<PAGE>
As filed with the Securities and Exchange Commission on April 13, 2000
Registration No. 333-32070
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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AMENDMENT NO. 1
TO
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 4,600,000 shares $12.00 $55,200,000 $15,180(3)
</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).
(3)A fee of $15,788 has been previously paid.
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 APRIL 13, 2000
PROSPECTUS
4,000,000 Shares
[SUNRISE LOGO]
Common Stock
This is an initial public offering of common stock by Sunrise Telecom
Incorporated. Sunrise is selling 3,800,000 shares of common stock. The selling
stockholders identified in this prospectus are offering an additional
200,000 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 $10.00 and $12.00 per share.
--------
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 600,000 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
Service verification solutions for telecommunications and Internet networks.
[Photograph of a technician using a Sunrise test set in a home office setting.
The photograph is surrounded by four triangles: Digital Subscriber Line, Cable
TV, Signaling and Fiber Optics]
Text under the picture says: Communications technicians use Sunrise Telecom
products to verify the operation of digital subscriber lines, fiber optics,
signaling, and cable TV.
[Sunrise logo]
<PAGE>
Sunrise Telecom equipment is used throughout the communications network.
[Network diagram illustrating where Sunrise products are used throughout the
communications network.]
<PAGE>
TABLE OF CONTENTS
<TABLE>
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Page
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<S> <C>
Prospectus Summary.................................................... 3
Risk Factors.......................................................... 7
Forward-Looking Statements............................................ 17
Use of Proceeds....................................................... 18
Dividend Policy....................................................... 18
Capitalization........................................................ 19
Dilution.............................................................. 20
Selected Consolidated Financial Data.................................. 21
Unaudited Pro Forma Consolidated
Condensed Financial Statements....................................... 22
Management's Discussion and Analysis of
Financial Condition and Results of Operations........................ 25
Business.............................................................. 34
Management............................................................ 47
Principal and Selling Stockholders.................................... 56
Certain Transactions.................................................. 58
Description of Capital Stock.......................................... 59
Shares Eligible for Future Sale....................................... 62
Underwriting.......................................................... 63
Legal Matters......................................................... 65
Experts............................................................... 65
Where You Can Find More Information................................... 65
Index To Financial Statements......................................... F-1
</TABLE>
<PAGE>
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. 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. Digital subscriber line technology is a
high-speed, high capacity access service that operates over standard copper
telephone wires. 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.
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. However, our growth
rate may not necessarily correspond with the growth rate of the installation of
DSL lines and cable TV modems. 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 integrated services digital network 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 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. 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.
4
<PAGE>
The Offering
<TABLE>
<C> <S>
Common stock offered by Sunrise..................... 3,800,000 shares
Common stock offered by the selling stockholders.... 200,000 shares
Common stock to be outstanding after this offering.. 49,578,401 shares
Use of proceeds..................................... We may use up to $3.0
million to repay amounts
drawn to finance our
short-term liquidity
needs after March 31,
2000 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 45,778,401 shares of common stock outstanding at March 31, 2000
after giving effect to a three-for-one stock split of our common stock
on April 10, 2000;
. excludes approximately 8,893,905 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 2,796,198 shares were
subject to outstanding options at March 31, 2000 issued at a weighted
average exercise price of $5.11 per share; and
. assumes our reincorporation from California to Delaware, which will
occur before the closing of this offering.
5
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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
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(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
======= ======= ======= ======= =======
Dividends............................ 30 60 89 89 223
======= ======= ======= ======= =======
Earnings per share: (1)
Basic.............................. $ 0.04 $ 0.08 $ 0.10 $ 0.08 $ 0.25
======= ======= ======= ======= =======
Diluted............................ $ 0.04 $ 0.08 $ 0.10 $ 0.07 $ 0.24
======= ======= ======= ======= =======
Shares used in computing earnings per
share: (1)
Basic.............................. 45,222 44,954 44,645 44,537 44,667
======= ======= ======= ======= =======
Diluted............................ 45,269 45,071 44,896 45,003 45,824
======= ======= ======= ======= =======
</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 $46,389
Working capital....................................... 16,029 53,803
Total assets.......................................... 38,266 76,040
Notes payable, less current portion................... 638 638
Total stockholders' equity............................ 25,471 63,245
</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
3,800,000 shares of our common stock by us at an assumed initial public
offering price of $11.00 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.
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.
The factors listed above may affect our business and stock price in several
ways, including 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 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.
. 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.
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
7
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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. 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
. 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.
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.
Use of Field Technicians--If service providers reduce their use of field
technicians and successfully implement a self-service installation model,
demand for our products could decrease.
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. However, SBC Communications has
recently announced plans to encourage their customers to install their own DSL
service. U.S. West and Bell Atlantic already encourage customers to install DSL
themselves. By encouraging
8
<PAGE>
customers to install DSL themselves, these phone companies intend to reduce
their expenses and expedite installation for their customers. To encourage
self-installation, these companies offer financial incentives. If SBC and other
service providers successfully implement these plans or choose to send
technicians into the field only after a problem has been reported, or if
alternative methods of verification become available, such as remote
verification, the need for field technicians and the need 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, which could cause our stock price to decline. For more information
regarding the length and unpredictability of our sales and implementation
cycles, see "Business--Sales, Marketing and Customer Service."
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.
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 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 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.
9
<PAGE>
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.
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 228 at March 31, 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 are described in "Business--Competition." 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, Inc. and Wavetek
Wandel Goltermann, Inc announced the merger of TTC, a division of Dynatech, to
Wavetek, which could make 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 and 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
10
<PAGE>
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.
Our business requires engineers, technicians and other highly trained and
experienced personnel. In particular, since our products require a
sophisticated selling effort targeted at several key people within our
prospective customers' organizations, we have a special need for 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 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. Given that competition for such persons is intense, especially in the
San Francisco Bay Area, we may not be successful in attracting and retaining
these individuals. Our failure to hire, train and keep these kinds of employees
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.
Reliance On Non-U.S. Workers--If U.S. immigration policies prevent us from
hiring or retaining the workers we need, our growth may be limited.
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. Furthermore, 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.
11
<PAGE>
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;
. 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 sole supplier and we license certain software from third
parties. 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 or software licenses were to become unavailable, the need to
qualify new or alternative products or develop or license new software
for our use and/or to reconfigure our products and manufacturing
process, each of which could be lengthy and expensive;
12
<PAGE>
. 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."
Acquisitions--We have acquired two companies and intend to pursue further
acquisitions 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. As a result of these acquisitions, we face numerous
risks, including:
. 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, 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.
If we pursue further acquisitions, we will face similar risks as those above
and additional risks, including:
. the diversion of our management's attention and the expense of
identifying and pursuing suitable acquisition 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.
We cannot assure you that we will locate suitable acquisition candidates or
that, if we do, we will be able to acquire them and then integrate them
successfully and efficiently into our business.
13
<PAGE>
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 experienced 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 and the acceptance of competing technologies. 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.
The telecommunications industry 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. For
example, in recent years, SBC acquired Pacific Bell and Ameritech, both of
which were customers of ours. 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 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 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.
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.
14
<PAGE>
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."
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 26.8%, 24.5% and 13.0% of our outstanding shares of
common stock (26.3%, 24.0% and 12.8%, 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.
15
<PAGE>
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 between our company 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. In addition, the public markets have
experienced volatility that has particularly affected the market prices of
securities of many technology and telecommunications companies for reasons that
have been unrelated to their operating results. As a result, you may face the
following risks:
. the market price of our common stock may decline below the initial
offering price;
. an active trading market for our common stock may not develop, which may
result in your not being able to sell the shares you purchase at
attractive prices or at all; and
. volatility and a lack of liquidity for our common stock may impede our
ability to raise additional capital to expand our business.
In addition, 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.
Sale of Shares--The sale of a substantial number of shares of our common stock
after this offering may adversely affect our stock price.
Beginning 180 days after the date of this prospectus, approximately
45,050,725 shares of our common stock held by existing stockholders will become
available for resale under Rule 144 and Rule 701 of the Securities Act. The
market price of our common stock could decline as a result of sales of
substantial amounts of common stock in the public market upon the expiration of
lockup agreements between the existing stockholders and the underwriters 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."
16
<PAGE>
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 the "Risk Factors" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" portions of this prospectus or elsewhere in this prospectus.
17
<PAGE>
USE OF PROCEEDS
We will receive net proceeds of approximately $37,800,000 million from the
sale of shares of common stock by us in this offering at an assumed initial
public offering price of $11.00 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 may use up to $3.0 million to repay amounts drawn to finance our short-
term liquidity needs after March 31, 2000 under our line of credit. Our line of
credit bears interest at the bank's prime rate, which was 9.0% at March 31,
2000, 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, including sales and marketing, research and
development and general and administrative expenses;
. 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.
18
<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 3,800,000 shares of common stock offered
by us in this offering at an assumed initial public offering price of
$11.00 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 9,259,305 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 2,453,100 shares were subject to
outstanding options at December 31, 1999 issued at a weighted average
exercise price of $1.46 per share; and
. 500,001 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 $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; 44,913,000 shares outstanding, actual; and
48,713,000 shares outstanding, as adjusted 45 49
Additional paid-in capital.............................. 3,915 41,685
Deferred stock-based compensation....................... (2,065) (2,065)
Retained earnings....................................... 23,576 23,576
------- -------
Total stockholders' equity............................ 25,471 63,245
------- -------
Total capitalization................................ $26,109 $63,883
======= =======
</TABLE>
19
<PAGE>
DILUTION
At December 31, 1999, our actual net tangible book value was approximately
$23.1 million or $0.52 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 3,800,000 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 $60.9 million, or $1.25 per share. This represents an
immediate increase in as adjusted net tangible book value of $0.73 per share to
existing stockholders and an immediate dilution of $9.75 per share to new
investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................ $11.00
Net tangible book value per share at December 31, 1999....... $0.52
Increase per share attributable to new investors............. 0.73
-----
Pro forma net tangible book value per share after the
offering...................................................... 1.25
------
Dilution per share to new investors............................ $ 9.75
======
</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.. 44,913,000 92.2% $ 690,853 1.6% $ 0.02
New investors.......... 3,800,000 7.8 41,800,000 98.4 11.00
---------- ----- ----------- -----
Total................ 48,713,000 100.0% $42,490,853 100.0%
========== ===== =========== =====
</TABLE>
The discussion and tables above assume no exercise of the following:
. approximately 9,295,305 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 2,453,100 shares were subject to
outstanding options at December 31, 1999 issued at a weighted average
exercise price of $1.46 per share;
. 500,001 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 44,713,000 or
approximately 91.7% (44,113,000 shares, or approximately 90.5%, 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 4 million or
approximately 8.3% (4,600,000 shares, or approximately 9.5%, 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."
20
<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 except for share and earnings per share
data, which is unaudited, 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
======= ======= ======= ======= =======
Dividends............................ 30 60 89 89 223
======= ======= ======= ======= =======
Earnings per share:
Basic.............................. $ 0.04 $ 0.08 $ 0.10 $ 0.08 $ 0.25
======= ======= ======= ======= =======
Diluted............................ $ 0.04 $ 0.08 $ 0.10 $ 0.07 $ 0.24
======= ======= ======= ======= =======
Shares used in computing earnings per
share:
Basic.............................. 45,222 44,954 44,645 44,537 44,667
======= ======= ======= ======= =======
Diluted............................ 45,269 45,071 44,896 45,003 45,824
======= ======= ======= ======= =======
<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>
21
<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......................... $ 0.25 $ 0.19
======= =======
Diluted....................... $ 0.24 $ 0.19
======= =======
</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 issued to certain Pro.Tel
employees 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 assuming a
rate of return of 5%.
(D) To reflect the income tax effect of the adjustments at the effective tax
rate of 36.5%.
22
<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, acquired work-force 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:
Fair value of Pro.Tel's assets and liabilities.................... 276
------
Excess purchase price over allocation to identifiable assets and
liabilities........................................................ $9,414
======
</TABLE>
23
<PAGE>
The Company expects to allocate such excess purchase price as follows:
<TABLE>
<S> <C>
Developed technology.................................................. $4,365
Acquired work-force................................................... 108
Non-compete agreement................................................. 500
Unidentified goodwill................................................. 4,441
------
$9,414
======
</TABLE>
(C) To reflect the note payable, including interest at a rate of 10.5% per
annum, and non-compete payable from the acquisition costs to be repaid in
May 2000 and in 16 quarterly payments, respectively.
(D) To reflect common stock contingently issuable as partial consideration for
the purchase. We granted 500,001 shares of its common stock to Pro.Tel
shareholders with the right to "put" their Sunrise stock to us for cash on
May 22, 2000 for $10.00 per share. The "put" feature represents, in effect,
a guarantee of purchase price. We expect to account for the value of such
shares in the determination of purchase price.
(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.
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.
Currently, competition in the telecommunications equipment market is intense
and is characterized by declining prices due to increased competition, new
products and increasing unit volumes. Due to competition and potential pricing
pressures from large customers in the future, we expect that the average
selling price and gross margins for our products will decline over time. If we
fail to reduce our production costs accordingly, our gross margins will
correspondingly decline. See "Risk Factors--Competition and --Risks of the
Telecommunications Industry."
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
25
<PAGE>
other than U.S. dollars, thereby exposing us to gains and losses on non-U.S.
currency transactions. We may 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.
Our industry is characterized by limited supply chains and long lead times
for materials and components we use in the manufacture of our products. If we
underestimate our requirements, we may have inadequate inventory, resulting in
additional costs to our products to expedite delivery of certain long lead time
components. An increase in the cost of components could result in lower
margins.
Additionally, these long lead times have in the past, and may in the future,
cause us to attempt to mitigate these lead times by purchasing larger
quantities of some parts, increasing our investment in inventory and the risk
of the parts' obsolescence. Any subsequent write-off of inventory could also
result in lower margins. See "Risk Factors--Risks Relating to Our Business--
Dependence on Sole and Single Source Suppliers" and "Business--Manufacturing."
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
26
<PAGE>
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.
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>
27
<PAGE>
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.
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.
28
<PAGE>
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.
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
29
<PAGE>
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.
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
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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.
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.
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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
Engineering acquisition and $2.7 million of purchases of property and
equipment. We believe that capital expenditures in 2000, will include
approximately $15.0 million relating to 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 approximately $5.0
million for equipment, furniture and fixtures relating to the new facility. In
addition, due to anticipated growth in our operations and the increased
capacity afforded by our new facility, we believe that capital expenditures for
the acquisition of property and equipment relating to our ongoing business
activities will increase to a total of approximately $5.0 million in 2000.
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 500,001 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
$10.00 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 and March 31, 2000, there were no balances outstanding
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 and March 31, 2000, 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.
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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 consists of copper wires that operate at
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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 integrated services digital network 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.
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,
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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, asymmetric DSL, or 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, high bit-rate DSL, or HDSL, high speed
symmetric DSL, or 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.
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
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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 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.
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. 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
asynchronous transfer mode or 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.
. 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
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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 for U.S. and international standards.
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
verification 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 modules to
test DSL and other digital transmission types, such as
T1 which is used by large businesses for broadband
access. 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 test equipment.
SunSet xDSL
Full Chassis . Handheld unit for DSL service verification that 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 product.
SunSet xDSL
Light Chassis . Handheld unit for DSL service verification only. This
product supports all Sunrise DSL modules to allow
field technicians to test various types of DSL
technologies.
xDSL RAM
. Rack-mount unit 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,
SunLite BRI . These products support analysis and service
verification for the integrated services digital
network, known as ISDN. ISDN is an enhanced digital
network that offers more bandwidth than the
traditional telephone network.
- --------------------------------------------------------------------------------
North American
We design our North American DSL products specifically
for the North American market and support applications
common to this market such as T1, a standard for digital
transmission in North America used by large businesses
for broadband access.
SunSet T1
. Handheld unit that supports transmission testing for
T1, including service verification for voice
services.
SunSet T10
. Handheld unit that supports transmission testing for
T1, with service verification and diagnostics for
multiple data protocols and voice services.
SunSet T3
. Handheld unit that offers the versatility to test
multiple transmission types in a single unit and
support areas that have international and North
American standards. It also offers service
verification and diagnostics for integrated services
digital network, known as ISDN, and voice services.
SunSet STS-1
. Handheld unit that supports transmission testing for
all levels of electrical digital transmission testing
for traditional applications and newer SONET
applications. SONET, synchronous optical network, is
a family of fiber optic transmission rates that also
encompases electrical digital signals with different
capacities.
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DSL Products
International
We design international DSL products specifically for
testing lines outside the North American market and to
support protocols common to the international market
such as E1, a standard for international digital
transmission used by large businesses for broadband
access.
SunLite E1
. Handheld unit that supports transmission testing in a
small test set for E1.
SunSet E1, E1e,
E8 . Handheld unit that supports transmission testing and
service verification for E1 and voice services.
SunSet E10, E20
. Handheld unit that supports transmission testing for
E1, and service verification for data protocols,
voice and other signaling protocols.
SunSet PDH
. Handheld unit that supports transmission testing for
E1 and higher transmission rates.
Cable TV Product
CR1200R
. Portable unit being introduced to support field
transmission analysis for digital and analog cable TV
networks for both inbound and outbound signals. It
also finds common transmission problems in cable TV
digital networks that would inhibit the networks' use
for Internet services. The unit is water resistant,
portable and can be used without additional
equipment.
Fiber Optic Products
SunSet OCx
. Handheld unit that supports transmission testing for
SONET, synchronous optical network, a family of fiber
optic transmission rates with many electrical digital
signals with different capacities. It includes both
electrical and optical signal testing and performs
service verification for various services such as
asynchronous transfer mode, a very high speed
transmission technology, which allows telephone
companies to mix formerly incompatible signals, such
as voice, video, and data. The SunSet OCx is
currently the smallest multi-rate optical test set
available.
SS500
. Central office based SONET and asynchronous transfer
mode testing device, with service verification for
various protocols such as integrated services digital
network, or ISDN, and voice. It combines service
verification functionality with central office
transmission and signaling testing in a single unit.
SunSet SDH
. Handheld unit that supports fiber optic transmission
types, such as SONET and synchronous digital
hierarchy, a set of international fiber-optic
standards, as well as traditional North American and
international digital transmission types. Also
supports testing for asynchronous transfer mode. The
SunSet SDH offers the ability to test SONET and
synchronous digital hierarchy in a single unit and
facilitates testing in areas where international and
U.S. standards co-exist.
41
<PAGE>
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.
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.
Nextel Communications, Inc.
AT&T Corp. 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.
Telkom SA, Ltd.
Winstar Network Expansion, LLC
As of March 31, 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 13 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.
42
<PAGE>
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 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. 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. 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;
43
<PAGE>
. 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
our largest direct employment expense. At March 31, 2000, we had a total of 89
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.
44
<PAGE>
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."
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
45
<PAGE>
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.
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. 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. For more information regarding the risks to our intellectual property, see
"Risk Factors--Risks Relating to Our Business--Intellectual Property Risks."
Employees
At March 31, 2000, we had a total of 228 full-time employees, consisting of
184 in the United States, 21 in Taiwan and 23 in Italy, and approximately 35
temporary employees. Of the total permanent employees, 89 were engaged in
research and development, 50 were engaged in sales, marketing and customer
support, 62 were engaged in operations and 27 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.
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<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 three 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 60,000 15,103(8)
Chief Financial Officer 1998 108,600 12,945 30,000 6,856(9)
and Treasurer 1997(10) 46,212 16,741 60,000 --
</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 $68 paid on behalf
of such officer.
(10) Mr. Eidelman joined Sunrise in July 1997.
50
<PAGE>
Option Grants
The following table provides summary information regarding stock options
granted to the officers listed in the summary compensation table during the
fiscal year ended December 31, 1999. The options were granted pursuant to
Sunrise's 1993 stock option plan.
Option Grants During Fiscal 1999
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed Annual
Rates of Stock Price
Appreciation for Option
Individual Grants Term (3)
---------------------------------------------------------- ------------------------
Number of Fair
Securities Percent of Market
Underlying Total Options Value On
Options Granted to Exercise or Date of
Granted Employees in Base Price Grant Expiration
Name (#)(1) Fiscal Year(%) ($/Sh) ($/sh)(2) Date 0% ($) 5% ($) 10%($)
- ---- ---------- -------------- ----------- --------- ---------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Paul Ker-Chin Chang..... -- -- -- -- -- -- -- --
Paul A. Marshall........ -- -- -- -- -- -- -- --
Robert C. Pfeiffer...... -- -- -- -- -- -- -- --
Peter L. Eidelman....... 21,000 2.0 $1.50 $2.67 03/23/09 $24,500 $59,718 $113,750
15,000 1.4 2.17 5.00 10/08/09 42,500 89,667 162,031
24,000 2.3 2.17 5.00 11/17/09 68,000 143,467 259,249
</TABLE>
- ---------------------
(1) All options granted to Mr. Eidelman vest annually in four equal
installments beginning one year after the date of grant.
(2) Based on the deemed 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 0%, 5%
and 10% rates (determined from the fair market value 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.
51
<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 $5.00 per share.
Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Number of Options at Fiscal In-the-Money Options
Shares Year-End(#) at Fiscal Year-End($)
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....... 7,500 $29,250 142,500/0 $495,750/0
</TABLE>
Benefit Plans
1993 Stock Option Plan. Our 1993 stock option plan was adopted by our board
of directors in December 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 5,250,000 shares has been reserved for
issuance under the 1993 stock option plan. As of March 31, 2000, options to
purchase an aggregate of 2,796,198 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 was adopted by our board of directors
and approved by our stockholder in April 2000. The 2000 stock plan will become
effective upon our initial public offering. At that time, all outstanding
shares reserved 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 3,750,000 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
. 2 1/2% of the outstanding shares on the last day of the prior fiscal
year;
. 1,300,000 shares; and
. 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 or 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 600,000 shares. However, in connection with an optionee's initial
service with us, such optionee may be granted up to a total of 900,000 shares
during the initial fiscal year of service. Restricted stock grants are limited
to 75,000 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
53
<PAGE>
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 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 was
adopted by our board of directors and approved by our stockholder in April
2000. A total of 600,000 shares of our common stock has been reserved for
issuance under the 2000 purchase plan, plus annual increases equal to the least
of
. 0.75% of the outstanding shares on the last day of the prior fiscal
year;
. 300,000 shares; and
. 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
. 27 months after the date of grant;
. the option period as determined by the board at the time of grant; or
. the employee's termination of employment.
54
<PAGE>
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.
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 31, 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
31, 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 45,778,401 shares of common stock outstanding
as of March 31, 2000, together with applicable options for that stockholder.
Shares of common stock issuable upon exercise of options and other rights
beneficially owned were 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..... 13,281,000(2) 29.0% --(3) 13,281,000 26.8%
Paul A. Marshall........ 12,123,000(4) 26.5 --(5) 12,123,000 24.5
Robert C. Pfeiffer...... 6,465,000 14.1 --(6) 6,465,000 13.0
Peter L. Eidelman....... 150,000(7) * -- 150,000 *
Patrick Peng-Koon Ang... -- -- -- -- --
Henry P. Huff........... -- -- -- -- --
Jennifer J. Walt........ 440,250 1.0 5,175 435,075 *
All directors and
executive officers as a
group (seven persons).. 32,459,250(7) 70.7 5,175 32,454,075 65.3
Selling Stockholders:
Marshall Family Trust
U/T/A dtd. 3/26/91..... 624,000 1.4 6,000 618,000 1.2
Calafia Group........... 600,000 1.3 13,925 586,075 1.2
Antao Lin & Cathy Ko
Yuen Chang............. 1,447,500 3.2 13,925 1,433,575 2.9
Bryant C. Blewett &
Ellen Marshall......... 562,500 1.2 13,925 548,575 1.1
George Butzler.......... 555,000 1.2 13,925 541,075 1.1
Shao-Hwa Wu............. 600,000 1.3 13,925 586,075 1.2
Jack Posnick............ 450,000 1.0 13,925 436,075 *
Helfrich Family Trust
U/T/A dtd. 4/9/82...... 462,000 1.0 13,925 448,075 *
Keith Alan Gilmore &
Cindy Gilmore.......... 258,000 * 13,925 244,075 *
Ko-Wen Chang Tam........ 601,500 1.3 13,925 587,575 1.2
Marshall Family Trust
U/T/A dtd. 3/21/96..... 150,000 * 1,800 148,200 *
Meng-Shan & Pohwa Chen
Lin.................... 562,500 1.2 13,925 548,575 1.1
Robert & Patricia
Pfeiffer............... 547,500 1.2 13,925 533,575 1.1
Stanton Clarke.......... 351,000 * 13,925 337,075 *
William & Lori
Dougherty.............. 562,500 1.2 13,925 548,575 1.1
Shirley Siegel.......... 66,000 * 6,000 60,000 *
</TABLE>
- ---------------------
* Less than one percent of the outstanding shares of common stock.
56
<PAGE>
(1) Assumes no exercise of the Underwriters' over-allotment option.
(2) Includes 31,800 shares held as custodian for minor child.
(3) Mr. Chang has granted the underwriters an option to purchase up to 250,000
shares of our common stock to cover over-allotments, if any. If the over-
allotment option is exercised in full, Mr. Chang would own 13,031,000
shares or 26.3% of the outstanding shares.
(4) Includes 1,200 shares held as custodian for minor child.
(5) Mr. Marshall has granted the underwriters an option to purchase up to
228,240 shares of our common stock to cover over-allotments, if any. If the
over-allotment option is exercised in full, Mr. Marshall would own
11,894,760 shares or 24.0% of the outstanding shares.
(6) Mr. Pfeiffer has granted the underwriters an option to purchase up to
121,760 shares of our common stock to cover over-allotments, if any. If the
over-allotment option is exercised in full, Mr. Pfeiffer would own
6,343,240 shares or 12.8% of the outstanding shares.
(7) Includes 133,500 shares issuable upon exercise of outstanding options,
which are exercisable within 60 days of March 31, 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.
57
<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 $1.10
per share from certain of our stockholders, including:
. 3,000 shares from Bruce and Molly Mastic, a brother-in-law and sister of
Paul Marshall, our Chief Operating Officer;
. 60,000 shares from Robert and Pat Pfeiffer, the parents of Robert C.
Pfeiffer, our Chief Technology Officer; and
. 15,000 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 $1.43
per share from certain of our stockholders, including:
. 15,000 shares from Andrew and Mary Marshall, the parents of Paul
Marshall, our Chief Operating Officer; and
. 52,500 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."
58
<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 31, 2000, there were 45,778,401 shares of common stock outstanding,
held of record by 90 stockholders. Options to purchase 2,796,198 shares of
common stock were also outstanding. There would be 49,578,401 shares of common
stock outstanding as of March 31, 2000 (assuming no exercise of outstanding
options under Sunrise's stock option plans after March 31, 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.
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
59
<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.
60
<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.
61
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have outstanding 49,578,401 shares
of common stock based upon shares outstanding at March 31, 2000. Excluding the
4,000,000 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 45,578,401 shares of common stock
outstanding, all of which are "restricted" shares under the Securities Act of
1933.
The following table indicates approximately when the 45,578,401 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.................................. 15,675
180 days after the date of this prospectus...................... 45,050,725
Thereafter upon expiration of one year holding periods ......... 512,001
</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
495,784 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 March 31, 2000, 4,543,905 shares were reserved for issuance under our
1993 stock option plan, of which options to purchase 2,796,198 shares were then
outstanding, all of which were 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 8,293,905 shares under our 2000 stock
option plan, including the shares from the 1993 stock option plan, and the
600,000 shares of common stock reserved for issuance under our employee stock
purchase plan. Upon registration, all of these shares will be freely tradeable
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.
62
<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................................... 4,000,000
=========
</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 600,000 additional shares of common stock at the
63
<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.
64
<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. 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.
65
<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 referenced 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; 44,518,605 and 44,913,000 shares issued and
outstanding as of December 31, 1998 and 1999,
respectively............................................... 45 45
Additional paid-in capital.................................. 481 3,915
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.................................. $ 0.10 $ 0.08 $ 0.25
============ =========== ===========
Diluted................................ $ 0.10 $ 0.07 $ 0.24
============ =========== ===========
Shares used in computing earnings per
share:
Basic.................................. 44,645,271 44,536,911 44,666,646
============ =========== ===========
Diluted................................ 44,895,759 45,002,796 45,823,980
============ =========== ===========
</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................... 44,868 $45 $ 463 $ -- $ 5,894 $ 6,402
Exercise of stock
options................ 46 -- 18 -- -- 18
Repurchase of common
stock.................. (298) -- (14) -- (311) (325)
Net income.............. -- -- -- -- 4,456 4,456
Cash dividend of $.006
per share.............. -- -- -- -- (89) (89)
------ --- ------ ------- ------- -------
Balances, December 31,
1997................... 44,616 45 467 -- 9,950 10,462
Exercise of stock
options................ 39 -- 21 -- -- 21
Repurchase of common
stock.................. (136) -- (7) -- (188) (195)
Net income.............. -- -- -- -- 3,371 3,371
Cash dividend of $.006
per share.............. -- -- -- -- (89) (89)
------ --- ------ ------- ------- -------
Balances, December 31,
1998................... 44,519 45 481 -- 13,044 13,570
Exercise of common stock
options................ 229 -- 177 -- -- 177
Repurchase of common
stock.................. (135) -- (13) -- (189) (202)
Issuance of stock in
connection with Hukk
acquisition............ 300 -- 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................... 44,913 $45 $3,915 $(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,
standard warranty and customer support.
