<PAGE>
As filed with the Securities and Exchange Commission on March 9, 2000
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
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SUNRISE TELECOM INCORPORATED
(Exact name of registrant as specified in its charter)
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Delaware 3825 77-0291197
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial
incorporation or Classification Code Identification Number)
organization) Number)
22 Great Oaks Boulevard
San Jose, California 95119
(408) 363-8000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
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Paul Ker-Chin Chang
Chief Executive Officer and President
Sunrise Telecom Incorporated
22 Great Oaks Boulevard
San Jose, California 95119
(408) 363-8000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
John F. Seegal Gary L. Sellers
Brett E. Cooper Simpson Thacher & Bartlett
Orrick, Herrington & Sutcliffe LLP 425 Lexington Avenue
Old Federal Reserve Bank Building New York, New York 10017
400 Sansome Street (212) 455-2000
San Francisco, California 94111-3143
(415) 392-1122
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.
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,
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, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier 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
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<TABLE>
<CAPTION>
Amount Proposed Proposed Amount of
Title of Each Class of to be Maximum Offering Maximum Aggregate Registration
Securities to be Registered Registered (1) Price Per Share (2) Offering Price (2) Fee
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<S> <C> <C> <C> <C>
Common Stock, $.001 par
value per share shares $ $57,500,000 $15,180
</TABLE>
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(1) Includes shares that may be sold if the over-allotment option granted to
the Underwriters is exercised in full.
(2)Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a).
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 or until this Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and we are not soliciting offers to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MARCH 9, 2000
PROSPECTUS
[No. of Shares] Shares
[SUNRISE LOGO]
Common Stock
This is an initial public offering of common stock by Sunrise Telecom
Incorporated. Sunrise is selling shares of common stock. The selling
stockholders identified in this prospectus are offering an additional
shares of common stock. Sunrise will not receive any of the proceeds from
the sale of common stock held by the selling stockholders. The estimated
initial public offering price is between $ and $ per share.
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We have applied for listing of Sunrise's common stock on the Nasdaq National
Market under the symbol SRTI.
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<TABLE>
<CAPTION>
Per Share Total
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<S> <C> <C>
Initial public offering price................................... $ $
Underwriting discounts and commissions.......................... $ $
Proceeds to Sunrise, before expenses............................ $ $
Proceeds to the selling stockholders, before expenses........... $ $
</TABLE>
The selling stockholders have granted the underwriters an option for a period
of 30 days to purchase up to additional shares of common stock.
--------
Investing in the common stock involves a high degree of risk.
See "Risk Factors" beginning on page 7.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.
Chase H&Q
Banc of America Securities LLC
CIBC World Markets
, 2000
<PAGE>
INSIDE FRONT COVER
[Artwork to come.]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................................................... 3
Risk Factors.......................................................... 7
Forward-Looking Statements............................................ 18
Use of Proceeds....................................................... 19
Dividend Policy....................................................... 19
Capitalization........................................................ 20
Dilution.............................................................. 21
Selected Consolidated Financial Data.................................. 22
Unaudited Pro Forma Consolidated
Condensed Financial Statements....................................... 23
Management's Discussion and Analysis of
Financial Condition and Results of Operations........................ 25
Business.............................................................. 33
Management............................................................ 47
Principal and Selling Stockholders.................................... 56
Certain Transactions.................................................. 57
Description of Capital Stock.......................................... 58
Shares Eligible for Future Sale....................................... 61
Underwriting.......................................................... 62
Legal Matters......................................................... 64
Experts............................................................... 64
Where You Can Find More Information................................... 64
Index To Financial Statements......................................... F-1
</TABLE>
We maintain Web sites at www.sunrisetelecom.com, www.hukk.com,
www.ghepardo.com and www.protel-italy.com. Information contained on our Web
sites does not constitute part of this prospectus.
"Sunrise Telecom," "SunSet," and "SunLite" are trademarks of Sunrise Telecom
Incorporated. This prospectus also includes references to registered service
marks and trademarks of other entities.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. This summary may not contain all of the information that you should
consider before investing in our common stock. You should read the entire
prospectus carefully, including "Risk Factors" and our consolidated financial
statements, before making an investment decision.
Sunrise Telecom
We manufacture and market service verification equipment to pre-qualify,
verify and diagnose telecommunications and Internet networks. Our products
offer broad functionality, leading-edge technology and compact size to test the
variety of new digital subscriber line, or DSL, services, fiber optics, cable
TV networks and signaling networks. We design our products to maximize
technicians' effectiveness in the field and to provide realistic network
simulations for equipment manufacturers to test their products. Our customers
include incumbent local exchange carriers, or ILECs, such as Bell Atlantic
Corporation and SBC Communications Inc., competitive local exchange carriers,
or CLECs, such as Covad Communications Group, Inc. and NorthPoint
Communications Group, Inc., and other service providers, network infrastructure
suppliers and installers throughout North America, Latin America, Europe and
the Asia/Pacific region.
According to Ryan Hankin Kent, Inc., the number of DSL lines and cable TV
modems in homes and businesses in the United States and Canada will grow from
2.1 million in 1999 to 24.7 million in 2003. We believe that service
verification products are required for the efficient deployment and maintenance
of broadband networks and that the dramatic growth in broadband service, driven
by the Internet, will accelerate the need for our products. For the year ended
December 31, 1999, our net sales were approximately $61.5 million and our net
income was approximately $10.9 million.
Our service verification products are used for a broad range of
telecommunications transmission and signaling technologies, including:
. DSL. Our new DSL products test the most popular types of DSL service,
including asymmetric DSL, or ADSL, symmetric DSL, or SDSL, high bit-rate
DSL, or HDSL, and ISDN DSL, or IDSL. Our DSL products have accounted for
virtually all of our net sales.
. Cable TV. We recently introduced a new service verification solution for
cable network operators who are converting their analog cable networks
into digital networks capable of providing Internet and voice services.
. Fiber Optics. We recently introduced three new products to verify fiber
optic transmissions in the access network and to analyze services
carried on fiber optics in the central office. Our fiber optic products
allow service providers to verify fiber optic services based on North
American and international transmission standards.
. Signaling. We recently introduced an Internet browser-based remote
testing and surveillance solution for service providers to test and
monitor various and changing signaling protocols.
Our products offer the following key benefits:
. Design Flexibility. We design our products to be flexible and to evolve
as customer needs change. For instance, a flexible design allows the
customer to adapt their SunSet xDSL test set to new DSL services and
applications as network standards evolve, thereby protecting the
customer's investment in the test equipment.
3
<PAGE>
. Customer Driven Features. Each of our products is highly tailored to our
customers' needs. Our marketing engineers continually interact with our
customers during the design process to ensure that our products are the
best available solution for them.
. Handheld Design. Most of our DSL and fiber optic products weigh less
than three pounds and offer handheld convenience. The compact,
lightweight design of these products enable field technicians to access
problems and verify line operation quickly.
. Rapid and Efficient DSL Deployment. Our products allow field and office
technicians to test DSL lines rapidly and efficiently to ensure that
they are properly connected to the central office and that they can
support a specific type and speed of DSL service. In a single device,
our products can be used to pre-qualify facilities for services,
identify the source of problems and verify the proper operation of newly
installed service before handing service over to customers.
. Improved Network Quality and Reliability. Field and office technicians
use our products to diagnose and locate a variety of problems and
degradations in broadband service. This allows service providers to
identify and repair problems and to restore service efficiently. As a
result, our products support our customers' need to provide high quality
and reliable service.
Our objective is to be a leading provider of service verification test
equipment for a broad range of applications within the global
telecommunications industry. The key elements of our strategy are to maintain
our leadership position in DSL service verification equipment, to penetrate the
growing market for verification test equipment for fiber optics and cable TV,
to expand beyond field verification testing into remote testing, alarm and
surveillance and central office testing applications, to continue to expand
internationally, to pursue strategic acquisitions and joint ventures and to
pursue follow-on sales opportunities by continuing to develop and market
hardware modules which can be inserted into the chassis of our service
verification equipment.
We were incorporated in California as Sunrise Telecom, Inc. in October 1991.
Prior to the closing of this offering, we intend to reincorporate as a Delaware
corporation and change our name to Sunrise Telecom Incorporated. Our principal
executive offices are located at 22 Great Oaks Boulevard, San Jose, California
95119, and our telephone number is (408) 363-8000.
4
<PAGE>
The Offering
<TABLE>
<C> <S>
Common stock offered by Sunrise..................... shares
Common stock offered by the selling stockholders.... shares
Common stock to be outstanding after this offering.. shares
Use of proceeds..................................... We expect to use up to
$3.0 million to pay down
recent borrowings under
our line of credit. We
have not made other
specific allocations
regarding the remaining
net proceeds and expect
to use the balance to
expand our business
generally. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol.............. SRTI
</TABLE>
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Unless otherwise noted, the information in this prospectus, including the
information above:
. assumes 14,971,000 shares of common stock outstanding at December 31,
1999;
. reflects a -for-one stock split of our common stock, which will
occur before the closing of this offering;
. excludes approximately 3,086,435 shares of common stock reserved for
issuance under our 1993 stock option plan, our 2000 stock plan and our
2000 employee stock purchase plan, of which 817,700 shares were subject
to outstanding options at December 31, 1999 issued at a weighted average
exercise price of $4.39 per share;
. excludes 166,667 shares of contingently issuable stock as part of the
Pro.Tel acquisition; and
. assumes our reincorporation from California to Delaware, which will
occur before the closing of this offering.
5
<PAGE>
Summary Consolidated Financial Information
The table below sets forth summary consolidated financial information for the
periods indicated. It is important that you read this information together with
the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our consolidated financial statements
and the notes to them included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Year Ended December 31,
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1995 1996 1997 1998 1999
------- ------- ------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations:
Net sales............................ $10,674 $20,174 $29,064 $28,535 $61,465
Cost of sales........................ 2,880 5,189 7,652 7,590 14,736
------- ------- ------- ------- -------
Gross profit....................... 7,794 14,985 21,412 20,945 46,729
Operating expenses:
Research and development........... 1,722 3,051 5,892 6,203 10,694
Sales and marketing................ 2,565 5,444 7,645 7,764 15,215
General and administrative......... 649 1,019 1,632 2,243 3,912
------- ------- ------- ------- -------
Total operating expenses........... 4,936 9,514 15,169 16,210 29,821
------- ------- ------- ------- -------
Income from operations............. 2,858 5,471 6,243 4,735 16,908
Other income, net.................... 22 51 112 224 327
------- ------- ------- ------- -------
Income before income taxes......... 2,880 5,522 6,355 4,959 17,235
Income taxes......................... 1,107 2,081 1,899 1,588 6,291
------- ------- ------- ------- -------
Net income......................... $ 1,773 $ 3,441 $ 4,456 $ 3,371 $10,944
======= ======= ======= ======= =======
Earnings per share: (1)
Basic.............................. $ 0.30 $ 0.23 $ 0.74
======= ======= =======
Diluted............................ $ 0.30 $ 0.22 $ 0.72
======= ======= =======
Shares used in computing earnings per
share: (1)
Basic.............................. 14,882 14,846 14,889
======= ======= =======
Diluted............................ 14,965 15,001 15,275
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
December 31, 1999
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Actual As Adjusted (2)
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(in thousands)
<S> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents............................. $ 8,615
Working capital....................................... 16,029
Total assets.......................................... 38,266
Notes payable, less current portion................... 638
Total stockholders' equity............................ 25,471
</TABLE>
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(1) See Note 1 of the notes to consolidated financial statements of Sunrise for
a detailed explanation of the determination of the number of shares used to
compute basic and diluted earnings per share.
(2) "As Adjusted" reflects the application of the net proceeds from the sale of
shares of our common stock by us at an assumed initial public
offering price of $ per share, after deducting the underwriting
discount and the estimated offering expenses. See "Use of Proceeds" and
"Capitalization."
6
<PAGE>
RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. If any of the following risks actually occur, our
business, financial condition or results of operations could be materially
adversely affected. In that event, the trading price of our shares could
decline, and you may lose part or all of your investment.
Risks Relating to Our Business
Quarterly Fluctuations--Because our quarterly operating results have fluctuated
significantly in the past and are likely to fluctuate significantly in the
future, our stock price may decline and may be volatile.
In the past, we have experienced significant fluctuations in our quarterly
results due to a number of factors beyond our control. In the future, we expect
that our quarterly operating results may fluctuate significantly and will be
difficult to predict given the nature of our business. Many factors could cause
our operating results to fluctuate from quarter to quarter in the future,
including the following:
. the size and timing of orders from our customers, in each case
exacerbated by the lengthy and unpredictable buying patterns of our
customers, and our ability to ship these orders on a timely basis;
. the degree to which our customers have allocated and spent their yearly
budgets, which has, in some cases, resulted in higher net sales in our
fourth quarter;
. the uneven pace of technology innovation, the development of products
responding to these technology innovations by us and our competitors and
customer acceptance of these products and innovations;
. the varied degree of price, product and technology competition, which
has been buffeted by the rapid changes in the telecommunications
industry and our customers' and competitors' responses to these changes;
. the relative percentages of our products sold domestically and
internationally; and
. the mix of the products we sell and the varied margins associated with
these products.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Selected Quarterly Results of Operations."
We cannot assure you that we will be able to anticipate and manage the
factors listed above, and it is likely that there will be significant
fluctuations in our quarterly operating results in the future. As a result, we
expect that the fluctuations in our quarterly results and the factors listed
above may affect our business and stock price in several ways, include the
following:
. Given the high fixed costs relating to overhead, research and
development, advertising and marketing, among others, if our net sales
are below our expectations in any quarter, the negative effect may be
magnified by our inability to adjust spending in a timely manner. As a
result, our profitability may fluctuate beyond the variability of our
business due to the factors listed above.
. As a result of the above, our stock price may decline and may be
volatile, particularly if public market analysts and investors perceive
these factors to exist, whether or not that perception is accurate. A
lower and more volatile stock price will likely reduce our stockholders'
ability to sell their shares at attractive prices or at all.
. Finally, the above factors, taken together may make it more difficult
for us to issue additional equity in the future or raise debt financing
to fund future acquisitions and accelerate growth.
7
<PAGE>
Customer Concentration--A limited number of customers account for a high
percentage of our net sales, and any adverse factor affecting these
customers or our relationship with these customers could cause our net sales
to decrease.
Our customer base is highly concentrated, and a relatively small number of
companies have accounted for a large percentage of our net sales. Net sales
from our top five customers in the United States represented approximately
16.4% of net sales in 1997, 15.9% in 1998 and 49.4% in 1999. Our largest
customers over this period have been affiliates of SBC Communications Inc.,
which include Pacific Bell Telephone Company, Southwestern Bell Telephone
Company, Ameritech Corporation, Nevada Bell and Southern New England Telephone
and which in total accounted for approximately 40.6% of net sales in fiscal
1999. No customer is presently obligated to purchase a specific amount of
products or to provide us with binding forecasts of purchases for any period.
We expect that we will continue to depend upon SBC Communications' affiliates
and other major customers for a substantial portion of our net sales in future
periods. We cannot guarantee that our future net sales, including those from
SBC Communications' affiliates, will be comparable to our fiscal 1999 net
sales. The loss of a major customer or the reduction, delay or cancellation of
orders from one or more of our significant customers could cause our net sales
and, therefore, profits to decline.
Because we are dependent on a limited number of customers, we expect that our
net sales from quarter to quarter may be volatile due to the budgeting cycles
and the unpredictable buying patterns of our customers and the uneven pace of
technological innovation and reputation of telecommunications industry. Adverse
changes in our net sales or operating results as a result of these budgeting
cycles or any other reduction in capital expenditures by our large customers
could substantially reduce the trading price of our common stock.
In addition, many of our customers are able to exert substantial negotiating
leverage over us. As a result, they may cause us to lower our prices and
negotiate other forms and provisions that may negatively affect our business
and profits.
Dependence on DSL--Substantially all of our sales have been from our DSL
products. If the market for DSL services does not continue to grow as we
anticipate, our net sales could decline.
In 1999, sales of our DSL products represented approximately 97.5% of our net
sales. Currently, our DSL products are primarily used by a limited number of
incumbent local exchange carriers, including the regional Bell operating
companies, and competitive local exchange carriers, who offer DSL services. A
competitive local exchange carrier is a company that, following the
Telecommunications Act of 1996, is authorized to compete in a local
communications services market. These parties, and other Internet service
providers and users, are continuously evaluating alternative high-speed data
access technologies, including cable modems, fiber optics, wireless technology
and satellite technologies, and may at any time adopt these competing
technologies. These competing technologies may ultimately prove to be superior
to DSL services and reduce or eliminate the demand for our DSL products.
In addition, the availability and quality of DSL service may be impaired by
technical limitations and problems of the existing copper wire network on which
DSL service runs, such as:
. the distance of end users from the central office of the incumbent local
exchange carrier, which is typically limited to between 12,000 and
18,000 feet;
. the quality and degree of interference with the copper wire network;
. the configuration of the copper wire network, which may degrade or
prevent DSL service;
. the ability of DSL networks and operational support systems of service
providers to connect and manage a substantial number of online end users
at high speeds, while achieving reliable and high quality service; and
8
<PAGE>
. the vulnerability of the copper wire network to physical damage from
natural disasters and other unanticipated telecommunications failures
and problems.
Accordingly, our future success is substantially dependent upon whether DSL
technology gains widespread market acceptance by these companies, end users of
their services and other Internet service providers and users.
In addition, factors adversely affecting DSL service providers and DSL
products, such as adverse conditions in the telecommunications industry,
increased competition, unforeseen technological change and disputes regarding
proprietary rights used in these products, would have a negative effect on the
pricing of and demand for our products. We cannot assure you that we will be
successful in developing any other products or taking steps to reduce the risks
described above. Any downturn in the demand for such products could reduce our
net sales and profitability. For more information regarding the
telecommunications industry, see "Business--Industry Background."
To date, our customers have deployed DSL equipment, including our products,
in substantially larger volumes than their current subscriber count. The
inability of our current or future customers to acquire and retain subscribers
as planned, or to respond to competition for their services or reduced demand
for their services, could cause them to reduce or eliminate their DSL
deployment plans. If our customers are forced to reduce or eliminate their DSL
deployment plans, our sales to them will decline.
Moreover, to ensure quality service, our major service provider customers,
including SBC Communications, typically send a technician who uses our product
into the field to verify service for installations. If, in the future, these
services providers choose to send technicians into the field only after a
problem has been reported or alternative methods of verification become
available, such as remote verification, demand for our products could decrease.
Sales Implementation Cycles--The length and unpredictability of the sales and
implementation cycles for our products makes it difficult to forecast
quarterly revenues.
Sales of our products often entail an extended decision-making process on the
part of prospective customers. We frequently experience delays following
initial contact with a prospective customer and expend substantial funds and
management effort pursuing these sales. Our ability to forecast the timing and
amount of specific sales is therefore limited. As a result, the uneven buying
patterns of our customers may cause fluctuations in our quarterly operating
results, making some quarters less profitable than expected by public market
analysts and investors, which could cause our stock price to decline.
We sell our products predominantly to large telecommunications service
providers. These prospective customers generally commit significant resources
to an evaluation of our and our competitors' products and require each vendor
to expend substantial time, effort and money educating the prospective customer
about the value of the proposed solutions. Consequently, sales to this type of
customer generally require an extensive sales effort throughout the prospective
customer's organization and final approval by an executive officer or other
senior level employee. The result is lengthy sales and implementation cycles,
which make sales forecasting difficult. In addition, even after a large
telecommunications service provider has approved our product for purchase,
their future purchases are uncertain because we do not enter into long-term
supply agreements or requirements contracts with those parties.
Other sources of delays that lead to long sales cycles, or even a sales loss,
include: potential customers' internal approval and contracting procedures,
procurement practices, and testing and acceptance processes. As a result, the
sales cycle for larger deployment of selected products typically ranges from
six to 24 months for new deployment of selected product sales, and up to six
months for occasional large selected product sales. The deferral or loss of one
or more significant sales could significantly affect operating results in a
particular quarter, especially if there are significant sales and marketing
expenses associated with the deferred or lost sales. See "Business--Sales,
Marketing and Customer Service."
9
<PAGE>
Product Enhancements--If we are unable to enhance our existing products and
successfully manage the development of new products, our future success may
be threatened.
The market for our products is characterized by rapid technological advances,
changes in customer requirements and preferences, evolving industry and
customer-specific protocol standards and frequent new product enhancements and
introductions. Our existing products and our products currently under
development could be rendered obsolete and unmarketable by the introduction of
products for telecommunications networks involving competing technologies, by
the evolution of alternative technologies or new industry protocol standards
and by rival products introduced by our competitors. These market conditions
are made more complex and challenging by the high degree to which the
telecommunications industry is fragmented.
We believe our future success will depend, in part, upon our ability, on a
timely and cost-effective basis, to continue to:
. anticipate and respond to varied and rapidly changing customer
preferences and requirements, a process made more challenging by our
customers' buying patterns;
. anticipate and develop new products and solutions for networks based on
emerging technologies, such as the Asynchronous Transfer Mode, or ATM,
protocol that packs digital information into cells to be routed across a
network, and Internet telephony, which comprises voice, video, image and
data across the Internet, that are likely to be characterized by
continuing technological developments, evolving industry standards and
changing customer requirements;
. invest in research and development to enhance our existing products and
to introduce new verification and diagnostic products for the
telecommunications, Internet, cable network and other markets; and
. support our products by investing in effective advertising, marketing
and customer support.
We cannot assure you that we will accomplish these objectives, and our failure
to do so could have a material adverse impact on our market share, business and
financial results.
Potential Product Liability--Our products are complex, and our failure to
detect errors and defects may subject us to costly repairs, product returns
under warranty and product liability litigation.
Our products are complex and may contain undetected defects or errors when
first introduced or as enhancements are released. These errors may occur
despite our testing and may not be discovered until after a product has been
shipped and used by our customers. This risk is compounded by the fact that we
offer over 20 products, with multiple hardware and software modifications,
which makes it more difficult to ensure high standards of quality control in
our manufacturing process. The existence of these errors or defects could
result in costly repairs and/or returns of products under warranty and, more
generally, in delayed market acceptance of the product or damage to our
reputation and business.
In addition, the terms of our customer agreements and purchase orders, which
provide us with protection against unwarranted claims of product defect and
error, may not protect us adequately from unwarranted claims against us, unfair
verdicts if a claim were to go to trial, settlement of these kinds of claims or
future regulation or laws regarding our products. Our defense against these
claims in the future, regardless of their merit, could result in substantial
expense to us, diversion of management time and attention, damage to our
business reputation and hurt our ability to retain existing customers or
attract new customers.
10
<PAGE>
Managing Growth--We may have difficulties managing our expanding operations,
which could reduce our chances of maintaining our profitability.
We have recently experienced rapid growth in revenues and in our business
generally that has placed, and we expect will continue to place, a significant
strain on our management and operations. For example, our revenues have
increased from $28.5 million in 1998 to $61.5 million in 1999, our number of
employees has increased from 118 at December 31, 1998 to 216 at March 1, 2000,
and we have made two important acquisitions, that of Hukk Engineering and
Pro.Tel. As a result of our historical and expected growth, we face several
risks, including:
. the need to improve our operational, financial, management,
informational and control systems;
. the need to hire, train and retain highly skilled personnel in a market
where there are already severe shortages of these kinds of personnel, as
we discuss below; and
. the possibility that our management's attention will be diverted from
running our business to the needs of managing a public company.
We cannot assure you that we will be able to manage this growth profitably.
Competition--Competition could reduce our market share and decrease our net
sales.
The market for our products is fragmented and intensely competitive both in
and outside the United States, and is subject to rapidly evolving industry
standards and varied and changing customer preferences and requirements. Our
principal competitors in the DSL product category include TTC (a division of
Dynatech, Inc.) and Agilent Technologies (84% owned by Hewlett-Packard Company,
Inc.); our principal competitors in the fiber optics SONET/SDH product category
include Digital Lightwave, Inc., TTC and Agilent Technologies; our principal
competitors in the cable TV product category include Wavetek Wandel Goltermann,
Inc. and Agilent Technologies; and our principal competitors in the signaling
product category include Inet Technologies, Inc. and GN Nettest. Many of these
competitors have longer operating histories, larger installed customer bases,
longer relationships with customers, wider name recognition and product
offerings and greater financial, technical, marketing, customer service and
other resources than we do. On February 14, 2000, Dynatech and Wavetek
announced the merger of TTC to Wavetek, which could have the effect of making
the combined company a more formidable competitor.
We expect that, as our industry and market evolves, new competitors or
alliances among competitors with existing and new technologies could emerge and
acquire significant market share. We anticipate that competition in our market
will increase with the result that we will face greater threats to our market
share, price pressure on our products and the likelihood that, over time, our
profitability may decrease. In addition, it is difficult to assess accurately
the market share of our products or of Sunrise overall because of the high
degree of fragmentation in the market for DSL service verification equipment,
in particular, and for high-speed data access technology, in general. As a
result, it may be difficult for us to forecast accurately trends in the market,
which of our products will be the most competitive over the longer term and,
thus, what is the best use of our human and other form of capital. We cannot
assure you that we will be able to compete effectively. For discussion of the
principal competitive factors in our market, see "Business--Competition."
Need for New Personnel--If we cannot hire and train the R&D, manufacturing,
sales, and marketing personnel we need to support our anticipated growth,
our plans for continued expansion will be hampered.
The development, manufacture, marketing and sales of our products requires
engineers, technicians and other highly trained and experienced personnel. In
particular, our products require a sophisticated selling effort targeted at
several key people within our prospective customers' organizations. This
process requires the efforts of experienced sales personnel as well as
specialized engineers. In addition, the complexity of our products and the
difficulty of configuring and maintaining them require highly trained
11
<PAGE>
customer service and support personnel. If we continue to grow, we will need to
hire a significant number of engineering, sales, marketing and customer service
and support personnel in the future, in and outside the United States. We
believe our success depends, in large part, upon our ability to attract and
retain these employees. Competition for such persons is intense, especially in
the San Francisco Bay Area. We may not be successful in attracting and
retaining these individuals. We cannot assure you that we will be able to hire,
train and keep these kinds of employees, and our failure to do so could impair
our ability to grow profitably. In addition, if we do hire new personnel, the
addition of significant numbers of new personnel will require us to incur
significant start-up expenses, including procurement of office space and
equipment, initial training costs, and may result in low productivity rates of
these new personnel. These start-up expenses may adversely affect our future
operating results.
In addition, in the past we have filled a significant portion of our new
personnel needs, particularly for our engineers, with non-U.S. citizens holding
temporary work visas that allow these persons to work in the United States for
a limited period of time. We rely on these non-U.S. workers because of the
shortage of engineers, technicians and other highly skilled and experienced
workers in the telecommunications industry in the United States, in general,
and in the San Francisco Bay Area, in particular. Regulations of the
Immigration and Naturalization Service permit non-U.S. workers a limited number
of extensions for their visas and also set quotas regarding the number of non-
U.S. workers U.S. companies may hire. As a result, we face the risk that a
portion of our existing employees may not be able to continue to work for us,
thereby disrupting our operations, and that we may not be able to hire the
number of engineers, technicians and other highly skilled and experienced
workers that we need to grow our business. Further, changes in these
regulations could exacerbate these risks.
Dependence on Key Employees--If one or more of our senior managers were to
leave, we could experience difficulties in replacing them and our operating
results could suffer.
Our success depends to a significant extent upon the continued service and
performance of a relatively small number of key senior management, technical,
sales and marketing personnel. The loss of any of our three founders, Paul Ker-
Chin Chang, Paul A. Marshall and Robert C. Pfeiffer, in particular, would
likely harm our business. None of these individuals is bound by an employment
agreement with us, and we do not carry key man life insurance on them. In
addition, competition for senior level personnel with telecommunications
knowledge and experience is intense. If any of our senior managers were to
leave Sunrise, we would need to devote substantial resources and management
attention to replace them. As a result, management attention may be diverted
from managing our business and we may need to pay higher compensation to
replace these employees.
Risks of International Operations--Our plan to expand sales in international
markets could lead to higher operating expenses and may subject us to
unpredictable regulatory and political systems.
Sales to customers located outside of the United States represented 46% of
our net sales in 1997, 42% in 1998 and 20% in 1999, and we expect international
revenues to continue to account for a significant percentage of net sales for
the foreseeable future. In addition, an important part of our strategy calls
for further expansion into international markets. As a result, we will face
various risks relating to our international operations, including:
. potentially higher operating expenses, resulting from the establishment
of international offices, the hiring of additional personnel and the
localization and marketing of products for particular countries'
technologies;
. the need to establish relationships with government-owned or subsidized
telecommunications providers as well as additional distributors;
12
<PAGE>
. fluctuations in foreign currency exchange rates and the risks of using
hedging strategies to minimize our exposure to these fluctuations, which
have been heightened by our recent acquisition of Pro.Tel, whose
revenues have been and are likely to continue to be in Italian lira; and
. potentially adverse tax consequences related to acquisitions and
operations, including the ability to claim goodwill deductions and a
foreign tax credit against U.S. federal income taxes, especially since
Italy has a higher tax rate.
We cannot assure you that one or more of these factors will not materially and
adversely affect our ability to expand into international markets, our revenues
and profits.
In addition, since the last six months of 1997, the Asia/Pacific region has
experienced instability in many of its economies and significant devaluations
in local currencies. Approximately 20% of our sales in 1998 and 9% of our sales
in 1999 were derived from customers located in this region. These instabilities
may continue or worsen, which could have a materially adverse effect on our
results of operations. If international revenues are not adequate to offset the
additional expense of expanding international operations, our future growth and
profitability could suffer.
Dependence on Sole and Single Source Suppliers--Because we depend on a limited
number of suppliers and some sole and single source suppliers that are not
contractually bound in the long-term, our future supply of product
components is uncertain. This could lead to manufacturing difficulties.
In our manufacturing process, we purchase many key products, such as
microprocessors, bus interface chips, optical components and oscillators, from
a single source or from that product's sole supplier. We rely exclusively on
third-party subcontractors to manufacture some sub-assemblies, and we have
retained, from time to time, third party design services in the development of
our products. We do not have long-term supply agreements with these vendors. In
general, we make advance purchases of some products and components to ensure an
adequate supply, particularly for products that require lead times of up to six
months to manufacture. In the past, we have experienced supply problems as a
result of financial or operational difficulties of our suppliers, shortages,
discontinuations resulting from component obsolescence or other shortages or
allocations of supplies. Our reliance on these third parties involves a number
of risks, including:
. the unavailability of critical products and components on a timely
basis, on commercially reasonable terms or at all;
. if products were to become unavailable, the need to qualify new or
alternative products for our use and/or to reconfigure our products and
manufacturing process, each of which could be lengthy and expensive;
. the likelihood that, if these products are not available, we would
suffer an interruption in the manufacture and shipment of our products
until the products or alternatives become available;
. reduced control over product quality and cost, risks exacerbated by the
need to respond, at times, to unanticipated changes and increases in
customer orders; and
. the unavailability of, or interruption in, access to some process
technologies.
In addition, the purchase of these components on a sole source basis subjects
us to risks of price increases and potential quality assurance problems. This
dependence magnifies the risk that we may not be able to ship our products on a
timely basis to satisfy customers' orders. We cannot assure you that one or
more of these factors will not cause delays or reductions in product shipments
or increases in product costs, which in turn could have a material adverse
effect on our business. See "Business--Manufacturing."
13
<PAGE>
In addition, we rely upon software that we license from third parties,
including software that is integrated with our internally developed software
and used in our products to perform key functions. The inability to maintain
these software licenses could result in shipment delays or reductions until
equivalent software could be developed or licensed and integrated into our
products, which could harm our business and threaten our reputation. We cannot
assure you that these third-party software licenses will continue to be
available to us on commercially reasonable terms or at all. See "Business--
Intellectual Property and Proprietary Technology."
Acquisitions--We have acquired two companies and intend to pursue further
acquisitions and joint ventures in the future. These activities involve
numerous risks, including the use of cash, amortization of goodwill and the
diversion of management attention.
Recently, we acquired two companies, Hukk Engineering in July 1999, and
Pro.Tel in February 2000, and, in the future, may acquire other businesses,
products and technologies or engage in joint ventures. As a result of the
acquisitions of Hukk Engineering and Pro.Tel, we face numerous risks relating
to the integration of these businesses, including the risks associated with:
. integrating the existing management, sales force, technicians and other
personnel into one existing culture and business;
. combining manufacturing, administrative and management information and
other control systems into our corresponding systems;
. developing and implementing an integrated business strategy from what
had been previously three independent companies; and
. developing compatible or complementary products and technologies from
previously independent operations. For Hukk Engineering, this means
addressing the convergence of telephony and cable products.
The risks stated above will be made more difficult because Hukk Engineering is
located in Norcross, Georgia and Pro.Tel is located in Modena, Italy and
Springfield, Virginia. In addition, if we make future acquisitions or enter
into joint ventures, these risks will be exacerbated by the need to integrate
additional operations at a time when we may not have fully integrated Hukk
Engineering and Pro.Tel. We cannot assure you that we will be able to integrate
these companies successfully, and a failure to do so could hurt our business
and likely our profitability.
Given the rapid evolution in the telecommunications industry and the need to
respond on a timely basis to changing technologies and customer preferences and
requirements, acquisitions and joint ventures can provide an efficient way to
expand a business, a product line, and access to different customers and niches
of our market. As a result, we believe that future acquisitions and joint
ventures may play an important role in the development of our business and in
our ability to remain competitive. If we pursue further acquisitions or enter
into joint ventures, we will face similar risks as those above and additional
risks, including:
. the diversion of our management's attention and the expense due to the
time consuming and complex process of identifying and pursuing suitable
acquisition or joint venture candidates, whether or not consummated;
. negotiating and closing these transactions;
. the potential need to fund these acquisitions by dilutive issuances of
equity securities and by incurring debt; and
. the potential negative effect on our financial statements from the
increase in goodwill and other intangibles, the write-off of research
and development costs and the high cost and expenses of completing
acquisitions or joint ventures.
14
<PAGE>
We cannot assure you that we will locate suitable acquisition or joint venture
candidates or that, if we do, we will be able to acquire them or enter into
joint ventures and then integrate them successfully and efficiently into our
business.
Risks of the Telecommunications Industry--We face several risks regarding the
telecommunications industry, including the possible effects of its rapid and
unpredictable growth, the possible effects of consolidation among our
principal customers and the risk that deregulation will slow.
Since the passage of the Telecommunication Act of 1996, the
telecommunications industry has undergone and, we believe, will likely continue
to experience rapid growth. This has and will likely continue to lead to great
innovations in technology, intense competition, short product life cycles and,
to some extent, regulatory uncertainty in and outside the United States. The
course of the development of the telecommunications industry is, however,
difficult to predict. As a result, companies who operate in this industry have
a difficult time forecasting future trends and developments, increasing their
overall business risks, and in forecasting the acceptance of competing
technologies, which we discuss above regarding DSL services. One possible
effect of this uncertainty is that there may be, in the future, a delay or a
reduction in these companies' investment in their business and purchase of
related equipment, such as our products, and a reduction in their and our
access to capital. Moreover, in the short-term, deregulation may result in a
delay or a reduction in the procurement cycle because of the general
uncertainty involved with the transition period of businesses.
Although the telecommunications industry is relatively young and continues to
change rapidly, it has been experiencing consolidation among its primary
participants, such as incumbent local exchange carriers and competitive local
exchange carriers, several of whom are our primary customers. Continued
consolidation may cause delay or cause cancellation of orders for our products.
In addition, the consolidation of our customers will likely provide them with
greater negotiating leverage with us and may lead them to pressure us to lower
the prices of our products.
Because the market for our products in and outside the United States has
grown with the deregulation of portions of the telecommunications industry, we
face the risk that these trends may slow or may be reversed. For example, in
the United States, there is litigation pending that challenges the validity of
the Telecommunications Act of 1996 and the local telephone competition rules
adopted by the Federal Communications Commission to implement that act. If
deregulation in international markets and in the United States were to slow or
to take an unanticipated course, the telecommunications industry might suffer
the following effects:
. greater consolidation and concentration of providers of high-speed
access technologies, which may not favor the development of DSL
technology and which might provide these companies with greater
negotiating leverage regarding the prices and other terms of the DSL
products and services they purchase;
. uncertainty regarding judicial and administrative proceedings, which may
affect the pace at which investment and deregulation continue to occur;
. a general slowdown in economic activity relating to the
telecommunications industry and a consequent multiplier effect on the
general economy;
. reduced investment in the telecommunications industry in general and in
DSL technology in particular due to increased uncertainty regarding the
future of the industry and this technology; and
. delay in purchase orders of service verification equipment, such as our
products, if they were to reduce their investment in new high-speed
access technologies.
15
<PAGE>
Intellectual Property Risks--Policing any unauthorized use of our intellectual
property by third parties and defending any intellectual property
infringement claims against us could be expensive and disrupt our business.
Our intellectual property and proprietary technology is an important part of
our business, and we depend on the development and use of various forms of
intellectual property and proprietary technology. As a result, we are subject
to several related risks, including the risks of unauthorized use of our
intellectual property and the costs of protecting our intellectual property.
Much of our intellectual property and proprietary technology is not protected
by patents. If unauthorized persons were to copy, obtain or otherwise
misappropriate our intellectual property or proprietary technology without our
approval, the value of our investment in research and development would
decline, our reputation and brand could be diminished and we would likely
suffer a decline in revenue. We believe these risks, which are present in any
business in which intellectual property and proprietary technology play an
important role, are exacerbated by the difficulty in finding unauthorized use
of intellectual property in our business, the increasing incidence of patent
infringement in our industry in general and the difficulty of enforcing
intellectual property rights in some foreign countries.
In addition, litigation has in the past been, and may in the future be,
necessary to enforce our intellectual property rights. This kind of litigation
is time-consuming and expensive to prosecute or resolve, and results in
substantial diversion of management resources. We cannot assure you that we
will be successful in that litigation, that our intellectual property rights
will be held valid and enforceable in any litigation or that we will otherwise
be able to protect our intellectual property and proprietary technology. See
"Business--Intellectual Property and Proprietary Technology."
We may receive in the future notices from holders of patents that raise
issues as to possible infringement by our products. As the number of
telecommunications test, measurement, and network management products increases
and the functionality of these products further overlaps, we believe that we
may become subject to allegations of infringement given the nature of the
telecommunications industry and the high incidence of these kinds of claims.
Questions of infringement and the validity of patents in the field of
telecommunications technologies involve highly technical and subjective
analyses. We cannot assure that patent holders or others will not in the future
initiate claims or legal proceedings against us or that, if these proceedings
are initiated, we will be successful in defending against them. These kinds of
proceedings are time consuming and expensive to defend or resolve, result in
substantial diversion of management resources, cause product shipment delays or
could force us to enter into royalty or license agreements rather than dispute
the merits of the proceeding initiated against us. We cannot assure that any
such royalty or license agreements would be available on terms acceptable to
us, if at all. Therefore, any such claims against us, with or without merit,
would be costly and reduce our profits. In addition, if we were to lose a
patent infringement case, we could be forced to pay costly damages award and
redesign our products to avoid future infringement.
16
<PAGE>
Risks Relating to this Offering
Concentration of Control--Our executive officers and directors will retain
significant control over us after this offering, which will allow them to
decide the outcome of matters submitted to stockholders for approval. This
influence may not be beneficial to all stockholders.
Upon completion of the offering, Mr. Chang, Mr. Marshall and Mr. Pfeiffer
will beneficially own %, % and % of our outstanding shares of
common stock ( %, % and %, if the underwriters' over-allotment
options are exercised in full). Consequently, these three individuals, acting
together, will be able to control the election of our directors and the
approval of significant corporate transactions that must be submitted to a vote
of stockholders. In addition, Mr. Chang, Mr. Marshall and Mr. Pfeiffer will
constitute three of the six members of the board of directors and will have
significant influence in directing the actions taken by the directors. The
interests of these persons may conflict with your interests as stockholders,
and the actions they take or approve may be contrary to those desired by other
stockholders. This concentration of ownership and control of the management and
affairs of our company may also have the effect of delaying or preventing a
change in control of our company that stockholders may consider desirable. See
"Management" and "Principal and Selling Stockholders."
Anti-takeover Provisions--Anti-takeover provisions in our charter documents
could prevent or delay a change of control, and as a result, negatively
impact our stockholders.
Some provisions of our certificate of incorporation and bylaws may have the
effect of discouraging, delaying or preventing a change in control of our
company or unsolicited acquisition proposals that you, as a stockholder, may
consider favorable. These provisions provide for:
. authorizing the issuance of "blank check" preferred stock;
. a classified board of directors with staggered, three-year terms;
. prohibiting cumulative voting in the election of directors;
. requiring super-majority voting to effect certain amendments to our
certificate of incorporation and by-laws;
. limiting the persons who may call special meetings of stockholders;
. prohibiting stockholder action by written consent; and
. establishing advance notice requirements for nominations for election to
the board of directors or for proposing matters that can be acted upon
at stockholders meetings.
Some provisions of Delaware law and our stock incentive plans may also have the
effect of discouraging, delaying or preventing a change in control of our
company or unsolicited acquisition proposals. These provisions also could limit
the price that some investors might be willing to pay in the future for shares
of our common stock. See "Management--Benefit Plans," "Description of Capital
Stock--Delaware Anti-Takeover Law and Charter and Bylaw Provisions" and
"Description of Capital Stock--Indemnification Provisions."
No Prior Public Market--There has been no prior public market for our common
stock, and our stock price may be volatile, resulting in potential
litigation.
Prior to this offering, there has been no public market for our common stock.
The initial public offering price for the common stock will be determined by
negotiations among our company, the selling stockholders and the underwriters,
and may not be representative of the price that will prevail in the open
market. See "Underwriting" for a discussion of the factors to be considered in
determining the initial public offering price. We cannot assure you that an
active trading market will develop or be sustained after the offerings. Nor can
we be certain that the market price of our common stock will not decline below
the initial public offering price.
17
<PAGE>
If our stock price is volatile, we could face securities class action
litigation. In the past, following periods of volatility in the market price of
their stock, many companies have been the subjects of securities class action
litigation. If we were sued in a securities class action, it could result in
substantial costs and a diversion of management's attention and resources and
could cause our stock prices to fall further. Furthermore, the public markets
have experienced volatility that has particularly affected the market prices of
securities of many technology companies for reasons that have often been
unrelated to their operating results. This volatility, in addition to exposing
our company to potential litigation, may adversely affect the market price of
our common stock and our company's visibility and credibility in our markets.
Other factors that may cause the market price of our common stock to fluctuate
significantly after the offerings include:
. variations in our results of operations, particularly the risks
described in our discussion above of risks related to quarterly
fluctuations;
. future sales of additional shares of common stock;
. market analysts' estimates of our performance; and
. general market conditions or conditions in the market for
telecommunications companies.
Sale of Shares--The sale of a substantial number of shares of our common stock
after this offering may adversely affect our stock price.
The market price of our common stock could decline as a result of sales of
substantial amounts of common stock in the public market after the closing of
this offering or the perception that substantial sales could occur. These sales
might also make it difficult for us to sell equity securities in the future at
a time and at a price that we deem appropriate. See "Shares Eligible for Future
Sale."
Dilution--New investors will experience immediate and substantial dilution.
The initial public offering price will be substantially higher than the
current book value per share of our outstanding common stock. As a result,
purchasers of common stock in the offerings will incur immediate, substantial
dilution. In addition, we have issued options to acquire common stock at prices
substantially below the initial public offering price. To the extent these
options are exercised, there will be further dilution. See "Dilution."
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements, which may be deemed to
include, but are not limited to, our business strategy, timing of and plans for
the introduction of new products and enhancements, plans for hiring additional
personnel, timing of and plans for opening new offices and the adequacy of
anticipated sources of cash, including the proceeds from this offering, to fund
our operations. Words such as "believes," "anticipates," "plans," "expects,"
"intends" and similar expressions are intended to identify forward-looking
statements, but are not the exclusive means of identifying such statements.
Actual results could differ materially from those projected in any forward-
looking statements for the reasons detailed in other sections of the "Risk
Factors" portion of this prospectus or elsewhere in this prospectus. We assume
no obligation to update any forward-looking statement after the date of this
prospectus.
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<PAGE>
USE OF PROCEEDS
We will receive net proceeds of approximately $ million from the sale of
shares of common stock by us in this offering at an assumed initial public
offering price of $ per share after deducting underwriting commissions and
discounts and estimated offering expenses. We will not receive any of the
proceeds from the sale of shares by the selling stockholders.
The principal purpose of this offering is to increase our equity capital, to
create a public market for our common stock, to facilitate our future access to
public equity markets, to provide liquidity for certain of our existing
stockholders, to improve the effectiveness of our stock option plan in
attracting and retaining key employees and to provide increased visibility of
Sunrise in a marketplace where many of our competitors are publicly held
companies.
We will use up to $3.0 million to repay recent borrowings under our line of
credit, which bears interest at the bank's prime rate and expires in October
2000. We have not made other specific allocations regarding the remaining net
proceeds, and we expect to use the net proceeds from this offering to expand
our business generally, including to fund the following:
. general corporate purposes;
. working capital;
. up to approximately $15.0 million for the construction of our new
facility in San Jose, California, which we are building to accommodate
our need for an increase in manufacturing capacity and employees; and
. the acquisition of businesses, products and technologies which are
complementary with or support our business, product offerings and
strategy.
In addition, if the former shareholders of Pro.Tel exercise their option to
sell back shares of our common stock on May 22, 2000, that they received as
part of the purchase price for that company, we will use $5.0 million of the
net proceeds to repurchase these shares. Pending any use, the net proceeds will
be invested in short-term, interest-bearing securities.
DIVIDEND POLICY
We have declared and paid cash dividends on our common stock since 1994. In
the future, our board of directors will determine whether we will pay dividends
on our common stock. Our line of credit limits the payment of dividends on our
common stock.
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<PAGE>
CAPITALIZATION
The following table sets forth our capitalization at December 31, 1999:
. on an actual basis; and
. on an as adjusted basis to give effect to the receipt of the estimated
net proceeds from the sale of shares of common stock offered by us in
this offering at an assumed initial public offering price of $ per
share, after deducting underwriting discounts and commissions and
estimated offering expenses.
The number of shares of common stock listed in the following table excludes
the following:
. approximately 3,086,435 shares of common stock reserved for issuance
under our 1993 stock option plan, our 2000 stock plan and our 2000
employee stock purchase plan, of which 817,700 shares were subject to
outstanding options at December 31, 1999 issued at a weighted average
exercise price of $4.39 per share;
. $3.0 million of borrowings under our line of credit during March 2000;
and
. 166,667 shares of contingently issuable stock in the Pro.Tel
acquisition.
The information below is qualified by, and should be read in conjunction
with, our consolidated financial statements and the notes to those statements
appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
December 31, 1999
--------------------
Actual As Adjusted
------- -----------
(dollars in
thousands)
<S> <C> <C>
Notes payable, less current portion....................... $ 638
-------
Stockholders' equity:
Preferred stock, $0.001 par value; 10,000,000 shares
authorized; none issued and outstanding................ --
Common stock, $0.001 par value; 175,000,000 shares
authorized; 14,971,000 shares outstanding, actual; and
shares outstanding, as adjusted 15
Additional paid-in capital.............................. 3,945
Deferred stock-based compensation....................... (2,065)
Retained earnings....................................... 23,576
-------
Total stockholders' equity............................ 25,471
-------
Total capitalization................................ $26,109
=======
</TABLE>
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DILUTION
At December 31, 1999, our actual net tangible book value was approximately
$23.1 million or $1.55 per share. Actual net tangible book value per share
represents the amount of total actual tangible assets less total actual
liabilities, divided by the shares of common stock outstanding at December 31,
1999. After giving effect to the sale of the shares of common stock we are
offering, after deducting the underwriting discounts and commissions and
estimated offering expenses, our adjusted net tangible book value at December
31, 1999 would have been $ million, or $ per share. This represents an
immediate increase in as adjusted net tangible book value of $ per share to
existing stockholders and an immediate dilution of $ per share to new
investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
Net tangible book value per share at December 31, 1999.... $1.55
Increase per share attributable to new investors..........
-----
Pro forma net tangible book value per share after the
offering...................................................
---------
Dilution per share to new investors......................... $
=========
</TABLE>
The following table sets forth, on a pro forma basis, at December 31, 1999
the difference between the number of shares of common stock purchased, the
total consideration paid and the average price per share paid by the existing
stockholders and the new investors purchasing shares of common stock in this
offering:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ ---------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders... 14,971,000 % $ 690,853 % $
New investors...........
---------- ----- ----------- --------
Total................. 100.0% $ 100.0%
========== ===== =========== ========
</TABLE>
The discussion and tables above assume no exercise of the following:
. approximately 3,086,435 shares of common stock reserved for issuance
under our 1993 stock option plan, our 2000 stock plan and our 2000
employee stock purchase plan, of which 817,700 shares were subject to
outstanding options at December 31, 1999 issued at a weighted average
exercise price of $4.39 per share;
. 166,667 shares of contingently issuable stock in the Pro.Tel
acquisition.
Sales by the selling stockholders in this offering will reduce the number of
shares of common stock held by existing stockholders to or approximately
% ( shares, or approximately %, if the underwriters' over-allotment
option is exercised in full) of the total number of shares of common stock
outstanding upon the closing of this offering and will increase the number of
shares held by new public investors to or approximately % ( shares,
or approximately %, if the underwriters' over-allotment option is exercised
in full) of the total number of shares of common stock outstanding after this
offering. See "Principal and Selling Stockholders."
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<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data as of December 31, 1997, 1998 and
1999 and for each of the years in the three-year period ended December 31, 1999
have been derived from our audited consolidated financial statements audited by
KPMG LLP, independent auditors, and, except for the consolidated balance sheet
as of December 31, 1997, are included elsewhere in this prospectus.
The selected consolidated financial data as of and for each of the years in the
two-year period ended December 31, 1996 have been derived from our audited
consolidated financial statements, which were audited by other auditors, and
are not included in this prospectus. See Note 1 of the notes to consolidated
financial statements of Sunrise for a detailed explanation of the determination
of the number of shares used to compute basic and diluted earnings per share.
You should read the data presented below in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," our
consolidated financial statements and the notes to them appearing elsewhere in
this prospectus.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations:
Net sales............................ $10,674 $20,174 $29,064 $28,535 $61,465
Cost of sales........................ 2,880 5,189 7,652 7,590 14,736
------- ------- ------- ------- -------
Gross profit....................... 7,794 14,985 21,412 20,945 46,729
Operating expenses:
Research and development........... 1,722 3,051 5,892 6,203 10,694
Sales and marketing................ 2,565 5,444 7,645 7,764 15,215
General and administrative......... 649 1,019 1,632 2,243 3,912
------- ------- ------- ------- -------
Total operating expenses........... 4,936 9,514 15,169 16,210 29,821
------- ------- ------- ------- -------
Income from operations............. 2,858 5,471 6,243 4,735 16,908
Other income, net.................... 22 51 112 224 327
------- ------- ------- ------- -------
Income before income taxes......... 2,880 5,522 6,355 4,959 17,235
Income taxes......................... 1,107 2,081 1,899 1,588 6,291
------- ------- ------- ------- -------
Net income......................... $ 1,773 $ 3,441 $ 4,456 $ 3,371 $10,944
======= ======= ======= ======= =======
Earnings per share:
Basic.............................. $ 0.30 $ 0.23 $ 0.74
======= ======= =======
Diluted............................ $ 0.30 $ 0.22 $ 0.72
======= ======= =======
Shares used in computing earnings per
share:
Basic.............................. 14,882 14,846 14,889
======= ======= =======
Diluted............................ 14,965 15,001 15,275
======= ======= =======
<CAPTION>
December 31,
---------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents............ $ 597 $ 638 $ 2,409 $ 5,030 $ 8,615
Working capital...................... 2,568 4,832 8,087 10,164 16,029
Total assets......................... 6,246 11,260 14,678 17,193 38,266
Notes payable, less current portion.. -- -- -- -- 638
Total stockholders' equity........... 3,223 6,402 10,462 13,570 25,471
</TABLE>
22
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
We have prepared the following unaudited pro forma consolidated condensed
financial statements from our historical financial statements included
elsewhere in this prospectus. The unaudited pro forma consolidated condensed
income statement for the year ended December 31, 1999 is adjusted as if we had
acquired Pro.Tel as of January 1, 1999. The pro forma consolidated condensed
balance sheet reflects the acquisition as though it had occurred as of December
31, 1999. Our historical balance sheet at December 31, 1999 reflects the
acquisition of Hukk Engineering, which occured in July 1999.
You should read the unaudited pro forma consolidated condensed financial
statements below in conjunction with our audited consolidated financial
statements and related notes as of December 31, 1999 and 1998 and for each of
the years in the three years ended December 31, 1999, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
financial statements of Pro.Tel included elsewhere in this prospectus.
The unaudited pro forma consolidated condensed financial statements below do
not purport to represent what our results of operations or financial position
would have been had the Pro.Tel acquisition occurred on the date specified
below or to project our results of operations or financial position for any
future periods or date. The pro forma adjustments are based upon available
information and assumptions that we believe are reasonable. In our opinion, we
have made all adjustments that are necessary to present fairly the pro forma
data presented below. The actual amounts could differ from those stated below.
Sunrise Telecom, Inc. & Subsidiaries
Unaudited Pro Forma Consolidated Condensed Income Statement
Year Ended December 31, 1999
(in thousands, except per share data)
<TABLE>
<CAPTION>
Historical Historical Pro Forma Pro Forma
Sunrise Pro.Tel Adjustments Combined
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Net sales....................... $61,465 $1,893 -- $63,358
Cost of sales................... 14,736 1,348 $ 146 (A) 16,230
------- ------ ------- -------
Gross profit.................. 46,729 545 (146) 47,128
Operating expenses:
Research and development...... 10,694 28 684 (A) 11,406
Sales and marketing........... 15,215 190 325 (A) 15,730
General and administrative.... 3,912 311 470 (A) 6,576
1,883 (B)
------- ------ ------- -------
Total operating expenses...... 29,821 529 3,362 33,712
------- ------ ------- -------
Income from operations.......... 16,908 16 (3,508) 13,416
Other income, net............... 327 108 (195) (C) 240
------- ------ ------- -------
Income before income taxes.... 17,235 124 (3,703) 13,656
Income taxes.................... 6,291 73 (1,352) (D) 5,012
------- ------ ------- -------
Net income.................... $10,944 $ 51 $(2,351) $ 8,644
======= ====== ======= =======
Earnings per share:
Basic......................... $ 0.74 $ 0.58
======= =======
Diluted....................... $ 0.72 $ 0.57
======= =======
</TABLE>
(A) To reflect the increase in amortization expense due to the amortization of
deferred stock-based compensation expense, on a straight line basis over
the four year vesting period, related to options to purchase common stock
at exercise prices deemed to be below fair market value.
(B) To reflect increase in amortization expense due to the amortization of
intangibles and goodwill on a straight line basis over five years.
(C) To reflect the decrease in interest income as a result of the reduction in
cash paid as partial consideration for the purchase of Pro.Tel.
(D) To reflect the income tax effect of the adjustments at the effective tax
rate of 36.5%.
23
<PAGE>
Sunrise Telecom, Inc. & Subsidiaries
Unaudited Pro Forma Consolidated Condensed Balance Sheet
As of December 31, 1999
(in thousands)
<TABLE>
<CAPTION>
Historical Historical Pro Forma Pro Forma
Sunrise Pro.Tel Adjustments Combined
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Cash.......................... $ 8,615 $ 97 $(3,900) (A) $ 4,812
Accounts receivable........... 9,524 691 10,215
Inventories................... 7,612 252 7,864
Prepaid expenses and other
assets....................... 214 29 243
Deferred income taxes......... 2,050 -- 2,050
------- ------ ------- -------
Total current assets........ 28,015 1,069 (3,900) 25,184
Property and equipment, net... 4,417 177 4,594
Investment.................... 646 -- 646
Net intangible assets......... 2,324 16 9,414 (B) 11,754
Other assets.................. 2,864 29 2,893
------- ------ ------- -------
Total assets................ $38,266 $1,291 $ 5,514 $45,071
======= ====== ======= =======
Accounts payable.............. $ 1,701 $ 498 $ 190 (B) $ 2,389
Commissions payable........... 1,344 -- 1,344
Accrued compensation and
related benefits............. 3,399 -- 3,399
Current portion of notes
payable and
other debt................... 219 289 600 (C) 1,108
Other accrued expenses........ 2,098 100 2,198
Income taxes payable.......... 2,814 51 2,865
Deferred revenue.............. 411 -- 411
------- ------ ------- -------
Total current liabilities... 11,986 938 790 13,714
------- ------ ------- -------
Deferred income taxes......... 171 19 190
Other long-term liabilities... -- 44 44
Notes payable, less current
portion...................... 638 14 652
Stock issued in acquisition
subject to put arrangement... -- -- 5,000 (D) 5,000
Common stock.................. 3,960 260 (260) (E) 3,960
Deferred stock-based
compensation (loss).......... (2,065) -- (2,065)
Retained earnings............. 23,576 16 (16) (E) 23,576
------- ------ ------- -------
Total equity................ 25,471 276 (276) 25,471
------- ------ ------- -------
Total liabilities and
equity................... $38,266 $1,291 $ 5,514 $45,071
======= ====== ======= =======
</TABLE>
- ---------------------
(A) To reflect the reduction in cash paid as partial consideration for the
purchase of Pro.Tel.
(B) To reflect the excess acquisition cost over the estimated fair value of net
assets acquired (intangibles, goodwill and non-compete agreement).
The purchase price and purchase price allocation is summarized below (in
thousands):
<TABLE>
<S> <C>
Purchase price paid:
Cash............................................................... $3,900
Common stock....................................................... 5,000
Non-compete payable................................................ 500
Note payable....................................................... 100
Acquisition costs.................................................. 190
------
Acquisition costs.................................................... 9,690
Allocated to:
Historical book value of Pro.Tel's assets and liabilities.......... 276
------
Excess purchase price over allocation to identifiable assets and
liabilities (intangibles, goodwill and non-compete agreement)....... $9,414
======
</TABLE>
(C) To reflect the non-compete payable from the acquisition costs to be paid in
16 quarterly payments.
(D) To reflect common stock issued as partial consideration for the purchase.
(E) To reflect the elimination of the shareholders' equity accounts of Pro.Tel.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our consolidated
financial statements and the related notes appearing at the end of this
prospectus. Our discussion contains forward-looking statements based upon
current expectations that involve risks and uncertainties, such as our plans,
objectives, expectations and intentions. Actual results and the timing of
events could differ materially from those anticipated in these forward-looking
statements as a result of a number of factors, including those set forth under
"Risk Factors," "Business" and elsewhere in this prospectus.
Overview
We manufacture and market service verification equipment to pre-qualify,
verify and diagnose telecommunications and Internet networks. We design our
products to maximize technicians' effectiveness in the field and to provide
realistic network simulations for equipment manufacturers to test their
products. Our customers include incumbent local exchange carriers, such as Bell
Atlantic Corporation and SBC Communications Inc., competitive local exchange
carriers, such as Covad Communications Group, Inc. and NorthPoint
Communications Group, Inc., and other service providers, network infrastructure
suppliers and installers throughout North America, Latin America, Europe and
the Asia/Pacific region.
Sources of Net Sales
We sell our products predominantly to large telecommunications service
providers. These prospective customers generally commit significant resources
to an evaluation of our and our competitors' products and require each vendor
to expend substantial time, effort and money educating the prospective customer
about the value of the proposed solutions. Delays associated with potential
customers' internal approval and contracting procedures, procurement practices,
testing and acceptance processes are common and may cause potential sales to be
delayed or foregone. As a result of these and related factors, the sales cycle
of new products for large customers typically ranges from six to 24 months.
Substantially all of our sales are made on the basis of purchase orders rather
than long-term agreements or requirements contracts. As a result, we commit
resources to the development and production of products without having received
advance or long-term purchase commitments from customers.
To date, a significant portion of our net sales has resulted from a small
number of relatively large orders from a limited number of customers. In 1999,
we sold approximately $25.0 million of our products to affiliates of SBC
Communications, which represented approximately 40.6% of our net sales. We
anticipate that our operating results for any given period will continue to be
dependent to a significant extent on large purchase orders, which can be
delayed or cancelled by our customers without penalty. In addition, we
anticipate that our operating results for a given period will continue to be
dependent on a small number of customers.
During the last three years, a substantial portion of our net sales were
derived from customers located outside of the United States, and we believe
that continued growth will require expansion of our sales in international
markets. Currently, we maintain a procurement support and manufacturing
facility in Taipei, Taiwan, a representative liaison office in Beijing, China,
a foreign sales corporation in Barbados and manufacturing, research and
development and sales facilities in Modena, Italy and expect to establish
additional international sales and other offices in the future. Prior to our
acquisition of Pro.Tel, international sales have been denominated solely in
U.S. dollars and, accordingly, we have not been exposed to fluctuations in non-
U.S. currency exchange rates related to these sales activities. We have been
exposed, however, to fluctuations in non-U.S. currency exchange rates related
to our procurement activities in Taiwan. In the future, we expect that a
portion of international sales may be denominated in currencies other than U.S.
dollars, thereby exposing us to gains and losses on non-U.S. currency
transactions. We may
25
<PAGE>
choose to limit such exposure by entering into various hedging strategies. See
Note 14 of notes to consolidated financial statements of Sunrise and "Risk
Factors--Risks Relating to Our Business--Risks of International Operations."
We recognize product sales upon shipment to customers. We offer a three-year
warranty covering parts and labor on our DSL and fiber optic products sold in
the United States and a one-year warranty covering parts and labor for those
products sold overseas with a two-year extended warranty option at time of
sale. Our cable TV and signaling products are covered by a one-year warranty.
Sales of extended warranties are deferred and recognized over the extended
warranty term, which is generally two years. We charge estimated warranty costs
to cost of sales when the related sales are recognized. We recognize revenue
for out-of-warranty repair when we ship the repaired product.
Cost of Sales
Our cost of sales consist primarily of:
. direct material costs of product components, manuals, product
documentation and product accessories sold;
. production wages, taxes and benefits;
. production allocated occupancy costs;
. warranty costs;
. the costs of board level assembly by third party contract manufacturers;
and
. scrapped material used in the production process.
We recognize direct cost of sales as we ship product. We expense scrapped
materials, wages, taxes, benefits and allocated occupancy costs as incurred.
Operating Costs
We classify our operating expenses into three general operational categories:
sales and marketing, research and development and general and administrative.
Our operating expenses also include stock-based compensation and amortization
of goodwill and other intangible assets. We classify all charges to the sales
and marketing, research and development and general and administrative expense
categories based on the nature of the expenditures. Although each of these
three categories includes expenses that are unique to the category type, there
are commonly recurring expenditures that are typically included in these
categories, such as salaries, amortization of stock-based compensation,
employee benefits, travel and entertainment costs, allocated communication,
rent and facilities costs and third party professional service fees. The sales
and marketing category of operating expenses also includes expenditures
specific to the sales and marketing group, such as those relating to
commissions, public relations and advertising, trade shows and marketing
materials.
We allocate the total cost of overhead and facilities to each of the
functional areas that use overhead and facilities based upon the facilities
square footage used by each of these areas. These allocated charges include
facility rent and utilities for the corporate office, communications charges
and depreciation expense for office furniture and equipment.
In 1999, we recorded amortization of deferred compensation expense of
$205,000 related to the grant of options to purchase our common stock at
exercise prices subsequently deemed to be below fair market value. Total
compensation expense related to options granted in 1999 will be amortized on a
straight-line basis to the departments in which the employees received these
below market option grants over the respective four-year vesting periods of the
options. In 1999, we allocated amortization of deferred compensation expense of
$17,000 to cost of sales, $111,000 to research and development expense, $58,000
to sales and marketing expense and $18,000 to general and administrative
expense. At December 31, 1999, $2,065,000 of deferred compensation expense
remained to be amortized at a rate not exceeding $142,000 per quarter.
26
<PAGE>
Acquisitions
Recently, we purchased two companies, Hukk Engineering and Pro.Tel. In July
1999, we acquired Hukk Engineering, a manufacturer of digital cable testing
equipment. We accounted for the Hukk Engineering acquisition as a purchase and
recorded goodwill and other intangibles of approximately $2.5 million to be
amortized on a straight-line basis over the next five years. In February 2000,
we acquired Pro.Tel, an Italian manufacturer of distributed network signaling
analysis equipment, and its U.S. affiliate and the assets of an unrelated U.S.
distributor. We accounted for the Pro.Tel acquisition as a purchase and
recorded goodwill and other intangibles of approximately $9.4 million to be
amortized on a straight-line basis over the next five years. In addition, we
expect to record stock-based compensation for stock options granted to
employees of Pro.Tel subsequent to December 31, 1999 in the amount of $6.5
million to be amortized on a straight-line basis over their four year vesting
period. We believe that acquisitions and joint ventures may be an important
part of our growth and competitive strategy. See Notes 11 and 15(a) of notes to
consolidated financial statements of Sunrise and "Risk Factors--Risks Relating
to Our Business--Acquisitions."
Results of Operations
The following table sets forth certain operating data as a percentage of net
sales for the periods indicated:
<TABLE>
<CAPTION>
Percentage of
Net Sales
-------------------
Year Ended
December 31,
-------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Net sales.................................................. 100.0% 100.0% 100.0%
Cost of sales............................................ 26.3 26.6 24.0
----- ----- -----
Gross profit............................................. 73.7 73.4 76.0
Operating expenses:
Research and development................................. 20.3 21.7 17.4
Sales and marketing...................................... 26.3 27.2 24.7
General and administrative............................... 5.6 7.9 6.4
----- ----- -----
Total operating expenses................................. 52.2 56.8 48.5
----- ----- -----
Income from operations................................... 21.5 16.6 27.5
Other income, net.......................................... 0.4 0.8 0.5
----- ----- -----
Income before income taxes............................... 21.9 17.4 28.0
Income taxes............................................... 6.5 5.6 10.2
----- ----- -----
Net income................................................. 15.4% 11.8% 17.8%
===== ===== =====
</TABLE>
Comparison of Years Ended December 31, 1998 and 1999
Net Sales. Net sales increased approximately 115.4% from $28.5 million in
1998 to $61.5 million in 1999. Sales of our xDSL products accounted for
approximately $30.0 million of the $33.0 million increase in net sales in 1999.
Sales to affiliates of SBC Communications represented approximately $22.8
million of the increase in 1999. We also introduced two new products in the
second half of 1999, the SunSet OCx and SS500, to address the fiber optic
transmissions testing market. We expect that sales growth in the near future
will be primarily from our xDSL, fiber optics and signaling products.
Cost of Sales. Cost of sales consists primarily of direct material, warranty
and personnel costs related to the manufacturing of our products and allocated
overhead. Cost of sales increased approximately 94.2% from $7.6 million in 1998
to $14.7 million in 1999. Cost of sales represented approximately 26.6% of net
sales in 1998 and approximately 24.0% in 1999. The decrease as a percentage of
net sales during 1999 resulted primarily from an increase in domestic sales,
which have higher gross margins than international sales as a percentage of net
sales and lower manufacturing costs due to volume discounts.
27
<PAGE>
Research and Development. Research and development expenses consist primarily
of the costs of payroll and benefits for engineers, equipment and consulting
services. Research and development expenses increased approximately 72.4% from
$6.2 million in 1998 to $10.7 million in 1999. The increase in absolute dollars
was primarily due to costs associated with increased staffing dedicated to
research and development activities. These research and development expenses
represented approximately 21.7% of net sales during 1998 and approximately
17.4% in 1999. The decrease as a percentage of net sales in 1999 was primarily
attributable to increased product sales relative to research and development
expenditures. We expect that research and development expenses will increase in
absolute dollars for the foreseeable future as we intend to continue to invest
in product development.
Sales and Marketing. Sales and marketing expenses consist primarily of
manufacturers' representatives and direct sales commissions, personnel, travel
and facilities expenses related to sales and marketing, and trade show and
advertising expenses. Sales and marketing expenses increased approximately
96.0% from $7.8 million in 1998 to $15.2 million in 1999. The increase in
absolute dollars in 1999 was primarily related to increased staffing to support
expanded product offerings, increased marketing and promotional activities and
an increase in commissions paid to the independent manufacturers'
representatives. These sales and marketing expenses represented approximately
27.2% of net sales during 1998 and approximately 24.7% in 1999. The decrease as
a percentage of net sales during 1999 was primarily due to relatively higher
growth in sales in North America as a percentage of net sales. We expect that
sales and marketing expenses will increase in absolute dollars for the
foreseeable future as we intend to invest in our sales and marketing
capabilities.
General and Administrative. General and administrative expenses consist
primarily of personnel, facilities and other costs of our finance and
administrative departments, amortization of goodwill and other intangibles as
well as legal and accounting expenses. General and administrative expenses
increased approximately 74.4% from $2.2 million in 1998 to $3.9 million in
1999. The increase in absolute dollars was primarily related to increased
staffing and related costs associated with the growth of our business and
professional and legal fees associated with our successful patent lawsuit
against Electrodata, Inc. These general and administrative expenses represented
approximately 7.9% of net sales during 1998 and approximately 6.4% in 1999. The
slight decrease as a percentage of net sales during 1999 was primarily due to
relatively higher growth in net sales and our ability to leverage our base of
resources to support a larger organization. We anticipate that general and
administrative expenses will continue to increase in absolute dollars for the
foreseeable future as we accommodate our growth, add related infrastructure and
incur expenses related to being a public company.
Other Income, Net. Other income, net represents primarily interest earned on
cash balances. Other income, net increased from $224,000 in 1998 to $327,000 in
1999. The increase in 1999 resulted from increased interest earned on higher
balances of cash and cash equivalents resulting from increased cash flow from
operations, partially offset by interest expense attributable to notes payable.
Income Taxes. Income taxes consists of federal, state and international
income taxes. We recorded income tax expense of $1.6 million in 1998 and $6.3
million in 1999. Our effective income tax rates were 32.0% in 1998 and 36.5% in
1999. The effective income tax rate was higher in 1999 than in 1998 primarily
due to higher levels of income as well as an increased concentration of sales
in local jurisdictions with higher tax rates.
Comparison of Years Ended December 31, 1997 and 1998
Net Sales. Net sales decreased 1.8% from $29.1 million in 1997 to $28.5
million in 1998. The decrease in sales from 1997 to 1998 was primarily due to
the consolidation of two of our large customers, which resulted in delays in
orders for certain of our products as they integrated their purchasing
practices, a downturn in global economies, especially in Asia, deregulation in
Europe and privatization in Latin America.
28
<PAGE>
Cost of Sales. Cost of sales decreased approximately 0.8% from $7.7 million
in 1997 to $7.6 million in 1998. Cost of sales represented approximately 26.3%
of net sales in 1997 and 26.6% in 1998. The decrease in absolute dollars and
the slight increase as a percentage of net sales during 1998 resulted primarily
from the change in product mix and lower volume of new products sold in 1998
compared to 1997. Overall decreases in material costs were assisted by the
organization of Taiwan Sunrise Telecom Company Limited in 1998 to manage local
procurement activities in Taiwan. The material cost reductions were partially
offset by lower prices on our products in Asia and other countries during 1998
as well as start-up manufacturing, materials and integration expenses
associated with the initial release of SunLite E1, SunLite BRI, SunSet E8,
SunSet PDH, SunSet E20 and the SunSet xDSL. Quality standards and procedures
were also increased in 1998 as a result of ISO 9001 certification, which we
received in September 1998. The increased effort to maintain ISO 9001
certification, documentation and procedures increased additional expense to the
overall cost of goods sold.
Research and Development. Research and development expenses increased
approximately 5.3% from $5.9 million in 1997 to $6.2 million in 1998. The
increase in both absolute dollars and as a percentage of net sales was
primarily due to costs associated with increased staffing dedicated to research
and development activities. These expenses represented approximately 20.3% of
net sales in 1997 and approximately 21.7% in 1998.
Sales and Marketing. Sales and marketing expenses increased approximately
1.6% from $7.6 million in 1997 to $7.8 million in 1998. The increase in
absolute dollars in 1998 was primarily related to increased staffing as we
expanded product offerings and increased marketing and promotional activities.
These expenses represented approximately 26.3% of net sales during 1997 and
approximately 27.2% in 1998. The increase as a percentage of net sales during
1998 was primarily due to advertising and promotional expenses for new products
as well as an increase in travel expenses for expanded sales activities.
General and Administrative. General and administrative expenses increased
approximately 37.4% from $1.6 million in 1997 to $2.2 million in 1998. The
increase in absolute dollars was primarily related to increased staffing and
related costs associated with the growth of our business. These expenses
represented approximately 5.6% of net sales during 1997 and approximately 7.9%
in 1998. The increase as a percentage of net sales during 1998 was primarily
due to increased staffing and related costs incurred in anticipation of future
growth as well as an increase in legal and professional fees associated with
our successful patent lawsuit against Electrodata, Inc.
Other Income, Net. Other income, net increased from $112,000 in 1997 to
$224,000 in 1998. The increase in 1998 resulted from increased interest earned
on higher balances of cash and cash equivalents resulting from increased cash
flow from operations, partially offset by interest expense attributable to
notes payable.
Income Taxes. We recorded income tax expense of $1.9 million in 1997 and $1.6
million in 1998. Our effective income tax rates were 30% in 1997 and 32% in
1998. The effective income tax rate was higher in 1998 than in 1997 primarily
due to reduced foreign sales corporation export benefits due to a reduction in
international sales as a percentage of net sales and research and development
tax credit benefits.
29
<PAGE>
Selected Quarterly Results of Operations
The following table sets forth certain quarterly financial data for the eight
quarters ended December 31, 1999. This quarterly information is unaudited, has
been prepared on the same basis as our annual financial statements, and, in our
opinion, reflects all adjustments, consisting only of normal recurring
accruals, necessary for a fair presentation of the information for periods
presented. 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,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- --------- -------- -------- -------- --------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $5,956 $7,831 $7,499 $7,249 $8,090 $16,410 $14,511 $22,454
Cost of sales........... 1,750 2,124 2,096 1,620 2,281 4,001 3,463 4,991
------ ------ ------ ------ ------ ------- ------- -------
Gross profit............ 4,206 5,707 5,403 5,629 5,809 12,409 11,048 17,463
Operating expenses:
Research and
development........... 1,389 1,582 1,574 1,658 1,706 2,813 2,793 3,382
Sales and marketing.... 1,676 2,080 1,938 2,070 2,130 4,157 3,645 5,283
General and
administrative........ 447 480 534 782 522 1,040 1,100 1,250
------ ------ ------ ------ ------ ------- ------- -------
Total operating
expenses.............. 3,512 4,142 4,046 4,510 4,358 8,010 7,538 9,915
------ ------ ------ ------ ------ ------- ------- -------
Income from
operations............ 694 1,565 1,357 1,119 1,451 4,399 3,510 7,548
Other income, net....... 43 49 52 80 71 39 99 118
------ ------ ------ ------ ------ ------- ------- -------
Income before income
taxes................. 737 1,614 1,409 1,199 1,522 4,438 3,609 7,666
Income taxes............ 258 565 523 242 476 1,404 1,149 3,262
------ ------ ------ ------ ------ ------- ------- -------
Net income.............. $ 479 $1,049 $ 886 $ 957 $1,046 $ 3,034 $ 2,460 $ 4,404
====== ====== ====== ====== ====== ======= ======= =======
<CAPTION>
As a Percentage of Net Sales
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales........... 29.4 27.1 28.0 22.3 28.2 24.4 23.9 22.2
------ ------ ------ ------ ------ ------- ------- -------
Gross profit............ 70.6 72.9 72.0 77.7 71.8 75.6 76.1 77.8
Operating expenses:
Research and
development........... 23.3 20.2 21.0 22.9 21.1 17.1 19.2 15.1
Sales and marketing.... 28.2 26.6 25.8 28.5 26.3 25.3 25.1 23.5
General and
administrative........ 7.5 6.1 7.1 10.8 6.5 6.4 7.6 5.6
------ ------ ------ ------ ------ ------- ------- -------
Total operating
expenses.............. 59.0 52.9 53.9 62.2 53.9 48.8 51.9 44.2
------ ------ ------ ------ ------ ------- ------- -------
Income from
operations............ 11.6 20.0 18.1 15.5 17.9 26.8 24.2 33.6
Other income, net....... 0.7 0.6 0.7 1.1 0.9 0.2 0.7 0.5
------ ------ ------ ------ ------ ------- ------- -------
Income before income
taxes................. 12.3 20.6 18.8 16.6 18.8 27.0 24.9 34.1
Income taxes............ 4.3 7.2 7.0 3.4 5.9 8.5 7.9 14.5
------ ------ ------ ------ ------ ------- ------- -------
Net income.............. 8.0% 13.4% 11.8% 13.2% 12.9% 18.5% 17.0% 19.6%
====== ====== ====== ====== ====== ======= ======= =======
</TABLE>
Our operating results have fluctuated from quarter to quarter due to a
variety of reasons. We note below some of the larger changes in various line
items in the table above.
Net Sales. Net sales increased significantly during the quarter ended June
30, 1999 as compared to the first and third quarters of 1999. This was
primarily due to an increase in shipments of our SunSet xDSL product to Pacific
Bell, an affiliate of SBC Communications, as Pacific Bell began to accelerate
the installation of their ADSL service. Shipments in the third quarter of 1999
remained relatively level and then increased once again in the fourth quarter
of 1999 as Pacific Bell's year end orders increased.
Gross Profit. Gross profit increased to 77.7% of net sales during the quarter
ended December 31, 1998 and increased again to 77.8% of net sales during the
quarter ended December 31, 1999, primarily due to an increase in domestic sales
as a percentage of net sales and the mix of product shipped during the quarter,
each of which led to higher gross profit.
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Research and Development. During the quarters ended September 30, 1998 and
September 30, 1999, research and development expenses decreased in absolute
dollars due to the reduction in bonus accruals during the quarter,
corresponding with net sales declines during the third quarters of 1998 and
1999.
Sales and Marketing. Sales and marketing expenses increased in absolute
dollars during the second and fourth quarters ended June 30, 1998 and December
31, 1998 due to increased spending in advertising and promotion of new products
during the quarters. Additional fluctuation in sales and marketing expense can
occur due to the geographical location of sales because we incur commission
expense on domestic sales whereas we incur a reduced sales price net of
distributor mark up on international sales.
General and Administrative. General and administrative expenses generally
increased in absolute dollars during the eight quarters ended December 31, 1999
primarily due to increases in personnel and related costs required to support
our growth. The increase in general and administrative expense during the
quarters ended December 31, 1998 and June 30, 1999 through September 30, 1999
was related primarily to legal and professional expenses relating to our
successful patent litigation against Electrodata. During the quarter ended
December 31, 1999, general and administrative expenses increased due to a full
quarter of amortization associated with the Hukk Engineering acquisition.
