-----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, DLFTMpCRSi9TrRpvf0kIbb13m0fVaFtMGAA9Y/qSV6nKr8ixmPsV7BAOuQLjiyp4 oECUbPQ4P+lED0G2JA+G7A== 0000891618-99-002263.txt : 19990517 0000891618-99-002263.hdr.sgml : 19990517 ACCESSION NUMBER: 0000891618-99-002263 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 22 FILED AS OF DATE: 19990514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NETCOM SYSTEMS INC CENTRAL INDEX KEY: 0001061244 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING SERVICES [7371] IRS NUMBER: 954312521 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-78513 FILM NUMBER: 99623847 BUSINESS ADDRESS: STREET 1: 20550 NORDHOFF ST STREET 2: C/O NETCOM SYSTEMS INC CITY: CHATSWORTH STATE: CA ZIP: 91311 BUSINESS PHONE: 8187005100 MAIL ADDRESS: STREET 1: 20550 NORDHOFF ST STREET 2: C/O NETCOM SYSTEMS INC CITY: CHATSWORTH STATE: CA ZIP: 91311 S-1 1 FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 14, 1999 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ NETCOM SYSTEMS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 3576 95-4312521 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
20550 NORDHOFF STREET CHATSWORTH, CA 91311 (818) 700-5100 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) BARRY PHELPS CHIEF EXECUTIVE OFFICER 20550 NORDHOFF STREET CHATSWORTH, CA 91311 (818) 700-5100 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES TO: STEVEN E. BOCHNER GREGORY M. GALLO WILSON SONSINI GOODRICH & ROSATI GRAY CARY WARE & FREIDENRICH LLP PROFESSIONAL CORPORATION 400 HAMILTON AVENUE 650 PAGE MILL ROAD PALO ALTO, CA 94301 PALO ALTO, CA 94304 (650) 328-6561 (650) 493-9300
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, 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 of 1933 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 PROPOSED MAXIMUM OF SECURITIES TO AGGREGATE OFFERING AMOUNT OF BE REGISTERED PRICE(1) REGISTRATION FEE - --------------------------------------------------------------------------------------------------------------- Common Stock, $0.001 par value..................... $86,250,000 $23,978 - --------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------
(1) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(a) under the Securities Act of 1933. ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY CHANGE. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION MAY 14, 1999 SHARES [NETCOM SYSTEMS LOGO] COMMON STOCK ------------------------- This is the initial public offering of Netcom Systems, Inc., and we are offering shares of our common stock. We anticipate that the initial public offering price will be between $ and $ per share. We have applied to list the common stock on the Nasdaq National Market under the symbol "NTCM." INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 6.
PER SHARE TOTAL --------- -------- Public offering price....................................... $ $ Underwriting discounts...................................... $ $ Proceeds, before expenses, to Netcom Systems................ $ $
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. Some of our stockholders have granted the underwriters the right to purchase up to additional shares of common stock at the initial public offering price to cover over-allotments. BT ALEX. BROWN DAIN RAUSCHER WESSELS A DIVISION OF DAIN RAUSCHER INCORPORATED NATIONSBANC MONTGOMERY SECURITIES LLC THOMAS WEISEL PARTNERS LLC , 1999 3 INSIDE FRONT COVER OF PROSPECTUS: Graphic depicts a series of arrows arranged point-to-tail in a circle traveling clockwise. The arrows are labeled as follows: "Network Equipment Manufacturers," "Network Service Providers," "Enterprise End-Users," "New Product Design," "Production," "Sales," "Proof of Product," and "Proof of Service." The arrows emerge from and terminate at the corporate logo of Netcom Systems, which is situated at the base of the circle created by the arrows. Above the arrows is the heading, in large type, "The first link in the network." Below the logo is the caption, "Netcom Systems' SmartBits products verify network performance to create the first link in a new network. Netcom Systems reduces the risks and costs associated with network failures. SmartBits proactively measures the limits of network devices and complex network configurations before they "go live." From initial product design to first end-user deployment, Netcom Systems helps new technology take its place in today's evolving network world." INSIDE GATEFOLD: Graphic depicts a series of arrows arranged point-to-tail emerging from a picture of SmartBits at the base of the graphic, traveling clockwise in a circle, and terminating back at the picture of SmartBits. The arrows are labeled "Network Equipment Manufacturers," "Network Service Providers," "Enterprise End-Users," "New Product Design," "Production," "Sales," "Proof of Product," and "Proof of Service." Above the circle that is created by the arrows is the corporate logo of Netcom Systems followed by "Network Performance Analysis." Emerging from the picture of the products and filling the space in the center of the circle is a diagram detailing SmartBits interconnected with network equipment. Under the lower left area of the circle are two pictures of computer screens showing the graphical user interface of SmartBits. There are three similar pictures under the lower right area of the circle. At the bottom of the graphic is the following caption: "SmartMetrics is Netcom Systems measurement methodology: the necessary measurements that determine the Quality of Service of a network based system. Netcom Systems SmartBits products implement SmartMetrics methodology, recreating the traffic of millions of connected computers. Then they analyze the results to accurately measure a network's performance. Network service providers and enterprises use SmartBits to validate that their networks can perform to contracted service levels. Network Equipment manufacturers use SmartBits to develop new technologies, accelerate time-to-market and prove that their products work for their customers. Netcom Systems works with other network experts and standards bodies to create independent test benchmarks for the networking industry. SmartBits is used to determine the viability of new technology by leading networking laboratories and trade publications." INSIDE BACK COVER OF PROSPECTUS: Graphic depicts a rectangle rotated clockwise approximately 20 degrees bearing the words "Tested by SmartBits." Also inside the rectangle, in smaller type at the bottom, is "Netcom Systems." The rectangle is superimposed over a list of companies. The companies listed are: 3Com - Aetna Life Insurance - Ameritech - Andersen Consulting - AT&T - Bell South - British Telecom - Cable Television Lab - Cabletron - Cisco - Deutsche Telekom - D-Link - FORE Systems - France Telecom - GTE - Hitachi - IBM - Los Alamos Laboratories - Lucent Technologies - Matsushita - MCI WorldCom - Microsoft - NationsBank - NEC - Nortel Networks - NTT - Southwestern Bell - Sprint - U.S. Army - Xylan. "SmartBits(TM)" is our trademark. All rights reserved. All other trade names and trademarks appearing in this prospectus are the property of their respective holders. 4 PROSPECTUS SUMMARY You should read the following summary together with the more detailed information regarding our company and the common stock being sold in this offering, as well as our Consolidated Financial Statements and Notes to Consolidated Financial Statements appearing elsewhere in this prospectus. The terms "Netcom Systems," "we," "us," and "our" refer to Netcom Systems, Inc. and our subsidiaries, Netcom Systems Europe S.A.R.L. and Netcom (Barbados) Limited. NETCOM SYSTEMS We are a leading provider of network performance analysis solutions for network equipment manufacturers, network service providers and enterprises. Our flagship platform, SmartBits, analyzes networking equipment, including infrastructure and enterprise switches and routers, and broadband access devices, such as cable modems and xDSL devices, to determine performance, reliability, scalability, interoperability, quality of service and proof of service, before deployment on the network. SmartBits allows users to analyze network performance by emulating complex, multi-technology networks through the generation, reception and analysis of high speed network traffic flows. We have sold our products to over 700 accounts including leading network equipment manufacturers such as Cisco, Lucent Technologies and Nortel Networks; semiconductor manufacturers; network service providers, including telecommunications carriers and Internet service providers such as AT&T, GTE, MCI WorldCom and Sprint; and enterprises such as Fortune 1000 companies, financial institutions, systems integrators and government entities. In 1998, we earned revenues of $73.5 million and net income of $18.6 million. The increase in the number of individuals, groups and businesses exchanging information electronically through LANs, WANs and the Internet has driven the growth of the multi-billion dollar networking industry. As a result of this growth, communications networks are encountering a number of significant challenges: - Networks are becoming increasingly constrained as the number of network users and the volume of bandwidth-intensive multimedia and voice traffic continues to grow substantially. - Networks are becoming increasingly complex as the number of new technologies and services designed to improve and differentiate network performance creates complex interoperability issues. - Networks are becoming increasingly mission-critical as functions such as e-commerce, on-line trading, data warehousing, enterprise resource planning and payroll processing are routinely performed on today's networks. As a result of these trends, network equipment manufacturers are under time-to-market pressure to provide cost-effective, high performance equipment with enhanced features, while at the same time ensuring that these products meet interoperability standards and are highly reliable under increasingly variable traffic conditions. Service providers and enterprises are under competitive pressure to rapidly deploy new applications and services to increase revenues and to intelligently manage their available bandwidth and minimize network failures in a cost-effective manner. To meet these needs, network equipment manufacturers, network service providers and enterprises require independent, sophisticated and industry-recognized performance analysis solutions. Our SmartBits solution allows simultaneous performance analysis over a wide variety of networking technologies, including Ethernet, Fast Ethernet, Gigabit Ethernet, Frame Relay, ATM, Token Ring and Packet over SONET, as well as broadband access devices such as cable modems and xDSL devices. The intelligent performance analysis capabilities of SmartBits enable users to 3 5 effectively analyze traditional networking performance parameters relating to individual network components, as well as more sophisticated parameters associated with large, multi-technology networks. The modular SmartBits platform enables users to easily add or substitute our SmartCards and SmartModules, which are technology-specific interface cards, within a common SmartBits chassis. Our SmartBits solution is scalable, allowing for the addition of multiple SmartCards or SmartModules within a single chassis and linkage of multiple SmartBits chassis for performance analysis of network equipment replicating the demands of up to 768 simultaneous connections. Our SmartBits chassis and SmartCards and SmartModules are used in conjunction with a versatile suite of software applications that address the performance analysis requirements of network equipment manufacturers, network service providers and enterprises. Our strategy is to strengthen and expand our market leadership in developing, manufacturing and marketing network performance analysis solutions to become the industry standard for network performance analysis. Key elements of our strategy include: - capitalizing on rapid technological change by creating network performance analysis solutions for network technologies as they emerge; - further penetrating and expanding our network equipment manufacturer customer base by increasing sales to multiple functional departments within our installed base and increasing sales to manufacturers of emerging network technologies; - further expanding our customer base in the service provider and enterprise markets, as well as international markets, by leveraging our leadership in performance analysis solutions; and - leveraging our key relationships with industry experts and test labs, networking publications and customers to be first to market with new industry standard performance analysis solutions. Our principal executive offices are located at 20550 Nordhoff Street, Chatsworth, CA 91311, and our telephone number is (818) 700-5100. We were incorporated in California in August 1989 and reincorporated in Delaware in June 1998. Our web site can be found at www.netcomsystems.com. Information contained on our web site does not constitute part of this prospectus. ------------------------ Except as set forth in the Consolidated Financial Statements and the Notes thereto or as otherwise indicated, all information in this prospectus assumes: - the filing and effectiveness upon closing of this offering of a Restated Certificate of Incorporation authorizing a class of undesignated preferred stock; - the automatic conversion of all outstanding shares of our convertible preferred stock into common stock upon the closing of the offering; - the redemption of all outstanding shares of our redeemable preferred stock upon the closing of, and with the proceeds of, the offering; - no exercise of options to purchase our common stock after March 31, 1999; and - no exercise of the underwriters' over-allotment option. 4 6 THE OFFERING Common stock offered by us......................... shares Common stock to be outstanding after the offering......................................... shares Use of proceeds.................................... With our proceeds, we intend to redeem approximately $54.3 million in redeemable preferred stock. We intend to use the remaining proceeds to repay indebtedness and for working capital and other general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market symbol............. NTCM
The number of shares of common stock to be outstanding after the offering is based on the number of shares outstanding as of March 31, 1999. This number excludes: - 6,763,765 shares of common stock issuable upon exercise of outstanding stock options; - 2,976,300 shares that have been set aside for future issuance under our stock option plans; and - 150,000 shares that have been set aside for future issuance under our employee stock purchase plan. SUMMARY CONSOLIDATED FINANCIAL DATA You should read the following summary consolidated financial data in conjunction with our Consolidated Financial Statements and related Notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. The data in the "As Adjusted" column below reflects the conversion of all outstanding shares of convertible preferred stock into common stock and the redemption of all outstanding shares of redeemable preferred stock upon the closing of the offering, the sale of common stock offered by us in this offering and the application of the estimated net proceeds.
THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, --------------------------------------------- ----------------- 1994 1995 1996 1997 1998 1998 1999 ------ ------ ------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues............................... $2,080 $9,053 $27,454 $56,273 $73,474 $18,011 $19,513 Gross profit........................... 1,744 7,787 24,198 49,025 57,562 14,963 14,640 Operating expenses: Research and development............. 446 833 1,681 3,527 8,588 1,662 2,665 Sales and marketing.................. 193 844 1,466 3,713 12,956 2,271 4,087 General and administrative........... 365 1,262 1,342 3,452 3,799 776 855 Amortization of deferred compensation....................... -- -- -- -- 60 -- 133 Income from operations................. 740 4,848 19,709 38,333 32,159 10,254 6,900 Net income............................. $ 483 $2,958 $11,811 $22,796 $18,582 $ 5,648 $ 4,041 ====== ====== ======= ======= ======= ======= ======= Pro forma net income per common share.. $ 0.73 $ 0.16 ======= ======= Pro forma weighted average number of common shares outstanding............ 25,606 25,688 ======= ======= Pro forma diluted net income per common share................................ $ 0.63 $ 0.13 ======= ======= Pro forma weighted average number of common shares and common equivalent shares outstanding................... 29,542 30,335 ======= =======
MARCH 31, 1999 ---------------------- ACTUAL AS ADJUSTED -------- ----------- (UNAUDITED) CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................... $ 17,970 $ Working capital............................................. 31,049 Total assets................................................ 57,264 Long-term debt, net of current portion...................... 35,000 Redeemable preferred stock.................................. 53,363 Stockholders' investment.................................... (50,734)
5 7 RISK FACTORS This offering involves a high degree of risk. You should carefully consider the risks described below and the other information included in this prospectus before deciding to invest in our stock. BECAUSE A SIGNIFICANT PORTION OF OUR REVENUES IS DERIVED FROM SALES TO A LIMITED NUMBER OF NETWORK EQUIPMENT MANUFACTURERS, OUR BUSINESS COULD BE ADVERSELY AFFECTED AND THE PRICE OF OUR STOCK COULD FALL IF WE LOSE ONE OR MORE OF THESE CUSTOMERS. Historically, a significant amount of our revenues has been derived from sales to our largest customers, all of whom are network equipment manufacturers. If we lose any significant network equipment manufacturer as a customer or one or more of these customers reduces, delays or cancels large orders, our sales and results of operations would suffer and the price of our stock could fall. U.S. sales to our four largest customers collectively accounted for 36.0% of our revenues in 1996, 31.1% of our revenues in 1997 and 31.9% of our revenues in 1998. During the three month period ended March 31, 1999, U.S. sales to our four largest customers represented 21.6% of our revenues. In the year ended December 31, 1996, sales to Bay Networks accounted for 14.9% of our revenues and sales to Cisco accounted for 11.8% of our revenues. In the year ended December 31, 1997, sales to each of Bay Networks and Cisco accounted for 10.9% of our revenues. Sales to Cisco also accounted for 12.1% of our revenues in the year ended December 31, 1998. No customer accounted for 10% or more of our revenues in the first three months of 1999. Our international distributors may also make additional sales to foreign divisions or affiliates of these customers which are not reflected in the percentages above. We anticipate that our results of operations in any given period will continue to depend upon sales to a small number of customers. There are only a limited number of network equipment manufacturers, and the number of these manufacturers may decrease as a result of consolidation in the industry. Our dependence on large orders from a limited number of network equipment manufacturers makes our relationships with these manufacturers critical to the success of our business. As these relationships evolve over time, adjustments to product specifications, forecasts and delivery timetables may be required in response to customer demands and expectations. If we are unable to satisfy customer requirements or manage customer relationships successfully, we may lose sales to these customers. As a result of this customer concentration, our revenues may be subject to substantial period-to-period fluctuations which could have a material adverse effect on our business, results of operations and financial condition. OUR FUTURE PERFORMANCE IS UNPREDICTABLE AND OUR QUARTERLY RESULTS MAY FLUCTUATE WHICH COULD RESULT IN VOLATILITY IN THE PRICE OF OUR STOCK. Our quarterly operating results could be adversely affected by a wide variety of factors including the following: - changes in the demand for our products; - the timing, composition and size of orders from our customers, including the possibility that significant orders will be made in the last month of each quarter; - spending patterns and budgetary resources of our customers; - introductions or enhancements of products, or delays in the introductions or enhancements of products; - flaws in our products that we cannot detect and remedy in a timely manner; - shortages of critical components; - pricing pressure; - our ability to hire and retain additional sales, technical and marketing personnel; 6 8 - the publication of opinions about us or our products, or our competitors and their products, by industry analysts or others; - exchange rate fluctuations; and - seasonality and changes in global or regional economic conditions. In addition, we cannot predict whether our current or future competitors will develop or market technologies and products that offer higher performance or are more cost-effective than our current or future products, thereby rendering our products obsolete. Any increase in competition in the network performance analysis market could result in increased pressure on us to reduce prices and could result in a reduction in our revenues or a decrease in our gross margins, each of which could cause our net income to decrease. Consolidation in the computer networking industry may also disrupt procurement decisions of our customers. As a result, these customers may delay purchasing our products during the transition period following their consolidation with another company and our revenues during this transition period may decline. For example, during 1998, we believe that the consolidation of two of our network equipment manufacturer customers contributed to a slow down in sales to these customers. Further consolidation in the networking industry could cause our revenues in any period to decline and could materially adversely impact our results of operations for that period. In addition, we cannot assure you that following a consolidation of our customers, they will resume purchasing our products in volumes comparable to those purchased prior to the consolidation. Due to the foregoing factors, we believe that period-to-period comparisons of our operating results should not be relied upon as an indicator of our future performance. IF WE FAIL TO DEVELOP NEW PRODUCTS OR ENHANCEMENTS TO OUR EXISTING PRODUCTS AT THE RATE REQUIRED BY OUR RAPIDLY CHANGING NETWORKING MARKET, OUR BUSINESS WILL NOT GROW AND OUR STOCK PRICE MAY FALL. The market for network performance analysis equipment is rapidly evolving and is subject to rapid technology and market fluctuations. The market for our products is characterized by: - rapidly changing technologies; - evolving industry standards; - frequent competitive product introductions; and - short product life cycles. Our success will depend substantially upon our ability to enhance our existing products and to develop and introduce, on a timely and cost-effective basis, new products and features that meet changing customer requirements and emerging industry standards. We are dependent upon sales of these products to sustain and grow our revenues. If we are unable to develop new products and enhanced functionalities to adapt to these changes or if we cannot offset a decline in revenues of existing products by sales of new products, our business would be materially adversely affected. In addition, our product development process involves a number of risks. Developing technologically advanced products is a complex and uncertain process requiring innovation as well as the accurate anticipation of technology and market trends. We may not be able to successfully develop new products or we may experience delays or unexpected costs in connection with our efforts. We budget our research and development expenditures based on planned product introductions and enhancements. However, the rapidly evolving nature of the networking market could cause our actual research and development costs to differ significantly from our budget. If we fail to timely and cost-effectively develop new products that respond to new technologies and the needs of the networking market, we will lose revenue and our business will suffer. 7 9 In addition, any new or enhanced products we introduce may contain undetected or unresolved software or hardware defects when they are first introduced or as new versions are released. It is possible that design defects will occur in new products or upgrades after commencement of commercial shipments. These defects could result in a loss of sales and additional costs as well as damage to our reputation and the loss of relationships with our customers and industry experts. Additionally, our introductions of new products and product enhancements may result in declines in sales of our existing products. We must effectively manage the transition from older products to newer generation products 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 customer demand. We routinely pre-announce the release of new products. In the past, we have experienced reductions in sales of existing products after we have announced the release of new products. If we are unable to effectively manage future product introductions, our sales will decrease and our business will suffer. INCREASING COMPETITION IN THE NETWORK PERFORMANCE ANALYSIS MARKET COULD PREVENT US FROM SUSTAINING AND GROWING OUR REVENUES OR PREVENT US FROM SUSTAINING PROFITABILITY. We face competition from the following sources: - network equipment manufacturers that develop in-house products; - test equipment manufacturers such as Hewlett-Packard; - start-up companies focused on network performance measurement such as IXIA Communications and Antara; - companies specializing in asynchronous transfer mode, or ATM, performance testing such as Adtech and RADCOM; and - software-based network traffic simulators such as Ganymede Software and Optimal Networks. We may also face competition from other companies such as Network Associates and some of our distributors who make products complimentary to SmartBits. Some of our competitors and potential competitors have greater resources, name recognition and sales capabilities than we do. The network performance analysis market became increasingly competitive in 1998 which affected our business. Any further increase in competition in the network performance analysis market could result in increased pressure on us to reduce prices and could result in a reduction in our revenues and/or a decrease in our margins, each of which could materially adversely impact our results of operations. In addition, increased competition could prevent us from increasing our market share, or cause us to lose our existing market share, either of which would harm our business and could impact our profitability. We cannot predict whether our current or future competitors will develop or market technologies and products that offer higher performance or are more cost-effective than our current or future products. To remain competitive, we must continue to develop products and product enhancements which offer higher performance at a lower cost. Our failure to do so will adversely affect our revenues and results of operations. IF WE DO NOT EXPAND INTO NEW MARKETS, WE MAY NOT BE ABLE TO GROW OUR BUSINESS OR INCREASE OUR PROFITABILITY. Our future growth depends in part on our ability to increase sales of our products to our network service provider and enterprise customers from which we derived 18.0% of our U.S. revenues in 1998 and 22.3% of our U.S. revenues in the first three months of 1999. To effectively compete in the network performance analysis markets for service providers and enterprises, we must develop new products and enhancements to existing products and expand our sales, 8 10 marketing and customer support capabilities, which will result in substantial increases in operating costs. If we cannot offset these increases in costs with an increase in our revenues, our net income may fall and our stock price may fall. Some of our existing and potential competitors have relationships with many service providers and enterprises. We cannot assure you that we will be successful in developing and marketing products in these new markets. Any failure by us to increase sales in these new markets would adversely affect our future growth. OUR RESULTS OF OPERATIONS MAY SUFFER IF WE ARE UNABLE TO PROPERLY FORECAST SALES. We typically operate with little or no backlog. In addition, the sales cycle for our products is generally not longer than sixty days and can be as short as a few days. Furthermore, our customers may cancel orders or change delivery schedules without significant penalties. As a result, quarterly sales and operating results generally depend on the volume and timing of orders received within the quarter, which are difficult to forecast. A significant portion of our spending, including rent and headcount, is relatively fixed in advance based on our forecast of future sales. If sales are below expectations in any given quarter, the adverse impact of the shortfall on our quarterly operating results may be magnified by our inability to adjust spending to compensate for the shortfall. In addition, we began to invest significantly in the infrastructure of our business beginning in the fourth quarter of 1997, including significant investments in our research and development, customer support and sales and marketing organizations. Our investments in 1998 included a significant increase in personnel and an upgrade in information technology systems. We anticipate that our operating expenses will likely increase in the future as we continue to invest in our infrastructure. In the absence of a corresponding increase in sales of our products, this increase in expenses may prevent us from sustaining profitability in the future, particularly on a quarter-to-quarter basis, and may cause material fluctuations in our quarterly operating results. If our future quarterly operating results fall below the expectations of analysts and investors, the price of our common stock may decline significantly. WE MUST DEVELOP AND EXPAND INDIRECT DISTRIBUTION CHANNELS TO INCREASE OUR INTERNATIONAL SALES. We depend on distributors for the substantial majority of our international sales. The loss of one or more distributors or their failure to sell our products internationally would limit our ability to sustain and grow our revenues. We intend to enter into additional international markets and to continue to expand our operations outside of the United States by adding distributors and international sales and support personnel and pursuing additional strategic relationships which will require significant management attention and expenditure of significant financial resources. Our failure to be successful in these efforts could materially adversely affect our results of operations and cause our stock price to fall. While we have contracts with most of our distributors, these contracts do not require a distributor to purchase our products and, in some cases, may be terminated by a distributor at any time without penalty. We cannot assure you that any of our distributors will continue to market our products. In addition, we may, from time to time, terminate some of our relationships with distributors. Any such termination could have a negative impact on our business and result in threatened or actual litigation. Also, some of our distributors manufacture products with functionality complementary in some respects to SmartBits, and, therefore, are potential competitors. These distributors may, in the future, enhance their existing products or develop new products to compete directly with us. In such event, these distributors would likely cease to distribute our products. Our distributors also possess confidential information concerning our products, product release schedules, and sales, marketing and distribution operations. Although our contracts with our distributors contain confidentiality provisions, we cannot assure you that any distributor would not use our confidential information in competition with us or otherwise. If 9 11 our distributors fail to successfully market and sell our products for these or any other reasons, our international sales could be reduced or fail to grow and our revenues could decline. INTERNATIONAL SALES ACCOUNT FOR A SIGNIFICANT PORTION OF OUR REVENUES AND COULD DECREASE FOR REASONS UNIQUE TO INTERNATIONAL BUSINESS. Sales to customers outside of the United States accounted for 25.5% of our revenues in 1998 and 29.6% of our revenues in the three-month period ended March 31, 1999. We expect that international sales will continue to account for a significant portion of our revenues in future periods. Any reduction in international sales, or our failure to further develop our international distribution channels could have a material adverse effect on our business, results of operations and financial condition. Our international operations are subject to particular risks, including: - currency fluctuations; - longer receivables collection periods; - increased exposure to bad debt write-offs; - political and economic instability; - difficulties in enforcing agreements through foreign legal systems; - unexpected changes in regulatory requirements; - import or export licensing requirements; - reduced protection of our intellectual property rights in some countries; and - local holidays and customary vacation times, which cause customers in some markets to reduce their business activities. In addition, if the export or import of our products is prohibited by the laws of the