(d) Warranty Cost
The Company provides standard warranties covering parts and labor on all
its hardware products. Estimated warranty costs for such standard
warranties 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 fair value of the intangibles relating to the acquisition
to their carrying value.
(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........................................... 44,645 44,537 44,667
Effect of dilutive common
equivalent shares--stock
options outstanding................................... 251 466 1,157
------ ------ ------
Diluted EPS--weighted-average
number of common shares
and common equivalent
shares outstanding.................................... 44,896 45,003 45,824
====== ====== ======
</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
one of two external rounds of third-party financing obtained by Top Union. This
investment by the Company was less than 16.4% of the total financing raised by
Top Union and, thus, diluted the Company's 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 298,000, 135,000, and 135,000 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 5,250,000
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 9,000, 6,750, and 25,161,
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................ 478,755 $0.51 1,290,360 $0.91 1,811,145 $1.09
Granted at market
value.................. 925,500 1.10 663,000 1.43 -- --
Granted at less than
market value........... -- -- -- -- 1,079,100 1.88
Exercised............... (46,395) 0.39 (38,715) 0.55 (229,095) 0.77
Canceled................ (67,500) 1.10 (103,500) 1.20 (208,050) 1.14
--------- --------- ---------
Options at end of year.. 1,290,360 0.91 1,811,145 1.09 2,453,100 1.46
========= ========= =========
Weighted-average fair
value of options
granted during the year
with exercise prices at
fair value............. $0.11 $0.14 $ --
===== ===== =====
Weighted-average fair
value of options
granted during the year
with exercise prices
less than market value
at date of grant....... $ -- $ -- $2.58
===== ===== =====
</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>
$0.25 33,750 5.22 $0.25 33,750 $0.25
0.60 150,000 6.29 0.60 112,500 0.60
1.10-1.50 1,679,250 8.23 1.32 473,625 1.20
2.17 590,100 9.78 2.17 -- 2.17
--------- -------
2,453,100 619,875
========= =======
</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.
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......................................... 0.10 0.08 0.25
Adjusted pro forma.................................. 0.10 0.07 0.24
Diluted net income per share:
As reported......................................... 0.10 0.07 0.24
Adjusted pro forma.................................. 0.10 0.07 0.24
</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 300,000 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>
Revenue information by product category is as follows (in thousands):
<TABLE>
<CAPTION>
Years Ended
December 31,
-----------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Digital Subscriber Line .......................... $29,064 $28,535 $59,895
Cable TV ......................................... -- -- 1,334
Fiber Optics...................................... -- -- 236
------- ------- -------
$29,064 $28,535 $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
F-18
<PAGE>
SUNRISE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 500,001 contingently issuable shares of the Company stock
valued at $5,000,000. The Company also incurred direct costs associated
with the acquisition of approximately $200,000. The 500,001 shares of
stock in Sunrise were granted to Pro.Tel with the right to "put" their
Sunrise stock to the Company for cash on May 22, 2000 for $10.00 per
share. The "put" feature represents, in effect, a guarantee of purchase
price which was used in conjunction with both a discounted cashflow and
market-based valuations in determining the valuation of the shares issued
in connection with the acquisition.
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 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 April 5, 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 reincorporation will be effective upon the Company's initial
public offering. The Board of Directors also authorized a three-for-one
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)2000 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
600,000 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 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 3,750,000 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 (unaudited)
<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 $1.00.
See accompanying notes to consolidated financial statements.
F-21
<PAGE>
PRO.TEL. SRL AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(expressed in thousands of Italian Lire and US Dollars)
<TABLE>
<CAPTION>
December 31,
-----------------------------------
Note 1998 1999 1999
---- ---------- ---------- -----------
(L'000) (L'000) ($)
(unaudited)
<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 $1.00.
See accompanying notes to consolidated financial statements.
F-22
<PAGE>
PRO.TEL. SRL AND ITS SUBSIDIARY
CONSOLIDATED STATEMENTS OF QUOTAHOLDERS' EQUITY
(expressed in thousands of Italian Lire)
<TABLE>
<CAPTION>
Retained Total
Quota earning/ quotaholders'
capital (deficit) equity
------- --------- -------------
<S> <C> <C> <C>
Balance at January 1, 1998 of Pro.Tel. Srl.... 100,000 (3,749) 96,251
Balance at January 1, 1998 of Tel.Mark. Srl... 60,000 (7,265) 52,735
------- ------- -------
Combined balance.............................. 160,000 (11,014) 148,986
Acquisition of Tel. Mark. Srl............... (60,000) -- (60,000)
Capital increase............................ 400,000 -- 400,000
Net loss for the year....................... -- (55,414) (55,414)
------- ------- -------
Consolidated balance at December 31, 1998..... 500,000 (66,428) 433,572
Net profit for the year..................... -- 98,063 98,063
------- ------- -------
Consolidated balance at December 31, 1999..... 500,000 31,635 531,635
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-23
<PAGE>
PRO.TEL. SRL AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(expressed in thousands of Italian Lire and US Dollars)
<TABLE>
<CAPTION>
December 31,
---------------------------------
1998 1999 1999
---------- -------- -----------
(L'000) (L'000) ($)
(unaudited)
<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) which include those
established or adopted by the Italian Civil Code, 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 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 any
rights of return other than for defects in materials or workmanship. As such
defects are covered under warranty for labor and material costs described in
Note 17. 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>
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. Due to the nature, high quality and
workmanship of Pro. Tel's products, managements does not expect warranty costs
to be significant. For the years ended December 31, 1999 and 1998, the group
incurred product warranty costs which were insignificant. Therefore, management
does not consider any additional provision to be required as at December 31,
1999 and 1998 since such provisions are not considered significant.
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) Intangible assets
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. The Company in certain circumstances has made payments in advance of
delivery of leased assets.
Under Italian GAAP, these advance payments are recognized as an expense
in the period in which they are paid. Under US GAAP, such advance payments
would be accounted for as a prepaid expense.
(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
capital leases:.............................................
depreciation of plant and equipment....................... -- (2,756)
cost of goods sold........................................ 1,040 11,439
interest expenses for capital leases...................... -- (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)
capital leases:
plant and equipment..................................... -- 24,804
obligation under capital leases......................... -- (17,549)
prepaid 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
Complete DSL testing solutions
[Illustration of various Sunrise Telecom equipment]
[Sunrise Telecom logo]
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
4,000,000 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................................................ $ 15,788
NASD filing fee..................................................... 6,480
Nasdaq National Market listing fee.................................. 95,000
Printing and engraving expenses..................................... 200,000
Legal fees and expenses............................................. 350,000
Accounting fees and expenses........................................ 400,000
Blue Sky qualification fees and expenses............................ 10,000
Transfer Agent and Registrar fees................................... 10,000
Miscellaneous fees and expenses..................................... 12,732
----------
Total $1,100,000
</TABLE>
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
4,084,848 shares of its common stock under Sunrise's 1993 stock option plan
to a number of its employees, 706,095 shares of which have been exercised
at purchase prices ranging from $0.07 per share to $2.17 per share.
II-1
<PAGE>
2. On July 30, 1999, Sunrise issued 300,000 shares of its common stock at an
assumed price of $3.33 per share to the former shareholders of Hukk
Engineering, Inc.
3. On February 22, 2000, Sunrise issued 500,001 shares of its common stock at
an assumed price of $10.00 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 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 Italy.
24.1 Power of Attorney (included on page II-4).
27.1 Financial Data Schedule.
</TABLE>
- ---------------------
*To be supplied by amendment.
+Previously filed.
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 April 12, 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 April 12, 2000
____________________________________ Executive Officer (Principal
Paul Ker-Chin Chang Executive Officer)
/s/ Peter L. Eidelman Chief Financial Officer April 12, 2000
____________________________________ (Principal Accounting
Peter Eidelman Officer)
Paul A. Marshall* Director April 12, 2000
____________________________________
Paul A. Marshall
Robert C. Pfeiffer* Director April 12, 2000
____________________________________
Robert C. Pfeiffer
Patrick Peng-Koon Ang* Director April 12, 2000
____________________________________
Patrick Peng-Koon Ang
Henry P. Huff* Director April 12, 2000
____________________________________
Henry P. Huff
Jennifer J. Walt* Director April 12, 2000
____________________________________
Jennifer J. Walt
/s/ Paul Ker-Chin Chang
*By: _______________________________
Paul Ker-Chin Chang
Attorney-in-fact
</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 Plan.
10.8 2000 Employee Stock Purchase Plan.
21.1 List of Subsidiaries.+
23.1 Consent of Orrick, Herrington & Sutcliffe LLP (included in Exhibit
5.1).
23.2 Consent of KPMG LLP.
23.3 Consent of KPMG Italy.
24.1 Power of Attorney (included on page II-4).
27.1 Financial Data Schedule
</TABLE>
- ---------------------
*To be supplied by amendment.
+Previously filed.
<PAGE>
EXHIBIT 3.1
FIRST AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
SUNRISE TELECOM INCORPORATED
The undersigned, Paul Chang and Robert Pfeiffer, hereby certify that:
1. They are the duly elected and acting President and Secretary,
respectively, of SUNRISE TELECOM INCORPORATED a Delaware corporation.
2. The Certificate of Incorporation of this corporation was originally
filed with the Secretary of State of Delaware on March 7, 2000 under the name of
SUNRISE TELECOM INCORPORATED.
3. The Certificate of Incorporation of this corporation shall be
amended and restated to read in full as follows:
ARTICLE I
The name of this corporation is SUNRISE TELECOM INCORPORATED (the
"Corporation").
ARTICLE II
The address of the Corporation's registered office in the State of
Delaware is 1209 Orange Street, Wilmington, County of New Castle. The name of
its registered agent at such address is The Corporation Trust Company.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of Delaware.
ARTICLE IV
(A) The Corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total number
of shares which the Corporation is authorized to issue is one hundred
eighty-five million (185,000,000) shares, each with a par value of $0.001 per
share. One hundred seventy-five million (175,000,000) shares shall be Common
Stock and ten million (10,000,000) shares shall be Preferred Stock.
(B) The Preferred Stock may be issued from time to time in one or more
series. The Board of Directors is hereby authorized, by filing a certificate
pursuant to the applicable law of
<PAGE>
the state of Delaware and within the limitations and restrictions stated in this
Certificate of Incorporation, to determine or alter the rights, preferences,
privileges and restrictions granted to or imposed upon any wholly unissued
series of Preferred Stock and the number of shares constituting any such series
and the designation thereof, or any of them; and to increase or decrease the
number of shares of any series subsequent to the issuance of shares of that
series, but not below the number of shares of such series then outstanding. In
case the number of shares of any series shall be so decreased, the shares
constituting such decrease shall resume the status which they had prior to the
adoption of the resolution originally fixing the number of shares of such
series.
ARTICLE V
The number of directors of the Corporation shall be fixed from time to
time by a bylaw or amendment thereof duly adopted by the Board of Directors.
ARTICLE VI
This Article VI shall become effective only when the Corporation
qualifies for an exemption from Section 2115 of the California Corporations Code
(the "Effective Time").
On or prior to the date on which the Corporation first provides notice
of an annual meeting of the stockholders following the Effective Time, the Board
of Directors of the Corporation shall divide the directors into three classes,
as nearly equal in number as reasonably possible, designated Class I, Class II
and Class III, respectively. Directors shall be assigned to each class in
accordance with a resolution or resolutions adopted by the Board of Directors.
At the first annual meeting of stockholders or any special meeting in lieu
thereof following the Effective Time, the terms of the Class I directors shall
expire and Class I directors shall be elected for a full term of three years. At
the second annual meeting of stockholders or any special meeting in lieu thereof
following the Effective Time, the terms of the Class II directors shall expire
and Class II directors shall be elected for a full term of three years. At the
third annual meeting of stockholders or any special meeting in lieu thereof
following the Effective Time, the terms of the Class III directors shall expire
and Class III directors shall be elected for a full term of three years. At each
succeeding annual meeting of stockholders or special meeting in lieu thereof,
directors elected to succeed the directors of the class whose terms expire at
such meeting shall be elected for a full term of three years.
Prior to the Effective Time, the provisions of the preceding paragraph
shall not apply, and all directors shall be elected at each annual meeting of
stockholders or any special meeting in lieu thereof to hold office until the
next annual meeting or special meeting in lieu thereof.
Notwithstanding the foregoing provisions of this Article VI, each
director shall serve until his or her successor is duly elected and qualified or
until his or her death, resignation, or removal. No decrease in the number of
directors constituting the Board of Directors shall shorten the term of any
incumbent director.
-2-
<PAGE>
Any vacancies on the Board of Directors resulting from death,
resignation, disqualification, removal, or other causes shall be filled by
either (i) the affirmative vote of the holders of a majority of the voting power
of the then-outstanding shares of voting stock of the Corporation entitled to
vote generally in the election of directors (the "Voting Stock") voting together
as a single class; or (ii) by the affirmative vote of a majority of the
remaining directors then in office, even though less than a quorum of the Board
of Directors. Subject to the rights of any series of Preferred Stock then
outstanding, newly created directorships resulting from any increase in the
number of directors shall, unless the Board of Directors determines by
resolution that any such newly created directorship shall be filled by the
stockholders, be filled only by the affirmative vote of the directors then in
office, even though less than a quorum of the Board of Directors, or by a sole
remaining director. Any director elected in accordance with the preceding
sentence shall hold office for the remainder of the full term of the class of
directors in which the new directorship was created or the vacancy occurred and
until such director's successor shall have been elected and qualified. Any
director, or the entire Board of Directors, may be removed from office, with or
without cause, by the holders of a majority of the Voting Stock.
ARTICLE VII
In the election of directors, each holder of shares of any class or
series of capital stock of the Corporation shall be entitled to one vote for
each share held. No stockholder will be permitted to cumulate votes at any
election of directors.
ARTICLE VIII
No action shall be taken by the stockholders of the Corporation other
than at an annual or special meeting of the stockholders, upon due notice and in
accordance with the provisions of the Bylaws of the Corporation (the "Bylaws"),
and no action shall be taken by the stockholders by written consent.
ARTICLE IX
The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Certificate of Incorporation, in the manner now
or hereafter prescribed by statute, and all rights conferred upon stockholders
herein are granted subject to this reservation. Notwithstanding the foregoing,
the provisions set forth in Articles VI, X, XIII and XIV of this Certificate of
Incorporation may not be repealed or amended in any respect without the
affirmative vote of holders of at least 66-2/3% of the voting power of all of
the then-outstanding shares of the voting stock of the Corporation entitled to
vote.
-3-
<PAGE>
ARTICLE X
(A) Except as otherwise provided in the Bylaws, the Bylaws may be
altered or amended or new Bylaws adopted by the affirmative vote of at least
66-2/3% of the voting power of all of the then-outstanding shares of the voting
stock of the Corporation entitled to vote. The Board of Directors of the
Corporation is expressly authorized to adopt, amend or repeal Bylaws.
(B) The directors of the Corporation need not be elected by written
ballot unless the Bylaws so provide.
(C) Advance notice of stockholder nominations for the election of
directors or of business to be brought by the stockholders before any meeting of
the stockholders of the Corporation shall be given in the manner provided in the
Bylaws.
ARTICLE XI
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the bylaws of the Corporation.
ARTICLE XII
The Corporation shall have perpetual existence.
ARTICLE XIII
(A) To the fullest extent permitted by the General Corporation Law of
Delaware, as the same may be amended from time to time, a director of the
Corporation shall not be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director. If
the General Corporation Law of Delaware is hereafter amended to authorize, with
the approval of a corporation's stockholders, further reductions in the
liability of a corporation's directors for breach of fiduciary duty, then a
director of the Corporation shall not be liable for any such breach to the
fullest extent permitted by the General Corporation Law of Delaware, as so
amended.
(B) Any repeal or modification of the foregoing provisions of this
Article XIII shall not adversely affect any right or protection of a director of
the Corporation with respect to any acts or omissions of such director occurring
prior to such repeal or modification.
ARTICLE XIV
(A) To the fullest extent permitted by applicable law, the Corporation
is also authorized to provide indemnification of (and advancement of expenses
to) such agents (and any other persons to which Delaware law permits the
Corporation to provide indemnification) through Bylaw provisions, agreements
with such agents or other persons, vote of stockholders or disinterested
directors or otherwise, in excess of the indemnification and advancement
otherwise
-4-
<PAGE>
permitted by Section 145 of the General Corporation Law of Delaware, subject
only to limits created by applicable Delaware law (statutory or non-statutory),
with respect to actions for breach of duty to a corporation, its stockholders,
and others.
(B) Any repeal or modification of any of the foregoing provisions of
this Article XIV shall not adversely affect any right or protection of a
director, officer, agent or other person existing at the time of, or increase
the liability of any director of the Corporation with respect to any acts or
omissions of such director, officer or agent occurring prior to such repeal or
modification."
* * *
-5-
<PAGE>
The foregoing First Amended and Restated Certificate of Incorporation
has been duly adopted by this Corporation's Board of Directors and stockholders
in accordance with the applicable provisions of Section 228, 242 and 245 of the
General Corporation Law of the State of Delaware.
Executed at ____________________, on the ____ day of ___________, 2000.
--------------------------------
Paul K.C. Chang, President
--------------------------------
Robert C. Pfeiffer, Secretary
-6-
<PAGE>
EXHIBIT 3.2
BYLAWS
OF
SUNRISE TELECOM INCORPORATED
(AS AMENDED AND RESTATED EFFECTIVE __________ __, 2000)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I - CORPORATE OFFICES........................................................... 1
1.1 Registered Office........................................................ 1
1.2 Other Offices............................................................ 1
ARTICLE II - MEETINGS OF STOCKHOLDERS................................................... 1
2.1 Place Of Meetings........................................................ 1
2.2 Annual Meeting........................................................... 1
2.3 Special Meeting.......................................................... 2
2.4 Notice Of Stockholder's Meetings; Affidavit Of Notice.................... 2
2.5 Advance Notice Of Stockholder Nominees And Other Stockholder Proposals... 3
2.6 Quorum................................................................... 4
2.7 Adjourned Meeting; Notice................................................ 4
2.8 Conduct Of Business...................................................... 4
2.9 Voting................................................................... 4
2.10 Waiver Of Notice......................................................... 5
2.11 Record Date For Stockholder Notice; Voting............................... 5
2.12 Proxies.................................................................. 5
ARTICLE III - DIRECTORS................................................................. 6
3.1 Powers................................................................... 6
3.2 Number Of Directors...................................................... 6
3.3 Election, Qualification And Term Of Office Of Directors.................. 6
3.4 Resignation And Vacancies................................................ 6
3.5 Place Of Meetings; Meetings By Telephone................................. 7
3.6 Regular Meetings......................................................... 8
3.7 Special Meetings; Notice................................................. 8
3.8 Quorum................................................................... 8
3.9 Waiver Of Notice......................................................... 8
3.10 Board Action By Written Consent Without A Meeting........................ 9
3.11 Fees And Compensation Of Directors....................................... 9
3.12 Approval Of Loans To Officers............................................ 9
3.13 Removal Of Directors..................................................... 9
3.14 Chairman Of The Board Of Directors....................................... 10
ARTICLE IV - COMMITTEES................................................................. 10
4.1 Committees Of Directors.................................................. 10
4.2 Committee Minutes........................................................ 10
4.3 Meetings And Action Of Committees........................................ 11
</TABLE>
-i-
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE V - OFFICERS.................................................................. 11
5.1 Officers.............................................................. 11
5.2 Appointment Of Officers............................................... 11
5.3 Subordinate Officers.................................................. 11
5.4 Removal And Resignation Of Officers................................... 11
5.5 Vacancies In Offices.................................................. 12
5.6 Chief Executive Officer............................................... 12
5.7 President............................................................. 12
5.8 Vice Presidents....................................................... 12
5.9 Secretary............................................................. 12
5.10 Chief Financial Officer............................................... 13
5.11 Representation Of Shares Of Other Corporations........................ 13
5.12 Authority And Duties Of Officers...................................... 14
ARTICLE VI - INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS..... 14
6.1 Indemnification Of Directors And Officers............................. 14
6.2 Indemnification Of Others............................................. 14
6.3 Payment Of Expenses In Advance........................................ 14
6.4 Indemnity Not Exclusive............................................... 15
6.5 Insurance............................................................. 15
6.6 Conflicts............................................................. 15
ARTICLE VII - RECORDS AND REPORTS..................................................... 15
7.1 Maintenance And Inspection Of Records................................. 15
7.2 Inspection By Directors............................................... 16
7.3 Annual Statement To Stockholders...................................... 16
ARTICLE VIII - GENERAL MATTERS........................................................ 16
8.1 Checks................................................................ 16
8.2 Execution Of Corporate Contracts And Instruments...................... 16
8.3 Stock Certificates; Partly Paid Shares................................ 17
8.4 Special Designation On Certificates................................... 17
8.5 Lost Certificates..................................................... 18
8.6 Construction; Definitions............................................. 18
8.7 Dividends............................................................. 18
8.8 Fiscal Year........................................................... 18
8.9 Seal.................................................................. 18
8.10 Transfer Of Stock..................................................... 18
8.11 Stock Transfer Agreements............................................. 19
</TABLE>
-ii-
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
8.12 Registered Stockholders............................................ 19
ARTICLE IX - AMENDMENTS.......................................................... 19
</TABLE>
-iii-
<PAGE>
BYLAWS
OF
SUNRISE TELECOM INCORPORATED
ARTICLE I
CORPORATE OFFICES
-----------------
1.1 Registered Office.
-----------------
The address of the Corporation's registered office in the State of
Delaware is 1209 Orange Street, Wilmington, County of New Castle. The name of
its registered agent at such address is The Corporation Trust Company.
1.2 Other Offices.
-------------
The Board of Directors may at any time establish other offices at any
place or places where the Corporation is qualified to do business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
------------------------
2.1 Place Of Meetings.
-----------------
Meetings of stockholders shall be held at any place, within or outside
the State of Delaware, designated by the Board of Directors. In the absence of
any such designation, stockholders' meetings shall be held at the registered
office of the Corporation.
2.2 Annual Meeting.
--------------
(a) The annual meeting of stockholders shall be held each year on a
date and at a time designated by resolution of the Board of Directors. At the
meeting, directors shall be elected and any other proper business may be
transacted.
(b) Nominations of persons for election to the Board of Directors of
the Corporation and the proposal of business to be transacted by the
stockholders may be made at an annual meeting of stockholders (i) pursuant to
the Corporation's notice with respect to such meeting, (ii) by or at the
direction of the Board of Directors or (iii) by any stockholder of the
Corporation who was a stockholder of record at the time of giving of the notice
provided for in this Section 2.2, who is entitled to vote at the meeting and who
has complied with the notice procedures set forth in this Section 2.2.
<PAGE>
(c) For nominations or other business to be properly brought before
an annual meeting by a stockholder pursuant to clause (iii) of paragraph (b) of
this Section 2.2, the stockholder must have given timely notice thereof in
writing to the secretary of the Corporation, as provided in Section 2.5, and
such business must be a proper matter for stockholder action under the General
Corporation Law of Delaware.
(d) Only such business shall be conducted at an annual meeting of
stockholders as shall have been brought before the meeting in accordance with
the procedures set forth in these Bylaws. The chairman of the meeting shall
determine whether a nomination or any business proposed to be transacted by the
stockholders has been properly brought before the meeting and, if any proposed
nomination or business has not been properly brought before the meeting, the
chairman shall declare that such proposed business or nomination shall not be
presented for stockholder action at the meeting.
(e) For purposes of this Section 2.2, "public announcement" shall
mean disclosure in a press release reported by the Dow Jones News Service,
Associated Press or a comparable national news service.
(f) Nothing in this Section 2.2 shall be deemed to affect any rights
of stockholders to request inclusion of proposals in the Corporation's proxy
statement pursuant to Rule 14a-8 under the Exchange Act.
2.3 Special Meeting.
---------------
(a) A special meeting of the stockholders may be called at any time
by the Board of Directors, or by the chairman of the board, or by the president.
(b) Nominations of persons for election to the Board of Directors may
be made at a special meeting of stockholders at which directors are to be
elected pursuant to such notice of meeting (i) by or at the direction of the
Board of Directors or (ii) by any stockholder of the Corporation who is a
stockholder of record at the time of giving of notice provided for in Section
2.5, who shall be entitled to vote at the meeting and who complies with the
notice procedures set forth in Section 2.5.
2.4 Notice Of Stockholder's Meetings; Affidavit Of Notice.
-----------------------------------------------------
All notices of meetings of stockholders shall be in writing and shall
be sent or otherwise given in accordance with this Section 2.4 of these Bylaws
not less than 10 nor more than 60 days before the date of the meeting to each
stockholder entitled to vote at such meeting (or such longer or shorter time as
is required by Section 2.5 of these Bylaws, if applicable). The notice shall
specify the place, date, and hour of the meeting, and, in the case of a special
meeting, the purpose or purposes for which the meeting is called. Written notice
of any meeting of stockholders, if mailed, is given when deposited in the United
States mail, postage prepaid, directed to the stockholder at his address as it
appears on the records of the Corporation. An affidavit of the secretary or an
assistant secretary or of the transfer agent of the Corporation that
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the notice has been given shall, in the absence of fraud, be prima facie
evidence of the facts stated therein.
2.5 Advance Notice Of Stockholder Nominees And Other Stockholder
------------------------------------------------------------
Proposals.
- ----------
Only persons who are nominated in accordance with the procedures set
forth in this Section 2.5 shall be eligible for election as directors.
Nominations of persons for election to the Board of Directors of the Corporation
may be made at a meeting of stockholders by or at the direction of the Board of
Directors or by any stockholder of the Corporation entitled to vote for the
election of directors at the meeting who complies with the notice procedures set
forth in this Section 2.5. Such nominations, other than those made by or at the
direction of the Board of Directors, shall be made pursuant to timely notice in
writing to the secretary of the Corporation. Stockholders may bring other
business before the annual meeting, provided that timely notice is provided to
the secretary of the Corporation in accordance with this section, and provided
further that such business is a proper matter for stockholder action under the
General Corporation Law of Delaware. To be timely, a stockholder's notice shall
be delivered to or mailed and received at the principal executive offices of the
Corporation not less than 90 days nor more than 120 days prior to the
anniversary date of the prior year's meeting; provided, however, that in the
event that (i) the date of the annual meeting is more than 30 days prior to or
more than 60 days after such anniversary date, and (ii) less than 60 days notice
or prior public disclosure of the date of the meeting is given or made to
stockholders, notice by the stockholder to be timely must be so received not
later than the close of business on the 10/th/ day following the day on which
such notice of the date of the meeting was mailed or such public disclosure was
made. Such stockholder's notice shall set forth (a) as to each person whom the
stockholder proposes to nominate for election or re-election as a directors, (i)
the name, age, business address and residence address of such person, (ii) the
principal occupation or employment of such person, (iii) the class and number of
shares of the Corporation which are beneficially owned by such person and (iv)
any other information relating to such person that is required to be disclosed
in solicitations of proxies for election of directors, or is otherwise required,
in each case pursuant to Regulation 14A under the Securities Exchange Act of
1934 (including, without limitation, such person's written consent to being name
in the proxy statement as a nominee and to serving as a director if elected);
(b) as to any other business that the stockholder proposes to bring before the
meeting, a brief description of such business, the reasons for conducting such
business at the meeting and any material interest in such business of such
stockholder and the beneficial owner, if any, on whose behalf the proposal is
made; and (c) as to the stockholder giving the notice and the beneficial owner,
if any, on whose behalf the proposal is made (i) the name and address of the
stockholder, as they appear on the Corporation's books, and of such beneficial
owner and (ii) the class and number of shares of the Corporation which are owned
of record by such stockholder and beneficially by such beneficial owner. At the
request of the Board of Directors any person nominated by the Board of Directors
for election as a director shall furnish to the secretary of the Corporation
that information required to be set forth in a stockholder's notice of
nomination which pertains to the nominee. No person shall be eligible for
election as a director of the Corporation unless nominated in accordance with
the procedures set forth in this Section 2.5. The chairman of the meeting shall,
if the facts warrant, determine and declare to the meeting that a nomination was
not made in accordance with the procedures prescribed by the Bylaws, and
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if he or she should so determine, he or she shall so declare to the meeting and
the defective nomination shall be disregarded.
2.6 Quorum.
------
The holders of a majority of the stock issued and outstanding and
entitled to vote thereat, present in person or represented by proxy, shall
constitute a quorum at all meetings of the stockholders for the transaction of
business except as otherwise provided by statute or by the Certificate of
Incorporation. If, however, such quorum is not present or represented at any
meeting of the stockholders, then either (a) the chairman of the meeting or (b)
the stockholders entitled to vote thereat, present in person or represented by
proxy, shall have power to adjourn the meeting from time to time, without notice
other than announcement at the meeting, until a quorum is present or
represented. At such adjourned meeting at which a quorum is present or
represented, any business may be transacted that might have been transacted at
the meeting as originally noticed.