We believe that quarterly revenues and operating results are likely to vary
significantly in the future and that quarter-to-quarter comparisons of our
results of operations are not necessarily meaningful and should not be relied
upon as indications of future performance. We cannot assure you that our net
sales will increase or be sustained or that we will be profitable in any future
period. Further, it is likely that there will be quarter to quarter
fluctuations in our operating results some of which may be below the
expectations of public market analysts and investors. For a discussion of the
factors that could affect our quarterly operating results and the possible
effects of these changes, see "Risk Factors--Risks Relating to Our Business--
Quarterly Fluctuations" and "Selected Consolidated Financial Data."
Backlog
Our backlog of customer orders at December 31, 1999 was approximately $11.0
million. Variations in the size and delivery schedules of purchase orders that
we receive, as well as changes in customers' delivery requirements may result
in substantial fluctuations in the amount of backlog orders for our products
from quarter to quarter. Accordingly, we believe that our backlog cannot be
considered a meaningful indicator of our future financial results.
Seasonality
We believe that our sales are seasonal in nature with the largest portion of
quarterly sales tied to the buying patterns of our customers which usually
increase during the last calendar quarter of the year as customers spend the
unused portion of their yearly budget. As a result, our first quarter sales
tend to decrease from the prior quarter.
Liquidity and Capital Resources
Historically, we have financed our operations and satisfied our capital
expenditure requirements primarily through cash flow from operations. As of
December 31, 1999, we had working capital of $16.0 million and cash and cash
equivalents of $8.6 million.
Cash provided by operating activities was $2.4 million in 1997, $4.5 million
in 1998 and $10.1 million in 1999. Operating cash flows in 1999 increased
primarily due to increased levels of income from operations, partially offset
by increases in accounts receivable due to increased sales late in the period
and increases in inventory.
Cash used in investing activities was $227,000 in 1997, $1.7 million in 1998
and $6.2 million in 1999. Our use of cash in investing activities in 1999 was
primarily related to a $2.7 million cash deposit for the purchase of land for
and construction of our new facility, a $782,000 payment relating to the Hukk
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Engineering acquisition and $2.7 million of purchases of property and
equipment. We believe that capital expenditures will total approximately $25.0
million in 2000, including an additional approximately $15.0 million relating
to our new facility in San Jose, California.
Cash used in financing activities was $396,000 in 1997, $263,000 in 1998 and
$311,000 in 1999. Our use of cash in financing activities in 1999 was primarily
related to the repurchase of $202,000 of our common stock and cash dividends of
$223,000, offset by proceeds from the exercise of stock options.
In February 2000, we issued 166,667 shares of our common stock to the former
Pro.Tel shareholders as part of the total purchase price for Pro.Tel and
granted those shareholders the right to sell all of their shares back to us at
$30.00 per share on May 22, 2000. If all of the former Pro.Tel shareholders
elect to sell their shares back to us, we will be required to pay them $5.0
million in cash.
Currently, we have a line of credit from Bank of America, N.A., an affiliate
of Banc of America Securities LLC. The line of credit provides for up to $3.0
million in borrowings at the bank's prime rate and expires on October 1, 2000.
At December 31, 1999, there was no balance outstanding under the line of
credit. In March 2000, we borrowed $3.0 million under the line of credit.
Borrowings under the line of credit are secured by our inventory and accounts
receivable. The agreement governing the line of credit contains covenants,
which we were in compliance with at December 31, 1999, that, among other
things:
. requires us to maintain various financial covenants, including
profitability and current ratios;
. limits capital expenditures;
. restricts the payment of dividends on our common stock, including that
offered by this prospectus, to dividends payable in common stock and to
$750,000 payable in any one fiscal year; and
. restricts our ability to redeem our common stock beyond 20% of our net
income for the prior fiscal year.
We believe that the net proceeds received by us from this offering, together
with current cash balances, cash flows from operations and available borrowings
under our line of credit will be sufficient to meet our anticipated cash needs
for working capital, capital expenditures and other activities for at least the
next 12 months. After that, if current sources are not sufficient to meet our
needs, we may seek additional equity or debt financing. In addition, any
material acquisition of complementary businesses, products or technologies or
material joint venture could require us to obtain additional equity or debt
financing. We cannot assure you that such additional financing would be
available on acceptable terms, if at all.
Qualitative and Quantitative Disclosure about Market Risk
We sell our products in North America, Asia, Latin America and Europe. As a
result, our financial results could be affected by factors such as changes in
foreign currency exchange rates. As all sales are currently made in U.S.
dollars, a strengthening of the dollar could make our services less competitive
in foreign markets. Prior to the acquisition of Pro.Tel in February 2000, we
had not used derivative instruments to hedge our foreign exchange risks. Our
interest income is sensitive to changes in the general level of U.S. interest
rates, particularly since the majority of our investments are in money market
accounts. Due to the nature of our investments, we anticipate no material
market risk exposure.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards, or SFAS, No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 established methods of
accounting for derivative financial instruments and hedging activities related
to those instruments as well as other hedging activities. Currently, we do not
hold any derivative instrument, so we expect that the adoption of SFAS No. 133
will not have a material impact on our financial position, results of
operations or cash flows. We will be required to implement SFAS No. 133 during
the year ending December 31, 2001.
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BUSINESS
Overview
We manufacture and market service verification equipment that enables service
providers to pre-qualify facilities for services, verify newly installed
services and diagnose problems relating to the new DSL services, fiber optics,
cable TV networks and signaling networks. We design our products to maximize
technicians' effectiveness in the field and to provide realistic network
simulations for equipment manufacturers to test their products. Our customers
include incumbent local exchange carriers, such as Bell Atlantic Corporation
and SBC Communications Inc., competitive local exchange carriers, such as Covad
Communications Group, Inc. and NorthPoint Communications Group, Inc. and other
service providers, network infrastructure suppliers and installers throughout
North America, Latin America, Europe and the Asia/Pacific region.
Our objective is to be a leading provider of service verification test
equipment for a broad range of applications within the global
telecommunications industry. The key elements of our strategy are to maintain
our leadership position in DSL service verification equipment, to penetrate the
growing market for verification test equipment for fiber optics and cable TV,
to expand beyond field verification testing into remote testing, alarm and
surveillance and central office testing applications, to continue to expand
internationally, to pursue strategic acquisitions and joint ventures and to
pursue follow-on sales opportunities by continuing to develop and market
hardware modules which can be inserted into the chassis of our service
verification equipment.
We were incorporated in California as Sunrise Telecom, Inc. in October 1991.
Prior to the closing of this offering, we intend to reincorporate as a Delaware
corporation and change our name to Sunrise Telecom Incorporated.
Industry Background
Demand for High-Speed Data Access
The telecommunications industry is undergoing fundamental change and growth
worldwide. Following the Telecommunications Act of 1996, competitive local
exchange carriers in the United States have been allowed to compete with
incumbent local exchange carriers, including the regional Bell operating
companies, for local carrier services. The regulatory developments in the
telecommunications industry have coincided with a surge in demand for high-
speed Internet access and data transmission service. According to Ryan Hankin
Kent, Inc., data traffic in the United States and Canada has surpassed the
amount of voice traffic carried on the existing telephone network. At the end
of 1999, data traffic had reached 350,000 terabytes per month, approximately
seven times the level of voice traffic. Further, the research indicates that
streaming media or other large, multi-media intensive files account for ten
percent of all Internet traffic, while voice and fax over Internet protocol
represents two to three percent of all traffic. Consumers are seeking higher-
speed access to bandwidth intensive content and services, such as highly
graphical Web sites, audio, video and software downloads. As an increasing
number of Internet users access more and different content, the ability to
connect to and receive data from the Internet at high speeds has become and
will continue to be more important. Businesses have even greater requirements
for high-speed access to implement e-commerce strategies, to access the
Internet for a variety of purposes and to provide employees with effective
telecommuting capabilities. Outside the United States, there is evidence to
suggest that deregulation and the availability of broadband service will
continue and will follow the general trends in the United States.
Service providers are responding to the increased demand with the deployment
of reliable high-speed, digital networks. One primary investment area is the
redesign of the access network to support broadband access to end users. This
portion of the network between the customer's premise and the service
provider's central office is also known as the "last-mile." The last mile
typically consist of copper wires that operate at
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<PAGE>
substantially lower transmission speeds than those offered in the long-haul
segment of a network or by some available broadband alternatives. These copper
wires were originally intended to carry only analog circuit-switched, low-speed
voice signals and, as a result, have become a bottleneck that limits high-speed
data transmission. Several access technologies are being deployed to support
higher-speed Internet access in the networks, including digital subscriber
lines, digital cable TV, fiber optics and broadband wireless. In addition, the
signaling portion of the network is essential to the integration of new
broadband services into the existing telecommunications network. We summarize
some of these technologies below.
Digital Subscriber Line Technology. Digital subscriber line technology,
commonly known as DSL, today transmits data up to 50 times faster than a
conventional dial-up modem using the existing copper telephone wires. Various
implementations of DSL are being developed and deployed, including asymmetric
DSL, known as ADSL, symmetric DSL, know as SDSL, high bit-rate DSL, know as
HDSL, and ISDN DSL, known as IDSL. Service providers deploying DSL technology
include incumbent local exchange carriers, such as SBC Communications, Inc. and
Bell Atlantic Corporation, as well as competitive local exchange carriers, such
as Rhythms NetConnections Inc., Covad Communications Group, Inc. and Northpoint
Communications Group, Inc.
Cable TV Networks. Cable TV operators use two-way cable, cable modems
installed in the home, cable modem termination systems installed at major cable
concentration points and network headend equipment designed to interface their
cable TV networks to video feeds and other networks. Several cable companies
are currently offering broadband access services across two-way cable,
including Excite@Home, Road Runner, Softnet Systems, Inc., High Speed Access
Corporation and TimeWarner. In addition, we believe that as a result of AT&T's
recent acquisition of Tele-Communications, Inc. and the proposed merger of
America Online, Inc. and Time Warner, cable TV networks will be used
increasingly for voice and high-speed data services.
Fiber Optics. Fiber optic cables use pulses of light to transmit digital
information. Because fiber optic cables support thousands of high-speed, local
digital connections onto a single higher-speed connection to the central office
or the central side of the cable TV network where the video signals emanate,
they offer virtually unlimited bandwidth capacity. Due to their high capacity,
fiber optic cables are being used increasingly in the access network in both
telecommunications and cable TV applications.
Signaling. Telephone systems require a signaling mechanism to set up and end
phone calls. These signals serve three basic functions: supervising or
monitoring the status of a line on circuit to see if it is busy, idle or
requesting service; alerting or indicating the arrival of an incoming call;
addressing or transmitting routing and destination signals over the network.
Signaling Systems 7, or SS7, is the standard signaling system used by telecom
networks worldwide. Signaling networks must support new access technologies to
ensure interoperability with the existing telephone network.
We believe that the increasing demand for high-speed bandwidth access and the
increasing development and availability to end users of technologies, such as
those described above, that support this access will propel the continued
growth of the Internet and of network service providers. According to Ryan
Hankin Kent, Inc., at the end of 1999, 625,000 households and businesses in the
United States and Canada used DSL for broadband access and another 1.5 million
households used cable TV modems. Further, by 2003, the research indicates that
there will be 13.6 million DSL connections and 11.1 million cable TV modem
connections.
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Challenges of High-Speed Data Services Deployment
Regardless of the type of technology, the successful deployment of high-speed
broadband services poses several major challenges to service providers.
Physical impairments in cable TV lines and the copper telephone wires upon
which DSL technology depends can degrade the quality of the broadband access
and, in some cases, prevent any service from being delivered. Examples of
physical impairments include the following:
. shorts, which occur when the twisted pair conductors are touching each
other or when one of them comes into contact with a grounded piece of
metal;
. opens, which occur in a variety of ways including when a splice joining
two cable segments fails or when a construction crew cuts through a
buried cable;
. power crosses, which occur when the telephone wire comes into contact
with a live AC power source; and
. wet cables, which occur when the aerial cable is subjected to rain or
when the underground cable comes into contact with ground water and the
pressurization system (if any) is inadequate to handle the leakage.
In addition to the challenges stated above, ADSL service for residential end
users faces its own particular challenges. ADSL is designed to share the
existing copper telephone wires using splitters or microfilters at the customer
premises and central office to break the single line into two service
appearances. Although a customer may have a working voice line, several line
impairments can kill ADSL service. These impairments include:
. load coils, which are inductors sometimes placed at 6000 foot intervals
on telephone lines to optimize voice transmission;
. bridge taps, which occur when an existing spare telephone line to one
customer location is "tapped" into prior to its endpoint to provide
service to another location that has exhausted its supply of existing
copper telephone lines, with the result that the line then has two
separate customer ends, one at the original location and the other at
the new location;
. AM radio interference, where the AM radio spectrum covers the same
frequencies used in ADSL, HDSL, high speed SDSL and T1 frequencies; and
. intra-cable crosstalk between high frequency service twisted pairs,
where the twisted pairs act as long antennas placed in the same cable
bundles, effectively transmitting onto one another creating excessive
levels of background noise.
Because these problems may only be diagnosed and repaired effectively in the
field, many DSL service providers send field technicians to verify every line
before they hand over service to their customers.
Cable TV and fiber optic networks face similar challenges. The cable TV
network was used originally to support one-way analog transmission of video
images. Now, digital cable TV networks also support voice and interactive high-
speed data services and customers require the same level of reliability as
provided by the existing telephone network. Potential problems for reliable and
high quality broadband access through cable TV lines include signal return path
interference and downstream signal degradation. As a result, cable TV providers
believe that cable plant pre-qualification and verification is a prerequisite
for the successful implementation of the technology. The widespread deployment
of fiber optic technologies into the cable TV and telecommunications access
networks also requires field verification equipment to verify and diagnose
service problems with these links.
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The Need for Service Verification Equipment
In order to deploy successfully and maintain the new broadband networks,
service providers rely on sophisticated service verification equipment. This
equipment allows service providers to pre-qualify facilities for services,
verify proper operation of newly installed services and diagnose problems. In
addition, equipment manufacturers use service verification equipment to test
simulated networks during equipment development and verify the successful
production of equipment. Service verification equipment can be grouped into
three types: field verification, remote testing and alarm and surveillance.
Field Verification Equipment. Field verification equipment is used by all
service providers to probe the actual wires, cables or airwaves to verify that
a service works. In the case of a service malfunction, a field technician can
use the equipment to locate the exact fault so that repairs can be made.
Research and development labs, manufacturing departments and central office
technicians also use field verification equipment in their day-to-day
operations. Of the three types of service verification equipment, field
verification equipment delivers the most detailed service information and is
essential to the successful deployment of broadband networks. Service providers
have found field verification to be the most effective method to ensure that
the lines work as promised before they hand over service to their customers.
Remote Test Equipment. Remote test equipment can help verify services and
identify certain types of service malfunctions from a centralized location. The
equipment is typically controlled by a centralized test system that automates
much of the remote testing process. It is commonly used to determine which
section within a 3,000 mile circuit has malfunctioned and to diagnose quickly
the nature of a customer's complaint. Due to its centralized and automated
nature, remote test equipment is an efficient way to complement field test
equipment in the deployment and maintenance of broadband networks.
Alarm and Surveillance Equipment. Alarm and surveillance equipment constantly
monitors the telephone network, searching for facility or service degradations,
including outages. When a problem is noticed, a report may be sent immediately
to an automated trouble diagnostic system or to a human operator who interprets
the message and decides what further action is required. Corrective action
typically involves field verification or remote test equipment to identify and
correct specific problems.
Because the competition for subscribers for high-speed bandwidth access is
intense, the quality and reliability of network service has become critical to
service providers because of the expense, loss of customers and negative
publicity resulting from poor service. Field technicians who use service
verification equipment allow service providers to verify and repair service
problems effectively and, thus, increase the quality and reliability of the
network. We believe that as broadband services are deployed further and as
competition for subscribers proliferates, service providers will increasingly
depend on advanced field test and monitoring solutions.
The Sunrise Solution
We design and manufacture service verification equipment that enables service
providers to pre-qualify facilities for services, verify newly installed
services and diagnose problems relating to the new DSL services, fiber optic
and cable TV and signaling networks. Our products also enable equipment
manufacturers to test simulated networks during equipment development and
verify the successful production of equipment. Our products offer the following
features:
. Design Flexibility. We design our products to be flexible and to evolve
as customer needs change. Our SunSet xDSL line, for example, allows
field technicians the ability to upgrade their equipment easily through
a variety of plug-in hardware modules. This flexible design allows the
customer to adapt the test set to new DSL services and applications as
network standards evolve, thereby protecting the customer's investment
in the test equipment.
. Customer Driven Features. Each of our products is highly tailored to our
customers' needs. Our marketing engineers continually interact with our
customers during the design process to ensure
36
<PAGE>
that our products are the best available solution for them. For example,
based on conversations with our customers, we developed a pinging method
for the technician to verify that a DSL line works the entire distance
from the customer's premise to the Internet service provider. This
feature is now an industry standard.
. Handheld Design. We design most of our products to be used in the field.
Most of our DSL and fiber optic products weigh less than three pounds
and offer handheld convenience. The compact, lightweight design of these
products enable field technicians to access problems and verify line
operation quickly. The SunSet OCx for example, is the first handheld
ATM-compatible fiber optic field test set for SONET, or synchronous
optical network, which is the North American standard for transmissions
using fiber optics. Similarly, our new SunSet SDH will offer the same
flexibility as the SunSet OCx for different international standards.
Because of the design and functionality of our products, we provide the
following benefits to our customers:
. Rapid and Efficient DSL Deployment. Our products allow field and office
technicians to test DSL lines rapidly and efficiently to ensure that
they are properly connected to the central office and that they can
support a specific type and speed of DSL service. In a single device,
our products can be used to pre-qualify facilities for services,
identify the source of problems and verify the proper operation of newly
installed service before handing service over to customers.
. Improved Network Quality and Reliability. Field and office technicians
use our products to diagnose and locate a variety of problems and
degradations in broadband service. For example, our xDSL products allow
extensive diagnosis and analysis of the physical layers of the copper
wire network. This allows service providers to identify and repair
problems and to restore service efficiently. As a result, our products
support our customers' need to provide high quality and reliable
service.
Strategy
Our objective is to be a leading provider of service verification test
equipment for a broad range of applications within the global
telecommunications industry. The following are the key elements of our
strategy:
. Maintain Leadership Position in DSL Service Verification Equipment. We
intend to maintain our leadership position in DSL service verification
equipment by continuing to enhance the features and functionality of our
existing products to serve our customers' rapidly changing needs. In
particular, we expect to introduce additional products to address new
DSL technologies. We also plan to expand our relationships with the top
DSL service providers in the United States and in international markets.
. Penetrate the Growing Market for Fiber Optic Cable Verification Testing
Equipment. We plan to capitalize on the expanding use of fiber optic
cable in the telecommunications industry. For example, we have just
introduced three new products to support testing of higher bandwidth
fiber optic networks and plan to continue to increase the data rates
supported by our optical products and develop additional products to
support new network applications and technologies based on gigabit
optical rates.
. Provide New Cable TV Verification Solutions. We intend to penetrate the
growing market for verification equipment for cable TV by adding
features and functionality to increase the applicability of our product
offerings. For example, we have recently introduced our CR1200R, which
provides for testing digital networks with Internet capabilities, and we
expect to add new features in the future. Similarly, we intend to
further address the convergence of voice and data across cable TV
networks.
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<PAGE>
. Expand Beyond Field Verification Testing. We intend to leverage our
expertise in field verification testing to expand into remote testing,
alarm and surveillance and central office testing applications. Our
Ghepardo signaling products allow technicians to remotely access
signaling probes distributed throughout the network. In addition, our
Ghepardo products provide alarm and surveillance monitoring and enable
equipment developers to exercise and evaluate their network elements'
signaling capabilities. We have also introduced products aimed at
central office testing that are a natural extension of our field testing
products. For example, the SS500 is a complete SONET service tester that
offers a new combination of bi-directional protocol analysis and service
verification for the central office, and our xDSL products offer the
industry's only rack-mount verification solution for central office
technicians.
. Grow Internationally. We plan to expand from our presence in over 60
countries to meet the growing demand for high-speed access solutions and
increase our brand recognition internationally. We believe existing
service providers in Asia, Europe and Latin America will gradually
convert their installed base of analog voice equipment to more efficient
DSL equipment due to the advantages of the technology, its superior
economics compared to readily available alternatives and the increasing
demand for it. We plan to introduce a new fiber optics testing product,
the Sunset SDH, which provides a combination of SONET/SDH for testing
international gateway areas. We intend to add features to our existing
products to make our solutions more attractive to service providers in
other countries.
. Pursue Strategic Acquisitions. We plan to continue to make acquisitions
and enter into joint ventures on a selected basis. We expect that
acquisitions and joint ventures may provide an efficient way of
expanding our business, product offerings and access to different
customers and market niches.
. Pursue Follow-On Sales Opportunities. We plan to continue to develop
hardware modules that allow our customers to increase the functionality
of the products which they have purchased from us. For example, our xDSL
products allow technicians to add hardware cartridges to test different
types of DSL service. This feature allows customers to protect their
investment in test equipment and generates follow-on sales opportunities
as we develop new modules in the future.
Products
We currently offer two main categories of service verification products:
broadband access service verification products and signaling testing products.
Broadband Access Service Verification Products
Our broadband access service verification products support a wide range of
access technologies, including DSL, cable TV and fiber optics, and within each
of these technologies, different transmission types, frequencies or speeds and
protocols, including:
. T1 and T3, which are digital transmission links used in the United
States, Canada, Hong Kong and Japan with a capacity of 1.54 and 44.7
megabits per second;
. EI, E2, E3 and E4, which are the European equivalents of T1 and related
transmission types;
. Internet Protocol, a standard describing software which keeps track of
the network of Internet addresses for different notes, routes, outgoing
messages and incoming messages;
. datacom, a transmission type which transfers encoded data between
points;
. DDS, or data digital service, a private line digital service;
. ISDN, or integrated services digital network, a standard for digital
communication which comes in two types, BRI, or basic rate interface, at
144,000 bits per second, and primary rate at 1.54 megabits per second.
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. frame relay, an access standard which uses a form of packet switching in
the form of "frames" in variable length, which allows the transmission
of data with most protocols;
. GSM, or the global system for mobile communications, which is the set of
standards specifying infrastructure for digital phone service in Europe,
Japan, Alaska and other countries;
. STS-1, or synchronous transport signal level 1, which is an electrical
signal which is converted to or from SONET's optically based signal; and
. OC-3 and OC-12, which are optical carrier levels that are the optical
counterparts of STS-1 at speeds ranging from 156 to 622 megabits per
second.
We design our products to enable technicians to verify if a broadband service
has been properly installed and to help identify and correct problems in case
of an error. Our products are designed to be carried into the field by a
technician and offer a large graphical display, menu-driven functionality and
an easy-to-use interface. In addition, most of our DSL and fiber optic
products weigh less than three pounds, allowing field technicians to carry
them easily. Many of our new models support plug-in hardware modules that
enable technicians to upgrade our handheld test sets quickly and easily while
in the field.
Sales of our DSL products accounted for 100% of our net sales in 1997 and
1998 and approximately 97.5% in 1999. Although we have recently introduced or
acquired fiber optic, cable TV and signaling products, we expect that sales of
DSL products will continue to account for a substantial majority of our net
sales for the foreseeable future.
We offer a three-year warranty on our DSL and fiber optic products sold in
the United States and a one-year warranty for those sold overseas with a two-
year extended warranty option at the time of sale. We offer a one-year
warranty on our cable TV and signaling products.
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Within our broadband access testing products, we manufacture service
varification equipment for three main technologies: DSL, cable TV and fiber
optics. We describe our major products in each product category below.
DSL Products
Global DSL Global DSL products allow worldwide telecommunications
service providers to install and troubleshoot digital
copper-based circuits and services. The xDSL series
finds data transmission rates and noise margins that can
be supported by the line. This series employs DSL
modules to test specific transport technologies, such as
IDSL, ADSL, HDSL, SDSL, and other digital transmission
types, such as T1, datacom and DDS. Our DSL modules also
support data communication protocols such as IP, ISDN,
frame relay and voice. Our modular architecture allows
technicians to use a single unit to test a variety of
DSL services. In addition, the flexibility of the
modular architecture protects a customer's investment in
the chassis.
SunSet xDSL . Handheld chassis for DSL service verification that
Full Chassis also supports the testing of lines for physical
impairments. This module supports all Sunrise DSL
modules to allow field technicians to test various
types of DSL technologies with a single chassis.
SunSet xDSL . Handheld chassis for DSL service verification only.
Light Chassis This chassis supports all Sunrise DSL modules to
allow field technicians to test various types of DSL
technologies with a single chassis.
xDSL RAM . Rack-mount chassis to be used in central office
applications by central office technicians and frame
technicians. The xDSL RAM holds up to six DSL modules
for DSL service verification and supports the testing
of lines for physical impairments.
SunSet ISDN, . Our ISDN and BRI products support ISDN analysis and
SunLite BRI service verification for primary rate ISDN and basic
rate ISDN.
- --------------------------------------------------------------------------------
North American We design our North American DSL products specifically
for the North American market and support applications
common to this market.
SunSet T1 . Supports transmission testing for T1, including
service verification for voice services.
SunSet T10 . Supports transmission testing for T1 with service
verification and diagnostics for multiple data
protocols, such as ISDN, frame relay, GSM, SS7 and
voice services.
SunSet T3 . Supports transmission testing for T1, T3 and E1 and
service verification and diagnostics for ISDN and
voice services. This product offers the versatility
to test T1 and T3 in a single unit as well as E1
testing for international gateway areas that support
these circuits.
SunSet STS-1
. Supports transmission testing for T1, T3 and STS-1
and both optical and electrical signals related to
SONET.
40
<PAGE>
DSL Products
International We design international DSL products specifically for
testing lines outside the North American market and
supports protocols common to the international market.
SunLite E1 . Supports E1 transmission testing in a small test set.
SunSet E1, E1e, . Supports E1 transmission testing and service
E8 verification for frame relay and voice services.
SunSet E10, E20 . Supports transmission testing for E1 circuits and
service verification for data protocols such as ISDN,
frame relay, GSM SS7, voice and other signaling
protocols.
SunSet PDH . Supports transmission testing for E1 and higher
transmission rates, up to E4, or 139 Mbps in a single
unit.
Cable TV Product
CR1200R . Supports field transmission analysis for digital and
analog cable TV networks with signal return path
testing. Finds common problems with coaxial
transmission on digital networks that would inhibit
the networks' use for Internet services. The unit is
water resistant, portable and can be used without
additional subscriber equipment.
Fiber Optic Products
SunSet OCx . Supports transmission testing for SONET transmission
types T1, T3 and STS-1. Also supports optical
transmission rates of OC-3 and OC-12. Performs
service verification for data protocols such as ISDN,
ATM and voice. This product is currently the smallest
multi-rate optical SONET test set available.
SS500 . Central office based SONET and ATM testing device
with service verification for protocols such as ISDN,
SS7 and voice. Combines high end central office SONET
and signaling testing as well as service verification
in a single unit.
SunSet SDH . Supports fiber optic transmission types, such as
SONET and SDH, as well as traditional transmission
types for U.S. (T1, T3) and international (E1 to E4).
Also supports ATM testing. The ability to test SONET
and SDH in a single unit is targeted for testing
international gateway areas where both transmission
types exist.
Signaling Testing Products
We recently introduced Ghepardo, a new product line for signaling testing and
analysis. Our signaling products are designed for the central office to analyze
major signaling protocols, including SS7, and standard data communication
protocols. We design our products on an open platform with hardware and
software that users can customize easily. Our web-based user interface allows
users to control our products, including customization of test functions, from
anywhere in the world through standard web-browser software.
41
<PAGE>
Customers
Our customers include telecommunications service providers, network
infrastructure suppliers and installers, technicians and engineers in North
America, Latin America, Europe and the Asia/Pacific region. The following is a
selected list of companies who purchased in excess of $100,000 of our products
during 1999.
Allegiance Telecom, Inc. Nippon Telegraph and Telephone
Bell Atlantic Corporation Corporation
BellSouth Telecom, Inc. Northern Telecom
China Telecom Hong Kong Ltd. NorthPoint Communications Group,
Chunghwa Telecom Co., Ltd. Inc.
Cisco Systems, Inc. PSINet, Inc.
Covad Communications Group, Inc. Rhythms NetConnections Inc.
Cox Communications, Inc. SBC Communications Inc.
Ericsson Wireless Communications, (consisting of Ameritech
Inc. Corporation, Nevada Bell, Pacific
France Telecom Bell, Southern New England
ITC Deltacom, Inc. Telephone and Southwestern Bell
KMC Telecom Holdings, Inc. Telephone Company)
Korea Telecom Sprint Corporation
Lucent Technologies, Inc. Telecom Italia SpA
MCI Worldcom, Inc. Teligent, Inc.
Nextel Communications, Inc. Telkom SA, Ltd.
Winstar Network Expansion, LLC
As of March 1, 2000, we had sold versions of our products to over 1,800
customers in over 60 countries. In 1999, affiliates of SBC Communications
accounted for approximately 40.6% of our net sales. Besides SBC Communications
in 1999, no individual customer accounted for 10% or more of our net sales in
1997, 1998 or 1999. We expect that we will continue to depend upon a relatively
limited number of customers for substantially all of our revenues in future
periods. See "Risk Factors--Risks Relating to Our Business--Customer
Concentration."
Sales, Marketing and Customer Service
Sales. We sell our products to telecommunications service providers, network
infrastructure suppliers and installers, technicians and engineers through
manufacturers' representatives, independent distributor organizations and our
direct sales force.
In the United States, we sell our products through 13 manufacturers'
representatives companies who are supported by our in-house direct sales force.
Manufacturers' representatives are paid on a commission basis to sell our
products and have exclusive rights in their respective regions. Our
manufacturers' representatives solicit orders from the customer, and we ship
our products directly to the customer. We pay commissions once payment is
received from the customer. Our direct sales force consists of 14 employees who
focus on sales in the United States, including a team of regional sales
managers who direct the efforts of our manufacturers' representatives, regional
account managers who focus on specific accounts within a region and our Vice
President of North American Sales, who directs the sales effort in North
America.
Outside the United States, we sell our products through 64 independent
distributor organizations, which are directed by our regional directors of
marketing and sales. Once a sale is made, we sell our product to the
distributor who then resells the product to the end user. We sell our products
to our independent distributor organizations at a discount off our list price.
The Asia/Pacific region is directed by our Vice President of Strategic
Marketing. International sales were $13.5 million or approximately 46% of our
net sales in 1997, $12.0 million or approximately 42% in 1998 and $12.2 million
or approximately 20% in 1999. We expect that international sales will continue
to account for a significant portion of our net sales in future
42
<PAGE>
periods. In addition to our network of international distributors, we have
sales people located in Beijing, China and Modena, Italy and plan to open new
offices in other locations in the future. See "Risk Factors--Risks Relating to
Our Business--Risks of International Operations." For information regarding
export sales and international operations, see Note 14 of notes to
consolidated financial statements of Sunrise.
We sell our products predominantly to large telecommunications service
providers. These prospective customers generally commit significant resources
to an evaluation of our and our competitors' products and require each vendor
to expend substantial time, effort and money educating the prospective
customer about the value of the vendor's solutions. Delays associated with
potential customers' internal approval and contracting procedures, procurement
practices, testing and acceptance processes are common and may cause potential
sales to be delayed or foregone. As a result of these and related factors, the
sales cycle of new products for large customers typically ranges from six to
24 months.
Marketing. We market and promote sales of our products by the following
activities:
. Our product marketing group researches new opportunities, prepares
product definitions with our research and development group and defines
new features to create new products;
. The overall marketing group hosts a variety of seminars several times a
year in the United States, Asia, Europe and Latin America to improve the
sales effectiveness of our manufacturers' representatives and
international distributors;
. Our product marketing engineers, regional sales managers and account
managers travel extensively with our manufacturers' representatives and
international distributors to develop new product opportunities with
customers and to support their presentations;
. The marketing communications group maintains a public Web site,
publishes brochures and specification sheets and generates press
releases and publicity to increase our recognition in the
telecommunications industry;
. Our technical publications group prepares user's manuals, field manuals,
quick reference guides, and product operation videos to serve the needs
of our users;
. Our training department prepares customer training presentations and
sponsors Sunrise University, a factory-based xDSL training program for
our customers.
Customer Service. We believe that customer service following the sale of our
products is a critical ingredient to our success. We provide customer service
in numerous ways, including:
. providing rapid instrument repair services;
. operating a 24 hour per day telephone support line to help customers who
are having difficulty using our products in their particular
application;
. maintaining a proprietary Web site containing on-line, up-to-the-minute
product repair information for our distributors' international repair
centers, with a factory-certified technician training program for our
distributors' international repair center technicians; and
. measuring the satisfaction of our customers and communicating this
information to our quality group.
Research and Development
We have assembled a team of highly skilled engineering professionals who are
experienced at designing telecommunications service verification test
equipment. Our engineering personnel have expertise in a number of fields,
including interfacing test equipment with digital loop carrier, voice and data
switching technology, local loop equipment and operations support systems. We
spent approximately $5.9 million on research and development in 1997, $6.2
million in 1998 and $10.7 million in 1999. Research and development represents
43
<PAGE>
our largest direct employment expense. At March 1, 2000, we had a total of 84
employees engaged in research and development in San Jose, California;
Norcross, Georgia; Springfield, Virginia; and Modena, Italy.
We believe that our continued success depends on our ability to anticipate
and respond to changes in the telecommunications industry and anticipate and
satisfy our customers preferences and requirements. Accordingly, we
continually review and evaluate technological and regulatory changes affecting
the telecommunications industry and seek to offer products and capabilities
that solve customers' operational challenges and improve their efficiency. In
general, we spend anywhere from two months to four years developing a new
product.
Regulations and Industry Standards
Our products are designed to comply with a significant number of industry
standards and regulations, some of which are evolving as new technologies are
deployed. In the United States, our products must comply with various
regulations defined by the Federal Communications Commission and Underwriters
Laboratories as well as industry standards established by Telcordia
Technologies, Inc., formerly Bellcore, and the American National Standards
Institute. Internationally, our products must comply with standards
established by the European Committee for Electrotechnical Standardization,
the European Committee for Standardization, the European Telecommunications
Standards Institute, telecommunications authorities in various countries as
well as with recommendations of the International Telecommunications Union.
The failure of our products to comply, or delays in compliance, with the
various existing and evolving standards could negatively impact our ability to
sell our products.
Manufacturing
Our production process consists of planning, procurement, fabrication,
rework, system assembly, system final test, software option customization and
shipping. We purchase substantially all parts, including resistors, integrated
circuit boards, LCDs and printed circuit boards, from distributors and
manufacturers worldwide. We package these parts into kits and send them to
contract manufacturers to assemble them into printed circuit boards. We
perform substantially all remaining manufacturing operations. We maintain
sourcing and manufacturing operations in San Jose, California; Norcross,
Georgia; Taipei, Taiwan and Modena, Italy. In 1999, we performed the majority
of sourcing and nearly all contract manufacturing and final assembly in San
Jose, California. We have obtained ISO-9001 certification for our San Jose
operations.
In 1998, we formed a subsidiary in Taiwan, Taiwan Sunrise Telecom Company
Limited, as a turn-key manufacturer and local procurement operation. We also
own an equity interest of approximately fifteen percent in Top Union, an
assembly company located in Taipei, Taiwan that performs module assembly as
part of the Taiwan Sunrise Telecom turn-key operation. We intend to increase
the use of outsource manufacturing for our more mature products. We believe
that outsourcing will lower our manufacturing costs, in particular our labor
costs, provide us with more flexibility to scale our operations to meet
changing demand and allow us to focus our engineering resources on new product
development and product enhancements.
In our manufacturing process, we purchase many key products, such as
microprocessors, bus interface chips, optical components and oscillators, from
a single source or from that product's sole supplier. We rely exclusively on
third-party subcontractors to manufacture certain sub-assemblies and we have
retained, from time to time, third party design services in the development of
our products. We do not have long-term supply agreements with these vendors.
In general, we make advance purchases of some products and components to
ensure an adequate supply, particularly for products that require lead times
of up to six months to manufacture. For a discussion of the risks associated
with our reliance on these third parties, see "Risk Factors--Risks Relating to
Our Business--Dependence on Sole and Single Source Suppliers."
44
<PAGE>
Competition
The market for field verification test equipment is fragmented and intensely
competitive, both in and outside the United States, and is subject to rapid
technological change, evolving industry standards and regulatory developments.
We compete with a number of United States and international suppliers that vary
in size and in the scope and breadth of the products and services offered. The
following table sets forth our principal competitors in each of our product
categories.
<TABLE>
<CAPTION>
Product Category Principal Competitors
- ---------------- ---------------------
<S> <C>
Digital Subscriber Line TTC (a division of Dynatech, Inc.) and Agilent Technologies, Inc.
Fiber Optics SONET/SDH Digital Lightwave, Inc., TTC and Agilent Technologies, Inc.
Cable TV Wavetek Wandel Golterman, Inc. and Agilent Technologies, Inc.
Signaling Inet Technologies, Inc. and GN Nettest
</TABLE>
On February 14, 2000, Dynatech and Wavetek announced the merger of TTC to
Wavetek, which could have the effect of making the combined company a more
formidable competitor. We expect that, as our industry and market evolves, new
competitors or alliances among competitors could emerge and acquire significant
market share. We anticipate that competition in our market will increase with
the result that we will face greater threats to our market share, price
pressure on our products and the likelihood that, over time, our profitability
may decrease.
We believe that the principal competitive factors in our market include:
. a continued high level of investment in research and development and
marketing;
. speed of new product introductions to market;
. depth of product functionality;
. ease of installation, integration and use;
. system reliability and performance;
. price and financing terms;
. technical support and customer service;
. size and stability of the vendor's operations; and
. compliance with government and industry standards.
Intellectual Property and Proprietary Technology
Our intellectual property, including our proprietary technology, processes
and know-how, trade secrets, patents, trademarks and copyrights, is important
to our business and to our continued success. We have one patent for a handheld
communications tester, and we have filed several applications for additional
patents with the U.S. Patent and Trademark Office. Our research and development
and manufacturing process typically involves the use and development of a
variety of forms of intellectual property and proprietary technology, although
no one form of this intellectual property and proprietary technology is
material to our business. In addition, we incorporate software that we license
from several third party sources into our products. These licenses generally
renew automatically on an annual basis. We believe that alternative
technologies for this licensed software are available both domestically and
internationally.
We protect our proprietary technology by:
. relying on intellectual property law, including patent, trade secret,
copyright and trademark law and by initiating litigation where necessary
to enforce our rights;
. limiting access to our software, documentation and other proprietary
information; and
. entering into confidentiality agreements with our employees.
45
<PAGE>
For more information regarding the risks to our intellectual property, see
"Risk Factors--Risks Relating to Our Business--Intellectual Property Risks."
Employees
At March 1, 2000, we had a total of 216 full-time employees, consisting of
179 in the United States, 15 in Taiwan and 22 in Italy, and approximately 35
temporary employees. Of the total permanent employees, 84 were engaged in
research and development, 52 were engaged in sales, marketing and customer
support, 56 were engaged in operations and 24 were engaged in administration
and finance. None of our employees is subject to a collective bargaining
agreement. The employees of our Pro.Tel subsidiary are protected by certain
provisions of Italian law. We believe that our relations with our employees are
good. See "Risk Factors--Risks Relating to Our Business--Need for New
Personnel" and "--Dependence on Key Employees."
Legal Proceedings
We are not currently a party to any material legal proceedings. In September
1999, the United States District Court for the Northern District of California
entered final judgment against Electrodata, Inc. stating that it had literally
infringed our U.S. Patent No. 5,619,489, entitled Handheld Communications
Tester. The court also entered judgment against Electrodata that the claims at
issue were valid and the patent was enforceable. Electrodata has filed a notice
of appeal with the United States Court of Appeals for the Federal Circuit. We
do not believe that the outcome of this appeal will materially impact our
business.
Facilities
Our current headquarters and manufacturing facility occupies approximately
47,000 square feet in San Jose, California under a lease that expires in
November 2004. We have contracted to build near our current headquarters a new
91,700 facility, which we are building to accommodate our need for an increase
in manufacturing capacity and employees. The new facility is scheduled for
completion in late 2000. We also lease approximately 7,500 square feet of
office and manufacturing space in Norcross, Georgia; approximately 7,300 square
feet of office space in Springfield, Virginia, approximately 10,000 square feet
of office and manufacturing space in Modena, Italy, 10,000 square feet of
office space in Taipei, Taiwan and a liaison office in Beijing, China.
46
<PAGE>
MANAGEMENT
Executive Officers, Directors and Key Employees
The names and ages of our executive officers, directors and key employees as
of the date of this prospectus are as follows:
<TABLE>
<CAPTION>
Name Age Position(s)
- ---- --- -----------
<S> <C> <C>
Paul Ker-Chin Chang......... 41 Chief Executive Officer, President and Director
Paul A. Marshall............ 42 Chief Operating Officer, Vice President Marketing and Director
Robert C. Pfeiffer.......... 37 Chief Technology Officer, Vice President Engineering,
Secretary and Director
Peter L. Eidelman........... 33 Chief Financial Officer and Treasurer
Robert H. King.............. 38 Vice President North American Sales
Raymond L. Chong............ 43 Vice President Strategic Marketing
Dennis K. Koo............... 40 Vice President Quality Group
Patrick Peng-Koon Ang 40
(1)(2)..................... Director
Henry P. Huff (1)(2)........ 56 Director
Jennifer J. Walt (1)(2)..... 43 Director
</TABLE>
- ---------------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
Paul Ker-Chin Chang co-founded Sunrise in October 1991 and has served as
Chief Executive Officer, President and Chairman since that time. From 1984 to
1991, Mr. Chang was employed as Engineering Supervisor for the Wiltron division
of Anritsu Corporation, a manufacturer of communications test equipment. Mr.
Chang holds an M.S. in Electrical Engineering from the University of Kansas at
Lawrence and a B.S. in Physics from Tunghai University in Taiwan.
Paul A. Marshall co-founded Sunrise in October 1991 and has served as Chief
Operating Officer since December 1999, as Vice President of Marketing since
March 1992 and as a director since October 1991. Mr. Marshall also served as
Chief Financial Officer of Sunrise until December 1999. From 1985 to 1992,
Mr. Marshall held various positions with the Wiltron division of Anritsu
Corporation, most recently as Marketing Staff Engineer. Mr. Marshall holds an
M.B.A. from the Harvard Business School and a B.S. in Mechanical Engineering
from the University of California at Davis.
Robert C. Pfeiffer co-founded Sunrise in October 1991 and has served as Vice
President of Engineering, Secretary and a director since that time. Mr.
Pfeiffer has also served as Chief Technology Officer of Sunrise since December
1999. From June 1989 to October 1991, Mr. Pfeiffer was employed as a
Telecommunication R&D Engineer for the Wiltron division of Anritsu Corporation.
Mr. Pfeiffer holds an M.B.A. and a B.S. in Electrical Engineering from Santa
Clara University.
Peter L. Eidelman joined Sunrise in July 1997 and has served as Chief
Financial Officer and Treasurer since December 1999. Mr. Eidelman served as
Sunrise's Treasurer and Director of Finance and Administration from January
1999 to December 1999 and as Director of Tax, Finance and Accounting from July
1997 to January 1999. Mr. Eidelman was employed as a Manager of Tax, Accounting
and Compliance for Amdahl Corporation, an enterprise solution company, from
July 1994 to July 1997. From November 1988 to July 1993, Mr. Eidelman was
employed as a Tax Manager at Coopers & Lybrand, an international accounting
firm. Mr. Eidelman holds a B.B.A. in Accounting from the University of
Massachusetts at Amherst. Mr. Eidelman is a member of the A.I.C.P.A. and Tax
Executive Institute.
47
<PAGE>
Robert H. King joined Sunrise in September 1997 and has served as Vice
President North American Sales since January 2000. From February 1997 to
September 1997, Mr. King was employed as Regional Sales Manager for Bosch
Telecom, a telecommunications equipment company. From April 1995 to February
1997, Mr. King was an independent sales representative for various
telecommunications equipment companies. Mr. King was employed as Regional Sales
Manager for Ameritech Corporation, a telecommunications equipment company, from
September 1985 to April 1995. Mr. King also served as Regional Sales Manager
for CXR Halcyon, Inc., a telecommunications equipment company, from December
1983 to September 1985.
Raymond L. Chong joined Sunrise in February 1996 and has served as Vice
President Strategic Marketing since January 2000. From May 1988 to February
1996, Mr. Chong was employed as Account Manager of the Communication
Instruments Group at Hewlett Packard, a computer and office equipment company.
Mr. Chong was employed as a Product Marketing Manager at Tektronix Inc., a test
and measurement solutions company, in their Portable Instruments Division from
April 1984 to May 1988. Mr. Chong holds an M.S. in Electrical Engineering from
the University of California at Davis and an M.B.A. from Santa Clara
University.
Dennis K. Koo joined Sunrise in June 1997 and has served as Vice President
Quality Group since January 2000. From June 1989 to June 1997, Mr. Koo was
employed as Manufacturing Engineering Manager for Anritsu Corporation. Mr. Koo
holds a B.S. in Electrical Engineering from the University of British Columbia
in Canada.
Patrick Peng-Koon Ang has served as a director of Sunrise since March 2000.
Mr. Ang has served as President of Digicom Systems Inc., a manufacturer of
high-speed communications products, since December 1998. From December 1993 to
November 1997, Mr. Ang was employed as Division President for OPTi, Inc., a
supplier of semiconductor products for the personal computer market. Mr. Ang
holds a B.S. in Electrical Engineering from the National University of
Singapore.
Henry P. Huff has served as a director of Sunrise since March 2000. Mr. Huff
has been the Vice President, Finance and Chief Financial Officer of NorthPoint
Communications Group Inc. since June 1998. Mr. Huff served as the Chief
Financial Officer of Fabrik Communications, Inc., a messaging service provider,
from October 1996 until June 1998 and as the Chief Financial Officer of Sierra
Ventures, a Menlo Park-based venture capital firm, from February 1992 to
September 1996. From August 1986 to February 1992, Mr. Huff was the Chief
Financial Officer of Centex Telemanagement, Inc.
Jennifer J. Walt has served as a director of Sunrise since March 2000. Ms.
Walt has been an attorney at the law firm of Littler Mendelson, P.C. since 1983
and is currently a shareholder of that firm. Ms. Walt holds a B.A. in history
from Stanford University and a J.D. from U.C. Hastings College of the Law.
Board Composition
Our board of directors currently has six members. In accordance with the
terms of our certificate of incorporation to be filed prior to this offering in
connection with our reincorporation in Delaware, the board of directors will be
divided into three classes, each serving staggered three-year terms: Class I,
whose initial term will expire at the annual meeting of stockholders held in
2001; Class II, whose initial term will expire at the annual meeting of
stockholders in 2002; and Class III, whose initial term will expire at the
annual meeting of stockholders in 2003. As a result, only one class of
directors will be elected at each annual meeting of our stockholders, with the
other classes continuing for the remainder of their respective terms. Robert C.
Pfeiffer and Jennifer J. Walt have been designated as Class I directors; Paul
A. Marshall and Patrick Peng-Koon Ang have been designated as Class II
directors; and Paul Ker-Chin Chang and Henry P. Huff have been designated as
Class III directors. These provisions in our certificate of incorporation may
have the effect of delaying or preventing changes in control or management of
Sunrise. The executive officers serve at the discretion of the Board of
Directors. There are no family relationships among any of the directors or
executive officers of Sunrise.
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<PAGE>
Board Compensation
Except for reimbursement for reasonable travel expenses relating to
attendance at board meetings and the grant of stock options, employee directors
are not compensated for their services as directors. Directors who are not our
employees receive compensation for their services as directors at a rate of
$30,000 per year plus $1,000 per board meeting attended. Directors who are our
employees are eligible to participate in our 2000 stock plan and, beginning in
2000, they will also be eligible to participate in our 2000 employee stock
purchase plan. Beginning in 2000, directors who are not our employees will
receive annual options to purchase $25,000 worth of shares of our common stock
under our 2000 stock plan based on the initial public offering price and
thereafter based on the fair market value of our common stock on the date of
our annual meeting of stockholders. See "--Benefit Plans."
Board Committees
In March 2000, the board established the Audit Committee and Compensation
Committee. The Audit Committee reviews our annual audit and meets with our
independent auditors to review our internal controls and financial management
practices. The Board's Audit Committee currently consists of Patrick Peng-Koon
Ang, Henry P. Huff and Jennifer J. Walt. The Compensation Committee recommends
compensation for certain of our personnel to the board and administers our
stock plans. The Compensation Committee currently consists of Patrick Peng-Koon
Ang, Henry P. Huff and Jennifer J. Walt.
Compensation Committee Interlocks and Insider Participation
The members of our Compensation Committee are currently Patrick Peng-Koon
Ang, Henry P. Huff and Jennifer J. Walt. None of Patrick Peng-Koon Ang, Henry
P. Huff or Jennifer J. Walt has at any time been an officer or employee of
Sunrise or any subsidiary of Sunrise. During 1999, we retained the law firm of
Littler Mendelson to perform legal services for us. Ms. Walt, a director of
Sunrise and a member of the Compensation Committee, is a shareholder in Littler
Mendelson. Mr. Huff is the Chief Financial Officer of NorthPoint
Communications. During 1999, we sold approximately $590,000 of products to
NorthPoint Communications.
49
<PAGE>
Executive Compensation
The following table provides summary information concerning the compensation
received for services rendered to us during the fiscal year ended December 31,
1999 by the Chief Executive Officer and each of the other four most highly
compensated executive officers, each of whose aggregate compensation during our
last fiscal year exceeded $100,000.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation
Compensation(1) Awards
--------------------- ------------
Securities
Underlying All Other
Name and Principal Position Year Salary ($) Bonus ($) Options (#) Compensation ($)
- --------------------------- ---- ---------- ---------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
Paul Ker-Chin Chang...... 1999 $513,945 $1,204,629 -- $22,548(2)
Chief Executive Officer 1998 513,945 50,325 -- 13,406(3)
and President 1997 513,945 727,720 -- --
Paul A. Marshall......... 1999 481,140 1,117,851 -- 18,391(4)
Chief Operating Officer, 1998 481,140 46,402 -- 9,395(5)
Vice President Marketing 1997 481,140 681,269 -- --
Robert C. Pfeiffer....... 1999 354,051 819,213 -- 18,244(6)
Chief Technology
Officer, 1998 354,051 33,315 -- 11,555(7)
Vice President 1997 354,051 501,486 -- --
Engineering and
Secretary
Peter L. Eidelman........ 1999 127,500 117,300 20,000 15,103(8)
Chief Financial Officer 1998 108,600 12,945 10,000 6,856(9)
and Treasurer 1997(10) 46,212 16,741 20,000 --
</TABLE>
- ---------------------
(1) Excludes certain perquisites and other benefits which did not exceed 10% of
any officer's total salary and bonus.
(2) Includes $12,800 in deferred profit sharing, $4,110 in paid out vacation,
$5,000 of company contributions to Sunrise's 401(k) plan and life insurance
premiums of $638 paid on behalf of such officer.
(3) Includes $4,000 in deferred profit sharing, $3,994 in paid out vacation,
$5,000 of company contributions to Sunrise's 401(k) plan and life insurance
premiums of $412 paid on behalf of such officer.
(4) Includes $12,800 in deferred profit sharing, $5,000 of company
contributions to Sunrise's 401(k) plan and life insurance premiums of $591
paid on behalf of such officer.
(5) Includes $4,000 in deferred profit sharing, $5,000 of company contributions
to Sunrise's 401(k) plan and life insurance premiums of $395 paid on behalf
of such officer.
(6) Includes $12,800 in deferred profit sharing, $5,000 of company
contributions to Sunrise's 401(k) plan and life insurance premiums of $444
paid on behalf of such officer.
(7) Includes $4,000 in deferred profit sharing, $2,555 in paid out vacation and
$5,000 of company contributions to Sunrise's 401(k) plan.
(8) Includes $10,200 in deferred profit sharing, $4,781 of company
contributions to Sunrise's 401(k) plan and life insurance premiums of $122
paid on behalf of such officer.
(9) Includes $2,715 in deferred profit sharing, $4,073 of company contributions
to Sunrise's 401(k) plan and life insurance premiums of $68 paid on behalf
of such officer.
(10) Mr. Eidelman joined Sunrise in July 1997.
50
<PAGE>
Option Grants
The following table provides summary information regarding stock options
granted to the officers listed in the summary compensation table during the
fiscal year ended December 31, 1999. The options were granted pursuant to
Sunrise's 1993 Stock Option Plan. Stock price appreciation of 5% and 10% is
assumed pursuant to rules promulgated by the Securities and Exchange Commission
and does not represent Sunrise's prediction of its stock performance.
Option Grants During Fiscal 1999
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of
Stock Price
Appreciation for
Individual Grants Option Term (3)
---------------------------------------------------- --------------------
Number of Percent of
Securities Total Options
Underlying Granted to Exercise or
Options Employees in Base Price Expiration
Name Granted (#)(1) Fiscal Year(%) ($/Sh)(2) Date 5% ($) 10%($)
- ---- -------------- -------------- ----------- ---------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Paul Ker-Chin Chang..... -- -- -- -- -- --
Paul A. Marshall........ -- -- -- -- -- --
Robert C. Pfeiffer...... -- -- -- -- -- --
Peter L. Eidelman....... 7,000 2.0 $4.50 03/23/09 $ 6,788 $ 14,619
5,000 1.4 6.50 10/08/09 7,004 15,083
8,000 2.3 6.50 11/17/09 11,206 24,133
</TABLE>
- ---------------------
(1) All options granted to Mr. Eidelman vest annually in four equal
installments beginning one year after the date of grant.
(2) All options were granted at our estimate of fair market value at date of
grant.
(3) Realizable values are reported net of the option exercise price. The dollar
amounts under these columns are the result of calculations at the 5% and
10% rates (determined from the price at the date of grant, not the stock's
current market value) set by the Securities and Exchange Commission and
therefore are not intended to forecast possible future appreciation, if
any, of Sunrise's stock price. Actual gains, if any, on stock option
exercises are dependent on the future performance of the common stock as
well as the optionholder's continued employment through the vesting period.
The potential realizable value calculation assumes that the optionholder
waits until the end of the option term to exercise the option.
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<PAGE>
Option Exercises and Holdings
The following table provides summary information concerning the shares of
common stock acquired in 1999, the value realized upon exercise of stock
options in 1999, and the year end number and value of unexercised options with
respect to each of the officers listed in the summary compensation table as of
December 31, 1999. The value was calculated by determining the difference
between the fair market value of underlying securities and the exercise price.
The fair market value of our common stock at December 31, 1999 was assumed to
be $15.00 per share.
Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Number of Options at Fiscal In-the-Money Options
Shares Year-End(#) at Fiscal Year-End($)
Acquired On Value ------------------------- -------------------------
Name Exercise(#) Realized($) Exercisable/Unexercisable Exercisable/Unexercisable
- ---- ----------- ----------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Paul Ker-Chin Chang..... -- -- -- --
Paul A. Marshall........ -- -- -- --
Robert C. Pfeiffer...... -- -- -- --
Peter L. Eidelman....... 2,500 $29,250 47,500/0 $495,750/0
</TABLE>
Benefit Plans
1993 Stock Option Plan. Our 1993 stock option plan was adopted by our board
of directors in September 1993 and approved by our stockholders in April 1994.
In 1995, our board amended and restated the 1993 stock option plan and our
stockholders approved the amended and restated plan in April 1996. Our 1993
stock option plan provides for the granting to employees of incentive stock
options within the meaning of Section 422 of the Internal Revenue Code and of
nonstatutory stock options. A total of 1,750,000 shares has been reserved for
issuance under the 1993 stock option plan. As of March 1, 2000, options to
purchase an aggregate of 995,616 shares of our common stock were outstanding
under our 1993 stock option plan. Nonqualified options generally become vested
and exercisable over a four year period in equal annual installments and expire
ten years from the date of grant. Incentive stock options generally are
exercisable upon grant; provided, however, that no incentive stock options are
still outstanding from a prior grant. In the event of a stock split or stock
dividend the board may appropriately adjust the number, kind and price of the
shares subject to outstanding options to reflect such a change. In the event of
an acquisition of Sunrise (including a merger or sale of assets), options will
generally terminate, unless the merger agreement provides for the assumption of
the stock option agreements executed pursuant to the plan. Upon the exercise of
an option, shares may be subject to transfer restrictions, as defined in the
stock option agreement, including the right of first refusal and the right to
repurchase the stock. Our board of directors has determined that no further
options will be granted under the 1993 stock option plan after this offering.
2000 Stock Plan. Our 2000 stock plan will be adopted by our board of
directors and approved by our stockholders in April 2000. The 2000 stock plan
will become effective upon our initial public offering. At that time, all
outstanding options under our 1993 stock option plan will be merged into the
reserved share pool of the 2000 stock plan. All outstanding options under the
1993 stock option plan will continue to be administered according to the terms
and conditions of the stock option agreements issued pursuant to that plan. In
the event that an option expires after this offering without being exercised,
any remaining shares reserved for the option grant under the 1993 stock option
plan will return to the reserved share pool of the 2000 stock plan.
The 2000 stock plan provides for the discretionary grant of incentive stock
options to employees, including officers and employee directors, and for the
discretionary grant of nonstatutory stock options and stock purchase rights to
employees, directors and consultants. The 2000 stock plan also provides for the
periodic automatic grant of nonstatutory stock options to non-employee
directors.
52
<PAGE>
The total shares of common stock currently reserved for issuance under the
2000 stock plan equals 1,250,000 shares of common stock plus the number of
shares that remain reserved for issuance under the 1993 stock option plan as of
the date the 2000 stock plan became effective.
In addition, commencing on the first day of our next fiscal year, shares will
be added to the 2000 stock plan annually equal to the least of (a) 1% of the
outstanding shares on the last day of the prior fiscal year, (b) 100,000 shares
and (c) such lower amount as the board may determine.
Unless terminated sooner, the 2000 stock plan will terminate automatically 10
years from its effective date.
Our compensation committee, which generally administers our 2000 stock plan,
has the power to determine the terms of the options or stock purchase rights
granted, including the exercise price of the option or restricted stock grant;
the number of shares subject to each option or restricted stock grant; the
vesting and exercise forms of each option or stock purchase right; and the form
of consideration payable upon the exercise of each option or stock purchase
right.
Under the 2000 stock plan non-employee directors receive annual grants of
nonstatutory stock options. As of the date of this prospectus non-employee
directors will receive a grant of an option to purchase shares with a fair
market value of $25,000 on the grant date. Non-employee directors who first
join our board after the date of this prospectus will receive an initial grant
when they join the board. In addition, all non-employee directors will receive
a grant of an option to purchase shares with a fair market value equal to
$25,000 on the grant date at each subsequent annual meeting, provided they will
continue to serve on the board after such annual meeting. Non-employee director
options will have a term of ten years but will expire within 90 days of the
directors termination of service (one year if such termination is due to death
or disability.) Non-employee director options vest one year from the date of
grant, provided the director continues to serve as a director at that time.
In addition, the board has the authority to amend, suspend or terminate the
2000 stock plan, so long as no such action affects any shares of common stock
previously issued and sold or any option previously granted under the plan. The
maximum number of option shares each optionee may be granted during a fiscal
year is 200,000 shares. However, in connection with an optionee's initial
service with us, such optionee may be granted up to a total of 300,000 shares
during the initial fiscal year of service. Restricted stock grants are limited
to 25,000 shares per person in any fiscal year.
Options and restricted stock granted under our 2000 stock plan are generally
not transferable by the participant, and each option is exercisable during the
lifetime of the optionee and only by such optionee.
In the case of restricted stock, unless the compensation committee determines
otherwise, the restricted stock purchase agreement shall grant Sunrise a
repurchase option exercisable after the purchaser's employment or consulting
relationship with Sunrise has ended for any reason, including death or
disability. The purchase price for shares repurchased pursuant to the
restricted stock purchase agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to Sunrise. The repurchase option shall lapse at a rate determined by the
compensation committee.
The exercise price of all incentive stock options and nonstatutory stock
options granted automatically to non-employee directors must be at least equal
to the fair market value of the common stock on the date of grant. The exercise
price of other nonstatutory stock options and stock purchase rights granted
under the 2000 stock plan is determined by the administrator, but with respect
to nonstatutory stock options intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Internal Revenue
Code, the exercise price must be at least equal to the fair market value of our
common stock on the date of grant. With respect to any participant who owns
stock possessing more than 10% of the voting power of all classes of our
outstanding capital stock, the exercise price of any incentive stock option
granted
53
<PAGE>
must at least equal 110% of the fair market value on the grant date and the
term of such incentive stock option must not exceed five years. The term of all
other options granted under the 2000 stock plan may not exceed ten years.
The 2000 stock plan provides that in the event that we are acquired by
another corporation, or sell substantially all of our assets, each option and
stock purchase right may be assumed or an equivalent option substituted for by
the successor corporation. If the outstanding options and stock purchase rights
are not assumed or substituted for by the successor corporation, the stock
option agreements made under the 2000 stock plan may provide that the option
holder will fully vest in and have the right to exercise the option as to all
of the optioned stock, or that the repurchase option of a restricted stock
grant may lapse, including shares to which the holder would not otherwise be
entitled.
2000 Employee Stock Purchase Plan. Our 2000 employee stock purchase plan will
be adopted by our board of directors and approved by our stockholder in April
2000. A total of 200,000 shares of our common stock has been reserved for
issuance under the 2000 purchase plan, plus annual increases equal to the least
of (a) 0.5% of the outstanding shares on the last day of the prior fiscal year,
(b) 100,000 shares and (c) such lower amount as the board may determine.
Under the 2000 purchase plan, which is intended to qualify under Section 423
of the Internal Revenue Code, our board of directors may determine the duration
and frequency of stock purchase periods. Initially the plan will operate using
consecutive, overlapping, twenty-four month offering periods. Each offering
period will include four six-month purchase periods. The offering periods
generally start on the first trading day on or after May 15 and November 15 of
each year, except for the first such offering period which commences on the
first trading day on or after the effective date of this offering and ends on
the last trading day on or before November 14, 2000.
Employees of Sunrise or of any participating subsidiaries are eligible to
participate. However, employees may not be granted an option to purchase stock
under the 2000 purchase plan if they, immediately after the grant, own stock
possessing 5% or more of the total combined voting power or value of all
classes of our capital stock.
The 2000 purchase plan permits participants to purchase our common stock
through payroll deductions of up to 15% of their total base compensation,
excluding bonuses, commissions and overtime, not to exceed $25,000 in any plan
year. In addition, no more than 0.5% of the outstanding shares of the company
may be sold under the plan on any purchase date, and no more than 1% of the
outstanding shares may be sold in any calendar year.
Amounts deducted and accumulated by the participant are used to purchase
shares of common stock at the end of each purchase period. The price of stock
purchased under the 2000 purchase plan is generally 85% of the lower of the
fair market value of the common stock either at the beginning of the offering
period or at the end of the purchase period. Rights to purchase stock under the
2000 purchase plan expire on the earlier of (i) 27 months after the date of
grant, (ii) the option period as determined by the board at the time of grant,
or (iii) the employee's termintation of employment.
In the event the fair market value at the end of a purchase period is less
than the fair market value at the beginning of the offering period, the
participants will be withdrawn from the current offering period following
exercise and automatically re-enrolled in a new offering period. Participants
may end their participation at specified times during an offering period, and
they will be paid their payroll deductions to date. Participation ends
automatically upon termination of employment with Sunrise.
Rights granted under the 2000 purchase plan are not transferable by a
participant other than upon death or by a special determination by the plan
administrator. Each outstanding option under the 2000 purchase plan will be
subject to the acquisition agreement in the event we merge with or into another
corporation or sell substantially all of our assets.
54
<PAGE>
Our board of directors has the authority to amend or terminate the 2000
purchase plan at any time and for any reason. If the board of directors
terminates the plan during an offering period, the board may terminate all
outstanding rights either upon termination of the plan, upon completion of the
purchase of shares on the next purchase date, or may elect to permit rights to
expire according to their terms. Notwithstanding anything to the contrary, the
board of directors may in its sole discretion amend the 2000 purchase plan to
the extent necessary and desirable to avoid unfavorable financial accounting
consequences by altering the purchase price for any offering period, shortening
any offering period or allocating remaining shares among the participants.
Unless earlier terminated by our board of directors, the 2000 purchase plan
will terminate automatically ten years from its effective date.
55
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information regarding the beneficial ownership
of our common stock as of March 1, 2000 and as adjusted to reflect the sale of
the common stock offered by Sunrise by this prospectus by:
. each of our directors and the officers listed in the summary
compensation table;
. all directors and executive officers as a group;
. each person who is known to us to own beneficially more than 5% of its
common stock; and
. each of the selling stockholders.
Except as otherwise noted, the address of each person listed in the table is
c/o Sunrise Telecom, Inc., 22 Great Oaks Boulevard, San Jose, California 95119.
The table includes all shares of common stock issuable within 60 days of March
1, 2000 upon the exercise of options and other rights beneficially owned by the
indicated stockholders on that date. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission and
includes voting and investment power with respect to shares. To our knowledge,
except under applicable community property laws or as otherwise indicated, the
persons named in the table have sole voting and sole investment control
regarding all shares beneficially owned. The applicable percentage of ownership
for each stockholder is based on 15,227,417 shares of common stock outstanding
as of March 1, 2000, together with applicable options for that stockholder.
Shares of common stock issuable upon exercise of options and other rights
beneficially owned ware deemed outstanding for the purpose of computing the
percentage ownership of the person holding these options and other rights, but
are not deemed outstanding for computing the percentage ownership of any other
person.
<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially
Owned Prior to Offering Number of Owned After Offering (1)
------------------------------ Shares ---------------------------
Holders Number Percent Offered Number Percent
- ------- -------------- --------------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Paul Ker-Chin Chang..... 4,427,000(2) 29.1%
Paul A. Marshall........ 4,041,000(3) 26.5
Robert C. Pfeiffer...... 2,155,000 14.2
Peter L. Eidelman....... 50,000(4) *
Patrick Peng-Koon Ang... -- --
Henry P. Huff........... -- --
Jennifer J. Walt........ 146,750 1.0
All directors and
executive officers as a
group (seven persons).. 10,819,750(4) 70.8
Selling Stockholders:
</TABLE>
- ---------------------
* Less than one percent of the outstanding shares of common stock.
(1) Assumes no exercise of the Underwriters' over-allotment option.
(2) Includes 10,600 shares held as custodian for minor child.
(3) Includes 400 shares held as custodian for minor child.
(4) Includes 44,500 shares issuable upon exercise of outstanding options, which
are exercisable within 60 days of March 1, 2000.
We will pay all costs and expenses of the offering, other than the
underwriting discount relating to shares sold by the selling stockholders, the
fees and disbursements of legal counsel and other advisors to the selling
stockholders and stock transfer and other taxes attributable to the sale of
shares by the selling stockholders, which will be paid by the selling
stockholders.
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<PAGE>
CERTAIN TRANSACTIONS
Since January 1, 1997, we have not been involved in any transaction or series
of similar transactions to which we were or are a party in which the amount
involved exceeded or exceeds $60,000 and in which any of our directors or
executive officers, any holder of more than 5% of any class of our voting
securities or any member of the immediate family of any of the foregoing
persons had or will have a direct or indirect material interest, other than the
transactions described below.
Insider Transactions
Paul Ker-Chin Chang, our Chief Executive Officer and President, is the owner
of Telecom Research Center. We purchased equipment from Telecom Research Center
used in our manufacturing process totaling $58,000 in 1999, $84,000 in 1998 and
$81,000 in 1997. At December 31, 1999, 1998 and 1997, there was no accounts
payable due to Telecom Research Center. The terms of these transactions were
negotiated at arms length and are similar to those of unrelated parties.
In June 1997, we repurchased shares of our common stock at a price of $3.30
per share from certain of our stockholders, including:
. 1,000 shares from Bruce and Molly Mastic, a brother-in-law and sister of
Paul Marshall, our Chief Operating Officer;
. 20,000 shares from Robert and Pat Pfeiffer, the parents of Robert C.
Pfeiffer, our Chief Technology Officer; and
. 5,000 shares from Ann Filson, a sister of Paul Marshall, our Chief
Operating Officer.
In May 1998, we repurchased shares of our common stock at a price of $4.30
per share from certain of our stockholders, including:
. 5,000 shares from Andrew and Mary Marshall, the parents of Paul
Marshall, our Chief Operating Officer; and
. 17,500 shares from Bryant Blewett and Ellen Marshall, a brother-in-law
and a sister of Paul Marshall, our Chief Operating Officer.
During 1997, 1998 and 1999, we retained the law firm of Littler Mendelson to
perform legal services for us. Ms. Walt, a director of Sunrise and a member of
the Compensation Committee, is a shareholder in Littler Mendelson.
Mr. Huff, a director of Sunrise, is the Chief Financial Officer of NorthPoint
Communications. We sold approximately $590,000 of products to NorthPoint
Communications in 1999 and $192,000 in 1998.
Agreements with Management
We have entered into indemnification agreements with our officers and
directors containing provisions which may require us, among other things, to
indemnify our officers and directors against certain liabilities that may arise
by reason of their status or service as officers or directors (other than
liabilities arising from willful misconduct of a culpable nature) and to
advance their expenses incurred as a result of any proceeding against them as
to which they could be indemnified. See "Description of Capital Stock--
Indemnification Provisions."
57
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the completion of this offering, Sunrise will be authorized to issue
175,000,000 shares of common stock, $.001 par value per share, and 10,000,000
shares of undesignated preferred stock, $.001 par value per share.
Common Stock
At March 1, 2000, there were 15,227,417 shares of common stock outstanding,
held of record by 87 stockholders. Options to purchase 995,616 shares of common
stock were also outstanding. There will be shares of common stock
outstanding (assuming no exercise of outstanding options under Sunrise's stock
option plans after March 1, 2000) after giving effect to the sale of the shares
offered hereby.
The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. Subject to
preferences that may be applicable to any outstanding preferred stock, holders
of common stock are entitled to receive ratably such dividends as may be
declared by the Board of Directors out of funds legally available for that
purpose. See "Dividend Policy." In the event of liquidation, dissolution or
winding up of Sunrise, the holders of common stock are entitled to share
ratably in all assets remaining after payment of liabilities, subject to the
prior distribution rights of any outstanding preferred stock. The common stock
has no preemptive or conversion rights or other subscription rights. The
outstanding shares of common stock are, and the shares of common stock to be
issued upon completion of this offering will be, fully paid and non-assessable.
Preferred Stock
There are currently no outstanding shares of preferred stock. Upon the
closing of this offering, the Board of Directors will have the authority,
without further action by the stockholders, to issue up to 10,000,000 shares of
preferred stock, $.001 par value, in one or more series. The Board of Directors
will also have the authority to designate the rights, preferences, privileges
and restrictions of each such series, including dividend rights, dividend
rates, conversion rights, voting rights, terms of redemption, redemption
prices, liquidation preferences and the number of shares constituting any
series.
The issuance of preferred stock may have the effect of delaying, deferring or
preventing a change in control of Sunrise without further action by the
stockholders. The issuance of preferred stock with voting and conversion rights
may also adversely affect the voting power of the holders of common stock. In
certain circumstances, an issuance of preferred stock could have the effect of
decreasing the market price of the common stock. As of the closing of the
offering, no shares of preferred stock will be outstanding. Sunrise currently
has no plans to issue any shares of preferred stock.
Delaware Anti-Takeover Law and Charter and Bylaw Provisions
Provisions of Delaware law and our charter documents could make the
acquisition of our company and the removal of incumbent officers and directors
more difficult. These provisions are expected to discourage certain types of
coercive takeover practices and inadequate takeover bids and to encourage
persons seeking to acquire control of our company to negotiate with it first.
We believe that the benefits of increased protection of its potential ability
to negotiate with the proponent of an unfriendly or unsolicited proposal to
acquire or restructure Sunrise outweigh the disadvantages of discouraging such
proposals because, among other things, negotiation of such proposals could
result in an improvement of their terms.
Section 203. We are subject to the provisions of Section 203 of the Delaware
law. In general, the statute prohibits a publicly-held Delaware corporation
from engaging in a "business combination" with an "interested stockholder" for
a period of three years after the date that the person became an interested
stockholder unless, subject to exceptions, the business combination or the
transaction in which the person
58
<PAGE>
became an interested stockholder is approved in a prescribed manner. Generally,
a "business combination" includes a merger, asset or stock sale, or other
transaction resulting in a financial benefit to the stockholder. Generally, an
"interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years prior, did own, 15% or more of the
corporation's voting stock. These provisions may have the effect of delaying,
deferring or preventing a change in control of Sunrise without further action
by the stockholders.
Special Stockholder Meetings. Our restated certificate of incorporation will
provide that special meetings of the stockholders for any purpose or purposes,
unless required by law, may only be called by the board of directors, the
Chairman of the Board, if any, and the President. This limitation on the
ability to call a special meeting could make it more difficult for stockholders
to initiate actions that are opposed by the board. These actions could include
the removal of an incumbent director or the election of a stockholder nominee
as a director. They could also include the implementation of a rule requiring
stockholder ratification of specific defensive strategies that have been
adopted by the board with respect to unsolicited takeover bids. In addition,
the limited ability to call a special meeting of stockholders may make it more
difficult to change the existing board and management.
Classified Board of Directors. Our board will be divided into three classes
of directors serving staggered three-year terms. As a result, approximately
one-third of the board of directors will be elected each year. These provision
are likely to increase the time required for stockholders to change the
composition of our board of directors. For example, in general at least two
annual meetings will be necessary for stockholders to effect a change in the
majority of our board of directors. Subject to the rights of the holders of any
outstanding series of preferred stock, the certificate of incorporation
authorizes only the board of directors to fill vacancies, including newly
created directorships. The certificate of incorporation also provides that
directors may be removed by stockholders only for cause and only by affirmative
vote of holders of two-thirds of the outstanding shares of voting stock.
Supermajority Vote to Amend Charter and Bylaws. Our restated certificate of
incorporation and restated bylaws each will provide that our bylaws may only be
amended by a two-thirds vote of the outstanding shares. In addition, our
certificate of incorporation provides that its provisions related to bylaw
amendments, staggered board and indemnification may only be amended by a two-
thirds vote of the outstanding shares.
No Stockholder Action by Written Consent. Our restated certificate of
incorporation will provide that stockholder action can be taken only at an
annual or special meeting of stockholders and may not be taken by written
consent.
Advance Notice Procedures. Our restated bylaws will provide for an advance
notice procedure for the nomination, other than by or at the direction of our
board of directors, of candidates for election as directors as well as for
other stockholder proposals to be considered at annual meetings of
stockholders.
Indemnification Provisions
As permitted by the Delaware General Corporation Law, our certificate of
incorporation eliminates the personal liability of our officers and directors
for monetary damages for breach or alleged breach of their fiduciary duties as
officers or directors, other than in cases of fraud or other willful
misconduct. In addition, our by-laws provide that we are required to indemnify
our officers and directors even when indemnification would otherwise be
discretionary, and we are required to advance expenses to our officers and
directors as incurred in connection with proceedings against them for which
they may be indemnified. We have entered into indemnification agreements with
our officers and directors containing provisions that are, in some respects,
broader than the specific indemnification provisions contained in the Delaware
General Corporation Law. The indemnification agreements require us to indemnify
our officers and directors against liabilities that may arise by reason of
their status or service as officers and directors and to advance their expenses
incurred as a result of any proceeding against them as to which they could be
indemnified.
59
<PAGE>
At present, we are not aware of any pending or threatened litigation or
proceeding involving a director, officer, employee or agent of Sunrise in which
indemnification would be required or permitted. We are not aware of any
threatened litigation or proceeding that might result in a claim for
indemnification. We believe that our charter provisions and indemnification
agreements are necessary to attract and retain qualified persons as directors
and officers.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is American Securities
Transfer & Trust, Inc. The transfer agent's address and telephone number is
12039 W. Alameda Parkway, Suite Z2, Lakewood, Colorado 80228 and (303) 984-
4110.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have outstanding
shares of common stock based upon shares outstanding at December 31, 1999,
assuming no exercise of the underwriters' over-allotment option. Excluding the
shares of common stock offered hereby and assuming no exercise of
the underwriters' over-allotment option, as of the effective date of the
registration statement, there will be shares of common stock
outstanding, all of which are "restricted" shares under the Securities Act of
1933.
The following table indicates approximately when the shares of
our common stock that are not being sold in the offering but which will be
outstanding at the time the offering is complete will be eligible for sale into
the public market:
Eligibility of Restricted Shares For Sale in the Public Market
<TABLE>
<S> <C>
At the date of this prospectus......................................... 0
180 days after the date of this prospectus.............................
After 180 days post-effective date.....................................
</TABLE>
Most of the restricted shares that will become available for sale in the
public market beginning 180 days after the effective date will be subject to
volume and other resale restrictions pursuant to Rule 144 under the Securities
Act of 1933 because the holders are our affiliates. The general provisions of
Rule 144 are described below.
In general, under Rule 144, any of our affiliates, or person, or persons
whose shares are aggregated, who has beneficially owned restricted shares for
at least one year, will be entitled to sell in any three-month period a number
of shares that does not exceed the greater of:
. 1% of the then outstanding shares of the common stock, approximately
shares immediately after this offering, or
. the average weekly trading volume during the four calendar weeks
preceding the date on which notice of the sale is filed with the SEC.
In addition, sales pursuant to Rule 144 are subject to requirements relating to
manner of sale, notice and availability of current public information about us.
A person, or persons whose shares are aggregated, who is not deemed to have
been one of our affiliates at any time during the 90 days immediately preceding
the sale and who has beneficially owned his or her shares for at least two
years is entitled to sell such shares pursuant to Rule 144(k) without regard to
the limitations described above.
As of December 31, 1999, shares were reserved for issuance under
our 1993 stock option plan, of which options to purchase shares
were then outstanding and were then exercisable. We intend to file,
within 180 days after the date of this prospectus, a registration statement
under the Securities Act of 1933 to register the shares under our
2000 stock option plan and the shares of common stock reserved for
issuance under our employee stock purchase plan. Upon registration, all of
these shares will be freely tradable when issued, subject to Rule 144 volume
limitations applicable to affiliates and lock-up agreements.
