for issuance under the
Company's Employee Stock Purchase Plan. Also excludes 2,265,848 shares of
Common Stock reserved for issuance pursuant to the exercise of warrants
outstanding as of December 31, 1996, after giving effect to the exercise of
warrants to acquire 307,928 shares of Common Stock by certain Selling
Stockholders to be sold in this offering. See "Management -- Stock Incentive
Plan," " -- Employee Stock Purchase Plan," "Certain Transactions,"
"Principal and Selling Stockholders" and "Description of Capital Stock."
(2) Includes a charge of $15.8 million to reflect a cash payment of $10.1
million and the issuance of 725,787 shares of Common Stock to DSC
Communications Corporation in settlement of outstanding litigation. See
"Business -- Legal Proceedings." Without this charge, operating income for
the year ended December 31, 1996 would have been $17.5 million.
(3) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the determination of the number of shares used in computing pro forma net
income per share.
(4) As adjusted to reflect the sale of 200,000 shares of Common Stock by the
Company at an assumed public offering price of $53 1/4 per share (after
deducting estimated underwriting discounts and commissions and estimated
offering expenses) and the issuance of 307,928 shares of Common Stock upon
exercise of certain outstanding warrants at an exercise price of $1.165 per
share. The shares issued on exercise of such warrants will be sold by
certain Selling Stockholders in this offering. The Company will receive the
exercise price of such warrants, but will not receive the proceeds from the
sale of the underlying shares of Common Stock. See "Use of Proceeds" and
"Principal and Selling Stockholders."
3
<PAGE>
RISK FACTORS
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS,
INCLUDING THOSE SET FORTH IN THE FOLLOWING RISK FACTORS AND ELSEWHERE IN THIS
PROSPECTUS. IN EVALUATING THE COMPANY'S BUSINESS, PROSPECTIVE INVESTORS SHOULD
CAREFULLY CONSIDER THE FOLLOWING FACTORS IN ADDITION TO THE OTHER INFORMATION
PRESENTED IN THIS PROSPECTUS.
LIMITED HISTORY OF OPERATIONS AND PROFITABILITY. The Company was
incorporated in May 1992 and was in the initial startup and development phase
through December 1993. The Company began shipping the UMC in January 1994 and,
accordingly, has a limited operating history. The Company has incurred
substantial expenditures related to the development, manufacturing startup and
marketing of the UMC system. As a result of these expenditures, combined with
$25.9 million of expenses and settlement amounts recorded in connection with
certain litigation with DSC Communications Corporation ("DSC") which was settled
in June 1996, the Company had an accumulated deficit of $6.2 million as of
December 31, 1996. Although the Company achieved profitability for the years
ended December 31, 1995 and 1996, there can be no assurance that the Company
will sustain or increase its profitability in the future. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business -- Legal Proceedings."
POTENTIAL FLUCTUATIONS IN FUTURE OPERATING RESULTS; SEASONALITY. The
Company's operating results have been, and will continue to be, affected by a
wide variety of factors, some of which are outside of the Company's control,
that could have a material adverse effect on revenues and results of operations
during any particular period. These factors include: the 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
4
<PAGE>
December 31. In particular, the Company currently believes that revenues in the
quarter ended March 31, 1997 may be lower than revenues in the quarter ended
December 31, 1996. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Quarterly Results of Operations."
DEPENDENCE ON TELECOMMUNICATIONS INDUSTRY AND SMALL LINE-SIZE MARKET. The
Company's customers are concentrated in the public carrier telecommunications
industry. Accordingly, the Company's future success depends upon the capital
spending patterns of such customers and the continued demand by such customers
for the UMC system. The target markets for the UMC system are the small
line-size markets of the United States and developing countries. Historically,
these markets have had little access to the advanced services that can be made
available through the UMC system and, accordingly, there can be no assurance
that potential customers will consider the near term value of these advanced
services to be sufficient to influence their purchase decisions. Furthermore,
there can be no assurance that the UMC system will find widespread acceptance
among the telephone companies and other potential customers in small line-size
markets or that such customers and potential customers will not adopt
alternative architectures or technologies that are incompatible with the UMC
technology, which would have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, there can
be no assurance that telephone companies, foreign governments or other customers
will pursue infrastructure upgrades that will necessitate the implementation of
advanced products such as the UMC system. Infrastructure improvements requiring
the Company's or similar technology may be delayed or prevented by a variety of
factors, including cost, regulatory obstacles, the lack of consumer demand for
advanced telecommunications services and alternative approaches to service
delivery. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business -- Markets and Customers" and
"-- Competition."
CONCENTRATED PRODUCT LINE, NEW PRODUCTS AND RAPID TECHNOLOGICAL CHANGE. The
Company currently derives substantially all of its revenues from the UMC system
and expects that this concentration will continue in the foreseeable future. As
a result, any decrease in the overall level of sales of, or the prices for, the
UMC system due to product enhancements, introductions or announcements by the
Company's competitors, a decline in the demand for the UMC system, product
obsolescence or any other reason could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The telecommunications equipment market is characterized by rapidly changing
technology, evolving industry standards, changes in end-user requirements, and
frequent new product introductions and enhancements. The introduction of
products embodying new technologies or the emergence of new industry standards
can render existing products obsolete or unmarketable. The Company's success
will depend upon its ability to enhance the UMC technology and to develop and
introduce, on a timely basis, new products 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
software that may contain undetected or unresolved errors as products are
introduced or as new versions are
5
<PAGE>
released. The Company has in the past discovered software errors in certain UMC
system installations. There can be no assurance that, despite significant
testing by the Company, software errors will not be found in new enhancements of
the UMC system after commencement of shipments, resulting in delays in or loss
of market acceptance, either of which could have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Business -- Competition" and "-- Research and Product Development."
DEPENDENCE ON SOLE-SOURCE AND OTHER KEY SUPPLIERS. Certain components used
in the Company's products, including the Company's proprietary application
specific integrated circuits ("ASICs"), codecs, certain surface mount technology
components and other components, are only available from a single source or
limited number of suppliers. Some of the Company's sole-source suppliers are
companies which from time to time allocate parts to telephone equipment
manufacturers due to market demand for telecommunications equipment. Many of the
Company's competitors are much larger and may be able to obtain priority
allocations from these shared suppliers, thereby limiting or making unreliable
the sources of supply for these components. The Company encountered supply
delays for codecs in the second quarter of 1994 which resulted in delayed
shipments of the UMC system, and there can be no assurance that similar
shortages will not occur in the future or will not result in the Company having
to pay a higher price for components. If the Company is unable to obtain
sufficient quantities of these or any other components, delays or reductions in
manufacturing or product shipments could occur which would have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Manufacturing."
DEPENDENCE ON LIMITED NUMBER OF THIRD PARTY MANUFACTURERS AND SUPPORT
ORGANIZATIONS. The Company relies on a limited number of independent
contractors that manufacture the subassemblies to the Company's specifications
for use in the Company's products. In particular, the Company relies on: (i)
Flextronics International Ltd. and Tanon Manufacturing, Inc. (a division of
Electronic Associates, Inc.) to manufacture the Company's printed circuit board
assemblies; (ii) Paragon, Inc. to manufacture backplanes and channel bank
assemblies and (iii) Sonoma Metal Products, Inc. and Cowden Metal 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. See "Business --
Manufacturing."
The Company also relies on Point-to-Point Communications, Inc.
("Point-to-Point"), a third-party support organization, to provide first-line
technical assistance and post-sales support to AFC customers. There can be no
assurance that Point-to-Point will be able to provide the level of customer
support demanded by the Company's existing or potential customers. See "Business
- -- Sales, Marketing and Customer Support."
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. 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
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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. See "Business --
Competition," "-- Proprietary Rights and Licenses" and "-- Legal Proceedings."
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 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. See "Business -- Competition" and "-- Legal Proceedings."
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. See "Business -- Legal Proceedings." In the future
the Company may be subject to additional litigation to defend against claimed
infringements of the rights of others or to determine the scope and validity of
the proprietary rights of others. Future litigation also may be necessary to
enforce and protect trade secrets and other intellectual property rights owned
by the Company. Any such litigation could be costly and cause diversion of
management's attention, either of which could have a material adverse effect on
the Company's business, financial condition and results of operations. Adverse
determinations in such litigation could result in the loss of the Company's
proprietary rights, subject the Company to significant liabilities, require the
Company to seek licenses from third parties, or prevent the Company from
manufacturing or selling its products, any one of which could have a material
adverse effect on the Company's business, financial condition and results of
operations. Furthermore, there can be no assurance that any necessary licenses
will be available on reasonable terms. See "Business -- Proprietary Rights and
Licenses."
RISK OF FAILURE TO MANAGE EXPANDING OPERATIONS. The Company has recently
experienced a period of rapid growth, which has placed and could continue to
place, a significant strain on the Company's management, operational, financial
and other resources. The members of the Company's management team have
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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 has begun evaluation of
new management and accounting systems and intends to begin implementing such
systems in 1997. There can be no assurance that the Company will complete such
evaluation or 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. See "Business -- Employees" and "Management -- Executive Officers,
Key Employees and Directors."
CUSTOMER CONCENTRATION. Approximately 15.7% and 8.1% of the Company's
revenues in 1995 and 1996, respectively, were derived from sales to ALLTEL
Supply, Inc. In 1995 and 1996, the Company's five largest customers accounted
for approximately 37% and 28% of revenues, respectively. Although the Company's
largest customers have varied from period to period, the Company anticipates
that its results of operations in any given period will continue to depend to a
significant extent upon sales to a small number of customers. None of the
Company's customers has entered into an agreement requiring it to purchase a
minimum amount of product from the Company. There can be no assurance that the
Company's principal customers will continue to purchase product from the Company
at current levels, if at all. The loss of one or more major customers could have
a material adverse effect on the Company's business, financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business -- Markets and Customers."
RISKS ASSOCIATED WITH INTERNATIONAL MARKETS. International sales
constituted 13.2% and 20.8% of the Company's total revenues in 1995 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 have a material adverse
effect on the Company's business, financial condition and results of operations.
International telephone companies are in many cases owned or strictly
regulated by local regulatory authorities. Access to such markets is often
difficult due to the established relationships between a government owned or
controlled telephone company and its traditional indigenous suppliers of
telecommunications equipment. In addition, the Company's bids for business in
certain international markets typically will
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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. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business -- Markets and Customers" and "-- Sales, Marketing and Customer
Support."
DEPENDENCE ON KEY PERSONNEL. The Company's success depends to a significant
extent upon a number of key technical and management employees. In particular,
the Company's success depends in large part on the knowledge, expertise and
services of its co-founders: Donald Green, Chairman of the Board and Chief
Executive Officer; James T. Hoeck, Vice President, Advanced Development; and
John W. Webley, Vice President, Advanced Development. The loss of the services
of any of these persons or other key employees of the Company could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company does not have employment agreements with, or
key person life insurance for, any of its employees. Competition for highly
qualified employees is intense and the process of locating key technical and
management personnel with the combination of skills and attributes required to
execute the Company's strategy is often lengthy. There can be no assurance that
the Company will be successful in retaining its existing key personnel or in
attracting and retaining the additional employees it may require. See
"Management."
COMPLIANCE WITH REGULATIONS AND INDUSTRY STANDARDS. The UMC system is
required to comply with a large number of voice and data regulations and
standards, which vary between domestic and international markets, and may vary
by the specific international market into which the Company sells its products.
The standards in the United States are determined by the Federal Communications
Commission ("FCC"), by Underwriters Laboratories, by independent telephone
companies and by Bell Communications Research ("Bellcore"). 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 affect on the Company's
business, financial condition and results of operations.
In addition, the Company will need to ensure that its products are easily
integrated with the carriers' network management systems. The Regional Bell
Operating Companies ("RBOCs"), which represent a large segment of the U.S.
telecommunications market, 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
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completed a Bellcore technical audit and was found to meet applicable
requirements. The failure to maintain such compliance or to obtain it on new
features released in the future could have a material adverse affect on the
Company's business, financial condition and results of operations.
The Company has not received ISO certification, which certifies that design
and manufacturing processes adhere to certain established standards. Many
telecommunications service providers, particularly in international markets,
will not purchase products from suppliers that have not received ISO
certification. Accordingly, until it is able to obtain ISO certification, the
Company may be precluded from selling its products to these service providers
and its ability to compete with other suppliers of communications equipment may
be adversely affected. 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. See "Business
- -- Compliance with Regulatory and Industry Standards."
RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS. An important element of the
Company's strategy is to review acquisition prospects that would complement its
existing product offerings, augment its market coverage or enhance its
technological capabilities or that may otherwise offer growth opportunities.
While the Company has no current agreements or negotiations underway with
respect to any such acquisitions, the Company recently acquired a partner's
interest in one of its joint ventures and may make additional acquisitions of
businesses, products or technologies in the future. Future acquisitions by the
Company could result in potentially dilutive issuances of equity securities, the
incurrence of debt and contingent liabilities and amortization expenses related
to goodwill and other intangible assets, any of which could materially adversely
affect the Company's business, financial condition and results of operations
and/or the price of the Company's Common Stock. Acquisitions entail numerous
risks, including difficulties in the assimilation of acquired operations,
technologies and products, diversion of management's attention to other business
concerns, risks of entering markets in which the Company has no or limited prior
experience and potential loss of key employees of acquired organizations. The
Company's management has no experience in assimilating acquired organizations.
No assurance can be given as to the ability of the Company to successfully
integrate any businesses, products, technologies or personnel that might be
acquired in the future, and the failure of the Company to do so could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Use of Proceeds."
MANAGEMENT'S DISCRETION AS TO USE OF UNALLOCATED NET PROCEEDS. The Company
expects to use the net proceeds for general corporate purposes, including
working capital. Consequently, the Board of Directors and management of the
Company will have broad discretion in allocating a significant portion of the
net proceeds of this offering. See "Use of Proceeds."
CONTROL OF THE COMPANY; ANTI-TAKEOVER EFFECTS. Immediately after this
offering, officers, directors and their affiliates will beneficially own
approximately 28.5% of the Company's outstanding Common Stock. Due to this
ownership position, these stockholders will be able to significantly influence
the affairs and policies of the Company, the election of directors and the
approval or disapproval of matters submitted to a vote of stockholders.
Furthermore, these stockholders may have conflicts of interest with other
stockholders with respect to the affairs and policies of the Company. The
Company is also subject to certain provisions of
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Delaware law which could have the effect of delaying, deterring or preventing a
change in control of the Company, including Section 203 of the Delaware General
Corporation Law, which prohibits a Delaware corporation from engaging in any
business combination with any interested stockholder for a period of three years
from the date the person became an interested stockholder unless certain
conditions are met. In addition, the Company's certificate of incorporation and
bylaws contain certain provisions that could discourage potential takeover
attempts and make more difficult attempts by stockholders to change management.
The Company's Board of Directors is classified into three classes of directors
serving staggered, three-year terms and has the authority, without action by the
Company's stockholders, to fix the rights and preferences and issue shares of
the Preferred Stock, and to impose various procedural and other requirements
that could make it more difficult for stockholders to effect certain corporate
actions. The Company's certificate of incorporation provides that directors may
be removed only by the affirmative vote of the holders of two-thirds of the
shares of capital stock entitled to vote. Any vacancy on the board of directors
may be filled only by vote of the majority of directors then in office. Further,
the Company's certificate of incorporation provides that any "Business
Combination" (as therein defined) requires the affirmative vote of two-thirds of
the shares entitled to vote, voting together as a single class. These
provisions, and certain other provisions of the certificate of incorporation
which may have the effect of delaying proposed stockholder actions until the
next annual meeting of stockholders, together with the ownership position of the
officers, directors and their affiliates, could have the effect of delaying or
preventing a tender offer for the Company's Common Stock or other changes of
control or management of the Company, which could adversely affect the market
price of the Company's Common Stock. See "Description of Capital Stock."
POSSIBLE VOLATILITY OF STOCK PRICE. The trading price of the Common Stock
has fluctuated significantly since the Company's initial public offering in
October 1996 and could be subject to significant fluctuations in the future in
response to variations in quarterly operating results, changes in analysts'
earnings estimates, announcements of new products and innovations by the Company
or its competitors, general conditions in the telecommunications equipment
industry and other factors. In addition, the stock market in recent years has
experienced extreme price and volume fluctuations that often have been unrelated
or disproportionate to the operating performance of companies. These broad
fluctuations may adversely affect the market price of the Common Stock.
BENEFITS OF THE OFFERING TO SELLING STOCKHOLDERS. Existing stockholders
will be selling 2,400,000 shares of the Common Stock offered hereby (2,790,000
shares if the Underwriter's over-allotment option is exercised). The price per
share paid by the Selling Stockholders for their shares is a fraction of the
proposed public offering price for the Common Stock offered hereby. See "Certain
Transactions."
SHARES ELIGIBLE FOR FUTURE SALE. Sales of a substantial number of shares of
Common Stock in the public market following this offering could adversely affect
the market price for the Company's Common Stock. The number of shares of Common
Stock available for sale in the public market is limited by restrictions under
the Securities Act of 1933, as amended (the "Securities Act") and by the
following lock-up agreements (collectively, the "Lock-Up Agreements"): (i) in
connection with the Company's initial public offering, the Company's officers,
directors and certain stockholders agreed (the "IPO Lock-Up Agreement") not to
sell or otherwise dispose of any of their shares for 180 days following the date
of the Company's initial public offering without the prior consent of Morgan
Stanley & Co. Incorporated; and (ii) in connection with this offering, the
Company's executive officers, directors and the Selling Stockholders have
entered into agreements with Morgan Stanley & Co. Incorporated (the "Follow-On
Lock-Up Agreements") pursuant to which such holders agreed not to sell or
otherwise dispose of any of their shares for 90 days following completion of
this offering. Morgan Stanley & Co. Incorporated may, however, in its sole
discretion at any time and without notice, release all or any portion of the
securities subject to Lock-Up Agreements. Upon completion of this offering, the
Company will have outstanding 33,157,535 shares of Common Stock. Of these
shares: 7,793,750 shares (including the 5,175,000 shares sold in the Company's
initial public offering and the 2,600,000 shares sold in this offering) will be
available for immediate sale; 10,547,936 shares will become eligible for sale on
March 30, 1997 upon expiration of the IPO Lock-Up Agreements pursuant to Rule
701 or Rule 144 under the Securities Act ("Rule 701" and "Rule 144,"
respectively) (subject in certain cases to the volume limitations of Rule 144);
13,346 shares will become eligible for sale pursuant to Rule 144 (subject in
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certain cases to the applicable Rule 144 volume limitations) at various dates
between March 30, 1997 and the expiration date of the Follow-On Lock-Up
Agreements upon expiration of the applicable Rule 144 holding periods;
11,499,943 shares will become eligible for sale 90 days after the completion of
this offering upon expiration of the Follow-On Lock-Up Agreements pursuant to
Rule 701 or Rule 144 (subject in certain cases to the volume limitations of Rule
144); and the remaining 3,302,560 shares will become eligible for sale pursuant
to Rule 144 (subject in certain cases to the applicable Rule 144 volume
limitations) at various dates following expiration of the Follow-On Lock-Up
Agreements. In addition, as of December 31, 1996, the Company had outstanding
warrants to purchase an aggregate of 2,265,848 shares of Common Stock (after
giving effect to the exercise of warrants to purchase 307,928 shares in
connection with this offering). These warrants contain net exercise provisions.
Accordingly, any shares issued upon net exercise will be eligible for sale
immediately upon expiration of any lock-up agreements to which such shares are
subject pursuant to Rule 144. In addition, the Company has filed a registration
statement on Form S-8 with the Securities and Exchange Commission (the
"Commission") registering 8,675,676 shares of Common Stock reserved for issuance
under the Company's Employee Stock Purchase Plan and 1996 Stock Incentive Plan.
Of such shares, 4,313,544 shares subject to stock options outstanding under the
1996 Stock Incentive Plan are subject to lock-up agreements and will be eligible
for sale upon expiration of such lock-up agreements as follows: 3,290,108 shares
on March 30, 1997 and the remaining 1,023,436 shares 90 days from the date of
this Prospectus. The 1,500,000 shares reserved under the Employee Stock Purchase
Plan will be eligible for sale upon issuance. In addition, the holders of
approximately 19,368,927 shares of Common Stock outstanding or issuable upon
exercise of outstanding warrants have certain rights to require the Company to
register those shares under the Securities Act. If such holders, by exercising
their demand registration rights, cause a large number of shares to be
registered and sold in the public market, such sales could have a material
adverse effect on the market price for the Company's Common Stock. If the
Company were required to include in a Company-initiated registration shares held
by such holders pursuant to the exercise of their piggyback registration rights,
such sales may have an adverse effect on the Company's ability to raise needed
capital. See "Description of Capital Stock," "Shares Eligible for Future Sale"
and "Underwriters."
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THE COMPANY
Advanced Fibre Communications, Inc. ("AFC" or the "Company") designs,
develops, manufactures, markets and supports the Universal Modular Carrier
1000-TM- (the "UMC" system), a cost-effective, multi-feature digital loop
carrier system developed to serve small line-size markets. The Company's UMC
system is designed to enable telephone companies, cable companies and other
service providers to connect subscribers to the central office switch for voice
and data communications over copper wire, fiber optic cable, coaxial cable and
analog radio networks. The Company believes that the UMC system is the only
digital loop carrier that can operate simultaneously over a variety of
transmission media. The UMC system meets the service needs of domestic and
international subscribers, including analog services such as plain old telephone
service ("POTS"), universal voice grade service ("UVG") and analog switched data
service, and digital services such as high speed digital data service, ISDN and
asynchronous and synchronous data channel ("ADU" and "SDU") services. Through a
relationship with Tellabs Operations, Inc. ("Tellabs"), AFC has developed the
capability to deliver these same services over cable TV networks.
Although urban markets have experienced the greatest initial demand for
additional lines and high-speed telecommunications services, the Company
believes that demand for these services is increasing in rural and suburban
markets as well. The Company also believes, however, that telecommunications
service providers in suburban and rural markets generally do not have the
resources to completely replace existing copper networks and therefore must
upgrade to fiber in incremental steps. These incremental infrastructure upgrades
result in hybrid networks containing both copper and fiber transmission lines.
In addition, worldwide demand for POTS and, to a lesser extent, high speed
telecommunications services, is creating the need for significant infrastructure
investments to increase the effective capacity of existing copper, replace
deteriorating copper and provide services in new areas. As telecommunications
service providers upgrade to fiber technology, deploy new networks and plan for
future subscriber services, they must determine how to ensure a seamless,
cost-effective connection between copper and fiber facilities within the local
loop.
The UMC system is easily scalable from six to 672 lines through the addition
of plug-in components. Utilizing a single platform and a variety of line cards
supporting specific services, the UMC system is capable of providing a range of
voice and data services. In addition, the UMC system can be installed in a
variety of network configurations to support the varying geographic distribution
of subscriber bases. The Company has designed the UMC system to require a
minimum number of common control units to support transmission over a variety of
media and the delivery of more advanced services and features by telephone
companies. Thus, the UMC system offers a cost-effective solution to the small
line-size market with a wide variety of features and advanced services.
The UMC system has been sold to more than 450 independent telephone
companies in the United States, is being initially deployed by Ameritech and
GTE, and is in laboratory or field trials at Pacific Bell and BellSouth. The
Company has also sold the UMC system to telephone companies in Hong Kong,
France, Brazil, Canada, China, Mexico, the Netherlands Antilles and the
Dominican Republic. The UMC system is distributed and serviced worldwide through
its direct sales force in the domestic market and through its direct sales
force, distributors and agents in international markets.
The Company was incorporated in California in May 1992 and reincorporated in
Delaware in September 1995. The Company's principal executive offices are
located at 1445 McDowell Boulevard North, Petaluma, California 94954, and the
telephone number at that address is (707) 794-7700.
RECENT DEVELOPMENTS
Revenues for the quarter ended December 31, 1996 increased 112% to $41.4
million from $19.5 million for the quarter ended December 31, 1995. Operating
income in the quarter increased 218% to $6.2 million from $1.9 million and net
income in the quarter increased 258% to $5.6 million from $1.6 million in the
quarter ended December 31, 1995. The Company continued to expand its penetration
of international markets, completing sales to its first customers in Brazil and
increasing sales in China. The Company has begun working with Flextronics
International, Ltd. ("Flextronics"), one of the Company's contract
manufacturers, to manufacture UMC assemblies at a Flextronics facility in China.
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USE OF PROCEEDS
The net proceeds to the Company from the sale of the 200,000 shares of
Common Stock offered by the Company hereby and the exercise of warrants to
purchase 307,928 shares of Common Stock by certain Selling Stockholders will be
approximately $10.0 million, assuming a public offering price of $53 1/4 per
share and after deducting estimated underwriting discounts and commissions and
estimated offering expenses. The Company will not receive any proceeds from the
sale of Shares by the Selling Stockholders. The Company expects to use the net
proceeds received by it from the Shares sold by it in this offering and the
exercise of the warrants by certain Selling Stockholders for general corporate
purposes, including the funding of working capital requirements. Pending such
uses, the Company will invest the net proceeds of this offering in
investment-grade, interest-bearing securities.
From time to time, the Company may evaluate opportunities to enter into new
strategic relationships, joint ventures, potential acquisitions or other similar
transactions and may use a portion of the proceeds to enter into such
transactions. There are no present understandings or agreements with respect to
any such transaction, and there can be no assurance that the Company will enter
into any such arrangements.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its capital stock.
The Company currently intends to retain all of its earnings, if any, for use in
its business and does not anticipate paying any cash dividends in the
foreseeable future. In addition, the Company's revolving line of credit
agreement requires the prior consent of the bank before payment of dividends by
the Company.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has traded on the Nasdaq National Market under
the symbol "AFCI" since October 1, 1996. The Company's initial public offering
price was $25.00 per share. The following table sets forth, for the periods
indicated, the high and low closing sale prices for the Company's Common Stock
as reported by the Nasdaq National Market:
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
Year Ending December 31, 1997:
First Quarter (through January 23, 1997)................................... $ 55 5/8 $ 47
Year Ending December 31, 1996:
Fourth Quarter (beginning October 1, 1996)................................. 61 1/4 44 1/2
</TABLE>
On January 23, 1997, the last reported sale price of the Common Stock on the
Nasdaq National Market was $53 1/4 per share. As of December 31, 1996 there were
approximately 211 holders of record of the Common Stock.
14
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) at
December 31, 1996, and (ii) as adjusted to give effect to the sale by the
Company of 200,000 shares of Common Stock at an assumed public offering price of
$53 1/4 per share (after deducting estimated underwriting discounts and
commissions and estimated offering expenses) and the exercise of warrants to
purchase 307,928 shares of Common Stock at an exercise price of $1.165 per
share.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------
ACTUAL AS ADJUSTED
---------- -----------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
Stockholders' equity (deficit):
Preferred Stock, $.01 par value; 5,000,000 shares authorized, no shares issued and
outstanding........................................................................... $ -- $ --
Common Stock, $.01 par value; 100,000,000 shares authorized, 32,649,607 shares issued
and outstanding, actual; 33,157,535 shares issued and outstanding, as adjusted (1).... 326 332
Additional paid-in capital............................................................... 164,002 174,022
Notes receivable from stockholders....................................................... (151) (151)
Accumulated deficit...................................................................... (6,154) (6,154)
---------- -----------
Total stockholders' equity............................................................. 158,023 168,049
---------- -----------
Total capitalization............................................................... $ 158,023 $ 168,049
---------- -----------
---------- -----------
</TABLE>
- ---------
(1) Excludes 7,008,142 shares of Common Stock reserved for issuance under the
Company's stock option plans, under which options to purchase 4,313,544
shares were outstanding as of December 31, 1996, and 1,500,000 shares
reserved for issuance under the Company's Employee Stock Purchase Plan. Also
excludes 2,265,848 shares of Common Stock reserved for issuance pursuant to
the exercise of warrants outstanding as of December 31, 1996 after giving
effect to the issuance of 307,928 shares of Common Stock upon the exercise
of warrants by certain Selling Stockholders in connection with this
offering. See ``Management -- Stock Incentive Plan," `` -- Employee Stock
Purchase Plan," ``Certain Transactions" and ``Description of Capital Stock."
15
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Company's consolidated financial statements and notes
thereto and the discussion under ``Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
Prospectus. The consolidated statement of operations data for the years ended
December 31, 1994, 1995 and 1996 and consolidated balance sheet data as of
December 31, 1995 and 1996 are derived from financial statements, which have
been audited by KPMG Peat Marwick LLP, independent auditors, included elsewhere
in this Prospectus. The consolidated statement of operations data for the year
ended December 31, 1993 and the consolidated balance sheet data as of December
31, 1993 and 1994 have been derived from audited financial statements not
included in this Prospectus. The consolidated statement of operations data for
the period from May 29, 1992 to December 31, 1992 and balance sheet data as of
December 31, 1992 have been derived from unaudited financial statements that are
not contained herein but which reflect, in management's opinion, all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation thereof. These historical results are not necessarily indicative of
the results to be expected in the future.
<TABLE>
<CAPTION>
INCEPTION (MAY
29, 1992) TO
DECEMBER 31, YEAR ENDED DECEMBER 31,
--------------- ------------------------------------------
1992 1993 1994 1995 1996 (1)
--------------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues........................................................ $ 275 $ 620 $ 18,802 $ 54,287 $ 130,193
Cost of revenues................................................ 38 2,574 14,124 33,469 73,950
----- --------- --------- --------- ---------
Gross profit (loss)........................................... 237 (1,954) 4,678 20,818 56,243
----- --------- --------- --------- ---------
Operating expenses:
Research and development...................................... 622 2,044 2,867 5,730 14,413
Selling, general and administrative........................... 266 2,509 5,051 9,660 21,188
DSC litigation costs.......................................... -- 784 4,551 1,623 18,947
----- --------- --------- --------- ---------
Total operating expenses.................................... 888 5,337 12,469 17,013 54,548
----- --------- --------- --------- ---------
Operating income (loss)......................................... (651) (7,291) (7,791) 3,805 1,695
Gain on dissolution (equity in loss) of joint venture, net...... -- -- -- (1,516) 1,516
Other income (expense), net..................................... (25) -- 26 149 872
----- --------- --------- --------- ---------
Income (loss) before income taxes............................... (676) (7,291) (7,765) 2,438 4,083
Income taxes (benefit).......................................... -- -- -- 97 (3,154)
----- --------- --------- --------- ---------
Net income (loss)............................................... $ (676) $ (7,291) $ (7,765) $ 2,341 $ 7,237
----- --------- --------- --------- ---------
----- --------- --------- --------- ---------
Pro forma net income per share (2).............................. $ 0.09 $ 0.21
--------- ---------
--------- ---------
Shares used in per share computations (2)....................... 27,329 34,282
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------
1992 1993 1994 1995 1996
--------------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents and marketable securities............. $ -- $ 450 $ 3,858 $ 11,118 $ 108,430
Working capital................................................. 77 466 6,809 18,770 145,338
Total assets.................................................... 458 3,787 14,884 36,680 175,679
Redeemable convertible preferred stock.......................... -- 9,152 23,546 37,777 --
Total stockholders' equity (deficit)............................ (661) (7,952) (15,706) (15,765) 158,023
</TABLE>
- ------------
(1) Includes a charge of $15.8 million to reflect a cash payment of $10.1
million and the issuance of 725,787 shares of Common Stock to DSC in
settlement of outstanding litigation. See ``Business -- Legal Proceedings."
Without this charge, operating income for the year ended December 31, 1996
would have been $17.5 million.
(2) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the determination of the number of shares used in computing pro forma net
income per share.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
AFC designs develops, manufactures, markets and supports the UMC system, a
cost-effective multi-feature digital loop carrier system developed to serve
small line-size markets. The Company's UMC system is designed to enable
telephone companies, cable companies and other service providers to connect
subscribers to the central office switch for voice and data communications over
copper, fiber, coaxial cable and analog radio networks. The Company was
incorporated in May 1992 and was in the initial startup and development phase
through December 1993. The Company began shipping the UMC in January 1994 and,
accordingly, has a limited operating history.
The Company has incurred substantial expenditures related to the
development, manufacturing startup and marketing of the UMC system. As a result
of these expenditures, combined with $25.9 million of expenses and settlement
amounts recorded in connection with certain litigation with DSC which was
settled in June 1996, the Company had an accumulated deficit of $6.2 million as
of December 31, 1996. Although the Company achieved profitability for the years
ended December 31, 1995 and 1996, there can be no assurance that the Company
will sustain or increase its profitability in the future.
The Company currently derives substantially all of its revenues from the UMC
system and expects that this concentration will continue in the foreseeable
future. As a result, any decrease in the overall level of sales of, or the
prices for, the UMC system due to product enhancements, introductions or
announcements by the Company's competitors, a decline in the demand for the UMC
system, product obsolescence or any other reason would have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company derives a minor amount of revenue from license fees generated from
the Company's various strategic relationships. Support revenues have been
negligible since most systems shipped to date remain under the Company's initial
two-year product warranty period.
The Company sells its products worldwide, primarily through its direct sales
force in the domestic market, and through its direct sales force, distributors
and agents in international markets. In April 1994, the Company and a third
party entered into a joint venture, pursuant to which a Hong Kong-based
subsidiary was formed, 49% of which was owned by the Company and the remaining
51% of which was owned by the third party. In April 1996, the Company acquired
the third party's interest in the subsidiary. As a result of this acquisition,
the Company began consolidating the results of the Hong Kong-based subsidiary
and of a China-based joint venture, 60% of which was owned by the subsidiary and
40% of which was owned by the joint venture partner. The change in accounting
from the equity method to consolidation did not have a material impact on the
Company's financial condition and results of operations in 1996. In August 1996,
the Company and the China-based joint venture partner agreed to liquidate the
joint venture. A charge for liquidation costs of $383,000 was recorded in the
second half of 1996. The liquidation is expected to be completed during the
first quarter of 1997 and is not expected to have a material impact on the
Company's financial condition and results of operations. See Note 2 of Notes to
Consolidated Financial Statements.
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. In particular, the Company currently
believes that revenues in the quarter ended March 31, 1997 may be lower than
revenues in the quarter ended December 31, 1996. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Quarterly
Results of Operations."
17
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage of
revenues represented by certain items reflected in the Company's consolidated
statements of operations:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1994 1995 1996(1)
--------- --------- -----------
<S> <C> <C> <C>
Revenues........................................................................... 100.0% 100.0% 100.0%
Cost of revenues................................................................... 75.1 61.7 56.8
--------- --------- -----
Gross profit..................................................................... 24.9 38.3 43.2
--------- --------- -----
Operating expenses:
Research and development......................................................... 15.2 10.6 11.1
Selling, general and administrative.............................................. 26.9 17.8 16.3
DSC litigation costs............................................................. 24.2 3.0 14.5
--------- --------- -----
Total operating expenses....................................................... 66.3 31.3 41.9
--------- --------- -----
Operating income (loss)............................................................ (41.4) 7.0 1.3
Gain on dissolution (equity in loss) of joint venture, net......................... -- (2.8) 1.2
Other income, net.................................................................. 0.1 0.3 0.6
--------- --------- -----
Income (loss) before income taxes.................................................. (41.3) 4.5 3.1
Income taxes (benefit)............................................................. -- 0.2 (2.4)
--------- --------- -----
Net income (loss).................................................................. (41.3)% 4.3% 5.5%
--------- --------- -----
--------- --------- -----
</TABLE>
- ------------
(1) Includes a charge of $15.8 million to reflect a cash payment of $10.1
million and the issuance of 725,787 shares of Common Stock to DSC in
settlement of outstanding litigation. See "Note 10 of the Notes to the
Consolidated Financial Statements." Without this charge, operating income as
a percentage of revenues for the year ended December 31, 1996 would have
been 13.4%.
1996 COMPARED WITH 1995
REVENUES. Revenues increased 139.8% from $54.3 million in 1995 to $130.2
million for 1996. International revenues increased 276.7% from $7.2 million in
1995 to $27.1 million in 1996 and represented 13.2% and 20.8% of total revenues
in 1995 and 1996, respectively. No single customer accounted for 10% or more of
revenues in 1996. ALLTEL Supply, Inc. an affiliate of ALLTEL, an independent
domestic telephone company, accounted for 15.7% of total revenues in 1995. No
other single customer accounted for 10% or more of revenues in 1995. 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.
International and domestic revenues increased as a result of expansion of
the Company's customer base and the introduction of new features in the UMC
system. The increase in international revenues was partially due to higher sales
levels in China resulting from the acquisition in April 1996 of the shares of
the Company's Hong Kong-based subsidiary not previously owned by the Company
(which resulted in the consolidation for financial reporting purposes of the
Company's China-based operations) as well as increased levels of sales activity
in China. The increase in international revenues was also attributable to sales
to France Telecom, Hong Kong Telecom and Promon Electronics (Brazil).
GROSS PROFIT. Gross profit is comprised of revenues less materials,
manufacturing and warranty costs. Gross profit increased 170.2% from $20.8
million in 1995 to $56.2 million in 1996. As a percent of revenues, gross
profits were 38.3% in 1995 and 43.2% in 1996. The improvement in gross margins
was attributable to greater efficiencies in purchasing and manufacturing
activities resulting from higher unit volumes. Also, the Company realized lower
product costs as a result of engineering design improvements. Gross margins were
negatively impacted in 1996 by the increased level of sales in China which
generally have a lower gross margin due to the higher cost of distribution and
price sensitivity as compared with other markets. In the
18
<PAGE>
future, gross margins may fluctuate due to a wide variety of factors, including:
the mix between domestic and international sales; 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. Expenses relating to research and development
activities increased 151.5% from $5.7 million in 1995 to $14.4 million in 1996.
As a percentage of revenues, research and development expenses increased from
10.6% for 1995 to 11.1% in 1996. The increase resulted primarily from the hiring
of additional personnel and the increased use of outside services for certain
development efforts during 1996. The number of employees in research and
development increased from 63 at December 31, 1995 to 124 at December 31, 1996.
The increase in research and development expenses was also attributable to
higher costs for material and test equipment used to develop and test new
products and features. The Company expects that research and development
expenditures generally will continue to increase in absolute dollars to support
the continued development of new features and product cost reduction efforts.
All research and development costs have been expensed as incurred.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased 119.3% from $9.7 million in 1995 to $21.2 million in 1996. As
a percentage of revenues, selling, general and administrative expenses decreased
from 17.8% in 1995 to 16.3% in 1996. Costs in the sales and marketing area
increased significantly from period to period reflecting the hiring of new
employees, and commissions earned by the Company's sales force and outside
international sales representatives as a result of higher revenue levels. The
Company also increased its advertising and trade show participation in 1996.
General and administrative expenses increased as a result of the expansion of
the administrative staff in 1996, the legal costs incurred for the ITRI
litigation and the additional costs associated with being a public company.
DSC LITIGATION COSTS. Litigation expenses incurred in connection with the
DSC litigation increased from $1.6 million for 1995 to $18.9 million for 1996.
The increase is primarily attributable to the $15.8 million charge recorded in
the second quarter of 1996 in connection with the final settlement of the DSC
litigation. See Note 10 of Notes to the Consolidated Financial Statements.
GAIN ON DISSOLUTION (EQUITY IN LOSS) OF JOINT VENTURE, NET. In 1996 and
1995, the Company made advances to a joint venture in which the Company had a
50% ownership interest. In April 1995, the Company made a loan of $1.0 million
to the joint venture. During 1995 and the first quarter of 1996, the Company
recorded its proportionate share of the joint venture's losses to the extent of
the loan and advances. As a result, the loan and intercompany receivables were
reduced to zero on the Company's balance sheet as of December 31, 1995. On
December 23, 1996 the Company and the joint venture partner entered into an
agreement to terminate the joint venture. In connection with the dissolution,
the joint venture partner reimbursed the Company $1,683,000 for all loans and
advances made by the Company to date. The reimbursement was recorded as a gain
in the fourth quarter of 1996 and is reflected in gain on dissolution (equity in
loss) of joint venture, net.
OTHER INCOME, NET. Net other income increased from $149,000 in 1995 to
$872,000 in 1996 and consisted primarily of interest income from the Company's
cash and investments in marketable securities, net of interest expense on the
Company's bank line of credit and short-term bank loan.
INCOME TAXES (BENEFIT). An income tax benefit of $3.2 million was recorded
for 1996 to reflect the benefit of the DSC litigation settlement and the
decrease in the valuation allowance recorded against the Company's deferred tax
assets. As of December 31, 1996, the Company has recorded no valuation allowance
against its deferred tax assets because management believes such assets are
realizable. For the second half of 1996, the Company recorded income taxes at an
effective rate that approximates the combined federal and state statutory rates.
19
<PAGE>
1995 COMPARED WITH 1994
REVENUES. Revenues were $18.8 million and $54.3 million in 1994 and 1995,
respectively. The Company began shipping the UMC 1000 in January 1994. The
revenue level achieved in 1994 reflected initial market acceptance of the
Company's product by independent telephone companies in the United States, as
well as sales to a distributor in Mexico. The 189% increase in revenues in 1995
compared with 1994 resulted from growth in system sales of the UMC to an
expanded customer base. During 1994, shipments to PTI, an independent domestic
telephone company, accounted for approximately 27.0% of revenues. In 1995, the
Company's largest customer, ALLTEL Supply, Inc., accounted for 15.7% of
revenues. No other single customer accounted for 10% or more of revenues in 1994
or 1995. International revenues increased $3.6 million, or 99% from $3.6 million
in 1994 to $7.2 million in 1995, and represented 19.2% and 13.2% of revenues in
1994 and 1995, respectively.
GROSS PROFIT (LOSS). Gross profit increased from $4.7 million in 1994 to
$20.8 million in 1995, respectively, and gross margins increased from 24.9% in
1994 to 38.3% in 1995. Gross margins improved in 1995 due to lower product costs
resulting from engineering design improvements and greater efficiencies achieved
in purchasing and manufacturing activities associated with higher unit volumes.
RESEARCH AND DEVELOPMENT. Research and development expenses were $2.9
million and $5.7 million in 1994 and 1995, respectively. As a percentage of
revenues, research and development expenses were 15.2% and 10.6% in 1994 and
1995, respectively. The Company increased its engineering staff to support
continued product development and cost reductions during these periods from 38
to 63 employees at December 31, 1994 and 1995, respectively. The decrease in
research and development expenses as a percentage of revenues from 1994 to 1995
was the result of the Company's rapid growth in revenues. All research and
development costs have been expensed as incurred.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses were $5.1 million and $9.7 million in 1994 and 1995, respectively. As a
percentage of revenues, selling, general and administrative expenses were 26.9%
and 17.8% in 1994 and 1995, respectively, with the decrease being the result of
the increased revenue base. The increases in absolute dollars reflects the build
up of the Company's domestic and international direct sales team, investments in
customer support and marketing, costs associated with trade shows and other
marketing efforts, expansion of the Company's administrative staff and
installation of information, manufacturing and financial control systems.
DSC LITIGATION COSTS. DSC litigation costs were $4.6 million and $1.6
million in 1994 and 1995, respectively. DSC litigation costs in 1994 included
reserves for a possible settlement of $2.0 million. See Note 10 of Notes to
Consolidated Financial Statements.
GAIN ON DISSOLUTION (EQUITY IN LOSS) OF JOINT VENTURE, NET. During 1995,
the Company made a loan of $1.0 million and other operating expense advances
totaling approximately $516,000 to a joint venture in which the Company had a
50% ownership interest. In 1995, the Company recorded its proportionate share of
the joint venture's losses to the extent of the loan and advances. As a result,
the loan and intercompany receivables were reduced to zero on the Company's
balance sheet as of December 31, 1995.
OTHER INCOME, NET. Net other income was $26,000 and $149,000 in 1994 and
1995, respectively, and consisted of interest income from the Company's cash
investments, net of interest expense on stockholder loans in 1994 and advances
under the Company's bank line of credit in 1995.
INCOME TAXES. Because of operating losses sustained in 1994, the Company
did not provide for income taxes in that year, other than minimum California
state franchise tax. In fiscal 1995, the provision for income taxes was $97,000
and consisted of the federal alternative minimum tax and the California minimum
state franchise tax. See Note 7 of Notes to Consolidated Financial Statements.
20
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following tables present unaudited quarterly financial information for
the four quarters of 1995 and 1996. In the opinion of the Company's management,
this unaudited information has been prepared on the same basis as the audited
financial statements contained herein and includes all adjustments (consisting
only of normal recurring adjustments) necessary to present fairly the
information set forth therein. The operating results for any quarter are not
necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1995 1995 1995 1995 1996 1996 (1) 1996 1996
----------- --------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.............................. $ 7,456 $ 11,789 $ 15,548 $ 19,494 $ 24,121 $ 29,651 $ 35,012 $ 41,409
Cost of revenues...................... 4,633 7,288 9,837 11,711 14,101 16,957 19,737 23,155
----------- --------- --------- --------- --------- --------- --------- ---------
Gross profit.......................... 2,823 4,501 5,711 7,783 10,020 12,694 15,275 18,254
----------- --------- --------- --------- --------- --------- --------- ---------
Operating expenses:
Research and development............ 1,050 1,214 1,406 2,060 2,619 3,275 4,141 4,378
Selling, general and
administrative..................... 1,681 2,281 2,471 3,227 3,545 4,356 5,608 7,679
DSC litigation costs................ 358 392 324 549 691 18,256 -- --
----------- --------- --------- --------- --------- --------- --------- ---------
Total operating expenses........ 3,089 3,887 4,201 5,836 6,855 25,887 9,749 12,057
----------- --------- --------- --------- --------- --------- --------- ---------
Operating income (loss)............... (266) 614 1,510 1,947 3,165 (13,193) 5,526 6,197
Other income (expense):
Gain on dissolution (equity in loss)
of joint venture, net.............. (202) (340) (526) (448) (167) -- -- 1,683
Other income (expense), net......... 26 15 (4) 112 84 (18) (338) 1,144
----------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) before income taxes..... (442) 289 980 1,611 3,082 (13,211) 5,188 9,024
Income taxes (benefit)................ -- 2 39 56 910 (9,498) 1,984 3,450
----------- --------- --------- --------- --------- --------- --------- ---------
Net income (loss)..................... $ (442) $ 287 $ 941 $ 1,555 $ 2,172 $ (3,713) $ 3,204 $ 5,574
----------- --------- --------- --------- --------- --------- --------- ---------
----------- --------- --------- --------- --------- --------- --------- ---------
<CAPTION>
AS A PERCENTAGE OF REVENUES
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.............................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Costs of revenues..................... 62.1 61.8 63.3 60.1 58.5 57.2 56.4 55.9
----------- --------- --------- --------- --------- --------- --------- ---------
Gross profit.......................... 37.9 38.2 36.7 39.9 41.5 42.8 43.6 44.1
----------- --------- --------- --------- --------- --------- --------- ---------
Operating expenses:
Research and development............ 14.1 10.3 9.0 10.6 10.9 11.0 11.8 10.6
Selling, general and
administrative..................... 22.5 19.3 15.9 16.6 14.7 14.7 16.0 18.5
DSC litigation costs................ 4.8 3.3 2.1 2.8 2.9 61.6 -- --
----------- --------- --------- --------- --------- --------- --------- ---------
Total operating expenses........ 41.4 33.0 27.0 29.9 28.4 87.3 27.8 29.1
----------- --------- --------- --------- --------- --------- --------- ---------
Operating income (loss)............... (3.6) 5.2 9.7 10.0 13.1 (44.5) 15.8 15.0
Other income (expense):
Gain on dissolution (equity in loss)
of joint venture, net.............. (2.7) (2.9) (3.4) (2.3) (0.7) -- -- 4.1
Other income (expense), net......... 0.3 0.1 -- 0.6 0.3 (0.1) (1.0) 2.7
----------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) before income taxes..... (5.9) 2.5 6.3 8.3 12.8 (44.6) 14.8 21.8
Income taxes (benefits)............... -- -- 0.3 0.3 3.8 (32.1) 5.6 8.3
----------- --------- --------- --------- --------- --------- --------- ---------
Net income (loss)..................... (5.9)% 2.5% 6.0% 8.0% 9.0% (12.5)% 9.2% 13.5%
----------- --------- --------- --------- --------- --------- --------- ---------
----------- --------- --------- --------- --------- --------- --------- ---------
</TABLE>
- ------------
(1) Includes a charge of $15.8 million in the quarter ended June 30, 1996 to
reflect a cash payment of $3.0 million paid in June 1996, additional cash
payments of $7.1 million paid in July and the issuance of 725,787 shares of
Common Stock to DSC in settlement of outstanding litigation. See "Business
-- Legal Proceedings." Without this charge, operating income for the quarter
ended June 30, 1996 would have been $2.6 million, and as a percentage of
revenues would have been 8.8%.
21
<PAGE>
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 development 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, the general and administrative functions are
based in part on future revenue projections and in the near term are relatively
fixed. The Company may be unable to adjust spending in a timely manner in
response to any unanticipated declines in revenues. Accordingly, any significant
decline in demand for the UMC system relative to planned levels could have a
material adverse effect on the business, financial condition and results of
operations in that quarter or subsequent quarters. All of the above factors are
difficult to forecast, and these or other factors could materially adversely
affect the Company's business, financial condition and results of operations. As
a result, the Company believes that period-to-period comparisons are not
necessarily meaningful and should not be relied upon as indications of future
performance. Fluctuations in the Company's operating results may cause
volatility in the price of the Company's Common Stock. Further, it is likely
that in some future quarter the Company's revenue or operating results will be
below the expectations of public market analysts or investors. In such event,
the market price of the Company's Common Stock would likely be materially
adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
The components of the Company's capital resources and liquidity at December
31, 1995 and 1996 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Cash and cash equivalents............................................... $ 11,118 $ 24,942
Marketable securities................................................... -- 83,488
Non-debt working capital, excluding cash and cash equivalents and
marketable securities.................................................. 7,652 36,908
</TABLE>
On October 1, 1996, the Company issued 5,175,000 shares of its common stock
pursuant to an underwritten initial public offering which generated
approximately $118.1 million of net proceeds. These proceeds were used to reduce
debt of approximately $14.8 million and to provide resources for general working
capital purposes. The balance was invested in cash equivalents and marketable
securities.
Prior to the Company's initial public offering, the Company had funded its
operations primarily through a series of preferred stock financings. From its
incorporation through September 1995, the Company completed five private
financings of equity securities providing aggregate net proceeds of
approximately $38.1 million. In September 1995, the Company repurchased and
retired approximately $4.2 million of its outstanding preferred stock. Upon the
consummation of the initial public offering, all shares of redeemable
convertible preferred stock were converted into a total of 18,717,463 shares of
Common Stock.
In April 1995, the Company made a loan of $1.0 million to a joint venture
owned 50% by the Company which bears interest at a rate of 5.5%. Beginning in
fiscal 1995, the Company recorded its proportionate
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<PAGE>
share of the joint venture's losses to the extent of the loan balance and
advances made to the joint venture. As a result, the loan and advances to the
joint venture were written off as of December 31, 1995. On December 23, 1996,
the Company and the joint venture partner entered into an agreement to terminate
the partnership. In connection with the dissolution, the joint venture partner
reimbursed the Company $1,683,000 for all loans and advances made by the Company
to date. The reimbursement was recorded as a gain in the fourth quarter of 1996
and is reflected in gain on dissolution (equity in loss) of joint venture, net
in the accompanying financial statements.
In April 1996, the Company purchased all of the stock outstanding in a
49%-owned subsidiary that had not previously been owned by the Company in
exchange for 220,000 shares of the Company's Series F Preferred Stock and
approximately $939,000 in cash.
In June 1996, as part of the DSC litigation settlement, the Company paid
$3.0 million in cash to DSC. In July 1996, the Company borrowed approximately
$7.1 million under a six-month term loan with Bank of the West. The proceeds
from the loan were used to pay the remaining obligations under the DSC
litigation settlement. The loan had an interest rate of 5.75% and a $4.0 million
compensating balance requirement. The loan was due in January 1997. In October
1996, the Company repaid the loan with the proceeds of the initial public
offering. See "Business -- Legal Proceedings" and Note 10 of Notes to
Consolidated Financial Statements.
The $6.2 million of cash used by operating activities during 1996 was
primarily the result of increases in receivables and inventory. Receivables were
higher by $21.4 million in 1996 because of increased revenues. The $5.7 million
growth in inventory is in support of the higher revenue levels.
Investing activities used $91.1 million of cash during 1996, primarily due
to the investment of the proceeds of the Company's initial public offering and
due to $8.4 million of capital expenditures offset by the $1.5 million net
reimbursement from a joint venture. The Company continues to invest in capital
equipment to support employee growth and research and development activities.
Financing activities provided $111.2 million of cash in 1996. The Company's
initial public offering generated $118.1 million of net proceeds. A portion of
the proceeds were used to repay $7.7 million in outstanding balances under a
line of credit agreement and $7.1 million outstanding under a six-month term
loan arrangement with a bank. The Company borrowed under the term loan
arrangement to fund a portion of the DSC litigation settlement.
The Company has a $12.0 million line of credit with a bank bearing interest
at 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 accounts receivable at the time of
borrowing. As part of the bank line, the bank may issue letters of credit up to
$10.0 million and foreign exchange contracts up to $5.0 million. The bank line
requires the Company to comply with certain financial covenants. As of December
31, 1995 and 1996, no borrowings were outstanding under the bank line. At
December 31, 1996, $1.6 million was reserved under the line for letters of
credit and foreign exchange contracts. The Company also has lease lines totaling
$5.2 million that were used to purchase equipment and furniture. There were no
amounts left available under the lease lines as of December 31, 1996.
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.
23
<PAGE>
BUSINESS
THE FOLLOWING BUSINESS SECTION CONTAINS FORWARD-LOOKING STATEMENTS WHICH
INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A
RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET FORTH UNDER ``RISK FACTORS" AND
ELSEWHERE IN THIS PROSPECTUS. SEE "GLOSSARY OF TERMS" COMMENCING ON PAGE 63 FOR
DEFINITIONS OF VARIOUS ACRONYMS AND TECHNICAL TERMS USED IN THIS PROSPECTUS.
COMPANY OVERVIEW
Advanced Fibre Communications, Inc. designs, develops, manufactures, markets
and supports the UMC system, a cost-effective, multi-feature digital loop
carrier system developed to serve small line-size markets. The Company's UMC
system is designed to enable telephone companies, cable companies and other
service providers to connect subscribers to the central office switch for voice
and data communications over copper, fiber, coax and analog radio networks. The
Company believes that the UMC system is the only digital loop carrier that can
operate simultaneously over a variety of transmission media. The UMC system
meets the service needs of domestic and international subscribers including
analog services such as POTS, UVG and analog switched data service, and digital
services such as high speed digital data service, ISDN and ADU and SDU services.
Through a relationship with Tellabs Operations, Inc. (``Tellabs"), AFC has
developed the capability to deliver these same services over cable TV networks.
The UMC system has been sold to more than 450 independent telephone
companies in the United States, is being initially deployed by Ameritech and
GTE, and is in laboratory or field trials at Pacific Bell and BellSouth. The
Company has also sold the UMC system to telephone companies in Hong Kong,
France, Brazil, Canada, China, Mexico, the Netherlands Antilles and the
Dominican Republic. The UMC system is distributed and serviced worldwide through
its direct sales force in the domestic market and through its direct sales
force, distributors and agents in international markets. See ``-- Markets and
Customers" and "-- Proprietary Rights and Licenses."
INDUSTRY BACKGROUND
Much of the existing local loop, which connects the subscriber to the
central office switch, was designed to provide analog voice communications, or
POTS, over copper. As a transmission medium, copper suffers from significant
signal degradation, particularly when transmitting signals beyond 10,000 feet.
In addition, the traditional copper infrastructure was designed to support low
speed telecommunications services and offers relatively poor transmission
quality, especially in data communications applications. Before the 1970s,
various solutions were implemented to address these concerns; however, these
solutions were generally costly to maintain and resulted in complex
architectures. In the early 1970s, to decrease the cost and complexity of
extending service beyond 10,000 feet from the central office, telephone
companies began to deploy digital loop carriers (``DLCs"), which convert analog
signals into digital bit streams for transmission to and from the central
office. The resulting improved signal quality enabled telephone companies to
increase transmission distances from the central office to the customer.
Advancements in digital technology have enabled central office switches to
increase by tenfold the number of lines served. While these advancements have
permitted greater centralization of switch resources, they have also resulted in
increased distances between the central office and the subscribers. Rapid
deployment of DLCs was necessary to effectively transmit signals over these
greater distances. However, the copper infrastructures supported by traditional
DLCs lacked the bandwidth for additional lines and the transmission quality for
high speed telecommunications. In response to these limitations as well as the
deterioration of the existing copper infrastructure, telephone companies began
installing fiber in high density urban markets in the late 1980s. Next
generation DLCs (``NGDLCs") were designed and introduced to the market in the
early 1990s to support telecommunications services over fiber-only networks in
densely populated urban markets with 600 to 2,000 lines within the serviceable
area of the NGDLC (``large line-size markets"). NGDLCs address certain of the
limitations inherent in DLCs. However, NGDLCs have high installation costs and
complex, support-intensive characteristics and are optimized for fiber-only
networks and large line-size markets.
24
<PAGE>
Although urban markets have experienced the greatest initial demand for
additional lines and high-speed telecommunications services, the Company
believes that demand for these services is increasing in rural and suburban
markets as well. The Company also believes, however, that telecommunications
service providers in suburban and rural markets generally do not have the
resources to completely replace existing copper networks and therefore must
upgrade to fiber in incremental steps. These incremental infrastructure upgrades
result in hybrid networks containing both copper and fiber transmission lines.
In addition, worldwide demand for POTS and, to a lesser extent, high speed
telecommunications services, is creating the need for significant infrastructure
investments to increase the effective capacity of existing copper, replace
deteriorating copper and provide services in new areas. As telecommunications
service providers upgrade to fiber technology, deploy new networks and plan for
future subscriber services, they must determine how to ensure a seamless,
cost-effective connection between copper and fiber within the local loop.
THE AFC SOLUTION
The Company has developed the UMC system to provide cost-effective,
multi-feature local loop systems for the small line-size market, incorporating a
modular architecture that supports copper, fiber and coax and the evolution from
one transmission media to another. The Company believes that the UMC system is
the only digital loop carrier that can operate simultaneously over a variety of
transmission media. The UMC system is easily scalable from six to 672 lines
through the addition of plug-in components. Utilizing a single platform and a
variety of line cards supporting specific services, the UMC system is capable of
providing a range of voice and data services. In addition, the UMC system can be
installed in a variety of network configurations to support the varying
geographic distribution of subscriber bases. The Company has designed the UMC
system to require a minimum number of common control units to support
transmission over a variety of media and the delivery of more advanced services
and features by telephone companies. Thus, the UMC system offers a
cost-effective solution for the small line-size market with a wide variety of
features and advanced services.
AFC'S STRATEGY
AFC's objective is to be the leading provider of cost-effective,
multi-feature local loop systems for small line-size markets worldwide. The key
elements of its strategy to achieve this objective include:
TARGET DOMESTIC SMALL LINE-SIZE MARKETS. The Company sells the UMC system
principally through its direct sales force into domestic small line-size
markets. These markets, which are generally located in rural and suburban areas,
are served by independent telephone companies and by the RBOCs. The Company
intends to expand its direct sales force and augment its marketing and customer
support efforts to further penetrate its existing customer base of 450
independent telephone companies and penetrate the balance of the approximately
1,300 independent telephone companies. In addition, with the satisfactory
completion of a Bellcore technical audit, the Company is expanding into the RBOC
market by offering the UMC system as a solution to the small line-size system
requirements of the RBOCs.
PENETRATE INTERNATIONAL MARKETS. The Company markets the UMC system
internationally through local distributors and agents, through strategic
relationships, and directly to local service providers. The Company intends to
enhance its existing international operations with greater sales and marketing
resources to pursue market opportunities in countries currently undergoing
initial infrastructure deployment or upgrades which demand flexible and
cost-effective systems.
PROVIDE COST-EFFECTIVE SOLUTIONS. The UMC system enhances the transmission
quality and capacity of existing copper facilities, enabling telephone companies
to maximize the performance of the existing copper infrastructure while
permitting a cost-effective and easily configurable upgrade solution as
infrastructure is modernized or demands for more advanced communication services
increase. The Company believes that
the UMC system is the only digital loop carrier that can operate seamlessly over
hybrid networks including copper, fiber and analog radio. The UMC system can
also serve as a platform for providing high speed data transmission and other
advanced digital services such as video teleconferencing. The Company has
designed the UMC system to require a minimum number of common control units to
support transmission over a
25
<PAGE>
variety of media and the delivery of more advanced services and features by
telephone companies. The Company's engineering and manufacturing efforts are
directed toward preserving and enhancing the cost-effectiveness of the UMC
system as new features and designs are released.
EXTEND TECHNOLOGY LEADERSHIP. The UMC system contains a proprietary
software and backplane design and modular architecture, which enable telephone
companies to more easily support the varying geographic distribution of
subscriber bases by employing multiple configurations which may be distributed
over any combination of transmission media (including copper, fiber, coax and
analog radio). The proprietary backplane design currently supports a variety of
voice and data services, and the Company is developing improvements to support
higher bandwidth applications. The Company is engaged in ongoing research and
development to leverage its technical expertise and to adapt its technology to
new markets and applications. For example, the Company is engaged in development
efforts to increase the scalability of the UMC system for large line-size
markets.
DEVELOP STRATEGIC RELATIONSHIPS. The Company has entered into certain
strategic relationships in order to broaden the manufacturing and distribution
of the UMC system into developing international markets, such as China and
India, and to leverage the UMC technology for applications in markets not
directly targeted by the Company, such as the provision of telephone services
over existing cable TV systems. The Company intends to invest in existing
strategic relationships and to seek additional relationships to gain
manufacturing and distribution leverage, to access advanced technologies and to
broaden the acceptance of the UMC system.
TECHNOLOGY AND PRODUCT ARCHITECTURE
The UMC architecture is based upon a modular software and hardware product
platform that can be configured and adapted to the particular requirements of
the customer. Each line card, transceiver and common control unit contains
proprietary application specific integrated circuits ("ASICs") that incorporate
the digital cross-connect function, eliminating the need for a separate digital
cross-connect within the assembly. This design improves efficiency, allowing the
Company to deliver the common control required by telephone companies with fewer
assemblies than most NGDLCs.
A basic UMC system consists of two terminals. Each terminal contains a power
supply, a central processing unit ("CPU"), a transceiver and a line card
providing subscriber service, such as analog voice service. The Local Exchange
Terminal (``LET"), located next to the local exchange switch in the central
office, contains a central processing unit and transmits and receives the
telephone signal from the Remote Service Terminal (``RST") mounted close to the
subscriber group in a weatherproof housing. The RST receives analog signals from
the telephone instruments of subscribers, transforms them into digitally
encoded, time divisioned multiplexed bit streams, and transports them across
either copper, fiber or radio transmission media to a central office. There, the
LET either decodes the signal and converts it back into an analog signal for
connection into the telephone network, or connects the digital signal directly
into the network.
The base UMC system permits telephone companies to offer basic analog voice
service to six subscribers and is priced at approximately $4,000, excluding the
cabinet. The base UMC system can be expanded to accommodate additional
subscribers, to provide advanced services and to operate over different or
multiple transmission media. The UMC system can be configured to accommodate up
to 120 subscribers through the addition of line cards and up to 672 subscribers
through the addition of channel bank assemblies. During 1996, UMC systems with
capacities of 120 and 240 lines of POTS sold for average prices, including the
cabinet, of approximately $25,000 and $40,000, respectively.
26
<PAGE>
In addition, the UMC architecture enables telephone companies to more easily
support the varying geographic distribution of subscriber bases by employing
multiple configurations which may be distributed over any combination of various
transmission media, including copper, fiber and coax. A sample installation is
depicted below:
[Diagram of sample UMC system installation.]
The UMC system consists of the following modules, which may be
configured according to the needs of the Company's customers:
CHANNEL BANK ASSEMBLY. The channel bank assembly is used at both
the remote and central office location, employing a 98 megabit backplane
and a flexible slot architecture which supports system expansion (via a
fiber connection between channel bank assemblies) to 672 subscribers, as
well as a variety of configurations to match the geographic distribution
of the subscribers served.
COMMON CONTROL UNITS. Common control units include the central
processing unit, power supplies at both the central office and remote
location, connection units for expansion of the system from 120
subscriber lines to 672 subscriber lines and a metallic test unit for
network testing from the central switching office.
TRANSCEIVERS. Transceivers used for providing the transport of the
signal between the subscriber and the central office switch are
available in fiber, E1, T1 and analog radio versions.
LINE CARDS. Line cards are designed to provide voice and data
transmissions in either analog or digital form for both domestic and
international requirements.
SOFTWARE. The UMC proprietary system software is menu driven with
self-configurable plug and play orientation, providing detailed system
monitoring, alarm information, card inventory and security.
CABINET. The UMC cabinet is available in configurations supporting
subscriber levels of 48, 120, 240 or 672. The cabinet is a weather
resistant, field installable unit and includes power supplies, battery
backup, lightning protection and cross-connect capabilities.
27
<PAGE>
MARKETS AND CUSTOMERS
To date, the UMC system has been deployed primarily in the U.S. rural and
suburban markets served by independent telephone companies. While the Company
believes this market has substantial revenue potential and intends to continue
to pursue customers in the U.S. small line-size market, the Company has also
begun to pursue other potential markets and customers for the UMC system, such
as the RBOCs, international telecommunications service providers and competitive
access providers.