2.7 Adjourned Meeting; Notice.
-------------------------
When a meeting is adjourned to another time or place, unless these
Bylaws otherwise require, notice need not be given of the adjourned meeting if
the time and place thereof are announced at the meeting at which the adjournment
is taken. At the adjourned meeting the Corporation may transact any business
that might have been transacted at the original meeting. If the adjournment is
for more than 30 days, or if after the adjournment a new record date is fixed
for the adjourned meeting, a notice of the adjourned meeting shall be given to
each stockholder of record entitled to vote at the meeting.
2.8 Conduct Of Business.
-------------------
The chairman of any meeting of stockholders shall determine the order
of business and the procedure at the meeting, including the manner of voting and
the conduct of business.
2.9 Voting.
------
(a) The stockholders entitled to vote at any meeting of stockholders
shall be determined in accordance with the provisions of Section 2.11 of these
Bylaws, subject to the provisions of Sections 217 and 218 of the General
Corporation Law of Delaware (relating to voting rights of fiduciaries, pledgors
and joint owners of stock and to voting trusts and other voting agreements).
(b) Except as may be otherwise provided in the Certificate of
Incorporation, each stockholder shall be entitled to one vote for each share of
capital stock held by such stockholder.
2.10 Waiver Of Notice.
----------------
Whenever notice is required to be given under any provision of the
General Corporation Law of Delaware or of the Certificate of Incorporation or
these Bylaws, a written
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waiver thereof, signed by the person entitled to notice, whether before or after
the time stated therein, shall be deemed equivalent to notice. Attendance of a
person at a meeting shall constitute a waiver of notice of such meeting, except
when the person attends a meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened. Neither the business to be transacted at,
nor the purpose of, any regular or special meeting of the stockholders need be
specified in any written waiver of notice unless so required by the Certificate
of Incorporation or these Bylaws.
2.11 Record Date For Stockholder Notice; Voting.
------------------------------------------
In order that the Corporation may determine the stockholders entitled
to notice of or to vote at any meeting of stockholders or any adjournment
thereof or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock or for the purpose of any other lawful
action, the Board of Directors may fix, in advance, a record date, which shall
not be more than 60 nor less than 10 days before the date of such meeting, nor
more than 60 days prior to any other action. If the Board of Directors does not
so fix a record date:
(a) The record date for determining stockholders entitled to notice
of or to vote at a meeting of stockholders shall be at the close of business on
the day next preceding the day on which notice is given, or, if notice is
waived, at the close of business on the day next preceding the day on which the
meeting is held.
(b) The record date for determining stockholders for any other
purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto.
A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
2.12 Proxies.
-------
Each stockholder entitled to vote at a meeting of stockholders may
authorize another person or persons to act for such stockholder by a written
proxy, signed by the stockholder and filed with the secretary of the
Corporation, but no such proxy shall be voted or acted upon after three years
from its date, unless the proxy provides for a longer period. A proxy shall be
deemed signed if the stockholder's name is placed on the proxy (whether by
manual signature, typewriting, electronic or telegraphic transmission or
otherwise) by the stockholder or the stockholder's attorney-in-fact. The
revocability of a proxy that states on its face that it is irrevocable shall be
governed by the provisions of Section 212(e) of the General Corporation Law of
Delaware.
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ARTICLE III
DIRECTORS
---------
3.1 Powers.
------
Subject to the provisions of the General Corporation Law of Delaware
and any limitations in the Certificate of Incorporation or these Bylaws relating
to action required to be approved by the stockholders or by the outstanding
shares, the business and affairs of the Corporation shall be managed and all
corporate powers shall be exercised by or under the direction of the Board of
Directors.
3.2 Number Of Directors.
-------------------
The number of directors constituting the entire Board of Directors
shall be six (6).
Thereafter, this number may be changed by a resolution of the Board of
Directors or of the stockholders, subject to Section 3.4 of these Bylaws. No
reduction of the authorized number of directors shall have the effect of
removing any director before such director's term of office expires.
3.3 Election, Qualification And Term Of Office Of Directors.
-------------------------------------------------------
Directors need not be stockholders unless so required by the
Certificate of Incorporation or these Bylaws, wherein other qualifications for
directors may be prescribed. The directors shall be divided into three classes,
as nearly equal in number as possible, designated "Class I," "Class II" and
"Class III." Directors of each class shall serve for a term ending on the third
annual meeting of stockholders following the annual meeting at which such class
was elected, except that the term of office of the initial Class I director
shall expire on the date of the annual meeting in 2001, the term of office of
the initial Class II directors shall expire on the date of the annual meeting in
2002 and the term of office of the initial Class III directors shall expire on
the date of the annual meeting in 2003. The foregoing notwithstanding, each
director shall serve until his or her successor shall have been duly elected and
qualified, unless such director shall die, resign, retire or be disqualified or
removed. At all elections of directors, the directors chosen to succeed those
directors whose terms then expire shall be identified as being of the same class
as the directors they succeed. If for any reason the number of directors in the
various classes shall not be as nearly equal as possible, the Board of Directors
may redesignate any director into a different class in order that the balance of
directors in such classes shall be as nearly equal as possible.
3.4 Resignation And Vacancies.
-------------------------
Any director may resign at any time upon written notice to the
attention of the secretary of the Corporation. When one or more directors so
resigns and the resignation is effective at a future date, a majority of the
directors then in office, including those who have so resigned, shall have power
to fill such vacancy or vacancies, the vote thereon to take effect when such
resignation or resignations shall become effective, and each director so chosen
shall hold office as provided in this section in the filling of other vacancies.
A vacancy created by the
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removal of a director by the vote of the stockholders or by court order may be
filled only by the affirmative vote of a majority of the shares represented and
voting at a duly held meeting at which a quorum is present (which shares voting
affirmatively also constitute a majority of the quorum. Each director so elected
shall hold office until the next annual meeting of the stockholders and until a
successor has been elected and qualified.
Unless otherwise provided in the Certificate of Incorporation or these
Bylaws:
(a) Vacancies and newly created directorships resulting from any
increase in the authorized number of directors elected by all of the
stockholders having the right to vote as a single class may be filled by a
majority of the directors then in office, although less than a quorum, or by a
sole remaining director.
(b) Whenever the holders of any class or classes of stock or series
thereof are entitled to elect one or more directors by the provisions of the
Certificate of Incorporation, vacancies and newly created directorships of such
class or classes or series may be filled by a majority of the directors elected
by such class or classes or series thereof then in office, or by a sole
remaining director so elected.
If at any time, by reason of death or resignation or other cause, the
Corporation should have no directors in office, then any officer or any
stockholder or an executor, administrator, trustee or guardian of a stockholder,
or other fiduciary entrusted with like responsibility for the person or estate
of a stockholder, may call a special meeting of stockholders in accordance with
the provisions of the Certificate of Incorporation or these Bylaws, or may apply
to the Court of Chancery for a decree summarily ordering an election as provided
in Section 211 of the General Corporation Law of Delaware.
If, at the time of filling any vacancy or any newly created
directorship, the directors then in office constitute less than a majority of
the whole Board of Directors (as constituted immediately prior to any such
increase), then the Court of Chancery may, upon application of any stockholder
or stockholders holding at least 10% of the total number of the shares at the
time outstanding having the right to vote for such directors, summarily order an
election to be held to fill any such vacancies or newly created directorships,
or to replace the directors chosen by the directors then in office as aforesaid,
which election shall be governed by the provisions of Section 211 of the General
Corporation Law of Delaware as far as applicable.
3.5 Place Of Meetings; Meetings By Telephone.
----------------------------------------
The Board of Directors of the Corporation may hold meetings, both
regular and special, either within or outside the State of Delaware. Unless
otherwise restricted by the Certificate of Incorporation or these Bylaws,
members of the Board of Directors, or any committee designated by the Board of
Directors, may participate in a meeting of the Board of Directors, or any
committee, by means of conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each other,
and such participation in a meeting shall constitute presence in person at the
meeting.
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3.6 Regular Meetings.
----------------
Regular meetings of the Board of Directors may be held without notice
at such time and at such place as shall from time to time be determined by the
Board of Directors.
3.7 Special Meetings; Notice.
------------------------
Special meetings of the board of directors for any purpose or purposes
may be called at any time by the chairman of the board, the president, any vice
president, the secretary or any two (2) directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at that director's address
as it is shown on the records of the Corporation. If the notice is mailed, it
shall be deposited in the United States mail at least four (4) days before the
time of the holding of the meeting. If the notice is delivered personally or by
telephone, telecopy, telegram, telex or other similar means of communication, it
shall be delivered at least twenty-four (24) hours before the time of the
holding of the meeting, or on such shorter notice as the person or persons
calling such meeting may deem necessary and appropriate in the circumstances.
Any oral notice given personally or by telephone may be communicated either to
the director or to a person at the office of the director who the person giving
the notice has reason to believe will promptly communicate it to the director.
The notice need not specify the purpose of the place of the meeting, if the
meeting is to be held at the principal executive office of the Corporation.
3.8 Quorum.
------
At all meetings of the Board of Directors, a majority of the
authorized number of directors shall constitute a quorum for the transaction of
business and the act of a majority of the directors present at any meeting at
which there is a quorum shall be the act of the Board of Directors, except as
may be otherwise specifically provided by statute or by the Certificate of
Incorporation. If a quorum is not present at any meeting of the Board of
Directors, then the directors present thereat may adjourn the meeting from time
to time, without notice other than announcement at the meeting, until a quorum
is present.
A meeting at which a quorum is initially present may continue to
transact business notwithstanding the withdrawal of directors, if any action
taken is approved by at least a majority of the required quorum for that
meeting.
3.9 Waiver Of Notice.
----------------
Whenever notice is required to be given under any provision of the
General Corporation Law of Delaware or of the Certificate of Incorporation or
these Bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at,
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nor the purpose of, any regular or special meeting of the directors, or members
of a committee of directors, need be specified in any written waiver of notice
unless so required by the Certificate of Incorporation or these Bylaws.
3.10 Board Action By Written Consent Without A Meeting.
-------------------------------------------------
Unless otherwise restricted by the Certificate of Incorporation or
these Bylaws, any action required or permitted to be taken at any meeting of the
Board of Directors, or of any committee thereof, may be taken without a meeting
if all members of the Board of Directors or committee, as the case may be,
consent thereto in writing and the writing or writings are filed with the
minutes of proceedings of the Board of Directors or committee. Written consents
representing actions taken by the board or committee may be executed by telex,
telecopy or other facsimile transmission, and such facsimile shall be valid and
binding to the same extent as if it were an original.
3.11 Fees And Compensation Of Directors.
----------------------------------
Unless otherwise restricted by the Certificate of Incorporation or
these Bylaws, the Board of Directors shall have the authority to fix the
compensation of directors. No such compensation shall preclude any director from
serving the Corporation in any other capacity and receiving compensation
therefor.
3.12 Approval Of Loans To Officers.
-----------------------------
The Corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the Corporation or of its
subsidiary, including any officer or employee who is a director of the
Corporation or its subsidiary, whenever, in the judgment of the directors, such
loan, guaranty or assistance may reasonably be expected to benefit the
Corporation. The loan, guaranty or other assistance may be with or without
interest and may be unsecured, or secured in such manner as the Board of
Directors shall approve, including, without limitation, a pledge of shares of
stock of the Corporation. Nothing in this Section 3.2 contained shall be deemed
to deny, limit or restrict the powers of guaranty or warranty of the Corporation
at common law or under any statute.
3.13 Removal Of Directors.
--------------------
Unless otherwise restricted by statute, by the Certificate of
Incorporation or by these Bylaws, any director or the entire Board of Directors
may be removed, with or without cause, by the holders of a majority of the
shares then entitled to vote at an election of directors; provided, however,
that if the stockholders of the Corporation are entitled to cumulative voting,
if less than the entire Board of Directors is to be removed, no director may be
removed without cause if the votes cast against his removal would be sufficient
to elect him if then cumulatively voted at an election of the entire Board of
Directors.
No reduction of the authorized number of directors shall have the
effect of removing any director prior to the expiration of such director's term
of office.
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3.14 Chairman Of The Board Of Directors.
----------------------------------
The Corporation may also have, at the discretion of the Board of
Directors, a Chairman of the Board of Directors who shall not be considered an
officer of the Corporation.
ARTICLE IV
COMMITTEES
----------
4.1 Committees Of Directors.
-----------------------
The Board of Directors may, by resolution passed by a majority of the
whole Board of Directors, designate one or more committees, with each committee
to consist of one or more of the directors of the Corporation. The Board of
Directors may designate one or more directors as alternate members of any
committee, who may replace any absent or disqualified member at any meeting of
the committee. In the absence or disqualification of a member of a committee,
the member or members thereof present at any meeting and not disqualified from
voting, whether or not such member or members constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member. Any such
committee, to the extent provided in the resolution of the Board of Directors or
in the Bylaws of the Corporation, shall have and may exercise all the powers and
authority of the Board of Directors in the management of the business and
affairs of the Corporation, and may authorize the seal of the Corporation to be
affixed to all papers that may require it; but no such committee shall have the
power or authority to (a) amend the Certificate of Incorporation (except that a
committee may, to the extent authorized in the resolution or resolutions
providing for the issuance of shares of stock adopted by the Board of Directors
as provided in Section 151(a) of the General Corporation Law of Delaware, fix
the designations and any of the preferences or rights of such shares relating to
dividends, redemption, dissolution, any distribution of assets of the
Corporation or the conversion into, or the exchange of such shares for, shares
of any other class or classes or any other series of the same or any other class
or classes of stock of the Corporation or fix the number of shares of any series
of stock or authorize the increase or decrease of the shares of any series),(b)
adopt an agreement of merger or consolidation under Sections 251 or 252 of the
General Corporation Law of Delaware, (c) recommend to the stockholders the sale,
lease or exchange of all or substantially all of the Corporation's property and
assets, (d) recommend to the stockholders a dissolution of the Corporation or a
revocation of a dissolution, or (e) amend the Bylaws of the Corporation; and,
unless the board resolution establishing the committee, the Bylaws or the
Certificate of Incorporation expressly so provide, no such committee shall have
the power or authority to declare a dividend, to authorize the issuance of
stock, or to adopt a certificate of ownership and merger pursuant to Section 253
of the General Corporation Law of Delaware.
4.2 Committee Minutes.
-----------------
Each committee shall keep regular minutes of its meetings and report
the same to the Board of Directors when required.
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4.3 Meetings And Action Of Committees.
---------------------------------
Meetings and actions of committees shall be governed by, and held and
taken in accordance with, the provisions of Section 3.5 (place of meetings and
meetings by telephone), Section 3.6 (regular meetings), Section 3.7 (special
meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice), and
Section 3.10 (action without a meeting) of these Bylaws, with such changes in
the context of such provisions as are necessary to substitute the committee and
its members for the Board of Directors and its members; provided, however, that
the time of regular meetings of committees may be determined either by
resolution of the Board of Directors or by resolution of the committee, that
special meetings of committees may also be called by resolution of the Board of
Directors and that notice of special meetings of committees shall also be given
to all alternate members, who shall have the right to attend all meetings of the
committee. The Board of Directors may adopt rules for the government of any
committee not inconsistent with the provisions of these Bylaws.
ARTICLE V
OFFICERS
--------
5.1 Officers.
--------
The officers of the Corporation shall be a chief executive officer, a
president, a secretary, and a chief financial officer. The Corporation may also
have, at the discretion of the Board of Directors, one or more vice presidents,
one or more assistant secretaries, one or more assistant treasurers, and any
such other officers as may be appointed in accordance with the provisions of
Section 5.3 of these Bylaws. Any number of offices may be held by the same
person.
5.2 Appointment Of Officers.
-----------------------
The officers of the Corporation, except such officers as may be
appointed in accordance with the provisions of Sections 5.3 or 5.5 of these
Bylaws, shall be appointed by the Board of Directors, subject to the rights, if
any, of an officer under any contract of employment.
5.3 Subordinate Officers.
--------------------
The Board of Directors may appoint, or empower the chief executive
officer or the president to appoint, such other officers and agents as the
business of the Corporation may require, each of whom shall hold office for such
period, have such authority, and perform such duties as are provided in these
Bylaws or as the Board of Directors may from time to time determine.
5.4 Removal And Resignation Of Officers.
-----------------------------------
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by an
affirmative vote of the majority of the Board of Directors at any regular or
special meeting of the Board of Directors or, except in
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the case of an officer chosen by the Board of Directors, by any officer upon
whom such power of removal may be conferred by the Board of Directors.
Any officer may resign at any time by giving written notice to the
attention of the secretary of the Corporation. Any resignation shall take effect
at the date of the receipt of that notice or at any later time specified in that
notice; and, unless otherwise specified in that notice, the acceptance of the
resignation shall not be necessary to make it effective. Any resignation is
without prejudice to the rights, if any, of the Corporation under any contract
to which the officer is a party.
5.5 Vacancies In Offices.
--------------------
Any vacancy occurring in any office of the Corporation shall be filled
by the Board of Directors.
5.6 Chief Executive Officer.
-----------------------
Subject to such supervisory powers, if any, as may be given by the
Board of Directors to the chairman of the board, if any, the chief executive
officer of the Corporation shall, subject to the control of the Board of
Directors, have general supervision, direction, and control of the business and
the officers of the Corporation. He or she shall preside at all meetings of the
stockholders and, in the absence or nonexistence of a chairman of the board, at
all meetings of the Board of Directors and shall have the general powers and
duties of management usually vested in the office of chief executive officer of
a corporation and shall have such other powers and duties as may be prescribed
by the Board of Directors or these Bylaws.
5.7 President.
---------
Subject to such supervisory powers, if any, as may be given by the
Board of Directors to the chairman of the board (if any) or the chief executive
officer, the president shall have general supervision, direction, and control of
the business and other officers of the Corporation. He or she shall have the
general powers and duties of management usually vested in the office of
president of a corporation and such other powers and duties as may be prescribed
by the Board of Directors or these Bylaws.
5.8 Vice Presidents.
---------------
In the absence or disability of the chief executive officer and
president, the vice presidents, if any, in order of their rank as fixed by the
Board of Directors or, if not ranked, a vice president designated by the Board
of Directors, shall perform all the duties of the president and when so acting
shall have all the powers of, and be subject to all the restrictions upon, the
president. The vice presidents shall have such other powers and perform such
other duties as from time to time may be prescribed for them respectively by the
Board of Directors, these Bylaws, the president or the chairman of the board.
5.9 Secretary.
---------
The secretary shall keep or cause to be kept, at the principal
executive office of the Corporation or such other place as the Board of
Directors may direct, a book of minutes of all
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meetings and actions of directors, committees of directors, and stockholders.
The minutes shall show the time and place of each meeting, the names of those
present at directors' meetings or committee meetings, the number of shares
present or represented at stockholders' meetings, and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal
executive office of the Corporation or at the office of the Corporation's
transfer agent or registrar, as determined by resolution of the Board Of
Directors, a share register, or a duplicate share register, showing the names of
all stockholders and their addresses, the number and classes of shares held by
each, the number and date of certificates evidencing such shares, and the number
and date of cancellation of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings
of the stockholders and of the Board of Directors required to be given by law or
by these Bylaws. He or she shall keep the seal of the Corporation, if one be
adopted, in safe custody and shall have such other powers and perform such other
duties as may be prescribed by the Board of Directors or by these Bylaws.
5.10 Chief Financial Officer.
-----------------------
The chief financial officer shall keep and maintain, or cause to be
kept and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the Corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital
retained earnings, and shares. The books of account shall at all reasonable
times be open to inspection by any director.
The chief financial officer shall deposit all moneys and other
valuables in the name and to the credit of the Corporation with such
depositories as may be designated by the Board of Directors. He or she shall
disburse the funds of the Corporation as may be ordered by the Board of
Directors, shall render to the president, the chief executive officer, or the
directors, upon request, an account of all his or her transactions as chief
financial officer and of the financial condition of the Corporation, and shall
have other powers and perform such other duties as may be prescribed by the
Board of Directors or the Bylaws.
5.11 Representation Of Shares Of Other Corporations.
----------------------------------------------
The chairman of the board, the chief executive officer, the president,
any vice president, the chief financial officer, the secretary or assistant
secretary of this Corporation, or any other person authorized by the Board of
Directors or the chief executive officer or the president or a vice president,
is authorized to vote, represent, and exercise on behalf of this Corporation all
rights incident to any and all shares of any other corporation or corporations
standing in the name of this Corporation. The authority granted herein may be
exercised either by such person directly or by any other person authorized to do
so by proxy or power of attorney duly executed by the person having such
authority.
-13-
<PAGE>
5.12 Authority And Duties Of Officers.
--------------------------------
In addition to the foregoing authority and duties, all officers of
the Corporation shall respectively have such authority and perform such duties
in the management of the business of the Corporation as may be designated from
time to time by the Board of Directors or the stockholders.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS,
-----------------------------
OFFICERS, EMPLOYEES, AND OTHER AGENTS
-------------------------------------
6.1 Indemnification Of Directors And Officers.
-----------------------------------------
The Corporation shall, to the maximum extent and in the manner
permitted by the General Corporation Law of Delaware, indemnify each of its
directors and officers against expenses (including attorneys' fees), judgments,
fines, settlements and other amounts actually and reasonably incurred in
connection with any proceeding, arising by reason of the fact that such person
is or was an agent of the Corporation. For purposes of this Section 6.1, a
"director" or "officer" of the Corporation includes any person (a) who is or was
a director or officer of the Corporation, (b) who is or was serving at the
request of the Corporation as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise, or (c) who was a director
or officer of a Corporation which was a predecessor corporation of the
Corporation or of another enterprise at the request of such predecessor
corporation.
6.2 Indemnification Of Others.
-------------------------
The Corporation shall have the power, to the maximum extent and in
the manner permitted by the General Corporation Law of Delaware, to indemnify
each of its employees and agents (other than directors and officers) against
expenses (including attorneys' fees), judgments, fines, settlements and other
amounts actually and reasonably incurred in connection with any proceeding,
arising by reason of the fact that such person is or was an agent of the
Corporation. For purposes of this Section 6.2, an "employee" or "agent" of the
Corporation (other than a director or officer) includes any person (a) who is or
was an employee or agent of the Corporation, (b) who is or was serving at the
request of the Corporation as an employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, or (c) who was an
employee or agent of a corporation which was a predecessor corporation of the
Corporation or of another enterprise at the request of such predecessor
corporation.
6.3 Payment Of Expenses In Advance.
------------------------------
Expenses incurred in defending any action or proceeding for which
indemnification is required pursuant to Section 6.1 or for which indemnification
is permitted pursuant to Section 6.2 following authorization thereof by the
Board of Directors shall be paid by the Corporation in advance of the final
disposition of such action or proceeding upon receipt of an undertaking by or on
behalf of the indemnified party to repay such amount if it shall
-14-
<PAGE>
ultimately be determined that the indemnified party is not entitled to be
indemnified as authorized in this Article VI.
6.4 Indemnity Not Exclusive.
-----------------------
The indemnification provided by this Article VI shall not be deemed
exclusive of any other rights to which those seeking indemnification may been
titled under any Bylaw, agreement, vote of shareholders or disinterested
directors or otherwise, both as to action in an official capacity and as to
action in another capacity while holding such office, to the extent that such
additional rights to indemnification are authorized in the Certificate of
Incorporation.
6.5 Insurance.
---------
The Corporation may purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee or agent of the Corporation,
or is or was serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him or her and incurred
by him or her in any such capacity, or arising out of his or her status as such,
whether or not the Corporation would have the power to indemnify him or her
against such liability under the provisions of the General Corporation Law of
Delaware.
6.6 Conflicts.
---------
No indemnification or advance shall be made under this Article VI,
except where such indemnification or advance is mandated by law or the order,
judgment or decree of any court of competent jurisdiction, in any circumstance
where it appears:
(a) That it would be inconsistent with a provision of the Certificate
of Incorporation, these Bylaws, a resolution of the stockholders or an agreement
in effect at the time of the accrual of the alleged cause of the action asserted
in the proceeding in which the expenses were incurred or other amounts were
paid, which prohibits or otherwise limits indemnification; or
(b) That it would be inconsistent with any condition expressly
imposed by a court in approving a settlement.
ARTICLE VII
RECORDS AND REPORTS
-------------------
7.1 Maintenance And Inspection Of Records.
-------------------------------------
The Corporation shall, either at its principal executive offices or at
such place or places as designated by the Board of Directors, keep a record of
its stockholders listing their names and addresses and the number and class of
shares held by each stockholder, a copy of these Bylaws as amended to date,
accounting books, and other records.
-15-
<PAGE>
Any stockholder of record, in person or by attorney or other agent,
shall, upon written demand under oath stating the purpose thereof, have the
right during the usual hours for business to inspect for any proper purpose the
Corporation's stock ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the attorney or other agent to so act on
behalf of the stockholder. The demand under oath shall be directed to the
Corporation at its registered office in Delaware or at its principal place of
business.
7.2 Inspection By Directors.
-----------------------
Any director shall have the right to examine the Corporation's
stockledger, a list of its stockholders, and its other books and records for a
purpose reasonably related to his or her position as a director. The Court of
Chancery is hereby vested with the exclusive jurisdiction to determine whether a
director is entitled to the inspection sought. The Court may summarily order the
Corporation to permit the director to inspect any and all books and records, the
stock ledger, and the stock list and to make copies or extracts therefrom. The
Court may, in its discretion, prescribe any limitations or conditions with
reference to the inspection, or award such other and further relief as the Court
may deem just and proper.
7.3 Annual Statement To Stockholders.
--------------------------------
The Board of Directors shall present at each annual meeting, and at
any special meeting of the stockholders when called for by vote of the
stockholders, a full and clear statement of the business and condition of the
Corporation.
ARTICLE VIII
GENERAL MATTERS
---------------
8.1 Checks.
------
From time to time, the Board of Directors shall determine by
resolution which person or persons may sign or endorse all checks, drafts, other
orders for payment of money, notes or other evidences of indebtedness that are
issued in the name of or payable to the Corporation, and only the persons so
authorized shall sign or endorse those instruments.
8.2 Execution Of Corporate Contracts And Instruments.
------------------------------------------------
The Board of Directors, except as otherwise provided in these Bylaws,
may authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
Corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the Board of Directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
-16-
<PAGE>
authority to bind the Corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
8.3 Stock Certificates; Partly Paid Shares.
--------------------------------------
The shares of the Corporation shall be represented by certificates,
provided that the Board of Directors of the Corporation may provide by
resolution or resolutions that some or all of any or all classes or series of
its stock shall be uncertificated shares. Any such resolution shall not apply to
shares represented by a certificate until such certificate is surrendered to the
Corporation. Notwithstanding the adoption of such a resolution by the Board of
Directors, every holder of stock represented by certificates and upon request
every holder of uncertificated shares shall be entitled to have a certificate
signed by, or in the name of the Corporation by the chairman or vice-chairman of
the Board of Directors, or the chief executive officer or the president or vice-
president, and by the chief financial officer or an assistant treasurer, or the
secretary or an assistant secretary of the Corporation representing the number
of shares registered in certificate form. Any or all of the signatures on the
certificate may be a facsimile. In case any officer, transfer agent or registrar
who has signed or whose facsimile signature has been placed upon a certificate
has ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the Corporation with the same effect
as if he or she were such officer, transfer agent or registrar at the date of
issue.
The Corporation may issue the whole or any part of its shares as
partly paid and subject to call for the remainder of the consideration to be
paid therefor. Upon the face or back of each stock certificate issued to
represent any such partly paid shares, upon the books and records of the
Corporation in the case of uncertificated partly paid shares, the total amount
of the consideration to be paid therefor and the amount paid thereon shall be
stated. Upon the declaration of any dividend on fully paid shares, the
Corporation shall declare a dividend upon partly paid shares of the same class,
but only upon the basis of the percentage of the consideration actually paid
thereon.
8.4 Special Designation On Certificates.
-----------------------------------
If the Corporation is authorized to issue more than one class of stock
or more than one series of any class, then the powers, the designations, the
preferences, and the relative, participating, optional or other special rights
of each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the Corporation shall
issue to represent such class or series of stock; provided, however, that,
except as otherwise provided in Section 202 of the General Corporation Law of
Delaware, in lieu of the foregoing requirements there may be set forth on the
face or back of the certificate that the Corporation shall issue to represent
such class or series of stock a statement that the Corporation will furnish
without charge to each stockholder who so requests the powers, the designations,
the preferences, and the relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
-17-
<PAGE>
8.5 Lost Certificates.
-----------------
Except as provided in this Section 8.5, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the Corporation and canceled at the same time. The Corporation
may issue a new certificate of stock or uncertificated shares in the place of
any certificate previously issued by it, alleged to have been lost, stolen or
destroyed, and the Corporation may require the owner of the lost, stolen or
destroyed certificate, or the owner's legal representative, to give the
Corporation a bond sufficient to indemnify it against any claim that may be made
against it on account of the alleged loss, theft or destruction of any such
certificate or the issuance of such new certificate or uncertificated shares.
8.6 Construction; Definitions.
-------------------------
Unless the context requires otherwise, the general provisions, rules
of construction, and definitions in the Delaware General Corporation Law shall
govern the construction of these Bylaws. Without limiting the generality of this
provision, the singular number includes the plural, the plural number includes
the singular, and the term "person" includes both a corporation and a natural
person.