Lock-Up Agreements
Substantially all of the holders of common stock and options to purchase
common stock, including our executive officers and directors and the selling
stockholders, have agreed, pursuant to "lock-up" agreements with Chase
Securities Inc., that they will not offer, sell, contract to sell, pledge,
grant any option to sell, or otherwise dispose of, directly or indirectly, any
shares of common stock or securities convertible or exchangeable for common
stock, or warrants or other rights to purchase common stock for a period of
180 days after the date of this prospectus without the prior written consent of
Chase Securities Inc.. Chase Securities Inc. may release the shares subject to
the lock-up agreements in whole or in part at any time with or without notice.
Currently, Chase Securities Inc. has no plans, however, to do so.
61
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, the
underwriters named below, through their representatives, Chase Securities Inc.,
Banc of America Securities LLC and CIBC World Markets Corp., have severally
agreed to purchase from Sunrise and the selling stockholders the following
respective numbers of shares of common stock:
<TABLE>
<CAPTION>
Number
Name of Shares
---- ---------
<S> <C>
Chase Securities Inc. ..................
Banc of America Securities LLC..........
CIBC World Markets Corp. ...............
--------
Total...................................
========
</TABLE>
The underwriting agreement provides that the obligations of the underwriters
are subject to specified conditions precedent, including the absence of any
material adverse change in our business and the receipt of certain
certificates, opinions and letters from us, our counsel and the independent
accountants. The underwriters are committed to purchase all of the shares of
common stock offered by us and the selling stockholders if they purchase any
shares.
The following table shows the per share and total underwriting discounts and
commissions we will pay to the underwriters. These amounts are shown assuming
both no exercise and full exercise of the underwriters' over-allotment option
to purchase additional shares.
Underwriting Discounts and Commissions
<TABLE>
<CAPTION>
With Without
Over-Allotment Over-Allotment
Exercise Exercise
-------------- --------------
<S> <C> <C>
Per Share.................................. $ $
Total...................................... $ $
</TABLE>
We estimate that the total expenses of this offering, excluding underwriting
discounts and commissions, will be approximately $ .
The underwriters propose to offer the shares of common stock directly to the
public at the initial public offering price set forth on the cover page of this
prospectus and to selected dealers at that price less a concession not in
excess of $ per share. The underwriters may allow and these dealers may
reallow a concession not in excess of $ per share to other dealers.
After the initial public offering of the shares, the offering price and other
selling terms may be changed by the underwriters. The underwriters have
informed us that they do not intend to confirm discretionary sales of more than
5% of the shares of common stock offered in this offering.
The selling stockholders have granted to the underwriters an option,
exercisable no later than 30 days after the date of this prospectus, to
purchase up to additional shares of common stock at the
62
<PAGE>
initial public offering price, less the underwriting discount set forth on the
cover page of this prospectus. To the extent that the underwriters exercise
this option, each of the underwriters will have a firm commitment to purchase
approximately the same percentage of shares which the number of shares of
common stock to be purchased by it shown in the above table bears to the total
number of shares of common stock offered hereby. The selling stockholders will
be obligated, pursuant to the option, to sell shares to the underwriters to the
extent the option is exercised. The underwriters may exercise this option only
to cover over-allotments made in connection with the sale of shares of common
stock offered hereby.
The offering of the shares is made for delivery when, as and if accepted by
the underwriters and subject to prior sale and withdrawal, cancellation or
modification of the offering without notice. The underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
We and the selling stockholders have each agreed to indemnify the
underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, and to contribute to payments the underwriters may be
required to make in respect of these liabilities.
Our stockholders, including executive officers, directors and the selling
stockholders, have agreed not to, without the prior written consent of Chase
Securities Inc., offer, sell or otherwise dispose of any shares of common stock
or options to acquire shares of common stock or securities exchangeable for or
convertible into shares of common stock owned by them during the 180-day period
following the date of this prospectus. We have agreed that we will not, without
the prior written consent of Chase Securities Inc., offer, sell or otherwise
dispose of any shares of common stock or options to acquire shares of common
stock or securities exchangeable for or convertible into shares of common stock
during the 180-day period following the date of this prospectus, except that we
may issue shares upon the exercise of options granted prior to the date hereof.
We may grant additional options under our stock option plans. Without the prior
written consent of Chase Securities Inc., the additional options shall not be
exercisable during this 180-day period.
The representatives of the underwriters participating in this offering may
over-allot or effect transactions which stabilize, maintain or otherwise affect
the market price of the common stock at levels above those which might
otherwise prevail in the open market, including by entering stabilizing bids,
effecting syndicate covering transactions or imposing penalty bids. A
stabilizing bid means the placing of any bid or the effecting of any purchase,
for the purpose of pegging, fixing or maintaining the price of the common
stock. A syndicate covering transaction means the placing of any bid on behalf
of the underwriting syndicate or the effecting of any purchase to reduce a
short position created in connection with the offering. A penalty bid means an
arrangement that permits the underwriters to reclaim a selling concession from
a syndicate member in connection with the offering when shares of common stock
sold by the syndicate member are purchased in syndicate covering transactions.
Such transactions may be effected on the Nasdaq National Market, in the over-
the-counter market, or otherwise. Stabilizing, if commenced, may be
discontinued at any time.
Prior to this offering, there has been no public market for the common stock.
The initial public offering price for the common stock will be determined by
negotiation among us and the representatives. Among the factors to be
considered in determining the initial public offering price will be prevailing
market and economic conditions, our revenues and earnings, market valuations of
other companies engaged in activities similar to our business operations and
management.
Currently, we have a line of credit from Bank of America, N.A., an affiliate
of Banc of America Securities LLC, one of the underwriters.
63
<PAGE>
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
Sunrise by Orrick, Herrington & Sutcliffe LLP, San Francisco, California.
Certain legal matters in connection with this offering will be passed upon for
the Underwriters by Simpson Thacher & Bartlett, New York, New York and Palo
Alto, California.
EXPERTS
The consolidated financial statements of Sunrise as of December 31, 1998 and
1999 and for each of the years in the three-year period ended December 31,
1999, have been included herein and in the registration statement in reliance
upon the report of KPMG LLP, independent auditors, appearing elsewhere in this
prospectus, and upon the authority of said firm as experts in accounting and
auditing. The consolidated financial statements of Pro.Tel as of December 31,
1998 and 1999 and for each of the years in the two-year period ended December
31, 1999, have been included herein and in the registration statement in
reliance upon the report of KPMG S.p.A., independent auditors, appearing
elsewhere in this prospectus, and upon the authority of said firm as experts in
accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
Sunrise has filed with the Securities and Exchange Commission a Registration
Statement on Form S-1 under the Securities Act of 1933 for the common stock
offered by this prospectus. This prospectus does not contain all of the
information contained in the Registration Statement and the exhibits and
schedules. For further information regarding Sunrise and the common stock
offered by this prospectus, we refer you to the Registration Statement and to
the exhibits and schedules. Statements made in this prospectus concerning the
contents of any document referred to herein are not necessarily complete. With
respect to each such document filed as an exhibit to the Registration
Statement, we refer you to the exhibit for a more complete description of the
matter involved. The Registration Statement and the exhibits and schedules may
be inspected without charge at the public reference facilities maintained by
the Securities and Exchange Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the regional offices of the Securities and Exchange
Commission located at Seven World Trade Center, 13th Floor, New York, New York
10048 and the Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of all or any part of the Registration
Statement may be obtained from the Securities and Exchange Commission's offices
upon payment of fees prescribed by the Securities and Exchange Commission. The
Securities and Exchange Commission maintains a World Wide Web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Securities and Exchange
Commission. The address of the site is http://www.sec.gov.
64
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Audited Consolidated Financial Statements of Sunrise Telecom Incorporated
Report of Independent Auditors.......................................... F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999............ F-3
Consolidated Statements of Net Income for the years ended December 31,
1997, 1998
and 1999............................................................... F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997,
1998 and 1999.......................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1998
and 1999............................................................... F-6
Notes to Consolidated Financial Statements.............................. F-7
Audited Consolidated Financial Statements of Pro.Tel. Srl
Report of Independent Auditors.......................................... F-20
Consolidated Balance Sheets as of December 31, 1998 and 1999............ F-21
Consolidated Statements of Operations for the years ended December 31,
1998 and 1999.......................................................... F-22
Consolidated Statements of Changes of Quotaholders' Equity for the years
ended
December 31, 1998 and 1999............................................. F-23
Consolidated Statements of Cash Flows for the years ended December 31,
1998 and 1999.......................................................... F-24
Notes to Consolidated Financial Statements.............................. F-25
</TABLE>
F-1
<PAGE>
When the recapitalization of the Company referred to in Note 15 to the
consolidated financial statements has been consummated, we will be in a
position to issue the following report.
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Sunrise Telecom, Inc.
We have audited the accompanying consolidated balance sheets of Sunrise
Telecom, Inc. and subsidiaries as of December 31, 1998 and 1999, and the
related consolidated statements of net income, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1999.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 Sunrise
Telecom, Inc. and subsidiaries as of December 31, 1998 and 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally
accepted accounting principles.
KPMG LLP
Mountain View, California
February 29, 2000, except as to Note 15,
which is as of , 2000
F-2
<PAGE>
SUNRISE TELECOM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31,
---------------
1998 1999
ASSETS ------- -------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................... $ 5,030 $ 8,615
Accounts receivable, net of allowance for doubtful accounts
of $220 and $252, respectively............................. 4,749 9,524
Inventories................................................. 2,914 7,612
Prepaid expenses and other assets........................... 106 214
Deferred income taxes....................................... 906 2,050
------- -------
Total current assets.......................................... 13,705 28,015
Property and equipment, net................................... 2,799 4,417
Minority investment........................................... 607 646
Intangibles, net of accumulated amortization of $222, as of
December 31, 1999............................................ 31 2,324
Other assets.................................................. 51 2,864
------- -------
Total assets.................................................. $17,193 $38,266
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................ $ 403 $ 1,701
Commissions payable......................................... 568 1,344
Accrued compensation and related benefits................... 1,014 3,399
Current portion of notes payable............................ -- 219
Other accrued expenses...................................... 406 2,098
Income taxes payable........................................ 707 2,814
Deferred revenue............................................ 443 411
------- -------
Total current liabilities..................................... 3,541 11,986
------- -------
Deferred income taxes......................................... 82 171
Notes payable, less current portion........................... -- 638
Commitments
Stockholders' equity:
Preferred stock, $0.001 par value per share; 10,000,000
authorized shares; none issued and outstanding............. -- --
Common stock, $0.001 par value per share; 175,000,000 shares
authorized; 14,839,535 and 14,971,000 shares issued and
outstanding as of December 31, 1998 and 1999,
respectively............................................... 15 15
Additional paid-in capital.................................. 511 3,945
Deferred stock-based compensation........................... -- (2,065)
Retained earnings........................................... 13,044 23,576
------- -------
Total stockholders' equity.................................... 13,570 25,471
------- -------
Total liabilities and stockholders' equity.................... $17,193 $38,266
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
SUNRISE TELECOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF NET INCOME
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
1997 1998 1999
------------ ---------- ----------
<S> <C> <C> <C>
Net sales.................................. $ 29,064 $ 28,535 $ 61,465
Cost of sales.............................. 7,652 7,590 14,736
------------ ---------- ----------
Gross profit............................. 21,412 20,945 46,729
------------ ---------- ----------
Operating expenses:
Research and development................. 5,892 6,203 10,694
Sales and marketing...................... 7,645 7,764 15,215
General and administrative............... 1,632 2,243 3,912
------------ ---------- ----------
Total operating expenses................. 15,169 16,210 29,821
------------ ---------- ----------
Income from operations................... 6,243 4,735 16,908
Other income, net.......................... 112 224 327
------------ ---------- ----------
Income before income taxes............... 6,355 4,959 17,235
Income taxes............................... 1,899 1,588 6,291
------------ ---------- ----------
Net income............................... $ 4,456 $ 3,371 $ 10,944
============ ========== ==========
Earnings per share:
Basic.................................... $ 0.30 $ 0.23 $ 0.74
============ ========== ==========
Diluted.................................. $ 0.30 $ 0.22 $ 0.72
============ ========== ==========
Shares used in computing earnings per
share:
Basic.................................... 14,881,757 14,845,637 14,888,882
============ ========== ==========
Diluted.................................. 14,965,253 15,000,932 15,274,660
============ ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
SUNRISE TELECOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1997, 1998, and 1999
(in thousands except per share data)
<TABLE>
<CAPTION>
Common Stock Additional Deferred Total
-------------- Paid-in Stock-based Retained Stockholders'
Shares Amount Capital Compensation Earnings Equity
------ ------ ---------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31,
1996................... 14,956 $15 $ 493 $ -- $ 5,894 $ 6,402
Exercise of stock
options................ 15 -- 18 -- -- 18
Repurchase of common
stock.................. (99) -- (14) -- (311) (325)
Net income.............. -- -- -- -- 4,456 4,456
Cash dividend of $.006
per share.............. -- -- -- -- (89) (89)
------ --- ------ ------- ------- -------
Balances, December 31,
1997................... 14,872 15 497 -- 9,950 10,462
Exercise of stock
options................ 13 -- 21 -- -- 21
Repurchase of common
stock.................. (45) -- (7) -- (188) (195)
Net income.............. -- -- -- -- 3,371 3,371
Cash dividend of $.006
per share.............. -- -- -- -- (89) (89)
------ --- ------ ------- ------- -------
Balances, December 31,
1998................... 14,840 15 511 -- 13,044 13,570
Exercise of common stock
options................ 76 -- 177 -- -- 177
Repurchase of common
stock.................. (45) -- (13) -- (189) (202)
Issuance of stock in
connection with Hukk
acquisition............ 100 -- 1,000 -- -- 1,000
Deferred stock-based
compensation........... -- -- 2,270 (2,270) -- --
Amortization of deferred
stock- based
compensation........... -- -- -- 205 -- 205
Cash dividend of $.015
per share.............. -- -- -- -- (223) (223)
Net income.............. -- -- -- -- 10,944 10,944
------ --- ------ ------- ------- -------
Balances, December 31,
1999................... 14,971 $15 $3,945 $(2,065) $23,576 $25,471
====== === ====== ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
SUNRISE TELECOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years Ended
December 31,
-------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income....................................... $ 4,456 $ 3,371 $10,944
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................... 575 739 1,205
Amortization of deferred stock-based compensa-
tion............................................ -- -- 205
Gain on the sale of property and equipment....... (16) (21) 156
Deferred income taxes............................ (340) (1) (1,055)
Changes in operating assets and liabilities:
Accounts receivable.............................. (634) 1,246 (4,721)
Inventories...................................... (425) (406) (4,536)
Prepaid expenses and other assets................ (205) 44 (259)
Income tax receivable............................ (317) 317 --
Accounts and commissions payable................. (437) (118) 2,040
Accrued compensation and related benefits........ 452 (1,663) 2,368
Other accrued expenses........................... (301) 162 1,704
Income taxes payable............................. (455) 472 2,107
Deferred revenue................................. 41 400 (32)
------- ------- -------
Net cash provided by operating activities.......... 2,394 4,542 10,126
------- ------- -------
Cash flows from investing activities:
Purchase of long-term investment................. -- (607) (39)
Sale or maturity of short-term investments....... 1,122 -- --
Capital expenditures, net........................ (1,494) (1,094) (2,734)
Proceeds from sale of property and equipment..... 145 43 --
Acquisition of Hukk, net of cash acquired........ -- -- (782)
Deposit on land and building..................... -- -- (2,675)
------- ------- -------
Net cash used in investing activities.............. (227) (1,658) (6,230)
------- ------- -------
Cash flows from financing activities:
Payments on notes payable........................ -- -- (63)
Repurchase of common stock....................... (325) (195) (202)
Cash dividends................................... (89) (89) (223)
Proceeds from exercise of stock options.......... 18 21 177
------- ------- -------
Net cash used in financing activities.............. (396) (263) (311)
------- ------- -------
Net increase in cash and cash equivalents.......... 1,771 2,621 3,585
Cash and cash equivalents, beginning of year....... 638 2,409 5,030
------- ------- -------
Cash and cash equivalents, end of year............. $ 2,409 $ 5,030 $ 8,615
======= ======= =======
Supplement disclosures of cash flow information:
Cash paid during the year:
Interest......................................... $ 2 $ 2 $ 2
======= ======= =======
Income taxes..................................... $ 2,671 $ 799 $ 5,365
======= ======= =======
Noncash investing and financing activities:
Stock issued for acquisition of Hukk............. $ -- $ -- $ 1,000
======= ======= =======
Deferred stock-based compensation................ $ -- $ -- $ 2,270
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
SUNRISE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1998, and 1999
(1) Business and Significant Accounting Policies
(a)Business
Sunrise Telecom, Inc. and subsidiaries (the Company) was incorporated in
California on October 1, 1991. The Company manufactures and markets service
verification equipment to pre-qualify, verify and diagnose
telecommunications and Internet networks. The Company markets and
distributes its products via a worldwide network of manufacturers,
representatives and independent distributor organizations. The Company has
wholly owned subsidiaries in Norcross, Georgia; Taipei, Taiwan; a
representative liaison office in Beijing, China; and a foreign sales
corporation in Barbados.
(b)Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of the Company and its wholly owned subsidiaries. All significant
intercompany transactions have been eliminated in consolidation.
(c)Revenue Recognition
Revenue is recognized when earned. The Company recognizes revenue from
product sales upon shipment, assuming collectibility of the resulting
receivable is probable. Revenue from services and support provided under
the Company's extended warranty programs is deferred and recognized on a
straight-line basis over the period of the contract. Deferred revenue
represents amounts received from customers in respect of the extended
warranty program in advance of services and support to be provided.
Provisions are recorded at the time of sale for estimated product returns,
warranty and customer support.
(d)Warranty Cost
The Company provides various warranties covering parts and labor on all
its hardware products. Estimated warranty costs are charged to cost of
sales when the related sales are recognized.
(e)Research and Development
Development costs incurred in the research and development of new
products and enhancements to existing products are expensed as incurred
until the product has been completed, tested, and is ready for commercial
manufacturing. To date, hardware and software development projects have
been completed concurrently with the establishment of commercial
manufacturing and technological feasibility in the form of a working model,
respectively. Accordingly, no development costs have been capitalized.
(f)Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities at
the date of purchase of three months or less to be cash equivalents. Cash
equivalents are limited to money market mutual funds.
F-7
<PAGE>
SUNRISE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(g)Fair Value of Financial Instruments
For certain financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable, notes payable, and accrued expenses,
recorded amounts approximate fair value due to the relatively short
maturity period.
(h)Inventories
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out method.
(i)Property and Equipment
Equipment, furniture, fixtures, and leasehold improvements are stated at
cost. Depreciation and amortization is computed by the straight-line method
over the shorter of the estimated useful life of the asset or the lease
term. The estimated useful lives of assets are five years.
The Company reviews property and equipment for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of property and equipment is
measured by comparison of its carrying amount to the future net cash flows
the property and equipment are expected to generate. If such assets are
considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the property and equipment
exceeds its fair market value. To date, the Company has made no adjustments
to the carrying values of its property and equipment.
(j)Intangible Assets
Intangibles include the fair value of issued and pending patents,
technology, noncompete agreements, and goodwill. The Company amortizes such
intangibles on a straight-line basis over four to five years based on
expected lives of patents, technology, noncompete agreements, and goodwill.
The Company reviews intangible assets for impairment based on a
comparison of the undiscounted expected future cash flows of the products
relating to the acquisition to the carrying value of associated
intangibles.
(k)Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(l)Business and Concentrations of Credit Risk
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist primarily of cash equivalents and
accounts receivable. The Company's cash equivalents are primarily in highly
liquid money market funds. The Company believes no significant
concentrations of credit exist with respect to these financial instruments.
Concentrations of credit risk with respect to
F-8
<PAGE>
SUNRISE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
trade receivables are limited as the majority of the Company's sales is
derived from large telephone operating companies and other
telecommunication companies located throughout the world. The Company
performs ongoing credit evaluations of its customers. Based on management's
evaluation of potential credit losses, the Company believes its allowances
for doubtful accounts are adequate. The Company had one customer that
accounted for 9.9%, 7.7%, and 40.6% of its revenues for 1997, 1998, and
1999, respectively, and $301,000, $148,000, and $2,833,000 of its accounts
receivable as of December 31, 1997, 1998, and 1999, respectively.
The Company's customers are concentrated in the telecommunications
industry. Accordingly, the Company's future success depends upon the buying
patterns of such customers and the continued demand by such customers for
the Company's products. Additionally, the telecommunications equipment
market is characterized by rapidly changing technology, evolving industry
standards, changes in end user requirement, and frequent new product
introductions and enhancements. Furthermore, the telecommunications
industry has experienced and is expected to continue to experience
consolidation. The Company's continued success will depend upon its ability
to enhance existing products and to develop and introduce, on a timely
basis, new products and features that keep pace with technological
developments and emerging industry standards. Furthermore, as a result of
its international sales, the Company's operations are subject to risks of
doing business abroad, including but not limited to, fluctuations in the
value of currency, longer payment cycles, and greater difficulty in
collecting accounts receivable. While to date these factors have not had an
adverse material impact on the Company's consolidated results of
operations, there can be no assurance that there will not be such an impact
in the future.
(m)Net Income per Share
Basic earnings per share (EPS) is computed using the weighted-average
number of common shares outstanding during the period. Diluted EPS is
computed using the weighted-average number of common and dilutive common
equivalent shares outstanding during the period. Dilutive common equivalent
shares consist of common stock issuable upon exercise of stock options
using the treasury stock method.
The following is a reconciliation of the shares used in the computation
of basic and diluted EPS (in thousands):
<TABLE>
<CAPTION>
Years Ended
December 31,
--------------------
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Basic EPS--weighted-average
number of common shares
outstanding........................................... 14,882 14,846 14,889
Effect of dilutive common
equivalent shares--stock
options outstanding................................... 83 155 386
------ ------ ------
Diluted EPS--weighted-average
number of common shares
and common equivalent
shares outstanding.................................... 14,965 15,001 15,275
====== ====== ======
</TABLE>
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin
No. 98, convertible preferred stock and common stock granted for nominal
consideration prior to the anticipated effective date of an initial public
offering (IPO) must be included in the calculation of basic and diluted net
F-9
<PAGE>
SUNRISE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
income per share as if they had been outstanding for all periods presented.
To date, the Company has not had any issuances or grants for nominal
consideration.
(n)Stock-Based Compensation
The Company uses the intrinsic-value method in accordance with
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock-
Issued to Employees, to account for employee stock-based compensation.
Accordingly, compensation cost is recorded on the date of grant to the
extent the fair value of the underlying share of common stock exceeds the
exercise price for a stock option or the purchase price for a share of
common stock. During 1999, the Company issued stock options to employees
which were subsequently determined to have been issued below the fair value
of the stock on the date of grant. The compensation cost associated with
1999 stock options is amortized as a charge against income on a straight-
line basis over four years vesting period of the options. The Company has
allocated the amortization of deferred stock-based compensation to the
departments in which the related employee's services are charged. Pursuant
to Statement of Financial Accounting Standards (SFAS) No. 123, the Company
discloses the pro forma effect of using the fair value method of accounting
for employee stock-based compensation arrangements.
(o)Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses
during the period. Accordingly, actual results could differ from those
estimates.
(p)Foreign Currency Translation
The functional currency for the Company's foreign subsidiary is the U.S.
dollar. Accordingly, the Company remeasures monetary assets and liabilities
of its foreign subsidiaries at year-end exchange rates while nonmonetary
items are remeasured at historical rates. Income and expense accounts are
remeasured at the average rates in effect during the year, except for
depreciation which is remeasured at historical rates. Remeasurement
adjustments and transaction gains and losses are recognized in income in
the year of occurrence.
(q)Other Comprehensive Income
The Company has no material components of other comprehensive income.
(r)Advertising Expense
The cost of advertising is expensed as incurred. Such costs are included
in selling and marketing expense and totaled approximately $743,000,
$848,000, and $1,023,000 during the years ended December 31, 1997, 1998,
and 1999, respectively.
(s)Recent Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133, Accounting for Derivative Interments and Hedging Activities.
SFAS No. 133 establishes accounting and reporting standards, requiring that
every derivative instrument be recorded in the balance sheet as either an
asset
F-10
<PAGE>
SUNRISE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
or liability measured at its fair value. SFAS No. 133, as recently amended,
is effective for fiscal years beginning after June 30, 2000. Management
believes the adoption of SFAS No. 133 will not have a material effect on
the Company's financial position or results of operations.
(2) Related Party Transactions
One of the significant stockholders of the Company is also the owner of
Telecom Research Center. During 1997, 1998, and 1999, the Company purchased
equipment used in its manufacturing process totaling $81,000, $84,000, and
$58,000, respectively, from Telecom Research Center. As of December 31, 1997,
1998, and 1999, there were no accounts payable due to Telecom Research Center.
The terms of these transactions were similar to those of unrelated parties.
During 1999, the Company issued an employee a promissory note in an aggregate
principal amount of $50,000. The note bears interest at 7.75% per annum and is
payable monthly with the final payment due in December 2004. As of December 31,
1999, the outstanding balance totaled $44,034.
(3) Financial Statement Details
Inventories
As of December 31, 1998 and 1999, inventories consisted of the following (in
thousands):
<TABLE>
<CAPTION>
1998 1999
------ ------
<S> <C> <C>
Raw material................................................... $1,530 $2,553
Work in process................................................ 940 2,704
Finished goods................................................. 444 2,355
------ ------
$2,914 $7,612
====== ======
</TABLE>
Property and Equipment
As of December 31, 1998 and 1999, property and equipment consisted of the
following (in thousands):
<TABLE>
<CAPTION>
1998 1999
------ ------
<S> <C> <C>
Equipment..................................................... $3,881 $6,352
Furniture and fixtures........................................ 419 494
Leasehold improvements........................................ 150 171
------ ------
4,450 7,017
Less accumulated depreciation and amortization................ 1,651 2,600
------ ------
$2,799 $4,417
====== ======
Other Accrued Expenses
As of December 31, 1998 and 1999, other accrued expenses consisted of the
following (in thousands):
<CAPTION>
1998 1999
------ ------
<S> <C> <C>
Sales tax payable............................................. $ 43 $ 857
Accrued warranty.............................................. 174 733
Other accrued expenses........................................ 189 508
------ ------
$ 406 $2,098
====== ======
</TABLE>
F-11
<PAGE>
SUNRISE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(4) Valuation and Qualifying Accounts
A summary of valuation and qualifying accounts are as follows (in thousands):
<TABLE>
<CAPTION>
Balance at Charged to Balance
Beginning Costs and at End
of Year Expenses Deductions of Year
---------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Allowance for
doubtful accounts:
1997.............................. $ -- $ 32 $11 $ 21
1998.............................. 21 202 3 220
1999.............................. 220 32 -- 252
</TABLE>
(5) Minority Investment
During 1998, the Company acquired 1,666,667 shares (approximately 16.4%) of
the common stock of Top Union Electronics (Top Union), a Taiwan R.O.C.
corporation, for a purchase price of $606,612. Top Union is a subcontractor
manufacturer utilized by the Company for the manufacture of certain products.
During 1999, the Company invested an additional $39,000 in Top Union as part of
an external round of third-party financing obtained by Top Union. This
investment by the Company was less than 16.4% of the total investment financing
made and, thus, reduced the Company's previous 16.4% ownership of Top Union to
14.6%. The Company accounts for this investment using the cost method of
accounting. During the years ended December 31, 1998 and 1999, the Company
purchased $26,406 and $94,227, respectively, in product from Top Union. As of
December 31, 1998 and 1999, the Company had $0 and $36,484, respectively, in
accounts payable to Top Union. The Company evaluates the fair value of its
investment based on the valuation associated with third party external rounds
of financing. To date no impairment charges have been recognized.
(6) Other Assets and Commitments
Other assets as of December 31, 1999, consist principally of a $2,675,000
deposit for the Company's new facility, currently under construction, which is
estimated to be complete in late 2000. The total cost of the new facility is
estimated to be $17,000,000.
(7) Notes Payable and Line of Credit
In connection with the acquisition of Hukk Engineering ("Hukk"), the Company
issued two notes payable, a $450,000 note related to a noncompete agreement due
in quarterly installments of $28,125 through October 2004, and a $450,000 note
due in quarterly installments through October 2004 bearing interest at a rate
of prime plus 2.5%.
The Company has a $3,000,000 revolving line of credit with a financial
institution that expires on October 1, 2000, bearing interest at the bank's
prime rate (8.5% as of December 31, 1999). The agreement, which is
collateralized by the receivables and inventories of the Company, contains
certain financial covenants and restrictions. As of December 31, 1998 and 1999,
there were no balances outstanding under the line of credit.
F-12
<PAGE>
SUNRISE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(8) Leases
The Company leases its facilities under operating lease agreements, expiring
January 2001 and August 2004. The leases require the Company to pay property
taxes and normal maintenance. Future minimum lease payments, under these
agreements, as of December 31, 1999, are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C>
2000................................................................ $ 639
2001................................................................ 764
2002................................................................ 893
2003................................................................ 928
Thereafter.......................................................... 783
------
$4,007
======
</TABLE>
Rent expense for the years ended December 31, 1997, 1998, and 1999, was
approximately $405,000, $415,000, and $511,000, respectively.
The Company intends to sublease its current facility upon the completion of
its new facility.
(9) Common Stock
In January 1997, the Company's Board of Directors approved the increase of
the authorized common stock to 100,000,000 shares and approved a five-for-one
stock split. All share amounts in the accompanying consolidated financial
statements have been retroactively adjusted to reflect the stock split.
The Company established a program of repurchasing common stock in order to
offer liquidity to its stockholders. Repurchases are offered based on
valuations performed by the Company of the fair value of its stock at the time
of repurchase. During 1997, 1998, and 1999, the Company repurchased
approximately 99,000, 45,000, and 45,000 shares of common stock, respectively,
for $325,000, $195,000, and $202,000, respectively.
(10) Stock Option Plan
Under the terms of the 1993 Employee Stock Option Plan (the Option Plan), the
Company's Board of Directors may grant options to directors, officers, and
employees of the Company to purchase not more than an aggregate of 1,750,000
shares of the Company's common stock.
Options may be granted as incentive stock options or nonstatutory stock
options at the fair market value of such shares on the date of grant as
determined by the Board of Directors. Options granted prior to 1996 expire 5
years from the date of grant and are exercisable in 3 equal annual installments
commencing 1 year from the date of grant. Upon termination of employment, the
optionee may exercise any such vested options within 30 days of termination.
Options granted subsequent to 1996 vest over a 4-year period, and expire at the
end of 10 years from the date of grant, or sooner, if terminated by the Board
of Directors.
The options include a provision whereby the option holder may elect at any
time to exercise the option prior to the full vesting of the option. Unvested
shares so purchased are subject to a repurchase right by the Company at the
original purchase price. Such right shall lapse at a rate equivalent to the
vesting period of the original option. As of December 31, 1997, 1998, and 1999,
shares issued and subject to repurchase were 3,000, 2,250, and 8,387,
respectively.
F-13
<PAGE>
SUNRISE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Option activity is summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------
1997 1998 1999
------------------- ------------------- -------------------
Weighted- Weighted- Weighted-
Average Average Average
Number of Price Per Number of Price Per Number of Price Per
Options Share Options Share Options Share
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 159,585 $1.53 430,120 $2.73 603,715 $3.28
Granted at market
value.................. 308,500 3.30 221,000 4.30 -- --
Granted at less than
market value........... -- -- -- -- 359,700 5.63
Exercised............... (15,465) 1.17 (12,905) 1.66 (76,365) 2.32
Canceled................ (22,500) 3.30 (34,500) 3.60 (69,350) 3.41
------- ------- -------
Options at end of year.. 430,120 2.73 603,715 3.28 817,700 4.39
======= ======= =======
Weighted-average fair
value of options
granted during the year
with exercise prices at
fair value............. $0.32 $0.41 $ --
===== ===== =====
Weighted-average fair
value of options
granted during the year
with exercise prices
less than market value
at date of grant....... $ -- $ -- $7.75
===== ===== =====
</TABLE>
Information regarding the stock options outstanding as of December 31, 1999,
is summarized in the table below.
<TABLE>
<CAPTION>
Options outstanding Vested Options
--------------------------------------- --------------------
Weighted-
Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Shares Contractual Exercise Vested Exercise
Prices Outstanding Life (years) Price shares Price
-------- ----------- ----------- --------- ------- ---------
<S> <C> <C> <C> <C> <C>
$0.75--0.75 11,250 5.22 $0.75 11,250 $0.75
1.80--1.80 50,000 6.29 1.80 37,500 1.80
3.30--4.50 559,750 8.23 3.96 157,875 3.59
6.50--6.50 196,700 9.78 6.50 -- 6.50
------- -------
817,700 206,625
======= =======
</TABLE>
The Company uses the intrinsic-value based method to account for its
employees stock-based compensation plan. For options granted in 1997 and 1998,
no compensation cost has been recognized in the accompanying consolidated
financial statements for options granted under this plan as the exercise price
of each option equaled or exceeded the fair value of the underlying common
stock as of the grant date. With respect to options granted in 1999, the
Company has recorded unearned stock-based compensation of approximately
$2,270,000 for the difference at the grant date between the exercise price and
the fair value as determined by an independent valuation.
F-14
<PAGE>
SUNRISE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The deferred compensation represents the aggregate difference, at the date of
grant, between the respective exercise price of stock options and the estimated
fair value of the underlying common stock. The total unearned stock-based
compensation recorded for all option grants through December 31, 1999, will be
amortized as follows for the years ending December 31: 2000, $567,000; 2001,
$567,000; 2002, $567,000; and 2003, $364,000. The amount of deferred stock
compensation expense to be recorded in future periods could decrease if options
for which accrued but unvested compensation has been recorded are forfeited.
If compensation for the Company's stock-based compensation plans had been
determined in a manner consistent with the fair value approach described in
SFAS No. 123, Accounting for Stock-Based Compensation, the Company's net income
and net income per share, as reported, would have been reduced to the pro forma
amounts indicated below (in thousands, except per share data):
<TABLE>
<CAPTION>
Years Ended December
31,
---------------------
1997 1998 1999
------ ------ -------
<S> <C> <C> <C>
Net income applicable to common stock:
As reported......................................... $4,456 $3,371 $10,944
Adjusted pro forma.................................. 4,425 3,318 10,883
Basic net income per share:
As reported......................................... 0.30 0.23 0.74
Adjusted pro forma.................................. 0.30 0.22 0.73
Diluted net income per share:
As reported......................................... 0.30 0.22 0.72
Adjusted pro forma.................................. 0.30 0.22 0.71
</TABLE>
The provisions of SFAS No. 123 are effective for options granted beginning
January 1, 1996. Options vest over several years and new options are generally
granted each year. Because of these factors, the pro forma effect shown above
may not be representative of the pro forma effect of SFAS No. 123 in future
years.
For the purposes of computing pro forma net income, the fair value of each
option grant is estimated on the date of grant using the Black-Scholes option
pricing model. The assumptions used to value the option grant are as follows:
<TABLE>
<CAPTION>
Years Ended December
31,
-----------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Dividend yield....................................... 2.60% 2.60% None
Expected term........................................ 4 years 4 years 4 years
Risk-free interest rate.............................. 5.45% 5.45% 5.66%
Volatility rate...................................... None None None
</TABLE>
F-15
<PAGE>
SUNRISE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(11) Acquisition
In July 1999, the Company acquired all of the outstanding shares of stock of
Hukk, a developer of cable TV service verification equipment. The Company paid
approximately $800,000 in cash and acquisition costs, $900,000 in notes
payable, and 100,000 shares of the Company's common stock valued at $1,000,000
based on an independent valuation. The transaction has been accounted for under
the purchase method. The results of Hukk and the estimated fair value of assets
acquired and liabilities assumed are included in the Company's financial
statements from the date of acquisition. In connection with the Hukk
acquisition, the purchase price has been allocated to the assets and
liabilities assumed based upon fair values on the date of acquisition, as
follows (in thousands):
<TABLE>
<S> <C>
Current assets...................................................... $ 349
Property and equipment, net......................................... 65
Intangibles and goodwill associated with acquisition................ 2,495
Current liabilities................................................. (209)
-------
$ 2,700
=======
</TABLE>
Intangibles include the fair value of technology and noncompete agreements
with resulting excess purchase price allocated to goodwill. The Company
amortizes such intangibles on a straight-line basis over four to five years
based on expected lives of technologies, noncompete agreements, and goodwill.
If the identified technologies are not successfully developed, the Company may
not utilize the value assigned to intangible assets.
The following summary prepared on an unaudited pro forma basis reflects the
condensed consolidated results of operations for the years ended December 31,
1998 and 1999, assuming Hukk had been acquired at the beginning of the periods
presented (in thousands, except per share data):
<TABLE>
<CAPTION>
December 31,
---------------
1998 1999
------- -------
<S> <C> <C>
Net revenues................................................ $31,511 $61,823
Net income.................................................. $ 3,393 $10,185
Basic net income per share.................................. $ 0.23 $ 0.68
Shares used in pro forma per share computation.............. 14,946 14,989
</TABLE>
The pro forma results are not necessarily indicative of what would have
occurred if the acquisition had been in effect for the periods presented. In
addition, they are not intended to be a projection of future results and do not
reflect the synergies that might be achieved from combined operations.
(12) 401(k) Plan
In 1996, the Company adopted a 401(k) Plan (the Plan). Participation in the
Plan is available to all full-time employees. Each participant may elect to
contribute up to 15% of his or her annual salary, but not to exceed the
statutory limit as prescribed by the Internal Revenue Code. The Company may
make discretionary contributions to the Plan. These contributions vest annually
over seven years. Contributions to the Plan of $-0-, $290,638, and $746,954
were made by the Company in 1997, 1998, and 1999, respectively.
F-16
<PAGE>
SUNRISE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(13) Income Taxes
The provision for income taxes consisted of the following (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
------ ------ -------
<S> <C> <C> <C>
Current:
Federal........................................... $1,981 $1,506 $ 6,394
State............................................. 258 83 952
------ ------ -------
2,239 1,589 7,346
------ ------ -------
Deferred expense (benefit):
Federal........................................... (297) 16 (960)
State............................................. (43) (17) (95)
------ ------ -------
(340) (1) (1,055)
------ ------ -------
$1,899 $1,588 $ 6,291
====== ====== =======
Income tax expense differed from the amounts computed by applying the U.S.
federal income tax rate of 35% to pretax income as a result of the following
(in thousands):
<CAPTION>
1997 1998 1999
------ ------ -------
<S> <C> <C> <C>
Computed "expected" tax............................. $2,224 $1,736 $ 6,032
State taxes, net of federal income tax benefit...... 140 44 557
Foreign sales corporation benefit................... (157) (188) (109)
Research credit..................................... (313) (366) (480)
Nondeductible expenses.............................. 5 362 291
------ ------ -------
$1,899 $1,588 $ 6,291
====== ====== =======
</TABLE>
The types of temporary differences that give rise to significant portions of
the Company's deferred tax assets and liabilities are set out below (in
thousands):
<TABLE>
<CAPTION>
December 31,
--------------
1998 1999
------ ------
<S> <C> <C>
Deferred tax assets:
Inventory reserves and additional costs capitalized........ $ 118 $ 156
Accrued compensation and vacation.......................... 342 528
Allowance for doubtful accounts............................ 91 108
Other accruals and reserves................................ 317 622
Net operating losses and start-up costs.................... 291 304
Tax credits................................................ -- 240
State income taxes......................................... 28 332
------ ------
Total gross deferred tax assets.............................. 1,187 2,290
------ ------
Deferred tax liabilities:
Property and equipment..................................... (272) (313)
Unrealized exchange gains.................................. (57) (30)
Federal tax cost of net state deferred assets.............. (35) (69)
------ ------
Total deferred tax liabilities............................... (364) (412)
------ ------
Net deferred tax assets...................................... $ 823 $1,878
====== ======
</TABLE>
F-17
<PAGE>
SUNRISE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Based on the level of
historical taxable income and projections for future taxable income over the
periods which the deferred tax assets are deductible, management believes it is
more likely than not that the Company will realize the benefits of such
deferred assets.
(14) Segment Information
SFAS No. 131, Disclosure About Segments of an Enterprise and Related
Information, establishes standards for the manner in which public companies
report information about operating segments, products, services, geographic
areas, and major customers in annual and interim financial statements. The
method of determining what information to report is based on the way that
management organizes the operating segments within the enterprise for making
operating decisions and assessing financial performance.
The Company's chief operating decision-maker is considered to be the
Company's Chief Executive Officer (CEO). The CEO reviews financial information
presented on a consolidated basis accompanied by disaggregated information
about revenue by geographic region for purposes of making operating decisions
and assessing financial performance. The consolidated financial information
reviewed by the CEO is the same as the information presented in the
accompanying consolidated statements of operations. In addition, as the
Company's assets are primarily located in its corporate offices in the United
States and not allocated to any specific segment, the Company does not produce
reports for or measures the performance of its segments based on any asset-
based metrics. Therefore, the Company operates in a single operating segment
the design, manufacture, and sale of digital test equipment for
telecommunications, transmission, and signaling applications.
Revenue information regarding operations in the different geographic regions
is a follows (in thousands):
<TABLE>
<CAPTION>
North Latin
America Europe Asia/Pacific America Consolidated
------- ------ ------------ ------- ------------
<S> <C> <C> <C> <C> <C>
Revenues:
1997......................... $15,699 $4,840 $6,794 $1,731 $29,064
1998......................... 17,028 4,684 5,668 1,155 28,535
1999......................... 50,168 4,364 5,742 1,191 61,465
</TABLE>
(15) Subsequent Events
(a)Acquisition
On February 22, 2000, the Company acquired all the outstanding shares of
Pro.Tel. Srl and subsidiaries, an Italian manufacturer of distributed
network signal analysis equipment. The Company paid $3,900,000 in cash, a
$100,000 note repayable in May 2000, a note payable related to a
noncompete agreement for $500,000, payable over four years, and 166,667
shares of the Company stock valued at $5,000,000 based on an external
valuation of the Company's stock as of February 22, 2000. The Company
also incurred direct costs associated with the acquisition of
approximately $200,000.
The transaction will be accounted for under the purchase method. The
Company expects to allocate approximately $276,500 to the fair value of
the net tangible assets acquired with the excess purchase
F-18
<PAGE>
SUNRISE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
price of approximately $9,400,000 allocated to technology, noncompete
agreements, and goodwill. The Company expects to amortize goodwill and
other intangibles over a period of four to five years.
(b)Recapitalization
On March 7, 2000, the Board of Directors authorized the filing of a
registration statement with the SEC that would permit the Company to sell
shares of the Company's common stock in connection with a proposed
initial public offering. On March 7, 2000, the Company's Board of
Directors approved the reincorporation of the Company into Delaware
effecting the authorization of 175,000,000 shares of $0.001 par value per
share common stock and 10,000,000 shares of $0.001 par value preferred
stock. The Board of Directors also authorized a -for- stock split of
its common stock and the change of the name of the company to Sunrise
Telecom Incorporated. The consolidated financial statements have been
adjusted to give effect to the recapitalization.
(c)Employee Stock Purchase Plan
In April 2000, the Company's Board of Directors approved the adoption of
the 2000 Employee Stock Purchase Plan (the "Purchase Plan") and reserved
200,000 shares of common stock for issuance thereunder. The Purchase Plan
will be effective upon the Company's initial public offering. The
Purchase Plan permits eligible employees to purchase common stock through
payroll deductions of up to 15% of the employee's total base
compensation, not to exceed $25,000 in any plan year, excluding bonuses,
commissions and overtime at a price equal to 85% of the lower of the fair
market value of the common stock on the first day of the offering period
or on the last day of the purchase period.
(d)2000 Stock Option Plan
In April 2000, the Company's Board of Directors approved the adoption of
the 2000 Stock Plan (the "Stock Plan.") The Stock Plan will become
effective upon the Company's initial public offering. The total number of
shares reserved for issuance under the stock plan equals 1,250,000 shares
of common stock plus the number of shares that remain reserved for
issuance under the 1993 stock option plan as of the date the stock plan
becomes effective. All outstanding options under the 1993 stock option
plan will be administered under the 2000 Stock Plan but will continue to
be governed by their existing terms.
F-19
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and
Quotaholders of Pro.Tel. Srl
We have audited the accompanying consolidated balance sheets of Pro.Tel. Srl
and its subsidiary as of December 31, 1998 and 1999 and the related
consolidated statements of operations, quotaholders' equity and cash flows for
each of the years in the two-year period ended December 31, 1999. These
financial statements are the responsibility of the management of Pro.Tel. Srl.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the Republic of Italy, which standards are substantially similar in
all material respects to generally accepted auditing standards in the United
States of America. Those standards require that we plan and perform the audits
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 Pro.Tel.
Srl and its subsidiary as of December 31, 1998 and 1999, and the results of
their operations and their cash flows for each of the years in the two-year
period ended December 31, 1999 in conformity with accounting principles
generally accepted in the Republic of Italy.
Accounting principles established or adopted by Italian law and the Italian
Accounting Profession, as described in note 1, vary in certain significant
respects from generally accepted accounting principles in the United States of
America. Application of generally accepted accounting principles in the United
States of America would have affected the results of operations for each of the
years in the two-year period ended December 31, 1999 and quotaholders' equity
as of December 31, 1998 and 1999 to the extent summarized in note 26 to the
consolidated financial statements.
/KPMG S.p.A./
Bologna, Italy
February 18, 2000
F-20
<PAGE>
PRO. TEL SRL AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(expressed in thousands of Italian Lire and US Dollars)
<TABLE>
<CAPTION>
December 31,
-------------------------------
Note 1998 1999 1999
---- --------- --------- ---------
(L'000) (L'000) ($)
ASSETS
<S> <C> <C> <C> <C>
Current assets:
Cash................................... 3 55,032 186,885 97,194
Trade receivables, net................. 4 1,344,629 1,328,145 690,731
Inventories............................ 5 134,050 483,643 251,529
Other current assets................... 6 77,972 55,773 29,006
--------- --------- ---------
Total current assets..................... 1,611,683 2,054,446 1,068,460
Non current assets:
Plant and equipment.................... 326,550 528,466 274,840
Less accumulated depreciation.......... (109,361) (187,209) (97,362)
--------- --------- ---------
Plant and equipment, net............. 7 217,189 341,257 177,478
Intangible assets, net................. 8 50,773 31,052 16,149
Other long term assets................. 9 32,531 54,980 28,594
--------- --------- ---------
Total assets............................. 1,912,176 2,481,735 1,290,681
========= ========= =========
<CAPTION>
LIABILITIES AND QUOTAHOLDERS' EQUITY
<S> <C> <C> <C> <C>
Current liabilities:
Short-term bank borrowings............. 10 85,204 474,966 247,017
Current portion of long-term debt...... 10 145,895 80,152 41,685
Accounts payable--trade................ 11 817,973 957,642 498,043
Accrued expenses and other current
liabilities........................... 12 159,850 192,264 99,991
Income and other taxes payable......... 13 111,382 97,786 50,856
--------- --------- ---------
Total current liabilities................ 1,320,304 1,802,810 937,592
Long term liabilities:
Long-term debt......................... 107,197 27,047 14,066
Employees' leaving entitlements........ 10 51,103 84,975 44,193
Deferred income taxes.................. 14 -- 35,268 18,342
--------- --------- ---------
Total long term liabilities.............. 13 158,300 147,290 76,601
--------- --------- ---------
Total liabilities........................ 1,478,604 1,950,100 1,014,193
Quotaholders' equity
Quota capital.......................... 15 500,000 500,000 260,036
Retained earnings/(deficit)............ (66,428) 31,635 16,452
--------- --------- ---------
Total quotaholders' equity............... 433,572 531,635 276,488
--------- --------- ---------
Total liabilities and quotaholders'
equity.................................. 1,912,176 2,481,735 1,290,681
--------- --------- ---------
Commitments and contingent liabilities... 16 77,404 18,993 9,878
========= ========= =========
</TABLE>
Exchange rate used for the convenience translation of the December 31, 1999
balances is Italian Lire 1,922.810327 to $1.00.
See accompanying notes to consolidated financial statements.
F-21
<PAGE>
PRO.TEL. SRL AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(expressed in thousands of Italian Lire and US Dollars)
<TABLE>
<CAPTION>
December 31,
----------------------------------
Note 1998 1999 1999
---- ---------- ---------- ----------
(L'000) (L'000) ($)
<S> <C> <C> <C> <C>
Net sales............................ 17 2,709,880 3,639,354 1,892,726
Cost of goods sold................... 18 (1,794,743) (2,591,093) (1,347,555)
---------- ---------- ----------
Gross profit....................... 915,137 1,048,261 545,171
Selling, general and administrative
expenses............................ 19 (900,172) (1,016,955) (528,890)
---------- ---------- ----------
Operating income................... 14,965 31,306 16,281
Interest income...................... 20 3,995 4,137 2,152
Interest expense..................... 20 (35,614) (43,628) (22,690)
Foreign exchange gain, net........... 21 9,262 42,818 22,268
Other non operating
income/(expense):................... 22
Grant revenue...................... -- 217,706 113,223
Other income/(expense)............. 7,558 (13,614) (7,080)
---------- ---------- ----------
Profit before income taxes......... 166 238,725 124,154
Income taxes......................... 23 (55,580) (140,662) (73,154)
---------- ---------- ----------
Net profit/(loss).................. (55,414) 98,063 51,000
========== ========== ==========
</TABLE>
Exchange rate used for the convenience translation of the December 31, 1999
balances is Italian Lire 1,922.810327 to $1.00.
See accompanying notes to consolidated financial statements.
F-22
<PAGE>
PRO.TEL. SRL AND ITS SUBSIDIARY
CONSOLIDATED STATEMENTS OF QUOTAHOLDERS' EQUITY
(expressed in thousands of Italian Lire)
<TABLE>
<CAPTION>
Retained Total
Quota earning/ quotaholders'
capital (deficit) equity
------- --------- -------------
<S> <C> <C> <C>
Balance at January 1, 1998 of Pro.Tel. Srl.... 100,000 (3,749) 96,251
Balance at January 1, 1998 of Tel.Mark. Srl... 60,000 (7,265) 52,735
------- ------- -------
Combined balance.............................. 160,000 (11,014) 148,986
Acquisition of Tel. Mark. Srl............... (60,000) -- (60,000)
Capital increase............................ 400,000 -- 400,000
Net loss for the year....................... -- (55,414) (55,414)
------- ------- -------
Consolidated balance at December 31, 1998..... 500,000 (66,428) 433,572
Net profit for the year..................... -- 98,063 98,063
------- ------- -------
Consolidated balance at December 31, 1999..... 500,000 31,635 531,635
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-23
<PAGE>
PRO.TEL. SRL AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(expressed in thousands of Italian Lire and US Dollars)
<TABLE>
<CAPTION>
December 31,
------------------------------
1998 1999 1999
---------- -------- --------
(L'000) (L'000) ($)
<S> <C> <C> <C>
Cash flows from operating
activities:
Net profit/(loss)........... (55,414) 98,063 51,000
Adjustments to reconcile net
profit/(loss) to net cash
provided by/(used in)
operating activities:
Amortization of intangible
assets.................... 20,907 21,283 11,069
Depreciation of plant and
equipment................. 43,087 77,735 40,428
Employees' leaving
entitlement (charge for
the year)................. 37,285 53,236 27,687
Deferred income taxes...... -- 49,312 25,646
Other...................... -- 122 63
Changes in operating assets
and liabilities:
Trade receivables.......... (1,085,356) 16,484 8,573
Inventories................ (87,674) (349,593) (181,814)
Other current assets....... (71,665) 22,199 11,545
Other long-term assets..... (20,631) (22,449) (11,675)
Accounts payable--trade.... 689,298 139,669 72,638
Accrued expenses and other
liabilities............... 110,917 32,414 16,858
Income and other taxes
payable................... 48,629 (27,640) (14,375)
Employees' leaving
entitlement (payments)....... (5,364) (19,364) (10,071)
---------- -------- --------
Net cash provided by/(used
in) operating activities.... (375,981) 91,471 47,572
---------- -------- --------
Cash flows from investing
activities:
Purchases of plant and
equipment................. (63,005) (201,925) (105,016)
Purchases of intangible
assets.................... (4,968) (1,562) (812)
Acquisition of Tel.Mark.
Srl....................... (60,000) -- --
---------- -------- --------
Net cash (used in) investing
activities.................. (127,973) (203,487) (105,828)
---------- -------- --------
Cash flows from financing
activities:
Movements in bank
borrowings:
Proceeds from additional
term debt................. 50,000 -- --
Repayments of term debt.... (129,095) (145,893) (75,875)
Net borrowing under short-
term facilities........... 85,204 389,762 202,704
Increase of quota capital... 400,000 -- --
---------- -------- --------
Net cash provided by
financing activities........ 406,109 243,869 126,829
---------- -------- --------
Net increase/(decrease) in
cash........................ (97,845) 131,853 68,573
Cash at beginning of period.. 152,877 55,032 28,621
---------- -------- --------
Cash at end of period........ 55,032 186,885 97,194
========== ======== ========
</TABLE>
Exchange rate used for the convenience translation of the December 31, 1999
balances is Italian Lire 1,922.810327 to $1.00.
See accompanying notes to consolidated financial statements.
F-24
<PAGE>
PRO. TEL. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and summary of significant accounting policies
Pro.Tel. Srl (hereafter "Pro.Tel.' or the "Company') was incorporated on July
24, 1996 with a quota capital of L100,000 thousand and is registered in Italy
with limited liability and is regulated by Italian law.
On June 25, 1998 Pro.Tel. purchased 100% of the quota capital of Tel.Mark.
Srl (hereafter "Tel.Mark.') from certain quotaholders of Pro.Tel.. Tel.Mark. is
registered in Italy with limited liability and is regulated by Italian law.
The Extraordinary General Meeting of the quotaholders on June 25, 1998
increased the quota capital of the Company from L100,000 thousand to L500,000
thousand.
Pro.Tel. is a full service telecommunication engineering consulting and
manufacturing company and provides hardware, firmware and software design. In
particular Pro.Tel. is a worldwide company designing both test and network
equipment for the data and telecommunications industry and prototyping products
for the Information Communication market. The volume of sales became
significant at the end of 1998.
Tel.Mark. supplies administrative services, office space, technical
assistance and specific advice concerning data and telecommunication networks
primarily to Pro.Tel. The annual remuneration for these activities provided to
Pro.Tel. is L360 million for the period from October 1, 1999 to October 1,
2000.
The offices and the production site of Pro.Tel. and its subsidiary (hereafter
the "Group') are located in Vaciglio Modena, Italy.
The By-laws of Pro.Tel. and Tel.Mark. contain specific clauses restricting
the transfer or sale of the companies' quota to third parties. In the event of
such a sale or transfer, the existing quotaholders have the right of first
refusal. Otherwise, such a transaction would be subject to the approval of the
majority of the existing quotaholders.
A summary of the significant accounting policies followed by the Group is set
out below:
Principles of preparation and consolidation
The consolidated financial statements of the Company have been prepared for
distribution to its quotaholders in conformity with accounting standards issued
by the "Consigli Nazionali dei Dottori Commercialisti e dei Ragionieri'
(National Boards of Public Accountants in Italy), and where these are not
exhaustive, with standards issued by the International Accounting Standard
Committee (I.A.S.C.). Hereafter these have been identified as "Italian GAAP'.
Italian GAAP differ in certain respects from generally accepted accounting
principles in the United States of America ("US GAAP'). A description of these
differences and their approximate effects on net profit/(loss) and
quotaholders' equity is set forth in note 26. The consolidated financial
statements have been reformatted from the original Italian statutory financial
statement presentation to conform more closely with international presentation
and include certain additional disclosures required by the US Securities and
Exchange Commission ("the SEC').
The consolidated financial statements for the years ended December 31, 1998
and 1999, have been prepared on the basis of statutory accounts of Pro.Tel. Srl
and its subsidiary Tel.Mark. Srl. The statutory accounts of the two companies
for the year ended December 31, 1999 have not yet been approved by the Board of
Directors and the Quotaholders' Meeting. The consolidated financial statements
for the years ended December 31, 1998 and 1999 have been approved by the Board
of Directors during the meeting held on February 17, 2000.
F-25
<PAGE>
PRO. TEL. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
All significant intercompany balances and transactions have been eliminated
in consolidation.
As noted above, the company acquired 100% of the quota capital of Tel.Mark.
on June 25, 1998 for L60 million. The majority of the quotaholders of Tel.Mark.
were also quotaholders of Pro.Tel. as of January 1, 1998 and the date of
acquisition. Therefore, for purposes of these consolidated financial
statements, the financial position and results of operations of Tel.Mark. prior
to the acquisition date have been combined with Pro.Tel. as of January 1, 1998,
the earliest period presented. No goodwill was recorded as a result of this
transaction.
Cash and bank borrowings
Cash and bank borrowings are stated at nominal value and include accrued
interest.
Accounts receivable and payable
Receivables are stated at nominal value net of an allowance for doubtful
accounts. Payables are stated at face value.
Inventories
Inventories are stated at the lower of cost or net realizable value. The cost
is determined using the average purchase cost method.
Plant and equipment
Plant and equipment are stated at cost less accumulated depreciation.
Maintenance and repairs are expensed as incurred; significant improvements are
capitalized and depreciated over the useful lives of the related assets.
Depreciation is calculated on the straight-line method over the estimated
useful lives of the assets. The following table summarizes the annual
depreciation rates of the Group's plant and equipment:
<TABLE>
<CAPTION>
Annual
rate
------
<S> <C>
Plant and machinery................................................ 12-30%
Industrial and sales tooling/equipment............................. 15-30%
Other.............................................................. 10-25%
</TABLE>
Assets acquired during the year are depreciated at half the annual rate in
order to take into account the average period of utilization thereof.
Assets acquired with a unit cost less than L1 million are charged to the
profit and loss account given their limited estimated useful life.
Assets acquired under capital leases are treated in the same manner as
operating leases, with the purchase of the asset being recorded at the price
paid to acquire title at the end of the lease term.
F-26
<PAGE>
PRO. TEL. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Intangible assets
Intangible assets are carried at the purchase price and are amortized on the
straight-line method over the estimated useful lives of the assets. The
following table summarizes the estimated useful lives of the Group's intangible
assets:
<TABLE>
<CAPTION>
Years
-----
<S> <C>
Incorporation and expansion costs................................... 5
Research and development costs on specific development projects..... 5
Software............................................................ 5
</TABLE>
In addition to the above, intangible assets include leasehold improvements
which are amortized on a straight-line basis over the shorter of the lease term
or estimated life of the asset.
Research and development costs, comprising principally external consultants
employed in that activity, are capitalized as an intangible asset for specific
development projects. The amortization is allocated to cost of goods sold' and
selling, general and administrative expenses' based on their useful life. The
total amount capitalized was L51,506 thousand all of which related to expenses
incurred prior to December 31, 1997. No such costs have been incurred or
capitalized in the years ended December 31, 1998 and 1999 as there have been no
specific development projects that could be capitalized in conformity with
accounting principles generally accepted in the Republic of Italy. All research
and development costs have been expensed as incurred in 1998 and 1999.
Management periodically assesses the recoverability of intangible assets and,
in cases where such an asset is deemed to have no remaining useful economic
life, the carrying value of the asset is written off in full.
Advertising costs
Advertising costs are expensed as incurred.
Income taxes
Current income tax payable by each of the two individual companies included
in the consolidation is calculated according to the tax regulations in force in
Italy and is classified net of the advances paid or withholdings sustained
under "income and other taxes payable'. If the net amount is a debit balance,
it is classified under "other current assets'. In addition, a provision is made
for deferred tax liabilities of the two individual companies, as well as those
deriving from consolidation adjustments, net of deferred tax assets, if any,
where realization of the benefit is considered reasonably certain on the basis
of the Group's forecasted performance.
Deferred income taxes are calculated at the relevant tax rates in force in
Italy at the balance sheet date and are reviewed annually to reflect changes in
the economic circumstances of the companies and in the tax rates.
Revenue and cost recognition
Revenues are recognized when title passes to the customer, usually the date
of shipment or when services are rendered to the independent dealer or other
third party. Costs are recognized on the accrual basis.
F-27
<PAGE>
PRO. TEL. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Employee benefit plans
Leaving entitlements reflect the liability to employees when they leave their
employment, calculated in conformity with current Italian legislation, and are
based on a percentage of remuneration. The full amount of the employees' vested
benefits is accrued. The liability is adjusted annually by 1.5% plus 75% of the
official inflation. There is no funding requirement associated with this
liability. Employees' leaving entitlements charged in the years ended December
31, 1998 and 1999 amounted to L37,285 thousand and L53,236 thousand,
respectively.
Foreign currencies
Foreign currency transactions are recorded at the exchange rates applicable
at the transaction dates. Assets and liabilities denominated in foreign
currencies are re-measured at exchange rates applicable at the balance sheet
date unless covered by a hedge instrument. Balances denominated in currencies
of the member countries of the European Monetary Union at December 31, 1998 and
1999 have been recorded at their final Euro conversion rates with respect to
the Italian Lire. The resulting gains and losses on assets and liabilities are
recorded in the consolidated statement of operations.
Grants
Grants received for reimbursement of research and development expenses not
capitalized are recorded as non operating income when they become receivable.
Grants are considered receivable when the Company's request is approved by the
governmental institution. The related expenses are recorded in the financial
year when incurred.
Use of estimates
Management has made a number of estimates and assumptions relating to the
reporting of assets and liabilities and the disclosure of contingent assets and
liabilities to prepare these financial statements in conformity with generally
accepted accounting principles in the Republic of Italy and, with respect to
note 26, the United States of America. Actual results could differ from those
estimates.
2. Translations of Italian Lire into US Dollars
The consolidated financial statements are stated in Italian Lire. The
translations of Italian Lire into US Dollars are included solely for the
convenience of the reader, using the noon buying rate in New York on December
31, 1999, which was 1,922.810327 to $1.00. The convenience translations are
unaudited and should not be construed as representations that the Italian Lire
amounts have been, could have been, or could in the future be, converted into
US Dollars at this or any other rate of exchange.
3. Cash
Cash is composed of the following items:
<TABLE>
<CAPTION>
December 31,
--------------
1998 1999
------ -------
(L'000)
<S> <C> <C>
Bank accounts in US Dollars................................. 52,558 184,438
Cash on hand................................................ 2,474 2,447
------ -------
55,032 186,885
====== =======
</TABLE>
F-28
<PAGE>
PRO. TEL. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Bank accounts include 30,802 US Dollars and 95,692 US Dollars at December 31,
1998 and 1999, respectively.
4. Trade receivables, net
At December 31, trade receivables, net, were comprised of the following
items:
<TABLE>
<CAPTION>
December 31,
-------------------
1998 1999
--------- ---------
(L'000)
<S> <C> <C>
Trade receivables....................................... 1,337,775 1,329,213
Invoices to be issued................................... -- 5,471
Unaccepted trade bills on bank.......................... 6,854 --
--------- ---------
Trade accounts receivable--gross........................ 1,344,629 1,334,684
Allowance for doubtful accounts......................... -- (6,539)
--------- ---------
Trade accounts receivable--net.......................... 1,344,629 1,328,145
========= =========
</TABLE>
Trade receivables denominated in US Dollars totalled 644,231 US Dollars and
51,727 US Dollars at December 31, 1998 and 1999, respectively.
The Group is potentially subject to concentrations of credit risk principally
on its accounts receivable balances. Management believes, however, that the
loss due to credit risk to be incurred by the Group if parties to these
receivables failed completely to perform according to the terms of the
contracts is not material. The Group does not require collateral and all the
accounts receivable balances are unsecured. While management believes the trade
receivables will ultimately be collected, it anticipates that in the event of
default they will follow normal collection procedures. The Group estimates the
allowance for doubtful accounts on the basis of the credit worthiness of its
customers as well as general economic conditions. Consequently, an adverse
change in those factors could affect estimates of bad debts. As described in
note 17, Pro.Tel.'s products are sold exclusively by independent distributors
pursuant to a distribution agreement with the Company. During the years ended
December 31, 1998 and 1999, two customers/distributors (Pro.Tel. USA in 1998
and 1999; Chevas in 1998; Set-up in 1999) accounted for approximately 89% and
63%, respectively, of net sales for products of the Group. In addition, these
customers, who are unrelated third parties, accounted for 74% and 88%,
respectively, of the trade receivable balance as of December 31, 1998 and 1999.
Sales made to distributors (which are all unrelated third parties) are
recognized on the date of shipment of the goods and are not subject to unusual
rights of return. Furthermore, these sales are not contingent upon their
subsequent sale to third parties by the distributors.
F-29
<PAGE>
PRO. TEL. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Inventories
At December 31, inventories were comprised of the following items:
<TABLE>
<CAPTION>
December 31,
---------------
1998 1999
------- -------
(L'000)
<S> <C> <C>
Cases........................................................ 10,440 209,412
Pae-boards................................................... 36,682 210,844
Ghepardo units............................................... 73,385 26,490
Consumables and supplies..................................... 13,543 36,897
------- -------
134,050 483,643
======= =======
</TABLE>
Inventories are comprised of raw materials and purchased components.
No provision is made for slow moving, obsolete or non-saleable items, as
management does not consider such provision necessary.
6. Other current assets
At December 31, other current assets were comprised of the following items:
<TABLE>
<CAPTION>
December 31,
-------------
1998 1999
------ ------
(L'000)
<S> <C> <C>
Guarantee deposits............................................. -- 10,000
Tax receivables................................................ 44,103 13,899
Advances to suppliers.......................................... 20,365 22,137
Other amounts receivable....................................... 384 3
Accrued income and prepaid expenses............................ 13,120 9,734
------ ------
77,972 55,773
====== ======
</TABLE>
Tax receivables are comprised of VAT receivables, withholding taxes on
interest earned by the Group as well as advance corporation tax for those Group
companies which have paid amounts in excess of their tax liability for the
year.
Advances to suppliers comprise for the most part advances paid to suppliers
for services.
F-30
<PAGE>
PRO. TEL. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Plant and equipment, net
At December 31, plant and equipment, net, were comprised of the following
items:
<TABLE>
<CAPTION>
December 31,
----------------
1998 1999
------- -------
(L'000)
<S> <C> <C>
Plant and equipment
Cost..................................................... 181,974 357,234
Accumulated depreciation................................. (50,070) (90,086)
------- -------
Net book value............................................. 131,904 267,148
------- -------
Industrial and sales tooling/equipment
Cost..................................................... 115,400 141,556
Accumulated depreciation................................. (54,955) (91,075)
------- -------
Net book value............................................. 60,445 50,481
------- -------
Other
Cost..................................................... 29,176 29,676
Accumulated depreciation................................. (4,336) (6,048)
------- -------
Net book value............................................. 24,840 23,628
------- -------
217,189 341,257
======= =======
</TABLE>
Depreciation amounted to L43,087 thousand in 1998 and L77,735 thousand in
1999.
Pro.Tel. has entered into capital lease agreements for some personal
computers. The value of these assets amounted to approximately L27,560 thousand
at December 31, 1999. According to the prevailing Italian Civil Code, the lease
installments are charged to the statement of operations on an accrual basis and
the assets are recorded as plant and equipment when the purchase option is
exercised. As such, the commitments for unexpired installments have been
disclosed in note 16. Had these assets been recognized as purchased under
capital leases, the following effects would result on quotaholders' equity at
December 31:
<TABLE>
<CAPTION>
December 31,
--------------
1998 1999
----- -------
(L'000)
<S> <C> <C>
Plant and equipment:
increase in cost........................................... -- 27,560
increase in accumulated depreciation....................... -- (2,756)
Advances to suppliers........................................ 1,040 --
Obligations under capital leases............................. -- (17,549)
----- -------
Pre-tax effect on quotaholders' equity....................... 1,040 7,255
Tax effect calculated at the effective rates................. (325) (2,267)
----- -------
715 4,988
===== =======
</TABLE>
There are no mortgages and liens on the Group's plant and equipment.
All long-lived assets are located in Italy and comprise only plant and
equipment.
F-31
<PAGE>
PRO. TEL. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Intangible assets, net
At December 31, intangible assets, net, were comprised of the following
items:
<TABLE>
<CAPTION>
December 31,
-------------
1998 1999
------ ------
(L'000)
<S> <C> <C>
Incorporation and expansion costs............................ 9,040 5,320
Research and development costs on specific development
projects.................................................... 27,483 17,181
Software..................................................... 12,139 6,694
Other........................................................ 2,111 1,857
------ ------
50,773 31,052
====== ======
</TABLE>
Amortization amounted to L20,907 thousand in 1998 and L21,283 thousand in
1999. Software relates to the cost of software purchased from independent third
parties.
9. Other long-term assets
At December 31, other long-term assets were comprised of the following items:
<TABLE>
<CAPTION>
December 31,
-------------
1998 1999
------ ------
(L'000)
<S> <C> <C>
Employees' termination fund insurance.......................... 20,631 53,080
Other long-term assets......................................... 11,900 1,900
------ ------
32,531 54,980
====== ======
</TABLE>
Employees' termination fund insurance refers to the employees' leaving
entitlement existing at year-end. Funds were previously paid to an insurance
company (Zurigo SA) as a form of long-term funding and includes matured
interest.
Other long-term assets consist of guarantee deposits for rented properties
and utilities. In the consolidated financial statements at December 31, 1999 an
amount of L10,000 thousand relating to the rental properties, has been
reclassified to other current assets as the rental agreement expires in
November 2000.
10. Borrowings
At December 31, short-term bank borrowings were comprised of the following
items:
<TABLE>
<CAPTION>
December 31,
--------------
1998 1999
------ -------
(L'000)
<S> <C> <C>
Current accounts in Italian Lire.............................. 83,044 472,203
Other (credit card accounts).................................. 2,160 2,763
------ -------
85,204 474,966
====== =======
</TABLE>
F-32
<PAGE>
PRO. TEL. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Current accounts are repayable on demand of the banks and carry interest at
market rates.
At December 31, the Group's long-term debt was comprised as follows:
<TABLE>
<CAPTION>
December 31,
---------------
1998 1999
------- -------
(L'000)
<S> <C> <C>
Current portion............................................ 145,895 80,152
Non-current portion........................................ 107,197 27,047
------- -------
253,092 107,199
======= =======
</TABLE>
Information relating to long-term bank loans at December 31, 1999 may be
analyzed as follows:
<TABLE>
<CAPTION>
Interest
Short- Long- Expiry rate %
Original term term Total date (1)
-------- ------- ------- ------- ---------- --------
(L'000) (L'000) (L'000) (L'000)
<S> <C> <C> <C> <C> <C> <C>
Rolo Banca 1473.......... 50,000 9,789 27,047 36,836 April 2003 5.5
Banca Popolare
dell'Emilia Romagna..... 100,000 28,719 -- 28,719 Dec. 2000 5.5
Banca Popolare
dell'Emilia Romagna..... 145,000 41,644 -- 41,644 Dec. 2000 5.5
------ ------ -------
80,152 27,047 107,199
====== ====== =======
</TABLE>
- ---------------------
(1)Variable on the basis of the ABI prime rate.
The company has not provided any guarantees relating to the above mentioned
loans.
The term loan repayment schedule provides for up to 2003 with annual
maturities, as below:
<TABLE>
<CAPTION>
At December 31,
1999
---------------
Repayment date
-------------- (L'000)
<S> <C> <C>
By December 31,:
2000................................................. 80,152
2001................................................. 10,362
2002................................................. 10,965
2003................................................. 5,720
-------
107,199
=======
</TABLE>
11. Accounts payable--trade
At December 31, accounts payable to suppliers were comprised of the following
items:
<TABLE>
<CAPTION>
December 31,
---------------
1998 1999
------- -------
(L'000)
<S> <C> <C>
Accounts payable to Italian suppliers...................... 617,609 634,993
Accounts payable to foreign suppliers...................... 200,364 322,649
------- -------
817,973 957,642
======= =======
</TABLE>
F-33
<PAGE>
PRO. TEL. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Accounts payable includes invoices denominated in US Dollars totalling
109,454 US Dollars and 93,145 US Dollars at December 31, 1998 and 1999,
respectively.
12. Accrued expenses and other current liabilities
At December 31, accrued expenses and other current liabilities were comprised
of the following items:
<TABLE>
<CAPTION>
December 31,
---------------
1998 1999
------- -------
(L'000)
<S> <C> <C>
Accrued wages and salaries................................. 47,434 39,214
Accrued holidays........................................... 31,051 31,694
Social security charges payable............................ 66,126 80,500
Other liabilities.......................................... 6,106 31,439
Deferred income and accrued expenses....................... 9,133 9,417
------- -------
159,850 192,264
======= =======
</TABLE>
13. Income and other taxes payable, deferred income taxes
At December 31, income and other taxes payable and deferred income taxes were
comprised of the following items:
<TABLE>
<CAPTION>
December 31,
--------------
1998 1999
------- ------
(L'000)
<S> <C> <C>
Income and other current tax payable........................ 111,382 83,742
Deferred income taxes--short-term........................... -- 14,044
------- ------
111,382 97,786
======= ======
Deferred income taxes--long-term............................ -- 35,268
------- ------
-- 35,268
======= ======
</TABLE>
Income and other current taxes payable mainly include the income and other
non-income taxes due and withholdings of tax yet to be reimbursed at the
balance sheet date, net of the advances paid or withholdings sustained.
Deferred taxes mainly relate to the grants obtained by Pro.Tel. in 1999 under
the Italian law 140/97 (see note 22). The Italian fiscal authority permits the
taxation of such amounts to be deferred for a period of five years. Deferred
taxes are calculated at the effective IRPEG tax rate of the company at December
31, 1999 (27%) and are classified between short-term and long-term.
F-34
<PAGE>
PRO. TEL. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. Employees' leaving entitlements
The accounting policy for this entitlement is outlined in note 1. The
movements in this account were as follows:
<TABLE>
<CAPTION>
December 31,
---------------
1998 1999
------ -------
(L'000)
<S> <C> <C>
Balance at the beginning of the year...................... 17,043 51,103
Combination of Tel.Mark. Srl.............................. 2,139 --
------ -------
Combined balance at the beginning of the year............. 19,182 51,103
Charge for the year....................................... 37,285 53,236
Payments.................................................. (5,364) (19,364)
------ -------
Balance at the end of the year............................ 51,103 84,975
====== =======
</TABLE>
At December 31, 1998 and 1999 the number of employees were 16 and 17,
respectively.
15. Quotaholders' equity
The Extraordinary General Meeting held on June 25, 1998 increased the quota
capital of Pro.Tel. Srl from L100,000 thousand to L500,000 thousand.
Before the increase, the quota capital was held by:
<TABLE>
<CAPTION>
Percentage of
Quota capital Quota capital
------------- -------------
(L'000) (%)
<S> <C> <C>
Franco Messori................................. 51,000 51.00
Paola Vitali................................... 4,000 4.00
Angelo Baccarani............................... 14,000 14.00
Franco Corradini............................... 14,000 14.00
Cristina Gozzi................................. 1,000 1.00
Daniela Iseppi................................. 1,000 1.00
Giuliano Sala.................................. 15,000 15.00
------- ------
100,000 100.00
======= ======
</TABLE>
F-35
<PAGE>
PRO. TEL. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 1999 the quota capital was held by:
<TABLE>
<CAPTION>
Percentage of
Quota capital Quota capital
------------- -------------
(L'000) (%)
<S> <C> <C>
Franco Messori................................. 200,000 40.00
Giuliano Sala.................................. 25,000 5.00
Franco Corradini............................... 25,000 5.00
Angelo Baccarani............................... 25,000 5.00
Lucia Silvani.................................. 25,000 5.00
Gian Piero Brandolini.......................... 128,000 25.60
Pietro Zucchini................................ 16,000 3.20
Aldo Baccarani................................. 40,000 8.00
Franco Montanari............................... 16,000 3.20
------- ------
500,000 100.00
======= ======
</TABLE>
The statutory financial statements of Pro.Tel. Srl, stated in accordance with
Italian civil and tax law, include a legal reserve, amounting to L889 thousand,
which can only be used to cover losses.
Reconciliation of statutory net profit/(loss) and quotaholders' equity of
Pro.Tel. to consolidated net profit/(loss) and quotaholders' equity
The principal adjustments made in the consolidation of Pro.Tel. Srl and its
subsidiary are shown in the following reconciliation of net profit/(loss) and
quotaholders' equity as reported in the statutory financial statements of
Pro.Tel. Srl to those reported in the consolidated financial statements for the
years ended December 31, 1999 and 1998.
<TABLE>
<CAPTION>
Net Net
profit/(loss) profit/(loss)
for the Quotaholders' for the Quotaholders'
year ended equity at year ended equity at
December 31, December 31, December 31, December 31,
1998 1998 1999 1999
------------- ------------- ------------ -------------
(L'000)
<S> <C> <C> <C> <C>
Per the financial
statements of
Pro.Tel................ (47,713) 448,539 90,068 538,607
Adjustments to:
lower investment value
of consolidated
subsidiary with
respect to carrying
value................ (7,701) (14,967) 1,810 (13,157)
eliminate tax-driven
treatments........... -- -- 8,473 8,473
tax effects of the
above in
consolidation
adjustments.......... -- -- (2,288) (2,288)
------- ------- ------ -------
Total consolidation
adjustments............ (7,701) (14,967) 7,995 (6,972)
------- ------- ------ -------
Quotaholders' equity and
net profit/(loss) of
the Group as per the
consolidated financial
statements............. (55,414) 433,572 98,063 531,635
======= ======= ====== =======
</TABLE>
F-36
<PAGE>
PRO. TEL. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Tax driven treatments relate to the conversion of foreign currency balances
at year-end, which is not recorded in the statutory financial statements of
Pro.Tel. if it's net effect is positive.
16. Commitments and contingent liabilities
The Group has, at December 31, certain commitments, comprised of:
<TABLE>
<CAPTION>
December 31,
-------------
1998 1999
------ ------
(L'000)
<S> <C> <C>
Forward foreign exchange contract.............................. 47,247 --
Residual installments on lease agreements...................... 30,157 18,993
------ ------
77,404 18,993
====== ======
</TABLE>
At December 31, 1998 the Group had one forward foreign exchange contract
outstanding for 28,000 US Dollars which was designated as being for hedging
purposes. The Group uses these contracts to manage its exposure to foreign
currency fluctuations.
There were no other foreign exchange contracts, futures, options or other
financial instruments open at December 31, 1998 and 1999.
The Group is subject to the national agreement for "mechanical engineering
employees' which covers all of its employees. The contract expires in 2001.
Management expects that this agreement will be renewed without any significant
adverse effects to the operations of the Group.
The Group is not involved in any claims or legal actions arising in the
ordinary course of its business.
17. Net sales
The Group operates predominantly in a single industry segment:
telecommunication engineering consulting and manufacturing market, by providing
hardware, firmware and software design. The Group offers a wide product range
of items for sale, manufactured and marketed.