DOMESTIC SMALL LINE-SIZE MARKET
The domestic small line-size markets for telecommunications services are
generally located in rural and suburban areas and are served by approximately
1,300 independent telephone companies and the seven RBOCs. The independent
telephone companies range from rural companies with as few as 125 subscribers to
GTE, with approximately 17 million subscribers. The independent companies in
general do not require telephone equipment suppliers to satisfy Bellcore
testing, and typically do not require specific design changes in the product in
order for the equipment to be deployed. As a result, the Company was able to
deploy the UMC system rapidly to independent telephone companies and to build
customer acceptance of the UMC system quickly. In addition, independent
telephone companies typically have smaller budgets for telephone equipment than
the RBOCs and demand easily scalable and configurable cost-effective solutions.
The UMC system's ability to improve analog transmission and increase the
capacity of existing networks, together with its ability to operate
simultaneously over a variety of transmission media, enables telephone companies
to maximize the performance of existing copper infrastructure while permitting a
cost-effective and easily configurable upgrade solution as infrastructure is
modernized or demands for more advanced communication services increase. Thus,
the Company believes that the UMC system provides an attractive solution for the
independent telephone companies in small line-size markets. Moreover, with the
satisfactory completion of a Bellcore technical audit, the Company is expanding
into the RBOC market by offering the UMC system as a solution for the small
line-size system requirements of the RBOCs.
The Company has segmented and prioritized the independent telephone company
market into the following: (i) small independents that use consulting
engineering firms to provide network design for service expansion and
modernization; (ii) medium-size independents that perform the network design
internally; and (iii) large independents, such as GTE, that have engineering
committees that approve equipment for standardization and may require testing
and equipment modifications to meet their specific network requirements. The
Company has targeted each of these segments as sources of potential customers
and to date over 450 independents have purchased the Company's products.
28
<PAGE>
The following table lists the domestic independent telephone companies that
have purchased at least $200,000 of equipment from the Company since January
1996:
3 Rivers Telephone Co-op
Albany Mutual Telephone
Aliant Communications
ALLTEL
Anixter Brothers
Arvig Telephone
Atlantic Telephone Membership
BEK Communications Co-op
Ben Lomand Rural Telephone Co-op
Benkelman Telephone Company
Benton Cooperative Telephone Company
Big Bend Telephone
Blackfoot Telephone Co-op
Bledsoe Telephone Co-op
Blue Earth Valley Telephone Company
Bridgewater Telephone
Central Texas Telephone Co-op
Chibardun Telephone Co-op
Citizens Telephone
Classic Telephone
Clay County Rural Telephone
Coleman County Telephone Co-op
Commonwealth Telephone Company
Consolidated Telephone Company
Contoocook Valley Telephone
Copper Valley Telephone Company
Cross Telephone
Delta County Tele-Com
Delta Telephone Company
Dickey Rural Telephone
East Ottertail Telephone
Eastern Nebraska Telephone
Ellensburg Telephone
Evans Telephone Company
Farmers Telephone Co-op
Frontier Communications
Geneseo Telephone
Golden West Telecommunications
Granite State Telephone
GTE
Guadalupe Valley Telephone Co-op
Gulf Telephone Company
Hancock Rural Telephone
Harrisonville Telephone
Hill Country Telephone Co-op
Horry Telephone Co-op
Illinois Consolidated Telephone Company
JBN Telephone
Kerrville Telephone
Ketchikan Public Utilities
Lakedale Telephone
Logan Telephone Co-op
Mankato Citizens Telephone
Margaretville Telephone
Mid Rivers Telephone Co-op
Midplains Telephone
NE Missouri Rural Telephone
Nemont Telephone Co-op
North East North Central Telephone Co-op
North Pittsburgh Telephone
Northland Telephone
People's Rural Telephone Co-op
Perry-Spencer Telephone Co-op
Pioneer Telephone Association
Pioneer Telephone Co-op
Planters Telephone Co-op
Prairie Grove Telephone
PTI Communications
Pulaski-White Telephone
Range Telephone Company
RT Communications
Runestone Telephone Association
Rural Telephone Service
Sanborn Telephone Co-op
Shenandoah Telephone Company
Silver Star Telephone Company
Skyline Telephone
Smithville Telephone Company
Somerset Telephone Company
South Central Rural Telephone Co-op
Southwestern Telephone
St. Joseph Telecommunications
Standard Telephone Company
TDS Telecom
The Ponderosa Telephone
Triangle Telephone Co-op
Tricom
Twin Valley-Ulen Telephone
Uintah Basin Telephone
Valley Telephone Co-op
West Carolina Rural Telephone Co-op
West Central Telephone Association
Woodbury Telephone
29
<PAGE>
INTERNATIONAL MARKETS
The international telephone market is segmented into developing countries
requiring basic telecommunication services, or POTS, and developed countries
which, in addition to POTS, have requirements for more advanced
telecommunication services and which have barriers to entry in the form of
standards or unique domestic network specifications. In most of these
international markets, a single telephone company, which is typically highly
regulated and government-owned, provides service throughout the country.
Typically, these companies are striving to install technology that offers the
opportunity in the future for advanced services, with ease of installation and
servicing at an attractive price. In addition, they are striving to optimize
existing facilities, which typically consist of copper, for a growing subscriber
base. The Company is pursuing selected opportunities to develop these markets
primarily through direct contacts with local distributors and through its
strategic relationships, where the market also requires local manufacturing to
address high import tariffs and where the Company benefits from a local partner
that can assist customer relationships.
As part of its international strategy, the Company is primarily focused on
the substantial market opportunity which the Company believes exists in
developing countries currently undergoing infrastructure deployment.
Telecommunications companies in these markets demand flexible and cost-effective
systems. The Company has sold UMC systems to telephone companies in Brazil,
China, Mexico, the Netherlands Antilles and the Dominican Republic.
Telecommunications companies in more developed countries require that
products have modifications and design specifications that meet local
standardization guidelines. To date, the Company has successfully met these
standards requirements in, and is currently shipping products to, both France
and Hong Kong. The Company was awarded a contract with France Telecom for a
multiplexer subscriber system. The Company was also awarded a three-year
contract with Hongkong Telecommunications Limited to deploy the UMC system.
Although neither of these contracts require the customer to purchase any
specific amount of product from the Company, the Company believes that these
customers present a significant opportunity to the Company.
AFC and Harris Corporation, a stockholder of the Company, entered into an
agreement to form a joint venture to manufacture, distribute and support the UMC
system in India. The joint venture included formation of a holding company in
Mauritius, owned 51% by AFC and 49% by Harris, which in turn intends to form a
joint venture in India with local Indian partners following receipt of certain
government approvals. To date, the parties have identified and selected two
Indian companies that will collectively own 34% of the Indian venture to be
located in Delhi. In addition, as a means to protect its licensed technology in
India, AFC formed a 100% foreign-owned subsidiary in India, AFC India Private
(Ltd.), which holds the rights to license the UMC technology in India for
manufacturing in the local market. To date, the joint venture activities have
included testing and seeking type approval for the UMC system.
The UMC system has received or is currently undergoing type approval
qualification in a number of countries, including Hungary, Indonesia, the
Philippines and Russia. There can be no assurance that the UMC system will
receive type approval in these or other countries or that receipt of type
approval will lead to product sales. In addition, the Company currently has
outstanding responses to bid requests from telephone companies in India, Panama
and Brazil. The Company's bid responses have been accepted in certain cases and
rejected in others in the past, and there can be no assurance that currently
outstanding or future bid responses will be accepted and, even if accepted,
there can be no assurance that such acceptance will lead to significant sales.
FUTURE MARKET OPPORTUNITIES
REGIONAL BELL OPERATING COMPANIES (RBOCS). The seven RBOCs make up the
largest segment of the U.S. telecommunications equipment market and serve over
80% of all U.S. telephone customers, primarily in urban areas. All of these
companies have stringent testing and approval requirements, known as Bellcore
testing, that must be met before products can be installed in their networks.
Bellcore testing requires significant investments in resources to achieve
compliance. In addition, the RBOCs require that the equipment undergo one or
more field trials to demonstrate that the equipment meets the standards and
satisfies their
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<PAGE>
service and network requirements. The UMC system completed a Bellcore technical
audit, and the Company intends to submit new features for Bellcore testing as
they are released. In addition, the UMC system is being initially deployed by
Ameritech and is in laboratory or field trials at Pacific Bell and BellSouth.
COMPETITIVE ACCESS PROVIDERS. Deregulation has allowed non-regulated
telephone companies to provide local telephone services. Through better pricing,
faster installation and better customer service, these companies, known as
competitive access providers, hope to attract customers away from the RBOCs and
independent telephone companies. These companies historically have focused on
high density downtown business customers. As these carriers diversify their
sales efforts to include smaller businesses and office parks, an increasing
number will require smaller systems. The companies active in this market segment
are attractive targets for the Company because the UMC system has the capability
to cost-effectively provide a full range of communication services. The Company
intends to address this market primarily through its relationship with Tellabs.
AFC intends to serve this market both over traditional transmission media as
well as over coax media.
CABLE-BASED TELEPHONY. AFC and Tellabs, a stockholder of the Company,
entered into a general partnership in 1994 to design, develop, manufacture and
distribute a new product line derived from the UMC system. This product is
designed to allow telephone services to be provided over existing cable TV
systems as well as other transmission media. AFC contributed a non-exclusive
license to use the UMC technology, Tellabs contributed cash to the joint
venture, and each received defined marketing rights for the developed
technology. In early 1996, upon review of the development of the market for this
product, the Company concluded that the market for transmitting voice and data
over cable systems would develop at a slower pace than originally anticipated.
In the interest of directing its resources towards more immediate market
opportunities, AFC entered into agreements with Tellabs in 1996 that changed the
relationship between the parties. The new relationship provides AFC with
royalties and OEM revenues from Tellabs on its sales into its markets and, in
return, AFC works on selected developments of the UMC technology for Tellabs'
markets on a development contract basis. AFC retains all rights in its
technology as well as the market rights previously defined.
SALES, MARKETING AND CUSTOMER SUPPORT
The Company markets the UMC system worldwide directly to telephone companies
and indirectly through OEMs, distributors and joint ventures to accommodate
specific markets and customer support requirements. The Company's sales force
consists of two groups, one that focuses on U.S. and Canadian telephone
companies and one that focuses on international markets.
The Company's North American sales force focuses on developing relationships
with independent telephone companies in the U.S. and Canada and on understanding
their network deployment strategies and cost requirements. As of December 31,
1996, the Company's domestic sales organization consisted of 17 direct
salespersons, a domestic sales vice president, and technical support personnel.
The Company has sales personnel located in Pittsburgh, Minneapolis, Atlanta,
Denver, Dallas, Chicago, Seattle, Orlando, Birmingham, Tulsa and Santa Clara.
The Company also has sales personnel dedicated to specific customer accounts,
such as Ameritech, BellSouth, GTE and Pacific Bell. In addition to direct calls
on the telephone companies, sales to customers often involve marketing through
consulting engineers who are retained by small independent telephone companies
for engineering, specification and installation services.
The Company employs an international direct sales force consisting of three
salespersons and one vice president. The primary tasks of the international
sales force are to market the UMC system directly to international telephone
companies and to select, manage, and train local distributors. Sales to
international customers are primarily fulfilled through the Company's
distributors and agents. The Company currently has an office in Hong Kong.
The AFC sales organization receives support from the Company's marketing
department, which is responsible, among other things, for product marketing,
advertising and marketing communications. The marketing department works closely
with the planning and engineering departments of telephone companies in order to
provide product proposals that are optimal in terms of both performance and cost
for a specific network configuration.
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The Company's customer support organization is responsible for servicing the
Company's products and assisting the Company's sales personnel. In addition to
its own field technical service engineers, the Company uses Point-to-Point
Communications, Inc. (``Point-to-Point"), a third-party support organization,
which provides first-line support for the Company's customers through a
toll-free number open 24 hours per day, 365 days per year, and provides
installation services on a subcontract basis for the Company. Although to date
the Company believes Point-to-Point has provided satisfactory customer
assistance, there can be no assurance that Point-to-Point will be able to
provide the level of customer support demanded by existing or potential
customers. The Company maintains a training organization which is dedicated to
developing training curriculums and materials that are made available to the
customer either through a student training or a train the trainer program.
Internationally, the Company provides customer support either directly or
through authorized distributors or joint venture partners. The Company's
products generally have a warranty period of 24 months.
RESEARCH AND DEVELOPMENT
The Company's research and development efforts have been focused on
developing local loop products with advanced features for small line-size
markets. The Company has developed a modular software and hardware platform that
can be configured and adapted to particular customer requirements. In addition,
development efforts include extensive attention to ease of installation and use
by the customer as evidenced in the menu driven software approach as well as the
compact and efficient hardware design demonstrated in its PCBAs. The Company's
research and development personnel work closely with sales and marketing
personnel to ensure development efforts are targeted at customer needs. In
addition, the Company's development efforts are focused on developing
enhancements to the UMC system, such as a higher bandwidth backplane.
The current focus of the Company's research and development efforts is
directed at new releases of the UMC system addressing market demands for new
features and services. These efforts include developing new transceivers
incorporating HDSL capabilities, new customer features such as ISDN and new
interfaces such as TR303. The Company is also incorporating MLT remote testing
capabilities into the product in support of the RBOC market. In addition, future
releases are expected to include capabilities to support broader star
configurations, SONET OC3 transceivers and multi-point support for the coax
transceiver version of the product. Finally, the engineering team also
concentrates its attention on numerous projects in the areas of cost and quality
improvements in the UMC system.
In 1995 and 1996, the Company's research and development expenditures were
$5.7 million and $14.4 million, respectively, which represented 10.6% and 11.1%,
respectively, of total revenues in such periods. In 1993 and 1994, the Company's
research and development expenditures were $2.0 million and $2.9 million,
respectively. The Company considers its research and development efforts to be
vital to its future success and anticipates that research and development
expenditures as a percentage of revenues will remain significant for the
foreseeable future. As of December 31, 1996, the Company's research and
development staff consisted of 124 employees.
MANUFACTURING
Manufacturing, system integration and certain testing operations are
performed at the Company's headquarters in Petaluma, California. The Company's
manufacturing operations consist primarily of final assembly and test of
finished goods from components and custom-made subassemblies (primarily printed
circuit boards) purchased from third parties. The Company monitors quality at
each stage of the production process, including the selection of component
suppliers, warehouse procedures, the assembly of finished goods and final
testing, packaging and shipping. The Company also performs functional,
environmental and systems testing and quality assurance procedures on the
subassemblies which are incorporated into the UMC system and with respect to the
final products themselves.
The Company relies on a limited number of independent contractors that
manufacture the subassemblies to the Company's specifications for use in the
Company's products. In particular, the Company relies on: (i) Flextronics and
Tanon Manufacturing, Inc. (a division of Electronic Associates, Inc.) to
manufacture the Company's printed circuit board assemblies; (ii) Paragon, Inc.
to manufacture backplanes and channel bank assemblies and (iii) Sonoma Metal
Products, Inc. and Cowden Metal San Jose, Inc. to manufacture the outside
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cabinets. The Company believes that it has good relations with each of its
suppliers. As the demand for the UMC system has increased, the Company has begun
a program to identify, and potentially qualify at a future date, additional
suppliers to manufacture key product subassemblies. While the Company believes
that the subassemblies manufactured by any of the suppliers could be procured
from alternate suppliers, in the event that the Company's subcontractors were to
experience financial, operational, production, or quality assurance difficulties
that resulted in a reduction or interruption in supply to the Company or
otherwise failed to meet the Company's manufacturing requirements, the Company's
business, financial condition and results of operations would be adversely
affected until the Company established sufficient manufacturing supply from
alternative sources. There can be no assurance that 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.
Certain components used in the Company's products, including the Company's
proprietary ASICs, codecs, certain surface mount technology components and other
components, are only available from a single source or limited number of
suppliers. Some of the Company's sole-source suppliers are companies which from
time to time allocate parts to telephone equipment manufacturers due to market
demand for the telecommunication equipment. Many of the Company's competitors
are much larger and may be able to obtain priority allocations from these shared
suppliers, thereby limiting or making unreliable the sources of supply for these
components. The Company encountered supply delays for codecs in the second
quarter of 1994 which resulted in delayed shipments of the UMC system, and there
can be no assurance that similar shortages will not occur in the future or will
not result in the Company having to pay a higher price for components. If the
Company is unable to obtain sufficient quantities of these or any other
components, delays or reductions in manufacturing or product shipments could
occur which would have a material adverse effect on the Company's business,
financial condition and results of operations.
COMPETITION
The market for equipment for local telecommunications networks is extremely
competitive. The Company's competitors range from small companies, both domestic
and international, to large multinational corporations. The Company's
competitors include Alcatel Alsthom Compagnie Generale d'Electricite, DSC, ECI
Telecom, Ltd., E/O 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. 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 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 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 whether, among other things, ITRI possesses the right to grant
such rights to manufacture and sell the ETSI version of the UMC system to new
member companies. 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. The principal competitive factors in the segment of the
telecommunications equipment industry in which the Company operates are total
cost of solution, product quality and performance, scalability, flexibility of
configuration and range of system capabilities available. The Company believes
that it competes favorably with respect to these factors, and that the ability
of the UMC system to offer voice and data communications over a variety of
transmission media in a cost-effective package provides a competitive advantage
in the small line-size market. There can be no assurance that the Company will
be able to compete successfully in the future.
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COMPLIANCE WITH REGULATORY AND INDUSTRY STANDARDS
The UMC system is required to comply with a large number of voice and data
regulations and standards, which vary domestically versus internationally and
may vary by the specific international market to which the Company sells its
products. The standards in the United States are determined by the FCC, by
Underwriters Laboratories, by independent telephone companies and by Bellcore.
The UMC technology is certified by Underwriters Laboratories. In international
markets, the Company's products must comply with recommendations by the
Consultative Committee on International Telegraph and Telephony and with
requirements established by the individual regional carriers which specify how
equipment that is connected to their local networks must operate. In addition,
the Company's products must comply with standards issued by ETSI. These
standards are implemented and enforced by the Telecommunications Regulatory
Authority of each European nation. Standards for new services continue to
evolve, and the Company will be required to modify its products or develop and
support new versions of its products to meet these standards. The failure of the
Company's products to comply, or delays in meeting compliance, with the evolving
standards both in its domestic and international markets could have a material
adverse affect on the Company's business, financial condition and results of
operations.
In addition, the Company will need to ensure that its products are easily
integrated with the carriers' network management systems. The RBOCs, which
represent a large segment of the U.S. telecommunications market, 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 and/or to obtain it on new features released in the future could have
a material adverse affect on the Company's ability to sell the UMC system to the
RBOCs, which represent a large segment of the telecommunications market.
The Company has not received ISO certification, which certifies that design
and manufacturing processes adhere to certain established standards. Many
telecommunications service providers particularly in international markets, will
not purchase products from suppliers that have not received ISO certification.
Accordingly, until it is able to obtain ISO certification, the Company may be
precluded from selling its products to these service providers and its ability
to compete with other suppliers of communications equipment may be adversely
affected. 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.
PROPRIETARY RIGHTS AND LICENSES
The Company attempts to protect its technology through a combination of
copyrights, trade secret laws and contractual obligations. The Company does not
presently hold any patents for its existing products and has no patent
applications pending. There can be no assurance that the Company's intellectual
property protection measures will be sufficient to prevent misappropriation of
the Company's technology or that the 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
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Company's intellectual property rights to the same extent as the laws of the
United States. The failure of the Company to protect its proprietary information
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The increasing dependence of the telecommunications industry on proprietary
technology has resulted in frequent litigation based on allegations of the
infringement of patents and other intellectual property. The Company recently
settled litigation with DSC under which DSC had claimed proprietary rights in
the UMC technology. See ``-- Legal Proceedings." In the future the Company may
be subject to additional litigation to defend against claimed infringements of
the rights of others or to determine the scope and validity of the proprietary
rights of others. Future litigation also may be necessary to enforce and protect
trade secrets and other intellectual property rights owned by the Company. Any
such litigation could be costly and cause diversion of management's attention
either of which could have a material adverse effect on the Company's business,
financial condition and results of operations. Adverse determination in such
litigation could result in the loss of the Company's proprietary rights, subject
the Company to significant liabilities, require the Company to seek licenses
from third parties, or prevent the Company from manufacturing or selling its
products, any one of which could have a material adverse effect on the Company's
business, financial condition and results of operations. Furthermore, there can
be no assurance that any necessary licenses will be available on reasonable
terms.
In September 1992, AFC entered into agreements (the "ITRI Agreements") with
the Industrial Technology Research Institute ("ITRI") to jointly develop
products based on the ETSI version of the UMC system. ITRI is a Taiwanese
government-sponsored research and development organization in the
telecommunications field. Under the ITRI Agreements, ITRI has the exclusive
right in Taiwan to use and develop the ETSI version of the UMC technology, and
to manufacture such version of the UMC system through the member companies, but
does not have the right to manufacture and sell the Company's proprietary ASICs
except in circumstances where AFC has failed to provide the ASICs as required.
The ASIC designs were placed in escrow in order to be available to ITRI and the
member companies should the right to manufacture ASICs become effective. ITRI
and the member companies also have a non-exclusive right to sell or lease the
ETSI version of the UMC system in all countries outside of North America. The
ITRI Agreements require ITRI to pay the Company a royalty on sales or leases of
the UMC system made through September 2002, at which time the license becomes
fully-paid, and ITRI will have a worldwide, non-exclusive, royalty free,
irrevocable license to use the ETSI version of the UMC technology. ITRI's member
companies currently compete with the Company in international markets, primarily
in China. The Company is currently involved in litigation with ITRI and certain
of its member companies arising out of disputes over, among other things,
payment of royalties and the supply of ASICs. See ``-- Competition" and "--
Legal Proceedings -- ITRI."
LEGAL PROCEEDINGS
ITRI
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. In reliance upon certain provisions of the ITRI Agreements, in April 1996,
the Company ceased delivering to the Member Companies certain proprietary ASICs
used in the manufacture of the UMC system. Pursuant to agreements with ITRI
reached in 1994, 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 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.
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
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secret misappropriation, tortious interference, and related claims. The
complaint alleges that ITRI breached the ITRI Agreements, among other things, 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 damages,
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 another company 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 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 will be required to supply the
Member Companies with a specified number of ASICs during the ensuing two month
period 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. The Company believes that compliance with the
court's order will not have a material adverse effect on the Company's business,
financial condition and results of operations. 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. In an order
dated January 9, 1997, the court stayed the litigation and granted the ITRI
parties' motion to compel arbitration. The court has promised, but not yet
issued, an opinion explaining the nature and scope of its arbitration order, and
has issued no ruling on the motion for a preliminary injunction.
The Company believes that it has meritorious defenses to the claims asserted
by ITRI and the Member Companies and it intends to defend the litigation
vigorously. Moreover, the Company believes that the Member Companies' damages
claim is without merit. The Company further believes that its claims against
ITRI and the Member Companies 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. See "Risk Factors -- Competition" and "-- Risks Associated with Pending
Litigation."
DSC
From July 1993 until June 1996 the Company was involved in litigation with
DSC. DSC had alleged, among other things, that the UMC technology contained or
was derived from trade secrets and other proprietary technology of DSC. The
parties entered into a Settlement Agreement and Mutual Releases dated as of June
24, 1996 (the ``Settlement Agreement"), pursuant to which the litigation was
terminated. Under the terms of the Settlement Agreement, the Company paid DSC an
aggregate of $10.1 million and
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issued 725,787 shares of Common Stock to DSC. In addition, under the terms of
the Settlement Agreement, AFC maintains all rights to the UMC technology free
and clear of any claim by DSC. In July 1996, the Company borrowed approximately
$7.1 million (representing the present value of the $8.5 million obligation)
under a six-month term loan and repaid its remaining obligations under the
Settlement Agreement. See "Selected Consolidated Financial Data," ``Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Note 10 of Notes to Consolidated Financial Statements. The Company provided
indemnification to certain stockholders in connection with the settlement of the
DSC litigation. See "Certain Transactions."
OTHER
On June 20, 1995, two investment limited partnerships, Equity-Linked
Investors, L.P. and Equity-Linked Investors, L.P. II (the ``Plaintiffs"), filed
a complaint against the Company in the United States District Court for the
Southern District of New York. The Plaintiffs' complaint contains claims for
breach of contract, promissory estoppel, and specific performance related to an
alleged subordinated debt financing agreement. The Plaintiffs are affiliated
with Desai Capital Management Incorporated (``Desai"). From March to June 1995,
the Company was involved in negotiations with Desai regarding a proposed
subordinated debt financing of the Company. On June 13, 1995, the Company's
Board of Directors disapproved the proposed transaction. According to the
Plaintiff's complaint, the Company had a binding commitment to proceed with the
proposed financing. The complaint alleges that the Company committed to accept a
$10 million to $15 million loan from the Plaintiffs in exchange for interest
payments and warrants to purchase 350,000 shares of the Company's Series E
Preferred Stock at $12.50 per share (not taking into account a two-for-one stock
split in September 1995 and the further two-for-one stock split effected in
August 1996). The complaint alleges damages of ``at least the difference between
their exercisable $12.50 per share price on 350,000 shares and the per share
price of stock sold in any initial public offering."
On July 12, 1995, and September 8, 1995, the Company filed motions to
dismiss the case for lack of federal jurisdiction and failure to state a claim.
The Company's motions to dismiss the case remain pending and undecided. There
has been no discovery in the case, and no trial date is set.
The Company denies the allegations of the Plaintiffs' complaint,
specifically denies that there was any contract, and intends to contest the
claims vigorously.
EMPLOYEES
As of December 31, 1996, AFC had 425 full-time employees, including 82 in
marketing, sales and support services, 124 in research and development, 159 in
operations and 60 in general administrative positions. Substantially all of
AFC's employees are based at the Company's headquarters in Petaluma, California.
None of the Company's employees are represented by a labor union. The Company
believes its relationships with its employees are good and has never experienced
a strike or work stoppage.
PROPERTIES
The Company's administrative, sales and marketing, and product development
headquarters are located in Petaluma, California, where the Company leases
approximately 165,000 square feet under leases expiring beginning in March 2005.
The Company believes its facilities are adequate for its current needs and for
its needs in the foreseeable future.
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MANAGEMENT
EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS
The executive officers, key employees and directors of the Company, and
their respective ages as of December 31, 1996, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------------ --- ------------------------------------------------
<S> <C> <C>
EXECUTIVE OFFICERS
Donald Green.................................... 65 Chairman of the Board and Chief Executive
Officer
Carl J. Grivner................................. 43 President and Chief Operating Officer and
Director
Karen Godfrey................................... 42 Corporate Controller and Assistant Secretary
Glenn Lillich................................... 49 Vice President, Domestic Sales and Marketing
Dan E. Steimle.................................. 48 Vice President, Chief Financial Officer,
Treasurer and Secretary
KEY EMPLOYEES
James Hoeck..................................... 36 Vice President, Advanced Development
John Webley..................................... 38 Vice President, Advanced Development
David Arnold.................................... 46 Vice President, Engineering Development
Michael Hatfield................................ 34 Vice President, International and Product
Management
Peter Kilkus.................................... 52 Vice President, Quality Assurance
Greg Steele..................................... 35 Vice President, Operations
OUTSIDE DIRECTORS
B.J. Cassin (1)................................. 63 Director
Clifford H. Higgerson (1) (2)................... 57 Director
Brian Jackman (2)............................... 55 Director
Dan Rasdal (1).................................. 63 Director
</TABLE>
- ---------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
DONALD GREEN was a co-founder of the Company and has been the Company's
Chairman of the Board and Chief Executive Officer since May 1992. He founded
Optilink Corporation ("Optilink") in 1987 to develop a fiber NGDLC system called
the Litespan 2000. Mr. Green was the President and Chief Executive Officer of
Optilink from 1987 until its acquisition by DSC in 1990. From 1990 until the
founding of the Company, Mr. Green was Vice President and General Manager of the
Access Products division of DSC. Prior to founding Optilink, Mr. Green served
for 17 years as Chief Executive Officer of Digital Telephone Systems, a company
he founded in 1969 to develop, manufacture and market the D960 Digital Loop
Carrier system. Prior to founding Digital Telephone Systems, Mr. Green served as
Project Engineer and, subsequently, Vice President of Engineering for Lynch
Communication Inc., a telecommunications company ("Lynch"), as well as Design
Engineer for RCA Standard Telephone Cables (UK), a telecommunications company.
Mr. Green began his career with British Telecom, a telecommunications company,
and is a graduate of the British Institute of Electrical Engineers.
CARL J. GRIVNER has been the Company's President and Chief Operating Officer
since December 1995 and a Director since May 1996. From July 1995 to December
1995 he was the Company's Chief Operating Officer. From September 1994 to July
1995, he was President of Enhanced Business Services of Ameritech, an RBOC. From
1986 to September 1994, Mr. Grivner held various general management positions at
Ameritech, including President of Ameritech's Advertising Services (Yellow
Pages) Unit. From 1977 to 1986,
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he held a variety of technical and marketing positions at International Business
Machines, Inc. Mr. Grivner holds a Bachelor of Arts degree in Biology from
Lycoming College and an advanced degree from the University of Pennsylvania,
Wharton School of Business.
KAREN GODFREY has been the Company's Corporate Controller since May 1994 and
its Assistant Secretary since February 1995. From September 1992 to May 1994,
Ms. Godfrey was self-employed as a financial management consultant. Ms. Godfrey
was the Chief Financial Officer of Fortune's Almanac, Inc., a catalog company,
from September 1991 to September 1992 and the Chief Financial Officer and Vice
President of Operations of Paracomp, Inc., a software company, from 1989 to
September 1991. Ms. Godfrey held various financial management positions with
WordStar International Corporation, a software company, from 1984 to 1989,
including Corporate Controller. Ms. Godfrey started her professional career with
KPMG Peat Marwick. She is a C.P.A. and holds a Bachelor of Science degree in
Accountancy from the University of Illinois, Champaign-Urbana.
GLENN LILLICH has been the Company's Vice President, Domestic Sales and
Marketing since June 1996. From February 1993 to June 1996, Mr. Lillich was the
Company's Vice President, Sales. From January 1992 to February 1993, he served
as the Western Region Director of Sales for the Telecom Division of Stratus
Company, a manufacturer of computer systems. Mr. Lillich held various sales
positions at DSC from 1984 to December 1991, most recently as Vice President,
Sales; GTE Telenet Systems Corporation, a manufacturer of packet switch
hardware, from 1980 to 1983; and Northern Telecom Systems Corporation, a
manufacturer and distributor of data processing systems, from 1978 to 1979. Mr.
Lillich holds a Bachelor of Science degree in Accounting from Ohio State
University and an MBA in Behavioral Management from Pepperdine University.
DAN E. STEIMLE has been the Company's Vice President and Chief Financial
Officer since December 1993. He has also been the Company's Secretary and
Treasurer since July 1995. He was the Senior Vice President for Operations,
Chief Financial Officer and Treasurer for The Santa Cruz Operations, Inc., a
software company, from 1991 until joining AFC. Mr. Steimle served as Corporate
Director of Business Development at Mentor Graphics Corporation, a company
supplying engineering design software, from 1989 to September 1991 and held
various financial positions at Cipher Data Products, Inc., a manufacturer of
computer peripherals, from 1982 to 1989, including Corporate Vice President,
Chief Financial Officer and Treasurer. Mr. Steimle holds a Bachelor of Science
degree in Accounting from Ohio State University and an MBA in Marketing and
Management from the University of Cincinnati. Mr. Steimle is also a director of
Mitek Systems, Inc., a software company.
JAMES HOECK was a co-founder of the Company and served as Vice President,
Engineering from inception through January 1995 when he became Vice President,
Advanced Development. In November 1990, he co-founded Quadrium Research
Corporation, a design consulting company ("Quadrium"), and served as its
President until May 1992. Previously, Mr. Hoeck served as a manager of firmware
at Optilink and as a member of the technical staff at Teradyne, Inc., a test and
measurement equipment company. Mr. Hoeck holds a Bachelor of Science degree in
Electrical Engineering from Northwestern University.
JOHN WEBLEY was a co-founder of the Company and served as Vice President,
Engineering from inception through January 1995 when he became Vice President,
Advanced Development. In November 1990, he co-founded Quadrium with Mr. Hoeck,
and served as its Vice President until June 1992. Previously, Mr. Webley served
as manager of systems interface hardware at Optilink, as a member of the
technical staff at Rockwell International, a defense contractor, as a senior
engineer at Lynch and as a network systems engineer for the Department of
Telecommunications in Cape Town, South Africa. Mr. Webley holds a Bachelor of
Science degree in Electrical Engineering, an Hon. B.Sc. and a Master of Science
degree in Electrical Engineering from the University of Stellenbosch, South
Africa.
DAVID ARNOLD has been the Company's Vice President, Engineering Development
since April 1996. From November 1993 to November 1995, he was senior director of
telephony products research at Ericsson Raynet, a provider of telecommunications
equipment. From 1989 to November 1993, he served as engineering director for
Alcatel Network Systems, a provider of telecommunications equipment. Previously,
from
39
<PAGE>
1978 to 1983, Mr. Arnold held a variety of engineering positions at Digital
Equipment Corporation, a provider of computer and data processing equipment. Mr.
Arnold holds a Bachelor of Science degree in Computer Science from the
University of California, Berkeley.
MICHAEL HATFIELD has been the Company's Vice President, International and
Product Management since June 1996. From September 1992 to June 1996 he was Vice
President, Marketing. From July 1992 to September 1992, he served as the
director of marketing for the synchronization products division of Telecom
Solutions, Inc., a telecommunications company. Previously, Mr. Hatfield held
various marketing positions at DSC from 1987 to July 1992. Mr. Hatfield holds a
Bachelor of Science degree in Electrical Engineering from the Rose-Hulman
Institute of Technology and an MBA in Finance from Indiana University.
PETER KILKUS has been the Company's Vice President, Quality Assurance since
March 1995. From 1990 to March 1995, he served as the Senior Director, Quality
Assurance, for DSC. From 1988 to 1990, he held various positions at Optilink,
most recently as Vice President; Operations. Mr. Kilkus holds an MA in Physics
from the University of California, Santa Barbara and a Bachelor of Arts degree
in Physics from St. Mary's University of Minnesota.
GREG STEELE has been the Company's Vice President, Operations since April
1995. From November 1994 to March 1995, Mr. Steele was the Company's Director of
Operations. Prior to joining the Company, from 1990 to November 1994, Mr. Steele
held various positions at DSC, including director of account marketing and
senior manager of manufacturing from 1990 to April 1993. Previously, from 1984
to 1990, Mr. Steele held several manufacturing positions at Texas Instruments.
Mr. Steele holds a Bachelor of Science degree in Industrial Engineering from
Oregon State University.
B.J. CASSIN has been a director of the Company since January 1993. Since
1979, he has been a private venture capitalist. Previously, he co-founded Xidex
Corporation, a manufacturer of data storage media, in 1969, and served as Vice
President, Marketing.
CLIFFORD H. HIGGERSON has been a director of the Company since January 1993.
Mr. Higgerson has been a general partner of Vanguard Ventures Partners, a
venture capital firm and a stockholder of the Company, since July 1991 and
managing partner of Communications Ventures, a venture capital firm, since 1987.
Mr. Higgerson is also a director of Digital Microwave Corporation and eight
private companies.
BRIAN JACKMAN has been a director of the Company since September 1993. Mr.
Jackman has been the Executive Vice President of Tellabs, Inc., a
telecommunications equipment company and a stockholder of the Company, and the
President of Tellabs Operations Inc., a subsidiary of Tellabs, Inc., since 1991.
From 1990 to 1993, Mr. Jackman was the Executive Vice President of Business
Operations of Tellabs. From 1989 to 1990, he was the Senior Vice
President/General Manager of the data communications division of Tellabs, Inc.
Mr. Jackman is also a director of Tellabs, Inc. and Universal Electronics, Inc.
DAN RASDAL has been a director of the Company since February 1993. Mr.
Rasdal has been Chairman of the Board of SymmetriComm, Inc., a
telecommunications company, since July 1989, and the President and Chief
Executive Officer of SymmetriComm since 1985. Mr. Rasdal is also a director of
Celeritek, Inc., a semiconductor manufacturer.
The current directors have been elected pursuant to the terms of the
Company's certificate of incorporation and a voting agreement among certain
stockholders of the Company, whereby holders of the Company's Series A and
Series B Preferred Stock of the Company had the right to elect three directors
in the aggregate and the parties to the voting agreement agreed to vote for a
director designated in accordance with the voting agreement. Such arrangements
terminated upon closing of the initial public offering of the Company's Common
Stock on October 4, 1996.
The Company's certificate of incorporation provides for a classified Board
of Directors composed of seven directors. Accordingly, the terms of the office
of the Board of Directors are divided into three classes. Class I will expire at
the annual meeting of the stockholders to be held in 1997; Class II will expire
at the annual meeting of the stockholders to be held in 1998; and Class III will
expire at the annual meeting of the stockholders to be held in 1999. At each
annual meeting of the stockholders, beginning with the 1997 annual
40
<PAGE>
meeting, the successors to directors whose terms will then expire will be
elected to serve from the time of election and qualification until the third
annual meeting following election and until their successors have been duly
elected and qualified, or until their earlier resignation or removal, if any.
Carl Grivner and Clifford Higgerson have been designated as Class I directors.
B.J. Cassin and Brian Jackman have been designated as Class II directors. Donald
Green and Dan Rasdal have been designated as Class III directors. The Company is
continuing to seek to add one additional director to the Board of Directors in
the future. To the extent there is an increase in the number of directors,
additional directorships resulting therefrom will be distributed among the three
classes so that, as nearly as possible, each class will consist of an equal
number of directors.
Each executive officer and key employee serves at the discretion of the
Board of Directors. The Company does not have any existing employment agreements
with any executive officer or key employee. There are no family relationships
among any of the directors, executive officers and key employees of the Company.
BOARD COMMITTEES
The Board of Directors has two standing committees: an Audit Committee and a
Compensation Committee. The Audit Committee, currently consisting of Messrs.
Cassin, Higgerson and Rasdal, meets with the Company's financial management and
its independent accountants at various times during each year and reviews
internal control conditions, audit plans and results, and financial reporting
procedures. The Compensation Committee, currently consisting of Messrs.
Higgerson and Jackman, reviews and approves the Company's compensation
arrangements for key employees and administers the 1996 Stock Incentive Plan and
the Employee Stock Purchase Plan.
DIRECTOR COMPENSATION
Non-employee Board members do not receive any cash fees for their service on
the Board or any Board committee, but they are entitled to reimbursement of all
reasonable out-of-pocket expenses incurred in connection with their attendance
at Board and Board committee meetings. In addition, non-employee Board members
receive stock options pursuant to the automatic option grant program in effect
under the Company's 1996 Stock Incentive Plan. See `` -- Stock Incentive Plan"
for further information concerning this program.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's certificate of incorporation limits the liability of directors
to the maximum extent permitted by Delaware law. This provision is intended to
allow the Company's directors the benefit of Delaware General Corporation Law
which provides that directors of Delaware corporations may be relieved of
monetary liabilities for breach of their fiduciary duties as directors, except
under certain circumstances, including breach of their duty of loyalty, acts or
omissions not in good faith or involving intentional misconduct or a knowing
violation of law, unlawful payments or dividends or unlawful stock repurchases
or redemptions or any transaction from which the director derived an improper
personal benefit. As a result, the Company and its stockholders may be unable to
obtain monetary damages from a director for breach of duty of care. Although
stockholders may continue to seek injunctive or other equitable relief for an
alleged breach of fiduciary duty by a director, stockholders may not have any
effective remedy against the challenged conduct if equitable remedies are not
available. In addition, the Company's bylaws provide that the Company shall
indemnify its executive officers and directors to the fullest extent provided by
Delaware law. The bylaws also authorize the use of indemnification agreements,
and the Company has entered into such agreements with each of its directors and
executive officers. Prospective investors should be aware that the effect of
such indemnification provisions may be to shift to the Company liabilities which
may otherwise have been payable by individual directors or officers. Insofar as
indemnification for liabilities arising under the Securities Act may be provided
to the Company's executive officers and directors, the Company has been advised
that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act, and
is, therefore, unenforceable.
The Company has obtained officer and director liability insurance with
respect to liabilities arising out of certain matters, including matters arising
under the Securities Act.
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<PAGE>
There is no pending litigation or proceeding involving a director, officer,
employee or other agent of the Company as to which indemnification is being
sought, nor is the Company aware of any threatened litigation that may result in
claims for indemnification by any director, officer, employee or other agent.
EXECUTIVE COMPENSATION
SUMMARY OF CASH AND OTHER COMPENSATION. The following table sets forth the
compensation earned by the Company's Chief Executive Officer and the other four
executive officers of the Company (the ``Named Executive Officers"), each of
whose aggregate compensation for the year ended December 31, 1996 was in excess
of $100,000 for services rendered in all capacities to the Company for such
fiscal year.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
-------------
NUMBER OF
ANNUAL COMPENSATION SECURITIES
---------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS COMPENSATION
- --------------------------------------------------- ---------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Donald Green ...................................... 1996 $ 275,000 $ 138,903 184,902 $ --
Chairman of the Board and Chief Executive Officer 1995 185,000 115,625 25,000 --
Carl J. Grivner (1) ............................... 1996 235,000 106,349 -- 74,080(2)
President and Chief Operating Officer 1995 102,115 48,894 212,000 14,690(3)
Karen Godfrey ..................................... 1996 105,000 25,077 -- --
Corporate Controller and Assistant Secretary 1995 101,016 28,935 10,200 --
Glenn Lillich ..................................... 1996 170,000 51,868 -- --
Vice President, Domestic Sales and Marketing 1995 160,000 54,400 12,000 --
Dan E. Steimle .................................... 1996 170,000 51,868 -- --
Vice President, Chief Financial Officer, Treasurer 1995 160,000 54,400 12,000 --
and Secretary
</TABLE>
- ---------
(1) Mr. Grivner joined the Company in July 1995.
(2) Represents $34,377 in relocation expenses paid by the Company and
forgiveness of $39,703 of principal and interest on a note payable to the
Company. See "Certain Transactions."
(3) Represents relocation expenses paid by the Company.
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<PAGE>
STOCK OPTION GRANTS TO NAMED EXECUTIVE OFFICERS. The following table sets
forth certain information regarding stock option grants made to each of the
Named Executive Officers in 1996. No stock appreciation rights were granted to
the Named Executive Officers during such year.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS (1)
-------------------------------------------------------- POTENTIAL REALIZABLE VALUE
NUMBER OF AT ASSUMED ANNUAL RATES OF
SECURITIES PERCENT OF STOCK PRICE APPRECIATION
UNDERLYING TOTAL GRANTED PER SHARE FOR OPTION TERM (2)
OPTIONS TO EMPLOYEES IN EXERCISE EXPIRATION --------------------------
NAME GRANTED FISCAL YEAR BASE PRICE(3) DATE 5% 10%
- ------------------------------ ----------- --------------- ------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Donald Green.................. 184,902 17.1% $ 12.50 6/25/06 $ 1,453,548 $ 3,683,577
Carl J. Grivner............... -- -- -- -- -- --
Karen Godfrey................. -- -- -- -- -- --
Glenn Lillich................. -- -- -- -- -- --
Dan E. Steimle................ -- -- -- -- -- --
</TABLE>
- ---------
(1) The option shown in the table is immediately exercisable for all the option
shares. However, any shares purchased under the option will be subject to
repurchase by the Company, at the exercise price paid per share, in the
event the optionee terminates employment prior to vesting in those shares.
The shares vest in successive equal monthly installments over 24 months of
service, measured from the date of grant. All the option shares will
immediately vest in the event the Company is acquired by merger or asset
sale, unless the options are assumed by the acquiring entity.
(2) Realizable values are reported net of the option exercise price. The dollar
amounts under these columns are the result of calculations based upon stock
price appreciation at the assumed 5% and 10% compounded annual rates (as
applied to the estimated fair market value of the option shares on the date
of grant, not the current fair market value of those shares) and are not
intended to forecast any actual or potential future appreciation, if any, in
the value of the Company's stock price. Actual gains, if any, on stock
option exercises will be dependent upon the future performance of the Common
Stock as well as the option holder's continued employment through the
vesting period. The potential realizable value calculation assumes that the
option holder waits until the end of the option term to exercise the option.
(3) The exercise price for the shares of Common Stock subject to option grants
made under the Plan may be paid in cash or in shares of Common Stock valued
at fair market value on the exercise date. The option may also be exercised
through a same-day sale program without any cash outlay by the optionee. In
addition, the Plan Administrator may provide financial assistance to one or
more optionees in the exercise of their outstanding options by allowing such
individuals to deliver a full-recourse, interest-bearing promissory note in
payment of the exercise price and any associated withholding taxes incurred
in connection with such exercise.
OPTION EXERCISES AND HOLDINGS. The following table sets forth certain
information with respect to the Named Executive Officers concerning their option
exercises during 1996 and their option holdings as of December 27, 1996. None of
the Named Executive Officers held any stock appreciation rights at the end of
that fiscal year.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AS OF IN-THE-MONEY OPTIONS
DECEMBER 27, 1996 (2) AS OF DECEMBER 27, 1996(3)
SHARES ACQUIRED VALUE -------------------------- ----------------------------
NAME ON EXERCISE REALIZED (1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------- --------------- ------------ ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Donald Green............. -- $ -- 108,558 181,344 $ 5,193,968 $ 7,892,539
Carl J. Grivner.......... 46,666 2,292,467 12,401 152,933 650,503 8,039,699
Karen Godfrey............ 20,000 170,000 36,440 38,760 1,928,445 2,043,593
Glenn Lillich............ -- -- 160,534 87,466 8,533,982 4,630,868
Dan E. Steimle........... 160,000 236,000 18,400 33,600 971,200 1,767,300
</TABLE>
- ---------
(1) Based upon the difference between the exercise price and the fair market
value of the Company's Common Stock on the date of exercise.
43
<PAGE>
(2) Although each option is immediately exercisable for all the option shares,
any shares purchased under the option are subject to repurchase by the
Company, at the exercise price paid per share, in the event the optionee
terminates employment prior to vesting in those shares. Twenty percent of
the option shares will vest upon optionee's completion of one year of
service measured from the vesting date, and the balance will vest in
successive equal monthly installments over the next 48 months of service
thereafter (other than 184,000 of Mr. Green's options, which vest in
successive equal monthly installments over 24 months of service measured
from the date of grant). All the option shares will immediately vest in the
event the Company is acquired by merger or asset sale, unless the options
are assumed by the acquiring entity. Accordingly, the table reflects such
option shares as to which the repurchase right has lapsed under the
"exercisable" column and such option shares subject to the repurchase right
under the "unexercisable" column.
(3) Based on the last reported sale price of the Company's Common Stock on
December 27, 1996 ($53.25 per share) less the exercise price payable for
such shares.
COMPENSATION, TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL ARRANGEMENTS
The Compensation Committee as Plan Administrator of the 1996 Stock Incentive
Plan has the authority to provide for the accelerated vesting of the shares of
Common Stock subject to outstanding options held by the Chief Executive Officer
and the Company's other executive officers or any unvested shares actually held
by those individuals under the 1996 Stock Incentive Plan, in the event the
Company is acquired by merger or asset sale or there is a hostile change in
control effected by a successful tender or exchange offer for more than 50% of
the Company's outstanding voting securities or a change in the majority of the
Board as a result of one or more contested elections for Board membership.
Alternatively, the Compensation Committee may condition such accelerated vesting
upon the individual's termination of service within a designated period
following the acquisition or hostile change in control. See `` -- Stock
Incentive Plan."
On May 31, 1995, Mr. Green purchased 167,200 shares of Common Stock from the
Company in exchange for a note payable in the amount of $52,250, the fair market
value of such shares on such date, pursuant to a compensation agreement approved
by the Board of Directors. The Company has the right to repurchase such shares
at the original purchase price per share upon Mr. Green's cessation of service
prior to vesting in such shares. See "Certain Transactions."
STOCK INCENTIVE PLAN
The Company's 1996 Stock Incentive Plan (the ``1996 Plan") is intended to
serve as the successor equity incentive program to the Company's 1993 Stock
Option/Stock Issuance Plan (the ``Predecessor Plan"). The 1996 Plan was adopted
by the Board of Directors on July 12, 1996 and approved by the stockholders in
August 1996. A total of 7,008,142 shares of Common Stock are currently
authorized for issuance under the 1996 Plan. This share reserve is comprised of
(i) the shares which remained available for issuance under the Predecessor Plan,
including the shares subject to outstanding options thereunder, plus (ii) an
additional increase of 1,000,000 shares. As of December 31, 1996, there were
options to purchase 4,313,544 shares under the Plan. In addition, the share
reserve will automatically be increased on the first trading day of each
calendar year, beginning with the 1997 calendar year, by an amount equal to 3%
of the number of shares of Common Stock outstanding on the last trading day of
the immediately preceding calendar year. However, in no event may any one
participant in the 1996 Plan receive option grants or direct stock issuances for
more than 400,000 shares in the aggregate per calendar year. The 1996 Plan is
administered by the Compensation Committee of the Board of Directors (the ``Plan
Administrator").
Outstanding options under the Predecessor Plan have been incorporated into
the 1996 Plan, and no further option grants will be made under the Predecessor
Plan. The incorporated options will continue to be governed by their existing
terms, unless the Plan Administrator elects to extend one or more features of
the 1996 Plan to those options. However, except as otherwise noted below, the
outstanding options under the Predecessor Plan contain substantially the same
terms and conditions summarized below for the Discretionary Option Grant Program
in effect under the 1996 Plan.
44
<PAGE>
The 1996 Plan is divided into five separate components: (i) the
Discretionary Option Grant Program, under which eligible individuals in the
Company's employ or service (including officers, non-employee Board members and
consultants) may, at the discretion of the Plan Administrator, be granted
options to purchase shares of Common Stock at an exercise price not less than
85% of their fair market value on the grant date; (ii) the Stock Issuance
Program under which such individuals may, in the Plan Administrator's
discretion, be issued shares of Common Stock directly through the purchase of
such shares at a price not less than 100% of their fair market value at the time
of issuance or as a bonus tied to the performance of services; (iii) the Salary
Investment Option Grant Program under which, if activated by the Plan
Administrator for a given year, executive officers and other highly compensated
employees may elect to apply a portion of their base salary for such year to the
acquisition of special below-market stock option grants; (iv) the Automatic
Option Grant Program under which option grants will automatically be made at
periodic intervals to eligible non-employee Board members to purchase shares of
Common Stock at an exercise price equal to 100% of their fair market value on
the grant date; and (v) the Director Fee Option Grant Program, if activated by
the Plan Administrator for a given year, pursuant to which the non-employee
Board members may apply all or a portion of the annual retainer fee, if any,
otherwise payable to them in cash each year to the acquisition of special
below-market option grants.
The Plan Administrator will have complete discretion to determine which
eligible individuals are to receive option grants or stock issuances under the
Discretionary Option Grant, Salary Investment Option Grant or Stock Issuance
Programs, the time or times when such option grants or stock issuances are to be
made, the number of shares subject to each such grant or issuance, the status of
any granted option as either an incentive stock option or a non-statutory stock
option under the Federal tax laws, the vesting schedule to be in effect for the
option grant or stock issuance and the maximum term for which any granted option
is to remain outstanding. Generally, options will be immediately exercisable for
all the option shares. However, any shares purchased under the option will be
subject to repurchase by the Company, at the exercise price paid per share, in
the event the optionee terminates employment prior to vesting in those shares.
The administration of the Automatic Option Grant and Director Fee Option Grant
Programs will be self-executing in accordance with the express provisions of
each such program.
The exercise price for the shares of Common Stock subject to option grants
made under the Plan may be paid in cash or in shares of Common Stock valued at
fair market value on the exercise date. The option may also be exercised through
a same-day sale program without any cash outlay by the optionee. In addition,
the Plan Administrator may provide financial assistance to one or more optionees
in the exercise of their outstanding options by allowing such individuals to
deliver a full-recourse, interest-bearing promissory note in payment of the
exercise price and any associated withholding taxes incurred in connection with
such exercise.
In the event that the Company is acquired by merger or asset sale, each
outstanding option under the Discretionary Option Grant Program which is not to
be assumed by the successor corporation will automatically accelerate in full,
and all unvested shares under the Stock Issuance Program will immediately vest,
except to the extent the Company's repurchase rights with respect to those
shares are to be assigned to the successor corporation. The Plan Administrator
will have the authority under the Discretionary Option Grant and Stock Issuance
Programs to grant options and to structure repurchase rights so that the shares
subject to those options or repurchase rights will automatically vest in the
event the individual's service is terminated, whether involuntarily or through a
resignation for good reason, within a specified period (not to exceed eighteen
(18) months) following (i) a merger or asset sale in which those options are
assumed or those repurchase rights are assigned or (ii) a hostile change in
control of the Company effected by a successful tender offer for more than 50%
of the outstanding voting stock or by proxy contest for the election of Board
members. The Plan Administrator will also have the discretion to provide for the
automatic acceleration of outstanding options and the lapse of any outstanding
repurchase rights upon (i) a hostile change in control of the Company effected
by a successful tender offer for more than 50% of the Company's outstanding
voting stock or by proxy contest for the election of Board members or (ii) the
termination of the individual's service, whether involuntarily or through a
resignation for good reason, within a specified period (not to exceed eighteen
(18) months) following such a hostile change in control. Options currently
outstanding under the Predecessor Plan will accelerate upon an acquisition of
the Company by merger or asset sale, unless those
45
<PAGE>
options are assumed by the acquiring entity, but such options are not subject to
acceleration upon the termination of the optionee's service following an
acquisition in which those options are assumed or a hostile change in control of
the Company.
Stock appreciation rights are authorized for issuance under the
Discretionary Option Grant Program which provide the holders with the election
to surrender their outstanding options for an appreciation distribution from the
Company equal to the excess of (i) the fair market value of the vested shares of
Common Stock subject to the surrendered option over (ii) the aggregate exercise
price payable for such shares. Such appreciation distribution may be made in
cash or in shares of Common Stock. There are currently no outstanding stock
appreciation rights under the Predecessor Plan.
The Plan Administrator has the authority to effect the cancellation of
outstanding options under the Discretionary Option Grant Program (including
options incorporated from the Predecessor Plan) in return for the grant of new
options for the same or different number of option shares with an exercise price
per share based upon the fair market value of the Common Stock on the new grant
date.
In the event the Plan Administrator elects to activate the Salary Investment
Option Grant Program for one or more calendar years, each executive officer and
other highly compensated employee of the Company selected for participation may
elect, prior to the start of the calendar year, to reduce his or her base salary
for that calendar year by a specified dollar amount not less than $10,000 nor
more than $50,000. If such election is approved by the Plan Administrator, the
officer will be granted, as soon as practical following the start of the
calendar year for which the salary reduction is to be in effect, a non-statutory
option to purchase that number of shares of Common Stock determined by dividing
the salary reduction amount by two-thirds of the fair market value per share of
Common Stock on the grant date. The option will be exercisable at a price per
share equal to one-third of the fair market value of the option shares on the
grant date. As a result, the total spread on the option shares at the time of
grant will be equal to the amount of salary invested in that option. The option
will vest in a series of twelve (12) equal monthly installments over the
calendar year for which the salary reduction is in effect and will be subject to
full and immediate vesting upon certain changes in the ownership or control of
the Company.
Under the Automatic Option Grant Program, each individual who first joins
the Board after June 30, 1996 as a non-employee Board member will receive an
option grant for 20,000 shares of Common Stock at the time of his or her
commencement of Board service, provided such individual has not otherwise been
in the prior employ of the Company. In addition, at each annual meeting of
stockholders, beginning with the 1997 annual meeting, each individual who is to
continue to serve as a non-employee Board will receive an option grant to
purchase 6,000 shares of Common Stock, whether or not such individual has been
in the prior employ of the Company and whether or not such individual first
joined the Board after June 30, 1996, provided that such individual has served
as a non-employee Board member for at least six months.
Each automatic grant will have an exercise price equal to the fair market
value per share of Common Stock on the grant date and will have a maximum term
of 10 years, subject to earlier termination following the optionee's cessation
of Board service. Each automatic option will be immediately exercisable;
however, any shares purchased upon exercise of the option will be subject to
repurchase, at the option exercise price paid per share, should the optionee's
service as a non-employee Board member cease prior to vesting in the shares.
Each automatic option grant will vest in a series of installments over the
optionee's period of Board service as follows: one-third of the option shares
upon completion of one year of Board service, and the balance in twenty-four
(24) successive equal monthly installments upon the optionee's completion of
each additional month of Board service thereafter. However, each outstanding
option will immediately vest upon (i) certain changes in the ownership or
control of the Company or (ii) the death or disability of the optionee while
serving as a Board member.
Should the Director Fee Option Grant Program be activated in the future,
each non-employee Board member would have the opportunity to apply all or a
portion of the annual retainer fee, if any, otherwise payable in cash to the
acquisition of a below-market option grant. The option grant would automatically
be made on the first trading day in January in the year for which the retainer
fee would otherwise be payable in cash. The option will have an exercise price
per share equal to one-third of the fair market value of the option
46
<PAGE>
shares on the grant date, and the number of shares subject to the option will be
determined by dividing the amount of the retainer fee applied to the program by
two-thirds of the fair market value per share of Common Stock on the grant date.
As a result, the total spread on the option (the fair market value of the option
shares on the grant date less the aggregate exercise price payable for those
shares) will be equal to the portion of the retainer fee invested in that
option. The option will become exercisable for the option shares in a series of
installments over the optionee's period of Board service as follows: one half of
the option shares will become exercisable upon the optionee's completion of six
(6) months of Board service during the calendar year of the option grant and the
balance will become exercisable in six (6) successive equal monthly installments
upon his or her completion of each additional month of Board service in such
calendar year. However, the option will become immediately exercisable for all
the option shares upon certain changes in the ownership or control of the
Company.
The Board may amend or modify the 1996 Plan at any time. The 1996 Plan will
terminate on June 30, 2006, unless sooner terminated by the Board.
EMPLOYEE STOCK PURCHASE PLAN
The Company's Employee Stock Purchase Plan (the ``Purchase Plan") was
adopted by the Board of Directors on July 12, 1996 and approved by the
stockholders in August 1996. The Purchase Plan is designed to allow eligible
employees of the Company and participating subsidiaries to purchase shares of
Common Stock, at semi-annual intervals, through their periodic payroll
deductions under the Purchase Plan, and a reserve of 1,500,000 shares of Common
Stock has been established for this purpose.
The Purchase Plan will be implemented in a series of successive offering
periods, each with a maximum duration of 24 months. The initial offering period
began on October 1, 1996 and will end on the last business day in July 1998.
All individuals employed by the Company (or any current or future
participating subsidiary) will be eligible to participate in the Purchase Plan
if they are regularly scheduled to work more than twenty (20) hours per week for
more than five (5) calendar months per year.
Individuals who are eligible employees on the start date of any offering
period may enter the Purchase Plan on that start date or on any subsequent
semi-annual entry date (February 1 or August 1 each year). Individuals who
become eligible employees after the start date of the offering period may join
the Purchase Plan on any subsequent semi-annual entry date within that period.
Payroll deductions may not exceed 10% of the participant's base salary for
each semi-annual period of participation, and the accumulated payroll deductions
will be applied to the purchase of shares on the participant's behalf on each
semi-annual purchase date (January 31 and July 31 each year, with the first such
purchase date to occur on January 31, 1997) at a purchase price per share not
less than eighty-five percent (85%) of the LOWER of (i) the fair market value of
the Common Stock on the participant's entry date into the offering period or
(ii) the fair market value on the semi-annual purchase date. In no event,
however, may any participant purchase more than 1,500 shares on any one
semi-annual purchase date. Should the fair market value of the Common Stock on
any semi-annual purchase date be less than the fair market value of the Common
Stock on the first day of the offering period, then the current offering period
will automatically end, and a new twenty-four (24)-month offering period will
begin, based on the lower fair market value.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors established a Compensation Committee in May 1994.
During the last fiscal year, Messrs. Higgerson and Jackman served as members of
the Compensation Committee. Neither of these individuals has served at any time
as an officer or employee of the Company. Prior to the establishment of the
Compensation Committee, all decisions relating to executive compensation were
made by the Company's Board of Directors. For a description of the transactions
between the Company and members of the Compensation Committee and entities
affiliated with such members, see "Certain Transactions." No executive officer
of the Company serves as a member of the board of directors or compensation
committee of any entity which has one or more executive officers serving as a
member of the Company's Board of Directors or Compensation Committee.
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<PAGE>
CERTAIN TRANSACTIONS
Since its inception, the Company has issued and sold, in private placement
transactions, shares of Preferred Stock and warrants to purchase Common Stock to
the Company's executive officers, directors and/or greater than 5% stockholders
as follows:
<TABLE>
<CAPTION>
COMMON COMMON COMMON COMMON
EQUIVALENT EQUIVALENT EQUIVALENT EQUIVALENT
SHARES OF SHARES OF SHARES OF SHARES OF
SERIES A SERIES B SERIES C SERIES D COMMON
PREFERRED PREFERRED PREFERRED PREFERRED STOCK
INVESTOR (1) STOCK (2) STOCK (3) STOCK (4) STOCK (5) WARRANTS
- ----------------------------------------------------- ---------- ---------- ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
B.J. Cassin.......................................... 1,285,458 175,029 109,656 -- 339,908(6)
Coral Partners II.................................... 43,862 6,838 1,353,462 208,487 1,234,280(7)
Donald Green......................................... 681,552 -- -- -- 294,044(8)
Harris Corporation................................... -- -- 877,248 87,725 800,000(9)
Dan E. Steimle....................................... -- -- 5,483 -- 5,000(10)
St. Paul Venture Capital, Inc........................ 1,485,720 231,602 439,655 263,174 831,880(11)
Tellabs, Inc. (12)................................... -- 1,141,322 13,176 1,403,597 1,352,836(13)
Vanguard IV, L.P. (14)............................... 1,485,720 231,602 351,956 87,725 779,464(15)
</TABLE>
- ---------
(1) Shares held by all affiliated persons and entities have been aggregated.
See "Principal and Selling Stockholders" for more detail on shares held by
these purchasers.
(2) Shares of Series A Preferred Stock were issued in January and April 1993 at
an effective common equivalent per share price of $0.45597.
(3) Shares of Series B Preferred Stock were issued in October 1993 at an
effective common equivalent per share price of $2.27985.
(4) Shares of Series C Preferred Stock were issued in March and May 1994 at an
effective common equivalent per share price of $2.27985.
(5) Shares of Series D Preferred Stock were issued in October 1994 at an
effective common equivalent per share price of $2.84982.
(6) 80,292 of these Common Stock Warrants were exercised in February 1995, at
the following exercise prices: 6,472 at $0.025 per share and 73,820 at
$0.125 per share. The remaining 259,616 warrants have an exercise price of
$1.165 per share.
(7) An aggregate of 1,207,327 shares of Common Stock were issued upon exercise
of these Common Stock Warrants in October 1996 at an exercise price of
$1.165 per share.
(8) These Common Stock Warrants have the following exercise prices: 255,316 at
$0.025 per share and 38,728 at $0.125 per share.
(9) These Common Stock Warrants have an exercise price of $1.165 per share.
(10) These Common Stock Warrants were exercised in July 1995 at an exercise
price of $1.165 per share.
(11) These Common Stock Warrants have the following exercise prices: 6,472 at
$0.025 per share, 63,260 at $0.125 per share, 150,000 at $0.25 per share and
612,148 at $1.165 per share.
(12) Brian Jackman, an affiliate of Tellabs, is a director of the Company.
(13) 1,042,836 of these Common Stock Warrants were exercised in May 1995 at an
exercise price of $1.165 per share. The remaining 310,000 warrants have the
following exercise prices: 300,000 at $0.25 per share and 10,000 at $1.165
per share.
(14) Clifford H. Higgerson, an affiliate of Vanguard, is a director of the
Company.
(15) An aggregate of 767,463 shares of Common Stock were issued upon exercise of
these Common Stock Warrants in October 1996 at the following exercise
prices: 6,469 at $0.025 per share, 70,666 at $0.125 per share, 149,347 at
$0.25 per share and 540,981 at $1.165 per share.
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<PAGE>
The foregoing table has been adjusted to reflect the conversion of each
outstanding share of Series A, Series B, Series C and Series D Preferred Stock
of the Company into 1.09656 shares of Common Stock in October 1996. Each holder
of such shares of Common Stock issued upon conversion of Preferred Stock is
entitled to certain registration rights. See ``Description of Capital Stock --
Registration Rights."
In connection with the issuance and sale of Preferred Stock, the Company
entered into an indemnity agreement with its Preferred Stock investors (other
than investors of Series F Preferred Stock) pursuant to which the Company agreed
to indemnify such investors from the financial dilution they may experience as a
result of the costs and potential liabilities of the Company arising in
connection with the DSC litigation. In connection with the settlement of the
litigation with DSC, the Company entered into an Amended and Restated Indemnity
Agreement (the "Amended Indemnity Agreement") with such investors. Pursuant to
the Amended Indemnity Agreement, the indemnification was limited to the costs
and expenses of the litigation and was effected by amending the Company's
Articles of Incorporation in August 1996 to adjust the rate at which each series
of Preferred Stock (other than Series F) converts into Common Stock. The rate at
which each share of Series A, Series B, Series C and Series D Preferred Stock
was adjusted so that each of such shares converted into 1.09656 shares of Common
Stock and each share of Series E Preferred Stock converted into 1.02529 shares
of Common Stock. Such conversion into Common Stock automatically occured in
October 1996. Upon amendment of the Articles of Incorporation in August 1996,
the Amended Indemnity Agreement was terminated and no further indemnification
obligation remains. See Note 9 of Notes to Consolidated Financial Statements.