8.7 Dividends.
---------
The directors of the Corporation, subject to any restrictions
contained in (a) the General Corporation Law of Delaware or (b) the Certificate
of Incorporation, may declare and pay dividends upon the shares of its capital
stock. Dividends may be paid in cash, in property, or in shares of the
Corporation's capital stock.
The directors of the Corporation may set apart out of any of the funds
of the Corporation available for dividends a reserve or reserves for any proper
purpose and may abolish any such reserve. Such purposes shall include but not be
limited to equalizing dividends, repairing or maintaining any property of the
Corporation, and meeting contingencies.
8.8 Fiscal Year.
-----------
The fiscal year of the Corporation shall be fixed by resolution of the
Board of Directors and may be changed by the Board of Directors.
8.9 Seal.
----
The Corporation may adopt a corporate seal, which may be altered at
pleasure, and may use the same by causing it or a facsimile thereof, to be
impressed or affixed or in any other manner reproduced.
8.10 Transfer Of Stock.
-----------------
Upon surrender to the Corporation or the transfer agent of the
Corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignation or authority to transfer, it shall be the
duty of the Corporation to issue a new
-18-
<PAGE>
certificate to the person entitled thereto, cancel the old certificate, and
record the transaction in its books.
8.11 Stock Transfer Agreements.
-------------------------
The Corporation shall have power to enter into and perform any
agreement with any number of stockholders of any one or more classes of stock of
the Corporation to restrict the transfer of shares of stock of the Corporation
of any one or more classes owned by such stockholders in any manner not
prohibited by the General Corporation Law of Delaware.
8.12 Registered Stockholders.
-----------------------
The Corporation shall be entitled to recognize the exclusive right of
a person registered on its books as the owner of shares to receive dividends and
to vote as such owner, shall be entitled to hold liable for calls and
assessments the person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of another person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
ARTICLE IX
AMENDMENTS
----------
The Bylaws of the Corporation may be adopted, amended or repealed by
the stockholders entitled to vote; provided, however, that the Corporation may,
in its Certificate of Incorporation, confer the power to adopt, amend or repeal
Bylaws upon the directors. The fact that such power has been so conferred upon
the directors shall not divest the stockholders of the power, nor limit their
power to adopt, amend or repeal Bylaws.
-19-
<PAGE>
EXHIBIT 4.1
[LOGO OF SUNRISE TELECOM INCORPORATED]
NUMBER SHARES
D
INCORPORATED UNDER THE LAWS SEE REVERSE FOR CERTAIN DEFINITIONS
OF THE STATE OF DELAWARE CUSIP 86769Y 10 5
THIS CERTIFIES that
is the record holder of
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, $.001 PAR VALUE, OF
=========================SUNRISE TELECOM INCORPORATED===========================
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this certificate properly
endorsed. This certificate is not valid until countersigned by the Registrar.
WITNESS the facsimile seal of the Corporation and facsimile signatures
of its duly authorized officers.
Dated:
[CORPORATE SEAL
OF SUNRISE TELECOM INCORPORATED]
/s/ /s/ Paul Chang
SECRETARY CHIEF CHIEF EXECUTIVE OFFICER
COUNTERSIGNED AND REGISTERED:
AMERICAN SECURITIES TRANSFER & TRUST, INC.
P.O. Box 1596, Denver, Colorado 80201
BY
TRANSFER AGENT AND REGISTRAR AUTHORIZED
SIGNATURE
<PAGE>
SUNRISE TELECOM INCORPORATED
The Corporation shall furnish without charge to each stockholder who so requests
a statement of the powers, designations, preferences and relative,
participating, optional, or other special rights of each class of stock of the
Corporation or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights. Such requests shall be made to
the Corporation's Secretary at the principal office of the Corporation. The
following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT-......................Custodian.....................
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act.................................................
in common (State)
UNIF TRF MIN ACT-.................Custodian (until age...........)
(Cust)
......................under Uniform Transfers
(Minor)
to Minors Act.........................................
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For Value Received,______________________________hereby sell(s), assign(s) and
transfer(s) unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- --------------------------------------
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
_______________________________________________________________________Shares
of the common stock represented by the within certificate, and do hereby
irrevocably constitute and appoint ________________________________Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated_____________________________
X_______________________________________
X_______________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN
EVERY PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By_________________________________________________
THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS
AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE
MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE>
Exhibit 5.1
April 12, 2000
Sunrise Telecom Incorporated
22 Great Oaks Boulevard
San Jose, California 95119
Re: Sunrise Telecom Incorporated
Registration Statement on Form S-1
----------------------------------
Ladies and Gentlemen:
At your request, we are rendering this opinion in connection with a
proposed sale by Sunrise Telecom Incorporated, a Delaware corporation (the
"Company") of up to 3,800,000 shares of common stock, $.001 par value (the
"Common Stock"), and the sale by certain Company stockholders of 800,000 shares
of Common Stock.
We have examined instruments, documents, and records which we deemed
relevant and necessary for the basis of our opinion hereinafter expressed. In
such examination, we have assumed the following: (a) the authenticity of
original documents and the genuineness of all signatures; (b) the conformity to
the originals of all documents submitted to us as copies; and (c) the truth,
accuracy, and completeness of the information, representations, and warranties
contained in the records, documents, instruments, and certificates we have
reviewed.
Based on such examination, we are of the opinion that the 3,800,000
shares of Common Stock to be issued and sold by the Company are validly
authorized shares of Common Stock, and, when issued against payment of the
purchase price therefor, will be legally issued, fully paid and nonassessable.
We are of the further opinion that the 800,000 shares of Common Stock to be sold
by the stockholders (of which up to 600,000 shares are to be issued to cover
over-allotments, if any) are, as of the date hereof, validly authorized, legally
issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
above referenced Registration Statement and to the use of our name wherever it
appears in the Registration Statement and in the Prospectus included therein,
and any amendment or supplement thereto. In giving such consent, we do not
consider that we are "experts" within the meaning of such term as used in the
Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission issued thereunder, with respect to any part
of the Registration Statement, including this opinion as an exhibit or
otherwise.
Very truly yours,
Orrick, Herrington & Sutcliffe LLP
<PAGE>
Exhibit 10.5
THIS MASTER AGREEMENT (this "Agreement") is entered into as of
February 22, 2000 (the "Effective Date"), by and among SUNRISE TELECOM, INC., a
California corporation ("Buyer") represented by Paolo Barozzi Esq. born Novara
on March 14, 1958, Fiscal Code BRZ PLA 58C14 F952B, domiciled at Milan, Via
Vivaio n. 6, duly appointed, to such extent, through Special Powers of Attorney
granted to the latter by virtue of Unanimous Written Consent of the Board of
Directors of Buyer on February 15, 2000, and FRANCO MESSORI, FRANCO CORRADINI,
ANGELO BACCARANI, and LUCIA BARBARA SILVANI (the "Shareholders").
WHEREAS, the Shareholders own, as hereinafter set forth, the quotas
representing the 55% of the issued and outstanding stock capital (the "Quotas ")
of Pro. Tel. S.r.l., an Italian limited liability company (the "Company"):
(i) Franco Messori 40%;
(ii) Franco Corradini 5%;
(iii) Angelo Baccarani 5%;
(iv) Lucia Barbara Silvani 5%.
WHEREAS, the Shareholders desire to sell to Buyer, and Buyer desires
to purchase from the Shareholders all of the Quotas.
WHEREAS, the Board of Directors of Buyer has approved the acquisition
of the Quotas by Buyer on the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and the
representations, warranties and agreements herein contained, the parties agree
as follows :
ARTICLE I
---------
Sale and Purchase of Common Stock
---------------------------------
SECTION 1.01. Sale and Purchase. Subject to the terms and conditions
-----------------
herein set forth, the Shareholders shall sell, assign and transfer to Buyer and
Buyer shall purchase from the Shareholders the Quotas.
1
<PAGE>
SECTION 1.02. Closing. The closing of the purchase and sale of the
-------
Quotas (the "Closing") will take place on February 22, 2000, at the offices of
Anna Pellegrino Notary Public in Milan, Via Torquato Tasso No. 1.
(a) Shareholder Deliveries. The Shareholders shall deliver to Buyer at the
----------------------
Closing:
(i) Consents executed by all necessary parties whose consent to the
transactions contemplated hereby is required under the terms of the
Company's contracts, licenses or rights as listed in Schedule 1.02 (a)
hereto.
(ii) Noncompetition agreements in substantially the form of Exhibit
A hereto executed by each of the Shareholders.
(iii) Employment Agreements in substantially the form of Exhibit B
hereto executed by each of the Shareholders and any other person listed in
Exhibit E hereto.
(iv) Lockup Agreements in substantially the form of Exhibit C hereto
executed by each of the Shareholders.
(v) Confidential Information and Invention Assignment Agreements in
substantially the form of Exhibit D hereto executed by each of the
Shareholders and each of the Company's other employees.
(b) Buyer Deliveries. Buyer shall deliver to the Shareholders at the
----------------
Closing:
(i) Wire transfers payable to the Shareholders in the respective
amounts indicated on Schedule 1.02(b) attached hereto and in the aggregate
amount of $ 2.145 million
2
<PAGE>
(ii) Stock certificates registered in the names of the Shareholders
in the respective amounts indicated on Schedule 1.02(b) attached hereto and
evidencing a total of No. 91.668 Common Stock of Buyer.
(iii) Noncompetition agreements in substantially the form of Exhibit
A hereto with each of the Shareholders executed by Buyer.
(iv) Employment Agreements in substantially the form of Exhibit B
hereto with each of the persons listed in Exhibit E hereto executed by
Buyer.
(v) Stock Option Agreements in substantially the form of Exhibit F
hereto with each of the persons listed in Exhibit E hereto executed by
Buyer
(c) Short-form. At the Closing, the Buyer and the Shareholders
----------
(hereinafter jointly the "Parties") shall execute before the Italian Notary
Public the agreement for the sale and purchase of the Quotas, the contents
thereof being similar to those referred in Exhibit G (hereinafter the "Short-
form"). The Parties acknowledge that the Short-form shall be executed in
compliance with the provisions of article 2479 of the Italian Civil Code. It is
also agreed by the Parties that this Agreement shall, in any case and for all
legal purposes, prevail over the Short-form.
SECTION 1.03. The Purchase Price. For purposes hereof the Purchase
------------------
Price shall consist of the sum of $ 2.145 million, plus 91,668 shares of Buyer
Common Stock (the "Buyer Common Stock") and shall be divided among and paid to
each of the Shareholders as follows:
(i) Franco Messori $1,560,000 plus No 66,667 of shares of Buyer
Common Stock;
3
<PAGE>
(ii) Franco Corradini $195,000 plus No 8,333 of shares of Buyer
Common Stock;
(iii) Angelo Baccarani $195,000 plus No 8,334 of shares of Buyer
Common Stock;
(iv) Lucia Barbara Silvani $195,000 plus No 8,334 of shares of
Buyer Common Stock.
The Purchase Price shall be subject to adjustment as provided in Section 1.04
hereof.
SECTION 1.04. Adjustments to Purchase Price. After the Closing,
-----------------------------
Buyer's accountants will prepare an audited balance sheet of the Company as of
the Closing (the "Closing Balance Sheet"). If the Closing Balance Sheet reflects
(i) the absence of any debt other than ordinary course trade payables, (ii)
Positive Net Assets and, (iii) in any case, the absence of any decline in Net
Assets from the net assets reflected in the balance sheet of the Company as of
December 31, 1999 audited by KPMG there shall be no adjustment to the Purchase
Price. The Purchase Price shall be adjusted downward on a dollar-for-dollar
basis by (i) the amount of debt other than ordinary course trade payables
reflected on the Closing Balance Sheet, and (ii) the amount of any Negative Net
Assets. For purposes hereof, Net Assets shall mean the sum of cash, accounts
receivable and inventory less total liabilities; and the amount of any positive
(or negative) Net Assets shall be the amount by which the Net Assets are greater
than (or less than) zero.
SECTION 1.05. Repayment. In the event of a Purchase Price adjustment
---------
pursuant to Section 1.04, each Shareholder shall promptly pay his pro rata
portion of such Purchase Price adjustment to Buyer in cash and/or Buyer Common
Stock. In the event that any Shareholder fails to make any such repayment,
Buyer, at its election may (i) cancel the
4
<PAGE>
corresponding number of shares of Buyer Common Stock held by such Shareholder,
(ii) set off the amount of any such repayment obligation against any amounts
owed to such Shareholder by Buyer or the Company pursuant to the Noncompetition
Agreement with such Shareholder or (iii) take such other action as Buyer deems
appropriate.
SECTION 1.06. Further Cooperation. From time to time after the
-------------------
Closing, the Shareholders at Buyer's request and without further consideration,
agrees to take or cause to be taken such further or other action as may
reasonably be necessary or appropriate in order to effectuate the quotas
purchase and sale contemplated by this Agreement.
ARTICLE II
----------
Representations and Warranties
------------------------------
SECTION 2.01. Representations and Warranties of the Shareholders. The
--------------------------------------------------
Shareholders hereby jointly and severally represent and warrant to Buyer as
follows:
(a) Organization. The Company is a limited liability company duly
------------
organized, validly existing and in good standing under the laws of Italy.
(b) Authority To Do Business. The Company has all requisite power and
------------------------
authority to own or lease and operate its properties and to carry on its
business as now conducted.
(c) Binding Obligation. This Agreement has been duly executed and
------------------
delivered by the Shareholders and constitutes a valid and binding obligation of
the Shareholders enforceable in accordance with its terms. The execution,
delivery and performance by the Shareholders of this Agreement does not and will
not conflict with, or result in any violation of or default under, any provision
of the Articles of Incorporation or By-laws of the Company or any ordinance,
rule, regulation, judgment, order, decree, agreement, instrument or license
applicable to the Company or to any of its respective properties or assets. No
consent, approval,
5
<PAGE>
order or authorization of, or registration, declaration or filing with, any
court, administrative agency or commission or other governmental authority or
instrumentality, domestic or foreign, is required by or with respect to the
Shareholders or the Company in connection with the Shareholders' execution,
delivery of this Agreement or the performance by the Shareholders or the Company
of the obligations contemplated hereby.
(d) Title to Quotas. The Shareholders have good and marketable title
---------------
to all of the Quotas, free and clear of all claims, liens, security interests,
pledges, charges or encumbrances of any nature whatsoever, and the transfer of
the Quotas to Buyer pursuant to this Agreement will pass good and marketable
title to the Quotas , free and clear of all claims, liens, security interests,
pledges, charges or encumbrances of any nature whatsoever.
(e) Capitalization. The Company's authorized capital stock is equal
--------------
to ITL 500,000,000 and it is fully subscribed and paid in. No other equity
securities of the Company other than the Quotas are authorized, issued or
outstanding, and there are no outstanding options, warrants, agreements,
contracts, calls, commitments, or demands of any character, preemptive or
otherwise, other than the Agreement, relating to any of the Common Stock.
(f) Real Property. Schedule 2.01(f) includes a complete list of all
-------------
real property used by the Company, all of which real property is leased by the
Company ("Leased Real Property"). Except as set forth on Schedule 2.01(f), the
Company has valid lease hold interests in all the Leased Real Property.
(g) Title to Assets. The Company has good and marketable title to
---------------
all of its assets, in each case free and clear of all mortgages, liens, security
interests, pledges, charges or encumbrances of any nature whatsoever.
6
<PAGE>
(h) Contracts. Except as described in Schedule 2.01(h) and except,
---------
in the case of contracts primarily involving the receipt or payment of money,
for contracts involving the receipt of or payment of less than $25,000, the
Company is not a party to or bound by any lease, agreement, contract or other
commitment which relates in any way to the business of the Company
(collectively, the "Contracts"). Each Contract is a valid and binding obligation
of the Company and is in full force and effect. The Company has performed all
material obligations required to be performed by it to date under the Contracts,
is not (with or without the lapse of time or the giving of notice, or both) in
breach or default in any material respect thereunder and is not alleged to be in
breach or default in any material respect thereunder. All Contracts are in the
name of the Company.
Except as described in Schedule 2.01(h) and except, in the case of
contracts primarily involving the receipt or payment of money, for contracts
involving the receipt of or payment of less than $25,000, the Company is not a
party to or bound by any of the types of agreement enumerated below:
(i) agreement or contract not made in the ordinary course of
business;
(ii) agreement or contract with any Shareholders, director or
employee of the Company or any of its subsidiaries, except for those agreements
required by the Italian laws;
(iii) agreement or contract which is oral; or
(iv) agreement or contract the terms of which are known by the
Shareholders to be unfavorable to the Company.
(i) Litigation. There are no lawsuits, claims, proceedings or
----------
investigations pending or, to the best knowledge of the Company, threatened by
or against or affecting the Company or any of its properties, assets, operations
or business which could in any way adversely affect the
7
<PAGE>
transactions contemplated by this Agreement or the value to the Buyer of the
business being acquired by it, and the Shareholders are not aware of any
reasonable basis for any such lawsuit, claim, proceeding or investigation.
(j) Licenses. The Company holds each license, permit or other
--------
governmental authorization (collectively hereinafter referred to as "Licenses")
which is required for the operation of its business and, all such Licenses are
in full force and effect and will remain in full force and effect
notwithstanding the closing of the transactions contemplated hereby.
(k) Employee and Related Matters. There are no employment-related claims,
----------------------------
actions, proceedings or investigations pending or, to the best knowledge of the
Shareholders, threatened against or relating to the Company before any court,
governmental, regulatory or administrative authority or body, or arbitrator or
arbitration panel. The Company is not subject to any outstanding order, writ,
judgment, injunction, decision, award, compliance order, consent decree,
conciliation agreement, settlement agreement, affirmative action plan,
determination letter or advisory of any court, governmental, regulatory or
administrative authority or body, or arbitrator or arbitration panel. The
Company is in compliance with all contracts, laws and regulatory requirements
relating to employment matters.
(l) Absence of Changes or Events. Since December 31, 1998, the business
----------------------------
of the Company has been conducted in the ordinary course and there has not been
any material adverse change in the financial condition, results of operations,
business, assets or prospects of the Company. Without limiting the generality of
the foregoing, since December 31, 1998 the Company has not, except as described
in Schedule 2.01(l)(i):
8
<PAGE>
(i) acquired or agreed to acquire any assets which are material,
individually or in the aggregate, to the Company, except in the ordinary
course of business consistent with prior practice;
(ii) sold, leased or otherwise disposed of any of its assets, which
are material, individually or in the aggregate, to the Company, except in the
ordinary course of business consistent with prior practice;
(iii) adopted or amended in any material respect any agreement with
employees or benefit plans, other than in the ordinary course of business
consistent with prior practice and in compliance with the Italian laws;
(iv) increased the compensation of any employee other than in the
ordinary course of business consistent with prior procedure and in
compliance with the Italian laws;
(v) sustained any material loss or damage to its properties, whether
or not insured;
(vi) issued capital stock or declared or paid a dividend or made any
other payment from capital or surplus or other distribution of any nature, or
directly or indirectly, redeemed, purchased or otherwise acquired or
recapitalized or reclassified any of its capital stock or liquidated in whole
or in part;
(vii) merged or consolidated with another corporation;
(viii) created, incurred or assumed or committed to create, incur or
assume indebtedness or other liability, except for accounts payable or other
current liabilities which (1) are not for borrowed money, (2) were incurred
in the usual and ordinary course of business and (3) have not been and will
not be materially adverse to the general affairs,
9
<PAGE>
business, prospects, properties, financial condition, results of operations
or net worth of the Company;
(ix) altered or amended its articles of incorporation or bylaws; or
(x) entered into, materially amended or terminated any material
contract, agreement, franchise, permit or license, except for those set forth
into Schedule 2.01 (l)(ii).
(m) Compliance with Laws. The Company is not in violation of any law, order,
--------------------
ordinance, rule or regulation of any governmental authority.
(n) No Broker's or Finder's Fees. No agent, broker, investment banker,
----------------------------
person or firm acting on behalf of the Shareholders, the Company or any related
entity is or will be entitled to any broker's or finder's fee or any other
commission or similar fee in connection with any of the transactions
contemplated herein.
(o) Employee Benefit Plans. Except as set forth on Schedule 2.01(o),
----------------------
neither the Company nor any entity under common control with the Company
maintains, is required to contribute to, or is required to provide benefits
under, any plan, fund or program providing any pension, profit sharing, deferred
compensation, severance pay, bonuses, incentive compensation, stock options,
stock purchases, or any other form of retirement or deferred benefit, or any
health, accident, dependent care, or other welfare benefit (a "Plan"), save as
provided for by the Italian laws.
(p) Customers. Schedule 2.01(p) contains a true and correct list of the
---------
Company's largest 20 customers (as determined by dollar amount of orders) for
each of the last two years. The Company has no information which would cause it
to believe that any such customer will not
10
<PAGE>
continue to do business with Buyer after the Closing upon substantially the same
terms and at such volumes as such customer did business with the Company prior
to the Reference Date.
(q) Condition of Equipment. The equipment of the Company is in good
----------------------
operating condition, normal wear and tear excepted.
(r) Trademarks and Other Intellectual Property. Except as set forth in
------------------------------------------
Schedule 2.01(r), there are no patents, trademarks, service marks, trade names,
or applications therefor or registrations thereof ("Intellectual Property"),
which have been used or owned within the last three years by the Company.
Schedule 2.01(r) contains a true and complete description of the rights of the
Company with respect to each of such items of Intellectual Property. Except as
set forth in Schedule 2.01(r), the Company has sole, full and clear title to all
of such items of Intellectual Property, without any liens, encumbrances or
restrictions whatsoever, and upon closing of the transactions contemplated
hereby, the Company will continue to possess sole, full and clear title to all
of such items of Intellectual Property, without any liens, encumbrances or
restrictions whatsoever. The Company is not and, during the last two years, has
not (i) infringed or violated any trademark, service mark, trade name, patent or
copyright or other Intellectual Property right; or (ii) unlawfully or improperly
used any trade secrets belonging to any third party. Without limiting the
generality of the foregoing, with respect to the Ghepardo product:
(1) The Company is the sole and rightful owner of all right, title
and interest in and to any and all technology which is necessary or
desirable in connection with such product (the "Technology") and, it has
the unrestricted right to market, license and exploit the Technology;
(2) At all times prior to Closing, the Company has taken and shall
take all necessary steps to secure all right and title to and protect the
Technology
11
<PAGE>
(including, without limitation, obtaining executed non-disclosure
agreements with any third party having access to the Technology, and
executed confidentiality and proprietary right assignment agreements with
all employees and independent contractors performing work for the Company)
and to prevent the disclosure of, publication of or other activity that
would jeopardize any trade secret or confidential information related to
the Technology;
(3) There has been no disclosure of, publication of or other
activity that would jeopardize any trade secret or confidential information
related to the Technology;
(4) The Technology does not infringe or misappropriate any third-
party proprietary right;
(5) No claims have been made in respect of the Technology and no
demands of any third party have been made pertaining to the Technology, and
no proceedings have been instituted or are pending or threatened that
challenge the rights of the Company in respect thereof; and
(6) All software, firmware and systems containing software or
firmware related to the Technology (collectively, "Software Systems") shall
accurately and automatically handle and process all dates (including
without limitation all leap years), date values, and date-related data,
including, without limitation, interpreting, calculating, comparing and
sequencing and prior to, during, and after January 1, 2000.
(s) Environmental Matters. There have been no private or governmental
---------------------
claims, citations, complaints, notices of violation or letters made, issued to
or threatened against the Company by any governmental entity or private or other
party for the impairment or diminution
12
<PAGE>
of, or damage, injury or other adverse effects to, the environment or public
health resulting, in whole or in part, from the ownership, use or operation of
any of the facilities used by the Company past or present (the "Property").
There are no hazardous materials or hazardous waste on, under, in or
about the Property, including but not limited to the soil and groundwater at and
below the Property, and surface water on and running through the Property.
The Company has duly complied with, and the Property is in compliance
with, the provisions of all Italian state and local environmental, health and
safety laws, codes and ordinances and all rules and regulations promulgated
thereunder.
The Company has been issued and maintains all required federal, state
and local permits, licenses, certificates and approvals with respect to the
Property relating to (i) air emissions, (ii) discharges to surface water or
groundwater, (iii) noise emissions, (iv) solid or liquid waste disposal, (v) the
use, generation, storage, transportation or disposal of hazardous materials or
hazardous wastes, or (vi) other environmental, health or safety matters.
The Company has received no notice of, and neither knows of nor
suspects, any fact(s) which might constitute violation(s) of any or Italian
state or local environmental, health or safety laws, codes or ordinances, and
any rules or regulations promulgated thereunder, which relate to the use,
ownership or occupancy of the Property, and is not in violation of any
covenants, conditions, easements, rights of way or restrictions affecting the
Property or any rights appurtenant thereto.
Except as set forth in Schedule 2.01(s), the Company has no
information in its possession which pertains to the environmental history of the
Property which has not been furnished to Buyer.
13
<PAGE>
(t) Tax Returns and Payments. All VAT and any and all other Italian or
------------------------
Foreign, state and local tax returns and reports of the Company required by law
to be filed (including without limitation returns and reports relating to
required social funds, employment taxes, withholding and VAT) have been duly and
timely filed, and all VAT, withholding taxes, employment taxes and any and all
other taxes, required social funds, fees or other governmental charges of any
nature shown on such returns and reports have been timely paid. All such filed
tax returns and reports were correct and complete in all material respects.
There is no asserted, or to the knowledge of the Shareholders proposed,
deficiency for additional tax or governmental charge, and there is no tax
proceeding pending before any agency or court to which the Company or the
Shareholders is a party. There are no unpaid taxes of the Company which are a
lien on its properties and assets, except liens for taxes not yet due and
payable. All taxes not yet due and payable which require accrual under
generally accepted accounting principles have been properly accrued on the books
of account of the Company and are reflected in the Company's financial
statements. The Company has incurred no tax obligations of any kind except in
the ordinary course of business. No consents extending the statute of
limitations have been filed by the Company with respect to the Company's tax
liability for any fiscal year. The Company is currently not a beneficiary of
any extension of time within which to file a tax return or report. All monies
required to be collected or withheld by the Company in connection with amounts
paid or owing to any employee, independent contractor, creditor, stockholder or
other third party have been collected or withheld, and either paid to the
respective governmental agencies or set aside in accounts for such purpose. The
Company has no tax liability for the taxes of any other taxpayer, including as a
transferee or successor, by contract or otherwise.
14
<PAGE>
(u) Other Activities of the Shareholders. Neither the Shareholders nor any
------------------------------------
officer, director or other Key Employee of the Company owns, directly or
indirectly, any interest or has any investment or profit participation in a
corporation or other entity which is a competitor or potential competitor of or
which otherwise, directly or indirectly, does business with the Company or
Buyer, except as set forth in Schedule 2.01 (u), as well as possible
shareholdings not exceeding the 0,25% of the stock capital of public companies.
(v) Related Party Transactions. The Company does not have outstanding
--------------------------
loans or other advances to any of the Shareholders or any officer, director or
other employee of the Company or to any entity in which any of the Shareholders
or the Company has a direct or indirect interest, other than travel advances in
the usual and ordinary course of business.
(w) No Undisclosed Liabilities. The Company has no obligations or
--------------------------
liabilities except (i) liabilities and obligations which are described in
Schedule 2.01(w), and (ii) liabilities and obligations under any contracts set
forth in Schedule 2.01(h).
(x) The Shareholder List. Set forth as Schedule 2.01(x) is a true and
--------------------
accurate copy of the list of Shareholders of the Company.
(y) Disclosure. No representation or warranty made by the Shareholders in
----------
this Agreement and no statement contained in a certificate, schedule, list or
other instrument or document specified in or delivered pursuant to this
Agreement, whether heretofore furnished to the Buyer or hereafter required to be
furnished to the Buyer (all such documents being taken as a whole), contains or
will contain any untrue statement of a material fact or omits or will omit to
state any material fact necessary to make the statements contained herein or
therein not misleading.
15
<PAGE>
(z) Corporate Securities Law. THE SALE OF THE BUYER COMMON STOCK WHICH
-----------------------
ARE TO BE INTENDED AS A MEANS OF PAYMENT OF A PART OF THE PURCHASE PRICE OF THIS
AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE
STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR
RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION IS
UNLAWFUL. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED
UPON SUCH QUALIFICATION BEING OBTAINED.
(aa) Investment Representation. Each of the Shareholders acknowledges
-------------------------
that he is aware that the Buyer Common Stock has not been registered under the
Securities Act of 1933 (the "Securities Act"). In this connection, each
Shareholder represents and warrants to Buyer that he is acquiring the Buyer
Common Stock for investment and not with a view to or for sale in connection
with any distribution thereof or with any present intention of selling any such
Buyer Common Stock in connection with a distribution.
(bb) Restricted Securities. Each of the Shareholders understands that the
---------------------
Buyer Common Stock will be characterized as "Restricted Securities" under the
federal securities laws inasmuch as the Buyer Common Stock is being acquired
from the Buyer in a transaction not involving a public offering and that under
such laws and applicable regulations such securities may be resold without
registration under the Securities Act only in certain limited circumstances.
(cc) Legends.
