-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CB9yNW6mNbVmAy1TakfViJv1EQ1kX4F6YoUVhX+WWZmwQTqc0dvyKowRS9FfOOTr 0C9ycmhj1VmGUV6pyQp+lw== 0000927016-97-002517.txt : 19970918 0000927016-97-002517.hdr.sgml : 19970918 ACCESSION NUMBER: 0000927016-97-002517 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 20 FILED AS OF DATE: 19970917 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: EXCEL INC CENTRAL INDEX KEY: 0001036261 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 042992806 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-35791 FILM NUMBER: 97681521 BUSINESS ADDRESS: STREET 1: 255 INDEPENDENCE DR CITY: HYANNIS STATE: MA ZIP: 02601 BUSINESS PHONE: 5088623000 MAIL ADDRESS: STREET 1: 255 INDEPENDENCE DR CITY: HYANNIS STATE: MA ZIP: 02601 S-1 1 FORM S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 17, 1997 REGISTRATION NO. 333- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ---------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------- EXCEL SWITCHING CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MASSACHUSETTS 3661 04-2992806 (STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER JURISDICTION CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER) OF INCORPORATION OR ORGANIZATION) 255 INDEPENDENCE DRIVE HYANNIS, MA 02601 (508) 862-3000 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ---------------- MR. ROBERT P. MADONNA PRESIDENT, CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD OF DIRECTORS EXCEL SWITCHING CORPORATION 255 INDEPENDENCE DRIVE HYANNIS, MA 02601 (508) 862-3000 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ---------------- COPIES TO: JOHN HESSION, ESQ. CHRISTOPHER STAVROS, PETER B. TARR, ESQ. TESTA, HURWITZ & ESQ. HALE AND DORR LLP THIBEAULT, LLP GENERAL COUNSEL 60 STATE STREET HIGH STREET TOWER EXCEL SWITCHING BOSTON, MASSACHUSETTS 125 HIGH STREET CORPORATION 02109 BOSTON, MASSACHUSETTS 255 INDEPENDENCE DRIVE (617) 526-6000 02110 HYANNIS, MA 02601 (617) 248-7000 (508) 862-3000 ---------------- 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 of 1933, check the following box. [_] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, 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 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
TITLE OF EACH CLASS OF PROPOSED MAXIMUM AMOUNT OF SECURITIES TO BE REGISTERED AGGREGATE OFFERING PRICE(1) REGISTRATION FEE - -------------------------------------------------------------------------------- Common Stock, $.01 par value...... $77,625,000.00 $23,523.00
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (1) Estimated solely for the purpose of calculating the registration fee. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ PROSPECTUS (Subject to Completion) Issued September , 1997 4,500,000 Shares [LOGO] COMMON STOCK -------- ALL OF THE SHARES OF COMMON STOCK BEING OFFERED HEREBY ARE BEING SOLD BY THE COMPANY. PRIOR TO THIS OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR THE COMMON STOCK OF THE COMPANY. IT IS CURRENTLY ESTIMATED THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE $15 PER SHARE. SEE "UNDERWRITERS" FOR A DISCUSSION OF THE FACTORS TO BE CONSIDERED IN DETERMINING THE INITIAL PUBLIC OFFERING PRICE. -------- THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" COMMENCING ON PAGE 5 HEREOF. -------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. -------- PRICE $ SHARE --------
UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS(1) COMPANY(2) -------- -------------- ----------- Per Share....................... $ $ $ Total(3)........................ $ $ $
- ----- (1) The Company and the Selling Stockholder have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriters." (2) Before deducting expenses payable by the Company estimated at $800,000. The Company has agreed to pay the expenses of the Selling Stockholder, other than underwriting discounts and commissions. (3) The Selling Stockholder has granted to the Underwriters an option, exercisable within 30 days of the date hereof, to purchase up to an aggregate of 675,000 additional Shares at the price to public less underwriting discounts and commissions for the purpose of covering over- allotments, if any. If the Underwriters exercise such option in full, the total price to public, underwriting discounts and commissions, proceeds to Company and proceeds to the Selling Stockholder will be $ , $ , $ and $ , respectively. See "Underwriters." -------- The Shares are offered, subject to prior sale, when, as and if accepted by the Underwriters named herein and subject to approval of certain legal matters by Hale and Dorr LLP, counsel for the Underwriters. It is expected that delivery of the Shares will be made on or about , 1997 at the office of Morgan Stanley & Co. Incorporated, New York, New York, against payment therefor in immediately available funds. -------- MORGAN STANLEY DEAN WITTER HAMBRECHT & QUIST MONTGOMERY SECURITIES , 1997 NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDER OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. ---------------- UNTIL , 1997 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ---------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary.................. 3 Risk Factors........................ 5 The Company......................... 14 Use of Proceeds..................... 14 Dividend Policy..................... 14 Capitalization...................... 15 Dilution............................ 16 Selected Consolidated Financial Data............................... 17 Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 18 Business............................ 25
PAGE ---- Management............................................................ 38 Certain Transactions.................................................. 45 Principal Stockholders................................................ 46 Description of Capital Stock.......................................... 47 Shares Eligible for Future Sale....................................... 50 Underwriters.......................................................... 52 Legal Matters......................................................... 53 Experts............................................................... 53 Additional Information................................................ 54 Index to Consolidated Financial Statements............................ F-1
---------------- The Company intends to furnish its stockholders with annual reports containing audited consolidated financial statements and an opinion thereon expressed by an independent public accounting firm and with quarterly reports for the first three quarters of each year containing unaudited consolidated interim financial information. ---------------- XLDX, LNX, PCX, PPL, CSN, EXNET and EXS are trademarks of the Company. This Prospectus also includes trademarks and tradenames of companies other than Excel Switching Corporation. ---------------- Except as set forth in the consolidated financial statements or as otherwise indicated herein, all information in this Prospectus (i) assumes no exercise of the Underwriters' over-allotment option; (ii) reflects the filing, on September 16, 1997, of the Restated Articles of Organization of the Company increasing the authorized shares of Common Stock, creating a class of Preferred Stock and providing for the automatic conversion upon the closing of this offering of the Company's Non-Voting Common Stock into shares of the Company's Common Stock on a one-for-one basis; and (iii) reflects a two-for- one split of the Company's capital stock effected on September 16, 1997. See "Description of Capital Stock," "Underwriters" and Note 5 of Notes to Consolidated Financial Statements. On December 18, 1996, the Company changed its fiscal year end from December 31 to the last Saturday in December. All references to 1996 refer to the year ended December 28, 1996 and all references to all other years prior to 1996 refer to the year ended December 31. As used in this Prospectus, the "Company" and "Excel" refer to Excel Switching Corporation and its subsidiaries. ---------------- CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING, AND MAY BID FOR, AND PURCHASE, SHARES OF THE COMMON STOCK IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITERS." The gatefold graphic is three columns entitled "Excel Switching Corporation: Open Switching Platforms for Telecommunications Networks Worldwide". The first column is entitled "Technology" and is comprised of two boxes. The first box has a diagram of an internal bus. Underneath the diagram is the text "Excel's patented Selective Space Switching technology allows the switching platform's internal bus to switch traffic between any input or output port, DSP, packet engine resource or EXNET Controller without losing critical port capacity." The second box has a diagram that is a simulation of a computer screen depicting the programmable protocol language. Underneath the diagram is the text. "The Programmable Protocol Language (PPL) is a patented software technology utilizing a graphical user interface to make an easy and convenient mechanism for developers and operators to implement multi-level programming modifications to Excel switching platforms, decreasing both development costs and time-to- market." The second column is entitled "Open, Scalable Products" and has one box and cascading pictures of four switches. The box contains the following text: "Excel's carrier-class, open end programmable switching platforms allow network providers to offer cost-effective, scalable and flexible enhanced services and wireless and wireline communications with a time-to-market advantage over conventional switching platforms. Key benefits include: Open Programmability, Flexibility, Distributed Architecture, Rapid Time-to-Market, Scalability, Cost- Efficiency, Redundancy and Reliability." The first switch is a picture of the EXS switch with "EXS" underneath the product and the following text to the left of the product: "The EXS is an open system that supports up to 30,720 ports. EXS is comprised of any combination of LNX and CSN programmable switching platforms distributed across EXNET, the Company's fiber optic expansion network." The second switch is a picture of the LNX switch with "LNX" underneath the product and the following text to the left of the product: "The LNX is a 2,048 port non- blocking, open, programmable switching platform designed for central office environments, providing high-performance and fault tolerance in a compact, maintainable chassis." The third switch is a picture of the CSN switch with "CSN" underneath and the following text to the right of the product: "The CSN is a 1,024 port non-blocking, open, programmable switching platform that provides the same features and scalability as the LNX but in a more compact chassis." The fourth switch is a picture of the PCX switch with "PCX" underneath and the following text to the right of the product: "The PCX is a PC-based 512 port non- blocking, open, programmable switching platform designed for the customer premise equipment market place, providing a total solution in a small chassis." The third column is entitled "Markets" and is comprised of three boxes. The first box has a list entitled "Enhanced Service Platforms" with the following words listed in a column: "Voice Messaging," "One Number Services," "Paging," "E-Mail," "Fax Messaging," "Unified Messaging," "Voice Recognition Dialing," "Prepaid Debit Cards" and "Conference Bridging." There is also a diagram depicting potential uses of LNX that consists of pictures of telephones, fax machines and answering machines connected through the PSTN or wireless network to an LNX server which is connected to five boxes depicting software applications entitled "Personal Number," "Voicemail," "Paging," "FAX," and "Billing." The second box has a list entitled "Wireless Infrastructure" with the following words listed in a column: "Cellular Systems," "Personal Communications Services," "Wireless Local Loop," and "Mobile Satellite Systems." There is also a diagram depicting a wireless network that has host switches labeled "Enhanced Services" linked to a host switch labeled "Mobile Switching Center" which is linked to a host switch which is then connected to EXS switches labeled "Distributed Switches" and "Base Station Controller" which are linked to pictures of wireless radio towers. The third box has a list entitled "Wireline Infrastructure" with the following words listed in a column: "Tandem Switching," "One-Plus Dialing," "International Callback," and "International Gateway." There is also a diagram depicting a wireline network. PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and consolidated financial statements and notes thereto appearing elsewhere in this Prospectus. THE COMPANY Excel is a leading provider of open switching platforms for telecommunications networks worldwide. The Company develops, manufactures, markets and supports a family of open, programmable, carrier-class switches that addresses the complex enhanced services and wireless and wireline infrastructure needs of network providers. Excel's products offer network providers the flexibility to address multiple market applications and the scalability to deploy a variety of system capacities. The Company's programmable switching platforms enable network providers to deliver improved networking functionality at a lower cost than purchasing, upgrading or reprogramming traditional, closed, central office switches. The Company's products are currently deployed in telecommunications networks in approximately 50 countries throughout the world. Excel offers a family of programmable switching platforms that are designed with distributed architecture and open software to maximize performance and provide multiple levels of programmability and redundancy. Excel's open switching platforms integrate with a wide variety of host computer systems, operating systems and application development environments. The Company's product family scales from 512 to 30,720 ports. Using Excel's patented Programmable Protocol Language ("PPL"), application developers can customize the switching software to their unique requirements, allowing them to introduce new services and applications rapidly. As customer requirements evolve, the Excel platform can be upgraded without requiring extensive and complex programming changes to the underlying software. The Company sells to a variety of customers in the worldwide telecommunications market, including application developers, original equipment manufacturers ("OEMs") and systems integrators. These customers include Boston Technology, Inc., Brite Voice Systems, Inc., Ericsson Messaging Systems Inc., Glenayre Technologies, Inc., IEX Corporation, MCI Communications Corporation, Octel Communications Corporation, Phoenix Wireless Group, Inc., Priority Call Management, Inc., QUALCOMM Incorporated and WorldCom, Inc. Excel's customers integrate the Company's open, programmable switching platforms with their product offerings to address a variety of market applications for network providers, ranging from enhanced services such as voice messaging, one number services and prepaid debit cards, to wireless and wireline infrastructure services such as tandem switching, mobile switching centers and intelligent base station controllers. Network providers which have installed Excel's products include AT&T Corp., Ameritech Corporation, Bell Atlantic Corporation, BellSouth Corporation, British Telecommunications plc, GTE Corporation, MCI Communications Corporation, Nippon Telegraph and Telephone Corporation, Pacific Bell, Sprint Corporation, Telstra Corporation Ltd., Time Warner Inc. and WorldCom, Inc. THE OFFERING Common Stock offered........... 4,500,000 shares Common Stock to be outstanding after the offering............ 32,589,600 shares(1) Use of proceeds................ For general corporate purposes, including working capital, product development, capital expenditures and potential acquisitions. See "Use of Proceeds." Proposed Nasdaq National The Company has applied for listing on the Market symbol................. Nasdaq National Market under the symbol XLSW 3 SUMMARY CONSOLIDATED FINANCIAL DATA
YEAR ENDED SIX MONTHS ENDED ------------------------------------------- ----------------- DECEMBER 31, ------------------------------ DECEMBER 28, JUNE 30, JUNE 28, 1992 1993 1994 1995 1996 1996 1997 ------ ------- ------- ------- ------------ -------- -------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENTS OF IN- COME DATA: Revenues................ $5,111 $10,033 $20,723 $36,161 $62,050 $27,890 $39,055 Income from operations.. 692 2,892 7,083 8,783 13,570 6,255 12,272 Net income.............. 469 1,396 4,190 5,411 7,901 3,687 7,420 Net income per share(2)............... .01 .04 .13 .16 .23 .11 .22 Weighted average common and common equivalent shares outstanding(2).. 31,519 31,954 32,431 32,913 33,787 33,672 34,012
JUNE 28, 1997 ---------------------- ACTUAL AS ADJUSTED(3) ------- -------------- (UNAUDITED) CONSOLIDATED BALANCE SHEET DATA: Working capital............................ $21,915 $ 83,890 Total assets............................... 44,446 106,421 Long-term obligations, less current maturi- ties...................................... 3,584 3,584 Total stockholders' equity................. 27,541 89,516
- -------- (1) Based on shares of Common Stock outstanding as of June 28, 1997. Excludes (i) 10,808,640 shares of Common Stock issuable upon exercise of options outstanding as of June 28, 1997, of which options to purchase 6,515,940 shares were then exercisable, and (ii) 3,625,000 shares of Common Stock reserved for future issuance under the Company's stock plans. See "Management--Stock Plans" and Note 5 of Notes to Consolidated Financial Statements. (2) Computed on the basis described in Note 1 of Notes to Consolidated Financial Statements. (3) Adjusted to reflect the sale of the 4,500,000 shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $15.00 per share, after deducting estimated underwriting discounts and commissions and offering expenses payable by the Company, and the application of the estimated net proceeds therefrom. See "Use of Proceeds" and "Capitalization." 4 RISK FACTORS In evaluating the Company's business, prospective investors should carefully consider the following factors in addition to the other information presented in this Prospectus before purchasing the shares of Common Stock offered hereby. This Prospectus contains certain statements of a forward-looking nature relating to future events or the future financial performance of the Company. Prospective investors are cautioned that such statements are only predictions and that actual events or results may differ materially. In evaluating such statements, prospective investors should specifically consider the various factors identified in this Prospectus, including but not limited to the matters set forth below, which could cause actual results to differ materially from those indicated by such forward-looking statements. Fluctuations in Results of Operations. The Company's results of operations have varied significantly in the past and may vary significantly in the future, on a quarterly and annual basis, as a result of a variety of factors, many of which are outside the Company's control. These factors include, without limitation: (i) the timing and size of orders which are received and can be shipped in any particular period; (ii) the commercial success of the Company's products; (iii) delays in the introduction of products or product enhancements by the Company and the Company's ability to introduce new products and technologies on a timely basis; (iv) the financial stability of the Company's major customers; (v) the timing of new product introductions or announcements by the Company or its competitors; (vi) the availability of adequate supplies of key components and assemblies and the adequacy of third- party manufacturing capabilities; (vii) the seasonality of the placement of customer orders; (viii) the timing and nature of selling and marketing expenses such as tradeshows and advertising campaigns; (ix) the timing of development expenditures and personnel changes; (x) the publication of opinions about the Company and its products, or its competitors or their products, by industry analysts; (xi) customer order deferrals in anticipation of product enhancements or new product offerings by the Company or its competitors; and (xii) customer cancellation of orders and the gain or loss of significant customers, including those due to industry combinations. Moreover, any downturn in general economic conditions could precipitate significant reductions in corporate spending for telecommunications infrastructure, which could result in delays or cancellations of orders for the Company's products. The Company's expense levels are relatively fixed and are based, in significant part, on expectations of future revenues. Consequently, if revenue levels are below expectations, expense levels could be disproportionately high as a percentage of revenues, and the Company's business, financial condition and results of operations would be materially adversely affected. The Company has historically operated with little backlog because its products are generally shipped within 60 days of acceptance of an order by the Company. As a result, revenues in any quarter are substantially dependent on orders booked and shipped in that quarter and on sales by the Company's customers to end users. See "--Concentration of Customers" and "Business--Customers." The Company also believes that the purchase of its products generally involves a significant commitment of a customer's capital resources. Therefore, any downturn in any customer's business could have a material adverse effect on the Company's revenues, business, financial condition and quarterly results of operations. In addition, the Company historically has recognized a large portion of its revenues from sales booked and shipped in the last month of a quarter such that the magnitude of quarterly fluctuations may not become evident until late in, or at the end of, a particular quarter. Because a number of the Company's individual orders are for significant amounts, the failure to ship a significant order in a particular quarter could materially adversely affect revenues and results of operations for such quarter. To the extent that significant sales occur earlier than expected, results of operations for subsequent quarters may be materially adversely affected. Due to these and other factors, the Company's quarterly revenues, expenses and results of operations could vary significantly in the future, and period-to-period comparisons should not be relied upon as indications of future performance. There can be no assurance that the Company will be able to increase its revenues in future periods or be able to sustain its level of revenues or its rate of revenue growth on a quarterly or annual basis. See "-- Length of Sales Cycle" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Due to all of the foregoing factors, it is possible that in some future quarter, the Company's results of operations will be below the expectations of public market analysts and investors. In such event, the market price 5 of the Company's Common Stock would likely be materially adversely affected. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Dependence on Relationships with Application Developers, OEMs and Systems Integrators. The Company sells substantially all of its products to, and maintains strategic relationships with, application developers, original equipment manufacturers ("OEMs") and systems integrators which incorporate the Company's products into their service and product offerings. As a result, sales of the Company's products are dependent upon the continued market acceptance of the service and product offerings of the Company's customers. Although the Company maintains contractual relationships with a substantial number of its customers, such contracts do not provide for minimum purchase requirements, nor do they contain provisions requiring the exclusive purchase of the Company's products. The development of an application or service for the telecommunications market can involve a substantial amount of time and expense. The delay or failure of a customer's application development program incorporating the Company's products could delay or prevent expected sales of the Company's products. The inability or cessation of customers to integrate the Company's products into their service and product offerings, product development delays by application developers and other customers, lack of market acceptance of the service and product offerings of the Company's customers or a customer's decision to market products manufactured by a competitor of the Company, or the manufacture of such products themselves, would have a material adverse effect on the Company's business, financial condition and results of operations. Additionally, selling through indirect channels may limit the Company's information concerning the volume of products sold by the Company's customers to end users and the Company's contact with its end users. As a result, the Company's ability to forecast revenues accurately (notwithstanding the forecasts of its customers), evaluate end-user satisfaction and recognize emerging end-user requirements may be hindered. See "Business--Sales and Marketing." Length of Sales Cycle. The time between the date of initial contact with a potential customer and large-scale commercialization of a new customer application or system based on the Company's products is often lengthy, typically ranging from 12 to 24 months or more, and is subject to delays over which the Company has little or no control, including customers' budgetary constraints, customers' internal acceptance reviews, the success and continued internal support of customers' own development efforts, and the possibility of cancellation of projects by customers. Although the Company attempts to develop its products with the goal of shortening the time to market of its customers' products, the timing of the commercialization of a new customer application or service based on the Company's products is primarily dependent on the success and timing of a customer's own internal development program. Delays can also be caused by late deliveries by other vendors, changes in implementation priorities and slower than anticipated growth in demand for the services that the Company's products support. A delay in, or cancellation of, the sale of the Company's products could have a material adverse effect on the Company's business, financial condition and results of operations and cause the Company's results of operations to vary significantly from quarter to quarter. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Concentration of Customers. Approximately 33.1%, 40.6%, 36.7% and 34.6% of the Company's revenues in 1994, 1995, 1996 and in the first six months of 1997, respectively, were derived from sales to Boston Technology, Inc., approximately 11.4% of the Company's revenues in 1995 were derived from sales to Ericsson Messaging Systems Inc. and approximately 10.0% of the Company's revenues in 1994 were derived from sales to AccessLine Technologies, Inc. In 1994, 1995, 1996 and the first six months of 1997, the Company's five largest customers accounted for approximately 65.4%, 70.1%, 57.1% and 59.9%, respectively, of the Company's revenues. Although the Company's largest customers have varied from period to period, the Company anticipates that its results of operations in any given period will continue to depend to a significant extent upon sales to a small number of customers. None of the Company's customers has entered into a long-term supply agreement requiring any of them to purchase a minimum amount of product from the Company. There can be no assurance that the Company's principal customers will continue to purchase product from the Company at current levels, if at all, or that the Company will be able to replace such purchases with sales to other customers. In August 1997, Boston Technology, Inc. announced its intended merger with Comverse Technologies, Inc. In July 1997, Octel 6 Communications Corporation, one of the Company's five largest customers in 1996, announced its intended purchase by Lucent Technologies Inc. The Company cannot estimate the potential impact on its business of these two recently announced transactions. The loss of one or more major customers could have a material adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business--Customers." Evolving Market For Telecommunications Services. The Company's future success will depend on continued growth in the market for telecommunications services. The global telecommunications marketplace is evolving and it is difficult to predict its potential size or future growth rate. There can be no assurance that deregulation and continued improvements and expansions of infrastructure will continue to cause this market to grow or that increased regulation will not present barriers to the sales of existing or future products. There can also be no assurance that telecommunications applications and infrastructure needs will not emerge for which the Company's products are not designed. If this market fails to grow or grows more slowly or in a different direction than the Company currently anticipates, the Company's business, financial condition and results of operations could be materially adversely affected. See "Business--Industry Background." Concentrated Product Family. The Company currently derives substantially all of its revenues from its family of open, programmable switching platforms and expects that this concentration will continue in the foreseeable future. As a result, any decrease in the overall level of sales of, or the prices for, open, programmable switching platforms due to product enhancements, introductions or announcements by the Company's competitors, a decline in the demand for open, programmable switches, product obsolescence, price competition, technological change or any other reason could have a material adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Risk of New Product Introductions. The Company intends to continue to invest in product and technology development, including increasing port capacity and performance, the development of additional related software applications and tools, the improvement of third-party application integration, and the continued provision of updated product features and enhancements. There can be no assurance that the Company will not experience difficulties that could delay or prevent the successful development, introduction or marketing of such new products and enhancements, or that its new products and enhancements will adequately meet the requirements of the marketplace and achieve market acceptance. Announcements of currently planned or other new product offerings by the Company or its competitors may cause customers to defer or cancel the purchase of existing Company products. The Company's inability to develop on a timely basis new products or enhancements to existing products, or the failure of such new products or enhancements to achieve market acceptance, could have a material adverse effect on the Company's business, financial condition and results of operations. See "--Rapid Technological Change," "Business--Products and Technology" and "Business--Research and Product Development." The development of new, technologically advanced products is a complex and uncertain process requiring the accurate anticipation of technological and market trends. The introduction of new or enhanced products also requires the Company to manage the transition from older products in order to minimize disruption in customer ordering patterns, avoid excessive levels of older product inventories and ensure that adequate supplies of new products can be delivered to meet anticipated customer demand. There can be no assurance that the Company will successfully develop, introduce or manage the transition to new products. Furthermore, products such as those offered by the Company may contain undetected or unresolved errors when they are first introduced or as new versions are released. There can be no assurance that despite extensive testing by the Company, errors will not be found in new products or upgrades after commencement of commercial shipments, resulting in delays in or loss of market acceptance and sales, diversion of development resources, injury to the Company's reputation or increased service and warranty costs, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business--Research and Product Development." 7 Rapid Technological Change. The telecommunications equipment market is subject to rapid technological change, evolving industry standards and frequent new product introductions and enhancements that may render existing products obsolete. As a result, the Company's position in this market could erode rapidly due to unforeseen changes in product features and functions of competing products. The Company's growth and future results of operations will depend in part on its ability to respond to these changes by enhancing its existing products and developing and introducing, on a timely and cost- effective basis, new products and features to meet or exceed technological advances in the marketplace. The failure of the Company to respond to rapidly changing technologies could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business-- Industry Background" and "Business--Research and Product Development." Management of Growth and Hiring of Additional Personnel. The Company has experienced growth in revenues and expansion of its operations which have placed significant demands on the Company's management, engineering staff and facilities. The Company has recently hired additional engineering, marketing, accounting and finance personnel, including its Chief Operating Officer, Vice President of Marketing and Vice President of Research and Development within the last 12 months. The Company is also implementing additional financial and management procedures which the Company believes will address increasing demands on resources. However, the Company believes that further improvements in management and operational controls are needed, and will continue to be needed, to manage any future growth. Continued growth will also require the Company to hire more engineering, selling and marketing and administrative personnel, expand customer support capabilities, expand management information systems and improve its inventory management practices. The Company has at times experienced, and continues to experience, difficulty in recruiting qualified personnel. Recruiting qualified personnel is an intensely competitive and time-consuming process. There can be no assurance that the Company will be able to attract and retain the necessary personnel to accomplish its growth strategies or that it will not experience constraints that will adversely affect its ability to satisfy customer demand in a timely fashion or to support satisfactorily its customers and operations. If the Company's management is unable to manage growth effectively, the Company's business, financial condition and results of operations could be materially adversely affected. See "Business--Employees" and "Management--Executive Officers and Directors." While the Company believes its current and planned facilities are adequate to meet its needs through the next 12 months, future growth may require the Company to obtain additional or alternative facilities. Due to the limited supply of suitable additional or alternative office and manufacturing space in the Cape Cod, Massachusetts area, there can be no assurance that such space can be leased or acquired without substantial required renovations. Relocation of any segment of the Company's operations may disrupt business and have a material adverse effect on the Company's business, financial condition and results of operations. In addition, the local permitting and variance procedures for the renovation of buildings or new construction in the Cape Cod area is more onerous than found in metropolitan areas. Accordingly, there can be no assurance that the Company will not be required in the future to devote significant resources to the permitting and renovation of additional facilities or in relocating some or all of the Company's facilities. See "Business--Facilities." Dependence on Key Personnel. The Company's success depends to a significant degree upon the continued contributions of its President, Chief Executive Officer and principal stockholder, Robert P. Madonna, and its key management, engineering, selling and marketing and manufacturing personnel, many of whom would be difficult to replace. The Company does not have employment contracts with its key personnel. The loss of the services of any key personnel, the inability to attract or retain qualified personnel in the future or delays in hiring required personnel, particularly software engineers, could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business--Employees" and "Management--Executive Officers and Directors." Highly Competitive Market. The market for telecommunications products is highly competitive and subject to rapid technological change. The Company competes or may compete directly or indirectly with the following categories of companies: (i) other manufacturers of programmable switches such as Summa Four, Inc., Redcom Laboratories, Inc. and Harris Corporation; (ii) large, well-established switch and telecommunications 8 equipment manufacturers such as Alcatel Alsthom Compagnie Generale d'Electricite SA, DSC Communications Corporation, Lucent Technologies Inc., Northern Telecom Limited, Siemens AG and Telefonaktiebolaget LM Ericsson; and (iii) to a lesser degree, systems integrators and application developers whose switches are based on PC card-level products manufactured by companies such as Aculab Inc., Dialogic Corporation and Natural MicroSystems Corporation. In addition, several smaller companies have begun to manufacture programmable switching platforms. Due to the rapidly evolving markets in which the Company competes, additional competitors with significant market presence and financial resources, including large telecommunications equipment manufacturers and computer hardware and software companies, may enter those markets, thereby further intensifying competition. Additionally, there can be no assurance that one or more of the Company's application developers will not begin to develop or market products in competition with the Company. Increased competition could result in price reductions and loss of market share which would materially adversely affect the Company's business, financial condition and results of operations. Many of the Company's current and potential competitors have significantly greater financial, selling and marketing, technical, manufacturing and other resources than the Company. Some of the Company's competitors currently offer financing alternatives to their customers, a service that the Company does not provide. Moreover, the Company's competitors may also foresee the course of market developments more accurately than the Company. Although the Company believes it has certain technological and other advantages over its competitors, realizing and maintaining such advantages will require a continued high level of investment by the Company in research and product development, marketing and customer service and support. There can be no assurance that the Company will have sufficient resources to continue to make such investments or that the Company will be able to make the technological advances necessary to compete successfully with its existing competitors or with new competitors. See "Business--Competition." Dependence on Single and Sole Source Suppliers. The Company purchases many key components from single or sole source vendors. The inability to develop alternative sources for these components or to obtain sufficient quantities of these components could result in delays or reductions in product shipments which could materially adversely affect the Company's business, financial condition and results of operations. In the event of a reduction or interruption of supply, a significant amount of time, in some cases as much as three to four months, could be required before the Company would begin receiving adequate supplies from such alternative suppliers. In such event, the Company's business, financial condition and results of operations would be materially adversely affected. In addition, the manufacture of certain of these single or sole source components is extremely complex, and the Company's reliance on the suppliers of these components exposes the Company to potential production difficulties and quality variations, which could negatively impact cost and timely delivery of the Company's products. In particular, the Company uses a fiber transmitter, a receiver and a fiber driver manufactured by Hewlett-Packard Company in its EXS product, four power connectors manufactured by Positronic Industries, Inc. in its EXS, LNX and CSN products, and a power module manufactured by Lucent Technologies Inc. in its EXS, LNX and CSN products. Each of these components is available from only one supplier, for which there is no substitute at this time. If supply of these components should cease, the Company would be required to redesign its products. No assurance can be given that supply problems will not occur or, if such problems do occur, that satisfactory solutions would be available. The Company does not have long-term contracts with its suppliers and there can be no assurance that these suppliers will continue to be able to produce these components or to meet the Company's requirements. Any significant interruption in the supply, or degradation in the quality, of any such component could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business--Manufacturing." Although the Company generally requires its customers to submit quarterly forecasts of their needs, the Company's customers frequently require rapid delivery after placement of a purchase order. Because the Company does not maintain significant component inventories, a delay in shipment by a supplier could lead to lost sales. Lead times for materials and components may vary significantly and depend on factors such as specific supplier performance, contract terms and general market demand for components. If orders vary from forecasts, the Company may experience excess or inadequate inventory of certain materials and components. While the Company has not experienced shortages and allocations of these components to date, any shortages in the future, 9 including those occasioned by increased sales, could result in delays in fulfillment of customer orders. Such delays, shortages and allocations could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business--Manufacturing." Dependence on Third-Party Manufacturers. The Company relies on a limited number of independent manufacturers, some of which are small, privately-held companies, to provide certain components and assemblies made to the Company's specifications. These manufacturers substantially complete production of the Company's products, which are then shipped to the Company for final assembly and quality control. In the event that any of the Company's subcontractors were to experience financial, operational, production or quality assurance difficulties or a catastrophic event that resulted in a reduction or interruption in supply to the Company, the Company's business, financial condition and results of operations would be materially adversely affected until the Company was able to establish sufficient manufacturing capabilities from alternative sources. There can be no assurance that alternative manufacturing sources will be able to meet the Company's future requirements or that existing or alternative sources will continue to be available to the Company at favorable prices. See "Business--Manufacturing." Compliance with Regulations and Evolving Industry Standards. The market for the Company's products is characterized by the need to meet a significant number of communications regulations and standards, some of which are evolving as new technologies are deployed. In the United States, the Company's products must comply with various regulations including those promulgated by the Federal Communications Commission and standards established by Underwriters Laboratories and Bell Communications Research. Furthermore, there are regulations and standards imposed by various foreign countries where the Company's products are installed. The failure of the Company's products to comply, or delays in compliance, with the various existing and evolving industry regulations and standards could delay the introduction of the Company's products. Moreover, the enactment by federal, state or foreign governments of new laws or regulations, changes in the interpretation of existing laws or regulations or a reversal of the trend toward deregulation in the telecommunications industry could materially adversely affect the Company's customers, and thereby materially adversely affect the Company's business, financial condition and results of operations. See "Business-- Industry Background." Dependence on Proprietary Rights. The Company's success and its ability to compete is dependent, in part, upon its proprietary rights. The Company relies primarily on a combination of patent, copyright, trademark and trade secret laws, as well as confidentiality procedures and contractual restrictions to establish and protect its proprietary rights. There can be no assurance that such measures will be adequate to protect the Company's proprietary rights. Further, the Company may be subject to additional risks as it enters into transactions in countries where intellectual property laws are not well developed or are difficult to enforce. Legal protections of the Company's proprietary rights may be ineffective in such countries. Litigation to defend and enforce the Company's intellectual property rights could result in substantial costs and diversion of resources and could have a material adverse effect on the Company's business, financial condition and results of operations, regardless of the final outcome of such litigation. Despite the Company's efforts to safeguard and maintain its proprietary rights both in the United States and abroad, there can be no assurance that the Company will be successful in doing so or that the steps taken by the Company in this regard will be adequate to deter misappropriation or independent third-party development of the Company's technology or to prevent an unauthorized third party from copying or otherwise obtaining and using the Company's products or technology. There also can be no assurance that others will not independently develop similar technologies or duplicate any technology developed by the Company. Any such events could have a material adverse effect on the Company's business, financial condition and results of operations. The Company has entered into agreements with a small number of its customers requiring the Company to deposit its source code and, on occasion, manufacturing blueprints, tooling diagrams and production specifications, in escrow with a third party. These escrow agreements typically provide that these customers have a non-exclusive right to use such code and other materials in the event that there is a bankruptcy proceeding by or against the Company, if the Company ceases to conduct business or if the Company defaults on its support obligations. The use of such agreements may increase the likelihood of misappropriation by third parties. 10 As the number of entrants to the Company's markets increases and the functionality of the Company's products increases and overlaps with the products of other companies, the Company may become subject to claims of infringement or misappropriation of the intellectual property rights of others. In its distribution agreements, the Company agrees to indemnify its customers for any expenses or liabilities resulting from claimed infringements of patents, trademarks or copyrights of third parties. In certain limited instances, the amount of such indemnities may be greater than the revenues the Company may have received from the customer. There can be no assurance that third parties will not assert infringement or misappropriation claims against the Company in the future with respect to current or future products. Any claims or litigation, with or without merit, could be time-consuming, result in costly litigation, cause product shipment delays or require the Company to enter into royalty or licensing arrangements. Such royalty or licensing arrangements, if required, may not be available on terms acceptable to the Company, if at all, which could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, the Company changed its name from Excel Inc. to Excel Switching Corporation in September 1997. Searches performed on the term Excel have revealed several registrations and numerous uses of that term, and terms substantially similar to it, alone and in combination with other terms and designs. Accordingly, there can be no assurance that third parties will not assert trademark infringement claims relating to the name Excel in the future. See "Business--Intellectual Property." Risks Associated with International Sales. In 1996 and in the first six months of 1997, sales to customers located outside of the United States accounted for less than 4.0% of the Company's revenues in each such period. However, the Company sells its products to application developers, OEMs and systems integrators located within the United States which market products and services based on the Company's products worldwide. The Company intends to expand its operations outside the United States and enter additional international markets, which will require significant management attention and financial resources. International sales are subject to a variety of risks, including difficulties in establishing and managing international distribution channels, in servicing and supporting products sold outside the United States and in translating products and related materials into foreign languages. International operations are also subject to difficulties in collecting accounts receivable, staffing and managing personnel and enforcing intellectual property rights. Other factors that can adversely affect international operations include fluctuations in the value of foreign currencies and currency exchange rates, changes in import/export duties and quotas, introduction of tariff or non-tariff barriers and economic or political changes in international markets. Any inability to obtain foreign regulatory approvals on a timely basis could have a material adverse effect on the Company's business, financial condition and results of operations. If the Company's international sales increase, its revenues may also be affected to a greater extent by seasonal fluctuations resulting from lower levels of sales which typically occur during the summer months in Europe and other parts of the world. There can be no assurance that these factors will not have a material adverse effect on the Company's future international sales and, consequently, on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business--Strategy." Risks Relating to Potential Acquisitions. The Company may, from time to time, pursue the acquisition of other companies, assets, products and technologies although the Company has no present commitments or agreements with respect to any such acquisitions. Acquisitions involve a number of operating risks that could materially adversely affect the Company's results of operations, including the diversion of management's attention to assimilate the operations, products and personnel of the acquired companies, the amortization of acquired intangible assets, and the potential loss of key employees of the acquired companies. Furthermore, acquisitions may involve businesses in which the Company lacks experience. Because management has limited experience in acquisitions and the Company has no experience in integrating acquired companies or technologies into its operations, there can be no assurance that the Company will be able to manage one or more acquisitions successfully, or that the Company will be able to integrate the operations, products or personnel gained through any such acquisitions without a material adverse effect on the Company's business, financial condition and results of operations. See "Use of Proceeds." Control by Principal Stockholder. Following this offering, Robert P. Madonna, the Company's President, Chief Executive Officer, Chairman of the Board and principal stockholder, will beneficially own approximately 11 85.8% of the outstanding shares of Common Stock of the Company (83.7% if the Underwriters' over-allotment option is exercised in full). As a result, Mr. Madonna will have the ability to elect the Company's directors and to determine the outcome of corporate actions requiring stockholder approval, irrespective of how other stockholders of the Company may vote. This concentration of ownership may have the effect of delaying or preventing a change in control of the Company which may be favored by a majority of the remaining stockholders, or cause a change of control not favored by the Company's other stockholders. See "Management" and "Principal Stockholders." No Prior Trading Market; Potential Volatility of Stock Price. Prior to this offering, there has been no public market for the Company's Common Stock, and there can be no assurance that an active trading market will develop or be sustained after this offering or that the market price of the Common Stock will not decline below the initial public offering price. The initial public offering price will be determined solely by negotiations between the Company and the Representatives of the Underwriters and therefore may not be indicative of prices that will prevail in the trading market after this offering. The market price of the Company's Common Stock could be subject to wide fluctuations in response to, and may be adversely affected by, variations in quarterly results of operations, changes in earnings estimates by analysts, adverse earnings or other financial or business announcements by the Company and its customers or competitors and market conditions in the industry, as well as general economic conditions. In addition, the stock market has experienced extreme price and volume fluctuations that have particularly affected the market prices for many companies' stock and that often have been unrelated to the operating performance of such companies. These market fluctuations may adversely affect the market price of the Company's Common Stock. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." See "Underwriters" for a discussion of the factors to be considered in determining the initial public offering price. Shares Eligible for Future Sale. Sales of substantial amounts of shares of the Company's Common Stock in the public market following this offering could adversely affect the market price of the Common Stock. In addition to the 4,500,000 shares offered hereby (5,175,000 shares if the over-allotment option is exercised in full), approximately 144,000 additional shares of Common Stock outstanding as of August 30, 1997, which are not subject to 180-day lock-up agreements (the "Lock-Up Agreements") with the representatives of the Underwriters, will be eligible for sale in the public market in accordance with Rule 144(k) under the Securities Act of 1933, as amended (the "Securities Act"), on the date of this Prospectus. Upon expiration of the Lock-Up Agreements, 180 days after the date of this Prospectus, approximately 27,945,600 additional shares of Common Stock will be available for sale in the public market, subject to the provisions of Rule 144 under the Securities Act. At August 30, 1997, approximately 6,731,940 shares of Common Stock were issued or issuable pursuant to vested options under the Company's stock program, of which approximately 55,800 shares are not subject to Lock-up Agreements with the Underwriters and will be eligible for sale in the public market in accordance with Rule 701 under the Securities Act beginning 90 days after the date of this Prospectus. The Company intends to file one or more registration statements on Form S-8 under the Securities Act approximately 180 days after the date of this Prospectus to register up to 11,163,840 shares of Common Stock subject to outstanding stock options granted pursuant to the Company's stock program, including the 6,731,940 shares of Common Stock subject to options vested as of August 30, 1997, and 3,625,000 shares of Common Stock issuable pursuant to the Company's 1997 stock plans. Such registration statements are expected to become effective upon filing. At such time, approximately 7,362,970 shares of Common Stock covered by these registration statements will be vested and eligible for sale in the public market upon the exercise of underlying options to the extent not previously sold pursuant to Rule 701. See "Shares Eligible for Future Sale" and "Underwriters." Immediate and Substantial Dilution. Purchasers of shares of Common Stock offered hereby will suffer an immediate and substantial dilution in the net tangible book value per share of the Common Stock from the initial public offering price. See "Dilution." Potential Adverse Effects of Anti-Takeover Provisions; Availability of Preferred Stock for Issuance. The Company's Restated Articles of Organization and Restated By-Laws contain provisions that may make it more difficult for a third party to acquire, or discourage acquisition bids for, the Company. Moreover, the Company is subject to an anti-takeover provision of the Massachusetts General Laws which prohibits, subject to certain 12 exceptions, a holder of 5% or more of the outstanding voting stock of the Company from engaging in certain activities with the Company, including a merger, stock or asset sale. Such provisions could limit the price that certain investors might be willing to pay in the future for shares of the Company's Common Stock. In addition, shares of the Company's Preferred Stock may be issued in the future without further stockholder approval and upon such terms and conditions, and having such rights, privileges and preferences, as the Board of Directors may determine. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of any holders of Preferred Stock that may be issued in the future. The issuance of Preferred Stock or of rights to purchase Preferred Stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or discouraging a third party from acquiring, a majority of the outstanding voting stock of the Company. The Company has no present plans to issue any shares of Preferred Stock. See "Description of Capital Stock--Massachusetts Law and Certain Charter and By-Law Provisions; Anti-Takeover Effects" and "--Preferred Stock." 13 THE COMPANY The Company was incorporated in Massachusetts in January 1988 under the name Excel Inc. and changed its name to Excel Switching Corporation in September 1997. The Company's principal executive offices are located at 255 Independence Drive, Hyannis, Massachusetts, 02601 and its telephone number is (508) 862-3000. As used in this Prospectus, the "Company" and "Excel" refer to Excel Switching Corporation and its subsidiaries. USE OF PROCEEDS The net proceeds to the Company from the sale of the 4,500,000 shares of Common Stock offered by the Company hereby are estimated to be approximately $61,975,000, assuming an initial public offering price of $15.00 per share and after deducting estimated underwriting discounts and commissions and offering expenses. The Company expects to use the net proceeds for general corporate purposes, including working capital, product development and capital expenditures. A portion of the net proceeds may also be used for the acquisition of other companies, assets, products and technologies that are complementary to those of the Company, although the Company has no commitments or agreements with respect to any such acquisitions, and no portion of the net proceeds has been allocated for any specific acquisition. Pending such uses, the net proceeds of this offering will be invested in investment grade, interest-bearing securities. DIVIDEND POLICY The Company does not expect to pay cash dividends on its Common Stock in the foreseeable future. The Company currently intends to retain all of its future earnings, if any, for use in the operation of the business. In addition, the Company's credit facility restricts the Company's payment of cash dividends. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." 14 CAPITALIZATION The following table sets forth the capitalization of the Company at June 28, 1997 (i) on an actual basis and (ii) as adjusted to give effect to the sale of the 4,500,000 shares of Common Stock offered by the Company hereby, at an assumed initial public offering price of $15.00 per share, after deducting the estimated underwriting discounts and commissions and offering expenses payable by the Company, and the application of the estimated net proceeds therefrom.
JUNE 28, 1997 -------------------- ACTUAL AS ADJUSTED ------- ----------- (UNAUDITED, IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Long term obligations, less current maturities............ $ 3,584 $ 3,584 ------- ------- Stockholders' equity:(1) Preferred stock, $.01 par value; 10,000,000 shares authorized, no shares issued and outstanding........... -- -- Common stock, $.01 par value; 100,000,000 shares authorized, 28,089,600 shares issued and outstanding actual; 100,000,000 shares authorized, 32,589,600 shares issued and outstanding as adjusted(2)........... 281 326 Additional paid-in capital.............................. 1,007 62,937 Deferred compensation................................... (517) (517) Retained earnings....................................... 26,770 26,770 ------- ------- Total stockholders' equity............................ 27,541 89,516 ------- ------- Total capitalization................................ $31,125 $93,100 ======= =======
(1) Gives effect to the filing of the Restated Articles of Organization of the Company on September 16, 1997. (2) Excludes 10,808,640 shares of Common Stock issuable upon exercise of stock options outstanding as of June 28, 1997, of which options to purchase 6,515,940 shares were then exercisable, and (ii) 3,625,000 shares of Common Stock reserved for future issuance under the Company's stock plans. See "Management--Stock Plans" and Note 5 of Notes to Consolidated Financial Statements. 15 DILUTION The net tangible book value of the Company as of June 28, 1997 was approximately $27,541,000 or $.98 per share of Common Stock. Net tangible book value per share is determined by dividing the net tangible book value of the Company (total tangible assets less total liabilities) by the total number of shares of Common Stock outstanding. After giving effect to the sale of the 4,500,000 shares of Common Stock offered by the Company hereby (at an assumed initial public offering price of $15.00 per share, and after deducting estimated underwriting discounts and commissions and offering expenses), the net tangible book value of the Company as of June 28, 1997 would have been $89,516,000 or $2.75 per share. This represents an immediate increase in the net tangible book value of $1.77 per share to existing stockholders and an immediate dilution of $12.25 per share to new investors. The following table illustrates the per share dilution: Assumed initial public offering price per share............... $15.00 Net tangible book value per share before the offering....... $ .98 Increase in net tangible book value per share attributable to new investors........................................... 1.77 ----- Net tangible book value per share after the offering.......... 2.75 ------ Dilution per share to new investors........................... $12.25 ======
The following table summarizes, as of June 28, 1997, the difference between the number of shares of Common Stock purchased from the Company, the total consideration paid to the Company and the average price per share paid by the existing stockholders and by the new investors (at an assumed initial public offering price of $15.00 per share before deduction of estimated underwriting discounts and commissions and offering expenses):
AVERAGE PRICE SHARES PURCHASED TOTAL CONSIDERATION PER SHARE ------------------ ------------------- --------- NUMBER PERCENT AMOUNT PERCENT ---------- ------- ----------- ------- Existing stockholders... 28,089,600 86.2% $ 5,740 0.0% $ -- (/1/) New investors........... 4,500,000 13.8 67,500,000 100.0 15.00 ---------- ----- ----------- ----- Total................. 32,589,600 100.0% $67,505,740 100.0% ========== ===== =========== =====
- -------- (1) The average price per share paid by existing stockholders is $.0002. The foregoing table assumes no exercise of the Underwriters' over-allotment option and no exercise of stock options outstanding at June 28, 1997. As of June 28, 1997, there were options outstanding to purchase 10,808,640 shares of Common Stock at a weighted average exercise price of $1.45 per share and 3,625,000 shares reserved for future issuance under the Company's stock plans. To the extent any of these options are exercised, there will be further dilution to new investors. See "Management--Stock Plans" and Note 5 of Notes to Consolidated Financial Statements. 16 SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data should be read in conjunction with the Company's Consolidated Financial Statements and the Notes thereto, and with Management's Discussion and Analysis of Financial Condition and Results of Operations, included elsewhere in this Prospectus. The selected consolidated statements of income data set forth below for the three years in the period ended December 28, 1996 and the selected consolidated balance sheet data at December 31, 1995 and December 28, 1996 are derived from consolidated financial statements of the Company audited by Arthur Andersen LLP, independent public accountants, which are included elsewhere in this Prospectus. The selected consolidated statements of income data for the two years in the period ended December 31, 1993 and the selected consolidated balance sheet data at December 31, 1992, 1993 and 1994 are derived from consolidated financial statements of the Company audited by Arthur Andersen LLP which are not included in this Prospectus. The selected consolidated financial data for the six months ended June 30, 1996 and June 28, 1997 are derived from the Company's unaudited Consolidated Financial Statements included elsewhere in this Prospectus. The unaudited Consolidated Financial Statements have been prepared by the Company on a basis consistent with the Company's audited financial statements and, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the financial position and results of operations for such periods. Results for the six months ended June 28, 1997 are not necessarily indicative of the results that may be expected for the year ending December 27, 1997 or any other future fiscal year.
YEAR ENDED SIX MONTHS ENDED, ----------------------------------------------- ------------------ DECEMBER 31, ---------------------------------- DECEMBER 28, JUNE 30, JUNE 28, 1992 1993 1994 1995 1996 1996 1997 ----------------- ------- ------- ------------ -------- -------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENTS OF IN- COME DATA: Revenues................ $ 5,111 $10,033 $20,723 $36,161 $62,050 $27,890 $39,055 Cost of revenues........ 1,435 2,945 7,074 12,100 24,312 11,150 12,033 ------- ------- ------- ------- ------- ------- ------- Gross profit.......... 3,676 7,088 13,649 24,061 37,738 16,740 27,022 ------- ------- ------- ------- ------- ------- ------- Operating expenses: Engineering, research and development....... 1,360 1,862 3,301 8,117 11,121 4,994 6,017 Selling and marketing.. 99 140 362 2,923 6,621 2,816 4,882 General and administra- tive.................. 1,525 2,194 2,903 4,238 6,426 2,675 3,851 ------- ------- ------- ------- ------- ------- ------- Total operating ex- penses............... 2,984 4,196 6,566 15,278 24,168 10,485 14,750 ------- ------- ------- ------- ------- ------- ------- Income from opera- tions................ 692 2,892 7,083 8,783 13,570 6,255 12,272 Other income (expense).. (29) (681) (4) 38 (384) (101) 94 ------- ------- ------- ------- ------- ------- ------- Income before provision for income taxes................ 663 2,211 7,079 8,821 13,186 6,154 12,366 Provision for income taxes.................. 194 815 2,889 3,410 5,285 2,467 4,946 ------- ------- ------- ------- ------- ------- ------- Net income.............. $ 469 $ 1,396 $ 4,190 $ 5,411 $ 7,901 $ 3,687 $ 7,420 ======= ======= ======= ======= ======= ======= ======= Net income per share(1)............... $ .01 $ .04 $ .13 $ .16 $ .23 $ .11 $ .22 ======= ======= ======= ======= ======= ======= ======= Weighted average common and common equivalent shares outstanding(1).. 31,519 31,954 32,431 32,913 33,787 33,672 34,012
DECEMBER 31, ---------------------------- DECEMBER 28, JUNE 28, 1992 1993 1994 1995 1996 1997 ------ ------ ------ ------- ------------ ----------- (UNAUDITED) (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Working capital......... $ 656 $2,323 $5,906 $10,238 $14,960 $21,915 Total assets............ 2,277 5,483 9,973 22,683 34,772 44,446 Long-term obligations, less current maturi- ties................... -- -- -- 3,537 3,837 3,584 Total stockholders' eq- uity................... 739 2,255 6,471 12,125 20,086 27,541
- -------- (1) Computed on the basis described in Note 1 of Notes to Consolidated Financial Statements. 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Company's Consolidated Financial Statements and the Notes thereto included elsewhere in this Prospectus. The following discussion contains certain trend analysis and other statements of a forward-looking nature relating to future events or the future financial performance of the Company. Prospective investors are cautioned that such statements are only predictions and that actual results or events may differ materially. In evaluating such statements, prospective investors should specifically consider the risk factors set forth below and identified elsewhere in this Prospectus, particularly the matters set forth under the caption "Risk Factors," which could cause actual results to differ materially from those indicated by such forward-looking statements. OVERVIEW The Company has been profitable since it was founded in 1988 and has financed its operations principally through cash generated from operations. The Company has experienced significant revenue growth resulting, in part, from the increasing acceptance of programmable switching as a means of addressing the enhanced services and wireless and wireline infrastructure needs of network providers. The Company designed and shipped its first programmable switching product, the XLDX, during the fourth quarter of 1988, to Boston Technology, Inc. ("BTI"). The Company subsequently expanded its product offering to include a family of open, programmable switching platforms. The LNX and PCX switching platforms were introduced in 1991 and have been subsequently enhanced. The Company introduced the EXS switching system in 1995 and the CSN switching platform in 1996. Through June 28, 1997, a majority of the Company's revenues have been derived from sales of its LNX switching platform to application developers, OEMs and systems integrators for enhanced services applications. During the early years of the Company's operations, revenues from BTI represented substantially all of the Company's annual revenues. The Company has continued to establish customer relationships with other application developers, OEMs and systems integrators, penetrate new markets, and improve the capacity, functionality and features of its family of products. Currently, the Company sells its products to over 100 customers in a variety of segments of the global telecommunications industry. During 1996 and the first six months of 1997, BTI represented approximately 36.7% and 34.6%, respectively, of the Company's revenues. The Company's products are sold through its direct sales force primarily to application developers, OEMs and systems integrators which incorporate the Company's products into their service and product offerings. The Company sells each of its switching platforms with a varying combination of network interface line cards and service resource cards that are specified by customer and application requirements. The Company's switching platforms range in list price from approximately $21,000 to $275,000 depending upon the platform type, number and type of network interface line and service resource cards. The Company's EXS switching systems range in list price from approximately $500,000 to $4,500,000. The Company also sells additional network interface line cards and service resource cards that allow customers to expand capacity and functionality and provide for redundancy of their installed systems. Revenues from product sales are recognized upon shipment, at which time the Company provides an estimate of anticipated post sale support, warranty costs and sales returns. In addition, the Company estimates reserves to adjust for the realizability of accounts receivable and inventory. While the Company believes its estimates are adequate, actual results could differ from those estimates. Revenues from sales of software development tools and services such as technical support, training and product maintenance have not been significant to date. The Company has not capitalized any software development costs and all research and development costs have been expensed as incurred. The Company's profitability is influenced by a number of factors, including pricing, cost of materials, product and technological advancements from research and development efforts and the expansion of its 18 operations. The Company anticipates the addition of personnel and related infrastructure as it seeks to increase revenues, and to meet other strategic goals such as developing new products and technologies, broadening strategic partnerships with, and incorporating new applications for, its customers, entering new markets and expanding internationally. The Company anticipates that engineering, research and development expenses will increase in absolute dollars, and may increase as a percentage of revenues, as the Company pursues engineering efforts to provide enhanced functionality to its products, increase port capacity and develop additional software features. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentage of revenues represented by certain items reflected in the Company's Consolidated Statements of Income:
YEAR ENDED SIX MONTHS ENDED ---------------------------- ----------------- DECEMBER 31, -------------- DECEMBER 28, JUNE 30, JUNE 28, 1994 1995 1996 1996 1997 ------ ------ ------------ -------- -------- Revenues........................ 100.0% 100.0% 100.0% 100.0% 100.0% Cost of revenues................ 34.1 33.5 39.2 40.0 30.8 ------ ------ ----- ----- ----- Gross profit.................. 65.9 66.5 60.8 60.0 69.2 Operating expenses: Engineering, research and de- velopment..................... 15.9 22.4 17.9 17.9 15.4 Selling and marketing.......... 1.8 8.1 10.7 10.1 12.5 General and administrative..... 14.0 11.7 10.3 9.6 9.9 ------ ------ ----- ----- ----- Total operating expenses...... 31.7 42.2 38.9 37.6 37.8 ------ ------ ----- ----- ----- Income from operations........ 34.2 24.3 21.9 22.4 31.4 Other income (expense).......... -- .1 (.6) (.3) .2 ------ ------ ----- ----- ----- Income before provision for income taxes................. 34.2 24.4 21.3 22.1 31.6 Provision for income taxes...... 14.0 9.4 8.5 8.9 12.6 ------ ------ ----- ----- ----- Net income...................... 20.2% 15.0% 12.8% 13.2% 19.0% ====== ====== ===== ===== =====
SIX MONTHS ENDED JUNE 30, 1996 AND JUNE 28, 1997 Revenues. The Company's revenues consist of sales, primarily in the United States, of its open, programmable switching platforms and related network interface line cards and service resource cards. Revenues increased 40.0% from $27.9 million in the first six months of 1996 to $39.1 million for the comparable period in 1997. This increase resulted from the introduction of new or expanded offerings by existing customers incorporating the Company's products, the expansion of customers' existing markets and the introduction of new applications by new and existing customers. In addition, revenues increased due to increased market penetration resulting from the efforts of the Company's expanded selling and marketing organizations. Revenues from the Company's five largest customers represented approximately 53.8% and 59.9% of the Company's revenues for the first six months of 1996 and 1997, respectively. BTI represented approximately 37.6% and 34.6% of the Company's revenues for these same periods, respectively. Although the Company's largest customers have varied from period to period, the Company believes that revenues derived from current and potential large customers will continue to represent a significant proportion of revenues, and that its results of operations in any given period will continue to depend to a significant extent upon sales to a limited number of customers. There can be no assurance that the Company's principal customers will continue to purchase product at current levels, if at all. Gross Profit. Cost of revenues consists primarily of the cost of purchased components and subassemblies, contract manufacturing costs, labor and overhead relating to material procurement, final assembly, testing and quality control, and warranty and other related costs. Cost of revenues increased 7.9% from $11.2 million in the 19 first six months of 1996 to $12.0 million for the comparable period in 1997. Gross margin increased from 60.0% in the first six months of 1996 to 69.2% in the first six months of 1997. The increase in gross margin was primarily attributable to lower component prices, changes in product mix and increased manufacturing efficiencies as the Company produced larger volumes. In addition, gross margins for the first six months of 1996 were impacted by the introduction of the EXS switching system and related technology which resulted in valuation adjustments of certain existing inventory components. Engineering, Research and Development. Engineering, research and development costs consist primarily of compensation and related costs of engineering and development personnel, materials and supplies consumed in prototype development, related facility costs and depreciation of engineering and test equipment. All research and development costs, including software development costs, have been expensed as incurred. Engineering, research and development costs increased 20.5% from $5.0 million in the first six months of 1996 to $6.0 million for the comparable period in 1997. As a percentage of revenues, these costs were 17.9% and 15.4%, respectively, in such periods. The increase in engineering, research and development costs in absolute dollars was primarily attributable to an increase in engineering and research personnel partially offset by significant decreases in the consumption of prototype supplies and materials. Engineering and research personnel increased from 47 employees at the end of the second quarter of 1996 to 95 employees at the end of the same period in 1997. Selling and Marketing. Selling and marketing costs consist primarily of compensation and related costs for sales, marketing and customer support personnel, travel and advertising, trade show and other promotional activities. Selling and marketing costs increased 73.4% from $2.8 million in the first six months of 1996 to $4.9 million for the comparable period in 1997. As a percentage of revenues, these costs were 10.1% and 12.5%, respectively, in such periods. The increase in selling and marketing costs in absolute dollars was primarily attributable to an increase in sales, marketing and customer support personnel from 43 employees at the end of the second quarter of 1996 to 54 employees at the end of the same period in 1997. In addition, trade show and promotional activities in the first six months of 1997 contributed to this increase. General and Administrative. General and administrative costs include compensation and related costs of management and administrative personnel, professional services, costs to implement and maintain manufacturing and management information systems and other general corporate expenses. General and administrative costs increased 44.0% from $2.7 million in the first six months of 1996 to $3.9 million for the comparable period in 1997. As a percentage of revenues, these costs were 9.6% and 9.9%, respectively, in such periods. The increase in general and administrative costs was primarily attributable to an increase in general and administrative personnel from 30 employees at the end of the second quarter of 1996 to 38 employees at the end of the same period in 1997. In addition, expenditures for professional services contributed to the increase in general and administrative costs. Other Income (Expense). Other income (expense), which primarily includes interest income and interest expense, was ($101,000) and $94,000 for the first six months of 1996 and 1997, respectively. Provision for Income Taxes. The Company's effective rate for Federal and state income taxes was 40.1% and 40.0% for the first six months of 1996 and 1997, respectively. YEARS 1994, 1995 AND 1996 Revenues. Revenues increased 74.5% from $20.7 million in 1994 to $36.2 million in 1995 and increased 71.6% to $62.1 million in 1996. The increases resulted, in part, from the Company's continuing efforts to enhance the scalability, performance, capacity and functionality of its products through the modification and introduction of features and products, including the introduction of the EXS switching system in 1995 and the CSN switching platform in 1996. The increase in revenues in each of the years also resulted from the introduction of new or expanded offerings by existing customers incorporating the Company's products, the introduction of new applications by new and existing customers and the expansion of the Company's selling and marketing efforts. 20 Revenues from the Company's five largest customers represented approximately 65.4%, 70.1% and 57.1% of the Company's revenues for 1994, 1995 and 1996, respectively. During 1994, 1995 and 1996, BTI represented approximately 33.1%, 40.6% and 36.7%, respectively, of the Company's revenues. Additionally, 11.4% of the Company's revenues in 1995 were derived from sales to Ericsson Messaging Systems Inc. and 10.0% of the Company's revenues in 1994 were derived from sales to AccessLine Technologies, Inc. Gross Profit. Cost of revenues increased from $7.1 million in 1994 to $12.1 million in 1995 and to $24.3 million in 1996. The gross margin increased from 65.9% in 1994 to 66.5% in 1995 and decreased to 60.8% in 1996. The increase in gross margin in 1995 was attributable primarily to greater manufacturing efficiencies achieved in producing larger volumes in the same manufacturing facility. The decrease in gross margin in 1996 resulted primarily from the introduction of the EXS switching system and related technology, which resulted in valuation adjustments of certain existing inventory components. Increased warranty and related support costs also contributed to the decline in gross margin. In addition, gross margin was negatively impacted by the Company's relocation of its manufacturing operations in November 1995, the subsequent expansion of this facility in 1996 and increased compensation and related costs associated with the Company's efforts to strengthen its manufacturing infrastructure. Engineering, Research and Development. Engineering, research and development costs increased from $3.3 million in 1994 to $8.1 million in 1995 and to $11.1 million in 1996. As a percentage of revenues, engineering, research and development expenses were 15.9%, 22.4% and 17.9% for 1994, 1995 and 1996, respectively. The increases in engineering, research and development costs in absolute dollars were primarily attributable to continuing efforts to expand the Company's research and development infrastructure. Engineering, research and development personnel increased from 28 employees at the end of 1994 to 38 employees at the end of 1995 and to 68 employees at the end of 1996. Increases also resulted from the timing and amount of the consumption of materials used for prototypes in the development process. The Company's relocation in 1995 to a larger facility and capital investments made in 1995 and 1996 in engineering and test equipment resulted in increased occupancy costs and depreciation expenses for both years. Selling and Marketing. Selling and marketing costs increased from $362,000 in 1994 to $2.9 million in 1995 and to $6.6 million in 1996. As a percentage of revenues, these costs were 1.8%, 8.1% and 10.7% for 1994, 1995 and 1996, respectively. The increase in selling and marketing costs reflects the expansion of the Company's sales, marketing and customer support personnel from seven employees at the end of 1994 to 28 employees at the end of 1995 and to 51 employees at the end of 1996. During 1995 and 1996, the Company's expanded efforts to market and promote its products through trade shows, advertising, public relations and other promotional activities also resulted in increased selling and marketing costs. The Company's relocation in 1995 and the opening of four sales offices in 1996 resulted in increased occupancy costs in 1995 and 1996. General and Administrative. General and administrative costs increased from $2.9 million in 1994 to $4.2 million in 1995 and to $6.4 million in 1996. As a percentage of revenues, these costs were 14.0%, 11.7% and 10.3% for 1994, 1995 and 1996, respectively. The increase in general and administrative costs in absolute dollars resulted primarily from an increase in general and administrative personnel from six employees at the end of 1994 to 21 employees at the end of 1995 and to 35 employees at the end of 1996. The Company's efforts to expand and strengthen the administrative infrastructure included the additions of a Chief Financial Officer, Chief Operating Officer and other personnel in the areas of finance, human resources and purchasing. Beginning in 1995 and continuing in 1996, the Company made significant investments in its manufacturing and management information systems, including the implementation of its enterprise resource planning system. The Company's relocation to larger facilities in 1995 resulted in increased occupancy and depreciation costs in 1995 and 1996. Other Income (Expense). Other income (expense) was ($4,000), $38,000 and ($384,000) for 1994, 1995 and 1996, respectively. Provision for Income Taxes. The Company's effective rate for Federal and state income taxes was 40.8%, 38.7% and 40.1% for 1994, 1995 and 1996, respectively. 21 QUARTERLY RESULTS OF OPERATIONS The following tables set forth certain unaudited quarterly financial information for the six quarters in the period ended June 28, 1997 in dollars and as a percentage of revenues. This information is derived from unaudited consolidated financial statements and has been prepared on the same basis as the Company's Consolidated Financial Statements which appear elsewhere in this Prospectus. In the opinion of the Company's management, this information reflects all adjustments, (consisting only of normal recurring adjustments), necessary for a fair presentation of the information when read in conjunction with the Company's Consolidated Financial Statements and the Notes thereto. The results for any quarter are not necessarily indicative of future quarterly results of operations, and the Company believes that period-to-period comparisons should not be relied upon as an indication of future performance.