In October 1995, the Company loaned to Carl Grivner, the President and Chief
Operating Officer of the Company, the sum of $100,000 to assist him in
relocating to Northern California. Such loan bears interest at the rate of 6.37%
per annum, with accrued interest due and payable annually on July 19 of each
year, and the principal of such loan is due and payable in three equal
installments on July 19 of 1996, 1997 and 1998. In August 1996, the Company
forgave one-third of the principal balance and interest accrued through July 19,
1996. As of December 31, 1996, two-thirds of the principal balance of this loan
remained outstanding.
In May 1995, the Company issued an aggregate of 563,600 shares of Common
Stock at $0.3125 per share to certain key employees pursuant to compensation
agreements approved by the Company's Board of Directors. In connection with such
issuance, each such employee paid for the restricted stock by issuing a secured
note payable to the Company. The Company has the right to repurchase such stock
at the original purchase price per share upon the purchaser's cessation of
service prior to vesting in such shares. The repurchase right lapses with
respect to the shares, and each purchaser vests in his shares, as follows: 20%
of the shares upon completion of one year of service measured from the date of
issuance, and the balance of the shares in a series of equal successive monthly
installments upon the purchaser's completion of each of the next 48 months of
service thereafter. Such stock is also subject to the Company's right of first
refusal, which is exercisable in the event the purchaser decides to sell or
otherwise transfer any of the shares purchased prior to the initial public
offering of Common Stock. Donald Green, the Company's Chief Executive Officer,
purchased 167,200 shares of Common Stock and issued a note payable to the
Company in the amount of $52,250. The note is secured by shares of Preferred
Stock owned by Mr. Green. Such note bears interest at the rate of 6.5% per annum
with the entire principal balance of the note, together with all accrued or
unpaid interest, due and payable on December 13, 2000.
AFC and Harris, a stockholder of the Company, entered into an agreement in
1995 to form a joint venture to manufacture, distribute and support the UMC
system in India. The joint venture includes formation of a holding company in
Mauritius, owned 51% by AFC and 49% by Harris, which in turn intends to form a
joint venture in India with local Indian partners following receipt of certain
government approvals. To date, the parties have identified and selected two
Indian companies that will collectively own 34% of the Indian venture to be
located in Delhi. See "Business -- Markets and Customers."
AFC and Tellabs, a stockholder of the Company, entered into a general
partnership in 1994 to design, develop, manufacture and distribute a new product
line derived from the UMC system. AFC contributed a non-exclusive license to use
the UMC technology, Tellabs contributed cash to the joint venture, and each
received defined marketing rights for the developed technology. On December 23,
1996 the Company and
49
<PAGE>
the joint venture partner entered into an agreement to terminate the
partnership. In connection with the dissolution, the joint venture partner
reimbursed the Company $1,683,000 for all loans and advances made by the Company
to date. In addition, the Company and the joint venture partner entered into a
License and Marketing Agreement and an OEM Agreement. Under the License and
Marketing Agreement, the Company granted to the joint venture partner a license
to use the UMC technology in the development, manufacture, and distribution of
coaxial systems for specified markets. In return, the Company will receive
royalties from the sale of these systems. Under the OEM Agreement the Company
agreed to manufacture the UMC products for the joint venture partner. See
"Business -- Markets and Customers."
The Company has granted options to certain of its directors and executive
officers. See ``Management -- Executive Compensation" and ``Principal and
Selling Stockholders."
The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. The Company intends that all future transactions,
including loans, between the Company and its officers, directors, principal
stockholders and their affiliates be approved by a majority of the Board of
Directors, including a majority of the independent and disinterested outside
directors on the Board of Directors, and be on terms no less favorable to the
Company than could be obtained from unaffiliated third parties.
50
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of December 31, 1996 and as adjusted
to reflect the sale of shares of Common Stock offered hereby by (i) each person
(or group of affiliated persons) who is known by the Company to own beneficially
more than 5% of the outstanding shares of the Common Stock of the Company, (ii)
each executive officer of the Company, (iii) each director of the Company, (iv)
all directors and executive officers of the Company as a group and (v) each
Selling Stockholder.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED PRIOR TO SHARES BENEFICIALLY
OFFERING (1) NUMBER OF OWNED AFTER OFFERING
------------------------- SHARES BEING -----------------------
NAME OF BENEFICIAL OWNERS NUMBER PERCENT OFFERED (2) NUMBER PERCENT
- ------------------------------------------------------ ------------ ----------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
Tellabs, Inc. (3) .................................... 3,889,966 11.8% 735,492 3,154,474 9.4%
4951 Indiana Avenue
Lisle, IL 60532
Coral Partners II (4) ................................ 3,308,665 10.1 -- 3,308,665 10.0
60 South Sixth Street, Suite 3510
Minneapolis, MN 55402
St. Paul Venture Capital, Inc. (5) ................... 3,252,031 9.7 614,874 2,637,157 7.8
8500 Normandale Lake Blvd., Suite 1940
Bloomington, MN 55437
Vanguard IV, L.P. .................................... 2,946,397 9.0 250,000 2,696,397 8.1
525 University Avenue
Palo Alto, CA 94301
Harris Corporation (6) ............................... 1,764,973 5.3 300,000 1,464,973 4.4
DTS Division
300 Bel Marin Keys Blvd.
Novato, CA 94944-1188
B.J. Cassin (7)....................................... 1,342,915 4.1 50,000 1,292,915 3.9
Donald Green (8)...................................... 1,820,101 5.5 -- 1,820,101 5.4
Carl J. Grivner (9)................................... 216,000 * -- 216,000 *
Clifford H. Higgerson (10)............................ 2,946,397 9.0 250,000 2,696,397 8.1
Brian Jackman (11).................................... 3,910,932 11.9 735,492 3,175,440 9.5
Dan Rasdal (12)....................................... 63,000 * -- 63,000 *
Karen Godfrey (13).................................... 101,586 * -- 101,586 *
Glenn Lillich (14).................................... 268,000 * -- 268,000 *
Dan E. Steimle (15)................................... 255,407 * -- 255,407 *
All executive officers and directors as a group (9
persons) (16)........................................ 10,924,338 31.9 1,035,492 9,888,846 28.5
Norwest Equity Partners V............................. 1,004,021 3.1 189,834 814,187 2.5
Henri Sulzer (17)..................................... 872,185 2.7 11,644 860,541 2.6
Japan Associated Finance Co., Ltd. (18)............... 732,348 2.2 100,000 632,348 1.9
DSC Communications Corporation........................ 725,787 2.2 137,228 588,559 1.8
Estate of Chris McGill (19)........................... 48,772 * 3,000 45,772 *
John P. Kern and Jeanette E. Kern, TTEES
John P. Kern and Jeanette E. Kern Living Trust U/A
DTD 02/21/91 (20).................................... 41,931 * 7,928 34,003 *
</TABLE>
- ---------
* Less than 1%.
51
<PAGE>
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of Common Stock subject
to options and warrants currently exercisable within 60 days are deemed to
be outstanding for computing the percentage of the person holding such
options or warrants but are not deemed outstanding for computing the
percentage of any other person. Except as indicated by footnote, and subject
to community property laws where applicable, the persons named in the table
have sole voting and investment power with respect to all shares of Common
Stock shown as beneficially owned by them.
(2) Assumes (i) the issuance of 307,928 shares of Common Stock upon the
anticipated exercise of warrants by certain Selling Stockholders and (ii) no
exercise of the Underwriters' over-allotment option. If the over-allotment
option is exercised in full, certain Selling Stockholders will sell
additional shares, as follows: Tellabs, Inc. (56,608 shares); St. Paul
Venture Capital, Inc. (258,554 shares); Norwest Equity Partners V (10,166
shares); Henri Sulzer (4,896 shares); DSC Communications Corporation (57,704
shares) and John P. Kern and Jeanette E. Kern, TTEES John P. Kern and
Jeanette E. Kern Living Trust U/A DTD 02/21/91 (2,072 shares).
(3) Includes 300,000 shares which may be acquired upon exercise of a warrant.
(4) Includes 4,150 shares held by Yuval Almog and 5,263 shares held in an IRA
by Dain Bosworth, Inc. as a custodian for the benefit of Yuval Almog. Also
includes 4,150 shares held by Peter McNerney. Messrs. Almog and McNerney are
two of the general partners of Coral Management Partners II, which is the
general partner of Coral Partners II, and may be deemed to be the beneficial
owners of such shares. Mr. Almog and Mr. McNerney disclaim beneficial
ownership of such shares.
(5) St. Paul Venture Capital, Inc. is a wholly owned subsidiary of St. Paul
Fire and Marine Insurance Company, which is the record owner of the shares.
Includes 831,880 shares which may be acquired upon exercise of warrants.
(6) Includes 800,000 shares which may be acquired upon exercise of a warrant,
of which 300,000 shares are expected to be exercised in connection with this
offering.
(7) Includes 255,433 shares held by Mr. Cassin as a conservator for Robert
Cassin, 43,380 of which shares may be acquired upon exercise of a warrant,
100,000 shares held in trust by the Cassin Family Foundation and 100,000
shares held in trust by the Cassin Family Charitable Remainder Trust. The
remaining shares are held in trust by B.J. Cassin and Isabel B. Cassin,
Trustees of the Cassin Family Trust U/D/T, dated January 31, 1996. Of the
50,000 shares shown in this table as being offered by Mr. Cassin, 25,000
shares are being offered by each of the Cassin Family Foundation and the
Cassin Family Charitable Remainder Trust.
(8) Includes 289,902 shares issuable upon exercise of options held by Mr.
Green, 127,467 of which shares will be vested as of 60 days from December
31, 1996. Also includes 294,044 shares which may be acquired by Mr. Green
upon exercise of warrants. Excludes shares held by Mr. Green's adult
children.
(9) Includes 165,334 shares issuable upon exercise of options held by Mr.
Grivner, 19,467 of which shares will be vested as of 60 days from December
31, 1996.
(10) Includes 2,946,397 shares held by Vanguard IV, L.P. Mr. Higgerson is a
general partner of Vanguard Venture Partners, L.P., which is the general
partner of Vanguard IV, L.P. and may be deemed to be the beneficial owner of
such shares owned by Vanguard IV, L.P. Mr. Higgerson disclaims beneficial
ownership of such shares.
(11) Includes 3,889,966 shares held by Tellabs, Inc., 300,000 of which shares
may be acquired upon exercise of a warrant. Mr. Jackman is the Executive
Vice President of Tellabs, Inc. and the President of Tellabs Operations,
Inc. and may be deemed to be the beneficial owner of such shares owned by
Tellabs. Mr. Jackman disclaims beneficial ownership of such shares. Also
includes 10,000 shares which may be acquired by Mr. Jackman upon exercise of
a warrant.
(12) Includes 63,000 shares issuable upon exercise of options held by Mr.
Rasdal, 38,400 of which shares will be vested as of 60 days from December
31, 1996.
(13) Includes 75,200 shares issuable upon exercise of options held by Ms.
Godfrey, 40,813 of which shares will be vested as of 60 days from December
31, 1996.
52
<PAGE>
(14) Includes 248,000 shares issuable upon exercise of options held by Mr.
Lillich, 168,800 of which shares will be vested as of 60 days from December
31, 1996. Also includes 20,000 shares which may be acquired upon exercise of
a warrant.
(15) Includes 58,667 shares subject to a right of repurchase by the Company.
Includes 52,000 shares issuable upon exercise of options held by Mr.
Steimle, 20,113 of which shares will be vested as of 60 days from December
31, 1996; 4,800 shares held in an IRA by Alex. Brown & Sons as a custodian
for the benefit of Mr. Steimle; and 4,000 shares held in an IRA by Alex.
Brown & Sons as a custodian for the benefit of Jessica Steimle.
(16) Includes 58,667 shares subject to a right of repurchase by the Company.
Includes 893,436 shares issuable upon exercise of options, 415,080 of which
shares will be vested as of 60 days from December 31, 1996, and 667,424
shares which may be acquired upon exercise of warrants.
(17) Includes 130,600 shares issuable upon exercise of options held by Mr.
Sulzer, 107,486 of which shares will be vested as of 60 days from December
31, 1996.
(18) Represents shares held by the following entities affiliated with Japan
Associated Finance Co., Ltd.: Japan Associated Finance Co., Ltd. (29,295
shares), JAFCO R-1(A) Investment Enterprise Partnership (28,302 shares).
JAFCO R-1(B) Investment Enterprise Partnership (28,302 shares), JAFCO G-5
Investment Enterprise Partnership (60,570 shares) and U.S. Information
Technology Investment Enterprise Partnership (585,879 shares). Of the 28,500
shares to be sold in this offering, 4,000 shares will be sold by Japan
Associated Finance Co., Ltd., 3,865 shares will be sold by JAFCO R-1(A)
Investment Enterprise Partnership, 3,865 shares will be sold by JAFCO R-1(B)
Investment Enterprise Partnership, 8,270 shares will be sold by JAFCO G-5
Investment Enterprise Partnership and 80,000 will be sold by U.S.
Information Technology Investment Enterprise Partnership.
(19) Includes 8,000 shares which may be acquired upon exercise of a warrant.
(20) Includes 20,000 shares which may be acquired upon exercise of a warrant, of
which 7,928 shares are expected to be exercised in connection with this
offering.
53
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 100,000,000 shares
of Common Stock, par value $0.01 per share, and 5,000,000 shares Preferred
Stock, par value $0.01 per share.
COMMON STOCK
As of December 31, 1996, there were 32,649,607 shares of Common Stock
outstanding, held of record by 211 stockholders. There will be 33,157,535
shares, of Common Stock outstanding after giving effect to the sale of the
shares of Common Stock offered hereby after giving effect to the exercise of
warrants to purchase 307,928 shares in connection with this offering and
assuming no exercise after December 31, 1996 of any other outstanding stock
options and warrants. Subject to the rights of the holders of any Preferred
Stock which may be outstanding, each holder of Common Stock on the applicable
record date is entitled to receive such dividends as may be declared by the
Board of Directors out of funds legally available therefor, and, in the event of
liquidation, to share pro rata in any distribution of the Company's assets after
payment or providing for the payment of liabilities and the liquidation
preference of any outstanding Preferred Stock. Each holder of Common Stock is
entitled to one vote for each share held of record on the applicable record date
on all matters presented to a vote of stockholders, including the election of
directors. Holders of Common Stock have no preemptive rights to purchase or
subscribe for any stock or other securities, and there are no conversion rights
or redemption or sinking fund provisions with respect to such Common Stock. All
outstanding shares of Common Stock are, and the shares of Common Stock offered
hereby will be when issued, fully paid and non-assessable.
PREFERRED STOCK
The Board of Directors is authorized, without further vote or action by
holders of Common Stock, to issue 5,000,000 shares of Preferred Stock in one or
more series and to designate the rights, preferences, limitations, restrictions
of and upon shares of each series, including voting, redemption and conversion
rights. The Board of Directors may also designate dividend rights and
preferences in liquidation. It is not possible to state the effect of the
authorization and issuance of any series of Preferred Stock upon the rights of
holders of Common Stock until the Board of Directors determines the specific
terms, rights and preferences of such a series of Preferred Stock. However, such
effects might include, among other things, restricting dividends on the Common
Stock, diluting the voting power of the Common Stock or impairing the
liquidation rights of such shares without further action by holders of Common
Stock. In addition, under certain circumstances, the issuance of Preferred Stock
may render more difficult or tend to discourage a merger, tender offer or proxy
contest, the assumption of control by a holder of a large block of the Company's
securities or the removal of incumbent management, which could thereby depress
the market price of the Company's Common Stock.
WARRANTS
As of December 31, 1996, after giving effect to the exercise of warrants to
purchase 307,928 shares in connection with this offering, the Company had
outstanding warrants to purchase an aggregate of 2,265,848 shares of Common
Stock with the following per share exercise prices: 446,592 at $0.025; 101,988
at $0.125; 450,000 at $0.25; 1,237,200 at $1.165; and 30,068 at $7.00. These
warrants contain net exercise provisions and expire at various dates between
January 1, 1998 and September 30, 2000. See ``Certain Transactions."
ANTI-TAKEOVER PROVISIONS
DELAWARE LAW
Section 203 (``Section 203") of the Delaware General Corporation Law
(``DGCL") is applicable to corporate takeovers of Delaware corporations. Subject
to certain exceptions set forth therein, Section 203 provides that a corporation
shall not engage in any business combination with any ``interested stockholder"
for a three-year period following the date that such stockholder becomes an
interested stockholder unless (a) prior to such date, the board of directors of
the corporation approved either the business combination or the transaction
which resulted in the stockholder becoming an interested stockholder, (b) upon
consummation of the transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
54
<PAGE>
commenced (excluding certain shares) or (c) on or subsequent to such date, the
business combination is approved by the board of directors of the corporation
and by the affirmative votes of at least two-thirds of the outstanding voting
stock which is not owned by the interested stockholder. Except as specified in
Section 203, an interested stockholder is generally defined to include any
person that is the owner of 15% or more of the outstanding voting stock of the
corporation, or is an affiliate or associate of the corporation and was the
owner of 15% or more of the outstanding voting stock of the corporation, or is
an affiliate or associate of the corporation and was the owner of 15% or more of
the outstanding voting stock of the corporation any time within three years
immediately prior to the relevant date, and the affiliates and associates of
such person. Under certain circumstances, Section 203 makes it more difficult
for an interested stockholder to effect various business combinations with a
corporation for a three-year period, although the stockholders may, by adopting
an amendment to the corporation's certificate of incorporation or bylaws, elect
not to be governed by this section, effective 12 months after adoption. The
Company's certificate of incorporation and the bylaws do not exclude the Company
from the restrictions imposed under Section 203. It is anticipated that the
provisions of Section 203 may encourage companies interested in acquiring the
Company to negotiate in advance with the Board of Directors of the Company since
the stockholder approval requirement would be avoided if a majority of the
directors then in office approve either the business combination or the
transaction which resulted in the stockholder becoming an interested
stockholder. These provisions may have the effect of deterring hostile takeovers
or delaying changes in control of the Company, which could depress the market
price of the Common Stock and which could deprive the stockholders of
opportunities to realize a premium on shares of the Common Stock held by them.
CHARTER AND BYLAW PROVISIONS
The Company's certificate of incorporation and bylaws contain certain
provisions that could discourage potential takeover attempts and make more
difficult attempts by stockholders to change management. The certificate of
incorporation and the bylaws provide for a classified Board of Directors and
permit the Board to create new directorships and to elect new directors to serve
for the full term of the class of director in which the new directorship was
created. The terms of the directors are staggered to provide for the election of
approximately one- third of the Board members each year, with each director
serving a three-year term. The Board (or its remaining members, even though less
than a quorum) is also empowered to fill vacancies on the Board occurring for
any reason for the remainder of the term of the class of directors in which the
vacancy occurred. Stockholders may remove a director or the entire Board, and
such removal requires the affirmative vote of two- thirds of the outstanding
voting stock. The Company's certificate of incorporation provides that
stockholders may not take action by written consent but only at a stockholders'
meeting, and that special meetings of the stockholders of the Company may only
be called by the Chairman of the Board or a majority of the Board.
The Company's certificate of incorporation provides that, in addition to the
requirements of the DGCL, any ``Business Combination" (as defined in the
certificate of incorporation) requires the affirmative vote of two-thirds of the
votes entitled to be cast by the holders of the Company's then outstanding
capital stock, voting together as a class, unless two-thirds of the directors
(excluding certain directors affiliated with persons interested in the Business
Combination) approve the proposed transaction.
A ``Business Combination," as defined in the Company's certificate of
incorporation, includes (i) a merger or consolidation of the Company or any of
its subsidiaries with an ``Interested Stockholder" (as defined in the
certificate of incorporation) or any other corporation which is, or after such
transaction would be, an ``Affiliate" or ``Associate" (as such terms are defined
in the Securities Exchange Act of 1934) of an Interested Stockholder; (ii) any
sale, lease, exchange, mortgage, pledge, transfer or other disposition to or
with, or proposed by or on behalf of, any Interested Stockholder or any
Affiliate or Associate of any Interested Stockholder involving any assets of the
Company or any subsidiary that constitute five percent or more of the total
assets of the Company; (iii) the issuance or transfer by the Company or any
subsidiary of any securities of the Company or any subsidiary to, or proposed by
on behalf of, an Interested Stockholder or any Affiliate or Associate of an
Interested Stockholder in exchange for cash, securities or other property that
constitute five percent or more of the total assets of the Company; (iv) the
adoption of any plan or proposal for the liquidation or dissolution of the
Company or any spin-off or split-up of any kind of the Company or
55
<PAGE>
any subsidiary, proposed by or on behalf of an Interested Stockholder or any
Affiliate or Associate of an Interested Stockholder; or (v) any
reclassification, recapitalization, or merger or consolidation of the Company
with any of its subsidiaries or any other transaction that has the effect,
directly or indirectly, of increasing the proportionate share of any class or
series of capital stock of the Company or any of its subsidiaries that is
beneficially owned by any Interested Stockholder or an Affiliate or Associate of
any Interested Stockholder.
The Company's certificate of incorporation defines an ``Interested
Stockholder" as (i) an individual, corporation or other entity (a ``person")
which is or was at any time within the two-year period preceding the date of the
transaction in question, the beneficial owner of 15% or more of the outstanding
voting securities of the Company; (ii) an Associate or Affiliate of the Company
who within the two-year period preceding the date of the transaction in question
was the beneficial owner of 15% or more of the outstanding voting securities of
the Company; or (iii) under certain circumstances, an assignee of any of the
foregoing persons. A person is a ``beneficial owner" of any stock of the Company
(a) which such person or any of its Affiliates and Associates beneficially owns,
directly or indirectly; (b) which such person or any of its Affiliates or
Associates has, directly or indirectly, (i) the right to acquire (whether such
right is exercisable immediately or subject only to the passage of time),
pursuant to any agreement, arrangement or understanding or upon the exercise of
conversion rights, exchange warrants or options, or otherwise, or (ii) the right
to vote pursuant to any agreement, arrangement or understanding; or (c) which
are beneficially owned, directly or indirectly, by any other person with which
such person or any of its Affiliates or Associates has any agreement,
arrangement or understanding for the purpose of acquiring, holding, voting or
disposing of any shares of capital stock.
The foregoing provisions of the certificate of incorporation and bylaws of
the Company may deter any potential unfriendly offers or other efforts to obtain
control of the Company that are not approved by the Board of Directors and could
thereby deprive the stockholders of opportunities to realize a premium on their
Common Stock and could make removal of incumbent directors more difficult. At
the same time, these provisions may have the effect of inducing any persons
seeking control of the Company or a business combination with the Company to
negotiate terms acceptable to the Board of Directors. Such provisions of the
Company's certificate of incorporation and bylaws can be changed or amended only
by the affirmative vote of the holders of at least two-thirds of the Company's
then outstanding voting stock.
REGISTRATION RIGHTS
Following this offering, the holders of approximately 19,368,927 shares of
Common Stock outstanding or issuable upon exercise of outstanding warrants (the
``Holders") will be entitled to certain rights with respect to the registration
of such shares under the Securities Act. Under the terms of an agreement between
the Company and the Holders, if the Company proposes to register any of its
securities under the Securities Act, the Holders are entitled to notice of such
registration and are entitled to include shares of such Common Stock therein;
provided, among other conditions, that the underwriters of any offering have the
right to limit the number of such shares included in such registration. In
addition, upon the request of the Holders of at least 50% of the registrable
securities at any time after January 1, 1997, the Holders may require the
Company on not more than one occasion to file a registration statement under the
Securities Act with respect to such shares, and the Company is required to use
its best efforts to effect such registration, subject to certain conditions and
limitations. The Holders may require the Company to register all or a portion of
their shares with registration rights on Form S-3 when such form becomes
available to the Company, on not more than three occasions, subject to certain
conditions and limitations. If the Holders, by exercising their demand
registration rights, cause a large number of securities to be registered and
sold in the public market, such sales could have an adverse effect on the market
price for the Company's Common Stock. Moreover, if the Company were to include
in a Company initiated registration shares held by the Holders pursuant to
exercise of their piggyback registration rights, such sales may have an adverse
effect on the Company's ability to raise additional capital.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar of the Common Stock is The First National
Bank of Boston.
56
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock in the public market
following this offering could adversely affect the market price for the
Company's Common Stock. The number of shares of Common Stock available for sale
in the public market is limited by restrictions under the Securities Act and by
the following lock-up agreements: (i) in connection with the Company's initial
public offering, the Company's officers, directors and certain stockholders
agreed (the "IPO Lock-Up Agreement") not to sell or otherwise dispose of any of
their shares for 180 days following the date of the Company's initial public
offering without the prior consent of Morgan Stanley & Co. Incorporated; and
(ii) in connection with this offering, the Company's executive officers,
directors and the Selling Stockholders have entered into agreements with Morgan
Stanley & Co. Incorporated (the "Follow-On Lock-Up Agreements") pursuant to
which such holders agreed not to sell or otherwise dispose of any of their
shares for 90 days following completion of this offering. Morgan Stanley & Co.
Incorporated may, however, in its sole discretion at any time and without
notice, release all or any portion of the securities subject to Lock-Up
Agreements. Upon completion of this offering, the Company will have outstanding
33,157,535 shares of Common Stock. Of these shares: 7,793,750 shares (including
the 5,175,000 shares sold in the Company's initial public offering and the
2,600,000 shares sold in this offering) will be available for immediate sale;
10,547,936 shares will become eligible for sale on March 30, 1997 upon
expiration of the IPO Lock-Up Agreements pursuant to Rule 701 or Rule 144
(subject in certain cases to the volume limitations of Rule 144); 13,346 shares
will become eligible for sale pursuant to Rule 144 (subject in certain cases to
the applicable Rule 144 volume limitations) at various dates between March 30,
1997 and the expiration date of the Follow-On Lock-Up Agreements upon expiration
of the applicable Rule 144 holding periods; 11,499,943 shares will become
eligible for sale 90 days after the completion of this offering upon expiration
of the Follow-On Lock-Up Agreements pursuant to Rule 701 or Rule 144 (subject in
certain cases to the volume limitations of Rule 144); and the remaining
3,302,560 shares will become eligible for sale pursuant to Rule 144 (subject in
certain cases to the applicable Rule 144 volume limitations) at various dates
following expiration of the Follow-On Lock-Up Agreements.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned Restricted Shares for at
least two years (including the holding period of any prior owner except an
affiliate) would be entitled to sell within any three-month period a number of
shares that does not exceed the greater of: (i) one percent of the number of
shares of Common Stock then outstanding (approximately 330,000 shares
immediately after this offering); of (ii) the average weekly trading volume of
the Common stock during the four calendar weeks preceding the filing of a Form
144 with respect to such sale. Sales under Rule 144 are also subject to certain
manner of sale provisions and notice requirements and to the availability of
current public information about the Company. Under Rule 144(k), a person who is
not deemed to have been an affiliate of the Company at any time during the 90
days preceding a sale, and who has beneficially owned the shares proposed to be
sold for at least three years (including the holding period of any prior owner
except an affiliate), is entitled to sell such shares without complying with the
manner of sale, public information, volume limitation or notice provisions of
Rule 144.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
the resale of securities originally purchased from the Company by its employees,
directors, officers, consultants or advisers prior to the closing of this
offering, pursuant to written compensatory benefit plans or written contracts
relating to the compensation of such persons. In addition, the Securities and
Exchange Commission has indicated that Rule 701 will apply to stock options
granted by the Company before this offering, along with the shares acquired upon
exercise of such options. Securities issued in reliance on Rule 701 are deemed
to be Restricted Shares and, beginning 90 days after the date of this Prospectus
(unless subject to the contractual restrictions described above), may be sold by
persons other than affiliates subject only to the manner of sale provisions of
Rule 144 and by affiliates under Rule 144 without compliance with its two-year
minimum holding period requirements.
In addition, as of December 31, 1996, the Company had outstanding warrants
to purchase an aggregate of 2,265,848 shares of Common Stock (after giving
effect to the exercise of warrants to purchase 307,928 shares in connection with
this offering). These warrants contain net exercise provisions. Accordingly, any
shares issued upon net exercise will be eligible for sale immediately upon
expiration of any lock-up
57
<PAGE>
agreements to which such shares are subject pursuant to Rule 144. In addition,
the Company has filed a registration statement on Form S-8 with the Commission
registering 8,675,676 shares of Common Stock reserved for issuance under the
Company's Employee Stock Purchase Plan and 1996 Stock Incentive Plan. Of such
shares, 4,313,544 shares subject to stock options outstanding under the 1996
Stock Incentive Plan are subject to lock-up agreements and will be eligible for
sale upon expiration of such lock-up agreements as follows: 3,290,108 shares on
March 30, 1997 and the remaining 1,023,436 shares 90 days from the date of this
Prospectus. The 1,500,000 shares reserved under the Employee Stock Purchase Plan
will be eligible for sale upon issuance. In addition, the holders of
approximately 19,368,927 shares of Common Stock outstanding or issuable upon
exercise of outstanding warrants have certain rights to require the Company to
register those shares under the Securities Act. If such holders, by exercising
their demand registration rights, cause a large number of shares to be
registered and sold in the public market, such sales could have a material
adverse effect on the market price for the Company's Common Stock. If the
Company were required to include in a Company-initiated registration shares held
by such holders pursuant to the exercise of their piggyback registration rights,
such sales may have an adverse effect on the Company's ability to raise needed
capital. See "Description of Capital Stock" and "Underwriters."
58
<PAGE>
UNDERWRITERS
Under the terms and subject to conditions contained in an Underwriting
Agreement, the U.S. Underwriters named below, for whom Morgan Stanley & Co.
Incorporated, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Cowen &
Company and Hambrecht & Quist LLC are acting as U.S. Representatives (the ``U.S.
Underwriters"), have severally agreed to purchase, and the Company has agreed to
sell to them, and the International Underwriters named below, for whom Morgan
Stanley & Co. International Limited, Merrill Lynch International, Cowen &
Company and Hambrecht & Quist LLC are acting as International Representatives
(the ``International Underwriters"), have severally agreed to purchase, and the
Company has agreed to sell to them, the respective number of shares of Common
Stock set forth opposite their respective names below:
<TABLE>
<CAPTION>
NUMBER OF
NAME OF SHARES
- ------------------------------------------------------------------------------------------- ----------
<S> <C>
U.S. Underwriters:
Morgan Stanley & Co. Incorporated........................................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................................................
Cowen & Company..........................................................................
Hambrecht & Quist LLC....................................................................
----------
Subtotal............................................................................... 2,080,000
----------
International Underwriters:
Morgan Stanley & Co. International Limited...............................................
Merrill Lynch International..............................................................
Cowen & Company..........................................................................
Hambrecht & Quist LLC....................................................................
----------
Subtotal............................................................................... 520,000
----------
Total................................................................................ 2,600,000
----------
----------
</TABLE>
The U.S. Underwriters and the International Underwriters are collectively
referred to as the ``Underwriters." The Underwriting Agreement provides that the
obligations of the several Underwriters to pay for and accept delivery of the
shares of Common Stock offered hereby are subject to the approval of certain
legal matters by their counsel and to certain other conditions. The Underwriters
are obligated to take and pay for all of the shares of Common Stock offered
hereby (other than those covered by the over-allotment option described below),
if any are taken.
Pursuant to the Agreement Between U.S. and International Underwriters, each
U.S. Underwriter has represented and agreed that, with certain exceptions set
forth below, (a) it is not purchasing any of the U.S. Shares (as defined below)
for the account of anyone other than a United States or Canadian Person (as
defined below) and (b) it has not offered or sold, and will not offer or sell,
directly or indirectly, any of the U.S. Shares or distribute any prospectus
relating to the U.S. Shares outside the United States or Canada or to anyone
other than a United States or Canadian Person. Pursuant to the Agreement Between
U.S. and International Underwriters, each International Underwriter has
represented and agreed that, with certain exceptions set forth below, (a) it is
not purchasing any of the International Shares (as defined below) for the
account of any United States or Canadian Person and (b) it has not offered or
sold, and will not offer or sell, directly or indirectly, any of the
International Shares or distribute any prospectus relating to the International
Shares in the United States or Canada or to any United States or Canadian
Person. The foregoing limitations do not apply to stabilization transactions or
to certain other transactions specified in the Agreement Between U.S. and
International Underwriters. As used herein, ``United States or Canadian Person"
means any national or resident of the United States or Canada or any
corporation, pension, profit-sharing or other trust or other entity organized
under the laws of the United States or Canada or of any political subdivision
thereof (other than a branch located outside of the United States and Canada of
any United States or Canadian Person) and includes any United States or Canadian
branch of a person who is
59
<PAGE>
not otherwise a United States or Canadian Person, and ``United States" means the
United States of America, its territories, its possessions and all areas subject
to its jurisdiction. All shares of Common Stock to be offered by the U.S.
Underwriters and International Underwriters under the Underwriting Agreement are
referred to herein as the ``U.S. Shares" and the ``International Shares,"
respectively.
Pursuant to the Agreement Between U.S. and International Underwriters, sales
may be made between the U.S. Underwriters and the International Underwriters of
any number of shares of Common Stock to be purchased pursuant to the
Underwriting Agreement as may be mutually agreed. The per share price and
currency settlement of any shares of Common Stock so sold shall be the public
offering price set forth on the cover page hereof, in United States dollars,
less an amount not greater than the per share amount of the concession to
dealers set forth below.
Pursuant to the Agreement Between U.S. and International Underwriters, each
U.S. Underwriter has represented that it has not offered or sold, and has agreed
not to offer or sell, any shares of Common Stock, directly or indirectly, in
Canada or to, or for the benefit of, any resident of any province or territory
of Canada in contravention of the securities laws thereof and has represented
that any offer of such shares in Canada will be made only pursuant to an
exemption from the requirement to file a prospectus in the province or territory
of Canada in which such offer is made. Each U.S. Underwriter has further agreed
to send to any dealer who purchases from it any shares of Common Stock a notice
stating in substance that, by purchasing such shares, such dealer represents and
agrees that it has not offered or sold and will not offer or sell, directly or
indirectly, any of such shares in Canada or to, or for the benefit of, any
resident of any province or territory of Canada in contravention of the
securities laws thereof and that any offer of shares of Common Stock in Canada
will be made only pursuant to an exemption from the requirement to file a
prospectus in the province or territory of Canada in which such offer is made,
and that such dealer will deliver to any other dealer to whom it sells any of
such shares a notice to the foregoing effect.
Pursuant to the Agreement Between U.S. and International Underwriters, each
International Underwriter has represented that (i) it has not offered or sold
and prior to the expiration of the period of six months from the date of closing
will not offer or sell any shares of Common Stock to persons in the United
Kingdom except to persons whose ordinary activities involve them in acquiring,
holding, managing or disposing of investments (as principal or agent) for the
purposes of their businesses or otherwise in circumstances which have not
resulted and will not result in an offer to the public in the United Kingdom
within the meaning of the Public Offers of Securities Regulations 1995 (the
``Regulations"); (ii) it has complied and will comply with all applicable
provisions of the Financial Services Act 1986 and the Regulations with respect
to anything done by it in relation to such shares in, from or otherwise
involving the United Kingdom; and (iii) it has only issued or passed on and will
only issue or pass on to any person in the United Kingdom any document received
by it in connection with the issue of such shares to a person who is of a kind
described in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1996, or is a person to whom such document
may otherwise lawfully be issued or passed on.
Pursuant to the Agreement Between U.S. and International Underwriters, each
International Underwriter has represented and agreed that it has not offered or
sold, and will not offer or sell, directly or indirectly, in Japan or to or for
the account of any resident thereof, any shares of Common Stock acquired in
connection with this offering, except for offers or sales to Japanese
International Underwriters or dealers and except pursuant to any exemption from
the registration requirements of the Securities and Exchange Law and other
relevant laws and regulations of Japan. Each International Underwriter has
further agreed to send to any dealer who purchases from it any of such shares of
Common Stock a notice stating in substance that by purchasing such shares such
dealer may not offer or sell any of such shares, directly or indirectly, in
Japan or to or for the account of any resident thereof, except for offers or
sales to Japanese International Underwriters or dealers and except pursuant to
any exemption from the registration requirements of the Securities and Exchange
Law and other relevant laws and regulations of Japan, and that such dealer will
send to any other dealer to whom it sells any of such shares a notice to the
foregoing effect.
The Underwriters initially propose to offer part of the shares of Common
Stock directly to the public at the public offering price set forth on the cover
page hereof and part to certain dealers at a price which
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<PAGE>
represents a concession not in excess of $ a share under the public offering
price. Any Underwriter may allow, and such dealers may reallow, a concession not
in excess of $ a share to other Underwriters or to certain other dealers.
Certain Selling Stockholders have granted to the U.S. Underwriters an
option, exercisable for 30 days from the date of this Prospectus, to purchase up
to an aggregate of 390,000 additional shares of Common Stock at the public
offering price set forth on the cover page hereof, less underwriting discounts
and commissions. The U.S. Underwriters may exercise such option to purchase
solely for the purpose of covering over-allotments, if any, incurred in the sale
of the shares of Common Stock offered hereby.
The Company, the Selling Stockholders and the Underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act.
The Company has agreed not to offer, pledge, sell, contract to sell, sell
any option or contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase, or otherwise transfer or dispose
of, directly or indirectly, any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock, or enter into
any swap or similar agreement that transfers, in whole or in part, the economic
risk of ownership of the Common Stock, for a period of 90 days after the date of
this Prospectus, without the prior written consent of Morgan Stanley & Co.
Incorporated, subject to certain limited exceptions.
See ``Shares Eligible for Future Sale" for a description of certain
arrangements by which all officers, directors and stockholders of the Company
have agreed not to sell or otherwise dispose of the Common Stock of the Company
for a period of 90 days after the date of this Prospectus, without the prior
written consent of Morgan Stanley & Co. Incorporated.
Pursuant to regulations promulgated by the Securities and Exchange
Commission (the "Commission"), market makers in the Common Stock who are
Underwriters or prospective underwriters ("passive market makers") may, subject
to certain limitations, make bids for or purchases of shares of Common Stock
until the earlier of the time of commencement (the "Commencement Date") of
offers or sales of the Common Stock contemplated by this Prospectus or the time
at which a stabilizing bid for such shares is made. In general, on and after the
date two business days prior to the Commencement Date (1) such market maker's
net daily purchases of the Common Stock may not exceed 30% of its average daily
trading volume in such stock for the two full consecutive calendar months
immediately preceding the filing date of the registration statement of which
this Prospectus forms a part, (2) such market maker may not effect transactions
in, or display bids for, the Common Stock at a price that exceeds the highest
bid for the Common Stock by persons who are not passive market makers and (3)
bids made by passive market makers must be identified as such.
61
<PAGE>
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Brobeck, Phleger & Harrison LLP, San Francisco, California. Certain
legal matters in connection with this offering will be passed upon for the
Underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California.
EXPERTS
The consolidated financial statements of the Company as of December 31, 1995
and 1996, and for each of the years in the three-year period ended December 31,
1996, have been included herein and in the Registration Statement in reliance on
the report of KPMG Peat Marwick LLP, independent auditors, appearing elsewhere
herein and upon the authority of said firm as experts in auditing and
accounting.
ADDITIONAL INFORMATION
The Company has filed with the Commission a registration statement on Form
S-1 (together with all amendments and exhibits thereto, the ``Registration
Statement") under the Securities Act with respect to the Common Stock offered
hereby. This Prospectus, which constitutes a part of the Registration Statement,
does not contain all of the information set forth in the Registration Statement,
certain parts of which are omitted in accordance with the Rules and Regulations
of the Commission. For further information with respect to the Company and the
Common Stock offered hereby, reference is made to the Registration Statement and
to the exhibits and schedules filed therewith. Statements contained in this
Prospectus as to the contents of any contract or other document are not
necessarily complete, and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference. The
Company is also subject to the information requirements of the Securities
Exchange Act of 1934, and in accordance therewith files reports, proxy
statements and other information with the Commission. Copies of the Registration
Statement and the exhibits and schedules thereto, reports, proxy statements and
other information filed by the Company may be inspected or copied at the public
reference facilities maintained by the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional
offices located at Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661 and at Seven World Trade Center, 13th Floor, New
York, New York 10048. Copies of the Registration Statement may also be obtained
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. The Commission also maintains a
World Wide Web site that contains reports, proxy and information statements and
other information regarding registrants, such as the Company, that file
electronically with the Commission. The address of the site is
http://www.sec.gov. In addition, the Common Stock of the Company is quoted on
the Nasdaq National Market. Reports and other information concerning the Company
may be inspected at the National Association of Securities Dealers, Inc., 1735 K
Street, Washington, D.C.
62
<PAGE>
GLOSSARY OF TERMS
<TABLE>
<S> <C>
Analog....................................... A form of transmission employing a continuous
electrical signal (rather than a pulsed or
digital system) that varies in frequency and
amplitude.
Application Specific Integrated Circuit A broad term that refers to custom or
(ASIC)...................................... semi-custom integrated circuits.
Asynchronous Data Channel Service (ADU)...... A low speed asynchronous data interface for
rates up to 38.4 Kbps.
Backplane Design............................. The design of the circuit board that
interconnects a wide variety of service
types. The interconnection of the traces on
the backplane defines the performance and
flexibility of the system.
Bandwidth.................................... A relative range of frequencies that carry a
signal without distortion on a transmission
medium.
Bellcore..................................... Bell Communications Research. A standards
body funded by the telecommunications
industry that proposes new network
architectures and performs validation testing
and analysis.
Beta Testing................................. A step in the engineering cycle prior to full
manufacturing release.
Central Office............................... A term commonly used to describe the location
of the switching equipment that is used to
re-direct telephone calls.
Central Office Switch........................ Used synonomously with Central Office.
Central Processing Unit (CPU)................ The circuit pack that contains the main
operating software for the system. It is
responsible for co-ordination of all system
level functionality.
Channel Bank................................. A multiplexer that puts many slow speed voice
or data conversations onto one high speed
link and controls the flow of the
conversations.
Coaxial...................................... A type of electrical cable in which one
conductor is wrapped around another and
insulates the inner conductor.
Codec........................................ Electronic circuitry employed to digitize
analog signals and to convert the digital
signals back into analog form.
Digital...................................... The representation of information as discrete
value (i.e., 1s and 0s). These digital values
can be processed, manipulated, exchanged or
stored by electronic systems.
Digital Loop Carrier (DLC)................... A device used to concentrate susbscriber
telephone circuits onto one or more high
speed digital loops in a carrier's central
office by converting analog signals into
digital bit streams.
E1 Transceivers.............................. A transmitter and receiver (transceiver) for
sending digital data at 2.04 Mbps over
twisted pair cabling.
</TABLE>
63
<PAGE>
<TABLE>
<S> <C>
Frequency.................................... The number of identical cycles per second,
measured in hertz, of a periodic oscillation
or wave in radio propagation.
Hertz........................................ One cycle per second. The unit for measuring
frequency signals.
High Speed Digital Subscriber Line (HDSL).... A technology that enables high speed
transmission of data over copper wires.
Utilization of this technology requires
minimal changes to existing copper phone
lines.
Integrated Services Digital Network (ISDN)... An internationally accepted standard for
voice, data and signaling that makes all
transmission circuits end-to-end digital and
defines a standard out-of-band signaling
system.
ISO-9001..................................... ISO is the International Standards
Organisation responsible for drafting quality
procedures. 9001 is the quality procedure for
manufacturing.
Large Line-Size Market....................... Market with 600 to 2,000 lines within the
serviceable area of the NGDLC, generally in
urban areas.
Line Cards................................... A term commonly used to refer to service
interfaces that terminate on plug-in circuit
packs.
Local Exchange Terminal (LET)................ The term the Company uses to describe the
terminal that is housed in the Central
Office. Exchange is the international word
for switch.
Local Loop................................... A term used to describe the copper cables
that connect a customer's phone to the
Central Office.
MLT Remote Testing Capabilities.............. MLT or mechanized loop testing is a technique
the telephone companies use to test a
customer's telephone line. When a DLC is
used, special interfaces must be developed to
provide this test interface.
Next Generation Digital Loop Carrier The next generation of DLC's, designed and
(NGDLC)..................................... introduced in the market in the early 1990s
to support telecommunications services over
fiber-only networks in densely populated
urban markets with 600 to 2,000 lines within
the serviceable area of the NGDLC.
PCBA......................................... Printed Circuit Board Assembly.
Plain Old Telephone Service (POTS)........... Basic telephone service with no enhanced
features such as call waiting, conference
calling or call forwarding.
Printed Circuit Boards....................... A fiberglass laminated board with etched
copper traces.
RBOC......................................... Regional Bell Operating Company.
Remote Service Terminal (RST)................ A term the Company uses to describe its
outside enclosures located at or near the
customers that are being served from it.
</TABLE>
64
<PAGE>
<TABLE>
<S> <C>
Small Line-Size Market....................... Market with less than 600 lines within the
serviceable area of the DLC, generally in
rural and suburban areas.
Synchronous Data Channel Service (SDU)....... A low speed data interface for rates less
than 64 Kbps.
Synchronous Optical Network (SONET).......... A standard designed to establish a digital
hierarchical network that enables the
transmission of data over a consistent
transport scheme at speeds up to 2.4 Gbps.
SONET OC3 Transceivers....................... An optical bi-directional circuit pack
operating at the SONET OC3 rate (155.52 Mbps)
that meets the SONET requirements for
inter-operability.
T1 Transceivers.............................. A transmitter and receiver (transceiver) for
sending digital data at 1.544 Mbps over
twisted pair cabling.
Universal Voice Grade Service (UVG).......... A multipurpose circuit pack that fulfills a
variety of interface requirements for modems,
etc.
</TABLE>
65
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Independent Auditors' Report............................................................................... F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996............................................... F-3
Consolidated Statements of Operations for the years ended December 31, 1994, 1995 and 1996................. F-4
Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders' Equity (Deficit) for
the years ended December 31, 1994, 1995 and 1996.......................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996................. F-6
Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Advanced Fibre Communications, Inc.:
We have audited the accompanying consolidated balance sheets of Advanced
Fibre Communications, Inc. and subsidiaries (the "Company") as of December 31,
1995 and 1996, and the related consolidated statements of operations, redeemable
convertible preferred stock and stockholders' equity (deficit) and cash flows
for each of the years in the three-year period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of December 31, 1995 and 1996, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1996, in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
San Francisco, California
January 20, 1997
F-2
<PAGE>
ADVANCED FIBRE COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1996
---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents, including restricted cash of
$1,730 and $150 in 1995 and 1996, respectively......................................... $ 11,118 $ 24,942
Marketable securities................................................................... -- 83,488
Accounts receivable..................................................................... 10,993 32,779
Inventories............................................................................. 10,149 17,349
Deferred income taxes................................................................... -- 2,889
Prepaid expenses........................................................................ 132 742
---------- ----------
Total current assets.................................................................. 32,392 162,189
Property and equipment, net............................................................... 1,828 9,589
Other assets.............................................................................. 2,460 3,901
---------- ----------
Total assets........................................................................ $ 36,680 $ 175,679
---------- ----------
---------- ----------
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable........................................................................ $ 7,121 $ 8,799
Accrued liabilities..................................................................... 6,501 8,052
---------- ----------
Total current liabilities............................................................. 13,622 16,851
Long-term liabilities..................................................................... 1,046 805
Redeemable convertible preferred stock, $0.01 par value; 35,345,816 shares authorized in
1995; 17,011,204 shares issued and outstanding in 1995................................... 37,777 --
Stockholders' equity (deficit):
Preferred stock, $0.01 par value; 5,000,000 shares authorized in 1996; no shares issued
and outstanding in 1996................................................................ -- --
Common stock, $0.01 par value; 84,654,184 and 100,000,000 shares authorized in 1995 and
1996, respectively; 5,015,168 and 32,649,607 shares issued and outstanding in 1995 and
1996, respectively..................................................................... 50 326
Additional paid-in capital.............................................................. (2,248) 164,002
Notes receivable from stockholders...................................................... (176) (151)
Accumulated deficit..................................................................... (13,391) (6,154)
---------- ----------
Total stockholders' equity (deficit).................................................. (15,765) 158,023
---------- ----------
Total liabilities, redeemable convertible preferred stock, and stockholders' equity
(deficit).......................................................................... $ 36,680 $ 175,679
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
ADVANCED FIBRE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1994 1995 1996
--------- --------- ----------
<S> <C> <C> <C>
Revenues........................................................................ $ 18,802 $ 54,287 $ 130,193
Cost of revenues................................................................ 14,124 33,469 73,950
--------- --------- ----------
Gross profit................................................................ 4,678 20,818 56,243
--------- --------- ----------
Operating expenses:
Research and development...................................................... 2,867 5,730 14,413
Selling, general, and administrative.......................................... 5,051 9,660 21,188
DSC litigation costs.......................................................... 4,551 1,623 18,947
--------- --------- ----------
Total operating expenses.................................................... 12,469 17,013 54,548
--------- --------- ----------
Operating income (loss)..................................................... (7,791) 3,805 1,695
Other income (expense):
Gain on dissolution (equity in loss) of joint venture, net.................... -- (1,516) 1,516
Other income, net............................................................. 26 149 872
--------- --------- ----------
Income (loss) before income taxes........................................... (7,765) 2,438 4,083
Income taxes (benefit).......................................................... -- 97 (3,154)
--------- --------- ----------
Net income (loss)........................................................... $ (7,765) $ 2,341 $ 7,237
--------- --------- ----------
--------- --------- ----------
Pro forma net income per share.................................................. $ 0.09 $ 0.21
--------- ----------
--------- ----------
Shares used in per share computations........................................... 27,329 34,282
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
ADVANCED FIBRE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE
CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
REDEEMABLE
CONVERTIBLE PREFERRED
STOCK COMMON STOCK ADDITIONAL
--------------------- ---------------------- PAID-IN NOTES RECEIVABLE ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL FROM STOCKHOLDERS DEFICIT
---------- --------- --------- ----------- ----------- ----------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances as of December 31,
1993........................... 10,152,908 $ 9,145 3,006,472 $ 30 $ (15) $ -- $ (7,967)
Issuance of preferred stock..... 3,000,000 7,436 -- -- -- -- --
Conversion of notes payable to
preferred stock................ 200,000 500 -- -- -- -- --
Issuance of preferred stock..... 2,080,000 6,465 -- -- -- -- --
Exercise of common stock
options and warrants........... -- -- 86,252 1 10 -- --
Net loss........................ -- -- -- -- -- -- (7,765)
---------- --------- --------- ----- ----------- ----- ------------
Balances as of December 31,
1994........................... 15,432,908 23,546 3,092,724 31 (5) -- (15,732)
Issuance of preferred stock..... 2,193,540 14,539 -- -- -- -- --
Repurchase of preferred stock... (615,244) (308) -- -- (3,848) -- --
Sale of common stock for notes
receivable..................... -- -- 563,600 6 170 (176) --
Exercise of common stock options
and warrants................... -- -- 1,358,844 13 1,435 -- --
Net income...................... -- -- -- -- -- -- 2,341
---------- --------- --------- ----- ----------- ----- ------------
Balances as of December 31,
1995........................... 17,011,204 37,777 5,015,168 50 (2,248) (176) (13,391)
Issuance of preferred stock..... 220,000 1,540 -- -- -- -- --
Issuance of common stock in
settlement of litigation....... -- -- 725,787 7 8,986 -- --
Exercise of common stock options
and warrants................... -- -- 3,016,189 30 112 -- --
Initial public offering of
common stock................... 5,175,000 52 118,022
Conversion of preferred stock to
common stock................... (17,231,204) (39,317) 18,717,463 187 39,130 -- --
Payment of notes receivable from
stockholder.................... -- -- -- -- -- 25 --
Net income...................... -- -- -- -- -- -- 7,237
---------- --------- --------- ----- ----------- ----- ------------
Balances as of December 31,
1996........................... -- $ -- 32,649,607 $ 326 $ 164,002 $ (151) $ (6,154)
---------- --------- --------- ----- ----------- ----- ------------
---------- --------- --------- ----- ----------- ----- ------------
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
(DEFICIT)
-------------
<S> <C>
Balances as of December 31,
1993........................... $ (7,952)
Issuance of preferred stock..... --
Conversion of notes payable to
preferred stock................ --
Issuance of preferred stock..... --
Exercise of common stock
options and warrants........... 11
Net loss........................ (7,765)
-------------
Balances as of December 31,
1994........................... (15,706)
Issuance of preferred stock..... --
Repurchase of preferred stock... (3,848)
Sale of common stock for notes
receivable..................... --
Exercise of common stock options
and warrants................... 1,448
Net income...................... 2,341
-------------
Balances as of December 31,
1995........................... (15,765)
Issuance of preferred stock..... --
Issuance of common stock in
settlement of litigation....... 8,993
Exercise of common stock options
and warrants................... 142
Initial public offering of
common stock................... 118,074
Conversion of preferred stock to
common stock................... 39,317
Payment of notes receivable from
stockholder.................... 25
Net income...................... 7,237
-------------
Balances as of December 31,
1996........................... $ 158,023
-------------
-------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
ADVANCED FIBRE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................................... $ (7,765) $ 2,341 $ 7,237
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Noncash portion of litigation settlement...................................... -- -- 12,807
Deferred income taxes......................................................... -- -- (3,679)
Depreciation and amortization................................................. 199 547 956
Equity in loss (gain on dissolution) of joint venture, net.................... -- 1,516 (1,149)
Changes in operating assets and liabilities:
Accounts receivable......................................................... (4,815) (5,802) (21,403)
Inventories................................................................. (2,513) (5,529) (5,714)
Prepaid expenses and other assets........................................... (109) (169) (588)
Accounts payable............................................................ 1,266 4,516 1,602
Accrued liabilities......................................................... 3,215 1,626 3,442
Long-term liabilities....................................................... (30) (17) 258
--------- --------- ---------
NET CASH USED IN OPERATING ACTIVITIES...................................... (10,552) (971) (6,231)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net purchases of marketable securities.......................................... -- -- (83,488)
Acquisition of technology license............................................... -- (1,000) --
Purchase of property and equipment.............................................. (452) (1,084) (8,367)
Reimbursement of loans (advances) to joint venture.............................. -- (1,516) 1,516
Business acquisition, net of cash acquired...................................... -- -- (783)
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES...................................... (452) (3,600) (91,122)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank borrowings................................................... -- 1,550 16,806
Repayment of bank borrowings.................................................... -- (1,550) (16,806)
Prepayment of long-term portion of litigation settlement........................ -- -- (7,064)
Proceeds from stockholder loans................................................. 1,000 -- --
Repayment of stockholder loans.................................................. (500) -- --
Proceeds from initial public offering of common stock........................... -- -- 118,074
Proceeds from issuance of redeemable convertible preferred stock................ 13,901 14,539 --
Repurchase of redeemable convertible preferred stock............................ -- (4,156) --
Proceeds from exercise of common stock options and warrants..................... 11 1,448 167
--------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES.................................. 14,412 11,831 111,177
--------- --------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS............................................. 3,408 7,260 13,824
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR...................................... 450 3,858 11,118
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR............................................ $ 3,858 $ 11,118 $ 24,942
--------- --------- ---------
--------- --------- ---------
NONCASH FINANCING AND INVESTING ACTIVITIES:
Conversion of notes payable to redeemable convertible preferred stock........... $ 500 $ -- $ --
Issuance of common stock for notes receivable................................... -- 176 --
Deferred portion of technology license fee...................................... -- 1,500 --
Issuance of preferred stock for business acquisition............................ -- -- 1,540
CASH PAID:
Interest........................................................................ 21 37 398
Income taxes.................................................................... -- -- 265
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
ADVANCED FIBRE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Advanced Fibre Communications, Inc. (the "Company") operates in one business
segment and designs, develops, manufactures, markets, and supports the Universal
Modular Carrier 1000-TM- (the UMC system), a cost-effective, multi-feature
digital loop carrier system developed to serve small line-size markets. The
Company's UMC system is designed to enable telephone companies, cable companies,
and other service providers to connect subscribers to the central office switch
for voice and data communications over copper wire, fiber optic cable, coaxial
cable and analog radio networks.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany balances and transactions
have been eliminated. The Company's investments in 50% or less owned joint
ventures are accounted for under the equity method.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents. Cash and cash equivalents are
generally invested in money market funds, are classified as available-for-sales
securities and their cost approximates their market value. Included in cash and
cash equivalents is $833,000 and $150,000 as of December 31, 1995 and 1996,
respectively, held in escrow as collateral for bonds on certain contracts. Also
included in cash and cash equivalents as of December 31, 1995 is $897,000 held
in escrow related to sales to a particular customer pending resolution of the
litigation described in Note 10.
MARKETABLE SECURITIES
All marketable securities are classified as available-for-sale and are
stated at estimated fair value. Unrealized gains and losses were immaterial as
of December 31, 1996, and realized gains and losses were immaterial for the year
ended December 31, 1996.
INVENTORIES
Inventories are valued at the lower of first-in, first-out cost or market.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives, generally five to
seven years, of the related assets.
REVENUE RECOGNITION
Revenue is generally recognized when products are shipped. Product returns
and uncollectible accounts have been insignificant to date.
WARRANTY
The Company provides for estimated warranty costs at the time of sale.
INCOME TAXES
The Company accounts for income taxes using the asset and liability method.
Deferred tax assets and liabilities are recognized based on the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. The measurement of deferred tax assets is reduced, if necessary, by a
valuation allowance for any tax benefits that are not expected to be realized.
EQUITY-BASED COMPENSATION PLANS
The Company accounts for equity-based compensation plans using the intrinsic
value method.
F-7
<PAGE>
ADVANCED FIBRE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PRO FORMA NET INCOME PER SHARE
Pro forma net income per share is computed using the weighted average number
of shares of common stock and redeemable convertible preferred stock, on an
as-if converted basis, outstanding and common equivalent shares from options and
warrants to purchase common stock using the treasury stock method, when
dilutive. In accordance with certain Securities and Exchange Commission Staff
Accounting Bulletins, such computations included all common and common
equivalent shares issued within the 12 months preceding the initial public
offering ("IPO") date as if they were outstanding for all prior periods
presented using the treasury stock method and the estimated IPO price.
CONCENTRATION OF CREDIT RISK
Financial instruments potentially exposing the Company to concentrations of
credit risk consist primarily of cash and cash equivalents and trade accounts
receivable. The Company manufactures and sells its products principally to
telephone companies. To reduce credit risk, the Company performs ongoing credit
evaluations of its customers' financial condition. The Company does not
generally require collateral. For international shipments, the Company generally
requires prepayment or letters of credit.
USE OF ESTIMATES
The Company has made a number of estimates and assumptions that affect the
reported amount of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from these estimates.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND
LONG-LIVED ASSETS TO BE DISPOSED OF, effective January 1, 1996. This statement
requires long-lived assets to be evaluated for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset may not
be recoverable. Adoption of this statement did not have a material effect on the
Company's consolidated financial position or results of operations.
NOTE 2 -- JOINT VENTURES
ADVANCED ACCESS LABS
During fiscal 1994, the Company entered into a joint venture partnership,
Advanced Access Labs, with a stockholder. The joint venture designed and
developed a product to allow telephone services to be provided over existing
cable TV coaxial systems as well as other transmission media. The Company
contributed the right to use its technology in exchange for a 50% ownership in
the joint venture partnership. During 1995, the Company loaned $1,000,000 to the
joint venture. In addition, during 1995 and 1996, the Company made other net
advances to the joint venture totaling $516,000 and $167,000, respectively. The
Company has recorded its proportionate share of the joint venture's losses to
the extent of the Company's loans and advances therein. As a consequence, the
Company's loans and advances to the joint venture had been reduced to zero.
On December 23, 1996, the Company and the joint venture partner entered into
an agreement to terminate the partnership. In connection with the dissolution,
the joint venture partner reimbursed the Company $1,683,000 for all loans and
advances made by the Company to date. The reimbursement was recorded as a gain
and is reflected in gain on dissolution (equity in loss) of joint venture, net
in the accompanying consolidated financial statements. In addition, the Company
and the joint venture partner entered into a License and Marketing Agreement and
an OEM Agreement.
F-8
<PAGE>
ADVANCED FIBRE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- JOINT VENTURES (CONTINUED)
AFTEK HONG KONG
On April 11, 1996, the Company acquired all of the outstanding shares of
AFTEK Hong Kong, of which the Company had previously been a 49% stockholder.
AFTEK Hong Kong is a holding company that owns 60% of a joint venture, AFTEK
Hangzhou, that is licensed to manufacture and sell the Company's
telecommunications equipment in China. Total consideration consisted of the
following (in thousands):
<TABLE>
<S> <C>
Issuance of Series F preferred stock......................... $ 1,540
Cash paid to retire note payable............................. 939
Acquisition costs incurred................................... 79
---------
$ 2,558
---------
---------
</TABLE>
The acquisition has been accounted for using the purchase method of
accounting, and, accordingly, the purchase price has been allocated to the
assets purchased and the liabilities assumed based upon their fair values at the
date of acquisition. The excess of the purchase price over the fair values of
the net assets acquired was $932,000 and has been recorded as goodwill, which is
being amortized on a straight-line basis over 5 years.
Historical results of AFTEK Hong Kong and pro forma results of operations
giving effect to the acquisition have not been presented because such
information is immaterial in relation to the Company's results of operations.
On August 10, 1996, AFTEK Hong Kong and its joint venture partner agreed to
liquidate AFTEK Hangzhou. The partners appointed a liquidation committee to
facilitate the liquidation procedures and to ensure that the liquidation is
completed in accordance with the relevant stipulations contained in the joint
venture agreement. The Company has recorded a provision of approximately
$383,000 reflecting the reduction in the net realizable value of AFTEK Hong
Kong's interest in the joint venture's net assets to be distributed upon
liquidation.
The Company had sales to AFTEK Hong Kong of $2,020,000 in 1995.
NOTE 3 -- MARKETABLE SECURITIES
Marketable securities were comprised of the following as of December 31,
1996 (in thousands):
<TABLE>
<CAPTION>
FAIR
VALUE
---------
<S> <C>
Municipal debt securities....................................................... $ 61,488
Corporate debt securities....................................................... 22,000
---------
Total marketable securities..................................................... $ 83,488
---------
---------
</TABLE>
The fair value of securities maturing in one year or less and those maturing
between one year and five years was $54,128,000 and $29,360,000, respectively.
NOTE 4 -- INVENTORIES
The major components of inventories are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Raw materials..................................................... $ 5,155 $ 7,631
Work-in-progress.................................................. 899 155
Finished goods.................................................... 4,095 9,563
--------- ---------
$ 10,149 $ 17,349
--------- ---------
--------- ---------
</TABLE>
F-9
<PAGE>
ADVANCED FIBRE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- PROPERTY AND EQUIPMENT
A summary of property and equipment follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Furniture and fixtures............................................... $ 375 $ 1,266
Computer and office equipment........................................ 1,204 4,306
Engineering equipment................................................ 865 5,508
--------- ---------
2,444 11,080
Less: accumulated depreciation....................................... 616 1,491
--------- ---------
Net property and equipment......................................... $ 1,828 $ 9,589
--------- ---------
--------- ---------
</TABLE>
NOTE 6 -- ACCRUED LIABILITIES
A summary of accrued liabilities follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
DSC litigation costs................................................. $ 2,674 $ --
Warranty............................................................. 852 2,550
Other................................................................ 2,975 5,502
--------- ---------
$ 6,501 $ 8,052
--------- ---------
--------- ---------
</TABLE>
NOTE 7 -- INCOME TAXES
A summary of the components of income taxes (benefit) follows (in
thousands):
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
----------- --------- ---------
<S> <C> <C> <C>
Year ended December 31, 1995:
Federal...................................................... $ 82 $ -- $ 82
State........................................................ 15 -- 15
----- --------- ---------
$ 97 $ -- $ 97
----- --------- ---------
----- --------- ---------
Year ended December 31, 1996:
Federal...................................................... $ 523 $ (2,764) $ (2,241)
State........................................................ 2 (915) (913)
----- --------- ---------
$ 525 $ (3,679) $ (3,154)
----- --------- ---------
----- --------- ---------
</TABLE>
Income taxes (benefit) differs from the amount computed by applying the U.S.
federal statutory rate of 34% to income (loss) before income taxes as follows
(in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Income taxes (benefit) at statutory rate........................ $ (2,640) $ 829 $ 1,388
Current losses and temporary differences for which no benefit
was recognized................................................. 2,640 -- 476
Alternative minimum tax......................................... -- 82 --
State taxes net of federal benefit.............................. -- 15 (167)
Change in valuation allowance................................... -- (847) (4,687)
Other........................................................... -- 18 (164)
--------- --------- ---------
$ -- $ 97 $ (3,154)
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-10
<PAGE>
ADVANCED FIBRE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............................. $ 4,099 $ 3,316 $ --
DSC settlement costs......................................... -- -- 1,257
Allowances and accruals...................................... 1,789 1,914 1,618
Research tax credit carryforwards............................ 374 -- 588
Other........................................................ 52 6 216
--------- --------- ---------
6,314 5,236 3,679
Deferred tax liability -- investment in joint venture.......... -- (549) --
--------- --------- ---------
6,314 4,687 3,679
Less valuation allowance....................................... (6,314) (4,687) --
--------- --------- ---------
Net deferred tax asset......................................... $ -- $ -- $ 3,679
--------- --------- ---------
--------- --------- ---------
</TABLE>
The net change in the valuation allowance for the year ended December 31,
1996 was a decrease of approximately $4,687,000. Management believes that a
valuation allowance is not required, based upon current and projected
profitability of the Company.