-------
(i) Unless and until otherwise permitted, each certificate representing
the Buyer Common Stock shall be stamped or otherwise imprinted with any legends
restricting transfer
16
<PAGE>
required by the California Commissioner of Corporations, and the Buyer Common
Stock may not be transferred except in compliance with the regulations of the
Commissioner.
(ii) The certificates representing the Buyer Common Stock shall be stamped
or otherwise imprinted with a legend in the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE OR
OTHER JURISDICTION AND ARE BEING OFFERED AND SOLD PURSUANT TO REGULATION S UNDER
THE ACT. THESE SECURITIES MAY NOT BE TRANSFERRED OR SOLD IN THE UNITED STATES OR
TO U.S. PERSONS UNLESS IN ACCORDANCE WITH REGULATION S, OR PURSUANT TO
REGISTRATION UNDER THE ACT, OR PURSUANT TO AN AVAILABLE EXEMPTION FROM
REGISTRATION.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT
AND NOT WITH A VIEW TO DISTRIBUTION OR RESALE, AND MAY NOT BE OFFERED, SOLD,
MORTGAGED, PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT FOR SUCH SECURITIES UNDER THE ACT OR AN OPINION
OF COUNSEL SATISFACTORY TO THE COMPANY THAT REGISTRATION IS NOT REQUIRED UNDER
SUCH ACT. HEDGING TRANSACTIONS INVOLVING THESE SECURITIES MAY NOT BE CONDUCTED
UNLESS IN COMPLIANCE WITH THE ACT.
THESE SECURITIES ARE SUBJECT TO CERTAIN TRANSFER RESTRICTIONS AS SET FORTH IN
THE LOCKUP AGREEMENT DATED AS OF FEBRUARY 22, 2000. COPIES OF THIS AGREEMENT
MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST OF THE HOLDER OF RECORD OF THE
CERTIFICATE TO THE SECRETARY OF THE COMPANY AT THE PRINCIPAL EXECUTIVE OFFICES
OF THE COMPANY.
Such legend shall be removed by Buyer from any certificate upon delivery
to it of an opinion by counsel satisfactory to Buyer, in form and substance
satisfactory to Buyer, that a registration statement under the Securities
Act is at the time in effect with respect to the shares evidenced by such
certificate or that the shares evidenced by such certificate can be freely
transferred without such registration statement being in effect and that
such transfer will not jeopardize the exemption or exemptions from
registration pursuant to which the Buyer Common Stock is issued.
17
<PAGE>
(iii) The certificates representing the Buyer Common Stock shall be stamped
or otherwise imprinted with the legend referred to in the Lockup Agreement.
(dd) Affiliates. Shareholders represent and guarantee to Buyer that
----------
all representations and warranties given to Buyer under Section 2.01 are
also referred to and given with respect to all other entities under control
of or related to the Company.
SECTION 2.02 Representations and Warranties of Buyer. Buyer represents and
----------------------------------------------------
warrants to, and agrees with, the Shareholders as follows:
(a) Organization. Buyer is a corporation duly organized, validly
------------
existing and in good standing under the laws of the state of its
incorporation.
(b) Binding Obligation. Buyer has all requisite corporate power
------------------
and authority to enter into and perform its obligations under this Agreement.
All corporate acts and other proceedings required to be taken by Buyer to
authorize the execution, delivery and performance by Buyer of this Agreement and
the transactions contemplated hereby, have been duly and properly taken. This
Agreement has been duly executed and delivered by Buyer and constitutes the
legal, valid and binding obligation of Buyer, enforceable against Buyer in
accordance with its terms. The execution, delivery and performance by Buyer of
this Agreement does not and will not conflict with, or result in any violation
of, any provision of the Articles of Incorporation or By-laws of Buyer, or any
provision of any law, ordinance, rule, regulation, judgment, order, decree,
agreement, instrument or license applicable to Buyer or to its property or
assets. No consent, approval, order or authorization of, or registration,
declaration or filing with, any court, administrative agency or commission or
other governmental authority or instrumentality, domestic or foreign, is
required by or with respect to Buyer in connection with its execution, delivery
or performance of this Agreement.
18
<PAGE>
(c) Buyer Stock. The shares of Buyer Common Stock to be issued to the
-----------
Shareholders pursuant to this Agreement will be validly issued, fully paid and
nonassessable. At Closing, the Shareholders will acquire good and marketable
title to all of such Buyer Commons Stock, free and clear of any lien,
encumbrance, pledge, security interest or claim whatsoever.
(d) Right to the Shareholders. The Shareholders will have the right to
---------------------------
cause the Buyer to purchase the Buyer Common Stock at a per-share exercise price
of $ 30 per share, on and only on the 90/th/ day (on May 22, 2000 only) from
the Closing, provided that such a right be exercised by the Shareholders jointly
with the other shareholders of the Company Mr. Giuliano Sala, Mr. Gian Piero
Brandolini, Mr. Pietro Zucchini, Mr. Aldo Baccarani and Mr. Franco Montanari.
Such right will expire if written notice signed by all of the Shareholders
referred to in this Section 2.02 (d) is not received by Buyer on or before the
close of business on May 22, 2000. The $ 30 per share price shall be
appropriately adjusted to reflect any stock splits or similar transactions
occurring prior to May 22, 2000.
ARTICLE III
-----------
Additional Agreements
---------------------
SECTION 3.01. Legal Conditions. The Shareholders and Buyer will take
------------------------------
all reasonable actions necessary to comply promptly with all legal requirements
which may be imposed on the Company or Buyer with respect to the transactions
contemplated hereby and will promptly cooperate with and furnish information to
the other party in connection with any such requirements imposed upon such other
party in connection with the transactions contemplated hereby. Each party will
take all reasonable actions to obtain (and to cooperate with the other party in
obtaining) any consent, authorization, order or approval of, or any exemption
by, any governmental agency, commission, board, authority, court or other
entity, or other third party,
19
<PAGE>
required to be obtained or made by the Company or by Buyer in connection with
the transactions contemplated hereby or the taking of any action contemplated
thereby or by this Agreement.
SECTION 3.02.Expenses. Whether or not the transactions contemplated
---------------------
hereby are consummated, all costs and expenses incurred by Buyer or the
Shareholders in connection with this Agreement and the transactions contemplated
hereby shall be paid by the party incurring such costs. Without limiting the
generality of the foregoing, the Shareholders shall be solely responsible for
the fees and expenses of their counsel in connection with the transactions
contemplated hereby.
SECTION 3.03. Additional Agreements. Subject to the terms and
-----------------------------------
conditions of this Agreement, each of the parties hereto agrees to use all
reasonable efforts to take, or cause to be taken, all reasonable action and to
do, or cause to be done, all things reasonably necessary, proper or advisable
under applicable laws and regulations to consummate and make effective the
transactions contemplated by this Agreement, whether before or after the
Closing.
SECTION 3.04. Press Releases. None of the parties hereto shall issue
----------------------------
a press release or other publicity announcing the transactions contemplated
hereby without the prior written approval of the other party, unless such
disclosure is required by applicable law.
ARTICLE IV
----------
Indemnification
---------------
SECTION 4.01. Warranty Claims. Indemnification for Warranty Claims
-----------------------------
shall be governed by this Section 4.01.
(a) By the Shareholders. Except as hereinafter set forth, the
-------------------
Shareholders shall jointly and severally indemnify and hold harmless on an
after-tax basis Buyer, and its successors and assigns and its and their
respective officers, directors, shareholders, employees and agents, against, and
in respect of, any and all damages, claims, losses, liabilities and
20
<PAGE>
expenses, which arise out of: (i) any breach or violation of this Agreement by
the Shareholders; or (ii) any breach of any of the representations, warranties
or covenants made in this Agreement by the Shareholders; or (iii) any inaccuracy
or misrepresentation in the Schedules hereto or in any certificate or document
delivered in accordance with the terms of this Agreement by the Shareholders
(collectively, "Warranty Claims"); provided however, that Buyer shall be
entitled to indemnification hereunder only when, and only with respect to
amounts by which, the aggregate of all such Warranty Claims exceeds $25,000.
(b) By Buyer. Except as hereinafter set forth, Buyer shall indemnify and
--------
hold harmless on an after-tax basis the Shareholders and their heirs,
beneficiaries and estates against, and in respect of, any and all damages,
claims, losses, liabilities and expenses, including, without limitation,
reasonable legal, accounting and other expenses, which arise out of: (i) any
breach or violation of this Agreement by Buyer; or (ii) any breach of any of the
representations, warranties or covenants made in this Agreement by Buyer; or
(iii) any inaccuracy or misrepresentation in the Schedules hereto or in any
certificate or document delivered in accordance with the terms of this Agreement
by Buyer (collectively, "Warranty Claims"); provided however, that the
Shareholders shall be entitled to indemnification hereunder only when, and only
with respect to amounts by which, the aggregate of all such Warranty Claims
exceeds $25,000.
SECTION 4.02 Third Party Claims. Without regard to the limitations
-------------------------------
set forth in Section 4.01 hereof, the Shareholders shall jointly and severally
indemnify and hold Buyer and its successors and assigns and its and their
respective officers, directors, shareholders, employees and agents harmless on
an after-tax basis against any and all damages, claims, losses, liabilities and
expenses, including, without limitation, reasonable legal, accounting and other
21
<PAGE>
expenses, arising out of any legal, governmental or administrative actions, suit
or proceeding against Buyer, including those included in Schedule 2.01(i)
hereto, which legal governmental or administrative action, suit or proceeding
arises from the conduct of the business of the Company or the ownership or
condition of the properties owned or leased by the Company prior to Closing.
SECTION 4.03. Notice of Claim. Upon obtaining knowledge thereof, the
-----------------------------
indemnified party shall within 60 days from said acknowledgement, notify the
indemnifying party in writing of any damage, claim, loss, liability or expense
which the indemnified party has determined has given or could give rise to a
claim under Sections 4.01 or 4.02 (such written notice being hereinafter
referred to as a "Notice of Claim"). A Notice of Claim shall contain a brief
description of the nature and estimated amount of any such claim giving rise to
a right of indemnification.
SECTION 4.04. Defense of Third Party Claims. With respect to any
-------------------------------------------
claim or demand set forth in a Notice of Claim relating to a third party claim,
the indemnifying party may defend, in good faith and at its expense, any such
claim or demand, and the indemnified party, at its expense, shall have the right
to participate in the defense of any such third party claim. So long as the
indemnifying party is defending in good faith any such third party claim, the
indemnified party shall not settle or compromise such third party claim. If the
indemnifying party does not so elect to defend any such third party claim, the
indemnified party shall have no obligation to do so.
ARTICLE 5
---------
General Provisions
------------------
SECTION 5.01. Survival of Representations and Warranties. All
--------------------------------------------------------
representations and warranties in this Agreement or in any instrument delivered
pursuant to this Agreement shall
22
<PAGE>
survive the Closing for a period of two years, and, thereafter, to the extent a
claim is made prior to such expiration with respect to any breach of such
representation, warranty or agreement, until such claim is finally determined or
settled; provided, however, that all claims with respect to the tax matters or
resulting from any action or threatened action by any federal, state or local
taxing authority and all claims with respect to litigation by former
Shareholders of the Company regardless of whether or not disclosed shall expire
when the applicable period under the statute of limitations therefor (including
any waivers thereof) shall have expired and cannot thereafter be asserted.
SECTION 5.02. Notices. All notices and other communications hereunder
---------------------
shall be in writing and shall be deemed given if delivered personally or mailed
by registered or certified mail (return receipt requested) to the parties at the
following addresses (or at such other address for a party as shall be specified
by like notice):
(a) if to Buyer to
SUNRISE TELECOM, INC.
22 Great Oaks Boulevard
P.O. Box 899
San Jose, CA 95119
Attention: Peter L. Eidelman
with a copy to: John F. Seegal, Esq.
ORRICK, HERRINGTON & SUTCLIFFE LLP
The Old Federal Reserve Bank Building
400 Sansome Street
San Francisco, California 94111
(b) if to the Shareholders, to
23
<PAGE>
Mr Franco Messori
Via San Lorenzo n. 20
41051 Castelnuovo Rangone (MO)
All notices given hereunder shall be deemed given at the time of
personal delivery or, if mailed, on the earlier of actual receipt as shown on
the registry receipt or three business days after the date of such mailing.
SECTION 5.03. Interpretation. When a reference is made in this
----------------------------
Agreement to Sections, Schedules or Exhibits, such reference shall be to a
Section, Schedule or Exhibit to this Agreement unless otherwise indicated. The
table of contents and headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement. For purposes of contract interpretation, the parties agree that
they are joint authors of this document.
SECTION 5.04. Counterparts. This Agreement may be executed in one or
--------------------------
more counterparts, all of which shall be considered one and the same agreement
and shall become effective when one or more counterparts have been signed by
each of the parties and delivered to the other party, it being understood that
all parties need not sign the same counterpart.
SECTION 5.05. Miscellaneous. This Agreement, the documents and
---------------------------
instruments and other agreements between the parties hereto required by this
Agreement (a) constitute the entire agreement among the parties with respect to
the subject matter hereof and supersede all prior agreements and understandings,
both written and oral, among the parties with respect to the subject matter
hereof, (b) is not intended to confer upon any other person any rights or
remedies hereunder and (c) shall not be assigned by operation of law or
otherwise except as otherwise specifically provided.
24
<PAGE>
SECTION 5.06. Governing Law. This Agreement shall be governed in all
---------------------------
respects, including validity, interpretation and effect, by the substantive laws
of the State of California.
SECTION 5.07. No Waiver. No term or provision of this Agreement shall
-----------------------
be waived or any breach of this Agreement excused except in writing signed by
the party that is claimed to have so waived or excused. No waiver of any
provision of this Agreement shall constitute a waiver of any other provision.
Any consent or waiver by any party to any breach of this Agreement by the other
party, whether expressed or implied, shall not constitute a consent to, waiver
of, or excuse for, any other breach. The failure of any party to give notice to
the other party, or to take any other step in respect of, any breach of any
provision of this Agreement shall not constitute a waiver thereof. Acceptance
of payment by a party after the breach of any provision of this Agreement by the
other party shall not constitute a waiver thereof.
SECTION 5.08. Prevailing version. This agreement has been duly signed
--------------------------------
by the parties also into the Italian version, provided that the Buyer and the
Shareholders agree that in any case of disputes referred to the interpretation,
fulfillment and/or termination of the Agreement, the English version shall
apply.
IN WITNESS WHEREOF, Buyer and the Shareholders have executed this
Agreement, all as of the date first written above.
SUNRISE TELECOM, INC.
By_________________________________
SHAREHOLDERS:
___________________________________
25
<PAGE>
FRANCO MESSORI
___________________________________
FRANCO CORRADINI
___________________________________
ANGELO BACCARANI
___________________________________
LUCIA BARBARA SILVANI
26
<PAGE>
- --------------------------------------------------------------------------------
MASTER AGREEMENT
Effective as of February 22, 2000
among
FRANCO MESSORI, FRANCO CORRADINI, ANGELO BACCARANI,
LUCIA BARBARA SILVANI
and
SUNRISE TELECOM, INC.
- --------------------------------------------------------------------------------
<PAGE>
<TABLE>
<S> <C>
ARTICLE I Sale and Purchase of Common Stock
SECTION 1.01. Sale and Purchase.......................................... 1
SECTION 1.02. Closing.................................................... 1
(a) Shareholder Deliveries........................................ 1
(b) Buyer Deliveries.............................................. 2
(c) Short-form.................................................... 2
SECTION 1.03. The Purchase Price......................................... 2
SECTION 1.04. Adjustments to Purchase Price.............................. 2
SECTION 1.05. Repayment.................................................. 3
SECTION 1.06. Further Cooperation........................................ 3
ARTICLE II Representations and Warranties
SECTION 2.01. Representations and Warranties of the Shareholders......... 3
(a) Organization.................................................. 3
(b) Authority To Do Business...................................... 3
(c) Binding Obligation............................................ 3
(d) Title to Quotas............................................... 3
(e) Capitalization................................................ 3
(f) Real Property................................................. 4
(g) Title to Assets............................................... 4
(h) Contracts..................................................... 4
(i) Litigation.................................................... 4
(j) Licenses...................................................... 4
(k) Employee and Related Matters.................................. 4
(l) Absence of Changes or Events.................................. 5
(m) Compliance with Laws.......................................... 5
(n) No Broker's or Finder's Fees.................................. 5
(o) Employee Benefit Plans........................................ 5
(p) Customers..................................................... 6
(q) Condition of Equipment........................................ 6
(r) Trademarks and Other Intellectual Property.................... 6
(s) Environmental Matters......................................... 7
(t) Tax Returns and Payments...................................... 7
(u) Other Activities of the Shareholders.......................... 8
</TABLE>
<PAGE>
<TABLE>
<S> <C>
(v) Related Party Transactions.................................... 8
(w) No Undisclosed Liabilities.................................... 8
(x) The Shareholder List.......................................... 8
(y) Disclosure.................................................... 8
(z) Corporate Securities Law...................................... 8
(aa) Investment Representation..................................... 8
(bb) Restricted Securities......................................... 8
(cc) Legends....................................................... 9
(dd) Affiliates.................................................... 9
SECTION 2.02. Representations and Warranties of Buyer.................... 9
(a) Organization.................................................. 10
(b) Binding Obligation............................................ 10
(c) Buyer Stock................................................... 10
(d) Right to the Shareholders..................................... 10
ARTICLE III Additional Agreements
SECTION 3.01. Legal Conditions........................................... 10
SECTION 3.02. Expenses................................................... 10
SECTION 3.03. Additional Agreements...................................... 11
SECTION 3.04. Press Releases............................................. 11
ARTICLE IV Indemnification
SECTION 4.01. Warranty Claims............................................ 11
(a) By the Shareholders........................................... 11
(b) By Buyer...................................................... 11
SECTION 4.02. Third Party Claims......................................... 11
SECTION 4.03. Notice of Claim............................................ 12
SECTION 4.04. Defense of Third Party Claims.............................. 12
ARTICLE V General Provisions
SECTION 5.01. Survival of Representations and Warranties................. 12
SECTION 5.02. Notices.................................................... 12
SECTION 5.03. Interpretation............................................. 13
SECTION 5.04. Counterparts............................................... 13
SECTION 5.05. Miscellaneous.............................................. 13
SECTION 5.06. Governing Law.............................................. 13
</TABLE>
<PAGE>
<TABLE>
<S> <C>
SECTION 5.07. No Waiver.................................................. 13
SECTION 5.08. Prevailing version.......................................... 13
EXHIBIT A NONCOMPETITION AGREEMENT..........................................
EXHIBIT B EMPLOYMENT AGREEMENT..............................................
EXHIBIT C LOCKUP AGREEMENT..................................................
EXHIBIT D CONFIDENTIAL INFORMATION AND INVENTION ASSIGNMENT AGREEMENT.......
EXHIBIT E SCHEDULE OF STOCK OPTION GRANTS...................................
EXHIBIT F FORM OF STOCK OPTION AGREEMENT....................................
EXHIBIT G SHORT-FORM........................................................
</TABLE>
<PAGE>
THIS MASTER AGREEMENT (this "Agreement") is entered into as of
February 22, 2000 (the "Effective Date"), by and among SUNRISE TELECOM, INC., a
California corporation ("Buyer") represented by Paolo Barozzi Esq., born Novara
on March 14, 1958, Fiscal Code BRZ PLA 58C14 F952B, domiciled at Milan, Via
Vivaio n. 6, duly appointed, to such extent, through Special Powers of Attorney
granted to the latter by virtue of Unanimous Written Consent of the Board of
Directors of Buyer on February 15, 2000, and GIULIANO SALA, GIAN PIERO
BRANDOLINI, PIETRO ZUCCHINI, ALDO BACCARANI, and FRANCO MONTANARI (the
"Shareholders").
WHEREAS, the Shareholders own, as hereinafter set forth, the quotas
representing the 45% of the issued and outstanding stock capital (the "Quotas ")
of Pro. Tel. S.r.l., an Italian limited liability company (the "Company"):
(i) Giuliano Sala 5%;
(ii) Gian Piero Brandolini 25,6%;
(iii) Pietro Zucchini 3,2%;
(iv) Aldo Baccarani 8%;
(v) Franco Montanari 3,2%;
WHEREAS, the Shareholders desire to sell to Buyer, and Buyer desires
to purchase from the Shareholders all of the Quotas .
WHEREAS, the Board of Directors of Buyer has approved the acquisition
of the Quotas by Buyer on the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and the
representations, warranties and agreements herein contained, the parties agree
as follows:
ARTICLE I
Sale and Purchase of Common Stock
---------------------------------
SECTION 1.01. Sale and Purchase. Subject to the terms and conditions
-----------------
herein set forth, the Shareholders shall sell, assign and transfer to Buyer and
Buyer shall purchase from the Shareholders the Quotas.
1
<PAGE>
SECTION 1.02. Closing. The closing of the purchase and sale of the
-------
Quotas (the "Closing") will take place on February 22, 2000, at the offices of
Anna Pellegrino Notary Public in Milan, Via Torquato Tasso No. 1.
(a) Shareholder Deliveries. The Shareholders shall deliver to Buyer
----------------------
at the Closing:
(i) Consents executed by all necessary parties whose consent to the
transactions contemplated hereby is required under the terms of the
Company's contracts, licenses or rights as listed in Schedule 1.02 (a)
hereto.
(ii) Lockup Agreements in substantially the form of Exhibit A hereto
executed by each of the Shareholders.
(iii) Confidential Information and Invention Assignment Agreements in
substantially the form of Exhibit B hereto executed by each of the
Shareholders and each of the Company's other employees.
(b) Buyer Deliveries. Buyer shall deliver to the Shareholders at the
----------------
Closing:
(i) Wire transfers payable to the Shareholders in the respective
amounts indicated on Schedule 1.02(b) attached hereto and in the aggregate
amount of $ 1.755 million
(ii) Stock certificates registered in the names of the Shareholders
in the respective amounts indicated on Schedule 1.02(b) attached hereto and
evidencing a total of No. 74,999 Common Stock of Buyer.
(c) Short-form. At the Closing, the Buyer and the Shareholders
----------
(hereinafter jointly the "Parties") shall execute before the Italian Notary
Public the agreement for the sale and purchase of the Quotas, the contents
thereof being similar to those referred in Exhibit C
2
<PAGE>
(hereinafter the "Short-form"). The Parties acknowledge that the Short-form
shall be executed in compliance with the provisions of article 2479 of the
Italian Civil Code. It is also agreed by the Parties that this Agreement shall,
in any case and for all legal purposes, prevail over the Short-form.
SECTION 1.03. The Purchase Price. For purposes hereof the Purchase
------------------
Price shall consist of the sum of $ 1.755 million, plus 74,999 shares of Buyer
Common Stock (the "Buyer Common Stock") and shall be divided among and paid to
each of the Shareholders as follows:
(i) Giuliano Sala $ 195,000 plus No. 8,333 of shares of
Buyer Common Stock;
(ii) Gian Piero Brandolini $ 998,400 plus No. 42,667 of shares of
Buyer Common Stock;
(iii) Pietro Zucchini $ 124,800 plus No. 5,333 of shares of
Buyer Common Stock;
(iv) Aldo Baccarani $ 312,000 plus No. 13,333 of shares of
Buyer Common Stock;
(v) Franco Montanari $ 124,800 plus No. 5,333 of shares of
Buyer Common Stock.
The Purchase Price shall be subject to adjustment as provided in Section 1.04
hereof.
SECTION 1.04. Adjustments to Purchase Price. After the Closing,
-----------------------------
Buyer's accountants will prepare an audited balance sheet of the Company as of
the Closing (the "Closing Balance Sheet"). If the Closing Balance Sheet reflects
(i) the absence of any debt other than ordinary course trade payables, (ii)
Positive Net Assets and, (iii) in any case, the absence of
3
<PAGE>
any decline in Net Assets from the net assets reflected in the balance sheet of
the Company as of December 31, 1999 audited by KPMG there shall be no adjustment
to the Purchase Price. The Purchase Price shall be adjusted downward on a
dollar-for-dollar basis by (i) the amount of debt other than ordinary course
trade payables reflected on the Closing Balance Sheet, and (ii) the amount of
any Negative Net Assets. For purposes hereof, Net Assets shall mean the sum of
cash, accounts receivable and inventory less total liabilities; and the amount
of any positive (or negative) Net Assets shall be the amount by which the Net
Assets are greater than (or less than) zero.
SECTION 1.05. Repayment. In the event of a Purchase Price adjustment
---------
pursuant to Section 1.04, each Shareholder shall promptly pay his pro rata
portion of such Purchase Price adjustment to Buyer in cash and/or Buyer Common
Stock. In the event that any Shareholder fails to make any such repayment,
Buyer, at its election may (i) cancel the corresponding number of shares of
Buyer Common Stock held by such Shareholder, (ii) or take such other action as
Buyer deems appropriate.
SECTION 1.06. Further Cooperation. From time to time after the
-------------------
Closing, the Shareholders at Buyer's request and without further consideration,
agrees to take or cause to be taken such further or other action as may
reasonably be necessary or appropriate in order to effectuate the quotas
purchase and sale contemplated by this Agreement.
ARTICLE II
Representations and Warranties
------------------------------
SECTION 2.01. Representations and Warranties of the Shareholders. The
--------------------------------------------------
Shareholders hereby jointly and severally represent and warrant to Buyer as
follows:
(a) Organization. The Company is a limited liability company duly
------------
organized, validly existing and in good standing under the laws of Italy.
4
<PAGE>
(b) Authority To Do Business. The Company has all requisite power
------------------------
and authority to own or lease and operate its properties and to carry on its
business as now conducted.
(c) Binding Obligation. This Agreement has been duly executed and
------------------
delivered by the Shareholders and constitutes a valid and binding obligation of
the Shareholders enforceable in accordance with its terms. The execution,
delivery and performance by the Shareholders of this Agreement does not and will
not conflict with, or result in any violation of or default under, any provision
of the Articles of Incorporation or By-laws of the Company or any ordinance,
rule, regulation, judgment, order, decree, agreement, instrument or license
applicable to the Company or to any of its respective properties or assets. No
consent, approval, order or authorization of, or registration, declaration or
filing with, any court, administrative agency or commission or other
governmental authority or instrumentality, domestic or foreign, is required by
or with respect to the Shareholders or the Company in connection with the
Shareholders' execution, delivery of this Agreement or the performance by the
Shareholders or the Company of the obligations contemplated hereby.
(d) Title to Quotas. The Shareholders have good and marketable title
---------------
to all of the Quotas, free and clear of all claims, liens, security interests,
pledges, charges or encumbrances of any nature whatsoever, and the transfer of
the Quotas to Buyer pursuant to this Agreement will pass good and marketable
title to the Quotas , free and clear of all claims, liens, security interests,
pledges, charges or encumbrances of any nature whatsoever.
(e) Capitalization. The Company's authorized capital stock is equal
--------------
to ITL 500,000,000 and it is fully subscribed and paid in. No other equity
securities of the Company other than the Quotas are authorized, issued or
outstanding, and there are no outstanding options,
5
<PAGE>
warrants, agreements, contracts, calls, commitments, or demands of any
character, preemptive or otherwise, other than the Agreement, relating to any of
the Common Stock.
(f) Real Property. Schedule 2.01(f) includes a complete list of all
-------------
real property used by the Company, all of which real property is leased by the
Company ("Leased Real Property"). Except as set forth on Schedule 2.01(f), the
Company has valid lease hold interests in all the Leased Real Property.
(g) Title to Assets. The Company has good and marketable title to
---------------
all of its assets, in each case free and clear of all mortgages, liens, security
interests, pledges, charges or encumbrances of any nature whatsoever.
(h) Contracts. Except as described in Schedule 2.01(h) and except,
---------
in the case of contracts primarily involving the receipt or payment of money,
for contracts involving the receipt of or payment of less than $25,000, the
Company is not a party to or bound by any lease, agreement, contract or other
commitment which relates in any way to the business of the Company
(collectively, the "Contracts"). Each Contract is a valid and binding obligation
of the Company and is in full force and effect. The Company has performed all
material obligations required to be performed by it to date under the Contracts,
is not (with or without the lapse of time or the giving of notice, or both) in
breach or default in any material respect thereunder and is not alleged to be in
breach or default in any material respect thereunder. All Contracts are in the
name of the Company.
Except as described in Schedule 2.01(h) and except, in the case of
contracts primarily involving the receipt or payment of money, for contracts
involving the receipt of or payment of less than $25,000, the Company is not a
party to or bound by any of the types of agreement enumerated below:
6
<PAGE>
(i) agreement or contract not made in the ordinary course of
business;
(ii) agreement or contract with any Shareholders, director or
employee of the Company or any of its subsidiaries, except for those agreements
required by the Italian laws;
(iii) agreement or contract which is oral; or
(iv) agreement or contract the terms of which are known by the
Shareholders to be unfavorable to the Company.
(i) Litigation. There are no lawsuits, claims, proceedings or
----------
investigations pending or, to the best knowledge of the Company, threatened by
or against or affecting the Company or any of its properties, assets, operations
or business which could in any way adversely affect the transactions
contemplated by this Agreement or the value to the Buyer of the business being
acquired by it, and the Shareholders are not aware of any reasonable basis for
any such lawsuit, claim, proceeding or investigation.