United States or any foreign country in which we do business, or uncertainty about such laws limits our ability to market our products internationally, we could lose a substantial portion of our international sales. Further, our international sales are primarily denominated in U.S. dollars. An increase in the value of the U.S. dollar relative to foreign currencies could make our products less competitive on a price basis in international markets. Portions of our international sales are currently denominated in French francs and could be denominated in euros in the future. We do not engage in any hedging activities to reduce our exposure to currency risk. Accordingly, fluctuations in currency exchange rates for the French franc and possibly the euro could cause our revenues to decline. These international factors, along with the ones listed above, could cause future sales of our products to international customers to decline and could damage our business. WE DEPEND ON CONTRACT MANUFACTURERS TO MANUFACTURE ALL OF OUR PRODUCTS AND ANY DELAY OR DISRUPTION IN PRODUCTION FROM THESE MANUFACTURERS COULD RESULT IN LOST SALES TO CURRENT OR POTENTIAL CUSTOMERS. We design all of the hardware subassemblies for our products and use the services of contract manufacturers to build these subassemblies and our products to our specifications. Our internal manufacturing operations consist primarily of materials planning and procurement, quality control, final assembly and testing of our products. We intend to regularly introduce new products and product enhancements, which will require that we rapidly achieve volume production by coordinating our efforts with those of our suppliers and contract manufacturers. We do not have any long-term contracts with our contract manufacturers. The inability of our contract manufacturers to provide us with adequate supplies of high quality products or the loss of a 10 12 current contract manufacturer would cause a delay in our ability to fulfill customer orders while we obtain a replacement manufacturer. These delays could result in client dissatisfaction and could result in lost sales to current or new customers. WE PURCHASE SEVERAL KEY COMPONENTS FROM SOLE OR LIMITED SOURCES AND COULD LOSE SALES IF ANY OF THESE SOURCES FAIL TO FILL OUR NEEDS. We purchase a number of key components and parts used in our products, including microprocessors and integrated circuits, from sole or limited source suppliers and are dependent upon supply from these sources to meet our needs. We may encounter shortages and delays in obtaining components in the future which could materially adversely affect our ability to meet customer orders. We purchase components through purchase orders and we have no guaranteed supply arrangements with our suppliers. The availability of many of these components is dependent in part on our ability to provide our suppliers with accurate forecasts of our future needs. Our ability to make accurate forecasts is complicated by the typically short product life cycles and customer lead times for our products. We also purchase components from foreign suppliers, which places the supply of those components at risk of changing tariff and regulatory structures, particularly those affecting the import and export of electronics and technology. Any interruption in the supply of any of our key components that we obtain from a sole or limited source could disrupt our operations and materially adversely affect our business in any given period. In addition, any increase in component costs could increase the cost of our products and result in lower gross margins. IF WE FAIL TO HIRE AND MANAGE ADDITIONAL PERSONNEL AND RETAIN KEY PERSONNEL, OUR GROWTH COULD SLOW AND OUR REVENUES COULD FALL. We have recently experienced rapid growth and a significant expansion in the number of employees and the scope and complexity of our operating and financial systems. We increased the number of our full-time employees from 140 to 226 individuals during the 12 months ended April 30, 1999. This growth has placed and, if sustained, will continue to place, a significant strain upon our management, operations, financial systems and resources. We believe that our future success will depend in large part upon our continued ability to identify, hire, retain and motivate highly skilled employees, who are in great demand. In particular, we believe that we must expand our research and development, marketing, sales and customer support capabilities in order to effectively serve the evolving needs of our present and future customers. Competition for these employees is intense. Our failure to hire additional qualified personnel in a timely manner and on reasonable terms could adversely affect our business and results of operations. In addition, our success depends on the continuing contributions of our senior management and technical personnel, all of whom would be difficult to replace. The loss of any one of them could adversely affect our ability to execute our business strategy, which could cause our results of operations and financial condition to suffer. We cannot assure you that we will be successful in retaining these key personnel. IF WE FAIL TO MAINTAIN OUR RELATIONSHIPS WITH INDUSTRY EXPERTS, OUR PRODUCTS MAY LOSE INDUSTRY AND MARKET RECOGNITION AND SALES COULD DECLINE. We believe that our relationships with industry experts in the field of network performance are critical for maintaining our industry credibility and developing new products reflecting new technologies and testing methodologies in a timely fashion. These experts have established standard testing methodologies that evaluate new network equipment products and technologies. Through our relationships, we provide these experts and their testing labs with SmartBits solutions and engineering assistance to perform tests on these new network equipment products and technologies. These industry experts reference our network performance analysis products in their publications which has given our products industry recognition as an independent network 11 13 performance analysis solution. In addition, these labs offer us the opportunity to test our products on the newest network equipment products and technologies. We cannot assure you that we will be able to maintain our relationships with industry experts or that our competitors, including new entrants, will not obtain similar relationships with industry experts. If we are unable to maintain these relationships, our network performance analysis solution may lose industry recognition and sales of our products could decline. OUR LIMITED ABILITY TO PROTECT OUR PROPRIETARY TECHNOLOGY MAY ADVERSELY AFFECT OUR ABILITY TO COMPETE. Although we believe that our success is more dependent upon our technical expertise than our proprietary rights, our future success and ability to compete is dependent in part upon our proprietary technology. We rely on a combination of contractual rights and copyright, patent, trademark and trade secret laws to establish and protect our proprietary technology. Currently, we have one U.S. patent application pending. We cannot assure you that this patent will be issued or, if issued, will adequately protect the technology covered by the application. We also generally enter into confidentiality agreements with our employees, consultants, resellers, customers and potential customers, strictly limit access to and distribution of our source code, and further limit the disclosure and use of other proprietary information. We cannot assure you that the steps taken by us in this regard will be adequate to prevent misappropriation of our technology or that our competitors will not independently develop technologies that are substantially equivalent or superior to our technology. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain or use our products or technology. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the United States. OUR STOCK PRICE MAY BE EXTREMELY VOLATILE AND YOU MAY NOT BE ABLE TO RESELL YOUR SHARES AT OR ABOVE THE OFFERING PRICE. Our common stock has never been sold in a public market. An active trading market for our common stock may not develop or be sustained upon the completion of this offering. We are negotiating the initial offering price of the common stock with the underwriters. However, the initial offering price may not be indicative of the prices that will prevail in the public market after the offering, and the market price of the common stock could fall below the initial public offering price. You should read the "Underwriting" section for a discussion of the factors considered in determining the initial public offering price. In addition, the market price of our common stock could fluctuate widely in response to the following particular factors: - actual or anticipated variations in operating results; - announcements of technological innovations, new products or new services by us or by our competitors or customers; - changes in financial estimates or recommendations by stock market analysts regarding us or our competitors; - announcements by us of significant acquisitions, strategic partnerships, joint ventures or capital commitments; - additions or departures of key personnel; - future equity or debt offerings or our announcements of such offerings; and - general market and economic conditions. 12 14 In addition, in recent years, the stock market in general, and the Nasdaq National Market and the market for technology companies in particular, have experienced extreme price and volume fluctuations. These fluctuations have often been unrelated or disproportionate to the operating performance of individual companies. These broad market fluctuations may materially adversely affect our stock price, regardless of our operating results. MEMBERS OF MANAGEMENT AND OUR BOARD OF DIRECTORS, AND THEIR AFFILIATES, WILL CONTROL % OF OUR COMMON STOCK, AND WILL BE ABLE TO ELECT OUR DIRECTORS AND SIGNIFICANTLY INFLUENCE ALL MATTERS REQUIRING STOCKHOLDER APPROVAL. Following this offering, members of our executive management team and our board of directors and their affiliates will control approximately % of our common stock. These management and board members and their affiliates, along with other existing stockholders, have entered into a stockholders agreement pursuant to which they have agreed to vote their shares together to elect designated representatives to our board of directors and to maintain the number of authorized directors. This agreement will only terminate with the consent of the holders of two-thirds of the shares subject to the agreement. Accordingly, these stockholders are able to elect all of our directors, will retain the voting power to approve all matters requiring stockholder approval and have significant influence over our business affairs. This concentration of ownership and stockholders agreement could have the effect of delaying or preventing a change in control. For a more complete discussion of this concentration of ownership and the stockholders agreement, see "Principal Stockholders" and "Certain Transactions." WE MAY ENGAGE IN FUTURE ACQUISITIONS THAT DILUTE THE OWNERSHIP INTERESTS OF OUR STOCKHOLDERS, CAUSE US TO INCUR DEBT AND ASSUME CONTINGENT LIABILITIES. As a part of our business strategy, we may make acquisitions of, or significant investments in, complementary companies, products or technologies, although no such acquisitions or investments are currently pending. Any future acquisitions would be accompanied by the risks encountered in acquisitions of companies. These risks include: - difficulties in assimilating the operations and personnel of the acquired companies; - diversion of management's attention from ongoing business concerns; - our potential inability to maximize our financial and strategic position through the successful incorporation of acquired technology and rights into our products and services; - additional expense associated with amortization of acquired assets; - maintenance of uniform standards, controls, procedures and policies; and - impairment of existing relationships with employees, suppliers and customers as a result of the integration of new management personnel. We cannot assure you that we will be able to successfully integrate any business, products, technologies or personnel that we might acquire in the future, and our failure to do so could materially adversely affect our business, operating results and financial condition. In addition, as a result of our recapitalization in 1997 we are unable to account for any acquisition as a pooling of interests until September 1999. In the event that we complete any acquisition prior to September 1999, we would likely be required to amortize goodwill related to that acquisition which could adversely affect our results of operations. In addition, because we cannot be a party to an acquisition transaction accounted for as a pooling of interests prior to September 1999, third parties may be discouraged from attempting to acquire control of our business. 13 15 OUR FAILURE OR THE FAILURE OF OUR KEY SUPPLIERS OR MANUFACTURERS TO BE YEAR 2000 COMPLIANT COULD NEGATIVELY IMPACT OUR BUSINESS. Software that records only the last two digits of the calendar year may not be able to distinguish whether "00" means 1900 or 2000. This may result in software failures or the creation of erroneous results. We generally represent to our customers that we have achieved year 2000 compliance for our products. However, any undetected year 2000 problem in our products, or any problem which cannot be solved in a timely, cost-effective manner could substantially damage our customer relationships, disrupt our business and subject us to threatened or actual litigation. We are also subject to the following risks of the year 2000 issue: - disruptions in systems we use to run our business; and - disruptions in systems used by our suppliers or manufacturers. Our internal information systems, including our financial accounting, product development and operations systems, utilize software and hardware provided by third parties. We employ widely available software applications and other products from leading third-party vendors. Any failure of third-party computer products used by us to be year 2000 compliant could interrupt and disrupt our business. To fix any of these systems could require us to invest substantially in our operating systems and to hire additional personnel. However, since we cannot forecast with any certainty the impact, extent and duration of any year 2000 problems on our operations, our customer or our suppliers, there can be no assurance that our resources will be adequate to withstand any prolonged disruption. We have contacted third-party suppliers of components and our key subcontractors used in the manufacture of our products to identify, and to the extent possible, resolve issues involving the year 2000 problem. However, we have limited or no control over the actions of these third-party suppliers and subcontractors. Thus, while we expect that we will be able to resolve any significant year 2000 problems with these third parties, there can be no assurance that these suppliers and subcontractors will resolve any or all year 2000 problems before the occurrence of a material disruption to the operation of our business. Any failure of these third parties to resolve year 2000 problems in a timely manner could have a material adverse effect on our business, financial condition and results of operations. We are also subject to external forces that might generally affect industry and commerce, such as a utility or transportation company's year 2000 compliance failures and related service interruptions. OUR CHARTER AND BYLAWS AND DELAWARE LAW CONTAIN PROVISIONS WHICH MAY DELAY OR PREVENT A CHANGE OF CONTROL. Provisions of our charter and bylaws may have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of us. These provisions could limit the price that investors might be willing to pay in the future for shares of our common stock. These provisions include: - division of the board of directors into three separate classes; - elimination of cumulative voting in the election of directors; - prohibitions on our stockholders from acting by written consent and calling special meetings; - procedures for advance notification of stockholder nominations and proposals; and - the ability of the board of directors to alter our bylaws without stockholder approval. 14 16 In addition, our board of directors has the authority to issue up to 5,000,000 shares of preferred stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by the stockholders. The issuance of preferred stock, while providing flexibility in connection with possible financings or acquisitions or other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock. In addition, we are subject to Section 203 of the Delaware General Corporation Law which, subject to certain exceptions, prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that such stockholder became an interested stockholder. The preceding provisions of our charter and bylaws, as well as Section 203 of the Delaware General Corporation Law, could discourage potential acquisition proposals, delay or prevent a change of control and prevent changes in our management. FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE. Sales of a substantial number of shares of our common stock in the public market, or the appearance that such shares are available for sale, could materially adversely affect the trading price of our common stock. Such sales also might make it more difficult for us to sell equity securities or equity-related securities in the future at a time and price that we deem appropriate. Upon completion of this offering, we will have shares outstanding. Of these shares, the shares sold in this offering will be freely tradeable in the public market. The remaining 25,689,275 shares of common stock available for sale in the public market are limited by restrictions under the securities laws and 180-day lock-up agreements applicable to these shares and will be available for sale in the public market as follows:
DATE OF AVAILABILITY FOR SALE NUMBER ----------------------------- ----------- Immediately................................................. shares 90th day after the date of this prospectus.................. shares 180th day after the date of this prospectus................. shares