QUARTER ENDED ---------------------------------------------------------- MARCH 31, JUNE 30, SEPT. 30, DEC. 28, MARCH 29, JUNE 28, 1996 1996 1996 1996 1997 1997 --------- -------- --------- -------- --------- -------- (IN THOUSANDS) Revenues................ $12,222 $15,668 $16,439 $17,721 $18,518 $20,537 Cost of revenues........ 4,751 6,399 6,406 6,756 5,860 6,173 ------- ------- ------- ------- ------- ------- Gross profit........... 7,471 9,269 10,033 10,965 12,658 14,364 ------- ------- ------- ------- ------- ------- Operating expenses: Engineering, research and development....... 2,702 2,292 2,772 3,355 2,942 3,075 Selling and marketing.. 1,064 1,752 1,677 2,128 2,297 2,585 General and administrative........ 1,164 1,511 1,898 1,853 1,959 1,892 ------- ------- ------- ------- ------- ------- Total operating expenses.............. 4,930 5,555 6,347 7,336 7,198 7,552 ------- ------- ------- ------- ------- ------- Income from operations............ 2,541 3,714 3,686 3,629 5,460 6,812 Other income (expense).. (15) (86) (136) (147) 44 50 ------- ------- ------- ------- ------- ------- Income before provision for income taxes...... 2,526 3,628 3,550 3,482 5,504 6,862 Provision for income taxes.................. 1,013 1,454 1,424 1,394 2,201 2,745 ------- ------- ------- ------- ------- ------- Net income.............. $ 1,513 $ 2,174 $ 2,126 $ 2,088 $ 3,303 $ 4,117 ======= ======= ======= ======= ======= ======= AS A PERCENTAGE OF REVENUES ---------------------------------------------------------- MARCH 31, JUNE 30, SEPT. 30, DEC. 28, MARCH 29, JUNE 28, 1996 1996 1996 1996 1997 1997 --------- -------- --------- -------- --------- -------- Revenues................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of revenues........ 38.9 40.8 39.0 38.1 31.7 30.1 ------- ------- ------- ------- ------- ------- Gross profit........... 61.1 59.2 61.0 61.9 68.3 69.9 ------- ------- ------- ------- ------- ------- Operating expenses: Engineering, research and development....... 22.1 14.6 16.9 18.9 15.9 15.0 Selling and marketing.. 8.7 11.2 10.2 12.0 12.4 12.5 General and administrative........ 9.5 9.6 11.5 10.5 10.5 9.2 ------- ------- ------- ------- ------- ------- Total operating expenses.............. 40.3 35.4 38.6 41.4 38.8 36.7 ------- ------- ------- ------- ------- ------- Income from operations............ 20.8 23.8 22.4 20.5 29.5 33.2 Other income (expense).. (.1) (.6) (.8) (.8) .2 .2 ------- ------- ------- ------- ------- ------- Income before provision for income taxes...... 20.7 23.2 21.6 19.7 29.7 33.4 Provision for income taxes.................. 8.3 9.3 8.7 7.9 11.9 13.4 ------- ------- ------- ------- ------- ------- Net income.............. 12.4% 13.9% 12.9% 11.8% 17.8% 20.0% ======= ======= ======= ======= ======= =======
22 The Company has experienced significant fluctuations in revenues, expenses and results of operations from quarter to quarter, and such fluctuations are likely to continue. The Company typically receives more product orders and generates greater revenues in the fourth quarter. During the last several years, revenues in the first quarter have typically been lower than those recorded in the preceding fourth quarter. The Company believes that this concentration of order placements in specific quarterly periods is due to customers' buying patterns and budgeting cycles. A significant portion of the Company's revenues have been generated from a limited number of customers and it is difficult to predict the timing of future orders and shipments to these and other customers. The Company anticipates that its results of operations in any given period will continue to depend to a significant extent upon sales to a small number of customers. The Company has also experienced significant variations in its quarterly gross margins, particularly during 1996. This fluctuation was caused by several factors. During 1996, the introduction of the EXS switching system and related technology resulted in valuation adjustments of certain inventory components. The relocation and subsequent expansion of the Company's manufacturing facility and the development of manufacturing infrastructure also resulted in quarterly increases in occupancy and overhead costs. The Company's expenditures for engineering, research and development have varied from quarter to quarter primarily as a result of the timing and number of additions of personnel and related compensation costs, and the amount, timing and significance of prototype supplies and materials consumed in product prototype development and testing. The Company's selling and marketing and general and administrative expenses have generally increased on a quarterly basis primarily as a result of the timing and number of additions in personnel and compensation and related costs and the timing, number and significance of specific marketing and sales activities such as trade shows and other promotional activities. The relocation of the Company's facilities resulted in increased occupancy costs in 1996 and 1997. Overall, operating expenses vary with the number, timing and significance of additional product and product enhancement introductions by the Company and its competitors, increased competition, the gain of significant customers or the reduction in orders from customers, the hiring of personnel and general economic conditions. All of the above factors are difficult for the Company to forecast and these or other factors may have a material adverse effect on the Company's business, financial condition and results of operations for one quarter or a series of quarters. Customers can cancel or reschedule shipments, and development or production difficulties could delay shipments. Only a small portion of the Company's operating expenses vary with revenues in the short term and there would likely be a material adverse effect on the Company's business, financial condition and results of operations if revenues are lower than expected. Based on all of the foregoing, the Company believes that quarterly revenues and results of operations are likely to vary significantly in the future and that period-to-period comparisons of its results of operations are not necessarily meaningful and should not be relied upon as indications of future performance. See "Risk Factors--Fluctuations in Results of Operations." LIQUIDITY AND CAPITAL RESOURCES Since inception, the Company has funded its operations primarily through cash provided by operations. During 1994, 1995 and 1996, cash provided by operating activities totaled $2.2 million, $1.2 million and $7.3 million, respectively. The decrease in 1995 was primarily the result of increases in accounts receivable and inventory levels partially offset by increases in net income, accounts payable and accrued expenses. The increase in 1996 was primarily attributable to increases in net income, accrued expenses and accrued income taxes, partially offset by an increase in deferred income taxes and a decrease in accounts payable. Cash provided by operating activities for the first six months of 1996 and 1997 was $212,000 and $9.7 million, respectively. The increase in the 1997 period was primarily attributable to an increase in net income and a decrease in inventories. 23 The Company's investing activities consumed $940,000, $4.1 million and $4.1 million in 1994, 1995 and 1996, respectively. During the first six months of 1996 and 1997, investing activities consumed $2.5 million and $2.3 million, respectively. The majority of these expenditures reflect the acquisition, renovation and expansion of the Company's facilities and the purchase of capital equipment. During 1995, the Company purchased and renovated two buildings and related land for approximately $3.2 million. These acquisitions and renovations were financed, in part, by the proceeds from a $2.6 million secured loan from a bank. This loan requires monthly principal and interest payments of approximately $26,000 through April 2010. Interest accrues at the bank's prime rate plus .75%. This loan is secured by the two buildings and related land having a carrying value of approximately $3.1 million at June 28, 1997. In 1995, the Company entered into a building lease which requires monthly payments ranging from approximately $12,000 to $14,000 through July 2000. The lease can be extended through July 2005 and includes a purchase option exercisable, beginning in August 1998, for $875,000. The Company intends to exercise this option as early as possible, and accordingly, has reflected this lease as a capital transaction. On June 30, 1997, the Company purchased property to be used for the construction of an additional building. The purchase price of $575,000 and the estimated construction costs of $3.6 million will be financed, in part, by a $2.1 million Real Estate Promissory Note with a bank, of which $460,000 has been advanced to the Company to date. Borrowings under this note shall bear interest at prime (8.5% at June 28, 1997) plus .25% and are secured by the property and certain other assets. Monthly payments of interest are required beginning in July 1997. Beginning in July 1998, monthly payments of principal and interest will be made over a period of fifteen years. The Company's unsecured line of credit arrangement with a bank provides up to $10.0 million in credit availability. Borrowings under this agreement are limited to 75% of eligible accounts receivable plus 50% of certain inventories. Borrowings under this agreement bear interest, at the Company's discretion, at either the bank's base rate (8.5% at June 28, 1997) or the Eurodollar rate (5.7% at June 28, 1997) plus 2.5%. The agreement requires the Company to comply with certain financial covenants and restricts the Company's ability to pay cash dividends. During the first six months of 1996, the Company borrowed $2.3 million against this line of credit. There were no amounts outstanding under this line of credit at December 28, 1996 or June 28, 1997. At June 28, 1997, the Company's principal sources of liquidity consisted of cash, cash equivalents and short-term investments of approximately $12.2 million, working capital of approximately $21.9 million and $10.0 million of funds available under the bank line of credit. The Company believes that the net proceeds of this offering, together with available funds and cash generated from operations, will be sufficient to meet the Company's working capital requirements for at least the next 12 months. 24 BUSINESS Excel is a leading provider of open switching platforms for telecommunications networks worldwide. The Company develops, manufactures, markets and supports a family of open, programmable, carrier-class switches that addresses the complex enhanced services and wireless and wireline infrastructure needs of network providers. Excel's products offer network providers the flexibility to address multiple market applications and the scalability to deploy a variety of system capacities. The Company's programmable switching platforms enable network providers to deliver improved networking functionality at a lower cost than purchasing, upgrading or reprogramming traditional, closed, central office switches. The Company's products are currently deployed in telecommunications networks in approximately 50 countries throughout the world. Excel offers a family of programmable switching platforms that are designed with distributed architecture and open software to maximize performance and provide multiple levels of programmability and redundancy. Excel's open switching platforms integrate with a wide variety of host computer systems, operating systems and application development environments. The Company's product family scales from 512 to 30,720 ports. Using Excel's patented Programmable Protocol Language ("PPL"), application developers can customize the switching software to their unique requirements, allowing them to introduce new services and applications rapidly. As customer requirements evolve, the Excel platform can be upgraded without requiring extensive and complex programming changes to the underlying software. The Company sells to a variety of customers in the worldwide telecommunications market, including application developers, original equipment manufacturers ("OEMs") and systems integrators. These customers include Boston Technology, Inc., Brite Voice Systems, Inc., Ericsson Messaging Systems Inc., Glenayre Technologies Inc., IEX Corporation, MCI Communications Corporation, Octel Communications Corporation, Phoenix Wireless Group, Inc., Priority Call Management, Inc., QUALCOMM Incorporated and WorldCom, Inc. Excel's customers integrate the Company's open, programmable switching platforms with their product offerings to address a variety of market applications for network providers, ranging from enhanced services such as voice messaging, one number services and prepaid debit cards, to wireless and wireline infrastructure services such as tandem switching, mobile switching centers and intelligent base station controllers. Network providers which have installed Excel's products include AT&T Corp., Ameritech Corporation, Bell Atlantic Corporation, BellSouth Corporation, British Telecommunications plc, GTE Corporation, MCI Communications Corporation, Nippon Telegraph and Telephone Corporation, Pacific Bell, Sprint Corporation, Telstra Corporation Ltd., Time Warner Inc. and WorldCom, Inc. INDUSTRY BACKGROUND Global deregulation and technological advances have led to significant change in the worldwide telecommunications market. Increased telecommunications service demand coupled with the advent of new carriers are creating an intensely competitive environment for network providers. In the United States, competition exists among the Regional Bell Operating Companies ("RBOCs"), Interexchange Carriers ("IXCs"), Local Exchange Carriers ("LECs"), Competitive Local Exchange Carriers ("CLECs"), wireless carriers and cable television broadcasters. Internationally, established network providers ("PTTs") are facing competition from emerging alternative wireless and wireline carriers. Increasing competitive pressures in the United States and internationally are forcing network providers to lower infrastructure costs, increase network flexibility and offer new and enhanced services. These challenges require network providers to deploy new services rapidly and cost- effectively, while protecting their existing infrastructure investment. Functionality of the core telecommunications switching infrastructure has not developed as quickly as network providers demand. Traditional telecommunications switches are designed for specific uses, and as a result, are time-consuming and expensive to modify for new applications. These traditional, closed switches do not provide the scalability, flexibility or cost-effectiveness to address the requirements of enhanced services or wireless and wireline infrastructure. In addition, traditional switches are not compatible among vendors nor are they easily adaptable to different international network signaling requirements. 25 Enhanced Services The evolving telecommunications environment is increasingly forcing network providers to differentiate their offerings. As network providers strive to capture or maintain market share and stimulate usage, they must offer as standard features many enhanced services that were once offered as premium applications. Enhanced services include such diverse telephony applications as voice messaging, one number services, paging, e-mail, fax messaging, unified messaging, voice recognition dialing, prepaid debit cards and conference bridging. Once deployed, enhanced services enable network providers to increase revenues through subscription fees and greater network utilization. Open, programmable switches address an emerging market for enhanced services as application developers, OEMs and systems integrators increasingly are able to develop applications that were once controlled by closed switch vendors. Systems designed by traditional switch vendors are not easily modified for enhanced services. Using open, programmable switching platforms, network providers are able to implement applications cost-effectively today that can scale as customer demand increases over time, while protecting their existing investment in legacy switches. Wireless Infrastructure Deregulation, increased consumer demand, increased competition for subscribers and price/performance improvements in service have led to rapid growth in the wireless infrastructure market. The wireless infrastructure market includes traditional cellular systems, emerging personal communication services ("PCS"), wireless local loop and mobile satellite systems. Wireless infrastructure equipment for these markets needs to address both high and low mobility wireless networks and accommodate analog and emerging digital standards such as CDMA, GSM and PCS-1900. Network providers are seeking solutions that will allow them to meet today's market demands cost-effectively while scaling to meet future requirements. According to an industry source, the worldwide cellular and PCS subscriber base is expected to grow approximately 20% per year to reach 300 million users by the year 2000. Network providers also are seeking an alternative to the expensive and traditional infrastructure of the telephone network to address the local loop. As widespread replacement or installation of copper wireline remains prohibitively expensive, the market for wireless systems to provide basic telephone service has emerged. Open, programmable switches provide the speed, scalability and cost- effectiveness that wireless network providers are seeking. Programmable switches enable wireless network providers to prototype, test and deploy new wireless services in a rapid timeframe. Open, programmable switches can scale incrementally as the wireless subscriber base expands or demands more services, allowing wireless network providers to make cost-effective initial infrastructure investments. In addition, open, programmable switches enable wireless network providers to add enhanced services to their networks using the same infrastructure platform. Wireline Infrastructure Traditional switching technology has not kept pace with the new applications and service requirements generated by the rapid growth and competitive changes within the global telecommunications markets. New entrants, such as CLECs, long distance resellers and emerging international network providers, do not wish to invest in or incur the high operating costs of traditional, inflexible, single-purpose switching equipment. Many of these new network providers must initially compete with incumbent RBOCs, LECs, IXCs and PTTs for subscribers based upon lower prices and improved services. In addition, many existing network providers are expanding into new markets, such as the RBOCs entering the long distance market and the IXCs entering the local exchange market. To compete in these new markets, incumbent providers must add cost- effective switches to their current networking infrastructure. Using open, programmable switching platforms, network providers can build flexible, cost-effective wireline infrastructures which can be adapted to their specific service requirements. With open, programmable switching platforms, network providers can scale their networks as they add subscribers and implement new and enhanced services using the same infrastructure. Open, programmable switches have recently been implemented in tandem switching, one- plus dialing, international call-back services and international gateway. 26 Initial Programmable Switching Products Several companies market switching products aimed at addressing the limitations of traditional, closed switches. However, the initial switching products designed to address this opportunity have not satisfied the requirements of network providers. Initial products positioned as open, programmable switches have been configurable, but have lacked the programmability, openness, flexibility and scalability needed to address a wide range of enhanced services and wireless and wireline infrastructure requirements. The Company believes that network providers are demanding telecommunications switches that are truly open and programmable, thereby enabling them rapidly and cost-effectively to meet their enhanced services and infrastructure requirements. THE EXCEL SOLUTION Excel has developed open, programmable switching platforms that allow network providers to offer cost-effective, scalable and flexible enhanced services and wireless and wireline communications with a time-to-market advantage over conventional switching platforms. The Company's integrated hardware and software solutions are designed to offer the following benefits: Open Programmability. The Company's product architecture is designed to be open at multiple software programming levels, including the protocol, call control, digital signal processing, resource provisioning and application levels. Using these programmability features, network providers can rapidly integrate applications with non-standard and international protocol variations and offer customized services to their end-users. Excel's switching platforms offer complete programmability, rather than configurability, from the host computer. They are designed to be truly open, allowing customers to control their own applications, and to have the capability to modify any function of the software within the platform at any level, time or geographic location. Rapid Time-to-Market. The Company's products are designed to allow application developers to offer network providers new services more quickly than with conventional switching platforms. Excel's open programmability facilitates rapid deployment of these services in domestic and international markets by integrating rapidly with various signaling protocols and global network standards. Flexibility. The Company's switching platforms can be programmed by a customer to be used for a wide-range of enhanced services and wireless and wireline infrastructure applications. Scalability. The distributed and modular nature of Excel's switching platforms allows network providers to expand their networks easily as the subscriber base increases. Excel's switching platforms can scale from 512 to 2,048 ports within the individual chassis and total system capacity can be expanded to 30,720 ports through the use of Excel's patented fiber optic expansion network, EXNET. In addition, network providers can migrate across the Company's product family without undertaking expensive and time consuming modifications to the host platform. Distributed Architecture. The Company's products are designed with distributed architecture utilizing its patented Selective Space Switching technology and a fiber optic expansion network. These designs increase reliability and allow linear growth in performance as resources are added. Cost-Effective. Excel's products offer increased capacity, performance and functionality for a lower initial investment and reduced operational costs than traditional, closed switches. Redundancy and Reliability. The Company's carrier-class products are designed to meet the high redundancy and reliability requirements demanded by network providers. The redundant features of the Company's products ensure that critical applications remain operational. STRATEGY Excel's objective is to be a leader in open, programmable switching platforms for telecommunications networks worldwide. The key elements of the Company's strategy are to: 27 Focus on Open Telecommunications Technology. Since its inception, the Company has focused on developing, manufacturing and selling truly open, software-based programmable switching platforms. Openness is the ability to modify easily and rapidly any function of the software within the switching platform at any level, time or geographic location. All of the Company's products have been originally designed, rather than reengineered, to be open. To date, the Company has focused on enhancing its open architecture within the switching platforms. The Company is now focusing its research and development efforts to extend to applications the same level of openness established in its switching platforms. Excel believes this effort will allow application developers to accelerate the introduction of their products and services. Maintain and Strengthen Relationships with Application Developers, OEMs and Systems Integrators. Excel has built a market leadership position through its relationships with application developers, OEMs and systems integrators. The Company has worked with over 100 application developers, OEMs and systems integrators which market a wide variety of products and services based on the Company's technology. The Company believes that these relationships improve its understanding of the requirements of network providers and generate demand for a variety of market applications. The Company intends to strengthen its current relationships and develop new relationships with application developers, OEMs and systems integrators to increase the number and scope of applications which incorporate the Company's products. Provide Superior Customer Service and Support. The Company believes that providing a high level of service and support is a competitive advantage in developing key customer relationships. Excel focuses its customer support services on helping customers to integrate Excel's products into their applications rapidly. The Company's open, programmable software allows it to help its customers make detailed, on site platform modifications, without significant involvement of research and development resources. Expand Existing Markets and Enter Emerging Markets. Excel seeks to increase its market share through further collaboration with existing customers and increased penetration of existing applications markets. In addition, the Company is focusing on emerging geographic and product markets by developing new application developer, OEM and systems integrator relationships and expanding its sales and marketing efforts to international markets. Establish Open, Programmable Switching as an Industry Standard. The Company intends to leverage its market leadership position to establish open, programmable switching platforms as a standard in the telecommunications industry. The Company is working directly with network providers to accelerate the adoption of open, programmable switching into the core telecommunications infrastructure. PRODUCTS AND TECHNOLOGY PRODUCTS The Company offers a family of open, programmable switching products for application developers, OEMs and systems integrators. The Company's product family consists of four switching products: the LNX, a 2,048 port switching platform; the CSN, a 1,024 port switching platform; the PCX, a 512 port switching platform; and the EXS, a 30,720 port switching system. All of the Company's products can be used in a wide range of enhanced services and wireless and wireline infrastructure applications. All of Excel's products share a common software architecture, allowing any specific application to run on any platform, and are designed with multiple levels of redundancy. The LNX and CSN switching platforms share a set of common card components which include network interface line cards such as T1, E1 and J1 interfaces, and service resource cards such as multi-function Digital Signal Processors, Primary Rate ISDN, SS7 and DASS2. Excel's network interface line cards provide direct connectivity to, and ease of integration with, a variety of international signaling protocols. The service resource cards provide customers with a range of common 28 channel signaling and switching applications, offering network providers the ability to control their applications and the flexibility to expand to other services or signaling protocols as needed. Multiple cards can be installed on a single chassis to manage various signaling and call control capabilities or to provide fault tolerant configurations. In addition, the Company offers network interface line cards and service resource cards separately to allow customers to upgrade previously deployed switching platforms. EXCEL PRODUCT FAMILY
CURRENT CURRENT YEAR MAXIMUM LIST PRICE FIRST PRODUCT PORT CAPACITY DESCRIPTION RANGE SHIPPED - ------------------------------------------------------------------------------- LNX 2,048 --High capacity, 20-card switch in 1991 small chassis $68,000 --Redundant options for all modules to --Full cxompliance for central office environment $275,000 - ------------------------------------------------------------------------------- CSN 1,024 --Midrange capacity, 8-card switch 1996 in compact chassis $47,000 --Same redundant options and cards as LNX to --Full compliance for central office environment $95,000 - ------------------------------------------------------------------------------- PCX 512 --Stand-alone solution for 1991 customer premises equipment $21,000 environment to --Integrates with standard voice processing resources $49,000 - ------------------------------------------------------------------------------- EXS 30,720 --Designed to use LNX and CSN $500,000 1995 nodes as building blocks to --EXNET 1.2 Gbps fiber optic expansion network $4,500,000
- ------------------------------------------------------------------------------- LNX The LNX is a 2,048 port, non-blocking, open, programmable switching platform which provides high performance and fault tolerance in a small chassis. With all modules supporting redundant configurations, the LNX is designed for central office environments requiring a high level of reliability and ease of maintainability. The LNX can operate as a stand-alone switch or as a node in Excel's patented EXS switching system, currently supporting scalability up to 30,720 non-blocking ports. The LNX consists of the 2,048 port matrix card residing in a 20-slot chassis, a host interface and a fully configurable combination of network interface line and service resource cards. All LNX cards can be replaced while the system is operating ("hot-swappable"), providing ease of maintenance and upgrading without interruption of service. The predecessor to the LNX, the XLDX, is a 1,536 port programmable platform first installed in a central office environment in 1988. XLDX systems are still supported by the Company for customers with an XLDX installed base. CSN The CSN is a 1,024 port, non-blocking, open, programmable switching platform that provides the same features and scalability as the LNX but in a more compact chassis. The CSN utilizes the same common elements of network line interfaces, service resources, common channel signaling packet engines and host interfaces as the LNX, with the same reliability features such as hot- swappability and full redundancy. The CSN is well suited for wireless applications where space constraints dictate the need for carrier-class switching within a compact chassis. PCX The PCX is a PC-based, 512 port, non-blocking, open, programmable switching platform that supports the same programmable features and shares the same hardware and software architecture as the LNX and CSN 29 platforms. The PCX is designed for the customer premises equipment marketplace to provide a total solution in a small chassis, addressing the needs of midrange switching applications. With its PC-based platform, the PCX can support an internal host processor as well as internal voice processing resources. The PCX enables application developers to combine Excel's programmable switching features with industry-standard voice processing technology for a single, stand-alone solution. EXS The EXS is an open, non-blocking system comprised of LNX and CSN programmable switching platforms distributed across EXNET, the Company's fiber optic expansion network. The current EXNET network can support up to 30,720 ports, encompassing any combination of LNXs and CSNs. The patented EXS architecture is designed to allow further expansion beyond the current 30,720 ports. Parallel EXNET fiber networks can also be used to create fully redundant systems to ensure maximum availability and fault tolerance. Because each EXS node is a self-contained LNX or CSN switching platform, processing power can scale linearly as the system is expanded. Individual LNX or CSN nodes can be isolated and serviced without the entire system being brought out-of-service, providing ease of maintenance. Since each node can operate and process calls independently, total system reliability and availability is increased. TECHNOLOGY Selective Space Switching Technology A unique aspect of Excel's distributed architecture is its patented Selective Space Switching technology which allows the platform's internal bus to switch traffic between any input or output port, DSP, packet engine resource or EXNET Controller without losing critical port capacity. Unlike traditional switches, with Selective Space Switching technology, available port capacity is not compromised as additional modules are added. When resource modules are added, the platform's switching capacity increases, and its full non-blocking switch port capacity is retained. Open Software Technology Unlike traditional, proprietary switches, Excel's programmable platforms share a common, open, software architecture designed to be programmable by third parties. The open programmability of Excel's switching platforms is based on its Application Programming Interface ("API") and its patented Programmable Protocol Language ("PPL"). The API is a message-based protocol designed for communication between the programmable switching platform and the application software located on a host computer. Excel's open API allows the application software to access call processing control, configuration, maintenance and alarm reporting functions within the switch at a level that is not currently available in competitive products. Excel's API is compatible across the Company's product family. Excel's PPL is a patented technology that provides an easy and convenient mechanism for developers and operators to implement modifications at multiple programming levels without having to write complex software code. Protocols are developed and modified using a graphical user interface development environment, requiring the user to have only limited software programming experience. With PPL, support personnel can easily effect detailed changes to the switching software on site without using expensive equipment or requiring additional technical personnel. These benefits provide increased software maintainability while reducing development costs and eliminating customized work for Excel and its customers. Using its PPL technology, Excel is continually working with its customers to provide additional domestic and international network interfaces. 30 CUSTOMERS The Company has sold its products to over 100 customers in a variety of segments of the telecommunications industry. The Company's customers include application developers, OEMs and systems integrators. Approximately 33.1%, 40.6% and 36.7% of the Company's revenues in 1994, 1995 and 1996, respectively, were derived from sales to Boston Technology, Inc., approximately 11.4% of the Company's revenues in 1995 were derived from sales to Ericsson Messaging Systems Inc. and approximately 10.0% of the Company's revenues in 1994 were derived from sales to AccessLine Technologies, Inc. The twenty largest revenue producing customers in 1996 or in the first six months of 1997 were: AccessLine Technologies, Inc. Octel Communications Corporation AETHOS Communications Systems, Inc. Open Development Corporation Boston Communications Group, Inc. Phoenix Wireless Group, Inc. Boston Technology, Inc. Priority Call Management, Inc. Brite Voice Systems, Inc. QUALCOMM Incorporated Ericsson Messaging Systems Inc. Technology Control Systems Inc. EX-EL Enterprises, Ltd. Telegroup Inc. Glenayre Technologies, Inc. Telos Engineering Limited IEX Corporation Transaction Network Services, Innovative Telecom Corporation Inc. InterExchange Inc. XNT Systems, Inc. Magellan Network Systems, Inc. USA Global Link MCI Communications Corporation WorldCom, Inc. The primary end-users of the Company's products are public network providers, including RBOCs, IXCs, LECs, CLECs, wireless carriers and PTTs. The Company's products also are used by a number of large corporations to satisfy specific telecommunications requirements. Representative network providers which have installed the Company's products include: UNITED STATES AND CANADA ALLTEL Corporation Contel Corporation Sprint Corporation AT&T Corp. Cox Communications, Inc. Telegroup Inc. Ameritech Corporation Frontier of Rochester Teleport Communications Bell Atlantic Link USA International, Group Inc. Corporation Inc. Time Warner Inc. Bell Canada MCI Communications USFI, Inc. BellSouth Corporation Corporation WorldCom, Inc. Citizens Utilities Co. Pacific Bell SBC Communications Inc. AUSTRALIA AND ASIA SOUTH AND CENTRAL EUROPE AND MIDDLE EAST AMERICA DDI Corp. (Japan) BelgaCom Hong Kong Telecom CSL BellSouth Cellular S.A. British Limited (Chile) Telecommunications plc Hutchinson Companhia Telefonica E-Plus Mobilfunk GmbH Telecommunications Ltd. Brasil Central PTT Telecom Netherlands (China) TelCel, S.A. (Venezuela) Mercury One-2-One Malaysian Resources Telecommunications of (United Kingdom) Corporation Bhd Jamaica Limited Telia AB New World Telephone Ltd. Telefonos de Mexico, General Directorate of (China) S.A. de C.V. PTT (Turkey) Nippon Telegraph and Telephone Corporation PakTel Ltd TelecomAsia (Thailand) Telekom Malaysia Telstra Corporation Ltd. 31 The following case studies describe the manner in which the Company's three largest revenue producing customers in 1996 use the Company's products in their applications and services: Boston Technology, Inc. ("BTI"), a customer since 1988, uses Excel's products to deliver a variety of enhanced services software and systems to the telecommunications industry. Excel's products provide the base switching platform for BTI's enhanced services applications such as call answering, voice and unified messaging and pre-paid calling card. The Company's switching products, when integrated with BTI's applications, act as an intelligent front end that efficiently distributes advanced messaging traffic. The open programmability and distributed architecture of Excel's products allow BTI to customize and enhance its applications rapidly while providing it with the ability to scale capacity from entry level systems to large cluster configurations required by major network providers. The ease of use of PPL has allowed BTI to design cost-effectively and implement enhanced services applications for both wireless and wireline network providers in more than 13 countries worldwide. The Company's open platform architecture assists BTI in working with other Excel customers to increase BTI's application offerings for network providers. In August 1997, BTI announced its intended merger with Comverse Technologies, Inc. QUALCOMM Incorporated ("QUALCOMM") provides advanced communications systems and products based upon its proprietary CDMA (code division multiple access) digital wireless technology. QUALCOMM uses the Company's switching platforms in its Intelligent Base Station Controller ("IBSC") products, which manage numerous base station transceiver subsystems and connect wireless subscribers to the public wireline network. The IBSCs have become the intelligent nodes of a distributed wireless network. Excel's open products, with their distributed architecture and programmable software, provide QUALCOMM with a cost-effective and flexible switching solution. QUALCOMM uses the Company's products to provide a CDMA infrastructure solution for digital cellular, PCS and wireless local loop networks. Priority Call Management, Inc. ("PCM") is a developer of network-based platforms that enable wireless and wireline network service providers as well as Fortune 1000 companies to create and offer one number prepaid calling and enhanced messaging solutions. PCM utilizes the Company's full range of products to deliver pre-paid calling card, pre-paid cellular, international call-back and voice messaging services, among other enhanced services. The Company's engineers have worked closely with PCM in the pre- and post-sales engineering phases to provide the proper training and technical support required to integrate the Company's switching platforms with PCM's applications. CUSTOMER SERVICE, SUPPORT AND TRAINING The Company believes that the responsiveness and expertise of its customer service personnel is essential to developing and maintaining long-term relationships with its customers which require uninterrupted operation of the Company's products. The Company provides pre- and post-sales engineering services and has a technical assistance center which provides support and service by telephone. The Company offers a variety of engineering services such as customer application design review, protocol development, product training, performance testing and field support. The Company has a fully-equipped training facility and provides a wide range of training courses to its customers, both on and off site. The Company also has a fully-equipped applications lab with call traffic load capabilities where customers can test and verify new applications or enhancements to existing applications. The Company's technical assistance center provides telephone support and service on a 24-hour, seven-day-a-week basis. To ensure that the Company is providing quality support services, the Company has instituted a formal customer satisfaction program which involves senior management review and regularly scheduled customer support surveys. In addition, Company personnel meet regularly with customers to discuss product quality and customer satisfaction. 32 Although the Company charges fees for certain support and services, to date, revenues from such fees have been immaterial. SALES AND MARKETING The Company sells its products primarily to application developers, OEMs and systems integrators which incorporate the Company's products into their service and product offerings. The Company's principal marketing activities are to identify customers which could benefit from the Company's products, identify new markets for the Company's products and increase sales to existing customers. The sale of the Company's products is a multi-step and interdisciplinary process which can typically range from 12 to 24 months or more from initial customer contact to large-scale commercialization of a customer's application or service based on the Company's products. The initial evaluation stage, typically three to six months, is primarily the role of the Company's sales and marketing personnel, and members of the Company's senior management, and involves educating potential customers on the functionality and benefits derived from using the Company's products. The next stage, which can involve members of both the Company's customer support and research and development organizations, involves providing the customer with the required training and technical support to integrate the Company's products into a new application or service. This stage of the sales process is generally the longest and is dependent upon an application or service provider's own internal application or service development program. The Company sells to its customers through its own sales force, from its headquarters, as well as from sales offices in California, Georgia, New York, Ohio and Texas. The Company currently has no offices outside the United States, but intends to establish offices in certain international markets within the next 12 months. In addition, the Company maintains an inside sales group, located at its headquarters, which is responsible for platform configuration and price quotations, order administration and telephone sales activities. In order to create awareness, market demand and sales opportunities, the Company engages in a number of marketing activities which include exhibiting products and customer applications at industry trade shows, advertising in selected publications aimed at targeted markets, public relations activities with trade and business press, publication of technical articles and the distribution of sales literature, technical specifications and documentation. RESEARCH AND PRODUCT DEVELOPMENT Management believes that the Company's success will depend on its ability to develop and introduce in a timely fashion new products and enhancements to its existing products. The Company has in the past made, and intends to continue to make, significant investments in product and technological development. Extensive product development input is obtained through customers and the Company's monitoring of end-user needs and changes in the marketplace. The Company is focusing its development efforts on providing enhanced functionality to its products including increased port capacity and performance, the development of additional related software applications and tools and the improvement of third-party application integration. The software applications under development are being designed to enable customers to shorten their application development cycle thereby improving time-to-market and reducing initial investment in research and development. There can be no assurance that the Company will not experience difficulties that could delay or prevent the successful development, introduction or marketing of such new products and enhancements, or that its new products and enhancements will adequately meet the requirements of the marketplace and achieve market acceptance. Announcements of currently planned or other new product offerings by the Company or its competitors may cause customers to defer or cancel the purchase of existing Company products. The Company's inability to develop on a timely basis new products or enhancements to existing products, or the failure of such new products or enhancements to achieve market acceptance, could have a material adverse effect on the Company's business, financial condition and results of operations. 33 The development of new, technologically advanced products is a complex and uncertain process requiring the accurate anticipation of technological and market trends. The introduction of new or enhanced products also requires the Company to manage the transition from older products in order to minimize disruption in customer ordering patterns, avoid excessive levels of older product inventories and ensure that adequate supplies of new products can be delivered to meet anticipated customer demand. There can be no assurance that the Company will successfully develop, introduce or manage the transition to new products. Furthermore, products such as those offered by the Company may contain undetected or unresolved errors when they are first introduced or as new versions are released. There can be no assurance that despite extensive testing by the Company, errors will not be found in new products or upgrades after commencement of commercial shipments, resulting in delays in or loss of market acceptance and sales, diversion of development resources, injury to the Company's reputation or increased service and warranty costs, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. See "Risk Factors--Risk of New Product Introductions" and "Risk Factors--Rapid Technological Change." The Company's engineering, research and development expenditures totaled approximately $3.3 million, $8.1 million, $11.1 million and $6.0 million in 1994, 1995, 1996 and the first six months of 1997, respectively. The Company performs its research and product development activities at its principal offices in Hyannis, Massachusetts. MANUFACTURING The Company's manufacturing operations consist primarily of materials planning and procurement, final assembly, testing and quality control. The Company uses several independent manufacturers to provide certain printed circuit boards, chassis and subassemblies. The Company's manufacturing process enables it to configure its products to meet a wide variety of individual customer requirements. The Company has been recommended for International Standard Organization (ISO) 9001 registration and has achieved the 9002 registration for quality assurance in production, installation and service. Although the Company generally uses standard parts and components for its products, many key components are purchased from sole or single source vendors for which alternative sources are not currently available. In particular, the Company uses a fiber transmitter, a receiver and a fiber driver manufactured by Hewlett-Packard Company in its EXS product, four power connectors manufactured by Positronic Industries, Inc. in its EXS, LNX and CSN products, and a power module manufactured by Lucent Technologies Inc. in its EXS, LNX and CSN products. If supply of these components should cease, the Company would be required to redesign its products. Each of these components is available from only one supplier, for which there is no substitute at this time. While working closely with some well-established vendors, the Company has no supply commitments from its vendors and generally purchases components on a purchase order basis as opposed to entering into long term procurement agreements with vendors. To date, the Company has generally been able to obtain adequate supplies in a timely matter from vendors or, when necessary, to meet production needs from alternative vendors. The Company believes that, in most cases, alternate vendors can be identified if current vendors are unable to fulfill needs. However, delays or failure to identify an alternate vendor, if required, or a reduction or interruption in supply, or a significant increase in the price of components would materially and adversely affect the Company's business, financial condition and results of operations and could impact customer relationships. See "Risk Factors--Dependence on Single and Sole Source Suppliers." COMPETITION The markets in which the Company competes are characterized by intense competition, with a large number of suppliers providing different types of products to different segments of the markets. The Company currently competes principally on the basis of: (i) the breadth of its products' features and benefits; (ii) the flexibility, scalability, quality, ease of use, reliability and cost effectiveness of its products; and (iii) the Company's reputation and the depth of its expertise, customer service and support. While the Company believes that it 34 currently competes favorably overall with respect to these factors, there can be no assurance that the Company will be able to continue to do so. The Company competes or may compete directly or indirectly with the following categories of companies: (i) other manufacturers of programmable switches such as Summa Four, Inc., Redcom Laboratories, Inc. and Harris Corporation; (ii) large, well-established switch and telecommunications equipment manufacturers such as Alcatel Alsthom Compagnie Generale d'Electricite SA, DSC Communications Corporation, Lucent Technologies Inc., Northern Telecom Limited, Siemens AG and Telefonaktiebolaget LM Ericsson; and (iii) to a lesser degree, systems integrators and application developers whose switches are based on PC card-level products manufactured by companies such as Aculab Inc., Dialogic Corporation and Natural MicroSystems Corporation. In addition, several smaller companies have begun recently to manufacture programmable switching platforms. Due to the rapidly evolving markets in which the Company competes, additional competitors with significant market presence and financial resources, including large telecommunications equipment manufacturers and computer hardware and software companies, may enter those markets, thereby further intensifying competition. Additionally, there can be no assurance that one or more of the Company's application developers will not begin to develop or market products in competition with the Company. Many of the Company's current and potential competitors have significantly greater financial, selling and marketing, technical, manufacturing and other resources than the Company. As a result, these competitors may be able to devote greater resources to the development, promotion, sale and support of their products than the Company. Some of the Company's competitors currently offer financing alternatives to their customers, a service that the Company does not provide at this time. Moreover, these companies may introduce additional products that are competitive with those of the Company or enter into strategic relationships to offer complete solutions which the Company does not currently offer. There can be no assurance that the Company's products would compete effectively with such products. Although the Company believes that it has certain technological and other advantages over its competitors, maintaining such advantages will require continued investment by the Company in research and development, selling and marketing and customer service and support. In addition, as the Company enters new markets, distribution channels, technical requirements and levels and bases of competition may be different than those in the Company's current markets. There can be no assurance that the Company will be able to compete successfully against either current or potential competitors in the future. See "Risk Factors--Highly Competitive Market." INTELLECTUAL PROPERTY The Company relies upon a combination of patent, copyright and trademark and trade secret laws as well as confidentiality procedures and contractual restrictions to establish and protect its proprietary rights. The Company has also entered into confidentiality and invention assignment agreements with its employees and consultants and enters into non-disclosure agreements with its suppliers, distributors and customers so as to limit access to and disclosure of its proprietary information. There can be no assurance such measures will be adequate to deter and prevent misappropriation of the Company's technologies or independent third-party development of similar technologies. The laws of certain foreign countries in which the Company's products are or may be developed, manufactured or sold may not protect the Company's products or intellectual property rights to the same extent as do the laws of the United States and thus make the possibility of piracy of the Company's technology and products more likely. As of August 30, 1997, a total of nine U.S. patents have been issued to the Company. The Company has a total of 11 U.S. patent applications and 58 international and foreign national patent applications pending. The issued patents cover various aspects of: (i) the architecture and division of call processing responsibility in the Company's PCX product; (ii) the design and internal construction of a rack-mountable chassis used with the Company's PCX product; (iii) the architecture of certain communications resource and I/O cards which may be 35 used in conjunction with any of the Company's family of programmable switching platforms relating to the Company's Selective Space Switching technology; (iv) the PPL software which may be used, in conjunction with any of the Company's family of programmable switching platforms, to create or modify applications or communications protocols; (v) a line card redundancy arrangement for use in conjunction with the Company's LNX and CSN products; and (vi) the architecture of the Company's fiber optic expansion network, EXNET. The U.S. patents will expire at various times between the years 2008 and 2014. The Company also has seven U.S. trademark applications pending. The telecommunications industry is characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement. From time to time, third parties may assert patent, copyright, trademark and other intellectual property rights to technologies that are important to the Company. Although the Company has from time to time received communications from third parties asserting that the Company's products infringe or may infringe proprietary rights of third parties, the Company believes that none of such claims, if determined adversely to the Company, would have a material adverse effect on the Company's business, financial condition or results of operations. In its distribution agreements, the Company agrees to indemnify its customers for any expenses or liabilities resulting from claimed infringements of patents, trademarks or copyrights of third parties. In certain limited instances, the amount of such indemnities may be greater than the revenues the Company may have received from the customer. In the event of litigation to determine the validity of any third- party claims, such litigation, whether or not determined in favor of the Company, could result in significant expense to the Company and divert the efforts of the Company's technical and management personnel. In the event of an adverse ruling in such litigation, the Company might be required to discontinue the use and sale of infringing products, expend significant resources to develop non-infringing technology or obtain licenses from third parties. There can be no assurance that licenses from third parties would be available on reasonable commercial terms, if at all. In the event of a successful claim against the Company and the failure of the Company to develop or license a substitute technology, the Company's business, financial condition and results of operations would be materially adversely affected. The Company changed its name from Excel Inc. to Excel Switching Corporation in September 1997. Searches performed on the term Excel have revealed several registrations and numerous uses of that term, and terms substantially similar to it, alone and in combination with other terms and designs. Accordingly, there can be no assurance that third parties will not assert trademark infringement claims relating to the name Excel Switching Corporation in the future. See "Risk Factors--Dependence on Proprietary Rights." EMPLOYEES As of August 30, 1997, the Company employed 252 persons, including 97 in engineering, research and development, 24 in customer service and support, 35 in selling and marketing, 52 in manufacturing and 44 in finance and administration. None of the Company's employees is represented by a collective bargaining arrangement, and the Company believes that its relations with its employees are good. The Company's success depends to a significant degree upon the continuing contributions of its key management, sales, engineering, customer support and product development personnel. The loss of any of the key management or technical personnel could have a material adverse effect on the Company. The Company believes that its future success will depend in large part upon its ability to attract and retain highly-skilled managerial, sales, customer support and product development personnel. The Company has at times experienced and continues to experience difficulty in recruiting qualified personnel. Competition for qualified personnel in the Company's industry is intense, and there can be no assurance that the Company will be successful in attracting and retaining such personnel. Failure to attract and retain key personnel could have a material adverse effect on the Company's business, financial condition and results of operations. See "Risk Factors--Dependence on Key Personnel" and "Risk Factors--Management of Growth and Hiring of Additional Personnel." FACILITIES The Company's headquarters total approximately 98,250 square feet and are located in four buildings in Hyannis, Massachusetts. Two of the buildings, totaling approximately 55,500 square feet, are owned by the 36 Company and house the engineering, sales, marketing and administrative functions of the Company. These buildings are subject to a mortgage of approximately $2.4 million as of June 28, 1997. The third building, approximately 25,750 square feet, is leased by the Company and houses the manufacturing and manufacturing support functions of the Company. The lease expires in July 2000, but contains an option for an additional five-year term. An option to purchase this building may be exercised at any time after August 1998. The Company intends to exercise this option and, accordingly, has recorded this lease as a capital transaction. The fourth building, approximately 17,000 square feet, is leased by the Company until March 31, 1998 as temporary office space for research and development activities. The Company also leases sales offices in San Jose and San Diego, California; Atlanta, Georgia; White Plains, New York; Cleveland, Ohio; and Grapevine, Texas. The Company intends to expand the capabilities and size of these offices and open additional offices, both domestically and internationally, as needs arise. The Company significantly increased manufacturing capacity in the fourth quarter of 1995 through the relocation of the facility to its current location and the expansion of its manufacturing facility in 1996. Although the Company anticipates that it will not require additional manufacturing space for at least the next 12 months, the Company's business, financial condition and results of operations could be materially adversely affected if it does not expand manufacturing capacity as required. The Company has also recently completed the purchase of additional property to be used in the construction of a building, expected to be completed in 1998, adding approximately 46,000 square feet of space for engineering activities. The Company believes that its current facilities and planned expansions are adequate to meet its needs through the next 12 months. However, due to the limited supply of suitable additional or alternative office and manufacturing space in the Hyannis, Massachusetts area, there can be no assurance that the Company will not be required, in the future, to invest heavily in the renovation of space in the Hyannis vicinity or in relocating the Company's headquarters. See "Risk Factors--Management of Growth and Hiring of Additional Personnel" and "Management's Discussion and Analysis of Results of Operations--Liquidity and Capital Resources." LEGAL PROCEEDINGS The Company is not a party to any material legal proceedings. 37 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The executive officers and directors of the Company are as follows:
NAME AGE POSITION ---- --- -------- Robert P. Madonna....... 37 President, Chief Executive Officer and Chairman of the Board David C. Brajczewski.... 38 Vice President, Research and Development Robert J. Buttel........ 49 Vice President, Advanced Technology James W. Carroll........ 37 Vice President, Engineering Stephen S. Galliker..... 50 Vice President, Finance and Administration, and Chief Financial Officer Russell M. Levesque..... 37 Director of Product Management Robert C. Panoff........ 50 Vice President, Marketing Robert W. Ross.......... 48 Vice President, Sales Christopher Stavros..... 44 Vice President, General Counsel, Director and Clerk Gadi Tamari............. 52 Chief Operating Officer
Robert P. Madonna founded the Company in January 1988 and has served as its Chief Executive Officer, President and a Director since that time. Mr. Madonna was elected Chairman of the Board of Directors in September 1997. Mr. Madonna also served as the Company's Treasurer until June 1996 and Clerk until May 1997. From August 1984 to October 1987, Mr. Madonna was Director of Hardware Engineering for Lan-Tel, Inc., a developer and manufacturer of PBX voice and data switches. From January 1983 to July 1984, Mr. Madonna was a principal engineer at American Science and Engineering, Inc., a manufacturer of CAT scan imaging technology. David C. Brajczewski joined the Company in April 1997 as Vice President, Research and Development. From September 1988 to April 1997, Mr. Brajczewski was employed by the Otis Elevator Company, a supplier of elevator systems and a division of United Technologies Corporation, as part of its engineering management team. From September 1987 to September 1988, Mr. Brajczewski was a Project Engineer at Microtechnologies, Inc., a designer of microprocessor and PC-based test and control systems. From May 1986 to September 1987, Mr. Brajczewski was an Electrical Engineer at Lan-Tel, Inc. Robert J. Buttel joined the Company in May 1989 as a design engineer. Prior to his current position as Vice President, Advanced Technology, a position Mr. Buttel has held since April 1997, Mr. Buttel held several positions at Excel including Vice President, Research and Development, Vice President of Engineering, Director of Hardware Development, Director of Software Development and Manager of Manufacturing. From December 1985 to March 1989, Mr. Buttel was employed by GTECH Holdings Corporation, a supplier of computerized, on-line lottery products and services. While at GTECH, Mr. Buttel held several positions including Design Engineer, Manager of Firmware and Research and Development Engineer. From July 1984 to December 1985, Mr. Buttel was a design engineer at Lan-Tel, Inc. James W. Carroll joined the Company in August 1995 as Director of Corporate Quality. Since November 1996, Mr. Carroll has served as Vice President, Engineering. From December 1993 to August 1995 and from November 1990 to May 1992, Mr. Carroll was employed by Boston Technology, Inc., a designer and manufacturer of central office enhanced services. From December 1993 to August 1995, Mr. Carroll was Manager of Operations and Customer Service Quality Assurance and from November 1990 to May 1992, he was Senior Supplier, Quality Assurance. From May 1992 to December 1993, Mr. Carroll was employed by Brite Voice Systems, Inc., a manufacturer of voice processing systems. At Brite Voice, Mr. Carroll was Director of Quality until March 1993 and Director of Research and Development until December 1993. Stephen S. Galliker joined the Company in July 1996 as Chief Financial Officer and was elected Vice President, Finance and Administration in September 1997. From September 1992 to June 1996, Mr. Galliker was employed by Ultracision, Inc., a developer and manufacturer of ultrasonically powered surgical instruments. At 38 Ultracision, Inc., Mr. Galliker was Chief Financial Officer and Vice President of Finance until November 1995 and Chief Operating Officer from December 1995 to June 1996. From June 1989 to September 1992, Mr. Galliker was Senior Vice President, Operations/Finance and Chief Financial Officer at Tylink Corporation, a manufacturer of high speed telecommunications equipment. Mr. Galliker is a Certified Public Accountant. Russell M. Levesque joined the Company in May 1992 as Director of Software. Since June 1995, Mr. Levesque has served as the Company's Director of Product Management. From July 1986 to April 1992, Mr. Levesque served as Software Engineering Manager at Imaging Technologies, Inc., a manufacturer of image processing hardware and software products for the image inspection and image analysis markets. Robert C. Panoff joined the Company in January 1997 as Vice President, Marketing. From February 1986 to December 1996, Mr. Panoff was employed by Natural MicroSystems Corporation, a designer and manufacturer of PC-based call processing hardware and software components where he held several positions including Vice President and General Manager of the European group from 1994 through 1996, Vice President of New Business Development from 1990 to 1994, Vice President, Sales and Marketing from 1987 to 1990 and Vice President, Marketing from 1986 to 1987. Robert W. Ross joined the Company in February 1995 as Director of Sales and became Vice President, Sales in August 1996. From June 1994 to January 1995, Mr. Ross was a Director of Telecommunications Sales for Switchcraft, a division of Raytheon Company and a supplier of components for the audio/video, telecommunications, computer, medical, military, appliance, transportation and instrumentation industries. From January 1994 to June 1994, Mr. Ross was Regional Vice President of Sales for a division of Augat, Inc., a manufacturer of telecommunications equipment. From September 1982 to October 1993, Mr. Ross was employed by ADC Telecommunications, Inc., a manufacturer and designer of transmission, networking and connectivity products. During his tenure at ADC, Mr. Ross held several different positions, including National Sales Manager and Regional Sales Manager for the NYNEX region. Christopher Stavros joined the Company in August 1995 as General Counsel and was elected a director in December 1995 and Vice President in September 1997. From January 1992 to August 1995, Mr. Stavros was a member of the law firm of DeVito, Pransky and Stavros, P.A. Prior to 1992, Mr. Stavros maintained his own private practice concentrating in small business and general corporate law in Boston, Massachusetts. Gadi Tamari joined the Company in November 1996 as Chief Operating Officer. From February 1990 until joining Excel, Mr. Tamari was a consultant to various telecommunications companies based in both Israel and the United States. In addition to his work as a consultant, from February 1996 to October 1996, Mr. Tamari was President of ALNO Networks USA, an importer and distributor of household goods. From February 1988 to January 1990, Mr. Tamari served as Director of East Coast Operations at Credence Systems Corporation, a designer and manufacturer of automatic test equipment for digital and mixed signal semiconductors. From September 1986 to January 1988, Mr. Tamari was Vice President, Operations at Lan-Tel, Inc. The Company has received commitments from three individuals, Edward L. Breslow, William J. Cadogan and John Loughlin, to serve as members of the Board of Directors of the Company, with terms to commence upon the date of this Prospectus. Each of these individuals would be considered an "independent director" having no employment or other business relationship with the Company. It is anticipated that two or more of these individuals will serve, at least initially, on each of the Audit and Compensation Committees of the Board of Directors of the Company. The following is summarized biographical information about these individuals: Edward L. Breslow, age 50, has been Vice President, Corporate Business Development of EMC Corporation since December 1988. EMC Corporation is a supplier of enterprise-wide intelligent information storage and retrieval solutions. Prior to joining EMC Corporation, Mr. Breslow held various financial management positions at Bose Corporation, a consumer electronics company, and Texas Instruments, Inc., a diversified technology company. 39 William J. Cadogan, age 49, is currently Chairman of the Board, President and Chief Executive Officer of ADC Telecommunications, Inc., a telecommunications company. Mr. Cadogan was elected Chairman in February 1994 and President and Chief Executive Officer in July 1991. From 1987 until 1991, Mr. Cadogan was Vice President -- Private Network Marketing, Vice President -- Product Development and Senior Vice President of the Telecom Group at ADC. Prior to joining ADC, Mr. Cadogan was General Manager of Business Development at the International Telecommunications Satellite Organization. Mr. Cadogan is also a director of Pentair Corporation and Banta Corporation. John Loughlin, age 46, has been a human resources consultant providing staffing and human resource services to both technology and financial services clients since 1986. From 1981 to 1986, Mr. Loughlin served as Director of Human Resources at American Science & Engineering, Inc. The Company's By-laws provide for the Company's Board of Directors to be comprised of as many directors as are designated from time to time by the Board of Directors or by the stockholders of the Company but, in any event, not less than three at any time the Company has more than two stockholders. The Board is currently comprised of two members. Each director holds office until his successor is duly elected and qualified, or until his earlier death, resignation or removal. Executive officers of the Company are appointed by, and serve at the discretion of, the Board of Directors, and serve until their successors have been duly elected and qualified. There are no family relationships among any of the executive officers or directors of the Company. COMMITTEES OF THE BOARD OF DIRECTORS In September 1997 the Board of Directors established a Compensation Committee and an Audit Committee. The Compensation Committee will make recommendations concerning the salaries and incentive compensation of management and key employees of the Company and administers the Company's stock plans. The Audit Committee will be responsible for reviewing the results and scope of audits and other services provided by the Company's independent public accountants and reviewing the Company's internal controls. DIRECTOR COMPENSATION Following the consummation of this offering, non-employee directors will be reimbursed for their reasonable out-of-pocket expenses incurred in attending meetings of the Board of Directors. No director who is an employee of the Company will receive separate compensation for services rendered as a director. Mr. Loughlin received nominal consideration for service as a consultant to the Company in 1997. Non-employee directors are also eligible for participation in the Company's 1997 Non-Employee Director Stock Option Plan. See "Management--Stock Plans." 40 EXECUTIVE COMPENSATION The following Summary Compensation Table sets forth certain information with respect to the compensation paid to or accrued by the Company for services rendered during the fiscal year ended December 28, 1996 by the Company's Chief Executive Officer and each of the four other most highly compensated executive officers whose annual salary and bonus for the fiscal year ended December 28, 1996 exceeded $100,000 (collectively, the "Named Executive Officers"): SUMMARY COMPENSATION TABLE
LONG-TERM ANNUAL COMPENSATION(1) COMPENSATION(2) --------------------------------------- --------------- SECURITIES OTHER ANNUAL UNDERLYING NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION(3) OPTIONS (#) - --------------------------- -------- -------- --------------- --------------- Robert P. Madonna President, Chief Execu- tive Officer and Chairman of the Board of Directors............... $240,773 $ 69,000 $9,300 -- Robert J. Buttel Vice President, Advanced Technology............. 95,446 20,000 8,140 -- Stephen S. Galliker(4) Vice President, Finance and Administration, and Chief Financial Offi- cer..................... 67,993(5) 10,000 4,836 300,000 Russell M. Levesque Director of Product Man- agement................ 97,928 25,000 8,779 -- Robert W. Ross Vice President, Sales... 83,296 123,924(6) 9,300 60,000 Christopher Stavros Vice President, General Counsel and Clerk....... 128,077 16,800 9,298 -- Gadi Tamari(7) Chief Operating Offi- cer.................... 39,135(8) 2,200 -- 600,000
- -------- (1) The compensation described in this table does not include medical, group life insurance or other benefits received by the Named Executive Officers which are available generally to all salaried employees of the Company and certain perquisites and other personal benefits, securities or property received by the Named Executive Officers which do not exceed the lesser of $50,000 or 10% of any such officer's salary and bonus disclosed in this table. (2) Represents stock options granted during the fiscal year ended December 28, 1996. The Company did not grant any restricted stock awards or stock appreciation rights or make any long-term incentive plan payouts during 1996. (3) Represents contributions made by the Company to the Named Executive Officer under the Company's 401(k) plan. (4) Mr. Galliker joined the Company in July 1996. (5) Mr. Galliker would have earned a total annual salary of $140,000 had he been employed as an executive officer of the Company for the entire fiscal year ended December 28, 1996. (6)Includes commissions earned during the fiscal year ended December 28, 1996. (7)Mr. Tamari joined the Company in November 1996. (8) Mr. Tamari would have earned a total annual salary of $175,000 had he been employed as an executive officer of the Company for the entire fiscal year ended December 28, 1996. 41 OPTION GRANTS The following table sets forth certain information concerning grants of stock options made during the fiscal year ended December 28, 1996 to the Named Executive Officers. The Company did not grant any stock appreciation rights ("SARs") during the fiscal year ended December 28, 1996. OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION INDIVIDUAL GRANTS FOR OPTION TERM(2) ------------------------------------------------ -------------------- NUMBER OF PERCENT OF SECURITIES TOTAL OPTIONS UNDERLYING GRANTED TO EXERCISE OPTIONS EMPLOYEES IN PRICE PER EXPIRATION NAME GRANTED FISCAL YEAR(1) SHARE DATE 5% 10% - ---- ---------- -------------- --------- ---------- --------- ---------- Robert P. Madonna....... -- -- -- -- -- -- Robert J. Buttel........ -- -- -- -- -- -- Stephen S. Galliker..... 300,000(3) 15.0% $2.33 07/16/06 $ 440,258 $1,115,699 Russell M. Levesque..... -- -- -- -- -- -- Robert W. Ross.......... 60,000(4) 3.0 4.50 09/27/06 169,802 430,310 Christopher Stavros..... -- -- -- -- -- -- Gadi Tamari............. 600,000(3) 30.0 5.00 11/20/06 1,886,684 4,781,227
- -------- (1) Based on an aggregate of 1,997,500 shares subject to options granted to employees of the Company in 1996. (2) Amounts represent hypothetical gains that could be achieved for the respective options if exercised at the end of the option term. These gains are based on assumed rates of stock price appreciation of 5% and 10% compounded annually from the date the respective options were granted to their expiration date, and are not intended to forecast possible future appreciation, if any, in the price of the Common Stock. The gains shown are net of the option exercise price, but do not include deductions for federal or state income taxes or other expenses associated with the exercise of the options or the sale of the underlying shares. The actual gains, if any, on the stock option exercises will depend on the future performance of the Common Stock, the optionholder's continued employment through the option period and the date on which the options are exercised. (3) Options granted will vest and become exercisable over five years in the following installments: 20% of the total options granted will vest each year on the anniversary of the respective dates of grant in 1997, 1998, 1999, 2000 and 2001. (4) Options granted will vest and become exercisable over five years in the following installments: 10% of the total options granted will vest on the anniversary of the date of grant in each of 1997 and 1998, 20% of the total options granted will vest on the anniversary of the date of grant in each of 1999 and 2000 and the remaining 40% of the total options granted will vest on the anniversary of the date of grant in 2001. 42 YEAR-END OPTION TABLE The following table sets forth certain information concerning the number and value of unexercised stock options held by each of the Named Executive Officers as of December 28, 1996. No SARs or stock options were exercised during the fiscal year ended December 28, 1996 by any Named Executive Officer. AGGREGATED FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END(1) ------------------------- ------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---- ----------- ------------- ----------- ------------- Robert P. Madonna........... -- -- -- -- Robert J. Buttel............ 1,397,280 -- $20,956,894 $ -- Stephen S. Galliker......... -- 300,000 -- 3,799,995 Russell M. Levesque......... 546,000 204,000 8,153,357 3,020,900 Robert W. Ross.............. 21,600 98,400 316,800 1,193,199 Christopher Stavros......... 300,000 150,000 4,399,995 2,199,998 Gadi Tamari................. -- 600,000 -- 6,000,000
- -------- (1) There was no public trading market for the Common Stock as of December 28, 1996. Accordingly, as permitted by the rules of the Securities and Exchange Commission, these values have been calculated on the basis of the assumed initial public offering price of $15.00 per share, less the applicable exercise price. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Prior to September 1997, the Company had no separate compensation committee or other board committee performing equivalent functions, and these functions were performed by the Company's Board of Directors which consisted of Robert P. Madonna, the Company's President, Chief Executive Officer, Chairman of the Board and principal stockholder, and Christopher Stavros, Vice President and General Counsel of the Company. STOCK PLANS Stock Option Program. Until September 1997, the Company had an informal stock option program under which selected employees were granted non-qualified options to purchase shares of Non-Voting Common Stock. The primary purpose of this program had been to provide long-term incentives to the Company's selected employees and to further align their interests with those of the Company. The selection of the participants, the determination of the number of shares of Common Stock offered to each participant, the terms of the repurchase rights for each participant and other terms of sale had been made by the Company's President, Chief Executive Officer and principal stockholder, Robert P. Madonna, and Christopher Stavros, Vice President and General Counsel. Options granted under this informal plan are generally exercisable within ten years of the original grant date and generally vest over a period of five years from the date of grant. Under this program, options to purchase 11,533,840 shares of Common Stock, at a weighted average exercise price of $1.82 per share, have been granted, of which options to purchase 144,000 shares of Common Stock have been exercised and options to purchase 226,000 shares of Common Stock have been cancelled. The Board of Directors terminated this program in September 1997. 1997 Stock Option Plan. The Company's 1997 Stock Option Plan (the "1997 Plan") was adopted by the Board of Directors and approved by the Company's sole voting stockholder in September 1997. Under the terms of the 1997 Plan, the Company is authorized to grant incentive ("ISO") and non-qualified stock options (collectively, "Stock Options") to officers and other employees of and consultants to the Company. The aggregate number of shares of Common Stock which may be issued pursuant to the Plan is 3,000,000. 43 The 1997 Plan will be administered by the Compensation Committee of the Board of Directors, which is expected to consist of two disinterested directors. Subject to the provisions of the 1997 Plan, the Compensation Committee has the authority to select the optionees and determine the terms of the stock options granted under the 1997 Plan, including: (i) the time or times at which stock options may be granted; (ii) whether the stock option granted will be an ISO or a non-qualified stock option; (iii) the number of shares subject to each stock option; (iv) when the stock option becomes exercisable; (v) the exercise price of the stock option, which in the case of an ISO cannot be less than the fair market value of the Common Stock as of the date of grant, or not less than 110% of the fair market value in the case of ISO's granted to an employee or officer holding 10% or more of the voting stock of the Company; (vi) the duration of the stock option; and (vii) the time, manner and form of payment upon exercise of a Stock Option. A Stock Option is not transferable by the recipient except by will or by the laws of descent and distribution, or in the case of non-qualified stock options, only to the extent set forth in the agreement relating to such option or pursuant to a valid domestic relations order. Generally, no ISO may be exercised more than 90 days following termination of employment and no stock options may be exercised following termination of employment for cause. However, in the event that termination is due to death or disability, the stock option is exercisable for a maximum of 180 days after such termination. To date, no stock options have been granted pursuant to the 1997 Plan. 1997 Non-Employee Director Stock Option Plan. The Company's 1997 Non- Employee Director Stock Option Plan (the "Director Option Plan") was adopted by the Board of Directors and approved by the Company's sole voting stockholder in September 1997. The Director Option Plan provides for the grant of options to purchase a maximum of 225,000 shares of Common Stock of the Company to non-employee directors of the Company. The Director Option Plan is administered by the Compensation Committee of the Board of Directors. Under the Director Option Plan, each non-employee director who (i) is a member of the Board of Directors on September 16, 1997 (the "Approval Date") shall be automatically granted on the Approval Date, or (ii) first becomes a member of the Board of Directors shall be granted on the date such person first becomes a non-employee director, an option to purchase 30,000 shares of Common Stock. In addition, each non-employee director will be automatically granted an option to purchase 15,000 shares of Common Stock for each of the two years following the date such person first became a non- employee director, through December 1999. Options granted upon election to the Board under the Director Option Plan will vest as to one third of the total shares underlying the option immediately upon grant and one third of the total shares underlying the option on the anniversary of the date of grant for each of the following two years, provided that the optionee has continuously served as a director through such vesting dates. All other options granted under the Director Option Plan will vest at a rate of one third of the total shares underlying the option per year over a period of three years provided that the optionee has continuously served as a director through such vesting dates. The optionee may forfeit a portion of his or her exercise rights with respect to options vesting in any fiscal year unless the optionee attends at least 75% of the Board meetings held in that year. All options granted under the Director Option Plan will have an exercise price equal to the fair market value of the Common Stock on the date of grant and a term of ten years from the date of grant. Options may not be transferred except by will or by the laws of descent and distribution or pursuant to a domestic relations order. If the optionee ceases to be a member of the Board for any reason other than death or disability, any unvested options immediately terminate and become void and any unexercised portion of an option which is then vested may be exercised at any time prior to the scheduled expiration date of the option. However, if an optionee ceases to serve as a director of the Company due to death or disability, all unvested options become fully vested and are exercisable for a period of one year thereafter and any options that are vested and exercisable when the optionee ceases to serve as a director are exercisable at any time until the scheduled expiration date of the option. Upon joining the Board, each of Messrs. Breslow, Cadogan and Loughlin will be granted options for the purchase of 30,000 shares of Common Stock at an exercise price equal to the initial public offering price. 1997 Employee Stock Purchase Plan. The 1997 Employee Stock Purchase Plan (the "1997 Purchase Plan") was adopted by the Board of Directors and approved by the Company's sole voting stockholder in 44 September 1997. The 1997 Purchase Plan provides for the issuance of a maximum of 400,000 shares of Common Stock pursuant to the exercise of nontransferable options granted to participating employees. The 1997 Purchase Plan is administered by the Compensation Committee of the Board of Directors. All employees of the Company whose customary employment is more than 20 hours per week and for more than five months in any calendar year are eligible to participate in the 1997 Purchase Plan. Employees who would own 5% or more of the total combined voting power or value of the Company's stock immediately after the grant and non-employee directors may not participate in the 1997 Purchase Plan. To participate in the 1997 Purchase Plan, an employee must authorize the Company to deduct an amount (not less than one percent nor more than ten percent of a participant's total cash compensation) from his or her pay during six-month payment periods (the "Payment Period"). The first Payment Period will commence upon the initial offering of the Company's Common Stock to the public and will end on June 30, 1998. Thereafter, the Payment Periods will commence on January 1 and July 1 of each year, but in no case shall an employee be entitled to purchase more than 500 shares in any one Payment Period. The exercise price for the option granted in each Payment Period is 85% of the lesser of the market price of the Common Stock on the first or last business day of the Payment Period. If an employee is not a participant on the last day of the Payment Period, such employee is not entitled to exercise his or her option, and the amount of his or her accumulated payroll deductions will be refunded. Options granted under the 1997 Purchase Plan may not be transferred or assigned. An employee's rights under the 1997 Purchase Plan terminate upon his or her voluntary withdrawal from the plan at any time or upon termination of employment. No options have been granted to date under the 1997 Purchase Plan. 401(K) PLAN The Company has a Section 401(k) Retirement Savings Plan (the "401(k) Plan"). The 401(k) Plan is a tax-qualified plan covering Company employees who are over 21 years of age. Under the 401(k) Plan, participants may elect to defer a portion of their compensation, subject to certain limitations. In addition, at the discretion of the Board of Directors, the Company may make profit sharing contributions into the 401(k) Plan for all eligible employees. During 1996, the Company contributed $534,000 to the 401(k) Plan. CERTAIN TRANSACTIONS During December 1991, Mr. Madonna, the Company's President, Chief Executive Officer, Chairman of the Board and principal stockholder, loaned $300,000 to the Company under a demand note bearing interest at a rate of 10% per annum. In December 1993, Mr. Madonna loaned an additional $300,000 to the Company under a demand note bearing interest at a rate of 6% per annum. At December 31, 1994, the Company had paid in full the principal amount of such loans plus interest to Mr. Madonna. The Company has adopted a policy that all transactions between the Company and its officers, directors, principal stockholders and affiliates will be approved by a majority of the Board of Directors, including a majority of the independent and disinterested outside directors on the Board of Directors, and will be on terms no less favorable to the Company than could be obtained from unaffiliated third parties. 45 PRINCIPAL STOCKHOLDERS The following table sets forth certain information regarding beneficial ownership of the Company's Common Stock as of August 30, 1997 and as adjusted to reflect the sale of the shares offered hereby by (i) each person who is known by the Company to own beneficially more than 5% of the outstanding shares of Common Stock, (ii) each director and Named Executive Officer of the Company, and (iii) all directors and executive officers of the Company as a group. Unless otherwise indicated below, to the knowledge of the Company, all persons listed below have sole voting and investment power with respect to their shares of Common Stock, except to the extent authority is shared by spouses under applicable law. Except as otherwise provided below, the address of each person listed below is c/o Excel Switching Corporation, 255 Independence Drive, Hyannis, Massachusetts 02601.