(j) Licenses. The Company holds each license, permit or other
--------
governmental authorization (collectively hereinafter referred to as "Licenses")
which is required for the operation of its business and, all such Licenses are
in full force and effect and will remain in full force and effect
notwithstanding the closing of the transactions contemplated hereby.
(k) Employee and Related Matters. There are no employment-related claims,
----------------------------
actions, proceedings or investigations pending or, to the best knowledge of the
Shareholders , threatened against or relating to the Company before any court,
governmental, regulatory or administrative authority or body, or arbitrator or
arbitration panel. The Company is not subject to any outstanding order, writ,
judgment, injunction, decision, award, compliance order, consent decree,
conciliation agreement, settlement agreement, affirmative action plan,
determination letter or advisory of any court, governmental, regulatory or
administrative authority or body, or arbitrator
7
<PAGE>
or arbitration panel. The Company is in compliance with all contracts, laws and
regulatory requirements relating to employment matters.
(l) Absence of Changes or Events. Since December 31, 1998, the business
----------------------------
of the Company has been conducted in the ordinary course and there has not been
any material adverse change in the financial condition, results of operations,
business, assets or prospects of the Company. Without limiting the generality of
the foregoing, since December 31, 1998 the Company has not, except as described
in Schedule 2.01(l)(i):
(i) acquired or agreed to acquire any assets which are material,
individually or in the aggregate, to the Company, except in the ordinary
course of business consistent with prior practice;
(ii) sold, leased or otherwise disposed of any of its assets, which
are material, individually or in the aggregate, to the Company, except in
the ordinary course of business consistent with prior practice;
(iii) adopted or amended in any material respect any agreement with
employees or benefit plans, other than in the ordinary course of business
consistent with prior practice and in compliance with the Italian laws;
(iv) increased the compensation of any employee other than in the
ordinary course of business consistent with prior procedure and in
compliance with the Italian laws;
(v) sustained any material loss or damage to its properties, whether
or not insured;
(vi) issued capital stock or declared or paid a dividend or made any
other payment from capital or surplus or other distribution of any nature,
or directly or
8
<PAGE>
indirectly, redeemed, purchased or otherwise acquired or recapitalized or
reclassified any of its capital stock or liquidated in whole or in part;
(vii) merged or consolidated with another corporation;
(viii) created, incurred or assumed or committed to create, incur or
assume indebtedness or other liability, except for accounts payable or
other current liabilities which (1) are not for borrowed money, (2) were
incurred in the usual and ordinary course of business and (3) have not been
and will not be materially adverse to the general affairs, business,
prospects, properties, financial condition, results of operations or net
worth of the Company;
(ix) altered or amended its articles of incorporation or bylaws; or
(x) entered into, materially amended or terminated any material
contract, agreement, franchise, permit or license, except for those set
forth into Schedule 2.01 (l)(ii).
(m) Compliance with Laws. The Company is not in violation of any law,
--------------------
order, ordinance, rule or regulation of any governmental authority.
(n) No Broker's or Finder's Fees. No agent, broker, investment banker,
----------------------------
person or firm acting on behalf of the Shareholders, the Company or any related
entity is or will be entitled to any broker's or finder's fee or any other
commission or similar fee in connection with any of the transactions
contemplated herein.
(o) Employee Benefit Plans. Except as set forth on Schedule 2.01(o),
----------------------
neither the Company nor any entity under common control with the Company
maintains, is required to contribute to, or is required to provide benefits
under, any plan, fund or program providing any pension, profit sharing, deferred
compensation, severance pay, bonuses, incentive compensation,
9
<PAGE>
stock options, stock purchases, or any other form of retirement or deferred
benefit, or any health, accident, dependent care, or other welfare benefit (a
"Plan"), save as provided for by the Italian laws.
(p) Customers. Schedule 2.01(p) contains a true and correct list of the
---------
Company's largest 20 customers (as determined by dollar amount of orders) for
each of the last two years. The Company has no information which would cause it
to believe that any such customer will not continue to do business with Buyer
after the Closing upon substantially the same terms and at such volumes as such
customer did business with the Company prior to the Reference Date.
(q) Condition of Equipment. The equipment of the Company is in good
----------------------
operating condition, normal wear and tear excepted.
(r) Trademarks and Other Intellectual Property. Except as set forth in
------------------------------------------
Schedule 2.01(r), there are no patents, trademarks, service marks, trade names,
or applications therefor or registrations thereof ("Intellectual Property"),
which have been used or owned within the last three years by the Company.
Schedule 2.01(r) contains a true and complete description of the rights of the
Company with respect to each of such items of Intellectual Property. Except as
set forth in Schedule 2.01(r), the Company has sole, full and clear title to all
of such items of Intellectual Property, without any liens, encumbrances or
restrictions whatsoever, and upon closing of the transactions contemplated
hereby, the Company will continue to possess sole, full and clear title to all
of such items of Intellectual Property, without any liens, encumbrances or
restrictions whatsoever. The Company is not and, during the last two years, has
not (i) infringed or violated any trademark, service mark, trade name, patent or
copyright or other Intellectual Property right; or (ii) unlawfully or improperly
used any trade secrets belonging to any third party. Without limiting the
generality of the foregoing, with respect to the Ghepardo product:
10
<PAGE>
(1) The Company is the sole and rightful owner of all right, title
and interest in and to any and all technology which is necessary or
desirable in connection with such product (the "Technology") and, it has
the unrestricted right to market, license and exploit the Technology;
(2) At all times prior to Closing, the Company has taken and shall
take all necessary steps to secure all right and title to and protect the
Technology (including, without limitation, obtaining executed non-
disclosure agreements with any third party having access to the Technology,
and executed confidentiality and proprietary right assignment agreements
with all employees and independent contractors performing work for the
Company) and to prevent the disclosure of, publication of or other activity
that would jeopardize any trade secret or confidential information related
to the Technology;
(3) There has been no disclosure of, publication of or other activity
that would jeopardize any trade secret or confidential information related
to the Technology;
(4) The Technology does not infringe or misappropriate any third-
party proprietary right;
(5) No claims have been made in respect of the Technology and no
demands of any third party have been made pertaining to the Technology, and
no proceedings have been instituted or are pending or threatened that
challenge the rights of the Company in respect thereof; and
(6) All software, firmware and systems containing software or
firmware related to the Technology (collectively, "Software Systems") shall
accurately
11
<PAGE>
and automatically handle and process all dates (including without
limitation all leap years), date values, and date-related data, including,
without limitation, interpreting, calculating, comparing and sequencing and
prior to, during, and after January 1, 2000.
(s) Environmental Matters. There have been no private or governmental
---------------------
claims, citations, complaints, notices of violation or letters made, issued to
or threatened against the Company by any governmental entity or private or other
party for the impairment or diminution of, or damage, injury or other adverse
effects to, the environment or public health resulting, in whole or in part,
from the ownership, use or operation of any of the facilities used by the
Company past or present (the "Property").
There are no hazardous materials or hazardous waste on, under, in or
about the Property, including but not limited to the soil and groundwater at and
below the Property, and surface water on and running through the Property.
The Company has duly complied with, and the Property is in compliance
with, the provisions of all Italian state and local environmental, health and
safety laws, codes and ordinances and all rules and regulations promulgated
thereunder.
The Company has been issued and maintains all required federal, state
and local permits, licenses, certificates and approvals with respect to the
Property relating to (i) air emissions, (ii) discharges to surface water or
groundwater, (iii) noise emissions, (iv) solid or liquid waste disposal, (v) the
use, generation, storage, transportation or disposal of hazardous materials or
hazardous wastes, or (vi) other environmental, health or safety matters.
The Company has received no notice of, and neither knows of nor
suspects, any fact(s) which might constitute violation(s) of any or Italian
state or local environmental, health or safety laws, codes or ordinances, and
any rules or regulations promulgated thereunder, which
12
<PAGE>
relate to the use, ownership or occupancy of the Property, and is not in
violation of any covenants, conditions, easements, rights of way or restrictions
affecting the Property or any rights appurtenant thereto.
Except as set forth in Schedule 2.01(s), the Company has no
information in its possession which pertains to the environmental history of the
Property which has not been furnished to Buyer.
(t) Tax Returns and Payments. All VAT and any and all other Italian or
------------------------
Foreign, state and local tax returns and reports of the Company required by law
to be filed (including without limitation returns and reports relating to
required social funds, employment taxes, withholding and VAT) have been duly and
timely filed, and all VAT, withholding taxes, employment taxes and any and all
other taxes, required social funds, fees or other governmental charges of any
nature shown on such returns and reports have been timely paid. All such filed
tax returns and reports were correct and complete in all material respects.
There is no asserted, or to the knowledge of the Shareholders proposed,
deficiency for additional tax or governmental charge, and there is no tax
proceeding pending before any agency or court to which the Company or the
Shareholders is a party. There are no unpaid taxes of the Company which are a
lien on its properties and assets, except liens for taxes not yet due and
payable. All taxes not yet due and payable which require accrual under
generally accepted accounting principles have been properly accrued on the books
of account of the Company and are reflected in the Company's financial
statements. The Company has incurred no tax obligations of any kind except in
the ordinary course of business. No consents extending the statute of
limitations have been filed by the Company with respect to the Company's tax
liability for any fiscal year. The Company is currently not a beneficiary of
any extension of time within which to file a tax return or report.
13
<PAGE>
All monies required to be collected or withheld by the Company in connection
with amounts paid or owing to any employee, independent contractor, creditor,
stockholder or other third party have been collected or withheld, and either
paid to the respective governmental agencies or set aside in accounts for such
purpose. The Company has no tax liability for the taxes of any other taxpayer,
including as a transferee or successor, by contract or otherwise.
(u) Other Activities of the Shareholders. Neither the Shareholders nor any
------------------------------------
officer, director or other Key Employee of the Company owns, directly or
indirectly, any interest or has any investment or profit participation in a
corporation or other entity which is a competitor or potential competitor of or
which otherwise, directly or indirectly, does business with the Company or
Buyer, except as set forth in Schedule 2.01 (u), as well as possible
shareholdings not exceeding the 0,25% of the stock capital of public companies.
(v) Related Party Transactions. The Company does not have outstanding
--------------------------
loans or other advances to any of the Shareholders or any officer, director or
other employee of the Company or to any entity in which any of the Shareholders
or the Company has a direct or indirect interest, other than travel advances in
the usual and ordinary course of business.
(w) No Undisclosed Liabilities. The Company has no obligations or
--------------------------
liabilities except (i) liabilities and obligations which are described in
Schedule 2.01(w), and (ii) liabilities and obligations under any contracts set
forth in Schedule 2.01(h).
(x) The Shareholder List. Set forth as Schedule 2.01(x) is a true and
--------------------
accurate copy of the list of Shareholders of the Company.
(y) Disclosure. No representation or warranty made by the Shareholders in
----------
this Agreement and no statement contained in a certificate, schedule, list or
other instrument or document specified in or delivered pursuant to this
Agreement, whether heretofore furnished to
14
<PAGE>
the Buyer or hereafter required to be furnished to the Buyer (all such documents
being taken as a whole), contains or will contain any untrue statement of a
material fact or omits or will omit to state any material fact necessary to make
the statements contained herein or therein not misleading.
(z) Corporate Securities Law. THE SALE OF THE BUYER COMMON STOCK WHICH ARE
------------------------
TO BE INTENDED AS A MEANS OF PAYMENT OF A PART OF THE PURCHASE PRICE OF THIS
AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE
STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR
RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION IS
UNLAWFUL. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED
UPON SUCH QUALIFICATION BEING OBTAINED.
(aa) Investment Representation. Each of the Shareholders acknowledges
-------------------------
that he is aware that the Buyer Common Stock has not been registered under the
Securities Act of 1933 (the "Securities Act"). In this connection, each
Shareholder represents and warrants to Buyer that he is acquiring the Buyer
Common Stock for investment and not with a view to or for sale in connection
with any distribution thereof or with any present intention of selling any such
Buyer Common Stock in connection with a distribution.
(bb) Restricted Securities. Each of the Shareholders understands that the
---------------------
Buyer Common Stock will be characterized as "Restricted Securities" under the
federal securities laws inasmuch as the Buyer Common Stock is being acquired
from the Buyer in a transaction not involving a public offering and that under
such laws and applicable regulations such securities may be resold without
registration under the Securities Act only in certain limited circumstances.
15
<PAGE>
(cc) Legends.
-------
(i) Unless and until otherwise permitted, each certificate representing
the Buyer Common Stock shall be stamped or otherwise imprinted with any legends
restricting transfer required by the California Commissioner of Corporations,
and the Buyer Common Stock may not be transferred except in compliance with the
regulations of the Commissioner.
(ii) The certificates representing the Buyer Common Stock shall be stamped
or otherwise imprinted with a legend in the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE OR
OTHER JURISDICTION AND ARE BEING OFFERED AND SOLD PURSUANT TO REGULATION S UNDER
THE ACT. THESE SECURITIES MAY NOT BE TRANSFERRED OR SOLD IN THE UNITED STATES OR
TO U.S. PERSONS UNLESS IN ACCORDANCE WITH REGULATION S, OR PURSUANT TO
REGISTRATION UNDER THE ACT, OR PURSUANT TO AN AVAILABLE EXEMPTION FROM
REGISTRATION.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT
AND NOT WITH A VIEW TO DISTRIBUTION OR RESALE, AND MAY NOT BE OFFERED, SOLD,
MORTGAGED, PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT FOR SUCH SECURITIES UNDER THE ACT OR AN OPINION
OF COUNSEL SATISFACTORY TO THE COMPANY THAT REGISTRATION IS NOT REQUIRED UNDER
SUCH ACT. HEDGING TRANSACTIONS INVOLVING THESE SECURITIES MAY NOT BE CONDUCTED
UNLESS IN COMPLIANCE WITH THE ACT.
THESE SECURITIES ARE SUBJECT TO CERTAIN TRANSFER RESTRICTIONS AS SET FORTH IN
THE LOCKUP AGREEMENT DATED AS OF FEBRUARY 22, 2000. COPIES OF THIS AGREEMENT
MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST OF THE HOLDER OF RECORD OF THE
CERTIFICATE TO THE SECRETARY OF THE COMPANY AT THE PRINCIPAL EXECUTIVE OFFICES
OF THE COMPANY.
Such legend shall be removed by Buyer from any certificate upon delivery
to it of an opinion by counsel satisfactory to Buyer, in form and substance
satisfactory to Buyer, that a registration statement under the Securities
Act is at the time in effect with respect to the shares evidenced by such
certificate or that the shares evidenced by such certificate
16
<PAGE>
can be freely transferred without such registration statement being in
effect and that such transfer will not jeopardize the exemption or
exemptions from registration pursuant to which the Buyer Common Stock is
issued.
(iii) The certificates representing the Buyer Common Stock shall be stamped
or otherwise imprinted with the legend referred to in the Lockup Agreement.
(dd) Affiliates. Shareholders represent and guarantee to Buyer
----------
that all representations and warranties given to Buyer under Section 2.01
are also referred to and given with respect to all other entities under
control of or related to the Company.
SECTION 2.02 Representations and Warranties of Buyer. Buyer represents and
- -----------------------------------------------------
warrants to, and agrees with, the Shareholders as follows:
(a) Organization. Buyer is a corporation duly organized, validly
------------
existing and in good standing under the laws of the state of its
incorporation.
(b) Binding Obligation. Buyer has all requisite corporate power
------------------
and authority to enter into and perform its obligations under this Agreement.
All corporate acts and other proceedings required to be taken by Buyer to
authorize the execution, delivery and performance by Buyer of this Agreement and
the transactions contemplated hereby, have been duly and properly taken. This
Agreement has been duly executed and delivered by Buyer and constitutes the
legal, valid and binding obligation of Buyer, enforceable against Buyer in
accordance with its terms. The execution, delivery and performance by Buyer of
this Agreement does not and will not conflict with, or result in any violation
of, any provision of the Articles of Incorporation or By-laws of Buyer, or any
provision of any law, ordinance, rule, regulation, judgment, order, decree,
agreement, instrument or license applicable to Buyer or to its property or
assets. No consent, approval, order or authorization of, or registration,
declaration or filing with, any court,
17
<PAGE>
administrative agency or commission or other governmental authority or
instrumentality, domestic or foreign, is required by or with respect to Buyer in
connection with its execution, delivery or performance of this Agreement.
(c) Buyer Stock. The shares of Buyer Common Stock to be issued to the
-----------
Shareholders pursuant to this Agreement will be validly issued, fully paid and
nonassessable. At Closing, the Shareholders will acquire good and marketable
title to all of such Buyer Commons Stock, free and clear of any lien,
encumbrance, pledge, security interest or claim whatsoever.
(d) Right to the Shareholders. The Shareholders will have the right to
-------------------------
cause the Buyer to purchase the Buyer Common Stock at a per-share exercise price
of $ 30 per share, on and only on the 90th day (on May 22, 2000 only) from the
Closing, provided that such a right be exercised by the Shareholders jointly
with the other shareholders of the Company Mr.Franco Messori, Mr. Franco
Corradini, Mr. Angelo Baccarani and Mrs. Lucia Barbara Silvani. Such right will
expire if written notice signed by all of the Shareholders referred to in this
Section 2.02 (d) is not received by Buyer on or before the close of business on
May 22, 2000. The $ 30 per share price shall be appropriately adjusted to
reflect any stock splits or similar transactions occurring prior to May 22,
2000.
ARTICLE III
-----------
Additional Agreements
---------------------
SECTION 3.01. Legal Conditions. The Shareholders and Buyer will take
------------------------------
all reasonable actions necessary to comply promptly with all legal requirements
which may be imposed on the Company or Buyer with respect to the transactions
contemplated hereby and will promptly cooperate with and furnish information to
the other party in connection with any such requirements imposed upon such other
party in connection with the transactions contemplated hereby. Each party will
take all reasonable actions to obtain (and to cooperate with the other
18
<PAGE>
party in obtaining) any consent, authorization, order or approval of, or any
exemption by, any governmental agency, commission, board, authority, court or
other entity, or other third party, required to be obtained or made by the
Company or by Buyer in connection with the transactions contemplated hereby or
the taking of any action contemplated thereby or by this Agreement.
SECTION 3.02. Expenses. Whether or not the transactions contemplated
----------------------
hereby are consummated, all costs and expenses incurred by Buyer or the
Shareholders in connection with this Agreement and the transactions contemplated
hereby shall be paid by the party incurring such costs. Without limiting the
generality of the foregoing, the Shareholders shall be solely responsible for
the fees and expenses of their counsel in connection with the transactions
contemplated hereby.
SECTION 3.03. Additional Agreements. Subject to the terms and
-----------------------------------
conditions of this Agreement, each of the parties hereto agrees to use all
reasonable efforts to take, or cause to be taken, all reasonable action and to
do, or cause to be done, all things reasonably necessary, proper or advisable
under applicable laws and regulations to consummate and make effective the
transactions contemplated by this Agreement, whether before or after the
Closing.
SECTION 3.04. Press Releases. None of the parties hereto shall issue
----------------------------
a press release or other publicity announcing the transactions contemplated
hereby without the prior written approval of the other party, unless such
disclosure is required by applicable law.
ARTICLE IV
----------
Indemnification
---------------
SECTION 4.01. Warranty Claims. Indemnification for Warranty Claims
-----------------------------
shall be governed by this Section 4.01.
(a) By the Shareholders. Except as hereinafter set forth, the
Shareholders shall jointly and severally indemnify and hold harmless on an
after-tax basis Buyer, and its
19
<PAGE>
successors and assigns and its and their respective officers, directors,
shareholders, employees and agents, against, and in respect of, any and all
damages, claims, losses, liabilities and expenses, including, without
limitation, reasonable legal, accounting and other expenses, which arise out of:
(i) any breach or violation of this Agreement by the Shareholders; or (ii) any
breach of any of the representations, warranties or covenants made in this
Agreement by the Shareholders; or (iii) any inaccuracy or misrepresentation in
the Schedules hereto or in any certificate or document delivered in accordance
with the terms of this Agreement by the Shareholders (collectively, "Warranty
Claims"); provided however, that Buyer shall be entitled to indemnification
hereunder only when, and only with respect to amounts by which, the aggregate of
all such Warranty Claims exceeds $25,000.
(b) By Buyer. Except as hereinafter set forth, Buyer shall indemnify
--------
and hold harmless on an after-tax basis the Shareholders and their heirs,
beneficiaries and estates against, and in respect of, any and all damages,
claims, losses, liabilities and expenses, including, without limitation,
reasonable legal, accounting and other expenses, which arise out of: (i) any
breach or violation of this Agreement by Buyer; or (ii) any breach of any of the
representations, warranties or covenants made in this Agreement by Buyer; or
(iii) any inaccuracy or misrepresentation in the Schedules hereto or in any
certificate or document delivered in accordance with the terms of this Agreement
by Buyer (collectively, "Warranty Claims"); provided however, that the
Shareholders shall be entitled to indemnification hereunder only when, and only
with respect to amounts by which, the aggregate of all such Warranty Claims
exceeds $25,000.
SECTION 4.02 Third Party Claims. Without regard to the limitations
-------------------------------
set forth in Section 4.01 hereof, the Shareholders shall jointly and severally
indemnify and hold Buyer and its successors and assigns and its and their
respective officers, directors, shareholders,
20
<PAGE>
employees and agents harmless on an after-tax basis against any and all damages,
claims, losses, liabilities and expenses, including, without limitation,
reasonable legal, accounting and other expenses, arising out of any legal,
governmental or administrative actions, suit or proceeding against Buyer,
including those included in Schedule 2.01(i) hereto, which legal governmental or
administrative action, suit or proceeding arises from the conduct of the
business of the Company or the ownership or condition of the properties owned or
leased by the Company prior to Closing.
SECTION 4.03. Notice of Claim. Upon obtaining knowledge thereof, the
-----------------------------
indemnified party shall within 60 days from said acknowledgement, notify the
indemnifying party in writing of any damage, claim, loss, liability or expense
which the indemnified party has determined has given or could give rise to a
claim under Sections 4.01 or 4.02 (such written notice being hereinafter
referred to as a "Notice of Claim"). A Notice of Claim shall contain a brief
description of the nature and estimated amount of any such claim giving rise to
a right of indemnification.
SECTION 4.04. Defense of Third Party Claims. With respect to any
-------------------------------------------
claim or demand set forth in a Notice of Claim relating to a third party claim,
the indemnifying party may defend, in good faith and at its expense, any such
claim or demand, and the indemnified party, at its expense, shall have the right
to participate in the defense of any such third party claim. So long as the
indemnifying party is defending in good faith any such third party claim, the
indemnified party shall not settle or compromise such third party claim. If the
indemnifying party does not so elect to defend any such third party claim, the
indemnified party shall have no obligation to do so.
21
<PAGE>
ARTICLE 5
---------
General Provisions
------------------
SECTION 5.01. Survival of Representations and Warranties. All
--------------------------------------------------------
representations and warranties in this Agreement or in any instrument delivered
pursuant to this Agreement shall survive the Closing for a period of two years,
and, thereafter, to the extent a claim is made prior to such expiration with
respect to any breach of such representation, warranty or agreement, until such
claim is finally determined or settled; provided, however, that all claims with
respect to the tax matters or resulting from any action or threatened action by
any federal, state or local taxing authority and all claims with respect to
litigation by former Shareholders of the Company regardless of whether or not
disclosed shall expire when the applicable period under the statute of
limitations therefor (including any waivers thereof) shall have expired and
cannot thereafter be asserted.
SECTION 5.02. Notices. All notices and other communications hereunder
---------------------
shall be in writing and shall be deemed given if delivered personally or mailed
by registered or certified mail (return receipt requested) to the parties at the
following addresses (or at such other address for a party as shall be specified
by like notice):
(a) if to Buyer to
SUNRISE TELECOM, INC.
22 Great Oaks Boulevard
P.O. Box 899
San Jose, CA 95119
Attention: Peter L. Eidelman
with a copy to: John F. Seegal, Esq.
ORRICK, HERRINGTON & SUTCLIFFE LLP
22
<PAGE>
The Old Federal Reserve Bank Building
Sansome Street
400 San Francisco, California 94111
(b) if to the Shareholders, to
Mr Giuliano Sala
Via P. Vitruvio n. 34
41100 Modena
All notices given hereunder shall be deemed given at the time of
personal delivery or, if mailed, on the earlier of actual receipt as shown on
the registry receipt or three business days after the date of such mailing.
SECTION 5.03. Interpretation. When a reference is made in this
----------------------------
Agreement to Sections, Schedules or Exhibits, such reference shall be to a
Section, Schedule or Exhibit to this Agreement unless otherwise indicated. The
table of contents and headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement. For purposes of contract interpretation, the parties agree that
they are joint authors of this document.
SECTION 5.04. Counterparts. This Agreement may be executed in one or
--------------------------
more counterparts, all of which shall be considered one and the same agreement
and shall become effective when one or more counterparts have been signed by
each of the parties and delivered to the other party, it being understood that
all parties need not sign the same counterpart.
SECTION 5.05. Miscellaneous. This Agreement, the documents and
---------------------------
instruments and other agreements between the parties hereto required by this
Agreement (a) constitute the entire agreement among the parties with respect to
the subject matter hereof and supersede all prior agreements and understandings,
both written and oral, among the parties with respect to the
23
<PAGE>
subject matter hereof, (b) is not intended to confer upon any other person any
rights or remedies hereunder and (c) shall not be assigned by operation of law
or otherwise except as otherwise specifically provided.
SECTION 5.06. Governing Law. This Agreement shall be governed in all
---------------------------
respects, including validity, interpretation and effect, by the substantive laws
of the State of California.
SECTION 5.07. No Waiver. No term or provision of this Agreement shall
-----------------------
be waived or any breach of this Agreement excused except in writing signed by
the party that is claimed to have so waived or excused. No waiver of any
provision of this Agreement shall constitute a waiver of any other provision.
Any consent or waiver by any party to any breach of this Agreement by the other
party, whether expressed or implied, shall not constitute a consent to, waiver
of, or excuse for, any other breach. The failure of any party to give notice to
the other party, or to take any other step in respect of, any breach of any
provision of this Agreement shall not constitute a waiver thereof. Acceptance
of payment by a party after the breach of any provision of this Agreement by the
other party shall not constitute a waiver thereof.
SECTION 5.08. Prevailing version. This agreement has been duly signed
--------------------------------
by the parties also into the Italian version, provided that the Buyer and the
Shareholders agree that in any case of disputes referred to the interpretation,
fulfillment and/or termination of the Agreement, the English version shall
apply.
IN WITNESS WHEREOF, Buyer and the Shareholders have executed this
Agreement, all as of the date first written above.
SUNRISE TELECOM, INC.
By ______________________________
24
<PAGE>
SHAREHOLDERS:
_____________________________________
GIULIANO SALA
_____________________________________
GIAN PIERO BRANDOLINI
_____________________________________
PIERO ZUCCHINI
_____________________________________
ALDO BACCARANI
_____________________________________
FRANCO MONTANARI
25
<PAGE>
________________________________________________________________________________
MASTER AGREEMENT
Effective as of February 22, 2000
among
GIULIANO SALA, GIAN PIERO BRANDOLINI, PIETRO ZUCCHINI,
ALDO BACCARANI, FRANCO MONTANARI
and
SUNRISE TELECOM, INC.
________________________________________________________________________________
<PAGE>
<TABLE>
<S> <C>
ARTICLE I Sale and Purchase of Common Stock
SECTION 1.01. Sale and Purchase....................................... 1
SECTION 1.02. Closing................................................. 1
(a) Shareholder Deliveries....................................... 1
(b) Buyer Deliveries............................................. 1
(c) Short-form................................................... 2
SECTION 1.03. The Purchase Price...................................... 2
SECTION 1.04. Adjustments to Purchase Price........................... 2
SECTION 1.05. Repayment............................................... 2
SECTION 1.06. Further Cooperation..................................... 3
ARTICLE II Representations and Warranties
SECTION 2.01. Representations and Warranties of the Shareholders...... 3
(a) Organization................................................. 3
(b) Authority To Do Business..................................... 3
(c) Binding Obligation........................................... 3
(d) Title to Quotas............................................. 3
(e) Capitalization............................................... 3
(f) Real Property................................................ 3
(g) Title to Assets.............................................. 3
(h) Contracts.................................................... 3
(i) Litigation................................................... 4
(j) Licenses..................................................... 4
(k) Employee and Related Matters................................. 4
(l) Absence of Changes or Events................................. 4
(m) Compliance with Laws......................................... 5
(n) No Broker's or Finder's Fees................................. 5
(o) Employee Benefit Plans....................................... 5
(p) Customers.................................................... 5
(q) Condition of Equipment....................................... 5
(r) Trademarks and Other Intellectual Property................... 6
(s) Environmental Matters........................................ 6
(t) Tax Returns and Payments..................................... 6
(u) Other Activities of the Shareholders......................... 6
</TABLE>
<PAGE>
<TABLE>
<S> <C>
(v) Related Party Transactions................................... 8
(w) No Undisclosed Liabilities................................... 8
(x) The Shareholder List......................................... 8
(y) Disclosure................................................... 8
(z) Corporate Securities Law..................................... 8
(aa) Investment Representation.................................... 8
(bb) Restricted Securities........................................ 8
(cc) Legends...................................................... 8
(dd) Affiliates................................................... 9
SECTION 2.02. Representations and Warranties of Buyer................. 9
(a) Organization................................................. 9
(b) Binding Obligation........................................... 9
(c) Buyer Stock.................................................. 10
(d) Right to the Shareholders.................................... 10
ARTICLE III Additional Agreements
SECTION 3.01. Legal Conditions........................................ 10
SECTION 3.02. Expenses................................................ 10
SECTION 3.03. Additional Agreements................................... 10
SECTION 3.04. Press Releases.......................................... 11
ARTICLE IV Indemnification
SECTION 4.01. Warranty Claims......................................... 11
(a) By the Shareholders.......................................... 11
(b) By Buyer..................................................... 11
SECTION 4.02. Third Party Claims...................................... 11
SECTION 4.03. Notice of Claim......................................... 11
SECTION 4.04. Defense of Third Party Claims........................... 12
ARTICLE V General Provisions
SECTION 5.01. Survival of Representations and Warranties.............. 12
SECTION 5.02. Notices................................................. 12
SECTION 5.03. Interpretation.......................................... 13
SECTION 5.04. Counterparts............................................ 13
SECTION 5.05. Miscellaneous........................................... 13
SECTION 5.06. Governing Law........................................... 13
</TABLE>
<PAGE>
<TABLE>
<S> <C>
SECTION 5.07. No Waiver............................................... 13
SECTION 5.08. Prevailing version...................................... 13
EXHIBIT A LOCKUP AGREEMENT...............................................