In addition, we have 2,976,300 shares of our common stock available for future grant pursuant to our stock option plans, and 6,763,765 shares subject to outstanding options at March 31, 1999. of these outstanding options are also subject to a 180-day lockup agreement. We intend to register, prior to the expiration of the lock-up, the shares of common stock reserved for issuance under our stock option plans and shares of common stock reserved for issuance under our employee stock purchase plan. Accordingly, shares underlying vested options will be eligible for resale in the public market beginning on expiration of the lock-up. BT Alex. Brown may, in its sole discretion and at any time without notice, release all or any portion of the securities subject to lock-up agreements. WE WILL USE APPROXIMATELY $54.3 MILLION OF THE NET PROCEEDS OF THIS OFFERING TO REDEEM SENIOR SECURITIES AND WE WILL HAVE SUBSTANTIAL DISCRETION AS TO HOW TO USE THE REMAINING NET PROCEEDS FROM THIS OFFERING. The net proceeds to us from this offering are estimated to be approximately $ million, assuming the shares are sold at a price of $ per share and after deducting underwriting discounts and estimated offering expenses. We intend to use approximately $54.3 million of the net proceeds of the offering to redeem all outstanding shares of our redeemable preferred stock. We will use any remaining proceeds to repay indebtedness and for general corporate purposes, including working capital. We have agreed to repay a term loan, the principal amount of which was $45.0 million at March 31, 1999, in quarterly installments. The installments will be $7.5 million for July and October 1999 and $2.5 million per quarter thereafter with a final payment of $5,0 million in April 2002. Our management will have broad discretion to allocate any remaining proceeds and to determine the timing of expenditures in ways with which our 15 17 stockholders may not agree. We cannot predict that investment of the proceeds will yield a favorable or any return. See "Use of Proceeds." WE DO NOT INTEND TO PAY DIVIDENDS ON OUR COMMON STOCK. Although we have paid dividends on our common stock in the past, we currently intend to retain any future earnings for funding growth and, therefore, do not anticipate paying any dividends in the foreseeable future. See "Dividend Policy." INVESTORS IN THIS OFFERING WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION. If you purchase shares of our common stock, you will suffer an immediate and substantial dilution of approximately $ in net tangible book value per share, or approximately % of the offering price of $ per share. If optionholders exercise options, you will suffer further dilution. See "Dilution." FORWARD-LOOKING STATEMENTS This prospectus contains statements under the captions "Prospectus Summary," "Risk Factors," "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," that are "forward-looking statements." These forward-looking statements include statements about our plans, objectives, expectations and intentions and other statements contained in this prospectus that are not historical facts. When used in this prospectus, the words "expect," "anticipate," "intend," "plan," "believe," "estimate" and similar expressions are generally intended to identify forward-looking statements. Because these forward-looking involve risks and uncertainties, there are important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements, including our plans, objectives, expectations and intentions and other factors discussed under "Risk Factors." We undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future. 16 18 USE OF PROCEEDS The net proceeds to us from the sale of the shares of common stock in the offering, assuming an initial public offering price of $ per share and after deducting the underwriting discounts and estimated offering expenses of $700,000, are estimated to be $ . We intend to use approximately $54.3 million of the net proceeds to redeem all outstanding shares of our redeemable preferred stock. Following this redemption, no shares of redeemable preferred stock will be outstanding. A second purpose of this offering is to repay indebtedness. We have agreed to repay a term loan, the principal amount of which was $45.0 million at March 31, 1999, in quarterly installments. The installments will be $7.5 million for July and October 1999 and $2.5 million per quarter thereafter with a final payment of $5.0 million in April 2002. Following the redemption and repayment described above, we expect to use any remaining net proceeds of this offering for general corporate purposes including sales and marketing, hiring of additional consultants and staff, and working capital. We may also use a portion of the net proceeds to fund acquisitions of products, technologies or businesses that are related or complementary to our business. Although we have no present agreements or commitments and are not currently engaged in any negotiations with respect to any such transactions, we continue to evaluate these opportunities. Pending use of the net proceeds for the foregoing purposes, we intend to invest the net proceeds in investment grade interest bearing marketable securities. DIVIDEND POLICY Although we declared a $2.7 million dividend on our common stock in 1996 and repurchased shares of our common stock in connection with our recapitalization in 1997, we intend to retain earnings, if any, and we do not intend to pay cash dividends in the foreseeable future. See "Certain Transactions." In addition, our credit facility limits our ability to declare and pay dividends. Any future determination to pay cash dividends will be at the discretion of our board of directors and will be dependent upon our financial condition, results of operations, capital requirements, general business conditions and such other factors as the board of directors may deem relevant. 17 19 CAPITALIZATION The following table sets forth our actual capitalization as of March 31, 1999. The As Adjusted column gives effect to the sale in this offering of shares of common stock at a price of $ per share less underwriting discounts and estimated offering expenses payable by Netcom Systems, the conversion of all outstanding shares of convertible preferred stock into 22,903,436 shares of common stock, the redemption of all outstanding shares of redeemable preferred stock and the reclassification of $10.0 million in long-term debt into short-term debt following the closing of the offering. This table excludes: - 6,763,765 shares of common stock issuable upon exercise of outstanding stock options; - 2,976,300 shares that have been set aside for future issuance under our stock option plans; and - 150,000 shares that have been set aside for future issuance under our employee stock purchase plan. For a further discussion of our option plans, see "Management -- Employee Benefit Plans" and Note 12 of Notes to Consolidated Financial Statements included elsewhere in this prospectus.
MARCH 31, 1999 ----------------------- ACTUAL AS ADJUSTED --------- ----------- (IN THOUSANDS) Long-term debt, net of current portion...................... $ 35,000 $ 25,000 --------- --------- Redeemable preferred stock, $0.001 par value: Authorized -- 485,184 shares (actual); no shares (as adjusted) Issued and outstanding -- 485,184 (actual); no shares (as adjusted)................................ 53,363 -- --------- Stockholders' investment (deficit): Convertible preferred stock, $0.001 par value: Authorized -- 22,903,437 shares (actual); no shares (as adjusted) Issued and outstanding -- 22,903,436 shares (actual); no shares (as adjusted).............................. 48,518 -- Common stock, $0.001 par value: Authorized -- 50,000,000 shares (actual); 200,000,000 shares (as adjusted) Issued and outstanding -- 2,785,839 shares (actual); 25,689,275 shares (as adjusted)...................... 3 Additional paid-in capital................................ 12,547 Deferred compensation..................................... (1,217) (1,217) Retained deficit.......................................... (110,576) (110,576) Accumulated other comprehensive loss...................... (9) (9) --------- --------- Stockholders' investment.................................... (50,734) --------- --------- Total capitalization........................................ $ 37,629 $ ========= =========
18 20 DILUTION Pro forma net tangible book value (deficit) per share represents total assets, less intangible assets and total liabilities, divided by the number of shares outstanding as of March 31, 1999. Our pro forma net tangible book value (deficit) at March 31, 1999 was approximately $( million) or approximately $( ) per share. Without taking into account any changes in such net tangible book value per share after March 31, 1999, other than to give effect to the sale of the shares of common stock offered hereby at an assumed initial public offering price of $ per share and the receipt of the net proceeds of such sale, the pro forma net tangible book value at March 31, 1999 would have been approximately $ million or approximately $ per share. This represents an immediate increase in net tangible book value per share of $ to existing stockholders and an immediate dilution of $ per share to new investors. The following table illustrates this per share dilution: Assumed initial public offering price per share............. $ Pro forma net tangible book value (deficit) per share as of March 31, 1999............................................ $ Increase per share attributable to new investors.......... Pro forma net tangible book value per share after the offering.................................................. $ Dilution per share to new investors.........................
The following table summarizes, on a pro forma basis as of March 31, 1999, the differences between existing stockholders and new investors with respect to the total number of shares of common stock purchased from us, the total price paid and the average price per share paid, using an initial public offering price of $ per share:
TOTAL SHARES PURCHASED CONSIDERATION AVERAGE ---------------- ---------------- PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ------ ------- ------ ------- --------- Existing stockholders............................ New investors.................................... Total....................................... 100.0% 100.0% ===== =====
The above calculations do not give effect to the exercise of outstanding options to purchase 6,763,765 shares of common stock at a weighted average exercise price of $2.57 per share outstanding on March 31, 1999. To the extent that these options become exercisable and are exercised, there will be further dilution to new investors. 19 21 SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data at December 31, 1997 and 1998 and for each of the years in the three-year period ended December 31, 1998 are derived from our consolidated financial statements that have been audited by Arthur Andersen LLP, independent public accountants, and are included elsewhere in this prospectus. The statement of operations data for the year ended December 31, 1995 and the balance sheet data at December 31, 1995 and 1996 is derived from our audited financial statements that are not included herein. The statements of operations data for the year ended December 31, 1994 and the balance sheet data at December 31, 1994 are derived from unaudited consolidated financial statements not included in this prospectus. The consolidated statement of operations data for the three months ended March 31, 1998 and 1999 and the consolidated balance sheet data at March 31, 1999 are derived from unaudited consolidated financial statements included elsewhere in this prospectus. The historical results are not necessarily indicative of the operating results to be expected in the future. The following selected consolidated financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and Notes thereto included elsewhere in this prospectus.
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, --------------------------------------------- ------------------- 1994 1995 1996 1997 1998 1998 1999 ------ ------ ------- ------- ------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues................................ $2,080 $9,053 $27,454 $56,273 $73,474 $18,011 $19,513 Cost of goods sold...................... 336 1,266 3,256 7,248 15,912 3,048 4,873 ------ ------ ------- ------- ------- ------- ------- Gross profit............................ 1,744 7,787 24,198 49,025 57,562 14,963 14,640 ------ ------ ------- ------- ------- ------- ------- Operating expenses: Research and development.............. 446 833 1,681 3,527 8,588 1,662 2,665 Sales and marketing................... 193 844 1,466 3,713 12,956 2,271 4,087 General and administrative............ 365 1,262 1,342 3,452 3,799 776 855 Amortization of deferred compensation....................... -- -- -- -- 60 -- 133 ------ ------ ------- ------- ------- ------- ------- Total operating expenses................ 1,004 2,939 4,489 10,692 25,403 4,709 7,740 ------ ------ ------- ------- ------- ------- ------- Income from operations.................. 740 4,848 19,709 38,333 32,159 10,254 6,900 Other income (expense), net............. 6 65 244 (662) (2,020) (682) (328) ------ ------ ------- ------- ------- ------- ------- Income before provision for income taxes................................. 746 4,913 19,953 37,671 30,139 9,572 6,572 Provision for income taxes.............. 263 1,955 8,142 14,875 11,557 3,924 2,531 ------ ------ ------- ------- ------- ------- ------- Net income.............................. $ 483 $2,958 $11,811 $22,796 $18,582 $ 5,648 $ 4,041 ====== ====== ======= ======= ======= ======= ======= Pro forma net income per common share... $ 0.73 $ 0.16 ======= ======= Pro forma weighted average number of common shares outstanding............. 25,606 25,688 ======= ======= Pro forma diluted net income per common share................................. $ 0.63 $ 0.13 ======= ======= Pro forma weighted average number of common shares and common equivalent shares outstanding.................... 29,542 30,335 ======= =======
DECEMBER 31, MARCH 31, --------------------------------------------- ------------------- 1994 1995 1996 1997 1998 1998 1999 ---- ------ ------- -------- -------- -------- -------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents........... $469 $2,885 $ 9,314 $ 17,708 $ 19,597 $ 24,390 $ 17,970 Working capital..................... 716 3,735 12,505 23,312 31,802 28,836 31,049 Total assets........................ 986 5,683 18,110 34,129 54,155 42,805 57,264 Long-term debt, net of current portion........................... -- -- -- 47,500 37,500 47,500 35,000 Redeemable preferred stock.......... -- -- -- 49,520 52,579 50,255 53,363 Stockholders' investment............ 777 3,854 13,014 (71,004) (54,084) (66,111) (50,734)
20 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of our financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and the Notes thereto included elsewhere in this prospectus. This prospectus contains, in addition to historical information, forward-looking statements that involve risks and uncertainties. OVERVIEW We are a leading provider of network performance analysis solutions. Our flagship platform, SmartBits, analyzes networking equipment, including infrastructure and enterprise switches and routers, and broadband access devices, such as cable modems and xDSL devices, to determine performance, reliability, scalability, interoperability, quality of service and proof of service, before deployment on the network. SmartBits allows users to analyze network performance by emulating complex, multi-technology networks through the generation, reception and analysis of high speed network traffic flows. We were incorporated and began operations in 1989. In 1994, we introduced our SmartBits platform. We have been profitable in each of the past four years in which our financial statements were audited. Beginning in the fourth quarter of 1997, we began to invest significantly in the infrastructure of our business to position us for growth in existing and new markets and in anticipation of increased competition. Since that time, our primary focus has been and continues to be to build a customer-centric organization that delivers quality products through research and development in new technologies and supports those products both with an in-house service department and with strong field support. Our efforts to build a customer-centric organization have included activities that resulted in reduced gross and operating margins. For example, during 1998 we significantly increased personnel in our customer support organization. Further, beginning in the third quarter of 1998 we reduced prices on our products to aggressively compete with a new entrant in our markets. In addition, we have made significant investments in sales and marketing to increase the awareness of our products in new markets, particularly among service providers and enterprises. During the year ended December 31, 1998, total operating expenses were $25.4 million, as compared to $10.7 million during the year ended December 31, 1997, an increase of $14.7 million. Of that increase, approximately $14.3 million related to sales and marketing and research and development. During the year ended December 31, 1998, we also invested $1.5 million in building our customer support infrastructure, which is accounted for under cost of goods sold. These investments in our infrastructure demonstrate our commitment to our customers and we plan to continue to invest in infrastructure to support our customers. We realize revenues primarily from the sale of SmartBits systems, as well as from the licensing of related software and software maintenance contracts. System and software revenues are generally recognized at the time of shipment to customers or distributors, net of estimated allowances for product returns. Maintenance contracts typically require us to provide technical support and software updates to customers. Maintenance revenues are deferred and recognized ratably over the term of the maintenance period, which is typically one year. Post-contract support obligations are insignificant and we accrue them at the time of the sale. We market and sell our products and services in the United States through a direct sales force, except in Hawaii where we use a distributor. Internationally, we sell primarily through distributors in 35 separate markets worldwide, although we do sell directly in France, the United Kingdom, Denmark and Ireland. International sales represented 29.6% of our revenues in the three month period ended March 31, 1999, 25.5% of our