The Company has research credit carryforwards for federal income tax return
purposes of approximately $588,000. The federal research credit carryforwards
expire from 2008 through 2011. The Company also has California manufacturing
credits of approximately $276,000; which expire from 2002 through 2004.
The Tax Reform Act of 1986 and the California Conformity Act of 1987 impose
restrictions on the utilization of net operating loss and tax credit
carryforwards in the event of an "ownership change" as defined by the Internal
Revenue Code. The Company's ability to utilize its net operating loss and tax
credit carryforwards is subject to restriction pursuant to these provisions.
NOTE 8 -- BANK BORROWINGS
The Company has a revolving line of credit with a bank providing for
borrowings up to $12,000,000 at an interest rate of prime plus 0.5%. Borrowings
under the line are secured by the Company's accounts receivable. The line of
credit expired on November 15, 1996, but automatically renews for successive
thirty day periods until terminated by written agreement. The line of credit
agreement also contains covenants that require the Company to maintain certain
financial ratios. As of December 31, 1996, the Company was in compliance with
the covenants contained in the agreement. As of December 31, 1995 and 1996, no
borrowings were outstanding under the line of credit, and $1,642,000 was
reserved for letters of credit and foreign exchange contracts.
In July 1996, the Company borrowed approximately $7,106,000 under a
six-month term loan bearing interest at 5.75%. The proceeds from the loan were
used to pay the remaining obligations under the DSC litigation settlement (See
Note 10). The loan had a $4.0 million compensating balance requirement. The loan
was repaid in October 1996 with a portion of the proceeds from the IPO.
NOTE 9 -- REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(DEFICIT)
IPO
In October 1996, the Company issued 5,175,000 shares of its common stock
pursuant to the IPO, which generated approximately $118,074,000 of net proceeds
to the Company.
F-11
<PAGE>
ADVANCED FIBRE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 -- REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(DEFICIT) (CONTINUED)
In conjunction with the IPO, 17,231,204 shares of outstanding redeemable
convertible preferred stock were converted into a total of 18,717,463 shares of
common stock. Prior to the IPO, the Company had outstanding six series of
redeemable convertible preferred stock.
COMMON STOCK WARRANTS
Warrants to purchase shares of common stock were issued to investors as part
of the preferred stock agreements. The warrants expire beginning in 1998 and
ending in 2000 and are summarized as follows:
<TABLE>
<CAPTION>
EXERCISE
NUMBER PRICE
OF SHARES PER SHARE
----------- -----------
<S> <C> <C>
Warrants outstanding as of December 31, 1994................................. 6,496,204 $ 0.03-1.17
Issued..................................................................... 30,068 7.00
Exercised.................................................................. (1,305,192) 0.03-1.17
-----------
Warrants outstanding as of December 31, 1995................................. 5,221,080 0.03-7.00
Exercised.................................................................. (2,599,763) 0.03-1.17
Retired.................................................................... (47,541) 0.03-1.17
-----------
Warrants outstanding as of December 31, 1996................................. 2,573,776 0.03-7.00
-----------
-----------
</TABLE>
COMMON STOCK OPTIONS
The Company's 1996 Stock Incentive Plan (the "1996 Plan") is intended to
serve as the successor equity incentive program to the Company's 1993 Stock
Option/Stock Issuance Plan (the "Predecessor Plan"). As of December 31, 1996, a
total of 7,008,142 shares of Common Stock were authorized for issuance under the
1996 Plan. This share reserve is comprised of (i) the shares which remained
available for issuance under the Predecessor Plan, including the shares subject
to outstanding options thereunder, plus (ii) an additional increase of 1,000,000
shares. In addition, the share reserve will automatically be increased on the
first trading day of each calendar year, beginning with the 1997 calendar year,
by an amount equal to 3% of the number of shares of Common Stock outstanding on
the last trading day of the immediately preceding calendar year. Options
generally vest 20% on the first anniversary date and ratably over the following
48 months. The options expire 10 years from the date of grant and are normally
canceled three months after termination of employment.
A summary of the Company's stock option plan activity is presented below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1995 1996
----------------------- -----------------------
WEIGHTED WEIGHTED
1994 AVERAGE AVERAGE
---------- EXERCISE EXERCISE
OPTIONS SHARES SHARES PRICE SHARES PRICE
- ------------------------------------------------------ ---------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Outstanding at beginning of year...................... 1,608,000 2,734,280 $ 0.14 3,890,016 $ 0.35
Granted............................................... 1,238,080 1,274,036 0.81 1,083,082 12.33
Exercised............................................. (21,780) (53,652) 0.21 (416,426) 0.17
Canceled.............................................. (90,020) (64,648) 0.24 (243,128) 1.21
---------- ---------- ----------
Outstanding at end of year............................ 2,734,280 3,890,016 0.35 4,313,544 3.32
Options exercisable at year end....................... 1,189,402 1,705,659
Weighted average fair value of options granted
during the year...................................... 0.21 5.89
</TABLE>
F-12
<PAGE>
ADVANCED FIBRE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 -- REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(DEFICIT) (CONTINUED)
The following table summarizes information about stock options outstanding
as of December 31, 1996:
<TABLE>
<CAPTION>
WEIGHTED
RANGE AVERAGE WEIGHTED
OF NUMBER REMAINING AVERAGE NUMBER
EXERCISE OUTSTANDING CONTRACTUAL EXERCISE EXCERCISABLE
PRICES AT 12/31/96 LIFE PRICE AT 12/31/96
- ----------------- ----------- ----------- --------- -----------
<C> <C> <S> <C> <C>
$0.03 1,256,600 6.3 years $ 0.03 973,478
0.25 - 0.63 1,665,646 8.1 0.38 598,298
1.50 - 4.70 821,096 9.1 1.63 86,591
12.00 - 25.00 475,402 9.6 14.30 47,292
57.63 - 59.63 94,800 9.9 58.54 --
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
Under the 1996 Employee Stock Purchase Plan (the "Purchase Plan") adopted on
July 12, 1996, the Company is authorized to issue up to 1,500,000 shares of
Common Stock to eligible employees of the Company and participating
subsidiaries. The Purchase Plan will be implemented in a series of successive
offering periods, each with a maximum duration of 24 months. The initial
offering period commenced on October 4, 1996 and ends on the last business day
in July 1998. Under the terms of the Purchase Plan, eligible employees on the
start date of any offering period can enter the Purchase Plan on that start
date, or on any subsequent semi-annual entry date. Individuals who become
eligible after the start date may join the Purchase Plan on any subsequent
semi-annual entry date within that period. Employees may have up to 10 percent
of their base salary withheld through payroll deductions to purchase the
Company's Common Stock. The purchase price of the stock is the lower of 85
percent of (i) the fair market value of the Common Stock on the participant's
entry date into the offering period or (ii) the fair market value on the
semi-annual purchase date. Under the Purchase Plan, the purchase dates are
January 31 and July 31 of each year.
PRO FORMA FAIR VALUE INFORMATION
The Company applies the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, in
accounting for its stock-based compensation plans. Had compensation cost for the
Company's stock-based compensation plans been determined consistent with the
fair value approach set forth in SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, the Company's net income and earnings per share would have been
reduced to the pro forma amounts indicated below (in thousands except per share
amounts):
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Net income:
As reported............................................... $ 2,341 $ 7,237
Pro forma................................................. 2,334 6,638
Fully diluted earnings per share:
As reported............................................... $ 0.08 $ 0.21
Pro forma................................................. 0.08 0.19
</TABLE>
The fair value of option grants prior to the IPO is estimated on the date of
grant using the minimum value method with the following weighted average
assumptions: no dividend yield; risk-free interest rates of 6.22% to 6.25%, and
an expected life of 5 years. The fair value of option grants subsequent to the
IPO is estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted average assumptions: no dividend yield,
expected volatility of 55%; risk-free interest rate of 6.32%; and an expected
life of 5 years. Compensation cost related to the Purchase Plan is recognized
for the fair value of the employees' purchase rights, which are estimated using
the Black-Scholes model. No compensation expense has been disclosed for 1996 and
1995 as the first purchase date will occur on January 31, 1997.
F-13
<PAGE>
ADVANCED FIBRE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 -- REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(DEFICIT) (CONTINUED)
STOCK SPLIT AND REINCORPORATION
In August 1996, the Company's Board of Directors approved a two-for-one
stock split. The accompanying financial statements and notes have been restated
to give effect to the stock split.
NOTE 10 -- COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases office space and certain equipment under operating
leases. Future minimum payments under operating leases with an initial term of
more than one year as of December 31, 1996 are summarized as follows (in
thousands):
<TABLE>
<S> <C>
1997............................................................... $ 3,952
1998............................................................... 4,093
1999............................................................... 3,064
2000............................................................... 2,353
2001............................................................... 2,373
Thereafter......................................................... 9,714
---------
Total minimum lease payments....................................... $ 25,549
---------
---------
</TABLE>
Total rent expense for all operating leases was $462,000, $887,000, and
$3,030,000 for the years ended December 31, 1994, 1995 and 1996, respectively.
EMPLOYEE BENEFIT PLAN
The Company has a 401(k) plan under which employees may contribute a portion
of their compensation on a tax deferred basis to the plan. The Company, at its
discretion, may contribute to the plan on a matching basis up to a maximum of
$5,000 per employee per year. The Company is the plan administrator. During 1995
and 1996, the Company contributed $133,000 and $466,000, respectively, to the
plan.
LITIGATION
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 Universal Modular Carrier 1000-TM- ("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 settlement amount was recorded during the first six
months of 1996 as a charge of $15,807,000. Under the terms of the Settlement
Agreement, the Company maintains all rights to the UMC technology free and clear
of any claim by DSC.
ITRI:
In 1995, a dispute arose among the Company, the Industrial Technology
Research Institute ("ITRI"), a Taiwanese government-sponsored research and
development organization in the telecommunications field, 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. 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.
F-14
<PAGE>
ADVANCED FIBRE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
Pursuant to agreements with ITRI reached in 1994, 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 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.
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 things, 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 damages, 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 another company 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 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 will be required to supply the
Member Companies with a specified number of ASICs during the ensuing two month
period 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. The Company believes that compliance with the
court's order will not have a material adverse effect on the Company's business,
financial condition and results of operations. 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. In an order
dated January 9, 1997, the court stayed the litigation and granted the ITRI
parties' motion to compel arbitration. The court has promised, but not yet
issued, an opinion explaining the nature and scope of its arbitration order, and
has issued no ruling on the motion for a preliminary injunction.
The Company believes that it has meritorious defenses to the claims asserted
by ITRI and the Member Companies and it intends to defend the litigation
vigorously. Moreover, the Company believes that the Member Companies' damages
claim is without merit. The Company further believes that its claims against
ITRI and the Member Companies 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
F-15
<PAGE>
ADVANCED FIBRE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
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. 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.
NOTE 11 -- COMPANY INFORMATION AND CERTAIN CONCENTRATIONS
During 1994, one customer accounted for 27% of revenues. During 1995, one
customer accounted for approximately 16% of revenues. International sales
constituted 19%, 13% and 21% during 1994, 1995 and 1996, respectively.
The Company currently derives substantially all of its revenue from the UMC,
and expects that this concentration will continue for the foreseeable future. As
a result, any factor adversely affecting the demand for, or pricing of, the UMC
could have a material adverse effect on the Company's business and results of
operations.
The Company's manufacturing operations consist primarily of final assembly
and test of finished goods from components and custom-made subassemblies
purchased from third parties. Although the Company's product designs employ
primarily industry standard hardware, certain components are only available
through limited sources of supply. The Company's proprietary integrated
circuits, codec components, and some surface mount technology components and
other components are available from limited sources. If the Company cannot
obtain essential components as required, the Company may be unable to meet
demand for its products, thereby adversely affecting its operating results. In
addition, scarcity of such components could result in cost increases that
adversely affect the Company's gross margin.
The Company's printed circuit board assemblies and channel bank assemblies
are provided by a limited number of outside turnkey suppliers. In the event
operations of these turnkey suppliers are impaired or they are unable to support
the manufacturing requirements of the Company, the Company's operating results
could be adversely affected.
F-16
<PAGE>
[LOGO]
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS
PROSPECTUS (SUBJECT TO COMPLETION)
ISSUED JANUARY 24, 1997
2,600,000 SHARES
[LOGO]
COMMON STOCK
---------------------
OF THE 2,600,000 SHARES OF COMMON STOCK OFFERED, 520,000 SHARES ARE BEING
OFFERED INITIALLY OUTSIDE OF THE UNITED STATES AND CANADA BY THE INTERNATIONAL
UNDERWRITERS AND 2,080,000 SHARES ARE BEING OFFERED INITIALLY IN THE UNITED
STATES AND CANADA BY THE U.S. UNDERWRITERS. SEE "UNDERWRITERS." OF THE
520,000 SHARES OF COMMON STOCK BEING OFFERED BY THE INTERNATIONAL
UNDERWRITERS, 40,000 SHARES ARE BEING SOLD BY THE COMPANY AND 480,000
SHARES ARE BEING SOLD BY THE SELLING STOCKHOLDERS. SEE "PRINCIPAL AND
SELLING STOCKHOLDERS." THE COMPANY WILL NOT RECEIVE ANY OF THE
PROCEEDS FROM THE SALE OF SHARES BY THE SELLING STOCKHOLDERS. THE
COMPANY'S COMMON STOCK IS LISTED ON THE NASDAQ NATIONAL MARKET
UNDER THE SYMBOL "AFCI." ON JANUARY 23, 1997, THE LAST SALE PRICE
OF THE COMMON STOCK AS REPORTED ON THE
NASDAQ NATIONAL MARKET WAS $53 1/4 PER SHARE. SEE "PRICE RANGE
OF COMMON STOCK."
--------------------------
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE ``RISK FACTORS"
COMMENCING ON PAGE 4 HEREOF.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
PRICE $ A SHARE
------------------------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS (1) COMPANY (2) STOCKHOLDERS
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
PER SHARE..................... $ $ $ $
TOTAL (3)..................... $ $ $ $
</TABLE>
- ------------
(1) THE COMPANY AND THE SELLING STOCKHOLDERS HAVE AGREED TO INDEMNIFY THE
UNDERWRITERS AGAINST CERTAIN LIABILITIES, INCLUDING LIABILITIES UNDER THE
SECURITIES ACT OF 1933, AS AMENDED.
(2) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY ESTIMATED AT $450,000.
(3) CERTAIN SELLING STOCKHOLDERS HAVE GRANTED TO THE U.S. UNDERWRITERS AN
OPTION, EXERCISABLE WITHIN 30 DAYS OF THE DATE HEREOF, TO PURCHASE UP TO
AN AGGREGATE OF 390,000 ADDITIONAL SHARES AT THE PRICE TO PUBLIC LESS
UNDERWRITING DISCOUNTS AND COMMISSIONS FOR THE PURPOSE OF COVERING
OVER-ALLOTMENTS, IF ANY. IF THE U.S. UNDERWRITERS EXERCISE SUCH OPTION IN
FULL, THE TOTAL PRICE TO PUBLIC, UNDERWRITING DISCOUNTS AND COMMISSIONS
AND PROCEEDS TO SELLING STOCKHOLDERS WILL BE $ , $
AND $ , RESPECTIVELY. SEE "UNDERWRITERS."
------------------------------
THE SHARES ARE OFFERED, SUBJECT TO PRIOR SALE, WHEN, AS AND IF ACCEPTED BY
THE UNDERWRITERS NAMED HEREIN AND SUBJECT TO APPROVAL OF CERTAIN LEGAL MATTERS
BY WILSON SONSINI GOODRICH & ROSATI, PROFESSIONAL CORPORATION, COUNSEL FOR THE
UNDERWRITERS. IT IS EXPECTED THAT DELIVERY OF THE SHARES WILL BE MADE ON OR
ABOUT , 1997 AT THE OFFICE OF MORGAN STANLEY & CO. INCORPORATED, NEW
YORK, N.Y., AGAINST PAYMENT THEREFOR IN IMMEDIATELY AVAILABLE FUNDS.
--------------------------
MORGAN STANLEY & CO.
INTERNATIONAL
MERRILL LYNCH INTERNATIONAL
COWEN & COMPANY
HAMBRECHT & QUIST
, 1997
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses payable by the
Registrant in connection with the sale of Common Stock being registered, other
than underwriting discounts and commissions. All amounts are estimates except
the Securities and Exchange Commission registration fee, the NASD filing fee and
the Nasdaq National Market listing fee.
<TABLE>
<CAPTION>
AMOUNT
TO
BE PAID
------------
<S> <C>
Securities and Exchange Commission registration fee............................. $ 47,002
NASD filing fee................................................................. 16,011
Nasdaq National Market listing fee.............................................. 4,000
Printing and engraving expenses................................................. 85,000
Legal fees and expenses......................................................... 125,000
Accounting fees and expenses.................................................... 75,000
Blue sky fees and expenses...................................................... 3,000
Transfer agent and registrar fees............................................... 5,000
Miscellaneous expenses.......................................................... 89,987
------------
Total..................................................................... $ 450,000
------------
------------
</TABLE>
- ---------
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of the state of Delaware (the
``Delaware Law") empowers a Delaware corporation to indemnify any persons who
are, or are threatened to be made, parties to any threatened, pending or
completed legal action, suit or proceedings, whether civil, criminal,
administrative or investigative (other than action by or in the right of such
corporation), by reason of the fact that such person was an officer or director
of such corporation, or is or was serving at the request of such corporation as
a director, officer, employee or agent of another corporation or enterprise. The
indemnity may include expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding, provided that such officer or
director acted in good faith and in a manner he reasonably believed to be in or
not opposed to the corporation's best interests, and, for criminal proceedings,
had no reasonable cause to believe his conduct was illegal. A Delaware
corporation may indemnify officers and directors in an action by or in the right
of the corporation under the same conditions, except that no indemnification is
permitted without judicial approval if the officer or director is adjudged to be
liable to the corporation in the performance of his duty. Where an officer or
director is successful on the merits or otherwise in the defense of any action
referred to above, the corporation must indemnify him against the expenses which
such officer or director actually and reasonably incurred.
In accordance with the Delaware Law, the certificate of incorporation of the
Company contains a provision to limit the personal liability of the directors of
the Registrant for violations of their fiduciary duty. This provision eliminates
each director's liability to the Registrant or its stockholders for monetary
damages except (i) for any breach of the director's duty of loyalty to the
Registrant or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the Delaware Law providing for liability of directors for
unlawful payment of dividends or unlawful stock purchases or redemptions, or
(iv) for any transaction from which a director derived an improper personal
benefit. The effect of this provision is to eliminate the personal liability of
directors for monetary damages for actions involving a breach of their fiduciary
duty of care, including any such actions involving gross negligence.
II-1
<PAGE>
Article five of the Bylaws of the Registrant provide for indemnification of
the officers and directors of the Registrant to the fullest extent permitted by
applicable law.
In connection with the incorporation of the Registrant in the State of
Delaware, the Registrant entered into indemnification agreements with each
director and certain officers, a form of which is attached as Exhibit 10.20
hereto and incorporated herein by reference. The Indemnification Agreements
provide indemnification to such directors and officers under certain
circumstances for acts or omissions which may not be covered by directors' and
officers' liability insurance. The Company intends to obtain directors and
officers liability insurance, which will insure against liabilities that
directors or officers of the Company may incur in such capacities. Reference is
also made to Section 7 of the Underwriting Agreement contained in Exhibit 1.1
hereto, indemnifying officers and directors of the Registrant against certain
liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since January 1994, the Registrant has sold and issued the following
securities which were not registered under the Securities Act (all numbers take
into account the stock splits effected in September 1995 and August 1996):
(i) Since January 1994, the Registrant has granted stock options to its
employees under its stock option plans covering an aggregate of 3,595,198 shares
of the Registrant's Common Stock, at exercise prices ranging from $0.25 to
$59.625 per share. The Registrant has issued 206,393 shares upon exercise of
these stock options.
(ii) In March and May 1994, the Registrant issued and sold an aggregate of
3,200,000 shares of Series C Preferred Stock (convertible into 3,508,988 shares
of Common Stock) at $2.50 per share to 31 investors, and warrants to purchase an
aggregate of 600,000 shares of Common Stock at $0.25 per share to three
investors, and warrants to purchase an aggregate of 5,019,520 shares of Common
Stock at $1.165 per share to 31 investors.
(iii) In October 1994, the Registrant issued and sold an aggregate of
2,080,000 shares of Series D Preferred Stock (convertible into 2,280,844 shares
of Common Stock) at $3.125 per share to 13 investors.
(iv) In May 1995, the Registrant issued and sold an aggregate of 563,600
shares of Common Stock at $0.3125 per share to Donald Green, James Hoeck, Henri
Sulzer and John Webley pursuant to a restricted stock issuance program approved
by the Company's Board of Directors.
(v) In September 1995, the Registrant issued and sold an aggregate of
2,193,540 shares of Series E Preferred Stock (convertible into 2,249,014 shares
of Common Stock) at $7.00 per share to 10 investors, and warrants to purchase an
aggregate of 30,068 shares of Common Stock at $7.00 per share to Hambrecht &
Quist, L.P.
(vi) In April 1996, the Registrant issued and sold an aggregate of 220,000
shares of Series F Preferred Stock (convertible into 220,000 shares of Common
Stock) at an effective price of $7.00 per share to Elec and Eltek Communication
Holdings Limited. The Registrant purchased all of the stock of AFTEK-Hong Kong
that had not previously been owned by the Registrant in exchange for 220,000
shares of such shares of Series F Preferred Stock and approximately $939,000 in
cash.
(vii) Between January 1994 and January 1997, the Registrant has issued and
sold 3,970,427 shares of Common Stock upon exercise of warrants to 39
individuals.
II-2
<PAGE>
The sales and issuances of securities in the transactions described above
were deemed to be exempt from registration under the Securities Act in reliance
upon Section 4(2) of the Securities Act, or Regulation D promulgated thereunder,
or Rule 701 promulgated under Section 3(b) of the Securities Act, as
transactions by an issuer not involving any public offering or transactions
pursuant to compensatory benefit plans and contracts relating to compensations
as provided under Rule 701. The recipients of securities in each such
transaction represented their intentions to acquire the securities for
investments only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the securities
issued in such transactions. All recipients had adequate access, through their
relationships with the Company, to information about the Registrant.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.
3.3 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 3.1).*
5.1 Opinion of Brobeck, Phleger & Harrison LLP.
10.1 Form of Warrant Issued In Connection with the Sale of the Registrant's Series A Preferred Stock on
January 6, 1993.*
10.2 Form of Warrant Issued In Connection with the Sale of the Registrant's Series B Preferred Stock on
October 5, 1993.*
10.3 Form of Warrant Issued in Connection with the Sale of the Registrant's Series C Preferred Stock on March
16, 1994.*
10.4 Form of Performance Warrant Issued in Connection with the Sale of the Registrant's Series C Preferred
Stock on March 16, 1994 and May 4, 1994.*
10.4.1 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.*+
10.12 Joint Venture & Partnership Agreement, dated April 11, 1994, between the Registrant and Tellabs
Operations, Inc.*+
10.13 License, Joint Development, Supply and Authorized Manufacturing Agreement, dated September 25, 1992,
between the Registrant and Industrial Technology Research Institute of the Republic of China.*+
10.14 Hangzhou Aftek Communication Registrant Ltd. Contract, dated June 18, 1994, between Advanced Fibre
Technology Communication (Hong Kong) Limited and Hangzhou Communication Equipment Factory of the MPT.,
HuaTong Branch.*+
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------------
<C> <S>
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.
11.1 Statement regarding computation of per share earnings.
21.1 Subsidiaries of the Registrant.*
23.1 Consent of KPMG Peat Marwick LLP, Independent Auditors.
23.2 Consent of Brobeck, Phleger & Harrison LLP (included in Exhibit 5.1).
24.1 Power of Attorney (see page II-6).
27.1 Financial Data Schedule
</TABLE>
- ---------
* 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.
+ Portions of this Exhibit have been granted Confidential Treatment.
++ Portions of this Exhibit have been deleted pursuant to a Confidential
Treatment Request filed with the Commission.
II-4
<PAGE>
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the Delaware General Corporation Law, the certificate of
incorporation or the bylaws of Registrant, Indemnification Agreements entered
into between the Registrant and its directors and certain of its officers,
Underwriting Agreement, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered hereunder, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial BONA FIDE offering thereof.
II-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF PETALUMA, STATE OF
CALIFORNIA, ON THIS 24TH DAY OF JANUARY, 1997.
ADVANCED FIBRE COMMUNICATIONS, INC.
By /S/ DONALD GREEN
---------------------------------------
Donald Green
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints jointly and severally, Donald Green and Dan E.
Steimle, and each one of them, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any and all amendments
to this Registration Statement and to sign any registration statement for the
same offering covered by this Registration Statement that is to be effective
upon filing pursuant to Rule 462(b) promulgated under the Securities Act of
1933, and all post-effective amendments thereto, and to file the same, with all
exhibits thereto and all documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorneys-in-fact and agents, and
each of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming that each of said attorneys-in-fact and agents or any of them, or his
or their substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------- ------------------------------------------------------ ----------------------
<C> <S> <C>
/S/ DONALD GREEN
------------------------------- Chairman of the Board and Chief Executive Officer January 24, 1997
Donald Green (principal executive officer)
/S/ CARL J. GRIVNER
------------------------------- President, Chief Operating Officer and Director January 24, 1997
Carl J. Grivner
/S/ DAN E. STEIMLE Vice President, Chief Financial Officer, Treasurer and
------------------------------- Secretary (principal financial and accounting January 24, 1997
Dan E. Steimle officer)
/S/ B.J. CASSIN
------------------------------- Director January 24, 1997
B.J. Cassin
/S/ CLIFFORD H. HIGGERSON
------------------------------- Director January 24, 1997
Clifford H. Higgerson
/S/ BRIAN JACKMAN
------------------------------- Director January 24, 1997
Brian Jackman
/S/ DAN RASDAL
------------------------------- Director January 24, 1997
Dan Rasdal
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.
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 3.1).*
5.1 Opinion of Brobeck, Phleger & Harrison LLP.
10.1 Form of Warrant Issued In Connection with the Sale of the Registrant's Series A Preferred Stock on
January 6, 1993.*
10.2 Form of Warrant Issued In Connection with the Sale of the Registrant's Series B Preferred Stock on
October 5, 1993.*
10.3 Form of Warrant Issued in Connection with the Sale of the Registrant's Series C Preferred Stock on March
16, 1994.*
10.4 Form of Performance Warrant Issued in Connection with the Sale of the Registrant's Series C Preferred
Stock on March 16, 1994 and May 4, 1994.*
10.4.1 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.*+
10.12 Joint Venture & Partnership Agreement, dated April 11, 1994, between the Registrant and Tellabs
Operations, Inc.*+
10.13 License, Joint Development, Supply and Authorized Manufacturing Agreement, dated September 25, 1992,
between the Registrant and Industrial Technology Research Institute of the Republic of China.*+
10.14 Hangzhou Aftek Communication Registrant Ltd. Contract, dated June 18, 1994, between Advanced Fibre
Technology Communication (Hong Kong) Limited and Hangzhou Communication Equipment Factory of the MPT.,
HuaTong Branch.*+
10.15 1445 & 1455 McDowell Boulevard North Net Lease, dated February 1, 1993, between the Registrant and G &
W/ Redwood Associates Joint Venture, for the premises located at 1445 McDowell Boulevard North.*
10.16 Redwood Business Park Net Lease, dated July 9, 1995, between the Registrant and G & W/ Redwood
Associates Joint Venture, for the premises located at 1455 McDowell Boulevard North.*
10.17 Redwood Business Park Net Lease, dated July 10, 1995, between the Registrant and G & W/ Redwood
Associates Joint Venture, for the premises located at 1440 McDowell Boulevard North.*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------------
<C> <S>
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.
11.1 Statement regarding computation of per share earnings.
21.1 Subsidiaries of the Registrant.*
23.1 Consent of KPMG Peat Marwick LLP, Independent Auditors.
23.2 Consent of Brobeck, Phleger & Harrison LLP (included in Exhibit 5.1).
24.1 Power of Attorney (see page II-6).
27.1 Financial Data Schedule
</TABLE>
- ---------
* 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.
+ Portions of this Exhibit have been granted Confidential Treatment.
++ Portions of this Exhibit have been deleted pursuant to a Confidential
Treatment Request filed with the Commission.
<PAGE>
2,600,000 Shares
ADVANCED FIBRE COMMUNICATIONS, INC.
Common Stock, par value $.01 per share
UNDERWRITING AGREEMENT
_____________, 1997
<PAGE>
____________, 1997
Morgan Stanley & Co. Incorporated
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Cowen & Company
Hambrecht & Quist LLC
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Morgan Stanley & Co. International Limited
Merrill Lynch International
Cowen & Company
Hambrecht & Quist LLC
c/o Morgan Stanley & Co. International Limited
25 Cabot Square
Canary Wharf
London E14 4QA
England, United Kingdom
Dear Sirs and Mesdames:
Advanced Fibre Communications, Inc., a Delaware corporation (the
"Company"), proposes to issue and sell to the several Underwriters named in
Schedule II and Schedule III hereto (the "Underwriters"), and certain
stockholders of the Company (the "Selling Stockholders") named in Schedule I
hereto severally propose to sell to the several Underwriters, an aggregate of
2,600,000 shares of the Common Stock, par value $.01 per share, of the Company
(the "Firm Shares"), of which 200,000 shares are to be issued and sold by the
Company and 2,400,000 shares are to be sold by the Selling Stockholders, each
Selling Stockholder selling the amount set forth opposite such Selling
Stockholder's name in Schedule I hereto.
It is understood that, subject to the conditions hereinafter stated,
2,080,000 Firm Shares (the "U.S. Firm Shares") will be sold to the several U.S.
Underwriters named in Schedule II hereto (the "U.S. Underwriters") in connection
with the offering and sale of such U.S. Firm Shares in the United States and
Canada to United States and Canadian Persons (as such terms are defined in the
Agreement Between U.S. and International Underwriters of even date herewith),
and 520,000 Firm Shares (the "International Shares") will be sold to the several
International Underwriters named in Schedule III hereto (the "International
Underwriters") in connection with the offering and sale of such International
Shares outside the United States and Canada to persons other than United States
and Canadian Persons. Morgan Stanley & Co. Incorporated, Merrill Lynch, Pierce,
Fenner & Smith
<PAGE>
Incorporated, Cowen & Company and Hambrecht & Quist LLC shall act as
representatives (the "U.S. Representatives") of the several U.S. Underwriters,
and Morgan Stanley & Co. International Limited, Merrill Lynch International,
Cowen & Company and Hambrecht & Quist LLC shall act as representatives (the
"International Representatives") of the several International Underwriters.
The Selling Stockholders also propose to sell to the several U.S.
Underwriters not more than an additional 390,000 shares of the Common Stock, par
value $.01 per share, of the Company (the "Additional Shares"), if and to the
extent that the U.S. Representatives shall have determined to exercise, on
behalf of the U.S. Underwriters, the right to purchase such shares of Common
Stock granted to the U.S. Underwriters in Section 2 hereof. The Firm Shares and
the Additional Shares are hereinafter collectively referred to as the "Shares."
The shares of Common Stock, par value $.01 per share, of the Company to be
outstanding after giving effect to the sales contemplated hereby are hereinafter
referred to as the "Common Stock." The Company and the Selling Stockholders are
hereinafter sometimes collectively referred to as the "Sellers."
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement relating to the Shares. The registration
statement contains two prospectuses to be used in connection with the offering
and sale of the Shares: the U.S. prospectus, to be used in connection with the
offering and sale of the U.S. Firm Shares and the Additional Shares in the
United States and Canada to United States and Canadian Persons, and the
international prospectus, to be used in connection with the offering and sale of
the International Shares outside the United States and Canada to persons other
than United States and Canadian Persons. The international prospectus is
identical to the U.S. prospectus except for the outside front cover page. The
registration statement as amended at the time it becomes effective, including
the information (if any) deemed to be part of the registration statement at the
time of effectiveness pursuant to Rule 430A under the Securities Act of 1933, as
amended (the "Securities Act"), is hereinafter referred to as the "Registration
Statement"; the U.S. prospectus and the international prospectus in the
respective forms first used to confirm sales of Shares are hereinafter referred
to as the "Prospectus." If the Company has filed an abbreviated registration
statement to register additional shares of Common Stock pursuant to Rule 462(b)
under the Securities Act (the "Rule 462 Registration Statement"), then any
reference herein to the term "Registration Statement" shall be deemed to include
such Rule 462 Registration Statement.
Unless the context otherwise requires, all representations and warranties
of the Company herein shall also be deemed to be representations and warranties
with respect to all predecessor entities of the Company.
1. REPRESENTATIONS AND WARRANTIES. The Company represents and warrants
to and agrees with each of the Underwriters that:
(a) The Registration Statement has become effective; no stop order
suspending the effectiveness of the Registration Statement is in effect,
and no proceedings for such purpose are pending before or, to the Company's
knowledge, threatened by the Commission.
-2-
<PAGE>
(b) (i) The Registration Statement, when it became effective, did
not contain and, as amended or supplemented, if applicable, will not
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading, (ii) the Registration Statement and the Prospectus
comply and, as amended or supplemented, if applicable, will comply in all
material respects with the Securities Act and the applicable rules and
regulations of the Commission thereunder and (iii) the Prospectus does not
contain and, as amended or supplemented, if applicable, will not contain
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, except that the representations
and warranties set forth in this paragraph 1(b) do not apply to statements
or omissions in the Registration Statement or the Prospectus based upon
information relating to any Underwriter furnished to the Company in writing
by such Underwriter through you expressly for use therein.
(c) The Company has been duly incorporated, is validly existing as a
corporation in good standing under the laws of the State of Delaware, has
the corporate power and authority to own its property and to conduct its
business as described in the Prospectus and is duly qualified to transact
business and is in good standing in each jurisdiction in which the conduct
of its business or its ownership or leasing of property requires such
qualification, except to the extent that the failure to be so qualified or
be in good standing would not have a material adverse effect on the Company
and its Significant Subsidiaries, as that term is defined in Rule 1-02(w)
of Regulation S-X (each a "Subsidiary" and collectively "Subsidiaries"),
taken as a whole.
(d) Each Subsidiary of the Company, foreign and domestic, has been
duly incorporated, is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation, has the corporate
power and authority to own its property and to conduct its business as
described in the Prospectus and is duly qualified to transact business and
is in good standing in each jurisdiction in which the conduct of its
business or its ownership or leasing of property requires such
qualification, except to the extent that the failure to be so qualified or
be in good standing would not have a material adverse effect on the Company
and its Subsidiaries, taken as a whole. All of the outstanding shares of
capital stock of each Subsidiary of the Company have been duly authorized
and are validly issued, fully paid and non-assessable and are owned
directly (other than directors' qualifying shares) by the Company, free and
clear of any security interest, lien, encumbrance, equity, claim or adverse
interest of any nature.
(e) The Company and its Subsidiaries have good and marketable title
in fee simple to all real property and good and marketable title to all
personal property owned by them that is material to the business of the
Company and its Subsidiaries, in each case free and clear of any security
interest, lien, encumbrance, claim, defect or adverse interest of any
nature except such as are described in the Prospectus or such as do not
materially affect the value of such property and do not interfere with the
use made and proposed to be made of such property by the Company and its
Subsidiaries; and any real property and buildings held under lease by the
-3-
<PAGE>
Company and its Subsidiaries are held by them under valid, subsisting and
enforceable leases with such exceptions as are not material and do not
interfere with the use made and proposed to be made of such property and
buildings by the Company and its Subsidiaries, in each case except as
described in or contemplated by the Prospectus.
(f) The authorized capital stock of the Company conforms as to legal
matters to the description thereof contained in the Prospectus.
(g) The shares of Common Stock (including the Shares to be sold by
the Selling Stockholders) outstanding prior to the issuance of the Shares
have been duly authorized and are validly issued, fully paid and non-
assessable. Except as set forth in the Prospectus, neither the Company nor
any Subsidiary has outstanding any options to purchase, or any preemptive
rights or other rights to subscribe for or to purchase, any securities or
obligations convertible into, or any contracts or commitments to issue or
sell, shares of its capital stock or any such options, rights, convertible
securities or obligations. All outstanding shares of capital stock and
options and other rights to acquire capital stock have been issued in
compliance with the registration and qualification provisions of all
applicable securities laws and were not issued in violation of any
preemptive rights, rights of first refusal or other similar rights.
(h) The Shares have been duly authorized and, when issued and
delivered in accordance with the terms of this Agreement, will be validly
issued, fully paid and non-assessable, and the issuance of such Shares will
not be subject to any preemptive rights, rights of first refusal or similar
rights.
(i) The Company has corporate power and authority to enter into this
Agreement and to issue, sell and deliver to the Underwriters the Shares,
and this Agreement has been duly authorized, executed and delivered by the
Company.
(j) The execution and delivery by the Company of, and the performance
by the Company of its obligations under, this Agreement will not contravene
any provision of applicable law or the certificate of incorporation or
bylaws of the Company or any Subsidiary, or any agreement or other
instrument binding upon the Company or any of its Subsidiaries that is
material to the Company and its Subsidiaries, taken as a whole, or any
judgment, order or decree of any governmental body, agency or court having
jurisdiction over the Company or any Subsidiary, and no consent, approval,
authorization or order of, or qualification with, any governmental body or
agency is required for the performance by the Company of its obligations
under this Agreement, except such as may be required by the securities or
Blue Sky laws of the various states and jurisdictions in connection with
the offer and sale of the Shares.
(k) There has not occurred any material adverse change, or any
development involving a prospective material adverse change, in the
condition, financial or otherwise, or in the earnings, business or
operations of the Company and its Subsidiaries, taken as a whole, from that
set forth in the Prospectus.
-4-
<PAGE>
(l) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, (i) the Company and
its Subsidiaries have not incurred any material liability or obligation,
direct or contingent, nor entered into any material transaction not in the
ordinary course of business; (ii) the Company has not purchased any of its
outstanding capital stock, nor declared, paid or otherwise made any
dividend or distribution of any kind on its capital stock other than
ordinary and customary dividends; and (iii) there has not been any material
change in the capital stock, short-term debt or long-term debt of the
Company and its consolidated Subsidiaries, except in each case as described
in or contemplated by the Prospectus.
(m) There are no legal, regulatory or governmental proceedings
pending or, to the Company's knowledge, threatened to which the Company or
any of its Subsidiaries is a party or to which any of the properties of the
Company or any of its Subsidiaries is subject that are required to be
described in the Registration Statement or the Prospectus and are not so
described or any statutes, regulations, contracts or other documents that
are required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration Statement that
are not described or filed as required.
(n) Each of the Company and its Subsidiaries has all necessary
consents, authorizations, approvals, orders, certificates and permits of
and from, and has made all declarations and filings with, all foreign,
federal, state, local and other governmental authorities, all
self-regulatory organizations and all courts and other tribunals, to own,
lease, license and use its properties and assets and to conduct its
business in the manner described in the Prospectus, except to the extent
that the failure to obtain or file would not, singly or in the aggregate,
have a material adverse effect on the Company and its Subsidiaries, taken
as a whole; and neither the Company nor any such Subsidiary has received
any notice of proceedings related to the revocation or modification of any
such consent, authorization, approval, order, certificate or permit which,
singly or in the aggregate, if the subject of any unfavorable decision,
ruling or finding, would result in a material adverse change in the
condition, financial or otherwise, or in the earnings, business or
operations of the Company and its Subsidiaries, taken as a whole, except as
described in or contemplated by the Prospectus.
(o) Each preliminary prospectus filed as part of the registration
statement as originally filed or as part of any amendment thereto, or filed
pursuant to Rule 424 under the Securities Act, complied when so filed in
all material respects with the Securities Act and the applicable rules and
regulations of the Commission thereunder.
(p) The Company is not and, after giving effect to the offering and
sale of the Shares and the application of the proceeds thereof as described
in the Prospectus, will not be an "investment company" as such term is
defined in the Investment Company Act of 1940, as amended.
-5-
<PAGE>
(q) There is no legal or beneficial owner of any securities of the
Company who has any rights, not effectively satisfied or waived, to require
registration of any shares of capital stock of the Company in connection
with the filing of the Registration Statement.
(r) The Company and each of its Subsidiaries are insured by insurers
of recognized financial responsibility against such losses and risks and in
such amounts as are prudent and customary in the businesses in which they
are engaged; neither the Company nor any such Subsidiary has been refused
any insurance coverage sought or applied for; and neither the Company nor
any such Subsidiary has any reason to believe that it will not be able to
renew its existing insurance coverage as and when such coverage expires or
to obtain similar coverage from similar insurers as may be necessary to
continue its business at a cost that would not materially and adversely
affect the condition, financial or otherwise, or the earnings, business or
operations of the Company and its Subsidiaries, taken as a whole, except as
described in or contemplated by the Prospectus.
(s) The Company and its Subsidiaries (i) are in compliance with any
and all applicable foreign, federal, state and local laws and regulations
(A) relating to the protection of human health and safety, the environment
or hazardous or toxic substances or wastes, pollutants or contaminants
(collectively, "Environmental Laws") and (B) relating to the manufacture
and sale of telecommunications equipment, including without limitation the
rules and regulations of the Federal Communications Commission,
(collectively, "Telecommunications Laws"), (ii) have received all permits,
licenses or other approvals required of them under applicable Environmental
Laws or Telecommunications Laws, as the case may be, to conduct their
respective businesses and (iii) are in compliance with all terms and
conditions of any such permit, license or approval, except where such
noncompliance with Environmental Laws or Telecommunications Laws, as the
case may be, failure to receive required permits, licenses or other
approvals or failure to comply with the terms and conditions of such
permits, licenses or approvals would not, singly or in the aggregate, have
a material adverse effect on the Company and its Subsidiaries, taken as a
whole.
(t) There are no costs or liabilities associated with Environmental
Laws (including, without limitation, any capital or operating expenditures
required for clean-up, closure of properties or compliance with
Environmental Laws or any permit, license or approval, any related
constraints on operating activities and any potential liabilities to third
parties) which would, singly or in the aggregate, have a material adverse
effect on the condition, financial or otherwise, or on the earnings,
business or operations of the Company and its Subsidiaries, taken as a
whole.
(u) The Company and each of its Subsidiaries owns or possesses
adequate licenses or other rights to use all patents, patent rights,
inventions, trade secrets, copyrights, trademarks, service marks, trade
names, technology and know-how necessary to conduct its business in the
manner described in the Prospectus and, except as disclosed in the
Prospectus, neither the Company nor any of its Subsidiaries has received
any notice of infringement or conflict with, or knows of any infringement
or conflict with, asserted rights of others with
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respect to any patents, patent rights, inventions, trade secrets,
copyrights, trademarks, service marks, trade names, technology or know-how
which could result in any material adverse effect upon the Company and its
Subsidiaries, taken as a whole; and, except as disclosed in the Prospectus,
the discoveries, inventions, products or processes of the Company and its
Subsidiaries referred to in the Prospectus do not, to the best knowledge of
the Company or any of its Subsidiaries, infringe or conflict with any right
or patent of any third party, or any discovery, invention, product or
process which is the subject of a patent application filed by any third
party, known to the Company or any of its Subsidiaries which could have a
material adverse effect on the Company and its Subsidiaries, taken as a
whole.
(v) The Company and each of its Subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurance
that (i) transactions are executed in accordance with management's general
or specific authorizations; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability;
(iii) access to assets is permitted only in accordance with management's
general or specific authorization; and (iv) the recorded accountability for
assets is compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(w) No material labor dispute with the employees of the Company or
any of its Subsidiaries exists, except as described in or contemplated by
the Prospectus, or, to the best knowledge of the Company, is imminent; and
the Company is not aware of any existing, threatened or imminent labor
disturbance by the employees of any of its principal suppliers,
manufacturers or contractors that could result in a material adverse change
in the condition, financial or otherwise, or in the earnings, business or
operations of the Company and its Subsidiaries, taken as a whole.
(x) An aggregate of at least _________________ outstanding shares of
Common Stock, and securities convertible into or exercisable or
exchangeable for at least _________ shares of Common Stock, are subject to
valid, binding and enforceable agreements (collectively, the "Lock-up
Agreements") that restrict the holders thereof from selling, making any
short sale of, granting any option for the purchase of, or otherwise
transferring or disposing of, any of such shares of Common Stock, or any
such securities convertible into or exercisable or exchangeable for Common
Stock, for a period of 90 days after the date of the Prospectus without the
prior written consent of the Company or Morgan Stanley & Co. Incorporated.
(y) The Common Stock has been approved for quotation on The Nasdaq
National Market, subject only to official notice of issuance.
(z) The Company has complied with all provisions of Section 517.075,
Florida Statutes relating to doing business with the Government of Cuba or
with any person or affiliate located in Cuba.
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2. REPRESENTATIONS AND WARRANTIES OF THE SELLING STOCKHOLDERS. Each of
the Selling Stockholders represents and warrants to and agrees with each of the
Underwriters that:
(a) This Agreement has been duly authorized, executed and delivered
by or on behalf of such Selling Stockholder.
(b) The execution and delivery by such Selling Stockholder of, and
the performance by such Selling Stockholder of its obligations under, this
Agreement, the Custody Agreement signed by such Selling Stockholder and
_______________, as Custodian, relating to the deposit of the Shares to be
sold by such Selling Stockholder (the "Custody Agreement") and the Power of
Attorney appointing certain individuals as such Selling Stockholder's
attorneys-in-fact to the extent set forth therein, relating to the
transactions contemplated hereby and by the Registration Statement (the
"Power of Attorney") will not contravene any provision of applicable law,
or the certificate of incorporation or by-laws of such Selling Stockholder
(if such Selling Stockholder is a corporation), or any agreement or other
instrument binding upon such Selling Stockholder or any judgment, order or
decree of any governmental body, agency or court having jurisdiction over
such Selling Stockholder, and no consent, approval, authorization or order
of, or qualification with, any governmental body or agency is required for
the performance by such Selling Stockholder of its obligations under this
Agreement or the Custody Agreement or Power of Attorney of such Selling
Stockholder, except such as may be required by the securities or Blue Sky
laws of the various states in connection with the offer and sale of the
Shares.
(c) Such Selling Stockholder has, and on the Closing Date will have,
valid title to the Shares to be sold by such Selling Stockholder and the
legal right and power, and all authorization and approval required by law,
to enter into this Agreement, the Custody Agreement and the Power of
Attorney and to sell, transfer and deliver the Shares to be sold by such
Selling Stockholder.
(d) The Shares to be sold by such Selling Stockholder pursuant to
this Agreement have been duly authorized and are validly issued, fully paid
and non-assessable.
(e) The Custody Agreement and the Power of Attorney have been duly
authorized, executed and delivered by such Selling Stockholder and are
valid and binding agreements of such Selling Stockholder.
(f) Delivery of the Shares to be sold by such Selling Stockholder
pursuant to this Agreement will pass title to such Shares free and clear of
any security interests, claims, liens, equities and other encumbrances.
(g) To the extent that any statements or omissions made in the
Registration Statement, any preliminary prospectus, the Prospectus, or any
amendment or supplement thereto, are made in reliance upon and in
conformity with written information furnished to the Company by such
Selling Stockholder expressly for use therein, (i) the Registration
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<PAGE>
Statement, when it became effective, did not contain and, as amended or
supplemented, if applicable, will not contain any untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, and
(ii) the Prospectus does not contain and, as amended or supplemented, if
applicable, will not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading.
3. AGREEMENTS TO SELL AND PURCHASE. Each Seller, severally and not
jointly, hereby agrees to sell to the several Underwriters, and each
Underwriter, upon the basis of the representations and warranties herein
contained, but subject to the conditions hereinafter stated, agrees, severally
and not jointly, to purchase from the Sellers at $______ a share (the "Purchase
Price") the number of Firm Shares (subject to such adjustments to eliminate
fractional shares as you may determine) that bears the same proportion to the
number of Firm Shares to be sold by such Seller as the number of Firm Shares set
forth in Schedules II and III hereto opposite the name of such Underwriter bears
to the total number of Firm Shares.
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Selling Stockholders
agree to sell to the U.S. Underwriters the Additional Shares, and the U.S.
Underwriters shall have a one-time right to purchase, severally and not jointly,
up to an aggregate 390,000 Additional Shares at the Purchase Price. If the U.S.
Representatives, on behalf of the U.S. Underwriters, elect to exercise such
option, the U.S. Representatives shall so notify the Company and the attorney-
in-fact for the Selling Stockholders in writing not later than 30 days after the
date of this Agreement, which notice shall specify the number of Additional
Shares to be purchased by the U.S. Underwriters and the date on which such
shares are to be purchased. Such date may be the same as the Closing Date (as
defined below) but not earlier than the Closing Date nor later than ten business
days after the date of such notice. Additional Shares may be purchased as
provided in Section 4 hereof solely for the purpose of covering over-allotments
made in connection with the offering of the Firm Shares. If any Additional
Shares are to be purchased, each Selling Stockholder agrees, severally and not
jointly, to sell to the U.S. Underwriters, and each U.S. Underwriter agrees,
severally and not jointly, to purchase the number of Additional Shares (subject
to such adjustments to eliminate fractional shares as the U.S. Representatives
may determine) that bears the same proportion to the total number of Additional
Shares to be sold by such Selling Stockholder as the number of U.S. Firm Shares
set forth in Schedule II hereto opposite the name of such U.S. Underwriter bears
to the total number of U.S. Firm Shares. The Additional Shares to be purchased
by the U.S. Underwriters hereunder and the U.S. Firm Shares are hereinafter
collectively referred to as the "U.S. Shares."
Each Seller hereby agrees that, without the prior written consent of Morgan
Stanley & Co. Incorporated on behalf of the Underwriters, it will not, during
the period ending 90 days after the date of the Prospectus, (i) offer, pledge,
sell, contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to purchase or
otherwise transfer or dispose of, directly or indirectly, any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock or (ii) enter into any swap or
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other arrangement that transfers to another, in whole or in part, any of the
economic consequences of ownership of the Common Stock, whether any such
transaction described in clause (i) or (ii) above is to be settled by delivery
of Common Stock or such other securities, in cash or otherwise. The foregoing
sentence shall not apply to (A) the Shares to be sold hereunder or (B) the
issuance by the Company of shares of Common Stock upon the exercise of an option
or warrant or the conversion of a security outstanding on the date hereof of
which the Underwriters have been advised in writing. In addition, each Selling
Stockholder, agrees that, without the prior written consent of Morgan Stanley &
Co. Incorporated on behalf of the Underwriters, it will not, during the period
ending 90 days after the date of the Prospectus, make any demand for, or
exercise any right with respect to, the registration of any shares of Common
Stock or any security convertible into or exercisable or exchangeable for Common
Stock.
4. TERMS OF PUBLIC OFFERING. The Sellers are advised by you that the
Underwriters propose to make a public offering of their respective portions of
the Shares as soon after the Registration Statement and this Agreement have
become effective as in your judgment is advisable. The Sellers are further
advised by you that the Shares are to be offered to the public initially at U.S.
$_________ a share (the "Public Offering Price") and to certain dealers selected
by you at a price that represents a concession not in excess of U.S. $_______ a
share under the Public Offering Price, and that any Underwriter may allow, and
such dealers may reallow, a concession, not in excess of U.S. $_______ a share,
to any Underwriter or to certain other dealers.
Each U.S. Underwriter hereby makes to and with the Sellers the
representations and agreements of such U.S. Underwriter contained in the fifth
and sixth paragraphs of Article III of the Agreement Between U.S. and
International Underwriters of even date herewith. Each International
Underwriter hereby makes to and with the Sellers the representations and
agreements of such International Underwriter contained in the seventh, eighth,
ninth, tenth and eleventh paragraphs of Article III of such Agreement Between
U.S. and International Underwriters.
5. PAYMENT AND DELIVERY. In accordance with Rule 15c6-1 under the
Exchange Act (as hereinafter defined), payment for the Firm Shares shall be made
to each Seller in Federal or other funds immediately available in New York City
against delivery of such Firm Shares for the respective accounts of the several
Underwriters at 10:00 A.M., New York City time, on __________, 1997 or at such
other time on the same or such other date, not later than __________, 1997 as
shall be designated in writing by you. The time and date of such payment are
hereinafter referred to as the "Closing Date."
Payment for any Additional Shares shall be made to each Selling Stockholder
in Federal or other funds immediately available in New York City against
delivery of such Additional Shares for the respective accounts of the several
Underwriters at 10:00 A.M., New York City time, on the date specified in the
notice described in Section 2 or at such other time on the same or on such other
date, in any event not later than __________, 1997 as shall be designated in
writing by you. The time and date of such payment are hereinafter referred to
as the "Option Closing Date."
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Certificates for the Firm Shares and Additional Shares shall be in
definitive form and registered in such names and in such denominations as you
shall request in writing not later than one full business day prior to the
Closing Date or the Option Closing Date, as the case may be. The certificates
evidencing the Firm Shares and Additional Shares shall be delivered to you on
the Closing Date or the Option Closing Date, as the case may be, for the
respective accounts of the several Underwriters, with any transfer taxes payable
in connection with the transfer of the Shares to the Underwriters duly paid,
against payment of the Purchase Price therefor.
6. CONDITIONS TO THE UNDERWRITERS' OBLIGATIONS. The obligations of the
Sellers to sell the Shares to the Underwriters and the several obligations of
the Underwriters to purchase and pay for the Shares on the Closing Date are
subject to the condition that the Registration Statement shall have become
effective not later than 2:00 P.M. (New York City time) on the date hereof.
The several obligations of the Underwriters are subject to the following
further conditions:
(a) Subsequent to the execution and delivery of this Agreement and
prior to the Closing Date:
(i) there shall not have occurred any downgrading, nor
shall any notice have been given of any intended or potential
downgrading or of any review for a possible change that does not
indicate the direction of the possible change, in the rating accorded
any of the Company's securities by any "nationally recognized
statistical rating organization," as such term is defined for purposes
of Rule 436(g)(2) under the Securities Act, and
(ii) there shall not have occurred any change, or any
development involving a prospective change, in the condition,
financial or otherwise, or in the earnings, business or operations, of
the Company and its Subsidiaries, taken as a whole, from that set
forth in the Prospectus that, in your judgment, is material and
adverse and that makes it, in your judgment, impracticable to market
the Shares on the terms and in the manner contemplated in the
Prospectus.
(b) The Underwriters shall have received on the Closing Date a
certificate, dated the Closing Date and signed by an executive officer of
the Company, to the effect set forth in clause (a)(i) above and to the
effect that the representations and warranties of the Company contained in
this Agreement are true and correct as of the Closing Date and that the
Company has complied with all of the agreements and satisfied all of the
conditions on its part to be performed or satisfied hereunder on or before
the Closing Date.
The officer signing and delivering such certificate may rely upon the
best of his or her knowledge as to proceedings threatened.
(c) The Underwriters shall have received on the Closing Date, or the
Option Closing Date, as the case may be, a certificate, dated the Closing
Date, or the Option Closing
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<PAGE>
Date, as the case may be, and signed by the Selling Stockholders (or by
their attorney-in-fact on their behalf), to the effect that the
representations and warranties of the Selling Stockholders contained in
this Agreement are true and correct as of the Closing Date, or the Option
Closing Date, as the case may be, and that each Selling Stockholder has
complied with all of the agreements and satisfied all of the conditions on
his part or her part to be performed or satisfied hereunder on or before
the Closing Date, or the Option Closing Date, as the case may be.
(d) The Underwriters shall have received on the Closing Date an
opinion of Brobeck, Phleger & Harrison LLP, outside counsel for the
Company, dated the Closing Date, to the effect that:
(i) the Company has been duly incorporated, is validly
existing as a corporation in good standing under the laws of the State
of Delaware, has the corporate power and authority to own its property
and to conduct its business as described in the Prospectus and is duly
qualified to transact business and is in good standing in each
jurisdiction in which the conduct of its business or its ownership or
leasing of property requires such qualification, except to the extent
that the failure to be so qualified or be in good standing would not
have a material adverse effect on the Company and its Subsidiaries,
taken as a whole;
(ii) each Subsidiary of the Company, foreign and
domestic, has been duly incorporated, is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, has the corporate power and authority to own its
property and to conduct its business as described in the Prospectus
and is duly qualified to transact business and is in good standing in
each jurisdiction in which the conduct of its business or its
ownership or leasing of property requires such qualification, except
to the extent that the failure to be so qualified or be in good
standing would not have a material adverse effect on the Company and
its Subsidiaries, taken as a whole;
(iii) all of the outstanding shares of capital stock of
each Subsidiary of the Company have been duly authorized and are
validly issued, fully paid and non-assessable and are owned by the
Company, free and clear of any security interest, lien, encumbrance,
equity, claim or adverse interest of any nature;
(iv) the authorized capital stock of the Company
conforms as to legal matters to the description thereof contained in
the Prospectus;
(v) the shares of Common Stock (including the Shares
to be sold by the Selling Stockholders) outstanding prior to the
issuance of the Shares to be sold by the Company have been duly
authorized and are validly issued, fully paid and non-assessable;
except as set forth in the Prospectus, neither the Company nor any
Subsidiary has outstanding any options to purchase, or any preemptive
rights or other
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rights to subscribe for or to purchase, any securities or obligations
convertible into, or any contracts or commitments to issue or sell,
shares of its capital stock or any such options, rights, convertible
securities or obligations; all outstanding shares of capital stock and
options and other rights to acquire capital stock have been issued in
compliance with the registration and qualification provisions of all
applicable securities laws and were not issued in violation of any
preemptive rights, rights of first refusal or other similar rights;
(vi) the Shares to be sold by the Company have been
duly authorized and, when issued and delivered in accordance with the
terms of this Agreement, will be validly issued, fully paid and non-
assessable, and the issuance of such Shares will not be subject to any
preemptive rights, rights of first refusal or similar rights;
vii) the Company has corporate power and authority to
enter into this Agreement and to issue, sell and deliver to the
Underwriters the Shares to be issued and sold by the Company, and this
Agreement has been duly authorized, executed and delivered by the
Company;
(viii) the execution and delivery by the Company of, and
the performance by the Company of its obligations under, this
Agreement will not contravene any provision of applicable law or the
certificate of incorporation or by-laws of the Company or any
Subsidiary, or, to the best of such counsel's knowledge, any agreement
or other instrument binding upon the Company or any of its
Subsidiaries that is material to the Company and its Subsidiaries,
taken as a whole, or, to the best of such counsel's knowledge, any
judgment, order or decree of any governmental body, agency or court
having jurisdiction over the Company or any Subsidiary, and no
consent, approval, authorization or order of, or qualification with,
any governmental body or agency is required for the performance by the
Company of its obligations under this Agreement, except such as may be
required by the securities or Blue Sky laws of the various states and
jurisdictions in connection with the offer and sale of the Shares;
(ix) the statements (A) in the Prospectus under the
captions "Business--Proprietary Rights and Licenses," "Business--Legal
Proceedings," "Certain Transactions," "Description of Capital Stock"
and "Shares Eligible for Sale" and (B) in the Registration Statement
in Items 14 and 15, in each case insofar as such statements constitute
summaries of the legal matters, documents or proceedings referred to
therein, fairly present in all material respects the information
called for with respect to such legal matters, documents and
proceedings and fairly summarize in all material respects the matters
referred to therein;
(x) after due inquiry, such counsel does not know of
any legal, regulatory or governmental proceeding pending or threatened
to which the Company
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or any of its Subsidiaries is a party or to which any of the
properties of the Company or any of its Subsidiaries is subject that
are required to be described in the Registration Statement or the
Prospectus and are not so described or of any statutes, regulations,
contracts or other documents that are required to be described in the
Registration Statement or the Prospectus or to be filed as exhibits to
the Registration Statement that are not described or filed as
required;
(xi) the Company is not and, after giving effect to the
offering and sale of the Shares to be sold by the Company and the
application of the proceeds thereof as described in the Prospectus,
will not be an "investment company" as such term is defined in the
Investment Company Act of 1940, as amended;
(xii) to the best of such counsel's knowledge, there is
no legal or beneficial owner of any securities of the Company who has
any rights, not effectively satisfied or waived, to require
registration of any shares of capital stock of the Company in
connection with the filing of the Registration Statement;
(xiii) to the best of such counsel's knowledge: (A) the
Registration Statement has become effective under the Securities Act,
no stop order proceedings with respect thereto have been instituted or
are pending or threatened under the Securities Act and nothing has
come to such counsel's attention to lead it to believe that such
proceedings are contemplated; and (B) any required filing of the
Prospectus and any supplement thereto pursuant to Rule 424(b) under
the Securities Act has been made in the manner and within the time
period required by such Rule 424(b);
(xiv) the Common Stock has been approved for quotation
on The Nasdaq National Market; and
(xv) such counsel (A) is of the opinion that the
Registration Statement and Prospectus (except for financial statements
and schedules and other financial and statistical data included
therein as to which such counsel need not express any opinion) comply
as to form in all material respects with the Securities Act and the
applicable rules and regulations of the Commission thereunder, (B) has
no reason to believe that (except for financial statements and
schedules and other financial and statistical data as to which such
counsel need not express any belief) the Registration Statement and
the Prospectus included therein at the time the Registration Statement
became effective contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading and (C) has no
reason to believe that (except for financial statements and schedules
and other financial and statistical data as to which such counsel need
not express any belief) the Prospectus contains any untrue statement
of a material fact or omits to state a material fact necessary in
order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
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<PAGE>
(e) The Underwriters shall have received on the Closing Date an
opinion of ___________, counsel for the Selling Stockholders, dated the
Closing Date, to the effect that:
(i) this Agreement has been duly authorized, executed
and delivered by or on behalf of each of the Selling Stockholders;
(ii) the execution and delivery by each Selling
Stockholder of, and the performance by such Selling Stockholder of its
obligations under, this Agreement and the Custody Agreement and Power
of Attorney of such Selling Stockholder will not contravene any
provision of applicable law, or the certificate of incorporation or
by-laws of such Selling Stockholder (if such Selling Stockholder is a
corporation), or, to the best of such counsel's knowledge, any
agreement or, or to the best of such counsel's knowledge, any
agreement or other instrument binding upon such Selling Stockholder
or, to the best of such counsel's knowledge, any judgment, order or
decree of any governmental body or agency is required for the
performance by such Selling Stockholder of its obligations under this
Agreement or the Custody Agreement or Power of Attorney of such
Selling Stockholder, except such as may be required by the securities
or Blue Sky laws of the various states in connection with offer and
sale of the Shares;
(iii) each of the Selling Stockholders has valid title
to the Shares to be sold by such Selling Stockholder and the legal
right and power, and all authorization and approval required by law,
to enter into this Agreement and the Custody Agreement and Power of
Attorney of such Selling Stockholder and to sell, transfer and deliver
the Shares to be sold by such Selling Stockholder;
(iv) the Custody Agreement and the Power of Attorney of
each Selling Stockholder have been duly authorized, executed and
delivered by such Selling Stockholder and are valid and binding
agreements of such Selling Stockholder;
(v) delivery of the Shares to be sold by each Selling
Stockholder pursuant to this Agreement will pass title to such Shares
free and clear of any security interests, claims, liens, equities and
other encumbrances; and
(vi) such counsel, to the extent that any statements or
omissions made in the Registration Statement, and preliminary
prospectus, the Prospectus, or any amendment or supplement thereto,
are made in reliance upon and in conformity with written information
furnished to the Company by such Selling Stockholder expressly for use
therein, (A) is of the opinion that the Registration Statement and
Prospectus (except for financial statements and schedules and other
financial and statistical data included therein as to which such
counsel need not express any opinion) comply as to form in all
material respects with the Securities Act and the applicable rules and
regulations of the Commission thereunder, (B) has no reason to believe
that (except for financial statements and schedules and other
financial and statistical data as
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to which such counsel need not express any belief) the Registration
Statement and the prospectus included therein at the time the
Registration Statement became effective contained any untrue statement
of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading and (C) has no reason to believe that (except for financial
statements and schedules and other financial and statistical data as
to which such counsel need not express any belief) the Prospectus
contains any untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not
misleading.
(f) The Underwriters shall have received on the Closing Date an
opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation,
counsel for the Underwriters, dated the Closing Date, covering the matters
referred to in subparagraphs (vi), (vii), (ix) (but only as to the
statements in the Prospectus under "Description of Capital Stock" and
"Underwriters") and (xv) of paragraph (d) above.
With respect to subparagraph (xv) of paragraph (d) above, Brobeck,
Phleger & Harrison LLP and Wilson Sonsini Goodrich & Rosati, Professional
Corporation, may state that their opinion and belief are based upon their
participation in the preparation of the Registration Statement and
Prospectus and any amendments or supplements thereto and review and
discussion of the contents thereof, but are without independent check or
verification, except as specified. With respect to paragraph (e) above,
____________ may rely upon an opinion or opinions of counsel for any
Selling Stockholders and, with respect to factual matters and to the extend
such counsel deems appropriate, upon the representations of each Selling
Stockholder contained herein and in the Custody Agreement and Power of
Attorney of such Selling Stockholder and in other documents and
instruments; PROVIDED that (A) each such counsel for the Selling
Stockholders is satisfactory to your counsel, (B) a copy of each opinion so
relied upon is delivered to you and is in form and substance satisfactory
to your counsel, (C) copies of such Custody Agreements and Powers of
Attorney and of any such other documents and instruments shall be delivered
to you and shall be in form and substance satisfactory to your counsel and
(D) ___________________ shall state in their opinion that they are
justified in relying on each such other opinion.