EXHIBIT B CONFIDENTIAL INFORMATION AND INVENTION ASSIGNMENT AGREEMENT....
EXHIBIT C SHORT-FORM.....................................................
</TABLE>
<PAGE>
EXHIBIT 10.7
SUNRISE TELECOM INCORPORATED
2000 STOCK PLAN
EFFECTIVE AS OF [EFFECTIVE DATE]
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
SECTION 1. INTRODUCTION........................................ 1
SECTION 2. DEFINITIONS......................................... 1
(a) "Affiliate"......................................... 1
(b) "Award"............................................. 1
(c) "Board"............................................. 1
(d) "Change In Control"................................. 1
(e) "Code".............................................. 2
(f) "Committee"......................................... 2
(g) "Common Stock"...................................... 2
(h) "Company"........................................... 2
(i) "Consultant"........................................ 3
(j) "Director".......................................... 3
(k) "Disability"........................................ 3
(l) "Employee".......................................... 3
(m) "Exchange Act"...................................... 3
(n) "Exercise Price".................................... 3
(o) "Fair Market Value"................................. 3
(p) "Grant"............................................. 3
(q) "Incentive Stock Option" or "ISO"................... 3
(r) "Key Employee"...................................... 4
(s) "Non-Employee Director"............................. 4
(t) "Nonstatutory Stock Option" or "NSO"................ 4
(u) "Option"............................................ 4
(v) "Optionee".......................................... 4
(w) "Parent"............................................ 4
(x) "Participant"....................................... 4
(y) "Plan".............................................. 4
(z) "Restricted Stock".................................. 4
(aa) "Restricted Stock Agreement"........................ 4
(bb) "Securities Act".................................... 4
(cc) "Service"........................................... 4
(dd) "Share"............................................. 4
-i-
<PAGE>
Page
----
(ee) "Stock Option Agreement"............................ 4
(ff) "Subsidiary"........................................ 4
(gg) "10-Percent Shareholder"............................ 5
SECTION 3. ADMINISTRATION...................................... 5
(a) Committee Composition............................... 5
(b) Authority of the Committee.......................... 5
(c) Indemnification..................................... 6
(d) Financial Reports................................... 6
SECTION 4. ELIGIBILITY......................................... 6
(a) General Rules....................................... 6
(b) Incentive Stock Options............................. 6
(c) Non-Employee Directors.............................. 6
SECTION 5. SHARES SUBJECT TO PLAN.............................. 7
(a) Basic Limitation.................................... 7
(b) Annual Addition..................................... 7
(c) Additional Shares................................... 7
(d) Dividend Equivalents................................ 7
(e) Limits on Options................................... 8
(f) Limits on Restricted Stock.......................... 8
SECTION 6. TERMS AND CONDITIONS OF OPTIONS..................... 8
(a) Stock Option Agreement.............................. 8
(b) Number of Shares.................................... 8
(c) Exercise Price...................................... 8
(d) Exercisability and Term............................. 8
(e) Modifications or Assumption of Options.............. 9
(f) Transferability of Options.......................... 9
(g) No Rights as Stockholder............................ 9
(h) Restrictions on Transfer............................ 9
SECTION 7. PAYMENT FOR OPTION SHARES........................... 9
(a) General Rule........................................ 9
(b) Surrender of Stock.................................. 9
(c) Promissory Note..................................... 10
-ii-
<PAGE>
Page
----
(d) Other Forms of Payment.............................. 10
SECTION 8. TERMS AND CONDITIONS FOR AWARDS OF RESTRICTED STOCK. 10
(a) Time, Amount and Form of Awards..................... 10
(b) Restricted Stock Agreement.......................... 10
(c) Payment for Restricted Stock........................ 10
(d) Vesting Conditions.................................. 10
(e) Assignment or Transfer of Restricted Stock.......... 10
(f) Trusts.............................................. 10
(g) Voting and Dividend Rights.......................... 11
SECTION 9. PROTECTION AGAINST DILUTION......................... 11
(a) Adjustments......................................... 11
(b) Participant Rights.................................. 11
SECTION 10. EFFECT OF A CHANGE IN CONTROL....................... 11
(a) Merger or Reorganization............................ 11
(b) Acceleration........................................ 12
SECTION 11. LIMITATIONS ON RIGHTS............................... 12
(a) Retention Rights.................................... 12
(b) Stockholders' Rights................................ 12
(c) Regulatory Requirements............................. 12
SECTION 12. WITHHOLDING TAXES................................... 12
(a) General............................................. 12
(b) Share Withholding................................... 12
SECTION 13. DURATION AND AMENDMENTS............................. 13
(a) Term of the Plan.................................... 13
(b) Right to Amend or Terminate the Plan................ 13
SECTION 14. EXECUTION........................................... 13
-iii-
<PAGE>
SUNRISE TELECOM INCORPORATED
2000 STOCK PLAN
EFFECTIVE AS OF [EFFECTIVE DATE]
SECTION 1. INTRODUCTION.
The Company's Board of Directors adopted the Sunrise Telecom Incorporated
2000 Stock Plan on April 5, 2000 and the Company's stockholders approved
the Plan on April 5, 2000. The Plan is effective on [EFFECTIVE DATE], the
date of the Company's initial public offering.
The purpose of the Plan is to promote the long-term success of the Company
and the creation of shareholder value by offering Key Employees an
opportunity to acquire a proprietary interest in the success of the
Company, or to increase such interest, and to encourage such selected
persons to continue to provide services to the Company and to attract new
individuals with outstanding qualifications.
The Plan seeks to achieve this purpose by providing for Options (which may
constitute Incentive Stock Options or Nonstatutory Stock Options) and
Awards of Restricted Stock.
The Plan shall be governed by, and construed in accordance with, the laws
of the State of Delaware (except its choice-of-law provisions).
Capitalized terms shall have the meaning provided in Section 2 unless
otherwise provided in this Plan or Stock Option Agreement or Restricted
Stock Agreement.
SECTION 2. DEFINITIONS.
(a) "Affiliate" means any entity other than a Subsidiary, if the Company and/or
one or more Subsidiaries own not less than 50% of such entity. For
purposes of determining an individual's "Service," this definition shall
include any entity other than a Subsidiary, if the Company, a Parent and/or
one or more Subsidiaries own not less than 50% of such entity.
(b) "Award" means any award of an Option or Restricted Stock under the Plan.
(c) "Board" means the Board of Directors of the Company, as constituted from
time to time.
(d) "Change In Control" except as may otherwise be provided in the Stock Option
Agreement or Restricted Stock Agreement, means the occurrence of any of the
following:
(i) The consummation of a merger or consolidation of the Company with
or into another entity or any other corporate reorganization, if more than
<PAGE>
[50%] of the combined voting power of the continuing or surviving entity's
securities outstanding immediately after such merger, consolidation or
other reorganization is owned by persons who were not stockholders of the
Company immediately prior to such merger, consolidation or other
reorganization;
(ii) The sale, transfer or other disposition of all or substantially
all of the Company's assets;
(iii) A change in the composition of the Board, as a result of which
fewer that one-half of the incumbent directors are directors who either
(i) had been directors of the Company on the date 24 months prior to the
date of the event that may constitute a Change in Control (the "original
directors") or (ii) were elected, or nominated for election, to the Board
with the affirmative votes of at least a majority of the aggregate of the
original directors who were still in office at the time of the election or
nomination and the directors whose election or nomination was previously
so approved; or
(iv) Any transaction as a result of which any person is the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Company representing at least 20% of the
total voting power represented by the Company's then outstanding voting
securities. For purposes of this Paragraph (iv), the term "person" shall
have the same meaning as when used in sections 13(d) and 14(d) of the
Exchange Act but shall exclude:
(A) A trustee or other fiduciary holding securities under an
employee benefit plan of the Company or a subsidiary of the
Company; and
(B) A corporation owned directly or indirectly by the
stockholders of the Company in substantially the same proportions
as their ownership of the common stock of the Company.
A transaction shall not constitute a Change in Control if its sole
purpose is to change the state of the Company's incorporation or to create
a holding company that will be owned in substantially the same proportions
by the persons who held the Company's securities immediately before such
transactions.
(e) "Code" means the Internal Revenue Code of 1986, as amended.
(f) "Committee" means a committee consisting of one or more members of the
Board that is appointed by the Board (as described in Section 3) to
administer the Plan.
(g) "Common Stock" means the Company's common stock.
(h) "Company" means Sunrise Telecom Incorporated, a Delaware corporation.
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(i) "Consultant" means an individual who performs bona fide services to the
Company, a Parent, a Subsidiary or an Affiliate other than as an Employee
or Director or Non-Employee Director.
(j) "Director" means a member of the Board who is also an Employee.
(k) "Disability" means that the Key Employee is unable to engage in any
substantial gainful activity by reason of any medically determinable
physical or mental impairment which can be expected to result in death or
which has lasted or can be expected to last for a continuous period of not
less than 12 months.
(l) "Employee" means any individual who is a common-law employee of the
Company, a Parent, a Subsidiary or an Affiliate.
(m) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(n) "Exercise Price" means the amount for which a Share may be purchased upon
exercise of such Option, as specified in the applicable Stock Option
Agreement.
(o) "Fair Market Value" means the market price of Shares, determined by the
Committee as follows:
(i) If the Shares were traded over-the-counter on the date in question
but were not classified as a national market issue, then the Fair Market Value
shall be equal to the mean between the last reported representative bid and
asked prices quoted by the NASDAQ system for such date;
(ii) If the Shares were traded over-the-counter on the date in question
and were classified as a national market issue, then the Fair Market Value shall
be equal to the last-transaction price quoted by the NASDAQ system for such
date;
(iii) If the Shares were traded on a stock exchange on the date in
question, then the Fair Market Value shall be equal to the closing price
reported by the applicable composite transactions report for such date; and
(iv) If none of the foregoing provisions is applicable, then the Fair
Market Value shall be determined by the Committee in good faith on such basis as
it deems appropriate.
Whenever possible, the determination of Fair Market Value by the Committee shall
be based on the prices reported in the Wall Street Journal. Such determination
-------------------
shall be conclusive and binding on all persons.
(p) "Grant" means any grant of an Option under the Plan.
(q) "Incentive Stock Option" or "ISO" means an incentive stock option described
in Code section 422(b).
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(r) "Key Employee" means an Employee, Director, Non-Employee Director or
Consultant who has been selected by the Committee to receive an Award under
the Plan.
(s) "Non-Employee Director" means a member of the Board who is not an Employee.
(t) "Nonstatutory Stock Option" or "NSO" means a stock option that is not an
ISO.
(u) "Option" means an ISO or NSO granted under the Plan entitling the Optionee
to purchase Shares.
(v) "Optionee" means an individual, estate or other entity that holds an
Option.
(w) "Parent" means any corporation (other than the Company) in an unbroken
chain of corporations ending with the Company, if each of the corporations
other than the Company owns stock possessing fifty percent (50%) or more of
the total combined voting power of all classes of stock in one of the other
corporations in such chain. A corporation that attains the status of a
Parent on a date after the adoption of the Plan shall be considered a
Parent commencing as of such date.
(x) "Participant" means an individual or estate or other entity that holds an
Award.
(y) "Plan" means this Sunrise Telecom Incorporated 2000 Stock Plan as it may be
amended from time to time.
(z) "Restricted Stock" means a Share awarded under the Plan.
(aa) "Restricted Stock Agreement" means the agreement described in Section 8
evidencing each Award of Restricted Stock.
(bb) "Securities Act" means the Securities Act of 1933, as amended.
(cc) "Service" means service as an Employee, Director, Non-Employee Director or
Consultant.
(dd) "Share" means one share of Common Stock.
(ee) "Stock Option Agreement" means the agreement described in Section 6
evidencing each Grant of an Option.
(ff) "Subsidiary" means any corporation (other than the Company) in an unbroken
chain of corporations beginning with the Company, if each of the
corporations other than the last corporation in the unbroken chain owns
stock possessing fifty percent (50%) or more of the total combined voting
power of all classes of stock in one of the other corporations in such
chain. A corporation that attains the status of a Subsidiary on a date
after the adoption of the Plan shall be considered a Subsidiary commencing
as of such date.
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(gg) "10-Percent Shareholder" means an individual who owns more than ten percent
(10%) of the total combined voting power of all classes of outstanding
stock of the Company, its Parent or any of its subsidiaries. In
determining stock ownership, the attribution rules of section 424(d) of the
Code shall be applied.
SECTION 3. ADMINISTRATION.
(a) Committee Composition. A Committee appointed by the Board shall administer
the Plan. The Board shall designate one of the members of the Committee as
chairperson. If no Committee has been approved, the entire Board shall
constitute the Committee. Members of the Committee shall serve for such
period of time as the Board may determine and shall be subject to removal
by the Board at any time. The Board may also at any time terminate the
functions of the Committee and reassume all powers and authority previously
delegated to the Committee.
With respect to officers or directors subject to Section 16 of the Exchange
Act, the Committee shall consist of those individuals who shall satisfy the
requirements of Rule 16b-3 (or its successor) under the Exchange Act with
respect to Awards granted to persons who are officers or directors of the
Company under Section 16 of the Exchange Act.
The Board may also appoint one or more separate committees of the Board,
each composed of one or more directors of the Company who need not qualify
under Rule 16b-3, who may administer the Plan with respect to Key Employees
who are not considered officers or directors of the Company under Section
16 of the Exchange Act, may grant Awards under the Plan to such Key
Employees and may determine all terms of such Awards.
Notwithstanding the foregoing, the Board shall constitute the Committee and
shall administer the Plan with respect to Options granted to Non-Employee
Directors under Section 4(c).
(b) Authority of the Committee. Subject to the provisions of the Plan, the
Committee shall have full authority and discretion to take any actions it
deems necessary or advisable for the administration of the Plan. Such
actions shall include:
(i) selecting Key Employees who are to receive Awards under the Plan;
(ii) determining the type, number, vesting requirements and other
features and conditions of such Awards;
(iii) interpreting the Plan; and
(iv) making all other decisions relating to the operation of the Plan.
The Committee may adopt such rules or guidelines, as it deems appropriate
to implement the Plan. The Committee's determinations under the Plan shall
be final and binding on all persons.
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(c) Indemnification. Each member of the Committee, or of the Board, shall be
indemnified and held harmless by the Company against and from (i) any loss,
cost, liability, or expense that may be imposed upon or reasonably incurred
by him or her in connection with or resulting from any claim, action, suit,
or proceeding to which he or she may be a party or in which he or she may
be involved by reason of any action taken or failure to act under the Plan
or any Stock Option Agreement or any Restricted Stock Agreement, and (ii)
from any and all amounts paid by him or her in settlement thereof, with the
Company's approval, or paid by him or her in satisfaction of any judgment
in any such claim, action, suit, or proceeding against him or her, provided
he or she shall give the Company an opportunity, at its own expense, to
handle and defend the same before he or she undertakes to handle and defend
it on his or her own behalf. The foregoing right of indemnification shall
not be exclusive of any other rights of indemnification to which such
persons may be entitled under the Company's Certificate of Incorporation or
Bylaws, by contract, as a matter of law, or otherwise, or under any power
that the Company may have to indemnify them or hold them harmless.
(d) Financial Reports. To the extent required by applicable law, the Company
shall furnish to Participants the Company's summary financial information
including a balance sheet regarding the Company's financial condition and
results of operations, unless such Participants have duties with the
Company that assure them access to equivalent information. Such financial
statements need not be audited.
SECTION 4. ELIGIBILITY.
(a) General Rules. Only Employees, Directors, Non-Employee Directors and
Consultants shall be eligible for designation as Key Employees by the
Committee.
(b) Incentive Stock Options. Only Key Employees who are common-law employees
of the Company, a Parent or a Subsidiary shall be eligible for the grant of
ISOs. In addition, a Key Employee who is a 10-Percent Shareholder shall
not be eligible for the grant of an ISO unless the requirements set forth
in section 422(c)(5) of the Code are satisfied.
(c) Non-Employee Directors. Non-Employee Directors shall also be eligible to
receive Options as described in this Section 4(c) from and after the date
the Board has determined to implement this provision.
(i) Each eligible Non-Employee Director shall automatically be granted
an NSO to purchase Shares with a Fair Market Value of $25,000 as of the
date of grant of such NSO as of the later of (i) the effective date of this
Plan, or (ii) his or her initial appointment as a Non-Employee Director. In
addition, upon the conclusion of each regular annual meeting of the
Company's stockholders following the effective date of this Plan, each
eligible Non-Employee Director who will continue serving as a member of the
Board thereafter shall automatically receive an NSO to purchase Shares with
a Fair Market Value of $25,000 as of the date of grant of such NSO.
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(ii) All NSOs granted to a Non-Employee Director under this Section
4(c) shall vest and become 100% exercisable upon the one (1) year
anniversary of the date the Option is granted to the Non-Employee
Director, provided the Non-Employee Director is a member of the Board on
such date. Notwithstanding the foregoing, all NSOs granted to a Non-
Employee Director under this Section 4(c) shall become fully vested and
exercisable upon the Non-Employee Director's death or Disability while the
Non-Employee Director is a member of the Board.
(iii) The Exercise Price under all NSOs granted to a Non-Employee
Director under this Section 4(c) shall be equal to one hundred percent
(100%) of the Fair Market Value of a Common Share on the date of grant,
payable in one of the forms described in Section 7.
(iv) All NSOs granted to a Non-Employee Director under this Section
4(c) shall terminate on the earlier of:
(1) The 10th anniversary of the date of grant;
(2) The date ninety (90) days after the termination of such Non-
Employee Director's service for any reason, other than the Non-Employee
Director's death or Disability while a member of the Board; or
(3) The date one (1) year after the Non-Employee Director's death
or Disability while a member of the Board.
SECTION 5. SHARES SUBJECT TO PLAN.
(a) Basic Limitation. The stock issuable under the Plan shall be authorized
but unissued Shares or treasury Shares. The aggregate number of Shares
reserved for Awards under the Plan shall be 3,750,000, plus such number of
Shares as were available for issuance under the Company's 1993 Stock Plan
as of the effective date of this Plan. The foregoing limit is subject to
adjustment pursuant to Section 9.
(b) Annual Addition. Beginning with the first fiscal year of the Company
beginning after the effective date of this Plan, on the first day of each
fiscal year, Shares shall be added to the Plan equal to the least of (i)
2.5% (two and one-half percent) of the outstanding Shares as of the last
day of the prior fiscal year, (ii) 1,300,000 Shares, subject to the
adjustment pursuant to Section 9, or (iii) such lesser amount as the Board
may determine.
(c) Additional Shares. If Awards are forfeited or terminate for any other
reason before being exercised, then the Shares underlying such Awards shall
again become available for Awards under the Plan.
(d) Dividend Equivalents. Any dividend equivalents distributed under the Plan
shall not be applied against the number of Shares available for Awards.
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(e) Limits on Options. No Key Employee shall receive Options to purchase
Shares during any fiscal year covering in excess of 600,000 Shares;
provided, however, a newly hired Key Employee may receive Options to
purchase up to 900,000 Shares during the fiscal year of his or her date of
hire.
(f) Limits on Restricted Stock. No Key Employee shall receive Award(s) of
Restricted Stock during any fiscal year covering in excess of 75,000
Shares.
SECTION 6. TERMS AND CONDITIONS OF OPTIONS.
(a) Stock Option Agreement. Each Grant under the Plan shall be evidenced by a
Stock Option Agreement between the Optionee and the Company. Such Option
shall be subject to all applicable terms and conditions of the Plan and may
be subject to any other terms and conditions that are not inconsistent with
the Plan and that the Committee deems appropriate for inclusion in a Stock
Option Agreement. The provisions of the various Stock Option Agreements
entered into under the Plan need not be identical. A Stock Option
Agreement may provide that new Options will be granted automatically to the
Optionee when he or she exercises the prior Options. The Stock Option
Agreement shall also specify whether the Option is an ISO or an NSO.
(b) Number of Shares. Each Stock Option Agreement shall specify the number of
Shares that are subject to the Option and shall provide for the adjustment
of such number in accordance with Section 9.
(c) Exercise Price. An Option's Exercise Price shall be established by the
Committee and set forth in a Stock Option Agreement. To the extent
required by applicable law the Exercise Price of an ISO shall not be less
than 100% of the Fair Market Value (110% for 10-Percent Shareholders) of a
Share on the date of Grant. In the case of an NSO, a Stock Option
Agreement may specify an Exercise Price that varies in accordance with a
predetermined formula while the NSO is outstanding.
(d) Exercisability and Term. Each Stock Option Agreement shall specify the
date when all or any installment of the Option is to become exercisable.
The Stock Option Agreement shall also specify the term of the Option;
provided that the term of an ISO shall in no event exceed ten (10) years
from the date of Grant. An ISO that is granted to a 10-Percent Shareholder
shall have a maximum term of five (5) years. No Option can be exercised
after the expiration date provided in the applicable Stock Option
Agreement. A Stock Option Agreement may provide for accelerated
exercisability in the event of the Optionee's death, disability or
retirement or other events and may provide for expiration prior to the end
of its term in the event of the termination of the Optionee's service. A
Stock Option Agreement may permit an Optionee to exercise an Option before
it is vested, subject to the Company's right of repurchase over any Shares
acquired under the unvested portion of the Option (an "early exercise"),
which right of repurchase shall lapse at the same rate the Option would
have vested had there been no early exercise. In no event shall the
Company be required to issue fractional Shares upon the exercise of an
Option.
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(e) Modifications or Assumption of Options. Within the limitations of the
Plan, the Committee may modify, extend or assume outstanding options or may
accept the cancellation of outstanding options (whether granted by the
Company or by another issuer) in return for the grant of new Options for
the same or a different number of Shares and at the same or a different
Exercise Price. The foregoing notwithstanding, no modification of an
Option shall, without the consent of the Optionee, alter or impair his or
her rights or obligations under such Option.
(f) Transferability of Options. Except as otherwise provided in the applicable
Stock Option Agreement and then only to the extent permitted by applicable
law, no Option shall be transferable by the Optionee other than by will or
by the laws of descent and distribution. Except as otherwise provided in
the applicable Stock Option Agreement, an Option may be exercised during
the lifetime of the Optionee only or by the guardian or legal
representative of the Optionee. No Option or interest therein may be
assigned, pledged or hypothecated by the Optionee during his lifetime,
whether by operation of law or otherwise, or be made subject to execution,
attachment or similar process.
(g) No Rights as Stockholder. An Optionee, or a transferee of an Optionee,
shall have no rights as a stockholder with respect to any Common Stock
covered by an Option until such person becomes entitled to receive such
Common Stock by filing a notice of exercise and paying the Exercise Price
pursuant to the terms of such Option.
(h) Restrictions on Transfer. Any Shares issued upon exercise of an Option
shall be subject to such rights of repurchase, rights of first refusal and
other transfer restrictions as the Committee may determine. Such
restrictions shall apply in addition to any restrictions that may apply to
holders of Shares generally and shall also comply to the extent necessary
with applicable law.
SECTION 7. PAYMENT FOR OPTION SHARES.
(a) General Rule. The entire Exercise Price of Shares issued upon exercise of
Options shall be payable in cash at the time when such Shares are
purchased, except as follows:
(i) In the case of an ISO granted under the Plan, payment shall be made
only pursuant to the express provisions of the applicable Stock Option
Agreement. The Stock Option Agreement may specify that payment may be made
in any form(s) described in this Section 7.
(ii) In the case of an NSO granted under the Plan, the Committee may in
its discretion, at any time accept payment in any form(s) described in this
Section 7.
(b) Surrender of Stock. To the extent that this Section 7(b) is applicable,
payment for all or any part of the Exercise Price may be made with Shares
which have already been owned by the Optionee for such duration as shall be
specified by the Committee. Such Shares shall be valued at their Fair
Market Value on the date when the new Shares are purchased under the Plan.
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(c) Promissory Note. To the extent that this Section 7(c) is applicable,
payment for all or any part of the Exercise Price may be made with a full-
recourse promissory note.
(d) Other Forms of Payment. To the extent that this Section 7(d) is
applicable, payment may be made in any other form that is consistent with
applicable laws, regulations and rules.
SECTION 8. TERMS AND CONDITIONS FOR AWARDS OF RESTRICTED STOCK.
(a) Time, Amount and Form of Awards. Awards under the Plan may be granted in
the form of Restricted Stock.
(b) Restricted Stock Agreement. Each Award of Restricted Stock under the Plan
shall be evidenced by a Restricted Stock Agreement between the Participant
and the Company. Such Award shall be subject to all applicable terms and
conditions of the Plan and may be subject to any other terms and conditions
that are not inconsistent with the Plan and that the Committee deems
appropriate for inclusion in a Restricted Stock Agreement. The provisions
of the various Restricted Stock Agreements entered into under the Plan need
not be identical.
(c) Payment for Restricted Stock. Restricted Stock may be issued with or
without cash consideration under the Plan.
(d) Vesting Conditions. Each Award of Restricted Stock shall become vested, in
full or in installments, upon satisfaction of the conditions specified in
the Restricted Stock Agreement. A Restricted Stock Agreement may provide
for accelerated vesting in the event of the Participant's death, Disability
or retirement or other events.
(e) Assignment or Transfer of Restricted Stock. Except as provided in Section
12, or in a Restricted Stock Agreement, or as required by applicable law, a
Restricted Stock granted under the Plan shall not be anticipated, assigned,
attached, garnished, optioned, transferred or made subject to any
creditor's process, whether voluntarily, involuntarily or by operation of
law. Any act in violation of this Section 8(e) shall be void. However,
this Section 8(e) shall not preclude a Participant from designating a
beneficiary who will receive any outstanding Restricted Stock in the event
of the Participant's death, nor shall it preclude a transfer of Restricted
Stock by will or by the laws of descent and distribution.
(f) Trusts. Neither this Section 8 nor any other provision of the Plan shall
preclude a Participant from transferring or assigning Restricted Stock to
(a) the trustee of a trust that is revocable by such Participant alone,
both at the time of the transfer or assignment and at all times thereafter
prior to such Participant's death, or (b) the trustee of any other trust to
the extent approved in advance by the Committee in writing. A transfer or
assignment of Restricted Stock from such trustee to any person other than
such Participant shall be permitted only to the extent approved in advance
by the Committee in writing, and Restricted Stock held by such trustee
shall be subject to all of the conditions and
10
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restrictions set forth in the Plan and in the applicable Restricted Stock
Agreement, as if such trustee were a party to such Agreement.
(g) Voting and Dividend Rights. The holders of Restricted Stock awarded under
the Plan shall have the same voting, dividend and other rights as the
Company's other stockholders. A Restricted Stock Agreement, however, may
require that the holders of Restricted Stock invest any cash dividends
received in additional Restricted Stock. Such additional Restricted Stock
shall be subject to the same conditions and restrictions as the Award with
respect to which the dividends were paid. Such additional Restricted Stock
shall not reduce the number of Shares available under Section 5.
SECTION 9. PROTECTION AGAINST DILUTION.
(a) Adjustments. In the event of a subdivision of the outstanding Shares, a
declaration of a dividend payable in Shares, a declaration of a dividend
payable in a form other than Shares in an amount that has a material effect
on the price of Shares, a combination or consolidation of the outstanding
Shares (by reclassification or otherwise) into a lesser number of Shares, a
recapitalization, a spin-off or a similar occurrence, the Committee shall
make such adjustments as it, in its sole discretion, deems appropriate in
one or more of:
(i) the number of Shares available for future Awards under Section 5;
(ii) the number of Shares that may be awarded per person under Section
5;
(iii) the number of Shares covered by each outstanding Award; or
(iv) the Exercise Price under each outstanding Option.
(b) Participant Rights. Except as provided in this Section 9, a Participant
shall have no rights by reason of any issue by the Company of stock of any
class or securities convertible into stock of any class, any subdivision or
consolidation of shares of stock of any class, the payment of any stock
dividend or any other increase or decrease in the number of shares of stock
of any class.