The Group also produces personalized products upon the order of customers.
Warranties are given by the group for labor and material costs for a period
of 14 months from the date of sale. No provision is made for product warranty
costs as management does not consider such provision necessary. For the year
ended December 31, 1999 the group incurred product warranty costs for
L4,190 thousand.
Pro.Tel.'s products are sold exclusively by distributors in Italy, China,
Switzerland, France, Germany, USA, Austria, UK, Japan, Korea and Malaysia.
F-37
<PAGE>
PRO. TEL. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Net sales can be analyzed as follows:
<TABLE>
<CAPTION>
Year ended
December 31,
-------------------
1998 1999
--------- ---------
(L'000)
<S> <C> <C>
Sales for products..................................... 2,021,556 2,900,990
Sales for services..................................... 657,137 728,436
Other sales............................................ 31,187 9,928
--------- ---------
2,709,880 3,639,354
========= =========
</TABLE>
Net sales of products can be analyzed by geographic area, based on location
of the customers, as follows:
<TABLE>
<CAPTION>
Year ended
December 31,
-------------------
1998 1999
--------- ---------
(L'000)
<S> <C> <C>
Italy................................................... 32,234 99,988
Unites States........................................... 977,239 1,756,199
Europe.................................................. 195,633 821,100
Asia.................................................... 816,450 223,703
--------- ---------
2,021,556 2,900,990
========= =========
</TABLE>
18. Cost of goods sold
Cost of goods sold is comprised principally of the cost of materials, parts
and components for production, personnel (both direct and indirect), other
manufacturing costs, variations in inventory and depreciation of the plant and
equipment employed in the production cycle.
19. Selling, general and administrative expenses
Selling, general and administrative expenses comprises principally variable
sales costs, related personnel costs, commercial, advertising and promotion
costs and charges for doubtful accounts. This item also includes depreciation
of the plant and equipment employed in the commercial and administrative areas
of the Group's activities. Advertising and promotion costs of the Group for the
years ended December 31, 1998 and 1999 amounted to L30,211 thousand and L72,812
thousand, respectively.
F-38
<PAGE>
PRO. TEL. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
20. Interest income and expense
The composition of interest income is as follows:
<TABLE>
<CAPTION>
Year ended
December 31,
-------------
1998 1999
------ ------
(L'000)
<S> <C> <C>
Interest on insurance policy................................... 1,449 1,976
Interest earned at banks....................................... 2,046 1,911
Other.......................................................... 500 250
------ ------
3,995 4,137
====== ======
</TABLE>
The composition of interest expense is as follows:
<TABLE>
<CAPTION>
Year ended
December 31,
----------------
1998 1999
------- -------
(L'000)
<S> <C> <C>
Interest on borrowings:
short-term............................................... (3,886) (21,135)
long-term................................................ (22,122) (12,480)
Other financial charges.................................... (9,606) (10,013)
------- -------
(35,614) (43,628)
======= =======
</TABLE>
Interest on short and long-term debt relates to loans granted by credit
institutions (see note 10). Other financial charges mainly relate to bank
charges.
21. Foreign exchange gain, net
The composition of foreign exchange gain is as follows:
<TABLE>
<CAPTION>
Year ended
December 31,
---------------
1998 1999
------ -------
(L'000)
<S> <C> <C>
Foreign exchange gain...................................... 18,114 115,058
Foreign exchange loss...................................... (8,852) (72,240)
------ -------
9,262 42,818
====== =======
</TABLE>
F-39
<PAGE>
PRO. TEL. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
22. Other non operating income/expenses, net
Other non-operating income/expenses, net comprise:
<TABLE>
<CAPTION>
Year ended
December 31,
-------------
1998 1999
----- -------
(L'000)
<S> <C> <C>
Income:
Grants for law 140/97....................................... -- 217,706
Other income................................................ 7,558 780
Other expenses.............................................. -- (14,394)
----- -------
Net........................................................... 7,558 204,092
===== =======
</TABLE>
During 1999, the Company applied for reimbursement of certain research and
development expenditures from the Ministry of Industry and Trade under the
Italian law 140/97.
This application was subsequently approved by the Ministry of Industry and
Trade at which time the Company recorded grant revenue of L217,706 thousand.
The research and development costs were incurred in the year ended December 31,
1998 and related primarily to personnel costs. The grant is recovered through
reductions of the Company's employer withholding taxes and the remaining amount
to be received was L20,942 thousand as of December 31, 1999.
23. Income taxes
The two consolidated Group companies are located in Italy; consequently the
Group's activities are only affected by the income tax regime in Italy. Income
taxes recorded in the consolidated financial statements are IRPEG (national
corporate income tax) and IRAP (regional corporate income tax). IRPEG is
calculated at 37% of taxable income, but a reduced rate can be applied in
certain circumstances, in the presence of an increase of net equity of the
company, applying DIT (dual income tax) regulation. IRAP is levied at 4.25% on
certain components of revenue and expenses, which broadly speaking are all
business revenues less costs for purchases of materials and services and
depreciation and amortization excluding all other production, administration
and selling costs (such as personnel costs and charge for doubtful accounts).
Because of the method of calculation, IRAP is not directly related to pre-tax
income.
Deferred income taxes have been determined on the basis of the effective 1999
tax rate (see note 13).
Income tax charge is composed of the following:
<TABLE>
<CAPTION>
Year ended
December 31,
--------------
1998 1999
------ -------
(L'000)
<S> <C> <C>
Current taxation.............................................. 55,580 91,350
Deferred taxation............................................. -- 49,312
------ -------
55,580 140,662
====== =======
</TABLE>
For the two consolidated companies all fiscal periods since incorporation are
still open to assessment for both income tax and VAT regulations. At December
31, 1999, there are no claims concerning the fiscal matters of the Group's
entities.
F-40
<PAGE>
PRO. TEL. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
24. Related party transactions
A significant quotaholder of Pro.Tel. holds certain quota capital of Selcom
Elettronica Srl, one of the most important suppliers and customers of Pro.Tel.
The Company purchases principally components for its products and in 1999 sold
to Selcom a software development to integrate Ghepardo in a Selcom's customer
Network Management System (NMS).
All the quotaholders of Pro.Tel. Srl, except one, hold interests in the share
capital of Pro.Tel. Engineering Inc (Springfield, Virginia--USA), which
supplies Pro.Tel. with technical consulting services.
The following table presents a summary of transactions with the related
parties, Selcom Elettronica Srl and Pro.Tel. Engineering Inc, which have been
executed on terms similar with those negotiated with un-related third parties
during the periods presented:
<TABLE>
<CAPTION>
Year ended
December 31,
------------------
1998 1999
-------- --------
(L'000)
<S> <C> <C>
Sales................................................... 34,862 558,835
Purchases and services.................................. (673,260) (942,783)
</TABLE>
The components of the balances with these related parties at December 31, were
as follows:
<TABLE>
<CAPTION>
Receivable Payable Receivable Payable
December 31, December 31, December 31, December 31,
1998 1998 1999 1999
------------ ------------ ------------ ------------
(L'000)
<S> <C> <C> <C> <C>
Selcom Elettronica Srl..... 29,291 (507,157) 40,456 (494,281)
Pro.Tel. Engineering Inc... -- -- -- --
------ -------- ------ --------
29,291 (507,157) 40,456 (494,281)
====== ======== ====== ========
</TABLE>
25. Subsequent events
At the beginning of year 2000 the terms of an agreement between the
quotaholders of Pro.Tel. and Sunrise Telecom Inc, a company incorporated in the
United States of America, regarding the sale of 100% of the quota capital of
the Company, has been defined but has not yet been signed by the respective
parties. The transaction will be finalized in the first quarter of year 2000
and represents the best opportunity for development and growth for Pro.Tel.
F-41
<PAGE>
PRO. TEL. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
26. Summary of significant differences between generally accepted accounting
principles in the Republic of Italy and the United States of America
The accompanying consolidated financial statements of the Company have been
prepared in conformity with accounting principles established or adopted by
Italian law and the Italian Accounting Profession, as described in note 1
("Italian GAAP'). Those standards differ in certain significant respects from
those generally accepted in the United States ("US GAAP'). Set forth below is a
summary of certain significant differences between Italian and US GAAP which
management believe are relevant to the Group.
(a) Deferred costs
Under Italian GAAP certain costs, principally research and development
expenditures on specific product development projects and incorporation and
expansion costs, are deferred and amortized over the estimated useful lives
of the respective assets. Under US GAAP, such costs are expensed as
incurred.
(b)Leasing
Under Italian GAAP, all leases are accounted for as an operating lease,
i.e., plant and equipment acquired under capital leases are not recognized
as equipment along with the obligation under capital lease until the end of
the lease term. Under US GAAP, where the necessary conditions are met, the
plant and equipment are recorded at the present value of minimum lease
payments and the obligation under capital leases is recognized as a
liability. The related assets are then amortized over their useful economic
lives.
(c)Balance sheet reclassification differences
Under Italian GAAP leasehold improvements and purchased software costs
are classified as "other intangible assets' whereas these items would be
classified under "plant and equipment' for US GAAP purposes.
(d)Statement of cash flows
With regard to the consolidated statements of cash flows, differences in
classifications with that presented under Italian GAAP arise not only from
the aforementioned differences in presentation and principle in the
consolidated balance sheet but also from the fact that under US GAAP, the
effect of exchange rate changes on cash are included as a separate line
item of the consolidated statements of cash flows rather than within
operating activities.
F-42
<PAGE>
PRO. TEL. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Reconciliation of net profit and quotaholders' equity determined under Italian
GAAP with those under US GAAP.
The calculation of net profit and quotaholders' equity in conformity with US
GAAP is as follows:
Reconciliation of net profit:
<TABLE>
<CAPTION>
Year ended
December 31,
----------------
1998 1999
------- -------
(L'000)
<S> <C> <C>
Net profit/(loss) under Italian GAAP.......................... (55,414) 98,063
Adjustments increasing (decreasing) reported net profit:
amortization of intangible assets........................... 14,021 14,021
depreciation of plant and equipment......................... -- (2,756)
cost of goods sold.......................................... 1,040 11,439
interest expenses........................................... -- (2,468)
tax effect of US GAAP adjustments........................... (4,706) (6,324)
------- -------
Net profit/(loss) in conformity with US GAAP.................. (45,059) 111,975
======= =======
</TABLE>
Net profit/(loss) in conformity with US GAAP is also comprehensive income for
the Company.
Reconciliation of quotaholders' equity:
<TABLE>
<CAPTION>
December 31,
----------------
1998 1999
------- -------
(L'000)
<S> <C> <C>
Quotaholders' equity under Italian GAAP.................. 433,572 531,635
Adjustments increasing (decreasing) to reported
quotaholders' equity:
intangible assets...................................... (36,523) (22,501)
plant and equipment.................................... -- 24,804
obligation under capital leases........................ -- (17,549)
accrued expenses....................................... 1,040 --
tax effect of US GAAP adjustments...................... 11,088 4,764
------- -------
Quotaholders' equity in conformity with US GAAP.......... 409,177 521,153
======= =======
</TABLE>
F-43
<PAGE>
PRO. TEL. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Consolidated Cash Flows--US GAAP
The following table summarizes the consolidated statements of cash flows as
if they had been presented in accordance with US GAAP:
<TABLE>
<CAPTION>
Year ended
December 31,
------------------
1998 1999
-------- --------
(L'000)
<S> <C> <C>
Net cash provided by/(used in) operating activities..... (321,058) 348,819
Net cash (used in) investing activities................. (74,000) (143,173)
Net cash provided by/(used in) financing activities..... 297,211 (71,578)
Effect of exchange rate changes on cash................. -- (5,326)
-------- --------
Net increase/(decrease) in cash......................... (97,847) 128,742
======== ========
</TABLE>
Furthermore, the supplemental disclosure for the consolidated statement of
cash flows required by US GAAP is as follows:
<TABLE>
<CAPTION>
Year ended
December 31,
-------------
1998 1999
------ ------
(L'000)
<S> <C> <C>
Cash paid during the year for:
Interest....................................................... 35,112 40,695
====== ======
Income taxes................................................... 22,576 93,074
====== ======
</TABLE>
Income taxes--US GAAP basis
As described in note 23, the two consolidated companies are both located in
Italy. Consequently the profit before income taxes and the income tax expenses
consists only of domestic items which arise from the ordinary operating
activities of the Group.
Income taxes differ from the amounts computed by applying the Italian
statutory income tax rate (37%) to pre-tax income as a result of the following:
<TABLE>
<CAPTION>
Year ended
December 31,
-----------------
1998 1999
------- --------
(L'000)
<S> <C> <C>
Computed "expected' tax expense........................... (5,634) (95,815)
Regional corporate income tax (IRAP) (see note 23)........ (54,404) (71,701)
DIT saving (see note 23).................................. 441 25,370
Non-deductible items, net................................. (989) (6,548)
Benefit from tax losses carried forward................... 300 1,708
------- --------
Income tax expense--US GAAP............................... (60,286) (146,986)
======= ========
</TABLE>
F-44
<PAGE>
PRO. TEL. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The tax effects of temporary differences give rise to deferred tax
liabilities. Had the consolidated financial statements been prepared under US
GAAP, the detail of deferred tax at December 31 would have been as follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1999
---------------------- -------------------------
Non Non
Current current Total Current current Total
------- ------- ------ ------- ------- -------
(L'000)
<S> <C> <C> <C> <C> <C> <C>
Grants law 140/97 (see note
13)........................ -- -- -- (11,756) (35,268) (47,024)
Consolidation adjustments
(see note 15).............. -- -- -- (2,288) -- (2,288)
Tax effect of US GAAP
adjustments................ 6,324 4,764 11,088 4,764 -- 4,764
----- ----- ------ ------- ------- -------
Deferred tax assets
(liabilities).............. 6,324 4,764 11,088 (9,280) (35,268) (44,548)
===== ===== ====== ======= ======= =======
</TABLE>
Leasing--US GAAP basis
On October 2, 1998 Pro.Tel. signed a leasing contract relating to personal
computers that expires in 2001. Since such machinery was delivered on January
28, 1999, they have been included (together with the related obligations) in
the US GAAP reconciliation starting from 1999. At December 31, 1999, the gross
amount capitalized and related accumulated amortization of this lease amounted
to L27,560 thousand and L2,756 thousand, respectively. Plant and equipment,
net, and the related obligations would be higher by L24,804 thousand and
L17,549 thousand, respectively, as of December 31, 1999.
Future minimum capital lease payments as of December 31, 1999 are:
<TABLE>
<CAPTION>
L'000
------
<S> <C>
Year ending December 31:
2000............................................................... 12,479
2001............................................................... 6,514
------
Total minimum lease payments......................................... 18,993
Less amount representing interest (at a rate of 11.8%)............... (1,444)
------
Present value of net minimum capital lease payments.................. 17,549
------
Current installments................................................. 11,192
Long-term portion.................................................... 6,357
------
17,549
======
</TABLE>
F-45
<PAGE>
INSIDE BACK COVER
[Artwork to come.]
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
[No. of Shares] Shares
[SUNRISE LOGO]
Common Stock
----------------
PROSPECTUS
----------------
Chase H&Q
Banc of America Securities LLC
CIBC World Markets
----------------
, 2000
----------------
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock.
No action is being taken in any jurisdiction outside of the United States to
permit a public offering of the common stock or possession or distribution of
this prospectus in that jurisdiction. Persons who come into possession of this
prospectus in jurisdictions outside the United States are required to inform
themselves about and to observe any restrictions as to this offering and the
distribution of this prospectus applicable to that jurisdiction.
Until , 2000, all dealers that buy, sell or trade in our common
stock, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealers' obligation to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<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, other than
underwriting discounts and commissions, payable by Sunrise in connection with
the sale of common stock being registered. All amounts are estimates except
the SEC registration fee and the NASD filing fee and the Nasdaq National
Market listing fee.
<TABLE>
<CAPTION>
Amount
to be Paid
----------
<S> <C>
SEC registration fee................................................. $ 15,180
NASD filing fee...................................................... 6,250
Nasdaq National Market listing fee*..................................
Printing and engraving expenses*.....................................
Legal fees and expenses.............................................. 300,000
Accounting fees and expenses......................................... 400,000
Blue Sky qualification fees and expenses*............................
Transfer Agent and Registrar fees*...................................
Miscellaneous fees and expenses*.....................................
Total
</TABLE>
- ---------------------
* to be filed by amendment
Item 14. Indemnification of Directors and Officers
Article XIII of Sunrise's Amended and Restated Certificate of Incorporation
will provide that directors of Sunrise shall not be personally liable to
Sunrise or its stockholders for monetary damages for breach of fiduciary duty
as a director, to the fullest extent permitted by the General Corporation Law
of the State of Delaware. Article VI of Sunrise's Amended and Restated By-laws
will provide for indemnification of officers and directors to the full extent
and in the manner permitted by Delaware law. Section 145 of the Delaware
General Corporation Law makes provision for such indemnification in terms
sufficiently broad to cover officers and directors under certain circumstances
for liabilities arising under the Securities Act of 1933, as amended (the
"Securities Act").
Sunrise has entered into indemnification agreements with each director which
provide indemnification under certain circumstances for acts and omissions
which may not be covered by any directors' and officers' liability insurance.
The indemnification agreements may require Sunrise, among other things, to
indemnify its officers and directors against certain liabilities that may
arise by reason of their status or service as officers and directors (other
than liabilities arising from willful misconduct of culpable nature), to
advance their expenses incurred as a result of any proceeding against them as
to which they could be indemnified, and to obtain officers' and directors'
insurance if available on reasonable terms.
The form of Underwriting Agreement, filed as Exhibit 1.1 to the Registration
Statement, provides for indemnification of the Registrant and its controlling
persons against certain liabilities under the Securities Act.
Item 15. Recent Sales of Unregistered Securities
Since January 1, 1997, Sunrise has sold and issued the following
unregistered securities:
1. Since its inception, Sunrise has issued options to purchase an aggregate of
1,361,616 shares of its common stock under Sunrise's 1993 stock option plan
to a number of its employees, 203,315 shares of which have been exercised
at purchase prices ranging from $0.20 per share to $6.50 per share.
II-1
<PAGE>
2. On July 30, 1999, Sunrise issued 100,000 shares of its common stock at an
assumed price of $10.00 per share to the former shareholders of Hukk
Engineering, Inc.
3. On February 22, 2000, Sunrise issued 166,667 shares of its common stock at
an assumed price of $30.00 per share to the former shareholders of Pro.Tel.
Srl.
The issuances of the above securities were deemed to be exempt from
registration under the Securities Act in reliance on:
. Rule 701 promulgated under the Securities Act; or
. Section 4(2) of such Securities Act as transactions by an issuer not
involving any public offering; or
. Regulation S of the rules and regulations promulgated under the
Securities Act.
The recipients of securities in each such transaction represented their
intentions to acquire the securities for investment only and not with a view
to or for sale in connection with any distribution thereof and appropriate
legends were affixed to the share certificates and warrants issued in such
transactions. All recipients had adequate access, through their relationships
with Sunrise, to information about Sunrise.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
1.1 Form of Underwriting Agreement.*
3.1 Form of Amended and Restated Certificate of Incorporation to be
effective upon closing.*
3.2 Form of Amended and Restated Bylaws to be effective upon closing.*
4.1 Specimen Stock Certificate.*
5.1 Opinion of Orrick, Herrington & Sutcliffe LLP regarding the legality of
the common stock being registered.*
10.1 Lease Agreement dated June 22, 1999 between Sunrise and Great Oaks
Properties.
10.2 Purchase and Sale Agreement and Escrow Instructions dated November 5,
1999 between Sunrise and Enzo Drive, LLC.
10.3 Loan Agreement dated November 9, 1999 between Sunrise and Bank of
America.
10.4 Stock Purchase Agreement dated July 30, 1999 between Sunrise, Hukk
Engineering, Inc., Clifford D. Brown, Robert L. Richards and James A.
Barker.
10.5 Master Agreement dated February 22, 2000 between Sunrise and Franco
Messori, Franco Corradini, Angelo Baccarani and Lucia Barbara Silvani
and Master Agreement dated February 22, 2000 between Sunrise and
Giuliano Sala, Gian Piero Brandolini, Pietro Zucchini, Aldo Baccarani
and Franco Montanari.*
10.6 Form of Indemnification Agreement between Sunrise and each of its
Officers and Directors.
10.7 2000 Stock Option Plan.*
10.8 2000 Employee Stock Purchase Plan.*
21.1 List of Subsidiaries.
23.1 Consent of Orrick, Herrington & Sutcliffe LLP.*
23.2 Consent of KPMG.
23.3 Consent of KPMG.
24.1 Power of Attorney (included on page II-4).
</TABLE>
- ---------------------
*To be supplied by amendment.
II-2
<PAGE>
(b) Financial Statement Schedules
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
financial statements or notes thereto.
Item 17. Undertakings
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements 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
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, 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 Act, and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer, or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, 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 of
1933, 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-3
<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 San Jose, State of
California on March 9, 2000.
SUNRISE TELECOM INCORPORATED
/s/ Paul Ker-Chin Chang
By: _________________________________
Paul Ker-Chin Chang
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints, jointly and severally, Paul Ker-Chin
Chang, Paul A. Marshall and Robert C. Pfeiffer, and each of them, as his
attorney-in-fact, with full power of substitution, for him in any and all
capacities, to sign any and all amendments to this Registration Statement
(including post-effective amendments), and any and all Registration Statements
filed pursuant to Rule 462 under the Securities Act of 1933, as amended, in
connection with or related to the offering contemplated by this Registration
Statement and its amendments, if any, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming our signatures as they
may be signed by our said attorney to any and all amendments to said
Registration Statement.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Paul Ker-Chin Chang President and Chief March 9, 2000
____________________________________ Executive Officer (Principal
Paul Ker-Chin Chang Executive Officer)
/s/ Peter Eidelman Chief Financial Officer March 9, 2000
____________________________________ (Principal Accounting
Peter Eidelman Officer)
/s/ Paul A. Marshall Director March 9, 2000
____________________________________
Paul A. Marshall
/s/ Robert C. Pfeiffer Director March 9, 2000
____________________________________
Robert C. Pfeiffer
/s/ Patrick Peng-Koon Ang Director March 9, 2000
____________________________________
Patrick Peng-Koon Ang
Director March , 2000
____________________________________
Henry P. Huff
/s/ Jennifer J. Walt Director March 9, 2000
____________________________________
Jennifer J. Walt
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
The following exhibits are filed as part of this Form S-1 Registration
Statement.
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
1.1 Form of Underwriting Agreement.*
3.1 Form of Amended and Restated Certificate of Incorporation to be
effective upon closing.*
3.2 Form of Amended and Restated Bylaws to be effective upon closing.*
4.1 Specimen Stock Certificate.*
5.1 Opinion of Orrick, Herrington & Sutcliffe LLP regarding the legality of
the common stock being registered.*
10.1 Lease Agreement dated June 22, 1999 between Sunrise and Great Oaks
Properties.
10.2 Purchase and Sale Agreement and Escrow Instructions dated November 5,
1999 between Sunrise and Enzo Drive, LLC.
10.3 Loan Agreement dated November 9, 1999 between Sunrise and Bank of
America.
10.4 Stock Purchase Agreement dated July 30, 1999 between Sunrise, Hukk
Engineering, Inc., Clifford D. Brown, Robert L. Richards and James A.
Barker.
10.5 Master Agreement dated February 22, 2000 between Sunrise and Franco
Messori, Franco Corradini, Angelo Baccarani and Lucia Barbara Silvani
and Master Agreement dated February 22, 2000 between Sunrise and
Giuliano Sala, Gian Piero Brandolini, Pietro Zucchini, Aldo Baccarani
and Franco Montanari.*
10.6 Form of Indemnification Agreement between Sunrise and each of its
Officers and Directors.
10.7 2000 Stock Option Plan.*
10.8 2000 Employee Stock Purchase Plan.*
21.1 List of Subsidiaries.
23.1 Consent of Orrick, Herrington & Sutcliffe LLP.*
23.2 Consent of KPMG LLP.
23.3 Consent of KPMG S.p.A.
24.1 Power of Attorney (included on page II-4).
</TABLE>
- ---------------------
*To be supplied by amendment.
<PAGE>
EXHIBIT 10.1
STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE--GROSS
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
THIS LEASE AGREEMENT SUPERCEDES AND REPLACES ANY AND ALL PREVIOUS LEASE
AGREEMENTS, i.e., THE DOWNSTAIRS AREA LEASE AND THE UPSTAIRS FLOOR LEASE
AGREEMENT.
1. Basic Provisions ("Basic Provisions").
1.1 Parties: This Lease ("Lease"), dated for reference purposes only,
JUNE 22 1999, is made by and between GREAT OAKS PROPERTIES (G.O.P.) ("Lessor")
------------------------------
and SUNRISE TELECOM, INC. ("Lessee")
---------------------
(collectively the "Parties," or individually a "Party").
1.2(a) Premises: That certain portion of the Building, Including all
Improvements therein or to be provided by Lessor under the terms of this Lease,
commonly known by the street address of 22 GREAT OAKS BLVD., located in the
-------------------
City of SAN JOSE, County of SANTA CLARA, State of CA, with zip code 95119,
-------- ----------- -- -----
as outlined on Exhibit attached hereto ("Premises"). The "Building" is that
certain building containing the Premises and generally described as (describe
briefly the nature of the Building):
-------
57,600 SQUARE FEET, WHICH IS THE ENTIRE BUILDING. LESSEE AGREES TO
------------------------------------------------------------------
LEASE THIS BUILDING IN ITS CURRENT "AS-IS" CONDITION.
-----------------------------------------------------
In addition to Lessee's rights to use and occupy the Premises as hereinafter
specified, Lessee shall have non-exclusive rights to the Common Areas (as
defined in Paragraph 2.7 below) as hereinafter specified, but shall not have any
rights to the roof, exterior walls or utility raceways of the Building or to any
other buildings in the Industrial Center. The Premises, the Building, the Common
Areas, the land upon which they are located, along with all other buildings and
improvements thereon, are herein collectively referred to as the "Industrial
Center." (Also see Paragraph 2.)
1.2(b) Parking: PER ADDENDUM #1 unreserved vehicle parking spaces
---------------
("Unreserved Parking Spaces"); and
------------------------------------------
reserved vehicle parking spaces ("Reserved Parking Spaces"). (Also see
Paragraph 2.6.)
1.3 Term: 5 years and 0 months ("Original Term") commencing When Critical
-------------
Clean vacates the area, on or about November 1, 1999.
- ----------------------------------
("Commencement Date") and ending OCTOBER 31, 2004 ("Expiration Date").
(Also see Paragraph 3.)
1.4 Early Possession: TO BE PRORATED ("Early Possession Date").
(Also see Paragraphs 3.2 and 3.3.)
1.5 Base Rent: $ PER ADDENDUM #2 per month ("Base Rent"), payable on the
FIRST day of each month commencing ON OR ABOUT NOVEMBER 1, 1999 (Also see
Paragraph 4.)
[ ] If this box is checked, this Lease provides for the Base Rent to be
adjusted per Addendum #2, attached hereto.
1.6(a) Base Rent Paid Upon Execution: $10,049.00 as Base Rent for
the period
1.6(b) Lessee's Share of Common Area Operating Expenses: ONE HUNDRED
percent (100%) ("Lessee's Share") as determined by
[ ] prorata square footage of the Premises as compared to the total square
footage of the Building or[ ] other criteria as described in Addendum:
1.7 Security Deposit: $ PER ADDENDUM #3 ("Security Deposit").
(Also see Paragraph 5.)
1.8 Permitted Use: MARKETING, ENGINEERING, ASSEMBLY, GENERAL OFFICE &
WAREHOUSE AS REQUIRED BY SUNRISE TELECOM, INC. NO TOXIC WASTE CHEMICALS WITHOUT
G.O.P. APPROVAL
("Permitted Use") (Also see Paragraph 6.)
1.9 Insuring Party. Lessor is the "Insuring Party."
(Also see Paragraph 8.)
1.10(a) Real Estate Brokers. The following real estate broker(s)
(collectively, the "Brokers") and brokerage relationships exist in this
transaction and are consented to by the Parties (check applicable boxes):
[ ] N/A represents Lessor exclusively ("Lessor's Broker");
--------
[ ] represents Lessee exclusively ("Lessee's Broker"); or
--------
[ ] represents both Lessor and Lessee ("Dual Agency"). (Also see
--------
Paragraph 15.)
1.10(b) Payment to Brokers. Upon the execution of this Lease by both
Parties, Lessor shall pay to said Broker(s) jointly, or in such separate shares
as they may mutually designate in writing, a fee as set forth in a separate
written agreement between Lessor and said Broker(s) (or in the event there is no
separate written agreement between Lessor and said Broker(s), the sum of $ N/A )
for brokerage services rendered by said Broker(s) in connection with this
transaction.
1.11 Guarantor. The obligations of the Lessee tinder this Lease are to
be guaranteed by ("Guarantor"). (Also see Paragraph 37.)
1.12 Addenda and Exhibits. Attached hereto is an Addendum or Addenda
consisting of Paragraphs 1 through 5, and Exhibits through
--- --- ----- -------
all of which constitute a part of this Lease.
2. Premises, Parking and Common Areas.
2.1 Letting. Lessor hereby leases to Lessee, and Lessee hereby leases from
Lessor, the Premises, for the term, at the rental, and upon all of the terms,
covenants and conditions set forth in this Lease. Unless otherwise provided
herein, any statement of square footage set forth in this Lease, or that may
have been used in calculating rental and/or Common Area Operating Expenses, is
an approximation which Lessor and Lessee agree is reasonable and the rental and
Lessee's Share (as defined in Paragraph 1.6(b)) based thereon is not subject to
revision whether or not the actual square footage is more or less.
2.2 Condition. Lessor shall deliver the Premises to Lessee clean and free of
debris on the Commencement Date and warrants to Lessee that the existing
plumbing, electrical systems, fire sprinkler system, lighting, air conditioning
and heating systems and loading doors, if any, in the Premises, other than those
constructed by Lessee, shall be in good operating condition on the Commencement
Date. If a non-compliance with said warranty exists as of the Commencement Date,
Lessor shall, except as otherwise provided in this Lease, promptly after receipt
of written notice from Lessee setting forth with specificity the nature and
extent of such non-compliance, rectify same at Lessor's expense. If Lessee does
not give Lessor written notice of a non-compliance with this warranty within
thirty (30) days after the Commencement Date, correction of that non-compliance
shall be the obligation of Lessee at Lessee's sole cost and expense.
2.3 Compliance with Covenants, Restrictions and Building Code. Lessor
warrants that any Improvements (other than those constructed by Lessee or at
Lessee's direction) on or in the Premises which have been constructed or
installed by Lessor or with Lessor's consent or at Lessor's direction shall
comply with all applicable covenants or restrictions of record and applicable
building codes, regulations and ordinances in effect on the Commencement Date.
Lessor further warrants to Lessee that Lessor has no knowledge of any claim
having been made by any governmental agency that a violation or violations of
applicable building codes, regulations, or ordinances exist with regard to the
Premises as of the Commencement Date. Said warranties shall not apply to any
Alterations or Utility Installations (defined in Paragraph 7.3(a)) made or to be
made by Lessee. If the Premises do not comply with said warranties, Lessor
shall, except as otherwise provided in this Lease, promptly after receipt of
written notice from Lessee given within six (6) months following the
Commencement Date and setting forth with specificity the nature and extent of
such non-compliance, take such action, at Lessor's expense, as may be reasonable
or appropriate to rectify the non-compliance. Lessor makes no warranty that the
Permitted Use in Paragraph 1.8 is permitted for the Premises under Applicable
Laws (as defined in Paragraph 2.4).
2.4 Acceptance of Premises. Lessee hereby acknowledges: (a) that it has been
advised by the Broker(s) to satisfy itself with respect to the condition of the
Premises (including but not limited to the electrical and fire sprinkler
systems, security, environmental aspects, seismic and earthquake requirements,
and compliance with the Americans with Disabilities Act and applicable zoning,
municipal, county, state and federal laws, ordinances and regulations and any
covenants or restrictions of record (collectively, "Applicable Laws") and the
present and future suitability of the Premises for Lessee's intended use; (b)
that Lessee has made such investigation as it deems necessary with reference to
such matters, is satisfied with reference thereto, and assumes all
responsibility therefore as the same relate to Lessee's occupancy of the
Premises and/or the terms of this Lease; and (c) that neither Lessor, nor any of
Lessor's agents, has made any oral or written representations or warranties with
respect to said matters other than as set forth in this Lease.
2.5 Lessee as Prior Owner/Occupant. The warranties made by Lessor in this
Paragraph 2 shall be of no force or effect if immediately prior to the date set
forth in Paragraph 1.1 Lessee was the owner or occupant of the Premises. In such
event, Lessee shall, at Lessee's sole cost and expense, correct any non-
compliance of the Premises with said warranties.
<PAGE>
2.6 Vehicle Parking. Lessee shall be entitled to use the number of Unreserved
Parking Spaces and Reserved Parking Spaces specified in Paragraph 1.2(b) on
those portions of the Common Areas designated from time to time by Lessor for
parking. Lessee shall not use more parking spaces than said number. Said parking
spaces shall be used for parking by vehicles no larger than full-size passenger
automobiles or pick-up trucks, herein called "Permitted Size Vehicles." Vehicles
other than Permitted Size Vehicles shall be parked and loaded or unloaded as
directed by Lessor in the Rules and Regulations (as defined in Paragraph 40)
issued by Lessor. (Also see Paragraph 2.9.)
(a) Lessee shall not permit or allow any vehicles that belong to or are
controlled by Lessee or Lessee's employees, suppliers, shippers, customers,
contractors or invitees to be loaded, unloaded, or parked in areas other than
those designated by Lessor for such activities.
(b) If Lessee permits or allows any of the prohibited activities described
in this Paragraph 2.6, then Lessor shall have the right, without notice, in
addition to such other rights and remedies that it may have, to remove or tow
away the vehicle involved and charge the cost to Lessee, which cost shall be
immediately payable upon demand by Lessor.
(c) Lessor shall at the Commencement Date of this Lease, provide the
parking facilities required by Applicable Law.
2.7 Common Areas--Definition. The term "Common Areas" is defined as all areas
and facilities outside the Premises and within the exterior boundary line of the
Industrial Center and interior utility raceways within the Premises that are
provided and designated by the Lessor from time to time for the general non-
exclusive use of Lessor, Lessee and other lessees of the Industrial Center and
their respective employees, suppliers, shippers, customers, contractors and
invitees, including parking areas, loading and unloading areas, trash areas,
roadways, sidewalks, walkways, parkways, driveways and landscaped areas.
2.8 Common Areas--Lessee's Rights. Lessor hereby grants to Lessee, for the
benefit of Lessee and its employees, suppliers, shippers, contractors, customers
and invitees, during the term of this Lease, the non-exclusive right to use, in
common with others entitled to such use, the Common Areas as they exist from
time to time, subject to any rights, powers, and privileges reserved by Lessor
under the terms hereof or under the terms of any rules and regulations or
restrictions governing the use of the Industrial Center. Under no circumstances
shall the right herein granted to use the Common Areas be deemed to include the
right to store any property, temporarily or permanently, in the Common Areas.
Any such storage shall be permitted only by the prior written consent of Lessor
or Lessor's designated agent, which consent may be revoked at any time. In the
event that any unauthorized storage shall occur then Lessor shall have the
right, without notice, in addition to such other rights and remedies that it may
have, to remove the property and charge the Cost to Lessee, which cost shall be
Immediately payable upon demand by Lessor.
2.9 Common Areas--Rules and Regulations. Lessor or such other person(s) as
Lessor may appoint shall have the exclusive control and management of the Common
Areas and shall have the right, from time to time, to establish, modify, amend
and enforce reasonable Rules and Regulations with respect thereto in accordance
with Paragraph 40. Lessee agrees to abide by and conform to all such Rules and
Regulations, and to cause its employees, suppliers, shippers, customers,
contractors and invitees to so abide and conform. Lessor shall not be
responsible to Lessee for the non-compliance with said rules and regulations by
other lessees of the Industrial Center.
2.10 Common Areas--Changes. Lessor shall have the right, in Lessor's sole
discretion, from time to time:
(a) To make changes to the Common Areas, including, without limitation,
changes in the location, size, shape and number of driveways, entrances, parking
spaces, parking areas, loading and unloading areas, ingress, egress, direction
of traffic, landscaped areas, walkways and utility raceways;
(b) To close temporarily any of the Common Areas for maintenance purposes
so long as reasonable access to the Premises remains available;
(c) To designate other land outside the boundaries of the Industrial Center
to be a part of the Common Areas;
(d) To add additional buildings and Improvements to the Common Areas;
(e) To use the Common Areas while engaged in making additional
improvements, repairs or alterations to the Industrial Center, or any portion
thereof; and
(f) To do and perform such other acts and make such other changes in, to or
with respect to the Common Areas and Industrial Center as Lessor may, in the
exercise of sound business judgment, deem to be appropriate.
3. Term.
3.1 Term. The Commencement Date, Expiration Date and Original Term of this
Lease are as specified in Paragraph 1.3.
3.2 Early Possession. If an Early Possession Date is specified in Paragraph
1.4 and if Lessee totally or partially occupies the Premises after the Early
Possession Date but prior to the Commencement Date, the obligation to pay Base
Rent shall be abated for the period of such early occupancy. All other terms of
this Lease, however, (including but not limited to the obligations to pay
Lessee's Share of Common Area Operating Expenses and to carry the insurance
required by Paragraph 8) shall be in effect during such period. Any such early
possession shall not affect nor advance the Expiration Date of the Original
Term.
3.3 Delay in Possession. If for any reason Lessor cannot deliver possession
of the Premises to Lessee by the Early Possession Date, if one is specified in
Paragraph 1.4, or if no Early Possession Date is specified, by the Commencement
Date, Lessor shall not be subject to any liability therefor, nor shall such
failure affect the validity of this Lease, or the obligations of Lessee
hereunder, or extend the term hereof, but in such case, Lessee shall not, except
as otherwise provided herein, be obligated to pay rent or perform any other
obligation of Lessee under the terms of this Lease until Lessor delivers
possession of the Premises to Lessee. If possession of the Premises is not
delivered to Lessee within sixty (60) days after the Commencement Date, Lessee
may, at its option, by notice in writing to Lessor within ten (10) days after
the end of said sixty (60) day period, cancel this Lease, in which event the
parties shall be discharged from all obligations hereunder; provided further,
however, that if such written notice of Lessee is not received by Lessor within
said ten (10) day period, Lessee's right to cancel this Lease hereunder shall
terminate and be of no further force or effect. Except as may be otherwise
provided, and regardless of when the Original term actually commences, if
possession is not tendered to Lessee when required by this Lease and Lessee does
not terminate this Lease, as aforesaid, the period free of the obligation to pay
Base Rent, if any, that Lessee would otherwise have enjoyed shall run from the
date of delivery of possession and continue for a period equal to the period
during which the Lessee would have otherwise enjoyed under the terms hereof, but
minus any days of delay caused by the acts, changes or omissions of Lessee.
4. Rent.
4.1 Base Rent. Lessee shall pay Base Rent and other rent or charges, as the
same may be adjusted from time to time, to Lessor in lawful money of the United
States, without offset or deduction, on or before the day on which it is due
under the terms of this Lease. Base Rent and all other rent and charges for any
period during the term hereof which is for less than one full month shall be
prorated based upon the actual number of days of the month involved. Payment of
Base Rent and other charges shall be made to Lessor at its address stated herein
or to such other persons or at such other addresses as Lessor may from time to
time designate in writing to Lessee.
4.2 Common Area Operating Expenses. Lessee shall pay to Lessor during the
term hereof, in addition to the Base Rent, Lessee's Share (as specified in
Paragraph 1.6(b)) of all Common Area Operating Expenses, as hereinafter defined,
during each calendar year of the term of this Lease, in accordance with the
following provisions:
(a) "Common Area Operating Expenses" are defined, for purposes of this
Lease, as all costs incurred by Lessor relating to the ownership and operation
of the Industrial Center, including, but not limited to, the following:
(i) The operation, repair and maintenance, in neat, clean, good
order and condition, of the following:
(aa) The Common Areas, including parking areas, loading and
unloading areas, trash areas, roadways, sidewalks,
walkways, parkways, driveways, landscaped areas, striping,
bumpers, irrigation systems, Common Area lighting
facilities, fences and gales, elevators and roof.
(bb) Exterior signs and any tenant directories.
(cc) Fire detection and sprinkler systems.
(ii) The cost of water, gas, electricity and telephone to service the
Common Areas.
(iii) Trash disposal, property manage services and the costs of any
environmental inspections.
(iv) Reserves set aside for maintenance and repair of Common Areas.
(v) Any increase above the Base Real Properly Taxes (as defined in
Paragraph 10.2(b)) for the Building and the Common Areas.
(vi) Any "Insurance Cost Increase" (as defined in Paragraph 8.1).
(vii) The cost of insurance carried by Lessor with respect to the
Common Areas.
(viii) Any deductible portion of an insured loss concerning the
Building or the Common Areas.
(ix) Any other services to be provided by Lessor that are stated
elsewhere in this Lease to be a Common Area Operating Expense.
(b) Any Common Area Operating Expenses and Real Property Taxes that are
specifically attributable to the Building or to any other building in the
Industrial Center or to the operation, repair and maintenance thereof, shall be
allocated entirely to the Building or to such other building. However, any
Common Area Operating Expenses and Real Property Taxes that are not specifically
attributable to the Building or to any other building or to the operation,
repair and maintenance thereof, shall be equitably allocated by Lessor to all
buildings in the Industrial Center.
(c) The inclusion of the improvements, facilities and services set forth in
Subparagraph 4.2(a) shall not be deemed to impose an obligation upon Lessor to
either have said improvements or facilities or to provide those services unless
the Industrial Center already has the same, Lessor already provides the
services, or Lessor has agreed elsewhere in this Lease to provide the same or
some of them.
(d) Lessee's Share of Common Area Operating Expenses shall be payable by
Lessee within ten (10) days after a reasonably detailed statement of actual
expenses is presented to Lessee by Lessor. At Lessor's option, however, an
amount may be estimated by Lessor from time to time of Lessee's Share of annual
Common Area Operating Expenses and the same shall be payable monthly or
quarterly, as Lessor shall designate, during each 12-month period of the Lease
term, on the same day as the Base Rent is due hereunder. Lessor shall deliver to
Lessee within sixty (60) days after the expiration of each calendar year a
reasonably detailed statement showing Lessee's Share of the actual Common Area
Operating Expenses incurred during the preceding year. If Lessee's payments
under this Paragraph 4.2(d) during said preceding year exceed Lessee's Share as
indicated on said statement, Lessee shall be credited the amount of such over-
-2-
<PAGE>
payment against Lessee's Share of Common Area Operating Expenses next becoming
due. If Lessee's payments under this Paragraph 4.2(d) during said preceding year
were less than Lessee's Share as indicated on said statement, Lessee shall pay
to Lessor the amount of the deficiency within ten (10) days after delivery by
Lessor to Lessee of said statement.
5. Security Deposit. Lessee shall deposit with Lessor upon Lessee's execution
hereof the Security Deposit set forth in Paragraph 1.7 as security for Lessee's
faithful performance of Lessee's obligations under this Lease. If Lessee falls
to pay Base Rent or other rent or charges due hereunder, or otherwise Defaults
under this Lease (as defined in Paragraph 13.1), Lessor may use, apply or retain
all or any portion of said Security Deposit for the payment of any amount due
Lessor or to reimburse or compensate Lessor for, any liability, cost, expense,
loss or damage (including attorneys' fees) which Lessor may suffer or incur by
reason thereof. If Lessor uses or applies all or any portion of said Security
Deposit, Lessee shall within ten (10) days after written request therefore
deposit monies with Lessor sufficient to restore said Security Deposit to the
full amount required by this Lease. Any time the Base Rent Increases during the
term of this Lease, Lessee shall, upon written request from Lessor, deposit
additional monies with Lessor as an addition to the Security Deposit so that the
total amount of the Security Deposit shall at all times bear the same proportion
to the then current Base Rent as the initial Security Deposit bears to the
initial Base Rent set forth in Paragraph 1.5. Lessor shall not be required to
keep all or any part of the Security Deposit separate from its general accounts.
Lessor shall, at the expiration or earlier termination of the term hereof and
after Lessee has vacated the Premises, return to Lessee (or, at Lessor's option,
to the last assignee, if any, of Lessee's interest herein), that portion of the
Security Deposit not used or applied by Lessor. Unless otherwise expressly
agreed in writing by Lessor, no pad of the Security Deposit shall be considered
to be held in trust, to bear interest or other increment for its use, or to be
prepayment for any monies to be paid by Lessee under this Lease.
6. Use.
6.1 Permitted Use.
(a) Lessee shall use and occupy the Premises only for the Permitted Use set
forth in Paragraph 1.8, or any other legal use which is reasonably comparable
thereto, and for no other purpose. Lessee shall not use or permit the use of the
Premises in a manner that is unlawful, creates waste or a nuisance, or that
disturbs owners and/or occupants of, or causes damage to the Premises or
neighboring premises or properties.
(b) Lessor hereby agrees to not unreasonably withhold or delay its consent
to any written request by Lessee, Lessee's assignees or subtenants, and by
prospective assignees and subtenants of Lessee, its assignees and subtenants,
for a modification of said Permitted Use, so long as the same will not impair
the structural integrity of the improvements on the Premises or in the Building
or the mechanical or electrical systems therein, does not conflict with uses by
other lessees, is not significantly more burdensome to the Premises or the
Building and the improvements thereon, and is otherwise permissible pursuant to
this Paragraph 6. If Lessor elects to withhold such consent, Lessor shall within
five (5) business days after such request give a written notification of same,
which notice shall include an explanation of Lessor's reasonable objections to
the change in use.
6.2 Hazardous Substances.
(a) Reportable Uses Require Consent. The term "Hazardous Substance" as used
in this Lease shall mean any product, substance, chemical, material or waste
whose presence, nature, quantity and/or intensity of existence, use,
manufacture, disposal, transportation, spill, release or effect, either by
itself or in combination with other materials expected to be on the Premises, is
either: (i) potentially injurious to the public health, safety or welfare, the
environment, or the Premises; (ii) regulated or monitored by any governmental
authority; or (iii) a basis for potential liability of Lessor to any
governmental agency or third party under any applicable statute or common law
theory. Hazardous Substance shall include, but not be limited to, hydrocarbons,
petroleum, gasoline, crude oil or any products or by-products thereof. Lessee
shall not engage in any activity in or about the Premises which constitutes a
Reportable Use (as hereinafter defined) of Hazardous Substances without the
express prior written consent of Lessor and compliance in a timely manner (at
Lessee's sole cost and expense) with all Applicable Requirements (as defined in
Paragraph 6.3). "Reportable Use" shall mean (i) the installation or use of any
above or below ground storage tank, (ii) the generation, possession, storage,
use, transportation, or disposal of a Hazardous Substance that requires a permit
from, or with respect to which a report, notice, registration or business plan
is required to be filed with, any governmental authority, and (iii) the presence
in, on or about the Premises of a Hazardous Substance with respect to which any
Applicable Laws require that a notice be given to persons entering or occupying
the Premises or neighboring properties. Notwithstanding the foregoing, Lessee
may, without Lessor's prior consent, but upon notice to Lessor and in compliance
with all Applicable Requirements, use any ordinary and customary materials
reasonably required to be used by Lessee in the normal course of the Permitted
Use, so long as such use is not a Reportable Use and does not expose the
Premises or neighboring properties to any meaningful risk of contamination or
damage or expose Lessor to any liability therefor. In addition, Lessor may (but
without any obligation to do so) condition its consent to any Reportable Use of
any Hazardous Substance by Lessee upon Lessee's giving Lessor such additional
assurances as Lessor, in its reasonable discretion, deems necessary to protect
itself, the public, the Premises and the environment against damage,
contamination or injury and/or liability therefor, including but not limited to
the installation (and, at Lessor's option, removal on or before Lease expiration
or earlier termination) of reasonably necessary protective modifications to the
Premises (such as concrete encasements) and/or the deposit of an additional
Security Deposit under Paragraph 5 hereof.
(b) Duty to Inform Lessor. If Lessee knows, or has reasonable cause to
believe, that a Hazardous Substance has come to be located in, on, under or
about the Premises or the Building, other than as previously consented to by
Lessor, Lessee shall immediately give Lessor written notice thereof, together
with a copy of any statement, report, notice, registration, application, permit,
business plan, license, claim, action, or proceeding given to, or received from,
any governmental authority or private party concerning the presence, spill,
release, discharge of, or exposure to, such Hazardous Substance including but
not limited to all such documents as may be involved in any Reportable Use
involving the Premises. Lessee shall not cause or permit any Hazardous Substance
to be spilled or released in, on, under or about the Premises (including,
without limitation; through the plumbing or sanitary sewer system).
(c) Indemnification. Lessee shall indemnify, protect, defend and hold
Lessor, its agents, employees, lenders and ground lessor, if any, and the
Premises, harmless from and against any and all damages, liabilities, judgments,
costs, claims, liens, expenses, penalties, loss of permits and attorneys' and
consultants' fees arising out of or involving any Hazardous Substance brought
onto the Premises by or for Lessee or by anyone under Lessee's control. Lessee's
obligations under this Paragraph 6.2(c) shall include, but not be limited to,
the effects of any contamination or injury to person, property or the
environment created or suffered by Lessee, and the cost of investigation
(including consultants' and attorneys' fees and testing), removal, remediation,
restoration and/or abatement thereof, or of any contamination therein involved,
and shall survive the expiration or earlier termination of this Lease. No
termination, cancellation or release agreement entered into by Lessor and Lessee
shall release Lessee from its obligations under this Lease with respect to
Hazardous Substances, unless specifically so agreed by Lessor in writing at the
time of such agreement.
6.3 Lessee's Compliance with Requirements. Lessee shall, at Lessee's sole
cost and expense, fully, diligently and in a timely manner, comply with all
"Applicable Requirements," which term is used in this Lease to mean all laws,
rules, regulations, ordinances, directives, covenants, easements and
restrictions of record, permits, the requirements of any applicable fire
insurance underwriter or rating bureau, and the recommendations of Lessor's
engineers and/or consultants, relating in any manner to the Premises (including
but not limited to matters pertaining to (i) industrial hygiene, (ii)
environmental conditions on, in, under or about the Premises, including soil and
groundwater conditions, and (iii) the use, generation, manufacture, production,
installation, maintenance, removal, transportation, storage, spill, or release
of any Hazardous Substance), now in effect or which may hereafter come into
effect. Lessee shall, within five (5) days after receipt of Lessor's written
request, provide Lessor with copies of all documents and information, including
but not limited to permits, registrations, manifests, applications, reports and
certificates, evidencing Lessee's compliance with any Applicable Requirements
specified by Lessor, and shall immediately upon receipt, notify Lessor in
writing (with copies of any documents involved) of any threatened or actual
claim, notice, citation, warning, complaint or report pertaining to or involving
failure by Lessee or the Premises to comply with any Applicable Requirements.
6.4 Inspection; Compliance with Law. Lessor, Lessor's agents, employees,
contractors and designated representatives, and the holders of any mortgages,
deeds of trust or ground leases on the Premises ("Lenders") shall have the right
to enter the Premises at any time in the case of an emergency, and otherwise at
reasonable times, for the purpose of inspecting the condition of the Premises
and for verifying compliance by Lessee with this Lease and all Applicable
Requirements (as defined in Paragraph 6.3), and Lessor shall be entitled to
employ experts and/or consultants in connection therewith to advise Lessor with
respect to Lessee's activities, including but not limited to Lessee's
installation, operation, use, monitoring, maintenance, or removal of any
Hazardous Substance on or from the Premises. The costs and expenses of any such
Inspections shall be paid by the party requesting same, unless a Default or
Breach of this Lease by Lessee or a violation of Applicable Requirements or a
contamination, caused or materially contributed to by Lessee, is found to exist
or to be imminent, or unless the inspection is requested or ordered by a
governmental authority as the result of any such existing or imminent violation
or contamination. In such case, Lessee shall upon request reimburse Lessor or
Lessor's Lender, as the case may be, for the costs and expenses of such
inspections.
7. Maintenance, Repairs, Utility Installations, Trade Fixtures and Alterations.
7.1 Lessee's Obligations.
(a) Subject to the provisions of Paragraph 2.2 (Condition), 2.3 (Compliance
with Covenants, Restrictions and Building Code), 7.2 (Lessor's Obligations), 9
(Damage or Destruction), and 14 (Condemnation), Lessee shall, at Lessee's sole
cost and expense and at all times, keep the Premises and every part thereof in
good order, condition and repair (whether or not such portion of the Premises
requiring repair, or the means of repairing the same, are reasonably or readily
accessible to Lessee, and whether or not the need for such repairs occurs as a
result of Lessee's use, any prior use, the elements or the age of such portion
of the Premises), including, without limiting the generality of the foregoing,
all equipment or facilities specifically Serving the Premises, such as plumbing,
heating, air conditioning, ventilating, electrical, lighting facilities,
boilers, fired or unfired pressure vessels, fire hose connections it within the
Premises, fixtures, interior walls, interior surfaces of exterior walls,
ceilings, floors, windows, doors, plate glass, and skylights, but excluding any
items which are the responsibility of Lessor pursuant to Paragraph 7.2 below.
Lessee, in keeping the Premises in good order, condition and repair, shall
exercise and perform good maintenance practices. Lessee's obligations shall
include restorations, replacements or renewals when necessary to keep the
Premises and all improvements thereon or a part thereof in good order, condition
and state of repair.
(b) Lessee shall, at Lessee's sole cost and expense, procure and maintain a
contract, with copies to Lessor, in customary form and substance for and with a
contractor specializing and experienced in the inspection, maintenance and
service of the heating, air conditioning and ventilation system for the
Premises. However, Lessor reserves the right, upon notice to Lessee, to procure
and maintain the contract for the heating, air conditioning and ventilating
systems, and if Lessor so elects, Lessee shall reimburse Lessor, upon demand,
for the cost thereof.
(c) If Lessee fails to perform Lessee's obligations under this Paragraph
7.1, Lessor may enter upon the Premises after ten (10) days' prior written
notice to Lessee (except in the case of an emergency, in which case no notice
shall be required), perform such obligations on Lessee's behalf, and put the
Premises in good order, condition and repair, in accordance with Paragraph 13.2
below.
7.2 Lessor's Obligations. Subject to the provisions of Paragraphs 2.2
(Condition), 2.3 (Compliance with Covenants, Restrictions and Building Code),
4.2 (Common Area Operating Expenses), 6 (Use), 7.1 (Lessee's Obligations), 9
(Damage or Destruction) and 14 (Condemnation), Lessor, subject to reimbursement
pursuant to Paragraph 4.2, shall keep in good order, condition and repair the
foundations, exterior walls, structural condition of Interior bearing walls,
exterior roof, life sprinkler and/or standpipe and hose (if located in the
Common Areas) or other automatic fire extinguishing system Including fire alarm
and/or smoke detection
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<PAGE>
systems and equipment, fire hydrants, parking lots, walkways, parkways,
driveways, landscaping, fences, signs and utility systems serving the Common
Areas and all parts thereof, as well as providing the services for which there
is a Common Area Operating Expense pursuant to Paragraph 4.2. Lessor shall not
be obligated to paint the exterior or interior surfaces of exterior walls nor
shall Lessor be obligated to maintain, repair or replace windows, doors or plate
glass of the Premises. Lessee expressly waives the benefit of any statute now or
hereafter in effect which would otherwise afford Lessee the right to make
repairs at Lessor's expense or to terminals this Lease because of Lessor's
failure to keep the Building, Industrial Center or Common Areas in good order,
condition and repair.
7.3 Utility Installations, Trade Fixtures, Alterations.
(a) Definitions; Consent Required. The term "Utility Installations" is used
in this Lease to refer to all air lines, power panels, electrical distribution,
security, fire protection systems, communications systems, lighting fixtures,
heating, ventilating and air conditioning equipment, plumbing, and fencing in,
on or about the Premises. The term "Trade Fixtures" shall mean Lessee's
machinery and equipment which can be removed without doing material damage to
the Premises. The term "Alterations" shall mean any modification of the
improvements on the Premises which are provided by Lessor under the terms of
this Lease, other than Utility Installations or Trade Fixtures. "Lessee-Owned
Alterations and/or Utility Installations" are defined as Alterations and/or
Utility Installations made by LESSEE that are not yet owned by Lessor pursuant
to Paragraph 7.4(a). Lessee shall not make nor cause to be made any Alterations
or Utility Installations in, on, under or about the Premises without Lessor's
prior written consent. Lessee may, however, make non-structural Utility
Installations to the Interior of the Premises (excluding the roof) without
Lessor's consent but upon notice to Lessor, so long as they are not visible from
the outside of the Premises, do not involve puncturing, relocation or removing
the roof or any existing walls, or changing or interfering with the fire
sprinkler or fire detection systems and the cumulative cost thereof during the
term of this Lease as extended does not exceed $2,500.00.
(b) Consent. Any Alterations or Utility Installations that Lessee shall
desire to make and which require the consent of the Lessor shall be presented to
Lessor in written form with detailed plans. All consents given by Lessor,
whether by virtue of Paragraph 7.3(a) or by subsequent specific consent, shall
be deemed conditioned upon: (i) Lessee's acquiring all applicable permits
required by governmental authorities; (ii) the furnishing of copies of such
permits together with a copy of the plans and specifications for the Alteration
or Utility Installation to Lessor prior to commencement of the work thereon; and
(iii) the compliance by Lessee with all conditions of said permits in a prompt
and expeditious manner. Any Alterations or Utility Installations by Lessee
during the term of this Lease shall be done in a good and workmanlike manner,
with good and sufficient materials, and be in compliance with all Applicable
Requirements. Lessee shall promptly upon completion thereof furnish Lessor with
as-built plans and specifications therefor. Lessor may, (but without obligation
to do so) condition its consent to any requested Alteration or Utility
Installation that costs $2,500.00 or more upon Lessee's providing Lessor with a
lien and completion bond in an amount equal to one and one-half times the
estimated cost of such Alteration or Utility Installation.
(c) Lien Protection. Lessee shall pay when due all claims for labor or
materials furnished or alleged to have been furnished to or for Lessee at or for
use on the Premises, which claims are or may be secured by any mechanic's or
materialmen's lien against the Premises or any interest therein. Lessee shall
give Lessor not less than ten (10) days' notice prior to the commencement of any
work in, on, or about the Premises, and Lessor shall have the right to post
notices of non-responsibility in or on the Premises as provided by law. If
Lessee shall, in good faith, contest the validity of any such lien, claim or
demand, then Lessee shall, at its sole expense, defend and protect itself,
Lessor and the Premises against the same and shall pay and satisfy any adverse
judgment that may be rendered thereon before the enforcement thereof against the
Lessor or the Premises. If Lessor shall require, Lessee shall furnish to Lessor
a surety bond satisfactory to Lessor in an amount equal to one and one-half
times the amount of such contested lien claim or demand, indemnifying Lessor
against liability for the same, as required by law for the holding of the
Premises free from the effect of such lien or claim. In addition, Lessor may
require Lessee to pay Lessor's attorneys' fees and costs in participating in
such action if Lessor shall decide it is to its best interest to do so.
7.4 Ownership, Removal, Surrender, and Restoration.
(a) Ownership. Subject to Lessor's right to require their removal and to
cause Lessee to become the owner thereof as hereinafter provided in this
Paragraph 7.4, all Alterations and Utility Installations made to the Premises by
Lessee shall be the property of and owned by Lessee, but considered a part of
the Premises. Lessor may, at any time and at its option, elect in writing to
Lessee to be the owner of all or any specified part of the Lessee-Owned
Alterations and Utility Installations. Unless otherwise instructed per
Subparagraph 7.4(b) hereof, all Lessee-Owned Alterations and Utility
Installations shall, at the expiration or earlier termination of this Lease,
become the property of Lessor and remain upon the Premises and be surrendered
with the Premises by Lessee.
(b) Removal. Unless otherwise agreed in writing, Lessor may require that
any or all Lessee-Owned Alterations or Utility Installations be removed by the
expiration or earlier termination of this Lease, notwithstanding that their
installation may have been consented to by Lessor, Lessor may require the
removal at any time of all or any part of any Alterations or Utility
Installations made without the required consent of Lessor.
(c) Surrender/Restoration. Lessee shall surrender the Premises by the end
of the last day of the Lease term or any earlier termination date, clean and
free of debris and in good operating order, condition and state of repair,
ordinary wear and tear excepted. Ordinary wear and tear shall not include any
damage or deterioration that would have been prevented by good maintenance
practice or by Lessee performing all of its obligations, under this Lease.
Except as otherwise agreed or specified herein, the Premises, as surrendered,
shall include the Alterations and Utility Installations. The obligation of
Lessee shall include the repair of any damage occasioned by the Installation,
maintenance or removal of Lessee's Trade Fixtures, furnishings, equipment, and
Lessee-Owned Alterations and Utility Installations, as well as the removal of
any storage tank Installed by or for Lessee, and the removal, replacement, or
remediation of any soil, material or ground water contaminated by Lessee, all as
may then be required by Applicable Requirements and/or good practice. Lessee's
Trade Fixtures shall remain the property of Lessee and shall be removed by
Lessee subject to its obligation to repair and restore the Premises per this
Lease.
8. Insurance; Indemnity.
8.1 Payment of Premium Increases.
(a) As used herein, the term "Insurance Cost Increase" is defined as any
increase in the actual cost of the Insurance applicable to the Building and
required to be carried by Lessor pursuant to Paragraphs 8.2(b), 8.3(a) and
8.3(b), ("Required Insurance"), over and above the Base Premium, as hereinafter
defined, calculated on an annual basis. "Insurance Cost Increase" shall include,
but not be limited to, requirements of the holder of a mortgage or deed of trust
covering the Premises, increased valuation of the Premises, and/or a general
premium rate increase. The term "Insurance Cost Increase" shall not, however,
include any premium increases resulting from the nature of the occupancy of any
other lessee of the Building. If the parties insert a dollar amount in Paragraph
1.9, such amount shall be considered the "Base Premium." If a dollar amount has
not been inserted in Paragraph 1.9 and if the Building has been previously
occupied during the twelve (12) month period immediately preceding the
Commencement Date, the "Base Premium" shall be the annual premium applicable to
such twelve (12) month period. If the Building was not fully occupied during
such twelve (12) month period, the "Base Premium" shall be the lowest annual
premium reasonably obtainable for the Required Insurance as of the Commencement
Date, assuming the most nominal use possible of the Building. In no event,
however, shall Lessee be responsible for any portion of the premium cost
attributable to liability insurance coverage in excess of $1,000,000 procured
under Paragraph 8.2(b).
(b) Lessee shall pay any Insurance Cost Increase to Lessor pursuant to
Paragraph 4.2. Premiums for policy periods commencing prior to, or extending
beyond, the term of this Lease shall be prorated to coincide with the
corresponding Commencement Date or Expiration Date.
8.2 Liability Insurance.
(a) Carried by Lessee. Lessee shall obtain and keep in force during the
term of this Lease a Commercial General Liability policy of insurance protecting
Lessee, Lessor and any Lender(s) whose names have been provided to Lessee in
writing (as additional insureds) against claims for bodily injury, personal
injury and property damage based upon, involving or arising out of the
ownership, use, occupancy or maintenance of the Premises and all areas
appurtenant thereto. Such insurance shall be on an occurrence basis providing
single limit coverage in an amount not less than $1,000,000 per occurrence with
an "Additional Insured-Managers or Lessors of Premises" endorsement and contain
the "Amendment of the Pollution Exclusion" endorsement for damage caused by
heat, smoke or fumes from a hostile fire. The policy shall not contain any
intra-insured exclusions as between insured persons or organizations, but shall
include coverage for liability assumed under this Lease as an "insured contract"
for the performance of Lessee's indemnity obligations under this Lease. The
limits of said insurance required by this Lease or as carried by Lessee shall
not, however, limit the liability of Lessee nor relieve Lessee of any obligation
hereunder. All Insurance to be carried by Lessee shall be primary to and not
contributory with any similar insurance carried by Lessor, whose insurance shall
be considered excess insurance only.
(b) Carried by Lessor. Lessor shall also maintain liability insurance
described in Paragraph 8.2(a) above, in addition to and not in lieu of, the
insurance required to be maintained by Lessee. Lessee shall not be named as an
additional insured therein.
8.3 Property Insurance-Building, Improvements and Rental Value.
(a) Building and Improvements. Lessor shall obtain and keep in force during
the term of this Lease a policy or policies in the name of Lessor, with loss
payable to Lessor and to any Lender(s), insuring against loss or damage to the
Premises. Such insurance shall be for full replacement cost, as the same shall
exist from time to time, or the amount required by any Lender(s), but in no
event more than the commercially reasonable and available insurable value
thereof if, by reason of the unique nature or age of the improvements involved,
such latter amount is less than full replacement cost. Lessee-Owned Alterations
and Utility Installations, Trade Fixtures and Lessee's personal property shall
be insured by Lessee pursuant to Paragraph 8.4. If the coverage is available and
commercially appropriate, Lessor's policy or policies shall insure against all
risks of direct physical loss or damage (except the perils of flood and/or
earthquake unless required by a Lender or included in the Base Premium),
including coverage for any additional costs resulting from debris removal and
reasonable amounts of coverage for the enforcement of any ordinance or law
regulating the reconstruction or replacement of any undamaged sections of the
Building required to be demolished or removed by reason of the enforcement of
any building, zoning, safety or land use laws as the result of a covered loss,
but not including plate glass insurance. Said policy or policies shall also
contain an agreed valuation provision in lieu of any co-insurance clause, waiver
of subrogation, and inflation guard protection causing an increase in the annual
property insurance coverage amount by a factor of not less than the adjusted
U.S. Department of Labor Consumer Price Index for All Urban Consumers for the
city nearest to where the Premises are located.
(b) Rental Value. Lessor shall also obtain and keep in force during the
term of this Lease a policy or policies in the name of Lessor, with loss payable
to Lessor and any Lender(s), insuring the loss of the full rental and other
charges payable by all lessees of the Building to Lessor for one year (including
all Real Property Taxes, insurance costs, all Common Area Operating Expenses and
any scheduled rental increases). Said insurance may provide that in the event
the Lease is terminated by reason of an insured loss, the period of indemnity
for such coverage shall be extended beyond the date of the completion of repairs
or replacement of the Premises, to provide for one full year's loss of rental
revenues from the date of any such loss. Said insurance shall contain an agreed
valuation provision in lieu of any co-insurance clause, and the amount of
coverage shall be adjusted annually to reflect the projected rental income, Real
Property Taxes, insurance premium costs and other expenses, if any, otherwise
payable, for the next 12-month period. Common Area Operating Expenses shall
include any deductible amount in the event of such loss.
(c) Adjacent Premises. Lessee shall pay for any increase in the premiums
for the property insurance of the Building and for the Common Areas of other
buildings in the Industrial Center if said increase is caused by Lessee's acts,
omissions, use or occupancy of the Premises.
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(d) Lessee's Improvements. Since Lessor is the Insuring Party, Lessor shall
not be required to insure Lessee-Owned Alterations and Utility Installations
unless the item in question has become the property of Lessor under the terms of
this Lease.
8.4 Lessee's Property Insurance. Subject to the requirements of Paragraph
8.5, Lessee at its cost shall either by separate policy or, at Lessor's option,
by endorsement to a policy already carried, maintain insurance coverage on all
of Lessee's personal property, Trade Fixtures and Lessee-Owned Alterations and
Utility Installations in, on, or about the Premises similar in coverage to that
carried by Lessor as the Insuring Party under Paragraph 8.3(a). Such insurance
shall be full replacement cost coverage with a deductible not to exceed $1,000
per occurrence. The proceeds from any such insurance shall be used by Lessee for
the replacement of personal property and the restoration of Trade Fixtures and
Lessee-Owned Alterations and Utility Installations. Upon request from Lessor,
Lessee shall provide Lessor with written evidence that such insurance is in
force.
8.5 Insurance Policies. Insurance required hereunder shall be in companies
duly licensed to transact business in the state where the Premises are located,
and maintaining during the policy term a "General Policyholders Rating" of at
least B+, V, or such other rating as may be required by a Lender, as set forth
in the most current issue of "Best's Insurance Guide." Lessee shall not do or
permit to be done anything which shall invalidate the insurance policies
referred to in this Paragraph 8. Lessee shall cause to be delivered to Lessor,
within seven (7) days after the earlier of the Early Possession Date or the
Commencement Date, certified copies of, or certificates evidencing the existence
and amounts of, the insurance required under Paragraph 8.2(a) and 8.4. No such
policy shall be cancelable or subject to modification except after thirty (30)
days' prior written notice to Lessor. Lessee shall at least thirty (30) days
prior to the expiration of such policies, furnish Lessor with evidence of
renewals or "insurance binders" evidencing renewal thereof, or Lessor may order
such insurance and charge the cost thereof to Lessee, which amount shall be
payable by Lessee to Lessor upon demand.
8.6 Waiver of Subrogation. Without affecting any other rights or remedies,
Lessee and Lessor each hereby release and relieve the other, and waive their
entire right to recover damages (whether in contract or in tort) against the
other, for loss or damage to their property arising out of or incident to the
perils required to be insured against under Paragraph 8. The effect of such
releases and waivers of the right to recover damages shall not be limited by the
amount of insurance carried or required, or by any deductibles applicable
thereto. Lessor and Lessee agree to have their respective insurance companies
issuing property damage insurance waive any right to subrogation that such
companies may have against Lessor or Lessee, as the case may be, so long as the
insurance is not invalidated thereby.
8.7 Indemnity. Except for Lessor's negligence and/or breach of express
warranties, Lessee shall indemnify, protect, defend and hold harmless the
Premises, Lessor and its agents, Lessor's master or ground lessor, partners and
Lenders, from and against any and all claims, loss of rents and/or damages,
costs, liens, judgments, penalties, loss of permits, attorneys' and consultants'
fees, expenses and/or liabilities arising out of, involving, or in connection
with, the occupancy of the Premises by Lessee, the conduct of Lessee's business,
any act, omission or neglect of Lessee, its agents, contractors, employees or
Invitees, and out of any Default or Breach by Lessee in the performance in a
timely manner of any obligation on Lessee's part lobe performed under this
Lease. The foregoing shall include, but not be limited to, the defense or
pursuit of any claim or any action or proceeding involved therein, and whether
or not (in the case of claims made against Lessor) litigated and/or reduced to
Judgment. In case any action or proceeding be brought against Lessor by reason
of any of the foregoing matters, Lessee upon notice from Lessor shall defend the
same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor
shall cooperate with Lessee in such defense. Lessor need not have first paid any
such claim in order to be so indemnified.
8.8 Exemption of Lessor from Liability. Lessor shall not be liable for injury
or damage to the person or goods, wares, merchandise or other property of
Lessee, Lessee's employees, contractors, invitees, customers, or any other
person in or about the Premises, whether such damage or injury is caused by or
results from fire, steam, electricity, gas, water or rain, or from the breakage,
leakage, obstruction or other defects of pipes, fire sprinklers, wires,
appliances, plumbing, air conditioning or lighting fixtures, or from any other
cause, whether said injury or damage results from conditions arising upon the
Premises or upon other portions of the Building of which the Premises are a
part, from other sources or places, and regardless of whether the cause of such
damage or injury or the means of repairing the same is accessible or not. Lessor
shall not be liable for any damages arising from any act or neglect of any other
lessee of Lessor nor from the failure by Lessor to enforce the provisions of any
other lease in the Industrial Center. Notwithstanding Lessor's negligence or
breach of this Lease, Lessor shall under no circumstances be liable for injury
to Lessee's business or for any loss of income or profit therefrom.
9. Damage or Destruction.
9.1 Definitions.
(a) "Premises Partial Damage" shall mean damage or destruction to the
Premises, other than Lessee-Owned Alterations and Utility Installations, the
repair cost of which damage or destruction is less than fifty percent (50%) of
the then Replacement Cost (as defined in Paragraph 9.1(d)) of the Premises
(excluding Lessee-Owned Alterations and Utility Installations and Trade
Fixtures) immediately prior to such damage or destruction.
(b) "Premises Total Destruction" shall mean damage or destruction to the
Premises, other than Lessee-Owned Alterations and Utility Installations, the
repair cost of which damage or destruction is fifty percent (50%) or more of the
then Replacement Cost of the Premises (excluding Lessee-Owned Alterations and
Utility Installations and Trade Fixtures) immediately prior to such damage or
destruction. In addition, damage or destruction to the Building, other than
Lessee-Owned Alterations and Utility Installations and Trade Fixtures of any
lessees of the Building, the cost of which damage or destruction is fifty
percent (50%) or more of the then Replacement Cost (excluding Lessee-Owned
Alterations and Utility Installations and Trade Fixtures of any lessees of the
Building) of the Building shall, at the option of Lessor, be deemed to be
Premises Total Destruction.
(c) "Insured Loss" shall mean damage or destruction to the Premises, other
than Lessee-Owned Alterations and Utility Installations and Trade Fixtures,
which was caused by an event required to be covered by the insurance described
in Paragraph 8.3(a) irrespective of any deductible amounts or coverage limits
involved.
(d) "Replacement Cost" shall mean the cost to repair or rebuild the
improvements owned by Lessor at the time of the occurrence to their condition
existing immediately prior thereto, including demolition, debris removal and
upgrading required by the operation of applicable building codes, ordinances or
laws, and without deduction for depreciation.
(e) "Hazardous Substance Condition" shall mean the occurrence or discovery
of a condition involving the presence of, or a contamination by, a Hazardous
Substance as defined in Paragraph 6.2(a), in, on, or under the Premises.
9.2 Premises Partial Damage--Insured Loss. If Premises Partial Damage that is
an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such
damage (but not Lessee's Trade Fixtures or Lessee-Owned Alterations and Utility
Installations) as soon as reasonably possible and this Lease shall continue in
full force and effect. In the event, however, that there is a shortage of
insurance proceeds and such shortage is due to the fact that, by reason of the
unique nature of the improvements in the Premises, full replacement cost
insurance coverage was not commercially reasonable and available, Lessor shall
have no obligation to pay for the shortage in insurance proceeds or to fully
restore the unique aspects of the Premises unless Lessee provides Lessor with
the funds to cover same, or adequate assurance thereof, within ten (10) days
following receipt of written notice of such shortage and request therefor. If
Lessor receives said funds or adequate assurance thereof within said ten (10)
day period, Lessor shall complete them as soon as reasonably possible and this
Lease shall remain in full force and effect. If Lessor does not receive such
funds or assurance within said period, Lessor may nevertheless elect by written
notice to Lessee within ten (10) days thereafter to make such restoration and
repair as is commercially reasonable with Lessor paying any shortage in
proceeds, in which case this Lease shall remain in full force and effect. If
Lessor does not receive such funds or assurance within such ten (10) day period,
and if Lessor does not so elect to restore and repair, then this Lease shall
terminate sixty (60) days following this occurrence of the damage or
destruction. Unless otherwise agreed, Lessee shall in no event have any right to
reimbursement from Lessor for any funds contributed by Lessee to repair any such
damage or destruction. Premises Partial Damage due to flood or earthquake shall
be subject to Paragraph 9.3 rather than Paragraph 9.2, notwithstanding that
there may be some insurance coverage, but the net proceeds of any such insurance
shall be made available for the repairs if made by either Party.
9.3 Partial Damage--Uninsured Loss. If Premises Partial Damage that is not an
Insured Loss occurs, unless caused by a negligent or willful act of Lessee (in
which event Lessee shall make the repairs at Lessee's expense and this Lease
shall continue in full force and effect), Lessor may at Lessor's option, either
(i) repair such damage as soon as reasonably possible at Lessor's expense, in
which event this Lease shall continue in full force and effect, or (ii) give
written notice to Lessee within thirty (30) days after receipt by Lessor of
knowledge of the occurrence of such damage of Lessor's desire to terminate this
Lease as of the date sixty (60) days following the date of such notice. In the
event Lessor elects to give such notice of Lessor's intention to terminate this
Lease, Lessee shall have the right within ten (10) days after the receipt of
such notice to give written notice to Lessor of Lessee's commitment to pay for
the repair of such damage totally at Lessee's expense and without reimbursement
from Lessor. Lessee shall provide Lessor with the required funds or satisfactory
assurance thereof within thirty (30) days following such commitment from Lessee.
In such event this Lease shall continue in full force and effect, and Lessor
shall proceed to make such repairs as soon as reasonably possible after the
required funds are available. If Lessee does not give such notice and provide
the funds or assurance thereof within the times specified above, this Lease
shall terminate as of the date specified in Lessor's notice of termination.
9.4 Total Destruction. Notwithstanding any other provision hereof, if
Premises Total Destruction occurs (including any destruction required by any
authorized public authority), this Lease shall terminate sixty (60) days
following the date of such Premises Total Destruction, whether or not the damage
or destruction is an Insured Loss or was caused by a negligent or willful act of
Lessee. In the event, however, that the damage or destruction was caused by
Lessee, Lessor shall have the right to recover Lessor's damages from Lessee
except as released and waived in Paragraph 9.7.
9.5 Damage Near End of Term. If at any time during the last six (6) months of
the term of this Lease there is damage for which the cost to repair exceeds one
month's Base Rent, whether or not an Insured Loss, Lessor may, at Lessor's
option, terminate this Lease effective sixty (60) days following the date of
occurrence of such damage by giving written notice to Lessee of Lessor's
election to do so within thirty (30) days after the date of occurrence of such
damage. Provided, however, it Lessee at that time has an exercisable option to
extend this Lease or to purchase the Premises, then Lessee may preserve this
Lease by (a) exercising such option, and (b) providing Lessor with any shortage
in insurance proceeds (or adequate assurance thereof) needed to make the repairs
on or before the earlier of (i) the date which is ten (10) days after Lessee's
receipt of Lessor's written notice purporting to terminate this Lease, or (ii)
the day prior to the date upon which such option expires. If Lessee duly
exercises such option during such period and provides Lessor with funds:(or
adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor
shall, at Lessor's expense repair such damage as soon as reasonably possible and
this Lease shall continue in full force and effect. If Lessee fails to exercise
such option and provide such funds or assurance during such period, then this
Lease shall terminate as of the date set forth in the first sentence of this
Paragraph 9.5.