The opinions of __________________ and _________________ described in
paragraphs (d) and (e) above (and any opinions of counsel for any Selling
Stockholder referred to in the immediately preceding paragraph) shall be
rendered to the Underwriters at the request of the Company or one or more
of the Selling Stockholders, as the case may be, and shall so state
therein.
The opinion of Brobeck, Phleger & Harrison LLP described in
paragraph (d) above shall be rendered to the Underwriters at the request of
the Company and shall so state therein.
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(g) The Underwriters shall have received, on each of the date hereof
and the Closing Date, a letter dated the date hereof or the Closing Date,
as the case may be, in form and substance satisfactory to the Underwriters,
from KPMG Peat Marwick LLP, independent public accountants, containing
statements and information of the type ordinarily included in accountants'
"comfort letters" to underwriters with respect to the financial statements
and certain financial information contained in the Registration Statement
and the Prospectus; PROVIDED that the letter delivered on the Closing Date
shall use a "cut-off date" not earlier than the date hereof.
(h) The "lock-up" agreements, each substantially in the form of
Exhibit A hereto, between you and certain stockholders, each officer and
director of the Company relating to sales and certain other dispositions of
shares of Common Stock or certain other securities, delivered to you on or
before the date hereof, shall be in full force and effect on the Closing
Date.
(i) The Common Stock shall have been approved for quotation on The
Nasdaq National Market, subject only to official notice of issuance.
(j) The Company shall have complied with the provisions of
paragraph (a) of Section 7 hereof with respect to the furnishing of
Prospectuses on the business day following the date of this Agreement.
All the agreements, opinions, certificates and letters mentioned above or
elsewhere in this Agreement shall be deemed in compliance with the provisions
hereof only if Wilson Sonsini Goodrich & Rosati, Professional Corporation,
counsel for the Underwriters, shall be reasonably satisfied that they comply in
form and scope.
The several obligations of the Underwriters to purchase Additional Shares
hereunder are subject to the delivery to you on the Option Closing Date of such
documents as you may reasonably request with respect to the good standing of the
Company, the due authorization and issuance of the Additional Shares, other
matters related to the issuance of the Additional Shares and an opinion or
opinions of Brobeck, Phleger & Harrison LLP, counsel for the Company, and
__________, counsel for the Selling Stockholders, in form and substance
satisfactory to Wilson, Sonsini, Goodrich & Rosati, Professional Corporation,
counsel for the Underwriters.
7. COVENANTS OF THE COMPANY. In further consideration of the agreements
of the Underwriters herein contained, the Company covenants with each
Underwriter as follows:
(a) To furnish to you, without charge, five (5) signed copies of the
Registration Statement (including exhibits thereto) and for delivery to
each other Underwriter a conformed copy of the Registration Statement
(without exhibits thereto) and to furnish to you in New York City, without
charge, prior to 10:00 A.M. New York City time on the business day next
succeeding the date of this Agreement and during the period mentioned in
paragraph (c)
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<PAGE>
below, as many copies of the Prospectus and any supplements and amendments
thereto or to the Registration Statement as you may reasonably request.
(b) Before amending or supplementing the Registration Statement or
the Prospectus, to furnish to you a copy of each such proposed amendment or
supplement and not to file any such proposed amendment or supplement to
which you reasonably object, and to file with the Commission within the
applicable period specified in Rule 424(b) under the Securities Act any
prospectus required to be filed pursuant to such Rule.
(c) If, during such period after the first date of the public
offering of the Shares as in the opinion of Wilson Sonsini Goodrich &
Rosati, Professional Corporation, counsel for the Underwriters, the
Prospectus is required by law to be delivered in connection with sales by
an Underwriter or dealer, any event shall occur or condition exist as a
result of which it is necessary to amend or supplement the Prospectus in
order to make the statements therein, in the light of the circumstances
when the Prospectus is delivered to a purchaser, not misleading, or if, in
the opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation,
counsel for the Underwriters, it is necessary to amend or supplement the
Prospectus to comply with applicable law, forthwith to prepare, file with
the Commission and furnish, at its own expense, to the Underwriters and to
the dealers (whose names and addresses you will furnish to the Company) to
which Shares may have been sold by you on behalf of the Underwriters and to
any other dealers upon request, either amendments or supplements to the
Prospectus so that the statements in the Prospectus as so amended or
supplemented will not, in the light of the circumstances when the
Prospectus is delivered to a purchaser, be misleading or so that the
Prospectus, as amended or supplemented, will comply with law.
(d) To endeavor to qualify the Shares for offer and sale under the
securities or Blue Sky laws of such jurisdictions, foreign and domestic, as
you shall reasonably request and to pay all expenses (including fees and
disbursements of counsel) in connection with such qualification and in
connection with any review of the offering of the Shares by the National
Association of Securities Dealers, Inc.
(e) To make generally available to the Company's security holders and
to you as soon as practicable an earning statement covering the twelve-
month period ending __________, 1998 that satisfies the provisions of
Section 11(a) of the Securities Act and the rules and regulations of the
Commission thereunder.
(f) Whether or not the transactions contemplated in this Agreement
are consummated or this Agreement is terminated, to pay or cause to be paid
all expenses incident to the performance of its obligations under this
Agreement, including: (i) the fees, disbursements and expenses of the
Company's counsel and the Company's accountants in connection with the
registration and delivery of the Shares under the Securities Act and all
other fees or expenses in connection with the preparation and filing of the
Registration Statement, any preliminary prospectus, the Prospectus and
amendments and supplements to any of the foregoing, including all printing
costs associated therewith, and the mailing and
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<PAGE>
delivering of copies thereof to the Underwriters and dealers, in the
quantities hereinabove specified, (ii) all costs and expenses related to
the transfer and delivery of the Shares to the Underwriters, including any
transfer or other taxes payable thereon, (iii) the cost of printing or
producing any Blue Sky or Legal Investment memorandum in connection with
the offer and sale of the Shares under state securities laws and foreign
securities laws (in connection with qualification for the Directed Share
Program requested by the Company) and all expenses in connection with the
qualification of the Shares for offer and sale under state securities laws
and foreign securities laws as provided in Section 7(d) hereof, including
filing fees and the reasonable fees and disbursements of counsel for the
Underwriters in connection with such qualification and in connection with
the Blue Sky or Legal Investment memorandum, (iv) all filing fees and
disbursements of counsel to the Underwriters incurred in connection with
the review and qualification of the offering of the Shares by the National
Association of Securities Dealers, Inc., (v) all costs and expenses
incident to listing the Shares on the Nasdaq National Market, (vi) the cost
of printing certificates representing the Shares, (vii) the costs and
charges of any transfer agent, registrar or depositary, (viii) the costs
and expenses of the Company relating to investor presentations on any "road
show" undertaken in connection with the marketing of the offering of the
Shares, including, without limitation, expenses associated with the
production of road show slides and graphics, fees and expenses of any
consultants engaged in connection with the road show presentations with the
prior approval of the Company, travel and lodging expenses of the
representatives and officers of the Company and any such consultants, and
the cost of any aircraft chartered in connection with the road show, and
(ix) all other costs and expenses incident to the performance of the
obligations of the Company hereunder for which provision is not otherwise
made in this Section. It is understood, however, that except as provided
in this Section, Section 8 entitled "Indemnity and Contribution", and the
last paragraph of Section 10 below, the Underwriters will pay all of their
costs and expenses, including fees and disbursements of their counsel,
stock transfer taxes payable on resale of any of the Shares by them and any
advertising expenses connected with any offers they may make.
(g) During a period of three years from the effective date of the
Registration Statement, the Company will furnish to you copies of (i) all
reports to its stockholders and (ii) all reports, financial statements and
proxy or information statements filed by the Company with the Commission or
any national securities exchange.
(h) The Company will apply the proceeds from the sale of the Shares
as set forth under "Use of Proceeds" in the Prospectus.
(i) The Company will use its best efforts to obtain and maintain in
effect the quotation of the Shares on The Nasdaq National Market and will
take all necessary steps to cause the Shares to be included on The Nasdaq
National Market as promptly as practicable and to maintain such inclusion
for a period of three years after the date hereof or until such earlier
date as the Shares shall be listed for regular trading privileges on The
Nasdaq National Market or another national securities exchange approved by
you.
-19-
<PAGE>
(j) The Company will comply with all registration, filing and
reporting requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), which may from time to time be applicable to the
Company.
(k) The Company will comply with all provisions of all undertakings
contained in the Registration Statement.
(l) Prior to the Closing Date or any Option Closing Date, as the case
may be, the Company will not, directly or indirectly, issue any press
release or other communication and will not hold any press conference with
respect to the Company, or its financial condition, results of operations,
business, properties, assets, or prospects or this offering, without your
prior written consent.
(m) If at any time during such period after the first date of the
public offering of the Shares as in the opinion of Wilson Sonsini
Goodrich & Rosati, Professional Corporation, counsel for the Underwriters,
the Prospectus is required by law to be delivered in connection with sales
by an Underwriter or dealer, any rumor, publication or event relating to or
affecting the Company shall occur as a result of which in your opinion the
market price for the Common Stock has been or is likely to be materially
affected (regardless of whether such rumor, publication or event
necessitates a supplement to or amendment of the Prospectus), the Company
will, after written notice from you advising the Company to the effect set
forth above, forthwith prepare, consult with you concerning the substance
of, and disseminate a press release or other public statement, reasonably
satisfactory to you, responding to or commenting on such rumor, publication
or event.
(n) The Company agrees: (i) to enforce the terms of each Lock-up
Agreement, (ii) issue stop-transfer instructions to the transfer agent for
the Common Stock with respect to any transaction or contemplated
transaction that would constitute a breach of or default under the
applicable Lock-up Agreement and (iii) upon written request of Morgan
Stanley & Co. Incorporated, to release from the Lock-up Agreements those
shares of Common Stock held by those holders set forth in such request. In
addition, except with the prior written consent of Morgan Stanley & Co.
Incorporated, the Company agrees (i) not to amend or terminate, or waive
any right under, any Lock-up Agreement, or take any other action that would
directly or indirectly have the same effect as an amendment or termination,
or waiver of any right under, any Lock-up Agreement, that would permit any
holder of shares of Common Stock, or securities convertible into or
exercisable or exchangeable for Common Stock who is a party to a Lock-up
Agreement, to sell, make any short sale of, grant any option for the
purchase of, or otherwise transfer or dispose of, any of such shares of
Common Stock or other securities prior to the expiration of 90 days after
the date of the Prospectus, and (ii) not to consent to any sale, short
sale, grant of an option for the purchase of, or other disposition or
transfer of shares of Common Stock, or securities convertible into or
exercisable or exchangeable for Common Stock, subject to a Lock-up
Agreement.
8. INDEMNITY AND CONTRIBUTION.
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(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within
the meaning of either Section 15 of the Securities Act or Section 20 of the
Exchange Act from and against any and all losses, claims, damages and
liabilities (including, without limitation, any legal or other expenses
reasonably incurred in connection with defending or investigating any such
action or claim) caused by any untrue statement or alleged untrue statement
of a material fact contained in the Registration Statement or any amendment
thereof, any preliminary prospectus or the Prospectus (as amended or
supplemented if the Company shall have furnished any amendments or
supplements thereto), or caused by any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, except insofar as such losses,
claims, damages or liabilities are caused by any such untrue statement or
omission or alleged untrue statement or omission based upon information
relating to any Underwriter furnished to the Company in writing by such
Underwriter through you expressly for use therein; PROVIDED, HOWEVER, that
the foregoing indemnity agreement with respect to any preliminary
prospectus shall not inure to the benefit of any Underwriter from whom the
person asserting any such losses, claims, damages or liabilities purchased
Shares, or any person controlling such Underwriter, if a copy of the
Prospectus (as then amended or supplemented if the Company shall have
furnished any amendments or supplements thereto) was not sent or given by
or on behalf of such Underwriter to such person, if required by law so to
have been delivered, at or prior to the written confirmation of the sale of
the Shares to such person, and if the Prospectus (as so amended or
supplemented) would have cured the defect giving rise to such losses,
claims, damages or liabilities, unless such failure is the result of
noncompliance by the Company with Section 7(a) hereof.
(b) Each Selling Stockholder agrees, severally and not jointly, to
indemnify and hold harmless the Company, its directors, its officers who
sign the Registration Statement, each Underwriter and each person, if any,
who controls the Company or any Underwriter within the meaning of either
Section 15 of the Securities Act or Section 20 of the Exchange Act, from
and against any and all losses, claims, damages and liabilities (including,
without limitation, any legal or other expenses reasonably incurred in
connection with defending or investigating any such action or claim) caused
by any untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement or any amendment thereof, any
preliminary prospectus or the Prospectus (as amended or supplemented if the
Company shall have furnished any amendments or supplements thereto), or
caused by any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein
not misleading, but only with reference to information relating to such
Selling Stockholder furnished in writing by or on behalf of such Selling
Stockholder expressly for use in the Registration Statement, any
preliminary prospectus, the Prospectus or any amendments or supplements
thereto.
(c) Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, the Selling Stockholders, the directors of
the Company, the officers of the Company who sign the Registration
Statement and each person, if any, who controls the Company or any Selling
Stockholder within the meaning of either Section 15 of the Securities
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<PAGE>
Act or Section 20 of the Exchange Act to the same extent as the foregoing
indemnity from the Company or any Selling Stockholder to such Underwriter,
but only with reference to information relating to such Underwriter
furnished to the Company in writing by such Underwriter through you
expressly for use in the Registration Statement, any preliminary
prospectus, the Prospectus or any amendments or supplements thereto.
(d) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may
be sought pursuant to paragraph (a), (b) or (c) of this Section 8, such
person (the "indemnified party") shall promptly notify the person against
whom such indemnity may be sought (the "indemnifying party") in writing and
the indemnifying party, upon request of the indemnified party, shall retain
counsel reasonably satisfactory to the indemnified party to represent the
indemnified party and any others the indemnifying party may designate in
such proceeding and shall pay the fees and disbursements of such counsel
related to such proceeding. In any such proceeding, any indemnified party
shall have the right to retain its own counsel, but the fees and expenses
of such counsel shall be at the expense of such indemnified party unless
(i) the indemnifying party and the indemnified party shall have mutually
agreed to the retention of such counsel or (ii) the named parties to any
such proceeding (including any impleaded parties) include both the
indemnifying party and the indemnified party and representation of both
parties by the same counsel would be inappropriate due to actual or
potential differing interests between them. It is understood that the
indemnifying party shall not, in respect of the legal expenses of any
indemnified party in connection with any proceeding or related proceedings
in the same jurisdiction, be liable for (i) the fees and expenses of more
than one separate firm (in addition to any local counsel) for all
Underwriters and all persons, if any, who control any Underwriter within
the meaning of either Section 15 of the Securities Act or Section 20 of the
Exchange Act, (ii) the fees and expenses of more than one separate firm (in
addition to any local counsel) for the Company, its directors, its officers
who sign the Registration Statement and each person, if any, who controls
the Company within the meaning of either such Section and (iii) the fees
and expenses of more than one separate firm (in addition to any local
counsel) for all Selling Stockholders and all persons, if any, who control
any Selling Stockholder within the meaning of either such Section, and that
all such fees and expenses shall be reimbursed as they are incurred. In
the case of any such separate firm for the Underwriters and such control
persons of any Underwriters, such firm shall be designated in writing by
Morgan Stanley & Co. Incorporated. In the case of any such separate firm
for the Company, and such directors, officers and control persons of the
Company, such firm shall be designated in writing by the Company. In the
case of any Selling Stockholders, such firm shall be designated in writing
by the persons named as attorney-in-fact for the Selling Stockholders under
the Powers of Attorney. The indemnifying party shall not be liable for any
settlement of any proceeding effected without its written consent, but if
settled with such consent or if there be a final judgment for the
plaintiff, the indemnifying party agrees to indemnify the indemnified party
from and against any loss or liability by reason of such settlement or
judgment. Notwithstanding the foregoing sentence, if at any time an
indemnified party shall have requested an indemnifying party to reimburse
the indemnified party for fees and expenses of counsel as contemplated by
the second and third sentences of this paragraph,
-22-
<PAGE>
the indemnifying party agrees that it shall be liable for any settlement of
any proceeding effected without its written consent if (i) such settlement
is entered into more than 60 days after receipt by such indemnifying party
of the aforesaid request and (ii) such indemnifying party shall not have
reimbursed the indemnified party in accordance with such request prior to
the date of such settlement. No indemnifying party shall, without the
prior written consent of the indemnified party, effect any settlement of
any pending or threatened proceeding in respect of which any indemnified
party is or could have been a party and indemnity could have been sought
hereunder by such indemnified party, unless such settlement includes an
unconditional release of such indemnified party from all liability on
claims that are the subject matter of such proceeding.
(e) To the extent the indemnification provided for in paragraph (a),
(b) or (c) of this Section 8 is unavailable to an indemnified party or
insufficient in respect of any, losses, claims, damages or liabilities
referred to therein, then each indemnifying party under such paragraph, in
lieu of indemnifying such indemnified party thereunder, shall contribute to
the amount paid or payable by such indemnified party as a result of such
losses, claims, damages or liabilities (i) in such proportion as is
appropriate to reflect the relative benefits received by the indemnifying
party or parties on the one hand and the indemnified party or parties on
the other hand from the offering of the Shares or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the
indemnifying party or parties on the one hand and of the indemnified party
or parties on the other hand in connection with the statements or omissions
that resulted in such losses, claims, damages or liabilities, as well as
any other relevant equitable considerations. The relative benefits
received by the Sellers on the one hand and the Underwriters on the other
hand in connection with the offering of the Shares shall be deemed to be in
the same respective proportions as the net proceeds from the offering of
the Shares (before deducting expenses) received by each Seller and the
total underwriting discounts and commissions received by the Underwriters,
in each case as set forth in the table on the cover of the Prospectus, bear
to the aggregate Public Offering Price of the Shares. The relative fault
of the Sellers on the one hand and the Underwriters on the other hand shall
be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the
Sellers or by the Underwriters and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement
or omission. The Underwriters' respective obligations to contribute
pursuant to this Section 8 are several in proportion to the respective
number of Shares they have purchased hereunder, and not joint.
(f) The Sellers and the Underwriters agree that it would not be just
or equitable if contribution pursuant to this Section 8 were determined by
PRO RATA allocation (even if the Underwriters were treated as one entity
for such purpose) or by any other method of allocation that does not take
account of the equitable considerations referred to in paragraph (e) of
this Section 8. The amount paid or payable by an indemnified party as a
result of the losses, claims, damages and liabilities referred to in the
immediately preceding
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<PAGE>
paragraph shall be deemed to include, subject to the limitations set forth
above, any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action or
claim. Notwithstanding the provisions of this Section 8, no Underwriter
shall be required to contribute any amount in excess of the amount by which
the total price at which the Shares underwritten by it and distributed to
the public were offered to the public exceeds the amount of any damages
that such Underwriter has otherwise been required to pay by reason of such
untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Securities Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. The
remedies provided for in this Section 8 are not exclusive and shall not
limit any rights or remedies which may otherwise be available to any
indemnified party at law or in equity.
(g) The indemnity and contribution provisions contained in this
Section 8 and the representations, warranties and other statements of the
Company and the Selling Stockholders contained in this Agreement shall
remain operative and in full force and effect regardless of (i) any
termination of this Agreement, (ii) any investigation made by or on behalf
of any Underwriter or any person controlling any Underwriter, any Selling
Stockholder or any person controlling any Selling Stockholder or by or on
behalf of the Company, its officers or directors or any person controlling
the Company and (iii) acceptance of and payment for any of the Shares.
9. TERMINATION. This Agreement shall be subject to termination by notice
given by you to the Company, if (a) after the execution and delivery of this
Agreement and prior to the Closing Date (i) trading generally shall have been
suspended or materially limited on or by, as the case may be, any of the New
York Stock Exchange, the American Stock Exchange, the National Association of
Securities Dealers, Inc., the Chicago Board of Options Exchange, the Chicago
Mercantile Exchange or the Chicago Board of Trade, (ii) trading of any
securities of the Company shall have been suspended on any exchange or in any
over-the-counter market, (iii) a general moratorium on commercial banking
activities in New York shall have been declared by either Federal or New York
State authorities or (iv) there shall have occurred any outbreak or escalation
of hostilities or any change in financial markets or any calamity or crisis
that, in your judgment, is material and adverse and (b) in the case of any of
the events specified in clauses (a)(i) through (iv), such event, singly or
together with any other such event, makes it, in your judgment, impracticable to
market the Shares on the terms and in the manner contemplated in the Prospectus.
10. EFFECTIVENESS; DEFAULTING UNDERWRITERS. This Agreement shall become
effective upon the execution and delivery hereof by the parties hereto.
If, on the Closing Date or the Option Closing Date, as the case may be, any
one or more of the Underwriters shall fail or refuse to purchase Shares that it
has or they have agreed to purchase hereunder on such date, and the aggregate
number of Shares which such defaulting Underwriter or Underwriters agreed but
failed or refused to purchase is not more than one-tenth of the aggregate number
of the Shares to be purchased on such date, the other Underwriters shall be
obligated
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<PAGE>
severally in the proportions that the number of Firm Shares set forth opposite
their respective names in Schedule II or Schedule III bears to the aggregate
number of Firm Shares set forth opposite the names of all such non-defaulting
Underwriters, or in such other proportions as you may specify, to purchase the
Shares which such defaulting Underwriter or Underwriters agreed but failed or
refused to purchase on such date; PROVIDED that in no event shall the number of
Shares that any Underwriter has agreed to purchase pursuant to this Agreement be
increased pursuant to this Section 10 by an amount in excess of one-ninth of
such number of Shares without the written consent of such Underwriter. If, on
the Closing Date, any Underwriter or Underwriters shall fail or refuse to
purchase Firm Shares and the aggregate number of Firm Shares with respect to
which such default occurs is more than one-tenth of the aggregate number of Firm
Shares to be purchased, and arrangements satisfactory to you, the Company and
the attorney-in-fact for the Selling Stockholders for the purchase of such Firm
Shares are not made within 36 hours after such default, this Agreement shall
terminate without liability on the part of any non-defaulting Underwriter, the
Company or any Selling Stockholder. In any such case either you or the Company
shall have the right to postpone the Closing Date, but in no event for longer
than seven days, in order that the required changes, if any, in the Registration
Statement and in the Prospectus or in any other documents or arrangements may be
effected. If, on the Option Closing Date, any Underwriter or Underwriters shall
fail or refuse to purchase Additional Shares and the aggregate number of
Additional Shares with respect to which such default occurs is more than one-
tenth of the aggregate number of Additional Shares to be purchased, the non-
defaulting Underwriters shall have the option to (i) terminate their obligation
hereunder to purchase Additional Shares or (ii) purchase not less than the
number of Additional Shares that such non-defaulting Underwriters would have
been obligated to purchase in the absence of such default. Any action taken
under this paragraph shall not relieve any defaulting Underwriter from liability
in respect of any default of such Underwriter under this Agreement.
If this Agreement shall be terminated by the Underwriters, or any of them,
because of any failure or refusal on the part of any Seller to comply with the
terms or to fulfill any of the conditions of this Agreement, or if for any
reason any Seller shall be unable to perform its obligations under this
Agreement, the Sellers will reimburse the Underwriters or such Underwriters as
have so terminated this Agreement with respect to themselves, severally, for all
out-of-pocket expenses (including the fees and disbursements of their counsel)
reasonably incurred by such Underwriters in connection with this Agreement or
the offering contemplated hereunder.
11. COUNTERPARTS. This Agreement may be signed in two or more
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
12. APPLICABLE LAW. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of New York.
13. HEADINGS. The headings of the sections of this Agreement have been
inserted for convenience of reference only and shall not be deemed a part of
this Agreement.
[Signature Page follows this Page]
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<PAGE>
Very truly yours,
Advanced Fibre Communications, Inc.
By:
---------------------------------------------
Name: Dan E. Steimle
Title: Vice President, Chief Financial
Officer
The Selling Stockholders named in Schedule I
hereto, acting severally
By:
---------------------------------------------
Attorney-in-Fact
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<PAGE>
Accepted as of the date hereof:
Morgan Stanley & Co. Incorporated
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Cowen & Company
Hambrecht & Quist LLC
Acting severally on behalf of themselves
and the several U.S. Underwriters named in
Schedule I hereto.
By Morgan Stanley & Co. Incorporated
By:
----------------------------------------
Name: William R. Salisbury
Title: Vice President
Morgan Stanley & Co. International Limited
Merrill Lynch International
Cowen & Company
Hambrecht & Quist LLC
Acting severally on behalf of themselves and the
several International Underwriters named in
Schedule II hereto.
By Morgan Stanley & Co. International Limited
By:
-----------------------------------------
(Attorney-in-Fact)
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<PAGE>
SCHEDULE I
NUMBER OF NUMBER OF
FIRM SHARES ADDITIONAL SHARES
TO BE SOLD TO BE SOLD
----------- -----------------
COMPANY. . . . . . . . . . . . . . . .
SELLING STOCKHOLDERS
Total. . . . . . . . . . . . . . . . . 2,600,000 390,000
------------ --------------
------------ --------------
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SCHEDULE II
U.S. UNDERWRITERS
Number of
Firm Shares
Underwriter To Be Purchased
----------- ----------------
Morgan Stanley & Co. Incorporated . . . . . . . . . . . .
Merrill Lynch, Pierce, Fenner & Smith
Incorporated. . . . . . . . . . . . . . . . . .
Cowen & Company. . . . . . . . . . . . . . . . . . . . . .
Hambrecht & Quist LLC. . . . . . . . . . . . . . . . . . . ----------
Total . . . . . . . . . 2,080,000
-----------
-----------
<PAGE>
SCHEDULE III
INTERNATIONAL UNDERWRITERS
Number of
Firm Shares
Underwriter To Be Purchased
----------- ----------------
Morgan Stanley & Co. International Limited . . . . . . .
Merrill Lynch International. . . . . . . . . . . . . . .
Cowen & Company. . . . . . . . . . . . . . . . . . . . .
Hambrecht & Quist LLC. . . . . . . . . . . . . . . . . .
----------
Total 520,000
----------
----------
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<PAGE>
EXHIBIT A
ADVANCED FIBRE COMMUNICATIONS, INC.
LOCK-UP AGREEMENT
January ___, 1997
Morgan Stanley & Co. Incorporated
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Cowen & Company
Hambrecht & Quist LLC
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, NY 10036
Morgan Stanley & Co. International Limited
Merrill Lynch International
Cowen & Company
Hambrecht & Quist LLC
c/o Morgan Stanley & Co. International Limited
25 Cabot Square
Canary Wharf
London E14 4QA
England
Dear Sirs and Mesdames:
The undersigned understands that Morgan Stanley & Co. Incorporated ("Morgan
Stanley") proposes to enter into an Underwriting Agreement (the "Underwriting
Agreement") with Advanced Fibre Communications, Inc., a Delaware corporation
(the "Company"), providing for the public offering (the "Public Offering") by
the several Underwriters, including Morgan Stanley (the "Underwriters"), of
shares (the "Shares") of the Common Stock, par value $.01 per share, of the
Company (the "Common Stock").
To induce the Underwriters that may participate in the Public Offering to
continue their efforts in connection with the Public Offering, the undersigned
hereby agrees that, without the prior written consent of Morgan Stanley on
behalf of the Underwriters, it will not, during the period commencing on the
date hereof and ending 90 days after the date of the final prospectus relating
to the Public Offering (the "Prospectus"), (1) offer, pledge, sell, contract to
sell, sell any option or contract to purchase, purchase any option or contract
to sell, grant any option, right or warrant to purchase, or otherwise transfer
or dispose of, directly or indirectly, any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock
(whether such shares or any such securities are now owned by the undersigned or
are hereafter acquired), or (2) enter into any swap or other arrangement that
transfers to another, in whole or in part, any of the economic consequences of
ownership of the Common Stock, whether any such transaction described in
clause (1) or (2) above is to be settled by delivery of Common Stock or such
other securities, in cash or otherwise. Notwithstanding the foregoing, if the
undersigned is an individual, he or she may transfer any shares of Common Stock
either during
<PAGE>
his or her lifetime or on death by will or intestacy to his or her immediate
family or to a trust the beneficiaries of which are exclusively the undersigned
and/or a member or members of his or her immediate family; provided, however,
that in such case, it shall be a condition to the transfer that the transferee
execute an agreement (an original copy of which shall be provided to Morgan
Stanley) stating that the transferee is receiving and holding the shares of
Common Stock transferred subject to the provisions of this Agreement, and there
shall be no further transfer of such Common Stock except in accordance with this
Agreement. For purposes of the preceding sentence, "immediate family" shall
mean spouse, lineal descendant, father, mother, brother or sister of the
transferor. In addition, the undersigned agrees that, without the prior
written consent of Morgan Stanley on behalf of the Underwriters, it will not,
during the period commencing on the date hereof and ending 90 days after the
date of the Prospectus, make any demand for or exercise any right with respect
to, the registration of any shares of Common Stock or any security convertible
into or exercisable or exchangeable for Common Stock.
Whether or not the Public Offering actually occurs depends on a number of
factors, including market conditions. Any Public Offering will only be made
pursuant to an Underwriting Agreement, the terms of which are subject to
negotiation between the Company and the Underwriters.
This agreement shall expire by its terms if the Underwriting Agreement is
not executed on or before March 31, 1997.
Very truly yours,
---------------------------------------------
(Print name of stockholder)
---------------------------------------------
(signature)
---------------------------------------------
(name and title of signatory if applicable)
Address:
-----------------------------------
-----------------------------------
-----------------------------------
<PAGE>
EXHIBIT 5.1
January 24, 1997
Advanced Fibre Communications, Inc.
1445 McDowell Boulevard North
Petaluma, CA 94954
Ladies and Gentlemen:
We have acted as counsel to Advanced Fibre Communications, Inc., a Delaware
corporation (the "Company"), in connection with its registration of an aggregate
of 2,600,000 shares of its common stock, of which 200,000 shares are proposed to
be issued by the Company and 2,400,000 shares are proposed to be sold by certain
stockholders of the Company, plus an over-allotment of 390,000 shares offered by
certain stockholders of the Company (the "Shares"), all as described in the
Company's Registration Statement on Form S-1, filed with the Securities and
Exchange Commission under the Securities Act of 1933, as amended (the
"Registration Statement"). The Shares are to be sold pursuant to an Underwriting
Agreement to be entered into among the Company and Morgan Stanley & Co.
Incorporated, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Cowen &
Company and Hambrecht & Quist LLC as representatives of the several U.S.
underwriters named in such Underwriting Agreement and Morgan Stanley & Co.
International Limited, Merrill Lynch International, Cowen & Company and
Hambrecht & Quist LLC, as representatives of the several international
underwriters (the "International Underwriters") named in such Underwriting
Agreement (the "Underwriting Agreement").
In connection with this opinion, we have (i) examined and relied upon the
Registration Statement and related Prospectus, the Company's Fourth Amended and
Restated Certificate of Incorporation, the Company's Bylaws and the originals or
copies certified to our satisfaction of such records, documents, certificates,
memorandum or other instruments as in our judgment are necessary or appropriate
to enable us to render the opinion expressed below and (ii) assumed that the
Shares will be sold by the U.S. Underwriters and the International Underwriters
at a price established by the Price Committee of the Board of Directors of the
Company.
On the basis of the foregoing, and in reliance thereon, we are of the
opinion that the Shares have been duly authorized, and, when sold and issued by
the Company and when sold by certain stockholders of the Company in accordance
with the terms of the Underwriting Agreement, will be validly issued, fully paid
and nonassessable.
We consent to the filing of this opinion as Exhibit 5.1 to the Registration
Statement and to the reference to this firm under the caption "Legal Matters" in
the Prospectus which is part of the Registration Statement.
It is understood that this opinion is to be used only in connection with the
offer and sale of the Shares while the Registration Statement is in effect.
Very truly yours,
BROBECK, PHLEGER & HARRISON LLP
<PAGE>
Tellabs Contract No. CON AFC 010 TER 96 10
-------------------------------------------
TERMINATION AGREEMENT
OF JOINT VENTURE AND PARTNERSHIP AGREEMENT
This Termination Agreement of Joint Venture and Partnership Agreement
("Termination Agreement") is entered into as of December 23, 1996 (the
"Effective Date"), by and between Advance Fibre Communications, Inc., a Delaware
corporation located at 1445 McDowell Boulevard North Petaluma, California 94975
("AFC"), and Tellabs Operations, Inc., a Delaware corporation located at 4951
Indiana Avenue, Lisle, Illinois 60532 ("Tellabs").
WHEREAS, AFC and Tellabs (the "Partners") entered into that Joint Venture and
Partnership Agreement dated April 11, 1994 (the "J.V. Agreement") to form a
general partnership (the "J.V. Company") to design, develop, manufacture and
distribute a product line and its derivatives which were to allow telephone
services to be provided over existing cable television installed coaxial
systems;
WHEREAS, Tellabs and AFC entered into a Memorandum of Understanding dated April
3, 1996 ("MOU") pursuant to which they a agreed to terminate the J.V. Agreement;
and
WHEREAS, AFC and Tellabs desire to terminate the J.V. Agreement and enter into a
License and Marketing Agreement ("License Agreement") and an OEM Agreement
contemporaneously herewith.
Capitalized terms used in this Termination Agreement that are not otherwise
defined herein shall have the meanings given to them in the J.V. Agreement.
In consideration of the mutual promises and covenants set forth herein, AFC and
Tellabs agree as follows:
1. TERMINATION
On April 3, 1996, upon entering into the MOU, the Partners agreed to
terminate the J.V. Agreement and dissolve the J.V. Company. Provided that
the parties have contemporaneously executed the License Agreement, and that
Tellabs has paid the amount under Section 2, the partnership shall be
dissolved, effective as of the Effective Date.
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PAGE 1 OF 11
<PAGE>
2. LIQUIDATION OF J.V. COMPANY ASSETS
2.1 CONTRIBUTIONS AND LOANS
In connection with the dissolution of the J.V. Company, Tellabs
shall reimburse AFC for AFC's loans and advances to the J.V.
Company in the amount of $1,650,563.51. In exchange for such
reimbursement, AFC shall waive the debt and accounts receivable
owed to AFC by the J.V. Company in an amount of $1,650,563.51,
which is comprised of a $1,000,000 loan and $650,563.51 of
accounts payable owing to AFC. In addition, Tellabs shall pay to
AFC (i) interest of $69,791.87 (comprised of interest expense of
$60,648.50 accrued up through June 15, 1996 plus $9,143.37 in
interest income on cash in bank since June 15, 1996); and (ii)
$31,001.94 representing equipment lease payments paid by AFC
after April 3, 1996 relating to assets retained by Tellabs
hereunder. The interest payment and equipment lease
reimbursements are not included in the $1,650,563.51 owing on
the loan and accounts payable.
2.2 OWNERSHIP OF J.V. PRODUCT TECHNOLOGY AND THE JOINT TECHNOLOGY
Except for the Joint Technology (as defined below), all right,
title and interest in and to the J.V. Product Technology (as
defined in the J.V. Agreement) (and all patent rights, copyright
rights, trade secrets and other proprietary rights thereto) shall
vest in Tellabs, subject to the license rights granted to AFC in
the License Agreement. Tellabs will have the exclusive right to,
and at Tellabs' expense, AFC agrees to assist Tellabs in every
proper way (including without limitation, becoming a nominal party)
to evidence, record and perfect such ownership including filing any
and all patents in connection therewith.
Notwithstanding the foregoing, Tellabs and AFC shall have equal
rights to and shall jointly own all right, title and interest in
all of the technology relating to the upconverter, direct down
converter, the LUU-VIC burst receiver and the QPSK clock recovery
circuits ("Joint Technology") with no ongoing obligations to one
another to provide updates, enhancements, royalties or otherwise,
except as provided in Section 8 of the License Agreement.
2.3 OWNERSHIP OF UMC 1000 TECHNOLOGY AND AFC PROPRIETARY COMPONENTS
All right, title and interest in and to the UMC 1000 Technology and
AFC circuit designs which are a part of Tellabs' board designs (and
all patent rights, copyright rights, trade secrets and other
proprietary rights thereto) shall remain vested in AFC, subject to
the license rights granted to Tellabs in the License Agreement.
Further, all right, title and interest in and to AFC proprietary
components (and all patent rights, copyright rights,
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PAGE 2 OF 11
<PAGE>
trade secrets and other proprietary rights thereto) shall remain
vested in AFC.
2.4 RIGHT TO USE PRE-EXISTING TECHNOLOGY
The right of the J.V. Company to user AFC's Pre-existing Technology
granted to the J.V. Company by AFC pursuant to Section 4.1 of the
J.V. Agreement is hereby terminated.
2.5 RIGHT TO MARKET STUDY
The right to use the Market Study granted to the J.V. Company by
Tellabs pursuant to Section 4.2 of the J.V. Agreement is hereby
terminated.
2.6 MARKETING RIGHTS
The market rights granted to the Partners pursuant to Section 6 of
the J.V. Agreement are hereby terminated and are superseded in
their entirety by the market rights agreed upon by the parties in
the License Agreement.
2.7 OTHER J.V. COMPANY ASSETS
AFC has purchased from the J.V. Company at the net book value on
the J.V. Company's books, and shall be entitled to retain, those
assets listed in Attachment A. All right, title and interest in
and to all other J.V. Company assets not specifically referred to
in subsections 2.1 through 2.6 above or in Attachment A shall vest
in Tellabs. Those assets shall include, but shall not be limited
to, the assets listed on Attachment B hereto. The fixed assets to
be transferred to Tellabs from the J.V. Company, along with title
to such assets, will be transferred at Tellabs' headquarters in
Illinois.
3. WINDING UP
AFC and Tellabs each shall be obligated to provide for continuing support
for the other Partner's embedded customer base as follows:
3.1 Tellabs shall be responsible for making all royalty payments to
Digicom.
3.2 AFC shall be responsible for the Viacom cable expenses.
3.3 Tellabs shall be responsible for making all payments to Cecil
Deisch.
3.4 Tellabs shall be responsible for making all payments to Victor
Ivashin to the extent he performs any work for Tellabs after the
Effective Date.
4. MISCELLANEOUS
4.1 MUTUAL REPRESENTATIONS AND WARRANTIES.
Each Partner represents and warrants to the other Partner that,
since April 3, 1996, and except as stated in the J.V. Company books
and reflected in the J.V. Company's financial statements dated
December 23, 1996, (which
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PAGE 3 OF 11
<PAGE>
will be based upon the April 26, 1996 financial statements adjusted
only for matters referred to in this Termination Agreement), (a)
such Partner has not incurred any obligation or liability on behalf
of or as apparent agent of the J.V. Company or the other Partner,
or for which the other Partner may be charged, or for which the
Partner intends to claim refund or reimbursement from the J.V.
Company; and (b) such Partner has not received, discharged, or
transferred any credit, moneys, property, or other assets of the
J.V. Company. These representations and warranties shall survive
the final termination of the J.V. company.
4.2 MUTUAL GENERAL RELEASE
Each Partner, for itself, its predecessors, assigns and successors,
hereby fully releases, remises, acquits, and discharges the other
Partner, and each of its respective present or former officers,
directors, shareholders, employees, agents, attorneys, parents,
subsidiaries, affiliates, partners, joint venturers and successors
and assigns (collectively, "Releasees") and covenants not to sue or
otherwise institute or cause to be instituted or in any way
participate in (except at the request of such Releasee) any legal
or other proceedings or actions against any Releasee with respect
to any matter whatsoever arising under the J.V. Agreement
including, but not limited to, any and all liabilities, claims,
demands, contracts, debts, obligations, and causes of action of
every nature, kind and description, in law, equity, or otherwise,
whether or not now known or ascertained, which heretofore do, or
hereafter may, exist (other than matters arising under Section 10
of the J.V. Agreement and other than matters arising out of the
breach of any representation or warranty made pursuant to this
Termination Agreement or the License Agreement (collectively, the
"Non-Released Claims," which claims, if any, are specifically
excluded)).
4.3 UNCERTAIN CLAIMS
Each Partner hereby acknowledges that it has considered the
possibility that it may not now fully know the nature or value of
the claims which are generally released pursuant to the above
paragraph and that such general release extends to all claims of
every nature and kind, known or unknown, suspected or unsuspected,
past or present, however arising (except for the Non-Released
Claims), and that any and all rights granted to such Partner
pursuant to Section 1542 of the California Civil Code or any
analogous applicable state or federal law or regulation are
hereby expressly waived. Said Section 1542 of the Civil Code of
the State of California reads as follows:
"A general release does not extend to claims which the creditor
does not know or suspect to exist in his favor at the time of
executing the release,
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PAGE 4 OF 11
<PAGE>
which, if known by him, must have materially affected his
settlement with the debtor."
4.4 CONDUCT AFTER DISSOLUTION
Each partner hereby covenants and agrees not to undertake any
action or engage in any activity with respect to the assets of the
J.V. Company or incur any liability, obligation or charge against
the J.V. Company or the other Partner, following the Effective Date
of the dissolution hereunder, except as contemplated by this
Termination Agreement.
4.5 INDEMNIFICATION
Each Partner, for itself, its predecessors, assigns and successors,
hereby agrees to indemnify and hold harmless the other Partner, and
its respective present or former officers, directors, shareholders,
employees, agents, attorneys, parents, subsidiaries, affiliates,
partners, joint venturers and successors and assigns (collectively,
"Indemnities"), against any and all losses, liabilities, damages,
demands, claims, suits, actions, judgments, causes of action,
assessments, costs and expenses, including, without limitation,
interest, penalties, attorneys' fees, any and all expenses incurred
in investigating, preparing, and defending against any litigation,
commenced or threatened, and any claim whatsoever, and any and all
amounts paid in settlement of any claim or litigation, asserted
against, resulting from, imposed upon, or incurred or suffered by
any Indemnitee, directly or indirectly, as a result of or arising
from any inaccuracy in or breach or nonfulfillment of any of the
representations, warranties, covenants or agreements made by such
indemnifying Partner in this Agreement or any facts or
circumstances constituting such an inaccuracy, breach, or
nonfulfillment.
4.6 FINAL TAX RETURN
Each of Tellabs and AFC shall file a final tax return for the J.V.
Company with each of Tellabs and AFC bearing their own costs for
preparing and filing such return. in addition, Tellabs and AFC
shall cooperate with one another in providing the necessary
information for preparing the final tax returns.
5. GENERAL PROVISIONS
5.1 RELATIONSHIP OF THE PARTIES
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PAGE 5 OF 11
<PAGE>
Notwithstanding any provision hereof, for all purposes of this
Termination Agreement each party shall be and act as an independent
contractor and not as partner, joint venturer, or agent of the
other and shall not bind nor attempt to bind the other to any
contract.
5.2. ASSIGNMENT
Neither party shall have any right or ability to assign, transfer,
or sublicense any obligations or benefit under this Termination
Agreement without the written consent of the other except that
either party may assign and transfer this Termination Agreement and
its rights and obligations hereunder to any third party who
succeeds to substantially all its business, stock or assets whether
by merger, sale, acquisition or otherwise.
5.3 ENTIRE TERMINATION AGREEMENT; AMENDMENT. This Termination
Agreement (and all Attachments hereto) the License Agreement and
the OEM Agreement constitute the entire and only agreement between
the parties relating to the subject matter hereof, and all other
prior negotiations, representations, understandings and agreements
including but not limited to the MOU, are superseded hereby. No
agreements amending or supplementing the terms hereof shall be
effective except by means of a written document signed by the duly
authorized representatives of both parties.
5.4 NOTICES. All notices, consents or approvals required by this
Termination Agreement shall be in writing and shall be deemed given
five (5) days after being sent by certified or registered air mail,
postage prepaid, or when received after being sent by facsimile
(confirmed by such certified or registered mail) or by commercial
overnight courier service with tracking capabilities, to the
parties at the addresses set forth above or such other addresses
as may be designated in writing by the respective parties pursuant
to the terms of this notice provision.
5.5 DISPUTES.
5.5.1 In the event that the parties after diligent good faith
efforts, cannot resolve an issue, then the parties agree to
convene a meeting of their Presidents in an effort to reach
an appropriate resolution, settlement or compromise. If
after diligent good faith efforts the Presidents are unable
to resolve the dispute, then the parties agree to retain an
impartial qualified mediator to assist in reaching a
mutually agreeable resolution to the dispute. The costs of
any such mediation shall be shared equally by the parties.
Except where a party reasonably believes that irreparable
harm may occur and
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PAGE 6 of 11
<PAGE>
brings an action for injunction relief, the parties shall
follow the foregoing dispute resolution procedures prior to
commencing litigation. In connection with any such dispute
or litigation, the provisions of the following paragraph
will apply.
5.5.2 Prior to initiating any action hereunder (except for actions
for injunctive relief), the aggrieved party will provide
written notice to the other party and the parties will make
diligent good faith efforts to negotiate and resolve such
dispute in accordance with the foregoing dispute resolution
procedures. The parties agree that in the event that it
becomes necessary to initiate any action hereunder (except
for actions in equity where an alternative forum is required
for immediate injunctive relief), the appropriate forum
shall be (a) for claims commenced by AFC, in a state or
federal court located in Cook County or DuPage County,
Illinois or (b) for claims commenced by Tellabs, in a state
or federal court located in Sonoma County, California.
5.6 WAIVER.
The failure of AFC or Tellabs to enforce a right under this
Termination Agreement shall not act as a waiver of that right or
the ability to assert that right relative to the particular
situation involved. The waiver by either party of a breach of any
provisions contained in this Termination Agreement shall be
effective only if set forth in a writing signed by both parties and
shall in no way be construed as a waiver of any succeeding breach
of such provision or the waiver of the provision itself.
5.7 HEADINGS.
Headings included herein are for convenience only and shall not be
used to interpret or construe this Termination Agreement.
5.8 SEVERABILITY.
If any provision of this Termination Agreement shall be held void,
invalid, illegal or unenforceable, that provision shall be limited
or eliminated to the minimum extent necessary so that this
Termination Agreement shall otherwise remain in full force and
effect and enforceable.
5.9 REMEDIES; INJUNCTIVE RELIEF.
Except as expressly provided with respect to particular remedies,
the rights and remedies of a party set forth herein with respect to
failure of the other party to comply with the terms of this
Termination Agreement are not exclusive, the exercise thereof shall
not constitute an election of remedies and the aggrieved party
shall in all events be entitled to seek
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PAGE 7 of 11
<PAGE>
whatever additional remedies may be available in law or in equity
(including, without limitation, appropriate injunctive relief).
5.10 AGREEMENT CONTROLS.
The terms of this Termination Agreement shall control over any
contrary or inconsistent terms in any Attachment related hereto
unless this Termination Agreement is specifically superseded in a
written agreement signed by both parties.
5.11 SUCCESSORS AND ASSIGNS.
The provisions of this Termination Agreement shall inure to the
benefit of, and be binding upon, AFC and Tellabs and their
respective successors and permitted assigns.
5.12 PUBLICITY.
The parties agree to maintain the terms of this Termination
Agreement in confidence. Neither party shall directly or
indirectly issue or permit the issuance of any publicity, news
release or other public statement concerning this Termination
Agreement or the terms hereof without the prior written approval of
the other party; provided, however, that each party may make public
disclosures as required by law or governmental regulation with
reasonable prior notice to the other party. Notwithstanding the
foregoing, both parties shall be free to disclose the notice and
substance of this Termination Agreement, as necessary, in
connection with its annual report and SEC filings on Form 10-K and
10-Q.
5.13 COUNTERPARTS.
This Termination Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but
all of which together shall constitute but one instrument.
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PAGE 8 of 11
<PAGE>
IN WITNESS WHEREOF, this Termination Agreement has been duly executed and
delivered by the parties as of the date first above written.
ADVANCED FIBRE
COMMUNICATIONS, INC. TELLABS OPERATIONS, INC.