revenues in 1998, 26.1% of our revenues in 1997 and 16.7% of our revenues in 1996. Our international sales are denominated in U.S. dollars and French francs. Sales to distributors occur, in almost all cases, after the distributor has received an order from its customer. As a result, distributors generally do not inventory our 21 23 products and we have historically incurred very few product returns from our distributors. Typically, distributors receive a commission or sales discount to our international sales prices. Commissions to distributors are payable only after our receipt of payment for these sales. To date, we have incurred no bad debt write-offs based on sales to distributors, although there can be no assurance that we will not incur bad debt write-offs in the future. Historically, a significant amount of our revenues has been generated by sales to our largest customers, all of whom are network equipment manufacturers. U.S. sales to our four largest customers collectively accounted for 36.0% of our revenues in 1996, 31.1% of our revenues in 1997 and 31.9% of our revenues in 1998. Our customer concentration was less pronounced in the first three months of 1999, when U.S. sales to our four largest customers represented 21.6% of our revenues. In the year ended December 31, 1996, sales to Bay Networks accounted for 14.9% of our revenues and sales to Cisco accounted for 11.8% of our revenues. In the year ended December 31, 1997, sales to each of Bay Networks and Cisco accounted for 10.9% of our revenues. Sales to Cisco also accounted for 12.1% of our revenues in the year ended December 31, 1998. No customer accounted for 10% or more of our revenues in the first three months of 1999. Our international distributors may also make additional sales to foreign divisions or affiliates of these customers which are not reflected in the percentages above. We anticipate that our results of operations in any given quarter will continue to depend upon sales to a small number of customers. As a result of this customer concentration, our revenues from quarter to quarter may be subject to substantial fluctuations, which could have a material adverse effect on our business, financial condition and results of operations. In connection with this offering, certain stock option grants have been considered to be compensatory for financial accounting purposes. The amount of this compensation represents the difference between the exercise price of the stock options and the fair market value of our common stock at the time of issuance. Stock-based compensation of $60,000 was amortized during the year ended December 31, 1998 and $133,000 was amortized during the three month period ended March 31, 1999. As of May 1999, stock-based compensation of $1.8 million will be amortized over the remaining vesting periods of the related options using an accelerated method, including $672,000 for the nine month period ending December 31, 1999. 22 24 RESULTS OF OPERATIONS The following table presents, for the periods indicated, certain consolidated statement of operations data as a percentage of our revenues:
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ----------------------- -------------- 1996 1997 1998 1998 1999 ----- ----- ----- ----- ----- (UNAUDITED) Revenues........................................ 100.0% 100.0% 100.0% 100.0% 100.0% Cost of goods sold.............................. 11.9 12.9 21.7 16.9 25.0 ----- ----- ----- ----- ----- Gross profit.................................. 88.1 87.1 78.3 83.1 75.0 ----- ----- ----- ----- ----- Operating expenses: Research and development...................... 6.1 6.3 11.7 9.3 13.6 Sales and marketing........................... 5.3 6.6 17.6 12.6 20.9 General and administrative.................... 4.9 6.1 5.2 4.3 4.4 Amortization of deferred compensation......... -- -- 0.1 -- 0.7 ----- ----- ----- ----- ----- Total operating expenses........................ 16.3 19.0 34.6 26.2 39.6 Income from operations.......................... 71.8 68.1 43.7 56.9 35.4 Other income (expense), net..................... 0.9 (1.2) (2.7) (3.8) (1.7) ----- ----- ----- ----- ----- Income before provision for income taxes........ 72.7 66.9 41.0 53.1 33.7 ----- ----- ----- ----- ----- Provision for income taxes...................... 29.7 26.4 15.7 21.8 13.0 ----- ----- ----- ----- ----- Net income...................................... 43.0% 40.5% 25.3% 31.3% 20.7% ===== ===== ===== ===== =====
THREE MONTHS ENDED MARCH 31, 1999 COMPARED WITH THREE MONTHS ENDED MARCH 31, 1998 Revenues. Revenues were $19.5 million for the three month period ended March 31, 1999, as compared to $18.0 million for the three month period ended March 31, 1998, an increase of $1.5 million or 8.3%. This increase was due primarily to increased international revenues combined with increased sales to Internet service providers and telecommunications carriers, partially offset by price reductions. Gross Profit. Gross profit was $14.6 million for the three month period ended March 31, 1999, as compared to $15.0 million for the three month period ended March 31, 1998, a decrease of $0.4 million. Gross margin was 75.0% for the three month period ended March 31, 1999, as compared to 83.1% for the three month period ended March 31, 1998. The decrease in gross margin was due primarily to price erosion as a result of new competition, combined with an increase in manufacturing and customer support personnel to support expanding operations. Gross margins may decrease over the next 12 months due to factors that could include further price erosion and increases in overhead and customer support, the mix of product sales, new competition, changes in the networking industry and increases in component and contract manufacturing costs. Research and Development. Research and development expense was $2.7 million for the three month period ended March 31, 1999, as compared to $1.7 million for the three month period ended March 31, 1998, an increase of $1.0 million. Research and development expense was 13.6% of revenues for the three month period ended March 31, 1999, as compared to 9.3% of revenues for the three month period ended March 31, 1998. The increase in research and development expense in absolute dollars and as a percentage of revenues was due primarily to increased staffing levels, purchases of development materials and consulting fees. Research and development costs are expensed as incurred. We expect that research and development expenditures will continue to increase in absolute dollars for at least the next 12 months to support continued development of new products and product enhancements. 23 25 Sales and Marketing. Sales and marketing expense was $4.1 million for the three month period ended March 31, 1999, as compared to $2.3 million for the three month period ended March 31, 1998, an increase of $1.8 million. Sales and marketing expense was 20.9% of revenues for the three month period ended March 31, 1999, as compared to 12.6% of revenues for the three month period ended March 31, 1998. The increase in sales and marketing expense in absolute dollars and as a percentage of revenues was due primarily to increased staffing levels and related compensation, travel and other sales expenses, as well as various marketing and promotional programs. We expect that sales and marketing expenditures will increase in absolute dollars for at least the next 12 months as additional personnel are hired, field offices are opened and promotional expenditures are increased as we attempt to increase market penetration and pursue new market opportunities. General and Administrative. General and administrative expense was $0.9 million for the three month period ended March 31, 1999, as compared to $0.8 million for the three month period ended March 31, 1998, an increase of $0.1 million. General and administrative expense was 4.4% of revenues for the three month period ended March 31, 1999, as compared to 4.3% of revenues for the three month period ended March 31, 1998. We expect that general and administrative expenditures will continue to increase in absolute dollars for at least the next 12 months as our administrative staff and internal systems grow to support expanding operations and our status as a public company. Amortization of Deferred Compensation. Amortization of deferred compensation was $0.1 million for the three month period ended March 31, 1999. In that period, we recorded deferred compensation in the amount of $1.0 million, which related to the granting of employee stock options below fair market value. The deferred compensation will be amortized over five years, which is the vesting period of the options, using an accelerated method. Other Income (Expense), Net. In August 1997, we entered into a credit agreement with two banks under which we borrowed $50.0 million through a term loan facility. Interest expense relating to the borrowings was $0.7 million during the three month period ended March 31, 1999, as compared to $0.9 million for the three month period ended March 31, 1998. The decrease in interest expense was due to the reduction of outstanding borrowings through required $2.5 million principal payments made in October 1998 and January 1999. We expect interest expense to decrease for at least the next 12 months as we continue to reduce outstanding borrowings by $7.5 million in each of July and October 1999 and an additional $2.5 million in each three month period following the October 1999 payment with a final payment of $5.0 million in April 2002. Interest income was $0.4 million during the three month period ended March 31, 1999, as compared to $0.2 million during the three month period ended March 31, 1998. The increase in interest income was due to increased cash and investments. We expect interest income to increase for at least the next 12 months as our cash and investments increase from operating activities as well as from proceeds from the offering. Provision for Income Taxes. Our effective tax rate was 38.5% for the three month period ended March 31, 1999, as compared to 41.0% for the three month period ended March 31, 1998. The decrease in the effective tax rate resulted primarily from increased benefits from research and development tax credits and from our foreign sales corporation. YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997 Revenues. Revenues were $73.5 million for the year ended December 31, 1998, as compared to $56.3 million for the year ended December 31, 1997, an increase of $17.2 million or 30.6%. This increase was due primarily to increased sales in new markets such as sales to Internet service providers, telecommunications carriers and enterprises, increased international sales as well as increased sales to our traditional customer base of network equipment manufacturers, partially offset by price reductions. 24 26 Gross Profit. Gross profit was $57.6 million for the year ended December 31, 1998, as compared to $49.0 million for the year ended December 31, 1997, an increase of $8.6 million. Gross margin was 78.3% for the year ended December 31, 1998, as compared to 87.1% for the year ended December 31, 1997. The decrease in gross margin was due primarily to price erosion as a result of new competition, combined with an increase in manufacturing and customer support personnel to support expanding operations. Research and Development. Research and development expense was $8.6 million for the year ended December 31, 1998, as compared to $3.5 million for the year ended December 31, 1997, an increase of $5.1 million. Research and development expense was 11.7% of revenues for the year ended December 31, 1998, as compared to 6.3% of revenues for the year ended December 31, 1997. The increase in research and development expense in absolute dollars and as a percentage of revenues was due primarily to increased staffing levels, consulting fees and purchases of materials used in the development of new products and product enhancements. Sales and Marketing. Sales and marketing expense was $13.0 million for the year ended December 31, 1998, as compared to $3.7 million for the year ended December 31, 1997, an increase of $9.3 million. Sales and marketing expense was 17.6% of revenues for the year ended December 31, 1998, as compared to 6.6% of revenues for the year ended December 31, 1997. The increase in sales and marketing expense in absolute dollars and as a percentage of revenues was due primarily to increased staffing levels and related compensation, travel and other sales expenses, and various marketing and promotional programs, including product investments in independent test labs. General and Administrative. General and administrative expense was $3.8 million for the year ended December 31, 1998, as compared to $3.5 million for the year ended December 31, 1997, an increase of $0.3 million. General and administrative expense was 5.2% of revenues for the year ended December 31, 1998, as compared to 6.1% of revenues for the year ended December 31, 1997. The increase in general and administrative expense in absolute dollars was due primarily to increased staffing levels and increased accounting and legal costs. Other Income (Expense), Net. Interest expense relating to outstanding borrowings was $3.5 million during the year ended December 31, 1998, as compared to $1.2 million for the year ended December 31, 1997. The increase in interest expense was due to the borrowings being outstanding only for approximately three months during 1997. Interest income was $1.4 million during the year ended December 31, 1998, as compared to $0.6 million for the year ended December 31, 1997, an increase of $0.8 million. The increase in interest income was primarily due to increased cash and investments. Provision for Income Taxes. Our effective tax rate was 38.4% for the year ended December 31, 1998, as compared to 39.5% for the year ended December 31, 1997. The decrease in the effective tax rate was primarily due to the establishment of our foreign sales corporation at the end of 1997. YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996 Revenues. Revenues were $56.3 million for the year ended December 31, 1997, as compared to $27.5 million for the year ended December 31, 1996, an increase of $28.8 million or 105.0%. The increase was primarily due to the introduction of new products, further market acceptance of existing products, expansion into international markets and the acquisition of one of our international distributors, Netcom Systems Europe. Our international revenues were $14.7 million for the year ended December 31, 1997, as compared to $4.6 million for the year ended December 31, 1996, an increase of $10.1 million. This increase was primarily due to increased sales through distributors in our international markets, and secondarily as a result of the acquisition of Netcom Systems Europe in September 1997. 25 27 Gross Profit. Gross profit was $49.0 million for the year ended December 31, 1997, as compared to $24.2 million for the year ended December 31, 1996, an increase of $24.8 million. Gross margin was 87.1% for the year ended December 31, 1997, as compared to 88.1% for the year ended December 31, 1996. The decrease in gross margin was due primarily to the increase in manufacturing personnel to support expanding operations as well as increased volume sales discounts given to certain customers. Research and Development. Research and development expense was $3.5 million for the year ended December 31, 1997, as compared to $1.7 million for the year ended December 31, 1996, an increase of $1.8 million. Research and development expense was 6.3% of revenues for the year ended December 31, 1997, as compared to 6.1% of revenues for the year ended December 31, 1996. The increase in research and development expense in absolute dollars and as a percentage of revenues was due primarily to increased staffing levels and to increased purchases of materials used in the development of new products and product enhancements. Sales and Marketing. Sales and marketing expense was $3.7 million for the year ended December 31, 1997, as compared to $1.5 million for the year ended December 31, 1996, an increase of $2.2 million. Sales and marketing expense was 6.6% of revenues for the year ended December 31, 1997, as compared to 5.3% for the year ended December 31, 1996. The increase in sales and marketing expense in absolute dollars and as a percentage of revenues was due primarily to increased staffing levels and increased commissions. General and Administrative. General and administrative expense was $3.5 million for the year ended December 31, 1997, as compared to $1.3 million for the year ended December 31, 1996, an increase of $2.2 million. General and administrative expense was 6.1% of revenues for the year ended December 31, 1997, as compared to 4.9% for the year ended December 31, 1996. The increase in general and administrative expense in absolute dollars and as a percentage of revenues was due primarily to increased staffing levels and the related compensation to support expanding operations. Other Income (Expense), Net. Interest expense relating to outstanding borrowings was $1.2 million for the year ended December 31, 1997, as compared to no interest expense in 1996. Interest income increased $0.4 million for the year ended December 31, 1997 compared to the year ended December 31, 1996 due to increased cash and cash equivalent balances. Provision for Income Taxes. Our effective tax rate was 39.5% for the year ended December 31, 1997, as compared to 40.8% for the year ended December 31, 1996. The decrease in the effective tax rate was primarily due to the increase in research and development tax credits utilized in 1997. This increase in research and development tax credits as well as certain other tax benefits were caused primarily by the exercise of a substantial number of employee stock options in connection with a recapitalization in the third quarter of 1997. Accordingly, we do not expect these tax benefits to recur to the same extent in future periods. 26 28 SELECTED QUARTERLY RESULTS OF OPERATIONS The following tables present statement of operations data in dollars and as a percentage of our revenues. This quarterly information is unaudited but has been prepared on a basis consistent with our audited financial statements presented elsewhere herein, and in our opinion, includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the information for the quarters presented. The results of operations for any quarter are not necessarily indicative of results that may be expected for any subsequent periods.