SHARES BENEFICIALLY SHARES BENEFICIALLY OWNED PRIOR TO THE OWNED AFTER THE OFFERING(1) OFFERING(1)(9) ---------------------------------------------- NAME NUMBER PERCENT NUMBER PERCENT - ---- ------------ ---------------------- ---------- Robert P. Madonna(2)............... 27,945,600 99.5% 27,945,600 85.8% Robert J. Buttel(3)................ 1,397,280 4.7 1,397,280 4.1 Russell M. Levesque(4)............. 606,000 2.1 606,000 1.8 Christopher Stavros(5)............. 450,000 1.6 450,000 1.4 Robert W. Ross(6).................. 37,200 * 37,200 * Stephen S. Galliker(7)............. 60,000 * 60,000 * Gadi Tamari........................ 0 * 0 * All executive officers and directors as a group (10 persons)(8)................... 30,514,080 99.5% 30,514,080 86.8%
- -------- *Less than 1% of the outstanding Common Stock. (1) The number of shares of Common Stock deemed outstanding prior to this offering includes: (i) 28,089,600 shares of Common Stock outstanding as of August 30, 1997; and (ii) shares issuable pursuant to options held by the respective person which may be exercised within 60 days after August 30, 1997, as set forth below. The number of shares of Common Stock deemed outstanding after this offering includes an additional 4,500,000 shares of Common Stock being offered for sale by the Company in this offering. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission, and includes voting and investment power with respect to the shares. (2) Includes 4,191,840 shares of Common Stock held by the Madonna Family Limited Partnership of which Mr. Madonna is both a general and a limited partner. (3) Consists of 1,397,280 shares of Common Stock issuable upon the exercise of stock options, which options are exercisable within 60 days of August 30, 1997. (4) Consists of 606,000 shares of Common Stock issuable upon the exercise of stock options, which options are exercisable within 60 days of August 30, 1997. (5) Consists of 450,000 shares of Common Stock issuable upon the exercise of stock options, which options are exercisable within 60 days of August 30, 1997. (6) Consists of 37,200 shares of Common Stock issuable upon the exercise of stock options, which options are exercisable within 60 days of August 30, 1997. (7) Consists of 60,000 shares of Common Stock issuable upon the exercise of stock options, which options are exercisable within 60 days of August 30,1997. (8) Includes 2,568,480 shares of Common Stock issuable upon the exercise of stock options, which options are exercisable within 60 days of August 30, 1997. (9) The above table assumes no exercise of the over-allotment option to purchase up to an aggregate of 675,000 shares of Common Stock from the Selling Stockholder. If the Underwriters exercise their over-allotment option in full, the number of shares sold, the number of shares beneficially owned and the percentage of ownership after the offering for Mr. Madonna, the sole Selling Stockholder, would be: 675,000, 27,270,600 and 83.7%, respectively. 46 DESCRIPTION OF CAPITAL STOCK Effective upon the closing of this offering, the authorized capital stock of the Company will consist of 100,000,000 shares of Common Stock, $.01 par value per share, and 10,000,000 shares of Preferred Stock, $.01 par value per share. The following summary description of the Company's capital stock is not intended to be complete and is qualified in its entirety by reference to the provisions of applicable law and to the Company's Restated Articles of Organization (the "Charter") and Restated By-laws (the "By-laws"), filed as exhibits to the Registration Statement of which this Prospectus is a part. COMMON STOCK As of August 30, 1997, there were 28,089,600 shares of Common Stock outstanding held by two stockholders of record. Based upon the number of shares outstanding as of that date and giving effect to the issuance of the 4,500,000 shares of Common Stock offered by the Company hereby, there will be 32,589,600 shares of Common Stock outstanding upon the closing of this offering. In addition, as of August 30, 1997, there were outstanding stock options for the purchase of a total of 10,870,840 shares of Common Stock. Holders of Common Stock are entitled to one vote for each share held on all matters submitted to a vote of stockholders and do not have cumulative voting rights. Directors are elected by a plurality of the votes of the shares present in person or by proxy at the meeting and entitled to vote in such election. Holders of Common Stock are entitled to receive ratably such dividends, if any, as may be declared by the Board of Directors out of funds legally available therefor, subject to any preferential dividend rights of outstanding Preferred Stock. Upon the liquidation, dissolution or winding up of the Company, the holders of Common Stock are entitled to receive ratably the net assets of the Company available after the payment of all debts and other liabilities of the Company, subject to the prior rights of any outstanding Preferred Stock. Holders of the Common Stock have no preemptive, subscription, redemption or conversion rights, nor are they entitled to the benefit of any sinking fund. The outstanding shares of Common Stock are, and the shares offered by the Company in this offering will be, when issued and paid for, validly issued, fully paid and nonassessable. The rights, powers, preferences and privileges of holders of Common Stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of Preferred Stock which the Company may designate and issue in the future. PREFERRED STOCK The Board of Directors will be authorized, subject to any limitations prescribed by law, without further stockholder approval, to issue from time to time up to an aggregate of up to 10,000,000 shares of Preferred Stock, in one or more series. Each such series of Preferred Stock shall have such number of shares, designations, preferences, voting powers, qualifications and special or relative rights or privileges as shall be determined by the Board of Directors, which may include, among others, dividend rights, voting rights, redemption and sinking fund provisions, liquidation preferences, conversion rights and preemptive rights. There are no shares of Preferred Stock currently outstanding. The stockholders of the Company have granted the Board of Directors authority to issue the Preferred Stock and to determine its rights and preferences in order to eliminate delays associated with a stockholder vote on specific issuances. The rights of the holders of Common Stock will be subject to the rights of holders of any Preferred Stock issued in the future. The issuance of Preferred Stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could adversely affect the voting power or other rights of the holders of Common Stock, and could make it more difficult for a third party to acquire, or discourage a third party from attempting to acquire, a majority of the outstanding voting stock of the Company. The Company has no present plans to issue any shares of Preferred Stock. 47 MASSACHUSETTS LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS; ANTI-TAKEOVER EFFECTS Because the Company will have more than 200 stockholders of record after the offering, it will be subject to Chapter 110F of the Massachusetts General Laws, an anti-takeover law. In general, this statute prohibits a publicly held Massachusetts corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person becomes an interested stockholder, unless (i) the interested stockholder obtains the approval of the Board of Directors prior to becoming an interested stockholder, (ii) the interested stockholder acquires 90% of the outstanding voting stock of the corporation (excluding shares held by certain affiliates of the corporation) at the time it becomes an interested stockholder, or (iii) the business combination is approved by both the Board of Directors and the holders of two-thirds of the outstanding voting stock of the corporation (excluding shares held by the interested stockholder). An "interested stockholder" is a person who, together with affiliates and associates, owns (or at any time within the prior three years did own) 5% or more of the outstanding voting stock of the corporation. A "business combination" includes a merger, a stock or asset sale, and certain other transactions resulting in a financial benefit to the interested stockholders. By a vote of a majority of its stockholders, the Company has elected not to be governed by Chapter 110F, but such amendment will not be effective for twelve months and will not apply to a business combination with any person who became an interested stockholder prior to the adoption of the amendment. The By-laws include a provision excluding the Company from the applicability of Massachusetts General Laws Chapter 110D, entitled "Regulation of Control Share Acquisitions." Under Chapter 110D, any stockholder of a corporation subject to this statute who acquires 20% or more of the outstanding voting stock of a corporation may not vote such stock unless the stockholders holding a majority of the outstanding voting stock (excluding the interested shares) of the corporation so authorize. The Board of Directors may amend the By-laws at any time to subject the Company to this statute prospectively. The By-laws also require that a stockholder seeking to have any business conducted at a meeting of stockholders give notice to the Company not less than 90 and not more than 120 days prior to the scheduled meeting, provided in certain circumstances that a ten-day notice rule applies. The notice from the stockholders must describe the proposed business to be brought before the meeting and include information about the stockholder making the proposal, any beneficial owner on whose behalf the proposal is made and any other stockholder known to be supporting the proposal. The By-laws require the Company to call a special stockholders meeting at the request of stockholders holding at least 40% of the voting power of the Company. The Charter provides that shares of the Company's Preferred Stock may be issued in the future without stockholder approval and upon such terms and conditions, and having such rights, privileges and preferences, as the Board of Directors may determine. See "Description of Capital Stock--Preferred Stock." Chapter 156B of the Massachusetts General Laws, Section 50A, generally requires that publicly held Massachusetts corporations have a classified board of directors consisting of three classes as nearly equal in size as possible, unless those corporations elect to opt out of the statutes coverage. By vote of the Board of Directors, the Company has elected to opt out of the requirements of the classified board provisions of Section 50A. The foregoing provisions could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, control of the Company. LIMITATION OF LIABILITY AND INDEMNIFICATION The By-laws provide that the directors and officers of the Company shall be indemnified by the Company to the fullest extent authorized by Massachusetts law, as it now exists or may in the future be amended, against all expenses and liabilities reasonably incurred in connection with the service for or on behalf of the Company. In addition, the Charter provides that the directors of the Company will not be personally liable for monetary damages to the Company for breaches of their fiduciary duty as directors, unless they violated their duty of 48 loyalty to the Company or its stockholders, acted in bad faith, knowingly or intentionally violated the law, authorized illegal dividends or redemptions or derived an improper personal benefit from their action as directors. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Stock is BankBoston, N.A. 49 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this offering, the Company will have 32,589,600 shares of Common Stock outstanding (assuming no exercise of outstanding options). Of these shares, the 4,500,000 shares (5,175,000 shares if the over-allotment option is exercised in full) to be sold in this offering will be freely tradable without restriction or further registration under the Securities Act of 1933, as amended (the "Securities Act"), except that any shares purchased by affiliates of the Company, as that term is defined in Rule 144 ("Rule 144") under the Securities Act ("Affiliates"), may generally only be sold in compliance with the limitations of Rule 144 described below. SALES OF RESTRICTED SHARES The remaining 28,089,600 shares of Common Stock outstanding upon completion of this offering are deemed "Restricted Shares" under Rule 144 or Rule 701 under the Securities Act. Subject to the lock-up agreements described below (the "Lock-up Agreements"), approximately 144,000 of such Restricted Shares will be eligible for sale in the public market pursuant to Rule 144(k) on the date of this Prospectus. Upon expiration of the Lock-up Agreements, 180 days after the date of this Prospectus, an additional 27,945,600 shares of Common Stock will be eligible for sale in the public market pursuant to Rule 144 under the Securities Act. In general, under Rule 144, a person (or persons whose shares are aggregated), including an Affiliate, who has beneficially owned Restricted Shares for at least one year is entitled to sell, within any three-month period, a number of such shares that does not exceed the greater of (i) one percent of the then outstanding shares of Common Stock (approximately 325,896 shares immediately after this offering) or (ii) the average weekly trading volume in the Common Stock in the over-the-counter market during the four calendar weeks preceding the date on which notice of such sale is filed, provided certain requirements concerning availability of public information, manner of sale and notice of sale are satisfied. In addition, Affiliates must comply with the restrictions and requirements of Rule 144, other than the one- year holding period requirement, in order to sell shares of Common Stock which are not restricted securities. Under Rule 144(k), a person who is not an Affiliate and has not been an Affiliate for at least three months prior to the sale and who has beneficially owned Restricted Shares for at least two years may resell such shares without compliance with the foregoing requirements. In meeting the one and two year holding periods described above, a holder of Restricted Shares can include the holding periods of a prior owner who was not an Affiliate. The one and two year holding periods described above do not begin to run until the full purchase price or other consideration is paid by the person acquiring the Restricted Shares from the issuer or an Affiliate. Rule 701 provides that currently outstanding shares of Common Stock acquired under the Company's employee compensation plans may be resold by persons, other than Affiliates, beginning 90 days after the date of this Prospectus, subject only to the manner of sale provisions of Rule 144, and by Affiliates under Rule 144 without compliance with its one-year minimum holding period, subject to certain limitations. OPTIONS Rule 701 also provides that the shares of Common Stock acquired upon the exercise of currently outstanding options issued under the Company's stock plans may be resold by persons, other than Affiliates, beginning 90 days after the date of this Prospectus, subject only to the manner of sale provisions of Rule 144, and by Affiliates under Rule 144, without compliance with its one- year minimum holding period, subject to certain limitations. At August 30, 1997, approximately 6,731,940 shares of Common Stock were issued or issuable pursuant to vested options under the Company's stock program, of which approximately 55,800 shares are not subject to Lock-up Agreements with the Underwriters and will be eligible for sale in the public market in accordance with Rule 701 under the Securities Act beginning 90 days after the date of this Prospectus. The Company intends to file one or more registration statements on Form S-8 under the Securities Act, approximately 180 days after the date of this Prospectus, to register up to 11,163,840 shares of Common Stock subject to outstanding stock options granted pursuant to the Company's stock program, including the 6,731,940 shares of Common Stock subject to options vested as of August 30, 1997, and 3,625,000 shares of Common Stock issuable pursuant to the Company's 1997 stock plans. Such registration statements are expected to become effective upon filing. At such time, approximately 7,362,970 shares of Common Stock covered by these registration statements will be vested and eligible for sale in the public market upon the exercise of underlying options to the extent not previously sold pursuant to Rule 701. 50 LOCK-UP AGREEMENTS Subject to certain limited exceptions, the Company, the executive officers and directors, the Selling Stockholder and certain other securityholders have agreed not to sell or otherwise dispose of, directly or indirectly, any shares of Common Stock (or any security convertible into or exchangeable or exercisable for Common Stock) without the prior written consent of Morgan Stanley & Co. Incorporated for a period of 180 days from the date of this Prospectus. In addition, for a period of 180 days from the date of this Prospectus, except as required by law, the Company has agreed that its Board of Directors will not consent to any offer for sale, sale or other disposition, or any transaction which is designed or could be expected, to result in, the disposition by any person, directly or indirectly, of any shares of Common Stock without the prior written consent of Morgan Stanley & Co. Incorporated. See "Underwriters." REGISTRATION RIGHTS No securityholders of the Company are entitled to require the Company to register any securities of the Company under the Securities Act. Prior to this offering, there has been no public market for the Common Stock of the Company, and no predictions can be made as to the effect, if any, that market sales of shares of Common Stock prevailing from time to time, or the availability of shares for future sale, may have on the market price for the Common Stock. Sales of substantial amounts of Common Stock, or the perception that such sales could occur, could adversely effect prevailing market prices for the Common Stock and could impair the Company's future ability to obtain capital through an offering of equity securities. 51 UNDERWRITERS Under the terms and subject to the conditions contained in an Underwriting Agreement dated the date of this Prospectus, the Underwriters named below, for whom Morgan Stanley & Co. Incorporated, Hambrecht & Quist LLC and Montgomery Securities are acting as Representatives (the "Underwriters"), have severally agreed to purchase, and the Company has agreed to sell to them, the respective number of shares of Common Stock set forth opposite their respective names below:
NUMBER NAME OF SHARES ---- --------- Morgan Stanley & Co. Incorporated.................................. Hambrecht & Quist LLC.............................................. Montgomery Securities.............................................. --------- Total........................................................ 4,500,000 =========
The Underwriting Agreement provides that the obligations of the several Underwriters to pay for and accept delivery of the shares of Common Stock offered hereby are subject to the approval of certain legal matters by their counsel and to certain other conditions. The Underwriters are committed to take and pay for all the shares of Common Stock offered hereby (other than those covered by the over-allotment option described below) if any such shares are taken. The Underwriters initially propose to offer part of the Common Stock directly to the public at the public offering price set forth on the cover page hereof and part to certain dealers at a price which represents a concession not in excess of $ per share under the public offering price. Any Underwriter may allow, and such dealers may reallow, a concession not in excess of $ per share to other Underwriters or to certain dealers. After the initial offering of the shares of Common Stock, this offering price and other selling terms may from time to time be varied by the Underwriters. Mr. Madonna, the Selling Stockholder has granted the Underwriters an option, exercisable for 30 days from the date of the Prospectus, to purchase up to an additional 675,000 shares of Common Stock at the public offering price set forth on the cover page hereof, less underwriting discounts and commissions. The Underwriters may exercise such option to purchase solely for the purpose of covering over-allotments, if any, made in connection with this offering. To the extent such option is exercised, each Underwriter will become obligated, subject to certain conditions, to purchase approximately the same percentage of such additional shares as the number set forth next to such Underwriter's name in the preceding table bears to the total number of shares of Common Stock offered by the Underwriters hereby. The Underwriters have reserved up to shares of the Common Stock offered hereby for sale at the public offering price to certain employees, consultants and other persons associated with the Company. The number of shares of Common Stock available for sale to the general public will be reduced to the extent such persons purchase such reserved shares. Any reserved shares not so purchased will be offered by the Underwriters to the general public on the same basis as the other shares offered hereby. Subject to certain limited exceptions, the Company and the executive officers and directors of the Company, the Selling Stockholder and certain other securityholders have agreed that, without the prior written consent of Morgan Stanley & Co. Incorporated, they will not (a) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock (whether such shares or any such securities are then owned by such person or are thereafter acquired), or (b) enter into any swap or other arrangement that transfers 52 to another, in whole or in part, any of the economic consequences of ownership of the Common Stock, whether any such transactions described in clause (a) or (b) of this paragraph is to be settled by delivery of such Common Stock or such other securities, in cash or otherwise for a period of 180 days after the date of this Prospectus. In order to facilitate the offering of the Common Stock, the Underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the Common Stock. Specifically, the Underwriters may over-allot in connection with the offering, creating a short position in the Common Stock for their own account. In addition, to cover over-allotments or to stabilize the price of the Common Stock, the Underwriters may bid for, and purchase, shares of Common Stock in the open market. Finally, the underwriting syndicate may reclaim selling concessions allowed to an underwriter or a dealer for distributing the Common Stock in the offering, if the syndicate repurchases previously distributed Common Stock in transactions to cover syndicate short positions, in stabilization transactions or otherwise. Any of these activities may stabilize or maintain the market price of the Common Stock above independent market levels. The Underwriters are not required to engage in these activities, and may end any of these activities at any time. The Representatives of the Underwriters have informed the Company that the Underwriters do not intend to confirm sales to any accounts over which they exercise discretionary authority. The Company and the Selling Stockholder have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act. PRICING OF THE OFFERING 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 between the Company and the Representatives of the Underwriters. Among the factors to be considered in determining the initial public offering price are the future prospects of the Company and its industry in general, net revenues, earnings and certain other financial and operating information of the Company in recent periods, and the price-earnings ratios, certain other ratios, and market prices of securities and certain financial operating information of companies engaged in activities similar to those of the Company. LEGAL MATTERS The validity of the shares of Common Stock offered hereby will be passed upon for the Company by Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts. Certain legal matters in connection with this offering will be passed upon for the Underwriters by Hale and Dorr LLP, Boston, Massachusetts. EXPERTS The Consolidated Financial Statements and Financial Statement Schedule of the Company as of December 31, 1995 and December 28, 1996 and for the three years in the period ended December 28, 1996 included in this Prospectus and elsewhere included in the Registration Statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their reports with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said reports. The statements in this Prospectus relating to patent matters under the caption "Risk Factors--Dependence on Proprietary Rights" and "Business-- Intellectual Property" have been reviewed and approved by the Company's patent counsel, Cesari and McKenna, LLP. The statements are included herein in reliance upon the review and approval by such firm as experts in patent law. 53 ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission"), a Registration Statement on Form S-1 (together with all amendments, exhibits and schedules thereto, the "Registration Statement") under the Securities Act with respect to the Common Stock offered hereby. This Prospectus, which constitutes part of the Registration Statement, does not contain all of the information set forth in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the Commission. For further information with respect to the Company and the Common Stock offered hereby, reference is made to the Registration Statement. Statements contained in this Prospectus as to the contents of any contract or other document filed as an exhibit to the Registration Statement are not necessarily complete, and in each instance reference is made to the copy of such document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. The Registration Statement may be inspected without charge at the principal office of the Commission in Washington, D.C. and copies of all or any part of which may be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Judiciary Plaza, Room 1024, Washington, D.C. 20549, and at the Commission's regional offices located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of such material can also be obtained at prescribed rates by mail from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. In addition, the Commission maintains a Web site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. 54 EXCEL SWITCHING CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Public Accountants.................................... F-2
Consolidated Balance Sheets................................................. F-3
Consolidated Statements of Income........................................... F-4
Consolidated Statements of Stockholders' Equity............................. F-5
Consolidated Statements of Cash Flows....................................... F-6
Notes to Consolidated Financial Statements.................................. F-7
F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Excel Switching Corporation: We have audited the accompanying consolidated balance sheets of Excel Switching Corporation (a Massachusetts corporation formerly known as Excel Inc.) and subsidiaries as of December 31, 1995 and December 28, 1996, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 28, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Excel Switching Corporation and subsidiaries as of December 31, 1995 and December 28, 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 28, 1996, in conformity with generally accepted accounting principles. Arthur Andersen LLP Boston, Massachusetts March 3, 1997 F-2 EXCEL SWITCHING CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31, DECEMBER 28, JUNE 28, 1995 1996 1997 ------------ ------------ ----------- (UNAUDITED) ASSETS Current Assets: Cash and cash equivalents.............. $ 770 $ 4,069 $ 9,225 Marketable securities.................. -- -- 3,001 Accounts receivable, net of reserves of $653, $979 and $1,150 in 1995, 1996 and 1997, respectively................ 8,308 10,329 12,339 Inventories............................ 6,949 7,358 5,714 Prepaid taxes.......................... 401 -- -- Deferred tax asset..................... 507 3,761 4,819 Prepaid expenses....................... 161 292 138 ------- ------- ------- Total current assets............... 17,096 25,809 35,236 ------- ------- ------- Property and equipment: Buildings.............................. 3,735 3,925 4,014 Test equipment......................... 962 3,400 4,052 Office equipment, furniture and fix- tures................................. 649 1,836 2,339 Land................................... 576 576 576 Building improvements.................. 255 493 504 Assets under capital lease............. -- 489 489 ------- ------- ------- 6,177 10,719 11,974 Less--Accumulated depreciation and am- ortization............................ 590 1,756 2,764 ------- ------- ------- 5,587 8,963 9,210 ------- ------- ------- $22,683 $34,772 $44,446 ======= ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current maturities of long-term obliga- tions................................. $ 261 $ 499 $ 508 Accounts payable....................... 4,369 1,896 3,137 Accrued expenses....................... 1,931 5,807 8,366 Accrued income taxes................... 297 2,647 1,310 ------- ------- ------- Total current liabilities.......... 6,858 10,849 13,321 ------- ------- ------- Deferred income taxes.................... 163 -- -- ------- ------- ------- Long-term obligations, less current matu- rities.................................. 3,537 3,837 3,584 ------- ------- ------- Commitments (Note 6) Stockholders' Equity: Preferred stock, $.01 par value-- Authorized--10,000,000 shares; no shares issued and outstanding....... -- -- -- Common stock, $.01 par value (Note 5(a))-- Authorized--100,000,000 shares Issued and outstanding--28,089,600 shares.............................. 281 281 281 Additional paid-in capital............. 667 647 1,007 Deferred compensation.................. (272) (192) (517) Retained earnings...................... 11,449 19,350 26,770 ------- ------- ------- Total stockholders' equity......... 12,125 20,086 27,541 ------- ------- ------- $22,683 $34,772 $44,446 ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. F-3 EXCEL SWITCHING CORPORATION CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED SIX MONTHS ENDED ------------------------------ ------------------- DECEMBER 31, ---------------- DECEMBER 28, JUNE 30, JUNE 28, 1994 1995 1996 1996 1997 ------- ------- ------------ -------- --------- (UNAUDITED) Revenues................... $20,723 $36,161 $62,050 $27,890 $39,055 Cost of revenues........... 7,074 12,100 24,312 11,150 12,033 ------- ------- ------- ------- ------- Gross profit........... 13,649 24,061 37,738 16,740 27,022 ------- ------- ------- ------- ------- Operating expenses: Engineering, research and development............. 3,301 8,117 11,121 4,994 6,017 Selling and marketing.... 362 2,923 6,621 2,816 4,882 General and administra- tive.................... 2,903 4,238 6,426 2,675 3,851 ------- ------- ------- ------- ------- Total operating ex- penses................ 6,566 15,278 24,168 10,485 14,750 ------- ------- ------- ------- ------- Income from opera- tions................. 7,083 8,783 13,570 6,255 12,272 ------- ------- ------- ------- ------- Other income (expense): Interest income and other expense, net............ 43 110 111 55 286 Interest expense......... (47) (72) (495) (156) (192) ------- ------- ------- ------- ------- Total other income (ex- pense)................ (4) 38 (384) (101) 94 ------- ------- ------- ------- ------- Income before provision for income taxes...... 7,079 8,821 13,186 6,154 12,366 Provision for income tax- es........................ 2,889 3,410 5,285 2,467 4,946 ------- ------- ------- ------- ------- Net income................. $ 4,190 $ 5,411 $ 7,901 $ 3,687 $ 7,420 ======= ======= ======= ======= ======= Net income per share....... $ .13 $ .16 $ .23 $ .11 $ .22 ======= ======= ======= ======= ======= Weighted average common and common equivalent shares outstanding............... 32,431 32,913 33,787 33,672 34,012
The accompanying notes are an integral part of these consolidated financial statements. F-4 EXCEL SWITCHING CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
COMMON STOCK ------------------- ADDITIONAL NUMBER OF $.01 PAR PAID-IN DEFERRED RETAINED SHARES VALUE CAPITAL COMPENSATION EARNINGS TOTAL ---------- -------- ---------- ------------ -------- ------- Balance, December 31, 1993................... 27,945,600 $280 $ 251 $(126) $ 1,849 $ 2,254 Compensation associated with the grant of stock options.............. -- -- -- 27 -- 27 Net income............ -- -- -- -- 4,190 4,190 ---------- ---- ------ ----- ------- ------- Balance, December 31, 1994................... 27,945,600 280 251 (99) 6,039 6,471 Compensation associated with the grant of stock options.............. -- -- 432 (189) -- 243 Forfeiture of stock options with deferred compensation......... -- -- (16) 16 -- -- Exercise of stock op- tions................ 144,000 1 -- -- (1) -- Net income............ -- -- -- -- 5,411 5,411 ---------- ---- ------ ----- ------- ------- Balance, December 31, 1995................... 28,089,600 281 667 (272) 11,449 12,125 Compensation associated with the grant of stock options.............. -- -- -- 73 -- 73 Forfeiture of stock options with deferred compensation......... -- -- (20) 7 -- (13) Net income............ -- -- -- -- 7,901 7,901 ---------- ---- ------ ----- ------- ------- Balance, December 28, 1996................... 28,089,600 281 647 (192) 19,350 20,086 Compensation associated with the grant of stock options.............. -- -- 360 (325) -- 35 Net income............ -- -- -- -- 7,420 7,420 ---------- ---- ------ ----- ------- ------- Balance, June 28, 1997 (unaudited)............ 28,089,600 $281 $1,007 $(517) $26,770 $27,541 ========== ==== ====== ===== ======= =======
The accompanying notes are an integral part of these consolidated financial statements. F-5 EXCEL SWITCHING CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED SIX MONTHS ENDED ------------------------------ ------------------- DECEMBER 31, ---------------- DECEMBER 28, JUNE 30, JUNE 28, 1994 1995 1996 1996 1997 ------- ------- ------------ -------- --------- (UNAUDITED) Cash Flows From Operating Activities: Net income................ $ 4,190 $ 5,411 $ 7,901 $ 3,687 $ 7,420 Adjustments to reconcile net income to net cash provided by operating activities-- Depreciation and amorti- zation................. 443 560 1,166 335 1,008 Loss on disposal of property and equip- ment................... -- 95 -- -- -- Deferred income taxes... (304) (487) (3,417) (120) (1,058) Compensation expense associated with the grant of stock options, net of forfeitures..... 27 243 60 36 35 Changes in assets and liabilities-- Accounts receivable... (2,847) (3,928) (2,020) (1,165) (2,010) Inventories........... (327) (3,760) (409) (6,446) 1,644 Prepaid taxes......... -- (401) 401 (180) -- Prepaid expenses...... 2 (123) (132) 16 154 Accounts payable...... 1,297 2,419 (2,473) 2,544 1,241 Accrued expenses...... (158) 1,198 3,877 1,802 2,558 Accrued income taxes.. (130) (55) 2,350 (297) (1,337) ------- ------- ------- ------- ------- Net cash provided by operating activities......... 2,193 1,172 7,304 212 9,655 ------- ------- ------- ------- ------- Cash Flows From Investing Activities: Purchases of property and equipment, net........... (940) (4,096) (4,601) (2,541) (1,255) Purchases of marketable securities, net.......... -- -- -- -- (3,001) Proceeds from sale of property and equipment... -- -- 548 -- -- ------- ------- ------- ------- ------- Net cash used in investing activities......... (940) (4,096) (4,053) (2,541) (4,256) ------- ------- ------- ------- ------- Cash Flows From Financing Activities: Proceeds from issuance of long-term obligations.... -- 2,740 649 160 -- Proceeds from line of credit, net.............. -- -- -- 2,300 -- Payments on long-term ob- ligations................ -- (53) (601) (143) (243) Payments on notes payable to stockholder........... (600) -- -- -- -- ------- ------- ------- ------- ------- Net cash provided by (used in) financing activities......... (600) 2,687 48 2,317 (243) ------- ------- ------- ------- ------- Net increase (decrease) in cash and cash equivalents.. 653 (237) 3,299 (12) 5,156 Cash and cash equivalents, beginning of period........ 354 1,007 770 770 4,069 ------- ------- ------- ------- ------- Cash and cash equivalents, end of period.............. $ 1,007 $ 770 $ 4,069 $ 758 $ 9,225 ======= ======= ======= ======= ======= Supplemental disclosure of cash flow information: Cash paid during the year for: Interest.................. $ 48 $ 119 $ 490 $ 104 $ 187 Taxes..................... $ 3,429 $ 4,353 $ 5,951 $ 3,122 $ 7,286 Supplemental disclosure of noncash investing and financing activities: Acquisition of property and equipment under capital lease obligations.............. $ -- $ 1,112 $ 489 $ -- $ --
The accompanying notes are an integral part of these consolidated financial statements. F-6 EXCEL SWITCHING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 28, 1996 (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES Excel Switching Corporation (the Company), formerly known as Excel Inc., was incorporated in Massachusetts in January 1988 and is a provider of open switching platforms for telecommunications networks worldwide. The Company develops, manufactures, markets and supports a family of open, programmable, carrier-class switches that addresses the complex enhanced services and wireless and wireline infrastructure needs of network providers. The Company sells to a variety of customers in the worldwide telecommunications market, including application developers, original equipment manufacturers (OEMs) and systems integrators. Certain components used in the manufacture of the Company's products are currently available only from single or sole source suppliers. In addition, the Company relies on a limited number of third parties to manufacture certain other components and subassemblies. Shortages resulting from a change in arrangements with these suppliers and manufacturers could cause delays in manufacturing and product shipments and possible deferral or cancellation of customer orders. The accompanying consolidated financial statements reflect the application of certain accounting policies as described below and elsewhere in these notes to consolidated financial statements. (a) Principles of Consolidation These financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions have been eliminated. (b) Interim Financial Statements The accompanying consolidated financial statements as of June 28, 1997 and for the six-month periods ended June 30, 1996 and June 28, 1997 are unaudited, but in the opinion of management, include all adjustments consisting of normal recurring adjustments necessary for a fair presentation of results for the interim periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted, although the Company believes that the disclosures included are adequate to make the information presented not misleading. Results for the six months ended June 28, 1997 are not necessarily indicative of the results that may be expected for the year ending December 27, 1997. (c) Change in Fiscal Year-End During 1996, the Company elected to change its fiscal year-end from December 31 to the last Saturday in December. In the accompanying financial statements "1994" refers to the year ended December 31, 1994; "1995" refers to the year ended December 31, 1995; and "1996" refers to the year ended December 28, 1996. (d) Management Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The market for telecommunications equipment in which the Company operates can be characterized as rapidly changing due to several factors including: technological advancements, the introduction of new products F-7 EXCEL SWITCHING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 28, 1996 (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) and services by the Company and its competitors and the increasing demands placed on equipment in worldwide telecommunications networks. Significant assets and liabilities with reported amounts based on estimates include: accounts receivable, inventory and accrued expenses for post sale support costs, warranty costs and sales returns. While the Company believes its estimates are adequate, actual results could differ from those estimates. (e) Revenue Recognition Revenue from product sales is recognized at the time of shipment to the customer at which time transfer of ownership occurs. The Company provides for anticipated product returns, post sale support and warranty costs at the time of product shipment. (f) Cash, Cash Equivalents and Marketable Securities The Company accounts for investments in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities. Under SFAS No. 115, investments for which the Company has the positive intent and ability to hold to maturity, consisting of cash equivalents and marketable securities, are reported at amortized cost, which approximates fair market value. Cash equivalents are highly liquid investments with original maturities of three months or less. Marketable securities are investment-grade securities with original maturities of greater than three months but less than one year. To date, the Company has not recorded any realized gains or losses. Cash, cash equivalents and marketable securities consist of the following (in thousands):
JUNE 28, 1995 1996 1997 ---- ------ -------- Cash and cash equivalents-- Cash............................................... $770 $4,016 $ 485 Time deposits...................................... -- 53 7,051 Money markets...................................... -- -- 1,689 ---- ------ ------ Total cash and cash equivalents.................. $770 $4,069 $9,225 ==== ====== ====== Marketable securities-- Time deposits with banks........................... $-- $ -- $2,001 U.S. Government and Agency securities.............. -- -- 1,000 ---- ------ ------ Total marketable securities...................... $-- $ -- $3,001 ==== ====== ======
(g) Inventories Inventories are valued at the lower of cost (first-in, first-out) or market. Work-in-process and finished goods consist of materials, labor and manufacturing overhead. Inventories at December 31, 1995, December 28, 1996 and June 28, 1997, consist of the following (in thousands):
JUNE 28, 1995 1996 1997 ------ ------ -------- Raw materials...................................... $2,769 $3,585 $1,543 Work-in-process.................................... 3,726 2,988 3,635 Finished goods..................................... 454 785 536 ------ ------ ------ $6,949 $7,358 $5,714 ====== ====== ======
F-8 EXCEL SWITCHING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 28, 1996 (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (h) Depreciation and Amortization The Company provides for depreciation and amortization using both straight- line and accelerated methods by charges to operations in amounts that allocate the cost of the assets over their estimated useful lives as follows:
ESTIMATED DESCRIPTION USEFUL LIVES ----------- ------------- Buildings........................... 40 years Test equipment...................... 2-5 years Office equipment and fixtures....... 2-7 years Building improvements............... 7-40 years Assets under capital lease.......... 3 years
(i) Research and Development and Software Development Costs Research and development costs have been charged to operations as incurred. Capitalization of computer software costs begin upon the establishment of technological feasibility. Because the Company believes its current process for developing software is essentially completed concurrently with the establishment of technological feasibility, no costs have been capitalized to date. (j) Concentrations of Credit Risk Financial instruments that subject the Company to significant concentrations of credit risk consist primarily of cash, cash equivalents, marketable securities and trade accounts receivable. The Company's investments are in financial instruments with high credit ratings. Concentration of credit risk with respect to accounts receivable is limited to customers to whom the Company makes significant sales. One customer accounted for approximately 33%, 34% and 25% of accounts receivable at December 31, 1995, December 28, 1996 and June 28, 1997, respectively (see Note 8). To control credit risk, the Company performs regular credit evaluations of its customers' financial condition and maintains allowances for potential credit losses. (k) Fair Value of Financial Instruments The carrying amounts of the Company's cash, cash equivalents and accounts receivable and accounts payable approximate fair value due to the short-term nature of these instruments. The carrying amounts of debt issued pursuant to agreements with banks approximate fair value as the interest rates on these instruments fluctuate with market interest rates. (l) Net Income per Share Net income per share was determined by dividing net income by the weighted average common and common equivalent shares outstanding during the period. Common equivalent shares consist of common stock options and have been included in the calculation to the extent their effect is dilutive, except that pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 83 (SAB 83), common equivalent shares issued during the twelve months preceding the proposed date of the Registration Statement relating to an initial public offering have been included in the net income per share computations using the Treasury Stock method as if they were outstanding for all periods. F-9 EXCEL SWITCHING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 28, 1996 (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) In March 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 128, Earnings per Share. SFAS No. 128 establishes standards for computing and presenting earnings per share and applies to entities with publicly traded common stock or potential common stock. This statement is effective for fiscal years ending after December 15, 1997, and early adoption is not permitted. When adopted, the statement will require restatement of prior years' earnings per share. The Company will adopt this statement for its fiscal year ending December 27, 1997. Pro forma calculations of basic and diluted earnings per share, as required by SFAS No. 128, are as follows (in thousands, except per share data):
SIX MONTHS ENDED ----------------- JUNE 30, JUNE 28, 1994 1995 1996 1996 1997 ------- ------- ------- -------- -------- Net income.......................... $ 4,190 $ 5,411 $ 7,901 $ 3,687 $ 7,420 ======= ======= ======= ======= ======= Weighted average common shares out- standing........................... 27,946 27,962 28,090 28,090 28,090 Common equivalent shares in accordance with SAB 83............................. 1,090 1,090 1,090 1,090 1,090 ------- ------- ------- ------- ------- Basic weighted average shares out- standing........................... 29,036 29,052 29,180 29,180 29,180 Weighted average common equivalent shares............................. 3,395 3,861 4,607 4,492 4,832 ------- ------- ------- ------- ------- Diluted weighted average shares out- standing........................... 32,431 32,913 33,787 33,672 34,012 ======= ======= ======= ======= ======= Basic earnings per share............ $ .14 $ .19 $ .27 $ .13 $ .25 Diluted earnings per share.......... $ .13 $ .16 $ .23 $ .11 $ .22
(m) Reclassifications Certain reclassifications have been made to prior-year financial statements to conform with the current-year presentation. (n) New Accounting Standards In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income. SFAS No. 130 requires disclosure of all components of comprehensive income on an annual and interim basis. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. In July 1997, the FASB issued SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information. SFAS No. 131 requires certain financial and supplementary information to be disclosed on an annual and interim basis for each reportable segment of an enterprise. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997. Unless impracticable, companies would be required to restate prior period information upon adoption. F-10 EXCEL SWITCHING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 28, 1996 (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (2) LONG-TERM OBLIGATIONS Long-term obligations consist of the following at December 31, 1995 and December 28, 1996 (in thousands):
1995 1996 ------ ------ Mortgage and Security Agreement............................. $2,424 $2,485 Capital lease obligation--building.......................... 1,083 997 Promissory note payable to a bank........................... 291 435 Capital lease obligation--equipment......................... -- 419 ------ ------ 3,798 4,336 Less--Current maturities.................................... 261 499 ------ ------ $3,537 $3,837 ====== ======
On April 21, 1995, the Company entered into a $2,600,000 Mortgage and Security Agreement with a bank to finance the purchase of two buildings and related land. The agreement requires monthly principal and interest payments of approximately $26,000 through April 2010. Interest accrues at prime (8.5% at June 28, 1997) plus .75%. The mortgage is collateralized by the two buildings and related land, which have a carrying value of approximately $3,100,000 at June 28, 1997. The Company is subject to certain restrictive covenants under this agreement. In 1995, the Company entered into a building lease that requires monthly payments ranging from approximately $12,000 to $14,000 through July 2000. In addition, the lease includes a bargain purchase option exercisable in August 1998 for $875,000. The Company intends to exercise this option and, accordingly, has recorded this lease as a capital lease obligation. The present value of the remaining lease payments and the purchase price have been recognized as the capital lease obligation using an effective rate of 8.3%. During 1996, the Company entered into an agreement with a leasing company, which provided for the sale and leaseback of certain equipment that had a net book value of approximately $474,000. Proceeds to the Company in connection with this sale were approximately $548,000. The resulting gain has been deferred and will be recognized ratably over the lease term. Under the terms of the agreement, the Company is required to make thirty-six monthly installments of approximately $16,000. The present value of the lease payments has been recognized as a capital lease obligation using an effective rate of 9%. On June 30, 1997, the Company purchased property to be used for the construction of an additional building. The purchase price of $575,000 and the estimated construction costs of $3,600,000 will be financed, in part, by a $2,100,000 Real Estate Promissory Note with a bank. In connection with the purchase, the bank advanced $460,000 under this note. The remaining funds will be advanced as construction milestones are attained. Borrowings under this note shall bear interest at prime (8.5% at June 28, 1997) plus .25% and are secured by the property and certain other assets. Twelve monthly payments of interest only are required beginning in July 1997. Thereafter, monthly payments of principal and interest will be made over a period of fifteen years. On August 1, 1996, the Company entered into a promissory note with a bank for $489,000, the proceeds of which were used to fund leasehold improvements and to retire a 1995 promissory note with the same bank in the original amount of $300,000. Borrowings under this new note require monthly principal payments of approximately $14,000 plus interest at prime (8.5% at June 28, 1997) plus 1% through August 1999. F-11 EXCEL SWITCHING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 28, 1996 (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) Future maturities of long-term obligations as of December 28, 1996 are as follows (in thousands):
BANK CAPITAL OBLIGATIONS LEASES TOTAL ----------- ------- ------ 1997.......................................... $ 266 $ 341 $ 607 1998.......................................... 276 1,154 1,430 1999.......................................... 232 96 328 2000.......................................... 133 -- 133 2001.......................................... 146 -- 146 Thereafter.................................... 1,867 -- 1,867 ------ ------ ------ 2,920 1,591 4,511 Less--Amount representing interest............ -- 175 175 ------ ------ ------ Total long-term obligations................... $2,920 $1,416 $4,336 ====== ====== ======
(3) LINE-OF-CREDIT ARRANGEMENT The Company has an unsecured line-of-credit arrangement with a bank, which provides up to $10,000,000 in financing. Borrowings under this line are limited to 75% of eligible accounts receivable and 50% of certain inventories, as defined, and bear interest at either the bank's base rate (8.5% at June 28, 1997) or the Eurodollar rate (5.7% at June 28, 1997) plus 2.5%. The Company is required to comply with certain restrictive covenants under this agreement. There were no borrowings outstanding under this agreement at December 31, 1995, December 28, 1996 or June 28, 1997. (4) INCOME TAXES The Company provides for income taxes under SFAS No. 109, Accounting for Income Taxes. Under SFAS No. 109, a deferred tax asset or liability is determined based on the difference between the financial statement and tax bases of assets and liabilities, as measured by the enacted tax rates expected to be in effect when the differences reverse. The components of the provision for income taxes are as follows (in thousands):
1994 1995 1996 ------ ------ ------- Current-- Federal........................................ $2,462 $3,054 $ 6,731 State.......................................... 731 843 1,971 ------ ------ ------- 3,193 3,897 8,702 ------ ------ ------- Deferred (prepaid)-- Federal........................................ (226) (363) (2,904) State.......................................... (78) (124) (513) ------ ------ ------- (304) (487) (3,417) ------ ------ ------- Total provision.............................. $2,889 $3,410 $ 5,285 ====== ====== =======
F-12 EXCEL SWITCHING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 28, 1996 (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) A reconciliation of the federal statutory rate to the Company's effective tax rate is as follows:
1994 1995 1996 ---- ---- ---- Income tax provision at federal statutory rate............. 34% 34% 34% Increase (decrease) in tax resulting from-- State tax provision, net of federal benefit.............. 6 6 6 Research and development tax credit...................... (2) (1) -- Other.................................................... 3 -- -- --- --- --- Effective tax rate..................................... 41% 39% 40% === === ===
The approximate income tax effect of each type of temporary difference composing the net deferred tax asset at December 31, 1995 and December 28, 1996 is as follows (in thousands):
1995 1996 ----- ------ Difference in inventory accounting method................. $(468) $ (275) Nondeductible reserves.................................... 302 1,427 Nondeductible accruals.................................... 341 2,674 Property and equipment.................................... 85 137 Other temporary differences............................... 84 (202) ----- ------ Net deferred tax asset.................................. $ 344 $3,761 ===== ======
(5) STOCKHOLDERS' EQUITY (a) Authorized and Outstanding Common Stock As of December 31, 1995, December 28, 1996 and June 28, 1997, the Company has 27,945,600 shares of voting and 144,000 shares of nonvoting common stock outstanding. On September 19, 1996, the Company increased its authorized shares of no par value common stock from 10,000,000 shares to 30,000,000 shares with 15,000,000 shares being designated as voting and 15,000,000 shares as nonvoting. On September 16, 1997, the Company restated its Articles of Organization to provide for authorized common stock of 100,000,000 shares, with a $.01 par value, 85,000,000 of which are designated as voting shares and 15,000,000 of which are designated as nonvoting shares. The accompanying consolidated financial statements have been retroactively restated for this change. Upon the effective date of the Registration Statement relating to the Company's initial public offering of common stock described in this prospectus, all authorized and outstanding shares of nonvoting common stock will be automatically converted, on a one-for-one basis, into shares of voting common stock. (b) Preferred Stock In September 1997, the Board of Directors and sole voting stockholder authorized 10,000,000 shares of $.01 par value preferred stock. The Board of Directors will have the authority to issue such shares in one or more series and to fix the relative rights and preferences without further vote or action by the stockholders. Currently, the Board has no plans to issue any shares of preferred stock. F-13 EXCEL SWITCHING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 28, 1996 (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (c) Stock Split On September 19, 1996, the Company declared a three-for-one split of the shares of common stock. On September 16, 1997, the Company declared a two-for- one split of the shares of common stock. All share and per share amounts for all periods presented have been adjusted to reflect these splits. (d) Stock Options The Company has granted nonqualified stock options to purchase shares of its nonvoting common stock at exercise prices generally determined to be at fair market value by the Company's Board of Directors on the date of grant. Options are generally exercisable within 10 years of the original date of grant and vest over a period of up to five years from the date of grant. In some instances, options have been granted at exercise prices below the fair market value on the date of grant. The difference, if any, between the fair market value of shares of the Company's nonvoting common stock, as determined by the Company's Board of Directors, and the exercise price of the option is recognized as compensation expense over the vesting term. During 1994, 1995 and 1996, the Company recognized net compensation expense of $27,000, $243,000 and $60,000, respectively. Effective with the automatic conversion of the Company's nonvoting shares into shares of voting common stock, shares issuable upon exercise of these options will be voting common stock. Stock option activity for the three years in the period ended December 28, 1996 and for the six-month period ended June 28, 1997 is as follows:
WEIGHTED AVERAGE NUMBER OF EXERCISE SHARES PRICE ---------- --------- Outstanding, December 31, 1993...................... 5,709,840 $0.002 Granted........................................... 930,000 0.167 ---------- ------ Outstanding, December 31, 1994...................... 6,639,840 0.025 Granted........................................... 1,491,000 0.333 Exercised......................................... (144,000) 0.002 Forfeited......................................... (96,000) 0.002 ---------- ------ Outstanding, December 31, 1995...................... 7,890,840 0.084 Granted........................................... 1,997,500 4.250 Forfeited......................................... (30,000) 0.333 ---------- ------ Outstanding, December 28, 1996...................... 9,858,340 0.927 Granted........................................... 1,050,300 6.551 Forfeited......................................... (100,000) 3.850 ---------- ------ Outstanding, June 28, 1997.......................... 10,808,640 $1.447 ========== ======
Subsequent to June 28, 1997, the Company issued options to purchase a total of 355,200 shares of common stock at exercise prices ranging from $11.50 to $14.50. F-14 EXCEL SWITCHING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 28, 1996 (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) The following tables summarize information about stock options outstanding at June 28, 1997:
OPTIONS OUTSTANDING ----------------------------------- WEIGHTED NUMBER AVERAGE WEIGHTED OUTSTANDING REMAINING AVERAGE AT JUNE 28, CONTRACTUAL EXERCISE RANGE OF EXERCISE PRICES 1997 LIFE PRICE ------------------------ ------------ ------------ --------- $ 0.002......................... 5,469,840 6.4 $ 0.002 0.167......................... 930,000 7.4 0.167 0.333......................... 1,461,000 8.2 0.333 1.00-2.333......................... 324,000 9.0 2.235 4.50- 5.00......................... 1,573,500 9.3 4.691 6.00- 7.00......................... 952,800 9.6 6.307 7.50- 8.50......................... 61,100 9.8 8.196 9.50-11.50......................... 36,400 9.9 10.199 ---------- ------- 10,808,640 $ 1.447 ========== =======
OPTIONS EXERCISABLE ---------------------------- WEIGHTED NUMBER AVERAGE EXERCISE PRICES EXERCISABLE EXERCISE PRICE --------------- ------------ --------------- $0.002..................................... 5,355,840 $ 0.002 0.167..................................... 566,400 0.167 0.333..................................... 591,300 0.333 1.000..................................... 2,400 1.000 --------- ------- Exercisable, June 28, 1997................... 6,515,940 $ 0.047 ========= ======= Exercisable, December 28, 1996............... 6,356,940 $ 0.046 ========= ======= Exercisable, December 31, 1995............... 5,840,040 $ 0.029 ========= ======= Exercisable, December 31, 1994............... 5,433,840 $ 0.012 ========= =======
(e) Fair Value of Stock Options In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 requires the measurement of the fair value of stock options to be included in the statement of income or disclosed in the notes to financial statements. The Company has determined that it will continue to account for stock-based compensation for employees under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and elect the disclosure-only alternative under SFAS No. 123. F-15 EXCEL SWITCHING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 28, 1996 (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) Had compensation cost for the Company's option plans been determined based on the fair value at the grant dates, as prescribed in SFAS No. 123, the Company's net income and net income per share would have been as follows:
1995 1996 ------ ------ Net income (in thousands)-- As reported...................... $5,411 $7,901 Pro forma........................ $5,317 $7,456 Net income per share-- As reported...................... $ .16 $ .23 Pro forma........................ $ .16 $ .22
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for grants during the applicable period: dividend yield of 0.0% for all periods; volatility of 56.6% for all periods; risk-free interest rates of 6.0% to 6.5% for options granted during 1995 and 5.9% to 6.8% for options granted during 1996; and a weighted average expected option term of 7.5 years for all periods. The weighted average fair value per share of options granted during 1995 and 1996 was $0.97 and $5.64, respectively. (f) Stock Option Plans In September 1997, the Company's Board of Directors and sole voting stockholder adopted the 1997 Stock Option Plan (1997 Plan). Under the terms of the 1997 Plan, incentive and nonqualified stock options may be granted to employees and consultants to purchase an aggregate of 3,000,000 shares of common stock. No options have been granted under the 1997 Plan. The Company's Non-Employee Director Stock Option Plan (Director Option Plan) was adopted by the Board of Directors and sole voting stockholder in (September 1997). The Director Option Plan provides for the grant of options to purchase an aggregate 225,000 shares of common stock to non-employee directors of the Company. Each such director will be granted an option to purchase 30,000 shares upon election. In addition, each such director will be automatically granted an option to purchase 15,000 shares in each of the two years following the date such person becomes a director. These options will vest 1/3 on grant date, 1/3 one year from grant date, and 1/3 two years from grant date. Upon the closing of the public offering three directors will be elected and receive the options as described above. The exercise price of the options will be the fair market value on the date of grant. (g) Employee Stock Purchase Plan In September 1997, the Company's Board of Directors and sole voting stockholder approved the 1997 Employee Stock Purchase Plan pursuant to which a maximum of 400,000 shares of common stock may be issued to participating employees in semiannual grants at a price equal to 85% of fair market value, as defined. F-16 EXCEL SWITCHING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 28, 1996 (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (6) COMMITMENTS The Company leases certain equipment and office facilities under noncancelable operating leases, which expire at various dates through September 2001. Future minimum lease payments required under these leases at December 28, 1996 are approximately as follows (in thousands):
FISCAL YEAR AMOUNT ----------- ------ 1997....................................... $ 958 1998....................................... 318 1999....................................... 113 2000....................................... 96 2001....................................... 45 ------ $1,530 ======
Total rent expense under these agreements for 1994, 1995 and 1996 was approximately $134,000, $193,000 and $1,062,000, respectively. (7) EMPLOYEE BENEFIT PLAN The Company has a qualified 401(k) retirement savings plan covering all employees. Under this plan, participants may elect to defer a portion of their compensation, subject to certain limitations. In addition, the Company, at the discretion of the Board of Directors, may make profit sharing contributions into the plan. During 1994, 1995 and 1996, the Company made contributions of approximately $160,000, $209,000 and $534,000, respectively. (8) SIGNIFICANT CUSTOMERS Sales to significant customers as a percentage of the Company's total revenues were as follows:
SIX-MONTHS ENDED ----------------- JUNE 30, JUNE 28, 1994 1995 1996 1996 1997 ---- ---- ---- -------- -------- Customer A............................... 33% 41% 37% 38% 35% Customer B............................... -- 11% -- -- -- Customer C............................... 10% -- -- -- --
(9) ACCRUED EXPENSES Accrued expenses at December 31, 1995, December 28, 1996, and June 28, 1997 consist of the following (in thousands):
JUNE 28, 1995 1996 1997 ------ ------ -------- Accrued payroll and benefits....................... $ 666 $1,322 $2,438 Accrued sales returns.............................. 578 1,243 2,381 Accrued post sales support and warranty............ 235 1,225 1,550 Accrued other...................................... 362 1,041 781 Accrued professional fees.......................... 90 624 633 Accrued marketing.................................. -- 352 583 ------ ------ ------ $1,931 $5,807 $8,366 ====== ====== ======
F-17 [LOGO] PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. Estimated expenses (other than underwriting discounts and commissions) payable in connection with the sale of the Common Stock offered hereby are as follows: SEC Registration fee................................................ 23,523 NASD filing fee..................................................... 8,263 Nasdaq National Market listing fee.................................. 50,000 Printing and engraving expenses..................................... 125,000 Legal fees and expenses............................................. 300,000 Accounting fees and expenses........................................ 200,000 Blue Sky fees and expenses (including legal fees)................... 10,000 Transfer agent and registrar fees and expenses...................... 10,000 Miscellaneous....................................................... 73,214 -------- Total............................................................. $800,000 ========
The Company will bear all expenses shown above. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Company is required by its Restated By-laws and the Restated Articles of Organization generally to indemnify any director, officer or employee against all expenses and liabilities reasonably incurred by or imposed upon such person in connection with any legal action in which such person is involved by reason of such person's position with the Company unless such person shall have been finally adjudicated in any action, suit or proceeding not to have acted in good faith in the reasonable belief that such person's action was in the best interests of the Company. The Company may pay expenses incurred by any such person in defending a civil or criminal action or proceeding in advance of the final disposition of such action upon the Company's receipt of the undertaking of such person to repay such amount if such person shall be adjudicated not to be entitled to indemnification. The Company's Restated Articles of Incorporation include a provision limiting the personal liability of a director of the Company to its stockholders for monetary damages for breaches of their fiduciary duty except (i) for any breach of the director's duty of loyalty to the Company or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under section sixty-one or sixty-two of Chapter 156B of the Massachusetts General Laws, or (iv) for any transaction from which the director derived an improper personal benefit. The Underwriting Agreement provides that the Underwriters are obligated, under certain circumstances, to indemnify directors, officers and controlling persons of the Company against certain liabilities, including liabilities under the Securities Act. Reference is made to the form of Underwriting Agreement filed as Exhibit 1.1 hereto. The Company maintains directors and officers liability insurance for the benefit of its directors and certain of its officers. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. The Registrant has sold and issued the following securities during the past three years: (1) The Company has issued options to purchase an aggregate of 5,824,000 shares of Common Stock to employees at a weighted average exercise price of $3.60 per share of which 144,000 shares have been issued upon the exercise of such options. II-1 (2) On September 19, 1996, the Company's Board of Directors authorized a three-for-one stock split in the form of a stock dividend on the Common Stock. On September 16, 1997, the Company's Board of Directors authorized a subsequent two-for-one stock split in the form of a stock dividend on the Common Stock. All of the share information in this Registration Statement reflects such stock splits. No underwriters were involved in the foregoing sales of securities. Such sales were made in reliance upon an exemption from the registration provisions of the Securities Act of 1993, as amended (the "Securities Act"), set forth in Sections 2(3), 4(2) or Rule 701 thereof relative to sales by an issuer not involving any public offering or the rules and regulations thereunder. All of the foregoing securities are deemed restricted securities for the purposes of the Securities Act. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits:
EXHIBIT NO. DESCRIPTION ----------- ----------- 1.1 --Form of Underwriting Agreement. 3.1 --Restated Articles of Organization of the Company. 3.2 --Restated By-laws of the Company. 4.1* --Specimen certificate representing the Common Stock. 5.1* --Opinion of Testa, Hurwitz & Thibeault, LLP. 10.1 --1997 Stock Option Plan. 10.2 --1997 Non-Employee Director Stock Option Plan. 10.3 --1997 Employee Stock Purchase Plan. --Form of Stock Option Agreement of the Company used under Stock 10.4 Option Program. --Lease dated as of July 27, 1995 between the Company and 10.5 Independence Park, Inc., as amended. 10.6 --Purchase and Resale Agreement dated as of May 27, 1994 between the Company and Boston Technology, Inc. 10.7 --Credit Agreement and Promissory Note dated as of December 21, 1995 between the Company and The First National Bank of Boston, as amended. 10.8 --Mortgage and Security Agreement and Real Estate Promissory Note dated as of April 21, 1995 between the Company and Cape Cod Bank and Trust Company. 10.9 --Loan Agreement, Real Estate Promissory Note and Security Agreement dated as of June 30, 1997 between the Company and Cape Cod Bank and Trust Company. 11.1 --Statement re: computation of earnings per share. 23.1 --Consent of Arthur Andersen LLP. --Consent of Testa, Hurwitz & Thibeault, LLP (included in Exhibit 23.2* 5.1). 23.3 --Consent of Cesari and McKenna, LLP. 24.1 --Power of Attorney (see page II-4). 27.1 --Financial Statement Schedule. 99.1 --Consent of Edward L. Breslow, to be named a director. 99.2 --Consent of William J. Cadogan, to be named a director. 99.3 --Consent of John Loughlin, to be named a director.
- -------- *To be filed by amendment. II-2 (b) Financial Statement Schedule: Report of Independent Public Accountants Schedule II--Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. ITEM 17. UNDERTAKINGS. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the 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 Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes (i) to provide to the underwriters at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser; (ii) that for purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective; and (iii) that for the purpose of determining any liability under the Securities Act, each post- effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 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 Hyannis, Massachusetts on September 16, 1997. Excel Switching Corporation /s/ Robert P. Madonna By: _________________________________ ROBERT P. MADONNA CHIEF EXECUTIVE OFFICER, PRESIDENT AND CHAIRMAN OF THE BOARD OF DIRECTORS POWER OF ATTORNEY AND SIGNATURES The undersigned directors and officers of Excel Switching Corporation do hereby constitute and appoint Robert P. Madonna and Stephen S. Galliker and each of them, with full power of substitution, our true and lawful attorneys- in-fact and agents to do any and all acts and things in our name and behalf in our capacities as directors and officers, and to execute any and all instruments for us and in our names in the capacities indicated below which such person may deem necessary or advisable to enable Excel Switching Corporation to comply with the Securities Act of 1933, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Registration Statement, including specifically, but not limited to, power and authority to sign for us, or any of us, in the capacities indicated below, any and all amendments (including subsequent Registration Statements or post-effective amendments filed pursuant to Rule 462(b) of the Securities Act of 1933, as amended) hereto; and we do hereby ratify and confirm all that such person or persons shall do or cause to be done by virtue hereof. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED. SIGNATURE TITLE(S) DATE /s/ Robert P. Madonna Chief Executive September 16, - ------------------------------------- Officer, President 1997 ROBERT P. MADONNA (Principal Executive Officer) and Chairman of the Board of Directors /s/ Stephen S. Galliker Chief Financial September 16, - ------------------------------------- Officer (Principal 1997 STEPHEN S. GALLIKER Financial Officer and Principal Accounting Officer) /s/ Christopher Stavros Director, Vice September 16, - ------------------------------------- President and 1997 CHRISTOPHER STAVROS General Counsel II-4 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Excel Switching Corporation: We have audited, in accordance with generally accepted auditing standards, the consolidated financial statements of Excel Switching Corporation and subsidiaries included in this Form S-1 and have issued our report thereon dated March 3, 1997. Our audit was made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The schedule listed in Item 16(b) is the responsibility of the Company's management and is presented for the purpose of complying with Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states in all material respects, the financial data required to be set forth therein, in relation to the basic consolidated financial statements taken as a whole. ARTHUR ANDERSEN LLP Boston, Massachusetts March 3, 1997 S-1 SCHEDULE II EXCEL SWITCHING CORPORATION VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR DOUBTFUL BALANCE CHARGED TO BALANCE ACCOUNTS BEGINNING COST DEDUCTIONS END OF - ------------- OF PERIOD OR EXPENSE (WRITEOFFS) PERIOD --------- ---------- ----------- --------- 1994................................ 220,000 155,000 (109,000) 266,000 1995................................ 266,000 387,000 0 653,000 1996................................ 653,000 497,000 (171,000) 979,000 June 28, 1997 (unaudited)........... 979,000 184,000 (13,000) 1,150,000
S-2 EXHIBIT INDEX (a) Exhibits:
EXHIBIT NO. DESCRIPTION ----------- ----------- 1.1 --Form of Underwriting Agreement. 3.1 --Restated Articles of Organization of the Company. 3.2 --Restated By-laws of the Company. 4.1* --Specimen certificate representing the Common Stock. 5.1* --Opinion of Testa, Hurwitz & Thibeault, LLP. 10.1 --1997 Stock Option Plan. 10.2 --1997 Non-Employee Director Stock Option Plan. 10.3 --1997 Employee Stock Purchase Plan. --Form of Stock Option Agreement of the Company used under Stock 10.4 Option Program. --Lease dated as of July 27, 1995 between the Company and 10.5 Independence Park, Inc., as amended. 10.6 --Purchase and Resale Agreement dated as of May 27, 1994 between the Company and Boston Technology, Inc. 10.7 --Credit Agreement and Promissory Note dated as of December 21, 1995 between the Company and The First National Bank of Boston, as amended. 10.8 --Mortgage and Security Agreement and Real Estate Promissory Note dated April 21, 1995 between the Company and Cape Cod Bank and Trust Company. 10.9 --Loan Agreement, Real Estate Promissory Note and Security Agreement dated as of June 30, 1997 between the Company and Cape Cod Bank and Trust Company. 11.1 --Statement re: computation of earnings per share. 23.1 --Consent of Arthur Andersen LLP. --Consent of Testa, Hurwitz & Thibeault, LLP (included in Exhibit 23.2* 5.1). 23.3 --Consent of Cesari and McKenna, LLP. 24.1 --Power of Attorney (see page II-4). 27.1 --Financial Statement Schedule. 99.1 --Consent of Edward L. Breslow, to be named a director. 99.2 --Consent of William J. Cadogan, to be named a director. 99.3 --Consent of John Loughlin, to be named a director.
- -------- * To be filed by Amendment. EX-1.1 2 FORM OF UNDERWRITING AGREEMENT EXHIBIT 1.1 DRAFT 9/16/97 ________________ Shares EXCEL SWITCHING CORPORATION COMMON STOCK ($.01 PAR VALUE PER SHARE) UNDERWRITING AGREEMENT ____________, 1997 MORGAN STANLEY & CO. INCORPORATED HAMBRECHT & QUIST LLC MONTGOMERY SECURITIES _______________, 1997 Morgan Stanley & Co. Incorporated Hambrecht & Quist LLC Montgomery Securities c/o Morgan Stanley & Co. Incorporated 1585 Broadway New York, New York 10036 Dear Sirs and Mesdames: Excel Switching Corporation, a Massachusetts corporation (the "Company"), proposes to issue and sell to the several Underwriters named in Schedule II hereto (the "Underwriters"), an aggregate of _______________ shares of the common stock, $.01 par value per share, of the Company (the "Firm Shares"). Robert P. Madonna, a shareholder of the Company (the "Selling Shareholder"), also proposes to sell to the several Underwriters not more than an additional _______________ shares of the common stock, $.01 par value per share, of the Company (the "Additional Shares"), if and to the extent that you, as Managers of the offering, shall have determined to exercise, on behalf of the Underwriters, the right to purchase such shares of common stock granted to the Underwriters in Section 3 hereof. The Firm Shares and the Additional Shares are hereinafter collectively referred to as the "Shares." The shares of common stock, $.01 par value per share, of the Company to be outstanding after giving effect to the sales contemplated hereby are hereinafter referred to as the "Common Stock." The Company and the Selling Shareholder are hereinafter sometimes collectively referred to as the "Sellers." The Company has filed with the Securities and Exchange Commission (the "Commission") a registration statement, including a prospectus, relating to the Shares. The registration statement as amended at the time it becomes effective, including the information (if any) deemed to be part of the registration statement at the time of effectiveness pursuant to Rule 430A under the Securities Act of 1933, as amended (the "Securities Act"), is hereinafter referred to as the "Registration Statement"; the prospectus in the form first used to confirm sales of Shares is hereinafter referred to as the "Prospectus." If the Company has filed an abbreviated registration statement to register additional shares of Common Stock pursuant to Rule 462(b) under the Securities Act (the "Rule 462 Registration Statement"), then any reference herein to the term "Registration Statement" shall be deemed to include such Rule 462 Registration Statement. As part of the offering contemplated by this Agreement, Morgan Stanley & Co. Incorporated ("Morgan Stanley") has agreed to reserve out of the Shares set forth opposite its name on Schedule II to this Agreement, up to _____________ shares, for sale to the Company's employees, officers and directors [and other parties associated with the Company] (collectively, "Participants"), as set forth in the Prospectus under the heading "Underwriting" (the "Directed Share Program"). The Shares to be sold by Morgan Stanley pursuant to the Directed Share Program (the "Directed Shares") will be sold by Morgan Stanley pursuant to this Agreement at the public offering price. Any Directed Shares not orally confirmed for purchase by any Participants by the end of the first business day after the date on which this Agreement is executed will be offered to the public by Morgan Stanley as set forth in the Prospectus. 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents --------------------------------------------- and warrants to and agrees with each of the Underwriters that: (a) The Registration Statement has become effective; no stop order suspending the effectiveness of the Registration Statement is in effect, and no proceedings for such purpose are pending before or threatened by the Commission. (b) (i) The Registration Statement, when it became effective, did not contain and, as amended or supplemented, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) the Registration Statement and the Prospectus comply and, as amended or supplemented, if applicable, will comply in all material respects with the Securities Act and the applicable rules and regulations of the Commission thereunder and (iii) the Prospectus does not contain and, as amended or supplemented, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that the representations and warranties set forth in this paragraph 1(b) do not apply to statements or omissions in the Registration Statement or the Prospectus based upon information relating to any Underwriter furnished to the Company in writing by such Underwriter through you expressly for use therein. (c) The Company has been duly incorporated, is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has the corporate power and authority to own its property and to conduct its business as described in the Prospectus and is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or be in good standing -2- would not have a material adverse effect on the Company and its subsidiaries, taken as a whole. (d) Each subsidiary of the Company has been duly incorporated, is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has the corporate power and authority to own its property and to conduct its business as described in the Prospectus and is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or be in good standing would not have a material adverse effect on the Company and its subsidiaries, taken as a whole; all of the issued shares of capital stock of each subsidiary of the Company have been duly and validly authorized and issued, are fully paid and non-assessable and are owned directly by the Company, free and clear of all liens, encumbrances, equities or claims. (e) This Agreement has been duly authorized, executed and delivered by the Company. (f) The authorized capital stock of the Company conforms as to legal matters to the description thereof contained in the Prospectus. (g) The shares of Common Stock (including the Shares to be sold by the Selling Shareholders) outstanding prior to the issuance of the Shares to be sold by the Company have been duly authorized and are validly issued, fully paid and non-assessable. (h) The Shares to be sold by the Company have been duly authorized and, when issued and delivered in accordance with the terms of this Agreement, will be validly issued, fully paid and non-assessable, and the issuance of such Shares will not be subject to any preemptive or similar rights. (i) The execution and delivery by the Company of, and the performance by the Company of its obligations under, this Agreement will not contravene any provision of applicable law or the certificate of incorporation or by- laws of the Company or any agreement or other instrument binding upon the Company or any of its subsidiaries that is material to the Company and its subsidiaries, taken as a whole, or any judgment, order or decree of any governmental body, agency or court having jurisdiction over the Company or any subsidiary, and no consent, approval, authorization or order of, or qualification with, any governmental body or agency is required for the performance by the Company of its obligations under this Agreement, except such as may be required by the securities or Blue Sky laws of the various states in connection with the offer and sale of the Shares. -3- (j) There has not occurred any material adverse change, or any development involving a prospective material adverse change, in the condition, financial or otherwise, or in the earnings, business or operations of the Company and its subsidiaries, taken as a whole, from that set forth in the Prospectus (exclusive of any amendments or supplements thereto subsequent to the date of this Agreement). (k) There are no legal or governmental proceedings pending or threatened to which the Company or any of its subsidiaries is a party or to which any of the properties of the Company or any of its subsidiaries is subject that are required to be described in the Registration Statement or the Prospectus and are not so described or any statutes, regulations, contracts or other documents that are required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement that are not described or filed as required. (l) Each preliminary prospectus filed as part of the registration statement as originally filed or as part of any amendment thereto, or filed pursuant to Rule 424 under the Securities Act, complied when so filed in all material respects with the Securities Act and the applicable rules and regulations of the Commission thereunder. (m) The Company is not and, after giving effect to the offering and sale of the Shares and the application of the proceeds thereof as described in the Prospectus, will not be an "investment company" as such term is defined in the Investment Company Act of 1940, as amended. (n) The Company and its subsidiaries (i) are in compliance with any and all applicable foreign, federal, state and local laws and regulations relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants ("Environmental Laws"), (ii) have received all permits, licenses or other approvals required of them under applicable Environmental Laws to conduct their respective businesses and (iii) are in compliance with all terms and conditions of any such permit, license or approval, except where such noncompliance with Environmental Laws, failure to receive required permits, licenses or other approvals or failure to comply with the terms and conditions of such permits, licenses or approvals would not, singly or in the aggregate, have a material adverse effect on the Company and its subsidiaries, taken as a whole. The Company, in its reasonable judgment, has concluded that any costs or liabilities associated with Environmental Laws (including, without limitation, any capital or operating expenditures required for clean-up, closure of properties or compliance with Environmental Laws or any permit, license or approval, any related constraints on operating activities and any potential -4- liabilities to third parties) would not, singly or in the aggregate, have a material adverse effect on the Company and its subsidiaries, taken as a whole. (o) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, (i) the Company and its subsidiaries have not incurred any material liability or obligation, direct or contingent, nor entered into any material transaction not in the ordinary course of business; (ii) the Company has not purchased any of its outstanding capital stock, nor declared, paid or otherwise made any dividend or distribution of any kind on its capital stock other than ordinary and customary dividends; and (iii) there has not been any material change in the capital stock, short-term debt or long-term debt of the Company and its consolidated subsidiaries, except in each case as would not reasonably be expected to result in any material adverse change in the condition, financial or otherwise, or in the earnings, business or operations of the Company and its subsidiaries, taken as a whole, except as described in or contemplated by the Prospectus. (p) The Company and its subsidiaries have good and marketable title in fee simple to all real property and good and marketable title to all personal property owned by them which is material to the business of the Company and its subsidiaries, in each case free and clear of all liens, encumbrances and defects except such as are described in the Prospectus or such as do not materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company and its subsidiaries; and any real property and buildings held under lease by the Company and its subsidiaries are held by them under valid, subsisting and enforceable leases or subleases with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company and its subsidiaries, in each case except as described in or contemplated by the Prospectus. (q) The Company and its subsidiaries own or possess, or can acquire on reasonable terms, all material patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks and trade names currently employed by them in connection with the business now operated by them, and neither the Company nor any of its subsidiaries has received any notice of infringement of or conflict with asserted rights of others with respect to any of the foregoing which, singly or in the aggregate, in the Company's reasonable judgment, would result in any material adverse change in the condition, financial or otherwise, or in the earnings, business or operations of the Company and its subsidiaries, taken as a whole. -5- (r) No material labor dispute with the employees of the Company or any of its subsidiaries exists, except as described in or contemplated by the Prospectus, or, to the knowledge of the Company, is imminent; and the Company is not aware of any existing, threatened or imminent labor disturbance by the employees of any of its principal suppliers, manufacturers or contractors that could result in any material adverse change in the condition, financial or otherwise, or in the earnings, business or operations of the Company and its subsidiaries, taken as a whole. (s) The Company and each of its subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are customary in the businesses in which they are engaged; neither the Company nor any such subsidiary has been refused any insurance coverage sought or applied for; and neither the Company nor any such subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not materially and adversely affect the condition, financial or otherwise, or the earnings, business or operations of the Company and its subsidiaries, taken as a whole, except as described in or contemplated by the Prospectus. (t) The Company and its subsidiaries possess all certificates, authorizations and permits issued by the appropriate federal, state or foreign regulatory authorities necessary to conduct their respective businesses, and neither the Company nor any such subsidiary has received any notice of proceedings relating to the revocation or modification of any such certificate, authorization or permit which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would result in a material adverse change in the condition, financial or otherwise, or in the earnings, business or operations of the Company and its subsidiaries, taken as a whole, except as described in or contemplated by the Prospectus. (u) The Company and each of its subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. -6- (v) The accountants who have certified or shall certify the financial statements filed or to be filed with the Commission as part of the Registration Statement and the Prospectus are independent accountants as required by the Securities Act. The consolidated financial statements of the Company and its subsidiaries (together with the related notes thereto) included in the Registration Statement present fairly the financial position and results of operations of the Company and its subsidiaries at the respective dates and for the respective periods to which they apply, subject to normal year-end adjustments. Such financial statements have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved except as otherwise stated therein. (w) The Shares have been approved for listing on the Nasdaq National Market, subject to official notice of issuance. (x) Neither the Company nor any of its subsidiaries is in violation of any federal or state law or regulation relating to occupational safety and health or to the storage, handling or transportation of hazardous or toxic materials and the Company and its subsidiaries have received all permits, licenses or other approvals required of them under applicable federal and state occupational safety and health and environmental laws and regulations to conduct their respective businesses, and the Company and each subsidiary is in compliance with all terms and conditions of any such permit, license or approval, except any such violation of law or regulation, failure to receive required permits, licenses or other approvals or failure to comply with the terms and conditions of such permits, licenses or approvals which would not, singly or in the aggregate, result in a material adverse change in the condition, financial or otherwise, or in the earnings, business or operations of the Company and its subsidiaries, taken as a whole, except as described in or contemplated by the Prospectus. (y) There are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Securities Act with respect to any securities of the Company or to require the Company to include such securities with the Shares registered pursuant to the Registration Statement. (z) The Company has complied with all provisions of Section 517.075, Florida Statutes relating to doing business with the Government of Cuba or with any person or affiliate located in Cuba. Furthermore, the Company represents and warrants to Morgan Stanley that (i) the Registration Statement, the Prospectus and any preliminary prospectus comply, and any further amendments or supplements thereto will comply, with any applicable laws or regulations of foreign jurisdictions in which the Prospectus or any preliminary -7- prospectus, as amended or supplemented, if applicable, are distributed in connection with the Directed Share Program, and that (ii) no authorization, approval, consent, license, order, registration or qualification of or with any government, governmental instrumentality or court, other than such as have been obtained, is necessary under the securities laws and regulations of foreign jurisdictions in which the Directed Shares are offered outside the United States. The Company has not offered, or caused the Underwriters to offer, Shares to any person pursuant to the Directed Share Program with the specific intent to unlawfully influence (i) a customer or supplier of the Company to alter the customer's or supplier's level or type of business with the Company, or (ii) a trade journalist or publication to write or publish favorable information about the Company or its products. 2. REPRESENTATIONS AND WARRANTIES OF THE SELLING SHAREHOLDER. The --------------------------------------------------------- Selling Shareholder represents and warrants to and agrees with each of the Underwriters that: (a) This Agreement has been duly authorized, executed and delivered by or on behalf of the Selling Shareholder. (b) The execution and delivery by the Selling Shareholder of, and the performance by such Selling Shareholder of its obligations under, this Agreement, the Custody Agreement signed by such Selling Shareholder and ____________, as Custodian, relating to the deposit of the Shares to be sold by such Selling Shareholder (the "Custody Agreement") and the Power of Attorney appointing certain individuals as such Selling Shareholder's attorneys-in-fact to the extent set forth therein, relating to the transactions contemplated hereby and by the Registration Statement (the "Power of Attorney"), will not contravene any provision of applicable law or any agreement or other instrument binding upon the Selling Shareholder or any judgment, order or decree of any governmental body, agency or court having jurisdiction over the Selling Shareholder, and no consent, approval, authorization or order of, or qualification with, any governmental body or agency is required for the performance by the Selling Shareholder of his obligations under this Agreement or the Custody Agreement or Power of Attorney of such Selling Shareholder, except such as may be required by the securities or Blue Sky laws of the various states in connection with the offer and sale of the Shares. (c) The Selling Shareholder has, and on the Closing Date will have, valid title to the Shares to be sold by the Selling Shareholder and the legal right and power, and all authorization and approval required by law, to enter into this Agreement, the Custody Agreement and the Power of Attorney and to sell, transfer and deliver the Shares to be sold by the Selling Shareholder. -8- (d) The Shares to be sold by the Selling Shareholder pursuant to this Agreement have been duly authorized and are validly issued, fully paid and non-assessable. (e) The Custody Agreement and the Power of Attorney have been duly authorized, executed and delivered by the Selling Shareholder and are valid and binding agreements of the Selling Shareholder. (f) Delivery of the Shares to be sold by the Selling Shareholder pursuant to this Agreement will pass title to such Shares free and clear of any security interests, claims, liens, equities and other encumbrances. (g) (i) the Registration Statement, when it became effective, did not contain and, as amended or supplemented, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) the Registration Statement and the Prospectus comply and, as amended or supplemented, if applicable, will comply in all material respects with the Securities Act and the applicable rules and regulations of the Commission thereunder and (iii) the Prospectus does not contain and, as amended or supplemented, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that the representations and warranties set forth in this paragraph 2(g) do not apply to statements or omissions in the Registration Statement or the Prospectus based upon information relating to any Underwriter furnished to the Company in writing by such Underwriter through you expressly for use therein. 