9.6 Abatement of Rent; Lessee's Remedies.
(a) in the event of (i) Premises Partial Damage or (ii) Hazardous Substance
Condition for which Lessee is not legally responsible, the Base Rent, Common
Area Operating Expenses and other charges, if any, payable by Lessee hereunder
for the period during which such damage or condition, its repair, remediation or
restoration continues, shall be abated in proportion to the degree to which
Lessee's use of the Premises is impaired, but not in excess of proceeds from
insurance required to be carried under Paragraph 8.3(b). Except for abatement of
Base Rent, Common Area Operating Expenses and other charges, if any, as
aforesaid, all other obligations of Lessee hereunder shall be performed by
Lessee, and Lessee shall have no claim against Lessor for any damage suffered by
reason of any such damage, destruction, repair, remediation or restoration.
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(b) If Lessor shall be obligated to repair or restore the Premises under
the provisions of this Paragraph 9 and shall not commence, in a substantial and
meaningful way, the repair or restoration of the Premises within ninety (90)
days after such obligation shall accrue, Lessee may, at any time prior to the
commencement of such repair or restoration, give written notice to Lessor and to
any Lenders of which Lessee has actual notice of Lessee's election to terminate
this Lease on a date not less than sixty (60) days following the giving of such
notice. If Lessee gives such notice to. Lessor and such Lenders and such repair
or restoration is not commenced within thirty (30) days after receipt of such
notice, this Lease shall terminate as of the date specified in said notice. If
Lessor or a Lender commences the repair or restoration of the Premises within
thirty (30) days after the receipt of such notice, this Lease shall continue in
full force and effect. "Commence" as used in this Paragraph 9.6 shall mean
either the unconditional authorization of the preparation of the required plans,
or the beginning of the actual work on the Premises, whichever occurs first.
9.7 Hazardous Substance Conditions. If a Hazardous Substance Condition
occurs, unless Lessee is legally responsible therefor (in which case Lessee
shall make the investigation and remediation thereof required by Applicable
Requirements and this Lease shall continue in full force and effect, but subject
to Lessor's rights under Paragraph 6.2(c) and Paragraph 13), Lessor may at
Lessor's option either (i) investigate and remediate such Hazardous Substance
Condition, if required, as soon as reasonably possible at Lessor's expense, in
which event this Lease shall continue in full force and effect, or (ii) if the
estimated cost to investigate and remediate such condition exceeds twelve (12)
times the then monthly Base Rent or $100,000 whichever is greater, give written
notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of
the occurrence of such Hazardous Substance Condition of Lessor's desire to
terminate this Lease as of the date sixty (60) days following the date of such
notice. In the event Lessor elects to give such notice of Lessor's intention to
terminate this Lease, Lessee shall have the right within ten (10) days after the
receipt of such notice to give written notice to Lessor of Lessee's commitment
to pay for the excess costs of (a) investigation and remediation of such
Hazardous Substance Condition to the extent required by Applicable Requirements,
over (b) an amount equal to twelve (12) times the then monthly Base Rent or
$100,000, whichever is greater. Lessee shall provide Lessor, with the funds
required of Lessee or satisfactory assurance thereof within thirty (30) days
following said commitment by Lessee. In such event this Lease shall continue in
full force and effect, and Lessor shall proceed to make such investigation and
remediation as soon as reasonably possible after the required funds are
available. If Lessee does not give such notice and provide the required funds or
assurance thereof within the time period specified above, this Lease shall
terminate as of the date specified in Lessor's notice of termination.
9.8 Termination--Advance Payments. Upon termination of this Lease pursuant to
this Paragraph 9, Lessor shall return to Lessee any advance payment made by
Lessee to Lessor and so much of Lessee's Security Deposit as has not been, or is
not then required to be, used by Lessor under the terms of this Lease.
9.9 Waiver of Statutes. Lessor and Lessee agree that the terms of this Lease
shall govern the effect of any damage to or destruction of the Premises and the
Building with respect to the termination of this Lease and hereby waive the
provisions of any present or future statute to the extent it is inconsistent
herewith.
10. Real Property Taxes.
10.1 Payment of Taxes. Lessor shall pay the Real Property Taxes, as defined
in Paragraph 10.2(a), applicable to the Industrial Center, and except as
otherwise provided in Paragraph 10.3, any increases in such amounts over the
Base Real Property Taxes shall be included in the calculation of Common Area
Operating Expenses in accordance with the provisions of Paragraph 4.2.
10.2 Real Property Tax Definitions.
(a) As used herein, the term "Real Property Taxes" shall include any form
of real estate tax or assessment, general, special, ordinary or extraordinary,
and any license fee, commercial rental tax, improvement bond or bonds, levy or
tax (other than inheritance, personal income or estate taxes) imposed upon the
Industrial Center by any authority having the direct or indirect power to tax,
including any city, state or federal government, or any school, agricultural,
sanitary, fire, street, drainage, or other improvement district thereof, levied
against any legal or equitable interest of Lessor in the Industrial Center or
any portion thereof, Lessor's right to rent or other income therefrom, and/or
Lessor's business of leasing the Premises. The term "Real Property Taxes" shall
also include any tax, fee, levy, assessment or charge, or any increase therein,
imposed by reason of events occurring, or changes in Applicable Law taking
effect, during the term of this Lease, including but not limited to a change in
the ownership of the Industrial Center or in the improvements thereon, the
execution of this Lease, or any modification, amendment or transfer thereof, and
whether or not contemplated by the Parties.
(b) As used herein, the term "Base Real Property Taxes" shall be the amount
of Real Property Taxes, which are assessed against the Premises, Building or
Common Areas in the calendar year during which the Lease is executed. In
calculating Real Property Taxes for any calendar year, the Real Property Taxes
for any real estate tax year shall be included in the calculation of Real
Property Taxes for such calendar year based upon the number of days which Such
calendar year and tax year have in common.
10.3 Additional Improvements. Common Area Operating Expenses shall not
include Real Property Taxes specified in the tax assessor's records and work
sheets as being caused by additional improvements placed upon the Industrial
Center by other lessees or by Lessor for the exclusive enjoyment of such other
lessees. Notwithstanding Paragraph 10.1 hereof, Lessee shall, however, pay to
Lessor at the time Common Area Operating Expenses are payable under Paragraph
4.2, the entirety of any increase in Real Property Taxes if assessed solely by
reason of Alterations, Trade Fixtures or Utility Installations placed upon the
Premises by Lessee or at Lessee's request.
10.4 Joint Assessment. If the Building is not separately assessed, Real
Property Taxes allocated to the Building shall be an equitable proportion of the
Real Property Taxes for all of the land and improvements included within the tax
parcel assessed, such proportion to be determined by Lessor from the respective
valuations assigned in the assessor's work sheets or such other information as
may be reasonably available. Lessor's reasonable determination thereof, in good
faith, shall be conclusive.
10.5 Lessee's Property Taxes. Lessee shall pay prior to delinquency all taxes
assessed against and levied upon Lessee-Owned Alterations and Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee contained in the Premises or stored within the Industrial Center. When
possible, Lessee shall cause its Lessee-Owned Alterations and Utility
Installations, Trade Fixtures, furnishings, equipment and all other personal
property to be assessed and billed separately from the real property of Lessor.
If any of Lessee's said property shall be assessed with Lessor's real property,
Lessee shall pay Lessor the taxes attributable to Lessee's property within ten
(10) days after receipt of a written statement setting forth the taxes
applicable to Lessee's property.
11. Utilities. Lessee shall pay directly for all utilities and services
supplied to the Premises, including but not limited to electricity, telephone,
security, gas and cleaning of the Premises, together with any taxes thereon. If
any such utilities or services are not separately metered to the Premises or
separately billed to the Premises, Lessee shall pay to Lessor a reasonable
proportion to be determined by Lessor of all such charges jointly metered or
billed with other premises in the Building, in the manner and within the time
periods set forth in Paragraph 4.2(d).
12. Assignment and Subletting.
12.1 Lessor's Consent Required.
(a) Lessee shall not voluntarily or by operation of law assign, transfer,
mortgage or otherwise transfer or encumber (collectively, "assign") or sublet
all or any part of Lessee's interest in this Lease or in the Premises without
Lessor's prior written consent given under and subject to the terms of Paragraph
36.
(b) A change in the control of Lessee shall constitute an assignment
requiring Lessor's consent. The transfer, on a cumulative basis, of twenty-five
percent (25%) or more of the voting control of Lessee shall constitute a change
in control for this purpose.
(c) The involvement of Lessee or its assets in any transaction, or series
of transactions (by way of merger, sale, acquisition; financing, refinancing,
transfer, leveraged buy-out or otherwise), whether or not formal assignment or
hypothecation of this Lease or Lessee's assets occurs, which results or will
result in a reduction of the Net Worth of Lessee, as hereinafter defined, by an
amount equal to or greater than twenty-five percent (25%) of such Net Worth of
Lessee as it was represented to Lessor at the time of full execution and
delivery of this Lease or at the time of the most recent assignment to which
Lessor has consented, or as it exists immediately prior to said transaction or
transactions constituting such reduction, at whichever time said Net Worth of
Lessee was or is greater, shall be considered an assignment of this Lease by
Lessee to which Lessor may reasonably withhold its consent. "Net Worth of
Lessee" for purposes of this Lease shall be the net worth of Lessee (excluding
any Guarantors) established under generally accepted accounting principles
consistently applied.
(d) An assignment or subletting of Lessee's interest in this Lease without
Lessor's specific prior written consent shall, at Lessor's option, be a Default
curable after notice per Paragraph 13.1, or a non-curable Breach without the
necessity of any notice and grace period. If Lessor elects to treat such
unconsented to assignment or subletting as a non-curable Breach, Lessor shall
have the right to either: (i) terminate this Lease, or (ii) upon thirty (30)
days written notice ("Lessor's Notice"), increase the monthly Base Rent for the
Premises to the greater of the then fair market rental value of the Premises, as
reasonably determined by Lessor, or one hundred ten percent (110%) of the Base
Rent then in effect. Pending determination of the new fair market rental value,
if disputed by Lessee, Lessee shall pay the amount set forth in Lessor's Notice,
with any overpayment credited against the next installment(s) of Base Rent
coming due, and any underpayment for the period retroactively to the effective
date of the adjustment being due and payable immediately upon the determination
thereof. Further, in the event of such Breach and rental adjustment, (i) the
purchase price of any option to purchase the Premises held by Lessee shall be
subject to similar adjustment to the then fair market value as reasonably
determined by Lessor (without the Lease being considered an encumbrance or any
deduction for depreciation or obsolescence, and considering the Premises at its
highest and best use and in good condition) or one hundred ten percent (110%) of
the price previously in effect, (ii) any index oriented rental or price
adjustment formulas contained in this Lease shall be adjusted to require that
the base index be determined with reference in to the index applicable to the
time of such adjustments, and (iii) any fixed rental adjustments scheduled
during the remainder of the Lease term shall be increased in the same ratio as
the new rental bears to the Base Rent in effect immediately prior to the
adjustment specified in Lessor's Notice.
(e) Lessee's remedy for any Breach of this Paragraph 12.1 by Lessor shall
be limited to compensatory damages and or injunctive relief.
12.2 Terms and Conditions Applicable to Assignment and Subletting.
(a) Regardless of Lessor's consent, any assignment or subletting shall not
(i) be effective without the express written assumption by such assignee or
sublessee of the obligations of Lessee under this Lease, (ii) release Lessee of
any obligations hereunder, nor (iii) after the primary liability of Lessee for
the payment of Base Rent and other sums due Lessor hereunder or for the
performance of any other obligations to be performed by Lessee under this Lease.
(b) Lessor may accept any rent or performance of Lessee's obligations from
any person other than Lessee pending approval or disapproval of an assignment.
Neither a delay in the approval or disapproval of such assignment nor the
acceptance of any rent for performance shall constitute a waiver or estoppel of
Lessor's right to exercise its remedies for the Default or Breach by Lessee of
any of the terms, covenants or conditions of this Lease.
(c) The consent of Lessor to any assignment or subletting shall not
constitute a consent to any subsequent assignment or subletting by Lessee or to
any subsequent or successive assignment or subletting by the assignee or
sublessee. However, Lessor may consent to subsequent sublettings and assignments
of the sublease or any amendments or modifications thereto without notifying
Lessee or anyone else liable under this Lease or the sublease and without
obtaining their consent, and such action shall not relieve such persons from
liability under this Lease or the sublease.
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(d) In the event of any Default or Breach of Lessee's obligation under this
Lease, Lessor may proceed directly against Lessee, any Guarantors or anyone else
responsible for the performance of the Lessee's obligations under this Lease,
including any sublessee, without first exhausting Lessor's remedies against any
other person or entity responsible therefor to Lessor, or any security held by
Lessor.
(e) Each request for consent to an assignment or subletting shall be in
writing, accompanied by information relevant to Lessor's determination as to the
financial and operational responsibility and appropriateness of the proposed
assignee or sublessee, including but not limited to the intended use and/or
required modification of the Premises, if any, together with a non-refundable
deposit of $1,000 or ten percent (10%) of the monthly Base Rent applicable to
the portion of the Premises which is the subject of the proposed assignment or
sublease, whichever is greater, as reasonable consideration for Lessor's
considering and processing the request for consent. Lessee agrees to provide
Lessor with such other or additional information and/or documentation as may be
reasonably requested by Lessor.
(f) Any assignee of, or sublessee under, this Lease shall, by reason of
accepting such assignment or entering into such sublease, be deemed, for the
benefit of Lessor, to have assumed and agreed to conform and comply with each
and every term, covenant, condition and obligation herein to be observed or
performed by Lessee during the term of said assignment or sublease, other than
such obligations as are contrary to or inconsistent with provisions of an
assignment or sublease to which Lessor has specifically consented in writing.
(g) The occurrence of a transaction described in Paragraph 12.2(c) shall
give Lessor the right (but not the obligation) to require that the Security
Deposit be increased by an amount equal to six (6) times the then monthly Base
Rent, and Lessor may make the actual receipt by Lessor of the Security Deposit
Increase a condition to Lessor's consent to such transaction.
(h) Lessor, as a condition to giving its consent to any assignment or
subletting, may require that the amount and adjustment schedule of the rent
payable under this Lease be adjusted to what is then the market value and/or
adjustment schedule for property similar to the Premises as then constituted, as
determined by Lessor.
12.3 Additional Terms and Conditions Applicable to Subletting. The following
terms and conditions shall apply to any subletting by Lessee of all or any part
of the Premises and shall be deemed included in all subleases under this Lease
whether or not expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest
in all rentals and income arising from any sublease of all or a portion of the
Premises heretofore or hereafter made by Lessee, and Lessor may collect such
rent and income and apply same toward Lessee's obligations under this Lease;
provided, however, that until a Breach (as defined in Paragraph 13.1) shall
occur in the performance of Lessee's obligations under this Lease, Lessee may,
except as otherwise provided in this Lease, receive, collect and enjoy the rents
accruing under such sublease. Lessor shall not, by reason of the foregoing
provision or any other assignment of such sublease to Lessor, nor by reason of
the collection of the rents from a sublessee, be deemed liable to the sublessee
for any failure of Lessee to perform and comply with any of Lessee's obligations
to such sublessee under such Sublease. Lessee hereby irrevocably authorizes and
directs any such sublessee, upon receipt of a written notice from Lessor stating
that a Breach exists in the performance of Lessee's obligations under this
Lease, to pay to Lessor the rents and other charges due and to become due under
the sublease. Sublessee shall rely upon any such statement and request from
Lessor and shall pay such rents and other charges to Lessor without any
obligation or right to inquire as to whether such Breach exists and
notwithstanding any notice from or claim from Lessee to the contrary. Lessee
shall have no right or claim against such sublessee, or, until the Breach has
been cured, against Lessor, for any such rents and other charges so paid by said
sublessee to Lessor.
(b) in the event of a Breach by Lessee in the performance of its
obligations under this Lease, Lessor, at its option and without any obligation
to do so, may require any sublessee to attorn to Lessor, in which event Lessor
shall undertake the obligations of the sublessor under such sublease from the
time of the exercise of said option to the expiration of such sublease;
provided, however, Lessor shall not be liable for any prepaid rents or security
deposit paid by such sublessee to such sublessor or for any other prior defaults
or breaches of such sublessor under such sublease.
(c) Any matter or thing requiring the consent of the sublessor under a
sublease shall also require the consent of Lessor herein.
(d) No sublessee under a sublease approved by Lessor shall further assign
or sublet all or any part of the Premises without Lessor's prior written
consent.
(e) Lessor shall deliver a copy of any notice of Default or Breach by
Lessee to the sublessee, who shall have the right to cure the Default of Lessee
within the grace period, if any, specified in such notice. The sublessee shall
have a right of reimbursement and offset from and against Lessee for any such
Defaults cured by the sublessee.
13. Default; Breach; Remedies.
13.1 Default; Breach. Lessor and Lessee agree that if an attorney is
consulted by Lessor in connection with a Lessee Default or Breach (as
hereinafter defined), $350.00 is a reasonable minimum sum per such occurrence
for legal services and costs in the preparation and service of a notice of
Default, and that Lessor may include the cost of such services and costs in said
notice as rent due and payable to cure said default. A "Default" by Lessee is
defined as a failure by Lessee to observe, comply with or perform any of the
terms, covenants, conditions or rules applicable to Lessee under this Lease. A
"Breach" by Lessee is defined as the occurrence of any one or more of the
following Defaults, and, where a grace period for cure after notice is specified
herein, the failure by Lessee to cure such Default prior to the expiration of
the applicable grace period, and shall entitle Lessor to pursue the remedies set
forth in Paragraphs 13.2 and/or 13.3:
(a) The vacating of the Premises without the intention to reoccupy same, or
the abandonment of the Premises.
(b) Except as expressly otherwise provided in this Lease, the failure by
Lessee to make any payment of Base Rent, Lessee's Share of Common Area Operating
Expenses, or any other monetary payment required to be made by Lessee hereunder
as and when due, the failure by Lessee to provide Lessor with reasonable
evidence of insurance or surety bond required under this Lease, or the failure
of Lessee to fulfill any obligation under this Lease which endangers or
threatens life or property, where such failure continues for a period of three
(3) days following written notice thereof by or on behalf of Lessor to Lessee.
(c) Except as expressly otherwise provided in this Lease, the failure by
Lessee to provide Lessor with reasonable written evidence (in duly executed
original form, if applicable) of (i) compliance with Applicable Requirements per
Paragraph 6.3, (ii) the inspection, maintenance and service contracts required
under Paragraph 7.1(b), (iii) the rescission of an unauthorized assignment or
subletting per Paragraph 12.1, (iv) a Tenancy Statement per Paragraphs 16 or 37,
(v) the subordination or nonsubordination of this Lease per Paragraph 30, (vi)
the guaranty of the performance of Lessee's obligations under this Lease if
required under Paragraphs 1.11 and 37, (vii) the execution of any document
requested under Paragraph 42 (easements), or (viii) any other documentation or
information which Lessor may reasonably require of Lessee under the terms of
this lease, where any such failure continues tot a period of ten (10) days
following written notice by or on behalf of Lessor to Lessee.
(d) A Default by Lessee as to the terms, covenants, conditions or
provisions of this Lease, or of the rules adopted under Paragraph 40 hereof that
are to be observed, complied with or performed by Lessee, other than those
described in Subparagraphs 13.1(a), (b) or (c), above, where such Default
continues for a period of thirty (30) days after written notice thereof by or on
behalf of Lessor to Lessee; provided, however, that if the nature of Lessee's
Default is such that more than thirty (30) days are reasonably required for its
cure, then it shall not be deemed to be a Breach of this Lease by Lessee if
Lessee commences such cure within said thirty (30) day period and thereafter
diligently prosecutes such cure to completion.
(e) The occurrence of any of the following events: (i) the making by Lessee
of any general arrangement or assignment for the benefit of creditors; (ii)
Lessee's becoming a "debtor" as defined in 11 U.S. Code Section 101 or any
successor statute thereto (unless, in the case of a petition filed against
Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of
a trustee or receiver to take possession of substantially all of Lessee's assets
located at the Premises or of Lessee's interest in this Lease, where possession
is not restored to Lessee within thirty (30) days; or (iv) the attachment,
execution or other judicial seizure of substantially all of Lessee's assets
located at the Premises or of Lessee's interest in this Lease, where such
seizure is not discharged within thirty (30) days; provided, however, in the
event that any provision of this Subparagraph 13.1(e) is contrary to any
applicable law, such provision shall be of no force or effect, and shall not
affect the validity of the remaining provisions.
(f) The discovery by Lessor that any financial statement of Lessee or of
any Guarantor, given to Lessor by Lessee or any Guarantor, was materially false.
(g) If the performance of Lessee's obligations under this Lease is
guaranteed: (i) the death of a Guarantor, (ii) the termination of a Guarantor's
liability with respect to this Lease other than in accordance with the terms of
such guaranty, (iii) a Guarantor's becoming insolvent or the subject of a
bankruptcy filing, (iv) a Guarantor's refusal to honor the guaranty, or (v) a
Guarantor's breach of its guaranty obligation on an anticipatory breach basis,
and Lessee's failure, within sixty (60) days following written notice by or on
behalf of Lessor to Lessee of any such event, to provide Lessor with written
alternative assurances of security, which, when coupled with the then existing
resources of Lessee, equals or exceeds the combined financial resources of
Lessee and the Guarantors that existed at the time of execution of this Lease.
13.2 Remedies. If Lessee falls to perform any affirmative duty or obligation
of Lessee under this Lease, within ten (10) days after written notice to Lessee
(or in case of an emergency, without notice), Lessor may at its option (but
without obligation to do so), perform such duty or obligation on Lessee's
behalf, including but not limited to the obtaining of reasonably required bonds,
insurance policies, or governmental, licenses, permits or approvals. The costs
and expenses of any such performance by Lessor shall be due and payable by
Lessee to Lessor upon invoice therefor. If any check given to Lessor by Lessee
shall not be honored by the bank upon which it is drawn, Lessor, at its own
option, may require all future payments to be made under this Lease by Lessee to
be made only by cashier's check. In the event of a Breach of this Lease by
Lessee (as defined in Paragraph 13.1), with or without further notice or demand,
and without limiting Lessor in the exercise of any right or remedy which Lessor
may have by reason of such Breach, Lessor may:
(a) Terminate Lessee's right to possession of the Premises by any lawful
means, in which case this Lease and the term hereof shall terminate and Lessee
shall immediately surrender possession of the Premises to Lessor. In such event
Lessor shall be entitled to recover from Lessee: (i) the worth at the time of
the award of the unpaid rent which had been earned at the time of termination;
(ii) the worth at the time of award of the amount by which the unpaid rent which
would have been earned after termination until the time of award exceeds the
amount of such rental loss that the Lessee proves could have been reasonably
avoided; (iii) the worth at the time of award of the amount by which the unpaid
rent for the balance of the term after the time of award exceeds the amount of
such rental loss that the Lessee proves could be reasonably avoided; and (iv)
any other amount necessary to compensate Lessor for all the detriment
proximately caused by the Lessee's failure to perform its obligations under this
Lease or which in the ordinary course of things would be likely to result
therefrom, including but not limited to the cost of recovering possession of the
Premises, expenses of reletting, including necessary renovation and alteration
of the Premises, reasonable attorneys' fees, and that portion of any leasing
commission paid by Lessor in connection with this Lease applicable to the
unexpired term of this Lease. The worth at the time of award of the amount
referred to in provision (iii) of the immediately preceding sentence shall be
computed by discounting such amount at the discount rate of the Federal Reserve
Bank of San Francisco or the Federal Reserve Bank District in which the Premises
are located at the time of award plus one percent (1%). Efforts by Lessor to
mitigate damages caused by Lessee's Default or Breach of this Lease shall not
waive Lessor's right to recover damages under this Paragraph 13.2. If
termination of this Lease is obtained through the provisional remedy of unlawful
detainer, Lessor shall have the right to recover in such pro-
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ceding the unpaid rent and damages as are recoverable therein, or Lessor may
reserve the right to recover all or any part thereof in a separate suit for
such rent and/or damages. If a notice and grace period required under
Subparagraph 13.1(b), (c) or (d) was not previously given, a notice to pay rent
or quit, or to perform or quit, as the case may be, given to Lessee under any
statute authorizing the forfeiture of leases for unlawful detainer shall also
constitute the applicable notice for grace period purposes required by
Subparagraph 13.1(b),(c) or (d). In such case, the applicable grace period under
the unlawful detainer statue shall run concurrently after the one such statutory
notice, and the failure of Lessee to cure the Default within the greater of the
two (2) such grace periods shall constitute both an unlawful detainer and a
Breach of this Lease entitling Lessor to the remedies provided for in this Lease
and/or by said statute.
(b) Continue the lease and Lessee's right to possession in effect (in
California under California Civil Code Section 1951.4) after Lessee's Breach and
recover the rent as it becomes due, provided Lessee has the right to sublet or
assign, subject only to reasonable limitations. Lessor and Lessee agree that the
limitations on assignment and subletting in this Lease are reasonable. Acts of
maintenance or preservation, efforts to relet the Premises, or the appointment
of a receiver to protect the Lessor's interest under this Lease, shall not
constitute a termination of the Lessee's right to possession.
(c) Pursue any other remedy now or hereafter available to Lessor under the
laws or judicial decisions of the state wherein the Premises are located.
(d) The expiration or termination of this Lease and/or the termination of
Lessee's right to possession shall not relieve Lessee from liability under any
indemnity provisions of this Lease as to matters occurring or accruing during
the term hereof or by reason of Lessee's occupancy of the Premises.
13.3 Inducement Recapture in event of Breach. Any agreement by Lessor for
free or abated rent or other charges applicable to the Premises, or for the
giving or paying by Lessor to or for Lessee of any cash or other bonus,
inducement or consideration for Lessee's entering into this Lease, all of which
concessions are hereinafter referred to as "Inducement Provisions" shall be
deemed conditioned upon Lessee's full and faithful performance of all of the
terms, covenants and conditions of this Lease to be performed or observed by
Lessee during the term hereof as the same may be extended. Upon the occurrence
of a Breach (as defined in Paragraph 13.1) of this Lease by Lessee, any such
Inducement Provision shall automatically be deemed deleted front this Lease and
of no further force or effect, and any rent, other charge, bonus, inducement or
consideration theretofore abated, given or paid by Lessor under such an
Inducement Provision shall be immediately due and payable by Lessee to Lessor,
and recoverable by Lessor, as additional rent due under this Lease,
notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by
Lessor of rent or the cure of the Breach which initialed the operation of this
Paragraph 13.3 shall not be deemed a waiver by Lessor of the provisions of this
Paragraph 13.3 unless specifically so stated in writing by Lessor at the time of
such acceptance.
13.4 Late Charges. Lessee hereby acknowledges that late payment by Lessee to
Lessor of rent and other sums due hereunder will cause Lessor to incur costs not
contemplated by this Lease, the exact amount of which will be extremely
difficult to ascertain. Such costs include, but are not limited to, processing
and accounting charges, and late charges which may be imposed upon Lessor by the
terms of any ground lease, mortgage or deed of trust covering the Premises.
Accordingly, if any installment of rent or other sum due from Lessee shall not
be received by Lessor or Lessor's designee within ten (10) days after such
amount shall be due, then, without any requirement for notice to Lessee, Lessee
shall pay to Lessor a late charge equal to six percent (6%) of such overdue
amount. The parties hereby agree that such late charge represents a fair and
reasonable estimate of the costs Lessor will incur by reason of late payment by
Lessee. Acceptance of such late charge by Lessor shall in no event constitute a
waiver of Lessee's Default or Breach with respect to such overdue amount, nor
prevent Lessor from exercising any of the other rights and remedies granted
hereunder. In the event that a late charge is payable hereunder, whether or not
collected, for three (3) consecutive installments of Base Rent, then,
notwithstanding Paragraph 4.1 or any other provision of this Lease to contrary,
Base Rent shall, at Lessor's option, become due and payable quarterly in
advance.
13.5 Breach by Lessor. Lessor shall not be deemed in breach of this Lease
unless Lessor fails within a reasonable time to perform an obligation required
to be performed by Lessor. For purposes of this Paragraph 13.5, a reasonable
time shall in no event be less than thirty (30) days after receipt by Lessor,
and by any Lender(s) whose name and address shall have been furnished to Lessee
in writing for such purpose, of written notice specifying wherein such
obligation of Lessor has not been performed; provided, however, that if the
nature of Lessor's obligation is such that more than thirty (30) days after such
notice are reasonably required for its performance, then Lessor shall not be in
breach of this Lease if performance is commenced within such thirty (30) day
period and thereafter diligently pursued to completion.
14. Condemnation. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said power
(all of which are herein called "condemnation"), this Lease shall terminate as
to the part so taken as of the date the condemning authority takes title or
possession, whichever first occurs. If more than ten percent (10%) of the floor
area of the Premises, or more than twenty-five percent (25%) of the portion of
the Common Areas designated for Lessee's parking, is taken by condemnation,
Lessee may, at Lessee's option, to be exercised in writing within ten (10) days
after Lessor shall have given Lessee within notice of such taking (or in the
absence of such notice, within ten (10) days after the condemning authority
shall have taken possession) terminate this Lease as of the date the condemning
authority takes such possession. If Lessee does not terminate this Lease in
accordance with the foregoing, this Lease shall remain in full force and effect
as to the portion of the Premises remaining, except that the Base Rent shall be
reduced in the same proportion as the rentable floor area of the Premises taken
bears to the total rentable floor area of the Premises. No reduction of Base
Rent shall occur if the condemnation does not apply to any portion of the
Premises. Any award for the taking of all or any part of the Premises under the
power of eminent domain or any payment made under threat of the exercise of such
power shall be the property of Lessor, whether such award shall be made as
compensation for diminution of value of the leasehold or for the taking of the
fee, or as severance damages; provided, however, that Lessee shall be entitled
to any compensation, separately awarded to Lessee for Lessee's relocation
expenses and/or loss of Lessee's Trade Fixtures. In the event that this Lease is
not terminated by reason of such condemnation, Lessor shall to the extent of its
net severance damages received, over and above Lessee's Share of the legal and
other expenses incurred by Lessor in the condemnation matter, repair any damage
to the Premises caused by such condemnation authority. Lessee shall be
responsible for the payment of any amount in excess of such net severance
damages required to complete such repair.
15. Brokers' Fees.
15.1 Procuring Cause. The Broker(s) named in Paragraph 1.10 is/are the
procuring cause of this Lease.
15.2 Additional Terms. Unless Lessor and Broker(s) have otherwise agreed in
writing, Lessor agrees that: (a) if Lessee exercises any Option (as defined in
Paragraph 39.1) granted under this Lease or any Option subsequently granted, or
(b) if Lessee acquires any rights to the Premises or other premises in which
Lessor has an interest, or (c) If Lessee remains in possession of the Premises
with the consent of Lessor after the expiration of the term of this Lease after
having failed to exercise an Option, or (d) if said Brokers are the procuring
cause of any other lease or sale entered into between the Parties pertaining to
the Premises and/or any adjacent property in which Lessor has an interest; or
(e) if Base Rent is increased, whether by agreement or operation of an
escalation clause herein, then as to any of said transactions, Lessor shall pay
said Broker(s) a fee in accordance with the schedule of said Broker(s) in effect
at the time of the execution of this Lease.
15.3 Assumption of Obligations. Any buyer or transferee of Lessor's interest
in this Lease, whether such transfer is by agreement or by operation of law,
shall be deemed to have assumed Lessor's obligation under this Paragraph 15.
Each Broker shall be an intended third party beneficiary of the provisions of
Paragraph 1.10 and of this Paragraph 15 to the extent of its interest in any
commission arising from this Lease and may enforce that right directly against
Lessor and its successors.
15.4 Representations and Warranties. Lessee and Lessor each represent and
warrant to the other that it has had no dealings with any person, firm, broker
or finder other than as named in Paragraph 1.10(a) in connection with the
negotiation of this Lease and/or the consummation of the transaction
contemplated hereby, and that no broker or other person, firm or entity other
than said named Broker(s) is entitled to any commission or finder's fee in
connection with said transaction. Lessee and Lessor do each hereby agree to
indemnify, protect, defend and hold the other harmless from and against
liability for compensation or charges which may be claimed by any such unnamed
broker, finder or other similar party by reason of any dealings or actions of
the indemnifying Party, including any costs, expenses, and/or attorneys' fees
reasonably incurred with respect thereto.
16. Tenancy and Financial Statements.
16.1 Tenancy Statement. Each Party (as "Responding Party")shall within ten
(10) days after written notice from the other Party (the "Requesting Party")
execute, acknowledge and deliver to the Requesting Party a statement in writing
in a form similar to the then most current "Tenancy Statement" form published by
the American Industrial Real Estate Association, plus such additional
information, confirmation and/or statements as may be reasonably requested by
the Requesting Party.
16.2 Financial Statement. If Lessor desires to finance, refinance, or sell
the Premises or the Building, or any part thereof, Lessee and all Guarantors
shall deliver to any potential lender or purchaser designated by Lessor such
financial statements of Lessee and such Guarantors as may be reasonably required
by such lender or purchaser, including but not limited to Lessee's financial
statements for the past three (3) years. All such financial statements shall be
received by Lessor and such lender or purchaser in confidence and shall be used
only for the purposes herein set forth.
17. Lessor's Liability. The term "Lessor" as used herein shall mean the owner
or owners at the time in question of the fee title to the Premises. In the event
of a transfer of Lessor's title or interest in the Premises or in this Lease,
lessor shall deliver to the transferee or assignee (in cash or by credit) any
unused Security Deposit held by Lessor at the time of such transfer or
assignment. Except as provided in Paragraph 15.3, upon such transfer or
assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor
shall be relieved of all liability with respect to the obligations and/or
covenants under this Lease thereafter to be performed by the Lessor. Subject to
the foregoing, the obligations and/or covenants in this Lease to be performed by
the Lessor shall be binding only upon the Lessor as hereinabove defined.
18. Severability. The invalidity of any provision of this Lease, as determined
by a court of competent jurisdiction, shall in no way affect the validity of any
other provision hereof.
19. Interest on Past-Due Obligations. Any monetary payment due Lessor
hereunder, other than late charges, not received by Lessor within ten (10) days
following the date on which it was due, shall bear interest from the date due at
the prime rate charged by the largest state chartered bank in the state in which
the Premises are located plus four percent (4%) per annum, but not exceeding the
maximum rate allowed by law, in addition to the potential late charge provided
for in Paragraph 13.4
20. Time of Essence. Time is of the essence with respect to the performance of
all obligations to be performed or observed by the Parties under this Lease.
21. Rent Defined. All monetary obligations of Lessee to Lessor under the terms
of this Lease are deemed to be rent.
22. No Prior or other Agreements; Broker Disclaimer. This Lease contains all
agreements between the Parties with respect to any matter mentioned herein, and
no other prior or contemporaneous agreement or understanding shall be effective.
Lessor and Lessee each represents and warrants to the Brokers that it has made,
and is relying solely upon its own investigation as to the nature, quality,
character and financial responsibility of the other Party to this Lease and as
to the nature, quality and character of the Premises. Brokers have no
responsibility with respect thereto or with respect to any default or breach
hereof by either Party. Each Broker shall be an intended third party beneficiary
of the provisions of this Paragraph 22.
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23. Notices.
23.1 Notice Requirements. All notices required or permitted by this Lease
shall be in writing and may be delivered in person (by hand or by messenger or
courier service) or may be sent by regular, certified or registered mail or U.S.
Postal Service Express Mail, with postage prepaid, or by facsimile transmission
during normal business hours, and shall be deemed sufficiently given if served
in a manner specified in this Paragraph 23. The addresses noted adjacent to a
Party's signature on this Lease shall be that Party's address for delivery or
mailing of notice purposes. Either Party may by written notice to the other
specify a different address for notice purposes, except that upon Lessee's
taking possession of the Premises, the Premises shall constitute Lessee's
address for the purpose of mailing or delivering notices to Lessee. A copy of
all notices required or permitted to be given to Lessor hereunder shall be
concurrently transmitted to such party or parties at such addresses as Lessor
may from time to time hereafter designate by written notice to Lessee.
23.2 Date of Notice. Any notice sent by registered or certified mail, return
receipt requested, shall be deemed given on the date of delivery shown on the
receipt card, or if no delivery date is shown, the postmark thereon. If sent by
regular mail, the notice shall be deemed given forty-eight (48) hours after the
same if addressed as required herein and mailed with postage prepaid. Notices
delivered by United States Express Mail or overnight courier that guarantees
next day delivery shall be deemed given twenty-four (24) hours after delivery of
the same to the United States Postal Service or courier. If any notice is
transmitted by facsimile transmission or similar means, the same shall be deemed
served or delivered upon telephone or facsimile confirmation of receipt of the
transmission thereof, provided a copy is also delivered via delivery or mail. If
notice is received on a Saturday or a Sunday or a legal holiday, it shall be
deemed received on the next business day.
24. Waivers. No waiver by Lessor of the Default or Breach of any term, covenant
or condition hereof by Lessee, shall be deemed a waiver of any other term,
covenant or condition hereof, or of any subsequent Default or Breach by Lessee
of the same or any other term, covenant or condition hereof. Lessor's consent
to, or approval of, any such act shall not be deemed to render unnecessary the
obtaining of Lessor's consent to, or approval of, any subsequent or similar act
by Lessee, or be construed as the basis of an estoppel to enforce the provision
or provisions of this Lease requiring such consent. Regardless of Lessor's
knowledge of a Default or Breach at the time of accepting rent, the acceptance
of rent by Lessor shall not be a waiver of any Default or Breach by Lessee of
any provision hereof. Any payment given Lessor by Lessee may be accepted by
Lessor on account of moneys or damages due Lessor, notwithstanding any
qualifying statements or conditions made by Lessee in connection therewith,
which such statements and/or conditions shall be of no force or effect
whatsoever unless specifically agreed to in writing by Lessor at or before the
time of deposit of such payment.
25. Recording. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees or taxes applicable thereto.
26. No Right To Holdover. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or earlier termination of
this Lease. In the event that Lessee holds over in violation of this Paragraph
26 then the Base Rent payable from and after the time of the expiration or
earlier termination of this Lease shall be Increased to two hundred percent
(200%) of the Base Rent applicable during the month immediately preceding such
expiration or earlier termination. Nothing contained herein shall be construed
as a consent by Lessor to any holding over by Lessee.
27. Cumulative Remedies. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
28. Covenants and Conditions. All provisions of this Lease to be observed or
performed by Lessee are both covenants and conditions.
29. Binding Effect; Choice of Law. This Lease shall be binding upon the
Parties, their personal representatives, successors and assigns and be governed
by the laws of the State in which the Premises are located. Any litigation
between the Parties hereto concerning this Lease shall be initiated in the
county in which the Premises are located.
30. Subordination; Attornment; Non-Disturbance.
30.1 Subordination. This Lease and any Option granted hereby shall be subject
and subordinate to any ground lease, mortgage, deed of trust, or other
hypothecation or security device (collectively, "Security Device"), now or
hereafter placed by Lessor upon the real property of which the Premises are a
part, to any and all advances made on the security thereof, and to all renewals,
modifications, consolidations, replacements and extensions thereof. Lessee
agrees that the Lenders holding any such Security Device shall have no duty,
liability or obligation to perform any of the obligations of Lessor Under this
Lease, but that in the event of Lessor's default with respect to any such
obligation, Lessee will give any Lender whose name and address have been
furnished Lessee in writing for such purpose notice of Lessor's default pursuant
to Paragraph 13.5. If any Lender shall elect to have this Lease and/or any
Option granted hereby superior to the lien of its Security Device and shall give
written notice thereof to Lessee, this Lease and such Options shall be deemed
prior to such Security Device, notwithstanding the relative dates of the
documentation or recordation thereof.
30.2 Attornment. Subject to the non-disturbance provisions of Paragraph 30.3,
Lessee agrees to attorn to a Lender or any other party who acquires ownership of
the Premises by reason of a foreclosure of a Security Device, and that in the
event of such foreclosure, such new owner shall not: (i) be liable for any act
or omission of any prior lessor or with respect to events occurring prior to
acquisition of ownership, (ii) be subject to any offsets or defenses which
Lessee might have against any prior lessor, or (iii) be bound by prepayment of
more than one month's rent.
30.3 Non-Disturbance. With respect to Security Devices entered into by Lessor
after the execution of this lease, Lessee's subordination of this Lease shall be
subject to receiving assurance (a "non-disturbance agreement") from the Lender
that Lessee's possession and this Lease, including any options to extend the
term hereof, will not be disturbed so long as Lessee is not in Breach hereof and
attorns to the record owner of the Premises.
30.4 Self-Executing. The agreements contained in this Paragraph 30 shall be
effective without the execution of any further documents; provided, however,
that upon written request from Lessor or a Lender in connection with a sale,
financing or refinancing of Premises, Lessee and Lessor shall execute such
further writings as may be reasonably required to separately document any such
subordination or non-subordination, attornment and/or non-disturbance agreement
as is provided for herein.
31. Attorneys' Fees. If any Party or Broker brings an action or proceeding to
enforce the terms hereof or declare rights hereunder, the Prevailing Party (as
hereafter defined) in any such proceeding, action, or appeal thereon, shall be
entitled to reasonable attorneys' fees. Such fees may be awarded in the same
suit or recovered in a separate suit, whether or not such action or proceeding
is pursued to decision or judgment. The term "Prevailing Party" shall include,
without limitation, a Party or Broker who substantially obtains or defeats the
relief sought, as the case may be, whether by compromise, settlement, judgment,
or the abandonment by the other Party or Broker of its claim or defense. The
attorneys' fee award shall not be computed in accordance with any court fee
schedule, but shall be such as to fully reimburse all attorneys' fees reasonably
Incurred. Lessor shall be entitled to attorneys' fees, costs and expenses
Incurred in preparation and service of notices of Default and consultations in
connection therewith, whether or not a legal action is subsequently commenced in
connection with such Default or resulting Breach. Broker(s) shall be intended
third party beneficiaries of this Paragraph 31.
32. Lessor's Access; Showing Premises; Repair's. Lessor and Lessor's agents
shall have the right to enter the Premises at any time, in the case of an
emergency, and otherwise at reasonable times for the purpose of showing the same
to prospective purchasers, lenders, or lessees, and making such alterations,
repairs, improvements or additions to the Premises or to the Building, as Lessor
may reasonably deem necessary. Lessor may at any time place on or about the
Premises or Building any ordinary "For Sale" signs and Lessor may at any time
during the last one hundred eighty (180) days of the term hereof place on or
about the Premises any ordinary "For Lease" signs. All such activities of Lessor
shall be without abatement of rent or liability to Lessee.
33. Auctions. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or Involuntarily, any auction upon the Premises without first having
obtained Lessor's prior written consent. Notwithstanding anything to the
contrary in this Lease, Lessor shall not be obligated to exercise any standard
of reasonableness in determining whether to grant such consent.
34. Signs. Lessee shall not place any sign upon the exterior of the Premises or
the Building, except that Lessee may, with Lessor's prior written consent,
install (but not on the roof) such signs as are reasonably required to advertise
Lessee's own business so long as such signs are in a location designated by
Lessor and comply with Applicable Requirements and the signage criteria
established for the Industrial Center by Lessor. The installation of any sign on
the Premises by or for Lessee shall be subject to the provisions of Paragraph 7
(Maintenance, Repairs, Utility Installations, Trade Fixtures and Alterations).
Unless otherwise expressly agreed herein, Lessor reserves all rights to the use
of the roof of the Building; and the right to install advertising signs on the
Building, including the roof, which do not unreasonably interfere with the
conduct of Lessee's business; Lessor shall be entitled to all revenues from such
advertising signs.
35. Termination; Merger. Unless specifically stated otherwise in writing by
Lessor the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for Breach
by Lessee, shall automatically terminate any sublease or lesser estate in the
Premises; provided, however, Lessor shall, in the event of any such surrender,
termination or cancellation, have the option to continue any one or all of any
existing subtenancies. Lessor's failure within ten (10) days following any such
event to make a written election to the contrary by written notice to the holder
of any such lesser interest, shall constitute Lessor's election to have such
event constitute the termination of such interest.
36. Consents.
(a) Except for Paragraph 33 hereof (Auctions) or as otherwise provided
herein, wherever in this Lease the consent of a Party is required to an act by
or for the other Party, such consent shall not be unreasonably withheld or
delayed. Lessor's actual reasonable costs and expenses (including but not
limited to architects', attorneys', engineers' and other consultants' fees)
incurred in the consideration of, or response to, a request by Lessee for any
Lessor consent pertaining to this Lease or the Premises, including but not
limited to consents to an assignment a subletting or the presence or use of a
Hazardous Substance, shall be paid by Lessee to Lessor upon receipt of an
invoice and supporting documentation therefor. In addition to the deposit
described in Paragraph 12.2(e), Lessor may, as a condition to considering any
such request by Lessee, require that Lessee deposit with Lessor an amount of
money (in addition to the Security Deposit held under Paragraph 5) reasonably
calculated by Lessor to represent the cost Lessor will Incur in considering and
responding to Lessee's request. Any unused portion of said deposit shall be
refunded to Lessee without interest. Lessor's consent to any act, assignment of
this Lease or subletting of the Premises by Lessee shall not constitute an
acknowledgment that no Default or Breach by Lessee of this Lease exists, nor
shall such consent be deemed a waiver of any then existing Default or Breach,
except as may be otherwise specifically stated in writing by Lessor at the time
of such consent.
(b) All conditions to Lessor's consent authorized by this Lease are
acknowledged by Lessee as being reasonable. The failure to specify herein any
particular condition to Lessor's consent shall not preclude the impositions by
Lessor at the time of consent of such further or other conditions as are then
reasonable with reference to the particular matter for which consent is being
given.
37. Guarantor.
37.1 Form of Guaranty. If there are to be any Guarantors of this Lease per
Paragraph 1.11, the form of the guaranty to be executed by each such Guarantor
shall be in the form most recently published by the American Industrial Real
Estate Association, and each such Guarantor shall have the same Obligations as
Lessee under this lease, including but not limited to the obligation to provide
the Tenancy Statement and Information required in Paragraph 16.
-9-
<PAGE>
37.2 Additional Obligations of Guarantor. It shall constitute a Default of
the Lessee under this Lease if any such Guarantor fails or refuses, upon
reasonable request by Lessor to give: (a) evidence of the due execution of the
guaranty called for by this Lease, including the authority of the Guarantor (and
of the party signing on Guarantor's behalf) to obligate such Guarantor on said
guaranty, and resolution of its board of directors authorizing the making of
such guaranty, together with a certificate of incumbency showing the signatures
of the persons authorized to sign on its behalf, (b) current financial
statements of Guarantor as may from time to time be requested by Lessor, (c) a
Tenancy Statement, or (d) written confirmation that the guaranty is still in
effect.
38. Quiet Possession. Upon payment by Lessee of the rent for the Premises and
the performance of all of the covenants, conditions and provisions on Lessee's
part to be observed and performed under this Lease, Lessee shall have quiet
possession of the Premises for the entire term hereof subject to all of the
provisions of this Lease.
39. Options.
39.1 Definition. As used in this Lease, the word "Option" has the following
meaning: (a) the right to extend the term of this Lease or to renew this Lease
or to extend or renew any lease that Lessee has on other property of Lessor; (b)
the right of first refusal to lease the Premises or the right of first offer to
lease the Premises or the right of first refusal to lease other property of
Lessor or the right of first offer to lease other property of Lessor; (c) the
right to purchase the Premises, or the right of first refusal to purchase the
Premises, or the right of first offer to purchase the Premises, or the right to
purchase other property of Lessor, or the right of first refusal to purchase
other property of Lessor, or the right of first offer to purchase other property
of Lessor.
39.2 Options Personal to Original Lessee. Each Option granted to Lessee in
this Lease is personal to the original Lessee named in Paragraph 1.1 hereof, and
cannot be voluntarily or involuntarily assigned or exercised by any person or
entity other than said original Lessee while the original Lessee is in full and
actual possession of the Premises and without the intention of thereafter
assigning or subletting. The Options, if any, herein granted to Lessee are not
assignable, either as a part of an assignment of this Lease or separately or
apart thereon, and no Option may be separated from this Lease in any manner, by
reservation or otherwise.
39.3 Multiple Options. In the event that Lessee has any multiple Options to
extend or renew this Lease, a later option cannot be exercised unless the prior
Options to extend or renew this Lease have been validly exercised.
39.4 Effect of Default on Options.
(a) Lessee shall have no right to exercise an Option, notwithstanding any
provision in the grant of Option to the contrary: (i) during the period
commencing with the giving of any notice of Default under Paragraph 13.1 and
continuing until the noticed Default is cured, or (ii) during the period of time
any monetary obligation due Lessor from Lessee is unpaid (without regard to
whether notice thereof is given Lessee), or (iii) during the time Lessee is in
Breach of this Lease, or (iv) in the event that Lessor has given to Lessee three
(3) or more notices of separate Defaults under Paragraph 13.1 during the twelve
(12) month period immediately preceding the exercise of the Option, whether or
not the Defaults are cured.
(b) The period of time within which an Option may be exercised shall not be
extended or enlarged by reason of Lessee's inability to exercise an Option
because of the provisions of Paragraph 39.4(a)
(c) All rights of Lessee under the provisions of an Option shall terminate
and be of no further force or effect, notwithstanding Lessee's due and timely
exercise of the Option, if, after such exercise and during the term of this
Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee for a
period of thirty (30) days after such obligation becomes due (without any
necessity of Lessor to give notice thereof to Lessee), or (ii) Lessor gives to
Lessee three (3) or more notices of separate Defaults under Paragraph 13.1
during any twelve (12) month period, whether or not the Defaults are cured, or
(iii) if Lessee commits a Breach of this Lease.
40. Rules and Regulations. Lessee agrees that it will abide by, and keep and
observe all reasonable rules and regulations ("Rules and Regulations") which
Lessor may make from time to time for the management, safety, care, and
cleanliness of the grounds, the parking and unloading of vehicles and the
preservation of good order, as well as for the convenience of other occupants or
tenants of the Building and the Industrial Center and their invitees.
41. Security Measures. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises, Lessee,
its agents and invitees and their property from the acts of third parties.
42. Reservations. Lessor reserves the right, from time to time, to grant,
without the consent or joinder of Lessee, such easements, rights of way, utility
raceways, and dedications that Lessor deems necessary, and to cause the
recordation of parcel maps and restrictions, so long as such easements, rights
of way, utility raceways, dedications, maps and restrictions do not reasonably
interfere with the use of the Premises by Lessee. Lessee agrees to sign any
documents reasonably requested by Lessor to effectuate any such easement rights,
dedication, map or restrictions.
43. Performance Under Protest. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one Party to the other under the provisions
hereof, the Party against whom the obligation to pay the money is asserted shall
have the right to make payment "under protest" and such payment shall not be
regarded as a voluntary payment and there shall survive the right on the part of
said Party to institute suit for recovery of such sum. If it shall be adjudged
that there was no legal obligation on the part of said Party to pay such sum or
any part thereof, said Party shall be entitled to recover such sum of so much
thereof as it was not legally required to pay under the provisions of this
Lease.
44. Authority. If either Party hereto is a corporation, trust, or general or
limited partnership, each individual executing this Lease on behalf of such
entity represents and warrants that he or she is duly authorized to execute and
deliver this Lease on its behalf. If Lessee is a corporation, trust or
partnership, Lessee shall, within thirty (30) days after requested by Lessor,
deliver to Lessor evidence satisfactory to Lessor of such authority.
45. Conflict. Any conflict between the printed provisions of this Lease and the
typewritten or handwritten provisions shall be controlled by the typewritten or
handwritten provisions.
46. Offer. Preparation of this Lease by either Lessor or Lessee or Lessor's
agent or Lessee's agent and submission of same to Lessee or Lessor shall not be
deemed an offer to lease. This Lease is not intended to be binding until
executed and delivered by all Parties hereto.
47. Amendment. This Lease may be modified only in writing, signed by the
parties in interest at the time of the modification. The Parties shall amend
this Lease from time to time to reflect any adjustments that are made to the
Base Rent or other rent payable under this Lease. As long as they do not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modification to this Lease as may be reasonably required
by an institutional insurance company or pension plan Lender in connection with
the obtaining of normal financing or refinancing of the property of which the
Premises are a part.
48. Multiple Parties. Except as otherwise expressly provided herein, if more
than one person or entity is named herein as either Lessor or Lessee the
obligations of such multiple parties shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or Lessee.
-10-
<PAGE>
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR YOUR ATTORNEY'S
REVIEW AND APPROVAL. FURTHER EXPERTS SHOULD BE CONSULTED TO EVALUATE THE
CONDITION OF THE PROPERTY FOR THE POSSIBLE PRESENCE OF ASBESTOS,
UNDERGROUND STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO REPRESENTATION OR
RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
OR BY THE REAL ESTATE BROKERS OR THEIR CONTRACTORS, AGENTS OR EMPLOYEES AS
TO THE LEGAL SUFFICIENCY, LEGAL, EFFECT OR TAX CONSEQUENCES OF THIS LEASE
OR THE TRANSACTION TO WHICH IT RELATES; THE PARTIES SHALL RELY SOLELY UPON
THE ADVICE OF THEIR OWN COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF
THIS LEASE. IF THE SUBJECT PROPERTY IS IN A STATE OTHER THAN CALIFORNIA,
AN ATTORNEY FROM THE STATE WHERE THE PROPERTY IS LOCATED SHOULD BE
CONSULTED.
The parties hereto have executed this Lease at the place and on the dates
specified above their respective signatures.
Executed at: San Jose, CA Executed at: San Jose, CA
------------- ------------
on: 7/12/99 on: 7/12/99
---------------------- ----------------------
By LESSOR: By LESSEE:
Great Oaks Properties
- --------------------------- -------------------------
By: /s/ Lloyd E. Martin By: /s/ XXX
---------------------- --------------------
Name Printed: Lloyd E. Martin Name Printed:
--------------- ---------------
Title: General Partner Title:
--------------- ----------------------
Address: Address:
--------------------- ----------------------
Telephone: ( ) Telephone: ( )
------------------- ---------------------
Facsimile: ( ) Facsimile: ( )
------------------- ---------------------
Executed at: Executed at:
on: N/A on: N/A
--------------------------- ----------------------------
BROKER: BROKER:
By: By:
--------------------------- ----------------------------
Name Printed: Name Printed:
--------------------------- ----------------------------
Title: Title:
--------------------------- ----------------------------
Address: Address:
--------------------------- ----------------------------
--------------------------- ----------------------------
Telephone: ( ) Telephone: ( )
------------------- ---------------------
Facsimile: ( ) Facsimile: ( )
------------------- ---------------------
NOTE: These forms are often modified to meet changing requirements of law and
needs of the industry. Always write or call to make sure you are
utilizing the most current form: AMERICAN INDUSTRIAL REAL ESTATE
ASSOCIATION, 345 So. Figueroa St., M-1, Los Angeles, CA 90071.
(213) 687-8777
-11-
<PAGE>
ADDENDUM #1
TO STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE--GROSS
DATED JUNE 22, 1999
FOR 22 GREAT OAKS BLVD., SAN JOSE, CA
FOR SUNRISE TELECOM, INC.
PARKING:
Sunrise Telecom, Inc. is entitled to use all parking spaces associated with the
22 Great Oaks property every day of the week except Sunday. On Sundays, Sunrise
Telecom, Inc. has unrestricted use of twenty-nine (29) parking spaces associated
with the 22 Great Oaks property.
SUNRISE TELECOM, INC. GREAT OAKS PROPERTIES
Signature: /s/ XXX Signature: /s/ XXX
--------- -----------
Date: 7/12/99 Date: 7-12-99
--------- -----------
-12-
<PAGE>
<TABLE>
<CAPTION>
ADDENDUM # 2
22-Jun-1999 TO STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE--GROSS
DATED JUNE 22, 1999
Page 1 of 2 FOR 22 GREAT OAKS BLVD., SAN JOSE, CA
FOR SUNRISE TELECOM, INC.
<S> <C> <C> <C> <C> <C> <C> <C>
Bldg. Area Area Size Triple Net Year 1 Year 2 Year 3 Year 4 Year 5
- --------------------------------------------------------------------------------------------------------------
Location in feet2 Costs/feet2 01-Jan-1996 01-Jan-1997 01-Jan-1998 01-Jan-1999 01-Jan-2000
- --------------------------------------------------------------------------------------------------------------
31-Dec-1996 31-Dec-1997 31-Dec-1998 31-Dec-1999 31-Dec-2000
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Downstairs 17,784 $11,255.12 $11,255.12 $11,255.12 $11,255.12 $11,255.12
- --------------------------------------------------------------------------------------------------------------
Cost/feet2 $ 0.63 $ 0.63 $ 0.63 $ 0.63 $ 0.63
- --------------------------------------------------------------------------------------------------------------
Triple Net 0.07 $ 1,244.88 $ 1,244.88 $ 1,244.88
- --------------------------------------------------------------------------------------------------------------
Triple Net 0.07 $ 1,244.88 $ 1,244.88
- --------------------------------------------------------------------------------------------------------------
Triple Net 0.10
- --------------------------------------------------------------------------------------------------------------
Total Payment $ 12,500 $ 12,500 $ 12,500 $ 12,500 $ 12,500
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Year 1 Year 2 Year 3 Year 4
- --------------------------------------------------------------------------------------------------------------
01-Dec-1996 01-Dec-1997 01-Dec-1998 01-Dec-1999
- --------------------------------------------------------------------------------------------------------------
30-Nov-1997 30-Nov-1998 30-Nov-1999 30-Nov-2000
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Upstairs 29,775 $15,500.00 $18,500.00 $21,500.00 $22,500.00
- --------------------------------------------------------------------------------------------------------------
Cost/feet2 $ 0.52 $ 0.62 $ 0.72 $ 0.76
- --------------------------------------------------------------------------------------------------------------
Triple Net 0.07 $ 2,100.00 $ 2,100.00
- --------------------------------------------------------------------------------------------------------------
Triple Net 0.08 $ 2,400.00 $ 2,400.00
- --------------------------------------------------------------------------------------------------------------
Triple Net 0.10
- --------------------------------------------------------------------------------------------------------------
Total Payment $17,600.00 $20,600.00 $23,900.00 $24,900.00
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Year 1
- --------------------------------------------------------------------------------------------------------------
01-Nov-1999
- --------------------------------------------------------------------------------------------------------------
31-Oct-2000
- --------------------------------------------------------------------------------------------------------------
New Area from
- --------------------------------------------------------------------------------------------------------------
Critical Clean 10,041 $10,041.00
- --------------------------------------------------------------------------------------------------------------
Cost/feet2 $ 1.00
- --------------------------------------------------------------------------------------------------------------
Triple Net 0.10 $ 1,004.10
- --------------------------------------------------------------------------------------------------------------
Triple Net
- --------------------------------------------------------------------------------------------------------------
Triple Net $11,045.10
- --------------------------------------------------------------------------------------------------------------
Total Payment
- --------------------------------------------------------------------------------------------------------------
Total Square Feet 57,600
- --------------------------------------------------------------------------------------------------------------
SUNRISE TELECOM, INC.
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Signature: /s/ XXX
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Date:
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
ADDENDUM # 2
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
ADDENDUM # 2
22-Jun-1999 TO STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE--GROSS
DATED JUNE 22, 1999
Page 1 of 2 FOR 22 GREAT OAKS BLVD., SAN JOSE, CA
FOR SUNRISE TELECOM, INC.
<S> <C> <C> <C> <C>
Bldg. Area Year 6 Year 7 Year 8 Year 9
- ------------------------------------------------------------------------
Location 01-Jan-2001 01-Nov-2001 01-Jan-2002 01-Nov-2003
- ------------------------------------------------------------------------
31-Dec-2001 31-Oct-2002 31-Oct-2003 31-Oct-2004
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
Downstairs $18,673.20 $19,562.40 $20,451.60 $21,340.80
- ------------------------------------------------------------------------
Cost/feet2 $ 1.05 $ 1.10 $ 1.15 $ 1.20
- ------------------------------------------------------------------------
Triple Net
- ------------------------------------------------------------------------
Triple Net
- ------------------------------------------------------------------------
Triple Net $ 1,778.40 $ 1,778.40 $ 1,778.40 $ 1,778.40
- ------------------------------------------------------------------------
Total Payment $20,451.60 $21,340.80 $22,230.00 $23,119.20
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
Year 5 Year 6 Year 7 Year 8
- ------------------------------------------------------------------------
01-Dec-2000 01-Dec-2001 01-Nov-2002 01-Nov-2003
- ------------------------------------------------------------------------
30-Nov-2001 31-Oct-2002 31-Oct-2003 31-Oct-2004
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
Upstairs $23,500.00 $32,752.50 $34,241.25 $35,730.00
- ------------------------------------------------------------------------
Cost/feet2 $ 0.79 $ 1.10 $ 1.15 $ 1.20
- ------------------------------------------------------------------------
Triple Net
- ------------------------------------------------------------------------
Triple Net $ 2,400.00
- ------------------------------------------------------------------------
Triple Net $ 2,977.50 $ 2,977.50 $ 2,977.50
- ------------------------------------------------------------------------
Total Payment $25,900.00 $35,730.00 $37,218.75 $38,707.50
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
Year 2 Year 3 Year 4 Year 5
- ------------------------------------------------------------------------
01-Nov-2000 01-Nov-2001 01-Nov-2002 01-Nov-2003
- ------------------------------------------------------------------------
31-Oct-2001 31-Oct-2002 31-Oct-2003 31-Oct-2004
- ------------------------------------------------------------------------
New Area from
- ------------------------------------------------------------------------
Critical Clean $10,543.05 $11,045.10 $11,547.15 $12,049.20
- ------------------------------------------------------------------------
Cost/feet2 $ 1.05 $ 1.10 $ 1.15 $ 1.20
- ------------------------------------------------------------------------
Triple Net $ 1,004.10 $ 1,004.10 $ 1,004.10 $ 1,004.10
- ------------------------------------------------------------------------
Triple Net
- ------------------------------------------------------------------------
Triple Net $11,547.15 $12,049.20 $12,551.25 $13.053.30
- ------------------------------------------------------------------------
Total Payment
- ------------------------------------------------------------------------
Total Square Feet
- ------------------------------------------------------------------------
GREAT OAKS PROPERTIES
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
Signature: /s/ XXX
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
Date:
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
ADDENDUM # 2
- ------------------------------------------------------------------------
</TABLE>
-13-
<PAGE>
<TABLE>
<CAPTION>
ADDENDUM # 2
22-Jun-1999 TO STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE--GROSS
DATED JUNE 22, 1999
Page 1 of 2 FOR 22 GREAT OAKS BLVD., SAN JOSE, CA
FOR SUNRISE TELECOM, INC.
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Remaining time of current leases
- -----------------------------------------------------------------------------------------------------------------------------------
Total Monthly Payment 01-Jun-1999
- -----------------------------------------------------------------------------------------------------------------------------------
Rent 31-Oct-1999
- -----------------------------------------------------------------------------------------------------------------------------------
Triple Net $32,755.12
- -----------------------------------------------------------------------------------------------------------------------------------
Total Payment $ 3,644.88
- -----------------------------------------------------------------------------------------------------------------------------------
$36,400.00
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
As of the effective date of the new lease on or about November 1, 1999
- -----------------------------------------------------------------------------------------------------------------------------------
1-Nov-1999 01-Dec-1999 01-Nov-2000 01-Dec-2000 01-Jan-0001 01-Nov-2001 01-Dec-2001 01-Nov-2002 01-Nov-2003
- -----------------------------------------------------------------------------------------------------------------------------------
Total Monthly 0-Nov-1999 31-Oct-2000 30-Nov-2000 31-Dec-2000 31-Oct-2001 30-Nov-2001 31-Oct-2002 31-Oct-2003 31-Oct-2004
- -----------------------------------------------------------------------------------------------------------------------------------
Rent $42,796.12 $43,796.12 $44,298.17 $45,298.17 $52,716.25 $54,107.50 $63,360.00 $66,240.00 $69,120.00
- -----------------------------------------------------------------------------------------------------------------------------------
Triple Net $ 4,648.98 $ 4,648.98 $ 4,648.98 $ 4,648.98 $ 5,182.50 $ 5,182.50 $ 5,760.00 $ 5,760.00 $ 5,760.00
- -----------------------------------------------------------------------------------------------------------------------------------
Total Payment $47,445.10 $48,445.10 $48,947.15 $49,947.15 $57,898.75 $59,290.00 $69,120.00 $72,000.00 $74,880.00
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Notes: 1. The lease rate and triple net costs for the Downstairs and Upstairs are exactly those of the
previous lease agreements during years one through five.
- -----------------------------------------------------------------------------------------------------------------------------------
2. The New Area lease begins when Critical Clean vacates that part of the building, which is
anticipated to be on or about November 1, 1999.
- -----------------------------------------------------------------------------------------------------------------------------------
3. The Downstairs lease rate changes to the New Area rate of $18,664.80 on January 1, 2001.
- -----------------------------------------------------------------------------------------------------------------------------------
4. The Upstairs lease rate changes to the New Area rate of $32,752.50 on December 1, 2001.
- -----------------------------------------------------------------------------------------------------------------------------------
5. Triple net expenses are to be audited annually.
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
SUNRISE TELECOM, INC. GREAT OAKS PROPERTIES
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Signature: /s/ XXX Signature: /s/ XXX
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Date: Date:
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-14-
<PAGE>
ADDENDUM #3
TO STANDARD INDUSTRIAL COMMERCIAL MULTI-TENANT LEASE--GROSS
DATED JUNE 22, 1999
FOR 22 GREAT OAKS BLVD., SAN JOSE, CA
FOR SUNRISE TELECOM, INC.
SECURITY DEPOSIT:
Security deposits were received from Sunrise Telecom, Inc. under the two
previous leases for the downstairs area and upstairs floor. The table below
lists those security deposits. Security deposits are restated to reflect the new
area being leased by Sunrise Telecom, Inc. and the new value of the previous two
areas under this lease agreement.
<TABLE>
<CAPTION>
Area Location Currently New Area New Security Total Security
Received Security Deposit Deposit on Deposit to
Security Deposits Downstairs and Receive at
Upstairs Signing of this
Lease Agmt.
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Downstairs $12,500.00 $21,331.20 $ 8,831.20
- --------------------------------------------------------------------------------------------
Upstairs Floor $23,500.00 $35,730.00 $12,230.00
- --------------------------------------------------------------------------------------------
New Area $12,058.80 $12,058.80
- --------------------------------------------------------------------------------------------
Totals $36,000.00 $33,120.00
- --------------------------------------------------------------------------------------------
</TABLE>
ADDENDUM #4
TO STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE--GROSS
DATED JUNE 22, 1999
FOR 22 GREAT OAKS BLVD., SAN JOSE, CA
FOR SUNRISE TELECOM, INC.
UTILITIES
Sunrise Telecom, Inc. is responsible for the costs of gas and electricity (PG&E)
and garbage collection services. These costs are not included in the triple net
costs.
SUNRISE TELECOM, INC. GREAT OAKS PROPERTIES
Signature: /s/ XXX Signature: /s/
------- ---
Date: Date:
------- ---
-15-
<PAGE>
ADDENDUM # 5
The Lessee may at their option cancel this lease with a 120 day written
notice after November 1, 2001.
Triple net expenses are at cost with a 6% management fee.
At the end of this lease the triple net expenses are to be audited and all
moneys to be paid and or returned to the lessee as per the audit.
The cap rate for the triple net expenses is 0.14 cent per foot.
SUNRISE TELECOM, INC. GREAT OAKS PROPERTIES
Signature: /s/ XXX Signature: /s/
------- ---
Date: Date:
------- ---
-16-
<PAGE>
[CHECK DATED JULY 12, 1999
FROM SUNRISE TELECOM, INC.
TO GREAT OAKS PROPERTIES
IN THE AMOUNT OF $10,049]
<PAGE>
[CHECK DATED JULY 12, 1999
FROM SUNRISE TELECOM, INC.
TO GREAT OAKS PROPERTIES
IN THE AMOUNT OF $33,120]
<PAGE>
PURCHASE AND SALE AGREEMENT
---------------------------
AND ESCROW INSTRUCTIONS
-----------------------
THIS AGREEMENT, dated as of November 5, 1999, is entered into by and
between ENZO DRIVE, LLC, a California limited liability company ("Seller"), and
SUNRISE TELECOM, a California Corporation ("Buyer").
----------------------
IN CONSIDERATION of the respective agreements hereinafter set forth, Seller
and Buyer agree as follows:
1. Description of Property. Seller shall sell and convey to Buyer, and
-----------------------
Buyer shall purchase from Seller, subject to the terms-and conditions set forth
herein, that certain real property in the City of San Jose, Santa Clara County,
California, consisting of approximately 6.07 acres of land, as shown on the site
plan attached hereto as EXHIBIT A and more particularly described in EXHIBIT A-1
--------- -----------
attached hereto (the "Land"), together with those certain Building Improvements
to be constructed by Seller thereon as defined in subparagraph 7(a) below. As
used herein, the term "Property" shall mean the Land and the Building
Improvements together with (a) all easements and other rights appurtenant
thereto, and (b) Seller's entire right, title and interest in and to all plans
and specifications for the Building Improvements, all warranties and guaranties
applicable to the Building Improvements, and all governmental permits and
approvals applicable to construction and operation of the Building Improvements.
The parties hereto acknowledge and agree that, as of the date of execution of
this Agreement, the Land is not a separate, legal parcel and is part of a larger
parcel, consisting of approximately 11.01 acres, more or less. Seller intends to
process for approval by the City of San Jose a parcel map which, if approved,
will create the Land as a separate, legal parcel and the balance of the existing
11.01 acre parcel (the "Remainder Parcel") as a separate legal parcel. The
boundaries of the Land as shown on EXHIBIT A are approximate and the true
---------
boundaries of the Land shall be as shown on the approved parcel map to be
processed for approval by Seller. Seller makes no representation or warranty to
Buyer that the City of San Jose will approve the parcel map submitted by Seller
for approval.
2. Purchase Price.
--------------
(a) Amount and Payment. The purchase price of the Property is equal to
------------------
the sum of (i) Thirteen Million Three Hundred Eighty-seven Thousand Three
Hundred Twenty-four and no/100ths Dollars ($13,387,324), as the same may be
adjusted pursuant to the provisions below, plus (ii) an amount equal to the
amount of the Interior Improvements Allowance expended or disbursed by Seller
prior to the Close of Escrow. The parties hereto acknowledge that Seller desires
to construct a building shell, consisting of approximately 91,694 square feet,
on the Land pursuant to the terms and conditions set forth below. In the event
that Seller obtains approval from the City of San Jose for construction of a
building shell on the Land which is more or less than 91,694 square feet, then
the component of the Purchase Price of the Property referred to in clause (i) of
this subparagraph 2(a) shall be adjusted upward or downward, as the case may be,
based upon One Hundred Forty-six and 00/100 Dollars ($146.00) per square foot.
The
-1-
<PAGE>
Purchase Price shall be paid to Seller in immediately available funds at the
Closing (as defined in subparagraph 8(a)) of the purchase and sale contemplated
hereunder. The Deposit (as defined in subparagraph 2 (b) below), together with
an amount equal to the product obtained by multiplying the Deposit by five
percent per annum, commencing as of the date the Deposit is released to Seller
pursuant to the terms of subparagraph 2(b) below, shall be applied against the
Purchase Price at Closing. In addition to the Purchase Price, Buyer shall pay
the Buyer's Shell Contribution and Buyer's Interior Improvement Contribution (as
defined in subparagraph 7(b) below), if any, in the amount and at the time set
forth in subparagraph 7(b). No portion of Buyer's Shell Contribution or Buyer's
Interior Improvement Contribution (nor any of the interest earned thereon) shall
be applied against the Purchase Price.
(b) Deposit. Within three (3) business days after execution of this
-------
Agreement, Buyer shall deliver to Escrow Agent (as defined in subparagraph 8(a)
below) a deposit ("Deposit") of One Hundred Thousand Dollars ($100,000). The
Deposit shall be placed in an interest-bearing account to be approved by Buyer
(the "Deposit Account") with all interest earned thereon while in the Deposit
Account to accrue for the benefit of Buyer, except as expressly provided in
subparagraph 2(c). Upon the satisfaction or waiver of those conditions to
Buyer's obligation to purchase the Property set forth in subparagraphs 5(a),
5(b) and 5(c) below, Buyer shall increase the Deposit in the Deposit Account to
Two Million Six Hundred Seventy-five Thousand Dollars ($2,675,000). Buyer shall
cause and instruct the Escrow Agent (defined below) to release the Deposit to
Seller not later than one (1) business day following the date the conditions set
forth in subparagraphs 5(d) and 5(e) are satisfied. Upon release of the Deposit
to Seller, such Deposit shall be non-refundable to Buyer (in the absence of a
material breach or default by Seller hereunder) but applicable to the Purchase
Price. All of the funds in the Deposit Account and all interest earned thereon
while in the Escrow Account shall be returned to Buyer if Buyer elects to
terminate this Agreement pursuant to any termination right given Buyer under
this Agreement (and Buyer is not in breach or default of any obligation
hereunder at the time of such termination).
(c) LIQUIDATED DAMAGES. IN THE EVENT THE SALE OF THE PROPERTY IS NOT
------------------
CONSUMMATED BECAUSE OF A DEFAULT UNDER THIS AGREEMENT ON THE PART OF BUYER,
SELLER SHALL BE ENTITLED TO THE DEPOSIT TOGETHER WITH ANY INTEREST EARNED
THEREON AS LIQUIDATED DAMAGES. THE PARTIES HAVE AGREED THAT SELLER'S ACTUAL
DAMAGES IN THE EVENT OF A DEFAULT BY BUYER WOULD BE EXTREMELY DIFFICULT OR
IMPRACTICABLE TO DETERMINE. THEREFORE, BY PLACING THEIR INITIALS BELOW, THE
PARTIES ACKNOWLEDGE THAT THE AMOUNT OF THE DEPOSIT (i.e. $2,675,000) HAS BEEN
AGREED UPON, AFTER NEGOTIATION, AS THE PARTIES' REASONABLE ESTIMATE OF SELLER'S
DAMAGES AND AS SELLER'S EXCLUSIVE REMEDY AGAINST BUYER, AT LAW OR IN EQUITY, IN
THE EVENT THAT THIS TRANSACTION DOES NOT CLOSE DUE TO A DEFAULT UNDER THIS
AGREEMENT ON THE PART OF BUYER. THIS LIQUIDATED DAMAGES PARAGRAPH SHALL NOT BE
APPLICABLE TO ANY INDEMNIFICATION OBLIGATIONS OF BUYER UNDER THIS AGREEMENT. IN
THE EVENT THAT THIS TRANSACTION DOES NOT CLOSE DUE TO A DEFAULT UNDER THIS
AGREEMENT ON THE PART OF BUYER, SELLER
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<PAGE>
SHALL HAVE NO OBLIGATION TO RETURN TO BUYER ANY EXPENDED PORTION OF BUYER'S
SHELL CONTRIBUTION OR BUYER'S INTERIOR IMPROVEMENT CONTRIBUTION OR WHICH IS
STILL IN THE BUILDING SHELL FUND OR INTERIOR IMPROVEMENT FUND AS OF THE DATE
THIS AGREEMENT IS TERMINATED AS A RESULT OF BUYER'S BREACH OR DEFAULT UNDER THIS
AGREEMENT (OR ANY OF THE EXHIBITS ATTACHED HERETO).
Buyer's Initials /s/ XXX Seller's Initial /s/ XXX
------- -------
3. Title to the Property.
---------------------
(a) At the Closing, Seller shall convey to Buyer fee title to the
Property by a duly executed and acknowledged Grant Deed substantially in the
form attached hereto as EXHIBIT B (the "Grant Deed"). At Closing, Seller shall
---------
cause Alliance Title Company in San Jose or its underwriter ("Title Insurer") to
issue to Buyer a CLTA standard coverage owner's policy of title insurance in the
amount of the Purchase Price plus Buyer's Shell Contribution and Interior
Improvement Contribution, if any, insuring fee simple title to the Property,
subject only to (i) such exceptions to title as Buyer shall approve pursuant to
subparagraph 5(a) below, (ii) such exceptions as are shown on the approved
parcel map creating the Land as a separate, legal parcel, (iii) that certain
Declaration of Covenants, Conditions and Restrictions and/or Reciprocal Easement
Agreement, as the case may be, which may be executed by Seller prior to the
Closing and which is more particularly described below, (iv) any title matters
caused or created by Buyer or its agents, employees or contractors, and (v) any
title matters that would be shown on an accurate survey of the Land
(collectively, the "Permitted Exceptions"). Any extended coverage or title
endorsements desired by Buyer shall be obtained at Buyer's expense. Issuance of
an ALTA extended coverage owner's policy of title insurance is not a condition
to closing and, if Buyer desires such extended coverage, Buyer shall bear the
cost of any ALTA survey required in order to issue to Buyer an ALTA extended
coverage owner's policy of title insurance.
Prior to the Closing hereunder, Seller intends to execute a Declaration of
Covenants, Conditions or Restrictions and/or Reciprocal Easement Agreement
(collectively, the "CC&Rs") to be recorded against the Land (and the Remainder
Parcel) and which will provide for the operation, maintenance, repair and/or
management of improvements to be used in common and/or on a non-exclusive basis
by the owners, tenants and occupants of the Land and the Remainder Parcel (e.g.
common driveways, parking spaces, storm drains and utilities). Among other
things the CC&Rs shall likely provide that (i) each owner of the Land and the
Remainder Parcel will be responsible for the repair and maintenance of its
parcel, including any shared or jointly used facilities, (ii) if the number of
parking spaces located on the Remainder Parcel or the number of parking spaces
located on the Land does not satisfy the code requirements of the City of San
Jose, then the owner and tenant(s) of the Remainder Parcel and Land, as the case
may be, shall have the right to use, on a non-exclusive basis, a sufficient
number of parking spaces located on the other parcel to satisfy the code
requirements of the City of San Jose, and (iii) the owner and tenant(s) of the
Remainder Parcel shall be entitled to use not less than 200 parking spaces on
the Remainder Parcel (and if such 200 parking spaces are not located on the
Remainder Parcel, then the owner and tenant(s) of the Remainder Parcel shall be
entitled to use
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<PAGE>
on a non-exclusive basis such number of parking spaces on the Land as are equal
to the difference between 200 parking spaces and the number of parking spaces
located on the Remainder Parcel).
(b) Subject to and effective upon the Closing, Seller shall assign to
Buyer and Buyer shall accept, all of Seller's right, title and interest, as of
the Closing Date, in and to the following: (i)all plans and specifications for
the Building Improvements and warranties and guaranties applicable to the
Building Improvements, provided, however, that Seller reserves from the
foregoing assignment such right, title and interest to the extent necessary to
enable Seller to perform its post-Closing obligations as described in
subparagraph 7(e) below and the full right, power and authority to pursue claims
against parties who prepared such plans and specifications and issued such
warranties and guaranties; and (ii) all governmental permits and approvals
applicable to the Building Improvements. Such assignment and acceptance shall be
on the terms and conditions set forth in an Assignment Agreement substantially
in the form attached as EXHIBIT C ("Assignment Agreement"). Prior to the
---------
Closing, Seller and Buyer shall execute and deliver to Escrow Agent two (2)
originals of the Assignment Agreement.