THREE MONTHS ENDED -------------------------------------------------------------------------------------------------- MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, 1997 1997 1997 1997 1998 1998 1998 1998 1999 -------- -------- --------- -------- -------- -------- --------- -------- -------- (IN THOUSANDS) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues..................... $10,115 $12,958 $15,912 $17,288 $18,011 $19,344 $17,601 $18,518 $19,513 Cost of goods sold........... 1,163 1,575 2,017 2,493 3,048 4,043 4,286 4,535 4,873 ------- ------- ------- ------- ------- ------- ------- ------- ------- Gross profit......... 8,952 11,383 13,895 14,795 14,963 15,301 13,315 13,983 14,640 ------- ------- ------- ------- ------- ------- ------- ------- ------- Operating Expenses: Research and development... 748 589 805 1,385 1,662 2,134 2,256 2,536 2,665 Sales and marketing........ 540 761 1,090 1,322 2,271 3,313 3,606 3,766 4,087 General and administrative........... 753 965 805 929 776 778 1,301 944 855 Amortization of deferred compensation............. -- -- -- -- -- 30 15 15 133 ------- ------- ------- ------- ------- ------- ------- ------- ------- Total operating expenses........... 2,041 2,315 2,700 3,636 4,709 6,255 7,178 7,261 7,740 ------- ------- ------- ------- ------- ------- ------- ------- ------- Income from operations....... 6,911 9,068 11,195 11,159 10,254 9,046 6,137 6,722 6,900 Other income (expense), net........................ 189 167 (107) (911) (682) (525) (508) (305) (328) ------- ------- ------- ------- ------- ------- ------- ------- ------- Income before provision for income taxes............... 7,100 9,235 11,088 10,248 9,572 8,521 5,629 6,417 6,572 Provision for income taxes... 2,804 3,628 4,459 3,984 3,924 3,132 2,182 2,319 2,531 ------- ------- ------- ------- ------- ------- ------- ------- ------- Net income................... $ 4,926 $ 5,607 $ 6,629 $ 6,264 $ 5,648 $ 5,389 $ 3,447 $ 4,098 $ 4,041 ======= ======= ======= ======= ======= ======= ======= ======= ======= AS A PERCENTAGE OF TOTAL REVENUES: Revenues..................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of goods sold........... 11.5 12.1 12.7 14.4 16.9 20.9 24.3 24.5 25.0 ------- ------- ------- ------- ------- ------- ------- ------- ------- Gross profit......... 88.5 87.9 87.3 85.6 83.1 79.1 75.7 75.5 75.0 ------- ------- ------- ------- ------- ------- ------- ------- ------- Operating Expenses: Research and development... 7.4 4.5 5.1 8.0 9.3 11.0 12.8 13.7 13.6 Sales and marketing........ 5.4 5.9 6.8 7.6 12.6 17.1 20.5 20.3 20.9 General and administrative........... 7.4 7.5 5.1 5.4 4.3 4.2 7.5 5.2 4.4 Amortization of deferred compensation............. -- -- -- -- -- -- -- -- 0.7 ------- ------- ------- ------- ------- ------- ------- ------- ------- Total operating expenses........... 20.2 17.9 17.0 21.0 26.2 32.3 40.8 39.2 39.6 ------- ------- ------- ------- ------- ------- ------- ------- ------- Income from operations....... 68.3 70.0 70.3 64.6 56.9 46.8 34.9 36.3 35.4 Other income (expense), net........................ 1.9 1.3 (0.6) (5.3) (3.8) (2.7) (2.9) (1.7) (1.7) ------- ------- ------- ------- ------- ------- ------- ------- ------- Income before provision for income taxes............... 70.2 71.3 69.7 59.3 53.1 44.1 32.0 34.6 33.7 Provision for income taxes... 27.7 28.0 28.0 23.1 21.8 16.2 12.4 12.5 13.0 ------- ------- ------- ------- ------- ------- ------- ------- ------- Net income................... 42.5% 43.3% 41.7% 36.2% 31.3% 27.9% 19.6% 22.1% 20.7% ======= ======= ======= ======= ======= ======= ======= ======= =======
Beginning in 1994, our revenues increased in every quarter until the three month period ended September 30, 1998. In the second half of 1998, the emergence of new entrants in the network performance analysis market resulted in our decision to reduce prices and caused delays in the purchasing decisions of several of our customers. General market conditions, particularly an economic downturn in Asia, also created uncertainty among our network equipment manufacturer customers. In addition, industry consolidation during this period disrupted 27 29 procurement decisions by some of our largest customers. Due primarily to these factors, our quarterly revenues declined for the three month period ended September 30, 1998 relative to the three month period ended June 30, 1998. At the end of 1998 and during the three month period ended March 31, 1999, we increased our customer base, primarily among Internet service providers and telecommunications carriers. For the three month period ended March 31, 1999, revenues increased by $1.0 million over the three month period ended December 31, 1998. Gross margin has decreased primarily due to the effects of increases in manufacturing and customer support personnel and to price erosion caused by new competition. Research and development expenses increased relatively consistently in each of the quarters presented. Sales and marketing expenses increased significantly beginning in the three month period ended June 30, 1998 due to pronounced increases in headcount and promotional efforts. General and administrative expenses increased slightly, or remained relatively constant, each quarter, except for the three month period ended September 30, 1998, primarily due to increased legal and accounting costs related to preparation of our public offering. A number of factors could cause quarterly revenues and operating results to vary significantly, including changes in demand for our products, the timing, composition and size of orders from our customers, and spending patterns and budgetary resources of our customers. Operating results may also fluctuate on a quarterly basis based upon factors such as the introduction of product enhancements by us or our competitors, and market acceptance of new products offered by us or our competitors. Quarterly operating results could also be affected by the relative percentages of products sold through our direct and indirect sales channels, product pricing and competitive conditions in our markets. Any unfavorable change in these or other factors could have a material adverse effect on our business, financial condition and results of operations. Accordingly, we believe that period-to-period comparisons of our results of operations may not be meaningful and should not be relied upon as an indication of our future performance. Furthermore, there can be no assurance that we will be able to sustain profitability on a quarterly or annual basis. LIQUIDITY AND CAPITAL RESOURCES We have financed our operations to date primarily through cash provided by operating activities. At March 31, 1999, our principal source of liquidity was our cash, cash equivalents and short-term investments of $34.3 million. In August 1997, we established an unsecured $10.0 million revolving line of credit with NationsBank, an affiliate of NationsBanc Montgomery Securities, and BankBoston which we subsequently reduced to $2.0 million in 1998. At March 31, 1999, there were no borrowings outstanding under the line of credit. In August 1997, we underwent a recapitalization in which we received net proceeds of $91.0 million from the issuance and sale of redeemable and convertible preferred stock and $50.0 million from borrowings under a term loan facility with two banks. We used these proceeds, together with $14.7 million from our existing cash balances, to repurchase shares of our common stock for $155.7 million. In addition to our term loan facility, we have a $2.0 million revolving line of credit with the same banks. Both the term loan and the line of credit are unsecured and mature in August 2002. The line of credit also contains a $2.0 million letter of credit subfacility. The term loan is due and payable in quarterly installments which began on October 31, 1998. The amount of the installments will be $7.5 million for July and October 1999, declining to $2.5 million per quarter thereafter with a final payment of $5.0 million in April 2002. At March 31, 1999, $45.0 million was outstanding on the term loan and no amount was outstanding on the line of credit. Cash provided by operating activities was $21.8 million during the year ended December 31, 1998, $24.7 million during the year ended December 31, 1997 and $9.5 million during the year ended December 31, 1996. Cash provided by operating activities was $5.3 million during the 28 30 three month period ended March 31, 1999 and $7.4 million during the three month period ended March 31, 1998. Cash generated from operations for all of these periods was principally attributable to net income adjusted for certain non-cash charges such as depreciation and amortization and provisions for doubtful accounts. In addition, during 1997 we received a $6.9 million tax benefit from the exercise of stock options associated with our recapitalization. Through August 1997, our investing activities consisted of the acquisition of property and equipment. In September 1997, we acquired all of the outstanding common shares of Netcom Systems Europe S.A.R.L., a research development, sales and distribution company located near Paris, France. The purchase price was $3.0 million, plus $0.1 million of directly related costs. Net cash used for the acquisition, net of cash acquired, was $2.4 million. During 1998, we purchased investments, primarily corporate commercial paper, in the net amount of $14.7 million. During the three month period ended March 31, 1999, we increased these investments by an additional net amount of $1.6 million. Cash used in financing activities has consisted solely of $2.7 million used for stockholder distributions during 1996, $14.7 million used in connection with our recapitalization in 1997 and $2.5 million used to repay the term loan during each of the three month periods ended December 31, 1998 and March 31, 1999. Cash provided by financing activities has consisted solely of the exercise of employee stock options, providing cash of $0.3 million for the year ended December 31, 1998, $2.2 million for the year ended December 31, 1997, and $0.1 million from the repayment of a note receivable in 1998. We believe that the net proceeds from this offering, together with our current cash balances, cash provided by future operations and available borrowings under our line of credit, will be sufficient to meet our working capital and anticipated capital expenditure requirements for at least the next 12 months. Although operating activities may provide cash in certain periods, to the extent we experience continued growth in the future, our operating and investing activities may require significant cash. Consequently, any such future growth may require us to obtain additional capital. We cannot assure you that additional capital, if required, will be available on acceptable terms, or at all. If we are unable to obtain additional capital, we may be required to reduce the scope of our planned product development and marketing efforts, which would materially adversely affect our business, financial condition and operating results. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Borrowings under both the term loan and the line of credit bear interest, at our election, at the "Base Rate" or the "LIBOR Rate." Interest is payable quarterly. The Base Rate is the higher of (a) the prime rate or (b) the federal funds overnight rate plus 0.5 percent per year. The LIBOR Rate is a per annum rate of 30, 60, 90 or 180 days LIBOR, plus a margin based on our leverage ratio, ranging from 0.875 percent to 1.5 percent per year. Through December 31, 1998, we have selected the LIBOR Rate. However, we have an interest rate swap agreement with the banks that results in our paying a fixed rate of 6.11 percent on $25.0 million of the outstanding balance through October 5, 1999. At December 31, 1998, the interest rate in effect on the $22.5 million remaining outstanding balance was 6.35 percent through June 2, 1999. A hypothetical 65 basis point increase in interest rates would result in an approximate $130,000 increase, approximately 5%, in our interest expense in 1999. We generally invest our cash, cash equivalents and short-term investments in corporate commercial paper or money market accounts. As of December 31, 1998, the weighted average interest rate on these investments was approximately 5.5%. A hypothetical 55 basis point decrease in interest rates would result in an approximate $200,000 decrease, approximately 11%, in our interest income in 1999, assuming no change in cash balance. 29 31 RISKS ASSOCIATED WITH YEAR 2000 PROBLEM Many currently installed computer systems and software products are coded to accept only two digit entries in the date code field. As a result, software that records only the last two digits of the calendar year may not be able to distinguish between 20th and 21st century dates. This may result in software failures or the creation of erroneous results. As a result, computer systems and/or software used by many companies may need to be upgraded to account for this year 2000 problem. Our internal information systems, including our financial accounting, product development and operations systems, utilize software and hardware provided by third parties. In most cases, we employ widely available software applications and other products from leading third-party vendors and have been advised by these vendors that their products are year 2000 compliant or that year 2000 versions will be provided in a timely fashion. Assessment of our products. Beginning in 1997, we began assessing the ability of our software and products to operate properly in the year 2000. During this assessment, we sent a questionnaire to our suppliers, requesting compliance information and possible corrective action plans. We generally represent to our customers that we have achieved year 2000 compliance for our products and believe this to be the case. We believe our products do not contain hardware components or software which involve the rollover of dates. Assessment of our IT systems. Our internal systems include both our information technology, or IT, and non-IT systems. We have initiated an assessment of our significant internal IT systems. We believe we have identified and tested all significant business critical applications such as accounting, operations and sales management. Each of these systems has been acquired within the past 15 months. We believe that these applications are all year 2000 compliant, although we cannot assure you of this. To the extent that we are not able to test the technology provided by third-party vendors, we are seeking assurances from vendors that their systems are year 2000 compliant. We are not currently aware of any significant operational issues or costs associated with preparing our internal IT systems for year 2000, although we cannot assure you that no such operational issues or costs will arise. We continue to test and will potentially make upgrades to Microsoft Office desktop applications, which may not be year 2000 compliant. Additionally, Microsoft NT will be upgraded during the summer of 1999 to ensure year 2000 compliance. The anticipated costs for these upgrades are not expected to exceed $25,000, although we cannot assure you that costs will not be greater. Currently, we have not incurred material costs associated with our year 2000 compliance program. Assessment of our non-IT systems. In addition to computers and related systems, the operation of office and facilities equipment, such as fax machines, telephone switches, security systems, and other common devices have been assessed and are expected to have little or no disruption on our business due to the year 2000 problem, although we cannot assure you of this. Most systems and applications are less than one year old. Assessment of our suppliers. As part of our year 2000 plan, we contacted third-party suppliers of components and our key subcontractors used in the delivery of our products to identify, and to the extent possible, resolve issues involving the year 2000 problem. However, we have limited or no control over the actions of these third-party suppliers and subcontractors. Thus, while we expect that we will be able to resolve any significant year 2000 problems with these third parties, there can be no assurance that these suppliers will resolve any or all year 2000 problems before the occurrence of a material disruption to the operation of our business. Any failure