By: /s/ Carl Grivner By: /s/ Brian J. Jackman
--------------------------- ---------------------------
Name: Carl Grivner Name: Brian J. Jackman
Title: President & COO Title: President
Date: December 30, 1996 Date: December 23, 1996
------------------------- -------------------------
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PAGE 9 of 11
<PAGE>
ATTACHMENT A
J.V. COMPANY ASSETS RETAINED BY AFC
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PAGE 10 OF 11
<PAGE>
ADVANCED ACCESS LABS FIXED ASSETS
ENGINEERING, COMPUTER EQUIPMENT & CUBICLE FURNITURE
12/18/96 11:24
<TABLE>
<CAPTION>
Beginning Jan-96 Feb-96 Mar-96
Purchases Date Rec'd Description Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Arco Manhattan 01-Jun-94 Refurbished Action Office Stations 14,590.55 188.17 188.17 188.17
CB Technical
Source 08-Dec-95 AAL Test Lab Work Benches (4 ea) 5,701.80 407.27 73.54 73.54
Global Equipment 12-Dec-95 AAL Test Lab Cabinet 215.00 15.36 2.77 2.77
Global Equipment 12-Dec-95 AAL Test Lab Adjustable Stools (5 ea) 473.75 33.84 6.11 6.11
Global Equipment 12-Dec-95 AAL Test Lab Storage Center 1,847.26 131.95 23.82 17.67
Global Equipment 24-Jan-96 AAL Test Lab Drawer Unit 2,120.50
ACCOUNT 1500 24,948.86 776.59 294.41 288.26
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Elek-Tek 31-Mar-94 Presario 486-66 $14,560.00 187.77 187.77 187.77
Elek-Tek 31-Mar-94 Presario 486-66 $2,080.00 26.83 26.83 26.83
Elek-Tek 31-Mar-94 4 MB RAM UG $1,365.00 17.60 17.60 17.60
Elek-Tek 31-Mar-94 8 MB RAM UG $1,199.97 15.48 15.48 15.48
Elek-Tek 31-Mar-94 4 MB RAM $195.00 2.51 2.51 2.51
Elek-Tek 31-Mar-94 8 MG RAM $399.99 5.16 5.16 5.16
Elek-Tek 31-Mar-94 Eagle NE2000T $439.99 5.67 5.67 5.67
Elek-Tek 31-Mar-94 HP Laserjet Printer-returned 4/26/94 (See May 5 94) $0.00 0.00 0.00 0.00
Elek-Tek 31-Mar-94 HP Ethernet Interface - returned 4/26/94 (See May 5 94) $0.00 0.00 0.00 0.00
Elek-Tek 31-Mar-94 Modem $139.99 1.81 1.81 1.81
Elek-Tek 31-Mar-94 Netware $1,499.99 19.35 19.35 19.35
Elek-Tek 31-Mar-94 17" Sony Monitor $1,199.00 15.46 15.46 15.46
Elek-Tek 31-Mar-94 17" Sony Monitor $1,199.00 15.46 15.46 15.46
Elek-Tek 31-Mar-94 17" Sony Monitor $1,199.00 15.46 15.46 15.46
Elek-Tek 31-Mar-94 21" Nec Monitor $2,099.99 27.08 27.08 27.08
Elek-Tek 31-Mar-94 21" Nec Monitor - Returned 5/13/94 - Replaced below $0.00 0.00 0.00 0.00
Elek-Tek 31-Mar-94 14" Nec Monitor $345.00 4.45 4.45 4.45
Elek-Tek 01-Apr-94 650 W UPS $344.00 4.44 4.44 4.44
Elek-Tek 01-Apr-94 17" Sony Monitor $1,199.00 15.46 15.46 15.46
Elek-Tek 04-Apr-94 Proliant 486-66 $5,875.00 75.77 75.77 75.77
Elek-Tek 06-Apr-94 Floppy Drive 3/12 $65.00 0.84 0.84 0.84
Elek-Tek 06-Apr-94 Think Pad 350 $5,367.00 69.22 69.22 69.22
Elek-Tek 06-Apr-94 2.2 AJ Bat IBM 350 $90.00 1.16 1.16 1.16
Elek-Tek 06-Apr-94 4 MG RAM 350 $636.00 8.20 8.20 8.20
Elek-Tek 19-Apr-94 Eagle 5pk $439.99 5.67 5.67 5.67
Elek-Tek 20-Apr-94 3 PORT 10 BANE-T HIL (Twisted Pair) $341.00 4.40 4.40 4.40
Elek-Tek 25-Apr-94 21" Nec Monitor $2,149.99 27.73 27.73 27.73
Elek-Tek 25-Apr-94 21" Nec Monitor $2,149.99 27.73 27.73 27.73
Elek-Tek 25-Apr-94 21" Nec Monitor $2,149.99 27.73 27.73 27.73
Elek-tek Inc 26-Apr-94 Returned HP laserjet & Interface - see Apr 94 0.00 0.00 0.00 0.00
Elek-Tek 05-May-94 HP Laserjet 4M Plus Printer - HpC2039A w/rails 2,040.99 26.32 26.32 26.32
Elek-Tek 17-May-94 PCMCIA Ethernet 10Baset Cards $636.49 8.21 8.21 8.21
Elek-Tek 02-Jun-94 Colorado PT25 Powertape 2.0 GB internal Tape Drive $1,008.96 13.01 13.01 13.01
Belmont 02-Jun-94 486-66-PCI motherboard; mini tower; 32 mb Ram; 2,706.75 34.91 34.91 34.91
Belmont 02-Jun-94 500 mg IDE HD w/PCI Controller; No monitor 0.00 0.00 0.00 0.00
Buerg 21-Jun-94 Downpayment on Nanao 17" monitor - see July 94 642.31 8.92 8.92 8.92
Buerg 21-Jun-94 Nanao 17" monitor model 550 IW - See Jun & Aug 1,195.00 15.41 15.41 15.41
Arrow Elec 29-Jun-94 PLASAP 2 ALTERA D (Bit Blaster rec'd Aug 94) 1,995.00 25.73 25.73 25.73
Elek-Tek 30-Jun-94 Sales Tax & Freight on all items purchased to date $2,190.22 28.25 28.25 28.25
Immecor 15-Jul-94 486/66; 16 mg ram; local bus; IDE Controller; 200 mb HD; 2,560.00 33.02 33.02 33.02
Immecor 15-Jul-94 Air motherboard; 256 cache Nanoa 17" Monitor 0.00 0.00 0.00 0.00
Immecor 15-Jul-94 #9 Vesa with 53 Chipset GXEG4PRO 0.00 0.00 0.00 0.00
Buerg 25-Aug-94 Credit memo for down payment on 17" monitor - see Jul & Aug (642.31) (115.97) (8.92) (8.92)
Buerg 25-Aug-94 Credit memo for down payment on 17" monitor - see Jun & Jul 0.00 0.00 0.00 0.00
Immecor 09-Sep-94 486/66; Auto Cad WS nano monitor 550/w; 3,960.00 51.07 51.07 51.07
Immecor 09-Sep-94 32 mb ram; 540 mb HD; mouse model 34120 0.00 0.00 0.00 0.00
Immecor 09-Sep-94 local bus controller; med. tower 0.00 0.00 0.00 0.00
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Beginning Q1 FY96 Net Book Total Depr AFC
Purchases Date Rec'd Description Depr Value By Asset KEEPING
- -----------------------------------------------------------------------------------------------------------------------------------
thru 1996 thru 1996
<S> <C> <C> <C> <C> <C> <C>
Arco Manhattan 01-Jun-94 Refurbished Action Office Stations 564.52 10,725.79 3,864.76 10,725.79
CB Technical
Source 08-Dec-95 AAL Test Lab Work Benches (4 ea) 554.34 5,147.46 554.34 5,147.46
Global Equipment 12-Dec-95 AAL Test Lab Cabinet 20.90 194.10 20.90 194.10
Global Equipment 12-Dec-95 AAL Test Lab Adjustable Stools (5 ea) 46.06 427.69 46.06 427.69
Global Equipment 12-Dec-95 AAL Test Lab Storage Center 173.44 1,673.82 173.44 1,673.82
Global Equipment 24-Jan-96 AAL Test Lab Drawer Unit 2,120.50 0.00 2,120.50
ACCOUNT 1500 1,359.26 20,289.35 4,659.50 20,289.35
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Elek-Tek 31-Mar-94 Presario 486-66 563.30 10,703.48 3,856.52
Elek-Tek 31-Mar-94 Presario 486-66 80.48 1,529.05 550.95
Elek-Tek 31-Mar-94 4 MB RAM UG 52.81 1,003.44 361.56
Elek-Tek 31-Mar-94 8 MB RAM UG 46.43 882.12 317.85
Elek-Tek 31-Mar-94 4 MB RAM 7.54 143.35 51.65
Elek-Tek 31-Mar-94 8 MG RAM 15.48 294.04 105.95
Elek-Tek 31-Mar-94 Eagle NE2000T 17.02 323.45 116.54
Elek-Tek 31-Mar-94 HP Laserjet Printer-returned 4/26/94 (See May 5 94) 0.00 0.00 0.00
Elek-Tek 31-Mar-94 HP Ethernet Interface - returned 4/26/94 (See May 5 94) 0.00 0.00 0.00
Elek-Tek 31-Mar-94 Modem 5.42 102.91 37.08
Elek-Tek 31-Mar-94 Netware 58.04 1,102.67 397.32
Elek-Tek 31-Mar-94 17" Sony Monitor 46.39 881.41 317.59
Elek-Tek 31-Mar-94 17" Sony Monitor 46.39 881.41 317.59
Elek-Tek 31-Mar-94 17" Sony Monitor 46.39 881.41 317.59
Elek-Tek 31-Mar-94 21" Nec Monitor 81.25 1,543.74 556.25
Elek-Tek 31-Mar-94 21" Nec Monitor - Returned 5/13/94 - Replaced below 0.00 0.00 0.00
Elek-Tek 31-Mar-94 14" Nec Monitor 13.35 253.62 91.38
Elek-Tek 01-Apr-94 650 W UPS 13.31 252.88 91.12
Elek-Tek 01-Apr-94 17" Sony Monitor 46.39 881.41 317.59
Elek-Tek 04-Apr-94 Proliant 486-66 227.31 4,318.82 1,556.18
Elek-Tek 06-Apr-94 Floppy Drive 3/12 2.51 47.78 17.22
Elek-Tek 06-Apr-94 Think Pad 350 207.65 3,945.38 1,421.62
Elek-Tek 06-Apr-94 2.2 AJ Bat IBM 350 3.48 66.16 23.84
Elek-Tek 06-Apr-94 4 MG RAM 350 24.61 467.54 168.46
Elek-Tek 19-Apr-94 Eagle 5pk 17.02 323.45 116.54
Elek-Tek 20-Apr-94 3 PORT 10 BANE-T HIL (Twisted Pair) 13.19 250.68 90.32
Elek-Tek 25-Apr-94 21" Nec Monitor 83.18 1,580.50 569.49
Elek-Tek 25-Apr-94 21" Nec Monitor 83.18 1,580.50 569.49
Elek-Tek 25-Apr-94 21" Nec Monitor 83.18 1,580.50 569.49
Elek-tek Inc 26-Apr-94 Returned HP laserjet & Interface - see Apr 94 0.00 0.00 0.00
Elek-Tek 05-May-94 HP Laserjet 4M Plus Printer - HpC2039A w/rails 78.97 1,500.37 540.62
Elek-Tek 17-May-94 PCMCIA Ethernet 10Baset Cards 24.63 467.90 168.59
Elek-Tek 02-Jun-94 Colorado PT25 Powertape 2.0 GB internal Tape Drive 39.04 741.71 267.25
Belmont 02-Jun-94 486-66-PCI motherboard; mini tower; 32 mb Ram; 104.73 1,989.78 716.97 1,989.78
Belmont 02-Jun-94 500 mg IDE HD w/PCI Controller; No monitor 0.00 0.00 0.00 0.00
Buerg 21-Jun-94 Downpayment on Nanao 17" monitor - see July 94 26.76 508.50 133.81
Buerg 21-Jun-94 Nanao 17" monitor model 550 IW - See Jun & Aug 46.24 878.47 316.53
Arrow Elec 29-Jun-94 PLASAP 2 ALTERA D (Bit Blaster rec'd Aug 94) 77.19 1,466.56 528.44
Elek-Tek 30-Jun-94 Sales Tax & Freight on all items purchased to date 84.74 1,610.07 580.15
Immecor 15-Jul-94 486/66; 16 mg ram; local bus; IDE Controller; 200 mb HD; 99.05 1,881.90 678.10 1,881.90
Immecor 15-Jul-94 Air motherboard; 256 cache Nanoa 17" Monitor 0.00 0.00 0.00 0.00
Immecor 15-Jul-94 #9 Vesa with 53 Chipset GXEG4PRO 0.00 0.00 0.00 0.00
Buerg 25-Aug-94 Credit memo for down payment on 17" monitor - see Jul & Aug (133.81) (508.50) (133.81)
Buerg 25-Aug-94 Credit memo for down payment on 17" monitor - see Jun & Jul 0.00 0.00 0.00
Immecor 09-Sep-94 486/66; Auto Cad WS nano monitor 550/w; 153.21 2,911.07 1,048.93 2,911.07
Immecor 09-Sep-94 32 mb ram; 540 mb HD; mouse model 34120 0.00 0.00 0.00 0.00
Immecor 09-Sep-94 local bus controller; med. tower 0.00 0.00 0.00 0.00
- ------------------------------------------------------------------------------------------------------------------------------------
Page 1
</TABLE>
<PAGE>
ADVANCED ACCESS LABS FIXED ASSETS
ENGINEERING, COMPUTER EQUIPMENT & CUBICLE FURNITURE
12/18/96 11:24
<TABLE>
<CAPTION>
Beginning Jan-96 Feb-96 Mar-96
Purchases Date Rec'd Description Total
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Immecor 16-Sep-94 Houston Inst. Jet Pro V100 Plotter w/sheet 2,274.00 29.33 29.33 29.33
Immecor 16-Sep-94 feeder & 4mb memory 0.00 0.00 0.00 0.00
Immecor 9-Nov-94 Add'l for PCI card for computer on PO7004 795.00 10.25 10.25 10.25
Immecor 9-Nov-94 See PO 7004 in September 0.00 0.00 0.00 0.00
Immecor 28-Dec-94 486-66 Computer 1,890.00 24.38 24.38 24.38
Immecor 7-Jan-95 IBM Thinkpad, 3Com Ethernet Card, 0.00 0.00 0.00 0.00
Immecor 7-Jan-95 PCMCIA 14400 Fax, 4mb memory $6,000.00 77.38 77.38 77.38
Elek-Tek, Inc 21-Mar-95 Prolinea mt 486dx2/66 420mb HD $3,467.52 44.72 44.72 44.72
Elek-Tek, Inc 21-Mar-95 8mb MOD Compaq Prolinea, Presar $828.94 10.69 10.69 10.69
Elek-Tek, Inc 21-Mar-95 Sony CGDM 17" 25mm Color Monitor $2,000.74 25.80 25.80 25.80
Elek-Tek, Inc 21-Mar-95 Viking 8 MB Mod Compaq Prolinea Presar $1,673.53 21.58 21.58 21.58
Elek-Tek, Inc 21-Mar-95 Reveal Dbl Speed CD-Rom Kit $868.00 11.19 11.19 11.19
Elek-Tek, Inc 21-Mar-95 TLBC-900Lan 650 Watt Standby Power $1,170.73 15.10 15.10 15.10
Elek-Tek, Inc 21-Mar-95 MAC-Newton Messagepad $759.50 9.80 9.80 9.80
Elek-Tek, Inc 21-Mar-95 MAC-Newton 4 MB Flash Storage Card $244.13 3.15 3.15 3.15
Elek-Tek, Inc 21-Mar-95 MAC-Carrycase $21.70 0.28 0.28 0.28
Elek-Tek, Inc 21-Mar-95 MAC-Battery Charger $96.57 1.25 1.25 1.25
Elek-Tek, Inc 21-Mar-95 MAC-AC Power Adapter $31.47 0.41 0.41 0.41
Elek-Tek, Inc 22-Mar-95 4 MB Simm Module Memory $846.30 10.91 10.91 10.91
Elek-Tek, Inc 22-Mar-95 Viking 8 MB Mod Compaq Prolinea Presar $752.99 9.71 9.71 9.71
Elek-Tek, Inc 22-Mar-95 Intelodx2dpr66 Overdrive Processor $648.83 8.37 8.37 8.37
Elek-Tek, Inc 22-Mar-95 Mouseman II $106.33 1.37 1.37 1.37
Elek-Tek, Inc 22-Mar-95 Logitech Mouse Serial $31.47 0.41 0.41 0.41
Elek-Tek, Inc 22-Mar-95 Multisync\XE 21" Color Monitor $2,313.68 29.84 29.84 29.84
Elek-Tek, Inc 22-Mar-95 Eagle NE2000T Plus $800.73 10.33 10.33 10.33
Elek-Tek, Inc 22-Mar-95 Viking 4 MB Mod Compaq Prolinea Presar $1,261.00 16.26 16.26 16.26
23-Mar-95 Intelodx2dpr66 Overdrive Processor $653.42 8.43 8.43 8.43
Elek-Tek, Inc 23-Mar-95 Mac-H0029LL/B Newton Connection Pro Kit/Win $107.42 1.39 1.39 1.39
Elek-Tek, Inc 24-Mar-95 Reveal Dbl Speed CD-Rom Kit $481.03 6.20 6.20 6.20
Elek-Tek, Inc 24-Mar-95 CQRails Compaq Prolinea/Presario $52.01 0.67 0.67 0.67
Elek-Tek, Inc 24-Mar-95 NEC Multisync 21" Color Monitor $6,812.68 87.86 87.86 87.86
Elek-Tek, Inc 27-Mar-95 CQDesk Prolinea MT 486DX2/66 4/420MB SPO $6,893.90 88.91 88.91 88.91
Elek-Tek, Inc 29-Mar-95 MAC-Recharge Battery $21.69 0.28 0.28 0.28
Elek-Tek, Inc 29-Mar-95 MAC-Newton Telescoping Pen $10.85 0.14 0.14 0.14
Elek-Tek, Inc 3-Apr-95 MAC-Newton Fax Modem $194.22 2.50 2.50 2.50
Elek-Tek, Inc 17-Apr-95 Multisync \XE 21" Color Monitor $2,319.81 29.92 29.92 29.92
Elek-Tek, Inc 17-Apr-95 CGACCE Pluggable SCSI-2 Drive $3,007.62 38.79 38.79 38.79
Micro City 4-May-95 Deskporte Fast $520.54 6.71 6.71 6.71
Elek-Tek 5-May-95 900VA/650 Watt Standby Power (DWG) $387.81 5.00 5.00 5.00
Corporate Sys 13-May-95 External Yamaha CD-Rom CD-R writer s/n 1120491 $3,535.00 45.59 45.59 45.59
Corporate Sys 13-May-95 Komag erase optical ??? $1,470.00 18.96 18.96 18.96
Corporate Sys 13-May-95 Premium peripheral cable 3ft centronic 50pin to 50 pin $38.00 0.49 0.49 0.49
Corporate Sys 13-May-95 1542CF Adaptec 16 bit SCSI Controller $195.00 2.51 2.51 2.51
Corporate Sys 13-May-95 1542CF Adaptec 16 bit SCSI Controller $100.00 1.29 1.29 1.29
Corporate Sys 13-May-95 Corel CD-Writer Software $295.00 3.80 3.80 3.80
Corporate Sys 13-May-95 CD-R75 Maxell recordable DC $287.50 3.71 3.71 3.71
Corporate Sys 13-May-95 JB10 Erasable optical jukebox $2,995.00 38.63 38.63 38.63
Elek-Tek, Inc 15-May-95 (4) 8mb Simm 70ns Memory $1,264.00 16.30 16.30 16.30
Elek-Tek, Inc 15-May-95 (5) Eagle NE2000 Plus Enet 8/16 (Returned) $0.00 0.00 0.00 0.00
Elek-Tek, Inc 15-May-95 (7) Overdrive Processors 486/100 & Prolinea/Pres Rails $1,953.85 25.20 25.20 25.20
Elek-Tek 16-May-95 Starion Pentium 100 CD-MT 1GB $6,031.07 77.78 77.78 77.78
Elek-Tek 16-May-95 Multisync XE 21" Color Monitor $4,186.00 53.99 53.99 53.99
Elek-Tek 16-May-95 Starion Pentium 100 CD-MT 1GB $2,588.00 33.38 33.38 33.38
Elek-Tek 16-May-95 Multisync XE 21" Color Monitor $4,812.59 62.07 62.07 62.07
Elek-Tek 17-May-95 Eagle Ne2000T Plus 8/16 Bit $360.00 4.64 4.64 4.64
Q1 FY96 Net Book Total Depr AFC KEEPING
Depr Value By Asset
thru 1996 thru 1996
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <S> <S> <S> <S>
Immecor 16-Sep-94 Houston Inst. Jet Pro V100 Plotter w/sheet 87.88 1,671.66 602.34 1,671.66
Immecor 16-Sep-94 feeder & 4mb memory 0.00 0.00 0.00 0.00
Immecor 9-Nov-94 Add'l for PCI card for computer on PO7004 30.76 584.42 210.58 584.42
Immecor 9-Nov-94 See PO 7004 in September 0.00 0.00 0.00 0.00
Immecor 28-Dec-94 486-66 Computer 73.13 1,389.38 500.63 1,389.38
Immecor 7-Jan-95 IBM Thinkpad, 3Com Ethernet Card, 0.00 0.00 0.00
Immecor 7-Jan-95 PCMCIA 14400 Fax, 4mb memory 232.14 5,339.29 660.71
Elek-Tek, Inc 21-Mar-95 Prolinea mt 486dx2/66 420mb HD 134.16 3,085.68 381.84
Elek-Tek, Inc 21-Mar-95 8mb MOD Compaq Prolinea, Presar 32.07 737.66 91.28
Elek-Tek, Inc 21-Mar-95 Sony CGDM 17" 25mm Color Monitor 77.41 1,780.42 220.32
Elek-Tek, Inc 21-Mar-95 Viking 8 MB Mod Compaq Prolinea Presar 64.75 1,489.24 184.29
Elek-Tek, Inc 21-Mar-95 Reveal Dbl Speed CD-Rom Kit 33.58 772.42 95.58
Elek-Tek, Inc 21-Mar-95 TLBC-900Lan 650 Watt Standby Power 45.30 1,041.81 128.92
Elek-Tek, Inc 21-Mar-95 MAC-Newton Messagepad 29.39 675.86 83.64
Elek-Tek, Inc 21-Mar-95 MAC-Newton 4 MB Flash Storage Card 9.45 217.25 26.88
Elek-Tek, Inc 21-Mar-95 MAC-Carrycase 0.84 19.31 2.39
Elek-Tek, Inc 21-Mar-95 MAC-Battery Charger 3.74 85.94 10.63
Elek-Tek, Inc 21-Mar-95 MAC-AC Power Adapter 1.22 28.00 3.47
Elek-Tek, Inc 22-Mar-95 4 MB Simm Module Memory 32.74 753.11 93.19
Elek-Tek, Inc 22-Mar-95 Viking 8 MB Mod Compaq Prolinea Presar 29.13 670.07 82.92
Elek-Tek, Inc 22-Mar-95 Intelodx2dpr66 Overdrive Processor 25.10 577.38 71.45
Elek-Tek, Inc 22-Mar-95 Mouseman II 4.11 94.62 11.71
Elek-Tek, Inc 22-Mar-95 Logitech Mouse Serial 1.22 28.00 3.47
Elek-Tek, Inc 22-Mar-95 Multisync\XE 21" Color Monitor 89.52 2,058.90 254.78
Elek-Tek, Inc 22-Mar-95 Eagle NE2000T Plus 30.98 712.55 88.18
Elek-Tek, Inc 22-Mar-95 Viking 4 MB Mod Compaq Prolinea Presar 48.79 1,122.14 138.86
23-Mar-95 Intelodx2dpr66 Overdrive Processor 25.28 581.47 71.95
Elek-Tek, Inc 23-Mar-95 Mac-H0029LL/B Newton Connection Pro Kit/Win 4.16 95.59 11.83
Elek-Tek, Inc 24-Mar-95 Reveal Dbl Speed CD-Rom Kit 18.61 428.06 52.97
Elek-Tek, Inc 24-Mar-95 CQRails Compaq Prolinea/Presario 2.01 46.28 5.73
Elek-Tek, Inc 24-Mar-95 NEC Multisync 21" Color Monitor 263.59 6,062.47 750.21
Elek-Tek, Inc 27-Mar-95 CQDesk Prolinea MT 486DX2/66 4/420MB SPO 266.73 6,134.75 759.15
Elek-Tek, Inc 29-Mar-95 MAC-Recharge Battery 0.84 19.30 2.39
Elek-Tek, Inc 29-Mar-95 MAC-Newton Telescoping Pen 0.42 9.66 1.19
Elek-Tek, Inc 3-Apr-95 MAC-Newton Fax Modem 7.51 172.83 21.39
Elek-Tek, Inc 17-Apr-95 Multisync \XE 21" Color Monitor 89.75 2,064.35 255.46
Elek-Tek, Inc 17-Apr-95 CGACCE Pluggable SCSI-2 Drive 116.37 2,676.42 331.20
Micro City 4-May-95 Deskporte Fast 20.14 463.22 57.32
Elek-Tek 5-May-95 900VA/650 Watt Standby Power (DWG) 15.00 345.10 42.71
Corporate Sys 13-May-95 External Yamaha CD-Rom CD-R writer s/n 1120491 136.77 3,145.73 389.27
Corporate Sys 13-May-95 Komag erase optical ??? 56.88 1,308.13 161.88
Corporate Sys 13-May-95 Premium peripheral cable 3ft centronic 50pin to 50 pins 1.47 33.82 4.18
Corporate Sys 13-May-95 1542CF Adaptec 16 bit SCSI Controller 7.54 173.53 21.47
Corporate Sys 13-May-95 1542CF Adaptec 16 bit SCSI Controller 3.87 88.99 11.01
Corporate Sys 13-May-95 Corel CD-Writer Software 11.41 262.51 32.49
Corporate Sys 13-May-95 CD-R75 Maxell recordable DC 11.12 255.84 31.66
Corporate Sys 13-May-95 JB10 Erasable optical jukebox 115.88 2,665.19 329.81
Elek-Tek, Inc 15-May-95 (4) 8mb Simm 70ns Memory 48.90 1,124.81 139.19
Elek-Tek, Inc 15-May-95 (5) Eagle NE2000 Plus Enet 8/16 (Returned) 0.00 0.00 0.00
Elek-Tek, Inc 15-May-95 (7) Overdrive Processors 486/100 & Prolinea/Pres Rails 75.60 1,738.69 215.16
Elek-Tek 16-May-95 Starion Pentium 100 CD-MT 1GB 233.34 5,366.93 664.14
Elek-Tek 16-May-95 Multisync XE 21" Color Monitor 161.96 3,725.04 460.96
Elek-Tek 16-May-95 Starion Pentium 100 CD-MT 1GB 100.13 2,303.01 284.99
Elek-Tek 16-May-95 Multisync XE 21" Color Monitor 186.20 4,282.63 529.96
Elek-Tek 17-May-95 Eagle Ne2000T Plus 8/16 Bit 13.93 320.36 39.64
</TABLE>
<PAGE>
ADVANCED ACCESS LABS FIXED ASSETS
ENGINEERING, COMPUTER EQUIPMENT & CUBICLE FURNITURE
12/18/96 11:24
<TABLE>
<CAPTION>
Beginning Jan-96 Feb-96 Mar-96
Purchases Date Rec'd Description Total
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Elec-Tek 17-May-95 8bm (2/32) Simm 70ns 72 pin $1,410.57 18.19 18.19 18.19
Elec-Tek 18-May-95 Starion Pentium 100 CD-MT 1 GB $2,823.72 36.42 36.42 36.42
Elec-Tek 24-Jul-95 (2ea)Toshiba Notebook 486DX2/50 260 MB HD $3,225.23 41.60 41.60 41.60
Elec-Tek 24-Jul-95 (2ea)Logitech Mouseman $93.31 1.20 1.20 1.20
Elec-Tek 24-Jul-95 MS Excel for Windows $324.42 4.18 4.18 4.18
Elec-Tek 26-Jul-95 (5ea)Eagle NE200oT Plus 16 Bit Enet Card $382.01 4.93 4.93 4.93
Elec-Tek 26-Jul-95 Starion Pentium 100 CD-MT 1 GBHD $2,845.34 36.70 36.70 36.70
Elec-Tek 26-Jul-95 (2ea) MIC8x32-70 Simm $685.72 8.84 8.84 8.84
Elec-Tek 26-Jul-95 Sony 17" Monitor $1,076.32 13.88 13.88 13.88
Elec-Tek 26-Jul-95 Performance PCMCIA Ether 1-BT Modem $321.16 4.14 4.14 4.14
Elec-Tek 26-Jul-95 Starion Pentium 100 CD-MT 1 GBHD $2,831.82 36.52 36.52 36.52
Elec-Tek 26-Jul-95 (2ea) MIC8x32-70 Simm $686.72 8.84 8.84 8.84
Elec-Tek 26-Jul-95 X-Jack PCMCIA 14.4 Fax Modem $190.96 2.46 2.46 2.46
Elec-Tek 26-Jul-95 See Invoice #411306- I can't read this copy $779.03 10.05 10.05 10.05
Elec-Tek 24-Jul-95 16mb mod IBM Thinkpad $840.25 10.84 10.84 10.84
Elec-Tek 16-Nov-95 Pcmcia 14.4 Fax Modem (2ea) $354.73 25.34 4.57 4.57
Elec-Tek 16-Nov-95 Pcmcia 28.8 Fax Modem (1ea) $302.72 21.62 3.90 3.90
Elec-Tek 16-Nov-95 Reveal CD Rom Kit (1ea) $216.99 15.50 2.80 2.80
Elec-Tek 16-Nov-95 Black Nylon Case for Notepad (6ea) $216.95 15.50 2.80 2.80
Elec-Tek 29-Nov-95 2.2AH Nimh Battery Pack/350 (3ea) $293.53 20.97 3.79 3.79
Elec-Tek 5-Dec-95 Viking 8mb Mod IBM Thinkpad $447.83 31.99 5.78 5.78
Elec-Tek 11-Dec-95 Presario Pentium 100 CD 16/1.6 (2ea) $5,174.56 369.91 66.74 66.74
Elec-Tek 11-Dec-95 Nec Multisync 17" Color Monitor (2ea) $1,733.83 123.85 22.36 22.36
Elec-Tek 13-Dec-95 UPG Netware $3,484.79 248.91 44.94 44.94
Elec-Tek 15-Dec-95 Nec Multisync 21" Color Monitor (4ea) $8,286.17 591.87 106.87 106.87
Elec-Tek 15-Dec-95 Presario Pentium 100 CD (4ea) $10,275.40 733.96 132.52 132.52
Immecor 11-Oct-95 Intell zapa P100, 16MgRam; 1.05 GbHD;PCI Graphics; $2,540.00 181.43 32.76 32.76
Immecor 11-Oct-95 Nanao 17" .28 Monitor $890.00 63.57 11.48 11.48
Immecor 17-Nov-95 HP Office Jet Printer $643.93 46.00 8.30 7.73
Immecor 5-Dec-95 16mb Simm Memory $569.00 40.64 7.34 7.34
Immecor 5-Dec-95 4X IDE CD Rom Drive $169.00 12.07 2.18 2.18
Elec-Tek, Inc. 31-Jan-96 (3) Presario P100 w CDRom, Multisync 17" Monitor $10,362.39
Elec-Tek, Inc. 31-Jan-96 (2) Eagle 883002670 Plus 10BT Enet 5pk $720.80
Elec-Tek, Inc. 31-Jan-96 (2) IBM Battery Packs; 16mb Mod Compaq Prolinea, Presa $1,489.79
Elec-Tek, Inc. 31-Jan-96 Multisync 21" Monitor $2,084.15
Elec-Tek, Inc. 31-Jan-96 Multisync 21" Monitor(DA) $2,084.15
Elec-Tek, Inc. 31-Jan-96 Lte 5000 Nb Pent75 8/810; Battery; 8mb kit; Combo(DA) $0.00
Elec-Tek, Inc. 31-Jan-96 Pcmcia Fax/modem; Framemaker for Windows (DA) $6,725.49
Elec-Tek, Inc. 31-Jan-96 MsOffice & MS Project for Windows (DA) $1,013.49
Elec-Tek, Inc. 30-Mar-96 (2)4mb Mod IBM PS/1,PS/2 Memory $298.88
Elec-Tek, Inc. 30-Mar-96 (4) 10Base-T Ethernet 8-port Conc $555.06
Elec-Tek, Inc. 30-Mar-96 Intel 486DX4 100 CPU $133.44
Immecor 24-Jan-96 (4) 486/DX80;(4)Tatung 14" .28 Monitors $6,876.00
Immecor 24-Jan-96 (2) Sustem C-P100, 1.08GbHD,(2) 4XCDRom; $4,196.00
Immecor 24-Jan-96 (2) Nanao 17" Monitors $1,780.00
ACCOUNT 1511 $239,914.08 4,576.57 2,599.92 2,599.34
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Cosmic Software 31-Jan-96 CDSH16 HC 16C Cross Compiler $1,520.00
Cosmic Software 31-Jan-96 (5) CDSH 16 HC 16 Cross Compiler $6,410.00
ACCOUNT 1512 $7,930.00
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Nohau 11-May-94 Emul 16/300-PC/QTR128-16.78 SN 232390(Trans from AF 4,298.63 55.44 55.44 55.44
NoiseCom 14-Jul-94 Noise Source-Noise/Com NC6108 100-500 hz 3,350.00 43.20 43.20 43.20
<CAPTION>
Beginning Q1 FY96 Net Book Total Depr AFC KEEPING
Purchases Date Rec'd Description Value By Asset
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
thru 1996 thru 1996
<S> <C> <C> <C> <C> <C> <C>
Elec-Tek 17-May-95 8bm (2/32) Simm 70ns 72 pin 54.58 1,256.24 155.33
Elec-Tek 18-May-95 Starion Pentium 100 CD-MT 1 GB 109.25 2,512.77 310.95
Elec-Tek 24-Jul-95 (2ea)Toshiba Notebook 486DX2/50 260 MB HD 124.79 2,870.07 355.16
Elec-Tek 24-Jul-95 (2ea)Logitech Mouseman 3.61 83.03 10.28
Elec-Tek 24-Jul-95 MS Excel for Windows 12.55 288.69 35.72
Elec-Tek 26-Jul-95 (5ea)Eagle NE200oT Plus 16 Bit Enet Card 14.78 339.94 42.07
Elec-Tek 26-Jul-95 Starion Pentium 100 CD-MT 1 GBHD 110.09 2,532.01 313.33
Elec-Tek 26-Jul-95 (2ea) MIC8x32-70 Simm 26.53 610.21 75.51
Elec-Tek 26-Jul-95 Sony 17" Monitor 41.64 957.80 118.52
Elec-Tek 26-Jul-95 Performance PCMCIA Ether 1-BT Modem 12.43 285.79 35.37
Elec-Tek 26-Jul-95 Starion Pentium 100 CD-MT 1 GBHD 109.56 2,519.98 311.84
Elec-Tek 26-Jul-95 (2ea) MIC8x32-70 Simm 26.53 610.21 75.51
Elec-Tek 26-Jul-95 X-Jack PCMCIA 14.4 Fax Modem 7.39 169.93 21.03
Elec-Tek 26-Jul-95 See Invoice #411306- I can't read this copy 30.14 693.24 85.79
Elec-Tek 24-Jul-95 16mb mod IBM Thinkpad 32.51 747.72 92.53
Elec-Tek 16-Nov-95 Pcmcia 14.4 Fax Modem (2ea) 34.49 320.24 34.49
Elec-Tek 16-Nov-95 Pcmcia 28.8 Fax Modem (1ea) 29.43 273.28 29.43
Elec-Tek 16-Nov-95 Reveal CD Rom Kit (1ea) 21.10 195.89 21.10
Elec-Tek 16-Nov-95 Black Nylon Case for Notepad (6ea) 21.09 195.85 21.09
Elec-Tek 29-Nov-95 2.2AH Nimh Battery Pack/350 (3ea) 28.54 264.99 28.54
Elec-Tek 5-Dec-95 Viking 8mb Mod IBM Thinkpad 43.54 404.29 43.54
Elec-Tek 11-Dec-95 Presario Pentium 100 CD 16/1.6 (2ea) 503.08 4,671.48 503.08
Elec-Tek 11-Dec-95 Nec Multisync 17" Color Monitor (2ea) 168.57 1,565.26 168.57
Elec-Tek 13-Dec-95 UPG Netware 338.80 3,145.99 338.80
Elec-Tek 15-Dec-95 Nec Multisync 21" Color Monitor (4ea) 805.60 7,480.57 805.60
Elec-Tek 15-Dec-95 Presario Pentium 100 CD (4ea) 999.00 9,276.40 999.00
Immecor 11-Oct-95 Intell zapa P100, 16MgRam; 1.05 GbHD;PCI Graphics; 246.94 2,293.06 246.94 2,293.06
Immecor 11-Oct-95 Nanao 17" .28 Monitor 86.53 803.47 86.53 803.47
Immecor 17-Nov-95 HP Office Jet Printer 62.02 581.91 62.02 581.91
Immecor 5-Dec-95 16mb Simm Memory 65.32 513.68 55.32 513.68
Immecor 5-Dec-95 4X IDE CD Rom Drive 16.43 152.57 16.43 152.57
Elec-Tek, Inc. 31-Jan-96 (3) Presario P100 w CDRom, Multisync 17" Monitor 10,362.39 0.00
Elec-Tek, Inc. 31-Jan-96 (2) Eagle 883002670 Plus 10BT Enet 5pk 720.80 0.00
Elec-Tek, Inc. 31-Jan-96 (2) IBM Battery Packs; 16mb Mod Compaq Prolinea, Presa 1,489.79 0.00
Elec-Tek, Inc. 31-Jan-96 Multisync 21" Monitor 2,084.15 0.00
Elec-Tek, Inc. 31-Jan-96 Multisync 21" Monitor(DA) 2,084.15 0.00 2,084.15
Elec-Tek, Inc. 31-Jan-96 Lte 5000 Nb Pent75 8/810; Battery; 8mb kit; Combo(DA) 0.00 0.00
Elec-Tek, Inc. 31-Jan-96 Pcmcia Fax/modem; Framemaker for Windows (DA) 6,725.49 0.00
Elec-Tek, Inc. 31-Jan-96 MsOffice & MS Project for Windows (DA) 1,013.49 0.00 1,013.49
Elec-Tek, Inc. 30-Mar-96 (2)4mb Mod IBM PS/1,PS/2 Memory 298.88 0.00
Elec-Tek, Inc. 30-Mar-96 (4) 10Base-T Ethernet 8-port Conc 555.06 0.00
Elec-Tek, Inc. 30-Mar-96 Intel 486DX4 100 CPU 133.44 0.00
Immecor 24-Jan-96 (4) 486/DX80;(4)Tatung 14" .28 Monitors 6,876.00 0.00 6,876.00
Immecor 24-Jan-96 (2) Sustem C-P100, 1.08GbHD,(2) 4XCDRom; 4,196.00 0.00 4,196.00
Immecor 24-Jan-96 (2) Nanao 17" Monitors 1,780.00 0.00 1,780.00
------------
------------
ACCOUNT 1511 9,775.82 207,034.58 32,879.51 30,722.54
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
0.00 0.00
Cosmic Software 31-Jan-96 CDSH16 HC C Cross Compiler 1,520.00 0.00
Cosmic Software 31-Jan-96 (5) CDSH 16 HC 16 Cross Compiler 6,410.00 0.00
0.00 0.00
ACCOUNT 1512 7,930.00 0.00
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
0.00 0.00
Nohau 11-May-94 Emul 16/300-PC/QTR128-16.78 SN 232390(Trans from AF 166.32 3,160.00 1,138.63
NoiseCom 14-Jul-94 Noise Source-Noise/Com NC6108 100-500 hz 129.61 2,462.65 887.35
</TABLE>
<PAGE>
ADVANCED ACCESS LABS FIXED ASSETS
ENGINEERING, COMPUTER EQUIPMENT & CUBICLE FURNITURE
12/18/96 11:24
<TABLE>
<CAPTION>
Beginning Jan-96
Purchases Date Rec'd Description Total
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NoiseCom 18-Jul-94 Noise Source -Noise/Com NC6105 10 hz- 10mhz 2,750.00 35.47
Nohau 26-Jul-94 Emul Board-Emul 51-PC/E32-16 3,439.17 44.35
Nohau 26-Jul-94 Bondoot Pod-C52-16 2,144.62 27.66
Nohau 26-Jul-94 Adv Trace Board-Emul 51-PC/ATRG-4-16 3,227.71 41.63
Nohau 26-Jul-94 Stand. Trace Board-Emul 51-PC/TR16-16 1,949.37 25.14
Tritek 26-Jul-94 Kron-Hite 3202 Turnable Filter 1,950.00 25.15
Test Equipment 28-Jul-94 HP 1645A-BER Test Set 1,862.00 24.01
Hewlett Packard 29-Jul-94 HP 5385A RF Frequency Counter 2,290.00 29.53
Hewlett Packard 29-Jul-94 HP 4378 Power Meter 2,725.00 35.14
Hewlett Packard 29-Jul-94 HP 8483A Air Power Sensor 795.00 10.25
Nohau 4-Aug-94 Emul Board - Emul 16/300-PC/EIM 16.78 6,393.68 82.46
Nohau 4-Aug-94 Pod - 16Z1/IM-16.78 2,449.91 31.60
Nohau 4-Aug-94 Trace Board - Eml 16/30OPC/DTR128-16.78 8,529.32 110.00
Nohau 4-Aug-94 Adaptor - Emul 16/300PC/QFP132Clip 1,910.82 24.64
Nohau 4-Aug-94 High Level Dbug SW-Emul 16/30OPC/HLD-CPU16 3,202.50 41.30
Nohau 4-Aug-94 Pod - 161/2M-16.78 5,172.03 66.70
Telogy 5-Aug-94 HP 8647A Signal Generator 5,374.65 69.32
Hewlett Packard 5-Aug-94 Amplifier & Preamplifier-HP8445F 50A 2,930.00 37.79
Stanford Research 12-Aug-94 Synthisized Function Generator-SRSDS345 30 Mhz 2,845.00 36.69
Stanford Research 12-Aug-94 w/high stab time base 0.00 0.00
Arrow Electronics 24-Aug-94 Bit Blaster-Part of PL-ASAP2 Programmers with 495.00 6.38
Arrow Electronics 24-Aug-94 PLPG Card for PLMPV - See June 94 0.00 0.00
Engineering Inventor 30-Sep-94 Per Rick Girvin-Will be transferred out at later date 1,025.00 13.22
Hewlett Packard 7-Oct-94 E4746A EESOF Touchstone RF Simulator 9,995.00 128.90
Hewlett Packard 7-Oct-94 E5787A EESOF ESYN Filter Package 995.00 12.83
Ameritec 11-Oct-94 Armeritec AM2-DE Bulk Call Generator 24,950.00 321.78
Ameritec 11-Oct-94 Manual, Bantam 120 ohm inputs 330.00 4.26
Advanced Fibre 2-Feb-95 Central Process Unit $1,909.90 24.63
Advanced Fibre 2-Feb-95 Local Exchange Power Supply Unit $557.67 7.19
Advanced Fibre 2-Feb-95 Remote Subscriber Power Supply Unit $926.61 11.95
Advanced Fibre 2-Feb-95 Let Adv Intl Pots Chnl Unit $1,556.28 20.07
Advanced Fibre 2-Feb-95 RST Adv Intl Pots Chnl Unit $1,507.31 19.44
Advanced Fibre 2-Feb-95 T1 Transceiver (powered) $1,919.79 24.76
Advanced Fibre 2-Feb-95 E1 Transceiver (powered) $1,910.22 24.64
Advanced Fibre 2-Feb-95 Channel Bank Assembly Test Shelf $1,612.50 20.80
Advanced Fibre 2-Feb-95 Central Process Unit $1,552.59 20.02
Advanced Fibre 2-Feb-95 Local Exchange Power Supply Unit $283.33 3.65
Advanced Fibre 2-Feb-95 Metallica Test Unit $356.83 4.60
Advanced Fibre 2-Feb-95 Remote Subscriber Power Supply Unit $313.86 4.05
Advanced Fibre 2-Feb-95 LET Univ. Voice Grade Chnl Unit $310.27 4.00
Advanced Fibre 2-Feb-95 RST Univ. Voice Grade Chnl Unit $268.85 3.47
Advanced Fibre 2-Feb-95 T1 Asynch chnl Unit (DSX) $711.78 9.18
Advanced Fibre 2-Feb-95 Let Pots Channel Unit $242.49 3.13
Advanced Fibre 2-Feb-95 RST Pots Channel Unit $281.15 3.63
Advanced Fibre 2-Feb-95 Fiber Optic Transceiver $1,748.50 22.55
Advanced Fibre 2-Feb-95 T1 Transceiver (DSX) $607.19 7.83
Advanced Fibre 2-Feb-95 E1 Transceiver (G.703) $605.81 7.81
Advanced Fibre 2-Feb-95 Transmission Only Channel Unit $546.18 7.04
Advanced Fibre 2-Feb-95 Channel Bank Assembly Test Shelf $830.20 10.71
Ameritec 15-May-95 C. O. Simulator, portable with Option AM7 DLC-96 Compt $5,749.68 74.15
Ameritec 15-May-95 DLC-96 Port Card $9,000.00 116.07
Ameritec 15-May-95 Am-7 Trunk Card $940.00 12.12
Ameritec 15-May-95 Dual Quad Tone Receiver Card $5,290.00 68.22
Ameritec 15-May-95 1.544 77 Port Card $1,765.00 22.76
Ameritec 15-May-95 Back Mount Kit $60.00 0.77
</TABLE>
ADVANCED ACCESS LABS FIXED ASSETS
ENGINEERING, COMPUTER EQUIPMENT & CUBICLE FURNITURE
12/18/96 11:24
<TABLE>
<CAPTION>
Beginning Feb-96 Mar-96
Purchases Date Rec'd Description
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NoiseCom 18-Jul-94 Noise Source -Noise/Com NC6105 10 hz- 10mhz 35.47 35.47
Nohau 26-Jul-94 Emul Board-Emul 51-PC/E32-16 44.35 44.35
Nohau 26-Jul-94 Bondoot Pod-C52-16 27.66 27.66
Nohau 26-Jul-94 Adv Trace Board-Emul 51-PC/ATRG-4-16 41.63 41.63
Nohau 26-Jul-94 Stand. Trace Board-Emul 51-PC/TR16-16 25.14 25.14
Tritek 26-Jul-94 Kron-Hite 3202 Turnable Filter 25.16 25.16
Test Equipment 28-Jul-94 HP 1645A-BER Test Set 24.01 24.01
Hewlett Packard 29-Jul-94 HP 5385A RF Frequency Counter 29.53 29.53
Hewlett Packard 29-Jul-94 HP 4378 Power Meter 35.24 35.24
Hewlett Packard 29-Jul-94 HP 8483A Air Power Sensor 10.25 10.25
Nohau 4-Aug-94 Emul Board - Emul 16/300-PC/EIM 16.78 82.46 82.46
Nohau 4-Aug-94 Pod - 16Z1/IM-16.78 31.60 31.60
Nohau 4-Aug-94 Trace Board - Eml 16/30OPC/DTR128-16.78 110.00 110.00
Nohau 4-Aug-94 Adaptor - Emul 16/300PC/QFP132Clip 24.64 24.64
Nohau 4-Aug-94 High Level Dbug SW-Emul 16/30OPC/HLD-CPU16 41.30 41.30
Nohau 4-Aug-94 Pod - 161/2M-16.78 66.70 66.70
Telogy 5-Aug-94 HP 8647A Signal Generator 69.32 69.32
Hewlett Packard 5-Aug-94 Amplifier & Preamplifier-HP8445F 50A 37.79 37.79
Stanford Research 12-Aug-94 Synthisized Function Generator-SRSDS345 30 Mhz 36.69 36.69
Stanford Research 12-Aug-94 w/high stab time base 0.00 0.00
Arrow Electronics 24-Aug-94 Bit Blaster-Part of PL-ASAP2 Programmers with 6.38 6.38
Arrow Electronics 24-Aug-94 PLPG Card for PLMPV - See June 94 0.00 0.00
Engineering Inventor 30-Sep-94 Per Rick Girvin-Will be transferred out at later date 13.22 13.22
Hewlett Packard 7-Oct-94 E4746A EESOF Touchstone RF Simulator 128.90 128.90
Hewlett Packard 7-Oct-94 E5787A EESOF ESYN Filter Package 12.83 12.83
Ameritec 11-Oct-94 Armeritec AM2-DE Bulk Call Generator 321.78 321.78
Ameritec 11-Oct-94 Manual, Bantam 120 ohm inputs 4.26 4.26
Advanced Fibre 2-Feb-95 Central Process Unit 24.63 24.63
Advanced Fibre 2-Feb-95 Local Exchange Power Supply Unit 7.19 7.19
Advanced Fibre 2-Feb-95 Remote Subscriber Power Supply Unit 11.95 11.95
Advanced Fibre 2-Feb-95 Let Adv Intl Pots Chnl Unit 20.07 20.07
Advanced Fibre 2-Feb-95 RST Adv Intl Pots Chnl Unit 19.44 19.44
Advanced Fibre 2-Feb-95 T1 Transceiver (powered) 24.76 24.76
Advanced Fibre 2-Feb-95 E1 Transceiver (powered) 24.64 24.64
Advanced Fibre 2-Feb-95 Channel Bank Assembly Test Shelf 20.80 20.80
Advanced Fibre 2-Feb-95 Central Process Unit 20.02 20.02
Advanced Fibre 2-Feb-95 Local Exchange Power Supply Unit 3.65 3.65
Advanced Fibre 2-Feb-95 Metallica Test Unit 4.60 4.60
Advanced Fibre 2-Feb-95 Remote Subscriber Power Supply Unit 4.05 4.05
Advanced Fibre 2-Feb-95 LET Univ. Voice Grade Chnl Unit 4.00 4.00
Advanced Fibre 2-Feb-95 RST Univ. Voice Grade Chnl Unit 3.47 3.47
Advanced Fibre 2-Feb-95 T1 Asynch chnl Unit (DSX) 9.18 9.18
Advanced Fibre 2-Feb-95 Let Pots Channel Unit 3.13 3.13
Advanced Fibre 2-Feb-95 RST Pots Channel Unit 3.63 3.63
Advanced Fibre 2-Feb-95 Fiber Optic Transceiver 22.55 22.55
Advanced Fibre 2-Feb-95 T1 Transceiver (DSX) 7.83 7.83
Advanced Fibre 2-Feb-95 E1 Transceiver (G.703) 7.81 7.81
Advanced Fibre 2-Feb-95 Transmission Only Channel Unit 7.04 7.04
Advanced Fibre 2-Feb-95 Channel Bank Assembly Test Shelf 10.71 10.71
Ameritec 15-May-95 C. O. Simulator, portable with Option AM7 DLC-96 Compt 74.15 74.15
Ameritec 15-May-95 DLC-96 Port Card 116.07 116.07
Ameritec 15-May-95 Am-7 Trunk Card 12.12 12.12
Ameritec 15-May-95 Dual Quad Tone Receiver Card 68.22 68.22
Ameritec 15-May-95 1.544 77 Port Card 22.76 22.76
Ameritec 15-May-95 Back Mount Kit 0.77 0.77
</TABLE>
ADVANCED ACCESS LABS FIXED ASSETS
ENGINEERING, COMPUTER EQUIPMENT & CUBICLE FURNITURE
12/18/96 11:24
<TABLE>
<CAPTION>
Beginning Q1 FY96 Net Book
Purchases Date Rec'd Description Depr Value
thru 1996
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NoiseCom 18-Jul-94 Noise Source -Noise/Com NC6105 10 hz- 10mhz 106.40 2,021.58
Nohau 26-Jul-94 Emul Board-Emul 51-PC/E32-16 133.06 2,528.20
Nohau 26-Jul-94 Bondoot Pod-C52-16 82.98 1,576.55
Nohau 26-Jul-94 Adv Trace Board-Emul 51-PC/ATRG-4-16 124.88 2,372.75
Nohau 26-Jul-94 Stand. Trace Board-Emul 51-PC/TR16-16 75.42 1,433.02
Tritek 26-Jul-94 Kron-Hite 3202 Turnable Filter 75.45 1,433.48
Test Equipment 28-Jul-94 HP 1645A-BER Test Set 72.04 1,368.79
Hewlett Packard 29-Jul-94 HP 5385A RF Frequency Counter 88.60 1,683.42
Hewlett Packard 29-Jul-94 HP 4378 Power Meter 105.43 2,003.20
Hewlett Packard 29-Jul-94 HP 8483A Air Power Sensor 30.76 584.42
Nohau 4-Aug-94 Emul Board - Emul 16/300-PC/EIM 16.78 247.37 4,700.12
Nohau 4-Aug-94 Pod - 16Z1/IM-16.78 94.79 1,800.98
Nohau 4-Aug-94 Trace Board - Eml 16/30OPC/DTR128-16.78 330.00 6,270.07
Nohau 4-Aug-94 Adaptor - Emul 16/300PC/QFP132Clip 73.93 1,404.68
Nohau 4-Aug-94 High Level Dbug SW-Emul 16/30OPC/HLD-CPU16 123.91 2,354.22
Nohau 4-Aug-94 Pod - 161/2M-16.78 200.11 3,802.06
Telogy 5-Aug-94 HP 8647A Signal Generator 207.95 3,951.01
Hewlett Packard 5-Aug-94 Amplifier & Preamplifier-HP8445F 50A 113.36 2,153.90
Stanford Research 12-Aug-94 Synthisized Function Generator-SRSDS345 30 Mhz 110.07 2,091.41
Stanford Research 12-Aug-94 w/high stab time base 0.00 0.00
Arrow Electronics 24-Aug-94 Bit Blaster-Part of PL-ASAP2 Programmers with 19.15 363.88
Arrow Electronics 24-Aug-94 PLPG Card for PLMPV - See June 94 0.00 0.00
Engineering Inventor 30-Sep-94 Per Rick Girvin-Will be transferred out at later date 39.66 753.50
Hewlett Packard 7-Oct-94 E4746A EESOF Touchstone RF Simulator 386.71 7,347.51
Hewlett Packard 7-Oct-94 E5787A EESOF ESYN Filter Package 38.50 731.44
Ameritec 11-Oct-94 Armeritec AM2-DE Bulk Call Generator 965.33 18,341.22
Ameritec 11-Oct-94 Manual, Bantam 120 ohm inputs 12.77 242.59
Advanced Fibre 2-Feb-95 Central Process Unit 73.89 1,699.58
Advanced Fibre 2-Feb-95 Local Exchange Power Supply Unit 21.58 496.26
Advanced Fibre 2-Feb-95 Remote Subscriber Power Supply Unit 35.65 824.57
Advanced Fibre 2-Feb-95 Let Adv Intl Pots Chnl Unit 60.21 1,384.90
Advanced Fibre 2-Feb-95 RST Adv Intl Pots Chnl Unit 58.32 1,341.33
Advanced Fibre 2-Feb-95 T1 Transceiver (powered) 74.28 1,708.38
Advanced Fibre 2-Feb-95 E1 Transceiver (powered) 73.91 1,699.87
Advanced Fibre 2-Feb-95 Channel Bank Assembly Test Shelf 62.39 1,434.93
Advanced Fibre 2-Feb-95 Central Process Unit 60.07 1,381.62
Advanced Fibre 2-Feb-95 Local Exchange Power Supply Unit 10.96 252.13
Advanced Fibre 2-Feb-95 Metallica Test Unit 13.81 317.54
Advanced Fibre 2-Feb-95 Remote Subscriber Power Supply Unit 12.14 279.29
Advanced Fibre 2-Feb-95 LET Univ. Voice Grade Chnl Unit 12.00 276.11
Advanced Fibre 2-Feb-95 RST Univ. Voice Grade Chnl Unit 10.40 239.25
Advanced Fibre 2-Feb-95 T1 Asynch chnl Unit (DSX) 27.54 633.40
Advanced Fibre 2-Feb-95 Let Pots Channel Unit 9.38 215.79
Advanced Fibre 2-Feb-95 RST Pots Channel Unit 10.88 250.19
Advanced Fibre 2-Feb-95 Fiber Optic Transceiver 67.65 1,555.95
Advanced Fibre 2-Feb-95 T1 Transceiver (DSX) 23.49 540.32
Advanced Fibre 2-Feb-95 E1 Transceiver (G.703) 23.44 539.10
Advanced Fibre 2-Feb-95 Transmission Only Channel Unit 21.13 486.04
Advanced Fibre 2-Feb-95 Channel Bank Assembly Test Shelf 32.12 738.78
Ameritec 15-May-95 C. O. Simulator, portable with Option AM7 DLC-96 Compt 222.46 5,116.53
Ameritec 15-May-95 DLC-96 Port Card 348.21 8,008.93
Ameritec 15-May-95 Am-7 Trunk Card 36.37 836.49
Ameritec 15-May-95 Dual Quad Tone Receiver Card 204.67 4,707.47
Ameritec 15-May-95 1.544 77 Port Card 68.29 1,570.64
Ameritec 15-May-95 Back Mount Kit 2.32 53.39
</TABLE>
ADVANCED ACCESS LABS FIXED ASSETS
ENGINEERING, COMPUTER EQUIPMENT & CUBICLE FURNITURE
12/18/96 11:24
<TABLE>
<CAPTION>
Beginning Total Depr AFC KEEPING
Purchases Date Rec'd Description By Asset
thru 1996
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NoiseCom 18-Jul-94 Noise Source -Noise/Com NC6105 10 hz- 10mhz 728.42
Nohau 26-Jul-94 Emul Board-Emul 51-PC/E32-16 910.97
Nohau 26-Jul-94 Bondoot Pod-C52-16 568.07
Nohau 26-Jul-94 Adv Trace Board-Emul 51-PC/ATRG-4-16 854.96
Nohau 26-Jul-94 Stand. Trace Board-Emul 51-PC/TR16-16 516.35
Tritek 26-Jul-94 Kron-Hite 3202 Turnable Filter 516.52
Test Equipment 28-Jul-94 HP 1645A-BER Test Set 493.21
Hewlett Packard 29-Jul-94 HP 5385A RF Frequency Counter 606.58
Hewlett Packard 29-Jul-94 HP 4378 Power Meter 721.80 2,003.20
Hewlett Packard 29-Jul-94 HP 8483A Air Power Sensor 210.58 584.42
Nohau 4-Aug-94 Emul Board - Emul 16/300-PC/EIM 16.78 1,693.56
Nohau 4-Aug-94 Pod - 16Z1/IM-16.78 648.93
Nohau 4-Aug-94 Trace Board - Eml 16/30OPC/DTR128-16.78 2,259.25
Nohau 4-Aug-94 Adaptor - Emul 16/300PC/QFP132Clip 506.14
Nohau 4-Aug-94 High Level Dbug SW-Emul 16/30OPC/HLD-CPU16 848.28
Nohau 4-Aug-94 Pod - 161/2M-16.78 1,369.97
Telogy 5-Aug-94 HP 8647A Signal Generator 1,423.64 3,951.01
Hewlett Packard 5-Aug-94 Amplifier & Preamplifier-HP8445F 50A 776.10
Stanford Research 12-Aug-94 Synthisized Function Generator-SRSDS345 30 Mhz 753.59
Stanford Research 12-Aug-94 w/high stab time base 0.00
Arrow Electronics 24-Aug-94 Bit Blaster-Part of PL-ASAP2 Programmers with 131.12
Arrow Electronics 24-Aug-94 PLPG Card for PLMPV - See June 94 0.00
Engineering Inventor 30-Sep-94 Per Rick Girvin-Will be transferred out at later date 271.50 753.50
Hewlett Packard 7-Oct-94 E4746A EESOF Touchstone RF Simulator 2,647.49 7,347.51
Hewlett Packard 7-Oct-94 E5787A EESOF ESYN Filter Package 263.56 731.44
Ameritec 11-Oct-94 Armeritec AM2-DE Bulk Call Generator 6,608.78
Ameritec 11-Oct-94 Manual, Bantam 120 ohm inputs 87.41
Advanced Fibre 2-Feb-95 Central Process Unit 210.32
Advanced Fibre 2-Feb-95 Local Exchange Power Supply Unit 61.41
Advanced Fibre 2-Feb-95 Remote Subscriber Power Supply Unit 102.04
Advanced Fibre 2-Feb-95 Let Adv Intl Pots Chnl Unit 171.38
Advanced Fibre 2-Feb-95 RST Adv Intl Pots Chnl Unit 165.98
Advanced Fibre 2-Feb-95 T1 Transceiver (powered) 211.41
Advanced Fibre 2-Feb-95 E1 Transceiver (powered) 210.35
Advanced Fibre 2-Feb-95 Channel Bank Assembly Test Shelf 177.57
Advanced Fibre 2-Feb-95 Central Process Unit 170.97
Advanced Fibre 2-Feb-95 Local Exchange Power Supply Unit 31.20
Advanced Fibre 2-Feb-95 Metallica Test Unit 39.29
Advanced Fibre 2-Feb-95 Remote Subscriber Power Supply Unit 34.56
Advanced Fibre 2-Feb-95 LET Univ. Voice Grade Chnl Unit 34.17
Advanced Fibre 2-Feb-95 RST Univ. Voice Grade Chnl Unit 29.61
Advanced Fibre 2-Feb-95 T1 Asynch chnl Unit (DSX) 78.38
Advanced Fibre 2-Feb-95 Let Pots Channel Unit 26.70
Advanced Fibre 2-Feb-95 RST Pots Channel Unit 30.96
Advanced Fibre 2-Feb-95 Fiber Optic Transceiver 192.54
Advanced Fibre 2-Feb-95 T1 Transceiver (DSX) 66.86
Advanced Fibre 2-Feb-95 E1 Transceiver (G.703) 66.71
Advanced Fibre 2-Feb-95 Transmission Only Channel Unit 60.14
Advanced Fibre 2-Feb-95 Channel Bank Assembly Test Shelf 91.42
Ameritec 15-May-95 C. O. Simulator, portable with Option AM7 DLC-96 Compt 633.15
Ameritec 15-May-95 DLC-96 Port Card 991.07
Ameritec 15-May-95 Am-7 Trunk Card 103.51
Ameritec 15-May-95 Dual Quad Tone Receiver Card 582.53
Ameritec 15-May-95 1.544 77 Port Card 194.36
Ameritec 15-May-95 Back Mount Kit 6.61
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ADVANCED ACCESS LABS FIXED ASSETS
ENGINEERING, COMPUTER EQUIPMENT & CUBICLE FURNITURE
12/18/96 11:24
- ------------------------------------------------------------------------------------------------------------------------------------
Beginning Jan-96 Feb-96 Mar-96
Purchases Date Rec'd Description Total
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Ameritec 25-May-95 Analog Bulk Call Generator $25,008.48 322.53 322.53 322.53
Ameritec 25-May-95 Option, AM2 High Performance Package $2,450.00 31.60 31.60 31.60
Ameritec 25-May-95 Rack Mount Kit $60.00 0.77 0.77 0.77
Nohau Corp 14-Jul-95 Test Equip-EMUL16/300 PCE256-16 Kit(s/n 162837) $2,295.00 29.60 29.60 29.60
Nohau Corp 14-Jul-95 POD-16Z1/1M-16 (s/n 162297) $2,295.00 29.60 29.60 29.60
Nohau Corp 14-Jul-95 EMUL16/300-PC/DTR128-16.78 Kit (s/n 232557) $2,716.00 35.03 35.03 35.03
Nohau Corp 14-Jul-95 EMUL16/300PC/HLD-CPU16 $1,500.00 19.35 19.35 19.35
Nohau Corp 14-Jul-95 EMUL16/300-PC/QRF132CLIP (s/n 950617) $895.00 11.54 11.54 11.54
Elect. Eng Tools 21-Jul-95 Universal Programmer 32 pin PLCC to 32 Dip Adapter $555.00 7.16 7.16 7.16
Toner Cable Equip 10-Aug-95 BTL61500090 SA7U 4121 Variable Attenuator $103.23 1.33 1.33 1.33
Toner Cable Equip 10-Aug-95 VTK51500100 VSg-21 SYNC Generator $956.07 12.33 12.33 12.33
Toner Cable Equip 10-Aug-95 VTK51500110 DAT-1 Rackmount Frame $98.00 1.26 1.26 1.26
Toner Cable Equip 10-Aug-95 (2ea) BTL 11400120 AM-60-550 (59412) Modulator $1,265.30 16.32 16.32 16.32
Toner Cable Equip 10-Aug-95 PBN99900120 2107A-0807TX Transmitter $8,372.36 107.98 107.98 107.98
Toner Cable Equip 10-Aug-95 PBN99900030 9-ORH Housing $64.00 0.83 0.83 0.83
Toner Cable Equip 10-Aug-95 PBN99900130 7OR-750-/22-42/54 SC/UPC $1,210.00 15.61 15.61 15.61
Toner Cable Equip 10-Aug-95 PBN99900140 7-ORT-WB1 SC/UPC $1,805.00 23.28 23.28 23.28
Toner Cable Equip 10-Aug-95 (4ea) PBN99905010 FC/APC Pigtail 5 meters $507.33 6.54 6.54 6.54
Toner Cable Equip 10-Aug-95 (50ea) OEM62900010 GRB-1 Grounding Splice Block $10.00 0.13 0.13 0.13
Toner Cable Equip 10-Aug-95 (10ea) OEM629000120 GRB-AR Sp Blk w/Lightn Arrestor $32.26 0.42 0.42 0.42
Microtek Internation 29-Sep-95 FA,PP,68HC16Z1 Emulator, 1 Mhz, 128K Trace,OMB $9,995.00 128.90 128.90 128.90
Microtek Internation 29-Sep-95 Overlay, Serial #507AA00545 $0.00 0.00 0.00 0.00
Microtek Internation 29-Sep-95 PWA, Powerpack, Overlay RAM (1mg) Board $2,995.00 38.63 38.63 38.63
Microtek Internation 29-Sep-95 Adapter, PP, To 132 PQFP Clipover $485.00 6.25 6.25 6.25
Toner Cable Equipm 27-Sep-95 RDRX Return Dual Receiver $1,764.25 126.02 22.75 22.75
Toner Cable Equipm 29-Sep-95 CT-2084VY Rec/Monitor $488.98 34.93 6.31 6.31
TTC 30-Oct-95 Central Office Testing Package (T-Berd) w/ case $14,667.21 1,047.66 189.16 189.16
Microtek Internation 26-Dec-95 Test Kit Option, PP, Kit68HC16Z1 Ser#503AB00114 $7,995.00 571.07 103.11 103.11
Arrow 12-Dec-95 ALtera PLS Magnum Development System w/Bitblaster $0.00 0.00 0.00 0.00
Arrow 12-Dec-95 Serial cable; ASAPz standalone Programmer; VHDL $0.00 0.00 0.00 0.00
Arrow 12-Dec-95 Design entry option $7,285.00 520.36 93.95 93.95
AT & T Capital 15-Dec-95 Tek/K 465 Cart $430.00 30.71 5.55 5.55
AT & T Capital 24-Jan-96 Tek/K 465 Cart ($430.00) (30.71) (5.55) (5.55)
AT & T Capital 24-Jan-96 Tek/K212 Cart-replaces Tek/K465 Cart $429.00 30.64 5.53 5.53
AT & T Capital 15-Dec-95 Tek/2465B Oscilloscope P07275 $7,347.25 524.80 94.76 94.76
AT & T Capital 15-Dec-95 Tek/06201 Probe; Tek/1101A Probe Pwr Sup-P07280 $2,229.82 159.27 28.76 28.76
AT & T Capital 15-Dec-95 HP8647A Signal Generator PO7278 $5,375.50 383.96 69.33 69.33
AT & T Capital 18-Dec-95 PHI/PM3585/90:A Logic Analyzer PO7277 $5,919.55 422.83 76.34 76.34
AT & T Capital 15-Dec-95 HP4263A LCR Meter $5,375.50 383.96 69.33 69.33
AT & T Capital 5-Jan-96 HP16334A Test Fixture $602.43
Hewlett Packard 11-Nov-95 225 MHz RF Counter, Serial #341BA01002, Box 46785 $0.00 0.00 0.00 25.79
Hewlett Packard 11-Nov-95 US-English Localization, 1.5 GHz RF Input Channel $2,150.00 153.57 27.73 1.93
Hewlett Packard 23-Jan-96 15MHz Functin/Arb Wavefore Generator $0.00
Hewlett Packard 23-Jan-96 Serial #US34015921, Box 69732 $1,854.37
Hewlett Packard 24-Jan-96 (3)DC Power Supply Serial # KE51310819,Box 83787 $322.50
Hewlett Packard 24-Jan-96 S#KR41808094, Box83788; S #KR51303298,Box83789 $645.00
Hewlett Packard 24-Jan-96 (3)Triple output DC Power Supply $0.00
Hewlett Packard 24-Jan-96 Serial # KR51305190, Box 83790 $526.75
Hewlett Packard 24-Jan-96 Serial # KR51305191, Box 83791 $526.75
Hewlett Packard 24-Jan-96 Serial # KR51305336, Box 83792 $526.75
Hewlett Packard 14-Mar-96 50 MHz Pulse/Function Generator, $0.00
Hewlett Packard 14-Mar-96 Serial # 3134G18083, Box 92835 PO7300 $4,516.50
ACCOUNT 1530 286,964.54 7,150.16 3,578.14 3,578.14
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
ADVANCED ACCESS LABS FIXED ASSETS
ENGINEERING, COMPUTER EQUIPMENT & CUBICLE FURNITURE
12/18/96 11:24
- ------------------------------------------------------------------------------------------------------------------------------------
Beginning Q1 FY96 Net Book Total Depr AFC
Purchases Date Rec'd Description Depr Value By Asset KEEPING
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
thru 1996 thru 1996
Ameritec 25-May-95 Analog Bulk Call Generator 967.59 22,254.57 2,753.91
Ameritec 25-May-95 Option, AM2 High Performance Package 94.79 2,180.21 269.79
Ameritec 25-May-95 Rack Mount Kit 2.32 53.39 6.61
Nohau Corp 14-Jul-95 Test Equip-EMUL16/300 PCE256-16 Kit(s/n 162837) 88.79 2,042.28 252.72
Nohau Corp 14-Jul-95 POD-16Z1/1M-16 (s/n 162297) 88.79 2,042.28 252.72
Nohau Corp 14-Jul-95 EMUL16/300-PC/DTR128-16.78 Kit (s/n 232557) 105.08 2,416.92 299.08
Nohau Corp 14-Jul-95 EMUL16/300PC/HLD-CPU16 58.04 1,334.82 165.18
Nohau Corp 14-Jul-95 EMUL16/300-PC/QRF132CLIP (s/n 950617) 34.63 796.44 98.56
Elect. Eng Tools 21-Jul-95 Universal Programmer 32 pin PLCC to 32 Dip Adapter 21.47 493.88 61.12
Toner Cable Equip 10-Aug-95 BTL61500090 SA7U 4121 Variable Attenuator 3.99 91.86 11.37
Toner Cable Equip 10-Aug-95 VTK51500100 VSg-21 SYNC Generator 36.99 850.79 105.28
Toner Cable Equip 10-Aug-95 VTK51500110 DAT-1 Rackmount Frame 3.79 87.21 10.79
Toner Cable Equip 10-Aug-95 (2ea) BTL 11400120 AM-60-550 (59412) Modulator 48.96 1,125.97 139.33
Toner Cable Equip 10-Aug-95 PBN99900120 2107A-0807TX Transmitter 323.93 7,450.40 921.96
Toner Cable Equip 10-Aug-95 PBN99900030 9-ORH Housing 2.48 56.95 7.05
Toner Cable Equip 10-Aug-95 PBN99900130 7OR-750-/22-42/54 SC/UPC 46.82 1,076.76 133.24
Toner Cable Equip 10-Aug-95 PBN99900140 7-ORT-WB1 SC/UPC 69.84 1,606.24 198.76
Toner Cable Equip 10-Aug-95 (4ea) PBN99905010 FC/APC Pigtail 5 meters 19.63 451.46 55.87
Toner Cable Equip 10-Aug-95 (50ea) OEM62900010 GRB-1 Grounding Splice Block 0.39 8.90 1.10
Toner Cable Equip 10-Aug-95 (10ea) OEM629000120 GRB-AR Sp Blk w/Lightn Arrestor 1.25 28.71 3.55
Microtek Internation 29-Sep-95 FA,PP,68HC16Z1 Emulator, 1 Mhz, 128K Trace,OMB 386.71 8,894.36 1,100.64
Microtek Internation 29-Sep-95 Overlay, Serial #507AA00545 0.00 0.00 0.00
Microtek Internation 29-Sep-95 PWA, Powerpack, Overlay RAM (1mg) Board 115.88 2,665.20 329.81
Microtek Internation 29-Sep-95 Adapter, PP, To 132 PQFP Clipover 18.76 431.59 53.41
Toner Cable Equip 27-Sep-95 RDRX Return Dual Receiver 171.52 1,592.73 171.52
Toner Cable Equip 29-Sep-95 CT-2084VY Rec/Monitor 47.54 441.43 47.54
TTC 30-Oct-95 Central Office Testing Package (T-Berd) w/ case 1,425.98 13,241.23 1,425.98
Microtek Internation 26-Dec-95 Test Kit Option, PP, Kit68HC16Z1 Ser#503AB00114 777.29 7,217.71 777.29
Arrow 12-Dec-95 ALtera PLS Magnum Development System w/Bitblaster 0.00 0.00 0.00 0.00
Arrow 12-Dec-95 Serial cable; ASAPz standalone Programmer; VHDL 0.00 0.00 0.00 0.00
Arrow 12-Dec-95 Design entry option 708.26 6,576.74 708.26 6,576.74
AT & T Capital 15-Dec-95 Tek/K 465 Cart 41.81 388.19 41.81 388.19
AT & T Capital 24-Jan-96 Tek/K 465 Cart (41.81) (388.19) (41.81) (388.19)
AT & T Capital 24-Jan-96 Tek/K212 Cart-replaces Tek/K465 Cart 41.71 387.29 41.71 387.29
AT & T Capital 15-Dec-95 Tek/2465B Oscilloscope P07275 714.32 6,632.93 714.32 6,632.93
AT & T Capital 15-Dec-95 Tek/06201 Probe; Tek/1101A Probe Pwr Sup-P07280 216.79 2,013.03 216.79 2,013.03
AT & T Capital 15-Dec-95 HP8647A Signal Generator PO7278 522.62 4,852.88 522.62 4,852.88
AT & T Capital 18-Dec-95 PHI/PM3585/90:A Logic Analyzer PO7277 575.51 5,344.04 575.51 5,344.04
AT & T Capital 15-Dec-95 HP4263A LCR Meter 522.62 4,852.88 522.62 4,852.88
AT & T Capital 5-Jan-96 HP16334A Test Fixture 602.43 0.00 602.43
Hewlett Packard 11-Nov-95 225 MHz RF Counter, Serial #341BA01002, Box 46785 25.79 (25.79) 25.79 (25.79)
Hewlett Packard 11-Nov-95 US-English Localization, 1.5 GHz RF Input Channel 183.23 1,966.77 183.23 1,966.77
Hewlett Packard 23-Jan-96 15MHz Functin/Arb Wavefore Generator 0.00 0.00 0.00
Hewlett Packard 23-Jan-96 Serial #US34015921, Box 69732 1,854.37 0.00 1,854.37
Hewlett Packard 24-Jan-96 (3)DC Power Supply Serial # KE51310819,Box 83787 322.50 0.00 322.50
Hewlett Packard 24-Jan-96 S#KR41808094, Box83788; S #KR51303298,Box83789 645.00 0.00 645.00
Hewlett Packard 24-Jan-96 (3)Triple output DC Power Supply 0.00 0.00 0.00
Hewlett Packard 24-Jan-96 Serial # KR51305190, Box 83790 526.75 0.00 526.75
Hewlett Packard 24-Jan-96 Serial # KR51305191, Box 83791 526.75 0.00 526.75
Hewlett Packard 24-Jan-96 Serial # KR51305336, Box 83792 526.75 0.00 526.75
Hewlett Packard 14-Mar-96 50 MHz Pulse/Function Generator, 0.00 0.00 0.00
Hewlett Packard 11-Nov-95 Serial # 3134G18083, Box 92835 PO7300 4,516.50 0.00 4,516.50
------------
------------
ACCOUNT 1530 14,306.44 240,581.54 46,383.00 57,492.91
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ADVANCED ACCESS LABS FIXED ASSETS
ENGINEERING, COMPUTER EQUIPMENT & CUBICLE FURNITURE
12/18/96 11:24
Beginning Jan-96 Feb-96 Mar-96
Purchases Date Rec'd Description Total
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
MTL 11-Nov-95 Misc computer/telephone setup $24,088.50 1,720.61 310.67 310.67
ACCOUNT 1550 24,088.50 1,720.61 310.67 310.67
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Jan-96 Feb-96 Mar-96
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL ACQUIRED ASSETS THRU MARCH 96 583,845.98 12,503.31 6,472.47 6,465.74
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
G/L 583,845.98
Difference (0.00)
<CAPTION>
Beginning Q1 FY96 Net Book Total Depr AFC
Purchases Date Rec'd Description Depr Value By Asset KEEPING
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
thru 1996 thru 1996
MTL 11-Nov-95 Misc computer/telephone setup 2,341.94 21,746.56 2,341.94 21,746.56
ACCOUNT 1550 2,341.94 21,746.56 2,341.94
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Total Depr Net Book Total
Q1 Value Depr
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
TOTAL ACQUIRED ASSETS THRU MARCH 96 25,441.53 497,582.03 86,263.95 130,251.36
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
ATTACHMENT B
J.V. COMPANY ASSETS RETAINED BY TELLABS
Cash in Bank $647,038.50 as of November 28, 1996 plus
any amounts of interest accrued
thereafter.
Property, Plant and Equipment $367,330.67
- --------------------------------------------------------------------------------
PAGE 11 OF 11
<PAGE>
Exhibit 10.31
LICENSE AND MARKETING AGREEMENT
BETWEEN
ADVANCED FIBRE COMMUNICATIONS, INC.
AND
TELLABS OPERATIONS, INC.
This License and Marketing Agreement ("Agreement") is entered into effective as
of December 23, 1996 ("Effective Date") between Advanced Fibre Communications,
Inc., a Delaware corporation located at 1445 McDowell Boulevard North, Petaluma,
CA 94975 ("AFC"), and Tellabs Operations, Inc., a Delaware corporation located
at 4951 Indiana Avenue, Lisle, IL 60532 ("Tellabs").
RECITALS
WHEREAS, AFC manufactures and sells or licenses certain telecommunications
hardware and software products;
WHEREAS, Tellabs is in the business of manufacturing, marketing and distributing
telecommunications products throughout the world;
WHEREAS, Tellabs and AFC were parties to a Joint Venture and Partnership
Agreement dated April 11, 1994 ("J.V. Agreement");
WHEREAS, Tellabs and AFC entered into a Memorandum of Understanding dated April
3, 1996 ("MOU") pursuant to which they agreed to terminate the J.V. Agreement;
WHEREAS, Tellabs and AFC have terminated the J.V. Agreement by entering into a
Termination Agreement contemporaneously herewith ("Termination Agreement");
WHEREAS, AFC wishes to grant to Tellabs, as provided herein, a development
license to modify certain of AFC's technology on a restricted basis for sale of
products by Tellabs, and further, upon completion of such modifications, Tellabs
desires to grant AFC the option to purchase such products from Tellabs on the
terms and conditions set forth in this Agreement and in a separate OEM Agreement
to be entered into contemporaneously herewith ("OEM Agreement");
- -------------------------------------------------------------------------------
12/23/96 Page 1 of 42
<PAGE>
WHEREAS, AFC may make certain developments to its UMC 1000 Products (as defined
below) and desires to grant to Tellabs, as provided herein, an option to fund
additional developments or to accelerate AFC planned developments on the terms
and conditions set forth in this Agreement as well as the option to purchase the
UMC 1000 Products from AFC on the terms and conditions set forth in this
Agreement and in the OEM Agreement;
WHEREAS, the parties wish to grant certain manufacturing rights to one another
for certain of their respective products; and
WHEREAS, AFC and Tellabs wish to provide for certain marketing and sales
activities on the terms and conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual promises contained herein, the
parties agree as follows:
1. DEFINITIONS
1.1 CROSS REFERENCE TABLE
The following terms defined elsewhere in this Agreement in the
sections set forth below, shall have the respective meanings therein
defined:
Section
-------
"Annual Revenue" 7.3.2
"CAPs" 7.1.1
"Competitive DLC Product" 5.5.1
"Competitive HFC Product" 5.5.2
"Current Bus" 3.1.1
"Development License Breach" 2.8
"Domestic Alternate Provider" 7.1.1
"Entities" 7.3
"Foreign Alternate Provider" 7.2.1
"Holding Company" 7.3.1
"J.V. Agreement" Preamble
"MOU" Preamble
"MSO" 7.1.1.1
"OEM Agreement" Preamble
"Specifications" 3.2.2
"Statement of Work" 3.2.1
"Tellabs Funded Development" 3.2
- -------------------------------------------------------------------------------
12/23/96 Page 2 of 42
<PAGE>
"Terminated Party" 13.3
"Terminating Party" 13.3
"Termination Agreement" Preamble
"Unauthorized Development" 2.8
1.2 "AFC COMPETITOR" shall mean a company engaged in the business of
development and marketing of a Competitive DLC Product.
1.3 "AFFILIATE" shall mean an individual or entity that directly or
indirectly controls, is controlled by, or is under common control
with, the entity specified. For purposes of this definition,
"control" shall mean beneficial ownership of more than 50% of the
voting stock of such entity.
1.4 "CPU SYSTEM SOFTWARE" means any software, including firmware,
developed by or for AFC, which is imbedded or incorporated in or used
in connection with the CPU for the UMC 1000 Products.
1.5 "DISTRIBUTOR" shall mean any person or entity who has been granted the
right to distribute or re-sell any products of AFC or its Affiliate(s)
and/or Tellabs or its Affiliate(s), either directly by such party or
indirectly under authority granted by such party, subject to the
restrictions set forth in Section 7.4 hereof.
1.6 "EMS INTERFACE" means the Software for an SNMP and/or Q3 MIB that is
loaded on the DLP module which is part of the UMC 1000 Product.
1.7 "END USER" shall mean any person or entity who has been granted the
right to use, but not to distribute or re-sell, any products sold by
AFC and/or Tellabs, either directly by such party or indirectly under
authority granted by such party.
1.8 "ENHANCEMENTS" shall mean revisions to a product (Hardware and/or
Software) which materially alter and/or add to its architecture or
fundamental functionality.