4. Due Diligence and Time for Satisfaction of Conditions.
-----------------------------------------------------
(a) Due Diligence Period. Buyer shall have until December 20, 1999
--------------------
(the "Due Diligence Period") to complete its due diligence investigations with
respect to the Property. Seller has delivered to Buyer and Buyer acknowledges
receipt of all of the items listed on EXHIBIT D attached hereto. Seller makes no
---------
representations regarding the accuracy or completeness of any of the studies,
reports or other documents identified in EXHIBIT D. Notwithstanding anything in
---------
this Agreement to the contrary, Buyer shall have the right to terminate this
Agreement at any time during the Due Diligence Period.
(b) Access to Property. During the Due Diligence Period, Seller shall
------------------
afford authorized representatives of Buyer reasonable access to the Property for
purposes of satisfying Buyer with respect to the representations, warranties and
covenants of Seller contained herein and with respect to satisfaction of any
Conditions Precedent to the Closing contained herein. Buyer hereby agrees to
indemnify, defend and hold Seller and its members and lender holding a security
interest in the Property harmless from and against any and all damages, losses,
claims, actions, causes of action, liabilities, injuries to persons or property,
costs or expenses (including, without limitation, reasonable attorney's fees and
legal costs) arising out of or related to the activities of Buyer or any of its
agents, employees, consultants, contractors or other representatives during
their entry and investigations prior to the Closing. In the event this Agreement
is terminated, Buyer shall restore the Property to the condition in which it was
found. The obligations of Buyer under this subparagraph 4(b) shall survive the
termination of this Agreement or the Closing, as applicable.
Prior to any entry onto the Property by Buyer, or its agents, employees,
consultants, contractors, or other representatives, Buyer shall obtain and
maintain during the term of this Agreement, a general liability policy on an
occurrence basis, identifying Seller as an additional insured, with a combined
single limit of not less than One Million Dollars ($1,000,000). Buyer
-4-
<PAGE>
shall provide Seller with an insurance certificate evidencing such coverage
prior to any entry by Buyer or its agents, employees, consultants or contractors
on the Property. Such liability insurance policy of Buyer shall provide that the
same shall not be cancelled or modified or scope of coverage reduced without at
least thirty (30) days advance written notice to Buyer.
5. Buyer's Conditions to Closing. The following conditions are precedent to
-----------------------------
Buyer's obligation to purchase the Property (the "Conditions Precedent"):
(a) Title. Buyer's review and approval of title to the Property during
-----
the Due Diligence Period. Buyer acknowledges receipt of or shall obtain, if not
previously provided by Seller to Buyer, a current preliminary title report
coveting the Property issued by Escrow Holder, accompanied by copies of all
documents referred to therein (collectively, the "Preliminary Report"). Buyer
shall advise Seller in writing prior to the expiration of the Due Diligence
Period if Buyer objects to any exceptions to title disclosed by the Preliminary
Report. If Buyer fails to object to any title exceptions during the Due
Diligence Period, then Buyer shall be deemed to have approved the condition of
title to the Property and this condition shall be deemed satisfied. It is the
intent of the parties that Title Insurer, Buyer and Seller shall agree on the
form of the title policy to be issued to Buyer upon the Close of Escrow (the
"Proforma Title Policy") during the Due Diligence Period. If Buyer does not
elect to terminate this Agreement prior to the expiration of the Due Diligence
Period, then Buyer shall be deemed to have approved the Proforma Title Policy
(or waived the right to receive the same).
(b) Physical Condition of Property. Buyer's review and approval, on or
------------------------------
prior to the expiration of the Due Diligence Period, of the physical condition
of the Property, including the soil and groundwater conditions, the stability
and load-bearing capacity of the soil, and the presence of Hazardous Materials
(defined below), if any, on or under the Property or the potential for migration
of Hazardous Materials onto the Property from other property in the area. To the
extent the same have not already been delivered to Buyer as provided in Section
4(a) above, Seller shall, within three (3) days following execution of this
Agreement, deliver or make available to Buyer, without representation or
warranty as to accuracy or completeness, copies of any environmental reports,
soils reports, and other studies in Seller's possession or control regarding the
physical condition of the Property and copies of all permits and approvals
obtained by Buyer related to the Property. Buyer's review of the Property may
include such additional environmental tests as Buyer deems necessary, which
shall be performed or arranged by Buyer at Buyer's sole expense, except that any
invasive testing of the soils or groundwater (or building materials testing)
shall require the prior consent of Seller.
(c) Permits and Approvals. Buyer's review and approval, within the Due
---------------------
Diligence Period, of all governmental permits, approvals and other information
relating to the development, construction, operation, use or occupancy of the
Property (collectively, the "Permits"), and all zoning, land use, subdivision,
environmental, building and construction laws and regulations restricting or
regulating or otherwise affecting the use, occupancy or enjoyment of the
Property. Promptly following the execution of this Agreement, Seller shall
deliver to Buyer all Permits (including any applications therefor) which are in
Seller's possession or control and thereafter promptly upon receipt thereof.
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<PAGE>
(d) Tentative Parcel Map Approval. On or before the Close of Escrow,
-----------------------------
Seller shall have obtained approval from the City of San Jose of a tentative
parcel map creating the Land and the Remainder Parcel as two separate, legal
parcels, subject to conditions acceptable to Seller.
(e) Site Development Permit. On or before the Close of Escrow, Seller
-----------------------
shall have obtained approval from the City of San Jose of a site development
permit applicable to the Land and building to be constructed thereon by Seller,
subject to conditions acceptable to Seller.
(f) Seller's Representations and Warranties. All of Seller's
---------------------------------------
representations and warranties contained in or made pursuant to this Agreement
shall have been true and correct upon the execution of this Agreement and shall
be true and correct as of the Closing Date.
(g) Title Policy. As of the Closing Date, Title Insurer shall issue or
------------
be committed to issue a CLTA extended coverage owner's policy of title insurance
insuring Buyer's title to the Property in the amount of the Purchase Price (and
the expended portion, if any, of Buyer's Shell Contribution and Buyer's Interior
Improvement Contribution) and subject only to the Permitted Exceptions (and
other exceptions shown in the Proforma Title Policy approved by Buyer and any
other exceptions to title approved by Buyer) ("Title Policy").
(h) Substantial Completion. As of the Closing Date, the Building
----------------------
Improvements shall have been Substantially Completed substantially in accordance
with the Building Plans and Interior Improvement Plans approved by Buyer and
Seller.
If any of the foregoing conditions are not satisfied or waived by Buyer
within the time period set forth above (the "Condition Period"), Buyer shall
have the right by notice to Seller prior to the expiration of the particular
Condition Period for the unsatisfied condition, to terminate this Agreement and
thereupon the Deposit and all interest thereon while in the Deposit Account (and
the Buyer's Shell Contribution and Interior Improvement Contribution, if
applicable) shall be returned to Buyer. Buyer's failure to so notify Seller
prior to the expiration of the applicable Condition Period shall be deemed to be
Buyer's approval of the condition.
6. Seller's Conditions Precedent. Seller's obligation to sell the
-----------------------------
Property to Buyer is subject to the satisfaction of the following conditions
precedent'
(a) Parcel Map Approval. On or before the Close of Escrow, Seller
-------------------
shall have obtained approval from the City of San Jose of a parcel map creating
the Land and the Remainder Parcel as two separate, legal parcels, subject to
conditions acceptable to Seller.
(b) Site Development Permit. On or before the Close of Escrow, Seller
-----------------------
shall have obtained approval from the City of San Jose of a site development
permit applicable to the Land and building to be constructed thereon by Seller,
subject to conditions acceptable to Seller.
-6-
<PAGE>
(c) Buyer's Performance of Obligations. Buyer shall have performed and
----------------------------------
complied with in all material respects all of the covenants and agreements
required by this Agreement to be performed and complied with by it within the
applicable time period set forth in this Agreement (or any of the Exhibits
attached hereto) for performance of or compliance with such covenants and
agreements. All of Buyer's representations and warranties contained in or made
pursuant to this Agreement shall have been true and correct upon the execution
of this Agreement and shall be true and correct as of the Closing Date.
If any of the conditions in subparagraphs 6(a) or 6(b) are not satisfied
prior to the Close of Escrow hereunder, Seller shall have the right by notice to
Buyer prior to the Close of Escrow, to terminate this Agreement and thereupon
the Deposit and all interest thereon while in the Deposit Account (and the
Buyer's Shell Contribution and Interior Improvement Contribution, if applicable)
shall be returned to Buyer. If the condition in subparagraph 6(c) is not
satisfied (or waived in writing by Seller), then Seller shall have the right by
notice to Buyer to terminate this Agreement and thereupon the Deposit and all
interest thereon while in the Deposit Account shall be released to or retained
by Seller as liquidated damages (and Seller shall have no obligation to return
to Buyer any expended portion of Buyer's Shell Contribution or Buyer's Interior
Improvement Contribution or which is still in the Building Shell Fund or
Interior Improvement Fund as of the date this Agreement is terminated as a
result of Buyer's breach or default under this Agreement or any of the exhibits
attached hereto).
7. Construction of Building Improvements.
-------------------------------------
(a) Building Improvements. Prior to the Closing, Seller shall complete
---------------------
the following improvements to the Land, free from all liens and claims
(collectively, "Building Improvements"), in accordance with the terms of the
Construction Agreement attached hereto as EXHIBIT E, which shall be executed by
---------
Buyer and Seller contemporaneously herewith:
(i) Grading, installation of underground utilities and preparation of
the Land for building foundations, in accordance with plans and specifications
prepared by Seller's project architect ("Project Architect");
(ii) A "Building Shell," as defined in the Construction Agreement,
sufficient to accommodate approximately 91,694 square feet of rentable area,
more or less, in accordance with plans and specifications prepared by the
Project Architect (as described in the Construction Agreement) and the
definition of Building Shell attached to the Construction Agreement as Exhibit
E-3;
(iii) Certain "Land Improvements," as defined in the Construction
Agreement, including surface parking areas, landscaping, drainage, irrigation,
utility service laterals, lighting, curbs, gutters, walkways, driveways,
retaining walls, fencing and gates, planters, sign monuments, and other
improvements, in accordance with plans and specifications prepared by the
Project Architect and in accordance with the "Sitework" element of the Building
Shell definition attached to the Construction Agreement as Exhibit E-3; and
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<PAGE>
(iv) Certain "Interior Improvements," as defined in the Construction
Agreement, in accordance with plans and specifications to be prepared by the
Seller's architect who shall be approved by Buyer and Seller.
(b) Building Improvements Costs. The total cost of construction for
---------------------------
the Land Improvements and the Building Shell including, without limitation,
direct costs of construction, the general contractor's fee, on-site supervision
and overhead, architectural and engineering fees, permits, and insurance shall
be paid by Seller and Buyer as follows: Seller shall provide an allowance of
Fifty and 00/100 Dollars ($50.00) per square foot of Building Shell ("Building
Shell Allowance") to be applied to the hard costs of constructing the Building
Shell (and the Land Improvements) only. For purposes of this Agreement and the
Construction Agreement attached hereto as EXHIBIT E, the parties agree that the
---------
hard costs of constructing the Building Shell (and the Land Improvements) shall
be equal to the contract price for the Building Shell and Land Improvements to
be set forth in a construction contract to be entered into between Seller and
Seller's general contractor, South Bay Construction Company, an affiliate of
Seller, and shall include, without limitation, a profit and overhead fee to be
paid to South Bay Construction Company equal to 4.5% of such costs of
construction. Seller will be responsible for the payment of all costs of
obtaining approvals for the construction of the Building Shell (and Land
Improvements), all costs of designing the Building Shell and Land Improvements
(including, without limitation, architectural and engineering fees for the
Building Shell and Land Improvements) and costs of testing and inspection; it
being understood and agreed that the Building Shell Allowance shall not be
applicable to such costs of obtaining approvals for the construction of the
Building Shell or Land Improvements, costs of designing the Building Shell or
Land Improvements or costs of testing and inspection. If the hard costs of
constructing the Building Shell and Land Improvements are less than the Building
Shell Allowance, then such savings shall be credited to Buyer in the form of a
reduction in the Purchase Price of the Property. Buyer shall pay for that
portion of the total hard costs of constructing the Building Shell and Land
Improvements which is in excess of the Building Shell Allowance ("Buyer's Shell
Contribution"). Prior to the commencement of construction of the Building Shell
and Land Improvements, Buyer shall deposit Buyer's Shell Contribution in an
interest-bearing operating account to be established for the collection and
disbursement of funds in connection with the Building Shell (and Land
Improvements). The term "Building Shell Fund" shall mean the aggregate of (i)
the Building Shell Allowance (or the construction loan proceeds of Seller
allocated thereto) and (ii) Buyer's Shell Contribution. The hard costs of
construction of the Building Shell and Land Improvements shall be paid from the
Building Shell Fund in accordance with the terms of the Construction Agreement
which shall provide that the hard costs of constructing the Building Shell (and
Land Improvements) shall be paid out of the Building Shell Fund in the same
ratio as the contributions required to be made to the fund (the "Building Shell
Contribution Ratios"). If the hard costs of constructing the Building Shell (and
Land Improvements") exceeds the amount of funds in the Building Shell Fund, then
Buyer shall pay such shortfall to Seller within five (5) days following receipt
of written invoice(s) or statements from Seller setting forth the amount of such
shortfall.
The total cost of designing and construction for the Interior Improvements
including, without limitation, direct costs of construction, the general
contractor's fee, on-site supervision
-8-
<PAGE>
and overhead, architectural and engineering fees, permits, and insurance shall
be paid by Seller and Buyer as follows: Seller shall provide an allowance of
Thirty and 00/100 Dollars ($30.00) per square foot of Building Shell to be
applied toward the total cost of the Interior Improvements ("Interior
Improvements Allowance"). The costs of constructing the Interior Improvements
will include, without limitation, a profit and overhead fee to be paid to
Seller's general contractor, South Bay Construction Company, equal to 4.5% of
such costs of construction of the Interior Improvements. Seller anticipates that
the Interior Improvements Allowance will be funded with proceeds of the loan to
be provided by Seller's construction lender. Buyer shall pay for that portion of
the total cost of the Interior Improvements which is in excess of the Interior
Improvements Allowance ("Buyer's Interior Improvement Contribution"). At the
time when invoices for the Interior Improvement work first become due and
payable (or, if earlier, when required by the construction lender), Buyer shall
deposit Buyer's Interior Improvement Contribution in an interest-bearing
operating account to be established for the collection and disbursement of funds
in connection with the Interior Improvements. The term "Interior Improvement
Fund" shall mean the aggregate of (i) the Interior Improvements Allowance (or
the construction loan proceeds allocated thereto) and (ii) Buyer's Interior
Improvement Contribution. The cost of the Interior Improvements shall be paid
from the Interior Improvement Fund in accordance with the terms of the
Construction Agreement which shall provide that the Interior Improvements cost
shall be paid out of the Interior Improvement Fund in the same ratio as the
contributions required to be made to the fund (the "Interior Improvement
Contribution Ratios"). For example, if Buyer's Interior Improvement Contribution
is $916,940 and the Interior Improvement Allowance is $2,750,820, then 25%
(i.e., 916,940/3,667,760) of each dollar disbursed from the Interior Improvement
Fund would come from Buyer's Interior Improvement Contribution and 75% (i.e.,
2,750,820/3,667,760) of each dollar disbursed from the Interior Improvement Fund
would come from the Interior Improvement Allowance. If the total costs to design
and construct the Interior Improvements is less than the Improvement Allowance,
then any unused or undisbursed portion of the Interior Improvement Allowance
will not be advanced or made available by Seller. If the costs of constructing
the Interior Improvements exceeds the amount of funds in the Interior
Improvement Fund, then Buyer shall pay such shortfall to Seller within five (5)
days following receipt by Buyer's Representative of written invoice(s) or
statements from Seller setting forth the amount of such shortfall.
If, at any time prior to the Closing, Buyer defaults under this Agreement
and this Agreement is terminated as a result thereof, Seller shall retain all
right, title and interest in and to the Land Improvements, the Building Shell,
the Interior Improvements and the remaining balance in the Building Shell Fund
and the Interior Improvement Fund; provided that such rights shall be subject to
the rights of Seller's construction lender, if any, as to the same. In such
case, Seller shall have no obligation to reimburse or refund to Buyer for any
portion of Buyer's Shell Contribution or Buyer's Improvements Contribution which
may have been expended prior to the date this Agreement is terminated or which
was still in the Building Shell Fund or Interior Improvement Fund as of the date
this Agreement is terminated as a result of Buyer's default.
(c) Building Shell Plans. The Building Shell and Land Improvements
--------------------
shall be constructed in accordance with the terms of the definition of Building
Shell attached to the Construction Agreement as Exhibit E-3 and the Project
Scope drawings described in Exhibit E-2
-9-
<PAGE>
to the Construction Agreement. Buyer hereby acknowledges that, prior to the
execution of this Agreement, Buyer approved the definition of Building Shell
attached to the Construction Agreement as Exhibit E-3 and the Project Scope
drawings described in Exhibit E-2 to the Construction Agreement. Contracts. No
changes shall be made by Buyer to such Project Scope drawings referred to in
Exhibit E-2 to the Construction Agreement.
(d) Substantial Completion. The Building Improvements shall be deemed
----------------------
substantially completed upon the date which is the earlier to occur of the
following: (i) the date the City has completed its final inspection of the
Building improvements and approved the Building Improvements for occupancy
(i.e., as evidenced by the inspector's signature in the appropriate box on the
Building Permit Inspection Record which indicates that Buyer may legally occupy
the Building; (ii) the date the Project Architect and Project Contractor have
certified that the Building Improvements have been substantially completed in
accordance with the final plans and specifications, as described in the
Construction Agreement, except for any punch list items, (iii) the date the
Building Improvements would have been completed but for any Buyer Caused Delay
(as defined in the Construction Agreement), or (iv) the date Buyer occupies the
Building Shell for the purpose of conducting its business therein.
(e) Post-Closing Obligations. As soon as reasonably possible after
------------------------
Closing, Seller shall at Seller's cost, complete the following: (i) cause any
uncompleted "Punch List" items (as described in Section 6.4 of the Construction
Agreement) to be completed in accordance with the final plans and
specifications, free from all liens and claims; and (ii) cause the City to issue
a certificate of occupancy, or its equivalent for the Building Improvements. If
Seller disburses any portion of the Interior Improvement Allowance after the
Closing (which it shall not be obligated to do hereunder) to cover costs of
constructing any Interior Improvements constructed prior to or following the
Closing, then Buyer shall pay to Seller, as additional consideration for the
Property, within fifteen (15) days following the receipt of written invoice(s)
or statement(s) evidencing the costs so incurred, the amount of such Interior
Improvement Allowance so disbursed or paid by Seller following the Closing.
(f) Mechanic's Lien. If Buyer receives notice, after Closing, of any
---------------
mechanics' or materialmen's lien recorded against the Property, or any claim of
such a lien, arising out of Seller's construction of the Building Improvements,
Buyer shall give prompt written notice thereof to Seller. Seller shall remove
any such lien (or provide to Buyer a bond insuring against any damage to Buyer
as a result of foreclosure of such lien) within thirty (30) days after Seller's
receipt of such notice; provided, however, Seller shall have no obligation to
remove or bond over such lien if such lien arises as a result of Buyer failing
or refusing to pay its share of the costs of the Building Improvements, or
applicable portion thereof. Buyer shall not file or pursue any claim under the
Title Policy relating to any such lien prior to giving the notice and providing
the cure period described above to Seller, but the provisions of this
subparagraph 7(f) are not intended to waive or adversely affect Buyer's rights
or remedies under such Title Policy.
(g) Damage or Destruction. If, prior to the Closing Date, any part of
---------------------
the improvements on the Property is damaged or destroyed by fire or other
casualty, Seller shall
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<PAGE>
promptly give notice thereof to Buyer. If due to such damage or destruction
Seller or its Project Contractor reasonably determines that Project Contractor
will be delayed in substantially completing the Building Improvements beyond
March 30, 2001, or if the damage or destruction is caused by an uninsured
casualty, then Seller may elect, by delivering written notice to Buyer, to
terminate this Agreement, in which event neither party shall have any further
rights or obligations hereunder and Buyer shall be entitled to recover its
Deposit and all interest earned thereon. If Seller does not deliver such written
notice of termination, then: (1) this Agreement shall remain in full force and
effect; (2) Seller shall restore the Property; and (3) the parties shall
continue performance under this Agreement, without modification of any of its
terms and without any reduction in the Purchase Price. Seller shall have no
liabilities or obligations to Buyer, and Buyer shall have no claims for damages
or other remedies against Seller, as a result of such damage or destruction of
the Property. Seller agrees to maintain (either directly or by requiting the
Project Contractor to maintain) an all-risk insurance policy on the Building
Improvements in an amount equal to the replacement cost of the same. Seller
agrees to have Buyer named as an additional insured on such insurance policy;
provided that Buyer's right to any insurance proceeds shall be specifically
subject to the rights of Seller's construction lender under Seller's
construction loan, and limited to Buyer's Building Shell Contribution Ratio and
Buyer's Interior Improvement Contribution Ratio (as defined in subparagraph 7(b)
above), as the case may be, times the insurance proceeds available to Seller and
Buyer; provided in no event shall Buyer receive insurance proceeds in excess of
Buyer's Shell Contribution (for damage to the Building Shell) actually expended
or in excess of Buyer's Interior Improvement Contribution (for damage to the
Interior Improvements) actually expended.
(h) Possession. Possession of the Property shall be delivered by
----------
Seller to Buyer on the Closing Date immediately upon the recordation of the
Grant Deed. All risk of loss and damage to the Property from whatever source
shall be the sole responsibility of Buyer after the Closing. On the Closing
Date, Seller shall deliver to Buyer (or to Escrow Agent for the benefit of
Buyer): (i) copies of the as-built plans and specifications for the Building
Improvements and other documentation required to be delivered to be delivered to
Seller under contract(s) with the Project Contractor; and (ii) keys, codes and
combinations for locks or security devices for the Building Improvements, to the
extent under Seller's control, (iii) the documents listed in subparagraph 8(c)
below, and (iv) copies of all other information and documents relating to the
Property which are in Seller's possession.
8. Closing and Escrow. Alliance Title Company located at 1732 North
------------------
First Street, Suite 175, San Jose, CA. 95112, is designated and authorized to
act as "Escrow Agent" pursuant to the terms of this Agreement. Within three (3)
days after execution of this Agreement by Buyer and Seller, the parties hereto
shall deposit an executed counterpart of this Agreement with Escrow Agent and
this Agreement shall serve as instructions to Escrow Agent for consummation of
the purchase and sale contemplated hereby. Seller and Buyer agree to execute
such additional escrow instructions as may be appropriate to enable the Escrow
Agent to comply with the terms of this Agreement; provided, however, that in the
event of any conflict between the provisions of this Agreement and any
supplementary escrow instructions, the terms of this Agreement shall control.
-11-
<PAGE>
(a) Closing Date. The Closing shall occur on a date five (5) days
------------
following the Substantial Completion of the Building Improvements (as defined
above) (the "Closing Date"). Seller shall exercise diligent efforts to break
ground on the Building Shell not later than April 1, 2000 and exercise diligent
efforts to substantially complete the Building Shell, Land Improvements and
Tenant Improvements by October 1, 2000. Seller makes no representation or
warranty as to the exact date ground will be broken on the Building Shell or the
exact date the Building Improvements will be Substantially Completed, and Seller
shall have no liability to Buyer if the actual Closing .Date does not occur on
or before October 1, 2000. The Close of Escrow on the Property (or the closing
of escrow or the Closing on the Property) shall mean the recordation of the
Grant Deed covering the Land and the Building Improvements constructed thereon.
The date escrow closes or the date of closing of escrow hereunder shall be the
date on which the Grant Deed describing the Land and Building Improvements is
recorded.
(b) Buyer-Caused Delays. In the event the Building Improvements are
-------------------
not completed by October 1, 2000 due to a Buyer-Caused Delay (as defined in the
Construction Agreement), then Buyer shall be responsible for paying the interest
incurred on the construction loan of Seller for the number of days of delay
attributable to a Buyer-Caused Delay. When the total number of days of delay
attributable to Buyer-Caused Delay equal or exceed, or when a proposed change by
Buyer to the Building Improvements will cause the total number of days of delay
attributable to Buyer-Caused Delay to equal or exceed, sixty (60) days, Seller
shall have no obligation to implement the proposed and future changes requested
by Buyer to the extent they would further delay the Close of Escrow and may
proceed to complete the Project without incorporating such requested changes.
The parties hereto agree that Seller shall be responsible for paying
the interest incurred on Seller's construction loan for the number of days of
delay attributable to a Seller Caused Delay (as defined in the Construction
Agreement) and/or a Force Majeure Delay (as defined in the Construction
Agreement). Seller shall not be responsible for any costs, expenses, damages or
liabilities incurred by Buyer as a result of a Force Majeure Delay and Buyer
agrees that it shall be responsible for any direct or indirect costs, expenses
or damages attributable to such Force Majeure Delay, such as leasing additional
space and/or the payment of holdover rent at its existing space.
(c) Delivery of Seller's Document. At or before the Closing (except to
-----------------------------
the extent otherwise specifically provided below), Seller shall deliver to Buyer
(or to Escrow Agent for the benefit of Buyer) the following:
(i) a duly executed and acknowledged Grant Deed, conveying
title to the Property to Buyer;
(ii) two (2) duly executed originals of the Assignment
Agreement;
(iii) An affidavit pursuant to Section 1445(b)(2) of the Internal
Revenue Code that Seller is not a "foreign person" within the meaning of Section
1445(f)(3) of the Internal Revenue Code;
-12-
<PAGE>
(iv) A properly executed California Form 590 certifying that
Seller has a permanent place of business in California or is qualified to do
business in California. If Seller fails to deliver any such Form 590, Buyer
shall not be excused from its obligation to consummate the transactions
contemplated herein, but rather may deduct and withhold from the Purchase Price
an amount equal to three and one-third percent (3 1/3%) of the "sales price of
the California real property conveyed" in connection with the transactions
contemplated herein, as defined and required by the State Withholding
Provisions; and
(v) Title Policy to be issued by Title Insurer.
(d) Deliver of Purchase Price. At or before the Closing, Buyer shall
-------------------------
deliver to Seller:
(i) the Purchase Price; and
(ii) two (2) duly executed originals of the Assignment Agreement.
(e) Designation Agreement. Seller and Buyer shall each deposit such
---------------------
other instruments as are reasonably required by the escrow holder or otherwise
required to close the escrow and consummate the purchase of the Property in
accordance with the terms hereof, including, without limitation, an agreement
(the "Designation Agreement") designating Escrow Agent as the "Reporting Person"
for the transaction pursuant to Section 6045(e) of the Internal Revenue Code,
and executed by Seller, Buyer and Escrow Agent. The Designation Agreement shall
be substantially in the form attached hereto as Exhibit F.
---------
(f) Prorations. General real estate taxes and assessments payable for
----------
fiscal year 2000-2001 shall be prorated between Seller and Buyer as of the
Closing Date based on the most recent official information available in the
office of the taxing entity. Buyer shall be solely responsible for any
supplemental assessments that may be imposed against the Property as a result of
the sale of the Property to Buyer.
(g) Closing Costs. Seller shall pay the Santa Clara County documentary
-------------
transfer tax and the premium for a CLTA standard owner's policy of title
insurance (and Buyer shall pay the excess premium associated with the issuance
of an ALTA owner's extended coverage Title Policy, if obtained by Buyer). City
of San Jose transfer taxes shall be paid fifty percent (50%) by Buyer and fifty
percent (50%) by Seller. All other costs and charges of the escrow for the sale
not otherwise provided for in this subparagraph 8(g) or elsewhere in this
Agreement (including, without limitation, escrow fees and recording fees) shall
be allocated in accordance with the closing customs for Santa Clara County. Each
party shall bear its own attorney's fees incurred in connection with the
drafting and negotiation of this Agreement.
9. Representations and Warranties of Seller. Seller hereby represents and
----------------------------------------
warrants to and covenants with Buyer as follows:
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<PAGE>
(a) Authority. Seller is a limited liability company duly organized
---------
and validly existing and in good standing under the laws of the State of
California; this Agreement and all documents executed by Seller which are to be
delivered to Buyer at the Closing are and at the time of Closing will be duly
authorized, executed and delivered by Seller, are and at the time of Closing
will be legal, valid and binding obligations of Seller enforceable against
Seller in accordance with their respective terms, and do not, and at the time of
Closing will not, violate any provision of any agreement or judicial order to
which Seller or the Property is subject.
(b) Governmental Proceedings. As of the date of execution of this
------------------------
Agreement, Seller has received no written notice of any condemnation, zoning or
other land-use regulation proceedings, either instituted or planned to be
instituted, which would detrimentally affect the use or operation of the
Property, nor has Seller received written notice of any special assessment
proceedings affecting the Property (other than as set forth in the Preliminary
Report). From the date hereof through the Closing Date, Seller shall notify
Buyer promptly of any such proceedings of which Seller becomes aware.
(c) Litigation. There is no litigation pending or, to the best of
----------
Seller's knowledge, threatened against Seller or the Property that might
detrimentally affect the use or operation of the Property for its intended
purpose or the ability of Seller to perform its obligations under this
Agreement. From the date hereof through the Closing Date, Seller shall notify
Buyer promptly of any such litigation of which Seller becomes aware.
(d) No Other Sales Contracts. Seller has not entered into any other
------------------------
contracts for the sale of the Property, other than this Agreement, and to the
actual knowledge of Seller, no other person or entity has any right of first
refusal, option or other preferential right to purchase the Property or any
interest therein.
(e) Non-Foreign Person. Seller is not a "foreign person" within the
------------------
meaning of Section 1445(f)(3) of the Internal Revenue Code.
(f) Hazardous Materials. Seller has received no written notice that
-------------------
the Property is in violation of any federal, state local or administrative
agency ordinance, law, role, regulation, order or requirement relating to
environmental conditions or Hazardous Materials. For the purposes hereof,
"Hazardous Material" shall mean any substance, chemical, waste or other material
which is listed, defined or otherwise identified as "hazardous" or "toxic" under
any federal, state, local or administrative agency ordinance or law, including,
without limitation, the Comprehensive Environmental Response, Compensation and
Liability Act, 42 U.S.C. (S)9601 et seq.; the Resource Conservation and Recovery
Act, 42 U.S.C. (S)6901 et seq.; the Federal Water Pollution Control Act, 33
U.S.C. (S)1251 et seq.; California Hazardous Substance Account Act, California
Health & Safety Code (S)25300 et seq.; California Hazardous Waste Control Law,
California Health & Safety Code (S)22100 et seq.; California Porter-Cologne
Water Quality Act, California Water Code (S)13000 et seq.; California
Underground Storage Tank Act, California Health & Safety Code (S)25280 et seq.;
or any regulation, order, rule or requirement adopted thereunder, as well as any
formaldehyde, urea, polychlorinated biphenyl, petroleum, petroleum
-14-
<PAGE>
product or by-product, crude oil, natural gas, natural gas liquids, liquefied
natural gas, or synthetic gas usable for fuel or mixture thereof, radon, and
asbestos.
(g) Bankruptcy. There are no attachments, execution proceedings,
----------
assignments for the benefit of creditors, insolvency, bankruptcy, or similar
proceedings pending or, to the actual knowledge of Seller, threatened against
Seller. From the date hereof through the Closing Date, Seller shall notify Buyer
promptly of any such proceedings of which Seller becomes aware.
For the purposes of the representations and warranties made pursuant to
this paragraph 9, a statement that a fact is true to "the actual knowledge of
Seller" means that neither Scott Trobbe nor James Mair actually knows such
statement to be untrue. Except for the representations and warranties set forth
in this paragraph 9 or elsewhere in this Agreement or any document delivered
pursuant to the terms of this Agreement, Seller makes no warranties or
representations regarding the Property, including the physical, economic or
other characteristics of the Property.
If, prior to the Close of Escrow hereunder, Buyer discovers or is informed
of any fact or condition which would make any of Seller's representations or
warranties in this paragraph 9 untrue or inaccurate in a material respect, and
such fact or condition is material to Buyer's decision whether to purchase the
Property, then Buyer shall have the right to terminate this Agreement by
delivery of written notice to Seller within ten (10) days following the date
such fact or condition is discovered or becomes known to Buyer. Time is of the
essence as to the delivery of such notice of termination. If Buyer timely
delivers such notice of termination, then all rights and obligations hereunder
shall cease (except for those that expressly survive termination of this
Agreement) and, as Buyer's sole and exclusive remedy, the Deposit shall be
returned to Buyer and Seller shall refund to Buyer its Building Shell
Contribution and Interior Improvement Contribution. If, prior to the Close of
Escrow hereunder, Buyer discovers or is informed of any fact or condition which
would make any of Seller's representations or warranties in this paragraph 9
untrue or inaccurate in a material respect and Buyer does not terminate this
Agreement as provided above based on a breach by Seller of any such
representation or warranty, then Buyer shall be deemed to have waived all rights
and remedies available against Seller with respect to any breach of any
representation or warranty set forth in paragraph 9 above.
Buyer hereby acknowledges that, as of the close of escrow hereunder, it
shall have inspected the Property and observed its physical characteristics and
conditions. As of the close of escrow, Buyer waives any and all objections to
said physical characteristics and conditions of the Property which would
reasonably be disclosed by such inspection. Buyer hereby agrees that if Buyer or
any of its agents, employees or consultants discover any Hazardous Materials on,
in or under the Land or Improvements in connection with its investigation or
environmental assessment of the Property under Section 4(b) above or otherwise
(excepting therefrom any Hazardous Materials caused to be present in, on or
under the Land or Improvements by Seller or its agents or employees), and if
Buyer elects nevertheless to close escrow under this Agreement (and escrow so
closes), then Seller shall have no obligation to Buyer hereunder to clean up or
remediate such environmental conditions so discovered by Buyer or its agents,
employees or consultants (and not caused to be present by Seller or its agents
or employees) and Buyer waives all claims against
-15-
<PAGE>
Seller with respect to such Hazardous Materials so discovered by Buyer or its
agents, employees or consultants. Buyer further acknowledges and agrees that, if
escrow closes hereunder, the Property shall be accepted by Buyer in its then "as
is" condition and that no physical, environmental, title or economic condition
of the Property shall affect the rights of either party hereto. As of the close
of escrow hereunder, Buyer shall have investigated and possessed knowledge of
operative or proposed governmental laws and regulations including, without
limitation, zoning, environmental and land use laws and regulations to which the
Property may be subject. Except for those representations and warranties set
forth in Section 9 above, Buyer has neither received nor relied upon any
representations concerning such laws and regulations made by Seller or any other
person acting on or in behalf of Seller.
BUYER SPECIFICALLY ACKNOWLEDGES AND AGREES BUYER IS NOT RELYING ON ANY
---
REPRESENTATIONS OR WARRANTIES OF ANY KIND WHATSOEVER, EXPRESS (EXCEPT AS
EXPRESSLY SET FORTH IN THIS AGREEMENT) OR IMPLIED, FROM SELLER, ITS AGENTS, OR
BROKERS AS TO ANY MATTERS CONCERNING THE PROPERTY, INCLUDING WITHOUT LIMITATION:
(I) THE QUALITY, NATURE, ADEQUACY AND PHYSICAL CONDITION OF THE PROPERTY,
INCLUDING, BUT NOT LIMITED TO, THE STRUCTURAL ELEMENTS, FOUNDATION, ROOF,
APPURTENANCES, ACCESS, LANDSCAPING, PARKING FACILITIES AND THE ELECTRICAL,
MECHANICAL, HVAC, PLUMBING, SEWAGE, AND UTILITY SYSTEMS, FACILITIES AND
APPLIANCES, (II) THE QUALITY, NATURE, ADEQUACY, AND PHYSICAL CONDITION OF SOILS,
GEOLOGY AND ANY GROUNDWATER, (III) THE EXISTENCE, QUALITY, NATURE, ADEQUACY AND
PHYSICAL CONDITION OF UTILITIES SERVING THE PROPERTY, (IV) THE DEVELOPMENT
POTENTIAL OF THE PROPERTY, AND THE PROPERTY'S USE, HABITABILITY,
MERCHANTABILITY, OR FITNESS, SUITABILITY, VALUE OR ADEQUACY OF THE PROPERTY FOR
ANY PARTICULAR PURPOSE, (V) THE ZONING OR OTHER LEGAL STATUS OF THE PROPERTY OR
ANY OTHER PUBLIC OR PRIVATE RESTRICTIONS ON USE OF THE PROPERTY, (VI) THE
COMPLIANCE OF THE PROPERTY OR ITS OPERATION WITH ANY APPLICABLE CODES, LAWS,
REGULATIONS, STATUTES, ORDINANCES, COVENANTS, CONDITIONS AND RESTRICTIONS OF ANY
GOVERNMENTAL OR QUASI-GOVERNMENTAL ENTITY OR OF ANY OTHER PERSON OR ENTITY,
(VII) THE PRESENCE OF HAZARDOUS MATERIALS ON, UNDER OR ABOUT THE PROPERTY OR THE
ADJOINING OR NEIGHBORING PROPERTY, (VIII) THE QUALITY OF ANY LABOR AND MATERIALS
USED IN ANY IMPROVEMENTS ON THE PROPERTY, (IX) THE CONDITION OF TITLE TO THE
PROPERTY, AND (X) THE ECONOMICS OF THE OPERATION OF THE PROPERTY. BUYER
ACKNOWLEDGES THAT IT SHALL USE ITS INDEPENDENT JUDGMENT AND MAKE ITS OWN
DETERMINATION AS TO THE SCOPE AND BREATH OF THE DUE DILIGENCE INVESTIGATION
WHICH IT SHALL MAKE RELATIVE TO THE PROPERTY. EXCEPT AS EXPRESSLY SET FORTH IN
THIS AGREEMENT, BUYER SHALL RELY UPON ITS OWN INVESTIGATION OF THE PHYSICAL,
ENVIRONMENTAL, ECONOMIC AND LEGAL CONDITION OF THE PROPERTY (INCLUDING, WITHOUT
LIMITATION, WHETHER THE PROPERTY IS LOCATED IN ANY AREA WHICH IS DESIGNATED AS A
SPECIAL FLOOD HAZARD
-16-
<PAGE>
AREA, DAM FAILURE INUNDATION AREA, EARTHQUAKE FAULT ZONE, SEISMIC HAZARD ZONE,
HIGH FIRE SEVERITY AREA OR WILDLAND FIRE AREA, BY ANY FEDERAL, STATE OR LOCAL
AGENCY). BUYER UNDERTAKES AND ASSUMES THE RISKS ASSOCIATED WITH ALL MATTERS
PERTAINING TO THE PROPERTY'S LOCATION IN ANY AREA DESIGNATED AS A SPECIAL FLOOD
HAZARD AREA, DAM FAILURE INUNDATION AREA, EARTHQUAKE FAULT ZONE, SEISMIC HAZARD
ZONE, HIGH FIRE SEVERITY AREA OR WILDLAND FIRE AREA, BY ANY FEDERAL, STATE OR
LOCAL AGENCY. THE PROVISIONS OF THIS PARAGRAPH SHALL INDEFINITELY SURVIVE THE
CLOSE OF ESCROW HEREUNDER OR TERMINATION OF THIS AGREEMENT AND SHALL NOT BE
MERGED INTO THE GRANT DEED.
Without limiting the above, as of the Close of Escrow, Buyer waives on
behalf of itself and its agents, employees, affiliates, partners, shareholders,
members, successors and assigns, any and all right to recover from Seller and
from Seller's members, the affiliates of Seller and the members, partners,
trustees, shareholders, directors, officers, employees and agents of each of
them (collectively, the "Seller Related Parties"), and forever releases and
discharges Seller and the Seller Related Parties from any and all damages,
claims, losses, liabilities, penalties, fines, liens, judgments, costs or
expenses whatsoever (including, without limitation, attorneys' fees and costs),
whether direct or indirect, known or unknown, foreseen or unforeseen, that may
arise on account of or in any way be connected with the Property, including
without limitation title to the Property, the physical condition of the Property
or any law or regulation applicable thereto (including, without limitation, the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended (42 U.S.C. Sections 9601 et seq.), the Resource Conservation and
-- ---
Recovery Act of 1976 (42 U.S.C. Sections 6901 et seq.), the Federal Water
-- ---
Pollution Control Act (33 U.S.C. Sections 1251 et seq.), the Toxic Substance
-- ---
Control Act (15 U.S.C. Sections 2601 et seq.), the California Hazardous Waste
-- ---
Control Law (California Health and Safety Code Sections 25100 et seq.), the
-- ---
Porter-Cologne Water Quality Control Act (California Water Code Sections 13000
et seq.), and the Safe Drinking Water and Toxic Enforcement Act (California
- -- ---
Health and Safety Code Section 25249.5 et seq.)). The above waiver and release
-- ---
shall not constitute a waiver or release of any warranty claims that Buyer may
have against South Bay Construction Company or any of its subcontractors or the
Project Architect based on the design or construction of the Building
Improvements.
In connection with the immediately preceding paragraph, Buyer
expressly waives the benefits of Section 1542 of the California Civil Code,
which provides 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, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS
SETTLEMENT WITH THE DEBTOR."
Buyer's Initial /s/ XXX Seller s Initials /s/ XXX
------- -------
10. Representation and Warranties of Buyer. Buyer hereby represents and
--------------------------------------
warrants to Seller as follows: this Agreement and all documents executed by
Buyer which are to be delivered to Seller at the Closing are or at the time of
Closing will be duly authorized, executed
-17-
<PAGE>
and delivered by Buyer, and are or at the Closing will be legal, valid and
binding obligations of Buyer, and do not and at the time of Closing will not,
violate any provisions of any agreement or judicial order to which Buyer is
subject.
11. Cooperation. Seller hereby irrevocably authorizes Buyer and its
-----------
agents during the Due Diligence Period to make all inquiries with and
applications to any third party, including any governmental authority, as Buyer
may reasonably require to complete its due-diligence. Buyer shall cooperate and
do all acts as may be reasonably required or requested by Seller with regard to
Seller's obtaining its contemplated construction loan from its construction
lender. Buyer agrees to execute any documents which may be reasonably required
by Seller's construction lender as a condition to making the construction loan.
12. General.
-------
(a) Notices. Any notice, consent or approval required or permitted to
-------
be given undo this Agreement shall be in writing and shall be deemed to have
been given upon (i) hand delivery, or (ii) one (1) day after being deposited
with Federal Express or another reliable overnight courier service or
transmitted by facsimile telecopy, and addressed as follows:
If to Seller: Enzo Drive, LLC
511 Division Street
Campbell, CA 95008
Attn: Dan Rosenbaum and Scott Trobbe
Phone: 408-379-0400
Fax: 408-379-3229
With a copy to: Berliner Cohen
10 Almaden Blvd., 11th Floor
San Jose, CA 95113
Attn: Sam Farb, Esq.
Phone: 408-286-5800
Fax: 408-998-5388
If to Buyer: Sunrise Telecom
22 Great Oaks Boulevard
San Jose, CA 95119
Attn: Peter Eidelman
Phone: 408-363-8000
Fax: 408-363-8313
or such other address as either party may from time to time specify in writing
to the other.
(b) Brokers and Finders. Neither party has had any contact or dealings
-------------------
regarding the Property, or any communication in connection with the subject
matter of this
-18-
<PAGE>
transaction, through any real estate broker, agent or person other than CPS who
can claim a right to a commission or finder's fee in connection with the sale
contemplated herein. If, and only if, escrow closes hereunder, then Seller shall
pay CPS a brokerage commission pursuant to the terms of a separate written
agreement between Seller and CPS. If any broker or finder perfects a claim for a
commission or finder's fee based upon any such contact, dealings or
communication, the party through whom the broker or finder makes its claim shall
be responsible for said commission or fee and all costs and expenses (including
reasonable attorneys' fees) incurred by the other party in defending against the
same. The provisions of this paragraph shall survive the Closing.
(c) Successors and Assigns. This Agreement may not be assigned by
----------------------
Buyer without Seller's prior written consent. Notwithstanding the foregoing,
Seller agrees that Buyer may assign its rights under this Agreement to an
"Affiliate" of Buyer; provided that such an assignment shall not relieve Buyer
from any of its obligations hereunder and Seller shall continue to have the
right to proceed directly against Buyer in the event Buyer's Affiliate fails to
timely perform any of the Buyer's obligations hereunder. For purposes of the
subparagraph 11 (c) the term "Affiliate" shall mean a legal entity which is
controlled by, is under common control with, or which controls Buyer. This
Agreement may be assigned by Seller to an entity approved by Buyer (which
approval shall not be unreasonably withheld or delayed). Seller hereby agrees
that Buyer shall not be deemed unreasonable if Buyer fails to approve an
assignment of this Agreement by Seller to a third party, where such third party
does not have a net worth at least equal to that of Seller as of the date of
execution of this Agreement. Subject to the foregoing, this Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors, heirs, administrators and assigns.
(d) Amendments. Except as otherwise provided herein, this Agreement
----------
may be amended or modified only by a written instrument executed by Seller and
Buyer.
(e) Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the State of California.
(f) Merger of Prior Agreements. This Agreement and the exhibits hereto
--------------------------
(including, without limitation, the Construction Agreement attached hereto as
EXHIBIT E, which shall be executed by Buyer and Seller contemporaneously
- ---------
herewith) constitute the entire agreement between the parties and supersede all
prior agreements and understandings between the parties relating to the subject
matter hereof.
(g) Enforcement. If either party hereto fails to perform any of its
-----------
obligations under this Agreement or if a dispute arises between the parties
hereto concerning the meaning or interpretation of any provision of this
Agreement, then the defaulting party or the party not prevailing in such dispute
shall pay any and all costs and expenses incurred by the other party on account
of such default and/or in enforcing or establishing its rights hereunder,
including, without limitation, court costs or costs of arbitration and
attorneys' fees and disbursements. Any such attorneys' fees and other expenses
incurred by either party in enforcing a judgment in its favor under this
Agreement shall be recoverable separately from and in addition to any other
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<PAGE>
amount included in such judgment, and such attorneys' fees obligation is
intended to be severable from the other provisions of this Agreement and to
survive and not be merged into any such judgment.
(h) Time of the Essence. Time is of the essence of this Agreement.
-------------------
(i) Severability. If any provision of this Agreement or the
------------
application thereof to any person, place or circumstance shall be held by a
court of competent jurisdiction to be invalid, unenforceable or void, the
remainder of this Agreement and such provisions as applied to other persons,
places and circumstances shall remain in full force and effect.
13. Like-Kind Exchange. Each party agrees to reasonably cooperate
------------------
with the other in the event a party attempts to effectuate a Section 1031
exchange with respect to the Property. Such cooperating party shall not be
required to obtain title to any exchange or target property, execute any
promissory note or other document or instrument which would or could impose
personal liability upon such cooperating party, or incur any additional expense,
cost or liability whatsoever (including, but not limited to, liabilities or
warranties of title, or assumption of indebtedness) with regard to the Section
1031 exchange or exchanges. The party engaging in such Section 1031 exchange
hereby agrees to indemnify and hold harmless the other party from any claim,
damage, liability, demand, cause of action, loss, cost, or expense (including,
without limitation, reasonable attorney's fees) such other party may suffer or
incur as a result of such other party's participation in the aforesaid exchange
or exchanges. Notwithstanding the foregoing, each party's agreement hereunder to
participate in a tax-deferred exchange or exchanges shall not extend the Closing
date hereunder. Neither party shall, by this Agreement or acquiescence to the
exchange contemplated by this Paragraph 13, (a) have its rights under this
Agreement affected or diminished in any manner or (b) be responsible for
compliance with or be deemed to have warranted to the other party that any
exchange in fact complies with Section 1031 of the Internal Revenue Code of
1986, as amended. The obligations of Seller and Buyer under this Paragraph 13
shall survive the Close of Escrow.
14. Default. In the event of a default of Buyer under the terms of
-------
this Agreement, Seller's rights and remedies shall be limited to those set forth
in subparagraph 2(c) herein; provided however Seller shall retain any rights
against Buyer that Seller may have hereunder in connection with Buyer's (or its
consultant's) activities on the Land. In the event of a default of Seller under
the terms of this Agreement, Buyer shall be entitled to avail itself of all of
its rights which it may have at law or in equity by reason of such default,
including the right to seek specific performance of this Agreement or terminate
this Agreement and have the Deposit and the interest earned thereon and Buyer's
Building Shell Contribution and Buyer's Initial Improvement Contribution (and
any interest thereon) returned to Buyer.
-20-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
SELLER BUYER
- ------ -----
ENZO DRIVE, LLC SUNRISE TELECOM
a California limited liability company a
By: /s/ XXX By: /s/ XXX
-------------------- --------------------
Its: Member Its: CFO
-------------------- --------------------
By: By:
-------------------- --------------------
Its: Its:
-------------------- --------------------
ESCROW AGENT
- ------------
ALLIANCE TITLE COMPANY
By:
--------------------
Its:
--------------------
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<PAGE>
[GRAPHIC OF EXHIBIT A]
STREET MAP SHOWING LOCATION OF PROPERTY
OF A NEW TWO STORY BUILDING FOR
ENZO DRIVE
ENZO DRIVE AT THE FERRARI DRIVE
SAN JOSE, CALIFORNIA
<PAGE>
EXHIBIT A
SITE ANALYSIS
PARKING
NEW BUILDING 91,694 SQ. FT.
91,694 X .85 = 77,940 NET SQ. FT.
PARKING PROVIDED = 325 CARS
PARKING RATIO - 325/77.94 4.2/1000
EXISTING BUILDING 58,785 SQ. FT.
58,785 X .85 = 49,967 NET SQ. FT.
PARKING PROVIDED = 234 CARS
PARKING RATIO - 234/49.98 4.7/1000
TOTAL BOTH BUILDINGS 150,479 SQ. FT.
150,479 X .85 = 127,907 NET SQ. FT.
PARKING PROVIDED = 559 CARS
PARKING RATIO - 559/127.9 4.4/1000
COVERAGE:
NEW BUILDING
SITE AREA 8.07 ACRES (264,407 SQ. FT.)
BUILDING (F.A.R.) 91,694 SQ. FT. = 34%
BUILDING FOOTPRINT 45,847 SQ. FT. = 17%
LANDSCAPE 125,605 SQ. FT. = 48%
PARKING 92,955 SQ. FT. = 35%
EXISTING BUILDING
SITE AREA 4.94 ACRES (264,407 SQ. FT.)
BUILDING (F.A.R.) 58,785 SQ. FT. = 34%
BUILDING FOOTPRINT 58,785 SQ. FT. = 17%
LANDSCAPE 62,251 SQ. FT. = 48%
PARKING 94,150 SQ. FT. = 35%
TOTAL SITE
SITE AREA 11.01 ACRES (264,407 SQ. FT.)
BUILDING (F.A.R.) 150,479 SQ. FT. = 34%
BUILDING FOOTPRINT 104,632 SQ. FT. = 17%
LANDSCAPE 187,858 SQ. FT. = 48%
PARKING 187,105 SQ. FT. = 35%
<PAGE>
EXHIBIT B
FORM OF GRANT DEED
------------------
Order No. SPACE ABOVE THIS LINE FOR RECORDER'S USE
Escrow or Loan No.
RECORDING REQUESTED BY AND
WHEN RECORDED MAIL TO:
- -------------------------------------------------------------------------------
Mail Tax Statements to:
- ---------------------------
- ---------------------------
- ---------------------------
Signature of Declarant or Agent determining tax --
Firm Name
- -----------------------------------------------------------------------------
A.P.N.
GRANT DEED
FOR VALUABLE CONSIDERATION, receipt of which is hereby acknowledged,
ENZO DRIVE, LLC a California limited liability company hereby GRANT(S) to
that certain real property in the City of San Jose, County of Santa Clara, State
of California, more particularly described in EXHIBIT A attached hereto and
---------
incorporated herein by this reference.
This conveyance is made subject to all liens and encumbrances of record.
Dated: ENZO DRIVE, LLC
--------------- a California limited liability company
By:
-----------------------------------
Its:
-----------------------------------
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<PAGE>
STATE OF CALIFORNIA
ss.
COUNTY OF
On , before me, , personally appeared ,
[ ] personally known to me -OR- [ ] proved to me on the basis of satisfactory
evidence to be the person(s) whose name(s) is/are subscribed to the within
instrument and acknowledged to me that he/she/they executed the same in
his/her/their authorized capacity(ies), and that by his/her/their signature(s)
on the instrument the person(s), or the entity upon behalf of which the
person(s) acted, executed the instrument
WITNESS my hand and official seal.
---------------------------------------------------------
SIGNATURE OF NOTARY
CAPACITY CLAIMED BY SIGNER
- -----------------------------
Though statute does not require the Notary to fill in the data below, doing so
may prove invaluable to persons relying on the document.
[ ] INDIVIDUAL
[ ] CORPORATE OFFICERS(S)
- -----------------------------
Title(s)
[ ] PARTNER(S) [ ] LIMITED
[ ] GENERAL
[ ] ATTORNEY-IN-FACT
[ ] TRUSTEE(S)
[ ] GUARDIAN/CONSERVATOR
[ ] OTHER:
----------------------
----------------------
SIGNER IS REPRESENTING:
- ----------------------
Name of Person(s) or Entity(ies)
- -----------------------------
- -----------------------------
-2-
<PAGE>
EXHIBIT C
ASSIGNMENT AGREEMENT
--------------------
THIS ASSIGNMENT AGREEMENT ("Assignment") is made as of
, , by ENZO DRIVE, LLC, a California limited
liability company ("Assignor") in favor of SUNRISE TELECOM, a
("Assignee").
A. Simultaneously herewith, Assignor shall sell to Assignee that certain
land ("Land") and all of the improvements thereon ("Improvements") described in
that certain Purchase and Sale Agreement dated , 1999 ("Purchase
Agreement") between Assignor and Assignee.
B. In connection with the foregoing conveyance, Assignor desires to
simultaneously assign to Assignee, and Assignee desires to accept and assume
from Assignor, Assignor's entire right, title and interest in those contracts
and other agreements which relate to the construction, development and/or
operation of the Land and Improvements on the terms and conditions set forth
herein. All capitalized terms not otherwise defined herein shall have the same
meanings given to such terms in the Purchase Agreement.
NOW, THEREFORE, for good and valuable consideration, Assignor and Assignee
agree as follows:
1. Assignment. Assignor hereby assigns, transfers, sets over and delivers
----------
to Assignee, to the extent assignable or transferable, all of Assignor's right,
title and interest in and to all preliminary and final development plans and
specifications, architectural drawings (excluding, any copyright owned by the
architect who prepared such drawings), environmental reports, map approvals, and
any and all of the warranties and guaranties in or relating to the construction
agreement for construction of the Land Improvements, Building Shell Improvements
and Interior Improvements, as the case may be (collectively, the "Agreements"),
as the same may be amended or otherwise modified from time to time. The
foregoing assignment encompasses the right of Assignee to receive proceeds of
any insurance, indemnity, warranty or guaranty with respect to any of the
Agreements.
Assignor reserves from the foregoing assignment of plans and specifications
for the Improvements and warranties and guaranties applicable to the
Improvements such right, title and interest to the extent necessary to enable
Assignor to perform its post-closing obligations as described in subparagraph
7(e) of the Purchase Agreement referred to above and the full right, power and
authority to pursue claims against parties who prepared such plans and
specifications and issued such guaranties and warranties.
2. Further Assurances. Assignor shall execute, at its cost, upon
------------------
Assignee's reasonable request, any documents necessary to cause the specific
assignment of any particular Agreements which are necessary, proper or desirable
in Assignee's judgment to carry out the purposes of this Assignment.
-1-
<PAGE>
3. Obligations. Assignee shall observe, perform, and discharge duly
-----------
and punctually all material obligations, terms, covenants, conditions and
warranties to be performed by it pursuant to the Agreements.
4. Counterparts. This Assignment may be executed in any number of
------------
counterparts, each of which counterparts shall be deemed to be an original and
all of which together shall constitute but one and the same Assignment.
5. Enforcement. If either party hereto fails to perform any of its
-----------
obligations under this Agreement or if a dispute arises between the parties
hereto concerning the meaning or interpretation of any provision of this
Agreement, then the defaulting party or the party not prevailing in such dispute
shall pay any and all costs and expenses incurred by the party on account of
such default and/or in enforcing or establishing its rights hereunder,
including, without limitation, court costs or costs of arbitration and
attorneys' fees and disbursements. Any such attorney's fees and other expenses
incurred by either party enforcing a judgement in its favor under this Agreement
shall be recoverable separately from and in addition to any other amount
included in such judgement, and such attorneys' fees obligation is intended to
be severable from the other provisions of this Agreement and to survive and not
be merged into any such judgement.
6. Governing Law. This Assignment shall be governed by and
-------------
construed in accordance with the laws of the State of California.
IN WITNESS WHEREOF, Assignor and Assignee have executed this
Assignment on the day and year first above written.
ASSIGNOR: ASSIGNEE:
ENZO DRIVE, LLC SUNRISE TELECOM,
a California limited liability company a
--------------------------------
By By
--------------------------------- --------------------------------
Its Its
--------------------------------- --------------------------------
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<PAGE>
EXHIBIT D
LIST OF DOCUMENTS DELIVERED TO AND RECEIVED BY BUYER
Sunrise Telecom, a , hereby acknowledges that it has received
------------
the following documents from ENZO DRIVE, LLC.:
1. Phase I Environmental Site Assessment prepared by ATC Associates dated
August 8, 1997
2. Geotechnical Investigation and Pavement Design prepared by United Soil
Engineering dated August 12, 1997
-2-
<PAGE>
EXHIBIT E
---------
CONSTRUCTION AGREEMENT
----------------------
This Construction Agreement ("Agreement") dated as , 1999, is made by
and between ENZO DRIVE, LLC, a California limited liability company ("Seller"),
and SUNRISE TELECOM, a ("Buyer").
ARTICLE 1
DEFINITIONS
-----------
1.1 Building. That certain two-story building with parking on grade to be
--------
constructed on the real property located off of Enzo Drive and Rue Ferrari in
San Jose, California and more particularly depicted in Exhibit E-1 attached
-----------
hereto.
1.2 Building Plans. Final calculations, designs, drawings and
--------------
specifications prepared by the Project Architect and its engineers and other
consultants for the Land Improvements and Building Shell. The final Building
Plans for the Land Improvements and Building Shell shall be a logical evolution
of, and consistent with, the Project Scope Drawings previously approved by Buyer
and referred to in Exhibit E-2 attached hereto.
-----------
1.3 Building Shell. The basic shell of the Building, as more particularly
--------------
described in the final Building Plans prepared by the Project Architect
(constituting a logical evolution of the Project Scope Drawings referred to in
Exhibit E-2), and further described in the definition of Building Shell attached
- ------------
hereto as Exhibit E-3.
-----------
1.4 Building Shell Allowance. The amount contributed by Seller toward the
------------------------
total hard cost of constructing the Building Shell and Land Improvements, which
amount shall not exceed Fifty Dollars ($50.00) per square foot of the Building
Shell, and which amount may be funded in whole or in part by the Construction
Lender. For purposes of this Agreement, the parties hereto agree that the hard
costs of constructing the Building Shell and the Land Improvements shall be
equal to the contract price for the Building Shell and Land Improvements to be
set forth in a construction contract to be entered into between Seller and the
Project Contractor, South Bay Construction Company, an affiliate of Seller, and
shall include, without limitation, a profit and overhead fee to be paid to the
Project Contractor equal to 4.5% of such costs of construction.
1.5 Building Shell Fund. The aggregate of (i) Construction Loan proceeds
-------------------
which have been specifically allocated to the payment of the Building Shell
Allowance (and any additional amount which may be contributed by Seller) and
(ii) funds contributed by Buyer as needed to pay all hard costs of constructing
the Building Shell and Land Improvements, as more fully described in Section 2.2
-----------
of this Agreement.
1.6 Buyer's Change. Any changes to the interior Improvement Plans and the
--------------
Interior Improvements requested by Buyer.
-1-
<PAGE>
1.7 Buyer's Equipment. Equipment and other personal property required by
-----------------
Buyer in the operation of its business, other than such personal property
installed as a part of the interior Improvement Plans, including equipment and
other installations necessary for obtaining a "right to occupy" from the City,
and including installation of necessary utility meters.
1.8 Buyer's Interior Improvement Contribution. The amount to be
-----------------------------------------
contributed by Buyer toward the total cost of the Interior Improvements, which
amount shall be all costs in excess of the Interior Improvement Allowance.
1.9 Buyer's Shell Contribution. The amount to be contributed by Buyer
--------------------------
toward the total hard costs of constructing the Building Shell and Land
Improvements, which amount shall be all hard costs of constructing the Building
Shell and Land Improvements in excess of the Building Shell Allowance.
1.10 Buyer-Caused Delay. Any delay, unless attributable to a condition or
------------------
event described as a Force-Majeure Delay, (i) caused by the failure of Buyer or
its respective contractors, agents or employees, to act within the time limits
set forth in this Agreement, (ii) in receiving or installing equipment ordered
to Buyer's specifications or in receiving permits, permissions or approvals for
the storage or use of Hazardous Material which are the responsibility of Buyer
to obtain; (iii) resulting from Buyer's request for materials, finishes or
installations which are unavailable or nonstandard; (iv) resulting from the
untimely delivery or installation of any of Buyer's Equipment; (v) by Buyer in
funding Buyer's Contribution to the Building Shell Fund or Interior Improvement
Fund within the time periods specified in Section 2.2 or Section 2.3, as the
case may be, of this Agreement or as provided in paragraph 7 of that certain
Purchase and Sale Agreement and Escrow Instructions dated , 1999, between
Seller and Buyer (the "Purchase Agreement"); (vii) caused by any personal injury
or property damage caused by the negligence or wilful misconduct of Buyer or any
of its agents, employees, consultants or contractors; (viii) resulting from or
arising out of any changes orders requested by Buyer, or Buyer modifying the
plans and specifications for the Interior Improvements, or any portion thereof
after the same have been approved by Buyer and Seller, (ix) interference with
the substantial completion of any off-site improvements resulting from the acts
of Buyer or any of its agents, employees, consultants or contractors, (x) caused
by physical interference with or damage to the construction of the Building
Shell or the Interior improvements by Buyer or any of its agents, employees,
contractors or consultants; or (xi) caused by the failure of the Interior
Improvement Plans to be approved by Buyer and Seller by April 15, 2000.
1.11 City. The City of San Jose, and any other governmental agencies and
----
entities involved in the permit and approval process for Building Plans or
Interior Improvement Plans.
1.12 Construction Lender. That lender or lenders which make the
-------------------
Construction Loan.
1.13 Construction Panel. A panel consisting of one of Seller's
------------------
Representatives, one of Buyer's Representatives, the Project Architect, and the
Project Contractor. For purposes of this
-2-
<PAGE>
Agreement and construction of the Building Shell, Interior Improvements and Land
Improvements, the parties hereto acknowledge that Peter Eidelman shall initially
be Buyer's sole Representative and person to whom instructions may be given, on
behalf of Buyer; however, Buyer reserves the right to substitute a new Buyer'
Representative upon delivery of written notice from Buyer to Seller.
1.14 Cost Estimate. An estimate of the cost of materials and construction
-------------
for completing the Interior Improvements, including without limitation the
following: (a) the cost of labor and materials provided by subcontractors to the
Project Contractor, including design-build and design-assist engineering
subcontractors; (b) direct costs for the project manager, field superintendent,
on-site administrative support, general labor (including trash removal) provided
by the Project Contractor, miscellaneous materials/tools provided by the Project
Contractor, on site office supplies, blue prints, safety equipment, and
security; (e) building permits and related fees for the Interior Improvements,
including but not limited to plan check and building permit fees, water, sewer
and other utility connection or service fees (including fees for excess
capacity), health department fees, hazardous material permit fees (if
applicable), and any other similar fees; (d) on-site supervision costs, which
include an allocable portion of the salary of any on-site supervisor of the
Project Contractor and the cost of any on-site construction facilities,
including, but not limited to, office supplies, postage, maintenance, telephone,
and utilities, (e) overhead, which includes general administrative overhead of
the Project Contractor associated with the Interior Improvements including
salaries and benefits for receptionist, secretarial, accounting, estimating,
department head supervision, licenses, legal, insurance, office supplies,
postage, computer supplies and maintenance, telephone, rent, utilities, off-site
office furniture rental, office equipment maintenance and equipment property
tax, and all other main office administrative, accounting and other overhead
costs; (f) the cost of any bonds which may be required of the Project Contractor
by the City, Buyer, or Construction Lender; (g) the premiums for any insurance
described in Sections 5.4 and 5.5 hereof; (h) the Project Contractor's fee; and
(i) a contingency to be reserved for costs for adjustments to the actual costs
of subcontractor's work.
1.15 Force Majeure Delay. Any delay which is attributable to any: (a)
-------------------
actual delay or failure to perform attributable to any strike, lockout or other
labor or industrial disturbance (whether or not on the part of the employees of
Seller or its contractors or other representatives), civil disturbance; future
order of any governmental entity claiming jurisdiction; act of a public enemy;
war; riot, sabotage, blockade, or embargo; or inability to secure customary
materials, supplies or labor through ordinary sources by reason of regulation or
order of any government or regulatory body; (b) delay attributable to the
failure to secure permits and approvals within a reasonable time period
following submittal of the application(s) for such permits or approvals due to
action or inaction of the City; (c) delay in completing plans and specifications
because of changes in any laws (including, without limitation, the Americans
with Disabilities Act of 1990 (the "ADA"))or building requirements, or the
interpretation thereof; or (d) delay attributable to lightning, earthquake,
fire, rain, storm, flood, washout, explosion, or any other cause beyond the
reasonable control of the party from whom performance is required, or any of its
contractors or other representatives. A Force-Majeure Delay shall not include a
delay due to financial inability of a party.
-3-
<PAGE>
1.16 Interior Improvements. The improvements within the Building Shell
---------------------
required by Buyer in the operation of its business described in the Interior
Improvement Plans.
1.17 Interior Improvements Allowance. The amount contributed by Seller
-------------------------------
toward the total cost of the Interior Improvements, which amount shall not
exceed Thirty Dollars ($30.00) per square foot of the Building Shell, which
amount Seller anticipates will be funded by the Construction Lender.
1.18 Interior Improvement Fund. The aggregate of (i) Construction Loan
-------------------------
proceeds which have been specifically allocated to the payment of the Interior
Improvements Allowance (and any additional amount which may be contributed by
Seller) and (ii) funds contributed by Buyer as needed to pay all costs and
expenses associated with the Interior Improvements, as more fully described in
Section 2.3 of this Agreement.
- -----------
1.19 Interior Improvement Plans. Final calculations, designs, drawings and
--------------------------
specifications prepared by the Project Architect and its engineers and other
consultants for the Interior Improvements, including all architectural,
plumbing, mechanical, and electrical drawings, and all structural calculations,
energy calculations and other engineering calculations necessary to acquire a
building permit.
1.20 Land Improvements. Surface parking areas, landscaping, drainage,
-----------------
irrigation, gutters, sidewalks, lighting, walkways, driveways and other
improvements and appurtenances relating to ingress and egress, preparation of
site (rough graded pad, excluding concrete work and other improvements), for
exterior trash enclosures, if applicable, and any other exterior enclosures and
structures (although Land Improvements shall not include such enclosures and
structures themselves).
1.21 Project. The real property upon which the Building will be
-------
constructed, the Land Improvements, the Building Shell, and the Interior
Improvements.
1.22 Project Architect. The Project Architect for the design of the
-----------------
Building Shell and Land Improvements shall be Arc Tec, Inc. who has been
retained by Seller. Arc Tec may retain civil engineers, structural engineers,
landscaping architects and other consultants. The Project Architect for
preparation of preliminary and final Interior Improvement Plans shall be
selected jointly by Seller and Buyer on or before December 10, 1999.
1.23 Project Contractor. South Bay Construction Company, the contractor
------------------
selected by Seller and approved by Buyer for the construction of the Building
Shell, Land Improvements and the Interior Improvement Work.
1.24 Intentionally Omitted.
---------------------
1.25 Seller's Representative. Scott Trobbe and Daniel L. Rosenbaum
-----------------------
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<PAGE>
1.26 Seller-Caused Delay. Any delay, unless attributable to a condition or
-------------------
event described as a Force-Majeure Delay, caused by the failure of Seller, the
Project Contractor, or their respective contractors, agents or employees, to act
within the time limits set forth in this Agreement.
1.27 Substantial Completion. The date the Land Improvements, the Building
----------------------
Shell and the Interior Improvements have been completed which shall be deemed to
be the earlier of (i) the date Buyer takes occupancy of the Building for the
purpose of conducting its business therein; (ii) the date the City has completed
its final inspection of the Building and determined that the Land Improvements,
the Building Shell and the Interior Improvements are approved for occupancy, as
evidenced by the City's sign-on the final inspection card for such improvements;
(iii) the date the Project Architect(s) has certified that the Building Shell
and the Interior Improvements have been substantially completed in accordance
with the Building Plans and the Interior Improvement Plans, respectively, except
for any punch-list items, or (iv) the date the Building Shell and Interior
Improvements would have been completed but for any Buyer Caused Delay.
ARTICLE 2
GENERAL REQUIREMENTS
--------------------
2.1 Project Schedule. Seller and Buyer agree to develop, design and
----------------
exercise diligent efforts to construct the Land Improvements, Building Shell,
and the Interior Improvements in accordance with this Agreement and the time and
responsibility criteria set forth in this Agreement.
2.2 Building Shell Fund.
--------------------
2.2.1 The Building Shell Fund may, at Seller's election, be
maintained with the Construction Lender (or an escrow holder selected by Seller
in its sole discretion), which shall hold and disburse the funds in accordance
with instructions approved by Seller and Buyer, including provisions for payment
of contractors and appropriate lien waivers.
2.2.2 Seller shall provide evidence reasonably satisfactory to Buyer
that the loan to be provided by the Construction Lender (together with any funds
provided by Seller, if any) includes funds sufficient to pay the Building Shell
Allowance. At or prior to the funding of the loan to be provided by the
Construction Lender, Buyer shall deposit Buyer's Shell Contribution in the
Building Shell Fund. The Building Shell Fund shall be drawn upon by Seller (or
disbursed by Construction Lender) as construction progresses and funds are
needed to pay the hard costs of constructing the Building Shell and Land
Improvements, with the hard costs of constructing the Building Shell and Land
Improvements being paid in the same ratio as the contributions required to be
made to the Building Shell Fund. Any interest earned on funds deposited in the
fund control account shall be added to the Building Shell Fund.
2.2.3 The Building Shell Fund shall be drawn upon by Seller (or
disbursed by Construction Lender) as construction progresses and funds are
needed to pay the hard cost of
-5-
<PAGE>
constructing the Building Shell and Land Improvements, with the hard cost of
constructing the Building Shell and Land Improvements being paid in the same
ratio as the contributions required to be made to the Building Shell Fund. Any
interest earned on funds deposited in the fund control account shall be added to
the Building Shell Fund.
2.2.4 If at any time during construction of the Building Shell or
Land Improvements, the remaining hard cost to complete the Building Shell or
Land Improvements exceeds the then-remaining balance of the Building Shell Fund,
Buyer shall contribute the necessary funds within five (5) days after Seller's
written request therefor, accompanied by appropriate invoices evidencing the
work to be performed. Seller may, but shall not be required to, make any
contributions which Buyer fails to make, subject to immediate reimbursement by
Buyer for the amount paid or Seller may halt construction if, at any time during
the course of construction, the remaining balance of the Building Shell Fund is
insufficient to pay the actual hard costs of construction expected to become due
within the following thirty (30) days because of Buyer's failure to contribute
the necessary funds. Buyer's failure to contribute any portion of Buyer's Shell
Contribution to the Building Shell Fund within five (5) days after Seller's
written request therefor shall be a material breach of this Agreement and the
Purchase Agreement, and shall be a Buyer-Caused Delay.
2.3 Interior Improvement Fund.
-------------------------
2.3.1 The Interior Improvement Fund may, at Seller's election, be
maintained with the Construction Lender (or an escrow holder selected by Seller
in its sole discretion), which shall hold and disburse the funds in accordance
with instructions approved by Seller, including provisions for payment of
contractors and appropriate lien waivers.
2.3.2 Seller shall provide evidence reasonably satisfactory to Buyer
that the loan to be provided by the Construction Lender (together with any funds
provided by Seller, if any) includes funds sufficient to pay the Interior
Improvements Allowance. At or prior to the funding of the loan to be provided by
the Construction Lender, Buyer shall deposit Buyer's Interior Improvement
Contribution in the Interior Improvement Fund.
2.3.3 The Interior Improvement Fund shall be drawn upon by Seller (or
disbursed by Construction Lender) as construction progresses and funds are
needed to pay the cost of the Interior Improvements, with the cost of the
Interior Improvements being paid in the same ratio as the contributions required
to be made to the Interior Improvement Fund. Any interest earned on funds
deposited in the fund control account shall be added to the Interior
Improvement Fund.
2.3.4 If at any time during construction of the Interior
Improvements, the remaining cost to complete the Interior Improvements exceeds
the then-remaining balance of the Interior Improvement Fund, Buyer shall
contribute the necessary funds within five (5) days after Seller's written
request therefor, accompanied by appropriate invoices evidencing the work to be
performed. Seller may, but shall not be required to, make any contributions
which Buyer fails to make, subject to immediate reimbursement by Buyer for the
amount paid or Seller may halt
-6-
<PAGE>
construction if, at any time during the course of construction, the remaining
balance of the Interior Improvement Fund is insufficient to pay the actual costs
of construction expected to become due within the following thirty (30) days
because of Buyer's failure to contribute the necessary funds. Buyer's failure to
contribute any portion of Buyer's Interior Improvement Contribution to the
Interior Improvement Fund within five (5) days after Seller's written request
therefor shall be a material breach of this Agreement and the Purchase
Agreement, and shall be a Buyer-Caused Delay.
ARTICLE 3
BUILDING AND IMPROVEMENT PLANS
------------------------------
3.1 Familiarization With Documents by Architect. The applicable Project
-------------------------------------------
Architect, prior to preparation of the Building Plans and the Interior
Improvement Plans, and each engineer, consultant and other professional retained
by such Project Architect shall thoroughly familiarize themselves with this
Agreement and all applicable building codes, and all other applicable city,
county, state and federal ordinances, roles and regulations, including, without
limitation, the energy conservation and handicap access requirements of Title 24
of the California Code of Regulations and the Americans With Disabilities Act,
and shall prepare the Building Plans and the Interior Improvement Plans with
full knowledge and compliance therewith. The Project Architect and each engineer
retained by the Project Architect shall be fully qualified and licensed by the
State of California to prepare the plans for which they are responsible.
3.2 Preparation of Building Plans.
-----------------------------
3.2.1 The parties hereto acknowledge and agree that the Project
Architect with respect to the Building Shell and Land Improvements has prepared
the Project Scope Drawings referred to in Exhibit E-2 attached hereto and that
-----------
Seller and Buyer approve the same. Buyer shall have no right to request or make
any changes to the approved Project Scope Drawings. Final Building Shell and
Land Improvement Plans shall conform to and represent a logical development of
the Building Plans referred to in Exhibit E-2. Buyer shall have no right to
-----------
request or make any changes to the approved Building Plans. Once the Building
Plans have been approved by Buyer and Seller (and the applicable governmental
agencies), and final bids have been received and accepted by Seller or its
Project Architect (or Seller's General Contractor), then Seller shall not make
any material changes to the Building Plans without Buyer's approval; provided,
however, without Buyer's prior approval, Seller shall be permitted to make
nonmaterial changes and other changes as shall be requested or required by the
City of San Jose.
3.2.2 Each day of delay incurred as a result of making changes
requested by Buyer to the Building Plans (if approved by Seller, which approval
Seller may withhold in its sole and absolute discretion) and any proceedings
associated therewith under Article 7 shall be a Buyer-Caused Delay.
3.3 Preparation and Approval of the Interior Improvement Plans. As soon as
----------------------------------------------------------
practicable following execution of the Purchase and Sale Agreement and Escrow
Instructions to which this Construction Agreement is attached, Seller shall
cause the Project Architect (to be
-7-
<PAGE>
approved by Seller and Buyer with respect to the Interior Improvements) to
complete and deliver to Buyer preliminary Interior Improvement Plans which shall
be subject to Buyer's reasonable approval. Within five (5) days following
receipt of such preliminary Interior Improvement Plans, Buyer shall deliver to
Seller either (i) written approval of such preliminary Interior Improvement
Plans (which shall not be unreasonably withheld), or (ii) specify in writing its
objections to such preliminary Interior Improvement Plans and all changes that
must be made to the same to satisfy such objections. If Buyer does not deliver
written objections to the preliminary Interior Improvement Plans within the
specified time period, Buyer shall be deemed to have approved the same. If Buyer
delivers timely objections within such time period, then the parties shall
confer and use their best efforts to develop preliminary Interior Improvement
Plans that are acceptable to Buyer and Seller as soon as practicable, but in no
event later than March 1, 2000. Once the preliminary Interior Improvement Plans
are approved by Buyer and Seller, Seller shall request the Project Architect to
prepare final Interior Improvement Plans. Within five (5) days following receipt
of such final Interior Improvement Plans, Buyer shall deliver to Seller either
(i) written approval of such final Interior Improvement Plans (which shall not
be unreasonably withheld), or (ii) specify in writing its objections to such
final Interior Improvement Plans and all changes that must be made to the same
to satisfy such objections; provided, however, Buyer may only object to such
final Interior Improvement Plans on the basis that they do not substantially
conform to or do not represent a logical development of the approved preliminary
Interior Improvement Plans. If Buyer does not deliver written objections to the
final Interior Improvement Plans within the specified time period, Buyer shall
be deemed to have approved the same. If Buyer delivers timely objections within
such time period, then the parties shall confer and use their best efforts to
develop preliminary Interior Improvement Plans that are acceptable to Buyer and
Seller as soon as practicable, but in no event later than April 15, 2000. If the
final Tenant Improvement Plans are not approved by Seller and Buyer by April 15,
2000, then each day that passes from April 15, 2000 until the final Interior
Improvement Plans are approved by Seller and Buyer shall be deemed a Buyer
Caused Delay. Time is of the essence with respect to the approval of the
Interior Improvement Plans. Fees of the Project Architect in preparing the
Interior Improvement Plans shall be paid from the Interior Improvement Fund.