of these third parties to resolve year 2000 problems in a timely manner could have a material adverse effect on our business, financial condition and results of operations. Risks. We do not intend to develop any specific contingency plans to address the effects of year 2000 problems. We believe that we have adequate financial liquidity to sustain a temporary 30 32 disruption in our business as a result of year 2000 problems. However, since we cannot forecast with any certainty the impact, extent and duration of any year 2000 problems on our operations, our customers or our suppliers, there can be no assurance that our resources will be adequate to withstand any prolonged disruption. Finally, we are also subject to external forces that might generally affect industry and commerce, such as a utility or transportation company's year 2000 compliance failures and related service interruptions. In addition, our customers are large companies with complex operations, and as such, we cannot adequately assess the impact which year 2000 issues might have on their operations. If current or future customers fail to achieve year 2000 compliance or if they divert technology expenditures to address year 2000 compliance problems, our business could be adversely affected. Disclaimer. The discussion of our efforts and expectations relating to year 2000 compliance are forward-looking statements. Our ability to achieve year 2000 compliance and the level of incremental costs associated therewith, could be adversely affected by, among other things, the availability and cost of programming and testing resources, third party suppliers' ability to modify proprietary software, and unanticipated problems identified in the ongoing compliance review. RECENT ACCOUNTING PRONOUNCEMENTS In March 1998 and December 1998, the American Institute of Certified Public Accounts, or AICPA, issued Statements of Position, or SOP, 98-4 and 98-9, "Software Revenue Recognition," which provide guidance on applying generally accepted accounting principles in recognizing revenue on software transactions. SOP 98-4 is effective for our fiscal year ending December 31, 1999. SOP 98-9 is effective for our fiscal year ending December 31, 2000. Earlier application is encouraged as of the beginning of the year or interim periods for which financial statements or information have not been issued. Retroactive application of the provisions of this SOP is prohibited. We have assessed the provisions of SOP 98-4 and 98-9 and do not expect that adoption will have a material impact on our financial statements. In March 1998, AICPA issued SOP 98-1, "Software for Internal Use," which provides guidance in accounting for the costs of computer software developed or obtained for internal use. SOP 98-1 is effective for our fiscal year ending December 31, 1999. We do not expect the adoption of SOP 98-1 to have a material impact on our financial statements. In June 1998, the FASB issued FAS No. 133, "Accounting for Derivative Instruments and Hedging Activities. We are required to adopt FAS 133 in the fiscal year ending December 31, 2000. FAS 133 established methods for accounting for derivative financial instruments and hedging activities related to those instruments as well as other hedging activities. We have not yet determined what the effect of FAS 133 will be on our financial statements. 31 33 BUSINESS The following contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth above under "Risk Factors" and elsewhere in this prospectus. OVERVIEW We are a leading provider of network performance analysis solutions for network equipment manufacturers, network service providers and enterprises. Our flagship platform, SmartBits, analyzes networking equipment, including infrastructure and enterprise switches and routers, and broadband access devices, such as cable modems and xDSL devices, to determine performance, reliability, scalability, interoperability, quality of service and proof of service, before deployment on the network. SmartBits allows users to analyze network performance by emulating complex, multi-technology networks through the generation, reception and analysis of high speed network traffic flows. SmartBits offers a flexible, modular and scalable network performance platform that allows our customers to deploy our solutions to fit their initial needs and expand their systems as their needs evolve. Due to the importance of industry recognition in our markets and rapidly evolving technology, we have established relationships with several prominent industry experts and multiple technology publications in the field of network performance analysis. Our customer base of over 700 accounts includes leading network equipment manufacturers such as Cisco, Lucent Technologies and Nortel Networks, semiconductor manufacturers, telecommunications carriers and Internet service providers such as AT&T, GTE, MCI WorldCom and Sprint, and enterprises such as Fortune 1000 companies, financial institutions, systems integrators and government entities. INDUSTRY BACKGROUND The need for individuals, groups and businesses to exchange information electronically has given rise to the multi-billion dollar networking industry. Computers are now connected via hubs, switches and routers to form local area networks, or LANs. LANs in multiple locations such as in remote and branch offices, telecommuters and small office/home office users are interconnected by public and private wide area networks, or WANs, enabling network users to access and share information regardless of their locations. In addition, the emergence of the Internet has provided a growing number of individuals with access to these networks. As a result of these developments, communications networks are encountering a number of significant challenges. - Networks are becoming increasingly constrained. Networks are becoming increasingly constrained due to the increase in communications traffic across WANs as well as due to the rapid growth of the Internet. This increase in network traffic and growth of the Internet are creating bandwidth constraints at both the LAN level, which transmits data primarily within a corporate network, as well as at the WAN backbone level, which carries the majority of public and private network voice and data traffic. In addition, there has been a dramatic increase in the use of bandwidth-intensive multimedia applications that contain voice, video and graphics. These applications are further burdening today's networks, which require intelligent management of bandwidth. Finally, an increasing amount of voice traffic is being migrated onto data networks, further constraining today's networks. - Networks are becoming more complex. Network complexity is increasing significantly as new technologies and services are deployed. Multiple high-speed technologies have been developed and now co-exist in LANs and WANs. Examples of these networking technologies include Fast Ethernet, Gigabit Ethernet, Frame Relay, ATM and Packet over SONET. In addition, broadband access devices, including cable modems and xDSL devices, 32 34 are being deployed to maximize the speed of access to the Internet of both businesses and remote users. Advances in the capacity and intelligence of network equipment have enabled telecom and Internet service providers to offer an array of new differentiated services and applications, including guaranteed quality of service, multicasting and virtual private networks. The requirements for service providers to effectively deploy, manage and bill for these services have further complicated networks. In addition, the need to mediate between co-existing voice and data traffic on the network has increased the complexity of today's networks. - Networks are becoming more mission-critical. E-commerce, on-line trading, data warehousing, enterprise resource planning and payroll processing are a few examples of the mission-critical applications that are routinely performed on today's networks. These and many other mission-critical applications require a robust networking infrastructure for the proper operation of today's businesses. Any interruption in network service or reduction in network performance can have immediate consequences in terms of lost revenue, reduced productivity and damage to customer goodwill, particularly as e-commerce continues to grow. As a result of these trends, network equipment manufacturers are under time-to-market pressure to provide cost-effective, high-performance equipment with enhanced features, while at the same time ensuring that these products meet interoperability standards and are highly reliable under increasingly variable traffic conditions. Service providers and enterprises are under competitive pressure to rapidly deploy new applications and services to increase revenues. In addition, they must intelligently manage their available bandwidth and minimize network failures in a cost-effective manner. Further, service providers are increasingly being motivated to offer advanced network services, such as guaranteed quality of service and service level agreements. To meet these needs, network equipment manufacturers, service providers and enterprises require independent, sophisticated and industry-recognized performance analysis solutions. Historically, network testing tools have existed to troubleshoot problems after deployment of equipment on the network. Network engineers have traditionally relied upon test instruments known as protocol analyzers to detect the source of network performance problems after they have occurred. While these products are adequate for monitoring data integrity problems of a live network, they were not designed to measure the performance of network products, such as switches and routers, prior to network deployment. Today's switches and routers require a sophisticated performance analysis solution that is able to scale to hundreds of ports, support a multitude of technologies and measure key metrics such as the speed of the network, the time required to process data, the variation in the time required to process data, out of sequence data and quality of service. In addition, service providers and enterprises require analysis solutions which can generate network traffic simulating multiple users and can receive and analyze the performance of network equipment under stressed conditions. We believe that the growth of and increased dependence on network communications has created a significant market opportunity for us to provide network equipment manufacturers, network service providers and enterprises with sophisticated performance analysis solutions. 33 35 THE NETCOM SYSTEMS SOLUTION Our flagship platform, SmartBits, enables network equipment manufacturers, service providers and enterprises to analyze the performance, reliability, scalability, interoperability, quality of service and proof of service of network equipment, before deployment on the network. Our solution provides the following key benefits: - High Performance and Multi-Technology Platform. Our SmartBits system is capable of generating, receiving and analyzing network traffic flows at wire-rate speeds, which is the maximum speed that data can travel across a particular device. As the diagram below indicates, a single SmartBits chassis can simultaneously analyze the performance of network equipment over a wide variety of networking technologies, including Ethernet, Fast Ethernet, Gigabit Ethernet, Token Ring, Frame Relay, ATM, and Packet over SONET, as well as broadband access devices such as cable modems and xDSL devices. [Graphic depicting SmartBits connected to various network equipment devices] - IP Competency. Since our inception, we have focused on the development of packet-based performance analysis equipment and, as a result, we have an extensive understanding of Internet protocol, or IP, and frame generation, tracking and analysis. Increasingly, the protocol used to identify the data packets used by networks is IP. Unlike other traffic generating devices, our SmartBits platform utilizes our proprietary component- 34 36 level technology to label and track individual data packets as they are received and processed by networking equipment. This enables our customers to ensure the performance of their IP network equipment and applications and measure variables such as throughput, packet loss, latency and jitter. - Intelligent Performance Analysis. The intelligent performance analysis capabilities of SmartBits, which includes our SmartMetrics testing methodology, enable users to effectively analyze the performance of individual network equipment components as well as the end-to-end performance of large, multi-technology networks. SmartMetrics analyzes traditional networking performance parameters relating to individual network components, which include packet loss, throughput and latency, as well as relating to more sophisticated parameters associated with overall network performance such as stream latency, jitter, traffic flow and bandwidth per connection. In addition, data networks are expanding to include voice and video traffic and differentiated quality of service levels. SmartMetrics enables analysis of advanced network functionality such as mixed class throughput, session setup and break down, session capacity and various quality of service levels. - Flexible, Modular and Scalable System. The scalable and modular SmartBits platform enables our customers to purchase any one of our four chassis for use with our technology-specific interface cards, called SmartCards or SmartModules. Our chassis can be linked together to simultaneously replicate up to 768 ports. Customers may also choose from our library of software tests to tailor their SmartBits system to their specific requirements. Our flexible solution enables our customers to select the combination of products that best suits their needs and to expand their systems as their needs evolve, thereby leveraging the value of their initial investments. - Independent and Industry Recognized Solution. The SmartBits platform serves as a common performance standard among users, manufacturers and suppliers of network equipment. Network service providers and enterprises use SmartBits to communicate existing and potential problems to equipment manufacturers, which use the same SmartBits performance analysis equipment to emulate, understand and solve these problems. In addition, industry experts use SmartBits to evaluate network equipment from multiple vendors and work closely with us to develop standard tests for new technologies. The SmartBits platform has been recognized for several years for its independent, multi-technology, high-port density performance analysis capabilities by widely recognized technology publications such as ATM World, Communications News, Computer Telephony, Data Communications Magazine, Government Communications News, Internet Week, Network Computing and Network World. - Comprehensive Customer Support. The network performance analysis market requires a high degree of customer interaction and support due to the rapid pace of new product introduction and the increasing complexity of new technologies. In recent years, we have invested significant resources to build a customer support organization consisting of our sales engineers in the field, our customer support center and our team of support engineers. We believe our customer support organization differentiates us from our competitors and increases customer loyalty. We will continue to invest in this area to support our customers as new technologies emerge and to expand the range of support services that we provide. 