1.9 "DESIGN PACKAGE" shall mean the set of documentation for the design of
the applicable product, and shall include, but shall not be limited
to, engineering design specifications, engineering test
specifications, costed bill of materials, parts list, board lay-outs
and schematics. The Design Package shall include, at a minimum, the
same level and types of documentation developed by AFC for the UMC
1000 Products.
- -------------------------------------------------------------------------------
12/23/96 Page 3 of 42
<PAGE>
1.10 "HARDWARE" shall mean equipment, modules, assemblies and subassemblies
but does not include Software.
1.11 "IMPROVEMENTS" shall mean fixes, corrections or work-arounds to errors
in a product as well as any other improvements in system performance,
modifications or revisions which do not materially alter the original
functional characteristics of such product.
1.12 "JOINT TECHNOLOGY" means the technology relating to the upconverter,
direct down converter, LUU-VIC burst receiver and QPSK clock recovery
circuits for the product developed under the J.V. Agreement and now
owned equally by Tellabs and AFC, as provided in the Termination
Agreement, as well as any Improvements or Enhancements to the LUU-VIC
burst receiver which are or have been contributed to by Victor Ivashin
after the Effective Date.
1.13 "J.V. Product" means the products developed pursuant to the terms of
the J.V. Agreement, whether developed by the J.V. Company, AFC or
Tellabs or jointly, including any Enhancements and Improvements
thereto.
1.14 "J.V. PRODUCT TECHNOLOGY" means the technology embodied in the J.V.
Product including, without limitation, design documentation, board
schematics, software, firmware, object and source code, designs,
technology, ideas, know-how, processes, formulas, data, techniques,
improvements, modifications, inventions (whether patentable or not),
works of authorship, derivative works, circuits, mask works, layouts,
algorithms, and computer programs relating thereto, and all patents,
patent rights, copyrights, mask work rights, trade secret rights and
other intellectual property and proprietary rights therein anywhere in
the world.
1.15 "MANUFACTURING DOCUMENTATION" shall mean the set of documentation for
the manufacture of the applicable product, which shall include those
documents referred to in Attachment A hereto, if available, but which
shall, in any event, be at least as detailed as the information
provided to the providing party's other manufacturing organizations,
both internal and external.
1.16 "NET REVENUE" shall mean a party's actual revenue received from the
distribution of the applicable product(s) hereunder (not including
taxes, freight, shipping, transport, handling, packaging, insurance,
export fees, duties, commissions and similar charges), less deductions
for returns.
- -------------------------------------------------------------------------------
12/23/96 Page 4 of 42
<PAGE>
1.17 "RF ACCESS PRODUCTS" means (a) the Hardware, Software and mechanical
aspects of a family of stand-alone coax RF access products; and (b)
the Software additions and modifications to the CPU System Software
solely for the purpose of supporting such RF Access Products (namely,
CUI provisioning screens, building a CPU load for Tellabs' name, logo,
and part numbers and database entries to support new RF card types),
where the maximum drop bandwidth is twelve (12) DSOs of capacity for
voice services (but no maximum drop bandwidth limitations for data).
1.18 "RF TRANSCEIVERS" means (a) the RF modem hardware (clock, data and
control) needed to interconnect into the AFC owned and controlled
backplane ASICs (e.g., WBGA) and the micro complex; (b) the software
or firmware loaded onto RF Transceiver boards; and (c) the software
additions to the CPU System Software solely for the purpose of
supporting the RF Transceivers (namely, CUI provisioning screens,
building a CPU load for Tellabs' name, logo, and part numbers and
database entries to support new RF card types).
1.19 "SOFTWARE" shall mean computer programs, procedures, rules and
associated documentation designed to make use of and extend the
capabilities of Hardware. Software includes, but is not limited to
source codes, object codes for control programs, operating system
programs, general application programs, special application programs,
programming aids, routines, subroutine translations, compilers,
diagnostics, firmware, proprietary VLSI devices, databases,
documentation to maintain, describe and use any of the foregoing, and
other related programs.
1.20 "TELLABS" shall mean Tellabs Operations, Inc. and its Affiliates.
1.21 "TELLABS COMPETITOR" shall mean a company engaged in the business of
development and marketing of a Competitive HFC Product.
1.22 "TELLABS DEVELOPMENTS" means, collectively, the (i) J.V. Product; and
(ii) the EMS Interface, the RF Access Products and the RF Transceivers
and any Enhancements and Improvements to the EMS Interface, the RF
Access Products and RF Transceivers, developed by Tellabs after the
Effective Date.
1.23 "TELLABS TECHNOLOGY" means the technology embodied in the Tellabs
Developments and any other products and technology developed by
Tellabs (and any Enhancements and Improvements to any of the foregoing
developed by Tellabs after the Effective Date) including,
- -------------------------------------------------------------------------------
12/23/96 Page 5 of 42
<PAGE>
without limitation, design documentation, board schematics, software,
firmware, object and source code, designs, technology, ideas, know-how,
processes, formulas, data, techniques, improvements, modifications,
inventions (whether patentable or not), works of authorship, derivative
works, circuits, mask works, layouts, algorithms, and computer programs
relating thereto, and all patents, patent rights, copyrights, mask work
rights, trade secret rights and other intellectual property and proprietary
rights therein anywhere in the world. "Tellabs Technology" specifically
excludes the UMC 1000 Licensed Technology and any modifications and
additions made by Tellabs to the CPU System Software, which shall be owned
by AFC.
1.24 "UMC 1000 LICENSED TECHNOLOGY" means technology developed by or
for, or licensed to AFC for the CPU, DLP, shelves and backplane of
the UMC 1000 Products existing as of the Effective Date of this
Agreement (and any Enhancements and Improvements to the foregoing
developed by AFC after the Effective Date which are licensed to
Tellabs pursuant to Section 3.1 below), including, without
limitation, design documentation, board schematics, software,
firmware, object and source code, designs, technology, ideas, know-
how, processes, formulas, data, techniques, improvements,
modifications, inventions, (whether patentable or not), works of
authorship, derivative works, circuits, mask works, layouts,
algorithms, and computer programs relating thereto, and all
patents, patent rights, copyrights, mask work rights, trade secret
rights and other intellectual property and proprietary rights
therein anywhere in the world.
1.25 "UMC 1000 PRODUCTS" mean those products currently constituted of
the AFC UMC 1000 product line as it exists as of the Effective Date
plus all Enhancements and Improvements thereto developed by or for
AFC during the term of this Agreement, whether or not carrying the
"UMC 1000" name, which are licensed to or otherwise made available
to Tellabs pursuant to the terms of this Agreement.
1.26 "UMC 1000 TECHNOLOGY" means the technology embodied in the UMC 1000
Products, including, without limitation, design documentation,
board schematics, software, firmware, object and source code,
designs, technology, ideas, know-how, processes, formulas, data,
techniques, improvements, modifications, inventions, (whether
patentable or not), works of authorship, derivative works,
circuits, mask works, layouts, algorithms, and computer programs
relating thereto, and all patents, patent rights, copyrights, mask
work rights, trade secret rights and other
- --------------------------------------------------------------------------------
PAGE 6 OF 42
<PAGE>
intellectual property and proprietary rights therein anywhere in the world.
2. DEVELOPMENT LICENSE FOR UMC 1000 LICENSED TECHNOLOGY
2.1 Subject to the terms and conditions of this Agreement, AFC hereby
grants Tellabs a limited, nontransferable, nonsublicensable,
nonexclusive, perpetual, irrevocable, worldwide license and right
to use the UMC 1000 Licensed Technology subject to the restrictions
herein and only for the purpose of developing, having developed,
manufacturing, having manufactured, maintaining, enhancing and
modifying and distributing:
2.1.1 Coax RF Transceivers which plug into any current or future
AFC shelf/assemblies;
2.1.2 An EMS Interface based upon SNMP and/or Q3 for network
management provided, however, that AFC shall be obligated to
make the Hardware modifications to the DLP and CPU System
Software changes to support Tellabs' requirements for the
EMS Interface;
2.1.3 RF Access Products that communicate with the RF Transceivers
referenced in Section 2.1.1 above. Such RF Access Products
will have a coax RF modem as the transceiver interface to
the UMC 1000 Products. The data interfaces on the RF Access
Products cannot be used as a transceiver to any additional
digital loop carrier equipment or any equipment used by the
service provider to derive voice services; and
2.1.4 Any mechanical products or designs outside of the UMC 1000
Product plug-in cards, shelf and/or backplane.
2.2 Tellabs shall have sole responsibility for funding the developments
listed in Section 2.1 and such developments will be deemed Tellabs
Technology hereunder, with the exception of any UMC 1000 Licensed
Technology incorporated or contained therein.
2.3 The license described in this Section 2 does not give Tellabs the
right to develop or have developed a copper, fiber or wireless
transceiver interface that communicates with the UMC 1000
Products. Such products are considered part of the UMC 1000
Products and will be developed and owned by AFC. Notwithstanding
the foregoing, nothing contained herein shall prohibit Tellabs
from using standard network interfaces to connect
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<PAGE>
with the UMC 1000 Products. Standard network interfaces do not
include any proprietary communication protocols.
2.4 AFC will maintain software locks between the UMC 1000 Products and
the Tellabs versions for such products. Tellabs will provide AFC
with all information reasonably required by AFC to maintain such
locks.
2.5 Tellabs will have no rights to sell, transfer, license or assign
the UMC 1000 Licensed Technology to any third party.
2.6 AFC shall control the CPU System Software. The license rights
granted pursuant to Sections 2.1.1 and 2.1.3 shall include the
right to make necessary changes to the CPU System Software. Except
as expressly permitted in this Agreement, Tellabs shall not be
allowed to modify the CPU System Software to alter or to modify the
basic UMC 1000 Product functionality, including, but not limited
to, call control, database structures, and interprocessor
communication. Any changes desired in these areas, will be made
only by AFC, as reasonably requested by Tellabs, at charges
calculated using the formula in Section 3.2.4. The changes made
pursuant to this Section 2.6 will be deemed a Tellabs Funded
Development under Section 3, provided however, that the payments
made by Tellabs will not be treated as advances on royalties under
Section 3.4.
2.7 AFC shall have the right, by written notice, to terminate
immediately the development license granted to Tellabs in Section
2.1 under the circumstances set forth in Section 2.8 below. If the
Section 2.1 license is terminated pursuant to this section, Tellabs
shall be required to turn over to AFC any designs which violate the
restrictions and remove any product containing such designs from
any customer locations. AFC shall not be entitled to use any such
designs but will retain all rights to the underlying UMC 1000
Licensed Technology.
2.8 Tellabs will be deemed to have committed a "Development License
Breach" if; (i) Tellabs violates the development license in Section
2.1 by developing a product, a feature or a fix outside the scope
of the license granted pursuant to Section 2.1 ("Unauthorized
Development"), and (ii) such Unauthorized Development is actually
incorporated in a product which is sold by Tellabs to a Customer.
If Tellabs commits a single Development License Breach during the
course of any consecutive twelve-month period, Tellabs shall be
entitled to cure such breach by: (i) removing the Unauthorized
Development from any
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<PAGE>
customer locations; and (ii) restoring the product design to its
original condition, prior to the Unauthorized Development. If
Tellabs either: (i) fails to cure the Development License Breach;
or (ii) commits a second Development License Breach during any
consecutive twelve-month period, AFC shall be entitled to exercise
the rights as set forth in Section 2.7 above. The remedy set forth
in Sections 2.7 and 2.8 shall be AFC's sole remedies for Tellabs'
breach of the development license provided, however, that is after
termination of the development license, Tellabs thereafter commits
another Development License Breach, AFC shall be entitled to
exercise the rights set forth in Sections 13 and 14 of this
Agreement.
3. UMC 1000 FUTURE DEVELOPMENTS
3.1 Tellabs shall be entitled to have access to Enhancements and
Improvements to the UMC 1000 Products developed by AFC after the
Effective Date (whether or not a Tellabs Funded Development), as
provided in this Section 3.1.
3.1.1 The development license granted pursuant to Section 2 shall
extend to all Improvements and Enhancements to the UMC 1000
Licensed Technology relating to developments which are
designed to fit into the 98 megabit backplane bus for the
UMC 1000 Products as it exists on the Effective Date
("Current Bus"). AFC shall deliver the Design Package
within ten (10) days of commencement of beta trial for each
such Improvement or Enhancement.
3.1.2 The manufacturing rights granted pursuant to Section 5 shall
extend to all Enhancements and Improvements to the UMC 1000
Products which fit into the Current Bus.
3.1.3 The Enhancements and Improvements referred to in Sections
3.1.1 and 3.1.2, as well as any other Enhancement or
Improvement which operates with both the Current Bus and a
new backplane bus, including but no limited to the new high-
speed bus for the next version of the UMC 1000 Products,
will be made available to Tellabs on an OEM basis under the
terms and conditions set forth in the OEM Agreement and in
Section 5 of this Agreement. AFC agrees that the design for
the new high-speed bus backplane will allow the Tellabs
Developments for the Current Bus to plug into and operate
with Current Bus on the new backplane.
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<PAGE>
3.1.4 AFC agrees to grant Tellabs manufacturing rights for any
Enhancement or Improvement to the UMC 1000 Products which
operate with both the Current Bus and a new backplane bus,
on commercially reasonable terms and conditions to be agreed
upon by the parties.
3.2 Tellabs has an option to fund additional Enhancements and
Improvements to the UMC 1000 Products (including but not limited to
the UMC 1000 Licensed Technology), or to accelerate, to the extent
reasonable and feasible, AFC-planned Enhancements and Improvements
to the UMC 1000 Products as Tellabs deems necessary for its markets
(collectively "Tellabs Funded Developments"). Any additional
Enhancements or Improvements to the UMC 1000 Licensed Technology
developed by AFC pursuant to this Section 3.2 shall be made
available to Tellabs under the license and subject to the
restrictions in Section 2 above. The following provisions will
apply to any Tellabs Funded Developments:
3.2.1 PREPARATION OF STATEMENT OF WORK. The parties shall jointly
prepare a mutually agreed upon written statement of work
("Statement of Work") setting forth the development
activities and obligations of AFC with respect to
specifications for the Tellabs Funded Development and a
milestone schedule and estimated resource allocations for
the completion of such activities and obligations. The
parties understand and agree that the Statement of Work may
be modified, from time to time, but only if such
modification is in writing and signed by both parties.
3.2.2 SPECIFICATIONS. All work and performance under the
Statement of Work shall be pursuant to one or more
specifications setting forth the functional description for
the Tellabs Funded Development ("Specification(s)")
developed by the parties, each of which shall be in writing
and become effective only when signed by both parties.
Changes in any Specification shall be effective only when a
written change request is signed by both parties.
3.2.3 DEVELOPMENT OBLIGATIONS. AFC will develop the Tellabs
Funded Developments in accordance with the Statement of Work
and Specifications. Unless otherwise agreed to by Tellabs,
AFC will not be allowed to reassign resources designated by
the Statement of Work to other developments until AFC has
completed its development of the Tellabs Funded Development.
Reassignment of such specifically committed resources by AFC
will be considered a breach of this Section 3.2.3 and will
allow Tellabs to manage the
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<PAGE>
development resources at AFC assigned to the applicable
Statement(s) of Work as provided in Section 3.5.
3.2.4 FUNDING. Funding level estimates for these Tellabs Funded
Developments will be determined per project based on a set
criteria mutually agreed to by the two companies. Tellabs may
fully participate in the progress of these developments which
includes but is not limited to inspecting development schedules,
attending formal design review(s), receiving copies of design
specifications and test results, and the right to participate in
the formulation of plans to keep projects on track. Tellabs will
provide the cash funding for these developments based upon the
actual salaries of the developers, plus 24.2% for benefits of
the recorded staff hours for the Tellabs Funded Developments
(provided that no benefit amount shall be charged if
consultants or outside contracted engineering are used to the
extent AFC is not responsible for benefit amounts). In addition,
Tellabs also will provide cash funding for facilities and
equipment allocations for any developers over an FTE (full-time
equivalent) of five (5). This amount will be paid on a monthly
basis within thirty (30) days after receipt of a valid invoice.
To receive payment, AFC must submit a formal invoice no later
than thirty (30) days after the end of the billing period,
including name, hours worked, actual salary rate and benefit
amount, if applicable. Tellabs will have no obligation to pay
invoices which are late (by more than sixty (60) days beyond
the thirty (30) day period in the prior sentence) or which do
not contain the information required by the previous sentence.
3.2.5 OWNERSHIP. AFC will own any and all CPU System Software
modifications and pre-existing UMC 1000 Technology which is
contained in a Tellabs Funded Development. Tellabs and AFC will
jointly own (and have equal rights to) all other technology
relating to a Tellabs Funded Development, including but not
limited to new Software code resident on a plug-in card that
controls the new circuit designs provided that Tellabs has
provided one hundred percent (100%) of the funding, otherwise
AFC will own such technology. Prior to commencing development,
the parties will jointly agree upon the level of ownership and
the funding allocation for each portion of the development,
subject to the foregoing terms. Tellabs agrees not to sell,
transfer or assign the jointly-owned technology to an AFC
Competitor. AFC agrees that the jointly owned technology will be
subject to all rights and restrictions relating to other UMC
1000 Technology.
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<PAGE>
3.3 AFC agrees to use its best efforts to complete developments in a
timely fashion and to keep Tellabs fully informed as to the
status of all UMC 1000 Product developments. AFC agrees to
distribute to Tellabs on a regular basis no less frequently than
monthly, a copy of the UMC Product roll-out plans, product
definitions, and development schedules for all planned
Enhancements and Improvements to the UMC 1000 Product.
3.4 If Tellabs funds a Tellabs Funded Development, such funds will
be considered a non-refundable advance against any royalties
Tellabs will be obligated to pay AFC for sales of each
particular development, which will be recouped against any such
royalties that accrue for such development until such time as
that project's development cost has been completely recouped
except for Tellabs Funded Developments under Section 2.6. At
such time as the development funds have been recouped, Tellabs
shall resume normal royalty payments on that particular
development. In the case of Tellabs Funded Developments
involving CPU System Software developments, a percent of the
overall system selling price will be used to determine the sales
value of the waived royalty amount.
3.5 If AFC (i) refuses to undertake development of a Tellabs Funded
Development, or (ii) fails to undertake any of its development
obligations under Section 2.1.2 and/or 2.6 hereof, AFC will be
considered in breach of its development commitment to Tellabs
and subject to a $100,000 penalty payable to Tellabs for each
such failure. Tellabs cannot accelerate an AFC-planned feature
that is within three (3) months of the date requested by
Tellabs. In addition, if AFC begins a Tellabs Funded
Development, or any development under Section 2.1.2 or 2.6, and
if that development is more than three (3) months late based
upon the key milestones as originally outlined in the plan for
the project mutually agreed to by both companies (or as amended
by mutual agreement), or, under the circumstances referred to in
Section 3.2.3, then Tellabs at its option can elect to take over
the management of this specific development project and the
resources which had been agreed upon as assigned to perform that
development at AFC's location. Unless otherwise agreed, Tellabs
shall not have the right to assign additional AFC resources to
this specific development; Tellabs' only right shall be to
manage AFC development resources assigned to the project and, if
necessary, to add Tellabs' resources provided that those
resources must perform their work in Petaluma, CA.
4. OWNERSHIP
4.1 AFC shall retain and own all title and, except as expressly
licensed herein, all rights and interests (including patent
rights, copyrights, trade secret
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<PAGE>
rights, know-how and other intellectual property and proprietary
rights throughout the world) in and to (i) the UMC 1000
Technology including, without limitation, the UMC 1000 Licensed
Technology and CPU System Software (including without limitation
all Software and firmware related to the foregoing); (ii) any
additional UMC 1000 Enhancements and Improvements developed by
AFC pursuant to Section 3 (including without limitation, to the
extent applicable thereto): (a) CPU System Software developments,
modifications or derivatives thereof and any existing AFC
technology/circuit designs on the UMC 1000 Product plug-in cards
that are reused in new UMC 1000 Enhancements or Improvements,
and (b) new technology/circuit designs of UMC 1000 Product
plug-in cards and the new software code which resides in such
plug-in cards and controls such new circuit designs); and (iii)
any and all portions of the foregoing which are contained or
embodied in the Tellabs Technology, discoveries, inventions,
works of authorship, ideas or information used or otherwise
created by or for Tellabs in the course of its performance under
this Agreement.
4.2 Tellabs shall retain and own all title and, except as expressly
licensed herein, all rights and interests (including patent
rights, copyrights, trade secret rights, know-how and other
intellectual property and proprietary rights throughout the
world) in and to the Tellabs Technology.
4.3 Ownership of Tellabs Funded Developments shall be as set forth
in Section 3.2.5 hereof.
4.4 Each party will execute any documentation reasonably requested
by the other party to evidence, record and perfect the
assignment and to apply for and obtain recordation of such
proprietary rights.
5. MANUFACTURING RIGHTS AND OEM PRODUCT PURCHASE
5.1 TELLABS' MANUFACTURING RIGHTS.
AFC grants Tellabs the right to sell all UMC 1000 Products in
Tellabs colors and software, either as provided in the OEM
arrangement under Section 5.2 or by exercise of Tellabs'
manufacturing rights under this Section 5.1., at Tellabs'
option, and subject to Tellabs' marketing rights under Section 7
of this Agreement,.
5.1.1 Subject to all of the terms and conditions of this
Agreement, AFC grants to Tellabs a non-exclusive,
irrevocable, perpetual, worldwide (except as provided
in Section 5.1.2) right and license to manufacture,
have manufactured, distribute, maintain, service and
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<PAGE>
repair UMC 1000 Products as they exist on the Effective
Date, as well as all Enhancements and Improvements
thereto referred to in Section 3.1.2, for the sole
purpose of enabling manufacture of the Tellabs version
of the UMC 1000 Product(s) for sale to Tellabs'
customers within the scope of Tellabs' marketing rights
under Section 7 of this Agreement.
5.1.2 Notwithstanding the language in Section 5.1.1, Tellabs
may not exercise its manufacturing rights in China and
India. If AFC has a local manufacturing partner in
China and/or India, AFC agrees to sell the UMC 1000
Product to Tellabs in that territory using the
local manufacturer at the same prices specified in this
Agreement, plus applicable taxes and duties if so
assessed to AFC.
5.1.3 If Tellabs decides to exercise its manufacturing rights
granted under Section 5.1.1, AFC agrees to provide
Tellabs with the Manufacturing Documentation to enable
Tellabs to purchase, manufacture and test the UMC 1000
Products. The level of information and support provided
to Tellabs shall be at least as detailed as the
information and support AFC provides other AFC
manufacturing organizations, both internal and
external. AFC will, at no charge, provide Tellabs with
the functional test software to allow Tellabs to test
the UMC 1000 Products. AFC also agrees to provide
Tellabs with certain proprietary components for which
AFC will charge Tellabs an amount equal to what AFC
pays for such proprietary components plus a small
handling fee not to exceed fifteen percent (15%) of
AFC's cost. AFC will lower this percentage mark-up
(with an objective of reaching 3%) when and as
permitted by its pre-existing pricing arrangements with
other parties. AFC will update the Manufacturing
Documentation and the functional test software at
all times during the term hereof, as necessary to keep
it current. If requested by Tellabs, AFC will place in
escrow, all technology relating to the proprietary
components, which escrow will be released to Tellabs
for use in exercising its manufacturing rights in the
event AFC ceases to make such proprietary components
available to Tellabs either, (i) due to bankruptcy or
otherwise due to AFC's ceasing to do business, or (ii)
due to AFC's material breach of its obligations to
provide proprietary components. The definition of
"material breach" for purposes of this section will be
agreed at the time the escrow is established.
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<PAGE>
5.2 TELLABS' OEM ARRANGEMENT OPTION.
5.2.1 If Tellabs decides not to exercise its manufacturing
rights referenced in Section 5.1.1, in whole or in
part, AFC agrees to sell to Tellabs the UMC 1000
Products in the Tellabs version under the terms of this
Agreement and the OEM Agreement. In addition, AFC
agrees to sell to Tellabs the UMC 1000 Products
Enhancements and Improvements referred to in Section
3.1.3 of this Agreement in the Tellabs version under
the terms of this Agreement and the OEM Agreement.
5.2.2 The purchase price for any product purchased by Tellabs
under the OEM Agreement shall be the higher of (i) the
manufacturing cost plus five percent (5%) or (ii)
twenty percent (20%) off the U.S. list price.
Notwithstanding the foregoing, Tellabs shall be
entitled to a discount off its purchase price based on
the volume of its purchases, if such discounted price
is lower than the price referred to in the preceding
sentence. AFC's current volume discount is set forth in
Attachment B. If AFC subsequently establishes a more
favorable standard volume discount structure, Tellabs
shall be entitled to the discounts contained therein.
5.2.3 Product shipments, forecasting, warranty, support,
repair and return, and the like, will be as set forth
in the OEM Agreement. Tellabs is responsible for
developing its own product documentation, however, AFC
agrees to share its customer documentation with
Tellabs, and to allow Tellabs to use, copy and modify
that documentation for its product as needed, at no
charge.
5.3 AFC'S MANUFACTURING RIGHTS.
5.3.1 Tellabs Developments will be made available to AFC for
sale in AFC's colors and software, either as provided
in the OEM Agreement, as permitted by Section 5.4 below
or by exercise of AFC's manufacturing rights under this
Section 5.3., at AFC's option, subject to AFC's
marketing rights under Section 7. Subject to the terms
of this Agreement, Tellabs grants to AFC the option to
manufacture the Tellabs Developments for the sole
purpose of manufacturing the UMC 1000 version of such
Tellabs Developments for shipment to its customers,
within the scope of its marketing rights under Section 7
below. Other products which are developed by Tellabs
using the J.V. Product Technology will be made
available to AFC on an OEM basis, on commercially
reasonable terms and conditions to be agreed. AFC will
have no
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<PAGE>
rights to sell, transfer, license or assign the Tellabs
Technology to any third party.
5.3.2 If AFC decides to exercise its manufacturing rights granted
under Section 5.3.1, Tellabs agrees to provide AFC with the
Manufacturing Documentation to enable AFC to purchase,
manufacture and test the Tellabs Developments which are to
be manufactured by AFC. The level of information and
support provided to AFC shall be at least as detailed as the
information and support Tellabs provides other Tellabs
manufacturing organizations, both internal and external.
Tellabs also agrees to provide AFC with certain proprietary
components which Tellabs will charge AFC an amount equal to
what Tellabs pays for such proprietary components plus a
small handling fee, not to exceed fifteen percent (15%) of
Tellabs' cost. This percentage mark-up will be lowered when
and as the mark-up in Section 5.1.3 is lowered. Tellabs
agrees to provide AFC with updates to the Manufacturing
Documentation as necessary to keep it current during the
Term hereof. If requested by AFC, Tellabs will place in
escrow, all technology relating to the proprietary
components, which escrow will be released to AFC for use in
exercising its manufacturing rights in the event Tellabs
ceases to make such proprietary components available to AFC
either, (i) due to bankruptcy or otherwise due to Tellabs
ceasing to do business, or (ii) due to Tellabs' material
breach of its obligations to provide proprietary components.
The definition of "material breach" for purposes of this
section will be agreed at the time the escrow is
established.
5.4 AFC'S OEM ARRANGEMENT OPTION.
5.4.1 If AFC decides not to exercise its manufacturing rights
referenced in Section 5.3.1., in whole or in part, Tellabs
agrees to sell to AFC the AFC version of the Tellabs
Developments under the terms of the OEM Agreement and this
Agreement.
5.4.2 If AFC elects to purchase the Tellabs Developments pursuant
to the OEM Agreement, the amount AFC will pay for the
Tellabs Developments shall be the higher of (i) the
manufacturing cost plus five percent (5%) or (ii) twenty
percent (20%) off the U.S. list price. Notwithstanding the
foregoing, AFC shall be entitled to a discount off its
purchase price based on the volume of its purchases if such
discounted price is lower than the price referred to in the
preceding sentence. Tellabs' current volume discount
structure is set forth in Attachment B. If Tellabs
subsequently establishes a more favorable
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<PAGE>
standard volume discount structure, AFC shall be entitled to
the discounts contained therein.
5.4.3 Product shipments, forecasting, warranty, support, repair
and return and the like, will be as set forth in the OEM
Agreement between the parties. AFC is responsible for
developing its own product documentation, however, Tellabs
agrees to share its customer documentation with AFC, and to
allow AFC to use, copy and modify that documentation for its
product as needed, at no charge.
5.5 COMPETITIVE PRODUCTS.
5.5.1 If (i) Tellabs licenses or sells Tellabs Technology to an
AFC Competitor under terms and conditions which would permit
the use of the Tellabs Technology with a digital loop
carrier product which is competitive with the UMC 1000
Product ("Competitive DLC Product"), or if (ii) Tellabs
acquires or develops a Competitive DLC Product and ships
that product to one or more Alternate Provider(s) in both of
the market segments defined below, then, the license granted
in Section 2 and the exclusive market rights provided in
Section 7, shall immediately terminate (and AFC will
immediately be able to sell UMC 1000 Products and Tellabs
Developments to Alternate Provider(s) in those market
segments) and Tellabs will thereafter have no rights to sell
the UMC 1000 Products to new customers. In such a case, the
manufacturing rights and OEM rights granted in Section 3
will continue for a period of two (2) years, and thereafter
Tellabs will be entitled to continue to purchase the UMC
1000 Products under the OEM Agreement for one (1) additional
year, in order to continue to support Tellabs' installed
base for a total of three (3) years from the time the
license is terminated. Tellabs' royalty obligations will
continue during this period. In addition, in such a case,
Tellabs would be required to return to AFC all information
relating to the UMC 1000 Licensed Technology, except such
information required to manufacture the UMC 1000 Products
for support of the installed base.
If Tellabs acquires or develops a Competitive DLC Product
and ships that product to one or more Alternate Provider(s)
in only one of the market segments defined below, then
Tellabs will immediately lose its market rights for sales to
new customers within that market segment only and AFC will
immediately be able to sell UMC 1000 Products and Tellabs
Developments to Alternate
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<PAGE>
Providers in that market segment. Tellabs will continue to
have manufacturing and OEM rights in accordance with the
preceding paragraphs, in order to support existing customers
in that market segment for a period of three (3) years.
Tellabs' royalty obligations will continue during this
period. All rights with respect to the other market segment
will remain in full force and effect.
For the purposes of Sections 5.5.1 and 5.5.2, (i) the term
"Alternate Provider" includes both "Domestic Alternate
Providers" or "Foreign Alternate Providers" and (ii) there
are two major market segments (1) an ANSI-based product
(T1/SONET) and (2) a CEPT-based product (E1/SDH). The
restrictions set forth in this Section 5.5.1 only apply for
international countries into which Tellabs has been granted
marketing rights to sell UMC 1000 Products under Section 7
below. Tellabs shall be entitled to acquire, distribute, or
perform an independent development and sell and/or
distribute any products, including, but not limited to
Competitive DLC Products in those countries listed on
Attachment E, without losing any rights provided for in this
Agreement.
5.5.2 If (i) AFC makes UMC 1000 Products available to a Tellabs
Competitor, or if (ii) AFC acquires or develops a hybrid
fiber coax product ("Competitive HFC Product") and ships and
sells that product to one or more Alternate Provider(s) in
both market segments defined in Section 5.5.1, then AFC will
immediately lose its rights as provided in Section 7.1.2 to
sell the Tellabs Developments to new customers in both
market segments and Tellabs will immediately be able to sell
the Tellabs Developments and the UMC 1000 Products (but only
in conjunction with sales of Tellabs Developments) to AFC's
customers in those market segments. In such a case, the
manufacturing rights granted in Section 3 will continue for
a period of two (2) years, and thereafter, AFC will be
entitled to continue to purchase the Tellabs Developments
under the OEM Agreement for one (1) additional year, in
order to continue to support AFC's installed base for the
Tellabs Developments for a total period of three (3) years
from the period AFC lost its rights to sell the Tellabs
Developments to new customers. AFC's royalty obligations
will continue during this period.
If AFC acquires or develops a Competitive HFC Product and
ships and sells such product to one or more of the Alternate
Provider(s) markets in only one of the market segments
defined in Section
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5.5.1, then AFC will immediately lose its market rights for
sales to new customers of Tellabs Developments within that
market segment only and Tellabs will immediately be able to
sell the Tellabs Developments and the UMC 1000 Products (but
only in conjunction with sales of Tellabs Developments) to
AFC's customers in that market segment only. AFC will
continue to have manufacturing and OEM rights in accordance
with the preceding paragraphs, in order to support existing
customers in that market for a period of three (3) years.
AFC's royalty obligations will continue during this period.
All AFC rights with respect to Tellabs Developments for the
other market segment will remain in full force and effect.
5.5.3 The rights and remedies granted in Section 5.5 shall be the
parties' exclusive remedy in the event that; (i) Tellabs
licenses or sells Tellabs Technology to an AFC Competitor;
(ii) AFC makes UMC 1000 Products available to a Tellabs
Competitor; or (iii) the other party develops or acquires a
Competitive DLC Product or Competitive HFC Product.
6. ROYALTY PAYMENTS
6.1 TELLABS' ROYALTY OBLIGATIONS. Tellabs agrees to pay AFC the
following royalties:
a. [*]
b. [*]
c. [*]
[*] Confidential treatment requested.
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<PAGE>
d. [*]
e. [*]
6.2 AFC'S ROYALTY OBLIGATIONS. [*]
6.3 If either party develops an independent product not incorporating
the other's party's technology or proprietary rights (as
permitted by Section 12), no royalties shall be due for the
shipment of such independent product(s), except as provided
in Section 6.2.
6.4 Either party shall be entitled to have an independent third party
auditor, reasonably acceptable to the other party, audit compliance
with this Section 6 no more frequently than once each calendar
year. In the event the auditor finds that royalties have been
underpaid by more than ten percent (10%) of the corrected total
royalty for the period audited, the audited party shall pay the
audit fees. Otherwise, the party requesting the audit shall bear
the cost of the audit.
[*] Confidential treatment requested.
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7. MARKET RIGHTS
7.1 DOMESTIC MARKETING RIGHTS.
7.1.1 TELLABS MARKETING RIGHTS. Except as set forth in the
third paragraph of this Section 7.1.1, Tellabs will have
exclusive rights to market, sell and otherwise distribute
the Tellabs Developments and/or the UMC 1000 Products,
directly and indirectly through Distributors to the
"Domestic Alternate Provider" market as defined herein,
and AFC shall be prohibited from marketing, selling or
distributing such products, in such market, either
directly or indirectly, through Distributors. The term
"Domestic Alternate Provider" shall mean competitive
access providers (CAPs), alternative local transport
service providers, alternative local access carriers,
multiple system operators (MSOs), or any company,
subsidiary, partnership, co-venture, or other entity
providing alternative telephony services in the United
States. "Domestic Alternate Provider" also includes:
a) AT&T and its Affiliates as of the Effective Date, and
b) the US West Media Group, including, but not limited to
US West International and US West Media One.
The term "Domestic Alternate Provider" does not include
(a) wireless service providers except those which are
affiliated with a Domestic Alternate Provider on the
Effective Date; (b) interexchange carrier companies and
their Affiliates as of the Effective Date; (except AT&T
and its Affiliates as of the Effective Date); (c)
telephone companies in the U.S. that operate within their
designated franchise; or d) telephone companies in the
U.S. which operate outside of their designated franchise
territory and build brand new wireline distribution
network(s) (upgrades to an existing cable (coax) network
purchased by a U.S. telephone company outside its
designated franchise territory is not considered a new
network and is therefore a Domestic Alternate Provider).
Exceptions to this Tellabs exclusive market right are:
7.1.1.1 Tellabs and AFC will both be entitled to sell
into the CAP market, each having an exclusive
customer segment. Subject to subsection 7.1.1.2
below, Tellabs shall have the exclusive
marketing right to CAPs that are majority owned
by the multiple system operators ("MSOs") as
of April 1, 1996, and to the customers listed in
Attachment C. Subject to
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subsection 7.1.1.3 below, marketing rights to
all other CAPs will belong to AFC.
7.1.1.2 In order for Tellabs to retain exclusive
marketing rights to the CAPs listed in
Attachment C, Tellabs must generate at least $12
million in Net Revenue of Tellabs Developments
and UMC 1000 Products from the customers listed
on Attachment C, over the next two (2) years
dating from April 1, 1996. If Tellabs fails to
meet this objective, then Tellabs will lose its
exclusivity in the CAP accounts in Attachment C.
Notwithstanding the foregoing, Tellabs can
maintain exclusivity by paying the royalty
equivalent (calculated pursuant to Section 6)
due on the difference between Net Revenue
actually achieved from such customers and $12
million. If Tellabs achieves the $12 million
minimum, AFC and Tellabs will reset new minimums
for succeeding years. Such new minimums will be
no less than $6 million per year and shall be
subject to the other terms of this subsection.
7.1.1.3 If, after the Effective Date, a Domestic
Alternate Provider is acquired by a company for
which AFC has exclusive market rights as defined
in Section 7.1.2, Tellabs shall retain exclusive
rights to the business segment of the acquired
entity (regardless of whether that entity
remains a separate business unit). If the
acquiring company wants to consolidate
purchasing, AFC must inform the Customer that
Tellabs has the exclusive marketing rights to
sell to the acquired entity of the business for
two (2) years from the Effective Date. After the
two year period, if the Customer still wants to
consolidate, Tellabs shall be entitled to
negotiate continued sales of the Tellabs
Developments and the UMC 1000 Products to the
acquired entity. If Tellabs is successful in
convincing the customer not to consolidate,
Tellabs will continue to sell to the acquired
entity. Tellabs will be given sixty (60) days to
convince the customer not to consolidate. If
after the sixty-day period Tellabs has failed to
convince the customer not to consolidate, then
AFC will be entitled to sell to the acquired
entity on an exclusive basis and will pay
a royalty of thirteen percent (13%) to Tellabs on
all Net Revenue from sales to that acquired
entity of Tellabs Developments manufactured by
AFC and any product being sold by AFC, which is
competitive with any Tellabs Development. For
purposes of this Section 7.1.1.3 and for
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<PAGE>
purposes of Section 7.1.2, "acquisition" or
"acquir(ed)" means the acquisition of greater
than fifty percent (50%) of the equity of a
company.
7.1.2 AFC MARKETING RIGHTS.
Except as provided in Section 7.1.1, AFC will have
exclusive rights to market, sell and otherwise distribute
UMC 1000 Products and the Tellabs Developments to all
other customers in the United States, and Tellabs shall
be prohibited from marketing, selling or distributing
such products, to any such customers, either directly or
indirectly.
If, after the Effective Date, a company for which AFC has
exclusive marketing rights is acquired by a Domestic
Alternate Provider or a company listed on Attachment D,
then AFC shall retain exclusive rights to the business
segment of the acquired entity (regardless of whether
that entity remains a separate business unit). If the
acquiring company wants to consolidate purchasing,
Tellabs must inform the customer that AFC has the
exclusive marketing rights to sell to the acquired entity
for two years from the Effective Date. After the two year
period, if the customer still wants to consolidate, AFC
shall be entitled to negotiate continued sales of the
Tellabs Developments and UMC 1000 Products to the
acquired entity. If AFC is successful in convincing the
customer not to consolidate, AFC will continue to sell to
the acquired entity. AFC will be given sixty (60) days to
convince the customer not to consolidate. If after the
sixty-day period AFC has failed to convince the customer
not to consolidate, then Tellabs will be entitled to sell
to the acquired entity on an exclusive basis and pay an
additional royalty of two percent (2%) to AFC on all Net
Revenue from sales to that acquired entity of UMC 1000
Products manufactured by Tellabs.
7.2 INTERNATIONAL MARKETING RIGHTS.
7.2.1 TELLABS MARKETING RIGHTS. Except as set forth in the
third paragraph of this Section 7.2.1, Tellabs will have
exclusive rights to market, sell and distribute the
Tellabs Developments and/or the UMC 1000 Products,
directly and indirectly through Distributors to Foreign
Alternate Providers in the following countries:
The United Kingdom, Australia, Japan,
France, Germany, Spain, Portugal, Italy,
Switzerland, Austria, Luxembourg, Belgium,
The Netherlands,
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Denmark, Ireland, Sweden, Finland, Norway,
Greece, New Zealand, Saudi Arabia, Hong
Kong, Singapore, Canada, Israel and Korea.
The term "Foreign Alternate Provider" shall mean
competitive access providers ("CAPs"), alternative local
transport service providers, alternative local access
carriers, multiple system operators ("MSO"), or any
company, subsidiary, partnership, co-venture, or other
entity providing alternative telephony services outside
of the United States. This also includes but is not
limited to consortiums, joint ventures, partnerships,
private companies, and/or other government agencies that
compete with the local PTT for telephone service in a
given territory. "Foreign Alternate Provider" does not
include wireless service providers except those
affiliated with a Foreign Alternate Provider.
Exceptions to this Tellabs exclusive market right are:
7.2.1.1 In order for Tellabs to retain exclusivity to
the Foreign Alternate Provider market in a given
country, Tellabs will be required to meet
minimum Net Revenues of Tellabs Developments and
UMC 1000 Products for such country. The starting
time period required to obtain these minimum
sales revenues will begin on the later to occur
of: (i) the first date that any Foreign
Alternate Provider in that country has provided
residential dial tone (i.e., a competitive
market exists), and (ii) the date on which UMC
1000 Product meets the market requirements for
that Foreign Alternate Provider market segment.
The UMC 1000 Product will be deemed to meet the
market requirements for an Foreign Alternate
Provider market when the UMC 1000 Product has a
released V5.1/2 digital switch interface for the
switch vendor used by the Foreign Alternate
Provider, channel cards with the proper
impedance, and regulatory compliance for that
market/country. Once these two criteria are met
for each country, a minimum of $2,000,000 in
cumulative Net Revenue of Tellabs Developments
and UMC 1000 Products is required for the first
three (3) years per country. Thereafter, a
minimum of US $2,000,000 per year in Net Revenue
of Tellabs Developments and UMC 1000 Products is
required. Failure to make these Net Revenue
targets within these timeframes in a particular
country will remove the exclusivity in that
country for Tellabs and Tellabs will hereafter
have non-exclusive rights in that country. The
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<PAGE>
non-exclusive rights are subject to termination
under the circumstances set forth in Section 5.5
and Section 14.
7.2.1.2 If, after the Effective Date, a Foreign
Alternate Provider is acquired by a company for
which AFC has exclusive market rights as defined
in Section 7.2.2, Tellabs shall retain exclusive
rights to the business segment of the acquired
entity (regardless of whether that entity
remains a separate business unit). If the
acquiring company wants to consolidate
purchasing, AFC must inform the customer that
Tellabs has the exclusive marketing rights to
sell to the acquired entity of the business for
two years from the Effective Date. After the two
year period, if the customer still wants to
consolidate, Tellabs shall be entitled to
negotiate continued sales of the Tellabs
Developments and the UMC 1000 Products to the
acquired entity. If Tellabs is successful in
convincing the customer not to consolidate,
Tellabs will continue to sell to the acquired
entity. Tellabs will be given sixty (60) days to
convince the customer not to consolidate. If
after the sixty-day period Tellabs has failed to
convince the customer not to consolidate, then
AFC will be entitled to sell to the acquired
entity on an exclusive basis and will pay a
royalty of thirteen percent (13%) to Tellabs on
all Net Revenue from sales to that acquired
entity of Tellabs Developments manufactured by
AFC and any product being sold by AFC, which is
competitive with any Tellabs Development.
Tellabs will have non-exclusive rights to sell the
Tellabs Developments and/or the UMC 1000 Products to
Foreign Alternate Providers in all other countries.
Notwithstanding the foregoing, AFC shall be entitled to
continue to exercise its rights under the existing AFC
agreements listed in Attachment E. In these countries,
Tellabs will have only a non-exclusive right to sell the
UMC 1000 Products if they are sold in conjunction with
Tellabs Developments. AFC agrees to use its best efforts
to amend each of these existing agreements to allow
Tellabs to sell the UMC 1000 Products into the Attachment
E countries.
7.2.2 AFC MARKETING RIGHTS
Except as provided in Section 7.2.1, AFC will have
exclusive rights to market, sell and otherwise distribute
UMC 1000 Products and
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<PAGE>
the Tellabs Developments to all other customers outside the
United States, and Tellabs shall be prohibited from
marketing, selling or distributing such products, to any
such customers, either directly or indirectly.
If, after the Effective Date, a company for which AFC has
exclusive marketing rights is purchased by a Foreign
Alternate Provider, then AFC shall retain exclusive rights
to the business segment of the acquired entity (regardless
of whether that entity remains at separate business unit).
If the acquiring company wants to consolidate purchasing,
Tellabs must inform the customer that AFC has the exclusive
marketing rights to sell to the acquired entity for two
years from the Effective Date. After the two year period,
if the customer still wants to consolidate, AFC shall be
entitled to negotiate continued sales of the Tellabs
Developments and UMC 1000 Products to the acquired entity.
If AFC is successful in convincing the customer not to
consolidate, AFC will continue to sell to the acquired
entity. AFC will be given sixty 960) days to convince the
customer not to consolidate. If after the sixty-day period
AFC has failed to convince the customer not to consolidate,
then Tellabs will be entitled to sell to the acquired entity
on an exclusive basis and pay an additional royalty of two
percent (2%) to AFC on all Net Revenue from sales to that
acquired entity of UMC 1000 Product manufactured by Tellabs.
Nothing contained herein shall be construed as granting any
rights to AFC in connection with any other products
developed using the Tellabs Technology (except as expressly
stated in Section 5.3.1).
7.3 HOLDING COMPANIES.
7.3.1 For purposes of this section, the term "Holding Company"
shall mean cable or telephone holding companies, joint
ventures, partnerships or other organizations with
affiliates, partners or members ("Entities") consisting of
both (i) Entities for which Tellabs has exclusive market
rights, and (ii) Entities for which AFC has exclusive market
rights, whether domestic or international. In order to be
considered an Entity hereunder, the affiliate, partner
and/or member must be more than fifty percent (50%) owned by
another Entity. Except under the circumstances described in
Section 7.3.3 below, each party will retain its market
rights to sell the UMC 1000 Products and/or the Tellabs
Developments to their respective accounts within a Holding
Company.
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<PAGE>
7.3.2 A Holding Company shall be defined as an Alternate Provider
if more of its combined annual revenue for the most recently
completed fiscal year ("Annual Revenue") is derived from
Foreign and/or Domestic Alternate Provider Entities within
the Holding Company than from Entities within AFC's
exclusive market segment. Attachment D identifies the
Holding Companies that Tellabs has identified as being
Alternate Providers as of April 1, 1996. Tellabs will hold
exclusive market rights to these companies under the
circumstances set forth in Section 7.3.3 On a going forward
basis, any Holding Company which has not been identified by
Tellabs on Attachment D or which did not exist as of April
1, 1996, shall be determined as follows:
7.3.2.1 If the Holding Company is not listed on Attachment
D, the first question is whether the Holding
Company was in existence on April 1, 1996. If the
Holding Company existed on April 1, 1996, and
Tellabs shows that more of such company's Annual
Revenue as of April 1, 1996 was derived from
Entities which were Foreign and/ or Domestic
Alternate Provider's Entities than from within
AFC's exclusive market segment, then the Holding
company will be added to the list on Attachment D
and Tellabs will have exclusive market rights
therein under the circumstances set forth in
Section 7.3.3. If Tellabs is unable to prove
this, then AFC will have exclusive market rights
for the Holding Company, under the circumstances
in Section 7.3.3.
7.3.2.2 If a Holding Company came/comes into existence
after April 1, 1996, and Tellabs can show that at
the time the Holding Company came into existence,
more of its Annual Revenue was derived from
Foreign and/ or Domestic Alternate Provider
Entities than from Entities within AFC's exclusive
market segments, then the Holding Company will be
added to the list on Attachment D. Similarly, if
AFC can show that at the time the Holding Company
came into existence, more of its Annual Revenue
was derived from Entities within AFC's exclusive
market segments than from Entities with Tellabs'
exclusive market segments, then AFC will have the
exclusive market rights for such Holding Company
under the circumstances set forth in Section
7.3.3. If neither company has made the showing
required by the prior two sentences, the Holding
Company will continue as unidentified until either
Tellabs or AFC decides it wants to
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<PAGE>
sell to the Holding Company. At such time, both
Tellabs and AFC shall meet to determine whether or
not the Holding Company is an Alternate Provider
which will be added to Attachment D and will
therefore be Tellabs' exclusive customer under the
circumstances set forth in Section 7.3.3. In
making that determination, the parties will first
attempt to calculate whether the Holding Company
was an Alternate Provider (as defined above) on
the date it came into existence. If they are
unable to reasonably make that determination, they
will make such assessment as of the date on which
the determination is being made.
7.3.3 Under the circumstances set forth in the remainder of this
section below, Tellabs will be granted exclusive market
rights to Holding Companies which have been deemed
"Alternate Providers" and AFC will be deemed to have
exclusive market rights to any other Holding Company. If any
Holding Company wants to consolidate its purchasing, neither
party shall have the right to will UMC 1000 Products and
Tellabs Developments into the other party's accounts within
a Holding Company for two (2) years form April 1, 1996.
After the two-year period, if such Holding Company still
wants to consolidate, the party that does not have exclusive
market rights (as determined pursuant to Section 7.3.2) has
the right to negotiate continued sales with that customer
in its market segment only. If that party is successful
in convincing the organization not to consolidate, that
party will continue to sell into its market/customer
segment. Such party will be given sixty (60) days to
convince the organization not to consolidate. If after
the sixty (60) day period the party fails to convince the
organization not to consolidate, then the other party
will assume this market right and pay royalties to the
other party pursuant to either Section 7.2.1.2 or 7.2.2,
as applicable.
7.4 With their respective markets, the parties are free to distribute
their respective products either directly to End Users or
indirectly through third party channels, such as Distributors or
sales representatives. Sales through such third party channels are
permissible only if the party has entered into a written agreement
with the third party which allows the party to terminate the
distribution rights if the third party if the third party
distributes the product outside such party's respective
markets(s). Both parties shall take all reasonable steps to
enforce these rights, including but not limited to terminating
the Distribution Agreement and/or refusing to ship products
unless prohibited from doing so by court or government order.
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<PAGE>
8. WARRANTY AND INDEMNIFICATION
8.1 OWNERSHIP WARRANTY AS TO UMC 1000 TECHNOLOGY.
AFC represents and warrants to Tellabs that (i) the UMC 1000
Technology is original with and is owned solely by AFC; (ii)
neither the UMC 1000 Technology nor any AFC Products sold under the
OEM Agreement infringe any patent, copyright, trade secret or other
proprietary rights of any third party; (iii) AFC is the sole and
exclusive developer of the UMC 1000 Technology or has the right to
grant the rights granted under this License Agreement; (iv) AFC has
not previously or otherwise granted any other right in the UMC 1000
Technology to any third party which may conflict with the rights
granted herein to Tellabs; and (v) AFC has the full power to enter
into this Agreement, to carry out its obligations contained herein,
and to grant the rights in the UMC 1000 Technology granted herein
to Tellabs.
8.2 OWNERSHIP WARRANTY AS TO TELLABS TECHNOLOGY.
Tellabs represents and warrants to AFC that (i) the Tellabs
Technology is original with and is owned solely by Tellabs; (ii)
neither the Tellabs Technology nor any Tellabs Products sold under
the OEM Agreement infringe any patent, copyright, trade secret or
other proprietary rights of any third party; (iii) Tellabs is the
sole and exclusive developer of the Tellabs Technology or has
the right to grant the rights granted under this License
Agreement; (iv) Tellabs has not previously or otherwise granted
any other right in Tellabs Technology to any third party which
may conflict with the rights granted herein to AFC; and (v)
Tellabs has the full power to enter into this Agreement, to
carry out its obligations contained herein, and to grant the
rights in the Tellabs Technology granted herein to AFC.
8.3 JOINTLY-OWNED TECHNOLOGY
Except as expressly stated in this Section 8, neither party shall
have any obligations to the other party with respect to the
ownership and/or rights of the Joint Technology or with respect to
jointly-owned technology pursuant to Section 3.2 of this Agreement.
Each party shall bear sole responsibility for any indemnification
with respect to their respective customers relating to the Joint
Technology and any jointly-owned technology pursuant to Section
3.2, and each party shall indemnify the other party (pursuant to
Section 8.4 below) for any claims made by such customers and/or
other third parties who derive their rights from such party.
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8.4 INFRINGEMENT. Each party ("Indemnifying Party") shall hold the
other party ("Indemnified Party") and its officers, directors
agents and employees harmless from liability resulting from breach
of the warranty contained in Sections 8.1 and 8.2, respectively,
and from third parties' claims relating to the Joint Technology and
any jointly-owned technology pursuant to Section 3.2, as provided
in Section 8.3, provided that: (i) the Indemnifying Party is
promptly notified of any and all threats, claims and proceeding
related thereto, (ii) the Indemnifying Party shall have sole
control of the defense and/or settlement thereof, (iii) the
Indemnified Party furnishes to the Indemnifying Party, upon
request, information available to the Indemnified Party for such
defense, and (iv) the Indemnified Party provides the Indemnifying
Party with reasonable assistance. This obligation of the
Indemnifying Party does not apply with respect to the UMC 1000
Products or the Tellabs Developments (as applicable), or portions
or components of the foregoing (a) not supplied by the Indemnifying
Party, (b) made in whole or in part in accordance to the
Indemnified Party's specifications, (c) that are modified after
delivery by the Indemnifying Party, if the alleged infringement
relates to such modification, (d) combined with other products,
processes or materials where the alleged infringement relates to
such combination, (e) where the Indemnified Party continues
allegedly infringing activity after being notified thereof or after
being informed of modifications that would have avoided the alleged
infringement, or (f) where the Indemnified Party's use of the
foregoing is not strictly in accordance with the license granted
under this Agreement. Should any of the products furnished and/or
in purchase orders placed under the OEM Agreement, or in the
operation thereof, become the subject of a claim of any
infringement of a United States or foreign patent, trademark,
copyright, trade secret or other proprietary interest, the
Indemnifying Party shall, at its expense and at its option, either
procure for the Indemnified Party the right to continue using the
Products, replace or modify the same so that they become non-
infringing, or, if replacement or modification is not possible,
refund the full purchase price of the infringing items.
9. LIMITATION OF LIABILITY
NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR ANY LOST PROFITS,
LOSS OF DATA OR FOR ANY OTHER INDIRECT, SPECIAL, OR CONSEQUENTIAL
DAMAGES, ARISING OUT OF THIS AGREEMENT OR THE TRANSACTIONS
CONTEMPLATED HEREBY, EVEN IF ADVISED OF THE POSSIBILITY OR
LIKELIHOOD OF SUCH DAMAGES, EXCEPT AS EXPRESSLY LIMITED BY LAW AND
EXCEPT FOR DAMAGES UNDER SECTION 8.4 EXCEPT AS EXPRESSLY PROVIDED
HEREIN, THE PARTIES
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<PAGE>
DISCLAIM ANY AND ALL WARRANTIES, EXPRESSED OR IMPLIED, INCLUDING, WITHOUT
LIMITATION, THE WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE.
10. CONFIDENTIALITY
10.1 Each party ("disclosing party") may, from time to time, in
connection with performance under this Agreement, disclose
confidential information to the other party ("receiving party").
The receiving party agrees not to use (other than for purposes
contemplated by this Agreement), and will use reasonable efforts
to prevent the disclosure to third parties of, any of the
disclosing party's confidential information that is identified as
confidential at the time of disclosure and is provided in tangible
form marked "confidential" or "proprietary" (or is reduced to such
form within thirty (30) days after oral disclosure). All UMC 1000
Technology, UMC 1000 CPU System Software (including, without
limitation, the source code thereof, and except the object code and
end user documentation) and all AFC product roll-out plans, product
definitions, development schedules and other business, marketing or
technical information provided to Tellabs pursuant to this
Agreement or otherwise, are hereby identified and marked as AFC's
confidential information, and Tellabs so acknowledges. All Tellabs
Technology and all Tellabs product roll-out (including, without
limitation, the source code thereof, and except the object code and
end user documentation) and all Tellabs Technology and all Tellabs
product roll-out plans, product definitions, development schedules
and other business, marketing or technical information provided to
Tellabs pursuant to this Agreement or otherwise, are hereby
identified and marked as Tellabs' confidential information, and AFC
so acknowledges. Each of the parties further acknowledge that they
are aware and will advise their employees who have access to
confidential information of the other party of the restrictions
imposed by the United States securities laws on the purchase or
sale of securities by any person who has received material, non-
public information from the issuer of such securities and on the
communication of such information to any other person when it is
reasonably foreseeable that such other person is likely to purchase
or sell such securities in reliance upon such information. The
receiving party's confidentiality obligation hereunder shall not
apply to information that the receiving party can document:
(i) was in the receiving party's possession or known by it prior
to receipt from the disclosing party;
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<PAGE>
(ii) is or (through no fault of the receiving party) becomes
generally available to the public;
(iii) is rightfully disclosed to the receiving party by a third
party having no obligations of confidentiality to the
disclosing party, provided the receiving party complies with
any restrictions imposed by the third party; or
(iv) is required by law or regulation to be disclosed (including,
without limitation, in connection with SEC filings),
provided that the receiving party uses reasonable efforts to
restrict disclosure and to obtain confidential treatment
therefor.
10.2 Each receiving party acknowledges and agrees that due to the
unique nature of the disclosing party's confidential information,
there can be no adequate remedy at law for any breach of its
obligations hereunder, that any such breach may allow the receiving
party or third parties to unfairly compete with the disclosing
party resulting in irreparable harm to the disclosing party and,
therefore, that upon any such breach or threat thereof, the
disclosing party shall be entitled to injunctive relief and other
appropriate equitable relief in addition to whatever remedies it
may have at law, and to be indemnified by the receiving party from
any loss or harm (including, without limitation, attorneys' fees)
in connection with any breach or enforcement of the receiving
party's obligations hereunder or the unauthorized use or release of
any confidential information. The receiving party will notify the
disclosing party in writing immediately upon the occurrence of any
such unauthorized release or other breach of which it is aware.
10.3 Tellabs acknowledges that the UMC 1000 Licensed Technology and UMC
1000 CPU System Software are the exclusive property of AFC, and
contain valuable trade secrets containing proprietary and
confidential information. Tellabs agrees to protect the
confidentiality of the UMC 1000 Licensed Technology and UMC 1000
CPU System Software as follows: Tellabs shall limit use of, and
access to, the UMC 1000 Licensed Technology and UMC 1000 CPU System
Software to those of its employees, subcontractors and agents who
are directly involved in implementing the permitted use of the UMC
1000 Licensed Technology and UMC 1000 CPU System Software under
this Agreement; who have a need to know the contents of the UMC
1000 Licensed Technology and UMC 1000 CPU System Software for the
performance of their duties in connection with such use; and who
have entered into confidentiality agreements with Tellabs. Tellabs
shall implement such internal
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procedures, and take such precautions, as are necessary to protect
the confidentiality of the UMC 1000 Licensed Technology and UMC
1000 CPU System Software. In no event shall Tellabs implement
procedures or take precautions to protect the UMC 1000 Licensed
Technology and UMC 1000 CPU System Software which are less rigorous
than procedures established to protect its own confidential
technology and other highly confidential information.
10.4 AFC acknowledges that the Tellabs Technology and the Licensed J.V.
Products are the exclusive property of Tellabs, and contain
valuable trade secrets containing proprietary and confidential
information. AFC agrees to protect the confidentiality of the
Tellabs Technology and the Licensed J.V. Products are as follows:
AFC shall limit use of, and access to, the Tellabs Technology and
the Licensed J.V. Products to those of its employee subcontractors
and agents who are directly involved in implementing the permitted
use of the Tellabs Technology and the Licensed J.V. Products under
this Agreement; who have a need to know the contents of the Tellabs
Technology and the Licensed J.V. Products for the performance of
their duties in connection with such use; and who have entered
into confidentiality agreements with AFC. AFC shall implement such
internal procedures, and take such precautions, as are necessary to
protect the confidentiality of the Tellabs Technology and the
Licensed J.V. Products. In no event shall AFC implement procedures
or take precautions to protect the Tellabs Technology and the
Licensed J.V. Products which are less rigorous than procedures
established to protect its own confidential technology and other
highly confidential information.
11. THIRD PARTY MATTERS
11.1 DISCLOSURE TO OTHER PARTIES.
Each party shall have the right to disclose to third parties
certain technical Confidential Information relating to
interoperability and network management, and certain non-technical
Confidential Information relating to the status and terms of the
relationship between Tellabs and AFC; provided, however, that such
third parties agree to confidentiality and nondisclosure provisions
substantially similar to those set forth in Section 10
(Confidentiality) hereof.
11.2 THIRD PARTY SOFTWARE
Certain third party software may be incorporated by the parties
from time to time into the products and/or technology licensed
pursuant to this Agreement. Each party shall (a) identify all such
third party software which is incorporated into such party's
products or technology licensed to
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the other party pursuant to this Agreement, (b) comply fully with
all terms and conditions applicable to the sublicensing,
disclosures or copying of such third party software, and (c)
provide reasonable assistance to the other party in securing
necessary and appropriate license rights in such third party
software; provided, however, that all costs incurred in connection
with the transfer of any license rights to the third party software
shall be borne by the party acquiring such license rights.
12. INDEPENDENT DEVELOPMENT
Nothing contained in this Agreement shall be construed as a restriction on
either party's right independently to develop, manufacture, acquire and
sell or otherwise distribute, for itself or others, any product whether or
not it is similar in function to the UMC 1000 Product(s) or the Tellabs
Developments, provided that such development, manufacture, acquisition,
sale or other distribution does not violate any of the provisions of this
Agreement. Except as provided in Section 7.2, no payment shall be due to
either party by reason of such independent development, manufacture and/or
sale or other distribution.
13. DEFAULT
13.1 DEFAULT OF TELLABS
Tellabs shall be deemed to be in material default under this
Agreement upon the occurrence of any of the following:
13.1.1 In the event that Tellabs violates the terms of Section 10
(Confidentiality) (other than violations which are
immaterial).
13.1.2 In the event that Tellabs fails to perform or comply with
any other material term or condition of this Agreement and
fails to cure such failure within thirty (30) days after
receipt of written notice from AFC; provided, however, that
an alleged default in making payments hereunder shall not
afford AFC right to terminate if and while Tellabs
reasonably disputes the obligation to make such payments or
the amount due.
13.2 DEFAULT OF AFC
AFC shall be deemed to be in material default under this Agreement
upon the occurrence of any of the following:
13.2.1 In the event that AFC violates the terms of Section 10
(Confidentiality) (other than violations which are
immaterial).
13.2.2 In the event that AFC fails to perform or comply with any
other material term or condition of this Agreement and fails
to cure such
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failure within thirty (30) days after receipt of written
notice from Tellabs; provided, however, that an alleged
default in making payments hereunder shall not afford
Tellabs a right to terminate if and while AFC reasonably
disputes the obligation to make such payments or the amount
due.
13.3 DEFAULT REMEDIES
Upon a material default by either party hereunder, as specified in
Sections 13.1 and 13.2 above, the non-defaulting party may seek any
remedies available to it in law and equity, including termination
of this Agreement under Section 14.1 or 14.2 (except as expressly
provided otherwise in Sections 2.8 and 5.3.3 of this Agreement).
For purposes of Sections 13 and 14 hereof, the party electing to
terminate this Agreement will be deemed to be the "Terminating
Party" and the other party shall be deemed to be the "Terminated
Party." Notwithstanding the foregoing, except where a party
reasonably believes irreparable harm may occur and brings an action
for injunctive relief, the parties shall follow the dispute
resolution procedures specified in Section 16.5 before commencing
litigation arising out of a default hereunder.
14. TERM, EXPIRATION AND TERMINATION
14.1 TERM.
Unless terminated earlier as provided herein, this Agreement shall
have an initial term of ten (10) years commencing on the Effective
Date, and shall be automatically renewed for successive one (1)
year terms unless either of the parties hereto gives to the other
party written notice of its election to terminate this Agreement at
least sixty (60) days prior to the expiration of the then current
term.
14.2 EFFECT OF EXPIRATION
Unless this Agreement is renewed by mutual agreement of the
parties, upon the expiration of the term referred to in Section
14.1, as may be extended, the following consequences shall ensue:
14.2.1 The parties agree to negotiate in good faith the terms and
conditions covering the winding down of this Agreement,
including the completion of any Enhancements and
Improvements then in process.
14.2.2 It is the intention of the parties that except as provided
in subsection 14.2.3 below, the technology license rights
and manufacturing rights (including accompanying royalty
obligations)
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<PAGE>
described in this Agreement will survive the expiration of
this Agreement; provided, however, that any such license or
manufacturing rights (and the accompanying royalty
obligations) shall thereafter be subject to termination
under the circumstances described in Sections 14.3 and 14.4
of this Agreement.
14.2.3 The parties' obligations to provide continuing updates to
technology under Sections 2 and 3 shall terminate.
14.2.4 The following sections of this Agreement will be deemed to
survive such expiration: 1, 2, 3.2.5, 4, 5.1, 5.3, 5.5, 6,
7, 8, 9, 10, 11, 12, 13, 14, 15 and 16, as well as any
provisions hereof which by their terms involve obligations
which survive expiration of this Agreement.
14.3 TERMINATION OF ENTIRE AGREEMENT.
This Agreement may be terminated in its entirety (subject only to
the survival of specific sections specified in Section 14.6 hereof)
under the circumstances specified in 13.3 hereof.