SECTION 10. EFFECT OF A CHANGE IN CONTROL.
(a) Merger or Reorganization. In the event that the Company is a party to a
merger or other reorganization, outstanding Awards shall be subject to the
agreement of merger or reorganization. Such agreement may provide, without
limitation, for the assumption of outstanding Awards by the surviving
corporation or its parent, for their continuation by the Company (if the
Company is a surviving corporation), for accelerated vesting or for their
cancellation with or without consideration, in all cases without the
consent of the Participant.
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(b) Acceleration. The Committee may determine, at the time of granting an
Award or thereafter, that such Award shall become fully vested as to all
Shares subject to such Award in the event that a Change in Control occurs
with respect to the Company.
SECTION 11. LIMITATIONS ON RIGHTS.
(a) Retention Rights. Neither the Plan nor any Award granted under the Plan
shall be deemed to give any individual a right to remain an employee,
consultant or director of the Company, a Parent, a Subsidiary or an
Affiliate. The Company and its Parents and Subsidiaries and Affiliates
reserve the right to terminate the Service of any person at any time, and
for any reason, subject to applicable laws, the Company's Certificate of
Incorporation and Bylaws and a written employment agreement (if any).
(b) Stockholders' Rights. A Participant shall have no dividend rights, voting
rights or other rights as a stockholder with respect to any Shares covered
by his or her Award prior to the issuance of a stock certificate for such
Shares. No adjustment shall be made for cash dividends or other rights for
which the record date is prior to the date when such certificate is issued,
except as expressly provided in Section 9.
(c) Regulatory Requirements. Any other provision of the Plan notwithstanding,
the obligation of the Company to issue Shares under the Plan shall be
subject to all applicable laws, rules and regulations and such approval by
any regulatory body as may be required. The Company reserves the right to
restrict, in whole or in part, the delivery of Shares pursuant to any Award
prior to the satisfaction of all legal requirements relating to the
issuance of such Shares, to their registration, qualification or listing or
to an exemption from registration, qualification or listing.
SECTION 12. WITHHOLDING TAXES.
(a) General. A Participant shall make arrangements satisfactory to the Company
for the satisfaction of any withholding tax obligations that arise in
connection with his or her Award. The Company shall not be required to
issue any Shares or make any cash payment under the Plan until such
obligations are satisfied.
(b) Share Withholding. If a public market for the Company's Shares exists, the
Committee may permit a Participant to satisfy all or part of his or her
withholding or income tax obligations by having the Company withhold all or
a portion of any Shares that otherwise would be issued to him or her or by
surrendering all or a portion of any Shares that he or she previously
acquired. Such Shares shall be valued at their Fair Market Value on the
date when taxes otherwise would be withheld in cash. Any payment of taxes
by assigning Shares to the Company may be subject to restrictions,
including, but not limited to, any restrictions required by rules of the
Securities and Exchange Commission.
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SECTION 13. DURATION AND AMENDMENTS.
(a) Term of the Plan. The Plan, as set forth herein, shall become effective on
the date of its adoption by the Board, subject to the approval of the
Company's stockholders. No Options shall be exercisable until such
stockholder approval is obtained. In the event that the stockholders fail
to approve the Plan within twelve (12) months after its adoption by the
Board, any Awards made shall be null and void and no additional Awards
shall be made. To the extent required by applicable law, the Plan shall
terminate on the date that is ten (10) years after its adoption by the
Board and may be terminated on any earlier date pursuant to Section 13(b).
(b) Right to Amend or Terminate the Plan. The Board may amend or terminate the
Plan at any time and for any reason. The termination of the Plan, or any
amendment thereof, shall not affect any Award previously granted under the
Plan. No Awards shall be granted under the Plan after the Plan's
termination. An amendment of the Plan shall be subject to the approval of
the Company's stockholders only to the extent required by applicable laws,
regulations or rules.
SECTION 14. EXECUTION.
To record the adoption of the Plan by the Board, the Company has caused its
duly authorized officer to execute this Plan on behalf of the Company.
SUNRISE TELECOM INCORPORATED
By
--------------------------------------
Title
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EXHIBIT 10.8
SUNRISE TELECOM INCORPORATED
2000 EMPLOYEE STOCK PURCHASE PLAN
<PAGE>
TABLE OF CONTENTS
Page
Section 1 PURPOSE...................................... 1
Section 2 DEFINITIONS.................................. 1
2.1 "1934 Act"................................... 1
2.2 "Board"...................................... 1
2.3 "Code"....................................... 1
2.4 "Committee".................................. 1
2.5 "Common Stock"............................... 1
2.6 "Company".................................... 1
2.7 "Compensation"............................... 1
2.8 "Eligible Employee".......................... 1
2.9 "Employee"................................... 2
2.10 "Employer" or "Employers".................... 2
2.11 "Enrollment Date"............................ 2
2.12 "Grant Date"................................. 2
2.13 "Participant"................................ 2
2.14 "Plan"....................................... 2
2.15 "Purchase Date".............................. 2
2.16 "Subsidiary"................................. 2
Section 3 SHARES SUBJECT TO THE PLAN................... 2
3.1 Number Available............................. 2
3.2 Adjustments.................................. 3
Section 4 ENROLLMENT................................... 3
4.1 Participation................................ 3
4.2 Payroll Withholding.......................... 3
Section 5 OPTIONS TO PURCHASE COMMON STOCK............. 3
5.1 Grant of Option.............................. 3
5.2 Duration of Option........................... 4
5.3 Number of Shares Subject to Option........... 4
5.4 Other Terms and Conditions................... 4
Section 6 PURCHASE OF SHARES........................... 4
6.1 Exercise of Option........................... 4
-i-
<PAGE>
TABLE OF CONTENTS
(continued)
Page
6.2 Delivery of Shares........................... 5
6.3 Exhaustion of Shares......................... 5
Section 7 WITHDRAWAL................................... 5
7.1 Withdrawal................................... 5
Section 8 CESSATION OF PARTICIPATION................... 5
8.1 Termination of Status as Eligible Employee... 5
Section 9 DESIGNATION OF BENEFICIARY................... 5
9.1 Designation.................................. 5
9.2 Changes...................................... 6
9.3 Failed Designations.......................... 6
Section 10 ADMINISTRATION............................... 6
10.1 Plan Administrator........................... 6
10.2 Actions by Committee......................... 6
10.3 Powers of Committee.......................... 6
10.4 Decisions of Committee....................... 7
10.5 Administrative Expenses...................... 7
10.6 Eligibility to Participate................... 7
10.7 Indemnification.............................. 7
Section 11 AMENDMENT, TERMINATION, AND DURATION......... 7
11.1 Amendment, Suspension, or Termination........ 7
11.2 Duration of the Plan......................... 8
Section 12 GENERAL PROVISIONS........................... 8
12.1 Participation by Subsidiaries................ 8
12.2 Inalienability............................... 8
12.3 Severability................................. 8
12.4 Requirements of Law.......................... 8
12.5 Compliance with Rule 16b-3................... 8
12.6 No Enlargement of Employment Rights.......... 9
12.7 Apportionment of Costs and Duties............ 9
12.8 Construction and Applicable Law.............. 9
12.9 Captions..................................... 9
-ii-
<PAGE>
TABLE OF CONTENTS
(continued)
Page
EXECUTION ............................................. 9
-iii-
<PAGE>
SUNRISE TELECOM INCORPORATED
2000 EMPLOYEE STOCK PURCHASE PLAN
(as adopted on April 5, 2000)
SECTION 1
PURPOSE
Sunrise Telecom Incorporated hereby establishes the Sunrise Telecom
Incorporated 2000 Employee Stock Purchase Plan, effective as of the first
Enrollment Date, in order to provide eligible employees of the Company and its
participating Subsidiaries with the opportunity to purchase Common Stock through
payroll deductions. The Plan is intended to qualify as an employee stock
purchase plan under Section 423(b) of the Code.
SECTION 2
DEFINITIONS
2.1 "1934 Act" means the Securities Exchange Act of 1934, as amended.
--------
Reference to a specific Section of the 1934 Act or regulation thereunder shall
include such Section or regulation, any valid regulation promulgated under such
Section, and any comparable provision of any future legislation or regulation
amending, supplementing or superseding such Section or regulation.
2.2 "Board" means the Board of Directors of the Company.
-----
2.3 "Code" means the Internal Revenue Code of 1986, as amended.
----
Reference to a specific Section of the Code or regulation thereunder shall
include such Section or regulation, any valid regulation promulgated under such
Section, and any comparable provision of any future legislation or regulation
amending, supplementing or superseding such Section or regulation.
2.4 "Committee" shall mean the committee appointed by the Board to
---------
administer the Plan. Any member of the Committee may resign at any time by
notice in writing mailed or delivered to the Secretary of the Company. As of the
effective date of the Plan, the Plan shall be administered by the Compensation
Committee of the Board.
2.5 "Common Stock" means the common stock of the Company.
------------
2.6 "Company" means Sunrise Telecom Incorporated, a Delaware
-------
corporation.
2.7 "Compensation" means a Participant's regular wages. The Committee,
------------
in its discretion, may (on a uniform and nondiscriminatory basis) establish a
different definition of Compensation prior to an Enrollment Date for all options
to be granted on such Enrollment Date.
2.8 "Eligible Employee" means every Employee of an Employer, except (a)
-----------------
any Employee who immediately after the grant of an option under the Plan, would
own stock and/or hold outstanding options to purchase stock possessing five
percent (5%) or more of the
<PAGE>
total combined voting power or value of all classes of stock of the Company or
of any Subsidiary of the Company (including stock attributed to such Employee
pursuant to Section 424(d) of the Code), or (b) as provided in the following
sentence. The Committee, in its discretion, from time to time may, prior to an
Enrollment Date for all options to be granted on such Enrollment Date, determine
(on a uniform and nondiscriminatory basis) that an Employee shall not be an
Eligible Employee if he or she: (1) has not completed at least two years of
service since his or her last hire date (or such lesser period of time as may be
determined by the Committee in its discretion), (2) customarily works not more
than 20 hours per week (or such lesser period of time as may be determined by
the Committee in its discretion), (3) customarily works not more than 5 months
per calendar year (or such lesser period of time as may be determined by the
Committee in its discretion), or (4) is an officer or other manager.
2.9 "Employee" means an individual who is a common-law employee of any
--------
Employer, whether such employee is so employed at the time the Plan is adopted
or becomes so employed subsequent to the adoption of the Plan.
2.10 "Employer" or "Employers" means any one or all of the Company, and
-------- ---------
those Subsidiaries which, with the consent of the Board, have adopted the Plan.
2.11 "Enrollment Date" means such dates as may be determined by the
---------------
Committee (in its discretion and on a uniform and nondiscriminatory basis) from
time to time.
2.12 "Grant Date" means any date on which a Participant is granted an
----------
option under the Plan.
2.13 "Participant" means an Eligible Employee who (a) has become a
-----------
Participant in the Plan pursuant to Section 4.1 and (b) has not ceased to be a
Participant pursuant to Section 8 or Section 9.
2.14 "Plan" means the Sunrise Telecom Incorporated 2000 Employee Stock
----
Purchase Plan, as set forth in this instrument and as hereafter amended from
time to time.
2.15 "Purchase Date" means such dates as may be determined by the
-------------
Committee (in its discretion and on a uniform and nondiscriminatory basis) from
time to time prior to an Enrollment Date for all options to be granted on such
Enrollment Date.
2.16 "Subsidiary" means any corporation in an unbroken chain of
----------
corporations beginning with the Company if each of the corporations other than
the last corporation in the unbroken chain then owns stock possessing fifty
percent (50%) or more of the total combined voting power of all classes of stock
in one of the other corporations in such chain.
SECTION 3
SHARES SUBJECT TO THE PLAN
3.1 Number Available. A maximum of 600,000 shares of Common Stock shall
----------------
initially be available for issuance pursuant to the Plan. Subsequently, the
number of shares of Common Stock available for issuance pursuant to the Plan
shall be increased as of the first day of each fiscal year of the Company
beginning after the Company's initial public offering by
2
<PAGE>
a number of shares that is the least of (a) 300,000 shares, (b) 0.75% of the
total outstanding shares of the Company as of the last day of the prior fiscal
year, and (c) such lesser number as the Board may determine. Shares sold under
the Plan may be newly issued shares or treasury shares.
3.2 Adjustments. In the event of any reorganization, recapitalization,
-----------
stock split, reverse stock split, stock dividend, combination of shares, merger,
consolidation, offering of rights or other similar change in the capital
structure of the Company, the Board may make such adjustment, if any, as it
deems appropriate in the number, kind and purchase price of the shares available
for purchase under the Plan and in the maximum number of shares subject to any
option under the Plan.
SECTION 4
ENROLLMENT
4.1 Participation. Each Eligible Employee may elect to become a
-------------
Participant by enrolling or re-enrolling in the Plan effective as of any
Enrollment Date. In order to enroll, an Eligible Employee must complete, sign
and submit to the Company an enrollment form in such form, manner and by such
deadline as may be specified by the Committee from time to time (in its
discretion and on a nondiscriminatory basis). Any Participant whose option
expires and who has not withdrawn from the Plan automatically will be re-
enrolled in the Plan on the Enrollment Date immediately following the Purchase
Date on which his or her option expires. Any Participant whose option has not
expired and who has not withdrawn from the Plan automatically will be deemed to
be un-enrolled from the Participant's current option and be enrolled as of a
subsequent Enrollment Date if the price per Share on such subsequent Enrollment
Date is lower than the price per Share on the Enrollment Date relating to the
Participant's current option.
4.2 Payroll Withholding. On his or her enrollment form, each
-------------------
Participant must elect to make Plan contributions via payroll withholding from
his or her Compensation. Pursuant to such procedures as the Committee may
specify from time to time, a Participant may elect to have withholding equal to
a whole percentage from 1% to 15% (or such lesser percentage that the Committee
may establish from time to time for all options to be granted on any Enrollment
Date). A Participant may elect to increase or decrease his or her rate of
payroll withholding by submitting a new enrollment form in accordance with such
procedures as may be established by the Committee from time to time. A
Participant may stop his or her payroll withholding by submitting a new
enrollment form in accordance with such procedures as may be established by the
Committee from time to time. In order to be effective as of a specific date, an
enrollment form must be received by the Company no later than the deadline
specified by the Committee, in its discretion and on a nondiscriminatory basis,
from time to time. Any Participant who is automatically re-enrolled in the Plan
will be deemed to have elected to continue his or her contributions at the
percentage last elected by the Participant.
3
<PAGE>
SECTION 5
OPTIONS TO PURCHASE COMMON STOCK
5.1 Grant of Option. On each Enrollment Date on which the Participant
---------------
enrolls or re-enrolls in the Plan, he or she shall be granted an option to
purchase shares of Common Stock.
5.2 Duration of Option. Each option granted under the Plan shall expire
------------------
on the earliest to occur of (a) the completion of the purchase of shares on the
last Purchase Date occurring within 27 months of the Grant Date of such option,
(b) such shorter option period as may be established by the Committee from time
to time prior to an Enrollment Date for all options to be granted on such
Enrollment Date, or (c) the date on which the Participant ceases to be such for
any reason. Until otherwise determined by the Committee for all options to be
granted on an Enrollment Date, the period referred to in clause (b) in the
preceding sentence shall mean the period from the applicable Enrollment Date
through the last business day prior to the immediately following Enrollment
Date.
5.3 Number of Shares Subject to Option. The number of shares available
----------------------------------
for purchase by each Participant under the option will be established by the
Committee from time to time prior to an Enrollment Date for all options to be
granted on such Enrollment Date.
5.4 Other Terms and Conditions. Each option shall be subject to the
--------------------------
following additional terms and conditions:
(a) payment for shares purchased under the option shall be made only
through payroll withholding under Section 4.2;
(b) purchase of shares upon exercise of the option will be accomplished
only in accordance with Section 6.1;
(c) the price per share under the option will be determined as provided
in Section 6.1; and
(d) the option in all respects shall be subject to such other terms and
conditions (applied on a uniform and nondiscriminatory basis), as the
Committee shall determine from time to time in its discretion.
SECTION 6
PURCHASE OF SHARES
6.1 Exercise of Option. Subject to Section 6.2, on each Purchase Date,
------------------
the funds then credited to each Participant's account shall be used to purchase
whole shares of Common Stock. Any cash remaining after whole shares of Common
Stock have been purchased shall be carried forward in the Participant's account
for the purchase of shares on the next Purchase Date. The price per Share of the
Shares purchased under any option granted under the Plan shall be eighty-five
percent (85%) of the lower of:
(a) the closing price per Share on the Grant Date for such option on
the NASDAQ National Market System; or
4
<PAGE>
(b) the closing price per Share on the Purchase Date on the NASDAQ
National Market System;
provided, however, that with respect to any Grant Date under the Plan that
coincides with the date of the final prospectus for the initial public offering
of the Common Stock, the price in clause (a) above shall be the price per Share
at which shares of Common Stock are initially offered for sale to the public by
the Company's underwriters in such offering.
6.2 Delivery of Shares. As directed by the Committee in its sole
------------------
discretion, shares purchased on any Purchase Date shall be delivered directly to
the Participant or to a custodian or broker (if any) designated by the Committee
to hold shares for the benefit of the Participants. As determined by the
Committee from time to time, such shares shall be delivered as physical
certificates or by means of a book entry system.
6.3 Exhaustion of Shares. If at any time the shares available under the
--------------------
Plan are over-enrolled, enrollments shall be reduced proportionately to
eliminate the over-enrollment. Such reduction method shall be "bottom up", with
the result that all option exercises for one share shall be satisfied first,
followed by all exercises for two shares, and so on, until all available shares
have been exhausted. Any funds that, due to over-enrollment, cannot be applied
to the purchase of whole shares shall be refunded to the Participants (without
interest thereon).
SECTION 7
WITHDRAWAL
7.1 Withdrawal. A Participant may withdraw from the Plan by submitting
----------
a completed enrollment form to the Company. A withdrawal will be effective only
if it is received by the Company by the deadline specified by the Committee (in
its discretion and on a uniform and nondiscriminatory basis) from time to time.
When a withdrawal becomes effective, the Participant's payroll contributions
shall cease and all amounts then credited to the Participant's account shall be
distributed to him or her (without interest thereon).
SECTION 8
CESSATION OF PARTICIPATION
8.1 Termination of Status as Eligible Employee. A Participant shall
------------------------------------------
cease to be a Participant immediately upon the cessation of his or her status as
an Eligible Employee (for example, because of his or her termination of
employment from all Employers for any reason). As soon as practicable after such
cessation, the Participant's payroll contributions shall cease and all amounts
then credited to the Participant's account shall be distributed to him or her
(without interest thereon). If a Participant is on a Company-approved leave of
absence, his or her participation in the Plan shall continue for so long as he
or she remains an Eligible Employee and has not withdrawn from the Plan pursuant
to Section 7.1.
SECTION 9
DESIGNATION OF BENEFICIARY
9.1 Designation. Each Participant may, pursuant to such uniform and
-----------
nondiscriminatory procedures as the Committee may specify from time to time,
designate one or
5
<PAGE>
more Beneficiaries to receive any amounts credited to the Participant's account
at the time of his or her death. Notwithstanding any contrary provision of this
Section 9, Sections 9.1 and 9.2 shall be operative only after (and for so long
as) the Committee determines (on a uniform and nondiscriminatory basis) to
permit the designation of Beneficiaries.
9.2 Changes. A Participant may designate different Beneficiaries (or
-------
may revoke a prior Beneficiary designation) at any time by delivering a new
designation (or revocation of a prior designation) in like manner. Any
designation or revocation shall be effective only if it is received by the
Committee. However, when so received, the designation or revocation shall be
effective as of the date the designation or revocation is executed (whether or
not the Participant still is living), but without prejudice to the Committee on
account of any payment made before the change is recorded. The last effective
designation received by the Committee shall supersede all prior designations.
9.3 Failed Designations. If a Participant dies without having
-------------------
effectively designated a Beneficiary, or if no Beneficiary survives the
Participant, the Participant's Account shall be payable to his or her estate.
SECTION 10
ADMINISTRATION
10.1 Plan Administrator. The Plan shall be administered by the
------------------
Committee. The Committee shall have the authority to control and manage the
operation and administration of the Plan.
10.2 Actions by Committee. Each decision of a majority of the members
--------------------
of the Committee then in office shall constitute the final and binding act of
the Committee. The Committee may act with or without a meeting being called or
held and shall keep minutes of all meetings held and a record of all actions
taken by written consent.
10.3 Powers of Committee. The Committee shall have all powers and
-------------------
discretion necessary or appropriate to supervise the administration of the Plan
and to control its operation in accordance with its terms, including, but not by
way of limitation, the following discretionary powers:
(a) To interpret and determine the meaning and validity of the
provisions of the Plan and the options and to determine any question
arising under, or in connection with, the administration, operation or
validity of the Plan or the options;
(b) To determine any and all considerations affecting the eligibility
of any employee to become a Participant or to remain a Participant in the
Plan;
(c) To cause an account or accounts to be maintained for each
Participant;
(d) To determine the time or times when, and the number of shares for
which, options shall be granted;
(e) To establish and revise an accounting method or formula for the
Plan;
6
<PAGE>
(f) To designate a custodian or broker to receive shares purchased
under the Plan and to determine the manner and form in which shares are to
be delivered to the designated custodian or broker;
(g) To determine the status and rights of Participants and their
Beneficiaries or estates;
(h) To employ such brokers, counsel, agents and advisers, and to obtain
such broker, legal, clerical and other services, as it may deem necessary
or appropriate in carrying out the provisions of the Plan;
(i) To establish, from time to time, rules for the performance of its
powers and duties and for the administration of the Plan;
(j) To adopt such procedures and subplans as are necessary or
appropriate to permit participation in the Plan by employees who are
foreign nationals or employed outside of the United States;
(k) To delegate to any one or more of its members or to any other
person, severally or jointly, the authority to perform for and on behalf of
the Committee one or more of the functions of the Committee under the Plan.
10.4 Decisions of Committee. All actions, interpretations, and
----------------------
decisions of the Committee shall be conclusive and binding on all persons, and
shall be given the maximum possible deference allowed by law.
10.5 Administrative Expenses. All expenses incurred in the
-----------------------
administration of the Plan by the Committee, or otherwise, including legal fees
and expenses, shall be paid and borne by the Employers, except any stamp duties
or transfer taxes applicable to the purchase of shares may be charged to the
account of each Participant. Any brokerage fees for the purchase of shares by a
Participant shall be paid by the Company, but fees and taxes (including
brokerage fees) for the transfer, sale or resale of shares by a Participant, or
the issuance of physical share certificates, shall be borne solely by the
Participant.
10.6 Eligibility to Participate. No member of the Committee who is also
--------------------------
an employee of an Employer shall be excluded from participating in the Plan if
otherwise eligible, but he or she shall not be entitled, as a member of the
Committee, to act or pass upon any matters pertaining specifically to his or her
own account under the Plan.
10.7 Indemnification. Each of the Employers shall, and hereby does,
---------------
indemnify and hold harmless the members of the Committee and the Board, from and
against any and all losses, claims, damages or liabilities (including attorneys'
fees and amounts paid, with the approval of the Board, in settlement of any
claim) arising out of or resulting from the implementation of a duty, act or
decision with respect to the Plan, so long as such duty, act or decision does
not involve gross negligence or willful misconduct on the part of any such
individual.
7
<PAGE>
SECTION 11
AMENDMENT, TERMINATION, AND DURATION
11.1 Amendment, Suspension, or Termination. The Board, in its sole
-------------------------------------
discretion, may amend or terminate the Plan, or any part thereof, at any time
and for any reason. If the Plan is terminated, the Board, in its discretion, may
elect to terminate all outstanding options either immediately or upon completion
of the purchase of shares on the next Purchase Date, or may elect to permit
options to expire in accordance with their terms (and participation to continue
through such expiration dates). If the options are terminated prior to
expiration, all amounts then credited to Participants' accounts which have not
been used to purchase shares shall be returned to the Participants (without
interest thereon) as soon as administratively practicable.
11.2 Duration of the Plan. The Plan shall commence on the date
--------------------
specified herein, and subject to Section 11.1 (regarding the Board's right to
amend or terminate the Plan), shall terminate on the date ten (10) years from
such date.
SECTION 12
GENERAL PROVISIONS
12.1 Participation by Subsidiaries. One or more Subsidiaries of the
-----------------------------
Company may become participating Employers by adopting the Plan and obtaining
approval for such adoption from the Board. By adopting the Plan, a Subsidiary
shall be deemed to agree to all of its terms, including (but not limited to) the
provisions granting exclusive authority (a) to the Board to amend the Plan, and
(b) to the Committee to administer and interpret the Plan. An Employer may
terminate its participation in the Plan at any time. The liabilities incurred
under the Plan to the Participants employed by each Employer shall be solely the
liabilities of that Employer, and no other Employer shall be liable for benefits
accrued by a Participant during any period when he or she was not employed by
such Employer.
12.2 Inalienability. In no event may either a Participant, a former
--------------
Participant or his or her Beneficiary, spouse or estate sell, transfer,
anticipate, assign, hypothecate, or otherwise dispose of any right or interest
under the Plan; and such rights and interests shall not at any time be subject
to the claims of creditors nor be liable to attachment, execution or other legal
process. Accordingly, for example, a Participant's interest in the Plan is not
transferable pursuant to a domestic relations order.
12.3 Severability. In the event any provision of the Plan shall be held
------------
illegal or invalid for any reason, the illegality or invalidity shall not affect
the remaining parts of the Plan, and the Plan shall be construed and enforced as
if the illegal or invalid provision had not been included.
12.4 Requirements of Law. The granting of options and the issuance of
-------------------
shares shall be subject to all applicable laws, rules, and regulations, and to
such approvals by any governmental agencies or securities exchanges as the
Committee may determine are necessary or appropriate.
8
<PAGE>
12.5 Compliance with Rule 16b-3. Any transactions under this Plan with
--------------------------
respect to officers (as defined in Rule 16a-1 promulgated under the 1934 Act)
are intended to comply with all applicable conditions of Rule 16b-3. To the
extent any provision of the Plan or action by the Committee fails to so comply,
it shall be deemed null and void, to the extent permitted by law and deemed
advisable by the Committee. Notwithstanding any contrary provision of the Plan,
if the Committee specifically determines that compliance with Rule 16b-3 no
longer is required, all references in the Plan to Rule 16b-3 shall be null and
void.
12.6 No Enlargement of Employment Rights. Neither the establishment or
-----------------------------------
maintenance of the Plan, the granting of options, the purchase of shares, nor
any action of any Employer or the Committee, shall be held or construed to
confer upon any individual any right to be continued as an employee of the
Employer nor, upon dismissal, any right or interest in any specific assets of
the Employers other than as provided in the Plan. Each Employer expressly
reserves the right to discharge any employee at any time, with or without cause.
12.7 Apportionment of Costs and Duties. All acts required of the
---------------------------------
Employers under the Plan may be performed by the Company for itself and its
Subsidiaries, and the costs of the Plan may be equitably apportioned by the
Committee among the Company and the other Employers. Whenever an Employer is
permitted or required under the terms of the Plan to do or perform any act,
matter or thing, it shall be done and performed by any officer or employee of
the Employers who is thereunto duly authorized by the Employers.
12.8 Construction and Applicable Law. The Plan is intended to qualify
-------------------------------
as an "employee stock purchase plan" within the meaning of Section 423(b) of the
Code. Any provision of the Plan which is inconsistent with Section 423(b) of the
Code shall, without further act or amendment by the Company or the Committee, be
reformed to comply with the requirements of Section 423(b). The provisions of
the Plan shall be construed, administered and enforced in accordance with such
Section and with the laws of the State of California (excluding California's
conflict of laws provisions).
12.9 Captions. The captions contained in and the table of contents
--------
prefixed to the Plan are inserted only as a matter of convenience, and in no way
define, limit, enlarge or describe the scope or intent of the Plan nor in any
way shall affect the construction of any provision of the Plan.
EXECUTION
IN WITNESS WHEREOF, Sunrise Telecom Incorporated, by its duly
authorized officer, has executed this Plan on the date indicated below.
SUNRISE TELECOM INCORPORATED
Dated: , 2000 By:
--------------- ------------------------
Title:
9
<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
April 12, 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
April 12, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEETS AT DECEMBER 31, 1998 AND 1999 AND STATEMENTS OF OPERATIONS FOR THE YEAR
ENDED DECEMBER 31, 1998 AND 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 8,615
<SECURITIES> 0
<RECEIVABLES> 9,776
<ALLOWANCES> 252
<INVENTORY> 7,612
<CURRENT-ASSETS> 28,015
<PP&E> 7,017
<DEPRECIATION> 2,600
<TOTAL-ASSETS> 38,266
<CURRENT-LIABILITIES> 11,986
<BONDS> 0
0
0
<COMMON> 15
<OTHER-SE> 25,456
<TOTAL-LIABILITY-AND-EQUITY> 38,266
<SALES> 61,465
<TOTAL-REVENUES> 61,465
<CGS> 14,736
<TOTAL-COSTS> 44,557
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 17,235
<INCOME-TAX> 6,291
<INCOME-CONTINUING> 10,944
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,944
<EPS-BASIC> 0.74
<EPS-DILUTED> 0.72
</TABLE>