3.4 Building Permit -- For Interior Improvement Work. Seller shall cause
------------------------------------------------
the Project Contractor to cause the Project Architect to obtain a building
permit (and any approvals and permits required from any governmental agencies)
required for the construction of the Interior Improvements from the City. If the
City rejects the Interior Improvement Plans and thereby prevents the issuance of
a building permit, Seller shall cause the Project Contractor to cause the
Project Architect to immediately make all necessary changes required by the
City. Upon the City's approval of the Interior Improvement Plans and permit
application, the Project Architect for the Interior Improvement work shall cause
the building permit to be picked up and delivered to Seller with an approved set
of the Interior Improvement Plans marked "for construction." Plan check and
building permit fees, water and sewer connection fees (including such fees for
excess capacity), health department fees, hazardous material permit fees, and
any other fees shall be paid from the Interior Improvement Fund. Any additional
costs and expenses incurred in connection with a change required by the City
shall be paid from the Interior Improvement Fund. Any delay incurred as a result
of a change required by the City shall be a Force Majeure Delay.
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<PAGE>
3.5 Buyer Changes to Interior Improvement Plans.
-------------------------------------------
3.5.1 Any requests for Buyer Changes shall be instituted in
accordance with the provisions of this Section 3.5 and shall be subject to the
written approval of Seller after consultation with the Project Architect.
3.5.2 Buyer may request changes to the Interior Improvement Plans
after the same have been approved by Seller by notifying Seller in writing of
the nature and extent of any such Buyer Change and, if the nature of such Buyer
Change requires revisions to the Interior Improvement Plans, then, except as
otherwise provided in this Construction Agreement or the Purchase and Sale
Agreement and Escrow Instructions to which this Construction Agreement is
attached), the Project Architect shall revise the Interior Improvement Plans.
Such notice of Buyer must be signed by Buyer, or Seller shall not be required to
process such Buyer Change request. Seller shall submit to Buyer in writing,
within five (5) business days after Buyer's request for a Buyer Change (or such
longer period of time as may be reasonably required depending on the extent of
the requested Buyer's Change), an analysis of construction costs or savings
resulting from the Buyer Change, including without limitation architectural and
engineering costs, and the period of time, if any, that the Buyer Change will
extend the time for completion of the Interior Improvement Work. Buyer shall
approve or disapprove in writing Seller's submission within five (5) business
days of receipt thereof. Seller shall not be obligated to implement any Buyer
Change for which Buyer does not approve Seller's analysis of construction costs
or savings resulting therefrom or the period of time, if any, that the Buyer
Change will extend the time for completion of the Interior Improvement Work. The
estimated time for completion of the Interior Improvements shall be extended one
day for each day of delay caused by analyzing and processing Buyer's request for
a Buyer Change whether or not the cost or savings and the extension of time for
completion of the Interior Improvements, if any, is approved by Buyer, and such
delay shall be a Buyer-Caused Delay.
3.5.3 If Buyer approves in writing the costs or savings and the
extension in the time for completion of the Interior Improvements, if any,
resulting from the Buyer Change, Seller shall cause the approved Buyer Change to
be instituted. The estimated time for completion of the Interior Improvement
Work shall be extended one day for each day of delay caused by instituting the
Buyer Change requested by Buyer, and such delay shall be a Buyer-Caused Delay.
3.6 Subsequent City - Required Changes. Any delay incurred as a result of
----------------------------------
a change required by the City after the issuance of the building permit shall be
a Force Majeure Delay.
ARTICLE 4
COST ESTIMATE FOR INTERIOR IMPROVEMENT WORK
-------------------------------------------
4.1 Estimate of Interior Improvement Work Costs.
-------------------------------------------
-9-
<PAGE>
4.1.1 The Project Contractor shall put the Interior Improvement Plans
out to bid to at least three subcontractors from each major trade involved in
the construction of the Interior Improvements.
4.1.2 Seller (with the Project Contractor's input) shall select one
subcontractor bid from each trade and shall deliver a list of selected
subcontractors and their respective bids to the Project Contractor.
4.2 Approval of Cost Estimate.
-------------------------
4.2.1 The Project Contractor shall prepare the Cost Estimate, and
shall submit the Cost Estimate prepared by the Project Contractor to Buyer for
Buyer's approval. Buyer shall, within five (5) business days after receipt of
the Cost Estimate, notify Seller in writing of either (i) Buyers approval of the
Cost Estimate or (ii) Buyer's disapproval of the Cost Estimate and specific
instructions to Seller to reduce the scope of the Interior Improvements. If
Buyer disapproves the Cost Estimate and instructs Seller to reduce the scope of
the Interior Improvements, and Buyer delivers to Seller revisions to the
Interior Improvement Plans prepared by the Project Architect, if required, then
Seller shall cause the Interior improvement Plans, as revised, to be re-bid in
accordance with Section 4.1, and shall cause a revised Cost Estimate to be
prepared by the Project Contractor and delivered to Buyer for approval or
disapproval in accordance with this Section 4.2. Any subsequent reduction in the
scope of the Interior Improvements and re-bid shall be subject to the same
procedures as set forth in this Article 4.
4.2.2 Each day of delay in Buyer's approval of the original Cost
Estimate or any revised Cost Estimate or any subsequent cost estimate beyond the
time periods set forth in this Article shall be a Buyer-Caused Delay.
ARTICLE 5
CONSTRUCTION
------------
5.1 Construction of Land Improvements and Building Shell. Seller agrees,
----------------------------------------------------
as soon as practical after the Building Plans have been approved by the City,
and the necessary permits have been issued, to cause Project Contractor to
construct the Land Improvements and the Building Shell. Seller shall cause the
Project Contractor to exercise diligent efforts to substantially complete the
Land Improvements and Building Shell in accordance with the Building Plans by
October 1, 2000, subject to extension for Buyer Caused Delays and Force Majeure
Delays. The hard costs incurred by Seller in connection with such construction
of the Land Improvements and the Building Shell shall be paid by Seller up to
the Building Shell Allowance (except that any increased costs resulting from any
Buyer Change to the Building Shell shall be paid by Buyer), and any hard costs
incurred by Seller in excess of the Building Shell Allowance shall be paid by
Buyer. Seller acknowledges and agrees that Buyer shall not be responsible for
payment of costs incurred in connection with the construction of the Land
Improvements and the Building Shell in excess of the greater of (i) the Building
Shell Allowance, or (ii) the Guaranteed Maximum Price ("GMP") established in the
construction contract entered into between Seller and the Project Contractor
(coveting such Land Improvements and Building Shell), subject to adjustment in
such GMP by change orders requested by Buyer, unless such cost overruns are
caused by or
-10-
<PAGE>
attributable to Buyer or any of its agents, employees, contractors, affiliates,
or other representatives.
5.2 Construction of Interior Improvements. Seller agrees, as soon as
-------------------------------------
practical after completion or substantial completion of the Land Improvements
and the Building Shell to the point where construction can commence, or earlier
at the sole discretion of Seller, and after receipt of the building permit for
the Interior Improvements, to cause the Project Contractor to construct the
Interior Improvements in accordance with the approved Interior Improvement
Plans. Seller shall cause the Project Contractor to exercise diligent efforts to
substantially complete the Interior Improvements by October 1, 2000, subject to
extension for Tenant Caused Delays and Force Majeure Delays. The costs and
expenses incurred in connection with such construction of the Interior
Improvements shall be paid from the Interior Improvement Fund.
5.3 Installation of Buyer's Equipment. Buyer agrees, at its own expense,
---------------------------------
to install Buyer's Equipment within a time period that does not delay or
interfere with the completion of the Building Shell, Land Improvements or
Interior Improvements by Seller or the Project Contractor. Buyer shall suspend
installing Buyer's Equipment if the same will delay or interfere with the
completion of the Building Shell, Land Improvements or Interior Improvements.
Buyer's Equipment shall be installed in compliance with all governmental
ordinances, rules and regulations relating thereto and shall not be constructed
in a manner inconsistent with the approved Interior Improvement Plans. Any
costs, expenses or damages incurred by Seller arising out of or related to the
installation of Buyer's Equipment by Buyer, its contractors, subcontractors or
other agents, shall be paid by Buyer to Seller.
5.4 Seller's Insurance. From the commencement of the Land Improvements and
------------------
the Building Shell until the completion of the Interior Improvements, Seller
shall maintain a policy of commercial general liability insurance in amounts
sufficient to protect Seller and Buyer from and against liability for death or
injury to persons and for damage to property arising from the construction of
the Land Improvements, the Building Shell and the Interior Improvements. All
such insurance shall name Buyer as an additional insured. In addition, from the
commencement of the Land Improvements and the Building Shell until the
completion of the Interior Improvements, Seller (or the Project Contractor)
shall maintain a policy of all risk builder's risk insurance covering the Land
Improvements, the Building Shell and the Interior Improvements in an amount
equal to one hundred percent (100%) of the full replacement value thereof. The
cost of such insurance allocable to the Land Improvements and the Building Shell
shall be paid by Seller, and the cost of such insurance allocable to the
Interior Improvements shall be paid from the Interior Improvement Fund. Seller's
responsibility to provide insurance under this Section 5.4 shall be satisfied to
the extent such insurance is provided by contractors under the following Section
5.5 hereof.
5.5 Contractor Insurance. The Project Contractor shall carry (a) worker's
--------------------
compensation insurance, including employer's liability insurance, covering all
of their respective employees in statutory amounts; (b) commercial general
liability insurance (including contractor's protective liability) in an amount
not less than Three Million Dollars ($3,000,000.00) combined single limit for
bodily injury and property damage; and (c) comprehensive automobile
-11-
<PAGE>
liability insurance in an amount not less than Five Hundred Thousand Dollars
($500,000.00) combined single limit for bodily injury and property damage. Such
policies shall name Seller, Buyer, and Construction Lender, as additional
insureds and shall be for the mutual and joint benefit and protection of Seller,
Buyer, and Construction Lender, as their interests may appear. The policy of
commercial general liability insurance referred to in clause (b) above may be
maintained under an umbrella policy or policies of insurance.
5.6 Rebuilt Drawings. Within thirty (30) days after Substantial
----------------
Completion, Seller shall provide Buyer, at Buyer's expense, with a set of "as-
built" drawings for the Interior Improvements and Seller shall provide Buyer, at
Seller's expense, with a set of "as-built" drawings for the Building Shell and
the Land Improvements.
5.7 Reliance on Construction Warranties. Seller and Buyer acknowledge that
-----------------------------------
each may have the non-exclusive benefit of any applicable warranties from design
professionals, contractors, materialmen manufacturers or other responsible
parties. Seller and Buyer each assumes responsibility to inquire into and be
fully informed regarding provisions of any applicable warranties, and the other
party shall bear no responsibility therefor. Seller shall make commercially
reasonable efforts to obtain, or to insure the Project Contractor obtains, the
warranties described in Section 6.6 hereof, to the extant they are available at
a reasonable expense.
ARTICLE 6
COMPLETION
----------
6.1 Completion of the Work. Seller shall use diligent efforts to
----------------------
substantially complete the Land Improvements, the Building Shell and the
Interior Improvements, on or before October 1, 2000, as such time is extended
one day for each day of delay resulting from a Force-Majeure Delay or Buyer-
Caused Delay.
6.2 Calculations of Delays. Any delay in Seller's or Buyer's performance
----------------------
beyond the date and time for such performance set forth in this Agreement shall
be a Force Majeure Delay, a Buyer-Caused Delay or a Seller-Caused Delay. At each
periodic on-site work review meeting, Seller and Buyer through their designated
construction representatives shall update the schedule for design, development
and construction of the Project and account for and allocate all Force Majeure
Delays, Seller-Caused Delays and Buyer-Caused Delays which have occurred since
the last work review meeting. If Seller and Buyer through their designated
construction representatives are unable to agree on the allocation of Force
Majeure Delays, Seller-Caused Delays and Buyer-Caused Delays, then such dispute
shall be resolved in accordance with Article 7. If a Force Majeure Delay, a
Seller-Caused Delay, or a Buyer-Caused Delay is deemed to have occurred but such
delay has no effect on the date the Building Shell, Land Improvements or
Interior Improvements are to be designed or developed, then such delay shall be
waived; if more than one type of delay contributed to a delay, the delay shall
be fairly apportioned between or among the contributing types of delay. Delays
attributable to the City other than as set forth in this Construction Agreement
shall be a Force Majeure Delay. No delay shall be allowed for any period of time
more than thirty (30) days prior to the time a party asserts at a periodic on-
site
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<PAGE>
review meeting (or otherwise in writing to the other party) that the delay has
occurred. As stated above, Buyer's designated construction representative
initially shall be Peter Eidelman, however, Buyer reserves the right, in Buyer's
sole discretion, to substitute a new construction representative for Peter
Eidelman upon written notice to Seller.
6.3 Condition of Improvements. Seller shall deliver the Building to Buyer
-------------------------
upon Substantial Completion of the Interior Improvements in clean and operating
condition, subject to punchlist items. The term "clean and operating condition"
shall include the following: (a) walls and partitions are cleaned; (b) glass is
cleaned on both sides; (c) trash, dirt and left-over materials are removed from
the Building and the Building entrance area; (d) air conditioning, heating and
ventilating system is in operating condition and approximately regulated; and
(e) plumbing, electrical and elevator systems are in operating condition.
Punchlist items may include such minor pick up work as would not materially
interfere with Buyer's occupancy and use of the Building for the purpose for
which it is to be used.
6.4 Walk-Through. On or before the date Buyer occupies the Building for
------------
the purpose of conducting its business therein, Seller and Buyer shall conduct a
walk-through inspection of the Building and shall jointly prepare a list of
initial construction items that need to be corrected. Seller shall exercise
commercially reasonable efforts to cause the Project Contractor to correct such
items within thirty (30) days thereafter, provided, however, if by the nature of
such correction more than thirty (30) days is required to effect such
correction, the Project Contractor shall be required to commence correction of
such punch list item(s) within such thirty (30) day period and diligently pursue
the same to completion. The expense of any such correction shall be paid by
Buyer, subject to reimbursement, if appropriate, from any design professional,
contractor, materialman, manufacturer or other responsible party.
6.5 Notice of Completion. Within ten (10) days after Substantial
--------------------
Completion, Seller (or the Project Contractor) shall execute and file a notice
of completion with respect thereto and furnish a copy thereof to Buyer upon
recordation.
6.6 Warranties and Guaranties. Each contractor and subcontractor
-------------------------
participating in the Land Improvements, the Building Shell and the Interior
Improvements shall guarantee that the portion thereof for which he is
responsible shall be free from any defects in workmanship and materials for a
period of not less than one (1) year from the date of Substantial Completion of
the applicable, Land Improvements, Building Shell or Interior Improvements, as
the case may be. Every such contractor or subcontractor shall be responsible for
the replacement or repair, without additional charge, of all work done or
furnished in accordance with its contract which shall become defective within
such one (1) year (or longer, if applicable) warranty period. Seller covenants
to give to Buyer any assignment or other assurances necessary to effect the
right to enforce such warranties.
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<PAGE>
ARTICLE 7
CONSTRUCTION DISPUTE RESOLUTION
-------------------------------
7.1 Dispute Resolution. If any dispute arises in connection with this
------------------
Agreement, such dispute shall be resolved in accordance with this Article. All
proceedings contemplated by this Article shall take place at the location for
all job-site meetings, unless the Construction Panel unanimously agrees to
another location, or unless any Arbitrator appointed hereunder selects another
location.
7.2 Notice. All disputes to be determined in accordance with this Article
------
shall be raised by Seller or Buyer by written notice to the other party. Notice
of any dispute with an issue resolved in any minutes of a periodic on-site
review meeting must be given within thirty (30) days of receipt of the minutes,
or the resolution of the issue as reflected in the minutes shall be deemed
conclusive.
7.3 Resolution by Construction Panel. The Construction Panel shall meet
--------------------------------
within two (2) business days of receipt of the notice and attempt in good faith
to resolve the dispute by unanimous agreement.
7.4 Resolution by Arbitrator. If the Construction Panel has not resolved
------------------------
the dispute for any reason within five (5) business days of receipt of the
notice, the panel shall promptly select by unanimous agreement a disinterested
arbitrator ("Arbitrator") with extensive development and construction experience
to resolve the dispute. In the event a selection is not made within six (6)
business days after the written notice, the Arbitrator shall, upon the request
of Seller or Buyer, be appointed by the American Arbitration Association. Once
an Arbitrator is appointed hereunder, such Arbitrator shall serve as Arbitrator
for all subsequent disputes arising in connection with this Construction
Agreement unless the Construction Panel unanimously agrees otherwise. The
Arbitrator shall resolve the dispute as soon as is reasonably practical in
accordance with the provisions of Section 1280 et seq. of the California Code of
Civil Procedure. The cost for the Arbitrator's services shall be paid by the
non-prevailing party in the dispute being determined by the Arbitrator, unless
the Arbitrator determines otherwise.
7.5 Interpretation and Resolution. In determining any dispute, the
-----------------------------
Construction Panel and the Arbitrator shall apply the pertinent provisions of
this Agreement. As part of resolving a dispute, the Construction Panel or the
Arbitrator, as the case may be, shall determine the days of delay, if any, in
completing the Land Improvements, the Building Shell and the Interior
Improvements which directly result from the dispute being considered by the
Construction Panel or the Arbitrator, and from the proceedings pursuant to this
Article 7. The days of delay shall be designated as either Buyer-Caused Delays,
Seller-Caused Delays or Force Majeure Delays or any combination thereof as
determined by the Construction Panel or the Arbitrator, as the case may be.
7.6 Continued Performance. During any proceedings pursuant to this
---------------------
Article, Seller and Buyer shall, to the extent possible, continue to perform and
discharge all of their respective obligations under this Agreement.
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<PAGE>
7.7 Binding Resolution. Any and all decisions of the Construction Panel
------------------
made by unanimous agreement as to the matter in dispute shall be binding upon
both Seller and Buyer. In the absence of such unanimous agreement, any and all
decisions by the Arbitrator shall be binding upon both Seller and Buyer. The
provisions of this Article 7 are an arbitration agreement enforceable under
Section 1280 et seq. of the California Code of Civil Procedure.
7.8 Arbitration of Disputes. "NOTICE: BY INITIALING IN THE SPACE BELOW YOU
-----------------------
ARE AGREEING TO HAVE ANY DISPUTE (WHICH CANNOT BE RESOLED BY THE CONSTRUCTION
PANEL) ARISING IN CONNECTION WITH THIS CONSTRUCTION AGREEMENT DECIDED BY NEURAL
ARBITRATION AS PROVIDED BY CALIFORNIA LAW AND YOU ARE GIVING UP ANY RIGHTS
YOU MIGHT POSSESS TO HAVE THE DISPUTE LITIGATED IN A COURT OR JURY TRIAL. BY
INITIALING IN THE SPACE BELOW YOU ARE GIVING UP YOUR JUDICIAL RIGHTS TO
DISCOVERY AND APPEAL, UNLESS THOSE RIGHTS ARE SPECIFICALLY INCLUDED ABOVE. IF
YOU REFUSE TO SUBMIT TO ARBITRATION AFTER AGREEING TO THIS PROVISION, YOU MAY BE
COMPELLED TO ARBITRATE UNDER THE AUTHORITY OF THE CALIFORNIA CODE OF CIVIL
PROCEDURE. YOUR AGREEMENT TO THIS ARBITRATION PROVISION IS VOLUNTARY.
"WE HAVE READ AND UNDERSTAND THE FOREGOING AND AGREE TO SUBMIT DISPUTES
(WHICH CANNOT BE RESOLVED BY THE CONSTRUCTION PANEL) ARISING IN CONNECTION WITH
THIS CONSTRUCTION AGREEMENT TO NEUTRAL ARBITRATION."
BUYERS INITIALS SELLER'S INITIALS
ARTICLE 8
MISCELLANEOUS PROVISIONS
------------------------
8.1 Notices. Any notice, consent or approval required or permitted to be
-------
given under this Agreement shall be in writing and shall be deemed to have been
given upon (i) hand delivery, or (ii) one (1) day after being deposited with
Federal Express or another reliable overnight courier service or transmitted by
facsimile telecopy, and addressed as follows:
If to Seller: Enzo Drive, LLC
511 Division Street
Campbell, CA 95008
Attn: Dan Rosenbaum
If to Buyer: Sunrise Telecom
22 Great Oaks Blvd.
San Jose, CA. 95119
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<PAGE>
or such other address as either party may from time to time specify in writing
to the other.
8.2 Consents and Approvals. Unless otherwise expressly provided herein,
----------------------
any consents or approvals required or allowed by this Agreement shall not be
unreasonably withheld or delayed.
8.3 Successors and Assigns. This Agreement shall be binding upon and inure
----------------------
to the benefit of the parties hereto and their respective successors, heirs,
administrators and assigns.
8.4 Amendments. Except as otherwise provided herein, this Agreement may be
----------
amended or modified only by a written instrument executed by Seller and Buyer.
8.5 Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of California.
8.6 Merger of Prior Agreements. This Agreement and the exhibits hereto,
--------------------------
together with that certain Purchase Agreement referred to in paragraph 1.10
above, constitute the entire agreement between the parties and supersede all
prior agreements and understandings between the parties relating to the subject
matter hereof.
8.7 Enforcement. If either party hereto fails to perform any of its
-----------
obligations under this Agreement or if a dispute arises between the parties
hereto concerning the meaning or interpretation of any provision of this
Agreement, then the defaulting party or the party not prevailing in such dispute
shall pay any and all costs and expenses incurred by the other party on account
of such default and/or in enforcing or establishing its rights hereunder,
including, without limitation, court costs or costs of arbitration and
attorneys' fees and disbursements. Any such attorneys' fees and other expenses
incurred by either party in enforcing a judgment in its favor under this
Agreement shall be recoverable separately from and in addition to any other
amount included in such judgment, and such attorneys' fees obligation is
intended to be severable from the other provisions of this Agreement and to
survive and not be merged into any such judgment.
8.8 Severability. If any provision of this Agreement or the application
------------
thereof to any person, place or circumstance shall be held by a court of
competent jurisdiction to be invalid, unenforceable or void, the remainder of
this Agreement and such provisions as applied to other persons, places and
circumstances shall remain in full force and effect.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
SELLER BUYER
- ------ -----
ENZO DRIVE, LLC SUNRISE TELECOM
a California limited liability company A
------------------------------------
By: By:
-------------------------------- -------------------------------
Its: Its:
-------------------------------- -------------------------------
By: By:
-------------------------------- -------------------------------
Its: Its:
-------------------------------- -------------------------------
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<PAGE>
[GRAPHIC OF EXHIBIT E-1]
------------------------
STREET MAP SHOWING THE LOCATION OF
A NEW TWO STORY BUILDING FOR
ENZO DRIVE
ENZO DRIVE AT RUE FERRARI DRIVE
SAN JOSE, CALIFORNIA
<PAGE>
EXHIBIT E-2
LIST OF PROJECT SCOPE DRAWINGS
A1.0 Site Plan
A2.0 First Floor Plan
A2.1 Second Floor Plan
A3.0 Elevation Plan
C1 Preliminary Grading Plan
L1 Planting Plan
L2 Irrigation Plan
L3 Other Irrigation Plans
<PAGE>
EXHIBIT E-3
-----------
DEFINITION OF BUILDING SHELL - ENZO DRIVE
The components and systems below shall be included in the design of the new
building, which shall consist ors two-story, concrete tilt-up building of
approximately 91,694 square feet. All code requirements should be considered
minimum beginning requirements and not the highest level of design.
Owner/Landlord's costs shall include all "hard and soft" costs related to the
construction of the site and shell, including architectural and engineering
services, peters, utility fees for connections and meters (shell only).
1. Building Structure
a) All foundations to include footings, piers, caissons, pilings, grade
beams, foundation walls or other building foundation components
required to support the entire building structure.
b) All columns, beams, joists, purlins, headers, or other framing members
to support the roof and roofing membrane. Second floor framing is
concrete over steel deck on steel frame, bar-joists, or trusses.
c) Five inch (5") thick concrete slab on grade with welded wire mesh and
any other reinforcing or structural connections that may be necessary
or required.
d) One (1) set of temporary wood-framed access stairs.
e) The foundation and structural framing will be designed to support a
minimum live load of 100 pounds psf in all leasable areas (which meets
or exceeds current code).
f) First floor to second floor height of 17'-0". Clear height of the
second floor to be 12"-0".
2. Building Exterior
a) Concrete exterior walls that enclose the perimeter of the building with
steel reinforcing and structural connections that may be necessary or
required.
b) Three (3) ply built up roofing: Base sheet one (1) ply of asphalt
impregnated tar paper and a cap sheet.
c) Glass to be 10'-0" tall at glass line. Glass to be "medium" performance
<PAGE>
d) All exterior doors, door closer and locking devices necessary for proper
functioning.
e) One "grade" level roll-up door and one "dock" level roll-up door
3. Plumbing
a) Underground sanitary sewer laterals connected to the city sewer main in
the street and piped into the building and under the concrete slab on
grade for the length of the building.
b) Domestic water mains connected to Great Oaks Water Company water main
in the street and stubbed to the building.
c) Gas lines connected to the city public utility mains and gas meters
adjacent to, and in close proximity to the building. Meters supplied by
utility company.
4. Electrical
a) All primary electrical service to the building that is complete
including underground conduit and wire feeders from transformers pads
into the building's main switchgear electrical room. The electrical
characteristics of the secondary side of transformers shall be 277/480
Volt, 3 Phase and the rated capacity of the transformers shall be 2,000
amps for the building.
b) Underground pull section, meter, and panel(s), for site lighting and
landscaping only.
c) Underground conduit from the street to the building electrical room for
telephone trunk line service by Pacific Bell Telephone.
d) An electrically operated landscape irrigation controller that is a
complete and functioning system.
e) Underground conduit from the building to the main fire protection
system, shut off valve (PIV) for installation of security alarm wiring.
f) All parking lot and landscaping lighting to include fixtures,
underground conduit, wire, distribution panel end controller. All
exterior lighting shall be a complete and functioning system.
5. Fire Protection (Sprinklers)
a) A complete and fully functional overhead system distributed throughout
the building. The systems shall be classified ordinary hazard group II
and be distributed throughout the building.
<PAGE>
b) system shall include all sprinkler heads that may be required by
building codes above the ceiling, when ceilings are installed.
c) Site sprinkler main to be sized adequately to support Tenant's uses
within the building.
6. Sitework
a) All work outside the building perimeter walls shall be considered site
work for the building shell and shall include grading, asphalt
concrete, paving, landscaping (hard and soft), landscape irrigation,
storm drainage, utility service laterals, curbs, gutters, sidewalks,
specialty paving (if required), retaining walls, fencing and gates,
trash enclosures, planters, sign monuments, parking lot and landscape
lighting and other exterior lighting per code.
b) Paving sections for automobile and truck access shall be according to
the Geological Soils Report.
c) All paring lot striping to include handicap signage and spaces. Amount
of spaces provided shall comply with City Code.
d) Underground site storm drainage system shall be connected to the city
storm system main.
EXCLUSIONS (partial list)
-------------------------
The following items are not included in the building shell:
a) Roof screen
b) Elevator
c) Proof loading roof for mechanical equipment
d) Deck penetrations for mechanical equipment
e) Framing, finishes or penetrations for interior stairs (other than
temporary stair).
f) Electrical panels and distribution.
g) Security system
h) All Interior Finishes
<PAGE>
EXHIBIT F
DESIGNATION AGREEMENT
---------------------
This DESIGNATION AGREEMENT (the "Agreement") is entered into on , 2000,
by and between ENZO DRIVE, LLC a California limited liability company
("Seller"), SUNRISE TELECOM ("Buyer") and ALLIANCE TITLE COMPANY ("Title
Company").
RECITALS
--------
A. Pursuant to that certain Purchase and Sale Agreement and Escrow
Instructions entered into by and between Seller and Buyer, dated , 1999
(the "Purchase Agreement"), Seller has agreed to sell to Buyer, and Buyer has
agreed to buy from Seller, that certain real property located at Enzo Drive and
Rue Ferrari, San Jose, California, and described more fully on attached EXHIBIT
-------
A (the "Property"). The purchase and sale of the Property pursuant to the
- -
Purchase Agreement is sometimes referred to below as the "Transaction."
B. Section 6045(e) of the United States Internal Revenue Code and the
regulations promulgated thereunder (collectively, the "Reporting Requirements")
require an information return to be made to the United States Infernal Revenue
Service, and a statement to be furnished to Seller, in connection with the
Transaction.
C. Pursuant to subparagraph 8.a of the Purchase Agreement, an escrow has
been opened with Title Company (Escrow No. ) through which the Transaction
will be or is being accomplishes. Title Company is either (i) the person
responsible for closing the Transaction (as described in the Reporting
Requirements) or (ii) the disbursing title or escrow company that is most
significant in terms of gross proceeds disbursed in connection with the
Transaction (as described in the Reporting Requirements).
D. Seller, Buyer and Title Company desire to designate Title Company as
the "Reporting Person" (as defined in the Reporting Requirements) with respect
to the Transaction.
AGREEMENT
---------
NOW THEREFORE, for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, Seller, Buyer and Title Company agree
as follows:
1. Title Company is hereby designated as the Reporting Person for the
Transaction. Title Company shall perform all duties that are required by the
Reporting Requirements to be performed by the Reporting Person for the
Transaction.
2. Seller and Buyer shall furnish to Title Company, in a timely manner,
any information requested by Title Company and necessary for Title Company to
perform its duties as Reporting Person for the transaction.
-1-
<PAGE>
3. Title Company hereby requests Seller to furnish to Title Company
Seller's correct taxpayer identification number. Seller acknowledges that any
failure by Seller to provide Title Company with Seller's correct taxpayer
identification number may subject Seller to civil or criminal penalties imposed
by law. Accordingly, Seller hereby certifies to Title Company, under penalty of
perjury, that Seller's correct taxpayer identification number is
4. The names and addresses of the parties hereto are as follows:
SELLER:
Enzo Drive, LLC
511 Division Street
Campbell, CA 95008
BUYER:
Sunrise Telecom
22 Great Oaks Blvd.
San Jose, CA. 95119
TITLE COMPANY:
Alliance Title Company
1732 North First Street, Suite 175
San Jose, CA 95112
5. Each of the parties hereto shall retain this Agreement for a period of
four years following the calendar year during which the date of closing of the
Transaction occurs.
IN WITNESS WHEREOF, the parties have entered into this Agreement as of the
date ant year first above written.
SELLER BUYER
ENZO DRIVE, LLC SUNRISE TELECOM
a California limited liability company A
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By: By:
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Its: Its:
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TITLE COMPANY:
ALLIANCE TITLE COMPANY
By
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Its
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-3-
<PAGE>
EXHIBIT 10.3
[LOGO] Bank of America
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Business Loan Agreement
This Agreement dated as of November 9, 1999, is between Bank of America, N.A.
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(the "Bank") and Sunrise Telecom, Inc. (the "Borrower").
1. LINE OF CREDIT AMOUNT AND TERMS
1.1 Line of Credit Amount.
(a) During the availability period described below, the Bank will provide a
line of credit to the Borrower. The amount of the line of credit (the
"Commitment") is Three Million and 00/100 Dollars ($3,000,000.00).
(b) This is a revolving line of credit providing for cash advances and letters
of credit. During the availability period, the Borrower may repay principal
amounts and reborrow them.
(c) The Borrower agrees not to permit the outstanding principal balance of
advances under the line of credit plus the outstanding amounts of any
letters of credit, including amounts drawn on letters of credit and not yet
reimbursed, to exceed the Commitment.
1.2 Availability Period. The line of credit is available between the date of
this Agreement and October 1, 2000, or such earlier date as the availability may
terminate as provided in this Agreement (the "Expiration Date"),
1.3 Interest Rate.
(a) Unless the Borrower elects an optional interest rate as described below,
the interest rate is the Bank's Prime Rate.
(b) The Prime Rate is the rate of interest publicly announced from time to time
by the Bank as its Prime Rate. The Prime Rate is set by the Bank based on
various factors, including the Bank's costs and desired return, general
economic conditions and other factors, and is used as a reference point for
pricing some loans. The Bank may price loans to its customers at, above, or
below the Prime Rate. Any change in the Prime Rate shall take effect at the
opening of business on the day specified in the public announcement of a
change in the Bank's Prime Rate.
1.4 Repayment Terms.
(a) The Borrower will pay interest on November 1, 1999, and then monthly
thereafter until payment in full of any principal outstanding under this
line of credit.
(b) The Borrower will repay in full all principal and any unpaid interest or
other charges outstanding under this line of credit no later than the
Expiration Date. Any interest period for an optional interest rate (as
described below) shall expire no later than the Expiration Date.
1.5 Optional Interest Rates. Instead of the interest rate based on the Bank's
Prime Rate, the Borrower may elect the optional interest rates listed below
during interest periods agreed to by the Bank and the Borrower. The optional
interest rates shall be subject to the terms and conditions described later in
this Agreement. Any principal amount bearing interest at an optional rate under
this Agreement is referred to as a "Portion." The following optional interest
rates are available:
(a) Short Term Fixed Rates.
1.6 Letters of Credit.
(a) This line of credit may be used for financing:
(i) commercial letters of credit with a maximum maturity of 180 days but
not to extend more than 90 days beyond the Expiration Date. Each
commercial letter of credit will require drafts payable at sight.
(ii) standby letters of credit with a maximum maturity of 365 days but
not to extend more than 90 days beyond the Expiration Date.
(iii) The amount of letters of credit outstanding at any one time
(including amounts drawn on letters of credit and not yet
reimbursed) may not exceed Two Hundred Fifty Thousand and 00/100
Dollars ($250,000.00).
(b) The Borrower agrees:
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(i) any sum drawn under a letter of credit may, at the option of the
Bank, be added to the principal amount outstanding under this
Agreement. The amount will bear interest and be due as described
elsewhere in this Agreement.
(ii) if there is a default under this Agreement, to immediately prepay
and make the Bank whole for any outstanding letters of credit.
(iii) the issuance of any letter of credit and any amendment to a letter
of credit is subject to the Bank's written approval and must be in
form and content satisfactory to the Bank and in favor of a
beneficiary acceptable to the Bank.
(iv) to sign the Bank's form Application and Agreement for Commercial
Letter of Credit or Application and Agreement for Standby Letter of
Credit.
(v) to pay any issuance and/or other fees that the Bank notifies the
Borrower will be charged for issuing and processing letters of
credit for the Borrower.
(vi) to allow the Bank to automatically charge its checking account for
applicable fees, discounts, and other charges.
2. OPTIONAL INTEREST RATES
2.1 Optional Rates. Each optional interest rate is a rate per year. Interest
will be paid on the last day of each interest period, and on the first day of
each month during the interest period. At the end of any interest period, the
interest rate will revert to the rate based on the Prime Rate, unless the
Borrower has designated another optional interest rate for the Portion. No
Portion will be converted to a different interest rate during the applicable
interest period. Upon the occurrence of an event of default under this
Agreement, the Bank may terminate the availability of optional interest rates
for interest periods commencing after the default occurs.
2.2 Short Term Fixed Rate. The election of Short Term Fixed Rates shall be
subject to the following terms and requirements:
(a) The "Short Term Fixed Rate" means the fixed interest rate the Bank and the
Borrower agree will apply during the applicable interest period.
(b) The interest period during which the Short Term Fixed Rate will be in
effect will be no shorter than 30 days and no longer than one year.
(c) Each Short Term Fixed Rate Portion will be for an amount not less than the
following:
(i) for interest periods of 91 days or longer, Five Hundred Thousand
Dollars ($500,000).
(ii) for interest periods of between 30 days and 90 days, One Million
Dollars ($1,000,000).
(d) Each prepayment of a Short Term Fixed Rate Portion, whether voluntary, by
reason of acceleration or otherwise, will be accompanied by the amount of
accrued interest on the amount prepaid, and a prepayment fee as described
below. A "prepayment" is a payment of an amount on a date earlier than the
scheduled payment date for such amount as required by this Agreement.
[(e) The prepayment fee shall be in an amount sufficient to compensate the Bank
for any loss, cost or expense incurred by it as a result of the prepayment,
including any loss of anticipated profits and any loss or expense arising
from the liquidation or reemployment of funds obtained by it to maintain
such Portion or from fees payable to terminate the deposits from which such
funds were obtained. The Borrower shall also pay any customary
administrative fees charged by the Bank in connection with the foregoing.
For purposes of this paragraph, the Bank shall be deemed to have funded
each Portion by a matching deposit or other borrowing in the applicable
interbank market, whether or not such Portion was in fact so funded.]
[(f) The prepayment fee shall be equal to the amount (if any) by which:
(i) the additional interest which would have been payable during the
interest period on the amount prepaid had it not been prepaid, exceeds
(ii) the interest which would have been recoverable by the Bank by placing
the amount prepaid on deposit in the domestic certificate of deposit
market, the eurodollar deposit market, or other appropriate money
market
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selected by the Bank for a period starting on the date on which it was
prepaid and ending on the last day of the interest period for such
Portion (or the scheduled payment date for the amount prepaid, if
earlier).]
3. FEES AND EXPENSES
3.1 Fees.
(a) Loan fee. The Borrower agrees to pay a loan fee in the amount of Seven
Thousand Five Hundred and 00/100 Dollars ($7,500,00). This fee is due on or
before the date of this Agreement.
(b) Waiver fee. If the Bank, at its discretion, agrees to waive or amend any
terms of this Agreement, the Borrower will, at the Bank's option, pay the
Bank a fee for each waiver or amendment in an amount advised by the Bank at
the time the Borrower requests the waiver or amendment. Nothing in this
paragraph shall imply that the Bank is obligated to agree to any waiver or
amendment requested by the Borrower. The Bank may impose additional
requirements as a condition to any waiver or amendment.
3.2 Reimbursement Costs.
(a) The Borrower agrees to reimburse the Bank for any expenses it incurs in the
preparation of this Agreement and any agreement or instrument required by
this Agreement. Expenses include, but are not limited to, reasonable
attorneys' fees, including any allocated costs of the Bank's in-house
counsel.
(b) The Borrower agrees to reimburse the Bank for the cost of periodic audits
and appraisals of the personal property collateral securing this Agreement,
at such intervals as the Bank may reasonably require. The audits and
appraisals may be performed by employees of the Bank or by independent
appraisers.
4. COLLATERAL
4.1 Personal Property. The Borrower's obligations to the Bank under this
Agreement will be secured by personal property the Borrower now owns or will own
in the future as listed below. The collateral is further defined in security
agreement(s) executed by the Borrower. In addition, all personal property
collateral securing this Agreement shall also secure all other present and
future obligations of the Borrower to the Bank (excluding any consumer credit
covered by the federal Truth in Lending law, unless the Borrower has otherwise
agreed in writing). All personal property collateral securing any other present
or future obligations of the Borrower to the Bank shall also secure this
Agreement.
(a) Inventory.
(b) Receivables.
4.2 Personal Property Supporting Guaranty. The obligations of the guarantor,
Hukk Engineering, Inc., to the Bank will be secured by personal property the
guarantor now owns or will own in the future as listed below. The collateral is
further defined in security agreement(s) executed by the guarantor.
(a} Inventory.
(b) Receivables.
5. DISBURSEMENTS, PAYMENTS AND COSTS
5.1 Telephone and Telefax Authorization.
(a) The Bank may honor telephone or telefax instructions for advances or
repayments or for the designation of optional interest rates and telefax
requests for the issuance of letters of credit given, or purported to be
given, by any one of the Individuals authorized to sign loan agreements on
behalf of the Borrower, or any other individual designated by any one of
such authorized signers.
(b) Advances will be deposited in and repayments will be withdrawn from the
Borrower's account number 14871-03852, or such other of the Borrower's
accounts with the Bank as designated in writing by the Borrower.
(c) The Borrower will indemnify and hold the Bank harmless from all liability,
loss, and costs in connection with any act resulting from telephone or
telefax instructions the Bank reasonably believes are made by any
individual authorized
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by the Borrower to give such instructions. This paragraph will survive this
Agreement's termination, and will benefit the Bank and its officers,
employees, and agents.
5.2 Direct Debit (Pre-Billing). The Borrower agrees that the Bank will debit
the Borrower's deposit account number 14871-03852, or such other of the
Borrower's accounts with the Bank as designated in writing by the Borrower (the
"Designated Account") on the date each payment of principal and interest and any
fees from the Borrower becomes due (the "Due Date"). Approximately 10 days prior
to each Due Date, the Bank will mail to the Borrower a statement of the amounts
that are expected to be due on that Due Date, based on current information (the
"Billed Amount"). The Bank will debit the Designated Account for the Billed
Amount, regardless of the actual amount due on that date (the "Accrued Amount").
If the Billed Amount debited to the Designated Account differs from the Accrued
Amount, the discrepancy will be added or subtracted from the amount due on the
next due date. Regardless of any such discrepancy, interest will continue to
accrue based on the actual amount of principal outstanding without compounding.
The Bank will not pay the Borrower interest on any overpayment. If there are
insufficient funds in the Designated Account on the date the Bank enters any
debit authorized by this Agreement, the debit will be reversed.
5.3 Banking Days. Unless otherwise provided in this Agreement, a banking-day is
a day other than a Saturday or a Sunday on which the Bank is open for business
in California. All payments and disbursements which would be due on a day which
is not a banking day will be due on the next banking day. All payments received
on a day which is not a banking day will be applied to the credit on the next
banking day.
5.4 Additional Costs. The Borrower will pay the Bank, on demand, for the Bank's
costs or losses arising from any statute or regulation, or any request or
requirement of a regulatory agency which is applicable to all national banks or
a class of all national banks. The costs and losses will be allocated to the
loan in a manner determined by the Bank, using any reasonable method. The costs
include the following:
(a) any reserve or deposit requirements; and
(b) any capital requirements relating to the Bank's assets and commitments for
credit.
5.5 Interest Calculation. Except as otherwise stated in this Agreement, all
interest and fees, if any, will be computed on the basis of a 360-day year and
the actual number of days elapsed. This results in more interest or a higher fee
than if a 365-day year is used. Installments of principal which are not paid
when due under this Agreement shall continue to bear interest until paid.
5.6 Default Rate. Upon the occurrence of any default under this Agreement,
principal amounts outstanding under this Agreement will at the option of the
Bank bear interest at a rate which is 2 percentage point(s) higher than the rate
of interest otherwise provided under this Agreement. This will not constitute a
waiver of any default.
5.7 Interest Compounding. At the Bank's sole option in each instance, any
interest, fees or costs which are not paid when due under this Agreement shall
bear interest from the due date at the Bank's Prime Rate plus 2 percentage
points. This may result in compounding of interest.
6. CONDITIONS
The Bank must receive any documents and other items it may reasonably require,
including but not limited to the following items, in form and content acceptable
to the Bank, before it is required to extend any credit to the Borrower under
this Agreement.
6.1 Authorizations. Evidence that the execution, delivery and performance by
the Borrower and each guarantor of this Agreement and any instrument or
agreement required under this Agreement have been duly authorized.
6.2 Governing Documents. A copy of the Borrower's articles of incorporation.
6.3 Security Agreements. Signed original security agreements, assignments,
financing statements and fixture filings (together with collateral in which the
Bank requires a possessory security interest), which the Bank requires.
6.4 Evidence of Priority. Evidence that security interests and liens in favor
of the Bank are valid, enforceable, and prior to all others' rights and
interests, except those the Bank consents to in writing.
6.5 Guaranty. A guaranty signed by Hukk Engineering, Inc. in the amount of
Three Million Dollars ($3,000,000).
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7. REPRESENTATIONS AND WARRANTIES
When the Borrower signs this Agreement, and until the Bank is repaid in full,
the Borrower makes the following representations and warranties. Each request
for an extension of credit constitutes a renewed representation:
7.1 Organization of Borrower. The Borrower is a corporation duly formed and
existing under the laws of the state where organized.
7.2 Authorization. This Agreement has been duly authorized and is enforceable
without conflict with any laws or any other obligation of the Borrower.
7.3 Good Standing. in each state in which the Borrower does business, it is
properly licensed, in good standing, and, where required, in compliance with
fictitious name statutes.
7.4 Lawsuits. There is no lawsuit, tax claim or other dispute pending or
threatened against the Borrower which, if lost, would impair the Borrower's
financial condition or ability to repay the loan, except as have been disclosed
in writing to the Bank.
7.5 Permits, Franchises. The Borrower possesses all permits, memberships,
franchises, contracts and licenses required and all trademark rights, trade name
rights, patent rights and fictitious name rights necessary to enable it to
conduct the business in which it is now engaged.
7.6 Location of Borrower. The Borrower's place of business (or, if the Borrower
has more than one place of business, its chief executive office) is located at
the address listed under the Borrower's signature on this Agreement.
7.7 Year 2000 Compliance. The Borrower has developed and budgeted for a
comprehensive program to address the "year 2000 problem" (that Is, the inability
of computers, as well as embedded microchips in non-computing devices, to
properly perform date-sensitive functions with respect to certain dates prior to
and after December 31, 1999). The Borrower has implemented that program
substantially in accordance with its timetable and budget and reasonably
anticipates that it will substantially avoid the year 2000 problem as to all
computers, as well as embedded microchips in non-computing devices, that are
material to the Borrower's business, properties or operations. The Borrower has
developed adequate contingency plans to ensure uninterrupted and unimpaired
business operation in the event of a failure of its own or a third party's
systems or equipment due to the year 2000 problem, including those of vendors,
customers, and suppliers, as well as a general failure of or interruption in its
communications and delivery infrastructure.
8. COVENANTS
The Borrower agrees, so long as credit is available under this Agreement and
until the Bank is repaid in full:
8.1 Use of Proceeds. To use the proceeds of the credit only for financing short
term operation needs and business acquisitions.
8.2 Financial Information. To provide the following financial information and
statements in form and content acceptable to the Bank, and such additional
information as requested by the Bank from time to time:
(a) Within 120 days of the Borrower's fiscal year end, the Borrower's annual
financial statements. These financial statements must be audited (with an
unqualified opinion) by a Certified Public Accountant ("CPA") acceptable to
the Bank. The statements shall be prepared on a consolidated basis.
(b) Within 120 days of the Borrower's fiscal year end, the Borrower's annual
financial statements. These financial statements may be Borrower preapred.
(c) Within 45 days of the period's end, the Borrower's quarterly financial
statements. These financial statements may be Borrower prepared. The
statements shall be prepared on a consolidated basis.
(d) Within the period(s) provided in (c) above, a compliance certificate of the
Borrower signed by an authorized financial officer of the Borrower setting
forth (i) the information and computations (in sufficient detail) to
establish that the Borrower is in compliance with all financial covenants
at the end of the period covered by the financial statements then being
furnished and (ii) whether there existed as of the date of such financial
statements and whether there exists as of the date of the certificate, any
default under this Agreement and, if any such default exists, specifying
the nature thereof and the action the Borrower is taking and proposes to
take with respect thereto.
(e) Within 120 days of Hukk Engineering Inc.'s fiscal year end, Hukk
Engineering, Inc.'s annual financial statements. These financial statements
may be company prepared.
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(f) Within 45 days of the period's end. Hukk Engineering, Inc.'s quarterly
financial statements. These financial statements may be company prepared.
(g) Within 120 days of the Borrower's fiscal year end, the Borrower's annual
budget, including balance sheet, income statement, and cash flow projected
on a monthly basis, These statements may be Borrower prepared.
8.3 Quick Ratio. To maintain a ratio of quick assets to current liabilities of
at least 1.5:1.0.
"Quick assets" means cash plus non-foreign accounts receivable, short-term cash
investments in non-affiliated entities, net trade receivables and marketable
securities not classified as long-term investments. "Current liabilities" shall
include (a) all obligations classified as current liabilities under generally
accepted accounting principles, plus (b) all principal amounts outstanding under
revolving lines of credit, whether classified as current or long-term, which are
not already included under (a) above.
8.4 Total Liabilities to Tangible Net Worth. To maintain a ratio of total
liabilities to tangible net worth not exceeding 0.75:1.0.
"Total liabilities" means the sum of current liabilities plus long term
liabilities.
"Tangible net worth" means the gross book value of the Borrower's assets
(excluding goodwill, patents, trademarks, trade names, organization expense,
unamortized debt discount and expense, capitalized or deferred research and
development costs, deferred marketing expenses, deferred receivables, and other
like intangibles, and monies due from affiliates, officers, directors, employees
or shareholders of the Borrower) less total liabilities, including but not
limited to accrued and deferred income taxes, and any reserves against assets.
8.5 Profitability. To maintain on a consolidated basis a positive net income
after taxes and extraordinary items for each quarterly accounting period and at
fiscal year end.
8.6 Other Debts. Not to have outstanding or incur any direct or contingent
liabilities (other than those to the Bank), or become liable for the liabilities
of others, without the Bank's written consent. This does not prohibit:
(a) Acquiring goods, supplies, or merchandise on normal trade credit.
(b) Endorsing negotiable instruments received in the usual course of business.
(c) Obtaining surety bonds in the usual course of business.
(d) Liabilities and lines of credit in existence on the date of this Agreement
disclosed in writing to the Bank.
(e) Additional debts which do not exceed a total principal amount of One
Million Dollars ($1,000,000) outstanding at any one time.
8.7 Other Liens. Not to create, assume, or allow any security interest or lien
(including judicial liens) on property the Borrower now or later owns, except:
(a) Deeds of trust and security agreements in favor of the Bank.
(b) Liens for taxes not yet due.
(c) Liens outstanding on the date of this Agreement disclosed in writing to the
Bank.
(d) Additional liens which secure obligations in a total principal amount not
exceeding One Million Dollars ($1,000,000).
8.8 Capital Expenditures. Not to spend or incur obligations (including the
total amount of any capital leases) for more than Three Million Dollars
($3,000,000) in any single fiscal year to acquire fixed assets.
8.9 Dividends. Not to declare or pay any dividends on any of its shares, and
not to purchase, redeem or otherwise acquire for value any of its shares, or
create any sinking fund in relation thereto, except:
(a) dividends payable in its capital stock;
(b) from earnings available for dividends and earned during the immediately
preceding fiscal year, and in any event, not in excess of Seven Hundred
Fifty Thousand Dollars ($750,000) in any one fiscal year.
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8.10 Change of Ownership. Not to cause, permit, or suffer any change, direct or
indirect, in the Borrower's capital ownership.
8.11 Paydown Period. To reduce the amount of advances outstanding under this
Agreement to[ zero] for a period of at least 30 consecutive days in each line-
year. "Line-year" means the period between the date of this Agreement and
October 1, 2000, and each subsequent one-year period (if any). For the purposes
of this paragraph, "advances" does not include undrawn amounts of outstanding
letters of credit.
8.12 Stock Purchase, Redemption. Not to purchase, redeem or otherwise acquire
for value any of its shares, or create any sinking fund in relation thereto,
except an amount in any fiscal year not to exceed 20% of the Borrower's net
income for the previous fiscal year.
8.13 Notices to Bank. To promptly notify the Bank in writing of:
(a) any lawsuit over Two Hundred Fifty Thousand Dollars ($250,000) against the
Borrower (or any guarantor).
(b) any substantial dispute between the Borrower (or any guarantor) and any
government authority.
(c) any event of default under this Agreement, or any event which, with notice
or lapse of time or both, would constitute an event of default.
(d) any material adverse change in the Borrower's (or any guarantor's) business
condition (financial or otherwise), operations, properties or prospects, or
ability to repay the credit.
(e) any change in the Borrower's name, legal structure, place of business, or
chief executive office if the Borrower has more than one place of business.
(f) any actual contingent liabilities of the Borrower (or any guarantor), and
any such contingent liabilities which are reasonably foreseeable.
8.14 Audits. To allow the Bank and its agents to inspect the Borrower's
properties and examine, audit, and make copies of books and records at any
reasonable time. If any of the Borrower's properties, books or records are in
the possession of a third party, the Borrower authorizes that third party to
permit the Bank or its agents to have access to perform inspections or audits
and to respond to the Bank's requests for information concerning such
properties, books and records. The Bank has no duty to inspect the Borrower's
properties or to examine, audit, or copy books and records and the Bank shall
not incur any obligation or liability by reason of not making any such
inspection or inquiry. In the event that the Bank inspects the Borrower's
properties or examines, audits, or copies books and records, the Bank will be
acting solely for the purposes of protecting the Bank's security and preserving
the Bank's rights under this Agreement. Neither the Borrower nor any other party
is entitled to rely on any inspection or other inquiry by the Bank. The Bank
owes no duty of care to protect the Borrower or any other party against, or to
inform the Borrower or any other party of, any adverse condition that may be
observed as affecting the Borrower's properties or premises, or the Borrower's
business. In the event that the Bank has a duty or obligation under applicable
laws, regulations or legal requirements to disclose any report or findings made
as a result of, or in connection with, any site visit, observation or testing by
the Bank, the Bank may make such a disclosure to the Borrower or any other
party.
8.15 Compliance with Laws. To comply with the laws (including any fictitious
name statute), regulations, and orders of any government body with authority
over the Borrower's business.
8.16 Perfection of Liens. To help the Bank perfect and protect its security
interests and liens, and reimburse it for related costs it incurs to protect its
security interests and liens.
8.17 Insurance.
(a) Insurance Covering Collateral. To maintain all risk property damage
insurance policies covering the tangible property comprising the
collateral. Each insurance policy must be in an amount acceptable to the
Bank. The insurance must be issued by an insurance company acceptable to
the Bank and must include a lender's loss payable endorsement in favor of
the Bank in a form acceptable to the Bank.
(b) General Business Insurance. To maintain insurance as is usual for the
business it is in.
(c) Evidence of Insurance. Upon the request of the Bank, to deliver to the Bank
a copy of each insurance policy, or, if permitted by the Bank, a
certificate of insurance listing all insurance in force.
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8.18 Additional Negative Covenants. Not to, without the Bank's written consent:
(a) engage in any business activities substantially different from the
Borrower's present business.
(b) liquidate or dissolve the Borrower's business.
(c) enter into any consolidation, merger, or other combination, or become a
partner in a partnership, a member of a joint venture, or a member of a
limited liability company.
(d) sell, assign, lease, transfer or otherwise dispose of any assets for less
than fair market value, or enter into any agreement to do so.
(e) sell, assign, lease, transfer or otherwise dispose of all or a substantial
part of the Borrower's business or the Borrower's assets except in the
ordinary course of the Borrower's business.
(f) enter into any sale and leaseback agreement covering any of its fixed
assets.
(g) acquire or purchase a business or its assets for a consideration, including
assumption of direct or contingent debt, in excess of One Million Five
Hundred Thousand Dollars ($1,500,000) in the aggregate.
8.19 Bank as Principal Depository. To maintain the Bank as its principal
depository bank, including for the maintenance of business, cash management,
operating and administrative deposit accounts.
9. HAZARDOUS WASTE INDEMNIFICATION
The Borrower will indemnify and hold harmless the Bank from any loss or
liability directly or indirectly arising out of the use, generation,
manufacture, production, storage, release, threatened release, discharge,
disposal or presence of a hazardous substance. This indemnity will apply whether
the hazardous substance is on, under or about the Borrower's property or
operations or property leased to the Borrower. The indemnity includes but is not
limited to attorneys' fees (including the reasonable estimate of the allocated
cost of in-house counsel and staff). The indemnity extends to the Bank, its
parent, subsidiaries and all of their directors, officers, employees, agents,
successors, attorneys and assigns. "Hazardous substances" means any substance,
material or waste that is or becomes designated or regulated as "toxic,"
"hazardous," "pollutant," or "contaminant" or a similar designation or
regulation under any federal, state or local law (whether under common law,
statute, regulation or otherwise) or judicial or administrative interpretation
of such, including without limitation petroleum or natural gas. This indemnity
will survive repayment of the Borrower's obligations to the Bank.
10. DEFAULT
If any of the following events occurs, the Bank may do one or more of the
following: declare the Borrower in default, stop making any additional credit
available to the Borrower, and require the Borrower to repay its entire debt
immediately and without prior notice. If an event of default occurs under the
paragraph entitled "Bankruptcy," below, with respect to the Borrower, then the
entire debt outstanding under this Agreement will automatically be due
immediately.
10.1 Failure to Pay. The Borrower fails to make a payment under this Agreement
when due.
10.2 Lien Priority. The Bank fails to have an enforceable first lien (except
for any prior liens to which the Bank has consented in writing) on or security
interest in any property given as security for this Agreement (or any guaranty).
10.3 False Information. The Borrower (or any guarantor) has given the Bank
false or misleading information or representations.
10.4 Bankruptcy. The Borrower (or any guarantor) files a bankruptcy petition, a
bankruptcy petition is filed against the Borrower (or any guarantor) or the
Borrower (or any guarantor) makes a general assignment for the benefit of
creditors.
10.5 Receivers. A receiver or similar official is appointed for the Borrower's
(or any guarantor's) business, or the business is terminated.
10.6 Lawsuits. Any lawsuit or lawsuits are filed on behalf of one or more trade
creditors against the Borrower (or any guarantor) in an aggregate amount of Two
Hundred Fifty Thousand Dollars ($250,000) or more in excess of any insurance
coverage.
10.7 Judgments. Any judgments or arbitration awards are entered against the
Borrower (or any guarantor), or the Borrower (or any guarantor) enters into any
settlement agreements with respect to any litigation or arbitration, in an
aggregate amount of Two Hundred Fifty Thousand Dollars ($250,000) or more in
excess of any insurance coverage.
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10.8 Government Action. Any government authority takes action that the Bank
believes materially adversely affects the Borrower's (or any guarantor's)
financial condition or ability to repay.
10.9 Material Adverse Change. A material adverse change occurs, or is
reasonably likely to occur, in the Borrower's (or any guarantor's) business
condition (financial or otherwise), operations, properties or prospects, or
ability to repay the credit.
10.10 Cross-default. Any default occurs under any agreement in connection with
any credit the Borrower (or any guarantor) or any of the Borrower's related
entities or affiliates has obtained from anyone else or which the Borrower (or
any guarantor) or any of the Borrower's related entities or affiliates has
guaranteed.
10.11 Default under Related Documents. Any guaranty, subordination agreement,
security agreement, deed of trust, or other document required by this Agreement
is violated or no longer in effect.
10.12 Other Bank Agreements. The Borrower (or any guarantor) fails to meet the
conditions of, or fails to perform any obligation under any other agreement the
Borrower (or any guarantor) has with the Bank or any affiliate of the Bank.
10.13 Other Breach Under Agreement. The Borrower fails to meet the conditions
of, or fails to perform any obligation under, any term of this Agreement not
specifically referred to in this Article. This includes any failure or
anticipated failure by the Borrower to comply with any financial covenants set
forth in this Agreement, whether such failure is evidenced by financial
statements delivered to the Bank or is otherwise known to the Borrower or the
Bank.
11. ENFORCING THIS AGREEMENT; MISCELLANEOUS
11.1 GAAP. Except as otherwise stated in this Agreement, all financial
information provided to the Bank and all financial covenants will be made under
generally accepted accounting principles, consistently applied.
11.2 California Law. This Agreement is governed by California law.
11.3 Successors and Assigns. This Agreement is binding on the Borrower's and
the Bank's successors and assignees. The Borrower agrees that it may not assign
this Agreement without the Bank's prior consent. The Bank may sell
participations in or assign this loan, and may exchange financial information
about the Borrower with actual or potential participants or assignees. If a
participation is sold or the loan is assigned, the purchaser will have the right
of set-off against the Borrower.
11 4 Arbitration.
11.5 Severability; Waivers. If any part of this Agreement is not enforceable,
the rest of the Agreement may be enforced. The Bank retains all rights, even if
it makes a loan after default. !f the Bank waives a default, it may enforce a
later default. Any consent or waiver under this Agreement must be in writing.
11.6 Attorneys' Fees. The Borrower shall reimburse the Bank for any reasonable
costs and attorneys' fees incurred by the Bank in connection with the
enforcement or preservation of any rights or remedies under this Agreement and
any other documents executed in connection with this Agreement, and in
connection with any amendment, waiver, "workout" or restructuring under this
Agreement. In the event of a lawsuit or arbitration proceeding, the prevailing
party is entitled to recover costs and reasonable attorneys' fees incurred in
connection with the lawsuit or arbitration proceeding, as determined by the
court or arbitrator. In the event that any case is commenced by or against the
Borrower under the Bankruptcy Code (Title 11, United States Code) or any similar
or successor statute, the Bank is entitled to recover costs and reasonable
attorneys' fees incurred by the Bank related to the preservation, protection, or
enforcement of any rights of the Bank in such a case. As used in this paragraph,
"attorneys' fees" includes the allocated costs of the Bank's in-house counsel.
11.7 One Agreement This Agreement and any related security or other agreements
required by this Agreement, collectively:
(a) represent the sum of the understandings and agreements between the Bank and
the Borrower concerning this credit;
(b) replace any prior oral or written agreements between the Bank and the
Borrower concerning this credit; and
(c) are intended by the Bank and the Borrower as the final, complete and
exclusive statement of the terms agreed to by them.
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In the event of any conflict between this Agreement and any other agreements
required by this Agreement. this Agreement will prevail.
11.8 Indemnification. The Borrower will indemnify and hold the Bank harmless
from any loss, liability, damages, judgments, and costs of any kind relating to
or arising directly or indirectly out of (a) this Agreement or any document
required hereunder, (b) any credit extended or committed by the Bank to the
Borrower hereunder, and (c) any litigation or proceeding related to or arising
out of this Agreement, any such document, or any such credit. This indemnity
includes but is not limited to attorneys' fees (including the allocated cost of
in-house counsel). This indemnity extends to the Bank, its parent, subsidiaries
and all of their directors, officers, employees, agents, successors, attorneys,
and assigns. This indemnity will survive repayment of the Borrower's obligations
to the Bank. All sums due to the Bank hereunder shall be obligations of the
Borrower, due and payable immediately without demand.
11.9 Prior Agreement Superseded. This Agreement supersedes the Business Loan
Agreement entered into as of July 24, 1998 between the Bank and the Borrower,
and any credit outstanding thereunder shall be deemed to be outstanding under
this Agreement.
This Agreement is executed as of the date stated at the top of the first page.
Bank of America, N.A., Sunrise telecom, Inc.
X /s/ Lakshmi Wolterding X /s/ Paul Chang
------------------------------------- ------------------------------
By: Lakshmi Wolterding, Vice President By: Paul Chang, President/Chief
Executive Officer
X /s/ Peter Eidelman
Address where notices to the Bank are to ------------------------------
be sent: By: Peter Eidelman, Treasurer
San Jose Commercial Banking Office #01487 Address for Notices:
101 Park Center Plaza, First Floor 22 Great Oaks
San Jose, CA 95113 Boulevard
San Jose, CA 95119
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<PAGE>
[LOGO] Bank of America
================================================================================
To: Continuing Guaranty
Borrowers: Sunrise Telecom, Inc.
Bank of America, N.A.
Guarantors: Hukk Engineering, Inc.
(1) For valuable consideration, the undersigned ("Guarantors") jointly and
severally unconditionally guarantee and promise to pay to Bank of America, N.A.
("Bank"), or order, on demand, in lawful money of the United States, any and all
indebtedness of Sunrise Telecom, Inc. ("Borrowers") to Bank. The word
"indebtedness" is used herein in its most comprehensive sense and includes any
and all advances, debts, obligations, and liabilities of Borrowers or any one or
more of them to Bank, heretofore, now, or hereafter made, incurred or created,
whether voluntary or involuntary and however arising, whether direct or acquired
by Bank by assignment or succession, whether due or not due, absolute or
contingent, liquidated or unliquidated, determined or undetermined, and whether
Borrowers may be liable individually or jointly with others, or whether recovery
upon such indebtedness may be or hereafter become barred by any statute of
limitations, or whether such indebtedness may be or hereafter become otherwise
unenforceable.
(2) The liability of Guarantors under this Guaranty (exclusive of liability
under any other guaranties executed by Guarantors) shall not exceed at any one
time the total of (a) Three Million and 00/100 Dollars ($3,000,000.00), for the
principal amount of the indebtedness and (b) all interest, fees, and other costs
and expenses relating to or arising out of the indebtedness or such part of the
indebtedness as shall not exceed the foregoing limitation. It is provided,
however, that the amount guaranteed under this Guaranty shall not exceed the
Maximum Guaranteed Amount. "Maximum Guaranteed Amount" means the greater of: (x)
the "reasonably equivalent value" received by Guarantors in exchange for or in
connection with Guarantors' execution of this Guaranty; or (y) ninety percent
(90%) of the excess of (i) a "fair valuation" of the amount of the assets of
Guarantors as of the applicable date of determination of the incurrence of
Guarantors' obligations under this Guaranty over (ii) a "fair valuation" of
Guarantors' debts as of such date. For purposes of the definition of "Maximum
Guaranteed Amount", "reasonably equivalent value", "fair valuation" and the
calculation of assets and other property and debts shall be determined in
accordance with applicable federal and California state laws governing the
determination of the insolvency of a debtor and to further the intent of the
parties not to render Guarantors insolvent or to leave Guarantors with an
unreasonably small amount of capital in relation to their business, in all cases
at the applicable date for determination of the incurrence of Guarantors'
obligations under this Guaranty. Bank may permit the indebtedness to exceed
Guarantors' liability, and may apply any amounts received from any source, other
than from Guarantors, to the unguaranteed portion of the indebtedness. This is a
continuing guaranty relating to any indebtedness, including that arising under
successive transactions which shall either continue the indebtedness or from
time to time renew it after it has been satisfied. Any payment by Guarantors
shall not reduce their maximum obligation hereunder, unless written notice to
that effect be actually received by Bank at or prior to the time of such
payment.
(3) If any Borrower is a partnership and any Guarantor is a general partner
of that partnership, then such Guarantor shall not be liable under this Guaranty
for any indebtedness of such Borrower which is secured by real property;
provided, however, that such Guarantor shall remain liable under partnership law
for all the indebtedness of such Borrower.
(4) The obligations hereunder are joint and several, and independent of the
obligations of Borrowers, and a separate action or actions may be brought and
prosecuted against Guarantors whether action is brought against Borrowers or
whether Borrowers be joined in any such action or actions; and Guarantors waive
the benefit of any statute of limitations affecting their liability hereunder.
(5) Guarantors authorize Bank, without notice or demand and without
affecting their liability hereunder, from time to time, either before or after
revocation hereof, to (a) renew, compromise, extend, accelerate, or otherwise
change the time for payment of, or otherwise change the terms of the
indebtedness or any part thereof, including increase or decrease of the rate of
interest thereon; (b) receive and hold security for the payment of this Guaranty
or any of the indebtedness, and exchange, enforce, waive, release, fail to
perfect, sell, or otherwise dispose of any such security; (c) apply such
security and direct the order or manner of sale thereof as Bank in its
discretion may determine; and (d) release or substitute any one or more of the
endorsers or guarantors.
(6) Guarantors waive any right to require Bank to (a) proceed against
Borrowers; (b) proceed against or exhaust any security held from Borrowers; or
(c) pursue any other remedy in Bank's power whatsoever. Guarantors waive any
defense arising by reason of any disability or other defense of Borrowers, or
the cessation from any cause whatsoever of the liability of Borrowers, or any
claim that Guarantors' obligations exceed or are more burdensome than those of
Borrowers. Until the indebtedness shall have been paid in full, even though the
indebtedness is in excess of Guarantors' liability hereunder, Guarantors waive
any right of subrogation, reimbursement, indemnification, and contribution
(contractual, statutory, or otherwise) including, without limitation, any claim
or right of subrogation under the Bankruptcy Code (Title 11, United States Code)
or any successor statute, arising from the existence or performance of this
Guaranty and Guarantors waive any right to enforce any remedy which Bank now has
or may hereafter have against Borrowers and waive any benefit of, and any right
to participate in, any security now or hereafter held by Bank. Guarantors waive
all presentments, demands for performance, notices of nonperformance, protests,
notices of protest, notices of dishonor, and notices of acceptance of this
Guaranty and of the existence, creation, or incurring of new or additional
Indebtedness.
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(7) (a) Guarantors understand and acknowledge that if Bank forecloses,
either by judicial foreclosure or by exercise of power of sale, any deed of
trust securing the indebtedness, that foreclosure could impair or destroy any
ability that Guarantors may have to seek reimbursement, contribution, or
indemnification from Borrowers or others based on any right Guarantors may have
of subrogation, reimbursement, contribution, or indemnification for any amounts
paid by Guarantors under this Guaranty. Guarantors further understand and
acknowledge that in the absence of this paragraph, such potential impairment or
destruction of Guarantors' rights, if any, may entitle Guarantors to assert a
defense to this Guaranty based on Section 580d of the California Code of Civil
Procedure as interpreted in Union Bank v. Gradsky, 265 Cal. App. 2d. 40 (1968).
---------------------
By executing this Guaranty, Guarantors freely, irrevocably, and unconditionally:
(i) waive and relinquish that defense and agree that Guarantors will be fully
liable under this Guaranty even though Bank may foreclose, either by judicial
foreclosure or by exercise of power of sale, any deed of trust securing the
indebtedness; (ii) agree that Guarantors will not assert that defense in any
action or proceeding which Bank may commence to enforce this Guaranty; (iii)
acknowledge and agree that the rights and defenses waived by Guarantors in this
Guaranty include any right or defense that Guarantors may have or be entitled to
assert based upon or arising out of any one or more of Sections 580a, 580b,
580d, or 726 of the California Code of Civil Procedure or Section 2848 of the
California Civil Code; and (iv) acknowledge and agree that Bank is relying on
this Waiver in creating the indebtedness, and that this waiver is a material
part of the consideration which Bank is receiving for creating the indebtedness.
(b) Guarantors waive any rights and defenses that are or may become
available to Guarantors by reason of Sections 2787 to 2855, inclusive, of the
California Civil Code.
(c) Guarantors waive all rights and defenses that Guarantors may have
because any of the indebtedness is secured by real property. This means, among
other things: (I) Bank may collect from Guarantors without first foreclosing on
any real or personal property collateral pledged by Borrowers; and (ii) if Bank
forecloses on any real property collateral pledged by Borrowers: (1) the amount
of the indebtedness may be reduced only by the price for which that collateral
is sold at the foreclosure sale, even if the collateral is worth more than the
sale price, and (2) Bank may collect from Guarantors even if Bank, by
foreclosing on the real property collateral, has destroyed any right Guarantors
may have to collect from Borrowers. This is an unconditional and irrevocable
waiver of any rights and defenses Guarantors may have because any of the
indebtedness is secured by real property. These rights and defenses include, but
are not limited to, any rights or defenses based upon Section 580a, 580b, 580d,
or 726 of the California Code of Civil Procedure.
(d) Guarantors waive any right or defense they may have at law or
equity, including California Code of Civil Procedure Section 580a, to a fair
market value hearing or action to determine a deficiency judgment after a
foreclosure.
(e) No provision or waiver in this Guaranty shall be construed as
limiting the generality of any other waiver contained in this Guaranty.
(8) Guarantors acknowledge and agree that they shall have the sole
responsibility for obtaining from Borrowers such information concerning
Borrowers' financial conditions or business operations as Guarantors may
require, and that Bank has no duty at any time to disclose to Guarantors any
information relating to the business operations or financial conditions of
Borrowers.
(9) To secure all of Guarantors' obligations hereunder, Guarantors assign
and grant to Bank a security interest in all moneys, securities, and other
property of Guarantors now or hereafter in the possession of Bank, all deposit
accounts of Guarantors maintained with Bank, and all proceeds thereof. Upon
default or breach of any of Guarantors' obligations to Bank, Bank may apply any
deposit account to reduce the indebtedness and may foreclose any collateral as
provided in the Uniform Commercial Code and in any security agreements between
Bank and Guarantors.
(10) Any obligations of Borrowers to Guarantors, now or hereafter existing,
including but not limited to any obligations to Guarantors as subrogees of Bank
or resulting from Guarantors' performance under this Guaranty, are hereby
subordinated to the indebtedness. Such obligations of Borrowers to Guarantors if
Bank so requests shall be enforced and performance received by Guarantors as
trustees for Bank, and the proceeds thereof shall be paid over to Bank on
account of the indebtedness, but without reducing or affecting in any manner the
liability of Guarantors under the provisions of this Guaranty.
(11) This Guaranty may be revoked at any time by Guarantors in respect to
future transactions, unless there is a continuing consideration as to such
transactions which Guarantors do not renounce. Such revocation shall be
effective upon actual receipt by Bank, at the address shown below or at such
other address as may have been provided to Guarantors by Bank, of written notice
of revocation. Revocation shall not affect any of Guarantors' obligations or
Bank's rights with respect to transactions which precede Bank's receipt of such
notice, regardless of whether or not the indebtedness related to such
transactions, before or after revocation, has been renewed, compromised,
extended, accelerated, or otherwise changed as to any of its terms, including
time for payment or increase or decrease of the rate of interest thereon, and
regardless of any other act or omission of Bank authorized hereunder. Revocation
by any one or more of Guarantors shall not affect any obligations of any
nonrevoking Guarantors. If this Guaranty is revoked, returned, or canceled, and
subsequently any payment or transfer of any interest in property by Borrowers to
Bank is rescinded or
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<PAGE>
must be returned by Bank to Borrowers, this Guaranty shall be reinstated with
respect to any such payment or transfer, regardless of any such prior
revocation, return, or cancellation.
(12) Where any one or more of Borrowers are corporations, partnerships, or
limited liability companies, it is not necessary for Bank to inquire into the
powers of Borrowers or of the officers, directors, partners, members, managers,
or agents acting or purporting to act on their behalf, and any indebtedness made
or created in reliance upon the professed exercise of such powers shall be
guaranteed hereunder.
(13) (a) Guarantors, authorize Bank to verify or check any information
given by Guarantors to Bank, check Guarantors' credit references, verify
employment, and obtain credit reports.
(b) Guarantors authorize Bank to disclose to any of Bank's affiliates
any information given by Guarantors to Bank in connection with Bank's extension
of credit to Borrowers provided that (i) such information will be used by such
affiliate only in connection with evaluating Borrowers' request or application
for a product or service offered by such affiliate and (ii) Guarantors may at
any time revoke this authorization. Such revocation shall be effective upon
actual receipt by Bank, at the address shown below or at such other address as
may have been provided to Guarantors by Bank, of written notice of such
revocation.
(c) Guarantors acknowledge and agree that the authorizations provided
in subparagraphs (a) and (b) of-this paragraph apply to any individual general
partners of any Guarantor and to any Guarantor's spouse and any such general
partner's spouse if such Guarantor or such general partner is married and lives
in a community property state.
(14) Bank may, without notice to Guarantors and without affecting
Guarantors' obligations hereunder, assign the indebtedness and this Guaranty, in
whole or in part. Guarantors agree that Bank may disclose to any assignee or
purchaser, or any prospective assignee or purchaser, of all or part of the
indebtedness any and all information in Bank's possession concerning Guarantors,
this Guaranty, and any security for this Guaranty,
(15) Guarantors agree to pay all reasonable attorneys' fees, including
allocated costs of Bank's in-house counsel, and all other costs and expenses
which may be incurred by Bank (a) in the enforcement of this Guaranty or (b) in
the preservation, protection, or enforcement of any rights of Bank in any case
commenced by or against Guarantors under the Bankruptcy Code (Title 11, United
States Code) or any similar or successor statute.
(16) Where there is but a single Borrower, or where a single Guarantor
executes this Guaranty, then all words used herein in the plural shall be deemed
to have been used in the singular where the context and construction so require;
and when there is more than one Borrower named herein, or when this Guaranty is
executed by more than one Guarantor, the words "Borrowers" and "Guarantors"
respectively shall mean all and any one or more of them.
(17) This Guaranty shall be governed by and construed according to the laws
of the State of California, to the jurisdiction of which the parties hereto
submit.
(18) (a) Any controversy or claim between or among the parties, including
but not limited to those arising out of or relating to this Guaranty or any
agreements or instruments relating hereto or delivered in connection herewith
and any claim based on or arising from an alleged tort, shall at the request of
any party be determined by arbitration. The arbitration shall be conducted in
accordance with the United States Arbitration Act (Title 9, U.S. Code),
notwithstanding any choice of law provision in this Guaranty, and under the
Commercial Rules of the American Arbitration Association ("AAA"). The
arbitrators shall give effect to statutes of limitation in determining any
claim, except as expressly waived hereunder by Guarantors. Any controversy
concerning whether an issue is arbitrable shall be determined by the
arbitrators. Judgment upon the arbitration award may be entered in any court
having jurisdiction. The institution and maintenance of an action for judicial
relief or pursuit of a provisional or ancillary remedy shall not constitute a
waiver of the right of any party, including the plaintiff, to submit the
controversy or claim to arbitration if any other party contests such action for
judicial relief.
(b) Notwithstanding the provisions of subparagraph (a), no controversy
or claim shall be submitted to arbitration without the consent of all parties
if, at the time of the proposed submission, such controversy or claim arises
from or relates to an obligation to Bank which is secured by real property
collateral located in California. If all parties do not consent to submission of
such a controversy or claim to arbitration, the controversy or claim shall be
determined as provided in subparagraph (c).
(c) A controversy or claim which is not submitted to arbitration as
provided and limited in subparagraphs (a) and (b) shall, at the request of any
party, be determined by a reference in accordance with California Code of Civil
Procedure Section 638 et seq. If such an election is made, the parties shall
------
designate to the court a referee or referees selected under the auspices of the
AAA in the same manner as arbitrators are selected in AAA-sponsored proceedings.
The presiding referee of the panel, or the referee if there is a single referee,
shall be an active attorney or retired judge. Judgment upon the award rendered
by such referee or referees shall be entered in the court in which such
proceeding was commenced in accordance with California Code of Civil Procedure
Sections 644 and 645.
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(d) No provision of this paragraph shall limit the right of any party
to this Guaranty to exercise self-help remedies such as setoff, to foreclose
against or sell any real or personal property collateral or security, or to
obtain provisional or ancillary remedies from a court of competent jurisdiction
before, after, or during the pendency of any arbitration or other proceeding.
The exercise of a remedy does not waive the right of either party to resort to
arbitration or reference. At Bank's option, foreclosure under a deed of trust or
mortgage may be accomplished either by exercise of power of sale under the deed
of trust or mortgage or by judicial foreclosure.
Date: 11/9 , 1999
---------------- ----
Witnessed: Hukk Engineering Inc.
X /s/ ????? X /s/ Peter Eidelman
------------------------------ --------------------------------------
Witness By: Peter Eidelman, Secretary Treasurer
X
- ------------------------------- --------------------------------------
Address By:
X
------------------------------ 3250-D Peachtree
Witness Corners Circle
Norcross, Ga 30092
- -------------------------------
Address
Address for Notices:
Bank of America, N.A.