3. AGREEMENTS TO SELL AND PURCHASE. The Company hereby agrees to sell to ------------------------------- the several Underwriters, and each Underwriter, upon the basis of the representations and warranties herein contained, but subject to the conditions hereinafter stated, agrees, severally and not jointly, to purchase from the Company at $______ a share (the "Purchase Price") the number of Firm Shares (subject to such adjustments to eliminate fractional shares as you may determine) that bears the same proportion to the number of Firm Shares to be sold by the Company as the number of Firm Shares set forth in Schedule II hereto opposite the name of such Underwriter bears to the total number of Firm Shares. On the basis of the representations and warranties contained in this Agreement, and subject to its terms and conditions, the Company and the Selling Shareholder agree to sell to the Underwriters the Additional Shares, and the Underwriters shall have a one-time right to purchase, severally and not jointly, up to ______________ Additional Shares at the Purchase Price. If you, on behalf of the Underwriters, elect to exercise such option, you shall so notify the Company in writing not later than 30 days after the date -9- of this Agreement, which notice shall specify the number of Additional Shares to be purchased by the Underwriters and the date on which such shares are to be purchased. Such date may be the same as the Closing Date (as defined below) but not earlier than the Closing Date nor later than ten business days after the date of such notice. Additional Shares may be purchased as provided in Section 5 hereof solely for the purpose of covering over-allotments made in connection with the offering of the Firm Shares. If any Additional Shares are to be purchased, each Underwriter agrees, severally and not jointly, to purchase the number of Additional Shares (subject to such adjustments to eliminate fractional shares as you may determine) that bears the same proportion to the total number of Additional Shares to be purchased as the number of Firm Shares set forth in Schedule II hereto opposite the name of such Underwriter bears to the total number of Firm Shares. Each Seller hereby agrees that, without the prior written consent of Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it will not, during the period ending 180 days after the date of the Prospectus, (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock or (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Common Stock, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. The foregoing sentence shall not apply to (A) the Shares to be sold hereunder or (B) the issuance by the Company of shares of Common Stock upon the exercise of an option or warrant or the conversion of a security outstanding on the date hereof of which the Underwriters have been advised in writing. In addition, each Selling Shareholder agrees that, without the prior written consent of Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it will not, during the period ending 180 days after the date of the Prospectus, make any demand for, or exercise any right with respect to, the registration of any shares of Common Stock or any security convertible into or exercisable or exchangeable for Common Stock. 4. TERMS OF PUBLIC OFFERING. The Sellers are advised by you that the ------------------------ Underwriters propose to make a public offering of their respective portions of the Shares as soon after the Registration Statement and this Agreement have become effective as in your judgment is advisable. The Sellers are further advised by you that the Shares are to be offered to the public initially at $____________ a share (the "Public Offering Price") and to certain dealers selected by you at a price that represents a concession not in excess of $______ a share under the Public Offering Price, and that any Underwriter may allow, and such dealers may reallow, a concession, not in excess of $_____ a share, to any Underwriter or to certain other dealers. -10- 5. PAYMENT AND DELIVERY. Payment for the Firm Shares to be sold by each -------------------- Seller shall be made to such Seller in Federal or other funds immediately available in New York City against delivery of such Firm Shares for the respective accounts of the several Underwriters at 10:00 A.M., New York City time, on ____________ 1997, or at such other time on the same or such other date, not later than _________, 1997, as shall be designated in writing by you. The time and date of such payment are hereinafter referred to as the "Closing Date." The closing of the offering and sale of the Firm Shares will be held at the offices of Testa, Hurwitz & Thibeault, LLP, 125 High Street, Boston, Massachusetts. Payment for any Additional Shares shall be made to the Company in Federal or other funds immediately available in New York City against delivery of such Additional Shares for the respective accounts of the several Underwriters at 10:00 A.M., New York City time, on the date specified in the notice described in Section 3 or at such other time on the same or on such other date, in any event not later than _______, 1997, as shall be designated in writing by you. The time and date of such payment are hereinafter referred to as the "Option Closing Date." The closing of the offering and sale of the Additional Shares will be held at the offices of Testa, Hurwitz & Thibeault, LLP, 125 High Street, Boston, Massachusetts. Certificates for the Firm Shares and Additional Shares shall be in definitive form and registered in such names and in such denominations as you shall request in writing not later than one full business day prior to the Closing Date or the Option Closing Date, as the case may be. The certificates evidencing the Firm Shares and Additional Shares shall be delivered to you on the Closing Date or the Option Closing Date, as the case may be, for the respective accounts of the several Underwriters, with any transfer taxes payable in connection with the transfer of the Shares to the Underwriters duly paid, against payment of the Purchase Price therefor. 6. CONDITIONS TO THE UNDERWRITERS' OBLIGATIONS. The obligations of the ------------------------------------------- Sellers to sell the Shares to the Underwriters and the several obligations of the Underwriters to purchase and pay for the Shares on the Closing Date are subject to the condition that the Registration Statement shall have become effective not later than 4:30 p.m. (New York City time) on the date hereof. The several obligations of the Underwriters are subject to the following further conditions: (a) Subsequent to the execution and delivery of this Agreement and prior to the Closing Date: (i) if any of the Company's securities are rated by any "nationally recognized statistical rating organization," as such term is defined for purposes of Rule 436(g)(2) under the Securities Act, there shall not have -11- occurred any downgrading, nor shall any notice have been given of any intended or potential downgrading or of any review for a possible change that does not indicate the direction of the possible change, in the rating accorded any such securities; and (ii) there shall not have occurred any change, or any development involving a prospective change, in the condition, financial or otherwise, or in the earnings, business or operations of the Company and its subsidiaries, taken as a whole, from that set forth in the Prospectus (exclusive of any amendments or supplements thereto subsequent to the date of this Agreement) that, in your judgment, is material and adverse and that makes it, in your judgment, impracticable to market the Shares on the terms and in the manner contemplated in the Prospectus. (b) The Underwriters shall have received on the Closing Date a certificate, dated the Closing Date and signed by an executive officer of the Company, to the effect set forth in clause (a) (i) above and to the effect that the representations and warranties of the Company contained in this Agreement are true and correct as of the Closing Date and that the Company has complied with all of the agreements and satisfied all of the conditions on its part to be performed or satisfied hereunder on or before the Closing Date. The officer signing and delivering such certificate may rely upon the best of his or her knowledge as to proceedings threatened. (c) The Underwriters shall have received on the Closing Date an opinion of Testa, Hurwitz & Thibeault, LLP, outside counsel for the Company, dated the Closing Date, to the effect that: (i) the Company has been duly incorporated, is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has the corporate power and authority to own its property and to conduct its business as described in the Prospectus and is duly qualified to transact business and is in good standing in _________, ________ and _________, which are the only jurisdictions in which the Company maintains an office or owns or leases property; (ii) each subsidiary of the Company has been duly incorporated, is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has the corporate power and authority to own its property and to conduct its business as described in the Prospectus and is duly qualified, in the case of _____, in _____, ______ and _____, and in the case of _____, in _____, ________ and _______, which are the only -12- jurisdictions in which such subsidiary maintains an office or owns or leases property; (iii) the authorized capital stock of the Company conforms in all material respects as to legal matters to the description thereof contained in the Prospectus under the caption "Description of Capital Stock" and the Shares have been duly authorized for quotation on the Nasdaq National Market. (iv) the shares of Common Stock (including the Shares to be sold by the Selling Shareholders) outstanding prior to the issuance of the Shares to be sold by the Company have been duly authorized and are validly issued, fully paid and non-assessable; (v) all of the issued shares of capital stock of each subsidiary of the Company have been duly and validly authorized and issued, are fully paid and non-assessable and are owned directly by the Company, free and clear of all liens, encumbrances, equities or claims; (vi) the Shares to be sold by the Company have been duly authorized and, when issued and delivered in accordance with the terms of this Agreement, will be validly issued, fully paid and non- assessable, and the issuance of such Shares will not be subject to any preemptive or similar rights under the Massachusetts Business Corporation Law or, to such counsel's knowledge, similar rights granted by contract; (vii) this Agreement has been duly authorized, executed and delivered by the Company; (viii) the execution and delivery by the Company of, and the performance by the Company of its obligations under, this Agreement will not contravene any provision of applicable law (except that such counsel need express no opinion as to state securities or blue sky laws) or the articles of organization or by-laws of the Company or, to the best of such counsel's knowledge, any agreement or other instrument binding upon the Company or any of its subsidiaries that is material to the Company and its subsidiaries, taken as a whole, or, to the best of such counsel's knowledge, any judgment, order or decree of any governmental body, agency or court having jurisdiction over the Company or any subsidiary, and no consent, approval, authorization or order of, or qualification with, any governmental body or agency is required for the performance by the Company of its obligations under this Agreement, except that counsel need express no opinion as to state securities or blue sky laws; -13- (ix) no shares of Common Stock are required pursuant to any agreement or other right to be registered under the Registration Statement, and no person has the right to require such registration, except such rights that have either been satisfied or validly waived; (x) the statements (A) in the Prospectus under the captions "Risk Factors -- Shares Eligible for Future Sale," "Risk Factors -- Potential Adverse Effects of Anti-Takeover Provisions; Availability of Preferred Stock for Issuance," "Management -- Stock Plans," "Description of Capital Stock," "Shares Eligible for Future Sale" and the first, second, third and fifth paragraphs of the "Underwriters" and (B) in the Registration Statement in Items 14 and 15, in each case insofar as such statements constitute summaries of the legal matters, documents or proceedings referred to therein, fairly present the information called for with respect to such legal matters, documents and proceedings and fairly summarize the matters referred to therein; (xi) after due inquiry, such counsel does not know of any legal or governmental proceedings pending or threatened to which the Company or any of its subsidiaries is a party or to which any of the properties of the Company or any of its subsidiaries is subject that are required to be described in the Registration Statement or the Prospectus and are not so described or of any statutes, regulations, contracts or other documents that are required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement that are not described or filed as required; (xii) the Company is not and, after giving effect to the offering and sale of the Shares and the application of the proceeds thereof as described in the Prospectus, will not be an "investment company" as such term is defined in the Investment Company Act of 1940, as amended; and (xiii) such counsel (A) is of the opinion that the Registration Statement and Prospectus (except for financial statements and schedules and other financial and statistical data included therein as to which such counsel need not express any opinion) comply as to form in all material respects with the Securities Act and the applicable rules and regulations of the Commission thereunder, (B) has no reason to believe that (except for financial statements and schedules and other financial and statistical data as to which such counsel need not express any belief) the Registration Statement and the prospectus included therein at the time the Registration Statement became effective contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading and (C) has no reason to believe that (except for financial statements and schedules and -14- other financial and statistical data as to which such counsel need not express any belief) the Prospectus contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. (d) If the option granted pursuant to the second paragraph of Section 3 hereof is exercised, the Underwriters shall have received on the Closing Date an opinion of Testa, Hurwitz & Thibeault, LLP, counsel for the Selling Shareholder, dated the Closing Date, to the effect that: (i) this Agreement has been duly authorized, executed and delivered by or on behalf of the Selling Shareholder; (ii) the execution and delivery by the Selling Shareholder of, and the performance by the Selling Shareholder of his obligations under, this Agreement and the Custody Agreement and Power of Attorney of such Selling Shareholder will not contravene any provision of applicable law or, to the best of such counsel's knowledge, any agreement or other instrument binding upon the Selling Shareholder or, to the best of such counsel's knowledge, any judgment, order or decree of any governmental body, agency or court having jurisdiction over the Selling Shareholder, and no consent, approval, authorization or order of, or qualification with, any governmental body or agency is required for the performance by the Selling Shareholder of his obligations under this Agreement or the Custody Agreement or Power of Attorney of such Selling Shareholder, except such as may be required by the securities or Blue Sky laws of the various states in connection with offer and sale of the Shares; (iii) the Selling Shareholder is the record owner of the Shares to be sold by him and he has the legal right and power, and all authorization and approval required by law, to enter into this Agreement and the Custody Agreement and Power of Attorney of such Selling Shareholder and to sell, transfer and deliver the Shares to be sold by him; (iv) the Custody Agreement and the Power of Attorney of the Selling Shareholder have been duly authorized, executed and delivered by the Selling Shareholder and are valid and binding agreements of the Selling Shareholder; and (v) each Underwriter that is a "bona fide purchaser" within the meaning of Article 8 of the Massachusetts Uniform Commercial Code (the "Code") will acquire, upon payment for the Shares as provided in this -15- Agreement, its interest in the Shares, free of any adverse claim, as defined in the Code. (e) The Underwriters shall have received on the Closing Date an opinion of Cesari and McKenna LLP, patent counsel for the Company, dated the Closing Date, covering the matters referred to in Exhibit A hereto. (f) The Underwriters shall have received on the Closing Date an opinion of Hale and Dorr LLP, counsel for the Underwriters, dated the Closing Date, covering the matters referred to in subparagraphs (vi), (vii), (x) (but only as to the statements in the Prospectus under "Description of Capital Stock" and "Underwriters") and (xiii) of paragraph (c) above. With respect to the first two clauses of subparagraph (v) of paragraph (c) above, Testa, Hurwitz & Thibeault, LLP, may rely upon an opinion of local counsel to any subsidiary of the Company in giving such opinion, provided that (A) counsel for the subsidiary is satisfactory to your -------- counsel, (B) a copy of each opinion so relied upon is delivered to you and is in form and substance satisfactory to your counsel, and (C) Testa, Hurwitz & Thibeault, LLP, shall state in their opinion that they are justified in relying on each such other opinion. With respect to subparagraph (xiii) of paragraph (c) above, Testa, Hurwitz & Thibeault, LLP, and Hale and Dorr LLP may state that their opinion and belief are based upon their participation in the preparation of the Registration Statement and Prospectus and any amendments or supplements thereto and review and discussion of the contents thereof, but are without independent check or verification, except as specified. The opinions of Testa, Hurwitz & Thibeault, LLP, described in paragraphs (c) and (d) above shall be rendered to the Underwriters at the request of the Company or the Selling Shareholder, as the case may be, and shall so state therein. (g) The Underwriters shall have received, on each of the date hereof and the Closing Date, a letter dated the date hereof or the Closing Date, as the case may be, in form and substance satisfactory to the Underwriters, from Arthur Andersen LLP, independent public accountants, containing statements and information of the type ordinarily included in accountants' "comfort letters" to underwriters with respect to the financial statements and certain financial information contained in the Registration Statement and the Prospectus; provided that the letter delivered on the Closing Date -------- shall use a "cut-off date" not earlier than the date hereof. (h) The "lock-up" agreements, each substantially in the form of Exhibit B hereto, between you and certain shareholders, officers and directors of the -16- Company relating to sales and certain other dispositions of shares of Common Stock or certain other securities, delivered to you on or before the date hereof, shall be in full force and effect on the Closing Date. The several obligations of the Underwriters to purchase Additional Shares hereunder are subject to the delivery to you on the Option Closing Date of such documents as you may reasonably request with respect to the good standing of the Company, the due authorization and issuance of the Additional Shares and other matters related to the issuance of the Additional Shares. 7. COVENANTS OF THE COMPANY. In further consideration of the agreements ------------------------ of the Underwriters herein contained, the Company covenants with each Underwriter as follows: (a) To furnish to you, without charge, four signed copies of the Registration Statement (including exhibits thereto) and for delivery to each other Underwriter a conformed copy of the Registration Statement (without exhibits thereto) and to furnish to you in New York City, without charge, prior to 10:00 A.M. New York City time on the business day next succeeding the date of this Agreement and during the period mentioned in paragraph (c) below, as many copies of the Prospectus and any supplements and amendments thereto or to the Registration Statement as you may reasonably request. (b) Before amending or supplementing the Registration Statement or the Prospectus, to furnish to you a copy of each such proposed amendment or supplement and not to file any such proposed amendment or supplement to which you reasonably object, and to file with the Commission within the applicable period specified in Rule 424(b) under the Securities Act any prospectus required to be filed pursuant to such Rule. (c) If, during such period after the first date of the public offering of the Shares as in the opinion of counsel for the Underwriters the Prospectus is required by law to be delivered in connection with sales by an Underwriter or dealer, any event shall occur or condition exist as a result of which it is necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances when the Prospectus is delivered to a purchaser, not misleading, or if, in the opinion of counsel for the Underwriters, it is necessary to amend or supplement the Prospectus to comply with applicable law, forthwith to prepare, file with the Commission and furnish, at its own expense, to the Underwriters and to the dealers (whose names and addresses you will furnish to the Company) to which Shares may have been sold by you on behalf of the Underwriters and to any other dealers upon request, either amendments or supplements to the Prospectus so that the statements in the Prospectus as so amended or supplemented will not, in the light of the circumstances when the -17- Prospectus is delivered to a purchaser, be misleading or so that the Prospectus, as amended or supplemented, will comply with law. (d) To aid your counsel in qualifying the Shares for offer and sale under the securities or Blue Sky laws of such jurisdictions as you shall reasonably request. (e) To make generally available to the Company's security holders and to you as soon as practicable an earning statement covering the twelve- month period ending _________, 1998 that satisfies the provisions of Section 11(a) of the Securities Act and the rules and regulations of the Commission thereunder. (f) Whether or not the transactions contemplated in this Agreement are consummated or this Agreement is terminated, to pay or cause to be paid all expenses incident to the performance of its and the Selling Shareholder's obligations under this Agreement, including: (i) the fees, disbursements and expenses of the Company's counsel, the Company's accountants and counsel for the Selling Shareholder in connection with the registration and delivery of the Shares under the Securities Act and all other fees or expenses in connection with the preparation and filing of the Registration Statement, any preliminary prospectus, the Prospectus and amendments and supplements to any of the foregoing, including all printing costs associated therewith, and the mailing and delivering of copies thereof to the Underwriters and dealers, in the quantities hereinabove specified, (ii) all costs and expenses related to the transfer and delivery of the Shares to the Underwriters, including any transfer or other taxes payable thereon, (iii) the cost of printing or producing any Blue Sky or Legal Investment memorandum in connection with the offer and sale of the Shares under state securities laws and all expenses in connection with the qualification of the Shares for offer and sale under state securities laws as provided in Section 7(d) hereof, including filing fees and the reasonable fees and disbursements of counsel for the Underwriters in connection with such qualification and in connection with the Blue Sky or Legal Investment memorandum, (iv) all filing fees and disbursements of counsel to the Underwriters incurred in connection with the review and qualification of the offering of the Shares by the National Association of Securities Dealers, Inc., (v) all fees and expenses in connection with the preparation and filing of the registration statement on Form 8-A relating to the Common Stock and all costs and expenses incident to listing the Shares on the Nasdaq National Market, (vi) the cost of printing certificates representing the Shares, (vii) the costs and charges of any transfer agent, registrar or depositary, (viii) the costs and expenses of the Company relating to investor presentations on any "road show" undertaken in connection with the marketing of the offering of the Shares, including, without limitation, expenses associated with the production of road show slides and graphics, fees and expenses of any consultants engaged in connection with the road show presentations with the prior approval of the -18- Company, travel and lodging expenses of the representatives and officers of the Company and any such consultants, and the cost of any aircraft chartered in connection with the road show, and (ix) all other costs and expenses incident to the performance of the obligations of the Company hereunder for which provision is not otherwise made in this Section. It is understood, however, that except as provided in this Section, Section 9 entitled "Indemnity and Contribution," and the last paragraph of Section 11 below, the Underwriters will pay all of their costs and expenses, including fees and disbursements of their counsel, stock transfer taxes payable on resale of any of the Shares by them and any advertising expenses connected with any offers they may make. (g) Not to file with the Commission any registration statement on Form S-8 relating to its Common Stock prior to 180 days after the date of the Prospectus. (h) That in connection with the Directed Share Program, the Company will ensure that the Directed Shares will be restricted to the extent required by the National Association of Securities Dealers, Inc. (the "NASD") or the NASD rules from sale, transfer, assignment, pledge or hypothecation for a period of three months following the date of the effectiveness of the Registration Statement. Morgan Stanley will notify the Company as to which Participants will need to be so restricted. At the request of Morgan Stanley, the Company will direct the transfer agent to place stop transfer restrictions upon such securities for such period of time. (i) To pay all fees and disbursements of counsel incurred by the Underwriters in connection with the Directed Share Program and stamp duties, similar taxes or duties or other taxes, if any, incurred by the Underwriters in connection with the Directed Share Program. Furthermore, the Company covenants with Morgan Stanley that the Company will comply with all applicable securities and other applicable laws, rules and regulations in each foreign jurisdiction in which the Directed Shares are offered in connection with the Directed Share Program. The provisions of this Section shall not supersede or otherwise affect any agreement that the Sellers may otherwise have for the allocation of such expenses among themselves. 8. Expenses of the Selling Shareholder. The Selling Shareholder agrees ----------------------------------- to pay or cause to be paid all taxes, if any, on the transfer and sale of the Shares being sold by the Selling Shareholder. -19- 9. Indemnity and Contribution. -------------------------- (a) The Company and the Selling Shareholder, jointly and severally, agree to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of either Section 15 of the Securities Act or Section 20 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any amendment thereof, any preliminary prospectus or the Prospectus (as amended or supplemented if the Company shall have furnished any amendments or supplements thereto), or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages or liabilities are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information relating to any Underwriter furnished to the Company in writing by such Underwriter through you expressly for use therein. The Company agrees to indemnify and hold harmless Morgan Stanley and each person, if any, who controls Morgan Stanley within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act ("Morgan Stanley Entities"), from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) (i) caused by any untrue statement or alleged untrue statement of a material fact contained in the prospectus wrapper material prepared by or with the consent of the Company for distribution in foreign jurisdictions in connection with the Directed Share Program attached to the Prospectus or any preliminary prospectus, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, when considered in conjunction with the Prospectus or any applicable preliminary prospectus, not misleading; (ii) caused by the failure of any Participant to pay for and accept delivery of the shares which, immediately following the effectiveness of the Registration Statement, were subject to a properly confirmed agreement to purchase; or (iii) related to, arising out of, or in connection with the Directed Share Program, provided that, the Company shall not be responsible under this subparagraph (iii) for any losses, claim, damages or liabilities (or expenses relating thereto) that are finally judicially determined to have resulted from the bad faith or gross negligence of Morgan Stanley Entities. -20- (b) The Selling Shareholder agrees to indemnify and hold harmless the Company, its directors, its officers who sign the Registration Statement and each person, if any, who controls the Company within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act, from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any amendment thereof, any preliminary prospectus or the Prospectus (as amended or supplemented if the Company shall have furnished any amendments or supplements thereto), or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, but only with reference to information relating to the Selling Shareholder furnished in writing by or on behalf of the Selling Shareholder expressly for use in the Registration Statement, any preliminary prospectus, the Prospectus or any amendments or supplements thereto. (c) Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, the Selling Shareholder, the directors of the Company, the officers of the Company who sign the Registration Statement and each person, if any, who controls the Company within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any amendment thereof, any preliminary prospectus or the Prospectus (as amended or supplemented if the Company shall have furnished any amendments or supplements thereto), or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, but only with reference to information relating to such Underwriter furnished to the Company in writing by such Underwriter through you expressly for use in the Registration Statement, any preliminary prospectus, the Prospectus or any amendments or supplements thereto. (d) The aggregate liability of the Selling Shareholder under the representations and warranties contained in Section 2(g) hereof and for indemnification under Section 9(a) shall in no event exceed the lesser of (i) the net proceeds received by the Selling Shareholder from the Underwriters in the offering of the Shares and (ii) that proportion of the total of such losses, claims, damages and liabilities equal to the proportion of the Shares being sold by such Selling Shareholder to the total Shares being sold hereunder. -21- (e) In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity may be sought pursuant to paragraph (a), (b) or (c) of this Section 9, such person (the "indemnified party") shall promptly notify the person against whom such indemnity may be sought (the "indemnifying party") in writing and the indemnifying party, upon request of the indemnified party, shall retain counsel reasonably satisfactory to the indemnified party to represent the indemnified party and any others the indemnifying party may designate in such proceeding and shall pay the fees and disbursements of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. It is understood that the indemnifying party shall not, in respect of the legal expenses of any indemnified party in connection with any proceeding or related proceedings in the same jurisdiction, be liable for (i) the fees and expenses of more than one separate firm (in addition to any local counsel) for all Underwriters and all persons, if any, who control any Underwriter within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act, (ii) the fees and expenses of more than one separate firm (in addition to any local counsel) for the Company, its directors, its officers who sign the Registration Statement and each person, if any, who controls the Company within the meaning of either such Section and (iii) the fees and expenses of more than one separate firm (in addition to any local counsel) for the Selling Shareholder, and that all such fees and expenses shall be reimbursed as they are incurred. In the case of any such separate firm for the Underwriters and such control persons of any Underwriters, such firm shall be designated in writing by Morgan Stanley & Co. Incorporated. In the case of any such separate firm for the Company, and such directors, officers and control persons of the Company, such firm shall be designated in writing by the Company. In the case of any such separate firm for the Selling Shareholder, such firm shall be designated in writing by the persons named as attorneys-in-fact for the Selling Shareholder under the Power of Attorney. The indemnifying party shall not be liable for any settlement of any -22- proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. Notwithstanding the foregoing sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel as contemplated by the second and third sentences of this paragraph, the indemnifying party agrees that it shall be liable for any settlement of any proceeding effected without its written consent if (i) such settlement is entered into more than 30 days after receipt by such indemnifying party of the aforesaid request and (ii) such indemnifying party shall not have reimbursed the indemnified party in accordance with such request prior to the date of such settlement. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such proceeding. Notwithstanding anything contained herein to the contrary, if indemnity may be sought pursuant to the last paragraph of Section 9(a) hereof in respect of such action or proceeding, then in addition to such separate firm for the indemnified parties, the indemnifying party shall be liable for the reasonable fees and expenses of not more than one separate firm (in addition to local counsel) for Morgan Stanley for the defense of any losses, claims, damages and liabilities arising out of the Directed Share Program, and all persons, if any, who control Morgan Stanley within the meaning of either Section 15 of the Act or Section 20 of the Exchange Act. (f) To the extent the indemnification provided for in paragraph (a), (b) or (c) of this Section 9 is unavailable to an indemnified party or insufficient in respect of any losses, claims, damages or liabilities referred to therein, then each indemnifying party under such paragraph, in lieu of indemnifying such indemnified party thereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by the indemnifying party or parties on the one hand and the indemnified party or parties on the other hand from the offering of the Shares or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the indemnifying party or parties on the one hand and of the indemnified party or parties on the other hand in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative benefits received by the Sellers on the one hand and the Underwriters on the other hand in connection with the offering of the Shares shall be deemed to be in the same respective proportions as the net proceeds from the offering of the Shares (before deducting expenses) received by each Seller and the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover of the Prospectus, bear to the aggregate Public Offering Price of the Shares. The relative fault of the Sellers on the one hand and the Underwriters on the other hand shall be determined by reference to, -23- among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Sellers or by the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Underwriters' respective obligations to contribute pursuant to this Section 9 are several in proportion to the respective number of Shares they have purchased hereunder, and not joint. (g) The Sellers and the Underwriters agree that it would not be just or equitable if contribution pursuant to this Section 9 were determined by pro rata allocation (even if the Underwriters were treated as one entity -------- for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in paragraph (f) of this Section 9. The amount paid or payable by an indemnified party as a result of the losses, claims, damages and liabilities referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 9, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages that such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The remedies provided for in this Section 9 are not exclusive and shall not limit any rights or remedies which may otherwise be available to any indemnified party at law or in equity. (h) The indemnity and contribution provisions contained in this Section 9 and the representations, warranties and other statements of the Company and the Selling Shareholders contained in this Agreement shall remain operative and in full force and effect regardless of (i) any termination of this Agreement, (ii) any investigation made by or on behalf of any Underwriter or any person controlling any Underwriter, any Selling Shareholder or any person controlling any Selling Shareholder, or the Company, its officers or directors or any person controlling the Company and (iii) acceptance of and payment for any of the Shares. 10. TERMINATION. This Agreement shall be subject to termination by notice ----------- given by you to the Company, if (a) after the execution and delivery of this Agreement and prior to the Closing Date (i) trading generally shall have been suspended or materially limited on or by, as the case may be, any of the New York Stock Exchange, the American Stock Exchange, the National Association of Securities Dealers, Inc., the Chicago Board of Options Exchange, the Chicago Mercantile Exchange or the Chicago -24- Board of Trade, (ii) trading of any securities of the Company shall have been suspended on any exchange or in any over-the-counter market, (iii) a general moratorium on commercial banking activities in New York shall have been declared by either Federal or New York State authorities or (iv) there shall have occurred any outbreak or escalation of hostilities or any change in financial markets or any calamity or crisis that, in your judgment, is material and adverse and (b) in the case of any of the events specified in clauses (a) (i) through (iv), such event, singly or together with any other such event, makes it, in your judgment, impracticable to market the Shares on the terms and in the manner contemplated in the Prospectus. 11. EFFECTIVENESS; DEFAULTING UNDERWRITERS. This Agreement shall become -------------------------------------- effective upon the execution and delivery hereof by the parties hereto. If, on the Closing Date or the Option Closing Date, as the case may be, any one or more of the Underwriters shall fail or refuse to purchase Shares that it has or they have agreed to purchase hereunder on such date, and the aggregate number of Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase is not more than one-tenth of the aggregate number of the Shares to be purchased on such date, the other Underwriters shall be obligated severally in the proportions that the number of Firm Shares set forth opposite their respective names in Schedule II bears to the aggregate number of Firm Shares set forth opposite the names of all such non-defaulting Underwriters, or in such other proportions as you may specify, to purchase the Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase on such date; provided that in no event shall the number of -------- Shares that any Underwriter has agreed to purchase pursuant to this Agreement be increased pursuant to this Section 11 by an amount in excess of one-ninth of such number of Shares without the written consent of such Underwriter. If, on the Closing Date, any Underwriter or Underwriters shall fail or refuse to purchase Firm Shares and the aggregate number of Firm Shares with respect to which such default occurs is more than one-tenth of the aggregate number of Firm Shares to be purchased, and arrangements satisfactory to you, the Company and the Selling Shareholders for the purchase of such Firm Shares are not made within 36 hours after such default, this Agreement shall terminate without liability on the part of any non-defaulting Underwriter, the Company or the Selling Shareholders. In any such case either you or the relevant Sellers shall have the right to postpone the Closing Date, but in no event for longer than seven days, in order that the required changes, if any, in the Registration Statement and in the Prospectus or in any other documents or arrangements may be effected. If, on the Option Closing Date, any Underwriter or Underwriters shall fail or refuse to purchase Additional Shares and the aggregate number of Additional Shares with respect to which such default occurs is more than one- tenth of the aggregate number of Additional Shares to be purchased, the non- defaulting Underwriters shall have the option to (i) terminate their obligation hereunder to purchase Additional Shares or (ii) purchase not less than the number of Additional Shares that such non-defaulting Underwriters would have been obligated to purchase in the absence of such default. -25- Any action taken under this paragraph shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. If this Agreement shall be terminated by the Underwriters, or any of them, because of any failure or refusal on the part of any Seller to comply with the terms or to fulfill any of the conditions of this Agreement, or if for any reason any Seller shall be unable to perform its obligations under this Agreement, the Sellers will reimburse the Underwriters or such Underwriters as have so terminated this Agreement with respect to themselves, severally, for all out-of-pocket expenses (including the fees and disbursements of their counsel) reasonably incurred by such Underwriters in connection with this Agreement or the offering contemplated hereunder. 12. COUNTERPARTS. This Agreement may be signed in two or more ------------ counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. 13. APPLICABLE LAW. This Agreement shall be governed by and construed in -------------- accordance with the internal laws of the State of New York. 14. HEADINGS. The headings of the sections of this Agreement have been -------- inserted for convenience of reference only and shall not be deemed a part of this Agreement. [BLANK PAGE IN ORIGINAL] -26- Very truly yours, EXCEL SWITCHING CORPORATION By______________________________________ Name: Title: The Selling Shareholder _________________________________________ Robert P. Madonna Accepted as of the date hereof Morgan Stanley & Co. Incorporated Hambrecht & Quist LLC Montgomery Securities Acting severally on behalf of themselves and the several Underwriters named herein. By Morgan Stanley & Co. Incorporated By __________________________ Name: Title: -27- SCHEDULE I
Number of Additional Shares to be Sold -------------------- Robert P. Madonna ---------------- Total..................... ================
-28- SCHEDULE II
Number of Firm Shares To Be Underwriter Purchased ----------- --------- Morgan Stanley & Co. Incorporated Hambrecht & Quist LLC Montgomery Securities [NAMES OF OTHER UNDERWRITERS] ------------ Total................. ============
-29- Exhibit A --------- MATTERS TO BE COVERED IN THE OPINION OF CESARI AND MCKENNA LLP Such counsel are familiar with the technology used by the Company and its subsidiaries in their businesses and the manner of its use thereof and have read the Registration Statement and the Prospectus, including particularly the portions of the Registration Statement and the Prospectus referring to trademarks, trade names, patents, mask works, copyrights, licenses, trade secrets or other intellectual property rights and: (i) such counsel have no reason to believe that the Registration Statement or the Prospectus (A) contains any untrue statement of a material fact with respect to trademarks, trade names, patents, mask works, copyrights, licenses, trade secrets or other intellectual property rights owned or used by the Company or any of its subsidiaries, or the manner of its use thereof, or any allegation on the part of any person that the Company or any of its subsidiaries is infringing any trademarks, trade names, patent rights, mask works, copyrights, licenses, trade secrets or other intellectual property rights of any such person or (B) omits to state any material fact relating to trademarks, trade names, patents, mask works, copyrights, licenses, trade secrets or other intellectual property rights owned or used by the Company or any of its subsidiaries, or the manner of its use thereof, or any allegation of which such counsel have knowledge, that is required to be stated in the Registration Statement or the Prospectus or is necessary to make the statements therein not misleading; (ii) to the best of such counsel's knowledge and except as set forth in the Prospectus under the captions "Risk Factors-Dependence on Proprietary Rights" and "Business-Intellectual Property," there are no legal or governmental proceedings pending relating to trademarks, trade names, patent rights, mask works, copyrights, licenses, trade secrets or other intellectual property rights of the Company or any of its subsidiaries, and to the best of such counsel's knowledge no such proceedings are threatened or contemplated by governmental authorities or others; (iii) the Company and its subsidiaries duly and properly hold the patents, and have duly and properly filed the patent applications, listed in the Prospectus under the caption "Business-Intellectual Property"; (iv) such counsel do not know of any contracts or other documents relating to the Company's or any of its subsidiaries' trademarks, trade names, patents, mask works, copyrights, licenses, trade secrets or other intellectual property rights of a character required to be filed as an exhibit to the Registration Statement or required to be described in the Registration Statement or the Prospectus that are not filed or described as required; (v) to the best of such counsel's knowledge, neither the Company nor any of its subsidiaries (A) is infringing or otherwise violating any patents, mask works, copyrights, licenses, trade secrets or other intellectual property rights of others or (B) has received any allegation or notice of infringement or other violation of any trademark or trade name, and to the best of such counsel's knowledge there are no infringements by others of any of the Company's or any of its subsidiaries' trademarks, trade names, patents, mask works, copyrights, licenses, trade secrets or other intellectual property rights which in the judgment of such counsel could affect materially the use thereof by the Company of any of its subsidiaries; and (vi) to the best of such counsel's knowledge, the Company or one of its subsidiaries owns or possesses sufficient licenses or other rights to use all patents, mask works, copyrights, licenses, trade secrets or other intellectual property rights necessary to conduct the business now being or proposed to be conducted by the Company and its subsidiaries as described in the Prospectus. -2- Exhibit B --------- [FORM OF LOCK-UP LETTER] ---------------------- ______________, 1997 Morgan Stanley & Co. Incorporated Montgomery Securities Hambrecht & Quist LLC c/o Morgan Stanley & Co. Incorporated 1585 Broadway New York, NY 10036 Dear Sirs and Mesdames: The undersigned understands that Morgan Stanley & Co. Incorporated ("Morgan Stanley") proposes to enter into an Underwriting Agreement (the "Underwriting Agreement") with Excel Switching Corporation, a Massachusetts corporation (the "Company"), providing for the public offering (the "Public Offering") by the several Underwriters, including Morgan Stanley (the "Underwriters"), of 4,500,000 shares (the "Shares") of the Common Stock, $.01 par value per share of the Company (the "Common Stock"). To induce the Underwriters that may participate in the Public Offering to continue their efforts in connection with the Public Offering, the undersigned hereby agrees that, without the prior written consent of Morgan Stanley on behalf of the Underwriters, it will not, during the period commencing on the date hereof and ending 180 days after the date of the final prospectus relating to the Public Offering (the "Prospectus"), (1) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock (provided that such shares or securities are either now owned by the undersigned or are hereafter acquired prior to or in connection with the Public Offering), or (2) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Common Stock, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. The foregoing sentence shall not apply to the sale of any Shares to the Underwriters pursuant to the Underwriting Agreement. In addition, the undersigned agrees that, without the prior written consent of Morgan Stanley on behalf of the Underwriters, it will not, during the period commencing on the date hereof and ending 180 days after the date of the Prospectus, make any demand for or exercise any right with respect to, the registration of any shares of Common Stock or any security convertible into or exercisable or exchangeable for Common Stock. Whether or not the Public Offering actually occurs depends on a number of factors, including market conditions. Any Public Offering will only be made pursuant to an Underwriting Agreement, the terms of which are subject to negotiation between the Company and the Underwriters. Very truly yours, --------------------------------- (Name) --------------------------------- (Address) -2- EX-3.1 3 RESTATED ARTICLES OF ORGANIZATION OF THE COMPANY EXHIBIT 3.1 FEDERAL IDENTIFICATION NO. 04-2992806 ---------------------- - --------- Examiner THE COMMONWEALTH OF MASSACHUSETTS WILLIAM FRANCIS GALVIN Secretary of the Commonwealth One Ashburton Place, Boston, Massachusetts 02108-1512 RESTATED ARTICLES OF ORGANIZATION (GENERAL LAWS, CHAPTER 156B, SECTION 74) - --------- Name Approved We, Robert P. Madonna *President, ----------------------------------------------------, and Christopher Stavros *Clerk, ----------------------------------------------------, of Excel Inc. --------------------------------------------------------------, (Exact name of corporation) located at 255 Independence Drive, Hyannis, MA 02601 -------------------------------------------------------, (Street address of corporation in Massachusetts) do hereby certify that the following Restatement of the Articles of Organization was duly adopted at a meeting held on September 16, 1997 by a vote of the directors/or: 13,972,800 shares of Common Stock of 13,972,800 shares outstanding, ---------- ------------- ---------- shares of Nonvoting Common Stock of 72,000 shares outstanding, and --- ---------------------- ------ (type, class & series, if any) shares of of --- ---------------------- ----------- shares outstanding, (type, class & series, if any) being at least two-thirds of each type, class or series outstanding and entitled to vote thereon and of each type, class or series of stock whose rights are adversely affected thereby: C [_] ARTICLE I The name of the corporation is: P [_] M [_] Excel Switching Corporation R.A.[_] ARTICLE II The purpose of the corporation is to engage in the following business activities: To develop, manufacture and sell computer hardware and software and to do any and all acts and things permitted to be done by business corporations under the provisions of Chapter 156B, as amended, of the General Business Laws of Massachusetts *Delete the inapplicable words. **Delete the inapplicable clause. - -------- NOTE: IF THE SPACE PROVIDED UNDER ANY P.C. ARTICLE OR ITEM ON THIS FORM IS INSUFFICIENT, ADDITIONS SHALL BE SET FORTH ON OF SEPARATE 8 1/2 X 11 SHEETS OF PAPER WITH A LEFT MARGIN OF AT LEAST 1 INCH. ADDITIONS TO MORE THAN ONE ARTICLE MAY BE MADE ON A SINGLE SHEET SO LONG AS EACH ARTICLE REQUIRING EACH ADDITION IS CLEARLY INDICATED. ARTICLE III State the total number of shares and par value, if any, of each class of stock which the corporation is authorized to issue.
WITHOUT PAR VALUE WITH PAR VALUE - -------------------------------------------------------------------------------- TYPE NUMBER OF TYPE NUMBER OF PAR SHARES SHARES VALUE - -------------------------------------------------------------------------------- Common: Common: 85,000,000 $.01 - -------------------------------------------------------------------------------- Nonvoting 15,000,000 $.01 Common Stock: - -------------------------------------------------------------------------------- Preferred: Preferred: 10,000,000 $.01 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
ARTICLE IV If more than one class of stock is authorized, state a distinguishing designation for each class. Prior to the issuance of any shares of a class, if shares of another class are outstanding, the corporation must provide a description of the preferences, voting powers, qualifications, and special or relative rights or privileges of that class and of each other class of which shares are outstanding and of each series then established within any class. See Continuation Sheet 4 which is attached hereto and incorporated herein by reference. ARTICLE V The restrictions, if any, imposed by the Articles of Organization upon the transfer of shares of stock of any class are: None ARTICLE VI **Other lawful provisions, if any, for the conduct and regulation of the business and affairs of the corporation, for its volun-tary dissolution, or for limiting, defining, or regulating the powers of the corporation, or of its directors or stockholders, or of any class of stockholders: See Continuation Sheet 6 which is attached hereto and incorporated herein by reference. **If there are no provisions state "None". NOTE: THE PRECEDING SIX (6) ARTICLES ARE CONSIDERED TO BE PERMANENT AND MAY ONLY BE CHANGED BY FILING APPROPRIATE ARTICLES OF AMENDMENT. EXCEL SWITCHING CORPORATION Restated Articles of Organization --------------------------------- CONTINUATION SHEET 4 -------------------- The total number of shares of all classes of stock which the Corporation shall have authority to issue prior to an initial offering of the Common Stock of the Corporation to the public is 110,000,000 shares, consisting of the following classes of stock: (A) 10,000,000 shares of Preferred Stock, $.01 par value per share (the "Preferred Stock"); (B) 85,000,000 shares of Common Stock, $.01 par value per share (the "Common Stock"); and (C) 15,000,000 shares of Non Voting Common Stock, $.01 par value per share (the " Non Voting Common Stock"). Effective upon, and subject to, an initial offering of the Common Stock of the Corporation to the public, the Corporation shall no longer be authorized to issue shares of Non Voting Common Stock and all 15,000,000 of the authorized shares of Non Voting Common Stock shall automatically convert and become 15,000,000 shares of authorized Common Stock and the class of Non Voting Common Stock shall cease to be an independent class such that the total number of shares of all classes of stock which the Corporation shall have authority to issue after an initial offering of the Common Stock of the Corporation to the public will be 110,000,000 shares, consisting of the following classes of stock: (A) 10,000,000 shares of Preferred Stock, $.01 par value per share (the "Preferred Stock"); and (B) 100,000,000 shares of Common Stock, $.01 par value per share (the "Common Stock"). The designations, powers, preferences and relative, participating, optional or other special rights, and the qualifications, limitations and restrictions thereof in respect of each class of authorized capital stock of the Corporation are as follows: A. UNDESIGNATED PREFERRED STOCK ---------------------------- Up to 10,000,000 shares of Preferred Stock may be issued in one or more series at such time or times and for such consideration or considerations as the Board of Directors may determine. Each series shall be so designated as to distinguish the shares thereof from the shares of all other series and classes. Except as to the relative preferences, powers, qualifications, rights and privileges referred to below, in respect of any or all of which there may be variations between different series, all shares of Preferred Stock shall be identical. Different series of Preferred Stock shall not be construed to constitute different classes of shares for the purpose of voting by classes. The Board of Directors is expressly authorized, subject to the limitations prescribed by law and the provisions of these Restated Articles of Organization, to provide by adopting a vote or votes, a certificate of which shall be filed in accordance with the Business Corporation Law of the Commonwealth of Massachusetts, for the issuance of the Preferred Stock in one or more series, each with such designations, preferences, voting powers, qualifications, special or relative rights and privileges as shall be stated in the vote or votes creating such series. The authority of the Board of Directors with respect to each such series shall include without limitation of the foregoing the right to determine and fix: (1) The distinctive designation of such series and the number of shares to constitute such series; CONTINUATION PAGE 4-1 (2) The rate at which dividends on the shares of such series shall be declared and paid, or set aside for payment, whether dividends at the rate so determined shall be cumulative, and whether the shares of such series shall be entitled to any participating or other dividends in addition to dividends at the rate so determined, and if so on what terms; (3) The right, if any, of the Corporation to redeem shares of the particular series and, if redeemable, the price, terms and manner of such redemption; (4) The special and relative rights and preferences, if any, and the amount or amounts per share, which the shares of such series shall be entitled to receive upon any voluntary or involuntary liquidation, dissolution or winding up of the Corporation; (5) The terms and conditions, if any, upon which shares of such series shall be convertible into, or exchangeable for, shares of stock of any other class or classes, including the price or prices or the rate or rates of conversion or exchange and the terms of adjustment, if any; (6) The obligation, if any, of the Corporation to retire or purchase shares of such series pursuant to a sinking fund or fund of a similar nature or otherwise, and the terms and conditions of such obligation; (7) Voting rights, if any; (8) Limitations, if any, on the issuance of additional shares of such series or any shares of any other series of Preferred Stock; and (9) Such other preferences, powers, qualifications, special or relative rights and privileges thereof as the Board of Directors may deem advisable and are not inconsistent with law and the provisions of these Restated Articles. B. COMMON STOCK ------------ 1. After the requirements with respect to preferential dividends on the Preferred Stock shall have been met and after the Corporation shall have complied with all the requirements, if any, with respect to the setting aside of sums as sinking funds or redemption or purchase accounts, then and not otherwise the holders of Common Stock shall be entitled to receive such dividends as may be declared from time to time by the Board of Directors. 2. After distribution in full of the preferential amount to be distributed to the holders of Preferred Stock, in the event of voluntary or involuntary liquidation, distribution or sale of assets, dissolution or winding up of the Corporation, the holders of the Common Stock shall be entitled to receive all the remaining assets of the Corporation, tangible or intangible, of whatever kind available for distribution to the stockholders ratably in proportion to the number of shares of Common Stock held by them respectively. 3. Except as may otherwise be required by law or the provisions of these Restated Articles, or by the Board of Directors pursuant to authority granted in these Restated Articles, each holder of Common Stock shall have one vote in respect of each share of stock held by him in all matters voted upon by the stockholders. CONTINUATION PAGE 4-2 C. NON VOTING COMMON STOCK ----------------------- 1. After the requirements with respect to preferential dividends on the Preferred Stock shall have been met and after the Corporation shall have complied with all the requirements, if any, with respect to the setting aside of sums as sinking funds or redemption or purchase accounts, then and not otherwise the holders of Common Stock shall be entitled to receive such dividends as may be declared from time to time by the Board of Directors. 2. After distribution in full of the preferential amount to be distributed to the holders of Preferred Stock, in the event of voluntary or involuntary liquidation, distribution or sale of assets, dissolution or winding up of the Corporation, the holders of the Common Stock shall be entitled to receive all the remaining assets of the Corporation, tangible or intangible, of whatever kind available for distribution to the stockholders ratably in proportion to the number of shares of Common Stock held by them respectively. 3. Except as may otherwise be required by law or the provisions of these Restated Articles, or by the Board of Directors pursuant to authority granted in these Restated Articles, the holders of Non Voting Common Stock shall have no voting power. In any case where a right to vote is required by law, the Non Voting Common Stock shall, subject to any agreement among holders of the Non Voting Common Stock to the contrary, vote together with the Common Stock as a single class and each holder of record of Non Voting Common Stock shall be entitled to one vote for each share of Non Voting Common Stock standing in such holder's name on the books of the Corporation as of the record date for such vote. Except to the extent otherwise required by law, the holders of shares of Non Voting Common Stock shall not be entitled to notice of stockholder meetings or have the right to attend such meetings. 4. Subject to the consummation of an initial public offering of the Common Stock of the Corporation, all of the issued and outstanding Non Voting Common Stock shall be automatically and without any action on the part of the Corporation deemed to be converted into fully paid and nonassessable shares of Common Stock, at a rate of one (1) share of Common Stock for every one (1) share of Non Voting Common Stock, as of the effective date of such initial public offering. Holders of shares of Non Voting Common Stock converted pursuant to this paragraph 4 may deliver to the Corporation at its principal office (or such other office or agency of the Corporation as the Corporation may designate by notice in writing to such holders) during its usual business hours, the certificate or certificates for the shares so converted. As promptly as practicable thereafter, the Corporation shall issue and deliver to such holder a certificate or certificates for the number of whole shares of Common Stock to which such holder is entitled, together with any cash dividends and payment in lieu of fractional shares to which such holder may be entitled. Until such time as a holder of shares of Non Voting Common Stock shall surrender his or its certificates therefor as provided above, such certificates shall be deemed to represent the shares of Common Stock to which such holder shall be entitled upon the surrender thereof. 5. Upon the conversion of the shares of Non Voting Common Stock into shares of Common Stock of the Corporation, as provided herein, all outstanding options and rights to acquire shares of Non Voting Common Stock of the Corporation will automatically and immediately become options and rights to acquire shares of Common Stock of the Corporation. CONTINUATION PAGE 4-3 EXCEL SWITCHING CORPORATION Restated Articles of Organization --------------------------------- CONTINUATION SHEET 6 -------------------- 6. Other provisions for the conduct and regulation of the business and affairs of the Corporation, for its voluntary dissolution, or for limiting, defining, or regulating the powers of the Corporation, or of its directors or stockholders, or of any class of stockholders, are as follows: A. Liability of Directors. ---------------------- The Corporation eliminates the personal liability of each director of the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director notwithstanding any provision of law imposing such liability; provided, however, that, to the extent provided by applicable law, this provision shall not eliminate or limit the liability of a director (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 61 or 62 or successor provisions of the Massachusetts Business Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit. This provision shall not eliminate or limit the liability of a director of the Corporation for any act or omission occurring prior to the date on which this provision becomes effective. No amendment to or repeal of this provision shall apply to or have any effect on the liability or alleged liability of any director for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal. B. Indemnification. --------------- 1. Actions, Suits and Proceedings. The Corporation shall indemnify ------------------------------ each person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was, or has agreed to become, a director or officer of the Corporation, or is or was serving, or has agreed to serve, at the request of the Corporation, as a director or officer of, or in a similar capacity with, another organization or in any capacity with respect to any employee benefit plan of the Corporation (all such persons being referred to hereafter as an "Indemnitee"), or by reason of any action alleged to have been taken or omitted in such capacity, against all expenses (including attorneys' fees), judgments and fines incurred by him or on his behalf in connection with such action, suit or proceeding and any appeal therefrom, unless such indemnification is prohibited by the Business Corporation Law of the Commonwealth of Massachusetts. Notwithstanding anything to the contrary in this Article, except as set forth in Section 5 below, the Corporation shall not indemnify an Indemnitee seeking indemnification in connection with a proceeding (or part thereof) initiated by the Indemnitee unless the initiation thereof was approved by the Board of Directors of the Corporation. 2. Settlements. The right to indemnification conferred in this ----------- Article shall include the right to be paid by the Corporation for amounts paid in settlement of any such action, suit or proceeding and any appeal therefrom, and all expenses (including attorneys' fees) incurred in connection with such settlement, pursuant to a consent decree or otherwise, unless and to the extent it is determined pursuant to Section 5 below that the Indemnitee did not act in good faith in the reasonable belief that his action was in the best interests of the Corporation or, to the extent such matter relates to service with CONTINUATION PAGE 6-1 respect to an employee benefit plan, in the best interests of the participants or beneficiaries of such employee benefit plan. 3. Notification and Defense of Claim. As a condition precedent to --------------------------------- his right to be indemnified, the Indemnitee must notify the Corporation in writing as soon as practicable of any action, suit, proceeding or investigation involving his for which indemnify will or could be sought. With respect to any action, suit, proceeding or investigation of which the Corporation is so notified, the Corporation will be entitled to participate therein at its own expense and/or to assume the defense thereof at its own expense, with legal counsel reasonably acceptable to the Indemnitee. After notice from the Corporation to the Indemnitee of its election so to assume such defense, the Corporation shall not be liable to the Indemnitee for any legal or other expenses subsequently incurred by the Indemnitee in connection with the such claim, other than as provided below in this Section 3. The Indemnitee shall have the right to employ his own counsel in connection with such claim, but the fees and expenses of such counsel incurred after notice from the Corporation of its assumption of the defense thereof shall be at the expense of the Indemnitee unless (i) the employment of counsel by the Indemnitee has been authorized by the Corporation, (ii) counsel to the Indemnitee shall have reasonably concluded that there may be a conflict of interest or position on any significant issue between the Corporation and the Indemnitee in the conduct of the defense of such action or (iii) the Corporation shall not in fact have employed counsel to assume the defense of such action, in each of which case the fees and expenses of counsel for the Indemnitee shall be at the expense of the Corporation, except as otherwise expressly provided by this Article. The Corporation shall not be entitled, without the consent of the Indemnitee, to assume the defense of any claim brought by or in the right of the Corporation or as to which counsel for the Indemnitee shall have reasonably made the conclusion provided for in clause (ii) above. 4. Advance of Expenses. Subject to the provisions of Section 5 ------------------- below, in the event that the Corporation does not assume the defense pursuant to Section 3 of this Article of any action, suit, proceeding or investigation of which the Corporation receives notice under this Article, any expenses (including attorneys' fees) incurred by an Indemnitee in defending a civil or criminal action, suit, proceeding or investigation or any appeal therefrom shall be paid by the Corporation in advance of the final disposition of such matter, provided, however, that the payment of such expenses incurred by an Indemnitee - -------- ------- in advance of the final disposition of such matter shall be made only upon receipt of an undertaking by or on behalf of the Indemnitee to repay all amounts so advanced in the event that it shall ultimately be determined that the Indemnitee is not entitled to be indemnified by the Corporation as authorized in this Article. Such undertaking may be accepted without reference to the financial ability of the Indemnitee to make such repayment. 5. Procedure for Indemnification. In order to obtain indemnification ----------------------------- or advancement of expenses pursuant to Section 1, 2 or 4 of this Article, the Indemnitee shall submit to the Corporation a written request, including in such request such documentation and information as is reasonably available to the Indemnitee and is reasonably necessary to determine whether and to what extent the Indemnitee is entitled to indemnification or advancement of expenses. Any such indemnification or advancement of expenses shall be made promptly, and in any event within sixty days after receipt by the Corporation of the written request of the Indemnitee, unless the Corporation determines within such sixty- day period that the Indemnitee did not meet the applicable standard of conduct set forth in Section 1 or 2, as the case may be. Such determination shall be made in each instance by (a) a majority vote of a quorum of the directors of the Corporation, (b) a majority vote of a quorum of the outstanding shares of stock of all classes entitled to vote for directors, voting as a single class, which quorum shall consist of stockholders who are not at that time parties to the action, suit or CONTINUATION PAGE 6-2 proceeding in question, (c) independent legal counsel (who may be regular legal counsel to the Corporation), or (d) a court of competent jurisdiction. 6. Remedies. The right to indemnification or advances as granted by -------- this Article shall be enforceable by the Indemnitee in any court of competent jurisdiction if the Corporation denies such request, in whole or in part, or if no disposition thereof is made within the sixty-day period referred to above in Section 5. Unless otherwise provided by law, the burden of proving that the Indemnitee is not entitled to indemnification or advancement of expenses under this Article shall be on the Corporation. Neither the failure of the Corporation to have made a determination prior to the commencement of such action that indemnification is proper in the circumstances because the Indemnitee has met the applicable standard of conduct, nor an actual determination by the Corporation pursuant to Section 5 that the Indemnitee has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the Indemnitee has not met such applicable standard of conduct. The Indemnitee's expenses (including attorneys' fees) incurred in connection with successfully establishing his right to indemnification, in whole or in part, in any such proceeding shall also be indemnified by the Corporation. 7. Subsequent Amendment. No amendment, termination or repeal of this -------------------- Article or of the relevant provisions of Chapter 156B of the Massachusetts General Laws or any other applicable laws shall affect or diminish in any way the rights of any Indemnitee to indemnification under the provisions hereof with respect to any action, suit, proceeding or investigation arising out of or relating to any actions, transactions or facts occurring prior to the final adoption of such amendment, termination or repeal. 8. Other Rights. The indemnification and advancement of expenses ------------ provided by this Article shall not be deemed exclusive of any other rights to which an Indemnitee seeking indemnification or advancement of expenses may be entitled under any law (common or statutory), agreement or vote of stockholders or directors or otherwise, both as to action in his official capacity and as to action in any other capacity while holding office for the Corporation, and shall continue as to an Indemnitee who has ceased to be a director or officer, and shall inure to the benefit of the estate, heirs, executors and administrators of the Indemnitee. Nothing contained in this Article shall be deemed to prohibit, and the Corporation is specifically authorized to enter into, agreements with officers and directors providing indemnification rights and procedures different from those set forth in this Article. In addition, the Corporation may, to the extent authorized from time to time by its Board of Directors, grant indemnification rights to other employees or agents of the Corporation or other persons serving the Corporation and such rights may be equivalent to, or greater or less than, those set forth in this Article. 9. Partial Indemnification. If an Indemnitee is entitled under any ----------------------- provision of this Article to indemnification by the Corporation for some or a portion of the expenses (including attorneys' fees), judgments, fines or amounts paid in settlement actually and reasonably incurred by him or on his behalf in connection with any action, suit, proceeding or investigation and any appeal therefrom but not, however, for the total amount thereof, the Corporation shall nevertheless indemnify the Indemnitee for the portion of such expenses (including attorneys' fees), judgments, fines or amounts paid in settlement to which the Indemnitee is entitled. 10. Insurance. The Corporation may purchase and maintain insurance, --------- at its expense, to protect itself and any director, officer, employee or agent of the Corporation or another organization or employee benefit plan against any expense, liability or loss incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to CONTINUATION PAGE 6-3 indemnify such person against such expense, liability or loss under Chapter 156B of the Massachusetts General Laws. 11. Merger or Consolidation. If the Corporation is merged into or ----------------------- consolidated with another Corporation and the Corporation is not the surviving Corporation, the surviving Corporation shall assume the obligations of the Corporation under this Article with respect to any action, suit, proceeding or investigation arising out of or relating to any actions, transactions or facts occurring prior to the date of such merger or consolidation. 12. Savings Clause. If this Article or any portion hereof shall be -------------- invalidated on any ground by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify each Indemnitee as to any expenses (including attorneys' fees), judgments, fines and amounts paid in settlement in connection with any action, suit, proceeding or investigation, whether civil, criminal or administrative, including an action by or in the right of the Corporation, to the fullest extent permitted by any applicable portion of this Article that shall not have been invalidated and to the fullest extent permitted by applicable law. 13. Subsequent Legislation. If the Massachusetts General Laws are ---------------------- amended after adoption of this Article to expand further the indemnification permitted to Indemnitees, then the Corporation shall indemnify such persons to the fullest extent permitted by the Massachusetts General Laws, as so amended. C. Location of Stockholders' Meetings. ---------------------------------- Meetings of the stockholders of the Corporation may be held anywhere in the United States. D. Amendment of By-Laws. -------------------- The directors of the Corporation may make, amend or repeal the By-laws in whole or in part, except with respect to any provision thereof which by law or the By-laws requires action by the stockholders. E. Issuance of Shares. ------------------ The whole or any part of the authorized but unissued shares of capital stock of the Corporation may be issued at any time or from time to time by the Board of Directors without further action by the stockholders. F. Corporation As Partner. ---------------------- The Corporation may become a partner in any business. CONTINUATION PAGE 6-4 ARTICLE VII The effective date of the restated Artiicles of Organization of the corporation shall be the date approved and filed by the Secretary of the Commonwealth. If a later effective date is desired, specify such date which shall not be more than thirty days after the date of filing. ARTICLE VIII THE INFORMATION CONTAINED IN ARTICLE VIII IS NOT A PERMANENT PART OF THE ARTICLES OF ORGANIZATION. a. The street address (post office boxes are not acceptable) of the principal office of the corporation in Massachusetts is: 255 Independence Drive, Hyannis, MA 02601 b. The name, residential address and post office address of each director and officer of the corporation is as follows:
NAME RESIDENTIAL ADDRESS POST OFFICE ADDRESS President: Robert P. Madonna 208 Carlson Lane 255 Independence Drive West Barnstable, MA Hyannis, MA 02601 Treasurer: Nathan C. Apatow 19 Mallard Drive 255 Independence Drive Orleans, MA 02653 Hyannis, MA 02601 Clerk: Christopher Stavros 300 Danielle Lane 255 Independence Drive Mansfield, MA Hyannis, MA 02601 Directors: Robert P. Madonna Same as above Same as above Christopher Stavros Same as above Same as above
c. The fiscal year (i.e., tax year) of the corporation shall end on the last Saturday of the month of: December d. The name and business address of the resident agent, if any, of the corporation is: **We further certify that the foregoing Restated Articles of Organization affect no amendments to the Articles of Organization of the corporation as heretofore amended, except amendments to the following articles. Briefly describe amendments below: See Continuation Sheet 8 which is attached hereto and incorporated herein by reference. SIGNED UNDER THE PENALTIES OF PERJURY, this 16th day of September , 1997, ---- -------------- /s/ Robert P. Madonna , *President, ---------------------------------------- /s/ Christopher Stavros , *Clerk. ---------------------------------------- *Delete the inapplicable words. **If there are no amendments, state 'None'. EXCEL, INC. Restated Articles of Organization --------------------------------- CONTINUATION SHEET 8 -------------------- Article I: amended to change the name of the Corporation from Excel Inc. to Excel Switching Corporation Article II: amended to reflect the current purposes for which the Corporation is formed. Articles III amended (i) to authorize the Corporation to issue 85,000,000 and IV: shares of Common Stock; 15,000,000 shares of Non Voting Common Stock, which will automatically convert to 15,000,000 shares of authorized Common Stock upon the effective date, and subject to the consummation, of the initial offering of the Common Stock of the Corporation to the public; and 10,000,000 shares of Preferred Stock having the preferences, voting powers, qualifications, special or relative rights or privileges set forth in Article IV; and (ii) to authorize the exchange of the authorized shares of Common and Non Voting Common Stock of the Corporation, no par value, for the same number of shares of Common and Non Voting Common Stock, par value of $.01 per share. Article VI: amended to reflect additional provisions for the conduct and regulation of the business and affairs of the Corporation including provisions relating to the indemnification of directors and officers. CONTINUATION PAGE 8-1 THE COMMONWEALTH OF MASSACHUSETTS RESTATED ARTICLES OF ORGANIZATION (GENERAL LAWS, CHAPTER 156B, SECTION 74) ============================================================= I hereby approve the within Restated Articles of Organization and, the filing fee in the amount of $____________ having been paid, said articles are deemed to have been filed with me this ______ day of ______________________ 19__. Effective date:__________________________________ WILLIAM FRANCIS GALVIN Secretary of the Commonwealth TO BE FILLED IN BY CORPORATION PHOTOCOPY OF DOCUMENT TO BE SENT TO: John Hession ------------------------------------------------------------ Testa, Hurwitz & Thibeault, LLP 125 High Street ------------------------------------------------------------ High Street Tower Boston, MA 02110 ------------------------------------------------------------ Telephone: (617) 248-7000 -------------------------------------------------- EX-3.2 4 RESTATED BY-LAWS OF THE COMPANY EXHIBIT 3.2 EXCEL SWITCHING CORPORATION **************** RESTATED BY-LAWS **************** ARTICLE I --------- Stockholders ------------ 1. Annual Meeting. The annual meeting of stockholders shall be held on the -------------- second Friday in May of each year (or if that be a legal holiday in the place where the meeting is to be held, on the next succeeding full business day) at 10:00 A.M., or such other time, place and date as may be fixed by the Directors and stated in the notice of the meeting. The purposes for which the annual meeting is to be held, in addition to those prescribed by law, by the Articles of Organization of the corporation (the "Articles of Organization") or by these By-laws, may be specified by the Directors or the President. In the event an annual meeting has not been held on the date fixed in these By-laws, a special meeting in lieu of the annual meeting may be held with all the force and effect of an annual meeting. 2. Special Meetings. Special meetings of stockholders may be called by the ---------------- President or by the Directors. Upon written application of one or more stockholders who hold at least 10% in interest of the capital stock entitled to vote at a meeting, a special meeting shall be called by the Clerk, or in the case of the death, absence, incapacity or refusal of the Clerk, by another officer. Notwithstanding the immediately preceding sentence, if the corporation has a class of voting stock registered under the Securities Exchange Act of 1934, as amended, upon written application of one or more stockholders who hold at least 40% in interest of the capital stock entitled to vote at a meeting, a special meeting shall be called by the Clerk, or in case of the death, absence, incapacity or refusal of the Clerk, by any other officer. 3. Place of Meetings. All meetings of stockholders shall be held at the ----------------- principal office of the corporation unless a different place (within or without Massachusetts, but within the United States) is fixed by the Directors or the President and stated in the notice of the meeting. 4. Notice of Meetings. A written notice of the place, date and hour of all ------------------ meetings of stockholders stating the purpose of the meeting shall be given by the Clerk or an Assistant Clerk or by the person calling the meeting at least seven days before the meeting or such longer period as is required by law to each stockholder entitled to vote thereat and to each stockholder who under the law, under the Articles of Organization or under these By-laws, is entitled to such notice, by leaving such notice with such stockholder or at his or her residence or usual place of business, or by mailing it, postage prepaid, and addressed to such stockholder at his or her address as it appears in the records of the corporation. Whenever notice of a meeting is required to be given a stockholder under any provision of the Massachusetts Business Corporation Law or of the Articles of Organization or these By-laws, a written waiver thereof, executed before or after the meeting by such stockholder or his or her attorney thereunto authorized and filed with the records of the meeting, shall be deemed equivalent to such notice. -2- 5. Notice of Stockholder Business. The following provisions of this Section ------------------------------ 5 shall apply to the conduct of business at any meeting of the stockholders. (As used in this Section 5, the term annual meeting shall include a special meeting in lieu of annual meeting.) (a) At any meeting of the stockholders, only such business shall be conducted as shall have been brought before the meeting (i) pursuant to the corporation's notice of meeting, (ii) by or at the direction of the Board of Directors or (iii) by any stockholder of the corporation who is a stockholder of record at the time of giving of the notice provided for in paragraph (b) of this Section 5, who shall be entitled to vote at such meeting and who complies with the notice procedures set forth in paragraph (b) of this Section 5. (b) For business to be properly brought before any meeting of the stockholders by a stockholder pursuant to clause (iii) of paragraph (a) of this By-law, the stockholder must have given timely notice thereof in writing to the Clerk of the corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the corporation (i) in the case of any annual meeting, not less than ninety (90) days nor more than 120 days prior to the date specified in Section 1 above for such annual meeting, regardless of any postponements, deferrals or adjournments of that meeting to a later date; provided, however, that if a special meeting in lieu of annual meeting of stockholders is to be held on a date prior to the date specified in Section 1 above, and if less than seventy (70) days' notice or prior public disclosure of the date of such special meeting in lieu of annual meeting is given or made, notice by the stockholder to be timely must be so delivered or received not later than the close of business on the tenth day following the earlier of the date on which notice of the date of such special meeting in lieu of annual meeting was mailed or the day on which public disclosure was made of the date of such special meeting in lieu of annual meeting; and (ii) in the case of a special meeting (other than a special meeting in lieu of an annual meeting), not later than the tenth day following the earlier of the day on which notice of the date of the scheduled meeting was mailed or the day on which public disclosure was made of the date of the scheduled meeting. A stockholder's notice to the Clerk shall set forth as to each matter the stockholder proposes to bring before the meeting, (i) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting, (ii) the name and address, as they appear on the corporation's books, of the stockholder proposing such business, the name and address of the beneficial owner, if any, on whose behalf the proposal is made, and the name and address of any other stockholders or beneficial owners known by such stockholder to be supporting such proposal, (iii) the class and number of shares of the corporation which are owned beneficially and of record by such stockholder of record, by the beneficial owner, if any, on whose behalf the proposal is made and by any other stockholders or beneficial owners known by such stockholder of record and/or of the beneficial owner, if any, on whose behalf the proposal is made, in such proposed business and any material interest of any other stockholders or beneficial owners known by such stockholder to be supporting such proposal in such proposed business, to the extent known by such stockholder. (c) Notwithstanding anything in these By-laws to the contrary, no business shall be conducted at a meeting except in accordance with the procedures set forth in these By-laws. The person presiding at the meeting shall, if the facts warrant, determine that business was not properly brought before the meeting and in accordance with the procedures prescribed by these By- laws, and if he should so determine, he shall so declare at the meeting and any such business not properly brought before the meeting shall not be transacted. Notwithstanding the foregoing provision of this By-law, a stockholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934, as amended -3- (or any successor provision), and the rules and regulations thereunder with respect to the matters set forth in this By-law. (d) This provision shall not prevent the consideration and approval or disapproval at the meeting of reports of officers, Directors and committees of the Board of Directors, but, in connection with such reports, no new business shall be acted upon at such meeting unless properly brought before the meeting as herein provided. 6. Quorum. The holders of a majority in interest of all stock issued, ------ outstanding and entitled to vote at a meeting shall constitute a quorum, but a lesser number may adjourn any meeting from time to time without further notice; except that, if two or more classes of stock are outstanding and entitled to vote as separate classes, then in the case of each such class, a quorum shall consist of the holders of a majority in interest of the stock of that class issued, outstanding and entitled to vote. 7. Voting and Proxies. Each stockholder shall have one vote for each share ------------------ of stock entitled to vote owned by him or her and a proportionate vote for a fractional share, unless otherwise provided by the Articles of Organization in the case that the corporation has two or more classes or series of stock. Capital stock shall not be voted if any installment of the subscription therefor has been duly demanded in accordance with the law of the Commonwealth of Massachusetts and is overdue and unpaid. Stockholders may vote either in person or by written proxy. Proxies shall be filed with the clerk of the meeting, or of any adjournment thereof, before being voted. No proxy dated more than six months before the date named therein shall be valid and no proxy shall be valid after the final adjournment of such meeting. Notwithstanding the provisions of the preceding sentence, a proxy coupled with an interest sufficient in law to support an irrevocable power, including, without limitation, an interest in shares or in the corporation generally, may be made irrevocable if it so provides, need not specify the meeting to which it relates, and shall be valid and enforceable until the interest terminates, or for such shorter period as may be specified in the proxy. Except as otherwise limited therein, proxies shall entitle the persons named therein to vote at any adjournment of such meeting but shall not be valid after final adjournment of such meeting. A proxy with respect to stock held in the name of two or more persons shall be valid if executed by any one of them unless at or prior to exercise of the proxy the corporation receives a specific written notice to the contrary from any one of them. A proxy purporting to be executed by or on behalf of a stockholder shall be deemed valid unless challenged at or prior to its exercise and the burden of proving invalidity shall rest on the challenger. 8. Action at Meeting. When a quorum is present, the holders of a majority ----------------- of the stock present or represented and voting on a matter (or if there are two or more classes of stock entitled to vote as separate classes, then in the case of each such class, the holders of a majority of the stock of that class present or represented and voting on a matter), except where a larger or different vote is required by law, the Articles of Organization or these By-laws, shall decide any matter to be voted on by the stockholders. Broker non-votes will be counted for purposes of determining whether a quorum is present on any matter, but will not be counted as having been voted on any matter for which voting authority is withheld. Any election of Directors or officers by the stockholders shall be determined by a plurality of the votes cast by stockholders entitled to vote at the election. Any such elections shall be by ballot if so requested by any stockholder entitled to vote thereon. The corporation shall not directly or indirectly vote any share of its own stock. -4- ARTICLE II ---------- Directors --------- 1. Powers. The business of the corporation shall be managed by a Board of ------ Directors who may exercise all the powers of the corporation except as otherwise provided by law, by the Articles of Organization or by these By-laws. In the event of vacancy in the Board of Directors, the remaining Directors, except as otherwise provided by law, may exercise the powers of the full Board until the vacancy is filled. 2. Number, Election and Qualification. A Board of Directors (the "Board") ---------------------------------- shall be elected by the stockholders at the annual meeting. The number of Directors shall be fixed by the stockholders (except as that number may be enlarged by the Board of Directors acting pursuant to Section 4 of this Article), but shall be not less than three, except that whenever there shall be only two stockholders the number of directors shall be not less than two and whenever there shall be only one stockholder or prior to the issuance of any stock, there shall be at least one director, and shall be not more than nine. 3. Vacancies. Any vacancy in the Board of Directors, however occurring, --------- including a vacancy resulting from the enlargement of the Board, may be filled by the stockholders or, in the absence of stockholder action, by the Directors. Each such successor shall hold office for the unexpired term of his or her predecessor and until his or her successor is chosen and qualified or until his or her earlier death, resignation or removal. 4. Enlargement of the Board. The Board of Directors may be enlarged by the ------------------------ stockholders at any meeting or by vote of a majority of the Directors then in office. 5. Tenure. Except as otherwise provided by law, by the Articles of ------ Organization or by these By-laws, Directors shall hold office until the next annual meeting of stockholders and until their successors are chosen and qualified. Any Director may resign by delivering his or her written resignation to the corporation at its principal office or to the President, Clerk or Secretary. Such resignation shall be effective upon receipt unless it is specified to be effective at some other time or upon the happening of some other event. 6. Removal. A Director may be removed from office (a) with or without cause ------- by the vote of the holders of a majority of the shares entitled to vote in the election of Directors, provided that the Directors of a class elected by a particular class of stockholders may be removed only by the vote of the holders of a majority of the shares of the particular class of stockholders entitled to vote for the election of such Directors; or (b) for cause by vote of a majority of the Directors then in office. A Director may be removed for cause only after a reasonable notice and opportunity to be heard before the body proposing to remove him or her. 7. Meetings. Regular meetings of the Directors may be held without call or -------- notice at such places and at such times as the Directors may from time to time determine, provided that any Director who is absent when such determination is made shall be given notice of the determination. A regular meeting of the Directors may be held without a call or notice at the same place as the annual meeting of stockholders. Special meetings of the Directors may be held at any time and place designated in a call by the President or two or more Directors. 8. Telephone Conference Meetings. Members of the Board of Directors may ----------------------------- participate in a meeting of the board by means of a conference telephone or similar communications equipment by -5- means of which all persons participating in the meeting can hear each other at the same time and participation by such means shall constitute presence in person at a meeting. 9. Notice of Meetings. Notice of all special meetings of the Directors ------------------ shall be given to each Director by the President, Secretary, or Assistant Secretary, or if there is no Secretary or Assistant Secretary, by the Clerk, or Assistant Clerk, or in case of the death, absence, incapacity or refusal of such persons, by the officer or one of the Directors calling the meeting. Notice shall be given to each Director in person or by e-mail or by telephone, telegram or facsimile sent to his or her business or home address at least twenty-four hours in advance of the meeting, or by written notice mailed to his or her business or home address at least forty-eight hours in advance of the meeting. Notice of a meeting need not be given to any Director if a written waiver of notice, executed by such Director before or after the meeting, is filed with the records of the meeting, or to any Director who attends the meeting without protesting prior thereto or at its commencement the lack of notice to him or her. A notice or waiver of notice of a Directors' meeting need not specify the purposes of the meeting. 10. Quorum. At any meeting of the Directors, a majority of the Directors ------ then in office shall constitute a quorum. Less than a quorum may adjourn any meeting from time to time without further notice. 11. Action at Meeting. At any meeting of the Directors at which a quorum is ----------------- present, a majority of the Directors present may take any action on behalf of the Board except to the extent that a larger number is required by law or the Articles of Organization or these By-laws. 12. Action by Consent. Any action required or permitted to be taken at any ----------------- meeting of the Directors may be taken without a meeting, if all the Directors consent to the action in writing and the written consents are filed with the records of the meetings of Directors. Such consents shall be treated for all purposes as a vote at a meeting. 13. Committees. The Directors may, by vote of a majority of the Directors ---------- then in office, elect from their number an executive or other committees and may by like vote delegate thereto some or all of their powers except those which by law, the Articles of Organization or these By-laws they are prohibited from delegating to such committee. Except as the Directors may otherwise determine, any such committee may make rules for the conduct of its business, but unless otherwise provided by the Directors or in such rules, its business shall be conducted as nearly as may be in the same manner as is provided by these By-laws for the Directors. ARTICLE III ----------- Officers -------- 1. Enumeration. The officers of the corporation shall consist of a ----------- President, a Treasurer, a Clerk, and such other officers, including a Chairman of the Board of Directors, one or more Vice-Presidents, Assistant Treasurers, Assistant Clerks, Secretary and Assistant Secretaries as the Directors may determine. 2. Election. The President, Treasurer and Clerk shall be elected annually -------- by the Directors at their first meeting following the annual meeting of stockholders. Other officers may be chosen by the Directors at such meeting or at any other meeting. -6- 3. Qualification. The President may, but need not be, a Director. No ------------- officer need be a stockholder. Any two or more offices may be held by the same person. The Clerk shall be a resident of Massachusetts unless the corporation has a resident agent appointed for the purpose of service of process. Any officer may be required by the Directors to give bond for the faithful performance of his or her duties to the corporation in such amount and with such sureties as the Directors may determine. 