14.4 PARTIAL TERMINATION.
Notwithstanding anything to the contrary herein contained, a
Terminating Party entitled to terminate this Agreement pursuant to
Section 13.3 may, at its election, only partially terminate this
Agreement by terminating all revocable (as provided in Section
14.5) license rights of the Terminated Party, while not terminating
its own license and manufacturing rights, with the effect set forth
in Section 14.5 below. In such a case, this Agreement shall remain
in partial force and effect, and the Terminated Party for the
remainder of the Term of this Agreement (unless the Terminated
Party terminates this Agreement in accordance with the terms of
this Section 14). Notwithstanding the foregoing, the Terminating
Party may, at any time prior to the end of the Term, elect to
terminate this Agreement in its entirety, with the effect set forth
in Section 14.5 below.
14.5 EFFECT OF TERMINATION
14.5.1 TERMINATION BY EITHER PARTY
In the event that this Agreement is terminated by either
party, in whole or in part, as provided in Sections 14.3 or
14.4:
14.5.1.1 It is the intention of the parties that except in
the circumstances described in Section 14.5.1.2
below, all technology license rights and
manufacturing rights described in this Agreement
will survive the
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<PAGE>
termination of this Agreement; provided, however,
that any such license or manufacturing rights
shall be subject to termination under the
circumstances described in Section 14.5.1.2 below.
The parties agree that except as expressly
provided in this Section 14.5, royalty obligations
of the parties in effect immediately prior to the
termination shall remain in full force and effect
after termination.
14.5.1.2 In the event of whole or partial termination due
to a material breach of any of the clauses
specifically referenced below, the Terminating
Party also shall have the option to terminate
certain of the Terminated Party's license rights
under the limited circumstances described below:
(A) In the event of a breach by AFC of those
obligations referenced in Sections 3.1, 5.1,
5.2, 6.2, 7.1.1, 7.2.1, 7.3, 7.4, 10, 11 and
12 hereof, then Tellabs shall have the option
to terminate effective immediately, all of
AFC's rights to Tellabs Technology as set
forth in Sections 5 and 7.
(B) In the event of a breach by Tellabs of those
obligations referenced in Sections 2, 5.3,
5.4, 6.1, 7.1.2, 7.2.2, 7.3, 7.4, 10, 11, 12,
and except as provided in Section 2.8, then
AFC shall have the option to terminate,
effective immediately, all of Tellabs'
license rights to UMC 1000 Licensed
Technology as set forth in Sections 2, 3, 5
and 7 hereof;
14.5.1.3 The parties will be obligated to agree upon terms
and conditions which provide for continuing
support for both parties' embedded customer bases
for the products. Unless otherwise agreed, the
Terminating Party will, at its option, either take
over such continuing support obligations, or grant
the Terminated Party sufficient rights to enable
that party to continue to provide such support.
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<PAGE>
14.5.1.4 Upon the request of the Terminating Party, the
Terminated Party shall promptly return all
Confidential Information of the other party,
except the technology reasonably required to fully
exercise the Terminated Party's ongoing
manufacturing, support and license rights, if any,
in the technology of the Terminating Party.
14.5.1.5 Upon the request of the Terminating Party,
the Terminated Party shall provide a written
certification that, through the Terminated
Party's best efforts and to the best of its
knowledge, the Terminated Party has complied
with all of its obligations under subsection
15.5.1.4 above.
14.6 SURVIVAL UPON TERMINATION
In the event that this Agreement is terminated by either
party either in whole or in part, for any of the reasons set
forth in Section 14.3, the following sections of this
Agreement will be deemed to survive such termination: 4, 8,
9, 10, 12, 16.5, 16.9 and 16.12 (including any Attachments
referred to therein), as well as any provisions hereof which
by their terms involve obligations which survive termination
of this Agreement.
Tellabs' rights and remedies pursuant to Section 5.5.2 shall
continue for as long as Tellabs has exclusive marketing
rights pursuant to Section 7 of this Agreement. AFC's
rights and remedies pursuant to Section 5.5.1 shall continue
for as long as AFC has exclusive market rights pursuant to
Section 7.
15. EXPORT RESTRICTIONS
Each party agrees to comply with all export laws, restrictions and
regulations of the Department of Commerce or other United States or
foreign agency or authority, and not to export, or allow the export
or reexport of, the technology, software or confidential
information of a party or any direct product of the foregoing in
violation of any such laws, restriction or regulations, or, if
prohibited pursuant to any governmental restriction or regulation,
to Afghanistan, the People's Republic of China or any Group Q, S,
W, Y or Z country specified in the then current Supplement No. 1 to
Section 770 of the U.S. Export Administration Regulations (or any
successor supplement or regulations).
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<PAGE>
16. GENERAL PROVISION
16.1 RELATIONSHIP OF THE PARTIES.
Notwithstanding any provision hereof, for all purposes of this
Agreement each party shall be and act as an independent contractor
and not as partner, joint venturer, or agent of the other and shall
not bind nor attempt to bind the other to any contract.
16.2 ASSIGNMENT.
Neither party shall have any right or ability to assign, transfer,
or sublicense any obligations or benefit under this Agreement
without the written consent of the other except that either party
may assign and transfer this Agreement and its rights and
obligations hereunder to any third party who succeeds to
substantially all its business, stock or assets whether by merger,
sale, acquisition or otherwise.
16.3 ENTIRE AGREEMENT; AMENDMENT.
This Agreement (and all Attachments hereto) and the OEM and
Termination Agreements constitute the entire and only agreement
between the parties relating to the subject matter hereof, and all
other prior negotiations, representations, understandings and
agreements including but not limited to the Memorandum of
Understanding dated April 3, 1996, are superseded hereby. No
agreements amending or supplementing the terms hereof shall be
effective except by means of a written document signed by the duly
authorized representatives of both parties.
16.4 NOTICES.
All notices, consents or approvals required by this Agreement shall
be in writing and shall be deemed given five (5) days after being
sent by certified or registered air mail, postage prepaid, or when
received after being sent by facsimile (confirmed by such certified
or registered mail) or by commercial overnight courier service with
tracking capabilities, to the parties at the addresses set forth
above or such other addresses as may be designated in writing by
the respective parties pursuant to the terms of this notice
provision.
16.5 DISPUTES.
16.5.1 In the event that the parties after diligent good faith
efforts, cannot resolve an issue, then the parties agree
to convene a meeting of their Presidents an effort to
reach an appropriate resolution, settlement or compromise.
If after diligent good faith efforts the Presidents are
unable to resolve the dispute, then the parties agree to
retain an impartial qualified mediator to assist in
reaching a
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<PAGE>
mutually agreeable resolution to the dispute. The costs
of any such mediation shall be shared equally by the
parties. Except where a party reasonably believes that
irreparable harm may occur and brings an action for
injunctive relief, the parties shall follow the foregoing
dispute resolution procedures prior to commencing
litigation. In connection with any such dispute or
litigation, the provisions of the following paragraph will
apply.
16.5.2 Prior to initiating any action hereunder (except for
actions for injunctive relief), the aggrieved party will
provide written notice to the other party and the parties
will make diligent good faith efforts to negotiate and
resolve such dispute in accordance with the foregoing
dispute resolution procedures. The parties agree that
in the event that it becomes necessary to initiate any
action hereunder (except for actions in equity where an
alternative forum is required for immediate injunctive
relief), the appropriate forum shall be (a) for claims
commenced by AFC, in a state or federal court located in
Cook County or DuPage County, Illinois or (b) for claims
commenced by Tellabs, in a state or federal court located
in Sonoma County, California.
16.6 WAIVER.
The failure of AFC or Tellabs to enforce a right under this
Agreement shall not act as a waiver of that right or the
ability to assert that right relative to the particular
situation involved. The waiver by either party of a breach of
any provisions contained in this Agreement shall be effective
only if set forth in a writing signed by both parties and shall
in no way be construed as a waiver of any succeeding breach of
such provision or the waiver of the provision itself.
16.7 HEADINGS.
Headings included herein are for convenience only and shall not
be used to interpret or construe this Agreement.
16.8 SEVERABILITY.
If any provision of this Agreement shall be held void, invalid,
illegal or unenforceable, that provision shall be limited or
eliminated to the minimum extent necessary so that this
Agreement shall otherwise remain in full force and effect and
enforceable.
16.9 REMEDIES; INJUNCTIVE RELIEF.
Except as expressly provided with respect to particular
remedies, the rights and remedies of a party set forth herein
with respect to failure of
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<PAGE>
the other party to comply with the terms of this Agreement are not
exclusive, the exercise thereof shall not constitute an election of
remedies and the aggrieved party shall in all events be entitled to
seek whatever additional remedies may be available in law or in
equity (including, without limitation, appropriate injunctive
relief).
16.10 AGREEMENT CONTROLS.
The terms of this Agreement shall control over any contrary or
inconsistent terms in any Attachment, Statement of Work or
Specification related hereto unless this Agreement is specifically
superseded in a written agreement signed by both parties.
16.11 SUCCESSORS AND ASSIGNS.
The provisions of this Agreement shall inure to the benefit of, and
be binding upon, AFC and Tellabs and their respective successors
and permitted assigns.
16.12 PUBLICITY.
The parties agree to maintain the terms of this Agreement in
confidence. Neither party shall directly or indirectly issue or
permit the issuance of any publicity, news release or other public
statement concerning this Agreement or the terms hereof without the
prior written approval of the other party; provided, however, that
each party may make public disclosures as required by law or
governmental regulation with reasonable prior notice to the other
party. Notwithstanding the foregoing, both parties shall be free
to disclose the nature and substance of this Agreement, as
necessary, in connection with its annual report and SEC filings on
Form 10-K and 10-Q.
16.13 COMPLIANCE WITH LAWS.
Each party further agrees to indemnify the other for any losses,
fines, or other penalties which may be incurred or assessed,
including reasonable attorney's fees, due to such party's failure
to comply with the provisions of this Section.
16.14 COUNTERPARTS.
The Agreement may be executed in any number of counterparts, each
of which shall be deemed to be an original, but all of which
together shall constitute but one instrument.
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PAGE 41 of 42
<PAGE>
IN WITNESS WHEREOF, the parties have caused their duly authorized
representatives to execute this Agreement as of the date first set forth above.
ADVANCED FIBRE COMMUNICATIONS, INC. TELLABS OPERATIONS, INC.
By: /s/ Carl J. Grivner By: /s/ Brian J. Jackman
--------------------------- ---------------------------
Name: Carl J. Grivner Name: Brian J. Jackman
------------------------- -------------------------
Title: President Title: President
------------------------ ------------------------
Date: December 30, 1996 Date: December 23, 1996
------------------------- -------------------------
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PAGE 42 of 42
<PAGE>
TELLABS CONTRACT NO. CON AFC 009 LIC 96 09
Attachment A
MANUFACTURING INFORMATION
ITEMS NEEDED FOR MANUFACTURING RIGHTS
(These will be made available for any items already existing, but will not be
created solely for the purpose of this Agreement.)
1. Bill(s) of Material
2. Hardware Requirements/Description
3. Software Requirements/Description
4. Schematic(s)
5. Fabrication Drawing(s)
6. Mechanical Drawing(s)
7. Test Specification(s)
8. Test Plans/Descriptions/Procedures
9. Test Equipment Documentation
10. Interface Schematics from the Unit Under Test (UUT) to the Test Equipment
11. Object Code for Testing
12. Placement Files (ASCII Text Files)
13. Net List (ASCII Text Files)
14. Circuit Description/Topology File (ASCII)
15. Qualified Sample(s)
16. Approved Vendor List
17. Qualified Parts List
18. Design Engineering Support
19. Enforceable Escalation and Product Change Procedure
20. Training as Required
- --------------------------------------------------------------------------------
<PAGE>
Attachment B
AFC CURRENT STANDARD VOLUME DISCOUNTS
UMC 1000 VOLUME DISCOUNT INFORMATION
The following discounts are available for commitment purchases of UMC 1000
equipment on an annual basis. A signed letter of commitment or purchase order
at the beginning of the calendar year is required to qualify for these discounts
throughout a given year.
Discounts may also be given on a moving forward basis during the year (without a
volume commitment) exceeding the baseline volumes shown in the table below.
Amount in U.S. Dollars Discount Percentage *
$0 - $500,000 0%
$500,001 - $1,000,000 2%
$1,000,001 - $1,500,000 4%
$1,500,001 - $2,000,000 6%
$2,000,001 - $2,500,000 8%
$2,500,001 and up 10%
Greater discounts may be negotiated with your AFC regional Sales Manager
- --------------------------------------------------------------------------------
<PAGE>
Tellabs Volume Discounts
CABLESPAN Volume Discount Information:
The following discounts are available for commitment purchases of CABLESPAN
equipment on an annual basis. A signed letter of commitment or purchase order
at the beginning of the calendar year is required to qualify for these discounts
throughtout a given year.
Discounts may be also given on a moving forward basis during the year (without a
volume commitment) exceeding the baseline volumes shown in the tables below.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Year 1996 1997
- ------------------------------------------------------------------------------------------------------------------------
Module RSU/1 RSU/2 MRF/FRF/RRF RSU/1 RSU/2 RSU/M MRF/FRF/RRF
- ------------------------------------------------------------------------------------------------------------------------
Number of Lines $ Net $ Net Disc off List $ Net $ Net $ Net Disc off List
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
0 - 10,000 $500 $600 0% $480 $580 $2,640 0%
10,001 - 25,000 $490 $580 0% $470 $560 $2,500 2%
25,001 - 50,000 $475 $550 2% $455 $530 $2,400 5%
50,001 - 100,000 $460 $520 5% $440 $500 $2,200 10%
100,001 - 250,000 $430 $480 10% $410 $460 $2,200 12%
250,001 - 500,000 $410 $460 12% $390 $440 $2,100 15%
500,001 - 1,000,000 $390 $440 15% $380 $430 $2,000 20%
1,000,001+ $380 $430 20% $370 $420 $2,000 25%
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Year 1998 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Module RSU/1 RSU/2 RSU/M MRF/FRF/RRF RSU/1 RSU/2 RSU/M MRF/FRF/RRF
- ------------------------------------------------------------------------------------------------------------------------------------
Number of Lines $ Net $ Net $ Net Disc off List $ Net $ Net $ Net Disc off List
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
0 - 10,000 $470 $560 $2,535 2% $440 $540 $2,430 2%
10,001 - 25,000 $460 $540 $2,435 5% $430 $520 $2,330 5%
25,001 - 50,000 $445 $510 $2,300 10% $415 $490 $2,200 10%
50,001 - 100,000 $430 $480 $2,100 12% $400 $460 $2,000 12%
100,001 - 250,000 $400 $440 $2,100 15% $390 $430 $2,000 15%
250,001 - 500,000 $380 $430 $2,000 20% $370 $420 $1,900 20%
500,001 - 1,000,000 $370 $420 $1,950 25% $360 $410 $1,850 25%
1,000,001+ $360 $410 $1,925 25% $350 $400 $1,800 30%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Attachment C
"CAP" Customer List
ACC Corp.
Advantis
Brooks Fiber Properties, Inc.
Cablevision Lightpath, Inc.
CTEC, Inc.
Cox Fibernet
Dukenet
Eastern Telelogic Corp., Inc.
Electric Lightwave, Inc.
FiberNet USA, Inc.
GST Telecom, Inc.
Hyperion Telecommunications, Inc.
Intelcom Group, Inc. (ICG)
Intermedia Communications, Inc.
Kamine Multimedia Corp.
Linkatel Communications, Inc.
Metro Access Networks, Inc.
MFS Communications, Inc.
MWR Telecom, Inc.
NEXTLINK
Northeast Networks, Inc.
Rogers Network Services
Teleport Communications, Inc.
- -------------------------------------------------------------------------------
12/23/96
<PAGE>
Attachment D
TELLABS "ALTERNATE PROVIDER HOLDING COMPANIES"
[NONE]
- -------------------------------------------------------------------------------
12/23/96
<PAGE>
Attachment E
EXISTING AFC AGREEMENTS - AFC RESERVED MARKETING RIGHTS
AFC agrees that this Attachment E consists of only those countries,
partnerships, and/or agreements listed in the J.V. Agreement as defined in
Exhibit D thereto, "Schedule of Exceptions" and as set forth below. AFC also
agrees to review the performance of each distributor listed below on any ongoing
basis and will use its best efforts to amend each of these agreements to allow
Tellabs to sell the full capabilities of the CABLESPAN product into the
Alternate Provider market on a non-exclusive basis. Also, AFC will use its best
efforts to allow Tellabs to sell the full capabilities of the CABLESPAN product
into the Alternate Provider market within the PRC on a non-exclusive basis.
The following provisions from Section 6.1 and Exhibit D to the J.V. Agreement
(as modified herein to reflect changes since the date of the J.V. Agreement)
are incorporated herein by reference:
Section 6.1 of the J.V. Agreement:
1. "AFC represents and warrants that none of the agreements with third parties
referred to in Section 6.1 of Exhibit D will prohibit the sale by the
Tellabs Partner of the Product or the J.V. Product into the Alternate
Provider market in the territories covered by such agreements. In
addition, AFC agrees to use its best efforts to amend each of the
agreements referred to in Section 6.1 of Exhibit D in order to prohibit
sales and/or distribution of the UMC 1000 Products or its derivatives,
including but not limited to the UMC 1000E, to the Alternate Provider
market in such territories by such third parties.
2. Except as provided in Section 6.1 of Exhibit D, any agreements entered into
by AFC from and after the Effective Date of the J.V. Agreement relating to
the sale or distribution of the UMC 1000 Products or its derivatives,
including but not limited to the UMC 1000E, will contain a provision
specifically prohibiting sale and/or distribution of such products to the
Alternate Provider market.
3. The parties acknowledge that it may be necessary to modify the definition
of Alternate Provider as it relates to markets outside North America to
take into account the specific market in each individual country. Any such
modification will be agreed by the Partners in order to most closely
effectuate the intent of this Agreement."
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12/23/96
<PAGE>
Section 6.1 to Exhibit D to J.V. Agreement:
1. "The product noted in 1 above [a version of the UMC 1000 integrated with
the Harris product known as the Harris 20/20 switch], if developed, would
include exclusive rights for Harris to market this product worldwide,
except for North America.
2. The Company is in the process of forming a joint venture in Hong Kong with
Elec & Eltek, a Hong Kong publicly traded company, whose purpose will be
for the manufacture and distribution of the Company's product within the
PRC. Subject to certain performance milestones, this agreement provides
the joint venture with exclusive marketing rights for the UMC 1000E within
the PRC for an initial period of eighteen (18) months, with the right for
twenty-four (24) month extensions. [The joint venture with Elec & Eltek was
subsequently terminated, but AFC continues to be bound by exclusivity
provisions which were entered into prior to the date of termination. AFC
agrees not to enter into any further exclusive relationships for the PRC
and will use best efforts to amend the current agreements to prohibit sale
and/or distribution to the Alternate Provider market.]
3. The Company has signed an exclusive distribution agreement with PT Diavox
Nusantara relating to the distribution, marketing and service of the
Company's UMC 1000E in Indonesia. AFC reserved the right to sell equipment
into the territory to systems engineering companies, end-users or OEM's.
The agreement requires that certain minimum performance levels be met.
4. The Company has signed an exclusive distribution agreement with Intelcom,
S.A. de C.V. relating to the distribution, marketing and service of the
Company's UMC 1000E in Mexico. The agreement requires that certain minimum
performance levels be met.
5. The Company entered into two License, Joint Development, Supply and
Authorized Manufacturing Agreements with Industrial Technology Research
Institutes ("ITRI") dated September 25, 1992 related to the joint
development of products based upon the Company's technology. These
agreements provide for the transfer of certain of the Company's technology
to ITRI.
6. The Company entered into an exclusive distribution agreement in September
1993 with Amruss International Marketing Corporation to market the UMC
1000E in the Commonwealth of Independent States. The exclusive rights
require certain minimum performance levels to be met and allows for AFC to
sell to systems engineering companies or end-users not headquartered in the
Territory.
- -------------------------------------------------------------------------------
12/23/96
<PAGE>
7. The Company entered into an exclusive distribution agreement in March 1994
with Amtelcom KFT to market the UMC 1000E in Hungary. The exclusive rights
require certain minimum performance levels to be met and allows for AFC to
sell to systems engineering companies, OEM's or end-users not headquartered
in the Territory."
- -------------------------------------------------------------------------------
12/23/96
<PAGE>
Tellabs Contract No. CON AFC 008 OEM 96 08
OEM AGREEMENT
This Agreement was made and executed by and between Tellabs Operations, Inc., on
behalf of itself, and its Affiliates, as hereinafter defined (collectively,
"Tellabs"), a Delaware corporation, having offices at 4951 Indiana Avenue,
Lisle, Illinois 60532-1698 USA; and Advanced Fibre Communications, Inc.
(hereinafter "AFC"), a Delaware corporation, having its principal place of
business at 1445 McDowell Blvd. No., Petaluma, CA 94975.
WHEREAS, Tellabs wishes to have AFC manufacture and deliver to Tellabs and AFC
wishes to manufacture and deliver to Tellabs, AFC's UMC 1000 Products, as
specified in the License Agreement (defined below) ("AFC Product(s)"), under
Tellabs' colors and tradedress;
WHEREAS, AFC wishes to have Tellabs manufacture and deliver to AFC and Tellabs
wishes to manufacture and deliver to AFC, the Tellabs Developments, as specified
in the License Agreement (defined below) ("Tellabs Products(s)"), under AFC's
colors and tradedress;
WHEREAS, AFC and Tellabs contemplate the repetitive purchases of their
respective Products between them, and desire that the terms and conditions
controlling such repetitive purchases shall be consistent, uniform, and
agreed to by both Tellabs and AFC in advance of placing any purchase orders;
and
WHEREAS, contemporaneous herewith, the parties have also entered into a
Termination Agreement and a License and Marking Agreement which contains certain
additional rights and obligations of the Parties as they relate to the AFC
Products and the Tellabs Products ("License Agreement").
NOW THEREFORE, in consideration of the mutual promises, covenants and conditions
contained herein, the parties agree as follows:
1. DEFINITIONS
1.1 Cross Reference Table
AFC Preamble
AFC Products Preamble
License Agreement Preamble
Tellabs Preamble
Tellabs Products Preamble
- --------------------------------------------------------------------------------
PAGE 1 OF 16
<PAGE>
Term Section 3
1.2 "Affiliates" shall mean an individual or entity that directly or
indirectly controls, is controlled by, or is under common control
with, the entity specified. For purposes of this definition,
"control" shall mean beneficial ownership of more than fifty
percent (50%) of the voting stock of such entity.
1.3 "Buyer" means Tellabs and its Affiliates in the case of the AFC
Products and AFC and its Affiliates, in the case of the Tellabs
Products.
1.4 "Customer" means a customer of a Buyer and includes both end users
and distributors.
1.5 "Functional Specifications" means the Seller's functional
specifications for the applicable Product.
1.6 "Licensed Software" means the particular software programs owned by
the Seller, or its licensors, that are provided to a Buyer under
the terms hereof, and all documentation relating to such software.
1.7 "Products" shall mean any products sold hereunder by Tellabs and
AFC. With respect to sales by AFC hereunder, "Product(s)" shall
mean the AFC Products. With respect to sales by Tellabs hereunder,
"Product(s)" shall mean the Tellabs Products.
1.8 "Seller" means AFC, in the case of the AFC Products, and Tellabs,
in the case of the Tellabs Products.
2. SCOPE OF WORK
AFC hereby grants to Tellabs and its Affiliates the right to sell and
service the AFC Products, subject to the terms and conditions set forth
below and in the License Agreement. AFC will, at no extra charge, use
Tellabs' colors and tradedress for the AFC Products being sold and licensed
to Tellabs hereunder.
Tellabs hereby grants to AFC and its Affiliates the right to sell and
service the Tellabs Products, subject to the terms and conditions set forth
below and in the License Agreement. Tellabs will, at no extra charge, use
AFC's colors and tradedress for the Tellabs Products being sold and
licensed to AFC hereunder.
3. TERM
This Agreement shall commence December 23, 1996, and shall remain in effect
until neither party has any OEM rights under the License Agreement, unless
sooner terminated as provided herein (hereinafter "Term").
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PAGE 2 OF 16
<PAGE>
4. QUANTITY
Buyer assumes no obligation hereunder to purchase any quantity of Products.
Any forecast of quantities stated herein or on any attached Attachment, or
otherwise provided to Seller from time to time, represents Buyer's best
estimate of requirements for planning purposes only and shall not be
construed as an obligation to buy any quantity of Products.
5. PRICE AND PAYMENT TERMS
During the Term, the prices charged to the Buyer for Products purchased
hereunder shall be as set forth in Sections 5.2.2 or 5.4.2, as applicable,
of the License Agreement. Seller warrants that at all times during the
Term, no lower price shall be offered to any of its customers which are not
Affiliates for the same Products or for equivalent products purchased in
similar quantities.
Seller will invoice on shipment, and Buyer will pay for Products within
thirty (30) days of the date of invoice. Prices are exclusive of charges
for freight and insurance. Unless otherwise agreed, such charges will be
prepaid by Seller and will appear as separate items on Seller's invoices.
Invoices for services ordered by the Buyer and performed by Seller shall be
due within thirty (30) days from the date of Seller's invoices. Invoices
for services shall be issued upon completion of such services.
6. TAXES
Buyer agrees to pay any sales, use or other local, state, and federal
taxes, however designated (but exclusive of taxes based on or measured by
Seller's net income or net worth), imposed on or based upon the provision,
sale or use of the Products or services provided under this Agreement.
Taxes will be separately stated on the invoice. If an order is exempt from
sales or use taxes, such tax will not be invoiced, provided Buyer provides
a valid exemption certificate.
7. PURCHASE ORDERS
Products shall be ordered by Buyer through the issuance of purchase orders
which shall be subject to and governed by this Agreement. Each purchase
order shall state the model number, Product description, quantity of
Product ordered, desired shipment date and delivery location, method of
shipment, unit and extended price for each Product ordered and total
purchase price for the order. Purchase Orders shall ship complete unless
Buyer has authorized partial shipments.
Seller shall place a readable packing slip on the face of all shipped
Products, which slip shall include the following:
a. Order Number/Buyer's Part Number
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<PAGE>
b. Quantity shipped
c. Description of Products and/or Services
d. Buyer's P.O. Number
8. CANCELLATION
Buyer can cancel any purchase order and/or any portion of a purchase order,
without charge, provided that Seller is advised of the cancellation at
least ninety-one (91) days prior to the original acknowledged, scheduled
ship date. Buyer can postpone any purchase order and/or any portion of a
purchase order. Cancellation notices received less than ninety-one (91)
days before shipment will be subject to the cancellation charges set forth
below. If an order has been postponed and then subsequently canceled, the
cancellation charge shall be based on the number of days prior to the
original scheduled ship date that notice of cancellation is received:
Number of days prior to original Cancellation charge as a percentage of
scheduled ship date that notice original purchase order amount:
of cancellation is received by
Seller:
1 to 30 days 25%
31 to 60 days 15%
61 to 90 days 10%
91 or more days No Charge
9. DELIVERY/LEAD TIME
Seller agrees to meet all purchase order delivery date requests which
reflect the lead times stated in Attachment A. During the Term, the Seller
shall attempt to reduce these lead times. Buyer shall be entitled to
cancel, at no charge, any purchase order which is more than five (5) days
late.
In addition, in the event that Seller fails to meet its agreed delivery
dates, Buyer may request a corrective action meeting. If Buyer so
requests, within ten (10) calendar days of receiving such a request, Seller
shall send the appropriate management representative from Seller's
manufacturing plant to Buyer's designated location to discuss the problem
and develop a corrective action plan.
10. QUALITY REQUIREMENTS
10.1 Products shall be subject to application analysis, electrical
characterization, and/or physical analysis. In addition, Buyer may
evaluate Seller for technical and processing capability through
written and on-site quality surveys.
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<PAGE>
10.2 Seller shall make available at no additional cost to Buyer, such production
testing facilities, labor, data, specifications, procedures and such other
documents and assistance as necessary for Buyer or Buyer's agent to perform
inspections. In addition, Seller shall make available to Buyer or Buyer's
agent at no additional charge, data obtained through Seller's normal
routines which show the results of Seller's inspections, tests and audits
of Products.
10.3 ON-SITE INSPECTION
To the extent that such testing and inspection are practicable without
interrupting Seller's normal work flow, during Seller's normal workday any
Products or Services supplied by Seller under this Agreement may be subject
to inspection and testing by Buyer at Seller's facility to determine
compliance with Buyer's quality specifications, at no Seller-imposed cost
to Buyer.
10.4 INSPECTION PROCEDURES/BUYER'S FACILITY
Incoming Products shall be subject to predetermined inspection/testing to
determine conformance with the purchase order as well as with all of the
following:
10.4.1 Seller's workmanship standards for the Products, approved in
advance by Buyer;
10.4.2 Seller's Functional Specifications; and
10.4.3 Buyer's packing and shipping requirements, or as otherwise agreed
to by the parties.
Incoming inspection also shall identify damage that may have
occurred in transit. Products may be subject to laboratory
testing, including but not limited to chemical, physical, and
metallurgical tests as required to verify specific characteristics.
Inspection and test reports indicating acceptance or rejection,
inspection results and quality evaluations shall be maintained by
Buyer in a central file and shall be used as the basis for the
adjustments of sampling inspection, corrective action, and
qualification status.
10.5 PRODUCT CHANGES
10.5.1 Seller will notify Buyer of all Product Change Notices
("PCN") for Products purchased by Buyer whether within or
outside the applicable warranty period, prior to
implementing any such change. Each PCN shall contain the
following information:
Product Change Number
Description Of Change
Reason For Change
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<PAGE>
Seller will provide Buyer with a single point of contact to
whom Buyer may direct questions regarding a particular PCN
in order to assess its impact on reliability,
specifications, and form, fit or function. Based upon the
information provided, Buyer shall classify changes in the
Product into one of the following classes:
"CLASS A" CHANGE:
Changes are required to correct a Product deficiency such
as:
Safety or fire hazard;
Electrically or mechanically inoperative;
Operational or design defects that cause higher than
advertised Product failure rates or adverse Buyer reaction;
Product does not operate as documented in the Seller's
specifications, literature, as warranted by the Seller or as
specified in this Agreement.
"CLASS AC" CHANGE:
Changes have limited application or are conditional changes
to a product that affects:
A specific Product over time;
A specific subset of Products over time;
Specific Product combinations;
The use of certain options.
"CLASS B" CHANGE:
Changes that are made to incorporate improvements in design
resulting in better operation, improved testing and
maintenance, longer life, service improvements, cost
reductions and addition of new features. Class B changes
are applied to manufactured Products and may be recommended
for application to existing equipment in the field.
"CLASS D" CHANGE:
Changes that incorporate minor new features and design
improvements that do not affect the existing functionality
of a Product, or other minor service improvement and test
capabilities not sufficiently significant to require a Class
B change.
a. Component changes that involve physical or electrical
specification differences to the replaced component and
require product identification change are considered
Class D.
b. Routine changes in Product documentation or technical
specification are documented with a Class D PCN. The
Product would not change since form, fit or function of
the Product was not affected.
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<PAGE>
Buyer shall have the right to accept such changes before
such changes may be implemented on Products shipped to Buyer
and its Customers. For Class A and AC changes Seller shall
replace or modify at no charge all affected Product and
documentation furnished hereunder. Seller shall supply
relevant documentation to Buyer for all Class A and AC
changes. The parties shall mutually agree on a schedule
which shall implement such changes for all affected
in-service Product locations. Seller shall at no charge to
the Buyer implement all Class A and AC changes prior to
shipment of Product, unless otherwise directed by Buyer.
For Class B changes, Seller shall first notify Buyer of the
exact nature of the change. Buyer shall determine if such
Class B change is to be implemented in Product furnished
hereunder and placed in service. Should such implementation
be deemed necessary, Seller shall make arrangements for the
implementation at prices and schedules agreed prior to
implementation. Documentation shall be provided by Seller
as specified for Class A and AC changes above.
For Class D changes, Seller shall notify Buyer of the nature
of the change and shall provide associated documentation.
Seller shall, at no charge to Buyer, make all A and AC
changes prior to shipment of Product, unless otherwise
directed by Buyer.
For Class A and AC changes which involve only an exchange of
components, Seller shall provide such components at no
charge for the Product affected and Buyer shall implement
such change.
10.5.2 MANUFACTURING CHANGES
Seller shall notify Buyer of process changes made by Seller
in the manufacturing of Products to be purchased under this
Agreement if such changes affect the form, fit, or function
of Products. If deemed necessary by Buyer, requalification
procedures for said Products then may be required.
10.6 QUALITY PERFORMANCE
Seller shall inspect and test all Products prior to their shipment
to Buyer. Seller agrees to maintain a 100% lot acceptance rate as
measured by Buyer's incoming inspection. Seller agrees to
communicate to Buyer, any and all process or Functional
Specification difficulties prior to Buyer's receipt of the effected
Product. Buyer's incoming inspection performance measure shall be
based upon the quantity of lots accepted for all specified
electrical, mechanical, cosmetic and solderability attributes
versus the quantity of lots received, which
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<PAGE>
results in a lot acceptance percentage. Any rejects caused by
Buyer's internal drawing or specification errors shall be excluded
from the calculation.
10.7 OUT-OF-BOX FAILURES
Seller shall inspect and test all Products prior to shipment.
Notwithstanding the foregoing, it is understood and agreed, that,
upon receiving the Products, Buyer reserves the right to perform,
within ten (10) business days after delivery, any test Buyer deems
necessary to adequately demonstrate that the Products meet all of
the Functional Specifications. Product which does not conform to
the Functional Specifications, or any other requirements outlined
in this Section 10 may, at Buyer's option, be returned to Seller
(at Seller's expense) for rework or replacement under warranty, or
Buyer may cancel the entire purchase order or the portion thereof
relating to the nonconforming Products at no charge to Buyer. For
any such returned defective Product, Buyer shall either debit
Seller the cost of said Product plus freight, or request a refund
for said amounts. Rejected units returned for rework shall be
repaired under warranty and shall have the warranty renewed upon
redelivery to Buyer for the full warranty period.
10.8 CORRECTIVE ACTION
Upon Buyer's request, Seller must within forty-eight (48) hours
following notification, provide Buyer with a written corrective
action plan to address Seller's failure to conform with this
Section 10. This plan shall be reviewed by Buyer who then may
conduct a follow-up on-site survey at Seller's facility.
11. PACKAGING AND SHIPMENT; RISK OF LOSS
Seller shall package and ship all items in Buyer's requested manner. All
shipments shall be F.O.B. origin with freight prepaid. Buyer may adjust
the purchase order shipping destination any time up to two days prior to
shipment. Seller shall invoice Buyer, and Buyer shall pay, Seller's actual
shipping charges upon presentation of evidence that Seller paid such
charges. The risk of loss and damage to Products shall pass to Buyer at
the F.O.B. point.
12. WARRANTY
Seller hereby warrants that all Products furnished hereunder shall conform
to the Functional Specifications, and shall be free from defects in
material, workmanship and design for a period of two (2) year(s) from date
of receipt of shipment. Buyer shall have the option to require Seller to
repair or replace defective Products without charge or expense. Repaired
Products, including Out-of-Box Failures shall be warranted for a minimum
period of six (6) months from completion of repairs or the remainder of the
Product's original warranty, whichever is longer. This warranty shall
survive inspection, acceptance, payment and expiration or termination of
this
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<PAGE>
Agreement. The parties also agree to comply with the terms of Attachment B,
with respect to their respective products, which shall be incorporated
herein by reference.
13. SOFTWARE LICENSE
13.1 The Licensed Software is subject to the terms and conditions set
forth in the License Agreement. Licensed Software is furnished to
Buyer solely for Buyer's use and the use of Buyer's Customers for
the use specified herein and in the License Agreement. The Licensed
Software may not be copied, in whole or in part, except as may be
necessary and incidental to such uses for archival and back-up
purposes or to replace a worn or defective copy.
13.2 Buyer will not reverse compile, disassemble, modify or alter any
Licensed Software, except under the circumstances referred to in the
License Agreement.
13.3 Buyer may sublicense Licensed Software to its Customers under the
sublicense conditions contained in Sections 13.3.1 and 13.3.2 below.
Otherwise, Buyer shall not sell, transfer, publish, disclose, display
or otherwise make available any Licensed Software or copies
thereof to any third party. The following conditions do not apply
to firmware. Buyer may sublicense firmware without restriction
(except as provided in the License Agreement) provided that the
firmware may only be used on and with the Product with which it is
delivered.
13.3.1 If Buyer sublicenses Licensed Software under this Agreement,
the sublicensee must also agree to the terms of a Software
License Agreement substantially in accordance with this
Section 13.
13.3.2 This right to sublicense is intended for Buyer's use for its
direct and indirect Customers and does not imply any further
right of sublicense by those Customers, except in the case
of distributors which may, in turn, sublicense to their end
user customers.
14. CONTINUING AVAILABILITY OF PRODUCTS, COMPONENTS AND PRODUCT SUPPORT
14.1 Seller Agrees to offer to Buyer during the Term hereof and for a
period of ten (10) years thereafter, full maintenance/repair services
and components for the Products. Repair or replacement shall be
accomplished within Seller's published repair intervals or as agreed
upon by the parties.
14.2 Seller shall be strictly liable for loss of or damage to Products
in its care, custody or control.
14.3 If Seller fails or is unable to offer such services, Products and
components thereof, and if Seller is unable to obtain another source
of supply acceptable to
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<PAGE>
Buyer, then such failure or inability shall be deemed noncompliant
with this Section 14 and, in addition to whatever other rights and
remedies Buyer may have at law or in equity, Seller shall be required
to provide to Buyer, without obligation or charge, the technical
information and any other licenses and rights necessary to enable
Buyer to supply, have supplied, manufacture, or have manufactured,
such services, Products and/or components. The above-referenced
technical information shall include, by example and not by
limitation: (1) manufacturing drawings and specifications of raw
materials and components comprising such parts; (2) manufacturing
drawings and specifications covering tooling and the operation
thereof; and (3) a detailed list of all commercially available
parts and components including the part number, name and location of
the component's supplier, prices and functional descriptions.
1.4. Seller shall provide Buyer advance written notification one (1) year
prior to entirely discontinuing the manufacture or replacement of
Products or component parts.
15. NOTIFICATION PROCEDURES
All notices, demands or consents required or permitted hereunder shall
be in writing and shall be delivered by overnight delivery, facsimile (with
confirmation copy by mail), or mailed to the respective parties at the
addresses first set forth above or at such other address as shall have
been given to the other party in writing for the purposes of this clause.
IF TO AFC: IF TO TELLABS:
Purchasing Department Purchasing Department
ADVANCED FIBRE COMMUNICATIONS, INC. TELLABS OPERATIONS, INC.
1445 McDowell Blvd. No. 1000 Remington Blvd. MS124
Petaluma, CA 94975 Bolingbrook, IL 60440
Phone: (707) 794-7700 Phone: (630) 969-8800
FAX: (707) 794-7777 FAX: (630) 378-5623
COPY TO: COPY TO:
Advanced Fibre Communications, Inc. Tellabs Operations, Inc.
Legal Department Legal Department - MS 16
1445 McDowell Blvd. No. 4951 Indiana Avenue
Petaluma, CA 94975 Lisle, IL 60532
Fax: (707) 794-7777 Fax: (630) 512-7293
Such notices and other communications shall be deemed effective upon the
earliest to occur of (i) actual delivery, (ii) five days after mailing,
addressed and postage prepaid, return receipt requested, delivery as
aforesaid (seven (7) days for intercontinental deliveries), (iii) one
(1) business day after transmission by overnight delivery (two (2)
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<PAGE>
business days for intercontinental deliveries), or (iv) the day of
receipt where receipt has been confirmed.
16. BANKRUPTCY
In addition to all other rights or remedies provided by law, either
party may cancel this Agreement or any purchase orders placed hereunder,
in the event that (a) the other party becomes insolvent or makes a
general assignment for the benefit of creditors, (b) the other party
admits in writing its inability to pay debts as they become due, (c) a
trustee or receiver is appointed by any court with respect to the assets
or any substantial portion of the assets of the other party, or (d) an
action is taken by or against the other party under bankruptcy or
insolvency laws relating to the relief of debtors, including the Federal
Bankruptcy Code.
17. FORCE MAJEURE
Neither party to this Agreement shall be held responsible for any delay
or failure in performing its obligations hereunder caused by fires,
strikes, embargoes, requirements imposed by government regulations, civil
or military authorities, acts of God, or by the public enemy or other
similar causes, if the injured party receives prompt notice of such
contingency. If such contingency occurs, the party injured by the other's
inability to perform may elect to: (a) terminate this Agreement in whole
or in part as to Products not already received or work not already
performed, (b) suspend performance for the duration of the delaying cause,
or (c) resume performance under this Agreement in whole or in part once
the delaying cause ceases, with an option to the injured party to extend
the delivery date up to the length of time the contingency endured. Unless
written notice is given within thirty (30) days after such injured party
is apprised of the contingency, option 18(b) shall be deemed selected.
18. TERMINATION
18.1 DEFAULT
Either party shall have the right to terminate this Agreement, in
whole or in part, as set forth in Section 18.4, for default by the
other in the performance of any substantial obligation or material
breach of this Agreement where such default or breach continues for a
period of thirty (30) days after written notice thereof to the other.
Termination of this Agreement will not affect any sublicenses granted
prior to termination.
18.2 BANKRUPTCY
Either party may terminate this Agreement, in whole or in part, as
set forth in Section 18.4, by written notice in the event that the
other party makes an assignment for the benefit of creditors, or
admits in writing its inability to pay debts as they become due, or a
trustee or receiver for any substantial part of its assets is
appointed by any court, or a proceeding is instituted under a
provision
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<PAGE>
of the Federal Bankruptcy Code by or against the other party and
is acquiesced in or is not dismissed within ninety (90) days or
results in an adjudication in bankruptcy.
18.3 TERMINATION OF LICENSE AGREEMENT
This Agreement shall terminate under the circumstances provided in
the License Agreement.
18.4 PARTIAL TERMINATION
Notwithstanding anything to the contrary herein contained, a
Terminating Party entitled to terminate this Agreement pursuant to
Section 18.1, 18.2 or 18.3 may, at its election, only partially
terminate this Agreement by terminating all license rights of the
Terminated Party, while not terminating its own license and
manufacturing rights, with the effect set forth in Section 18.5
below. In such a case, this Agreement shall remain in partial force
and effect, and the Terminated Party shall be required to observe all
of its obligations to the Terminating Party for the remainder of the
Term of this Agreement (unless the Terminated Party terminates this
Agreement in accordance with the terms of this Section 18).
Notwithstanding the foregoing, the Terminating Party may, at any time
prior to the end of the Term, elect to terminate this Agreement in
its entirety, with the effect set forth in Section 18.5 below. For
purposes of this Section 18, the party electing to terminate this
Agreement will be deemed to be the "Terminating Party" and the other
party shall be deemed to be the "Terminated Party."
18.5 EFFECT OF TERMINATION
18.5.1 In the event that this Agreement is terminated by either
party, in whole or in part, as provided in this Section 18,
the parties will be obligated to agree upon terms and
conditions which provide for continuing support for the
other party's embedded customer base for the Products. Unless
otherwise agreed, the Terminating Party will, at its option,
either take over such continuing support obligations, or
grant the Terminated Party sufficient rights to enable that
party to continue to provide such support.
18.5.2 In the event that this Agreement is terminated as provided
in Section 18.1, 18.2, 18.3 or 18.4 the Terminating Party
shall be entitled to obtain promptly from the Terminated
Party (and the Terminated Party will be obligated to provide
to the Terminating Party), any and all design and
manufacturing documentation, which is necessary or useful for
the design and/or manufacture of the Products, including the
Licensed Software and the source code therefor, being
purchased by the Terminating Party under this Agreement.
The Terminating Party shall be entitled to use such materials
as well as any other materials previously disclosed under
this Agreement for purposes of manufacturing, having
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<PAGE>
manufactured, modifying, maintaining, marketing and
distributing the Products. If requested by the Terminating
Party, at any time during the term hereof, the Terminated
Party agrees to deposit any and all such documentation in
escrow, subject to release under the terms hereof. The
Terminated Party shall bear the out of pocket costs
associated with the escrow. The Terminated Party will be
obligated to keep the escrow updated at all times.
In addition, the Terminated Party agrees:
18.5.2.1 if requested by the Terminating Party, to
continue to manufacture Products for the
Terminating Party for a one year period following
the date of notice of termination; and
18.5.2.2 to use its best efforts to assist the Terminating
Party to disengage its manufacturing operations
from the Terminated Party and to cooperate with the
transition to a new manufacturer, in such manner
as to enable the Terminating Party to continuously
acquire Products during a reasonable transition
period; and
18.5.2.3 to transfer to the Terminating Party or its
designee any of the Terminating Party's work-in-
process, inventory, finished goods ordered by the
Terminating Party and manufacturing equipment owned
by the Terminating Party on terms and conditions,
including prices, to be mutually agreed upon by the
parties.
19. LABELING AND EMISSIONS
19.1 Irrespective of whether a specification is furnished, if Products
or containers to be furnished under this Agreement or under the
License Agreement are required to be constructed, packaged, labeled
or registered in a prescribed manner, the Seller shall comply with
applicable federal, state and/or local laws. (As used herein, "local"
shall mean where Products are manufactured.) Seller further agrees to
indemnify Buyer for any losses, fines, or other penalties which may
be incurred or assessed, including reasonable attorney's fees, due
to Seller's failure to comply with the provisions of this Section.
19.2 Products and components hereunder shall comply, to the extent
applicable, with the requirements of Subpart J of Part 15 of the
Federal Communications Commission's Rules and Regulations, as may be
amended from time to time, including those sections concerning the
labeling of such Products and components and the suppression of
radiation to specified levels.
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<PAGE>
Nothing herein shall be deemed to diminish or otherwise limit
Seller's obligations under the "WARRANTY" section of this Agreement.
20. GOVERNING LAW
This Agreement shall be governed by the laws of the State of Illinois,
excluding its conflict of laws provisions, for matters relating to sales of
Tellabs Products and California law, excluding its conflict of laws
provisions, for matters relating to sales of AFC Products.
21. INCORPORATION BY REFERENCE
The following Sections of the License Agreement are incorporated herein
by reference.
Section 8 Warranty and Indemnification
Section 9 Limitation of Liability
Section 10 Confidentiality
Section 15 Export Restrictions
Section 16 General Provisions (except Section 16.4)
IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed by
their duly authorized agents on the dates written below. This Agreement shall
not be binding until it has been signed by both Parties.
ADVANCED FIBRE COMMUNICATIONS, INC. TELLABS OPERATIONS, INC.
By: /s/ CARL J. GRIVNER By: /s/ BRIAN J. JACKMAN
------------------------------- ----------------------------------
Name: Carl J. Grivner Name: Brian J. Jackman
----------------------------- --------------------------------
Title: President Title: President
---------------------------- -------------------------------
Date: December 30, 1996 Date: December 23, 1996
----------------------------- --------------------------------
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<PAGE>
ATTACHMENT A
LEAD TIMES
AFC Products 30 days after receipt of order
Tellabs Products 30 days after receipt of order
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<PAGE>
ATTACHMENT B
This Attachment B also includes the terms of Tellabs' and AFC's standard
warranty and repair and return policies which are attached hereto and
incorporated herein by reference. The Seller(s) will make available to Buyer
hardware and software compatibility matrixes for the Seller's Product(s) when
and as such matrixes are developed by Seller. In the event of a conflict
between the terms and conditions of this Attachment B, including the standard
policies, and the terms of the Agreement, the Agreement shall control.
WARRANTY AND SERVICE FOR TELLABS PRODUCTS
REPAIR COSTS
Tellabs Products may be returned freight prepaid to Tellabs for repair. AFC
must secure prior authorization of Tellabs for the return of such Products,
which authorization shall not be unreasonably withheld. The charge for such
repairs shall be as stated below:
Priority Warranty No Warranty
- -------- -------- -----------
Normal $0 50% of new board
Emergency $250 per module 50% of new board + $250
Customer
Requested $150 per module 50% of new board + $150
Priority
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<PAGE>
WARRANTY DATE CODES
- ------------------------------------------------------------------------------
Each Tellabs hardware product is stamped with a warranty code in a
customer-accessible location (E.G., front panel, circuit-card
stiffener, etc.). This date stamp approximates the date of shipment.
The warranty period begins on the date stamped on the product. A
sample date code is shown below:
---------
--- 05-96 ---
| --------- |
| |
month year
SOFTWARE
- ------------------------------------------------------------------------------
Tellabs warrants that software programs will substantially conform
to the applicable Tellabs product specifications for a period of
90 days from the date of shipment, provided that the software is used
on the hardware and with the system on which it was originally
installed. Tellabs also warrants that the media on which the software
programs are distributed are free from defects in material and
workmanship for a period of 90 days from the date of shipment.
Tellabs will replace the defective media or correct substantial
program errors at no charge, provided that the software is returned
to Tellabs during the warranty period.
CONDITION AND EXCEPTIONS
- ------------------------------------------------------------------------------
The product must be used as outlined in its applicable Tellabs
product specifications and it must be handled, installed, operated
and shipped in accordance with industry standards. Claims under this
warranty may be made only by the original purchaser or user. This
warranty does not apply to items that have a limited life expectancy,
such as lamps and fuses. Furthermore, this warranty does not apply to
products modified or repaired by someone other than Tellabs or
products deemed as being damaged beyond repair. Classification as
being damaged beyond repair includes, but is not limited to, burn
marks, cracks or other physical damage, and damage due to catastrophic
failure (such as lightning damage). Failure to comply with any of the
terms of this Tellabs U.S. Warranty, Repair and Return Policy will
result in invalidation of the warranty.
EXCLUSION OF WARRANTIES AND LIMITATION OF LIABILITY
- ------------------------------------------------------------------------------
NO OTHER WARRANTIES ARE EXPRESSED OR IMPLIED EXCEPT AS SET FORTH
HEREIN. ALL OTHER WARRANTIES, INCLUDING WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, ARE EXPRESSLY
EXCLUDED FROM THIS WARRANTY.
A CUSTOMER'S EXCLUSIVE REMEDY FOR ANY CAUSE OF ACTION ARISING OUT
OF ANY DEFECTIVE PRODUCT IS LIMITED TO REPAIR OR REPLACEMENT OF THE
PRODUCT DURING THE WARRANTY PERIOD, AT TELLABS' OPTION. UNDER NO
CIRCUMSTANCES WILL TELLABS BE LIABLE FOR ANY INDIRECT, SPECIAL,
INCIDENTAL, OR CONSEQUENTIAL DAMAGES OR LOSS, INCLUDING, BUT NOT
LIMITED TO, LOSS OF PROFITS, LOSS OF USE OR LOSS OF DATA, WHETHER
CAUSED BY BREACH OF CONTRACT, NEGLIGENCE, OR OTHERWISE. UNDER NO
CIRCUMSTANCES WILL TELLABS' LIABILITY UNDER THIS WARRANTY POLICY
EXCEED THE PURCHASE PRICE OR LICENSE FEE PAID BY A CUSTOMER FOR THE
PRODUCT.
TELLABS PRODUCT SCREENING SERVICE
- ------------------------------------------------------------------------------
For customers with product in inventory with uncertain operational
status, Tellabs offers a product screening service. During the
product screening, a pass/fail test is performed on your product to
determine if the product meets its applicable Tellabs product
specifications. Please contact the Tellabs Product Services
Department at 630.378.8800 for further details.
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<PAGE>
PROCEDURE FOR REPAIR AND RETURN
- -------------------------------------------------------------------------------
When a product requires repair service, contact the Tellabs Product
Services Department at 630.378.8800 and request a Material Return
Authorization (MRA) number. A service representative will request
your company's name and address; the product's model number, issue
number and warranty date code; and, the purchase order number for the
return transaction. The service representative will then assign an
MRA number that identifies your particular transaction. After you
obtain the MRA number, write the number clearly on the outside of the
carton being returned. Enclose an explanation of the malfunction,
your company name and address, the name of a person to contact for
further information and the purchase order number for the
transaction. Then send the product, freight prepaid, to:
Tellabs Operations, Inc.
4951 Indiana Avenue
Lisle, Illinois 60532
Attn: Product Services, MRA No.______
Product returned without an MRA number may be subject to return to
the customer without repair.
Tellabs will inspect the returned product. If the product is in
warranty and found defective, Tellabs will, at its option, either
repair or replace the product. Return freight will be paid by
Tellabs. Please allow 15 business days for standard repair and return
warranty service. Out-of-warranty products will be repaired rather
than replaced (see Costs section below for applicable charges).
If the product is found to be damaged beyond repair, a service
representative will contact you and offer a refurbished replacement,
when available, at 65 percent of the current list price in the
latest Tellabs published price list for that equipment.
Additionally, Tellabs offers a next day, expedited repair service.
If you require expedited repair, it should be indicated at the time
the MRA is requested (see Costs section below for applicable
charges).
EXTENT OF REPAIRS
- ------------------------------------------------------------------------------
All products will be repaired to meet the applicable Tellabs product
specifications established for the particular product returned.
The warranty period for any repaired product is either the
remainder of the products' original warranty period or a period of
six (6) months from the date of repair, whichever is longer. Out-of-
warranty products that are repaired will receive a new warranty
period covering the repairs for a period of six (6) months from the
date of repair.
COSTS
- ------------------------------------------------------------------------------
The charge for retesting, repairing and revision-updating a module
is based upon the module's current list price in the latest Tellabs
published price list. Listed below is the current repair pricing
formula for out-of-warranty products:
Repair Charge = 15 percent of the current published list price + $50
Products that have been modified or repaired by someone other than
Tellabs or that, in Tellabs' opinion, are deemed damaged beyond
repair will be returned to the customer with a $30 handling charge
and the warranty voided. Subject to availability, the customer may
elect to purchase an equivalent refurbished product at 65 percent
of the current list price in the latest Tellabs published price list.
In this case, the $30 handling charge will be waived.
Customers requiring next day expedited repairs will also be
assessed a $75 express fee for each product, in addition to the
applicable repair charge.
NOTE: IF A PRODUCT IS SUBMITTED FOR REPAIR UNDER WARRANTY AND IS
FOUND BY TELLABS TO MEET THE APPLICABLE TELLABS PRODUCT
SPECIFICATIONS (I.E., "NO DEFECT FOUND"), A RETEST CHARGE OF 15
PERCENT OF THE CURRENT LIST PRICE IN THE LATEST TELLABS PUBLISHED
PRICE LIST OF THE PRODUCT, UP TO A MAXIMUM OF $100 WILL BE INVOICED.
Page 16 - 2
<PAGE>
TELLABS EXPEDITED REPLACEMENT SERVICE
- ------------------------------------------------------------------------------
The Tellabs Expedited Replacement Service is designed to provide
reliable shipment of an exact replacement, if available in stock,
anywhere within the United States. When a time-critical service
outage exists, contact our Corporate Customer Service office at
800.443.5555, where our product specialists are available 24 hours
a day, seven days a week to provide technical assistance.
If product replacement is required, the product specialist will
arrange for the replacement of the defective equipment via the
shipment modes shown below. This service offers two (2) levels
of express shipment at an applicable service charge:
OVERNIGHT SERVICE: $90 per module for overnight shipment of a exact
replacement (if replacement is available from stock) anywhere in
the United States.
COUNTER-TO-COUNTER SERVICE: Price is based upon destination plus 10
percent of the current list price. Same-day shipment will be made
of an exact replacement (if replacement is available from stock)
anywhere in the United States.
THE OVERNIGHT SERVICE FEE WILL BE WAIVED IF THE EXPEDITED
REPLACEMENT REQUEST IS WITHIN 90 DAYS OF A DEFECTIVE PRODUCT'S
WARRANTY DATE CODE.
To expedite your replacement request, the product specialist will
also request your company's name and address; the product's model,
issue numbers and warranty date code; and, the purchase order
number for the replacement transaction. Tellabs will ship the
replacement via the shipment mode of the customer's choice. After
the replacement equipment is shipped, an invoice will be issued
for the current list price in the latest Tellabs published price
list for the equipment, plus an overnight delivery charge and an out-
of-warranty charge, if applicable.
After receiving the replacement, the customer has 30 days to return
the defective product to Tellabs Product Services Department using
the Material Return Authorization (MRA) number listed on the
packing slip issued with the replacement. If the defective
equipment is received within 30 days, credit will be issued for the
product's list price, leaving a balance due on the replacement
invoice reflecting the overnight delivery charges and an
out-of-warranty charge, if applicable.
Defective equipment returns RECEIVED AFTER 30 DAYS are also subject
to a restocking charge. The following restocking charges apply:
1 to 6 months: 25 percent of current list price in the latest
Tellabs published price list.
7 to 12 months: 40 percent of current list price in the latest
Tellabs published price list.
All invoices are due and payable within 30 days after the date of
invoice.
Any product(s) returned 12 months or more after the initial 30 days
WILL NOT BE ACCEPTED FOR CREDIT.
NOTE: IF A MODULE IS MODIFIED BY ANYONE OTHER THAN TELLABS, OR IS
DEEMED DAMAGED BEYOND REPAIR, TELLABS RESERVES THE RIGHT TO CHARGE
THE CUSTOMER FOR THE REPLACEMENT PART AT THE CURRENT LIST PRICE IN
THE TELLABS PUBLISHED PRICE LIST. MODIFIED PRODUCTS (DESIGNATED BY
"M" AND A NUMBER) AND MANUFACTURE-DISCONTINUED (MD) PRODUCTS ARE
EXPRESSLY EXCLUDED FORM THE TELLABS EXPEDITED REPLACEMENT SERVICE.
Tellabs Operations, Inc.
4951 Indiana Avenue
Lisle, Illinois 60532
630.378.8800
Fax: 630.512.7097
Tellabs, [logo], CROSSNET, Dataplexer. 331 Xplexer, T-Coder, TITAN
and Your Networking Partner are registered U.S. trademarks of Tellabs
Operations, Inc.
CABLESPAN, Datacell and Minicell are trademarks of Tellabs
Operations, Inc.
Martis and DXX are Finnish trademarks of MARTIS Oy, a subsidiary of
Tellabs, Inc. 74-0064 B
Page 16 - 3
<PAGE>
[LOGO]
WARRANTY
Advanced Fibre Communication ("AFC") warrants that its products ("Products")
are free from defects in design, workmanship, materials and title as provided
herein. This warranty shall survive inspection, acceptance, and payment for a
period of two (2) years after the date the Product is shipped from AFC (or
greater if an extended warranty has been purchased), provided that said
Product has not been misused, improperly operated or subjected to repairs or
modifications by any party other than AFC without AFC's written consent, or
damaged by fire, explosion, electrical power failure or acts of God.
Extended warranty plans are also available at an additional cost.
Except as expressly provided herein, AFC makes no warranty, express or implied,
with respect to its products or services including, without limitation,
warranties of merchantability or fitness for a particular purpose.
Buyer's sole remedy with respect to breach of any warranties shall be, at
AFC's option, to repair or replace the defective Product, or for AFC to
furnish a credit for such defective Product, or for AFC to furnish a credit
for such defective Product equal to the purchase price. Buyer shall, upon
evidence of a particular Product's breach of warranty, return said Product to
AFC, at Buyer's risk and expense. AFC shall examine the Product and repair
or replace the Product within a reasonable time, returning the Product to
Buyer at Buyer cost and expense, or furnish Buyer credit equal to the
purchase price for such defective Product.
If AFC's examination discloses misuse, improper operation, unauthorized repair
or modification of the Product by Buyer or its agents, then Buyer shall pay AFC
the current charges for repair or replacement for said Product. Repairs or
replacements carried out by AFC shall be free from defects in design,
workmanship, materials and title for the period of said Product's original
warranty, or for 90 days from the date of shipment of the repaired or replaced
Product, whichever occurs later.
Consumable materials such as fuses, batteries, floppy disks and lamps are not
warranted by AFC in any way. Equipment manufactured by third parties, such
as computers and computer peripherals carry only the manufacturer's original
warranty and are not warranted in any way by AFC. Components of AFC's
Product purchased from AFC carry no warranty, express or implied.
The remedy set forth above is Buyer's exclusive and sole remedy and the
entire extent of AFC's liability for any claims Buyer may have against AFC
regarding AFC products. AFC shall have no liability with respect to any
product or service, whether in contract, negligence, strict liability, or any
other legal or equitable theory, for any amount in excess of buyer's payments
to AFC for such product or service or any incidental, consequential or
special damages or lost profits or cost of procurement of substitute goods,
services or technology. There are no warranties which extend beyond the
description of the face hereof.
[LETTERHEAD]
<PAGE>
18.4. REPAIR & RETURN POLICY
Advanced Fibre Communications has designed a policy to help quickly and
efficiently repair and return quality equipment to our customers. All failed
boards which are processed through the Petaluma facility are repaired and
revised to the most current revision level possible. Equipment purchased from
Advanced Fibre Communications is covered under various warranty plans. Check
with your system administrator to determine the type of warranty plan and the
length of the warranty purchased for your system.
Equipment failure occurring in the field must be reported to the AFC order
administrator in Petaluma. The order administrator can be contacted during
normal working hours (8-5), pacific coast time at 1-707-794-7700. If an
emergency failure has occurred, call the 24 hour Technical Assistance Center at
1-800-500-7722. The order administrator will assign an RMA number to each
failed board. The RMA number is a unique number and should be recorded in your
files as it is the key to identifying a failed board throughout the repair and
return process. You will be able to contact Order Administration at any time to
identify the repair status and expected turn around time of your returned
boards. Failed boards should be shipped to:
Advanced Fibre Communications
1445 McDowell Boulevard North, Suite B
Petaluma, California 94954
Attention: Repair Service Department
RMA #__________________
There are three levels of priority which can be assigned to your failure. The
failure can be classified as either normal, emergency, or customer requested
priority upon your request. Fees for these services will depend upon the
current warranty status of the returned boards. The turn around time for boards
will vary depending upon local customs departments and methods of shipment,
however, AFC will guarantee the time periods listed below once the boards reach
our facility.
For boards which are classified as normal failures, we will repair the board
and ship it back within 15 calendar days. Shipping arrangements will be made
via the most economical means possible.
If a failure is traffic affecting, and no spares are available, the failure will
be classified as an emergency. In emergency cases, a reconditioned board of the
same revision or better will be shipped via a priority one service within 24
hours of notification to AFC. If there are no reconditioned boards available, a
new board will be shipped.
18-15
<PAGE>
UMC 100A Ordering Guide
Marketing Document
6-101, Issue 2.0
18.4. REPAIR & RETURN POLICY
AFC also offers a 72 hour turn around of failed boards. This service is
classified as a customer requested priority and guarantees return of a board
within 3 business days after receipt of a failed board. A schedule of costs
for the various priority classifications is given below.
--------------------------------
Warranty No Warranty
-----------------------------------------------
Normal $0 50% of new
board
-----------------------------------------------
Emergency $250 50% of new
board + $250
-----------------------------------------------
Customer
Requested $150 50% of new
Priority board + $150
-----------------------------------------------
To help facilitate the repair and return process, the order administrator will
request that a Failure Report Tag be completed for each failed board. If
failure tags are not available, a copy of the tag can be found in the
Installation, Maintenance and Test Manual of the UMC documentation set. The
failure tag must be included with the failed module and the RMA number must be
marked on the outside of the shipping container. All charges for shipping to
AFC's facility will be the responsibility of the customer. AFC is responsible
for shipping costs when returning boards to the field.
18-16
<PAGE>
EXHIBIT 11.1
ADVANCED FIBRE COMMUNICATIONS, INC.
SCHEDULE RE: COMPUTATION OF PRO FORMA NET INCOME PER SHARE
(In thousands, except per share data)
1995 1996
----------------------- -----------------------
FULLY FULLY
PRIMARY DILUTED PRIMARY DILUTED
----------- ----------- ----------- -----------
Net income $ 2,341 $ 2,341 $ 7,237 $ 7,237
----------- ----------- ----------- -----------
Weighted average common shares
outstanding 4,373 4,373 26,070 26,070
Redeemable convertible preferred
stock, on an as-if converted
basis 17,448 17,448 - -
Common stock equivalents-stock
options and warrants 3,521 4,003 7,954 8,296
Staff Accounting Bulletin No. 83
issuances and grants:
Stock options 1,070 1,070 202 203
Redeemable convertible
preferred stock 917 917 56 56
----------- ----------- ----------- -----------
Weighted average shares used in
per share computations 27,329 27,811 34,282 34,625
----------- ----------- ----------- -----------
Pro forma net income per share $0.09 $0.08 $0.21 $0.21
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Advanced Fibre Communications, Inc.:
We consent to the use of our report included herein and to the reference to
our firm under the headings "Selected Consolidated Financial Data" and "Experts"
in the Prospectus.
KPMG Peat Marwick LLP
San Francisco, California
January 23, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 24,942
<SECURITIES> 83,488
<RECEIVABLES> 32,779
<ALLOWANCES> 0
<INVENTORY> 17,349
<CURRENT-ASSETS> 162,189
<PP&E> 11,080
<DEPRECIATION> 1,491
<TOTAL-ASSETS> 175,679
<CURRENT-LIABILITIES> 16,851
<BONDS> 0
0
0
<COMMON> 326
<OTHER-SE> 157,697
<TOTAL-LIABILITY-AND-EQUITY> 175,679
<SALES> 128,941
<TOTAL-REVENUES> 130,193
<CGS> 69,628
<TOTAL-COSTS> 73,950
<OTHER-EXPENSES> 53,015
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (855)
<INCOME-PRETAX> 4,083
<INCOME-TAX> (3,154)
<INCOME-CONTINUING> 7,237
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,237
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0.21
</TABLE>