San Jose Commercial Banking Office #01487
101 Park Center Plaza, First Floor
San Jose, CA 95113
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<PAGE>
[LOGO] Bank of America
================================================================================
Security Agreement (Receivables and Inventory)
1. THE SECURITY.
The undersigned Hukk Engineering, Inc. ("Borrower") hereby assigns and grants to
Bank of America, N.A. ("Bank") a security interest in the following described
property ("Collateral"):
A. All of the following, whether now owned or hereafter acquired by
Borrower: accounts, contract rights, chattel paper, instruments,
deposit accounts, and general intangibles.
B. All inventory now owned or hereafter acquired by Borrower.
C. All negotiable and nonnegotiable documents of title now owned or
hereafter acquired by Borrower.
D. All rights under contracts of insurance now owned or hereafter
acquired by Borrower covering any of the above-described property.
E. All proceeds, product, rents and profits now owned or hereafter
acquired by Borrower of any of the above-described property.
F. All books and records now owned or hereafter acquired by Borrower
pertaining to any of the above-described property, including but not
limited to any computer-readable memory and any computer hardware or
software necessary to process such memory ("Books and Records").
2. THE INDEBTEDNESS.
The collateral secures and will secure all Indebtedness of Borrower to Bank. For
the purposes of this Agreement, "Indebtedness" means all loans and advances made
by Bank to Borrower and all other obligations and liabilities of Borrower to
Bank, whether now existing or hereafter incurred or created, whether voluntary
or involuntary, whether due or not due, whether absolute or contingent, or
whether incurred directly or acquired by Bank by assignment or otherwise. Unless
Borrower shall have otherwise agreed in writing, Indebtedness, for the purposes
of this Agreement, shall not include "consumer credit" subject to the disclosure
requirements of the Federal Truth in Lending Act or any regulations promulgated
thereunder.
3. BORROWER'S COVENANTS.
Borrower covenants and warrants that unless compliance is waived by Bank in
writing:
A. Borrower will properly preserve the Collateral; defend the Collateral
against any adverse claims and demands; and keep accurate Books and
Records.
B. Borrower has notified Bank in writing of, and will notify Bank in
writing prior to any change in the locations of (i) Borrower's place of
business or Borrower's chief executive office if Borrower has more than
one place of business and (ii) any Collateral, including the Books and
Records.
C. Borrower will notify Bank in writing prior to any change in Borrower's
name, identity or business structure.
D. Borrower will maintain and keep in force insurance covering Collateral
designated by Bank against fire and extended coverages. Such insurance
shall require losses to be paid on a replacement cost basis, be issued
by insurance companies acceptable to Bank and include a loss payable
endorsement in favor of Bank in a form acceptable to Bank.
E. Borrower has not granted and will not grant any security interest in any
of the Collateral except to Bank, and will keep the Collateral free of
all liens, claims, security interests and encumbrances of any kind or
nature, except the security interest of Bank.
F. Borrower will not sell, lease, agree to sell or lease, or otherwise
dispose of, or remove from Borrower's place of business (i) any
inventory except in the ordinary course of business as heretofore
conducted by Borrower, or (ii) any other Collateral except with the
prior written consent of Bank.
G. Borrower will promptly notify Bank in writing of any event which affects
the value of any Collateral, the ability of Borrower or Bank to dispose
of any Collateral, or the rights and remedies of Bank in relation
thereto, including but not limited to, the levy of any legal process
against any Collateral and the adoption of any marketing order,
arrangement or procedure affecting the Collateral, whether governmental
or otherwise.
H. If any Collateral is or becomes the subject of any negotiable document
of title including any warehouse receipt or bill of lading, Borrower
shall immediately deliver such document to Bank.
I. Until Bank exercises its rights to make collection, Borrower will
diligently collect all Collateral.
4. ADDITIONAL OPTIONAL REQUIREMENTS.
Borrower agrees that Bank may at its option at any time, whether or not Borrower
is in default:
A. Require Borrower to segregate all collections and proceeds of the
Collateral so that they are capable of identification and deliver daily
such collections and proceeds to Bank in kind.
B. Require Borrower to deliver to Bank (i) copies of or extracts from the
Books and Records, and (ii) information on any contracts or other
matters affecting the Collateral.
C. Examine the Collateral, including the Books and Records, and make copies
of or extracts from the Books and Records, and for such purposes enter
at any reasonable time upon the property where any Collateral or any
Books and Records are located.
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<PAGE>
D. Require Borrower to deliver to Bank any instruments or chattel paper.
E. Require Borrower to obtain Bank's prior written consent to any sale,
lease, agreement to sell or lease, or other disposition of any
inventory.
F. Notify any account debtors, any buyers of the Collateral, or any other
persons of Bank's interest in the Collateral.
G. Require Borrower to direct all account debtors to forward all payments
and proceeds of the Collateral to a post office box under Bank's
exclusive control.
H. Demand and collect any payments and proceeds of the Collateral. In
connection therewith Borrower irrevocably authorizes Bank to endorse or
sign Borrower's name on all checks, drafts, collections, receipts and
other documents, and to take possession of and open the mail addressed
to Borrower and remove therefrom any payments and proceeds of the
Collateral.
5. DEFAULTS.
Any one or more of the following shall be a default hereunder:
A. Borrower fails to pay any indebtedness when due.
B. Borrower breaches any term, provision, warranty or representation under
this Agreement or under any other obligation of Borrower to Bank.
C. Any custodian, receiver or trustee is appointed to take possession,
custody or control of all or a substantial portion of the property of
Borrower or of any guarantor of any indebtedness.
D. Borrower or any guarantor of any indebtedness becomes insolvent, or is
generally not paying or admits in writing its inability to pay its debts
as they become due, fails in business, makes a general assignment for
the benefit of creditors, dies or commences any case, proceeding or
other action under any bankruptcy or other law for the relief of, or
relating to, debtors.
E. Any case, proceeding or other action is commenced against Borrower or
any guarantor of any indebtedness under any bankruptcy or other law for
the relief of, or relating to, debtors.
F. Any involuntary lien of any kind or character attaches to any
Collateral.
G. Any financial statements, certificates, schedules or other information
now or hereafter furnished by Borrower to Bank proves false or incorrect
in any material respect.
6. BANK'S REMEDIES AFTER DEFAULT.
In the event of any default Bank may do any one or more of the following:
A. Declare any indebtedness immediately due and payable, without notice or
demand.
B. Enforce the security interest given hereunder pursuant to the Uniform
Commercial Cede and any other applicable law.
C. Enforce the security interest of Bank in any deposit account of Borrower
maintained with Bank by applying such account to the Indebtedness.
D. Require Borrower to assemble the Collateral, including the Books and
Records, and make them available to Bank at a place designated by Bank.
E. Enter upon the property where any Collateral, including any Books and
Records are located and take possession of such Collateral and such
Books and Records, and use such property (including any buildings and
facilities) and any of Borrower's equipment, if Bank deems such use
necessary or advisable in order to take possession of, hold, preserve,
process, assemble, prepare for sale or lease, market for sale or lease,
sell or [ease, or otherwise dispose of, any Collateral.
F. Grant extensions and compromise or settle claims with respect to the
Collateral for less than face value, all without prior notice to
Borrower.
G. Use or transfer any of Borrower's rights and interest in any
Intellectual Property now owned or hereafter acquired by Borrower, if
Bank deems such use or transfer necessary or advisable in order to take
possession of, hold, preserve, process, assemble, prepare for sale or
lease, market for sale or lease, sell or lease, or otherwise dispose of,
any Collateral. Borrower agrees that any such use or transfer shall be
without any additional consideration to Borrower. As used in this
paragraph, "Intellectual Property" includes, but is not limited to, all
trade secrets, computer software, service marks, trademarks, trade
names, trade styles, copyrights, patents, applications for any of the
foregoing, customer lists, working drawings, instructional manuals, and
rights in processes for technical manufacturing, packaging and labelling
in which Borrower has any right or interest, whether by ownership,
license, contract or otherwise.
H. Have a receiver appointed by any court of competent jurisdiction to take
possession of the Collateral.
I. Take such measures as Bank may deem necessary or advisable to take
possession of, hold, preserve, process, assemble, insure, prepare for
sale or lease, market for sale or lease, sell or lease, or otherwise
dispose of, any Collateral, and Borrower hereby irrevocably constitutes
and appoints Bank as Borrower's attorney-in-fact to perform all acts and
execute all documents in connection therewith.
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<PAGE>
7. MISCELLANEOUS.
A. Any waiver, expressed or implied, of any provision hereunder and any
delay or failure by Bank to enforce any provision shall not preclude
Bank from enforcing any such provision thereafter,
B. Borrower shall, at the request of Bank, execute such other agreements,
documents, instruments, or financing statements in connection with
this Agreement as Bank may reasonably deem necessary.
C. All notes, security agreements, subordination agreements and other
documents executed by Borrower or furnished to Bank in connection with
this Agreement must be in form and substance satisfactory to Bank.
D. This Agreement shall be governed by and construed according to the
laws of the State of California, to the jurisdiction of which the
parties hereto submit.
E. All rights and remedies herein provided are cumulative and not
exclusive of any rights or remedies otherwise provided by law. Any
single or partial exercise of any right or remedy shall not preclude
the further exercise thereof or the exercise of any other right or
remedy.
F. All terms not defined herein are used as set forth in the Uniform
Commercial Code.
G. In the event of any action by Bank to enforce this Agreement or to
protect the security interest of Bank in the Collateral, or to take
possession of, hold, preserve, process, assemble, insure, prepare for
sale or lease, market for sale or lease, sell or lease, or otherwise
dispose of, any Collateral, Borrower agrees to pay immediately the
costs and expenses thereof, together with reasonable attorney's fees
and allocated costs for in-house legal services.
H. Any Borrower who is married agrees that such Borrower's separate
property shall be liable for payment of the indebtedness if such
Borrower is personally liable for the indebtedness.
Date: 11/9 , 1999
----------------- ----
Bank of America, N.A. Borrower:
Hukk Engineering, Inc.
X /s/ Lakshmi Wolterding X /s/ Peter Eidelman
------------------------------------- ------------------------------------
By: Lakshmi Wolterding, Vice President By: Peter Eidelman, Secretary/
Treasurer
X
------------------------------------
By:
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N-255 (03/91) -3- 100699-7-RTIRITIL
<PAGE>
EXHIBIT 10.4
STOCK PURCHASE AGREEMENT
By and Among
SUNRISE TELECOM, INC.,
a California corporation,
HUKK ENGINEERING, INC.,
a Georgia corporation
CLIFFORD D. BROWN
ROBERT L. RICHARDS
JAMES A. BARKER
July 30, 1999
<PAGE>
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement (this "Agreement") is made this 30th day of
July, 1999 (the "Effective Date") by and among Sunrise Telecom, Inc., a
California corporation ("Parent"), Hukk Engineering, Inc., a Georgia corporation
("Hukk"), and Clifford D. Brown, Robert L. Richards, and James A. Barker
(individually referred to herein as "Shareholder" and collectively as
"Shareholders").
RECITALS
A. As of the date hereof, Clifford D. Brown owns 40,000 shares of common
stock of Hukk, Robert L. Richards owns 26,667 shares of common stock of Hukk,
and James A. Barker owns 2,062 shares of common stock of Hukk, which 68,729
shares of common stock collectively constitute all of the issued and outstanding
capital stock of Hukk (the "Shares").
B. The Shareholders desire to sell to Parent and Parent desires to
purchase from the Shareholders the Shares under the terms and conditions set
forth in this Agreement (the "Stock Purchase").
C. Upon the consummation of the transactions contemplated herein, the
parties intend that Hukk shall be a wholly-owned subsidiary of Parent.
D. The Boards of Directors of Parent and Hukk each have determined that
the transactions contemplated in this Agreement are in the best interests of
their respective companies and shareholders and accordingly, have agreed to
effect the Stock Purchase provided for herein upon the terms and subject to the
conditions set forth herein.
E. Parent, Hukk, and the Shareholders desire to make certain
representations, warranties and agreements in connection with the Stock
Purchase.
THEREFORE, in consideration of the foregoing and of the mutual promises,
covenants, representations, warranties, and agreements herein contained, and
intending to be legally bound, the parties hereby agree as follows:
AGREEMENT
ARTICLE 1
PURCHASE AND SALE OF STOCK
1.1 Purchase and Sale of Shares. Upon execution of the Agreement and
---------------------------
subject to the terms and conditions contained herein, the Shareholders shall
sell to Parent, and Parent shall purchase from the Shareholders, the Shares for
the consideration as specified in Sections 1.3 and 1.4.
-1-
<PAGE>
1.2 Closing. The closing of the purchase and sale of the Shares (the
-------
"Closing") shall take place in the offices of Hopkins & Carley, A Law
Corporation, 2 West Santa Clara Struet, Sixth Floor, San Jose, California 95113
on July 30, 1999 (the "Closing Date").
1.3 Purchase Price. The Purchase Price for the Shares shall be One Million
--------------
Seven Hundred Thousand Dollars ($1,700,000) consisting of cash in the amount of
Eight Hundred Thousand Dollars ($800,000); Promissory Notes for an aggregate
principal amount of Four Hundred Fifty Thousand Dollars ($450,000); and One
Hundred Thousand (100,000) shares of common stock of Parent at a per share value
of $4.50.
1.4 Payment of Purchase Price. The Purchase Price shall be paid to the
-------------------------
Shareholders as follows:
(a) At Closing, wire transfer in the amount of Eight Hundred Thousand
Dollars ($800,000) as specified on Schedule 1.4(a).
---------------
(b) At Closing, Promissory Notes in the aggregate amount of Four
Hundred Fifty Thousand Dollars ($450,000) to each of the Shareholders payable in
sixteen quarterly payments commencing October 30, 1999 with interest calculated
at the Federal prime rate plus 2.5% in substantially the form attached hereto as
Exhibits A-l, A-2, and A-3.
- ------------ --- ---
(c) At Closing, One Hundred Thousand (100,000) shares of common stock
of Parent (the "Parent Shares") shall be issued in the name of each Shareholder
subject to certain restrictions and legends as specified on Schedule 1.4(c).
---------------
ARTICLE 2
DIRECTORS AND OFFICERS OF HUKK
2.1 Directors. The directors of Hukk at Closing shall be as specified on
---------
Schedule 2.1 until their successors are duly appointed or elected in accordance
- ------------
with applicable law.
2.2 Officers. The officers of Hukk at Closing shall be as specified on
--------
Schedule 2.2 until their successors are duly appointed or elected in accordance
- ------------
with applicable law.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF HUKK AND SHAREHOLDERS
Except as set forth as written exceptions by Hukk and the Shareholders
before the Closing, Hukk and each of the Shareholders represent and warrant to
Parent as of the Closing Date as follows:
3.1 Organization, Power, Standing and Qualification. Hukk is a corporation
-----------------------------------------------
duly organized, validly existing, and in good standing under the laws of the
State of Georgia and has full corporate power and authority to carry on its
business as it is now being conducted, and to
-2-
<PAGE>
own, lease, and operate the properties and assets now owned, leased and operated
by it. Hukk is duly qualified to do business and is in good standing in Georgia
and as of the Closing Date in each and every other jurisdiction where the
failure to qualify or to be in good standing would have a material adverse
effect upon its financial condition, the conduct of its business, or the
ownership of its property and assets, and such qualification and good standing
is required by the laws of such jurisdiction.
3.2 Power and Authority. Hukk and each Shareholder have the full corporate
-------------------
power and authority or legal capacity and right, as the case may be, to execute,
deliver, and perform this Agreement. This Agreement is a valid and binding
obligation of Hukk and the Shareholders, enforceable in accordance with its
terms.
3.3 Validity of Contemplated Transactions; Consents. The execution,
-----------------------------------------------
delivery, and performance of this Agreement and the consummation of the
transactions contemplated hereby do not and will not:
(a) contravene any provision of the Certificate of Incorporation or
Bylaws of Hukk;
(b) violate, be in conflict with, or constitute a default under (or
any event which, with notice or lapse of time or both would constitute a default
under), cause the acceleration of any payments or performance pursuant to,
result in the termination of or otherwise impair the good standing, validity, or
effectiveness of any agreement, contract, indenture, lease, or mortgage, or
subject any property or asset of Hukk to any liens under any indenture,
mortgage, contract, commitment, or agreement to which Hukk is a party, or any of
its assets may be bound or affected; or
(c) violate any provision of law, role, ordinance, regulation, order,
judgment, permit, or license to which Shareholder or Hukk, or any of its assets,
is subject. Except as set forth on Schedule 3.3 hereto, no consent, approval or
------------
authorization of, notice to, registration or filing with any person, entity or
governmental authority is required on the part of the Shareholders or Hukk in
connection with the execution, delivery and performance by the Shareholders or
Hukk of this Agreement or the consummation of any of the transactions
contemplated hereby.
3.4 Capitalization of Hukk. As of the date hereof, Hukk's total authorized
----------------------
capital stock consists of One Hundred Thousand (100,000) shares of common stock
and One Hundred Thousand (100,000) shares of preferred stock, of which Sixty-
eight Thousand Seventy Nine (68,729) shares of common stock are outstanding and
no (0) shares of preferred stock are outstanding. All of such outstanding shares
have been duly authorized and validly issued, and are fully paid, and non-
assessable. Except as set forth on Schedule 3.4 hereto, there are no outstanding
------------
options, warrants, conversion privileges, subscription, calls, commitments, or
rights of any character relating to the Shares or any authorized but unissued
capital stock of Hukk.
3.5 Ownership of Shares. Except for the rights acquired by Parent pursuant
-------------------
to this Agreement, and except as set forth on Schedule 3.5, the Shareholders
------------
hold all of the legal and
-3-
<PAGE>
beneficial ownership of and title to the Shares, free and clear of any liens.
Each Shareholder owns the number of Shares listed to the right of his name on
Schedule 3.5. Delivery to the Parent of certificates representing the Shares
- ------------
pursuant to this Agreement will transfer to Parent valid title thereto, free and
clear of all liens. No Shareholder has a legal obligation, absolute or
contingent, to any other person or firm to sell any of the Shares or to effect
any merger, consolidation, or other reorganization of Hukk or to enter into any
agreement with respect to the Shares.
3.6 Title to Properties. Except as set forth in Schedule 3.6 hereto, Hukk
------------------- ------------
has good, valid and marketable title to, or valid leasehold interests in, all of
its properties and assets, real, personal, and mixed, tangible and intangible
including all of the properties and assets reflected on the latest balance sheet
of Hukk that is included in the Financial Statements (as defined in Section 3.8
hereof) and those properties and assets acquired since the date of such balance
sheet, except in each case for properties and assets sold or otherwise disposed
of in the ordinary course of business, free and clear of all liens, except (a)
liens disclosed in such balance sheet or the notes thereto; (b) liens for
current taxes not yet due (c) liens in connection with workmen's compensation,
unemployment insurance, or other social security obligations; (d) deposits or
pledges to secure bids, tenders, contracts (other than contracts for the payment
of money), leases, statutory obligations, surety and appeal bonds, and other
obligations of like nature arising in the ordinary course of business; (e)
mechanic's, workmen's, materialmen's, or other like liens arising in the
ordinary course of business with respect to obligations that are not due or that
are being contested in good faith; and (f) such imperfections of title, liens,
easements, and encumbrances, if any, as are not substantial and do not
materially detract from the value, or materially interfere with the present use,
of any of the properties subject thereto or affected thereby, or otherwise
materially impair the business, operations, or prospects of Hukk.
3.7 Intangibles; Names. Schedule 3.7 contains a correct and complete list
------------------ ------------
of all of the trademarks, trade names, service marks, registered copyrights,
patents and patent applications owned or licensed by Hukk (all of such items are
referred to hereinafter collectively as the "Intangibles"). To the knowledge of
the Shareholders; (a) none of the Intangibles or their past or current uses has
infringed or infringes, upon any patent, copyright, trade secret or other
proprietary right of any other person, and (b) no person is infringing upon any
of the Intangibles. In addition, none of the Intangibles is owned by or
registered in the name of any of the Shareholders or any current or former
shareholder, director, officer, employee, contractor or agent of Hukk, nor does
any such person have any interest therein. To the best knowledge of the
Shareholders, no person has a right to receive a royalty with respect to any of
the Intangibles.
3.8 Financial Information.
---------------------
(a) Shareholder has delivered to Parent financial statements for the
fiscal year ending December 31, 1998, the six-month period ended June 30, 1999,
and the period from June 30, 1999 through Closing Date (the "Financial
Statements"). The Financial Statements are complete and correct in all material
respects, have been prepared in accordance with generally accepted accounting
principles, consistently applied, and present
-4-
<PAGE>
fairly the financial condition of Hukk and the results of its operations for the
period ended on such date.
(b) Except as set forth in Schedule 3.8, Hukk has no debts,
------------
liabilities or obligations of any nature, known or unknown, fixed or contingent,
other than:
(i) those set forth in the Financial Statements and the notes
thereto;
(ii) those incurred since the Balance Sheet Date and not in
breach of any of the representations of Section 3.14; and
(iii) those which are not material, individually or in the
aggregate, to Hukk's business, assets or financial condition. To the knowledge
of the Shareholders, there are no circumstances, bases (either with notice,
lapse of time or both), conditions, events or arrangements which may hereafter
give rise to any liabilities of Hukk except in the ordinary course of business
consistent with past practices.
3.9 Tax Matters. Except as set forth on Schedule 3.9 attached hereto, Hukk
----------- ------------
has duly filed all federal, state, foreign and local tax returns and reports
required to be filed by it, and all of Hukk's taxes shown to be due on such
returns and reports or otherwise due and payable, including income, gross
receipt, and other taxes and any penalties with respect thereto, have been paid,
withheld, or reserved for or, to the extent that they relate to periods on or
prior to the date of the Financial Statements, are reflected as a liability on
the Financial Statements. Except as set forth on Schedule 3.9. attached hereto,
------------
no federal, state, local or foreign tax audit is pending or, to the knowledge of
the Shareholders, has been threatened against Hukk. No notice of deficiency or
adjustment has been received by Hukk or any Shareholder by or from any
governmental taxing authority. There are no agreements or waivers in effect
which provide for an extension of time for the assessment of any tax against
Hukk. Correct and complete copies of the following have been delivered by Hukk
or the Shareholders to Parent: Hukk's federal, state, and local tax returns for
all taxable periods for which the applicable statute of limitations remains open
and all correspondence with the Internal Revenue Service relating to any of the
foregoing.
3.10 Litigation; Compliance with Law. Except as set forth in Schedule
------------------------------- --------
3.10(a) hereto, there is no suit, action, claim, arbitration, administrative or
- -------
legal or other proceeding, or governmental investigation pending or, to
Shareholders' knowledge, threatened against Hukk or the Shareholders which
relate to Hukk or to the transactions contemplated by this Agreement. A correct
and complete list and brief description, including outcome, of all claims
threatened or filed against Hukk within the last five (5) years is set forth on
Schedule 3.10(a). To the best of the Shareholders' knowledge, Hukk is in
- ----------------
compliance with all applicable laws, ordinances, requirements, regulations,
judgments, decrees and orders applicable to Hukk, the violation of which,
individually or in the aggregate, might have a material adverse effect on the
financial condition, business, results of operations, properties, or assets of
Hukk, or Parent's ownership of the Shares. Hukk holds all permits, licenses,
consents, authorizations, approvals, privileges, waivers, exemptions and orders
("Permits") necessary or appropriate to permit it to own its properties and to
conduct its business in accordance with applicable laws, regulations
-5-
<PAGE>
and ordinances. Schedule 3.10(b) contains a correct and complete list of all
----------------
such Permits. Except as noted on Schedule 3.10(c), to the best of the
----------------
Shareholders' knowledge, there are no facts in existence that could form the
basis of any claim against Hukk for product liability on account of any express
or implied warranty.
3.11 ERISA Matters.
-------------
(a) Schedule 3.11(a) sets forth a true and complete list of each
----------------
employee benefit or compensation plan, arrangement or agreement that is
maintained, or has been maintained by Hukk (including terminated or transferred
plans) by Hukk or to which Hukk makes contributions and in each case, which
covers employees of Hukk (the "Plans"). Hukk has provided correct and complete
copies of all plan documents, summary plan descriptions, annual reports,
determination letters, trust agreements and other material agreements relating
to the Plans.
(b) Except as set forth in Schedule 3.11(b),
-----------------
(i) each of the Plans that is an "employee benefit plan" within
the meaning of (S) 3(3) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA") materially complies and has always materially complied with
ERISA, to the extent that any noncompliance would not have a materially adverse
effect ;
(ii) each of the Plans intended to be "qualified" within the
meaning of I.R.C. (S) 401 (a), complies and has always materially complied with
the Code, except such non-compliance as shall not disqualify such Plan;
(iii) each of the Plans has always been operated in accordance
with its terms in all material respects;
(iv) all contributions or other amounts payable by Hukk as of
the Closing Date with respect to each Plan in respect of current or prior plan
years have been paid or accrued in accordance with generally accepted accounting
practices and I.R.C (S) 412;
(v) to the knowledge of the Shareholders, there are no pending,
threatened or anticipated claims (other than routine claims for benefits) by, on
behalf of or against any of the Plans or any trusts related thereto.
3.12 Insurance. Hukk has maintained and maintains insurance covering
---------
Hukk's business, assets, the premises and its employees sufficient to comply
with all applicable laws and contracts. Schedule 3.12 is an accurate list of
-------------
each insurance policy owned or maintained by Hukk, correct and complete copies
of which have been delivered to Parent, and all such policies are in full force
and effect and with respect to product liability insurance policies for prior
periods, as enumerated on Schedule 3.12, such insurance was in full force and
-------------
effect for the applicable periods. Hukk has not received any notice of
cancellation with respect to any such policy. No claims are pending under any
such policy, and there are no actions or proceedings based on or arising out of
such policies, except as explained on Schedule 3.12 and
-------------
-6-
<PAGE>
except for claims covered under any employee health insurance plan. To the
knowledge of the Shareholders, there is no basis for the insurer thereunder to
terminate any such policy other than upon the expiration of the policy at the
end of its term in accordance with the provisions of such policies.
3.13 Contracts. Schedule 3.13 lists all contracts, licenses, guaranties,
--------- -------------
notes, leases, agreements and instruments to which Hukk is a party, or is bound
("Contracts"). Except as noted on Schedule 3.13, Hukk has in all material
-------------
respects performed all the material obligations required to be performed by Hukk
as of the date hereof pursuant to any Contract, and Hukk is not in default under
any Contract, nor, to the Shareholders' knowledge, has an event occurred which,
with the passage of time or giving of notice or both, will result in the
occurrence of a default under any Contract. Schedule 3.13 contains a correct and
-------------
complete list of all powers of attorney, forms of warranties, and forms of
purchase orders, sales contracts and service contracts, whether or not material
to the business of Hukk or entered into in the ordinary course of business. A
correct and complete copy of each of such document has been provided to Parent.
3.14 Other Transactions. Except as disclosed on Schedule 3.14 hereto, Hukk
------------------ -------------
has not, since the Balance Sheet Date;
(a) operated its business except in the ordinary course;
(b) incurred any debts, liabilities or obligations except in the
ordinary course of business;
(c) discharged or satisfied any material liens, or paid any material
debts, liabilities, or obligations, except in the ordinary course of business;
(d) mortgaged, pledged, or subjected to any Lien any of its assets,
tangible or intangible, having a book value of more than Twenty Thousand Dollars
($20,000) individually or in the aggregate;
(e) sold or transferred any of its tangible assets (other than
inventory in the ordinary course of business) having a book value of more than
Twenty Thousand Dollars ($20,000), or canceled any material debts or claims;
(f) declared, set aside, or paid any dividend or made any other
distribution (whether in cash, stock or property) with respect to any of Hukk's
capital stock;
(g) suffered any material extraordinary losses or waived any rights of
substantial value;
(h) suffered any materially adverse change in its condition (financial
or otherwise) or business, assets, liabilities, properties or prospects;
(i) increased compensation or benefits payable to any directors,
officers, employees or consultants;
-7-
<PAGE>
(j) suffered any material losses by theft, fire or other casualty;
(k) canceled or suffered the termination of any Contract except in the
ordinary course of business; or
(l) failed to operate the business of Hukk in the ordinary course.
3.15 Bank Accounts. Schedule 3.15 hereto lists the name and address of
------------- -------------
each bank and other financial institution in which Hukk maintains an account
(whether checking, savings or otherwise), lock box, or safe deposit box and the
account numbers and names of persons having signing authority or other access
thereto.
3.16 Compensation Arrangements. Hukk has delivered to Parent, on Schedule
------------------------- --------
3.16 hereto, a correct list showing the names of all officers, employees, and
- ----
agents performing services for Hukk in connection with its business and the rate
of hourly, monthly, or annual compensation (as the case may be), and any bonus,
severance or similar arrangement with any of them. No union or collective
bargaining agreement or employment agreement is currently in effect or being
negotiated by Hukk.
3.17 Corporate Records. The copies of the Certificate of Incorporation of
-----------------
Hukk, as amended to the date of this Agreement, certified by the Secretary of
Hukk, and the Bylaws of Hukk, as amended to the date of this Agreement,
certified by the Secretary of Hukk, which are being delivered herewith, are
true, correct, and complete copies of the Certificate of Incorporation and
Bylaws as currently in effect. Schedule 3.17 sets forth a true and correct list
-------------
of the names and titles of all of Hukk's current directors and officers, any
fictitious names of Hukk and the jurisdictions, if any, in which Hukk is
qualified as a foreign corporation. Correct and complete copies of Hukk's minute
books and stock records have been delivered to the Parent.
3.18 Environmental Matters.
---------------------
(a) "Environmental Law" shall mean any federal, state or local
statute, ordinance, role or regulation, any judicial or administrative order,
judgment, request or directive, any common law doctrine or theory and any
provision or condition of any Permit, license or other operating authorization,
primarily relating to (A) protecting the environment, including without
limitation protection of the environment, persons or the public welfare from
actual or potential exposure (or the effects of exposure) to any actual or
potential release, discharge or emission (whether past or present) of, or
regarding the manufacture, processing, importation, use, transportation,
generation, treatment, storage, disposal, transportation or handling of, any
chemical, raw material, pollutant, contaminant or toxic, hazardous or
radioactive substance; (B) occupational or public health or safety; or (C) land
use.
(b) Except as indicated in Schedule 3.18, Hukk is, or will be prior to
-------------
the Closing Date, in compliance with all Environmental Laws and in possession of
and compliance with all necessary Permits, licenses and other authorizations. To
the knowledge
-8-
<PAGE>
of the Shareholders, the present condition of Hukk and its property, Hukk's
present or past activities or manner of operating Hukk and its property
(including the real property which is currently leased by Hukk (the "Leased
Property")) including, but not limited to, disposing or arranging for the
disposal of waste materials, does not give rise to any liability to any person,
contingent or otherwise, under any Environmental Law. Hukk has fully disclosed
to Parent all documents and information in its possession and control regarding
activities and conditions relating to Hukk and the Leased Property which could
in the future result or may in the past have resulted in noncompliance with, or
liability under, any Environmental Law.
(c) To the actual knowledge of the Shareholders, there are no proposed
Environmental Laws or amendments to Environmental Laws which would require any
material change in any of Hukk's facilities, equipment, operation or procedures,
or materially affect Hukk's business or its costs of conducting its business as
now conducted, and to the Shareholder's knowledge, the operation by the owner of
the building within which Hukk's Leased Property is located is and has been in
compliance with all Environmental Laws.
3.19 Suppliers and Customers. Except as set forth on Schedule 3.19, no
----------------------- -------------
single customer accounted for more than five percent (5%) of Hukk's net sales in
Hukk's most recent fiscal year. To the best of Shareholder's knowledge, except
as disclosed on Schedule 3.19, no officer or director of Hukk, nor any spouse or
-------------
child of any such officer or director, nor any trust of which any such officer
or director is a grantor, trustee or beneficiary, has any ownership interest in
or is a director, officer or employee of, or consultant to, any entity which is
a competitor, potential competitor or supplier of Hukk, or has any ownership
interest, in whole or in part, in any property, asset or right which is
associated with any property, asset or right owned or purported to be owned by
Hukk or which Hukk is at present operating or using or the use of which is
necessary or material to Hukk's business, or has, directly or indirectly,
engaged in any transaction with Hukk other than transactions inherent in the
capacities of director, officer, employee, consultant or stockholder.
3.20 No Subsidiaries. Except as set forth on Schedule 3.20, Hukk does not
--------------- -------------
own or control, in whole or in part, directly or indirectly, any corporation,
association, partnership or other business entity.
3.21 Knowledge. When used in this Agreement, "to the knowledge" of Hukk,
---------
the Shareholder or the Shareholders means the Shareholder's actual knowledge or
information that the Shareholder would know had the Shareholder conducted a
reasonable investigation and inquiry (including inquiry of the officers of Hukk
with respect to the matters covered by such representations and warranties) and
an examination of whatever sources of information as are accessible to
Shareholder in order to verify the truth and accuracy of representations and
warranties. Shareholder acknowledges that Parent has relied and will rely on
such representations and warranties in executing this Agreement and in closing
the acquisition of the Shares pursuant to this Agreement, and agrees, prior to
the Closing Date, to promptly notify Parent in writing of any knowledge
Shareholder may obtain of any material change affecting such representations and
warranties.
-9-
<PAGE>
3.22 Availability of Information. Parent has made available for
---------------------------
examination by Hukk and the Shareholders and their representatives, copies of
the documents listed on Schedule 3.22, and has provided Hukk the opportunity to
-------------
examine such other documents and ask such questions of Parent as Hukk and each
Shareholder have deemed necessary, and Hukk and each Shareholder have received
satisfactory answers from Parent (or persons acting on Parent's behalf)
concerning the business of Parent, its affiliates, the entities it currently
plans to acquire and/or merge with, and the terms and conditions of the
transactions described herein. Notwithstanding the foregoing, nothing contained
in this representation shall affect the covenants, agreements, representations
and warranties made by Parent under this Agreement.
3.23 Investor Representations of Shareholders. In connection with the
----------------------------------------
issuance and sale of common stock of Parent to each of the Shareholders as set
forth in Schedule 1.4(c), each Shareholder represents that he is acquiring the
Parent Shares for investment for his own account, not as a nominee or agent, and
not with the view to, or for resale in connection with, any distribution
thereof. Shareholder understands that the Parent Shares have not been registered
under the Securities Act of 1933, as amended (the "Securities Act") by reason of
a specific exemption from the registration provisions of the Securities Act.
Shareholder further understands that the Parent Shares have not been registered
with, or qualified by, any state securities authorities by reason of a specific
exemption from the registration or qualification provisions of such states. Such
exemptions afforded by the Securities Act and applicable state law depend, among
other things, on the bona fide nature of Shareholder's investment intent and the
accuracy of Shareholder's representations as expressed herein. Shareholder
understands that no public market now exists for any securities of Parent, that
Parent has made no assurances that a public market will ever exist for the
Shares, and that, even if such a public market exists at some future time,
Parent might not then be satisfying the current public information requirements
of Rule 144. Shareholder understands that Parent is under no obligation, and
makes no commitment, to register the Shares with the Securities and Exchange
Commission for sale to the public. Each Shareholder shall execute Investor's
Certificates which set forth more fully the investor representations above.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF PARENT
Parent hereby represents and warrants to Hukk and to the Shareholders as
follows:
4.1 Organization and Good Standing. Parent is a corporation duly organized
------------------------------
and validly existing under the laws of California, and has full corporate power
and authority to carry on its business as it is now being conducted, and to own
and operate the properties and assets now owned and operated by it. Parent is
duly qualified to do business in each and every jurisdiction where the failure
to qualify would have a material adverse effect upon its financial condition,
the conduct of its business or the ownership of its property and assets.
4.2 Corporate Power and Authority. Parent has full corporate power and
-----------------------------
authority to enter into this Agreement and to perform all of its covenants and
undertakings herein set forth. The execution and delivery of this Agreement and
the consummation of the transactions
-10-
<PAGE>
contemplated hereby have been duly authorized by all necessary corporate action
on the part of Parent, and this Agreement is a valid and binding obligation of
Parent, enforceable in accordance with its terms, except as such enforcement may
be limited by applicable bankruptcy, insolvency, moratorium, or similar laws
affecting the rights of creditors generally.
4.3 Conflict with Authority, Bylaws, etc. Neither the execution and
------------------------------------
delivery of this Agreement nor the consummation of the transactions contemplated
hereby in the manner herein provided will:
(a) contravene any provision of the Certificate of Incorporation or
Bylaws of Parent;
(b) violate, be in conflict with, constitute a default under, cause
the acceleration of any payments pursuant to, or otherwise impair the good
standing, validity, and effectiveness of any lease, license, permit,
authorization, or approval applicable to Parent; or
(c) to the knowledge of Parent, violate any provision of law, role,
regulation, order, or permit to which Parent is subject.
4.4 No Conflict with Other Instruments. The execution, delivery and
----------------------------------
performance of this Agreement by Parent will not result in a violation or breach
of any term or provision of, or constitute a default or accelerate the
performance required under, any indenture, mortgage, deed of trust or other
contract or agreement to which Parent is a party or by which Parent or its
assets are bound, or violate any order, writ, injunction or decree of any court,
administrative agency or governmental body.
4.5 Validity of Agreement. This agreement has been duly executed and
---------------------
delivered by Parent and is the legal, valid and binding obligation of Parent in
accordance with its terms.
ARTICLE 5
ACTIVITIES BY HUKK AND SHAREHOLDERS PRIOR TO THE CLOSING DATE
5.1 Operation of Business. Hukk and each Shareholder hereby agree, jointly
---------------------
and severally, that from and after the date hereof to the Closing Date, except
as otherwise contemplated by this Agreement and except as otherwise agreed to in
writing by Parent, Hukk shall conduct its business solely in the ordinary
course, and the Shareholders and Hukk shall:
(a) not amend Hukk's Certificate of Incorporation or Bylaws, except as
may be necessary to carry out this Agreement or as required by law;
(b) not change Hukk's corporate name or permit the use thereof by any
other corporation;
(c) not pay or agree to pay to any employee, officer, or director of
Hukk any increase in compensation other than in the ordinary course of business;
-11-
<PAGE>
(d) not make any changes in Hukk's management;
(e) not merge or consolidate Hukk with any other corporation or allow
it to acquire or agree to acquire or be acquired by any corporation,
association, partnership, joint venture, or other entity;
(f) not amend or permit Hukk to default in any of its obligations
under any of the Contracts;
(g) not declare or pay any dividend or make any distribution on any
shares of its capital stock or redeem, purchase or otherwise acquire any shares
of its capital stock;
(h) not sell or transfer any of Hukk's tangible or intangible assets
having an aggregate book value of One Thousand Dollars ($1,000) or more, other
than sales of inventory in the ordinary course of business, or create any lien
or encumbrance on any of Hukk's assets or permit Hukk to incur any debt
liability or obligation, permit Hukk to waive any right or cancel any debt or
claim, enter into any contract or agreement involving amounts exceeding One
Thousand Dollars ($1,000);
(i) conduct Hukk's business in a diligent manner, and not make any
material change in its business practices; and
(j) in good faith use their best efforts to (i) preserve Hukk's
business organization intact; (ii) keep available the services of its current
officers, employees, salesmen, agents and representatives; and (iii) maintain
the good will of its suppliers, customers and other persons having business
relations with Hukk and (iv) maintain all of its properties in good repair,
order and condition, and maintain in effect all of the insurance policies listed
on Schedule 3.12.
-------------
5.2 Confidentiality. Except as contemplated by this Agreement, Hukk and
---------------
each Shareholder agree jointly and severally to maintain in confidence and to
not use or disclose to any third person any confidential or proprietary
information or documents relating to Parent or any portion of its business that
is provided to Shareholder or Hukk by Parent in connection with the consummation
of the transactions contemplated by this Agreement, as provided by and according
to the terms of the Confidentiality and Non-Disclosure Agreement, dated as of
May 16, 1999, by and among Hukk, the Shareholders and Parent, which agreement
shall survive the signing of this Agreement but not the Closing.
5.3 Access to Information. Hukk and the Shareholders agree, joint and
---------------------
severally, to cooperate fully with Parent and shall provide Parent and its
accountants, counsel, and other representatives, during normal business hours
(or otherwise agreed upon by Hukk), full access to the books, records,
equipment, real estate, contracts, and other assets of Hukk and full opportunity
to discuss Hukk's business, affairs, and assets with its officers and
independent accountants and furnish to Parent and its representatives copies of
such documents, records, and information with respect to the affairs of Hukk, as
Parent or its representatives may reasonably request and without unreasonably
disrupting the ordinary conduct of Hukk's business.
-12-
<PAGE>
5.4 Best Efforts. Between the date of this Agreement and the Closing Date,
------------
Hukk and the Shareholders shall use their best efforts to cause the conditions
in Article 7 to be met.
ARTICLE 6
ACTIVITIES BY PARENT PRIOR TO THE CLOSING DATE
6.1 Confidentiality. Except as contemplated by this Agreement, Parent
---------------
shall maintain in confidence and not use or disclose to any third person any
confidential or proprietary information or documents relating to the
Shareholders or Hukk or any portion of their business that is provided to Parent
by the Shareholders or Hukk in connection with the consummation of the
transactions contemplated by this Agreement, as provided by and according to the
terms of the Confidentiality and Non-Disclosure Agreement, dated as of May 16,
1999, by and among Hukk, the Shareholders and Parent, which agreement shall
survive the signing of this Agreement but not the Closing.
6.2 Access to Information. Parent agrees to cooperate fully with Hukk and
---------------------
the Shareholders and, to the extent Parent would provide such information to
employees and minority shareholders of Parent, shall provide Hukk and the
Shareholders and their accountants, counsel, and other representatives, during
normal business hours (or otherwise agreed upon by Parent), full access to the
books and records of Parent and full opportunity to discuss Parent's business,
affairs, and assets with its officers and independent accountants and furnish to
Hukk and the Shareholders and their representatives copies of such records and
information with respect to the affairs of Parent as Hukk and Shareholder or
their representatives may reasonably request and without unreasonably disrupting
the ordinary conduct of Parent's business. Specific detail human resources and
stock ownership or stock option information which requires confidentiality may
not be made available and is agreed by Hukk and the Shareholders to remain
confidential to authorized personnel and officers of Parent.
6.3 Employee Incentive Stock Options for Shareholders. Parent shall grant
-------------------------------------------------
Shareholders options to purchase an aggregate of Fifty Thousand (50,000) shares
of common stock of the Company pursuant to the terms and conditions of Stock
Option Agreements in substantially the form attached hereto as Exhibit B-1, B-2,
----------- ---
and B-3.
---
6.4 Best Efforts. Between the date of this Agreement and the Closing Date,
------------
Parent will use its best efforts to cause the conditions in Article 7 to be met.
ARTICLE 7
CONDITIONS PRECEDENT TO THE CLOSING
7.1 Obligation of Parent to Close. The obligations of Parent to consummate
-----------------------------
the Stock Purchase shall be subject to the satisfaction or the waiver by Parent
of the following conditions on or prior to the Closing Date:
-13-
<PAGE>
(a) Compliance with Agreement. Hukk and each Shareholder shall have
-------------------------
performed all covenants and agreements to be performed by Hukk or the
Shareholders under this Agreement on or prior to the Closing Date, and all of
the representations and warranties of Hukk and each Shareholder set forth herein
shall be true and correct in all respects as of and with respect to the Closing
Date to the same extent as if given on that date after giving effect to any
supplements to the Schedule of Exceptions made after the date hereof. Hukk and
the Shareholders shall have delivered to Parent a certificate to such effect
dated the Closing Date.
(b) Litigation Affecting Closing. On the Closing Date, no proceeding
----------------------------
brought by any individual or entity other than the Parties shall be pending or
threatened before any court or governmental agency in which it is sought to
restrain or prohibit or to obtain damages or other relief in connection with
this Agreement or the consummation of the transactions contemplated hereby.
(c) Required Consents. The holders of any material indebtedness of
-----------------
Hukk, and the parties to any contracts, to the extent that their consent or
approval is required under the pertinent agreement for the consummation of the
transaction contemplated hereby in the manner provided herein or the
continuation of such agreement without termination or penalty to Hukk, shall
have granted such consent or approval.
(d) Deliveries. Hukk and the Shareholders shall have delivered to
----------
Parent the following:
(i) The Noncompetition Agreements with each of the Shareholders
referenced in Section 11.1 executed by the Shareholder party thereto.
(ii) The Employment Agreements between Hukk and each of the
Shareholders in the forms attached hereto as Exhibits C-l, C-2, and C-3 executed
------------ --- ---
by the Shareholders party thereto.
(iii) The Certificate of Hukk referenced in Section 7.1(a)
executed by a duly authorized officer of Hukk.
(iv) Investor's Certificates executed by each Shareholder as
referenced in Section 3.23.
(e) Liens on Stock. Shareholders shall have obtained releases of all
--------------
liens on or claims to the Shares, including those listed on Schedule 3.5, or
------------
made arrangement satisfactory to Parent regarding such liens or claims.
(f) Materially Adverse Information as to Hukk. Parent shall not have
-----------------------------------------
become aware of any materially adverse information as to Hukk's financial
condition, business or prospects as a result of Parent's due diligence
investigation of Hukk.
7.2 Obligation of Hukk and Shareholder to Close. The obligations of Hukk
-------------------------------------------
and the Shareholders to consummate the Stock Purchase shall be subject to the
satisfaction of the following conditions on or prior to the Closing Date:
-14-
<PAGE>
(a) Compliance with Agreement. Parent shall have performed all
-------------------------
covenants and agreements to be performed by it under this Agreement on or prior
to the applicable Closing Date and shall have delivered to the Shareholders a
certificate dated as of such Closing Date, signed on behalf of Parent by its
President, to the effect that the transactions contemplated by this Agreement
were duly authorized by all necessary corporate action on the part of Parent.
(b) Litigation Affecting Closing. On the Closing Date, no proceeding
----------------------------
brought by any individual or entity other than the Parties shall be pending or
threatened before any court or governmental agency in which it is sought to
restrain or prohibit or to obtain damages or other relief in connection with
this Agreement or the consummation of the transaction contemplated hereby.
(c) Noncompetition Agreements. Parent shall have executed and
-------------------------
delivered to Shareholder the Noncompetition Agreements referenced in Section
11.1.
(d) Materially Adverse Information as to Parent. Hukk shall not have
-------------------------------------------
become aware of any materially adverse information as to the Parent's financial
condition, business or prospects as a result of Hukk's due diligence
investigation of the Parent.
ARTICLE 8
INDEMNIFICATION
8.1 By Hukk and the Shareholders. The representations and warranties of
----------------------------
Hukk and Shareholders in Section 3 of this Agreement shall survive the Closing.
From and after the Closing Date, Hukk and the Shareholders shall indemnify and
hold harmless Parent, Hukk and their respective officers, directors, employees,
shareholders and agents from and against any and all damages, losses,
obligations, deficiencies, liabilities, claims, encumbrances, penalties, costs,
and expenses, including reasonable attorneys' fees (collectively, "Losses"),
that any of them may suffer or incur, resulting from, related to, or arising out
of any misrepresentation or breach of any representation and warranty by the
Shareholders or Hukk contained in this Agreement, any breach of warranty, breach
of guarantee, or nonfulfillment of any of the respective covenants of the
Shareholders or Hukk in this Agreement or from any misrepresentation in or
omission from any Schedule to this Agreement, certificate, financial statement,
or from any other document furnished or to be furnished to Parent hereunder and
any and all actions, suits, investigations, proceedings, demands, assessments,
audits, judgments and claims arising out of any of the foregoing.
8.2 By Hukk Regarding License Dispute. In addition to the indemnification
---------------------------------
obligations in Section 8.1, the Shareholders shall jointly and severally
indemnify and hold harmless Parent and Hukk from and against any Losses arising
from the patent infringement dispute between Hukk and ComSonics, Inc. regarding
ComSonics, Inc.'s U.S. Patent No. 4,685,065; provided, however, that payments
made and expenses incurred by Hukk or Parent pursuant to the obligations or Hukk
set forth in the License Agreement between Hukk and ComSonics, Inc. shall not
constitute "Losses" as such term is used herein.
-15-
<PAGE>
8.3 By Parent. The representations and warranties of Parent in Section 4
---------
of this Agreement shall survive the Closing. From and after the Closing Date,
Parent agrees to indemnify and hold harmless the Shareholders and Hukk and its
officers, directors, employees, shareholders and agents from and against any and
all losses that any of them may suffer or incur, resulting from, related to, or
arising out of any misrepresentation, breach of warranty, or nonfulfillment of
any of the covenants or agreements of Parent in this Agreement or from any
misrepresentation in or omission from any certificate or document furnished or
to be furnished to the Shareholders or Hukk by Parent hereunder and any and all
actions, suits, investigations, proceedings, demands, assessments, audits,
judgments, and claims arising out of any of the foregoing.
8.4 Notice. Promptly after acquiring knowledge of any Losses against which
------
Hukk and the Shareholders have indemnified Parent or against which Parent has
indemnified Hukk and the Shareholders, or as to which any party may be liable,
Hukk and the Shareholders or Parent, as the case may be, shall give to the other
party written notice thereof. Each indemnifying party shall, at its own expense,
promptly defend, contest or otherwise protect against any Losses against which
it has indemnified an indemnified party, and each indemnified party shall
receive from the other party all necessary and reasonable cooperation in said
defense including, but not limited to, the services of employees of the other
party who are familiar with the transactions out of which any such Losses may
have arisen. The indemnifying party shall have the right to control the defense
of any such proceeding unless it is relieved of its liability hereunder with
respect to such defense by the indemnified party. The indemnifying party shall
have the right, at its option, and, unless so relieved, to compromise or defend,
at its own expense by its own counsel, any such matter involving the asserted
liability of the indemnified party. In the event that the indemnifying party
shall undertake to compromise or defend any such asserted liability, it shall
promptly notify the indemnified party of its intention to do so. In the event
that an indemnifying party, after written notice from an indemnified party,
fails to take timely action to defend the same, the indemnified party shall have
the right to defend the same by counsel of its own choosing, but at the cost and
expense of the indemnifying party.
ARTICLE 9
BROKERAGE; EXPENSES
9.1 Brokerage. None of the parties, nor, where applicable, any of their
---------
respective shareholders, officers, directors or employees, has employed or will
employ any broker, agent, finder, or consultant, and each Party represents to
the other Parties that such Party has not incurred nor will the other Parties
incur any liability for any brokerage fees, commissions, finders' fees, or other
fees, in connection with the negotiation or consummation of the transactions
contemplated by this Agreement.
9.2 Expenses. Except as otherwise expressly provided in this Agreement,
--------
each of the parties agrees to bear its own expenses of any character incurred in
connection with this Agreement or the transactions contemplated hereby.
-16-
<PAGE>
ARTICLE 10
TERMINATION PRIOR TO CLOSING
10.1 Termination of Agreement. This Agreement may be terminated at any
------------------------
time prior to the Closing:
(a) Mutual Consent. By the mutual consent of Parent, Hukk and the
--------------
Shareholders;
(b) Material Breach. By Parent, Hukk or Shareholder in writing,
---------------
without liability, if the other party shall (1) fail to perform in any material
respect its agreements contained herein required to be performed by, in, on or
prior to the Closing Date or (2) materially breach any of its representations,
warranties, agreements, or covenants contained herein, provided that such
failure or breach is not cured within ten (10) days after such party has been
notified of the other party's intent to terminate this Agreement pursuant
hereto; or
10.2 Termination of Obligations. Termination of this Agreement pursuant to
--------------------------
this Article 10 shall terminate all obligations of the parties hereunder, except
for the obligations set forth in Article 9.
ARTICLE 11
POST-CLOSING COVENANT
11.1 Covenant Not To Compete. For a period of four years following the
-----------------------
Closing, the Shareholders agree not to compete directly or indirectly with
Parent as more fully set forth in Non-Competition Agreements in the forms
attached hereto as Exhibits D-1, D-2, and D-3.
------------ --- ---
ARTICLE 12
GENERAL
12.1 Entire Agreement; Amendments. This Agreement constitutes the entire
----------------------------
understanding between the parties with respect to the subject matter contained
herein and supersedes any prior understandings and agreements among them
respecting such subject matter. This Agreement may be amended, supplemented, or
terminated only by a written instrument duly executed by all of the parties.
12.2 Headings. The headings in this Agreement are for convenience of
--------
reference only and shall not affect its interpretation.
12.3 Gender; Number. Words of gender may be read as masculine, feminine,
--------------
or neuter, as required by context. Words of number may be read as singular or
plural, as required by context.
-17-
<PAGE>
12.4 Exhibits and Schedules. Each Exhibit and Schedule referred to herein
----------------------
is incorporated into this Agreement by such reference.
12.5 Severability. If any provision of this Agreement is held illegal,
------------
invalid, or unenforceable, such illegality, invalidity, or unenforceability
shall not affect any other provision hereof. This Agreement shall, in such
circumstances, be deemed modified to the extent necessary to render enforceable
the provisions hereof.
12.6 Notices. All notices, requests, demands, waivers, consents,
-------
approvals, or other communications required or permitted hereunder shall be in
writing and shall be deemed to have been given if delivered personally, sent by
telegram, telex or sent by certified or registered mail or same day or overnight
courier service, postage prepaid, return receipt requested, to the following
addresses:
If to Parent, to:
Sunrise Telecom, Inc.
22 Great Oaks Boulevard
San Jose, CA 95119
Attention: Paul Chang, President
Facsimile: (408) 972-2158
With a copy to:
Hopkins & Carley
A Law Corporation
2 West Santa Clara Street, Sixth Floor
San Jose, CA 95113
Attention: Gail M. Hashimoto, Esq.
Facsimile: (408) 998-4790
If to Hukk, to:
Hukk Engineering, Inc.
3250-D Peachtree Corners Circle
Norcross, GA 30092
Attention: Clifford D. Brown
Facsimile: (770) 446-6850
If to Clifford D. Brown, to:
9430 Dominion Way
Alpharetta, GA 30202
Attention: Clifford D. Brown
Facsimile: (770) 446-6850
-18-
<PAGE>
With a copy to:
Hassett, Cohen, Goldstein, LLP
990 Hammond Drive, Suite 990
Atlanta, VA 30328
Attention: Joseph Gottlieb
Facsimile: (770) 901-9417
If to Robert L. Richards, to:
1015 Hembree Grove Drive
Roswell, GA 30076
Attention: Robert L. Richards
Facsimile: (770) 446-6850
With a copy to:
Hassett, Cohen, Goldstein, LLP
990 Hammond Drive, Suite 990
Atlanta, VA 30328
Attention: Joseph Gottlieb
Facsimile: (770) 901-9417
If to James A. Barker, to:
108 Indian Branch
Lawrenceville, GA 30243
Attn: James A. Barker
Facsimile: (770) 446-6850
With a copy to:
Hassett, Cohen, Goldstein, LLP
990 Hammond Drive, Suite 990
Atlanta, VA 30328
Attention: Joseph Gottlieb
Facsimile: (770) 901-9417
Notice of any change in any such address shall also be given in the manner
set forth above. Whenever the giving of notice is required, the giving of such
notice may be waived by the party entitled to receive such notice.
12.7 Waiver. The failure of any party to insist upon performance of any of
------
the terms or conditions of this Agreement shall not constitute a waiver of any
of his/its rights hereunder.
-19-
<PAGE>
12.8 Assignment. No party may assign any of his/its rights or delegate any
----------
of his/its obligations hereunder without the prior written consent of the other
parties.
12.9 Successors and Assigns. This Agreement binds, inures to the benefit
----------------------
of, and is enforceable by the successors and permitted assigns of the parties
and does not confer any rights on any other persons or entities.
12.10 Governing Law. This Agreement shall be construed and enforced in
-------------
accordance with California law.
12.11 No Benefit to Others. The representations, warranties, covenants,
--------------------
and agreements contained in this Agreement are for the sole benefit of the
parties hereto and their successors and permitted assigns, and they shall not be
construed as conferring and are not intended to confer any rights on any other
persons.
12.12 Publicity. During the period ending on the Closing Date, all notices
---------
to third parties and all other publicity relating to the transactions
contemplated by this Agreement shall be jointly planned, coordinated, and agreed
to by Hukk and Parent. During the period ending on the Closing Date, the
Shareholders shall not act unilaterally in this regard without the prior
approval of Parent; provided, however, that such approval shall not be
unreasonably withheld by Parent.
12.13 Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall for all purposes be deemed to be an original
and all of which shall constitute the same instrument.
[Execution Pages Follow]
-20-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first above written.
PARENT:
SUNRISE TELECOM, INC.
By: /s/ Paul Chang
--------------
Paul Chang, President
HUKK:
HUKK ENGINEERING, INC.
By: /s/ Clifford D. Brown
---------------------
Title: President
---------
SHAREHOLDERS:
/s/ Clifford D. Brown
---------------------
Clifford D. Brown
/s/ Robert L. Richards
----------------------
Robert L. Richards
/s/ James E. Barker
-------------------
James E. Barker
[Signature Page to Stock Purchase Agreement]
-21-
<PAGE>
SCHEDULES
<TABLE>
<S> <C>
Payment Purchase Price Wire Transfer At Closing Schedule 1.4(a)
- -----------------------------------------------------------------------------------------
Parent Shares Issued At Closing Schedule 1.4(c)
- -----------------------------------------------------------------------------------------
Directors Of Hukk At Closing Schedule 2.1
- -----------------------------------------------------------------------------------------
Officers Of Hukk At Closing Schedule 2.2
- -----------------------------------------------------------------------------------------
Validity Of Contemplated Transactions/Consents Of Hukk Schedule 3.3
- -----------------------------------------------------------------------------------------
Capitalization Of Hukk Schedule 3.4
- -----------------------------------------------------------------------------------------
Ownership Of Hukk Shares Schedule 3.5
- -----------------------------------------------------------------------------------------
Title To Properties Held By Hukk Schedule 3.6
- -----------------------------------------------------------------------------------------
Intangibles; Trademarks, Trade Names, Service Marks, Registered Schedule 3.7
Copyrights, Patents And Pending Patents Of Hukk
- -----------------------------------------------------------------------------------------
Financial Information Of Hukk Schedule 3.8
- -----------------------------------------------------------------------------------------
Tax Matters Schedule 3.9
- -----------------------------------------------------------------------------------------
Litigation Matters/Compliance With Law Issues Schedule 3.10(a)
- -----------------------------------------------------------------------------------------
Permits Held by Hukk Schedule 3.10(b)
- -----------------------------------------------------------------------------------------
Express/Implied Warranty Product Liability Claims Against Hukk Schedule 3.10(c)
- -----------------------------------------------------------------------------------------
Employee Benefits/Compensation Plans Offered By Schedule 3.11(a)
- -----------------------------------------------------------------------------------------
</TABLE>
-22-
<PAGE>
<TABLE>
<S> <C>
Hukk
- -----------------------------------------------------------------------------------------
Erisa Matters Schedule 3.11(b)
- -----------------------------------------------------------------------------------------
Insurance Policies Owned/Maintained By Hukk Engineering Schedule 3.12
- -----------------------------------------------------------------------------------------
Material Obligations Of Hukk Pursuant To Other Schedule 3.13
Contracts/Agreements
- -----------------------------------------------------------------------------------------
Other Transactions By Hukk As Of Balance Sheet Date Schedule 3.14
- -----------------------------------------------------------------------------------------
Financial Institution/Bank Accounts Of Hukk Schedule 3.15
- -----------------------------------------------------------------------------------------
Compensation Arrangements Of Officers, Employees And Agents Of Schedule 3.16
Hukk
- -----------------------------------------------------------------------------------------
Corporate Records Of Hukk Schedule 3.17
- -----------------------------------------------------------------------------------------
Environmental Law Compliance By Hukk Schedule 3.18
- -----------------------------------------------------------------------------------------
Non-Ownership Suppliers And Customers Of Hukk Schedule 3.19
- -----------------------------------------------------------------------------------------
Subsidiaries Owned/Controlled By Hukk Schedule 3.20
- -----------------------------------------------------------------------------------------
Information and Documents of Parent Schedule 3.22
- -----------------------------------------------------------------------------------------
</TABLE>
-23-
<PAGE>
EXHIBIT 10.6
INDEMNIFICATION AGREEMENT
-------------------------
This Indemnification Agreement (the "Agreement") is made as of __________,
---------
by and between Sunrise Telecom Incorporated, a Delaware corporation (the
"Company"), and _________________ (the "Indemnitee").
------- ----------
RECITALS
--------
The Company and Indemnitee recognize the increasing difficulty in obtaining
liability insurance for directors, officers and key employees, the significant
increases in the cost of such insurance and the general reductions in the
coverage of such insurance. The Company and Indemnitee further recognize the
substantial increase in corporate litigation in general, subjecting directors,
officers and key employees to expensive litigation risks at the same time as the
availability and coverage of liability insurance has been severely limited.
Indemnitee does not regard the current protection available as adequate under
the present circumstances, and Indemnitee and agents of the Company may not be
willing to continue to serve as agents of the Company without additional
protection. The Company desires to attract and retain the services of highly
qualified individuals, such as Indemnitee, and to indemnify its directors,
officers and key employees so as to provide them with the maximum protection
permitted by law.
AGREEMENT
---------
In consideration of the mutual promises made in this Agreement, and for
other good and valuable consideration, receipt of which is hereby acknowledged,
the Company and Indemnitee hereby agree as follows:
1. Indemnification.
---------------
(a) Third Party Proceedings. The Company shall indemnify Indemnitee
-----------------------
if Indemnitee is or was a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the Company) by reason of the fact that Indemnitee is or was a
director, officer, employee or agent of the Company, or any subsidiary of the
Company, by reason of any action or inaction on the part of Indemnitee while an
officer or director or by reason of the fact that Indemnitee is or was serving
at the request of the Company as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement (if such settlement is approved in advance by the Company, which
approval shall not be unreasonably withheld) actually and reasonably incurred by
Indemnitee in connection with such action, suit or proceeding if Indemnitee
acted in good faith and in a manner Indemnitee reasonably believed to be in or
not opposed to the best interests of the Company, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe Indemnitee's
conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that Indemnitee did
not act in good faith and in a manner which Indemnitee
<PAGE>
reasonably believed to be in or not opposed to the best interests of the
Company, or, with respect to any criminal action or proceeding, that Indemnitee
had reasonable cause to believe that Indemnitee's conduct was unlawful.
(b) Proceedings By or in the Right of the Company. The Company shall
---------------------------------------------
indemnify Indemnitee if Indemnitee was or is a party or is threatened to be made
a party to any threatened, pending or completed action or proceeding by or in
the right of the Company or any subsidiary of the Company to procure a judgment
in its favor by reason of the fact that Indemnitee is or was a director,
officer, employee or agent of the Company, or any subsidiary of the Company, by
reason of any action or inaction on the part of Indemnitee while an officer or
director or by reason of the fact that Indemnitee is or was serving at the
request of the Company as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees) and, to the fullest extent permitted by
law, amounts paid in settlement (if such settlement is approved in advance by
the Company, which approval shall not be unreasonably withheld), in each case to
the extent actually and reasonably incurred by Indemnitee in connection with the
defense or settlement of such action or suit if Indemnitee acted in good faith
and in a manner Indemnitee reasonably believed to be in or not opposed to the
best interests of the Company and its stockholders, except that no
indemnification shall be made in respect of any claim, issue or matter as to
which Indemnitee shall have been finally adjudicated by court order or judgment
to be liable to the Company in the performance of Indemnitee's duty to the
Company and its stockholders unless and only to the extent that the court in
which such action or proceeding is or was pending shall determine upon
application that, in view of all the circumstances of the case, Indemnitee is
fairly and reasonably entitled to indemnity for such expenses which such court
shall deem proper.
(c) Mandatory Payment of Expenses. To the extent that Indemnitee has
-----------------------------
been successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in Section 1(a) or Section 1(b) or the defense of any
claim, issue or matter therein, Indemnitee shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by Indemnitee in
connection therewith.
2. No Employment Rights. Nothing contained in this Agreement is intended
--------------------
to create in Indemnitee any right to continued employment.
3. Expenses; Indemnification Procedure.
-----------------------------------
(a) Advancement of Expenses. The Company shall advance all expenses
-----------------------
incurred by Indemnitee in connection with the investigation, defense, settlement
or appeal of any civil or criminal action, suit or proceeding referred to in
Section l(a) or Section 1(b) hereof (including amounts actually paid in
settlement of any such action, suit or proceeding). Indemnitee hereby
undertakes to repay such amounts advanced only if, and to the extent that, it
shall ultimately be determined that Indemnitee is not entitled to be indemnified
by the Company as authorized hereby.
(b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a
--------------------------------
condition precedent to his or her right to be indemnified under this Agreement,
give the Company notice in
-2-
<PAGE>
writing as soon as practicable of any claim made against Indemnitee for which
indemnification will or could be sought under this Agreement. Notice to the
Company shall be directed to the Chief Executive Officer of the Company and
shall be given in accordance with the provisions of Section 12(d) below. In
addition, Indemnitee shall give the Company such information and cooperation as
it may reasonably require and as shall be within Indemnitee's power.
(c) Procedure. Any indemnification and advances provided for in
---------
Section 1 and this Section 3 shall be made no later than twenty (20) days after
receipt of the written request of Indemnitee. If a claim under this Agreement,
under any statute, or under any provision of the Company's Certificate of
Incorporation or Bylaws providing for indemnification, is not paid in full by
the Company within twenty (20) days after a written request for payment thereof
has first been received by the Company, Indemnitee may, but need not, at any
time thereafter bring an action against the Company to recover the unpaid amount
of the claim and, subject to Section 11 of this Agreement, Indemnitee shall also
be entitled to be paid for the expenses (including attorneys' fees) of bringing
such action. It shall be a defense to any such action (other than an action
brought to enforce a claim for expenses incurred in connection with any action,
suit or proceeding in advance of its final disposition) that Indemnitee has not
met the standards of conduct which make it permissible under applicable law for
the Company to indemnify Indemnitee for the amount claimed, but the burden of
proving such defense shall be on the Company and Indemnitee shall be entitled to
receive interim payments of expenses pursuant to Section 3(a) unless and until
such defense may be finally adjudicated by court order or judgment from which no
further right of appeal exists. It is the parties' intention that if the
Company contests Indemnitee's right to indemnification, the question of
Indemnitee's right to indemnification shall be for the court to decide, and
neither the failure of the Company (including its Board of Directors, any
committee or subgroup of the Board of Directors, independent legal counsel, or
its stockholders) to have made a determination that indemnification of
Indemnitee is proper in the circumstances because Indemnitee has met the
applicable standard of conduct required by applicable law, nor an actual
determination by the Company (including its Board of Directors, any committee or
subgroup of the Board of Directors, independent legal counsel, or its
stockholders) that Indemnitee has not met such applicable standard of conduct,
shall create a presumption that Indemnitee has or has not met the applicable
standard of conduct.
(d) Notice to Insurers. If, at the time of the receipt of a notice of
------------------
a claim pursuant to Section 3(b) hereof, the Company has director and officer
liability insurance in effect, the Company shall give prompt notice of the
commencement of such proceeding to the insurers in accordance with the
procedures set forth in the respective policies. The Company shall thereafter
take all necessary or desirable action to cause such insurers to pay, on behalf
of the Indemnitee, all amounts payable as a result of such proceeding in
accordance with the terms of such policies.
(e) Selection of Counsel. In the event the Company shall be obligated
--------------------
under Section 3(a) hereof to pay the expenses of any proceeding against
Indemnitee, the Company, if appropriate, shall be entitled to assume the defense
of such proceeding, with counsel approved by Indemnitee, upon the delivery to
Indemnitee of written notice of its election so to do. After delivery of such
notice, approval of such counsel by Indemnitee and the retention of such counsel
-3-
<PAGE>
by the Company, the Company will not be liable to Indemnitee under this
Agreement for any fees of counsel subsequently incurred by Indemnitee with
respect to the same proceeding, provided that (i) Indemnitee shall have the
right to employ counsel in any such proceeding at Indemnitee's expense; and (ii)
if (A) the employment of counsel by Indemnitee has been previously authorized by
the Company, (B) Indemnitee shall have reasonably concluded that there may be a
conflict of interest between the Company and Indemnitee in the conduct of any
such defense or (C) the Company shall not, in fact, have employed counsel to
assume the defense of such proceeding, then the fees and expenses of
Indemnitee's counsel shall be at the expense of the Company.
4. Additional Indemnification Rights; Nonexclusivity.
-------------------------------------------------
(a) Scope. Notwithstanding any other provision of this Agreement, the
-----
Company hereby agrees to indemnify the Indemnitee to the fullest extent
permitted by law, notwithstanding that such indemnification is not specifically
authorized by the other provisions of this Agreement, the Company's Certificate
of Incorporation, the Company's Bylaws or by statute. In the event of any
change, after the date of this Agreement, in any applicable law, statute, or
rule which expands the right of a Delaware corporation to indemnify a member of
its board of directors or an officer, such changes shall be deemed to be within
the purview of Indemnitee's rights and the Company's obligations under this
Agreement. In the event of any change in any applicable law, statute or rule
which narrows the right of a Delaware corporation to indemnify a member of its
board of directors or an officer, such changes, to the extent not otherwise
required by such law, statute or rule to be applied to this Agreement shall have
no effect on this Agreement or the parties' rights and obligations hereunder.
(b) Nonexclusivity. The indemnification provided by this Agreement
--------------
shall not be deemed exclusive of any rights to which Indemnitee may be entitled
under the Company's Certificate of Incorporation, its Bylaws, any agreement, any
vote of stockholders or disinterested members of the Company's Board of
Directors, the General Corporation Law of the State of Delaware, or otherwise,
both as to action in Indemnitee's official capacity and as to action in another
capacity while holding such office. The indemnification provided under this
Agreement shall continue as to Indemnitee for any action taken or not taken
while serving in an indemnified capacity even though he or she may have ceased
to serve in any such capacity at the time of any action, suit or other covered
proceeding.
5. Partial Indemnification. If Indemnitee is entitled under any provision
-----------------------
of this Agreement to indemnification by the Company for some or a portion of the
expenses, judgments, fines or penalties actually or reasonably incurred in the
investigation, defense, appeal or settlement of any civil or criminal action,
suit or proceeding, but not, however, for the total amount thereof, the Company
shall nevertheless indemnify Indemnitee for the portion of such expenses,
judgments, fines or penalties to which Indemnitee is entitled.
6. Mutual Acknowledgment. Both the Company and Indemnitee acknowledge
---------------------
that in certain instances, Federal law or public policy may override applicable
state law and prohibit the Company from indemnifying its directors and officers
under this Agreement or otherwise.
-4-
<PAGE>
For example, the Company and Indemnitee acknowledge that the Securities and
Exchange Commission (the "SEC") has taken the position that indemnification is
---
not permissible for liabilities arising under certain federal securities laws,
and federal legislation prohibits indemnification for certain ERISA violations.
Indemnitee understands and acknowledges that the Company has undertaken or may
be required in the future to undertake with the SEC to submit the question of
indemnification to a court in certain circumstances for a determination of the
Company's right under public policy to indemnify Indemnitee.
7. Officer and Director Liability Insurance. The Company shall, from time
----------------------------------------
to time, make the good faith determination whether or not it is practicable for
the Company to obtain and maintain a policy or policies of insurance with
reputable insurance companies providing the officers and directors of the
Company with coverage for losses from wrongful acts, or to ensure the Company's
performance of its indemnification obligations under this Agreement. Among other
considerations, the Company will weigh the costs of obtaining such insurance
coverage against the protection afforded by such coverage. In all policies of
director and officer liability insurance, Indemnitee shall be named as an
insured in such a manner as to provide Indemnitee the same rights and benefits
as are accorded to the most favorably insured of the Company's directors, if
Indemnitee is a director; or of the Company's officers, if Indemnitee is not a
director of the Company but is an officer; or of the Company's key employees, if
Indemnitee is not an officer or director but is a key employee. Notwithstanding
the foregoing, the Company shall have no obligation to obtain or maintain such
insurance if the Company determines in good faith that such insurance is not
reasonably available, if the premium costs for such insurance are
disproportionate to the amount of coverage provided, if the coverage provided by
such insurance is limited by exclusions so as to provide an insufficient
benefit, or if Indemnitee is covered by similar insurance maintained by a parent
or subsidiary of the Company.
8. Severability. Nothing in this Agreement is intended to require or
------------
shall be construed as requiring the Company to do or fail to do any act in
violation of applicable law. The Company's inability, pursuant to court order,
to perform its obligations under this Agreement shall not constitute a breach of
this Agreement. The provisions of this Agreement shall be severable as provided
in this Section 8. If this Agreement or any portion hereof shall be invalidated
on any ground by any court of competent jurisdiction, then the Company shall
nevertheless indemnify Indemnitee to the full extent permitted by any applicable
portion of this Agreement that shall not have been invalidated, and the balance
of this Agreement not so invalidated shall be enforceable in accordance with its
terms.
9. Exceptions. Any other provision herein to the contrary
----------
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
(a) Claims Initiated by Indemnitee. To indemnify or advance expenses
------------------------------
to Indemnitee with respect to proceedings or claims initiated or brought
voluntarily by Indemnitee and not by way of defense, except with respect to
proceedings brought to establish or enforce a right to indemnification under
this Agreement or any other statute or law or otherwise as required under
Section 145 of the Delaware General Corporation Law, but such indemnification or
-5-
<PAGE>
advancement of expenses may be provided by the Company in specific cases if the
Board of Directors finds it to be appropriate;
(b) Lack of Good Faith. To indemnify Indemnitee for any expenses
------------------
incurred by Indemnitee with respect to any proceeding instituted by Indemnitee
to enforce or interpret this Agreement, if a court of competent jurisdiction
determines that each of the material assertions made by Indemnitee in such
proceeding was not made in good faith or was frivolous;
(c) Insured Claims. To indemnify Indemnitee for expenses or
--------------
liabilities of any type whatsoever (including, but not limited to, judgments,
fines, ERISA excise taxes or penalties, and amounts paid in settlement) to the
extent such expenses or liabilities have been paid directly to Indemnitee by an
insurance carrier under a policy of officers' and directors' liability insurance
maintained by the Company; or
(d) Claims under Section 16(b). To indemnify Indemnitee for expenses
--------------------------
or the payment of profits arising from the purchase and sale by Indemnitee of
securities in violation of Section 16(b) of the Securities Exchange Act of 1934,
as amended, or any similar successor statute.
10. Construction of Certain Phrases.
-------------------------------
(a) For purposes of this Agreement, references to the "Company" shall
-------
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, and employees or agents, so that
if Indemnitee is or was a director, officer, employee or agent of such
constituent corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, Indemnitee shall stand in
the same position under the provisions of this Agreement with respect to the
resulting or surviving corporation as Indemnitee would have with respect to such
constituent corporation if its separate existence had continued.
(b) For purposes of this Agreement, references to "other enterprises"
-----------------
shall include employee benefit plans; references to "fines" shall include any
-----
excise taxes assessed on Indemnitee with respect to an employee benefit plan;
and references to "serving at the request of the Company" shall include any
-------------------------------------
service as a director, officer, employee or agent of the Company which imposes
duties on, or involves services by, such director, officer, employee or agent
with respect to an employee benefit plan, its participants, or beneficiaries;
and if Indemnitee acted in good faith and in a manner Indemnitee reasonably
believed to be in the interest of the participants and beneficiaries of an
employee benefit plan, Indemnitee shall be deemed to have acted in a manner "not
---
opposed to the best interests of the Company" as referred to in this Agreement.
- --------------------------------------------
11. Attorneys' Fees. In the event that any action is instituted by
---------------
Indemnitee under this Agreement to enforce or interpret any of the terms hereof,
Indemnitee shall be entitled to be paid all court costs and expenses, including
reasonable attorneys' fees, incurred by Indemnitee
-6-
<PAGE>
with respect to such action, unless as a part of such action, the court of
competent jurisdiction determines that each of the material assertions made by
Indemnitee as a basis for such action were not made in good faith or were
frivolous. In the event of an action instituted by or in the name of the Company
under this Agreement or to enforce or interpret any of the terms of this
Agreement, Indemnitee shall be entitled to be paid all court costs and expenses,
including attorneys' fees, incurred by Indemnitee in defense of such action
(including with respect to Indemnitee's counterclaims and cross-claims made in
such action), unless as a part of such action the court determines that each of
Indemnitee's material defenses to such action were made in bad faith or were
frivolous.
12. Miscellaneous.
-------------
(a) Governing Law. This Agreement and all acts and transactions
-------------
pursuant hereto and the rights and obligations of the parties hereto shall be
governed, construed and interpreted in accordance with the laws of the State of
Delaware, without giving effect to principles of conflict of law.
(b) Entire Agreement; Enforcement of Rights. This Agreement sets
---------------------------------------
forth the entire agreement and understanding of the parties relating to the
subject matter herein and merges all prior discussions between them. No
modification of or amendment to this Agreement, nor any waiver of any rights
under this Agreement, shall be effective unless in writing signed by the parties
to this Agreement. The failure by either party to enforce any rights under this
Agreement shall not be construed as a waiver of any rights of such party.
(c) Construction. This Agreement is the result of negotiations
------------
between and has been reviewed by each of the parties hereto and their respective
counsel, if any; accordingly, this Agreement shall be deemed to be the product
of all of the parties hereto, and no ambiguity shall be construed in favor of or
against any one of the parties hereto.
(d) Notices. Any notice, demand or request required or permitted to
-------
be given under this Agreement shall be in writing and shall be deemed sufficient
when delivered personally or sent by telegram or fax, or forty-eight (48) hours
after being deposited in the U.S. mail, as certified or registered mail, with
postage prepaid, and addressed to the party to be notified at such party's
address as set forth below or as subsequently modified by written notice.
(e) Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.
(f) Successors and Assigns. This Agreement shall be binding upon the
----------------------
Company and its successors and assigns, and inure to the benefit of Indemnitee
and Indemnitee's heirs, legal representatives and assigns.
(g) Subrogation. In the event of payment under this Agreement, the
-----------
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of
-7-
<PAGE>
Indemnitee, who shall execute all documents required and shall do all acts that
may be necessary to secure such rights and to enable the Company to effectively
bring suit to enforce such rights.
[Signature Page Follows]
-8-
<PAGE>
The parties hereto have executed this Agreement as of the day and year set
forth on the first page of this Agreement.
SUNRISE TELECOM INCORPORATED
By: ______________________________
Title: ______________________________
Address: 22 Great Oaks Boulevard
San Jose, California 95119
AGREED TO AND ACCEPTED:
((IndemniteeName))
__________________________________
(Signature)
Address:
-9-
<PAGE>
Exhibit 21.1
List of Subsidiaries
Hukk Engineering, Inc.
Pro. Tel. S.r.l.
Taiwan Sunrise Telecom Co., Ltd.
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Sunrise Telecom, 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 LLP
Mountain View, California
March 8, 2000
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
of Pro.Tel.Srl
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the prospectus.
KPMG S.p.A.
Bologna, Italy
March 8, 2000