4. Tenure. Except as otherwise provided by law, by the Articles of ------ Organization or by these By-laws, the President, Treasurer and Clerk shall hold office until the first meeting of the Directors following the next annual meeting of stockholders and until their successors are chosen and qualified; and all other officers shall hold office until the first meeting of the Directors following the next annual meeting of stockholders and until their successors are chosen and qualified, unless a shorter term is specified in the vote choosing or appointing them. Any officer may resign by delivering his or her written resignation to the corporation at its principal office or to the President, Clerk or Secretary, and such resignation shall be effective upon receipt unless it is specified to be effective at some other time or upon the happening of some other event. 5. Removal. The Directors may remove any officer with or without cause by ------- vote of a majority of the Directors then in office; provided, that an officer may be removed for cause only after a reasonable notice and opportunity to be heard before the Board of Directors. 6. President, Chairman of the Board, and Vice-President. The President ---------------------------------------------------- shall, unless otherwise provided by the Directors, be the chief executive officer of the corporation and shall, subject to the direction of the Directors, have general supervision and control of its business. Unless otherwise provided by the Directors he or she shall preside, when present, at all meetings of stockholders and, unless a Chairman of the Board has been elected and is present, of the Directors. If a Chairman of the Board of Directors is elected he or she shall preside at all meetings of the Board of Directors at which he or she is present. The Chairman shall have such other powers as the Directors may from time to time designate. Any Vice-President shall have such powers as the Directors may from time to time designate. 7. Treasurer and Assistant Treasurers. The Treasurer shall, subject to the ---------------------------------- direction of the Directors, have general charge of the financial affairs of the corporation and shall cause accurate books of account to be kept. He or she shall have custody of all funds, securities, and valuable documents of the corporation, except as the Directors may otherwise provide. Any Assistant Treasurer shall have such powers as the Directors may from time to time designate. 8. Clerk and Assistant Clerks. The Clerk shall record all proceedings of -------------------------- the stockholders in a book to be kept therefor. Unless a transfer agent is appointed, the Clerk shall keep or cause to be kept in Massachusetts, at the principal office of the corporation or at his or her office, the stock and transfer records of the corporation, in which are contained the names of all stockholders and the record address and the amount of stock held by each. In case a Secretary is not elected, the Clerk shall record all proceedings of the Directors in a book to be kept therefor. In the absence of the Clerk from any meeting of the stockholders, an Assistant Clerk, if one be elected, otherwise a Temporary Clerk designated by the person presiding at the meeting, shall perform the duties of the Clerk. Any Assistant Clerk shall have such additional powers as the Directors may from time to time designate. 9. Secretary and Assistant Secretaries. If a Secretary is elected, he or ----------------------------------- she shall keep a record of the meetings of the Directors and in his or her absence, an Assistant Secretary, if one be elected, otherwise a Temporary Secretary designated by the person presiding at the meeting, shall keep a record -7- of the meetings of the Directors. Any Assistant Secretary shall have such additional powers as the Directors may from time to time designate. 10. Other Powers and Duties. Each officer shall, subject to these By-laws, ----------------------- have in addition to the duties and powers specifically set forth in these By- laws, such duties and powers as are customarily incident to his or her office, and such duties and powers as the Directors may from time to time designate. ARTICLE IV ---------- Capital Stock ------------- 1. Certificates of Stock. Subject to the provisions of Section 2 below, --------------------- each stockholder shall be entitled to a certificate of the capital stock of the corporation in such form as may be prescribed from time to time by the Directors. The certificate shall be signed by the President or a Vice- President, and by the Treasurer or an Assistant Treasurer; provided, however, such signatures may be facsimiles if the certificate is signed by a transfer agent, or by a registrar, other than a Director, officer or employee of the corporation. In case any officer who has signed or whose facsimile signature has been placed on such certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the corporation with the same effect as if he or she were such officer at the time of its issue. Every certificate issued for shares of stock at a time when such shares are subject to any restriction on transfer pursuant to the Articles of Organization, these By-laws or any agreement to which the corporation is a party shall have the restriction noted conspicuously on the certificate and shall also set forth on the face or back of the certificate either the full text of the restriction or a statement of the existence of such restriction and a statement that the corporation will furnish a copy thereof to the holder of such certificate upon written request and without charge. Every stock certificate issued by the corporation at a time when it is authorized to issue more than one class or series of stock shall set forth upon the face or back of the certificate either the full text of the preferences, voting powers, qualifications and special and relative rights of the shares of each class and series, if any, authorized to be issued, as set forth in the Articles of Organization, or a statement of the existence of such preferences, powers, qualifications, and rights, and a statement that the corporation will furnish a copy thereof to the holder of such certificate upon written request and without charge. 2. Stockholder Open Accounts. The corporation may maintain or caused to be ------------------------- maintained stockholder open accounts in which may be recorded all stockholders' ownership of stock and all changes therein. Certificates need not be issued for shares so recorded in a stockholder open account unless requested by the stockholder. 3. Transfers. Subject to the restrictions, if any, stated or noted on the --------- stock certificates, shares of stock may be transferred in the records of the corporation by the surrender to the corporation or its transfer agent of the certificate therefor, properly endorsed or accompanied by a written assignment and power of attorney properly executed, with necessary transfer stamps affixed, and with such proof of the authenticity of signature as the corporation or its transfer agent may reasonably require. When such stock certificates are thus properly surrendered to the corporation or its transfer agent, the corporation or transfer agent shall cause the records of the corporation to reflect the transfer of the shares of stock. Except as may be otherwise required by law, by the Articles of Organization or by these By-laws, the corporation shall be entitled to treat the record holder of stock as shown in its records as the owner of such stock for all purposes, including the payment of dividends and the right to vote with respect thereof, -8- regardless of any transfer, pledge or other disposition of such stock, until the shares have been transferred on the books of the corporation in accordance with the requirements of these By-laws. It shall be the duty of each stockholder to notify the corporation of his or her post office address. 4. Record Date. The Directors may fix in advance a time which shall be not ----------- more than sixty (60) days before the date of any meeting of stockholders or the date for the payment of any dividend or the making of any distribution to stockholders or the last day on which the consent or dissent of stockholders may be effectively expressed for any purpose, as the record date for determining the stockholders having the right to notice of and to vote at such meeting and any adjournment thereof or the right to receive such dividend or distribution or the right to give such consent or dissent. In such case only stockholders of record on such record date shall have such right, notwithstanding any transfer of stock on the books of the corporation after the record date. Without fixing such record date the Directors may for any of such purposes close the transfer books for all or any part of such period. If no record date is fixed and the transfer books are not closed, the record date for determining stockholders having the right 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, and the record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors acts with respect thereto. 5. Replacement of Certificates. In case of the alleged loss, mutilation or --------------------------- destruction of a certificate of stock, a duplicate certificate may be issued in place thereof, upon such terms and conditions as the Directors may prescribe. 6. Issue of Capital Stock. The whole or any part of the then authorized but ---------------------- unissued shares of each class of stock may be issued at any time or from time to time by the Board of Directors without action by the stockholders. 7. Reacquisition of Stock. Shares of stock previously issued which have ---------------------- been reacquired by the corporation, may be restored to the status of authorized but unissued shares by vote of the Board of Directors, without amendment of the Articles of Organization. ARTICLE V --------- Provisions Relative to Directors, Officers, Stockholders and Employees ------------------------------------ 1. Certain Contracts and Transactions. In the absence of fraud or bad ---------------------------------- faith, no contract or transaction by this corporation shall be void, voidable or in any way affected by reason of the fact that the contract or transaction is (a) with one or more of its officers, Directors, stockholders or employees, (b) with a person who is in any way interested in this corporation or (c) with a corporation, organization or other concern in which an officer, Director, stockholder or employee of this corporation is an officer, director, stockholder, employee or in any way interested. The provisions of this section shall apply notwithstanding the fact that the presence of a Director or stockholder, with whom a contract or transaction is made or entered into or who is an officer, director, stockholder or employee of a corporation, organization or other concern with which a contract or transaction is made or entered into or who is in any way interested in such contract or transaction, was necessary to constitute a quorum at the -9- meeting of the Directors (or any authorized committee thereof) or stockholders at which such contract or transaction was authorized and/or that the vote of such Director or stockholder was necessary for the adoption of such contract or transaction, provided that if said interest was material, it shall have been known or disclosed to the Directors or stockholders voting at said meeting on said contract or transaction. A general notice to any person voting on said contract or transaction that an officer, Director, stockholder or employee has a material interest in any corporation, organization or other concern shall be sufficient disclosure as to such officer, Director, stockholder or employee with respect to all contracts and transactions with such corporation, organization or other concern. This section shall be subject to amendment or repeal only by action of the stockholders. 2. Indemnification. Each Director and officer of the corporation, and any --------------- person who, at the request of the corporation, serves as a director or officer of another organization shall be indemnified by the corporation against any cost, expense (including attorneys' fees), judgment, liability and/or amount paid in settlement reasonably incurred by or imposed upon him or her in connection with any action, suit or proceeding (including any proceeding before any administrative or legislative body or agency), to which he or she may be made a party or otherwise involved or with which he or she shall be threatened, by reason of his or her being, or related to his or her status as, a Director or officer of the corporation or of any other organization, which other organization he or she serves or has served as director or officer at the request of the corporation (whether or not he or she continues to be an officer or Director of the corporation or such other organization at the time such action, suit or proceeding is brought or threatened), unless such indemnification is prohibited by the Business Corporation Law of the Commonwealth of Massachusetts. The foregoing right of indemnification shall be in addition to any rights to which any such person may otherwise be entitled and shall inure to the benefit of the executors or administrators of each such person. The corporation may pay the expenses incurred by any such person in defending a civil or criminal action, suit or proceeding in advance of the final disposition of such action, suit, or proceeding, upon receipt of an undertaking by such person to repay such payment if it is determined that such person is not entitled to indemnification hereunder. This section shall not affect any rights to indemnification to which corporate personnel other than Directors and officers may be entitled by contract or otherwise under law. This section shall be subject to amendment or repeal only by action of the stockholders, and any such amendment or repeal shall not affect the rights arising hereunder prior to the effective date of the amendment or repeal. ARTICLE VI ---------- Miscellaneous Provisions ------------------------ 1. Fiscal Year. Except as from time to time otherwise determined by the ----------- Directors, the fiscal year of the corporation shall be the fifty-two/fifty-three (52/53) week period ending with the last Saturday of December or as otherwise selected by the Board of Directors from time to time. Following any change in the fiscal year previously adopted, a certificate of such change, signed under the penalties of perjury by the Clerk or an Assistant Clerk, shall be filed forthwith with the state secretary. 2. Seal. The seal of this corporation shall, subject to alteration by the ---- Directors, bear its name, the word "Massachusetts", and the year of its incorporation. 3. Execution of Instruments. All deeds, leases, transfers, contracts, ------------------------ bonds, notes and other obligations authorized to be executed by an officer of the corporation in its behalf shall be signed by the President, any Vice President or the Treasurer except as the Directors may generally or in particular cases otherwise determine. -10- 4. Voting of Securities. Except as the Directors may otherwise designate, -------------------- the President or Treasurer may waive notice of, and appoint any person or persons to act as proxy or attorney in fact for this corporation (with or without power of substitution) at any meeting of stockholders or shareholders of any other corporation or organization, the securities of which may be held by the corporation. 5. Corporate Records. The original, or attested copies, of the Articles of ----------------- Organization, By-laws and records of all meetings of incorporators and stockholders, and the stock and transfer records, which shall contain the names of all stockholders and the record address and the amount of stock held by each, shall be kept in Massachusetts at the principal office of the corporation or at an office of its transfer agent or of the Clerk or of its resident agent. Said copies and records need not all be kept in the same office. They shall be available at all reasonable times to the inspection of any stockholder for any proper purpose but not to secure a list of stockholders or other information for the purpose of selling said list or information or copies thereof or of using the same for a purpose other than in the interest of the applicant, as a stockholder, relative to the affairs of the corporation. 6. Articles of Organization. All references in these By-laws to the ------------------------ Articles of Organization shall be deemed to refer to the Restated Articles of Organization of the corporation, as amended and in effect from time to time. 7. Amendments. These By-laws, to the extent provided in these By-laws, may ---------- be amended or repealed, in whole or in part, and new By-laws adopted either (a) by the stockholders at any meeting of the stockholders by the affirmative vote of the holders of at least a majority in interest of the capital stock present and entitled to vote, provided that notice of the proposed amendment or repeal or of the proposed making of new By-laws shall have been given in the notice of such meeting, or (b) if so authorized by the Restated Articles of Organization, by the Board of Directors at any meeting of the Board by the affirmative vote of a majority of the Directors then in office, but no amendment or repeal of a By- law shall be voted by the Board of Directors and no new By-law shall be made by the Board of Directors which alters the provisions of these By-laws with respect to removal of Directors, or the election of committees by Directors and the delegation of powers thereto, nor shall the Board of Directors make, amend or repeal any provision of the By-laws which by law, the Restated Articles of Organization or the By-laws requires action by the stockholders. Not later than the time of giving notice of the meeting of stockholders next following the making, amending, or repealing by the Directors of any By-law, notice thereof stating the substance of such change shall be given to all stockholders entitled to vote on amending the By-laws. Any By-law or amendment of a By-law made the Board of Directors may be amended or repealed by the stockholders by affirmative vote as above provided in this Section 7. 8. 1987 Massachusetts Control Share Acquisition Act. The 1987 Massachusetts ------------------------------------------------ Control Share Acquisition Act, Chapter 110D of the Massachusetts General Laws, as it may be amended from time to time, shall not apply to the corporation. 9. Massachusetts General Laws, Chapter 110F. Chapter 110F of the ---------------------------------------- Massachusetts General Laws, as it may be amended from time to time, shall not apply to the corporation. EX-10.1 5 1997 STOCK OPTION PLAN EXHIBIT 10.1 EXCEL SWITCHING CORPORATION 1997 STOCK OPTION PLAN 1. PURPOSE. This 1997 Stock Option Plan (the "Plan") is intended to ------- provide incentives: (a) to the officers and other employees of Excel Switching Corporation (the "Company"), any present or future parent and any present or future subsidiaries of the Company (collectively, "Related Corporations") by providing them with opportunities to purchase stock in the Company pursuant to options granted hereunder which qualify as "incentive stock options" ("ISO" or "ISOs") under Section 422(b) of the Internal Revenue Code of 1986, as amended (the "Code"); (b) to directors, officers, employees and consultants of the Company and Related Corporations by providing them with opportunities to purchase stock in the Company pursuant to options granted hereunder which do not qualify as ISOs ("Non-Qualified Option" or "Non-Qualified Options"); (c) to directors, officers, employees and consultants of the Company and Related Corporations by providing them with awards of stock in the Company ("Awards"); and (d) to directors, officers, employees and consultants of the Company and Related Corporations by providing them with opportunities to make direct purchases of stock in the Company ("Purchases"). Both ISOs and Non-Qualified Options are referred to hereafter individually as an "Option" and collectively as "Options". Options, Awards and authorizations to make Purchases are referred to hereafter collectively as "Stock Rights". As used herein, the terms "parent" and "subsidiary" mean "parent corporation" and "subsidiary corporation", respectively, as those terms are defined in Section 424 of the Code. 2. ADMINISTRATION OF THE PLAN. -------------------------- A. BOARD OR COMMITTEE ADMINISTRATION. The Plan shall be administered by --------------------------------- the Board of Directors of the Company (the "Board") or, subject to paragraph 2(D) (relating to compliance with Section 162(m) of the Code), by a committee appointed by the Board (the "Committee"). Hereinafter, all references in this Plan to the "Committee" shall mean the Board if no Committee has been appointed. Subject to ratification of the grant or authorization of each Stock Right by the Board (if so required by applicable state law), and subject to the terms of the Plan, the Committee shall have the authority to (i) determine the employees of the Company and Related Corporations (from among the class of employees eligible under paragraph 3 to receive ISOs) to whom ISOs may be granted, and to determine (from among the class of individuals and entities eligible under paragraph 3 to receive Non-Qualified Options and Awards and to make Purchases) to whom Non-Qualified Options, Awards and authorizations to make Purchases may be granted; (ii) determine the time or times at which Options or Awards may be granted or Purchases made; (iii) determine the exercise price per share subject to each Option, which price shall not be less than the minimum price specified in paragraph 6, and the purchase price of shares subject to each Purchase; (iv) determine whether each Option granted shall be an ISO or a Non-Qualified Option; (v) determine (subject to paragraph 7) the time or times when each Option shall become exercisable and the duration of the exercise period; (vi) extend the period during -2- which outstanding Options may be exercised; (vii) determine whether restrictions such as repurchase options are to be imposed on shares subject to Options, Awards and Purchases and the nature of such restrictions, if any, and (viii) interpret the Plan and prescribe and rescind rules and regulations relating to it. If the Committee determines to issue a Non-Qualified Option, it shall take whatever actions it deems necessary, under Section 422 of the Code and the regulations promulgated thereunder, to ensure that such Option is not treated as an ISO. The interpretation and construction by the Committee of any provisions of the Plan or of any Stock Right granted under it shall be final unless otherwise determined by the Board. The Committee may from time to time adopt such rules and regulations for carrying out the Plan as it may deem best. No member of the Board or the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any Stock Right granted under it. B. COMMITTEE ACTION. The Committee may select one of its members as its ---------------- chairman, and shall hold meetings at such time and places as it may determine. Acts by a majority of the Committee, or acts reduced to or approved in writing by a majority of the members of the Committee, shall be the valid acts of the Committee. From time to time the Board may increase the size of the Committee and appoint additional members thereof, remove members (with or without cause) and appoint new members in substitution therefor, fill vacancies however caused, or remove all members of the Committee and thereafter directly administer the Plan. C. GRANT OF STOCK RIGHTS TO BOARD MEMBERS. Stock Rights may be granted --------------------------------------- to members of the Board. All grants of Stock Rights to members of the Board shall in all other respects be made in accordance with the provisions of this Plan applicable to other eligible persons. Members of the Board who are either (i) eligible for Stock Rights pursuant to the Plan or (ii) have been granted Stock Rights may vote on any matters affecting the administration of the Plan or the grant of any Stock Rights pursuant to the Plan, except that no such member shall act upon the granting to himself of Stock Rights, but any such member may be counted in determining the existence of a quorum at any meeting of the Board during which action is taken with respect to the granting to him of Stock Rights. D. PERFORMANCE-BASED COMPENSATION. The Board, in its discretion, may ------------------------------ take such action as may be necessary to ensure that Stock Rights granted under the Plan qualify as "qualified performance-based compensation" within the meaning of Section 162(m) of the Code and applicable regulations promulgated thereunder ("Performance-Based Compensation"). Such action may include, in the Board's discretion, some or all of the following (i) if the Board determines that Stock Rights granted under the Plan generally shall constitute Performance-Based Compensation, by a committee consisting solely of two or more "outside directors (as defined in applicable regulations promulgated under Section 162(m) of the Code), (ii) if any Non-Qualified Options with an exercise price less than the fair market value per share of Common Stock are granted under the Plan and the Board determines that such Options should constitute Performance-Based Compensation, such options shall be made exercisable only upon the attainment of a pre-established, objective performance goal established by the Committee, and such grant shall be submitted for, and -3- shall be contingent upon shareholder approval and (iii) Stock Rights granted under the Plan may be subject to such other terms and conditions as are necessary for compensation recognized in connection with the exercise or disposition of such Stock Right or the disposition of Common Stock acquired pursuant to such Stock Right, to constitute Performance- Based Compensation. 3. ELIGIBLE EMPLOYEES AND OTHERS. ISOs may be granted only to employees ----------------------------- of the Company or any Related Corporation. Non-Qualified Options, Awards and authorizations to make Purchases may be granted to any director (whether or not an employee), officer, employee or consultant of the Company or any Related Corporation. Notwithstanding the foregoing, effective only on and after the date of the Company's initial public offering, non-employee directors shall no longer be eligible to participate in this Plan. The Committee may take into consideration a recipient's individual circumstances in determining whether to grant an ISO, a Non-Qualified Option or an authorization to make a Purchase. Granting of any Stock Right to any individual or entity shall neither entitle that individual or entity to, nor disqualify him from, participation in any other grant of Stock Rights. 4. STOCK. The stock subject to Options, Awards and Purchases shall be ----- authorized but unissued shares of Common Stock of the Company, par value $.01 per share (the "Common Stock"), or shares of Common Stock reacquired by the Company in any manner. The aggregate number of shares which may be issued pursuant to the Plan is 3,000,000 shares, subject to adjustment as provided in paragraph 13. If any Option granted under the Plan shall expire or terminate for any reason without having been exercised in full or shall cease for any reason to be exercisable in whole or in part, the shares subject to such Options shall again be available for grants of Stock Rights under the Plan. The following provision shall be effective only on and after the date of the initial public offering of shares of Common Stock of the Company pursuant to the Securities Act of 1933, as amended. If any Option granted under the Plan shall expire or terminate for any reason without having been exercised in full or shall cease for any reason to be exercisable in whole or in part or shall be repurchased by the Company, the shares subject to such Option shall be included in the determination of the aggregate number of shares of Common Stock deemed to have been granted to such employee under the Plan. 5. GRANTING OF STOCK RIGHTS. Stock Rights may be granted under the Plan ------------------------ at any time on or after SEPTEMBER 16, 1997 and prior to SEPTEMBER 15, 2007. The date of grant of a Stock Right under the Plan will be the date specified by the Committee at the time it grants the Stock Right; provided, however, that such date shall not be prior to the date on which the Committee acts to approve the grant. 6. MINIMUM OPTION PRICE; ISO LIMITATIONS. -------------------------------------- A. PRICE FOR NON-QUALIFIED OPTIONS, AWARDS, AND PURCHASES. Subject to ------------------------------------------------------ paragraph 2(D) (relating to compliance with Section 162(m) of the Code), the exercise price per share specified in the agreement relating to each Non-Qualified Option granted and the -4- purchase price per share of stock granted in any Award or authorized as a Purchase under the Plan shall in no event be less than the minimum legal consideration required therefor under the laws of any jurisdiction in which the Company or its successors in interest may be organized. B. PRICE FOR ISOS. The exercise price per share specified in the -------------- agreement relating to each ISO granted under the Plan shall not be less than the fair market value per share of Common Stock on the date of such grant. In the case of an ISO to be granted to an employee owning stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Related Corporation, the price per share specified in the agreement relating to such ISO shall not be less than one hundred ten percent (110%) of the fair market value per share of Common Stock on the date of grant. For purposes of determining stock ownership under this paragraph, the rules of Section 424(d) of the Code shall apply. C. $100,000 ANNUAL LIMITATION ON ISO VESTING. Each eligible employee ----------------------------------------- may be granted options treated as ISOs only to the extent that, in the aggregate under this Plan and all incentive stock option plans of the Company and any Related Corporation, such ISOs do not become exercisable for the first time by such employee during any calendar year in a manner which would entitle the employee to purchase more than $100,000 in fair market value (determined at the time the ISOs were granted) of Common Stock in that year. Any options granted to an employee in excess of such amount will be granted as Non-Qualified Options, and the Company shall issue separate certificates to the optionee with respect to options that are Non-Qualified Options and Options that are ISOs. D. DETERMINATION OF FAIR MARKET VALUE. If, at the time an Option is ---------------------------------- granted under the Plan, the Company's Common Stock is publicly traded, "fair market value" shall be determined as of the date of grant or, if the prices or quotes discussed in this sentence are unavailable for such date, the last business day for which such prices or quotes are available prior to the date such Option is granted and shall mean (i) the average (on that date) of the high and low prices of the Common Stock on the principal national securities exchange on which the Common Stock is traded, if the Common Stock is then traded on a national securities exchange; or (ii) the last reported sale price (on that date) of the Common Stock on the Nasdaq National Market, if the Common Stock is not then traded on a national securities exchange; or (iii) the average of the closing bid and asked prices last quoted (on that date) by an established quotation service for over-the-counter securities, if the Common Stock is not reported on the Nasdaq National Market. However, if the Common Stock is not publicly traded at the time an Option is granted under the Plan, "fair market value" shall be deemed to be the fair value of the Common Stock as determined by the Committee after taking into consideration all factors which it deems appropriate, including, without limitation, recent sale and offer prices of the Common Stock in private transactions negotiated at arm's length. -5- 7. OPTION DURATION. Subject to earlier termination as provided in --------------- paragraphs 9 and 10 or in the agreement relating to such Option, each Option shall expire on the date specified by the Committee, but not more than (i) ten years and one day from the date of grant in the case of Non-Qualified Options, (ii) ten years from the date of grant in the case of ISOs generally, and (iii) five years from the date of grant in the case of ISOs granted to an employee owning stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Related Corporation, as determined under paragraph 6(B). Subject to earlier termination as provided in paragraphs 9 and 10, the term of each ISO shall be the term set forth in the original instrument granting such ISO, except with respect to any part of such ISO that is converted into a Non-Qualified Option pursuant to paragraph 16. 8. EXERCISE OF OPTION. Subject to the provisions of paragraphs 9 ------------------ through 12, 21 and 22 each Option granted under the Plan shall be exercisable as follows: A. FULL VESTING OR PARTIAL VESTING. The Option shall either be fully -------------------------------- exercisable on the date of grant or shall become exercisable thereafter in such installments as the Committee may specify. B. FULL VESTING OF INSTALLMENTS. Once an installment becomes ---------------------------- exercisable it shall remain exercisable until expiration or termination of the Option, unless otherwise specified by the Committee or as otherwise provided in this Plan. C. PARTIAL EXERCISE. Each Option or installment may be exercised at any ---------------- time or from time to time, in whole or in part, for up to the total number of shares with respect to which it is then exercisable. D. ACCELERATION OF VESTING. Subject to any accounting considerations ----------------------- with respect to "Accounting for Business Combinations" pursuant to Accounting Principles Board Opinion No. 16, The Committee shall have the right to accelerate the date of exercise of any installment of any Option; provided that the Committee shall not accelerate the exercise date of any installment of any Option granted to any employee as an ISO (and not previously converted into a Non-Qualified Option pursuant to paragraph 16) if such acceleration would violate the annual vesting limitation contained in Section 422(d) of the Code, as described in paragraph 6(C). 9. TERMINATION OF EMPLOYMENT. Unless otherwise specified in the -------------------------- Agreement relating to such ISO, if an ISO Optionee ceases to be employed by the Company and all Related Corporations other than by reason of death or disability as defined in paragraph 10, no further installments of his ISOs shall become exercisable, and his ISOs shall terminate after the passage of ninety (90) days from the date of termination of his employment, but in no event later than on their specified expiration dates, except to the extent that such ISOs (or unexercised installments thereof) have been converted into Non-Qualified Options pursuant to paragraph 16. Employment shall be considered as continuing uninterrupted during any bona fide leave of absence (such as those attributable to illness, military obligations or governmental service) provided that the period of such leave does not exceed ninety (90) days or, if longer, any period -6- during which such Optionee's right to reemployment is guaranteed by statute or by contract. A bona fide leave of absence with the written approval of the Committee shall not be considered an interruption of employment under the Plan, provided that such written approval contractually obligates the Company or any Related Corporation to continue the employment of the Optionee after the approved period of absence. ISOs granted under the Plan shall not be affected by any change of employment within or among the Company and Related Corporations, so long as the Optionee continues to be an employee of the Company or any Related Corporation. Nothing in the Plan shall be deemed to give any grantee of any Stock Right the right to be retained in employment or other service by the Company or any Related Corporation for any period of time. 10. DEATH; DISABILITY. ----------------- A. DEATH. If an ISO Optionee ceases to be employed by the Company and ----- all Related Corporations by reason of his or her death, any ISO owned by such Optionee may be exercised, to the extent of the number of shares with respect to which he or she could have exercised it on the date of his or her death, by the estate, personal representative or beneficiary who has acquired the ISO by will or by the laws of descent and distribution, at any time prior to the earlier of (i) the specified expiration date of the ISO or (ii) 180 days from the date of the Optionee's death. B. DISABILITY. If an ISO Optionee ceases to be employed by the Company ---------- and all Related Corporations by reason of his or her disability, such Optionee shall have the right to exercise any ISO held by him or her on the date of termination of employment, to the extent of the number of shares with respect to which he or she could have exercised it on that date, until the earlier of (i) the specified expiration date of the ISO or (ii) 180 days from the date of the termination of the Optionee's employment. For the purposes of the Plan, the term "disability" shall mean "permanent and total disability" as defined in Section 22(e)(3) of the Code or successor statute. 11. ASSIGNABILITY. No Option shall be assignable or transferable by the ------------- Optionee except by will or by the laws of descent and distribution or in case of Non-Qualified Options only, pursuant to a valid domestic relations order, and during the lifetime of the Optionee each Option shall be exercisable only by him or her. 12. TERMS AND CONDITIONS OF OPTIONS. Options shall be evidenced by ------------------------------- instruments (which need not be identical) in such forms as the Committee may from time to time approve. Such instruments shall conform to the terms and conditions set forth in paragraphs 6 through 11 hereof and may contain such other provisions as the Committee deems advisable which are not inconsistent with the Plan, including restrictions applicable to shares of Common Stock issuable upon exercise of Options. In granting any Non-Qualified Option, the Committee may specify that such Non-Qualified Option shall be subject to the restrictions set forth herein with respect to ISOs, or to such other termination and cancellation provisions as the Committee may determine. The Committee may from time to time confer authority and responsibility on one or more of its own members and/or one or more officers of the Company to execute and deliver such -7- instruments. The proper officers of the Company are authorized and directed to take any and all action necessary or advisable from time to time to carry out the terms of such instruments. 13. ADJUSTMENTS. Upon the occurrence of any of the following events, an ----------- Optionee's rights with respect to Options granted to him hereunder shall be adjusted as hereinafter provided, unless otherwise specifically provided in the written agreement between the Optionee and the Company relating to such Option: A. STOCK DIVIDENDS AND STOCK SPLITS. If the shares of Common Stock -------------------------------- shall be subdivided or combined into a greater or smaller number of shares or if the Company shall issue any shares of Common Stock as a stock dividend on its outstanding Common Stock, the number of shares of Common Stock deliverable upon the exercise of Options shall be appropriately increased or decreased proportionately, and appropriate adjustments shall be made in the purchase price per share to reflect such subdivision, combination or stock dividend. B. CONSOLIDATIONS OR MERGERS. If the Company is to be consolidated with ------------------------- or acquired by another entity in a merger or other reorganization in which the holders of the outstanding voting stock of the Company immediately preceding the consummation of such event, shall, immediately following such event, hold as a group, less than a majority of the voting securities of the surviving or successor entity, or in the event of a sale of all or substantially all of the Company's assets or otherwise (an "Acquisition"), the Committee or the board of directors of any entity assuming the obligations of the Company hereunder (the "Successor Board"), shall, as to outstanding Options, take one or more of the following actions: (i) make appropriate provision for the continuation of such Options by substituting on an equitable basis for the shares then subject to such Options the consideration payable with respect to the outstanding shares of Common Stock in connection with the Acquisition; or (ii) make appropriate provision for the continuation of such Options by substituting on an equitable basis for the shares then subject to such Options any equity securities of the successor corporation or such other securities as the Successor Board deems appropriate, the fair market value of which shall not materially exceed the fair market value of the shares of Common Stock subject to such Options immediately preceding the Acquisition; or (iii) upon written notice to the Optionees, provide that all Options must be exercised, to the extent then exercisable, within a specified number of days of the date of such notice, at the end of which period the Options shall terminate; or (iv) terminate all Options in exchange for a cash payment equal to the excess of the fair market value of the shares subject to such Options (to the extent then exercisable) over the exercise price thereof; or (v) accelerate the date of exercise of such Options or of any installment of any such Options; or (vi) terminate all Options in exchange for the right to participate in any stock option or other employee benefit plan of any successor corporation. The foregoing actions are subject in all instances to the approval of the Board of Directors and any accounting considerations for any acquisition which is treated as a "pooling of interests" transaction pursuant to the Accounting Principles Board (APB) Opinion No. 16, if any discretionary action by the Board of Directors would otherwise violate the accounting rules for treatment of the Acquisition as a "pooling of interests" under APB No. 16. -8- C. RECAPITALIZATION OR REORGANIZATION. In the event of a ---------------------------------- recapitalization or reorganization of the Company (other than a transaction described in subparagraph B above) pursuant to which securities of the Company or of another corporation are issued with respect to the outstanding shares of Common Stock, an Optionee upon exercising an Option shall be entitled to receive for the purchase price paid upon such exercise the securities he or she would have received if he or she had exercised his or her Option prior to such recapitalization or reorganization. D. MODIFICATION OF ISOS. Notwithstanding the foregoing, any adjustments -------------------- made pursuant to subparagraphs A, B or C with respect to ISOs shall be made only after the Committee, after consulting with counsel for the Company, determines whether such adjustments would constitute a "modification" of such ISOs (as that term is defined in Section 424 of the Code) or would cause any adverse tax consequences for the holders of such ISOs. If the Committee determines that such adjustments made with respect to ISOs would constitute a modification of such ISOs, or would cause adverse tax consequences to the holders, it may refrain from making such adjustments. E. DISSOLUTION OR LIQUIDATION. In the event of the proposed dissolution -------------------------- or liquidation of the Company, each Option will terminate immediately prior to the consummation of such proposed action or at such other time and subject to such other conditions as shall be determined by the Committee. F. ISSUANCES OF SECURITIES. Except as expressly provided herein, no ----------------------- issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares subject to Options. No adjustments shall be made for dividends paid in cash or in property other than securities of the Company. G. FRACTIONAL SHARES. No fractional shares shall be issued under the ----------------- Plan and the Optionee shall receive from the Company cash in lieu of such fractional shares. H. ADJUSTMENTS. Upon the happening of any of the foregoing events ----------- described in subparagraphs A, B or C above, the class and aggregate number of shares set forth in paragraph 4 hereof that are subject to Stock Rights which previously have been or subsequently may be granted under the Plan shall also be appropriately adjusted to reflect the events described in such subparagraphs. The Committee or the Successor Board shall determine the specific adjustments to be made under this paragraph 13 and, subject to paragraph 2, its determination shall be conclusive. If any person or entity owning restricted Common Stock obtained by exercise of a Stock Right made hereunder receives shares or securities or cash in connection with a corporate transaction described in subparagraphs A, B or C above as a result of owning such restricted Common Stock, such shares or securities or cash shall be subject to all of the conditions and restrictions -9- applicable to the restricted Common Stock with respect to which such shares or securities or cash were issued, unless otherwise determined by the Committee or the Successor Board. 14. MEANS OF EXERCISING STOCK RIGHTS. A Stock Right (or any part or -------------------------------- installment thereof) shall be exercised by giving written notice to the Company at its principal office address. Such notice shall identify the Stock Right being exercised and specify the number of shares as to which such Stock Right is being exercised, accompanied by full payment of the purchase price therefor either (a) in United States dollars in cash or by check, or (b) at the discretion of the Committee, through delivery of shares of Common Stock having a fair market value equal as of the date of the exercise to the cash exercise price of the Stock Right, or (c) at the discretion of the Committee, by delivery of the grantee's personal recourse note bearing interest payable not less than annually at no less than 100% of the lowest applicable Federal rate, as defined in Section 1274(d) of the Code, or (d) at the discretion of the Committee and consistent with applicable law, through the delivery of an assignment to the Company of a sufficient amount of the proceeds from the sale of the Common Stock acquired upon exercise of the Option and an authorization to the broker or selling agent to pay that amount to the Company, which sale shall be at the participant's direction at the time of exercise, or (e) at the discretion of the Committee, by any combination of (a), (b), (c) and (d) above. If the Committee exercises its discretion to permit payment of the exercise price of an ISO by means of the methods set forth in clauses (b), (c), (d) or (e) of the preceding sentence, such discretion shall be exercised in writing at the time of the grant of the ISO in question. The holder of a Stock Right shall not have the rights of a shareholder with respect to the shares covered by his Stock Right until the date of issuance of a stock certificate to him for such shares. Except as expressly provided above in paragraph 13 with respect to changes in capitalization and stock dividends, no adjustment shall be made for dividends or similar rights for which the record date is before the date such stock certificate is issued. 15. TERM AND AMENDMENT OF PLAN. This Plan was adopted by the Board as -------------------------- of SEPTEMBER 16, 1997, subject (with respect to the validation of ISOs granted under the Plan) to approval of the Plan by the stockholders of the Company at the next Meeting of Stockholders or, in lieu thereof, by unanimous written consent. If the approval of stockholders is not obtained by SEPTEMBER 16, 1998, any grants of Options under the Plan made prior to that date will be rescinded. The Plan shall expire at the end of the day on SEPTEMBER 15, 2007 (except as to Options outstanding on that date). Subject to the provisions of paragraph 5 above, Stock Rights may be granted under the Plan prior to the date of stockholder approval of the Plan. The Board may terminate or amend the Plan in any respect at any time, except that, without the approval of the stockholders obtained within 12 months before or after the Board adopts a resolution authorizing any of the following actions: (a) the total number of shares that may be issued under the Plan may not be increased (except by adjustment pursuant to paragraph 13); (b) the benefits accruing to participants under the Plan may not be materially increased; (c) the requirements as to eligibility for participation in the Plan may not be materially modified; (d) the provisions of paragraph 3 regarding eligibility for grants of ISOs may not be modified; (e) the provisions of paragraph 6(B) regarding the exercise price at which shares may be offered pursuant to ISOs may not be modified (except by adjustment pursuant to paragraph 13); (f) the expiration date of the Plan may not be extended; and (g) the -10- Board may not take any action which would cause the Plan to fail to comply with Rule 16b-3. Except as otherwise provided in this paragraph 15, in no event may action of the Board or stockholders alter or impair the rights of a grantee, without his consent, under any Stock Right previously granted to him. 16. CONVERSION OF ISOS INTO NON-QUALIFIED OPTIONS; TERMINATION OF ISOS. ------------------------------------------------------------------ Subject to paragraph 13(D), without the prior written consent of the holder of an ISO, the Committee shall not alter the terms of such ISO (including the means of exercising such ISO) if such alteration would constitute a modification (within the meaning of Section 424(h)(3) of the Code). The Committee, at the written request or with the written consent of any Optionee, may in its discretion take such actions as may be necessary to convert such Optionee's ISOs (or any installments or portions of installments thereof) that have not been exercised on the date of conversion into Non-Qualified Options at any time prior to the expiration of such ISOs, regardless of whether the Optionee is an employee of the Company or a Related Corporation at the time of such conversion. Such actions may include, but shall not be limited to, extending the exercise period or reducing the exercise price of the appropriate installments of such ISOs. At the time of such conversion, the Committee (with the consent of the Optionee) may impose such conditions on the exercise of the resulting Non-Qualified Options as the Committee in its discretion may determine, provided that such conditions shall not be inconsistent with this Plan. Nothing in the Plan shall be deemed to give any Optionee the right to have such Optionee's ISOs converted into Non-Qualified Options, and no such conversion shall occur until and unless the Committee takes appropriate action. Upon the taking of such action, the Company shall issue separate certificates to the Optionee with respect to Options that are Non-Qualified Options and Options that are ISOs. 17. APPLICATION OF FUNDS. The proceeds received by the Company from the -------------------- sale of shares pursuant to Options granted and Purchases authorized under the Plan shall be used for general corporate purposes. 18. GOVERNMENTAL REGULATION. The Company's obligation to sell and ----------------------- deliver shares of the Common Stock under this Plan is subject to the approval of any governmental authority required in connection with the authorization, issuance or sale of such shares. 19. WITHHOLDING OF ADDITIONAL INCOME TAXES. Upon the exercise of a -------------------------------------- Non-Qualified Option, the grant of an Award, the making of a Purchase of Common Stock for less than its fair market value, the making of a Disqualifying Disposition (as defined in paragraph 20), the making of a distribution or other payment with respect to such stock or securities, or the vesting or transfer of restricted Common Stock acquired on the exercise of a Stock Right hereunder, the Company may withhold income and/or employment taxes in respect of amounts that constitute compensation includible in gross income, or otherwise treated by law as wages for withholding for income or employment tax purposes. The Committee in its discretion may condition (i) the exercise of an Option, (ii) the grant of an Award, (iii) the making of a Purchase of Common Stock for less than its fair market value, or (iv) the vesting or transferability of restricted Common Stock acquired by exercising a Stock Right, on the grantee's making satisfactory arrangement for such withholding. Such arrangement may include payment -11- by the grantee in cash or by check of the amount of the withholding taxes or, at the discretion of the Company, by the grantee's delivery of previously held shares of Common Stock or the withholding from the shares of Common Stock otherwise deliverable upon exercise of Option shares having an aggregate fair market value equal to the amount of such withholding taxes. The use of any method of payment other than by cash or check in some cases may require or cause additional withholding obligations. 20. NOTICE TO COMPANY OF DISQUALIFYING DISPOSITION. By accepting an ISO ---------------------------------------------- granted under the Plan, each ISO Optionee thereby agrees to notify the Company in writing immediately after such Optionee makes a Disqualifying Disposition of any Common Stock acquired pursuant to the exercise of an ISO. Generally, a Disqualifying Disposition is any disposition (including any sale) of such Common Stock occurring on or before the later of the date (a) two years after the date the employee was granted the ISO, or (b) one year after the date the employee acquired Common Stock by exercising the ISO. 21. NO EXERCISE OF OPTION IF ENGAGEMENT OR EMPLOYMENT TERMINATED FOR ---------------------------------------------------------------- CAUSE. If the employment of the Optionee is terminated for "Cause," this option - ----- shall terminate on the date of such termination and the Option shall thereupon not be exercisable to any extent whatsoever. "Cause" is conduct, as determined by the Board of Directors, involving one or more of the following: (i) gross misconduct by the employee which is materially injurious to the Company; or (ii) the commission of an act of embezzlement, fraud or deliberate disregard of the rules or policies of the Company which results in material economic loss, damage or injury to the Company; or (iii) the unauthorized disclosure of any trade secret or confidential information of the Company or any third party who has a business relationship with the Company or the violation of any noncompetition covenant or assignment of inventions obligation with the Company; or (iv) the commission of an act which induces any customer or prospective customer of the Company to break a contract with the Company or to decline to do business with the Company; or (v) the conviction of the employee of a felony involving any financial impropriety or which would materially interfere with the employee's ability to perform his or her services or otherwise be injurious to the Company; or (vi) the failure of the employee to perform in a material respect his or her employment obligations without proper cause. In making such determination, the Board shall act fairly and in utmost good faith. For the purposes of this Section 21, termination of employment shall be deemed to occur when the employee receives notice that his employment is terminated. 22. ACCELERATION AND VESTING OF OPTION FOR BUSINESS COMBINATIONS. Upon ------------------------------------------------------------ any merger, consolidation, sale of all (or substantially all) of the assets of the Company, or other business combination involving the sale or transfer of all (or substantially all) of the capital stock or assets of the Company in which the Company is not the surviving entity, or, if it is the surviving entity, does not survive as an operating going concern in substantially the same line of business (an "Acquisition"), then the remaining unvested portions of any Option outstanding to any Optionee shall, immediately prior to the consummation of any of the foregoing events, become vested and immediately exercisable by the Optionee according to the following formula and dependent upon the length of the Optionee's continuous months of employment or engagement by the Company prior to the consummation of the Acquisition, provided, however, ----------------- -12- that this Section shall not apply to any reincorporation of the Company in a different State pursuant to a migratory merger: For an ISO Optionee: (i) If the Optionee has been employed by the Company for 36 months or more, then the remaining unvested portion of any Option held by such Optionee shall become fully vested and exercisable. (ii) If the Optionee has been employed by the Company for more than 30 but less than 36 months, then 80% of the remaining unvested portion of any Option held by such Optionee shall become fully vested and exercisable. (iii) If the Optionee has been employed by the Company for more than 24 but less than 30 months, then 50% of the remaining unvested portion of any Option held by such Optionee shall become fully vested and exercisable. (iv) If the Optionee has been employed by the Company for more than 18 but less than 24 months, then 40% of the remaining unvested portion of any Option held by such Optionee shall become fully vested and exercisable. (v) If the Optionee has been employed by the Company for more than 12 but less than 18 months, then 30% of the remaining unvested portion of any Option held by such Optionee shall become fully vested and exercisable. (vi) If the Optionee has been employed by the Company for more than 6 but less than 12 months, then 20% of the remaining unvested portion of any Option held by such Optionee shall become fully vested and exercisable. (vii) If the Optionee has been employed by the Company for more than 1 but less than 6 months, then 10% of the remaining unvested portion of any Option held by such Optionee shall become fully vested and exercisable. For a Non-Qualified Option Optionee, the remaining unvested portion of any Option held by such Optionee shall become fully vested and exercisable. 23. GOVERNING LAW; CONSTRUCTION. The validity and construction of the --------------------------- Plan and the instruments evidencing Stock Rights shall be governed by the laws of the Commonwealth of Massachusetts or the laws of any jurisdiction in which the Company or its successors in interest may be organized. In construing this Plan, the singular shall include the plural and the masculine gender shall include the feminine and neuter, unless the context otherwise requires. EX-10.2 6 1997 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN EXHIBIT 10.2 EXCEL SWITCHING CORPORATION 1997 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN 1. PURPOSE. This Non-Qualified Stock Option Plan, to be known as the ------- 1997 Non-Employee Director Stock Option Plan (hereinafter, the "Plan") is intended to promote the interests of Excel Switching Corporation (hereinafter, the "Company") by providing an inducement to obtain and retain the services of qualified persons who are not employees or officers of the Company to serve as members of its Board of Directors (the "Board"). 2. AVAILABLE SHARES. The total number of shares of Common Stock, par ---------------- value $.01 per share, of the Company (the "Common Stock") for which options may be granted under this Plan shall not exceed 225,000 shares, subject to adjustment in accordance with paragraph 10 of this Plan. Shares subject to this Plan are authorized but unissued shares or shares that were once issued and subsequently reacquired by the Company. If any options granted under this Plan are surrendered before exercise or lapse without exercise, in whole or in part, the shares reserved therefor shall continue to be available under this Plan. 3. ADMINISTRATION. This Plan shall be administered by the Board or by a -------------- committee appointed by the Board (the "Committee"). In the event the Board fails to appoint or refrains from appointing a Committee, the Board shall have all power and authority to administer this Plan. In such event, the word "Committee" wherever used herein shall be deemed to mean the Board. The Committee shall, subject to the provisions of the Plan, have the power to construe this Plan, to determine all questions hereunder, and to adopt and amend such rules and regulations for the administration of this Plan as it may deem desirable. No member of the Board or the Committee shall be liable for any action or determination made in good faith with respect to this Plan or any option granted under it. 4. AUTOMATIC GRANT OF OPTIONS. Subject to the availability of shares --------------------------- under this Plan, (a) each person who is or becomes a member of the Board and who is not an employee or officer of the Company (a "Non-Employee Director") shall be automatically granted on either (i) the date such person is first elected to the Board or (ii) SEPTEMBER 16, 1997 (the "Approval Date") ((i) and (ii) collectively referred to as the "Grant Date"), without further action by the Board, an option to purchase 30,000 shares of the Common Stock ( the "Initial Options") and (b) each person receiving an option pursuant to clause (a) hereof who remains a Non-Employee Director through the anniversary of such person's Grant Date shall be automatically granted on the anniversary of such person's Grant Date an option to purchase 15,000 shares of Common Stock on each of the two years following such person's Grant Date until December 1999 (the "Additional Options"). 2 The options to be granted under this paragraph 4 shall be the only options ever to be granted at any time to such member under this Plan. Notwithstanding anything to the contrary set forth herein, if this Plan is not approved by a majority of the Company's stockholders present, or represented, and voting on such matter at the first meeting of Stockholders of the Company following the Approval Date, then the Plan and the options granted pursuant to this Section 4 shall terminate and become void, and no further options shall be granted under this Plan. 5. OPTION PRICE. The purchase price of the stock covered by an option ------------ granted pursuant to this Plan shall be 100% of the fair market value of such shares on the day the option is granted. The option price will be subject to adjustment in accordance with the provisions of paragraph 10 of this Plan. For purposes of this Plan, if, at the time an option is granted under the Plan, the Company's Common Stock is publicly traded, "fair market value" shall be determined as of the last business day for which the prices or quotes discussed in this sentence are available prior to the date such option is granted and shall mean (i) the average (on that date) of the high and low prices of the Common Stock on the principal national securities exchange on which the Common Stock is traded, if the Common Stock is then traded on a national securities exchange; or (ii) the last reported sale price (on that date) of the Common Stock on the Nasdaq National Market, if the Common Stock is not then traded on a national securities exchange; or (iii) the closing bid price (or average of bid prices) last quoted (on that date) by an established quotation service for over-the-counter securities, if the Common Stock is not reported on the Nasdaq National Market List. If the Common Stock is not publicly traded at the time an option is granted under the Plan, "fair market value" shall be deemed to be the fair value of the Common Stock as determined by the Committee after taking into consideration all factors which it deems appropriate, including, without limitation, recent sale and offer prices of the Common Stock in private transactions negotiated at arm's length. Notwithstanding the foregoing, the fair market value of the Common Stock for the grant of an option on the date of the Company's Prospectus in connection with its initial public offering (the "Offering") shall be equal to the price per share at which the Common Stock is sold to the underwriters upon the Offering, without regard to any applicable discounts or commissions provided to such underwriters. 6. PERIOD OF OPTION. Unless sooner terminated in accordance with the ---------------- provisions of paragraph 8 of this Plan, an option granted hereunder shall expire on the date which is ten (10) years after the date of grant of the option. 7. VESTING OF SHARES AND NON-TRANSFERABILITY OF OPTIONS. (a) Options ---------------------------------------------------- granted under this Plan shall not be exercisable until they become vested. (i) Initial Options granted under paragraph 4(a) of this Plan shall vest in the optionee and thus become exercisable in accordance with the following schedule, provided that the optionee has continuously served as a member of the Board through such vesting date, and subject also to subsection (b) of this paragraph 7:
Number of Option Shares for which Option Will be Exercisable Date of Vesting ---------------------------------- --------------- 1/3 Immediately upon Grant Date 1/3 One year from Grant Date 1/3 Two years from Grant Date
3 (ii) Additional Options granted under paragraph 4(b) of this Plan shall vest in the optionee and thus become exercisable in accordance with the following schedule, provided that the optionee has continuously served as a member of the Board through such vesting date, and subject also to subsection (b) of this Paragraph 7.
Number of Option Shares for which Option Will be Exercisable Date of Vesting --------------------------------- --------------- 1/3 One year from Grant Date 1/3 Two years from Grant Date 1/3 Three years from Grant Date
The number of shares as to which options may be exercised shall be cumulative, so that once the option shall become exercisable as to any shares it shall continue to be exercisable as to said shares, until expiration or termination of the option as provided in this Plan. (b) Notwithstanding subsection (a) of this paragraph 7, if an optionee attends less than 75% of the Board meetings held in any fiscal year (a "Default Year"), then (i) the optionee shall forfeit his exercise rights with respect to the option installment which vested on the preceding annual vesting date, in proportion to the percentage of Board meetings actually attended by such optionee during the Default Year, and (ii) in the event that the optionee does not own a sufficient number of exercisable options to satisfy the forfeiture obligation described above, the optionee shall forfeit his right to receive the next succeeding annual installment of the option, in proportion to the percentage of Board meetings which the optionee actually attended in the Default Year. By way of illustration, if an optionee attends only 50% of the actual meetings of the Board of Directors (whether regular or special) held in any fiscal year, then the optionee shall forfeit the right to exercise 50% of the option installment which became exercisable on the preceding annual vesting date. If, however, the optionee had already exercised 75% of the preceding option installment, and did not own any additional unexercised options available to satisfy the forfeiture obligation, the optionee would forfeit the remaining 25% of the prior installment, and would also forfeit the right to receive or exercise 25% of the next succeeding annual option installment. (c) Transferability. Any option granted pursuant to this Plan shall be assignable or transferable by will, the laws of descent and distribution, pursuant to a domestic relations order or in accordance with the terms of the optionee's option agreement and only in compliance with the provisions of the Securities Act of 1933, as amended. 4 8. TERMINATION OF OPTION RIGHTS. ---------------------------- (a) Except as otherwise specified in the agreement relating to an option, in the event an optionee ceases to be a member of the Board for any reason other than death or permanent disability, any then unexercised portion of options granted to such optionee shall, to the extent not then vested, immediately terminate and become void; any portion of an option which is then vested but has not been exercised at the time the optionee so ceases to be a member of the Board may be exercised, to the extent it is then vested, by the optionee at any time prior to the scheduled expiration date of the option. (b) In the event that an optionee ceases to be a member of the Board by reason of his or her death or permanent disability, any option granted to such optionee shall be immediately and automatically accelerated and become fully vested and all such unexercised options shall be exercisable by the optionee (or by the optionee's personal representative, heir or legatee, in the event of death) for a period of one year thereafter. Any options which are then exercisable but have not been exercised at the time the Optionee so ceases to be a member of the Board of Directors may be exercised, to the extent any portion of such options are then exercisable, by the Optionee at any time prior to the scheduled expiration date of the option. (c) No portion of an option may be exercised if the Optionee is removed from the Board of Directors for any one of the following reasons: (i) disloyalty, gross negligence, dishonesty or breach of fiduciary duty to the Company; or (ii) the commission of an act of embezzlement, fraud or deliberate disregard of the rules or policies of the Company which results in loss, damage or injury to the Company, whether directly or indirectly; or (iii) the unauthorized disclosure of any trade secret or confidential information of the Company; or (iv) the commission of an act which constitutes unfair competition with the Company or which induces any customer of the Company to break a contract with the Company; or (v) the conduct of any activity on behalf of any organization or entity which is a competitor of the Company or competitive or injurious to the business or goodwill of the Company. 9. EXERCISE OF OPTION. Subject to the terms and conditions of this Plan ------------------ and the option agreements, an option granted hereunder shall, to the extent then exercisable, be exercisable in whole or in part by giving written notice to the Company by mail, facsimile or in person addressed to Excel Switching Corporation, at its principal executive offices, stating the number of shares with respect to which the option is being exercised, accompanied by payment in full for such shares. Payment may be (a) in United States dollars in cash or by check, (b) in whole or in part in shares of the Common Stock of the Company already owned by the person or persons exercising the option or shares subject to the option being exercised (subject to such restrictions and guidelines as the Board may adopt from time to time), valued at fair market value determined in accordance with the provisions of paragraph 5 or (c) consistent with applicable law, through the delivery of an assignment to the Company of a sufficient amount of the 5 proceeds from the sale of the Common Stock acquired upon exercise of the option and an authorization to the broker or selling agent to pay that amount to the Company, which sale shall be at the participant's direction at the time of exercise. There shall be no such exercise at any one time as to fewer than one hundred (100) shares or all of the remaining shares then purchasable by the person or persons exercising the option if fewer than one hundred (100) shares. The Company's transfer agent shall, on behalf of the Company, prepare a certificate or certificates representing such shares acquired pursuant to exercise of the option, shall register the optionee as the owner of such shares on the books of the Company and shall cause the fully executed certificate(s) representing such shares to be delivered to the optionee as soon as practicable after payment of the option price in full. The holder of an option shall not have any rights of a stockholder with respect to the shares covered by the option, except to the extent that one or more certificates for such shares shall be delivered to him or her upon the due exercise of the option. 10. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION AND OTHER EVENTS. Upon ------------------------------------------------------------ the occurrence of any of the following events, an optionee's rights with respect to options granted to him or her hereunder shall be adjusted as hereinafter provided: (a) Stock Dividends and Stock Splits. If the shares of Common Stock -------------------------------- shall be subdivided or combined into a greater or smaller number of shares or if the Company shall issue any shares of Common Stock as a stock dividend on its outstanding Common Stock, the number of shares of Common Stock deliverable upon the exercise of options shall be appropriately increased or decreased proportionately, and appropriate adjustments shall be made in the purchase price per share to reflect such subdivision, combination or stock dividend. (b) Recapitalization Adjustments. If the Company is to be consolidated ---------------------------- with or acquired by another entity in a merger, sale of all or substantially all of the Company's assets or other business combination involving the sale or transfer of all (or substantially all) of the capital stock or assets of the Company in which the Company is not the surviving entity, or if it is the surviving entity, does not survive as a going concern in substantially the same line of business, each option granted under this plan which is outstanding but unvested as of the effective date of such event shall become exercisable in full immediately prior to the effective date of such event. In the event of a reorganization, recapitalization, merger, consolidation, or any other change in the corporate structure or shares of the Company, to the extent permitted by Rule 16b-3 under the Securities Exchange Act of 1934, adjustments in the number and kind of shares authorized by this Plan and in the number and kind of shares covered by, and in the option price of outstanding options under this Plan necessary to maintain the proportionate interest of the optionee and preserve, without exceeding, the value of such option, shall be made. Notwithstanding the foregoing, no such adjustment shall be made which would, within the meaning of any applicable provisions of the Internal Revenue Code of 1986, as amended, constitute a modification, extension or renewal of any Option or a grant of additional benefits to the holder of an Option. 6 (c) Issuances of Securities. Except as expressly provided herein, no ----------------------- issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares subject to options. No adjustments shall be made for dividends paid in cash or in property other than securities of the Company. (d) Adjustments. Upon the happening of any of the foregoing events, the ----------- class and aggregate number of shares set forth in paragraph 2 of this Plan that are subject to options which previously have been or subsequently may be granted under this Plan shall also be appropriately adjusted to reflect such events. The Board shall determine the specific adjustments to be made under this paragraph 10 and its determination shall be conclusive. 11. RESTRICTIONS ON ISSUANCE OF SHARES. Notwithstanding the provisions ---------------------------------- of paragraphs 4 and 9 of this Plan, the Company shall have no obligation to deliver any certificate or certificates upon exercise of an option until one of the following conditions shall be satisfied: (i) The issuance of shares with respect to which the option has been exercised is at the time of the issue of such shares effectively registered under applicable Federal and state securities laws as now in force or hereafter amended; or (ii) Counsel for the Company shall have given an opinion that the issuance of such shares is exempt from registration under Federal and state securities laws as now in force or hereafter amended; and the Company has complied with all applicable laws and regulations with respect thereto, including without limitation all regulations required by any stock exchange upon which the Company's outstanding Common Stock is then listed. 12. LEGEND ON CERTIFICATES. The certificates representing shares issued ---------------------- pursuant to the exercise of an option granted hereunder shall carry such appropriate legend, and such written instructions shall be given to the Company's transfer agent, as may be deemed necessary or advisable by counsel to the Company in order to comply with the requirements of the Securities Act of 1933, as amended, or any state securities laws. 13. REPRESENTATION OF OPTIONEE. If requested by the Company, the -------------------------- optionee shall deliver to the Company written representations and warranties upon exercise of the option that are necessary to show compliance with Federal and state securities laws, including representations and warranties to the effect that a purchase of shares under the option is made for investment and not with a view to their distribution (as that term is used in the Securities Act of 1933, as amended). 7 14. OPTION AGREEMENT. Each option granted under the provisions of this ---------------- Plan shall be evidenced by an option agreement, which agreement shall be duly executed and delivered on behalf of the Company and by the optionee to whom such option is granted. The option agreement shall contain such terms, provisions and conditions not inconsistent with this Plan as may be determined by the officer executing it. 15. TERMINATION AND AMENDMENT OF PLAN. Options may no longer be granted --------------------------------- under this Plan after 10 years from the Approval Date, and this Plan shall terminate when all options granted or to be granted hereunder are no longer outstanding. The Board may at any time terminate this Plan or make such modification or amendment thereof as it deems advisable; provided, however, that the Board may not, without approval by the affirmative vote of the holders of a majority of the shares of Common Stock present in person or by proxy and voting on such matter at a meeting, (a) increase the maximum number of shares for which options may be granted under this Plan (except by adjustment pursuant to Section 10), (b) materially modify the requirements as to eligibility to participate in this Plan, or (c) materially increase benefits accruing to option holders under this Plan. Termination or any modification or amendment of this Plan shall not, without consent of a participant, affect his or her rights under an option previously granted to him or her. 16. WITHHOLDING OF INCOME TAXES. Upon the exercise of an option, the ---------------------------- Company, in accordance with Section 3402(a) of the Internal Revenue Code, may require the optionee to pay withholding taxes in respect of amounts considered to be compensation includible in the optionee's gross income. 17. COMPLIANCE WITH REGULATIONS. It is the Company's intent that the --------------------------- Plan comply in all respects with Rule 16b-3 under the Securities Exchange Act of 1934 (or any successor or amended provision thereof) and any applicable Securities and Exchange Commission interpretations thereof. If any provision of this Plan is deemed not to be in compliance with Rule 16b-3, the provision shall be null and void. 18. GOVERNING LAW. The validity and construction of this Plan and the ------------- instruments evidencing options shall be governed by the laws of the Commonwealth of Massachusetts, without giving effect to the principles of conflicts of law thereof. EX-10.3 7 1997 EMPLOYEE STOCK PURCHASE PLAN EXHIBIT 10.3 EXCEL SWITCHING CORPORATION 1997 EMPLOYEE STOCK PURCHASE PLAN ARTICLE 1 - PURPOSE. - -------------------- This 1997 Employee Stock Purchase Plan (the "Plan") is intended to encourage stock ownership by all eligible employees of Excel Switching Corporation (the "Company"), a Massachusetts corporation, and its participating subsidiaries (as defined in Article 17) so that they may share in the growth of the Company by acquiring or increasing their proprietary interest in the Company. The Plan is designed to encourage eligible employees to remain in the employ of the Company and its participating subsidiaries. The Plan is intended to constitute an "employee stock purchase plan" within the meaning of Section 423(b) of the Internal Revenue Code of 1986, as amended (the "Code"). ARTICLE 2 - ADMINISTRATION OF THE PLAN. - --------------------------------------- The Plan may be administered by a committee appointed by the Board of Directors of the Company (the "Committee"). The Committee shall consist of not less than two non-employee members of the Company's Board of Directors. The Board of Directors may from time to time remove members from, or add members to, the Committee. Vacancies on the Committee, howsoever caused, shall be filled by the Board of Directors. The Committee may select one of its members as Chairman, and shall hold meetings at such times and places as it may determine. Acts by a majority of the Committee, or acts reduced to or approved in writing by a majority of the members of the Committee, shall be the valid acts of the Committee. The interpretation and construction by the Committee of any provisions of the Plan or of any option granted under it, shall be final, unless otherwise determined by the Board of Directors. The Committee may from time to time adopt such rules and regulations for carrying out the Plan as it may deem best, provided that any such rules and regulations shall be applied on a uniform basis to all employees under the Plan. No member of the Board of Directors or the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any option granted under it. In the event the Board of Directors fails to appoint or refrains from appointing a Committee, the Board of Directors shall have all power and authority to administer the Plan. In such event, the word "Committee" wherever used herein shall be deemed to mean the Board of Directors. The Compensation Committee of the Board of Directors may also administer the Plan. -2- ARTICLE 3 - ELIGIBLE EMPLOYEES. - ------------------------------- All employees of the Company or any of its participating subsidiaries whose customary employment is more than twenty (20) hours per week and for more than five (5) months in any calendar year and who have completed at least 45 days of employment with the Company or its participating subsidiaries shall be eligible to receive options under the Plan to purchase common stock of the Company, and all eligible employees shall have the same rights and privileges hereunder. Persons who are eligible employees on the first business day of any Payment Period (as defined in Article 5) shall receive their options as of such day. Persons who become eligible employees after any date on which options are granted under the Plan shall be granted options on the first day of the next succeeding Payment Period on which options are granted to eligible employees under the Plan. Directors who are not employees of the Company shall not be eligible to receive options under this Plan. In no event, however, may an employee be granted an option if such employee, immediately after the option was granted, would be treated as owning stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or of any parent corporation or subsidiary corporation, as the terms "parent corporation" and "subsidiary corporation" are defined in Section 424(e) and (f) of the Code. For purposes of determining stock ownership under this paragraph, the rules of Section 424(d) of the Code shall apply, and stock which the employee may purchase under outstanding options shall be treated as stock owned by the employee. ARTICLE 4 - STOCK SUBJECT TO THE PLAN. - -------------------------------------- The stock subject to the options under the Plan shall be shares of the Company's authorized but unissued Common Stock, par value $.01 per share (the "Common Stock"), or shares of Common Stock reacquired by the Company, including shares purchased in the open market. The aggregate number of shares which may be issued pursuant to the Plan is 400,000, subject to adjustment as provided in Article 12. If any option granted under the Plan shall expire or terminate for any reason without having been exercised in full or shall cease for any reason to be exercisable in whole or in part, the unpurchased shares subject thereto shall again be available under the Plan. ARTICLE 5 - PAYMENT PERIOD AND STOCK OPTIONS. - --------------------------------------------- The first Payment Period during which payroll deductions will be accumulated under the Plan shall commence immediately upon the initial offering of the Common Stock to the public (the `Offering"), and shall end on June 30, 1997 (the "First Payment Period"). For the remainder of the duration of the Plan, Payment Periods shall consist of the six-month periods commencing on January 1 and July 1 and ending on June 30 and December 31 of each calendar year. Twice each year, on the first business day of each Payment Period, the Company will grant to each eligible employee who is then a participant in the Plan an option to purchase on the last day of such Payment Period, at the Option Price hereinafter provided for, a maximum of five hundred (500) shares, on condition that such employee remains eligible to participate in the Plan throughout the remainder of such Payment Period. The participant shall be entitled to exercise -3- the option so granted only to the extent of the participant's accumulated payroll deductions on the last day of such Payment Period. If the participant's accumulated payroll deductions on the last day of the Payment Period would enable the participant to purchase more than 500 shares except for the 500-share limitation, the excess of the amount of the accumulated payroll deductions over the aggregate purchase price of the 500 shares shall be promptly refunded to the participant by the Company, without interest. The option price per share for each Payment Period shall be the lesser of (i) 85% of the average market price of the Common Stock on the first business day of the Payment Period and (ii) 85% of the average market price of the Common Stock on the last business day of the Payment Period, in either event rounded up to avoid fractions of a dollar other than 1/4, 1/2 and 3/4 (the "Option Price"). Notwithstanding the foregoing, with regard to the First Payment Period, the Option Price shall be calculated as the lesser of (i) 85% of the price per share at which the Common Stock is sold to the underwriters upon the Offering, without regard to any applicable discounts or commissions provided to such underwriters, and (ii) 85% of the average market price of the Common Stock on the last business day of the First Payment Period. The foregoing limitation on the number of shares subject to options and the Option Price shall be subject to adjustment as provided in Article 12. For purposes of the Plan, the term "average market price" on any date means (i) the average (on that date) of the high and low prices of the Common Stock on the principal national securities exchange on which the Common Stock is traded, if the Common Stock is then traded on a national securities exchange; or (ii) the last reported sale price (on that date) of the Common Stock on the NASDAQ National Market, if the Common Stock is not then traded on a national securities exchange; or (iii) the average of the closing bid and asked prices last quoted (on that date) by an established quotation service for over-the-counter securities, if the Common Stock is not reported on the NASDAQ National Market; or (iv) if the Common Stock is not publicly traded, the fair market value of the Common Stock as determined by the Committee after taking into consideration all factors which it deems appropriate, including, without limitation, recent sale and offer prices of the Common Stock in private transactions negotiated at arm's length. For purposes of the Plan, the term "business day" means a day on which there is trading on the NASDAQ National Market or the aforementioned national securities exchange, whichever is applicable pursuant to the preceding paragraph; and if neither is applicable, a day that is not a Saturday, Sunday or legal holiday in the Commonwealth of Massachusetts. No employee shall be granted an option which permits the employee's right to purchase stock under the Plan, and under all other Section 423(b) employee stock purchase plans of the Company and any parent or subsidiary corporations, to accrue at a rate which exceeds $25,000 of fair market value of such stock (determined on the date or dates that options on such stock were granted) for each calendar year in which such option is outstanding at any time. The purpose of the limitation in the preceding sentence is to comply with Section 423(b)(8) of the Code. If the participant's accumulated payroll deductions on the last day of the Payment Period would otherwise enable the participant to purchase Common Stock in excess of the Section 423(b)(8) limitation described in this paragraph, the excess of the amount of the accumulated payroll deductions over the aggregate purchase price of the shares actually purchased shall be promptly refunded to the participant by the Company, without interest. -4- ARTICLE 6 - EXERCISE OF OPTION. - ------------------------------- Each eligible employee who continues to be a participant in the Plan on the last day of a Payment Period shall be deemed to have exercised his or her option on such date and shall be deemed to have purchased from the Company such number of full shares of Common Stock reserved for the purpose of the Plan as the participant's accumulated payroll deductions on such date will pay for at the Option Price, subject to the 500-share limit of the option and the Section 423(b)(8) limitation described in Article 5. If the individual is not a participant on the last day of a Payment Period, then he or she shall not be entitled to exercise his or her option and the amount of his or her payroll deduction shall be refundable. Only full shares of Common Stock may be purchased under the Plan. Unused payroll deductions remaining in a participant's account at the end of a Payment Period by reason of the inability to purchase a fractional share shall be carried forward to the next Payment Period. ARTICLE 7 - AUTHORIZATION FOR ENTERING THE PLAN. - ------------------------------------------------ An employee may elect to enter the Plan by filling out, signing and delivering to the Company an authorization: A. Stating the percentage to be deducted regularly from the employee's pay; B. Authorizing the purchase of stock for the employee in each Payment Period in accordance with the terms of the Plan; and C. Specifying the exact name or names in which stock purchased for the employee is to be issued as provided under Article 11 hereof. Such authorization must be received by the Company at least ten (10) business days before the first day of the next succeeding Payment Period and shall take effect only if the employee is an eligible employee on the first business day of such Payment Period. Unless a participant files a new authorization or withdraws from the Plan, the deductions and purchases under the authorization the participant has on file under the Plan will continue from one Payment Period to succeeding Payment Periods as long as the Plan remains in effect. The Company will accumulate and hold for each participant's account the amounts deducted from his or her pay. No interest will be paid on these amounts. ARTICLE 8 - MAXIMUM AMOUNT OF PAYROLL DEDUCTIONS. - ------------------------------------------------- An employee may authorize payroll deductions in an amount (expressed as a whole percentage) not less than one percent (1%) but not more than ten percent (10%) of the employee's total compensation including base pay or salary (excluding overtime, bonuses or commissions). -5- ARTICLE 9 - CHANGE IN PAYROLL DEDUCTIONS. - ---------------------------------------- Deductions may not be increased or decreased during a Payment Period. However, a participant may withdraw in full from the Plan. ARTICLE 10 - WITHDRAWAL FROM THE PLAN. - -------------------------------------- A participant may withdraw from the Plan (in whole but not in part) at any time prior to the last day of a Payment Period by delivering a withdrawal notice to the Company, in which event the Company will promptly refund the entire balance of the employee's deductions not previously used to purchase stock under the Plan. To re-enter the Plan, an employee who has previously withdrawn must file a new authorization at least ten (10) business days before the first day of the next Payment Period in which he or she wishes to participate. The employee's re-entry into the Plan becomes effective at the beginning of such Payment Period, provided that he or she is an eligible employee on the first business day of the Payment Period. ARTICLE 11 - ISSUANCE OF STOCK. - ------------------------------ Certificates for stock issued to participants shall be delivered as soon as practicable after each Payment Period by the Company's transfer agent. Stock purchased under the Plan shall be issued only in the name of the participant, or if the participant's authorization so specifies, in the name of the participant and another person of legal age as joint tenants with rights of survivorship. ARTICLE 12 - ADJUSTMENTS. - ------------------------ Upon the happening of any of the following described events, a participant's rights to options granted under the Plan shall be adjusted as hereinafter provided: A. In the event that the shares of Common Stock shall be subdivided or combined into a greater or smaller number of shares or if, upon a reorganization, split-up, liquidation, recapitalization or the like of the Company, the shares of Common Stock shall be exchanged for other securities of the Company, each participant shall be entitled, subject to the conditions herein stated, to purchase such number of shares of Common Stock or amount of other securities of the Company as were exchangeable for the number of shares of Common Stock that such participant would have been entitled to purchase except for such action, and appropriate adjustments shall be made in the purchase price per share to reflect such subdivision, combination or exchange; and B. In the event the Company shall issue any of its shares as a stock dividend upon, or with respect to, the shares of stock of the class which shall at the time be subject to options hereunder, each participant upon exercising such an option shall be entitled to receive (for -6- the purchase price paid upon such exercise) the shares as to which the participant is exercising his or her option and, in addition thereto (at no additional cost), such number of shares of the class or classes in which such stock dividend or dividends were declared or paid, and such amount of cash in lieu of fractional shares, as is equal to the number of shares thereof and the amount of cash in lieu of fractional shares, respectively, which the participant would have received if the participant had been the holder of the shares as to which the participant is exercising his or her option at all times between the date of the granting of such option and the date of its exercise. Upon the happening of any of the foregoing events, the class and aggregate number of shares set forth in Article 4 hereof which are subject to options which have been or may be granted under the Plan and the limitations set forth in the second paragraph of Article 5 shall also be appropriately adjusted to reflect the events specified in paragraphs A and B above. Notwithstanding the foregoing, any adjustments made pursuant to paragraphs A or B shall be made only after the Committee, based on advice of counsel for the Company, determines whether such adjustments would constitute a "modification" (as that term is defined in Section 424 of the Code). If the Committee determines that such adjustments would constitute a modification, it may refrain from making such adjustments. If the Company is to be consolidated with or acquired by another entity in a merger, a sale of all or substantially all of the Company's assets or otherwise (an "Acquisition"), the Committee or the board of directors of any entity assuming the obligations of the Company hereunder (the "Successor Board") shall, with respect to options then outstanding under the Plan, either (i) make appropriate provision for the continuation of such options by arranging for the substitution on an equitable basis for the shares then subject to such options either (a) the consideration payable with respect to the outstanding shares of the Common Stock in connection with the Acquisition, (b) shares of stock of the successor corporation, or a parent or subsidiary of such corporation, or (c) such other securities as the Successor Board deems appropriate, the fair market value of which shall not materially exceed the fair market value of the shares of Common Stock subject to such options immediately preceding the Acquisition; or (ii) terminate each participant's options in exchange for a cash payment equal to the excess of (a) the fair market value on the date of the Acquisition of the number of shares of Common Stock that the participant's accumulated payroll deductions as of the date of the Acquisition could purchase, at an option price determined with reference only to the first business day of the applicable Payment Period and subject to the 500-share, Code Section 423(b)(8) and fractional-share limitations on the amount of stock a participant would be entitled to purchase, over (b) the result of multiplying such number of shares by such option price. The Committee or Successor Board shall determine the adjustments to be made under this Article 12, and its determination shall be conclusive. ARTICLE 13 - NO TRANSFER OR ASSIGNMENT OF EMPLOYEE'S RIGHTS. - ----------------------------------------------------------- An employee's rights under the Plan are the employee's alone and may not be transferred or assigned to, or availed of by, any other person other than by will or the laws of descent and -7- distribution. Any option granted under the Plan to an employee may be exercised, during the employee's lifetime, only by the employee. ARTICLE 14 - TERMINATION OF EMPLOYEE'S RIGHTS. - --------------------------------------------- Whenever a participant ceases to be an eligible employee because of retirement, voluntary or involuntary termination, resignation, layoff, discharge, death or for any other reason, his or her rights under the Plan shall immediately terminate, and the Company shall promptly refund, without interest, the entire balance of his or her payroll deduction account under the Plan. Notwithstanding the foregoing, eligible employment shall be treated as continuing intact while a participant is on military leave, sick leave or other bona fide leave of absence, for up to 90 days, or, if longer than 90 days, for so long as the participant's right to re-employment is guaranteed either by statute or by contract. If a participant's payroll deductions are interrupted by any legal process, a withdrawal notice will be considered as having been received from the participant on the day the interruption occurs. ARTICLE 15 - TERMINATION AND AMENDMENTS TO PLAN. - ----------------------------------------------- Unless terminated sooner as provided below, the Plan shall terminate on December 31, 2007. The Plan may be terminated at any time by the Company's Board of Directors but such termination shall not affect options then outstanding under the Plan. It will terminate in any case when all or substantially all of the unissued shares of stock reserved for the purposes of the Plan have been purchased. If at any time shares of stock reserved for the purpose of the Plan remain available for purchase but not in sufficient number to satisfy all then unfilled purchase requirements, the available shares shall be apportioned among participants in proportion to the amount of payroll deductions accumulated on behalf of each participant that would otherwise be used to purchase stock, and the Plan shall terminate. Upon such termination or any other termination of the Plan, all payroll deductions not used to purchase stock will be refunded, without interest. The Committee or the Board of Directors may from time to time adopt amendments to the Plan provided that, without the approval of the stockholders of the Company, no amendment may (i) increase the number of shares that may be issued under the Plan; (ii) change the class of employees eligible to receive options under the Plan, if such action would be treated as the adoption of a new plan for purposes of Section 423(b) of the Code; or (iii) cause Rule 16b-3 under the Securities Exchange Act of 1934 to become inapplicable to the Plan. ARTICLE 16 - LIMITS ON SALE OF STOCK PURCHASED UNDER THE PLAN. - ------------------------------------------------------------- The Plan is intended to provide shares of Common Stock for investment and not for resale. The Company does not, however, intend to restrict or influence any employee in the conduct of his or her own affairs. An employee may, therefore, sell stock purchased under the Plan at any time the employee chooses, subject to compliance with any applicable federal or state -8- securities laws and subject to any restrictions imposed under Article 21 to ensure that tax withholding obligations are satisfied. THE EMPLOYEE ASSUMES THE RISK OF ANY MARKET FLUCTUATIONS IN THE PRICE OF THE STOCK. ARTICLE 17 - PARTICIPATING SUBSIDIARIES. - ---------------------------------------- The term "participating subsidiary" shall mean any present or future subsidiary of the Company, as that term is defined in Section 424(f) of the Code, which is designated from time to time by the Board of Directors to participate in the Plan. The Board of Directors shall have the power to make such designation before or after the Plan is approved by the stockholders. ARTICLE 18 - OPTIONEES NOT STOCKHOLDERS. - ---------------------------------------- Neither the granting of an option to an employee nor the deductions from his or her pay shall constitute such employee a stockholder of the shares covered by an option until such shares have been actually purchased by the employee. ARTICLE 19 - APPLICATION OF FUNDS. - --------------------------------- The proceeds received by the Company from the sale of Common Stock pursuant to options granted under the Plan will be used for general corporate purposes. ARTICLE 20 - NOTICE TO COMPANY OF DISQUALIFYING DISPOSITION. - ----------------------------------------------------------- By electing to participate in the Plan, each participant agrees to notify the Company in writing immediately after the participant transfers Common Stock acquired under the Plan, if such transfer occurs within two years after the first business day of the Payment Period in which such Common Stock was acquired. Each participant further agrees to provide any information about such a transfer as may be requested by the Company or any subsidiary corporation in order to assist it in complying with the tax laws. Such dispositions generally are treated as "disqualifying dispositions" under Sections 421 and 424 of the Code, which have certain tax consequences to participants and to the Company and its participating subsidiaries. ARTICLE 21 - WITHHOLDING OF ADDITIONAL INCOME TAXES. - ---------------------------------------------------- By electing to participate in the Plan, each participant acknowledges that the Company and its participating subsidiaries are required to withhold taxes with respect to the amounts deducted from the participant's compensation and accumulated for the benefit of the participant under the Plan, and each participant agrees that the Company and its participating subsidiaries may deduct additional amounts from the participant's compensation, when amounts are added to the participant's account, used to purchase Common Stock or refunded, in order to satisfy such withholding obligations. Each participant further acknowledges that when Common Stock is purchased under the Plan the Company and its participating subsidiaries may be required to withhold taxes with respect to all or a portion of the difference between the fair market value of the Common Stock purchased and its purchase price, and each participant agrees that such taxes -9- may be withheld from compensation otherwise payable to such participant. It is intended that tax withholding will be accomplished in such a manner that the full amount of payroll deductions elected by the participant under Article 7 will be used to purchase Common Stock. However, if amounts sufficient to satisfy applicable tax withholding obligations have not been withheld from compensation otherwise payable to any participant, then, notwithstanding any other provision of the Plan, the Company may withhold such taxes from the participant's accumulated payroll deductions and apply the net amount to the purchase of Common Stock, unless the participant pays to the Company, prior to the exercise date, an amount sufficient to satisfy such withholding obligations. Each participant further acknowledges that the Company and its participating subsidiaries may be required to withhold taxes in connection with the disposition of stock acquired under the Plan and agrees that the Company or any participating subsidiary may take whatever action it considers appropriate to satisfy such withholding requirements, including deducting from compensation otherwise payable to such participant an amount sufficient to satisfy such withholding requirements or conditioning any disposition of Common Stock by the participant upon the payment to the Company or such subsidiary of an amount sufficient to satisfy such withholding requirements. ARTICLE 22 - GOVERNMENTAL REGULATIONS. - ------------------------------------- The Company's obligation to sell and deliver shares of Common Stock under the Plan is subject to the approval of any governmental authority required in connection with the authorization, issuance or sale of such shares. Government regulations may impose reporting or other obligations on the Company with respect to the Plan. For example, the Company may be required to identify shares of Common Stock issued under the Plan on its stock ownership records and send tax information statements to employees and former employees who transfer title to such shares. ARTICLE 23 - GOVERNING LAW. - --------------------------- The validity and construction of the Plan shall be governed by the laws of the Commonwealth of Massachusetts, without giving effect to the principles of conflicts of law thereof. EX-10.4 8 FORM OF STOCK OPTION AGREEMENT OF THE COMPANY EXHIBIT 10.4 EXCEL, INC. Non-Qualified Stock Option Agreement ------------------------------------ Excel, Inc., a Massachusetts corporation ("Excel"), hereby grants as of the _______ day of 19__, to _________________ (the "Optionee"), an option to purchase a maximum of ___ shares of its no par value Non-Voting Common Stock at the price of ______ Dollars ($______) per share, subject to the following terms and conditions: 1. Grant as Non-Qualified Option; Other Options. This option shall be -------------------------------------------- treated for federal income tax purposes as a Non-Qualified Stock Option (rather than an incentive stock option), and the Board of Directors of Excel will take appropriate action, if necessary, to achieve this result. This option is in addition to any other options previously or subsequently granted to the Optionee. 2. Extent of Option if Business Relationship Continues. If the Optionee --------------------------------------------------- is continuing to serve Excel in the capacity of an employee, officer, director or consultant (such continuing service being described herein as maintaining or being involved in a "Business Relationship" with Excel), on the following dates, the Optionee may exercise this option for the number of shares set forth opposite the applicable date: ------------------------------------------------------------------- less than one year -0 shares from the date hereof; ------------------------------------------------------------------- one year but less ________ shares than two years from the date hereof ------------------------------------------------------------------- two years but less -an additional than three years ______ shares from the date hereof ------------------------------------------------------------------- three years but less -an additional than four years from ______ shares the date hereof ------------------------------------------------------------------- Four years but less -an additional than five years from ______ shares the date hereof ------------------------------------------------------------------- Five years from the an additional date hereof _______ shares -------------------------------------------------------------------
The foregoing rights are cumulative and, while the Optionee continues to maintain a Business Relationship with Excel, may be exercised on or before the "Termination Date", which shall mean the earlier of (i) that date specified in either Section 3 or 4, if applicable, or (ii) that date which is ten (10) years from the date this option is granted. 3. Termination of Business Relationship. If the Optionee ceases to ------------------------------------ maintain a Business Relationship with Excel, other than by reason of death of "Disability" as defined in Section 4, this option shall terminate after the passage of sixty (60) days from the date the Business Relationship ceases, but in no event later than the Termination Date. In such a case, the Optionee's only rights hereunder shall be those which are properly exercised before the Termination Date. 4. Death; Disability. If the Optionee dies while involved in a Business ----------------- Relationship with Excel, this option may be exercised, to the extent of the number of shares with respect to which the Optionee could have exercised it on the date of this death, by his estate, personal representative or beneficiary to whom this option has been assigned pursuant to Section 8, at any time within sixty (60) days after the date of death, but not later than the Termination Date. If the Optionee is a natural person whose Business Relationship with Excel is terminated by reason of his "Disability" (as hereinafter defined), this option may be exercised, to the extent of the number of shares with respect to which the Optionee could have exercised it on the date the Business Relationship was terminated, at any time within sixty (60) days after the date of such termination, but not later than the Termination Date. In such a case, the Optionee's only rights hereunder shall be those which are properly exercised before the Termination Date. For purposes of this Agreement, a "Disability" shall mean the inability of the Optionee to perform the duties required under the term of their Business Relationship with Excel for sixty (60) days (whether or not consecutive) during any twelve (12) month period. 5. Partial Exercise. Exercise of this option may be made in whole or in ---------------- part at any time and from time to time within the limitations provided herein, except that this option may not be exercised for a fraction of a share unless such exercise is with respect to the final installment of stock subject to this option and a fractional share (or cash in lieu thereof) must be issued to permit the Optionee to exercise completely such final installment. Any fractional share with respect to which an installment of this option cannot be exercised because of the limitation contained in the preceding sentence shall remain subject to this option and shall be available for later purchase by the Optionee in accordance with the terms hereof. 6. Payment of Price. The option price is payable in United States ---------------- dollars and may be paid: (a) in cash or by check, or any combination of the foregoing, equal in amount to the option price; or (b) in the discretion of the Excel Board of Directors, in cash, by check, by delivery of shares of Excel's Non-Voting Common Stock having a fair market value (as determined by the Excel Board of Directors) equal as of the date of exercise to the option price, or by any combination of the foregoing, equal in amount to the option price; or (c) in the discretion of the Excel Board of Directors, in cash, by check, by delivery of shares of Excel's Non-Voting Common stock having an aggregate fair market value (as determined by the Excel Board of Directors) equal as of the date of exercise to the option price, by delivery of the Optionee's personal recourse note bearing interest payable not less than annually at no less than 100% of the lowest applicable Federal Rate, as defined in Section 1274(d) of the Internal Revenue Code of 1986, as amended, or by any combination of the foregoing, equal in amount to the option price. If the Optionee delivers Non-Voting Common stock held by the Optionee (the "Old Stock") to Excel in full or partial payment of the option price, and the Old Stock so delivered is subject to restrictions or limitations imposed by agreement between the Optionee and Excel, the Non-Voting Common stock received by the Optionee on the exercise of this option shall be subject to all restrictions and limitations applicable to the Old Stock to the extent that the Optionee paid for such Non-Voting Common stock by delivery of Old Stock, in addition to any restrictions or limitations imposed by this Agreement. 7. Method of Exercising Option. Subject to the terms and conditions of --------------------------- this agreement, this option may be exercised by written notice to Excel, at the principal executive office of Excel, or to such transfer agent as Excel shall designate. Such notice shall state the election to exercise this option and the number of shares in respect of which it is being exercised and shall be signed by the person or persons so exercising this option. Such notice shall be accompanied by payment of the full purchase price of such shares, and Excel shall deliver a certificate or certificates representing such shares as soon as practicable after the notice and purchase price shall be received. The certificate or certificates for the shares as to which this option shall have been so exercised shall be registered in the name of the person or persons so exercising this option (or, if this option shall be exercised by the Optionee and if the Optionee shall so request in the notice exercising this option and Excel shall, in its sole discretion, agree, shall be registered in the name of the Optionee and another person jointly, with right of survivorship), and shall be delivered as provided above to or upon the written order of the person or persons exercising this option. In the event this option shall be exercised pursuant to Section 4 hereof by any person or persons other than the Optionee, such notice shall be accompanied by appropriate proof of the right of such person or persons to exercise this option. All shares that shall be purchased upon the exercise of this option as provided herein shall be fully paid and non- assessable and shall be subject to the stock transfer restrictions set forth herein. All such shares and any shares of capital stock of Excel thereafter acquired by Optionee as a result of any subdivision, combination or reclassification of outstanding shares into a greater or smaller number of shares, or as a result of any recapitalization, reorganization, stock split, stock dividend or any similar event, are referred to herein as the "Shares." 8. Option Not Transferable. This option is not transferable or ----------------------- assignable except by will or by the laws of descent and distribution. During the Optionee's lifetime only the Optionee (or the guardian of an Optionee) may exercise this option. 9. No Obligation to Exercise Option. The grant and acceptance of this -------------------------------- option imposes no obligation on the Optionee to exercise it. 10. No Obligation to Continue Business Relationship. Excel is not by this ----------------------------------------------- option obligated to continue to maintain a Business Relationship with the Optionee. 11. No Rights as Stockholder until Exercise. The Optionee shall have no --------------------------------------- rights as a stockholder with respect to shares subject to this Agreement until a stock certificate therefor has been issued to the Optionee and is fully paid for. Except as is expressly provided in this Agreement with respect to certain changes in the capitalization of Excel, no adjustment shall be made for dividends or similar rights for which the record date is prior to the date such stock certificate is issued. 12. Restrictions on Transfer. Until the occurrence of a "Restrictions ------------------------ Termination Event' (as defined below), Optionee agrees to be bound individually and to bind Optionee's heirs, transferees, executors, administrators and assigns, not to sell, assign, gift, transfer, pledge, hypothecate, mortgage or otherwise dispose of, (including, without limitation, by any voluntary, involuntary or court ordered transfer in connection with divorce proceedings or any divorce settlement, or by the laws of bankruptcy, insolvency, intestacy, descent and distribution or otherwise), or in any way encumber all or any of the Shares (or securities or other interests in the Shares), ("Transfer"), except as expressly permitted by this Agreement. A "Restriction Termination Event" shall mean the first to occur of (i) Excel and all of its shareholders enter into a binding agreement providing restrictions upon transfer of Excel's capital stock (including the "Shares") which agreement specifies replacing restrictions set forth in this Agreement or, (ii) the Shares are registered and available to be offered to the public pursuant to an effective registration statement filed under the Securities Act of 1933 as amended. Notwithstanding the foregoing, Optionee may Transfer all or any portion of the Shares at any time or from time to time to Optionee's spouse or to a member of Optionee's immediate family provided the proposed transferee agrees in writing to be bound by the terms and conditions of this Agreement or another agreement with, and in form and substance satisfactory to, Excel. 13. Right of First Refusal. If at any time prior to the occurrence of a ---------------------- Restrictions Termination Event, Optionee desires or would otherwise be required to Transfer all or any portion of the Shares, Optionee shall give written notice to Excel (the "Option Notice"), setting forth all of the relevant facts and circumstances surrounding the proposed Transfer and the number of Shares subject to such proposed Transfer (the "Offered Shares"), which Option Notice shall be accompanied by a photocopy of any written offer and shall set forth at least the name and address of the Offeror and the price (or assessed value) for the Shares and the terms for Transfer thereof. Upon the receipt of the Option Notice, Excel shall have an assignable option (and, for only the limited purposes hereof, any such assignee shall be deemed to be referred to as if it was specifically mentioned in addition or instead of "Excel"), to purchase all, but not less than all, of the Offered Shares specified in the Option Notice, exercisable by giving , within twenty (20) business days after the receipt of the Option Notice (the "Exercise Period"), a counter-notice in writing to Optionee. If Excel elects to purchase all, but not less than all, of such Offered Shares, it shall be obligated to purchase, and Optionee shall be obligated to sell to Excel, all of such Offered Shares within ninety (90) days from the date of Excel's receipt of the Option Notice at the price and terms indicated in the Option Notice or, if such terms do not simply require the payment of money, the reasonably equivalent monetary value therefor, within ninety (90) days from the date of Excel's receipt of the Option Notice. Optionee further agrees to vote as a stockholder and/or a director of Excel in favor of any action the Board of Directors (excluding Optionee) deems necessary or appropriate in order of Excel to purchase Optionee's Shares including, but not limited to, actions associated with structuring and financing such purchase. Optionee may sell any or all of such Offered Shares which Excel has not so elected to purchase during the ninety (90) day period following the date of expiration of the Exercise Period (the "Transfer Period"), provided that: (a) such sale shall only be made pursuant to the terms indicated in the Option Notice; (b) Optionee shall not sell such Offered Shares if the proposed transferee is a competitor of Excel (as determined in Excel's Board of Directors' sole discretion), and Excel gives written notice within the Exercise Period forbidding such sale to Optionee; and (c) prior to and as a condition of the transfer of such Offered Shares to the proposed transferee, that proposed transferee shall execute an agreement with, and in form and substance satisfactory to, Excel pursuant to which that proposed transferee agrees to be subject to the stock transfer restrictions set forth in this Agreement. If any or all of such Offered Shares are not Transferred pursuant to the terms indicated in the Option Notice within the Transfer Period, the unsold Offered Shares shall remain subject to the terms of this Agreement. 14. Withholding Taxes. The Optionees hereby agrees that Excel may ----------------- withhold from the Optionee's wages or other remuneration the appropriate amount of federal, state and local taxes attributable to the Optionees' exercise of any installment of this Option. At Excel's discretion, the amount required to be withheld may be withheld in cash from such wages or other remuneration, or in kind from the non-Voting Common Stock otherwise deliverable to the Optionee on exercise of this option. The Optionee further agrees that, if Excel does not withhold an amount from the Optionee's wages or other remuneration sufficient to satisfy Excel's withholding obligation, the Optionee will reimburse Excel on demand, in cash, for the amount underwithheld. 15. No Exercise of Option if Business Relationship is Terminated for ---------------------------------------------------------------- Misconduct. If the Business Relationship of the optionee is terminated by Excel - ---------- for "Misconduct" (as hereinafter defined), this option shall terminate on the date of such termination and shall thereupon not be exercisable to any extent whatsoever, notwithstanding any provision herein to the contrary. For purposes of this Agreement "Misconduct" shall mean conduct, as determined by Excel's Board of Directors (excluding the Optionee, if the Optionee is a member), involving one or more of the following: (i) the substantial and continuing failure of the Optionee to render serves to Excel in accordance with his assigned duties; (ii) a determination that the Optionee has inadequately performed the duties required by their Business Relationship; (iii) disloyalty, gross negligence, dishonesty or breach of fiduciary duty to Excel; (iv) the commission of an act of embezzlement, fraud, disloyalty, dishonesty or deliberate disregard of the rules or polices of Excel which results in loss, damage or injury to Excel, whether directly or indirectly; (v) the unauthorized disclosure of any trade secret or confidential information of Excel; or (vi) the commission of an act which constitutes unfair competition with Excel or which induces any customer of or Vendor to Excel to break a contract or otherwise materially adversely alter its relationship with Excel. In making such determination, Excel's Board of Directors shall act fairly and in utmost good faith and shall give the Optionee an opportunity to appear and to be heard at a hearing before it. For the purposes of this Section 15, termination of the Business Relationship shall be deemed to occur when the Optionee receives notice (whether written or oral) that the Business Relationship is terminated. 16. Miscellaneous Provisions. This Agreement shall be governed by and ------------------------ interrupted in accordance with the laws of the Commonwealth of Massachusetts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original as against any party whose signature appears thereon, and all of which shall together constitute one and the same instrument. This Agreement shall become binding when one or more counterparts hereof, individually or taken together, shall bear the signatures of all of the parties reflected hereon as the signatories. This Agreement contains the entire understanding among the parties hereto with respect to the subject matter hereof, and supersedes all prior and contemporaneous agreements and understandings, inducements or conditions, express or implied, oral or written , except as herein contained. This Agreement may not be modified or amended other than by an agreement in writing signed by the parties hereto. The Section headings in this agreement are for convenience only and they form no part of this Agreement and shall not affect its interpretation. Words used herein, regardless of the number and gender specifically used, shall be deemed and construed to include any other number, singular or plural, and any other gender, masculine, feminine or neuter, as the context requires. In computing the number of days for purposes of this Agreement all days shall be counted, including Saturdays, Sundays and holidays; provided, however, that if the final day of any time period falls on a Saturday, Sunday or Massachusetts legal holiday, then the final day shall be deemed to be the next day which is not Saturday, Sunday or a Massachusetts legal holiday. IN WITNESS WHEREOF Excel and the Optionee have caused this instrument to be executed, and the optionee whose signature appears below acknowledges receipt of and acceptance of an original copy of this Agreement. _____________________________ EXCEL, INC. Optionee Signature _____________________________ By: ________________________ Print Name of Optionee Robert P. Madonna, President _____________________________ Street Address _____________________________ City, State Zip Code EX-10.5 9 LEASE DATED AS OF JULY 27, 1995 EXHIBIT 10.5 LEASE 1. PARTIES Independence Park, Inc., a Massachusetts Corporation, whose address is P.O. Box 1776, Barnstable (Hyannis) Barnstable County Massachusetts 02601, hereinafter called "Landlord" which expression shall include its successors and assigns where the context so admits does hereby lease to Excel, Inc., whose address is 41 Meetinghouse Lane, Sagamore Beach, MA 02652 hereinafter called "TENANT" which expression shall include its successors where the context so admits, and the TENANT hereby leases from the Landlord the following described premises: 2. PREMISES The "demised premises" consists of certain land with the buildings thereon known and numbered as Plant 5, Town of Barnstable assessors map 295, Parcel 12, Barnstable (Hyannis) Barnstable County, Massachusetts described on exhibit A attached hereto and incorporated herein. The said building is of one (1) story concrete block construction with rubberized flat roof and contains 26,370 square feet of floor space inclusive. 3. TERM The term of this lease shall be five (5) years with one five (5) year option period. 4. RENT Lease rates Year Dollar amount/Sq.Ft. 1 $5.60 2 $5.75 3 $6.00 4 $6.50 5 $6.50 OPTION 6 $7.00 7 $7.00 +CPI 8 year 7+CPI 9 year 8+CPI 10 year 9+CPI All rates are "triple Net" 5. UTILITIES AND REPAIRS A. Tenant shall pay as they become due, all bills for electricity, gas and other utilities that are furnished to the demised premises. Landlord agrees to provide utility service to the premises and operable services for heat light and water as of the time of commencement of -2- the lease. Tenant acknowledges that a sewer installation betterment fee and sewer user fee will be its responsibility. In addition to the above, Tenant agrees to pay the paving costs for asphalt of new parking area, all build-out costs (interior) and sewer hook up charges. B. Tenant agrees to keep the Premises, including without limitation the exterior and structure of all improvements thereon and all heating, plumbing, electrical, air conditioning, mechanical and other fixtures and equipment therein in the same order condition and repair as they are in as of the commencement date or may be put in during the term, reasonable use and wear and tear excepted, to take good care of all lawns and planted areas and to provide reasonable landscaping along either side of the entrance drive and to keep in good repair and clean and neat and free of snow and ice all surface roadways, walks and parking and loading areas, and to make all repairs and replacements and to do all other work necessary for the foregoing purposes whether the same may be ordinary or extraordinary, foreseen or unforeseen. It is further understood that tenant will keep the premises in suitable tenant-like and efficient and usable condition considering the nature of the premises and the use reasonably made thereof, and in good and tenant-like repair. C. Tenant will make all repairs, alterations additions or replacements to the premises required by law or ordinance or any order or regulation of any public authority to keep the premises equipped with all safety appliances so required; and to comply with the orders and regulations of any governmental authorities except that tenant may defer compliance so long as the validity of any such law ordinance order or regulation shall be contested by tenant in good faith and by appropriate legal proceedings if tenant first gives the landlord appropriate assurance against loss cost or expenses on account thereof. Landlord shall make all repairs, alterations, additions or replacements to the premises required by any law or ordinance or any order or regulation of any public authority of any violation that exists or occurred prior to commencement of this lease. D. Tenant shall upon commencement of this lease assure that all utilities are in tenants name. Landlord shall deliver the building, including but not limited to the roof, utility services heating sprinkler, electrical and plumbing operating and in good order, repair and condition, and free from all previous tenants. E. Landlord has agreed that immediately upon the signing hereof, it shall provide engineering, site work and necessary permits and/or waivers of Park regulations to provide for a minimum of 40 additional parking spaces at the rear of the building, to provide a four foot chain link fence to separate said additional parking areas from those of the current Auburn Wire location, and to insure that all air-conditioning units are fully functional. F. Tenant either by itself or through its agents, hereby agrees that it shall not go onto the roof without the landlord and Building Maintenance Service Company, Inc.'s written authorization, and any transgressor shall bear the costs of the damages done to the roof associated with such transgression. If tenant however requests that any work be done to the roof to allow for needed additional equipment and/or openings for ventilation ductwork or similar -3- purposes the tenant shall request landlord's permission to do so and landlords permission shall not be unreasonably withheld. It is further understood that tenant shall consult the installer and manufacturers representative to insure that the integrity of the roof shall not be impaired. The cost of any such work so performed on the roof shall be the sole responsibility of the tenant. 6. REAL ESTATE TAXES Tenant shall pay to landlord as additional rent all real estate taxes attributable to the demised premises for the term of this lease. Such payment shall be due within five days prior to the date said taxes are due and payable without penalty or interest, or within ten days following tenants receipt of town tax bill whichever is later. Landlord agrees to deliver to the tenant a copy of the most recent real estate tax bill prior to the execution of this lease. 7. USE OF LEASED PREMISES Tenant may use the demised premises for storage, warehousing, manufacturing office space and related uses. 8. COMPLIANCE WITH LAWS Tenant agrees that no use of the demised premises will be made which will constitute a legal nuisance, or be contrary to any law or municipal bylaw or ordinance in force in the Town of Barnstable. Landlord warrants, to the best of its knowledge, that the property is in compliance with all applicable government rule and regulations. 9. FIRE INSURANCE Tenant shall not permit any use of the demised premises which will make voidable any insurance on the demised premises. Tenant shall maintain fire and extended liability in minimum amounts so as to avoid coinsurance in responsible companies qualified to do business in Massachusetts and in good standing, and the policies shall be noncancellable without ten days notice to landlord and Tenant agrees to pay the reasonable cost of said insurance coverage relating to the term of this lease within thirty days following receipt of the invoices therefore, Tenant agrees to maintain fire and extended liability coverage with respect to its property located in or upon the demised premises and to hold the landlord harmless of and from any loss, claim or liability resulting from loss or damage covered by said insurance. 10. ALTERATIONS/ADDITIONS Tenant shall not make any structural alterations or additions to the demised premises without landlord's prior written consent, but may make interior nonstructural alterations. All such nonstructural alterations shall be at Tenant's expense. Tenant shall not permit any mechanics liens or similar liens to remain upon the demised premises for labor and materials furnished to tenant or claimed to have been furnished to tenant in connection with work of any character performed or claimed to have been performed at the direction of tenant and shall, after -4- notice thereof, cause any such lien to be released of record forthwith without cost to the Landlord. 11. ASSIGNMENT/SUBLEASING Tenant shall not assign this Lease or sublet the whole or any part of the demised premises without Landlord's prior written consent which consent shall not be unreasonably withheld or delayed. Notwithstanding such consent to subletting Tenant shall remain liable to Landlord for the payment of all rent and for the full performance of the covenants and conditions of this Lease. 12. LANDLORD'S ACCESS Landlord or agents of Landlord may, at reasonable times and except for emergencies, upon at least 24 hours prior written notice, enter to view the demised premises and to make repairs and alterations as so required herein to do, and at any time within six (6) months before the expiration of the term may show the demised premises to others and may affix to suitable part of the premises, a notice for letting or selling the premises or property of which the premises are a part and keep the same so affixed without hindrance or molestation. 13. INDEMNIFICATION AND LIABILITY Tenant agrees to hold Landlord harmless and indemnified from and against all bodily and personal injury, losses, claims or damages to any person or property while in the demised premises (unless occasioned by the act or negligence of Landlord, its employees, agents, licensees, lessees, or contractors or by a default by Landlord under this Lease), and from against all bodily and personal injury, loss, claims, or damage to any person or property outside of the demised premises, which is wholly occasioned by any act or negligence of Tenant, its employees, agents, licensees, lessees or contractors, or by a default by Tenant under this Lease. 14. TENANT'S LIABILITY INSURANCE To the extent to same is not covered by the insurance provided pursuant to "9" Tenant shall maintain with respect to the demised premises Comprehensive public liability insurance in the amount of Five Million ($5,000,000.00) Dollars in responsible companies qualified to do business in Massachusetts and in good standing therein insuring the Landlord as well as Tenant against injury to persons or damage to property as herein provided. Tenant shall deposit with Landlord certificates for such insurance at or prior to commencement of the term, and thereafter within ten (10) days prior to the expiration of any such policies. All such insurance certificates shall provide that such policies shall not be canceled without at least ten (10) days prior written notice to each assured named therein. 15. FIRE CASUALTY/EMINENT DOMAIN Should a substantial portion of the demised premises be damaged by fire or other casualty, or be taken be eminent domain, Landlord may elect to terminate this Lease. With such -5- fire, casualty or taking renders the demised premises substantially unsuitable for their intended use, a just and proportionate abatement of rent shall be made, and Tenant may elect to terminate this Lease if: (a) Landlord fails to give written notice within thirty (30) days of said damage or taking of intention to restore the demised premises, or (b) Landlord fails to restore the demised premises to a condition suitable for their intended use within ninety (90) days of said damage or taking. Landlord reserves, and Tenant grants to Landlord, all rights which Tenant may have for damages or injury to the demised premises for taking by eminent domain, except for damage to Tenant's fixtures, property or equipment and relocation expenses. 16. DEFAULT AND BANKRUPTCY In the event that: (a) Tenant shall fail in the payment of any installment of rent or other sum herein specified and such default shall continue for fourteen (14) days after written notice thereof, or (b) Tenant shall default in the observance or performance of any other of Tenant's covenants, agreements or obligations hereunder and such default shall not be corrected within thirty (30) days after written notice thereof (or, if such default is not capable of being corrected within thirty (30) days, Tenant shall not have commenced to correct such default and duly prosecuted the same to completion within thirty (30) days); or (c) Tenant shall be declared bankrupt or insolvent according to law; The Landlord shall have the right thereafter, while such default continues, to re-enter and take complete possession of the demised premises, to declare the term of this Lease ended, and remove Tenant's effects without prejudice to any remedies which might be otherwise used for arrears of rent or other default. Tenant shall indemnify Landlord monthly against all loss of rent and other payments which Landlord may incur by reason of such termination during the residue of the term including costs of collection and reasonable attorney's fees. The foregoing rights are nonexclusive and Landlord may avail itself of any other right available to it at law or in equity and such rights shall be cumulative and nonexclusive. 17. NOTICE Any notice from Landlord to Tenant relating to the demised premises or to the occupancy thereof, shall be deemed duly served, if mailed registered or certified mail, return receipt requested, postage prepaid addressed to Tenant at 255 Independence Dr., Hyannis Ma. -6- Any notice from Tenant to Landlord relating to the demised premises, shall be deemed duly served, if mailed to Landlord by registered or certified mail, return receipt requested, postage prepaid, addressed to Landlord at P.O. Box 1776, Barnstable (Hyannis), Barnstable County, Massachusetts 02601, Attention Paul Lorusso. All rent and other payments shall be sent to Landlord at such address. 18. SURRENDER Tenant shall at the expiration or other termination of this Lease remove all Tenant's goods and effects from the demised premises. Tenant shall deliver to Landlord the demised premises and all keys and locks thereto, in the condition the same are now in, damage by fire, other casualty, taking and reasonable wear and tear, excepted. 19. SIGNS Tenant shall have the right to affix signs of reasonable size at the entrance to the demised premises, and may remove signs upon leaving provided premises are returned to its condition prior to sign installation. Tenant may also install a sign on the ladder sign located at the entrance to Perseverance Way. 20. COSTS Wherever in this Lease, Landlord or Tenant are required to perform any act to observe any covenant, in the absence of an express provision to the contrary, such performance and observance shall be at the cost and expense of the party so required. 21. QUIET POSSESSION Landlord warrants that so long as Tenant conforms to the terms and provisions of this Lease the Tenant shall have full, uninterrupted quiet possession of the entirety of the demised premises for the use specified in "7" for the term of this lease and any extensions thereof, Landlord further warrants that Tenant's quiet possession will remain in full force and effect even should Landlord mortgage or sell the premises. 22. OPTION TO PURCHASE Tenant and Landlord agree that after the third year of this lease agreement, Tenant has the right to purchase the premises for a total price of $973,000.00. Said option to purchase shall be for the duration of this lease or any option period hereunder. Landlord agrees to credit the Tenant a total of $98,000.00 toward the above referenced purchase price at the time Tenant exercises its option to purchase. 23 OPTION TO BUY OUT REMAINING TERM OF LEASE Landlord and Tenant agree that at any time after the expiration of three years from the date of the signing hereof, whether under the initial five year term hereof, or under any optional lease term granted hereunder, Tenant shall have the right, upon written notice given to Landlord -7- at least thirty days in advance of the end of any lease year to "buy out " of this lease, by tendering to the Landlord, together with said notice, an amount of money equal to one additional full year's rent. For purposes of this "buy out" provision, the amount of money so tendered shall be the same as the total amount of rent due for the year of the giving of said notice: for example, if notice of intent to terminate is tendered by Tenant to Landlord in year 4 of this lease, in addition to the rent due for the remainder of year 4, Tenant shall pay an additional amount of money equal to the rent due under this lease for year 4. Landlord and Tenant agree that Tenant's right to not exercise its five year option granted hereunder, shall entitle Landlord to "buy out" compensation. TIME Time is of the essence of this agreement. 24. Tenant shall be allowed to file a notice of lease at the appropriate Registry of Deeds. EXECUTED as a sealed instrument this 27th day of July 1995. -8- LANDLORD, Independence Park, Inc., By: /s/ Paul Lorusso ______________________________ Paul Lorusso, President Commonwealth of Massachusetts Barnstable. SS. 1995 Then personally appeared the said Paul Lorusso as aforesaid and acknowledged the foregoing instrument to be his free act and Deed. _______________________________ Notary Public My commission expires: TENANT Excel, Inc., By: /s/ Robert P. Madonna ______________________________ Commonwealth of Massachusetts Then personally appeared the said and acknowledged the foregoing to be his free act and deed. _______________________________ Notary Public My commission expires: -9- FIRST AMENDMENT TO LEASE Reference is hereby made to a Lease, dated July 27, 1995, by and between EXCEL, INC., as tenant, and INDEPENDENCE PARK, INC. as landlord. The parties to said Lease do hereby agree to amend said lease as follows: "4. RENT" The rental amounts payable by tenant in said lease shall be increased, for the twelve month period beginning November 1, 1995 and ending with the payment due October 1, 1996, by adding to the Dollar amount /Sq.Ft. calculation the total sum of $2024.00/per month. Beginning November 1, 1996, the rental shall be paid in accordance with said lease as first written. In all other respects said Lease shall remain in full force and effect for the term thereof. In witness hereto, the parties do hereunder set their hands and seals this _____ day of October, 1995. EXCEL INC. INDEPENDENCE PARK INC., /s/ Robert P. Madonna /s/ Paul Lorusso _______________________________ ____________________________________ Paul Lorusso, President EX-10.6 10 PURCHASE AND RESALE AGREEMENT DATED 5/24/94 EXHIBIT 10.6 PURCHASE AND RESALE AGREEMENT This Agreement is entered into by and between EXCEL, INC., a corporation organized under the laws of the Commonwealth of Massachusetts, with its usual place of business at 355 Old Plymouth Road, Sagamore Beach, Massachusetts (hereinafter called "Excel") and BOSTON TECHNOLOGY, INC., whose address is, 100 Quannapowitt Parkway Wakefield Ma.(hereinafter called "BTI"). This agreement shall constitute the entire agreement between the parties and shall supersede any and all previous agreements with respect to the subject matter hereof. 1. EQUIPMENT PURCHASE AND SOFTWARE LICENSE a. BTI agrees to purchase and by its acceptance, Excel agrees to sell and/or license (as applicable), on the terms set forth below, the equipment and spare parts together with all applicable Software, as that term is further defined below (collectively referred to as the "Products") listed on the attached Exhibit I or listed on any of BTI's purchase orders referencing this Agreement ("Purchase Orders"). b. This Agreement shall not constitute an obligation of BTI to purchase and/or license any Product(s) unless either (a) implemented by Purchase Orders issued by BTI, or (b) Otherwise required by Exhibit II. c. The parties agree that each of BTI's Purchase Orders shall be only an offer to enter into a contract. Subject to the parameters of Exhibit II, BTI may revoke, amend or modify each Purchase Order at any time prior to Excel's acceptance of same. d. Within five (5) days of receipt of a Purchase Order, Excel shall issue a Sales Order or similar notice acknowledging its acceptance or rejection of BTI's Purchase Order and advising BTI of Excel's delivery schedule. Excel's failure to issue a Sales Order or similar notice within said five (5) day time period shall constitute Excel's acceptance of BTI's Purchase Order. 2. PRICES a. The prices, license fees, and other charges for the Products are set forth in Excel's price list as attached as Exhibits I and II of this Agreement, prices to be amended from time to time. Any change in prices will become effective ninety (90) days after Excel has delivered notice of such change to BTI in writing, and all orders accepted by Excel at expiration of said ninety day notice period shall be invoiced at the new price. Excel agrees that it shall, for all sales of its equipment to BTI , limit said price increases to 15 % per year, for two years, which period shall begin to run on upon the signing hereof. -2- Notwithstanding the above, BTI shall be entitled to rely on those prices in effect on Exhibits I and II at the time it gives written quotes to its customers. Any increase in such prices made in accordance with the previous paragraph will not apply to Purchase Orders subsequently issued by BTI in connection with such quotes, provided Purchase Order issuance occurs not later than six months after the corresponding quote. BTI must furnish to Excel copies of any such quotes in order for this paragraph to become binding upon Excel. b. Purchase Orders accepted by Excel shall not be subject to such price increases before the end of said ninety (90) day period. All prices expressed and all payments made must be in U.S. dollars. The prices shown are F.O.B. Excel's plant. c. Prices are exclusive of all federal, state, local, municipal, or other excise, sales, use, occupation, or similar taxes now in force or enacted in the future, all of which shall be paid by BTI exclusive of Excel's income taxes. BTI shall not be responsible for any tax levied or based upon the income of Excel. Excel may invoice BTI for any such taxes and remit any payments made on such invoice directly to the appropriate taxing authorities. It shall be BTI's responsibility to provide written proof, satisfactory to Excel of any applicable tax exemptions. d. The prices for Products contained herein, with applicable discounts and with any increase permitted hereunder, shall be at least as favorable as these prices and discounts offered by Excel to any of its other customers for comparable Products. If Excel at any time extends to any other customer lower prices or higher discounts for any Products, then Excel shall promptly notify BTI in writing and extend such favorable prices or discounts to BTI as of the date such prices or discounts were first offered to any other customer of Excel. If, after the effective date of a resulting price decrease, BTI shall have overpaid for affected Products at the preexisting price, then the amount of the overpayment shall be allowed as a credit against the price of Products on an existing Purchase Order for which payment has not been made. Notwithstanding the above, EXCEL may, at its sole option and discretion, provide more favorable pricing or greater discounts to third parties purchasing limited numbers of systems (i) for Product evaluation, testing, developmental or beta site installations, or (ii) as an inducement to a third party to order Products in quantity, without triggering this provision. 3. PAYMENT a. Payment for Products is due on or before the date specified on Excel's invoice, that is, net thirty (30) days after receipt of Product or invoice whichever is later. b. All balances due Excel by BTI not paid within thirty (30) days after due date shall accrue a late payment fee equal to 1.5% per month on such unpaid amounts together with all costs and expenses including reasonable attorney's fees incurred by Excel in collecting such overdue amounts. Any payment made by BTI to Excel shall first be applied to the late payment fees and costs and expenses incurred in collection and then to the oldest invoice due, regardless of any contrary instructions received from BTI. 4. DELIVERY -3- a. Excel's normal delivery schedule is ninety (90) days after receipt and acceptance of an order. This delivery schedule is expressly conditioned upon the accuracy of the Product purchase forecast and volume purchase commitments supplied to Excel by BTI in Exhibit II to this Agreement. Should BTI desire to shorten (or lengthen) said delivery schedule, Excel shall use reasonable efforts to comply with BTI'S request. Excel shall, within two (2) business days of such request, notify BTI if additional charges are required to facilitate any expedited delivery. BTI shall have 24 hours from said notification to elect to proceed with expedited delivery at the specified additional cost or to proceed under the normal delivery schedule at the original price. b. Excel will not assume any liability in connection with shipment for any loss or damage caused by any carrier. Upon request, shipments will be insured at the BTI's expense, and BTI shall be responsible for making claims with carriers, insurers, warehousemen, and others for its and/or their misdelivery, nondelivery, loss, damage or delay. c. BTI may inspect and test all Products at reasonable times during and after manufacture. If any such inspection or test is to be made on Excel's premises, BTI shall first give Excel 10 days notice in writing of its desire to make such inspection. Excel shall provide reasonable facilities and assistance for the safety and convenience of BTI's inspectors in such manner that shall not unreasonably hinder or delay Excel's performance. All Products shall be received subject to BTI's inspection, testing, approval and acceptance at its premises, notwithstanding any inspection or testing at Excel's premises or any prior payment for such Products. Products rejected by BTI as not conforming to the relevant Purchase Order or to Excel's or BTI's Specifications (as applicable) may be returned to Excel at BTI's risk and expense and shall not be replaced by Excel without BTI's written authorization. 5. SHIPMENT, RISK OF LOSS, TITLE a. All Products shall be packaged, marked and otherwise prepared for shipment by Excel in suitable containers in accordance with BTI's packing and shipping specifications for such Products, or if no such specifications are given to Excel, in accordance with sound commercial practices. Excel shall mark on such containers all necessary handling, loading and shipping instructions. An itemized packing list shall be included with each shipment. Bills of lading shall be mailed to BTI in triplicate. BTI agrees to assume any additional packaging costs incurred by Excel in complying with BTI'S packaging specifications. b. All Products under this Agreement shall be delivered to BTI F.O.B. Excel's plant and delivery of Products to the common carrier or a licensed trucker of BTI'S choice, shall constitute delivery to BTI. c. Title and risk of loss for the Product shall pass to BTI upon delivery to the common carrier or licensed trucker of BTI's choice. d. Excel will not assume any liability in connection with shipment for any loss or damage caused by any carrier. Upon request, shipments will be insured at BTI's expense, and BTI shall be responsible for making claims with carriers, insurers, warehousemen, and others for its and/or their misdelivery, non-delivery, loss, damage or delay. -4- e. All transportation, rigging, and similar costs and charges shall be paid by BTI. Excel may, however, invoice BTI for any such charges and remit payments directly to the shipper. 6. ADDITIONAL ORDERS Intentionally Deleted 7. SOFTWARE LICENSE AND SUBLICENSE a. Definitions As used in this Agreement: "Programs" or "Software" shall mean all computer programs in machine readable form furnished by Excel as a Licensor and all Sublicensed Programs (as that term is defined below) furnished by Excel as a Sublicensor to BTI and further described in Exhibit I of this Agreement and any Supplement thereto, including related supporting materials iii machine readable, printed or other form, and any other updates, improvements or revisions which are furnished by Excel to BTI; "Sublicensed Programs" shall mean any Programs which are owned by a third party and sublicensed under Agreement by Excel to BTI; "Designated Equipment" shall mean a single LNX, PCX, or XLDX, designated with a single Excel system serial number and all associated equipment, produced or supplied by Excel. "Documentation" shall mean any written and or printed materials that may accompany the Products, Software or Programs, or may be furnished by Excel to BTI subsequent to BTI'S receipt of said Products, Software or Programs. "Product Specifications" shall mean the specifications for the Products which have been developed by Excel or BTI (as the case may be.) b. License and Sublicense Subject to the terms and conditions of this Agreements Excel hereby grants, and BTI hereby accepts, a perpetual, worldwide, non-terminable, non-exclusive license (in the case of Programs proprietary to Excel) or sublicense (in the case of Programs owned by third parties), to use, and/or distribute directly or through a sublicensee or a succession of sublicensees to an end user to use (i.e. BTI and successive end-users may assign their sublicense to use), each Program and Sublicensed Program in connection with the Designated Equipment (and no other Excel base unit) except for EXCEL equipment replacing Designated Equipment) on which such Program and Sublicensed Program is first installed and as the same may be connected with any associated hardware and software, whether from Excel, BTI or a third party. The price established in this Agreement for a Program and/or Sublicensed Program shall be the only consideration due in connection with that Program and/or Sublicensed Program. BTI agrees that the owner of -5- Sublicensed Programs shall, with respect to those Sublicensed Programs, have the right to enforce the terms and conditions of this sublicense against BTI. BTI's rights to license and sublicense hereunder shall terminate upon the termination of this Agreement, provided that (i) the termination of such rights shall not affect licenses and sublicenses previously granted by BTI, (ii) such termination will not affect BTI's right to grant licenses and sublicenses with respect to Products accepted and paid for by BTI at the time of such termination, and (iii) BTI shall have the limited right to retain and use the Products to the extent necessary and to fulfill BTI's obligations to support existing license and sublicenses. c. Title to Programs Title to and ownership of the Programs, including all patents, copyrights, trade secrets, and proprietary property rights applicable thereto, shall at all times remain solely and exclusively with Excel or the owner of a Sublicensed Program, as the case may be, and BTI shall not take any action inconsistent with such title and ownership. BTI acknowledges Excel's representation that the Software is "Restricted Computer Software" as that term is defined in Subpart 227.471 of the Department of Defense Federal Acquisition Regulation Supplement (DFARS). BTI agrees to ensure that if any Software or Documentation will be supplied to a unit or agency of the United States government, whether by BTI or by any of the users to whom BTI directly or indirectly supplies the same, it may only be done by written contract in which: i. If the Software is supplied to the Department of Defense, (DoD), the government agrees that the Software will be classified as "Commercial Computer Software" and that the governments acquiring only "restricted rights" in the Software and Documentation as that term is defined in Clause 252.2277013 (c) (1) of the DFARS and ii. If the Software is supplied to any unit or agency of the United States government other than DoD, the government agrees that the governments rights in the Software and Documentation will be as defined in clause 52.22719 (c) (2) of the FAR. BTI acknowledges Excel's representation that the Software and Documentation were developed at private expense and no part of them is in the public domain. d. Protection of Programs BTI acknowledges that Excel and/or the respective owners of the Sublicensed Programs have proprietary interest in the Licensed Programs and the Sublicensed Programs respectively, and BTI shall hold such programs in complete confidence. BTI shall not, without the prior written consent of Excel, disclose or otherwise make available such Programs and Sublicenses Programs in any form to any person other than BTI's employees and agents and BTI's end-user customers, distributors and dealers ("BTI's Customers"). The Programs and Sublicensed Programs shall not be copied (other than for backup purposes) or modified, in whole or in part, without the prior written consent of Excel, nor shall BTI translate, reverse engineer, decompile or disassemble the same without the prior written consent of Excel. -6- BTI shall not remove or obscure any copyright, patent, trademark, trade secret or similar notice affixed to any Program or Sublicensed Program and shall reproduce and affix such notices or any copies or modifications of the Programs permitted by Excel. Under no circumstances will the source codes for the Programs be disclosed by BTI. BTI shall take appropriate action, by instruction, agreement, or otherwise with respect to any persons permitted access to the Programs and Sublicensed Programs, in order to enable BTI to satisfy its obligations hereunder. e. Terms of License Should BTI fail to comply with any of the material terms or conditions of this Agreement, Excel may, upon two (2) days prior written notice to BTI of its intent to do so, terminate any license granted herein to BTI. Unless so terminated, each license and sublicense granted in this Agreement for the use of the Programs and Sublicensed Programs shall remain in force until BTI discontinues the use of the Programs and Sublicensed Programs on the Designated Equipment. Within thirty (30) days after the BTI has discontinued the use of the Programs and Sublicensed Programs or within ten (10) days after Excel has terminated any license or sublicense thereto, BTI shall destroy or return to Excel the original and all copies (including partial copies) of such discontinued or terminated Programs and Sublicensed Programs and certify, in writing, to Excel that it has done so. The obligations of BTI to protect the proprietary nature of the Programs and Sublicensed Programs shall survive the termination of any such license. f. Injunctive Relief BTI acknowledges that (i) any unauthorized use or transfer of the Programs or other information contained in the Programs may substantially diminish the value to Excel of the trade secrets and proprietary rights that are the subject of this Agreement and thus irreparably harm Excel, and (ii) if Excel alleges that BTI has breached any of its obligations under this Agreement, Excel shall, if such breach is proven, in addition to all other remedies accorded by law, be entitled to equitable relief (including but not limited to injunctive relief) to protect its interests. 8. EXPORT CONTROLS BTI warrants to Excel that it will not resell, transfer or use the Products obtained from Excel under this Agreement in any way in violation of any laws, regulations, transactions or export controls, or economic sanctions imposed by the United States government with regard to any other State, government or political entity. If BTI intends to export the Products outside the United States, it is incumbent upon BTI to determine whether an export license will be required and, if so, to obtain the license from the appropriate authorities in the United States Commerce or State Department. In the event that BTI should need any additional information from Excel in order to obtain said license, BTI shall notify Excel in writing, and Excel agrees to furnish said information upon satisfactory proof of a legitimate need therefore. 9. PROGRAM UPDATES AND CHANGES IN PRODUCTS SPECIFICATIONS -7- a. Excel shall advise BTI in writing of design modifications to the Products where such modifications would, without limitation, improve Product quality, facilitate product sourcing or increase Product reliability. If Excel determines that said modifications would alter the form, fit or function of the Products, such that they are no longer functionally equivalent to the Products they are to replace, Excel shall, upon written request from BTI, deliver to BTI for a sixty day (60) evaluation period, free of charge, a sample of the Products so modified. BTI shall have the right to test and inspect such Products, and BTI shall have the right to disapprove, in writing, any of such proposed modifications to the Products. Should BTI fail to provide notice of said disapproval in writing to Excel as prescribed above, Excel shall assume BTI's consent to the incorporation of such modifications for use by BTI, and shall invoice BTI for the products so delivered. If BTI disapproves of such modifications for its use, BTI shall have the right, within sixty days (60) of such disapproval, to place additional purchase orders for Products without such modifications, provided that BTI's requested shipping dates for such Products occur within the succeeding six (6) month period. Upon such disapproval, BTI shall within ten (10) days, either return the Products so modified to Excel , or be invoiced for such Products. Should Excel determine that any of such modifications do not alter the form, fit, or function of said Products such that they remain functionally equivalent to the Products they are to replace, Excel shall notify BTI in writing of said change but shall not be obligated to provide a sample of such Product to BTI for testing or evaluation. b. The parties agree that this section 9. a. is not meant to cover changes made to the Products by Excel to correct errors in the Products that have been either reported by BTI or discovered by Excel. The parties further agree that nothing in section 9. a. above should be interpreted as a restriction on Excel's right to generally commercially distribute the Products with the design modifications described herein. c. Excel agrees that any new Products that it develops during the term of this Agreement and which it makes generally commercially available, shall be made available to BTI pursuant to the terms and conditions hereof. 10. NOTICES All notices by either party to the other party under this Agreement shall be in writing and personally delivered or send by confirmed facsimile with a copy sent by registered or certified mail, return receipt requested, to the other party at its address set forth above. The date of personal delivery or the date of facsimile transmission, as the case may be, shall be deemed to be the date on which such notice is given. 11. DISTRIBUTION OF PRODUCTS TO UNITED STATES GOVERNMENT The Products being provided by Excel to BTI under this Agreement are "Commercial Computer Software" as defined in the U.S. Government DOD FAR Supplement at 52.227-7013a. As such, the Products, including related documentation, are provided with restricted rights. BTI, in any dealings with the U.S. Government, agrees to inform the U.S. Government that the Products are "Commercial Computer Software" and that the use, duplication, or -8- disclosure by the U.S. Government of the Products is subject to the restrictions as set forth in DOD FAR Supplement at 52.227-7013(b)(3) and in subparagraph (c)(1)(11) of the Rights in Technical Data and Computer Software clause at 252.227-7013. BTI agrees to work with EXCEL to clearly and properly mark any and all Products, including related documentation, that are to be delivered to any branch or agency of the U.S Government with the restricted rights legend set forth in DOD FAR Supplement at 52.227-7013(b). BTI also agrees to inform all U.S. Government Contracting Officers, when applicable, that the Products are commercial software and subject to the restrictions described above. 12. PATENT AND COPYRIGHT INDEMNITY a. If notified promptly in writing of any action (and all prior claims relating to such action) brought against BTI based on a claim that any of the Products supplied to BTI infringes a patent, copyright or trademark, Excel shall defend such action at its sole expense and pay any costs or damages finally awarded in such action which are attributable to such claim; provided that Excel shall have sole control of the defense of any such action and all negotiations for its settlement or compromise. Notwithstanding the provisions of the previous sentence, Excel's obligation to defend as stated therein shall not be excused in the event that BTI engages its own counsel at its own expense, to assist BTI in determining the relevant issues in, and the merits of, said claims and to provide general advice with respect to such claims. If an injunction is obtained against BTI's use of any of the Products by reason of infringement of a patent, copyright or trademark, or if in Excel's opinion any of the Products hereunder is likely to become the subject of a successful claim of infringement of a patent, copyright or trademark, Excel shall, at its option and expense, either procure for BTI the right to continue using such Product or replace or modify the same so that it becomes noninfringing or if neither of the foregoing alternatives are possible, grant BTI a credit for such Product (as depreciated in the case of equipment over four (4) years) and accept its return. b. Notwithstanding the foregoing, Excel shall not have any liability to BTI under the foregoing provision if such infringement or claim is based upon. 1. the use of any of the Products in combination with other equipment or software which is not furnished by Excel where the Products would not, by themselves, be infringing. c. If notified promptly in writing of any action (and all prior claims relating to such action) brought against Excel based on a claim that any of the Products that were Manufactured or supplied by Excel in Compliance with BTI'S written designs, specifications or instructions, or any designs, specifications or instructions relayed to Excel orally by BTI which are confirmed by Excel in writing to BTI, ("BTI designed Products") infringes a patent, copyright or trademark, then BTI shall defend such action at its sole expense and pay costs or damages finally awarded in such action which are attributable to such claim, provided however, that BTI shall have sole control of the defense of any such action and all negotiations for its settlement or compromise. Notwithstanding the provisions of the previous sentence, BTI'S obligation to defend as stated therein shall not be excused in the event that Excel engages its own counsel at its own expense to -9- assist Excel in determining the relevant issues in, and merits of, said claims and to provide general advice with respect to said claims. d. Notwithstanding the foregoing provisions of Section 12.c. above, BTI shall not have any liability to Excel if such infringement or claim is based upon: 1. The use of any of the BTI Designed Products in combination with other equipment or software which is manufactured or supplied by Excel and is not in compliance with BTI'S written designs, specifications or instructions and/or where BTI Designed Products would not, by themselves, be infringing. e. In no event shall either party's total liability to the other party under section 12.a. or 12.c. respectively exceed two (2) times the aggregate sum paid to EXCEL by BTI for the allegedly infringing Products or Programs. f. The foregoing provision state the entire liability of Excel and BTI with respect to infringement of patents, trademarks or copyrights by any of the Products or any part thereof or their operation. 13. LIMITED WARRANTY a. Products Excel warrants that the Equipment shall be free of all liens and encumbrances. Excel further warrants that the Equipment shall conform to Excel's or BTI's (as applicable) Product Specifications for same and shall be free from defects in material and workmanship for a period of fourteen (14) months after the date of shipment to BTI (the Warranty period). Excel's sole obligation with respect of claims of non compliance or defects made within the Warranty period described above shall be, at its option, to repair or replace any item which Excel, in its reasonable judgment, determines to be defective within sixty (60) days after receipt of thereof. BTI shall obtain a return authorization number from Excel prior to returning any Equipment to Excel under this warranty. BTI shall be responsible for all shipping charges for Equipment returned to Excel for warranty service, and Excel shall pay charges for the return of the Equipment to BTI. Excel may employ previously utilized parts to make repairs or replacements, so long as the previously utilized parts are not defective in any respect and are subject to the same warranty as new parts. All replaced parts will become the property of Excel on an exchange basis. All replacements and repairs made during the initial Warranty period shall carry a warranty equal to the balance of said Warranty period, or ninety days, whichever is longer. Any repair made under said repair warranty which is made after the expiration of the initial Warranty period shall, unless covered by the EXCEL "EXTENDED WARRANTY and SUPPORT PROGRAM," not be further warranted and should additional repair be necessary, said repair shall be subject to the Out of Warranty prices as appended hereto in Exhibit VI. -10- Excel offers an "Extended Warranty and Support Program" at additional cost, a copy of which is appended hereto as Exhibit V, as well as an OUT OF WARRANTY price list, appended hereto as Exhibit VI, covering both repairs replacements and software upgrades. Excel further warrants that it shall make available the spare parts listed in Exhibit I (as such spares may be amended from time to time to account for technical changes and improvements) for a period of five (5) years from the date of the last Product shipped hereunder. This provision shall only apply to "LNX" and "PCX" Products; it shall not apply to "XLDX" Products. All "XLDX" spare parts will be supplied by EXCEL for the aforementioned period subject to their availability. b. Limitations of Warranty The foregoing limited warranties by Excel shall not apply if: i. A repair or replacement part is required as a result of causes other than normal use, including without limitation, repair, maintenance, alteration or modification of the Products by persons other than Excel or other authorized personnel (which term includes duly qualified and authorized BTI personnel); accident, fault or negligence of the BTI or BTI'S customer; operator error or improper use or misuse of the Products; or causes external to the Products not caused by Excel, such as, but not limited to, transportation or fluctuations of humidity or temperature in excess of the specified tolerance levels of the Products or failure of electrical power, or fire or water damage; or ii. The Products are modified by BTI or used with software or equipment for applications that are beyond the normal or customary business of BTI; or iii. BTI's customer's installation site is not maintained in accordance with Excel's applicable site specification as set forth in the relevant Product User's Manual. c. Software Excel warrants that for fourteen (14) months after shipment, all Software licensed hereunder will substantially conform to Excel's or BTI's (as preapproved by Excel) then current published Product Specifications for the Software. BTI must notify Excel in writing of any defect in the Software, and if the Software is found to be substantially defective, Excel shall correct such defect in a manner determined by Excel. Excel will correct any and all service affecting Software deficiencies or provide an adequate workaround(s) for same. d. Limitation of Liability and Damages No action, whether in contract or tort, including negligence arising out of or in connection with this Agreement, may be brought by either party more than twenty four (24) months after the cause of action has accrued. This limitation shall not apply to actions for any breach of the Patent and Copyright provisions or actions for violations or infringements as provided in Section 12 above, of Excel's rights relating to the Programs licensed or sublicensed hereunder. -11- e. Disclaimers OTHER THAN THE LIMITED WARRANTY SET FORTH IN THIS SECTION, EXCEL DISCLAIMS ALL WARRANTIES WITH RESPECT TO THE PRODUCTS (INCLUDING, WITHOUT LIMITATION, WARRANTIES AS TO MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE), EITHER EXPRESS OR IMPLIED, AND THE FOREGOING EXPRESS LIMITED WARRANTIES ARE PROVIDED IN LIEU OF ANY OTHER WARRANTIES ON THE PART OF EXCEL. IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER OR ANY OTHER PERSON FOR ANY SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES, EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. f. Use of the Equipment in Critical Application Excel's equipment and Products are manufactured for standard commercial use and must be carefully considered for use in critical elements in applications or systems, such as life support systems (e.g.: "911" or "E911" -like systems), mass transportation or air traffic control systems, where failure of the Equipment to perform can be reasonably expected to cause failure of the application or system, to affect the safety or effectiveness of the application or system. Before using, BTI will determine the suitability of the Equipment for its intended use. g. Out of Warranty Service Unless otherwise specified herein in any appendix, or otherwise in any service contract, Excel agrees to provide out of warranty service for any of its Products, in accordance with the Excel "Out of Warranty Price List" appended hereto as in Exhibit VI. 14. SUPPORT a. Products supplied to BTI hereunder will ultimately be used by end- users located outside as well as inside the U.S. In the event that BTI is unable to resolve problems with the Products during the installation/acceptance process or is unable to keep the Products in a reliable state during or after the Warranty period, BTI shall make available at the relevant end-user site or, at BTI if the problem is capable of remote cure, a person previously trained in the Excel technical training program. The person shall call Excel at 1-800-541-7002 and request technical support. If after attempting to repair through this telephone conversation, Excel and BTI are unable to rectify the situation, Excel will promptly send qualified technical experts to the relevant end-user site who will rectify the situation. As to end user site consultations which take place during the Warranty period: (i) if a Product defect caused the problem, EXCEL will bear the cost of the consultation (U.S. and Canada only) and BTI will bear the cost of out-of-pocket expenses, (ii) if a Product defect did not cause the problem, BTI will bear all costs. All end-user site consultations which take place after the initial Warranty period or the Extended Warranty period, if applicable, shall be invoiced and paid for in accordance with the Out of Warranty Price List as appended hereto as Exhibit VI. In addition to the out of warranty services described -12- elsewhere in this Agreement, Excel will continue to provide Product parts and Software services at reasonable prices after expiration of the relevant warranty. b. Excel will provide technical training to BTI's employees as outlined in Exhibit IV hereto. 15. CHANGES REQUESTED BY BTI BTI's Procurement department may, from time to time, by written notice to Excel, request changes in the method of packing or shipment, quantity ordered, (within the parameters contained in Exhibit II attached hereto,) destinations and delivery schedules for the Products. If any such change causes a material increase or decrease in Excel's cost of the Products or delivery schedule hereunder, an equitable adjustment shall be made to such price or delivery schedule, or both. Any claim by Excel for adjustment under this Section 15 shall be deemed waived unless made in writing within twenty (20) days after receipt of written notice of said change. In addition, BTI's Procurement Department may from time to time in writing, request changes in Product Specifications. Upon receipt of such request, EXCEL shall promptly make an evaluation of the proposed change. If, in EXCEL's sole discretion, it deems the proposed change reasonable, it shall, as the information becomes available, notify BTI of the terms, projected delivery times and minimum Product purchase commitment levels required from BTI in order for EXCEL to proceed with such modifications. EXCEL reserves to itself the right, in its sole discretion, to reject any such requests. 16. MANUFACTURING RIGHTS a. Excel hereby agrees that, within thirty (30) days of the effective date of this Agreement, it will place in escrow with Data Securities International, Inc. ("DSI") all materials necessary for BTI to manufacture the Products, including but not limited to, blueprints, artwork, process sheets, test procedures, tooling drawings, schematics, computer software source code, performance specifications and all related documentation. BTI agrees that it shall pay all fees associated with said deposit in escrow for the entire term of Escrow. b. Excel agrees, on an ongoing basis, to promptly provide DSI with any modifications or improvements of any materials placed in escrow pursuant to this Section 16. and to notify BTI of any such modifications or improvements promptly. c. In the event that any of the release conditions described below (the "Release Conditions") occurs, then the parties agree that: (1) DSI shall release to BTI all materials held in escrow; (2) Excel will grant to BTI a royalty-free license to manufacture such Products; and (3) BTI shall utilize such materials only to manufacture or otherwise procure Products to satisfy existing Purchase Orders and forecasted orders as required by Exhibit II, and to support existing Products already distributed by BTI. BTI further agrees to treat such materials as the Proprietary Information of Excel subject to the provisions of Section 17.d below. -13- d. For the purpose of this Section 16., the Release Conditions shall mean one or more of the following events: (1) Excel commits a material breach of its obligations hereunder and fails to cure such breach within forty five (45) days of the receipt of notice from BTI which details such breach; or (2) Excel fails to continue to do business in the ordinary course, which failure continues for more than forty five (45) days; or (3) One of the following circumstances materially affect Excel's ability to comply with the terms of this Agreement and such condition remains uncorrected for more than sixty (60) days: (i) entry of an order for relief by or against Excel under Title 11 of the United States Code; (ii) the making by Excel of a general Assignment for the benefit of creditors; (iii) the appointment of a general receiver of trustee in bankruptcy of Excel's business or property; or (iv) action by Excel under any state insolvency or similar law for the purpose of its bankruptcy, reorganization or liquidation. 17. GENERAL a. The obligations of Excel under this Agreement shall be subject to the procurement by, and at the expense of, BTI of any import or export licenses, documents, permits or clearances required with respect to this Agreement and are subject to the condition precedent that all necessary approvals from governmental authorities (including exchange control authorities) have been obtained. BTI agrees to comply with all laws applicable to BTI as they relate to the Products, of the United States of America and its states at all times and shall not take or refrain from taking any action which would result in the violation of such laws by Excel. Nothing contained in this Agreement shall be construed as creating a joint venture, partnership or employment relationship between Excel and BTI. b. If the financial condition of BTI at any time does not justify continuation of the work called for, or shipment on the terms of payment originally specified, Excel, in its sole discretion, may require full payment in advance of delivery. c. The validity, construction and interpretation of this Agreement and the rights and duties of the parties hereto shall be governed and construed in accordance with the laws of the Commonwealth of Massachusetts, excluding its conflict of law rules. -14- d. BTI agrees it shall protect all such information and hold such information so provided in accordance with the provisions of the Mutual Non- Disclosure Agreement between the parties, dated February 3, 1994. e. This Agreement and the above referenced Non-Disclosure Agreement is the complete and exclusive statement of this agreement between the parties and supersedes all prior agreements and communications with respect to the subject matter herein. Excel makes no representations to BTI except as expressly set forth herein. Unless otherwise agreed by the parties in writing, the terms of this Agreement and the said Non-Disclosure Agreement shall apply and govern the parties' dealings notwithstanding any proposed variations or additions which may be contained in any Purchase Order or other communications submitted by BTI or in any Sales Order or similar notice provided by Excel. f. This Agreement may not be modified, amended or waived in whole or in part, except by written agreement of the parties hereto. No Excel employee other than its President, shall have any actual or apparent authority to modify the terms of this Agreement in any way. Any authorized modifications shall be in writing and signed by such representative of Excel. Any item or service furnished by Excel in furtherance of this Agreement, although not specifically identified herein, shall nevertheless be covered and governed by this Agreement unless specifically covered by some other written agreement executed by BTI and an authorized representative of Excel. g. Either party may assign this Agreement, or any of its rights hereunder or delegate any of its obligations hereunder, provided such party's transferee agrees in writing to be bound by all of the provisions of this Agreement and such writing is provided to the other party within a reasonable period of time prior to the effective date of such assignment or delegation. h. Section headings are for descriptive purposes only and shall not control or alter the meaning of this Agreement. i. All rights and remedies of either party shall be cumulative and may be exercised singularly or concurrently. The failure of either party, in any one or more instances, to enforce any of the terms of this Agreement shall not be construed as a waiver of future enforcement of that or any other term. j. If any provisions of this Agreement shall for any reason be held illegal or unenforceable, such provisions shall be deemed separable from the remaining provisions of this Agreement and shall in no way affect or impair the validity or enforceability of the remaining provisions of this Agreement. k. In the event either party is unable, in its reasonable judgment, to perform in accordance with this Agreement, due in whole or in part to any cause beyond the party's control, including without limitation, Acts of God, acts of the enemy, events of war, embargoes, strikes, lockouts, dispute with workers, shortage of fuel, unusually severe weather conditions, fires, floods, earthquakes, and unreasonably dangerous situations, the affected party shall promptly notify the other party in writing and the date of performance shall be extended for a period equal -15- to the period of such delay. Notwithstanding the foregoing, if such period of delay extends beyond ninety (90) days, the other party may, upon written notice to the affected party, terminate this Agreement with no further liability except for any payments owed and then due. 18. TERMINATION This Agreement shall terminate two years from the date of the signing hereof. Unless otherwise notified in writing by Excel 6 months prior to any termination date, this Agreement shall be automatically renewed for successive two year periods. -16- IN WITNESS WHEREOF, the parties hereto have signed this Agreement this 27th day of May, 1994. Excel, Inc., BTI, By: By: /s/ Robert P. Madonna /s/ Edward P. Maggio, V.P. - -------------------------------- ------------------------------------ Robert Madonna, President Edward P. Maggio, V.P. EX-10.7 11 CREDIT AGREEMENT AND PROMISSORY NOTE DATED 12/21/95 EXHIBIT 10.7 EXCEL, INC. CREDIT AGREEMENT Dated as of December 21, 1995 THIS CREDIT AGREEMENT is made as of December 21, 1995, by and between EXCEL INC. (the "Company"), a Massachusetts corporation having its chief executive office at 255 Independence Drive, Hyannis, Massachusetts and THE FIRST NATIONAL BANK OF BOSTON (the "Bank"), a national banking association having its head office at 100 Federal Street, Boston, Massachusetts 02110. SECTION I --------- DEFINITIONS ----------- 1.1. Definitions. ----------- All capitalized terms used in this Agreement or in the Note or in any certificate, report or other document made or delivered pursuant to this Agreement (unless otherwise defined therein) shall have the meanings assigned to them below: Adjusted Eurodollar Rate. Applicable to any Interest Period, shall mean a ------------------------ rate per annum determined pursuant to the following formula: AER = [ IOR ]* --- [1.00-RP] AER = Adjusted Eurodollar Rate IOR = Interbank Offered Rate RP = Reserve Percentage *The amount in brackets shall be rounded upwards, if necessary, to the next higher 1/100 of 1%. Where: "Interbank Offered Rate" applicable to any Eurodollar Loan for any Interest Period means the rate of interest determined by the Bank to be the prevailing rate per annum at which deposits in U.S. dollars are offered to the Bank by first-class banks in the interbank Eurodollar market in which it regularly participates on or about 10:00 a.m. (Boston time) two Business Days before the first day of such Interest Period in an amount approximately equal to the principal amount of the Eurodollar Loan to which such Interest Period is to apply for a period of time approximately equal to such Interest Period. -2- "Reserve Percentage" applicable to any Interest Period means the rate (expressed as a decimal) applicable to the Bank during such Interest Period under regulations issued from time to time by the Board of Governors of the Federal Reserve System for determining the maximum reserve requirement (including, without limitation, any basic, supplemental, emergency or marginal reserve requirement) of the Bank with respect to "Eurocurrency liabilities" as that term is defined under such regulations. The Adjusted Eurodollar Rate shall be adjusted automatically as of the effective date of any change in the Reserve Percentage. Affected Loans. See Section 2.7(a). -------------- Agreement. This Agreement, as the same may be supplemented or amended from --------- time to time. Bank. See Preamble. ---- Base Rate. The greater of (i) the rate of interest announced from time to --------- time by the Bank at its head office at 100 Federal Street, Boston, Massachusetts 02110 as its Base Rate, and (ii) the Federal Funds Effective Rate plus 1/2 of 1% per annum (rounded upwards, if necessary, to the next 1/8 of 1%). Base Rate Loan. Any Loan bearing interest determined with reference to the -------------- Base Rate. Borrowing Base. An amount equal to the lesser of (a) the Commitment Amount -------------- or (b) 75% of the net outstanding amount of Base Accounts. "Base Accounts" means accounts receivable of the Company as ------------- to which the Company has furnished to the Bank the information required by this Agreement and shall not include (a) accounts payable by subsidiaries, affiliates and employees of the Company, (b) accounts payable by debtors not located in the United States, unless otherwise approved in writing by the Bank or (c) accounts evidenced by promissory notes. The "net outstanding amount of Base Accounts" means the net --------------------------------------- amount of Base Accounts outstanding after eliminating from the aggregate amount of outstanding Base Accounts (i) such accounts that are more than 90 days past the date of the original invoice date or more than 60 days past the due date, whichever is earlier, and (ii) all other accounts of any account debtor with 25% or more of its accounts that are more than 90 days past the date of the original invoice date or more than 60 days past due as aforesaid; and deducting from the aggregate face amount of the remaining Base Accounts all payments, adjustments and credits applicable thereto and all amounts due thereon considered by the Bank difficult to collect or uncollectible by reason of return, rejection, repossession, loss or damage of or to the merchandise giving rise thereto, a merchandise or other dispute, -3- insolvency of the account debtor, or any other reason, all as determined by the Bank in its discretion, which determination shall be final and binding upon the Company. Business Day. (i) For all purposes other than as covered by clause (ii) ------------ below, any day other than a Saturday, Sunday or legal holiday on which banks in Boston, Massachusetts are open for the conduct of a substantial part of their commercial banking business; and (ii) with respect to all notices and determinations in connection with, and payments of principal and interest on, Eurodollar Loans, any day that is a Business Day described in clause (i) and that is also a day for trading by and between banks in U.S. Dollar deposits in the interbank Eurodollar market. Code. The Internal Revenue Code of 1986 and the rules and regulations ---- thereunder, collectively, as the same may from time to time be supplemented or amended and remain in effect. Commitment Amount. $5,000,000.00 or any lesser amount, including zero, ----------------- resulting from a termination or reduction of such amount in accordance with Section 7.2. Company. See Preamble. ------- Computation Rate. See Section 2.11. ---------------- Consolidated Current Liabilities. At any date as of which the amount -------------------------------- thereof shall be determined, all amounts that should, in accordance with generally accepted accounting principles, be included as current liabilities on the consolidated balance sheet of the Company and its Subsidiaries as at such date, plus, to the extent not already included therein, all Loans made under this Agreement, and all Indebtedness that is payable upon demand or within one year from the date of determination thereof unless such Indebtedness is renewable or extendable at the option of the Company or any Subsidiary to a date more than one year from the date of determination. Consolidated Tangible Net Worth. At any date as of which the amount ------------------------------- thereof shall be determined, the consolidated total assets of the Company and its Subsidiaries minus (i) the sum of any amounts attributable to (a) goodwill, ----- (b) intangible items such as unamortized debt discount and expense, patents, trade and service marks and names, copyrights, capitalized software development costs, and research and development expenses except prepaid expenses, (c) all reserves not already deducted from assets, (d) any writeup in the book value of assets resulting from any revaluation thereof subsequent to the date of the financial statements referred to in Section 4.6 and (e) the value of any minority interests in Subsidiaries and (ii) Consolidated Total Liabilities. --- Consolidated Total Liabilities. At any date as of which the amount thereof ------------------------------ shall be determined, all obligations that should, in accordance with generally accepted accounting principles, be classified as liabilities on the consolidated balance sheet of the Company and its Subsidiaries, including in any event all Indebtedness. -4- Controlled Group. All trades or businesses (whether or not incorporated) ---------------- under common control that, together with the Company, are treated as a single employer under Section 414(b) or 414(c) of the Code or Section 4001 of ERISA. Default. An Event of Default or event or condition that, but for the ------- requirement that time elapse or notice be given, or both, would constitute an Event of Default. Encumbrances. See Section 6.5. ------------ ERISA. The Employee Retirement Income Security Act of 1974 and the rules ----- and regulations thereunder, collectively, as the same may from time to time be supplemented or amended and remain in effect. Eurodollar Loan. Any Loan bearing interest at a rate determined with --------------- reference to the Adjusted Eurodollar Rate. Event of Default. Any event described in Section 7.1. ---------------- Federal Funds Effective Rate. For any day, a fluctuating interest rate per ---------------------------- annum equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average of the quotations for such day on such transactions received by the Bank from three Federal funds brokers of recognized standing selected by the Bank. Guarantees. As applied to the Company and its Subsidiaries, all ---------- guarantees, endorsements or other contingent or surety obligations with respect to obligations of others whether or not reflected on the consolidated balance sheet of the Company and its Subsidiaries, including any obligation to furnish funds, directly or indirectly (whether by virtue of partnership arrangements, by agreement to keep-well or otherwise), through the purchase of goods, supplies or services, or by way of stock purchase, capital contribution, advance or loan, or to enter into a contract for any of the foregoing, for the purpose of payment of obligations of any other person or entity. Indebtedness. As applied to the Company and its Subsidiaries, (i) all ------------ obligations for borrowed money or other extensions of credit, whether or not secured, absolute or contingent, including, without limitation, unmatured reimbursement obligations in respect of letters of credit or guarantees issued for the account of or on behalf of the Company and its Subsidiaries; (ii) all obligations representing the deferred purchase price of property, other than accounts payable arising in the ordinary course of business; (iii) all obligations evidenced by bonds, notes, debentures or other similar instruments; (iv) all obligations secured by any mortgage, pledge, security interest or other lien on property owned or acquired by the Company or any of its Subsidiaries whether or not the obligations secured thereby shall have been assumed; (v) that portion of all obligations arising under capital leases that is required to be capitalized on the consolidated balance sheet of the Company and its Subsidiaries; (vi) all Guarantees; and (vii) all -5- obligations that are immediately due and payable out of the proceeds of or production from property now or hereafter owned or acquired by the Company or any of its Subsidiaries. Interest Period. --------------- (a) With respect to each Eurodollar Loan, the period commencing on the date of such Eurodollar Loan and ending one, two, three or six months thereafter, as the Company may elect the applicable Notice of Borrowing; (b) with respect to each Base Rate Loan, the period commencing on the date of such Base Rate Loan; provided that: -------- (i) any Interest Period (other than an Interest Period determined pursuant to clause (iii) below) that would otherwise end on a day that is not a Business Day shall be extended to the next succeeding Business Day unless, in the case of Eurodollar Loans, such Business Day falls in the next calendar month, in which case such Interest Period shall end on the immediately preceding Business Day; (ii) any Interest Period applicable to a Eurodollar Loan that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (iii) below, end on the last Business Day of a calendar month; (iii) any Interest Period during the Revolving Credit Period that would otherwise end after the Revolving Credit Termination Date shall end on the Revolving Credit Termination Date; and (iv) notwithstanding clauses (iii) and (iv) above, no Interest Period applicable to a Eurodollar Loan shall have a duration of less than one month, and if any Interest Period applicable to such Loans would be for a shorter period, such Interest Period shall not be available hereunder. Investment. As applied to the Company and its Subsidiaries, the purchase ---------- or acquisition of any share of capital stock, partnership interest, evidence of indebtedness or other equity security of any other person or entity, any loan, advance or extension of credit to, or contribution to the capital of, any other person or entity, any real estate held for sale or investment, any commodities futures contracts held other than in connection with bona fide hedging transactions, any other investment in any other person or entity, and the making of any commitment or acquisition of any option to make an Investment. Loan. A loan made to the Company by the Bank pursuant to Section 11 of ---- this Agreement, and "Loans" means all of such loans, collectively. -6- Note. A promissory note of the Company, substantially in the form of ---- Exhibit A hereto, evidencing the obligation of the Company to the Bank to repay the Loans. Notice of Borrowing. See Section 2.2. ------------------- Obligations. Any and all obligations of the Company to the Bank of every ----------- kind and description, direct or indirect, absolute or contingent, primary or secondary, due or to become due, now existing or hereafter arising, regardless of how they arise or by what agreement or instrument, if any, and including obligations to perform acts and refrain from taking action as well as obligations to pay money. PBGC. The Pension Benefit Guaranty Corporation or any entity succeeding to ---- any or all of its functions under ERISA. Permitted Encumbrances. See Section 6.5. ---------------------- Plan. At any time, an employee pension or other benefit plan that is ---- subject to Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code. Qualified Investments. As applied to the Company and its Subsidiaries, --------------------- investments in (i) notes, bonds or other obligations of the United States of America or any agency thereof that as to principal and interest constitute direct obligations of or are guaranteed by the United States of America; (ii) certificates of deposit or other deposit instruments or accounts of banks or trust companies organized under the laws of the United States or any state thereof that have capital and surplus of at least $100,000,000, (iii) commercial paper that is rated not less than prime-one or A-1 or their equivalents by Moody's Investors Service, Inc. or Standard & Poor's Corporation, respectively, or their successors, and (iv) any repurchase agreement secured by any one or more of the foregoing. Revolving Credit Period. The period beginning on the date of this ----------------------- Agreement and extending through and including the Revolving Credit Termination Date or such earlier date on which the commitment to make Loans is terminated or the Commitment Amount is reduced to zero in accordance with the terms hereof. Revolving Credit Termination Date. December 15,1997. --------------------------------- Subsidiary. Any corporation, association, joint stock company, business ---------- trust or other similar organization of which 50% or more of the ordinary voting power for the election of a majority of the members of the board of directors or other governing body of such entity is held or controlled by the Company or a Subsidiary of the Company; or any other such organization the management of which is directly or indirectly controlled by the Company or a Subsidiary of the Company through the exercise of voting power or otherwise; or any joint venture, whether incorporated or not, in which the Company has a 50% ownership interest. 1.2. Accounting Terms. All terms of an accounting character shall have the ---------------- meanings assigned thereto by generally accepted accounting principles applied on a basis consistent with -7- the financial statements referred to in Section 4.6 of this Agreement, modified to the extent, but only to the extent, that such meanings are specifically modified herein. SECTION 11 ---------- DESCRIPTION OF CREDIT --------------------- 2.1. The Loans. During the Revolving Credit Period, and subject to the --------- terms and conditions hereof, the Bank will make Loans to the Company, from time to time until the close of business on the Revolving Credit Termination Date, in such sums as the Company may request, provided that the aggregate principal -------- amount of all Loans at any one time outstanding hereunder shall not exceed the Borrowing Base. The Company may borrow, repay pursuant to Section 2.8 and reborrow, from the date of this Agreement until the Revolving Credit Termination Date, the full amount of the Borrowing Base or any lesser sum that is at least $100,000.00 and an integral multiple of $100,000.00. Any Loan not repaid by the Revolving Credit Termination Date shall be due and payable on the Revolving Credit Termination Date. 2.2. Notice and Manner of Borrowing of Loans. (a) Whenever the Company --------------------------------------- desires to obtain a Loan hereunder, the Company shall notify the Bank (which notice shall be irrevocable) by telephone received no later than 2:00 p.m. Boston time on the day on which the requested Loan is to be made as a Base Rate Loan, and received no later than 10:00 a.m. Boston time on the date two Business Days before the day on which the requested Loan is to be made as a Eurodollar Loan. Such notice shall specify (i) the effective date and amount of each Loan, subject to the limitations set forth in Section 2.1, (ii) the interest rate option to be applicable thereto, and (iii) with respect to any requested Eurodollar Loans, the duration of the applicable Interest Period (subject to the provisions of the definition of Interest Period and Section 2.5). If requested by the Bank, such notification (a "Notice of Borrowing") shall be immediately followed by a written confirmation thereof, provided that if such written -------- confirmation differs in any material respect from the action taken by the Bank, the records of the Bank shall control absent manifest error. Prior to the end of the Interest Period applicable to any Eurodollar Loan, the Borrower shall deliver a Notice of Borrowing in accordance with this Section 2.2 which shall specify the interest rate option and duration of the applicable Interest Period to rollover such Eurodollar Loan. Failure to deliver such Notice of Borrowing shall be deemed to be an election of the Base Rate. (b) Subject to the terms and conditions hereof, the Bank shall make each Loan on the effective date specified therefor by crediting the amount of such Loan to the Company's demand deposit account with the Bank; provided that if -------- such Loan is to be made on a day on which the Company is to repay all or any part of an outstanding Loan, the Bank shall apply the proceeds of such new Loan to make such repayment and only an amount equal to the difference (if any) between the amount being borrowed and the amount being repaid shall be made available by the Bank to the Company. 2.3. Facility Fee. The Company shall pay to the Bank during the Revolving ------------ Credit Period an annual facility fee equal to $9,500.00. The facility fee shall be payable quarterly in advance, on the first day of January, April, July and October of each year beginning January 1, -8- 1996. A prorated amount for the period from the date hereof to December 31, 1995 shall be payable at the closing. 2.4. The Note. (a) The Loans shall be evidenced by a single Note, payable -------- to the order of the Bank and having a final maturity of December 15, 1997. The Note shall be dated on or before the date of the first Loan and shall have the blanks, if any, therein appropriately completed. (b) The Bank shall, and is hereby irrevocably authorized by the Company to, enter on the schedule forming a part of the Note or otherwise in its records appropriate notations evidencing the date and the amount of each Loan, the interest rate applicable thereto and the date and amount of each payment of principal made by the Company with respect thereto; and in the absence of manifest error, such notations shall constitute conclusive evidence thereof. The Bank is hereby irrevocably authorized by the Company to attach to and make a part of the Note a continuation of any such schedule as and when required. No failure on the part of the Bank to make any notation as provided in this subsection (b) shall in any way affect any Loan or the rights or obligations of the Bank or the Company with respect thereto. 2.5. Duration of Interest Periods. Subject to the provisions of the ---------------------------- definition of Interest Period, the duration of the Interest Period for each Eurodollar Loan shall be as specified in the applicable Notice of Borrowing. Notwithstanding the foregoing, the Company may not select an Interest Period that would end, but for the provisions of the definition of Interest Period, after the final maturity hereof. 2.6. Interest Rates and Payments of Interest. (a) Each Base Rate Loan --------------------------------------- shall bear interest on the outstanding principal amount thereof at a rate per annum equal to the Base Rate, which rate shall change contemporaneously with any change in the Base Rate. Such interest shall be payable on the last day of each month commencing December 31, 1995, and when such Base Rate Loan is due (whether at maturity, by reason of acceleration or otherwise). (b) Each Eurodollar Loan shall bear interest on the outstanding principal amount thereof, for the Interest Period applicable thereto, at a rate per annum equal to the Adjusted Eurodollar Rate plus two and one half percent (2.5%). Such interest shall be payable for such Interest Period on the last day thereof and when such Eurodollar Loan is due (whether at maturity, by reason of acceleration or otherwise) and, if such Interest Period is longer than three months, at intervals of three months after the first day thereof. 2.7. Changed Circumstances. --------------------- (a) In the event that: (i) on any date on which the Adjusted Eurodollar Rate would otherwise be set the Bank shall have determined in good faith (which determination shall be final and conclusive) that, by reason of changes affecting the interbank Eurodollar market, adequate and reasonable means do not exist for ascertaining the Interbank Offered Rate, or -9- (ii) at any time the Bank shall have determined in good faith (which determination shall be final and conclusive) that: (A) the making of a Eurodollar Loan has been made impracticable or unlawful by (1) the occurrence of a contingency that materially and adversely affects the interbank Eurodollar market or (2) compliance by the Bank in good faith with any applicable law or governmental regulation, guideline or order or interpretation or change thereof by any governmental authority charged with the interpretation or administration thereof or with any request or directive of any such governmental authority (whether or not having the force of law); or (B) the Adjusted Eurodollar Rate shall no longer represent the effective cost to the Bank for U.S. dollar deposits in the interbank market for deposits in which it regularly participates; then, and in any such event, the Bank shall forthwith so notify the Company thereof. Until the Bank notifies the Company that the circumstances giving rise to such notice no longer apply, the obligation of the Bank to allow selection by the Company of the type of Loan affected by the contingencies described in this Section 2.7(a) (herein called "Affected Loans") shall be suspended. If at the -------------- time the Bank so notifies the Company, the Company has previously given the Bank a Notice of Borrowing with respect to one or more Affected Loans but such Loans have not yet gone into effect, such notification shall be deemed to be void and the Company may borrow Loans of a nonaffected type by giving a substitute Notice of Borrowing pursuant to Section 2.2 hereof. Upon such date as shall be specified in such notice (which shall not be earlier than the date such notice is given) the Company shall, with respect to the outstanding Affected Loans, prepay the same, together with interest thereon and any amounts required to be paid pursuant to Section 2.11, and may borrow a Loan of another type in accordance with Section 2.1 hereof by giving a Notice of Borrowing pursuant to Section 2.2 hereof. (b) In case any law, regulation, treaty or official directive or the interpretation or application thereof by any court or by any governmental authority charged with the administration thereof or the compliance with any guideline or request of any central bank or other governmental authority (whether or not having the force of law): (i) subjects the Bank to any tax with respect to payments of principal or interest or any other amounts payable hereunder by the Company or otherwise with respect to the transactions contemplated hereby (except for taxes on the overall net income of the Bank imposed by the United States of America or any political subdivision thereof), or (ii) imposes, modifies or deems applicable any deposit insurance, reserve, special deposit or similar requirement against assets held by, or deposits in or for the account of, or loans by, the Bank (other than such requirements as are already included in the determination of the Adjusted Eurodollar Rate), or -10- (iii) imposes upon the Bank any other condition with respect to its performance under this Agreement, and the result of any of the foregoing is to increase the cost to the Bank, reduce the income receivable by the Bank or impose any expense upon the Bank with respect to any Loans, the Bank shall notify the Company thereof. The Company agrees to pay to the Bank the amount of such increase in cost reduction in income or additional expense as and when such cost, reduction or expense is incurred or determined, upon presentation by the Bank of a statement in the amount and setting forth the Bank's calculation thereof, which statement shall be deemed true and correct absent manifest error. (c) If the Bank shall have determined that (i) the adoption of or change in any law, rule, regulation or guideline, directive or request regarding capital requirements for banks or bank holding companies (whether or not having the force of law), or any change in the interpretation or application thereof by any governmental authority, central bank or comparable authority charged with the interpretation or administration thereof, or (ii) compliance by the Bank with any of the foregoing, imposes on or increases a requirement of the Bank to allocate capital resources to the Bank's commitment to make Loans hereunder that has or would have the effect of reducing the return on the Bank's capital as a consequence of its commitment to make Loans hereunder to a level below that which the Bank could have achieved (taking into consideration the Bank's then existing policies with respect to capital adequacy and assuming the full utilization of the Bank's capital) but for such adoption, change or compliance by any amount deemed by the Bank to be material, then the Bank shall notify the Company thereof. The Company agrees to pay to the Bank the amount of such reduction of capital as and when such reduction is determined, upon presentation by the Bank of a statement in the amount and setting forth the Bank's calculation thereof, which statement shall be deemed true and correct absent manifest error. In determining such amount, the Bank may use any reasonable averaging and attribution methods. 2.8. Payments and Prepayments of the Loans. (a) Each Loan shall mature, ------------------------------------- and the principal amount thereof shall be due and payable, on the Revolving Credit Termination Date. Eurodollar Loans may not be prepaid. Base Rate Loans may be prepaid at any time, without premium or penalty. Interest accrued on the amounts so paid shall be paid in accordance with Section 2.6. No prepayment of the Loans during the Revolving Credit Period shall affect the Commitment Amount or impair the Company's right to borrow as set forth in Section 2.1. (b) If at any time the aggregate principal amount of outstanding Loans shall exceed the Borrowing Base, the Company shall repay such principal amount (together with accrued interest thereon) of the outstanding Loans, if any, as may be necessary so that after such repayment the aggregate outstanding principal amount of the Loans does not exceed the amount of the Borrowing Base. 2.9. Method of Payment. All payments and prepayments of principal and all ----------------- payments of interest shall be made by the Company to the Bank at 100 Federal Street, Boston, Massachusetts in immediately available funds, on or before 2:00 p.m. (Boston time) on the due -11- date thereof, free and clear of, and without any deduction or withholding for, any taxes or other payments. The Bank may, and the Company hereby authorizes the Bank to, debit the amount of any payment not made by such time to the demand deposit account of the Company with the Bank, followed promptly by notice to the Company of such action taken. 2.10. Overdue Payments. (a) Overdue principal (whether at maturity, by ---------------- reason of acceleration or otherwise) and, to the extent permitted by applicable law, overdue interest and fees or any other amounts payable hereunder or under the Note shall bear interest from and including the due date thereof until paid, compounded daily and payable on demand, at a rate per annum equal to (i) if such due date occurs prior to the end of an Interest Period for Eurodollar Loans, 2% above the interest rate applicable to such Loan for such Interest Period until the expiration of such Interest Period, and thereafter, 2% above the Base Rate; and (ii) in all other cases, 2% above the rate then applicable to Base Rate Loans, which interest shall be compounded daily and payable on demand. (b) If a payment of principal or interest hereunder is not made within 10 days of its due date, the Company will also pay, on demand, a late payment charge equal to 5% of the amount of such payment. Nothing in the preceding sentence shall affect the Bank's rights to exercise any of its rights or remedies, including those provided in Section 7.2, if an Event of Default has occurred. 2.11. Payments Not at End of Interest Period. If the Company for any -------------------------------------- reason makes any payment of principal with respect to any Eurodollar Loan on any day other than the last day of the Interest Period applicable to such Eurodollar Loan, or fails to borrow a Eurodollar Loan after giving a Notice of Borrowing pursuant to Section 2.2, the Company shall pay to the Bank an amount computed pursuant to the following formula: L = (R - T) x P x D --------------- 360 L = amount payable to the Bank R = interest rate on such Loan T = effective interest rate per annum at which any readily marketable bond or other obligation of the United States, selected at the Bank's sole discretion, maturing on or near the last day of the Interest Period of such Loan and in approximately the same amount as such Loan can be purchased by the Bank on the day of such payment of principal or failure to borrow P = the amount of principal prepaid or the amount of the requested Loan D = the number of days remaining in the Interest Period as of the date of such payment or the number of days of the requested Interest Period The Company shall pay such amount upon presentation by the Bank of a statement setting forth the amount and the Bank's calculation thereof pursuant hereto, which statement shall be deemed true and correct absent manifest error. 2.12. Computation of Interest and Fees. Interest and all fees payable -------------------------------- hereunder shall be computed daily on the basis of a year of 360 days and paid for the actual number of days for -12- which due. If the due date for any payment of principal is extended by operation of law, interest shall be payable for such extended time. If any payment required by this Agreement becomes due on a day that is not a Business Day such payment may be made on the next succeeding Business Day (subject to clause (i) of the definition of Interest Period), and such extension shall be included in computing interest in connection with such payment. SECTION III ----------- CONDITIONS OF LOANS ------------------- 3.1. Conditions Precedent to Initial Loan. The obligation of the Bank to ------------------------------------ make its initial Loan is subject to the condition precedent that the Bank shall have received, in form and substance satisfactory to the Bank and its counsel, the following: (a) this Agreement and the Note, duly executed by the Company; (b) a certificate of the Clerk or an Assistant Clerk of the Company with respect to resolutions of the Board of Directors authorizing the execution and delivery of this Agreement and the Note and identifying the officer(s) authorized to execute, deliver and take all other actions required under this Agreement, and providing specimen signatures of such officers; (c) the certificate of incorporation of the Company and all amendments and supplements thereto, filed in the office of the Secretary of The Commonwealth of Massachusetts, certified by said Secretary of The Commonwealth as being a true and correct copy thereof; (d) the Bylaws and articles of incorporation of the Company and all amendments and supplements thereto, certified by the Clerk or an Assistant Clerk as being a true and correct copy thereof; (e) a certificate of the Secretary of The Commonwealth of Massachusetts, as to legal existence and good standing in such state and listing all documents on file in the office of said Secretary of State; (f) an opinion addressed to it from Christopher Stavros, counsel to the Company, substantially in the form of Exhibit G hereto; and --------- (g) such other documents, and completion of such other matters, as counsel for the Bank may deem necessary or appropriate. 3.2. Conditions Precedent to all Loans. The obligation of the Bank to make --------------------------------- each Loan, including the initial Loan, is further subject to the following conditions: (a) timely receipt by the Bank of the Notice of Borrowing as provided in Section 2.2; (b) the representations and warranties contained in Section IV shall be true and accurate in all material respects on and as of the date of such Notice of Borrowing and on the effective date of each Loan as though made at and as of each such date (except to the extent that -13- such representations and warranties expressly relate to an earlier date), and no Default shall have occurred and be continuing, or would result from such Loan; (c) the resolutions referred to in Section 3.1(b) shall remain in full force and effect; and (d) no change shall have occurred in any law or regulation or interpretation thereof that, in the opinion of counsel for the Bank, would make it illegal or against the policy of any governmental agency or authority for the Bank to make Loans hereunder. The making of each Loan shall be deemed to be a representation and warranty by the Company on the date of such Loan as to the accuracy of the facts referred to in subsection (b) of this Section 3.2. SECTION IV ---------- REPRESENTATIONS AND WARRANTIES ------------------------------ In order to induce the Bank to enter into this Agreement and to make Loans hereunder, the Company represents and warrants to the Bank that: 4.1. Organization and Qualification. Each of the Company and its ------------------------------ Subsidiaries (a) is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, (b) has all requisite corporate power to own its property and conduct its business as now conducted and as presently contemplated and (c) is duly qualified and in good standing as a foreign corporation and is duly authorized to do business in each jurisdiction where the nature of its properties or business requires such qualification. 4.2. Corporate Authority. The execution, delivery and performance of this ------------------- Agreement and the Note and the transactions contemplated hereby are within the corporate power and authority of the Company and have been authorized by all necessary corporate proceedings, and do not and will not (a) require any consent or approval of the stockholders of the Company, (b) contravene any provision of the charter documents or bylaws of the Company or any law, rule or regulation applicable to the Company, (c) contravene any provision of, or constitute an event of default or event that, but for the requirement that time elapse or notice be given, or both, would constitute an event of default under, any other agreement, instrument, order or undertaking binding on the Company, or (d) result in or require the imposition of any Encumbrance on any of the properties, assets or rights of the Company. 4.3. Valid Obligations. This Agreement and the Note and all of their ----------------- respective terms and provisions are the legal, valid and binding obligations of the Company, enforceable in accordance with their respective terms except as limited by bankruptcy, insolvency, reorganization, moratorium or other laws affecting the enforcement of creditors' rights generally, and except as the remedy of specific performance or of injunctive relief is subject to the discretion of the court before which any proceeding therefor may be brought. -14- 4.4. Consents or Approvals. The execution, delivery and performance of --------------------- this Agreement and the Note and the transactions contemplated herein do not require any approval or consent of, or filing or registration with, any governmental or other agency or authority, or any other party. 4.5. Title to Properties; Absence of Encumbrances. Each of the Company -------------------------------------------- and its Subsidiaries has good and marketable title to all of the properties, assets and rights of every name and nature now purported to be owned by it, including, without limitation, such properties, assets and rights as are reflected in the financial statements referred to in Section 4.6 (except such properties, assets or rights as have been disposed of in the ordinary course of business since the date thereof), free from all Encumbrances except Permitted Encumbrances or those Encumbrances disclosed in Exhibit B hereto, and, except as --------- so disclosed, free from all defects of title that might materially adversely affect such properties, assets or rights, taken as a whole. 4.6. Financial Statements. The Company has furnished the Bank its -------------------- consolidated balance sheet as of December 31, 1994 and its consolidated statements of income, changes in stockholders' equity and cash flow for the fiscal year then ended, and related footnotes, audited and certified by Arthur Andersen & Co. The Company has also furnished the Bank its consolidated balance sheet as of September 22, 1995 and its consolidated statements of income, changes in stockholders' equity and cash flow for the period then ended, certified by the principal financial officer of the Company but subject, however, to normal, recurring year-end adjustments that shall not in the aggregate be material in amount. All such financial statements were prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods specified and present fairly the financial position of the Company and its Subsidiaries as of such dates and the results of the operations of the Company and its Subsidiaries for such periods. There are no liabilities, contingent or otherwise, not disclosed in such financial statements that involve a material amount. 4.7. Changes. Since the date of the financial statements referred to in ------- Section 4.6, there have been no changes in the assets, liabilities, financial condition, business or prospects of the Company or any of its Subsidiaries other than changes in the ordinary course of business, the effect of which has not, in the aggregate, been materially adverse. 4.8. Defaults. As of the date of this Agreement, no Default exists. -------- 4.9. Taxes. The Company and each Subsidiary have filed all federal, ----- state and other tax returns required to be filed, and all taxes, assessments and other governmental charges due from the Company and each Subsidiary have been fully paid. The Company and each Subsidiary have established on their books reserves adequate for the payment of all federal, state and other tax liabilities. 4.10. Litigation. Except as set forth on Exhibit C hereto, there is no ---------- --------- litigation, arbitration, proceeding or investigation pending, or, to the knowledge of the Company's or any Subsidiary's officers, threatened, against the Company or any Subsidiary that, if adversely determined, would result in a material judgment not fully covered by insurance or could result in a forfeiture of all or any substantial part of the property of the Company or its Subsidiaries, or -15- would otherwise have a material adverse effect on the assets, business or prospects of the Company or any Subsidiary. 4.11. Use of Proceeds. No portion of any Loan is to be used for the --------------- "purpose of purchasing or carrying" any "margin stock" as such terms are used in Regulations U and X of the Board of Governors of the Federal Reserve System, 12 C.F.R. 221 and 224, as amended; and following the application of the proceeds of each Loan, the value of all "margin stock" of the Company will not exceed 25% of the value of the total assets of the Company that are subject to the restrictions set forth in Section 6.5 and 6.6. 4.12. Subsidiaries. As of the date of this Agreement, all the ------------ Subsidiaries of the Company are listed on Exhibit D hereto. The Company or a --------- Subsidiary of the Company is the owner, free and clear of all liens and encumbrances, of all of the issued and outstanding stock of each Subsidiary. All shares of such stock have been validly issued and are fully paid and nonassessable, and no rights to subscribe to any additional shares have been granted, and no options, warrants or similar rights are outstanding. 4.13. Investment Company Act. Neither the Company nor any of its ---------------------- Subsidiaries is subject to regulation under the Investment Company Act of 1940, as amended. 4.14 Compliance with ERISA. The Company and each member of the --------------------- Controlled Group have fulfilled their obligations under the minimum funding standards of ERISA and the Code with respect to each Plan and are in compliance in all material respects with the applicable provisions of ERISA and the Code, and have not incurred any liability to the PBGC or a Plan under Title IV of ERISA; and no "Prohibited transaction" or "reportable event" (as such terms are defined in ERISA) has occurred with respect to any Plan. 4.15. Environmental Matters. The Company and each of its Subsidiaries --------------------- are in material compliance with all Federal, state and local environmental laws and ordinances with respect to the conduct of their business or business operations and have no knowledge or notice of any material violation of any environmental protection law, regulation or order. SECTION V --------- AFFIRMATIVE COVENANTS --------------------- So long as the Bank has any commitment to lend hereunder or any Loan or other Obligation remains outstanding, the Company covenants as follows: 5.1. Financial Statements and other Reporting Requirements. The Company ----------------------------------------------------- shall furnish to the Bank: (a) as soon as available to the Company, but in any event within 90 days after the end of each of its fiscal years, a consolidated and consolidating balance sheet as of the end of each such year, and a related consolidated and consolidating statement of income, changes in stockholders' equity and cash flow for such year, audited and certified by Arthur Andersen & Co. -16- (or other independent certified public accountants acceptable to the Bank) in the case of such consolidated statements, and certified by the chief financial officer in the case of such consolidating statements; and, concurrently with such financial statements, a copy of said certified public accountants' management report; (b) as soon as available to the Company, but in any event within 30 days after the end of each month, (i) a consolidated and consolidating balance sheet as of the end of each such fiscal quarter, and a related consolidated and consolidating statement of income for the period then ended, certified by the principal financial officer of the Company but subject, however, to normal, recurring yearend adjustments that shall not in the aggregate be material in amount and (ii) a borrowing base report substantially in the form of Exhibit E; ---------- (c) as soon as available to the Company, but in any event within 30 days after the end of each of its fiscal quarters, a report in substantially the form of Exhibit F hereto signed on behalf of the Company by its chief financial --------- officer; (d) promptly after the receipt thereof by the Company, copies of any reports submitted to the Company by independent public accountants in connection with any interim review of the accounts of the Company made by such accountants; (e) promptly alter the same are available, copies of all proxy statements, financial statements and reports as the Company may file with the Securities and Exchange Commission or any governmental authority at any time having jurisdiction over the Company or its Subsidiaries; (f) if and when the Company gives or is required to give notice to the PBGC of any "Reportable Event" (as defined in Section 4043 of ERISA) with respect to any Plan that might constitute grounds for a termination of such Plan under Title IV of ERISA, or knows that any member of the Controlled Group or the plan administrator of any Plan has given or is required to give notice of any such Reportable Event, a copy of the notice of such Reportable Event given or required to be given to the PBGC; (g) immediately upon becoming aware of the existence of any condition or event that constitutes a Default, written notice thereof specifying the nature and duration thereof and the action being or proposed to be taken with respect thereto; (h) promptly upon becoming aware of any investigative proceedings by a governmental agency or authority commenced or threatened against the Company or any of its Subsidiaries regarding any environmental hazard or condition or any spill, release, discharge or disposal of any substance defined or designated by any environmental statute, rule or regulation of any governmental entity now in effect and applicable to such property, as hazardous or toxic material, hazardous or toxic substance or any similar term, written notice thereof and the action being or proposed to be taken with respect thereto; (i) promptly upon becoming aware of any litigation or of any other investigative proceedings by a governmental agency or authority commenced or threatened against the -17- Company or any of its Subsidiaries of which it has notice, the outcome of which would or might have a materially adverse effect on the assets, business or prospects of the Company or the Company and its Subsidiaries on a consolidated basis, written notice thereof and the action being or proposed to be taken with respect thereto; and (j) from time to time, such other financial data and information about the Company or its Subsidiaries as the Bank may reasonably request. 5.2. Conduct of Business. Each of the Company and its Subsidiaries ------------------- shall: (a) duly observe and comply in all material respects with all applicable laws and valid requirements of any governmental authorities relative to its corporate existence, rights and franchises, to the conduct of its business and to its property and assets, and shall maintain and keep in full force and effect all licenses and permits necessary in any material respect to the proper conduct of its business; (b) maintain its corporate existence; and (c) remain engaged substantially in the design and manufacture of telecommunication platforms, and related software, devices, and services. 5.3. Maintenance and Insurance. Each of the Company and its Subsidiaries ------------------------- shall maintain its properties in good repair, working order and condition as required for the normal conduct of its business. Each of the Company and its Subsidiaries shall at all times maintain liability and casualty insurance with financially sound and reputable insurers in such amounts as the officers of the Company in the exercise of their reasonable judgment deem to be adequate. In the event of failure to provide and maintain insurance as herein provided, the Bank may, at its option, provide such insurance and charge the amount thereof to the account of the Company or any of its Subsidiaries with the Bank. 5.4. Taxes. The Company shall pay or cause to be paid all taxes, ----- assessments or governmental charges on or against it or any of its Subsidiaries or its or their properties on or prior to the time when they become due. 5.5. Inspection by the Bank. The Company shall permit the Bank or its ---------------------- designees, at any reasonable time, and upon reasonable notice (or if a Default shall have occurred and is continuing, at any time and without prior notice), to (i) visit and inspect the properties of the Company and its Subsidiaries, (ii) examine and make copies of and take abstracts from the books and records of the Company and its Subsidiaries, and (iii) discuss the affairs, finances and accounts of the Company and its Subsidiaries with their appropriate officers, employees and accountants. In handling such information the Bank shall exercise the same degree of care that it exercises with respect to its own proprietary information of the same types to maintain the confidentiality of any nonpublic information thereby received or received pursuant to subsections 5.1(a), (b), or (c) except that disclosure of such information may be made (i) to the subsidiaries or affiliates of the Bank in connection with their present or prospective business relations with the Company, (ii) to prospective transferees or purchasers of an interest in the Loans, (iii) as -18- required by law, regulation, rule or order, subpoena, judicial order or similar order and (iv) as may be required in connection with the examination, audit or similar investigation of the Bank. 5.6. Maintenance of Books and Records. Each of the Company and its -------------------------------- Subsidiaries shall keep adequate books and records of account, in which true and complete entries will be made reflecting all of its business and financial transactions, and such entries will be made in accordance with generally accepted accounting principles consistently applied and applicable law. 5.7. Consolidated Tangible Net Worth. The Company shall at all times ------------------------------- maintain Consolidated Tangible Net Worth of at least (i) $5,000,000.00. Any consolidated losses shall not reduce the amount of Consolidated Tangible Net Worth required to be maintained pursuant to this Section 5.7. 5.8. Consolidated Total Liabilities to Consolidated Tangible Net Worth ----------------------------------------------------------------- Ratio. The Company shall at all times maintain a ratio of Consolidated Total - ----- Liabilities to Consolidated Tangible Net Worth of not greater than 1.25 to 1.00. 5.9. Cash Flow Coverage. The Company shall at all times maintain ------------------ consolidated Cash Flow Coverage of not less than 2.0 to 1.00. As used in this Section 5.9, "Cash Flow Coverage" shall mean, at any date as of which the amount ------------------ thereof shall be determined and for the period specified, the quotient obtained by dividing the total of: (i) consolidated earnings before income taxes for -------- such period, excluding any nonrecurring or extraordinary items, plus (ii) ---- consolidated depreciation and amortization expenses for such period, plus (iii) ---- consolidated interest expense (including imputed interest on capital lease obligations) (collectively, "Interest Expense") minus (iv) capital expenditures ---------------- ----- minus cash taxes minus dividends and distributions; by the total of (i) Interest - ----- ----- -- Expense for such period plus (ii) current maturities of long-term Indebtedness ---- for such period. 5.10. Profitability. The Company shall earn consolidated pretax income of ------------- at least $1,000,000.00 in every fiscal quarter. 5.11. Cleanup Provision. The Company shall reduce its outstanding loan ----------------- balance once each period to a maximum of $500,000 and once each period to $300,000, each for 30 consecutive days in the 12 month periods ending December 31, 1996 and December 31, 1997, respectively. 5.12. Further Assurances. At any time and from time to time the Company ------------------ shall, and shall cause each of its Subsidiaries to, execute and deliver such further instruments and take such further action as may reasonably be requested by the Bank to effect the purposes of this Agreement and the Note. SECTION VI ---------- NEGATIVE COVENANTS ------------------ -19- So long as the Bank has any commitment to lend hereunder or any Loan or other Obligation remains outstanding, the Company covenants as follows: 6.1. Indebtedness. Neither the Company nor any of its Subsidiaries shall ------------ create, incur, assume, guarantee or be or remain liable with respect to any Indebtedness other than the following: (a) Indebtedness of the Company or any of its Subsidiaries to the Bank or any of its affiliates; (b) Indebtedness existing as of the date of this Agreement and disclosed on Exhibit B hereto or in the financial statements referred to in Section 4.6; and - --------- (c) other Indebtedness of the Company in an aggregate outstanding principal amount not exceeding $300,000.00 annually. 6.2. Contingent Liabilities. Neither the Company nor any of its ---------------------- Subsidiaries shall create, incur, assume, guarantee or remain liable with respect to any Guarantees other than in favor of the Bank or its affiliates, without the prior written consent of the Bank. 6.3. Leases. Neither the Company nor any of its Subsidiaries shall ------ during any fiscal year enter into any leases of real or personal property as lessee, except for capital leases or leases providing for payments in any one fiscal year (whether or not such payments are termed rent) that in the aggregate do not increase the aggregate annual lease payments of the Company and its Subsidiaries in excess of $100,000.00 over such payments required to be made during the immediately preceding fiscal year. 6.4. Sale and Leaseback. Neither the Company nor any of its Subsidiaries ------------------ shall enter into any arrangement, directly or indirectly, whereby it shall sell or transfer any property owned by it in order to lease such property or lease other property that the Company or any such Subsidiary intends to use for substantially the same purpose as the property being sold or transferred. 6.5. Encumbrances. Neither the Company nor any of its Subsidiaries shall ------------ create, incur, assume or suffer to exist any mortgage, pledge, security interest, lien or other charge or encumbrance, including the lien or retained security title of a conditional vendor upon or with respect to any of its property or assets including, without limitation, on any of its accounts receivable or inventory ("Encumbrances"), or assign or otherwise convey any ------------ right to receive income, including the sale or discount of accounts receivable with or without recourse, except the following ("Permitted Encumbrances"): ---------------------- (a) Encumbrances in favor of the Bank or any of its affiliates; and (b) Encumbrances existing as of the date of this Agreement and disclosed in Exhibit B hereto; - --------- -20- 6.6. Merger; Consolidation; Sale or Lease of Assets. Neither the Company ---------------------------------------------- nor any of its Subsidiaries shall sell, lease or otherwise dispose of assets or properties (valued at the lower of cost or market), other than sales of inventory in the ordinary course of business, in the aggregate in excess of $500,000 in any fiscal year; or liquidate, merge or consolidate into or with any other person or entity, provided that any Subsidiary of the Company may merge or -------- consolidate into or with (i) the Company if no Default has occurred and is continuing or would result from such merger and if the Company is the surviving company, or (ii) any other wholly-owned Subsidiary of the Company. 6.7. Change in Control. Robert Madonna, his spouse or issue shall own at ----------------- least 51% of the Equity Securities of the Company, but in any case Robert Madonna shall not own less than 51% of the voting stock. For purposes hereof "Equity Securities" shall mean (a) all common stock, preferred stock, participations, shares, partnership interests, or other equity interests in and of the Company (regardless of how designated and whether or not voting or non- voting) and (b) all warrants, options, and other rights to acquire any of the foregoing. 6.8. Equity Distributions. The Company shall not pay any dividends on -------------------- any class of its capital stock or make any other distribution or payment on account of or in redemption, retirement or purchase of such capital stock which result in an Event of Default under Sections 5.7, 5.8, 5.9 or 5.10, or violates any other provision of this Agreement. 6.9. Investments. Neither the Company nor any of its Subsidiaries shall ----------- make or maintain any Investments other than (i) existing Investments in Subsidiaries and (ii) Qualified Investments. 6.10. ERISA. Neither the Company nor any member of the Controlled ----- Group shall permit any Plan maintained by it to (i) engage in any "prohibited transaction" (as defined in Section 4975 of the Code, (ii) incur any "accumulated funding deficiency" (as defined in Section 302 of ERISA) whether or not waived, or (iii) terminate any Plan in a manner that could result in the imposition of a lien or encumbrance on the assets of the Company or any of its Subsidiaries pursuant to Section 4068 of ERISA. SECTION VII ----------- DEFAULTS -------- 7.1. Events of Default. There shall be an Event of Default hereunder if ----------------- any of the following events occurs: (a) the Company shall fail to pay when due (i) any amount of principal of any Loans, (ii) any amount of interest thereon or (iii) any fees or expenses payable hereunder or under the Note within 10 days following notice; or (b) The Company shall fail to perform any term, covenant or agreement contained in Sections 5.1(g), 5.5, 5.7 through 5.11 or 6.1 through 6.10; or -21- (c) the Company shall fail to perform any covenant contained in Sections 5.1(f, 5.1(h) or 5.2, and such failure shall continue for 30 days; or (d) the Company shall fail to perform any term, covenant or agreement (other than in respect of subsections 7.1(a) through (c) hereof) contained in this Agreement and such default shall continue for 30 days after notice thereof has been sent to the Company by the Bank; or (e) any representation or warranty of the Company made in this Agreement or in the Note or any other documents or agreements executed in connection with the transactions contemplated by this Agreement or in any certificate delivered hereunder shall prove to have been false in any material respect upon the date when made or deemed to have been made; or (f) there shall occur any material adverse change in the assets, liabilities, financial condition, business or prospects of the Company or the Company and its Subsidiaries, taken as a whole, as determined by the Bank acting good faith; or (g) the Company or any of its Subsidiaries shall fail to pay at maturity, or within any applicable period of grace, any obligation or obligations which in the aggregate exceed $10,000 for borrowed monies or advances, or for the use of real or personal property, or fail to observe or perform any term, covenant or agreement evidencing or securing such obligations for borrowed monies or advances, or relating to such use of real or personal property, the result of which failure is to permit the holder or holders of such Indebtedness to cause such Indebtedness to become due prior to its stated maturity upon delivery of required notice, if any; or (h) the Company or any of its Subsidiaries shall (i) apply for or consent to the appointment of, or the taking of possession by, a receiver, custodian, trustee, liquidator or similar official of itself or of all or a substantial part of its property, (ii) be generally not paying its debts as such debts become due, (iii) make a general assignment for the benefit of its creditors, (iv) commence a voluntary case under the Federal Bankruptcy Code (as now or hereafter in effect), (v) take any action or commence any case or proceeding under any law relating to bankruptcy, insolvency, reorganization, winding-up or composition or adjustment of debts, or any other law providing for the relief of debtors, (vi) fail to contest within 30 days or in an appropriate manner, or acquiesce in writing to, any petition filed against it in an involuntary case under the Federal Bankruptcy Code or other law, (vii) take any action under the laws of its jurisdiction of incorporation or organization similar to any of the foregoing; or (i) a proceeding or case shall be commenced, without the application or consent of the Company or any of its Subsidiaries in any court of competent jurisdiction, seeking (i) the liquidation, reorganization, dissolution, winding up, or composition or readjustment of its debts, (ii) the appointment of a trustee, receiver, custodian, liquidator or the like of it or of all or any substantial part of its assets, or (iii) similar relief in respect of it, under any law relating to bankruptcy, insolvency, reorganization, winding-up or composition or adjustment of debts or any other law providing for the relief of debtors, and such proceeding or case shall continue undismissed, or unstayed and in effect, for a period of 30 days; or an order for relief shall be entered in an involuntary case under the Federal Bankruptcy Code, against the Company or such Subsidiary; or action under the laws of the jurisdiction of incorporation or organization of the -22- Company or any of its Subsidiaries similar to any of the foregoing shall be taken with respect to the Company or such Subsidiary and shall continue unstayed and in effect for any period of 30 days; or (j) a judgment or order for the payment of money shall be entered against the Company or any of its Subsidiaries by any court, or a warrant of attachment or execution or similar process shall be issued or levied against property of the Company or such Subsidiary, and such judgment, order, warrant or process shall continue undischarged or unstayed for 30 days; or (k) the Company or any member of the Controlled Group shall fail to pay when due any amount or amounts that it shall have become liable to pay to the PBGC or to a Plan under Title IV of ERISA; or notice of intent to terminate a Plan or Plans shall be filed under Title IV of ERISA by the Company, any member of the Controlled Group, any plan administrator or any combination of the foregoing; or the PBGC shall institute proceedings under Title IV of ERISA to terminate or to cause a trustee to be appointed to administer any such Plan or Plans or a proceeding shall be instituted by a fiduciary of any such Plan or Plans against the Company and such proceedings shall not have been dismissed within 30 days thereafter; or a condition shall exist by reason of which the PBGC would be entitled to obtain a decree adjudicating that any; or 7.2. Remedies. Upon the occurrence of an Event of Default described in -------- subsections 7.1(h) and (i), immediately and automatically, and upon the occurrence of any other Event of Default, at any time thereafter while such Event of Default is continuing, at the Bank's option and upon the Bank's declaration: (a) the Bank's commitment to make any further Loans hereunder shall terminate; (b) the unpaid principal amount of the Loans together with accrued interest and all other Obligations shall become immediately due and payable without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived; and (c) the Bank may exercise any and all rights it has under this Agreement, the Note or any other documents or agreements executed in connection herewith, or at law or in equity, and proceed to protect and enforce the Bank's rights by any action at law, in equity or other appropriate proceeding. SECTION VIII ------------ MISCELLANEOUS ------------- 8.1. Notices. Unless otherwise specified herein, all notices hereunder ------- to any party hereto shall be in writing and shall be deemed to have been given when delivered by hand, when properly deposited in the mails postage prepaid, when sent by electronic facsimile transmission, or when delivered to the overnight courier, addressed to such party at its address indicated below: If to the Company, at -23- EXCEL INC. 255 Independence Drive Hyannis, MA 02601 Attention: Nathan Apatow If to the Bank, at The First National Bank of Boston 100 Federal Street Boston, Massachusetts 02110 Attention: Bradford Egan MA Corp. Cape Cod or at any other address specified by such party in writing. 8.2. Expenses. The Company shall, on demand, pay or reimburse the Bank -------- for all expenses (including attorneys' fees of outside counsel or allocation costs of in-house counsel incurred or paid by the Bank in connection with the preparation, negotiation and closing of this Agreement and the Note (whether or not the transactions contemplated hereby shall be consummated) or in connection with the administration or amendment of this Agreement or the Note (whether or not the transactions contemplated hereby shall be consummated) and with the enforcement of any Obligation or exercise of any right of the Bank hereunder or under the Note. 8.3. Set-Off. Regardless of the adequacy of any collateral or other ------- means of obtaining repayment of the Obligations, any deposits, balances or other sums credited by or due from the head office of the Bank or any of its branch offices to the Company may, at any time and from time to time after the occurrence of an Event of Default hereunder, without notice to the Company or compliance with any other condition precedent now or hereafter imposed by statute, rule of law, or otherwise (all of which are hereby expressly waived) be set off, appropriated, and applied by the Bank against any and all obligations of the Company to the Bank or any of its affiliates in such manner as the head office of the Bank or any of its branch offices in their sole discretion may determine, and the Company hereby grants the Bank a continuing security interest in such deposits, balances or other sums for the payment and performance of all such obligations. 8.4. Term of Agreement. This Agreement shall continue in force and ----------------- effect so long as the Bank has any commitment to make Loans hereunder or any Loan or any Obligation shall be outstanding. 8.5. No Waivers. No failure or delay by the Bank in exercising any ---------- right, power or privilege hereunder or under the Note or under any other documents or agreements executed in connection herewith shall operate as a waiver thereof; nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein and in the Note provided are cumulative and not exclusive of any rights or remedies otherwise provided by agreement or law. -24- 8.6. Massachusetts Law. This Agreement and the Note shall be deemed to ----------------- be contracts made under seal and shall be construed in accordance with and governed by the laws of The Commonwealth of Massachusetts (without giving effect to any conflicts of law provisions contained therein). 8.7. Amendments. Neither this Agreement nor the Note nor any provision ---------- hereof or thereof may be amended, waived, discharged or terminated except by a written instrument signed by the Bank and, in the case of amendments, by the Company. 8.8. Binding Effect of Agreement. This Agreement shall be binding upon --------------------------- and inure to the benefit of the Company and the Bank and their respective successors and assigns; provided that the Company may not assign or transfer its -------- rights or obligations hereunder. The Bank may sell, transfer or grant participations in the Note without the prior written consent of the Company, and the Company agrees that any transferee or participant shall be entitled to the benefits of Sections 2.7, 2.11, 5.5 and 8.3 to the same extent as if such transferee or participant were the Bank hereunder; provided that notwithstanding any such transfer or participation, the Company may, for all purposes of this Agreement, treat the Bank as the person entitled to exercise all rights hereunder and under the Note and to receive all payments with respect thereto. 8.9. Counterparts. This Agreement may be signed in any number of ------------ counterparts with the same effect as if the signatures hereto and thereto were upon the same instrument. 8.10. Partial Invalidity. The invalidity or unenforceability of any one ------------------ or more phrases, clauses or sections of this Agreement shall not affect the validity or enforceability of the remaining portions of it. 8.11. Captions. The captions and headings of the various sections and -------- subsections of this Agreement are provided for convenience only and shall not be construed to modify the meaning of such sections or subsections. 8.12. Termination. The Company shall have the right to terminate this ----------- Agreement upon sixty (60) days written notice, without prejudice to any rights of the Bank set forth in this Agreement and only to the extent that there is no loan Obligation outstanding at the time of termination. 8.13. WAIVER OF JURY TRIAL. EXCEPT AS PROHIBITED BY LAW, NEITHER THE -------------------- COMPANY NOR THE BANK, NOR ANY OF THEIR ASSIGNEES OR SUCCESSORS, SHALL (A) SEEK A JURY TRIAL IN ANY LAWSUIT, PROCEEDING, COUNTERCLAIM OR ANY OTHER LITIGATION PROCEDURE BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY RELATED DOCUMENT OR AGREEMENT, OR THE DEALINGS OR THE RELATIONSHIP BETWEEN OR AMONG ANY OF THEM, OR (B) SEEK TO CONSOLIDATE ANY SUCH ACTION, IN WHICH A JURY TRIAL HAS BEEN WAIVED, WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CAN NOT BE OR HAS NOT BEEN WAIVED. THE PROVISIONS OF THIS SECTION HAVE BEEN FULLY DISCUSSED BY THE PARTIES HERETO, AND THE PROVISIONS HEREOF SHALL BE SUBJECT TO NO EXCEPTIONS. NO PARTY HERETO HAS IN ANY WAY AGREED -25- WITH OR REPRESENTED TO ANY OTHER PARTY THAT THE PROVISIONS OF THIS SECTION 8.12 WILL NOT BE FULLY ENFORCED IN ALL INSTANCES. 8.14. Entire Agreement. This Agreement, the Note and the documents and ---------------- agreements executed in connection herewith constitute the final agreement of the parties hereto and supersede any prior agreement or understanding, written or oral, with respect to the matters contained herein and therein. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their duly authorized officers as of the day and year first above written. EXCEL INC. By /s/ Robert P. Madonna ---------------------------------- Title: President THE FIRST NATIONAL BANK OF BOSTON By /s/ Bradford P. Egan ---------------------------------- Title: Vice President EXCEL INC. PROMISSORY NOTE $5,000,000.00 December 21, 1995 Boston, Massachusetts For value received, the undersigned hereby promises to pay to The First National Bank of Boston (the "Bank"), or order, at the head office of the Bank at 100 Federal Street, Boston, Massachusetts 02110, the principal amount of Five Million Dollars ($5,000,000.00) or such lesser amount as shall equal the aggregate unpaid principal amount of all Loans (as defined in the Agreement referred to below) made by the Bank to the undersigned pursuant to the Agreement, in lawful money of the United States and in immediately available funds, in the amounts and on the dates provided on the schedule attached hereto and to pay interest on the unpaid principal amount hereof, at said office, in like money and funds, for the period commencing on the date hereof until paid in full, at the rates per annum and on the dates provided on such schedule. Overdue payments of principal (whether at stated maturity, by acceleration or otherwise), and, to the extent permitted by law, overdue interest, shall bear interest, compounded monthly and payable on demand in immediately available funds, at a rate per annum equal to two percent (2%) above greater of (i) the rate in effect with respect to such principal prior to its maturity and (ii) the rate then applicable to Base Rate Loans under the Agreement. This Note is issued pursuant to, and entitled to the benefits of, and is subject to, the provisions of a certain Credit Agreement dated as of December 21, 1995 by and between the undersigned and the Bank (herein, as the same may from time to time be amended or extended, referred to as the "Agreement"), but neither this reference to the Agreement nor any provision thereof shall affect or impair the absolute and unconditional obligation of the undersigned maker of this Note to pay the principal of and interest on this Note as herein provided. As provided in the Agreement, this Note is subject to mandatory prepayment in certain circumstances. In case an Event of Default (as defined in the Agreement) shall occur, the aggregate unpaid principal of plus accrued interest on this Note shall become or may be declared to be due and payable in the manner and with the effect provided in the Agreement. The undersigned may at its option prepay all or any part of the principal of this Note before maturity upon the terms provided in the Agreement. The undersigned maker hereby waives presentment, demand, notice of dishonor, protest and all other demands and notices in connection with the delivery, acceptance, performance and enforcement of this Note. This instrument shall have the effect of an instrument executed under seal and shall be governed by and construed in accordance with the laws of The Commonwealth of Massachusetts (without giving effect to any conflicts of laws provisions contained therein). EXCEL INC. By: /s/ Robert P. Madonna ------------------------------- Title: President AMENDMENT TO CREDIT AGREEMENT AND PROMISSORY NOTE This Amendment to Credit Agreement and Promissory Note (the "Amendment") is made as of May 24, 1996 and amends the Credit Agreement dated as of December 21, 1995 (as amended, the "Agreement"), between EXCEL, INC. (the "Company"), and THE FIRST NATIONAL BANK OF BOSTON, a national banking association (the "Bank") and the Promissory Note dated as of December 21, 1995 executed by the Company in favor of the Bank (as amended, the "Note"). Capitalized terms which are used in this Amendment and are defined in the Agreement, shall have the meanings given to them in the Agreement unless they are otherwise defined in this Amendment. WHEREAS, the Bank has made available to the Company a certain $5,000,000 credit facility as described in the Agreement and evidenced by the Note; and WHEREAS, the Company and the Bank have agreed to increase the credit facility to $10,000,000; NOW, THEREFORE, the Bank and the Company agree as follows: I. AMENDMENTS TO THE AGREEMENT 1. Section 1.1. of the Agreement is hereby amended by deleting "$5,000,000.00" from the definition of "Commitment Amount" set forth ----------------- and substituting "$10,000,000.00" therefor. 2. Section 2.3 of the Agreement is hereby amended by deleting it in its entirety and replacing it with the following: "2.3 Facility Fee. The Company shall pay to the Bank during the ------------ Revolving Credit Period an annual fee equal to (i) $9,500.00 from the date of this Agreement until June 30, 1996 and $25,000.00 thereafter. The facility fee shall be payable quarterly in advance, on the first day of January, April, July and October of each year. The Company shall pay $2,375.00 on each of January 1, 1996, and April 1, 1996 and $6,250.00 each quarter in advance thereafter commencing on July 1, 1996. A prorated amount for the period from the date of the Agreement to December 31, 1995 shall be payable at the closing." II. AMENDMENT TO THE NOTE The Note is hereby amended by deleting "$5,000,000.00" and "Five Million Dollars ($5,000,000.00)" from the first page thereof and substituting "$10,000,000.00" and "Ten Million Dollars $10,000,000.00)", respectively, therefor. III. MISCELLANEOUS AGREEMENTS 1. Continuing Effect of the Agreement. This Amendment shall not ---------------------------------- constitute an amendment of any provision of the Agreement or the Note not expressly referred to herein and shall not be construed as a consent to any action on the part of the Company that would require a waiver or consent of the Bank except as expressly stated herein. The provisions of the Agreement and the Note that are not expressly amended or modified hereby are and shall remain in full force and effect, and are hereby ratified and confirmed, including without limitation, the negative pledge on assets of the Company as set forth in Section 6.5 of the Agreement. 2. Representations and Warranties. The Company hereby represents and ------------------------------ warrants to the bank that the representations and warranties set forth in the Agreement and the Note as amended by this Amendment are true and correct on and as of the date hereof as if made on and as of the date hereof, and that no Event of Default exists on and as of the date hereof. 3. Fees, Costs, Expenses and Taxes. The Company also agrees to pay on ------------------------------- demand all costs and expenses of the Bank in connection with the preparation, execution and delivery of this Amendment and the other instruments and documents to be delivered hereunder, including the fees and allocation costs of its in-house counsel. 4. Effectiveness of Amendment. This Amendment shall be effective as of -------------------------- the date hereof upon receipt by the Bank of (a) this Amendment duly executed and delivered by the Company and the Bank and (b) such other documents and certificates as the bank or its counsel may have requested. 5. Governing Law. The Amendment shall be deemed to be a contract under ------------- seal and for all purposes shall be governed by and construed and enforced in accordance with the laws of The Commonwealth of Massachusetts. 6. Counterparts. The Amendment may be executed in any number of ------------ counterparts and by the different parties hereto on separate counterparts, each of which, when so executed, shall be deemed an original, but all such counterparts shall constitute but one and the same instrument. The Amendment shall be firmly attached to the Note by stapling or other permanent means of attachment and shall constitute an integral part of the Note from and after the date first above written. IN WITNESS WHEREOF, the parties have caused this Amendment to be executed and delivered by their duly authorized officers as of the date first above written. EXCEL. INC. By: /s/ Robert P. Madonna -------------------------------- Title: President THE FIRST NATIONAL BANK OF BOSTON By: /s/ Bradford P. Egan -------------------------------- Title: Vice President as of March 20, 1997 Excel, Inc. 255 Independence Park Hyannis, MA 02601 Attention: Mr. Robert Madonna RE: Line of Credit -------------- Gentlemen: The First National Bank of Boston (the "Bank") has made a certain revolving line of credit (the "Line") available to Excel, Inc. (the "Borrower") pursuant to a certain credit agreement dated December 21, 1995 (as amended, the "Agreement"). All obligations with respect to the Line are evidenced by a certain Promissory Note in the principal amount of $5,000,000 dated as of December 21, 1995, amended and increased to $10,000,000 (as amended, the "Note"). The Borrower has requested, and the Bank has agreed to amend the Borrowing Base definition and waive and amend certain covenants as set forth in the Agreement. Now, therefore, for good and valuable consideration, the receipt of which is hereby acknowledged, the Borrower and the Bank hereby agree as follows: 1. The Borrowing Base as defined in the Agreement is hereby amended to include 50% of the Net Security Value of Base Inventory net of the obsolescence reserve. "Net Security Value of Base Inventory" shall mean the net value of Base Inventory, calculated at the lesser of fair market value or cost determined on the "first in, first out" basis, after subtracting the value of any Base Inventory which is damaged or detective and after taking into account charges and liens, other than those of the Bank, of all kinds against the Base Inventory, changes in the market value thereof, and transportation, processing and other handling charges affecting the value thereof, all as determined by the Bank in its discretion, which determination shall be final and binding upon the Borrowers. "Base Inventory" shall mean inventory consisting of raw materials as to which a Borrower has acquired title, and is otherwise in compliance with Section 6.5 Encumbrance, and the Borrowers have furnished to the Bank ----------- information as required by Section 5.1(b) hereof. Inventory immediately loses the status of Base Inventory if and when a Borrower sells it, otherwise passes title thereto or consumes it. 2. Section 5.1(a) of the Agreement requires that audited fiscal year end statements be submitted to the Bank within 90 days of the Borrower's fiscal year end. The Borrower has made it known to the Bank that the statement will not be available within that set period of time for fiscal 1996. The Borrower has requested a waiver of the covenant default. Based on the representations made by the Borrower, the Bank hereby waives the covenant default referenced above for the year ended December 31, 1996 and resets the time period to 180 days from the Borrower's fiscal year end. Thereafter, the time period for said covenant will again be 90 days from fiscal year end. -2- 3. Section 6.3 of the Agreement requires that the Borrower or any of its subsidiaries not enter into any leases of real or personal property as lessee which increase the aggregate annual lease payments over $100,000 from the prior fiscal year. The Borrower has made it known to the Bank that the Borrower entered into new leases requiring annual aggregate lease payments of $225,000 in the fiscal year ended December 31, 1996, $125,000 in excess of the permitted amount. The Bank hereby waives the covenant default referenced above for the year ended December 31, 1996 based on the representations made by the Borrower and resets the covenant amending the annual limitation to $300,000 (from the previously agreed $100,000) for future periods. 4. Section 6.4 of the Agreement restricts the Borrower from entering into sale or leaseback transactions. The Borrower has made it known to the Bank that the Borrower did enter into a $560,000 sale/leaseback transaction in the fiscal year ended December 31, 1996. The Bank hereby waives the covenant default referenced above for the year ended December 31, 1996, based on the representations made by the Borrower and resets the covenant for the periods thereafter. These waivers shall not constitute a waiver of any provision of the Agreement other than Section 5.1(a), 6.3, and 6.4 and shall not be construed as a consent to any action on the part of the Borrower that would require a waiver or consent of the Bank except as expressly stated herein. All of the provisions of the Agreement are and shall remain in full force and effect and are hereby ratified and confirmed. Sincerely, THE FIRST NATIONAL BANK OF BOSTON By: /s/ Bradford P. Egan -------------------------------- Its: Vice President --------------------------- Acknowledged: Excel, Inc. By: /s/ Nathan C. Apatow ------------------------ Its: Treasurer -3- Exhibit MONTHLY BORROWING BASE CERTIFICATE Company ____________________________ 1. Accounts Receivable @ ___________ (date) $_____________ a. Less Accounts over 60 days $_____________ b. Less Accounts due to Cross Aging Rule (25%) $_____________ c. Less Affiliate Receivables $_____________ d. Less Foreign Receivables $_____________ e. Less Other Ineligibles $_____________ 2. Eligible Accounts Receivable $_____________ 3. Advance Rate (75%) $_____________ 4. Accounts Receivable Availability $_____________ 5. Raw Material Inventory $_____________ 6. Advance Rate (50%) $_____________ 7. Net Obsolescence Reserve $_____________ 8. Inventory Availability $_____________ 9. Total AIR and Inventory Availability $_____________ 10. Less Outstanding Loan Balance (maximum $10,000,000) $_____________ 12. Net Availability (Overadvance) $_____________ The undersigned, and the individual signing this certificate on behalf of the undersigned, certify that the information contained herein is true, correct, and complete as of the date set forth above. By: ______________________________ (Authorized Official) Date: ____________________________ EX-10.8 12 MORTGAGE AND SECURITY AGREEMENT AND REAL ESTATE PROMISSORY NOTE DATED 4/21/95 Exhibit 10.8 MORTGAGE AND SECURITY AGREEMENT EXCEL, INC., a Massachusetts business corporation, having a principal place of business at 41 Meeting House Lane, P.O. Box 327, Sagamore Beach, Massachusetts 02562 ("Mortgagor") for consideration paid, grant to CAPE COD BANK AND TRUST COMPANY, a Massachusetts banking corporation, having its usual place of business at 307 Main Street, Hyannis, MA 02601 ("Mortgagee") with MORTGAGE COVENANTS, to secure the payment OF TWO MILLION SIX HUNDRED THOUSAND AND N0/100 ($2,600,000.00) DOLLARS payable as provided in a note of even date (the "Note"), and also to secure the performance of all of the covenants and agreements contained in this Mortgage and the said note of even date and any other documents executed as collateral therefor or relating thereto and existing as of the date hereof. The land together with the buildings and other structures now or hereafter placed thereon (hereinafter called the "mortgaged premises" or the "premises" or the "property") in Barnstable (Hyannis), Barnstable County, Massachusetts, more particularly described in Exhibit "A" attached hereto and made a part hereof. ----------- There is included herein as a part of the premises all portable or sectional buildings at any time placed upon said premises, and all furnaces, ranges, heaters, plumbing, gas and electric fixtures, screens, mantels, shades, screen doors, storm doors and windows, oil burners, gas or electric refrigerators and all other fixtures of whatever kind and nature at present or hereafter installed in or on the premises in any manner which renders such articles usable in connection therewith so far as the same are, or can by agreement of parties, be made a part of the realty, and all material, apparatus or supplies intended to enter into the construction, repair or remodeling of the buildings on the premises, now in said buildings or on the premises, or placed therein or thereon prior to the full payment and discharge of this Mortgage. This mortgage is intended also to be a Security Agreement and Financing Statement under the Uniform Commercial Code. Accordingly, the Mortgagor grants to the Mortgagee a security interest in the Property (as hereinafter defined) and covenants and agrees that, as of the execution hereof and upon the subsequent acquisition of such furnishings, fixtures, supplies, materials, and any other improvements and items of personal property the Mortgagor shall have, and used in connection with the described real estate or purchase from the proceeds of the loan contemplated hereunder, and for replacement items: a) provide the Mortgagee with the above personal property a precise inventory, save for all new and used vehicles and any parts inventory, of the same, as and when acquired; b) execute and deliver to the Mortgagee, in form appropriate for recording and filing, financing statements on all such articles, fixtures, equipment and materials; -2- c) provide to the Mortgagee such other assurances as may be required by the holder to establish the holder's first and prior security interest in such fixtures, supplies, materials, and any other improvements; and d) execute, deliver and cause to be recorded and filed from time to time, without notice or demand, and at the mortgagor's sole cost and expense, continuance and such priority of security in such articles, fixtures, equipment and materials. The above-described furnishings, fixtures, supplies, materials, and realty, together with any and all improvements now thereon, or from time to time thereon, and any additions thereto or replacements thereof, are herein collectively referred to as the "Property". It is understood and agreed that the security interest in the property delivered to the Mortgagee hereunder shall not cover property owned by lessees and tenants in possession. The Mortgagor covenants: 1) to perform all of the covenants and agreements contained in said note; 2) to pay before the same become delinquent and a lien against the property (and to provide by such time evidence of such payment, satisfactory to the holder hereof) all taxes, charges, sewer use fees, water rates and assessments of every name and nature, whether or not assessed against the Mortgagor, if applicable or related to the property, or any interest therein, or the debt, obligation or any agreement secured hereby, or the disbursements or the application of the proceeds thereof; but the obligations of the Mortgagor under this Section 2 contained shall not extend to any income tax or corporation excise tax of the holder; 3) that if at any time any law or court decree prohibits the performance of any material obligation undertaken herein by the Mortgagor, or provides that any amount to be paid hereunder by the Mortgagor, exclusive of principal and interest payments, must be credited against the Mortgagor's obligations under the Note, the holder shall have the right, on 30 days' prior written notice to the Mortgagor, to require payment in full of the entire indebtedness secured hereby; 4) to assure the payment of all taxes, charges, sewer use fees, water rates, assessments of every name and nature, or any other obligation which may have or acquire priority over this Mortgage, and which are assessed or payable with reference to the property, at the election of the holder, if and only to the extent the loan to value ratio is more than 80%, the Mortgagor shall deposit with the holder, on each day when any payment under the Note is required to be made, a sum determined by the holder to be sufficient to provide, in the aggregate, a fund adequate to pay any such amounts 1 day at least before the same become delinquent; and whenever the holder determines sums accumulated under the provisions of this Section 4 to be insufficient to meet the obligation for which such deposits were made, the Mortgagor shall pay within 10 days of demand of -3- the holder, any amount required to cover the deficiency therein; every deposit may, at the option of the holder, be applied directly against the obligation with reference to which it was made, or, to the fullest extent permissible according to law, any other obligation of the Mortgagor secured hereby; such deposits may be commingled with other assets of the holder and, in the discretion of the holder, invested by the holder for its own account, without any obligation to pay income from such investment, or interest on such deposits, to Mortgagor, or to account to Mortgagor for such income in any manner; 5) not to suffer any act in its nature capable of materially harming the value of the mortgaged premises, irrespective of whether or not such act may constitute waste; not to suffer to be made any material alteration or change in the use, occupancy, or structural condition of the mortgaged premises unless the written consent of the Mortgagee be first obtained in each particular case; to keep all and singular the said premises in such repair, order and condition as the same are now in or may be in while the Mortgage is outstanding, reasonable wear and tear only excepted; not to permit or suffer any violation of any law, ordinance or regulation affecting the mortgaged premises or the use thereof, except to the extent Mortgagor may in good faith contest the validity or effect thereof by duly instituting proceedings as long as the action underlying the same is stayed; that the Mortgagee may, in its discretion upon reasonable notice and reasonable times, enter upon and make repairs as in its judgment may be necessary to keep said premises in good condition and repair, and that all money so expended shall be secured by this Mortgage, shall draw interest at the rate provided in the note from the date of the advance of such payment and shall be payable by the Mortgagor to the Mortgagee at such time and in such amounts as the Mortgagee may determine; 6) to carry with respect to the property and its use physical hazard insurance on an "all risks" basis covering the perils of fire, extended coverage and special extended coverage (including earthquake, boiler explosion, collapse, costs of demolition and contingent liability from the operation of any building laws as they may pertain to nonconforming property) in an amount not less than 100% of the full replacement cost of all building improvements and interests thereof and Mortgagor's contents therein, and during the construction of any improvements which become a part of the property, to carry insurance in "Builder's Risk completed value (non-reporting)" form, including all risk type coverage and to carry such liability insurance coverage as the holder shall from time to time reasonably require; initial minimum limits of $1,000,000.00 which limits may be reviewed annually by Mortgagee; all insurance (with evidence of payment of premiums thereon satisfactory to the holder) so required to be maintained, together with any other insurance with respect to the property maintained by the Mortgagor, shall be deposited with, and, except for public liability coverage and except to the extent of the first $50,000.00 in aggregate of losses payable in any calendar year, and any other coverage the holder may determine shall not by payable to it in case of loss, shall be first payable in case of loss to the holder; all -4- renewals or replacements of such insurance from time to time in force together with evidence of payment of premiums thereon satisfactory to the holder shall be delivered to the holder 1 day at least before the expiration date of then current insurance; all insurance required as aforesaid to be maintained with respect to the property shall be written by such companies, on such terms, in such form and for such periods and amounts as the holder shall from time to time approve and shall not be cancelable or amendable without at least 15 day's prior written notice to the holder; and no settlement on account of any loss covered by such insurance, exceeding $50, 000.00 in the aggregate in any calendar year, shall be effected without the consent of the holder; 7) except as provided in Paragraph 6, the proceeds of any hazard insurance shall, at the option of the holder (i) be applied to or toward the indebtedness secured hereby in such order as the holder may determine (in which event the Mortgagor shall be relieved of the obligation in Section 5 of this Mortgage to the extent of the repair of that part of the property damaged by the hazard with respect to which insurance is paid); or (ii) if the holder shall require repair of that part of the property so damaged by the insured hazard, the holder shall release to the Mortgagor insurance proceeds paid to it upon such reasonable conditions as the holder may prescribe and upon completion of such repair shall, at the holder's option, apply any excess insurance proceeds to or toward the indebtedness secured hereby in such order as the holder may determine or release the same to the Mortgagor; notwithstanding any thing in this Section 7 to the contrary, however, if the insurer denies liability to the Mortgagor, except where such denial is based on the negligence of the Mortgagee, the Mortgagor shall not be relieved of any obligation under Section 5 of this Mortgage, whether or not the proceeds of insurance are applied to or toward the indebtedness secured hereby; 8) the awards of damages on account of any condemnation for public use of or injury to the property shall be paid to the holder; such awards shall, at the option of the holder (i) be applied to or toward the indebtedness secured hereby in such order as the holder may determine, in which event the Mortgagor shall be relieved of the obligation of Section 5 of this Mortgage to the extent of the repair of that part of the property which remains and which has been damaged or injured by such public action; or (ii) if the holder shall require restoration of that part of the property which remains, the holder shall release to the Mortgagor such awards paid to it upon such conditions as the holder may reasonably prescribe, but not more than such portion of such awards as may be required to repair such damage or injury; and any balance remaining shall be applied by the holder to or toward the indebtedness secured hereby in such order as the holder may determine; 9) to use its best efforts continuously to use and occupy the property or cause the property to be used or occupied; -5- 10) except in the ordinary course of business in each instance, not to lease the property or any substantial part thereof, without the prior written consent of the holder; faithfully to keep, observe and satisfy all the obligations on the part of the lessor to be kept, performed and satisfied under every lease from time to time in force with reference to the property, except upon default of the tenant, and not to alter or terminate any such lease or accept rentals for more than one month's rental in advance; and, at any time on notice from the holder, to submit to the holder for examination all such leases and on the demand of the holder, to assign and deliver to the holder any or all such leases, or and upon and after an Event of Default the rents and profits thereof, such assignments to be in form satisfactory to the holder, but in all events to provide that the Mortgagor shall retain the rents and profits thereof until an Event of Default occurs in any covenant or condition in this Mortgage; and the holder shall have the right, by the execution of suitable written instruments from time to time, to subordinate this Mortgage, and the rights of the holder hereunder, to any lease or leases from time to time, in force with reference to the property, and, on the execution of any such instrument, this Mortgage shall to the extent permitted by law be subordinate to the lease for which such subordination is applicable with the same force and effect as if such lease had been executed and delivered, and a notice thereof recorded to the extent required to give notice to third persons, prior to the execution, delivery and recording of this Mortgage; 11) "Deleted in its Entirety" 12) that, at the option of the holder, upon the occurrence of any Event of Default under the Note, the rate of interest stated on the face hereof shall be increased by an additional three percent (3%) per annum above the Rate until such amount shall be paid in full (whether before or after judgment), said increased rate of interest shall remain in effect for such time as the event of default continues; 13) that, from time to time, on the written request of the holder, the Mortgagor shall furnish within 10 days of said request a written statement, signed and, if requested, acknowledged, setting forth the amount of the indebtedness which the Mortgagor acknowledges to be due on the Note and under this Mortgage, specifying any claims of offset or defense which the Mortgagor asserts against the indebtedness secured hereby or any obligations to be paid or performed hereunder, and the then state of facts relative to the condition of the property; 14) whether or not for additional interest or other consideration paid or payable to the holder, no forbearance on the part of the holder or extension of the time for the payment of the whole or any part of the obligations secured hereby, whether oral or in writing, or any other indulgence given by the holder to the Mortgagor or to any other party claiming any interest in or to the property, shall operate to release or in any manner affect the original liability of the Mortgagor, or the priority of this Mortgage or to limit, prejudice or impair any right of the holder, including, -6- without limitation, the right to realize upon the security, or any part thereof, for the obligations secured hereby or any of them, notice of any such extension, forbearance or indulgence being hereby waived by the Mortgagor and all those claiming by, through or under the Mortgagor; and no consent or waiver, express or implied, by the holder to or of any default by the Mortgagor shall be construed as a consent or waiver to, or of any further default in the same or any other term, condition, covenant or provision of this Mortgage or of the obligations secured hereby; in case redemption is had by the Mortgagor after foreclosure proceedings have begun, the holder shall be entitled to collect all costs, charges and expenses incurred up to the time of redemption; in case of foreclosure sale, the holder shall be entitled to the costs, charges and expenses allowed under the Statutory Power of Sale; and in case any one or more of the provisions of this Mortgage may be found to be invalid, or unenforceable for any reason or in any respect, such invalidity or unenforceability shall not limit or impair enforcement of any other provision hereof; 15) that wherever notice, demand or a request may properly be given to the Mortgagor under this Mortgage, the same shall always be sufficient to serve as a notice, demand or request hereunder if in writing and sent by registered or certified mail, postage prepaid, return receipt requested, so-called express mail, private express carrier or hand delivery, addressed to the Mortgagor at the address given in this Mortgage as the Mortgagor's address and to the Mortgagor at 41 Meeting House Lane, P.O. Box 327, Sagamore Beach, Massachusetts 02562; and any such notice, demand or request shall be treated as having been given upon receipt or tender for delivery at the notice address; and a notice so addressed shall always be sufficient notice, notwithstanding a change in the ownership of the equity of redemption of the property, whether or not consented to by the holder; and where more than one person constitutes the Mortgagor, one notice sent to the address given in this Mortgage as the Mortgagor' s address or the last known business address of any one of them shall constitute sufficient notice to all; 16) the undertakings of the Mortgagor contained in Section 2 of this Mortgage with respect to items other than the payment of real estate taxes, sewer use fees, water rates, and assessments, shall survive the payment of all obligations secured hereby; however, after an acknowledgment of the satisfaction of the obligations secured hereby, or a discharge of this Mortgage, this Mortgage shall not be security for the performance of such undertakings, notwithstanding the survival of the same; but, thereafter, and notwithstanding anything to the contrary contained in the Note, this Mortgage or any other document or instrument securing the Note, the holder shall look solely to the Mortgagor, personally, for the performance of such undertakings; 17) that without limiting the scope and effect of other provisions of the Mortgage, to the extent that any of the property is of a nature that a security interest therein may be perfected under the Uniform Commercial Code, as enacted in the -7- Commonwealth of Massachusetts, this instrument shall, as of the date of execution hereof, constitute a security agreement granting to the holder a security interest in the property. Without limiting the generality of the foregoing, the security interest held by the secured party shall cover cash and noncash proceeds of that portion of the property which is subject to a security interest. Further, with respect to that portion of the property which is subject to a security interest, the Mortgagor agrees with the holder as follows: a) such portion shall continue to be free from all pledges, liens, encumbrances and security interest or other claims in favor of others, except in the case of purchase money security interests, and that the Mortgagor will warrant and, at the holder's request, defend the same from all claims and demands of all persons, and b) such portion is to be located on the real estate which is included as part of the property and will not be removed therefrom without the prior written consent of the holder unless, upon such removal, similar items of equal value are substituted or replaced. 18) that annually, within one hundred fifty (150) days after the expiration of each calendar year, or fiscal year, if applicable, and at no expense to the holder, the Mortgagor shall deliver to the holder audited financial statements for the Mortgagor, showing a true and complete treatment of the annual operating expenses and income of the property, and financial statements and tax returns of the Mortgagor and any guarantors or endorsers, such statements to be in form reasonably satisfactory to the holder; 19) that the Mortgagor will, from time to time at the holder's request, make, execute, deliver, file and record all such instruments, conveyances, notices, financing statements and other documents, and take all such further action as the holder may determine to be reasonably necessary or advisable for the better assuring and confirming to the holder of its security interests in the property or any part thereof, and will so execute, deliver, file and record such instrument or instruments as the holder may request; 20) that in addition to other payments herein required, the Mortgagor shall, at the Mortgagee's option, exercisable at any time or from time to time, if and only to the extent the loan to value ratio exceeds 80%, now or in the future, pay to the Mortgagee monthly on the 21st day of each month, or such other day of the month as may be designated by the mortgagee during the term hereof, and for so long as the Liabilities secured by this Agreement shall remain unpaid, an amount equal to one-twelfth (1/12th) of the municipal taxes and assessments which the Mortgagee estimates will become due and payable on account of the Mortgaged Premises for the year next succeeding any period for which such taxes and assessments have been paid or escrowed hereunder sufficient, to enable Mortgagee to accumulate at -8- least thirty (30) days prior to the dates upon which such municipal taxes and assessments are payable the amounts then due and payable. Further, the Mortgagor shall pay to the Mortgagee on demand the amount of any deficiency of the funds so collected when the actual amount of such taxes and assessments becomes known. The Mortgagee shall maintain such funds in an interest bearing account which may be co-mingled with other funds of the Mortgagee. The Mortgagee shall apply said funds to the payment of municipal taxes and assessments, as applicable, to the extent such amounts are determined by he Mortgagee to be due and payable. In the event the Mortgagee collects such tax payments hereunder, the Mortgagor shall deliver to the Mortgagee the bills representing any such amounts within ten (10) days of the receipt thereof by the Mortgagor. Notwithstanding the provisions of this section, upon an occurrence of an event which is, or, solely with the passage of time, would be, an Event of Default hereunder, the Mortgagee shall not be required to apply such funds as provided above, and may set off such funds against the Liabilities and apply any such funds towards the Liabilities in accordance with the terms herein. 21) that the following are conditions of this Mortgage: a) the covenants and agreements herein contained shall not be breached; b) except for real estate taxes and assessments until 1 day before any delinquency therein (delinquency, with reference to such taxes and assessments being hereby defined, for the purposes of this Mortgage, as meaning the time when, on the non-payment thereof, interest or penalties commence to accrue), not to create any encumbrance on the property even if such encumbrance is inferior to this Mortgage; c) the Mortgagor shall not permit any encumbrance to exist against the property, even if such encumbrance is inferior to this Mortgage; without limitation, the filing of a notice of Federal or State tax lien with the holder or at the office at which, by law, such notice is to be filed to be effective against the property, whether or not such lien applies, in terms, to the property, shall be a breach of this condition; and any period of grace in this Mortgage provided to the Mortgagor for a default in this Mortgage shall not be applicable to the filing of such a notice of governmental lien or to any encumbrance created by the Mortgagor; d) the Mortgagor shall not make or permit any transfer, sale, or other disposition of any part or all of its interest in the Property other than in the ordinary course of business or of any ownership interest in the Mortgagor without the prior written approval of the holder hereof, which said approval shall not be unreasonably withheld. No such transfer, sale or other disposition and no forbearance on the part of the holder or extension of the time for the payment of the debt secured hereby or any other -9- indulgence given by the holder shall operate to release, discharge, modify, change or affect the original liability of the Mortgagor, nor the priority of this Mortgage either in whole or in part, notice of such forbearance, extension or other indulgence being herein expressly waived; e) no ownership interest of the Mortgagor in the limited partnership shall be transferred, without the prior written consent of the holder, to any person other than the stockholders of the Mortgagor in existence on the date of this Mortgage, or members of their immediate families; f) the Mortgagor shall not file a petition or any application for relief, extension, moratorium or reorganization under any bankruptcy, insolvency or debtor's relief law, or make an assignment for the benefit of creditors or enter into any trust mortgage arrangement, so-called, or consent to the appointment of a receiver or any of the property of the Mortgagor; and g) the Mortgagor shall not permit any petition under any bankruptcy, insolvency or debtor's relief law filed against it, to remain undischarged for a period of more than 45 days after the filing thereof, nor shall the Mortgagor permit the continuation of any receivership proceedings instituted against it for more than a period of 45 days after the commencement thereof; h) the Mortgagor shall not breach any provisions of any lease relative to the property which would allow the lessee under said lease to terminate the same, affecting more than 10% of the warehouse square footage at the property in any one year; i) the Mortgagor shall not breach any covenant contained in any loan documents executed herewith regarding the loan described herein, which breach has continued beyond any applicable cure or grace period; 22) that the following are Events of Default: a) if any payment required under the Note or this Mortgage shall not be made when due; b) if there shall be any breach of the conditions of Sections 21 b), 21 d), 21 e), 21 f), 21 g) and h) of this Mortgage or the covenant in Section 4 of this Mortgage; or c) if there shall be any breach of the condition of Section 21 c) of this Mortgage in any respect other than the filing of a governmental lien continuing for more than 30 days; or -10- d) if there shall be any breach of the other conditions or covenants of this Mortgage which shall exist for more than 30 days after notice thereof from the holder (except where a period of grace is specifically otherwise provided or negated, in which case, such specific periods of time or negotiation shall govern); (e) if the note secured by this Mortgage and any other obligations of the Mortgagor or any Co-maker, Guarantor or Endorser to the Mortgagee hereof, or assigned to or held by the Mortgagee, is further secured by additional security, any breach in the performance of any of the conditions contained in any of said other security shall also constitute a breach of the conditions of this Mortgage. Similarly, the breach of the conditions of this Mortgage shall likewise constitute a breach of all of the said additional security; and in the event of a foreclosure hereunder or under said additional security, the Mortgagee shall have the right to foreclose either this Mortgage or any of said additional security, jointly or severally, and in such order as in the sole opinion of the Mortgagee will be deemed best to protect the interest of the Mortgagee in both or either of this mortgage and said additional security; that the Mortgagee, in the event of a foreclosure of this mortgage or of the additional security shall have the right to offer the real estate and said additional security for sale as a unit or separately, and, if as a unit, may allocate any price received therefor between said real estate and said additional security. Upon an Event of Default, and without derogating from the rights of the holder to demand payment of the Note in accordance with the terms of the Note, the holder shall have the right to declare the entire indebtedness of the Mortgagor under the Note forthwith due and payable. For the purposes of this Mortgage, the term "default", as used in the STATUTORY POWER OF SALE, shall mean an Event of Default, as defined herein; 23) that if there shall be any breach in any condition or covenant of this mortgage which constitutes an Event of Default, the holder shall have the right, but without any obligation so to do, to cure such default for the account of the Mortgagor and, to the fullest extent permissible according to law, apply any funds credited by or due from the holder to the Mortgagor against the same (without any obligation first to enforce any other rights of the holder, including, without limitation, any rights under the Note or this Mortgage, or any guarantee thereof, and without prejudice to any such rights); without limiting the generality of the foregoing, the Mortgagor hereby authorizes the holder to pay all taxes, sewer use fees, water rates and assessments, with interest, costs and charges accrued thereon, which may at any time be a lien upon the property, or any part thereof; to pay the premiums for any insurance required hereunder; to incur and pay reasonable -11- expenses in protecting its rights hereunder and the security hereby granted; to pay any balance due under any Security Agreement on any articles, fixtures, equipment and materials included as a part of the property; and the payment of all amounts so incurred, together with interest thereon at the annual rate specified in the Note as the interest to be paid on the indebtedness evidenced by the Note shall be secured hereby as fully and effectually as any other obligation of the Mortgagor secured hereby; and, to the fullest extent permissible according to law, to apply to any of these purposes or to the repayment of any amounts so paid by the holder together with interest thereon any sums paid on the Note or this Mortgage by the Mortgagor as interest or otherwise; 24) that, at any foreclosure sale, any combination, or all, of the property or security given to secure the indebtedness secured hereby, may be offered for sale for one total price, and the proceeds of such sale accounted for in one account without distinction between the items of security or without assigning to them any proportion of such proceeds, the Mortgagor hereby waiving the application of any doctrine of marshalling; and, in case the holder, in the exercise of the power of sale herein given, elects to sell in parts or parcels, said sales may be held from time to time, and the power shall not be fully executed until all of the property or security not previously sold shall have been sold; 25) that, if the provisions of the Uniform Commercial Code as adopted in Massachusetts are applicable to any property or security given to secure the indebtedness secured hereby which is sold in combination with or as a part of the property, or any part thereof, at one or more foreclosure sales, any notice required under such provisions shall be fully satisfied by the notice given in execution of the Statutory Power of Sale (referred to below) with respect to the property or any part thereof; 26) that Mortgagor agrees to and hereby does indemnify and hold harmless the holder from and against any and all loss, cost or expense including, without limitation, any clean-up costs and fines incurred by the holder and arising out of or in any way connected with the application of any federal, state, County, Regional and local laws pertaining to the use, storage or existence of hazardous or toxic materials or environmental hazard on the property, including, without limitation, Massachusetts General Laws, Chapter 21E and in this connection the Mortgagor covenants that the property is not now being used and will not be used for any activities involving, directly or indirectly, the use, generation, treatment, storage or disposal of any hazardous or toxic chemical, material, substance or waste, including without limitation (a) asbestos in any form; (b) urea formaldehyde foam insulation; (c) transformers or other equipment which contain dielectric fluid containing polychlorinated byphenyls; (d) any other hazardous or toxic chemical, material, substance or waste, exposure to which is prohibited, limited or regulated by any federal, state, county, regional or local authority; in furtherance of the foregoing, Mortgagor agrees to take all steps necessary in order to prevent any -12- lien pursuant to said laws from attaching to the property or any part thereof; the Mortgagor's liability under this Section shall survive transfers of the property by the Mortgagor and foreclosure of this Mortgage; Notwithstanding any provision herein to the contrary, Mortgagor shall have no liability hereunder (a) to holder as to any matter for which Mortgagor might otherwise be liable hereunder which is not caused or contributed to by Mortgagor and which is caused by or due to the negligence of the holder or (b) to any successors or assigns of holder for any matter for which Mortgagor might otherwise be liable hereunder, which is not caused or contributed to by Mortgagor, and which is caused by or due to the negligence of any such successor or assign. The word "holder", as used herein, shall mean the Mortgagee named at the beginning of this instrument and any subsequent holder or holders of this Mortgage. The word "Mortgagor", as used herein, shall mean the person named at the beginning of this instrument as the Mortgagor, and any subsequent owner or owners of the equity of redemption of the property (but such reference is not intended as a consent by the holder to any transfer of such equity by the Mortgagor to which the holder has not provided its prior written consent). All the covenants and agreements of the Mortgagor herein contained shall be binding upon the Mortgagor and the successors and assigns of the Mortgagor. This MORTGAGE is upon the STATUTORY CONDITION, and upon the further condition that all covenants and agreements of MORTGAGOR herein or contained in the note or other collateral documents and all other conditions thereof shall be kept and fully performed, for any breach of which the Mortgagee shall have the STATUTORY POWER OF SALE. Executed as a sealed instrument this 21st day of April, 1995. EXCEL, INC. /s/ Robert P. Madonna -------------------------------- By: Robert P. Madonna, President and Treasurer COMMONWEALTH OF MASSACHUSETTS Barnstable, ss April 24, 1995 -13- Personally appeared the above-named Robert P. Madonna, President and Treasurer, as aforesaid and acknowledged the foregoing instrument to be the free act and deed of EXCEL, INC., before me, /s/ Laurie A. Warren -------------------------------- Notary Public: Laurie A. Warren My commission expires: August 10, 1995 (SEAL) REAL ESTATE PROMISSORY NOTE $2,600,000.00 HYANNIS, MASSACHUSETTS April 21, 1995 The undersigned (jointly and severally if more than one) for value received, promise to pay to the order of CAPE COD BANK AND TRUST COMPANY (the "Bank") at the Head Office of the Bank, at 307 Main Street, Hyannis, MA 02601, TWO MILLION SIX HUNDRED THOUSAND AND NO/100 ($2,600,000.00) DOLLARS seven (7) years after the date of this Note and, until this Note is paid in full, interest and principal shall be payable as follows: Interest only shall be payable monthly during the first six months of the term of this Note at the annual rate of the Prime Rate of Interest as published in the Wall Street Journal (the "Prime Rate") plus three quarters (.75%) percent per annum (the "Rate") computed on the unpaid principal balance with the first payment due May 21, 1995, changes in the Rate to take effect on the date changes in the Prime Rate are published in the Wall Street Journal; and Thereafter (the "Amortization Period") monthly payments of TWENTY-EIGHT THOUSAND AND NO/100 ($28,000.00) DOLLARS ("Amortization Payments") shall be payable with the first payment due on November 21, 1995 with Amortization Payments being first applied to interest then due and the balance, if any, to principal. At each anniversary date the Bank reserves the right: 1. To call for an additional payment of principal equal to the amount of the principal which would have been paid had the amortization payments been adjusted to reflect changes in the interest note in order to maintain a fifteen year amortization schedule; and 2. To recalculate the amortization payments in order to maintain a fifteen year amortization schedule calculated from the date of the note. In the event that any monthly payment due hereunder is not paid within Ten (10) days of the due date, there shall become due hereunder, at the option of the Bank hereof, a late charge of three and 00/100 (3.00%) percent of the amount overdue. The undersigned has granted to the Bank a mortgage on the following described property to secure the payment and performance of all obligations: Land, together with the buildings thereon, situated at 60, 70 and 80 Perseverance Way, Hyannis, Massachusetts, together with certain personal property of the undersigned. In addition to the above property, all other property belonging to, standing in the name of or pledged on behalf of the undersigned which is now or may hereafter be in the possession of the Bank for any purpose, and also any other property described in one or more agreements or mortgages which have been or shall be delivered or caused to be delivered, to the Bank by the undersigned, together with all additions or accessions thereto (all of the foregoing being hereinafter called "Collateral") , shall constitute continuing security for any and all obligations. In the event the undersigned is in default under the terms and provisions of the loan, or the unpaid principal and interest and other charges due the Bank are not paid when due, including acceleration after default, then the default rate of interest on the unpaid principal and interest then due shall be equal to the aggregate of the Rate of interest recited herein from time to time plus three (3.00%) percent per annum until such amount shall be paid in full (whether before or after judgment). In the event the Borrower pays the Note in full in or within three (3) years from the date hereof, the Borrower shall pay the Bank an exit fee in the amount of one-half (.50%) percent of the then outstanding principal balance. The entries on the records of the Bank (including any appearing on this Note) shall be prima facie evidence of the aggregate principal amount outstanding under this note and interest accrued thereon. The Borrower agrees that it will not permit the outstanding balance of the Loan to exceed 80% of the Bank's then current appraised value of the portion of the Collateral known as 60, 70 and 80 Perseverance Way, Hyannis, Massachusetts 02601. Any appraisal required by the Bank shall be performed by an appraiser of the Banks choice and shall be at the cost of the Borrower. Notwithstanding any provision to the contrary, in the event of a default hereunder, the Bank shall notify the Borrower in writing and Borrower shall have 30 days to cure by furnishing additional collateral satisfactory to the Bank. The undersigned represents and warrants that (a) all Collateral is owned by the undersigned or by the person(s) delivering all or any part of the property to the Bank to be held as Collateral and is not subject to any liens, security interests or rights of others, except those approved by the Bank in writing, and its delivery to the Bank has been duly authorized by all necessary action, and that (b) the Collateral is genuine and is what it purports to be. The Bank may at its option, whether or not this note is due, demand, sue for, collect, or make any compromise or settlement it deems desirable with reference to any Collateral. Right is expressly granted to the Bank at its option to transfer at any time to itself or to its nominee any securities, documents or other property pledged hereunder and to receive the income thereon and hold the same as security therefor, or apply it on the principal or interest due hereon or due on any liability secured hereby. The Bank shall have no duty as to the protection or collection of any Collateral or any income thereon, and shall be bound to take any steps necessary to preserve any rights in any Collateral against prior parties. The Bank shall not exercise its right to vote any voting securities comprising Collateral unless an event of default under this note has occurred and the Bank had notified the undersigned or successors and assigns thereof, in writing of its intention to vote such securities. The undersigned shall furnish the Bank from time to time, and at least annually within one hundred fifty (150) days after the end of the Borrower's fiscal year-end, with such financial statements as the Bank may require in form satisfactory to the Bank. Financial information furnished to the Bank shall be true and correct and fairly represent the financial condition of the undersigned as of the date(s) furnished and the operating results of the undersigned for the periods for which the same are furnished. The undersigned shall permit the representatives of the Bank to inspect its properties and its books and records, and to make copies or abstracts thereof. If the undersigned, as registered Bank of securities comprising Collateral, received (a) any dividend or other distribution in cash or other property in connection with the liquidation or dissolution of the issuer of such securities or (b) any stock certificate, option or right, whether as an addition to, in substitution of, or in exchange for, such securities, or otherwise, the undersigned agrees to accept same in trust for the Bank, and to forthwith deliver same to the Bank in the exact form received, with the undersigned's endorsement and/or assignment when necessary, to be held by the Bank as collateral. Upon the occurrence of any of the following events of default: (a) default in the payment or performance of any of the Obligations (including any failure to pay any installment of principal or interest hereunder when due) or of any obligations of any Obligor to others for borrowed money or in respect of any extension of credit or accommodation; (b) failure of any representation and warranty hereunder or of any representation or warranty, statement or information in any documents or financial statements delivered to the Bank for the purpose of inducing it to make or maintain the loan under this note to be true and correct; (c) failure of the undersigned to file any tax return, or to pay or remit any tax, when due; (d) failure to furnish the Bank promptly on request with financial information about, or to permit inspection by the Bank of books, records and properties of, any Obligor; (e) any financial information furnished to the Bank reflecting operating loss and/or total liabilities in excess of total assets, as determined by generally accepted accounting principles; (f) loss, theft, substantial damage, sale or encumbrance to or of any property constituting collateral or the making of any levy, seizure or attachment thereof or thereon or the failure to pay when due any tax thereon or, with respect to any insurance policy, any premium therefor; (g) default under any instrument constituting, or under any agreement relating, to Collateral; (h) any Obligor generally not paying its debts as they become due; (i) death, dissolution, termination of existence, business failure, appointment of a receiver or other custodian of any part of the property of, assignment for the benefit of creditors by, or the commencement of any proceedings under any bankruptcy or insolvency laws by or against, any Obligor; (j) change in the condition or affairs (financial or otherwise) of any Obligor which in the opinion of the Bank will impair its security or increase its risk (thereupon or at any time thereafter such default not having been previously cured), at the option of the Bank, all Obligations of the undersigned shall become immediately due and payable without notice or demand and the Bank shall then have in any jurisdiction where enforcement hereof is sought, in addition to all other rights and remedies, the rights and remedies of a secured party under the Uniform Commercial Code of Massachusetts. Without limiting the foregoing and in addition thereto, a failure to pay when due two or more installments of principal or payments of interest (whether consecutive or not) under this note shall be a default which shall not be deemed waived by the Bank by its acceptance of such payments. Any sums from time to time credited by or due from the Bank to any Obligor and any property of any Obligor in which the Bank has from time to time any security interest or which from time to time may be in the possession of the Bank for any purpose shall also constitute collateral for the payment or performance of the obligations of such Obligor, and the undersigned hereby grants the Bank a continuing security interest in such sums and property. Regardless of the adequacy of Collateral the Bank may apply such sums or property or realizations upon any such security interest against said Obligations at any time in the case of a primary Obligor but only against matured obligations in the case of a secondary Obligor. The terms and conditions of this note and any other loan documents relating to collateral constitute the entire agreement between the parties, and supersede all prior agreements and understandings, both written and oral, of the Bank and the undersigned with respect to the subject matter hereof and of any such agreement, and may not be modified or amended except in writing and signed by the Bank. No delay or omission on the part of the Bank in exercising any right hereunder shall operate as a waiver of such right or of any other right under this note. No waiver of any right shall be effective unless in writing and signed by the Bank nor shall a waiver on one occasion be construed as a bar to or waiver of any such right on any future occasion. Each obligor waives presentment, demand, notice, protest, and all other demands and notices in connection with the delivery, acceptance, performance, default or enforcement of this note or of any Collateral, and assents to any extension or postponement of the time of payment or any other indulgence under this note or with respect to any Collateral, to any substitution, exchange or release of any Collateral, and/or to the addition or release of any other party or person primarily or secondarily liable hereunder. The undersigned will pay on demand all costs of collection and attorney's fees paid or incurred by the Bank in enforcing the Obligations of any obligor. As herein used "Obligor" means any person primarily or secondarily liable hereunder or in respect hereto, including any person who has pledged property on behalf of the undersigned to be held as Collateral; "Obligation" means any obligation hereunder or otherwise of any Obligor to the Bank whether direct or indirect, absolute or contingent, due or to become due, now existing or arising; and "Bank" means the payee or any endorsee of this note who is in possession of it, or the bearer hereof if this note is at the time payable to the bearer. This note shall take effect as a sealed instrument and shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts. The Bank is hereby authorized, without further notice, to fill in any blank spaces on this note, and to date this note as of the date funds are first advanced hereunder. EXCEL, INC. /s/ Laurie A. Warren By: /s/ Robert P. Madonna - ------------------------- ----------------------------- Witness Robert P. Madonna, President and Treasurer EX-10.9 13 LOAN AGREEMENT, REAL ESTATE PROMISSORY NOTE AND SECURITY AGREEMENT DATED AS OF 6/30/97 EXHIBIT 10.9 LOAN AGREEMENT BY AND BETWEEN EXCEL, INC. AND CAPE COD BANK AND TRUST COMPANY JUNE 30, 1997 This LOAN AGREEMENT (the "Agreement") is entered into effective this 30th day of June, 1997, by and between EXCEL, INC., a Massachusetts business corporation having a principal place of business at 255 Independence Drive, Hyannis, Massachusetts 02601 (the "Borrower") and CAPE COD BANK, AND TRUST COMPANY (the "Bank") , having its principal place of business at 307 Main Street, Hyannis MA 02601. To the extent this Agreement varies from any earlier agreement or commitment, such earlier agreement or commitment is amended. 1. DEFINITIONS. ------------ The following terms shall have the meanings set forth in this Section 1 or elsewhere in the provisions of this Agreement referred to below: 1.1 ACCOUNTING TERMS. All terms of an accounting character not ---------------- specifically defined herein shall have the meanings assigned thereto by generally accepted accounting principles. 1.2 ACCOUNTS RECEIVABLE. All rights of the Borrower to payment for goods ------------------- sold, leased or otherwise marketed in the ordinary course of business and all rights of the Borrower to payment for services rendered in the ordinary course of business for all sums of money or other proceeds due thereon pursuant to transactions with Account Debtors, except for that portion of the sum of money or other proceeds due thereon that relates to sales, use property taxes in conjunction with such transaction, recorded on books of account in accordance with generally accepted accounting principals. 1.3 AFFILIATE. Any company, corporation, trust, partnership, association, --------- business, organization or other legal entity, controlling, controlled by, or under common control with, the Borrower. 1.4 BANK. See preamble. ---- 1.5 PRIME RATE. The rate of interest announced from time to time by the ---------- WALL STREET JOURNAL, as its Prime Rate, as the same shall vary from time to time. 1.6 BORROWER. See preamble. -------- 1.7 BUSINESS DAY. Any day on which banking institutions in Hyannis, ------------ Massachusetts are not permitted or required by law to remain closed. 1.8 CLOSING. See Section 7.1. ------- 1.9 COLLATERAL. All of the property of the Borrower described in its ---------- Security Agreement and Mortgage with the Bank securing the obligations of the Borrower to the Bank under this Agreement. -2- 1.10 COMMITMENT AMOUNT. The Bank's obligation to make a loan to the ---------------- Borrower under this Agreement. 1.11 DEFAULT. Any condition, act or event which with the giving of notice ------- or the lapse of time or both would constitute an Event of Default. 1.12 EVENT OF DEFAULT. Any condition, act or event described in Section 8 ---------------- hereof which has continued beyond the applicable period, if any, for notice and cure and as to which notice has been given as provided in the last paragraph of said Section 8. 1.13 GUARANTORS. See Preamble. ---------- 1.14 INDEBTEDNESS. All obligations, contingent and otherwise, of the ------------ Borrower, which in accordance with generally accepted accounting principles should be classified on the Borrower's balance sheet as liabilities, including, without limitation, liabilities secured by any mortgage, pledge, security interest, lien, charge, or other encumbrance existing on property owned or acquired subject thereto, whether or not the liability secured thereby shall have been assumed, and all guarantees, endorsements and other contingent obligations whether direct or indirect with respect to Indebtedness of others and the obligations to reimburse the issuers of any letters of credit, except to the extent that such obligations have been subordinated to the Loan ("Subordinated Debt") in a manner satisfactory to the Bank. 1.15 LOAN OR LOANS. Amounts loaned to the Borrower by the Bank hereunder, ------------- specifically the Term Loan. 1.16 NOTE. The Term Note. ---- 1.17 OBLIGATIONS. All indebtedness, obligations and liabilities of the ----------- Borrower, Endorser, Co-maker or Guarantors to the Bank, existing on the date of this Agreement or arising thereafter, direct or indirect, joint or several, absolute or contingent, matured or unmatured, liquidated or unliquidated, secured or unsecured, (whether) arising or incurred under this Agreement or with respect to the Loan made hereunder, and any Notes or other instruments at any time evidencing any thereof, including but not limited to a loan to the Borrower from the Bank in amount of $2,600,000.00 dated April 21, 1995. 1.18 PERSON. Any corporation, association, partnership, trust, ------ organization, business, individual or government or any governmental agency or political subdivision thereof. 1.19 SECURITY AGREEMENT. The Security Agreement between the Borrower and ------------------ the Bank whereby the Borrower and secure all its obligations to the Bank under this Agreement. 1.20 SUBORDINATED DEBT. Unsecured Indebtedness of the Borrower in such ----------------- amounts as the Bank may approve, which is subordinated to the Borrower's Obligations to the Bank to such extent and in such manner and on such terms and conditions as the Bank may approve. -3- 1.21 TERM LOAN. The loan to be made to the Borrower as contemplated by --------- Section 2 hereof. 1.22 TERM NOTE. The promissory note of the Borrower evidencing the Term --------- Loan. 1.23 MORTGAGE. The Mortgage whereby the Borrower secures all its -------- obligations to the Bank under this Agreement. 2. THE TERM LOAN. ------------- 2.1 COMMITMENT TO LEND. Subject to the terms and conditions hereinafter ------------------ set forth, the Bank agrees to lend to the Borrower TWO MILLION ONE HUNDRED THOUSAND AND N0/100 ($2,100,000.00) DOLLARS. The Term Loan shall be evidenced by a Term Note executed and delivered by the Borrower in favor of the Bank. 2.2 INTEREST ON THE TERM LOAN. The Term Loan shall at all times accrue -------------------------- and bear interest on the unpaid principal balance pursuant to the terms of the Term Note, provided that overdue principal and (to the extent permitted by applicable law) interest on the Term Loan shall bear interest payable on demand at a rate per annum equal to three (3.0%) percent per annum above the Prime Rate until such amount shall be paid in full (whether before or after judgment). The rate of interest on the Term Loan shall be payable as set forth in the Term Note. If at any time the rate of interest, together with all amounts which constitute interest and which are reserved, charged or taken by the Bank as compensation for fees, services or expenses incidental to the making, negotiating or collection of any advance evidenced hereby, shall be deemed by any competent court of law, governmental agency or tribunal to exceed the maximum rate of interest permitted by the laws of any applicable jurisdiction or the rules or regulations of any appropriate regulatory authority or agency, then, during such time as such rate of interest would be deemed excessive, that portion of each sum paid attributable to that portion of such interest rate that exceeds the maximum rate of interest so permitted shall be deemed a voluntary prepayment of principal. 2.3 LATE CHARGE. The Borrower hereby agrees to pay a "late charge" equal ----------- to Three (3.0%) percent of any installment of principal or interest due to the Bank which is not paid or reimbursed by the Borrower within fifteen (15) days of the due date to cover the extra expense involved in handling such delinquent payment. If at any time the rate of interest, together with all amounts which constitute interest and which are reserved, charged or taken by the Bank as compensation for fees, services or expenses incidental to the making, negotiating or collection of any advance evidenced hereby, shall be deemed by any competent court of law, governmental agency or tribunal to exceed the maximum rate of interest permitted by the laws of any applicable jurisdiction or the rules or regulations of any appropriate regulatory authority or agency, then, during such time as such rate of interest would be deemed excessive, that portion of each sum paid attributable to that portion of such -4- interest rate that exceeds the maximum rate of interest so permitted shall be deemed a voluntary prepayment of principal. 2.4 PAYMENTS OF PRINCIPAL. The principal amount of the Term Loan shall be --------------------- payable to the Bank in accordance with the terms of the Term Note. 2.5 PREPAYMENT OF PRINCIPAL. There shall be no penalty for a prepayment ----------------------- of the Term Loan. 2.6 GUARANTY OF PAYMENT OF TERM NOTE. "Not applicable". -------------------------------- 2.7 DISBURSEMENTS. At the closing, the sum of $460,000.00 shall be ------------- disbursed in order to purchase the property constituting the Collateral, thereafter the balance will be disbursed pursuant to the terms of the Commitment Letter from the Bank dated May 12, 1997, as amended. Notwithstanding the foregoing, the Bank shall never be required to disburse greater than 80% of the Bank's appraised value of the property as completed. 3. USE OF PROCEEDS, PAYMENTS AND COMPUTATIONS. ------------------------------------------ 3.1 USE OF PROCEEDS. The proceeds of the Term Loan shall be disbursed and --------------- used as follows: (a) The loan proceeds shall be disbursed for purposes of purchasing certain real estate located at 75 Perseverance Way, Hyannis Massachusetts 02601 and for making improvements thereto. 3.2 PAYMENTS. All payments of principal, interest, and any other amounts -------- due hereunder shall be made by the Borrower to the Bank in payment of the Bank's statement in immediately available funds at the Bank's head office at 307 Main Street, Hyannis MA 02601. 3.3 COMPUTATIONS. All computations of interest on the Loan shall be based ------------ on a 360-day year and paid for the actual number of days elapsed. Whenever a payment hereunder or under the Note becomes due on a day during which the head office of the Bank is not open for the conduct of normal banking business, the due date for such payment shall be extended to the next succeeding business day, and interest shall accrue during such extension. 4. REPRESENTATIONS AND WARRANTIES. ------------------------------ The Borrower represents and warrants to the Bank that on and as of the date of this Agreement, and on and as of the date of the making of the Loan hereunder. 4.1 CORPORATE AUTHORITY. ------------------- (a) INCORPORATION; GOOD STANDING. ----------------------------- -5- (i) EXCEL, INC. is a corporation duly organized, validly existing and in good standing under the laws of the Commonwealth of Massachusetts (ii) it has all requisite corporate power, permits, authorizations, licenses and authority, without unusual restrictions or limitations, to own its property and conduct its business as now conducted and as presently contemplated. (b) AUTHORIZATION. The execution, delivery and performance of this ------------- Agreement, the Note, the Mortgage and the `Security Agreement and other loan documents and the transactions contemplated hereby and thereby (i) are within the corporate and partnership authority of the Borrower, (ii) have been duly authorized by all necessary corporate proceedings, (iii) do not conflict with or result in any breach or contravention of any provision of any Federal, state or municipal law, statute, rule or regulation to which the Borrower is subject or any judgment, order, writ, injunction, license or permit applicable to the Borrower so as to materially and adversely affect the assets of the Borrower, business or any activity of the Borrower and will not result in the creation under any agreement or instrument of any lien, charge or encumbrance on any of the assets of the Borrower and (iv) do not conflict with any provision of the corporate charter or by-laws of the Borrower any agreement or other instrument binding upon the Borrower. (c) ENFORCEABILITY. The execution, delivery and performance of this -------------- Agreement, the Note, the Mortgage and related agreements will result in valid and legally binding obligations of the Borrower enforceable against it in accordance with the terms and provision hereof and thereof, except as enforceability is limited by bankruptcy, insolvency, reorganization, moratorium or other laws relating to or affecting generally the enforcement of creditors' rights and except to the extent that the availability of the remedy of specific enforcement or injunctive relief is subject to the discretion of the court before which any proceeding therefor may be brought. 4.2 GOVERNMENTAL APPROVALS. The execution, delivery and performance by ----------------------- the Borrower of this Agreement, the Note, the Mortgage, the Security Agreement and related agreements and the transactions contemplated hereby and thereby do not require any approval or consent of, or filing with, any governmental agency or authority other than those already obtained. 4.3 TITLE TO PROPERTIES; LEASES. The Borrower owns all of it's assets --------------------------- reflected in the balance sheet of the Borrower submitted to the Bank in connection herewith or acquired since that date except property and assets sold or otherwise disposed of in the ordinary course of business since that date, subject to no mortgages, leases, liens or other encumbrances, unless otherwise set forth on said balance sheet. 4.4 LITIGATION. To the best of the Borrower's knowledge, there are no ---------- actions, suits, proceedings or investigations of any kind pending or threatened against or materially affecting the Borrower before any court, tribunal or administrative agency or board. 4.5 NO MATERIALLY ADVERSE CONTRACTS, ETC. The Borrower is not subject to ------------------------------------ any charter, corporate or other legal restriction, or any judgment, decree, order, rule or regulation -6- which has or in the future may (because of matters existing as of the date of this agreement) have an adverse effect on the business, assets or financial condition of the Borrower. The Borrower is not a party to any contract or agreement which in the judgment of the Borrower's officers have or are expected to have any adverse effect on the business of the Borrower. 4.6 COMPLIANCE WITH OTHER INSTRUMENTS. The Borrower is not violating any --------------------------------- provision of its charter documents or bylaws or any agreement or instrument by which, because of matters existing as of the date of this agreement, they or any of their properties may be bound or any decree, order, or judgment, in a manner which could result in the imposition of material penalties or materially adversely affect the financial condition, properties or business of the Borrower. 4.7 TAX STATUS. The Borrower has made and filed all Federal and state ---------- income and all other tax returns, reports and declarations required by any jurisdiction to which it is subject; and has paid all taxes and other governmental assessments and charges that are material in amount, shown or determined to be due on such returns, reports and declarations, except those being contested in good faith; and have set aside on their books provisions reasonably adequate for the payment of all taxes for periods subsequent to the periods to which such returns, reports or declarations apply. There are no unpaid taxes claimed to be due by the taxing authority of any jurisdiction and the officers of the Borrower know of no basis for any such claim. 4.8 NO DEFAULT. No Default or Event of Default exists as of or on the --------- date of this Agreement. 4.9 DISCLOSURE. There is no fact known to the Borrower that does or in the ----------- future may (because of matters in existence on the date of this agreement) materially adversely affect the business, operations, affairs or condition of the Borrower or it's properties or assets. All information furnished or to be furnished by the Borrower pursuant to the terms hereof is, or will be at the time the same is furnished, accurate and complete in all material respects necessary in order to make the information furnished, in the light of the circumstances under which such information is furnished, not misleading. 4.10 FINANCIAL STATEMENTS. To the extent the Borrower has furnished to the --------------------- Bank balance sheets of the Borrower and the related profit and loss statement for the twelve (12) month period then ended, as prepared by the Borrower's independent certified public accountants, such financial statements are true, complete and correct, have been prepared in accordance with generally accepted accounting principles consistently applied, and fairly present the financial position of the Borrower as of the dates thereof, and since there have been no material adverse changes, individually or in the aggregate, in the business, operations, property or assets or financial condition of the Borrower from that reflected in such financial statements. To the extent said balance sheets have been furnished, there are no indirect or contingent liabilities of the Borrower as of the date hereof not disclosed in said balance sheet. 4.11 SOLVENCY. The Borrower is solvent and able to pay its debts as they -------- become due. -7- 4.12 Business Name and Location. The Borrower conducts its business -------------------------- solely in the name of EXCEL, INC. All books and records relating to its assets are located at the Borrower's Chief Executive Office at 255 Independence Drive, Hyannis, Massachusetts 02601. 4.13 NOTICES OF ENVIRONMENTAL PROBLEMS. The Borrower has not received any --------------------------------- notice that: (a) there has been a release of toxic substances or hazardous wastes from any real property owned or operated by the Borrower; (b) the Borrower may be or are liable for the costs of cleaning up or responding to a release of any toxic substances or hazardous wastes; or (c) any of such real property is subject to a lien for any liability arising from costs incurred in response to a release of toxic substances or hazardous wastes. 5. AFFIRMATIVE COVENANTS OF THE BORROWER. ------------------------------------- The Borrower covenants and agrees that, so long as any Note is outstanding or the Bank has any obligation to make Loans hereunder: 5.1 PUNCTUAL PAYMENT. The Borrower will duly and punctually pay or cause ---------------- to be paid the principal and interest on the Notes, all in accordance with the terms of this Agreement. 5.2 MAINTENANCE OF OFFICE. The Borrower will maintain it's Chief --------------------- Executive Office and principal place of business at 255 Independence Drive, Hyannis, Massachusetts, or at such other place as the Borrower shall designate upon written notice to the Bank given at least thirty (30) days prior to any such change. 5.3 RECORDS AND ACCOUNTS. The Borrower will keep true and accurate -------------------- records and books of account in which full, true and correct entries (including entries of all transactions with Affiliates) will be made in accordance with generally accepted accounting principles, and will maintain adequate accounts and reserves for all taxes (including income taxes), all depreciation, depletion, obsolescence and amortization of its properties, and all other reserves. 5.4 FINANCIAL STATEMENTS, CERTIFICATES AND INFORMATION. -------------------------------------------------- The Borrower will deliver to the Bank: (a) audited annual federal tax returns and financial statements prepared by a Certified Public Accountant within one hundred and twenty (120) days of the Borrower's year-end, including the same on or before August 1, 1997; and (b) from time to time such other financial data and information (including accountants' management letters) as the Bank may reasonably request. The financial statements referred to in this Section 5.4 shall be prepared (and the Borrower's compliance with the covenants contained in Section 5 and Section 6 hereof shall be determined) in accordance with generally accepted accounting principles in force at the time of the preparation thereof and applied consistently for all periods in respect of which such -8- statements are required to be delivered hereunder, provided that any material variations from the application of such principles to the financial statements referred to above and the effects thereof are disclosed to the Bank in writing. 5.5 CORPORATE EXISTENCE; MAINTENANCE OF PROPERTIES. The Borrower and will ---------------------------------------------- do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence, rights and franchises. It will cause all of its properties used or useful in the conduct of its business to be maintained and kept in good condition, repair and working order and supplied with all necessary equipment and will cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in the judgment of the Borrower may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times; provided, however, that nothing in this Section shall prevent the Borrower and from discontinuing the operation and maintenance of any of its properties if such discontinuance is, in the judgment of the Borrower, desirable in the conduct of its or their business and which do not in the aggregate materially adversely affect the business of the Borrower. 5.6 INSURANCE. The Borrower shall do or cause to be done all things --------- necessary to (a) keep its properties insured against fire and other hazards (so called "All Risk" coverage) in amounts and with companies satisfactory to the Bank to the same extent and covering such risks as is customary in the same or a similar business, but in no event in an amount less than the lesser of $1,000,000.00 or 100% of replacement cost of the property, which policies shall name the Bank as loss payee as its interest may appear, (b) maintain public liability coverage against claims for personal injuries or death with the Bank named as additional insured, and (c) maintain all worker's compensation, employment or similar insurance as may be required by applicable law. This said initial limit of $1,000,000.00 shall be reviewed annually by the Bank and may be subject to reasonable increase. Such All Risk property insurance coverage shall provide for a minimum of fifteen (15) days written cancellation notice to the Bank. Borrower agrees to deliver copies of all of the aforesaid insurance policies to the Bank. In the event of any loss or damage to any of its assets, including any collateral securing the loan hereunder, Borrower shall give immediate written notice to the Bank and to its insurers of such loss or damage and shall promptly file its proofs of loss with said insurers. 5.7 INSPECTION OF PROPERTIES AND BOOKS. The Borrower shall permit the ---------------------------------- Bank or any of its designated representatives, upon reasonable notice and at reasonable times, to visit and inspect any of the properties of the Borrower, to examine the books of account of the Borrower (and to make copies thereof and extracts therefrom), and to discuss the affairs, finances and accounts of the Borrower, and to be advised as to the same by its and their officers, all at such reasonable times (upon not less than five (5) days' notice, except where a material adverse event has occurred or may be occurring, in which case, inspections and examinations may be made immediately) and intervals as the Bank may reasonably request. 5.8 LICENSES AND PERMITS. If at any time while the Note is outstanding or -------------------- the Bank has any obligation to make Loans hereunder, any authorization, consent, approval, permit or license from any officer, agency or instrumentality of any government shall become necessary or -9- required in order that the Borrower may fulfill any of their obligations hereunder, the Borrower will immediately take or cause to be taken all reasonable steps within the power of the Borrower to obtain such authorization, consent, approval, permit or license and furnish the Bank with evidence thereof. 5.9 PENSION PLANS. The Borrower shall, if applicable: ------------- (a) fund each pension plan as required by Section 412 of the Internal Revenue Code of 1954, as amended, or the Internal Revenue Code of 1986, whichever is applicable. (the Internal Revenue Code of 1954, as amended, and the Internal Revenue Code of 1986 are collectively referred to hereinafter as the "Code.") (b) furnish, upon prior written request after an Event of Default, to the Bank a copy of any actuarial statement related to any pension plan required to be submitted under Section 103(d) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), no later than the date on which such statement is submitted to the Department of Labor or the Internal Revenue Service; (c) furnish to the Bank forthwith, a copy of (i) any notice of a pension plan termination sent to the Pension Benefit Guaranty Corporation under Section 4041(a) of ERISA, which would have a material adverse effect upon Borrower or corporate Guarantor, or (ii) any notice, report or demand sent or received by a pension plan under Sections 4041, 4042, 4043, 4063, 4065, 4066 and 4068 of ERISA, which would have a material adverse effect upon Borrower; and (d) furnish to the Bank a copy of any request for waiver from the funding standards or extension of the amortization periods required by Section 412 of the Code, which would have a material adverse effect upon Borrower, no later than the date on which the request is submitted to the Department of Labor or the Internal Revenue Service, as the case may be. 5.10 FURTHER ASSURANCES. The Borrower will cooperate with the Bank and ------------------ execute such further instruments and documents as the Bank shall reasonably request to carry out to the Bank's satisfaction the transactions contemplated by this Agreement. 5.11 CHANGES IN MANAGEMENT. There will be no changes in the principal ---------------------- officers or directors of the Borrower without the prior written consent of the Bank, which consent shall not be unreasonably withheld. 5.12 COMPLIANCE WITH LAWS: TAX AND OTHER LIENS. The Borrower will comply ----------------------------------------- with all Federal, state, county and municipal laws, rules, ordinances and regulations applicable to it, its business or its assets, including without limitation, any Federal, state, county and municipal laws, rules, ordinances and regulations concerning public health, safety and the environment, and pay or, if the Borrower have elected to be taxed as a Subchapter S Corporation, cause their shareholders to pay, all taxes, assessments, governmental charges or levies, or claims for labor, -10- supplies, rent and other obligations made against either of them or their property which, if unpaid, might become a lien or charge against the Borrower or their property, except liabilities being contested in good faith and against which, if requested by the Bank, the Borrower shall maintain reserves in amount and in form (book, cash, bond or otherwise) satisfactory to the Bank. 5.13 CHIEF EXECUTIVE OFFICE AND PLACE OF BUSINESS. The Borrower shall -------------------------------------------- keep its chief executive office, places of business, at 255 Independence Drive, Hyannis, Massachusetts and the Borrower maintain it's principal place of business, its chief executive office and locations of assets at said location. Borrower shall promptly give Bank written notice of any change in such locations and places. All business records of the Borrower, including those pertaining to all accounts and contract rights, shall be kept at the said chief executive office of the Borrower unless prior written consent of Bank is obtained to a change thereof. 5.14 LITIGATION. The Borrower shall promptly advise the Bank of the ---------- commencement of or threat of litigation, including arbitration proceedings and any proceeding before any governmental agency, which might have a material adverse effect upon the condition, (financial, operating or otherwise) of the Borrower. 5.15 COMPLIANCE WITH AGREEMENTS. The Borrower shall comply with all terms -------------------------- and conditions of this Agreement, the Note, the Mortgage, the Security Agreement and all other agreements, documents and instruments to which the Borrower are a party with the Bank. 5.16 NOTICE OF DEFAULT. In the event the Borrower knows of any Event of ----------------- Default which shall have occurred or knows of the occurrence of any event which, upon notice or lapse of time or both, would constitute an Event of Default, the Borrower will promptly furnish to the Bank a written statement as to such occurrence, specifying the nature and event thereof and the action, if any, which is proposed to be taken with respect thereto. 5.17 NOTICE OF ENVIRONMENTAL ACTIONS AND CLAIMS. The Borrower shall ------------------------------------------ immediately notify the Bank in writing of (a) any enforcement, clean-up, removal or other action which relates to any real property owned or operated by the Borrower and is instituted or threatened by any Federal, state, county or municipal authority or agency pursuant to any public health, safety or environmental laws, ordinances, rules or regulations, and (b) any and all claims made or threatened by any third party against the Borrower or any real property owned or operated by any one of them relating to the existence of, or damage, loss or injury from any toxic substances constituting actual or potential violations of such laws, ordinances, rules or regulations. 5.18 DEBT SERVICE COVERAGE. The Borrower agrees to maintain debt service --------------------- coverage of not less than 2.00 to 1. 5.19 LOAN TO VALUE. The Borrower agrees that it will not permit the ------------- outstanding balance of the Loan to exceed 8% of the Bank's then current appraised value of that portion of the Collateral known as 75 Perseverance Drive, Hyannis, MA. -11- 5.20 BUSINESS ACCOUNTS. The Borrower shall maintain all primary business ----------------- deposit accounts with the Bank. 5.21 COMPLIANCE WITH COMMITMENT. The Borrower and Bank agree to comply -------------------------- with all of the provisions of the Commitment Letter dated May 12, 1997 issued by the Bank, as amended. 6. NEGATIVE COVENANTS. ------------------- The Borrower covenant and agree that so long as any loans remain available to the Borrower, and until the principal of and interest on the Note and all other amounts due hereunder or thereunder shall have been paid in full, and all liabilities of the Borrower to the Bank shall have been completely discharged, the Borrower or shall not: 6.1 ENCUMBRANCES. Incur or permit to exist any lien, mortgage, charge or ------------ other encumbrance against the property or assets described in the Security Agreement or Mortgage, whether now owned or hereafter acquired, except: (a) liens required by this Agreement; (b) pledges or deposits in connection with or to secure worker's compensation, unemployment insurance, pensions, or other employee benefits; (c) tax liens which are being contested in good faith and in compliance with Section 5.12 hereof; (d) purchase money security interests. 6.2 LIMITATION ON INDEBTEDNESS. Create or incur any indebtedness or -------------------------- obligation for borrowed money, or issue or sell any obligations of the Borrower, excluding, however, from the operation of this covenant: (a) the loan hereunder and all other liabilities of the Borrower to the Bank; (b) indebtedness subordinated in payment and priority to all indebtedness of the Borrower to the Bank in writing and in form and substance reasonably satisfactory to the Bank; (c) accounts payable to trades creditors for goods sold or services rendered, reasonable compensation to employees, in each case incurred in the ordinary course of business as presently conducted, and paid within the specified time, unless contested in good faith and by appropriate proceedings; and (d) capital and income allocations to limited partners paid in the ordinary course of business. 6.3 DISPOSITION OF ASSETS. Sell, lease, pledge, transfer or otherwise --------------------- dispose of all or any of its assets (other than the disposition of inventory, capital or income allocations to partners, or obsolete property in the ordinary course of its business as presently conducted) or business whether now owned or hereafter acquired except for liens or encumbrances required or permitted hereby. 6.4 CONTINGENT LIABILITIES. Assume, guarantee, endorse or otherwise ---------------------- become liable upon the obligations of any person, firm or corporation except by the endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business. 6.5 CONSOLIDATION OR MERGER. Except with the prior written consent of the ----------------------- Bank, which said consent shall not be unreasonably withheld, merge into or consolidate with or into any corporation; and, for the purposes of this Section 6.5, the acquisition by the Borrower of all or substantially all of the assets, together with the assumption of all -12- or substantially all of the obligations and liabilities, of any corporation shall be deemed to be a consolidation of such corporation with the Borrower. 6.6 CHANGE OF NAME OR LOCATION. Change the corporate names or conduct -------------------------- the business under any trade name or style other than as hereinabove set forth, or change its chief executive office, places of business or the present locations of its assets or records relating thereto from that address set forth in Paragraph 4.12, without the consent of the Bank, which said consent shall not be unreasonably withheld. 6.7 MANAGEMENT, CAPITAL STRUCTURE, ACCOUNTING METHODS. Make or consent to ------------------------------------------------- a material change in the stock ownership or capital structure of the Borrower, or make a material change in the management of the Borrower or in the manner in which the business of the Borrower is conducted or in its method of accounting, or in its election to be taxed under Subchapter C or Subchapter S of the Internal Revenue Code, as applicable, except as otherwise expressly permitted in the loan documents. 7. CONDITIONS PRECEDENT. -------------------- The obligation of the Bank to make Loans hereunder is subject to the following conditions precedent: 7.l CLOSING. The Closing will be held at the offices of Kilroy & Warren, ------- P.C. , 171 Main Street, Hyannis, Massachusetts 02601 on May 12, 1997. 7.2 CLOSING CONDITIONS. ------------------ (a) CORPORATE AND PARTNERSHIP ACTION. All corporate and trust action -------------------------------- necessary for the valid execution, delivery and performance by the Borrower of this Agreement, the Note, Security Agreement and the Mortgage and the related agreements shall have been duly and effectively taken, and satisfactory evidence thereof shall have been delivered to the Bank. (b) PROCEEDINGS AND DOCUMENTS. The Bank shall have received a Term Note, ------------------------- Security Agreement, Mortgage and all certificates and financial statements, conforming to the requirements hereof and fully executed by duly authorized officers of the Borrower and all other parties. Any financing statements required to be filed in order to create, in favor of the Bank, a perfected first priority security interest under the Uniform Commercial Code in that portion of the Collateral consisting of personal property in each of the jurisdictions and locations listed in the Security Agreement shall have been properly filed in each office in such jurisdiction and location in which such filings are required; and the Bank shall have received acknowledgment copies of all such filings stamped by the appropriate filing officer and evidence that all necessary filing fees, taxes and other expenses related to such filings have been paid in full. All proceedings in connection with the transactions contemplated by this Agreement and all documents incident thereto shall be satisfactory in substance and in form to the Bank, and the -13- Bank shall have received all information and such counterpart originals or certified or other copies of such documents as the Bank may reasonably request. (c) REPRESENTATIONS TRUE; NO DEFAULT OR OCCURRENCE OF DEFAULT. Each of the ---------------------------------------------------------- representations and warranties of the Borrower contained in this Agreement or in any document or instrument delivered pursuant to or in connection with this Agreement shall be true as of the date as of which they were made and shall also be true at and as of the time of the making of each Loan with the same effect as if made at and as of that time (except to the extent of changes resulting from transactions contemplated or permitted by this Agreement and changes occurring in the ordinary course of business which singly or in the aggregate are not materially adverse, and to the extent that such representations and warranties relate expressly by their terms to an earlier date) and all covenants of the Borrower shall have been complied with and no Default or Event of Default shall exist. (d) NO LEGAL IMPEDIMENT. No change shall have occurred in any law or ------------------- regulations thereunder or interpretations thereof which in the reasonable opinion of the Bank would make it illegal for the Bank to make loans hereunder. (e) GOVERNMENTAL REGULATION. The Bank shall have received such statements ----------------------- in substance and form reasonably satisfactory to the Bank as they shall require for the purpose of compliance with any applicable regulations of the Comptroller of the Currency or the Board of Governors of the Federal Reserve System. 8. DEFAULTS AND REMEDIES. ---------------------- If any one or more of the following "Events of Default" shall occur: 8.1 Failure to make payment when due of the principal of the Note, or in the payment of interest on the Note or in the payment of any other liability owing by the Borrower to the Bank, whether now existing or hereinafter incurred, whether direct or contingent, and the same shall occur beyond any applicable grace period; or 8.2 Failure by the Borrower to observe or perform any covenant contained in Sections 5.1, 5.5, 5.6, 5.14, 5.16, 5.17 or 6 hereof, or failure by the Borrower to perform any of the obligations under any other agreement, document or instrument evidencing, governing or securing the Loan, and the same shall occur beyond any applicable grace period; or 8.3 Failure by the Borrower to perform any act, duty, obligation or other agreement contained herein which shall occur and continue for thirty (30) days after notice from the Bank; or 8.4 Any representation or warranty made by the Borrower herein or any statement, certificate or other data furnished by the Borrower in connection herewith which proves at any time to be incorrect in any material respect and to have misrepresented to the Bank the financial condition, business or assets of the Borrower; or -14- 8.5 The default by the Borrower which is a party to any other written agreement with the Bank, and such default shall continue for more than the period of grace, if any, specified therein and shall not have been waived pursuant thereto; or 8.6 A judgment or judgments for the payment of money shall be rendered against the Borrower which shall have a materially adverse effect upon the Borrower, and any such judgment shall remain unsatisfied and in effect for any period of thirty (30) consecutive days without a stay of execution or the filing of an appeal; or 8.7 The Borrower shall (1) apply for or consent to the appointment of a receiver, conservator, trustee or liquidator of all or a substantial part of their assets; (2) admit in writing its inability, to pay their debts as they mature; (3) file any petition, case, arrangement, reorganization, or the like under any insolvency or bankruptcy law, or the adjudication of it as a bankrupt, or the making of an assignment for the benefit of creditors or the consenting to any form of arrangement for the satisfaction, settlement or delay of debt or the appointment of a receiver for all or any part of its properties; or (4) any action shall be taken by the Borrower or for the purpose of effecting any of the foregoing; or 8.8 An order, judgment, or decree shall be entered, or a case shall be commenced, against the Borrower, without the application, approval or consent of the Borrower by or in any court of competent jurisdiction, approving a petition or permitting the commencement of a case seeking reorganization or liquidation of the Borrower or appointing a receiver, trustee, conservator or liquidator of, or of all or a substantial part of the assets of, the Borrower, and Borrower, and such order, judgment, decree or case shall continue unstayed and in effect for any period of forty-five (45) consecutive days; or 8.9 The Borrower shall dissolve or liquidate, or be dissolved or liquidated, or cease to legally exist, or, except as otherwise permitted, merge or consolidate, or be merged or consolidated with or into any other corporation; or 8.10 Any levy, seizure, attachment, execution or similar process shall be issued or levied on any of the Borrower's property as described in the Security Agreement or Mortgage which shall not be released or discharged within fifteen (15) days thereof; 8.11 Upon and after the occurrence of an Event of Default hereunder, then, and in such event, and at any time thereafter, the Bank may take either or both of the following actions: The Bank may by written notice to the Borrower (i) declare the entire unpaid principal balance of and accrued interest on the Note and all other amounts due hereunder or thereunder to be immediately due and payable, whereupon the entire unpaid principal balance of and accrued interest on the Note and all other amounts due hereunder and thereunder shall be immediately due and payable, without presentment, protest or demand or other notice or any kind, all of which are hereby expressly waived by the Borrower. In case any one or more Events of Default shall occur and be continuing, the Bank may proceed to protect and enforce its rights by action at law, suit in equity or other appropriate proceeding, whether for specific performance of any -15- agreement contained herein or in the Note or for an injunction against a violation of any of the terms hereof or thereof or in the aid of the exercise of any power granted hereby or thereby. 8.12 If the Note defined by this Loan Agreement and any other obligations of the Borrower or any Co-maker, Guarantor or Endorser to the Bank hereof, or assigned to or held by the Bank, is further secured by additional security, any breach in the performance of any of the conditions contained in any of said other security shall also constitute a breach of the conditions of this Loan Agreement. Similarly, the breach of the conditions of this Loan Agreement shall likewise constitute a breach of all of the said additional security; and in the event of a foreclosure under the Security Agreement or Mortgage, or under said additional security, the Bank shall have the right to foreclose either the Security Agreement or Mortgage, or any portion thereof, or any of said additional security, jointly or severally, and in such order as in the sole opinion of the Bank will be deemed best to protect the interest of the Bank in both or either of the Security Agreement and Mortgage, or any portion thereof, and said additional security; that the Bank, in the event of a foreclosure of the Security Agreement or Mortgage, or any portion thereof, or of the additional security shall have the right to offer the real estate, personal property and said additional security for sale as a unit or separately, and, if as a unit, may allocate any price received therefor between said real estate, personal property and said additional security. 9. MISCELLANEOUS. -------------- 9.1 WAIVERS. -------- (a) Borrower hereby waives presentment, demand, notice, protest, notice of acceptance of this Agreement, notice of advances made, credit extended, collateral received or delivered or other action taken in reliance hereon and all other demands and notices of any description. With respect to this Agreement, the Note, the Security Agreement and the Mortgage, and any collateral now or hereafter securing the Note, Borrower assents to any extension or postponement of the time of payment or any other indulgence, to any substitution, exchange or release of any collateral now or hereafter securing the Note, to the addition or release of any party or person, primarily or secondarily liable, to the acceptance of partial payments thereon and the settlement, compromising or adjusting of any thereof, all in such manner and at such time or times as the Bank may deem advisable. The Bank shall have no duty as to the collection or protection of any collateral now or hereafter securing the Note or any income thereon, nor as to the preservation of rights against prior parties, nor as to the preservation of any rights pertaining thereto beyond the safe custody thereof. The Bank may exercise its rights with respect to any collateral without resorting or regard to the other collateral now or hereafter securing the Notes or sources of reimbursement for liability. The Bank shall not be deemed to have waived any of its rights upon or under any document or agreement relating to the liabilities of the Borrower or any collateral now or hereafter securing any such liabilities unless such waiver be in writing and signed by the Bank. No delay or omission on the part of the Bank in exercising any right shall operate as a waiver of such right or any other right. A waiver on any one occasion shall not be construed as a bar to or waiver of any right on any future occasion. The Bank may revoke any permission or waiver previously granted to Borrower or, such revocation shall be effective when given in writing as to all events occurring after receipt -16- thereof. All rights and remedies of the Bank with respect to this Agreement, the Note, the Security Agreement or the Mortgage, or any collateral now or hereafter securing the Note, whether evidenced hereby or by any other instrument or document, shall be cumulative and may be exercised singularly or concurrently. 9.2 EXPENSES; ADDITIONAL DOCUMENTS. The Borrower will pay all reasonable ------------------------------- expenses arising out of the preparation, administration, amendment, protection, collection and/or other enforcement of this Agreement, the Note or of any collateral or security interest now or hereafter granted to secure the Note or security interest or lien granted under any other loan documents executed pursuant to this Agreement (including, without limitation, reasonable counsel fees). The Borrower will from time to time, at its expense, execute and deliver to the Bank all such other and further instruments and documents and take or cause to be taken all such other and further action as the Bank shall be request in order to effect and confirm all rights contemplated by this Agreement. 9.3 COMPLIANCE. The determination of the Borrower's compliance with all ----------- covenants contained in this Agreement or the Note shall be based on the consistent application of generally accepted accounting principles employed by the Borrower as of the date of this Agreement unless otherwise subsequently and specifically agreed to in writing by the Bank. 9.4 LIEN AND SET OFF. The Borrower and each Guarantor (if any) assigns, ----------------- transfers and pledges to and grants to the Bank a lien and security interest in, and agrees that the Bank, in its sole discretion may from time to time, hold and treat any deposits or other sums at any time credited by or due from the Bank or any of its affiliates to the Borrower and any securities, instruments or other property of the Borrower now or hereafter in the Bank's possession, custody or control or any of the Bank's affiliates whether the same are held as a pledge of collateral or for safekeeping or custody or otherwise, as collateral security for, with the right, without making demand or giving notice, to apply and set off the same against, any and all liabilities and amounts now or hereafter owed pursuant to the Agreement, the Note, Mortgage or Security Agreement, or any document or instrument executed pursuant to the terms of this Agreement if an Event of Default has occurred. 9.5 STAMP TAX. The Borrower will pay any stamp or other tax which becomes --------- payable in respect of the Note or this Agreement. 9.6 MASSACHUSETTS LAW. This Agreement and the rights and obligations of ----------------- the parties hereunder and thereunder and under the Note shall be construed and interpreted in accordance with the law of Massachusetts. The Borrower agrees that the execution of this Agreement and the performance of the Borrower's obligations hereunder and thereunder shall be deemed to have a Massachusetts situs and the Borrower and shall be subject to the personal jurisdiction of the courts of the Commonwealth of Massachusetts with respect to any action the Bank, its successors or assigns may commence hereunder or thereunder. Accordingly, the Borrower hereby specifically and irrevocably consent to the jurisdiction of the courts of the Commonwealth of Massachusetts with respect to all matters concerning this Agreement, the Note, the Security Agreement or the Mortgage, or the enforcement of any of the foregoing. -17- 9.7 SEVERABILITY. If any provision of this Agreement is invalid or ------------- unenforceable under applicable law, such provision is and will be totally ineffective to that extent, but the remaining provisions of this Agreement shall be unaffected. 9.8 SURVIVAL OF COVENANTS, ETC. All covenants, agreements, --------------------------- representations and warranties made herein, in the Note or in any documents or other papers delivered by or on behalf of the Borrower pursuant hereto shall be deemed to have been relied upon by the Bank, notwithstanding any investigation heretofore or hereafter made by it, and shall survive the making by the Bank of the Loan, as herein contemplated, and shall continue in full force and effect so long as any amount due under this Agreement or the Note remains outstanding and unpaid or the Bank has any obligation to make any Loans hereunder. 9.9 PARTIES IN INTEREST. All the terms of this Agreement and the Note -------------------- shall be binding upon and inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto and thereto; provided, that the Borrower shall not assign or transfer its rights hereunder without the prior written consent of the Bank nor shall the Bank assign or transfer its rights without prior written notice to the Borrower. 9.10 NOTICES, ETC. Except as otherwise expressly provided in this ------------ Agreement, all notices and other communications made or required to be given pursuant to this Agreement, the Note, the Security Agreement, the Mortgage, and the collateral loan documents shall be in writing and shall be delivered in hand, or mailed by United States certified mail, postage prepaid, return receipt requested, addressed as follows: (a) if to the Borrower to it's address as set forth at the beginning of this Agreement, Attention: President (if applicable) or at such other address for notice as the Borrower shall last have furnished in writing to the person giving the notice, with a copy to: Christopher Stavros, Esq. c/o Excel, Inc. 255 Independence Drive Hyannis, MA 02601 (b) if to the Bank, to: Cape Cod Bank and Trust Company 307 Main Street Hyannis, MA 02601 Attention: Timothy F. Kelleher, III Vice President or such other address for notice as the Bank shall last have furnished in writing to the person giving the notice, with a copy to: -18- Laurie A. Warren, Esq. Kilroy & Warren, P.C. P. 0. Box 960 Hyannis, MA 02601 Any such notice or demand shall be deemed to have been duly given or made and to have become effective (a) if delivered by hand to a responsible officer of the party to which its is directed or to that party's principal place of business as provided above, at the time of delivery thereof, or (b) if sent by registered or certified first-class mail, postage prepaid, return receipt requested, three business days after the posting thereof. 9.11 MISCELLANEOUS. The rights and remedies herein expressed are ------------- cumulative and not exclusive of any other rights which the Bank would otherwise have. The captions in this Agreement are for convenience of reference only and shall not define or limit the provisions hereof. This Agreement and any amendment hereof may be executed in several counterparts and by each party on a separate counterpart, each of which when so executed and delivered shall be an original, but all of which together shall constitute one instrument. In proving this Agreement it shall not be necessary to produce or account for more than one such counterpart signed by the party against whom enforcement is sought. 9.12 ENTIRE AGREEMENT, ETC. This Agreement, together with the Note and --------------------- any other documents executed in connection herewith or therewith, express the entire understanding of the parties with respect to the transactions contemplated hereby. Neither this Agreement nor any term hereof may be changed, waived, discharged or terminated orally or in writing. 9.13 CONSENTS, AMENDMENTS, WAIVERS, ETC. Except as otherwise expressly ---------------------------------- provided in this Agreement, any consent or approval required or permitted by this Agreement to be given by the Bank may be given; and any term of this Agreement or of any other instrument related hereto or mentioned herein may be amended, and the performance or observance by the Borrower of any terms of this Agreement or such other instrument or the continuance of any Event of Default may be waived (either generally or in a particular instance and either retroactively or prospectively) with, but only with, the written consent of the Borrower and the written consent of the Bank. No waiver shall extend to or affect any obligation not expressly waived or impair any right consequent thereon. No course of dealing or delay or omission on the part of the Bank in exercising any right shall operate as a waiver thereof or otherwise be prejudicial thereto. No notice to or demand upon the Borrower shall entitle the Borrower to other or further notice or demand in similar or other circumstances. IN WITNESS WHEREOF, the undersigned have duly executed this Agreement under seal as of the date first set forth above. EXCEL, INC. /s/ Laurie A. Warren - ----------------------------- -19- Witness /s/ Nathan C. Apatow ---------------------------------- By: Nate Apatow, Treasurer CAPE COD BANK AND TRUST COMPANY /s/ Laurie A. Warren /s/ Timothy F. Kelleher - ----------------------------- --------------------------------- Witness By: Timothy F. Kelleher, III Vice President -20- REAL ESTATE PROMISSORY NOTE $2,100,000.00 HYANNIS, MASSACHUSETTS June 30, 1997 The undersigned (jointly and severally if more than one) for value received, promise to pay to the order of CAPE COD BANK AND TRUST COMPANY (the "Bank") at the Head Office of the Bank, at 307 Main Street, Hyannis, MA 02601, TWO MILLION ONE HUNDRED THOUSAND AND N0/100 ($2,100,000.00) DOLLARS in or within five (5) years after the date of this Note and, until this Note is paid in full, interest and principal shall be payable as follows: Interest only shall be payable monthly during the first twelve months of the term of this Note at the annual rate of the Prime Rate of Interest as published in the Wall Street Journal (the "Prime Rate") plus one quarter (.25%) percent per annum (the "Rate") computed on the unpaid principal balance with the first payment due July 30, 1997, changes in the Rate to take effect on the date changes in the Prime Rate are published in the Wall Street Journal during the initial twelve (12) month period; and Thereafter monthly payments of principal and interest shall be payable at the above-referenced rate of interest with the first payment due on June 30, 1998 with payments being first applied to interest then due and the balance, if any, to principal. The loan shall be amortized over a period of fifteen (15) years. During the period commencing after the initial twelve (12) month period, the interest rate will be adjusted annually on the anniversary date of the loan for as long as the loan remains outstanding. In the event that any monthly payment due hereunder is not paid within fifteen (15) days of the due date, there shall become due hereunder, at the option of the Bank hereof, a late charge of three and 00/100 (3.00%) percent of the amount overdue. The undersigned has granted to the Bank a mortgage on the following described property to secure the payment and performance of all obligations: Land, together with the buildings thereon, situated at 75 Perseverance Way, Hyannis, Massachusetts, together with certain personal property of the undersigned. In addition to the above property, all other property belonging to, standing in the name of or pledged on behalf of the undersigned which is now or may hereafter be in the possession of the Bank for any purpose, and also any other property described in one or more agreements or mortgages which have been or shall be delivered or caused to be delivered, to the Bank by the undersigned, together with all additions or accessions thereto (all of the foregoing being hereinafter called ("Collateral"), shall constitute continuing security for any and all obligations. In the event the undersigned is in default under the terms and provisions of the loan, or the unpaid principal and interest and other charges due the Bank are not paid when due, including acceleration after default, then the default rate of interest on the unpaid principal and interest then due shall be equal to the aggregate of the Rate of interest recited herein from time to time plus three (3.00%) percent per annum until such amount shall be paid in full (whether before or after judgment). The entries on the records of the Bank (including any appearing on this Note) shall be prima facie evidence of the aggregate principal amount outstanding under this note and interest accrued thereon. The Borrower agrees that it will not permit the outstanding balance of the Loan to exceed 80% of the Bank's then current appraised value of the portion of the Collateral known as 75 Perseverance Way, Hyannis, Massachusetts 02601. Any appraisal required by the Bank shall be performed by an appraiser of the Bank's choice and shall be at the cost of the Borrower. Notwithstanding any provision to the contrary, in the event of a default hereunder, the Bank shall notify the Borrower in writing and Borrower shall have 30 days to cure by furnishing additional collateral satisfactory to the Bank. The undersigned represents and warrants that (a) all Collateral is owned by the undersigned or by the person(s) delivering all or any part of the property to the Bank to be held as Collateral and is not subject to any liens, security interests or rights of others, except those approved by the Bank in writing, and its delivery to the Bank has been duly authorized by all necessary action, and that (b) the Collateral is genuine and is what it purports to be. The Bank may at its option, whether or not this note is due, demand, sue for, collect, or make any compromise or settlement it deems desirable with reference to any Collateral. Right is expressly granted to the Bank at its option to transfer at any time to itself or to its nominee any securities, documents or other property pledged hereunder and to receive the income thereon and hold the same as security therefor, or apply it on the principal or interest due hereon or due on any liability secured hereby. The Bank shall have no duty as to the protection or collection of any Collateral or any income thereon, and shall not be bound to take any steps necessary to preserve any rights in any Collateral against prior parties. The Bank shall not exercise its right to vote any voting securities comprising Collateral unless an event of default under this note has occurred and the Bank had notified the undersigned or successors and assigns thereof, in writing of its intention to vote such securities. The undersigned shall furnish the Bank from time to time, and by August 1, 1997 and thereafter, at least annually within one hundred twenty (120) days after the end of the Borrower's fiscal year-end, with such signed audited financial statements as the Bank may require in form satisfactory to the Bank. Financial information furnished to the Bank shall be true and correct -2- and fairly represent the financial condition of the undersigned as of the date(s) furnished and the operating results of the undersigned for the periods for which the same are furnished. The undersigned shall permit the representatives of the Bank to inspect its properties and its books and records, and to make copies or abstracts thereof. If the undersigned, as registered Bank of securities comprising Collateral, received (a) any dividend or other distribution in cash or other property in connection with the liquidation or dissolution of the issuer of such securities or (b) any stock certificate, option or right, whether as an addition to, in substitution of, or in exchange for, such securities, or otherwise, the undersigned agrees to accept same in trust for the Bank, and to forthwith deliver same to the Bank in the exact form received, with the undersigned's endorsement and/or assignment when necessary, to be held by the Bank as collateral. Upon the occurrence of any of the following events of default: (a) default in the payment or performance of any of the obligations (including any failure to pay any installment of principal or interest hereunder when due) or of any obligations of any Obligor to others for borrowed money or in respect of any extension of credit or accommodation; (b) failure of any representation and warranty hereunder or of any representation or warranty, statement or information in any documents or financial statements delivered to the Bank for the purpose of inducing it to make or maintain the loan under this note to be true and correct; (c) failure of the undersigned to file any tax return, or to pay or remit any tax, when due; (d) failure to furnish the Bank promptly on request with financial information about, or to permit inspection by the Bank of books, records and properties of, any Obligor; (e) any financial information furnished to the Bank reflecting operating loss and/or total liabilities in excess of total assets, as determined by generally accepted accounting principles; (f) loss, theft, substantial damage, sale or encumbrance to or of any property constituting collateral or the making of any levy, seizure or attachment thereof or thereon or the failure to pay when due any tax thereon or, with respect to any insurance policy, any premium therefor; (g) default under any instrument constituting, or under any agreement relating, to Collateral; (h) any Obligor generally not paying its debts as they become due; (i) death, dissolution, termination of existence, business failure, appointment of a receiver or other custodian of any part of the property of, assignment for the benefit of creditors by, or the commencement of any proceedings under any bankruptcy or insolvency laws by or against, any obligor; (j) change in the condition or affairs (financial or otherwise) of any Obligor which in the opinion of the Bank will impair its security or increase its risk (thereupon or at any time thereafter such default not having been previously cured), at the option of the Bank, all obligations of the undersigned shall become immediately due and payable without notice or demand and the Bank shall then have in any jurisdiction where enforcement hereof is sought, in addition to all other rights and remedies, the rights and remedies of a secured party under the Uniform Commercial Code of Massachusetts. Without limiting the foregoing and in addition thereto, a failure to pay when due two or more installments of principal or payments of interest (whether consecutive or not) under this note shall be a default which shall not be deemed waived by the Bank by its acceptance of such payments. -3- Any sums from time to time credited by or due from the Bank to any Obligor and any property of any Obligor in which the Bank has from time to time any security interest or which from time to time may be in he possession of the Bank for any purpose shall also constitute collateral for the payment or performance of the Obligations of such Obligor, and the undersigned hereby grants the Bank a continuing security interest in such sums and property. Regardless of the adequacy of Collateral the Bank may apply such sums or property or realizations upon any such security interest against said obligations at any time in the case of a primary Obligor but only against matured Obligations in the case of a secondary Obligor. The terms and conditions of this note and any other loan documents relating to collateral constitute the entire agreement between the parties, and supersede all prior agreements and understandings, both written and oral, of the Bank and the undersigned with respect to the subject matter hereof and of any such agreement, and may not be modified or amended except in writing and signed by the Bank. No delay or omission on the part of the Bank in exercising any right hereunder shall operate as a waiver of such right or of any other right under this note. No waiver of any right shall be effective unless in writing and signed by the Bank nor shall a waiver on one occasion be construed as a bar to or waiver of any such right on any future occasion. Each Obligor waives presentment, demand, notice, protest, and all other demands and notices in connection with the delivery, acceptance, performance, default or enforcement of this note or of any Collateral, and assents to any extension or postponement of the time of payment or any other indulgence under this note or with respect to any Collateral, to any substitution, exchange or release of any Collateral, and/or to the addition or release of any other party or person primarily or secondarily liable hereunder. The undersigned will pay on demand all costs of collection and attorney's fees paid or incurred by the Bank in enforcing the Obligations of any obligor. As herein used "Obligor" means any person primarily or secondarily liable hereunder or in respect hereto, including any person who has pledged property on behalf of the undersigned to be held as Collateral; "Obligation" means any obligation hereunder or otherwise of any Obligor to the Bank whether direct or indirect, absolute or contingent, due or to become due, now existing or arising; and "Bank" means the payee or any endorsee of this note who is in possession of it, or the bearer hereof if this note is at the time payable to the bearer. This note shall take effect as a sealed instrument and shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts. The Bank is hereby authorized, without further notice, to fill in any blank spaces on this note, and to date this note as of the date funds are first advanced hereunder. EXCEL, INC. -4- /s/ Laurie A. Warren By /s/ Nathan C. Apatow - -------------------------------- ---------------------------------- Witness Nate Apatow, Treasurer -5- SECURITY AGREEMENT AGREEMENT made this 30th day of June, 1997, by and between EXCEL, INC. a Massachusetts business corporation having a principal place of business at 255 Independence Drive, Hyannis Massachusetts 02601, hereinafter referred to as "Borrower" and CAPE COD BANK AND TRUST COMPANY, a Massachusetts banking corporation, having its usual place of business at 307 Main Street, Hyannis, MA 02601, hereinafter referred to as "Secured Party"; WITNESSETH, to secure the payment of an indebtedness in the amount of TWO MILLION ONE HUNDRED THOUSAND AND NO/00 ($2,100,000.00) DOLLARS, payable as evidenced by a note of even date herewith, and also to secure any other indebtedness or liability of the Borrower to the Secured Party direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, including all future advances or loans which may be made at the option of the Secured Party (all hereinafter called the "obligations") pursuant to the terms of a Loan Agreement dated June 30, 1997 between the Borrower and Secured Party, Borrower hereby grants and conveys to the Secured Party a security interest in, (a) the property described in EXHIBIT A attached hereto (hereinafter called the collateral), which collateral the Borrower represents will be used primarily in business or other use; (b) all property, goods and chattels of the same classes as those scheduled, acquired by the Borrower subsequent to the execution of this agreement and prior to its termination; (c) all proceeds thereof, if any; and (d) all increases, substitutions, replacements, additions and accessions thereto. Borrower warrants, covenants and agrees as follows: 1. PAYMENT. ------- To pay and perform all of the obligations secured by this agreement according to their terms. 2. DEFEND TITLE. ------------ To defend the title to the collateral against all persons and against all claims and demands whatsoever, which collateral, except for the security interest granted hereby and purchase money security interests, is lawfully owned by the Borrower and is now free and clear of any and all liens, security interest, claims, charges, encumbrances, taxes and assessments except as may be set forth in the schedule. 3. ASSURANCE OF TITLE. ------------------ On demand of the secured party to do the following: furnish further assurance of title, execute any written agreement or do any other acts necessary to effectuate the purposes and provisions of this agreement, execute any instrument or statement required by law or otherwise in order to perfect, continue or terminate the security interest of the Secured Party in the collateral and pay all costs of filing in connection therewith. 4. POSSESSION. ---------- To retain possession of the collateral during the existence of this agreement and not to sell, exchange, assign, loan, deliver, lease, mortgage or otherwise dispose of same except in the ordinary course of its business, without the written consent of the Secured Party. 5. LOCATION. -------- To keep the collateral at the location specified in the schedule and not to remove any material portion of same without advising the second party of its new location, except in the usual course of business or for temporary periods, without the prior written consent of the Secured Party. 6. LIENS. ----- To keep the collateral free and clear of all liens, charges, encumbrances, taxes and assessments. 7. TAXES. To pay, when due, all taxes, assessments and license fees relating to the collateral. 8. REPAIRS. ------- To keep the collateral, at Borrower's own cost and expense, in good repair and condition and not to misuse, abuse, waste or allow to deteriorate except for normal wear and tear and to make same available for inspection by the Secured Party at all reasonable times. 9. INSURANCE. --------- To keep the collateral insured against loss by fire (including extended coverage), theft and other hazards as the Secured Party may reasonably require and to obtain collision insurance if applicable. Policies shall be in such form and amounts and with such companies as the Secured Party may designate. Policies shall be obtained from responsible insurers authorized to do business in the Commonwealth of Massachusetts. Certificates of insurance or policies, payable to the respective parties as their interest may appear, shall be deposited with the Secured Party who is authorized, but under no duty, to obtain such insurance upon failure of the Borrower to do so. Borrower shall give immediate written notice to the Secured Party and to insurers of loss or damage to the collateral and shall promptly file proofs of loss with insurers. Borrower hereby appoints the Secured Party as the attorney for the Borrower in obtaining, adjusting and cancelling any such insurance and endorsing settlement drafts exceeding $50,000.00 in the aggregate in any one calendar year and hereby assigns to the Secured Party all sums exceeding $50,000.00 in the aggregate in any one calendar year which may become payable under such insurance, including return premiums and dividends, as additional security for the indebtedness. -2- 10. LOAN - USE OF PROCEEDS. ---------------------- If this agreement is security for a loan to be used to pay a part or all of the purchase price of the collateral, to use the proceeds of the loan to pay the purchase price, filing fees and insurance premiums. The Secured Party, however, may pay the proceeds directly to the seller of the collateral. 11. CHANGE OF ADDRESS. ------------------ To immediately notify the Secured Party in writing of any change in or discontinuance of Borrower's place or places of business and/or residence. 12. AFFIXED TO REALTY. ----------------- That if the collateral has been attached to or is to be attached to real estate, a description of the real estate and the name and address of the record owner is set forth in the schedule herein; if the said collateral is attached to real estate prior to the perfection of the security interest granted hereby, Borrower will on demand of the Secured Party furnish the latter with a disclaimer or disclaimers, signed by all persons having an interest in the real estate, of any interest in the collateral which is prior to Secured Party's interest. 13. NOTES. ----- Notes, if any, executed in connection with this agreement, are separate instruments and may be negotiated by Secured Party without releasing Borrower, the collateral, or any guarantor or co-maker. Borrower consents to any extension of time of payment. If there be more than one Borrower, guarantor or co-maker of this agreement or of notes secured hereby, the obligation of all shall be primary, joint and several. 14. NON-WAIVER. ---------- Waiver of or acquiescence in any default by the Borrower, or failure of the Secured Party to insist upon strict performance by the Borrower of any warranties or agreements in this security agreement, shall not constitute a waiver of any subsequent or other default or failure. 15. NOTICES. ------- Notices to either party shall be in writing and shall be delivered personally or by mail addressed to the party and their counsel at the addresses set forth as follows: 1. Cape Cod Bank and Trust Company 307 Main Street Hyannis, MA 02601 Attn: Timothy F. Kelleher, III, Vice President -3- 2. Kilroy & Warren, P.C. 171 Main Street P.O. Box 960 Hyannis, MA 02601 Attn: Laurie A. Warren, Esquire 3. EXCEL, INC. 255 Independence Drive Hyannis, MA 02601 Attn: Robert P. Madonna, President and Treasurer 16. LAW APPLICABLE. -------------- Massachusetts General Laws Chapter 106 shall govern the rights, duties and remedies of the parties and any provisions herein declared invalid under any law shall not invalidate any other provision of this agreement. 17. DEFAULT. ------- The following shall constitute a default by Borrower: (a) Failure to pay the principal or any installment of principal or of interest on the Obligations or any notes within fifteen (15) days of the due date thereof; (b) Failure by Borrower to comply with or perform any provision of this agreement within thirty (30) days, except as otherwise provided in any other loan documents executed herewith; (c) False or misleading representations or warranties made or given by Borrower in connection with this agreement; (d) Subjection of the collateral to levy of execution or, if not discharged or released in thirty (30) days, other judicial process; (e) Commencement of any insolvency proceeding by or against the Borrower or of any guarantor of or surety for the Borrower's obligations which is not discharged within 45 days; 18. REMEDIES ON DEFAULT. ------------------- (a) Upon any default of the Borrower and at the option of the Secured Party, the obligations secured by this agreement shall immediately become due and payable in full without notice or demand and the Secured Party shall have all the rights, remedies and privileges with respect to repossession, retention and sale of the collateral and disposition of the proceeds as are accorded to a Secured Party by -4- the applicable sections of the Uniform Commercial Code respecting "Default", in effect as of the date of this Security Agreement. (b) Upon any default, the Secured Party's reasonable attorneys' fees and the legal and other expenses for pursuing, searching for, receiving, taking, keeping, storing, advertising and selling the collateral shall be chargeable to the Borrower. (c) The Borrower shall remain liable for any deficiency resulting from a sale of the collateral and shall pay any such deficiency forthwith on demand. (d) If the Borrower shall default in the performance of any of the provisions of this agreement on the Borrower's part to be performed, Secured Party may perform same for the Borrower's account and any monies expended in so doing shall be chargeable with interest to the Borrower and added to the indebtedness secured hereby. (e) In conjunction with, addition to or substitution for those rights, Secured Party, at his discretion, may: (i) enter upon Borrower's premises peaceably by Secured Party's own means or with legal process and take possession of the collateral, or render it unusable, or dispose of the collateral on the Borrower's premises and the Borrower agrees not to resist or interfere; (ii) require Borrower to assemble the collateral and make it available to the Secured Party at a place to be designated by the Secured Party, reasonably convenient to both parties (Borrower agrees that the Secured Party's addresses set forth above is a place reasonably convenient for such assembling); (iii) Unless the collateral is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market, Secured Party will give Borrower reasonable notice of the time and place of any public sale thereof or of the time after which any private sale or any other intended disposition thereof is to be made. The requirements of reasonable notice will be met if such notice is mailed, postage prepaid, to the address of the Borrower shown above, at least five days before the time of sale or disposition. 19. ASSIGNMENT. ---------- Secured Party may assign this agreement and if assigned the assignee shall be entitled, upon notifying the Borrower in writing, to performance of all of Borrower's obligations and agreements hereunder and the assignee shall be entitled to all of the rights and remedies of the Secured Party hereunder. Borrower will assert no claims or defenses Borrower may have against the Secured Party against the assignee. 20. FINANCING STATEMENT. ------------------- The Secured Party is hereby authorized to file a Financing Statement. -5- 21. FINANCIAL STATEMENTS. -------------------- Borrower agrees to provide Secured Party with annual audited financial statements and tax returns in form and substance reasonably satisfactory to the secured party in its sole discretion and in compliance with the commitment to the Borrower dated May 12, 1997, as amended, within one hundred and twenty (120) days of the close of Borrower's fiscal year-end. 22. CAPTIONS. -------- The captions are inserted only as a matter of convenience and for reference and in no way define, limit or describe the scope of this agreement nor the intent of any provision thereof. The gender and number used in this agreement are used as reference terms only and shall apply with the same effect whether the parties are of the masculine or feminine gender, corporate or other form, and the singular shall likewise include the plural. IN WITNESS WHEREOF, the parties here respectively signed and sealed these presents the day and year first above written. EXCEL, INC. /s/ Laurie A. Warren /s/ Nathan C. Apatow - ------------------------ ------------------------------------- Witness By: Nate Apatow, Treasurer CAPE COD BANK AND TRUST COMPANY /s/ Laurie A. Warren /s/ Timothy F. Kelleher - ------------------------ ------------------------------------- Witness By: Timothy F. Kelleher, III Vice President -6- EXHIBIT A (to Security Agreement) Re: 75 Perseverance Way Hyannis, Massachusetts A continuing security interest in all materials, equipment, supplies, fixtures, and other tangible personal property (with all accessions thereto) used or bought for use in connection with the real estate, whether now existing or hereafter arising, now or hereafter received by or belonging to the Debtor. -7- EX-11.1 14 STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE EXHIBIT 11.1 EXCEL SWITCHING CORPORATION COMPUTATION OF EARNINGS PER SHARE (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED --------------- YEAR ---------------- ENDED JUNE DECEMBER JUNE 30, 28, 1994 1995 28, 1996 1996 1997 ------- ------- -------- -------- ------- Net Income........................... $ 4,190 $ 5,411 $ 7,901 $ 3,687 $ 7,420 ======= ======= ======= ======= ======= Weighted average common shares outstanding......................... 27,946 27,962 28,090 28,090 28,090 Weighted average common share equivalents......................... 3,395 3,861 4,607 4,492 4,832 Weighted average common shares issued within twelve months of initial public offering(1).................. 1,090 1,090 1,090 1,090 1,090 ------- ------- ------- ------- ------- Weighted average number of common and common equivalent shares outstanding......................... 32,431 32,913 33,787 33,672 34,012 ======= ======= ======= ======= ======= Net income per common and common equivalent share.................... $ 0.13 $ 0.16 $ 0.23 $ 0.11 $ 0.22 ======= ======= ======= ======= =======
- -------- (1) Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 83, stock options issued at prices below the initial public offering price during the 12-month period immediately preceding the initial filing date of the Company's Registration Statement of its initial public offering have been included as outstanding for all periods presented. The dilutive effect of the common stock equivalents was computed in accordance with the treasury stock method. EX-23.1 15 CONSENT OF ARTHUR ANDERSEN LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our reports and to all references to our Firm included in or made a part of this Registration Statement. ARTHUR ANDERSEN LLP Boston, Massachusetts September 16, 1997 EX-23.3 16 CONSENT OF CESARI AND MCKENNA, LLP EXHIBIT 23.3 CONSENT OF CESARI AND MCKENNA, LLP We hereby consent to the reference to our firm as it appears in this Registration Statement, including the prospectus constituting a part hereof, and any amendments thereof. CESARI AND MCKENNA, LLP Boston, Massachusetts September 16, 1997 EX-27.1 17 FINANCIAL STATEMENT SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JUNE 28, 1997 CONSOLIDATED CONDENSED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 1,000 YEAR 6-MOS DEC-28-1996 DEC-27-1997 JAN-01-1996 DEC-29-1996 DEC-28-1996 JUN-28-1997 4,069 9,225 0 3,001 10,329 12,339 979 1,150 7,358 5,714 25,809 35,236 10,719 11,974 1,756 2,764 34,772 44,446 10,849 13,321 0 0 0 0 0 0 281 281 19,805 27,260 20,086 27,541 62,050 39,055 62,050 39,055 24,312 12,033 24,312 12,033 24,168 14,750 0 0 495 192 13,186 12,366 5,285 4,946 0 0 0 0 0 0 0 0 7,901 7,420 .23 .22 0 0
EX-99.1 18 CONSENT OF EDWARD L. BRESLOW EXHIBIT 99.1 September 15, 1997 Robert P. Madonna, President Excel Switching Corporation 255 Independence Drive Hyannis, MA 02601 Dear Mr. Madonna: I hereby consent to be named as a nominee for election as a director of Excel Switching Corporation in its Registration Statement on Form S-1 (and in the Prospectus forming a part hereof) and in any and all amendments thereto. Very truly yours, /s/ Ed Breslow Edward L. Breslow Dated: September 15, 1997 EX-99.2 19 CONSENT OF WILLIAM J. CADOGAN EXHIBIT 99.2 September 15, 1997 Robert P. Madonna, President Excel Switching Corporation 255 Independence Drive Hyannis, MA 02601 Dear Mr. Madonna: I hereby consent to be named as a nominee for election as a director of Excel Switching Corporation in its Registration Statement on Form S-1 (and in the Prospectus forming a part hereof) and in any and all amendments thereto. Very truly yours, /s/ William J. Cadogan William J. Cadogan Dated: September 15, 1997 EX-99.3 20 CONSENT OF JOHN LOUGHLIN EXHIBIT 99.3 September 15, 1997 Robert P. Madonna, President Excel Switching Corporation 255 Independence Drive Hyannis, MA 02601 Dear Mr. Madonna: I hereby consent to be named as a nominee for election as a director of Excel Switching Corporation in its Registration Statement on Form S-1 (and in the Prospectus forming a part hereof) and in any and all amendments thereto. Very truly yours, /s/ John Loughlin John Loughlin Dated: September 15, 1997 -----END PRIVACY-ENHANCED MESSAGE-----