35 37 NETCOM SYSTEMS' STRATEGY Our strategy is to strengthen and expand our market leadership in developing, manufacturing and marketing network performance analysis solutions become the industry standard for network performance analysis. Important elements of our strategy are to: - Capitalize on Rapid Technological Change. We believe that each new technological advance in network computing represents a new market for our performance analysis solution. We plan to continue to develop performance analysis solutions for next generation LAN and public network products and services and broadband access devices such as cable modems and xDSL devices. We also plan to continue to develop new chassis technology that is scalable to larger port counts and increased traffic flows to enable SmartBits to emulate denser and more complex networks. We intend to leverage our extensive IP knowledge to capitalize on the increasing deployment of IP-centric networks. We plan to develop new software applications to analyze performance features such as packet sequencing and prioritization for the performance analysis of time sensitive network traffic such as voice and video, as well as more intelligent analysis such as policy-based network testing systems. - Further Penetrate and Expand Our Network Equipment Manufacturer Customer Base. We intend to increase sales to existing network equipment manufacturer customers. We believe these customers are increasingly using SmartBits in functional operations beyond research and development, such as manufacturing, customer support and sales and marketing. We also intend to continue to expand our relationships with manufacturers of emerging network technologies, such as Extreme Networks, Foundry Networks and Juniper Networks. We believe that relationships with emerging companies will offer us new sales opportunities and the opportunity to continue to provide competitive, technologically advanced network performance analysis solutions. - Expand into Additional Growing Markets. We intend to expand into the service provider and enterprise markets, which increasingly require solutions for analyzing and optimizing network equipment performance before deployment on their mission-critical networks. In particular, we plan to continue to target high growth service providers such as Level 3, Qwest Communications and UUNet. To increase awareness of SmartBits among these potential customers, we intend to promote our performance analysis solutions through widely recognized publications and seminars and emphasize our customer support capabilities. We believe we can leverage our leadership in performance analysis equipment, our relationships with leading network equipment manufacturers and industry experts, our promotional efforts and our customer support infrastructure to further penetrate these service provider and enterprise markets. Finally, we intend to continue to develop and expand relationships with strategic partners and distributors in order to expand our presence in Europe, Asia and Latin America. - Leverage Key Industry Relationships. We believe that our role as an industry recognized provider of network performance analysis solutions for next generation technologies is critical to our continued leadership and success. We intend to continue to leverage our key relationships with prominent industry experts and test labs, networking publications and industry leading equipment manufacturers to position us to be first to market with new industry standard tests that analyze the performance of new networking technologies. We work closely with prominent industry experts and test labs such as Robert Mandeville of European Network Laboratories, Scott Bradner of Harvard University, Steve Bell of Silicon Valley Networking Labs, Kevin Tolly of The Tolly Group, Barry Reinhold of the University of New Hampshire and Lee Dorier of ZD Labs. 36 38 CUSTOMERS We have a customer base of over 700 accounts. We believe that our existing customer base, including most industry leading network equipment manufacturers, service providers and enterprises provides us with recognition among potential customers. Set forth below are the seven largest U.S. purchasers of our SmartBits systems in the categories of network equipment manufacturers, service providers and enterprises, based on 1998 U.S. revenues. Also set forth below are what we believe to be our three largest international customers for 1998 in each of these categories, based in part upon information provided to us by our distributors. The information set forth below has been compiled excluding sales to foreign divisions and affiliates of our U.S. customers. MANUFACTURERS United States 3Com Cabletron Cisco FORE Systems IBM Lucent Technologies Xylan International D-Link Hitachi Nortel Networks (includes Bay Networks) SERVICE PROVIDERS United States Ameritech AT&T Bell South GTE MCI WorldCom Southwestern Bell Sprint International British Telecom Deutsche Telekom France Telecom ENTERPRISES United States Aetna Life Insurance Andersen Consulting Cable Television Lab Los Alamos Laboratories Microsoft NationsBank U.S. Army International Matsushita NEC NTT Each of our target markets has different uses for SmartBits and different purchasing practices. Currently, network equipment manufacturers represent a significant amount of business for us. During 1998, U.S. sales to network equipment manufacturers represented 82.0% of our U.S. revenues. Network equipment manufacturers typically purchase an entire SmartBits system consisting of one or more chassis, interface cards and software. The demand from network equipment manufacturers for subsequent system purchases and add-on interface cards is driven by their internal needs. For example, research and development departments can use SmartBits to develop new network technologies, whereas quality assurance and manufacturing departments can use SmartBits to analyze new, improved or acquired products lines for interoperability and 37 39 standards compliance. This allows us to sell SmartBits to departments throughout an organization as illustrated below. [Graphic depicting SmartBits connected to various networking technologies encircled by representations of various departments in network equipment manufacturer organizations] A growing portion of our customer base includes service providers and enterprises. These customers purchase SmartBits to ensure that equipment from network equipment manufacturers conforms to industry standards and is fully interoperable in multi-vendor and multi-technology environments before network deployment. These customers also use SmartBits to proactively identify potential network problem areas before performance degradation occurs and to communicate network problems to vendors for resolution. Usually, a service provider or enterprise will purchase between one and four SmartBits chassis and then buy additional stand-alone interface cards as the need arises to analyze the performance of new technologies. Historically, a significant amount of our revenues has been generated by sales to our largest customers, all of whom are network equipment manufacturers. U.S. sales to our four largest customers collectively accounted for 36.0% of our revenues in 1996, 31.1% of our revenues in 1997 and 31.9% of our revenues in 1998. Our customer concentration was less pronounced in the first three months of 1999, when U.S. sales to our four largest customers represented 21.6% of our revenues. In the year ended December 31, 1996, sales to Bay Networks accounted for 14.9% of our revenues and sales to Cisco accounted for 11.8% of our revenues. In the year ended December 31, 1997, sales to each of Bay Networks and Cisco accounted for 10.9% of our revenues. Sales to Cisco also accounted for 12.1% of our revenues in the year ended December 31, 1998. No customer accounted for 10% or more of our revenues in the first three months of 1999. Our international distributors may also make additional sales to foreign divisions or affiliates of these customers which are not reflected in the percentages above. PRODUCTS The SmartBits platform consists of the following family of products: - SmartBits Chassis. Our SMB-2000, SMB-200, SMB-6000 and SMB-600 chassis provide users with a comprehensive selection of products which can scale to support up to 768 ports. In 38 40 addition, we offer the SMB-10, a 20-slot expansion chassis, which expands the capacity of the SMB-2000. - SmartCard and SmartModule Interface Cards. Our broad portfolio of SmartCards and SmartModules work in conjunction with our SmartBits chassis to allow users to simultaneously analyze, in LAN and WAN configurations, multiple networking technologies such as Ethernet, Fast Ethernet, Gigabit Ethernet, Token Ring, Frame Relay, ATM and Packet over SONET. - Software Applications. Our suite of automated, graphical user interface software applications performs sophisticated analyses such as raw packet-level performance analysis, signaling, connection oriented analysis, policy-based analysis, and broadband access device and system testing. - Custom Tools. Our user-customization tools allow users to create their own test scenarios using industry-standard development environments. With our products, a single SmartBits system can be configured to perform a wide range of performance analysis scenarios. These various scenarios can be applied to many of the emerging technologies currently used in the modern networking infrastructure. Examples of these technologies and their related products are listed below: BROADBAND ACCESS
RELATED PRODUCTS DESCRIPTION Interface Cards SmartBits can be used for testing high-speed Internet access ML-5710A technologies with a combination of interface cards and ML-7710A applications. SmartCableModem, for instance, allows cable modem manufacturers to accelerate product development of Applications their cable modem devices while at the same time easing the SmartCableModem certification process. SmartxDSL offers the same benefits SmartxDSL for xDSL manufacturers. Internet access providers can also use SmartCableModem and SmartxDSL for product and system verification prior to deployment. With the emergence of USB as the preferred method of access for home users, the ML-5710A also offers the same benefits for testing cable modem and xDSL devices and systems using a USB interface.
HIGH SPEED
RELATED PRODUCTS DESCRIPTION Interface Cards The increase in network complexity is creating a demand for GX-1405B higher speed networking technologies. Gigabit Ethernet and GX-1420A Packet over SONET are two examples of these high speed LAN-3200A technologies. The GX-1405B, GX-1420A, LAN-3200A and LAN-6200A LAN-6200A address the need for testing gigabit fiber and POS-6500A copper devices under heavy load. The POS-6500A allows users to test the performance of their OC-12c Packet over SONET devices to forward raw packets as well as to handle policy-based traffic forwarding.
39 41 POLICY-BASED
RELATED PRODUCTS DESCRIPTION Interface Cards The complexity of communications devices is increasing ML-5710 significantly as intelligent policy-based forwarding ML-7710 functions are incorporated into the devices. The convergence POS-6500A of data, voice and video requires devices to support various types and classes of services. Our ML-5710, ML-7710, and Applications POS-6500 interface cards are designed to enable such testing SmartFlow at speeds up to 622 Mbps and with hundreds of ports. Our SmartMulticastIP SmartFlow tests the ability of intelligent devices to handle SmartTCP IP flows under various quality of service and differentiated service settings. SmartMulticastIP provides an automated, industry-standard method of testing the capability of networking devices at handling multicast IP traffic that is critical for point-to-multipoint communications such as distant learning and data warehousing. Our SmartTCP tests the ability of load balancing devices to effectively take advantage of load balancing techniques for improved web server access. Each ML-7710 card, for instance, can generate up to 64 million IP flows for stress testing these devices while analyzing proper handling and forwarding of traffic based on the designated policy.
INTERNET BACKBONE
RELATED PRODUCTS DESCRIPTION Interface Cards As the volume of Internet traffic increases, carriers and AT-9155C network service providers are faced with the challenge of AT-9622 ensuring that their infrastructure can handle the increase WN-3415 in traffic while at the same time users are requiring WN-3420 improved performance. Our AT-9155C, AT-9622, WN-3415 and WN-3420 interface cards and our ATM-Mesh-Test and Applications FR-Mesh-Test applications can be used to characterize the ATM-Mesh-Test performance limits of ATM and Frame Relay carrier class FR-Mesh-Test switches with hundreds of ports. These products allow network equipment manufacturers and service providers to validate the performance of these high port density, high speed devices for handling the traffic demands of the Internet.
In addition, we offer a family of Ethernet SmartCards that generate and monitor Ethernet traffic at speeds up to 100Mbps, such as the LAN-3100A and LAN-6100A, and the SX-7210 and SX-7410, which continue to represent a substantial portion of our revenues. A stand-alone SmartBits chassis, which comes bundled with our standard software, lists in the U.S. for $12,495 for an SMB-2000, $4,995 for an SMB-200, $14,995 for an SMB-6000 and $7,500 for an SMB-600. An SMB-10 expansion chassis lists for $4,995. The U.S. list prices of SmartCards and SmartModules range from $1,195 to $29,995, while the U.S. list prices of software applications range from $1,995 to $20,000. TECHNOLOGY SmartBits consists of integrated software and hardware systems that provide users with a robust performance analysis solution. Key features of our SmartBits technology include: - Modular, Wire Rate, IP-Based Core Engine. At the core of SmartBits is an ASIC-based, IP packet generation, reception and analysis engine. Each SmartCard and SmartModule contains a single core engine and physical interface port. The core engine architecture is 40 42 scalable from one kilobit per second to one gigabit per second, and is capable of performing wire rate, real time traffic generation, reception and analysis. The core engine can generate up to 64 million individual IP flows with real time tracking and analysis. Our second generation of the core engine is capable of applying a unique signature field for each packet it generates. The signature field allows the core engine to analyze parameters important to a user's quality of service such as packet delay, packet delay variation, or jitter, and packet arriving sequence for each class of IP flows. The proprietary technology associated with our signature field is designed to guarantee that packets containing the signature field are compatible with most network equipment currently in operation. - SmartMetrics and Quality of Service. To meet the needs of increasingly complex IP networks, we have created an analysis methodology known as SmartMetrics. SmartBits implements the SmartMetrics methodology to analyze complex, scalable, high performance networks. SmartMetrics is comprised of a set of analysis tools and tests designed to determine the quality of service of a network-based system. Analyzing the quality of network services requires the assessment of each network component under a variety of conditions. SmartMetrics analyzes traditional networking performance parameters such as packet loss, throughput and packet latency, and more sophisticated parameters such as stream latency, jitter, traffic flow, bandwidth per connection and quality of service. - Scalable SmartBits Platform Architecture. The systems architecture of a SmartBits chassis allows for the flexible implementation of the core IP packet generation, reception and analysis engine. Up to eight SMB-200, SMB-2000 or SMB-10 chassis can be used together in a single configuration, allowing analysis of up to 640 network interface ports. The SMB-600 and SMB-6000 chassis support up to six SmartModules per system. Each SmartModule may contain up to 64 core engines and up to 16 physical interface ports. As many as eight SMB-600 or SMB-6000 chassis can be used together in a single configuration, allowing analysis of up to 768 network interface ports. A multiple SMB-600/6000 chassis configuration is capable of simulating and analyzing billions of IP traffic flows. - Standards-Based Network Performance Tests. We have developed a rich set of software applications to implement standards-based network performance tests using the SmartBits architecture. The standard SmartBits software applications enable customers to execute standards-based performance tests for network devices, LANs and backbone networks. These performance tests measure packet forwarding throughput, packet delivery latency, packet loss and device stability. Our standard performance tests support all technologies supported by SmartCards and SmartModules, including Ethernet, Fast Ethernet, Gigabit Ethernet, Token Ring, Frame Relay, ATM and Packet over SONET. - Testing Network Connection Resources. Certain modern network devices incorporate additional intelligence which enables them to support multiple virtual connections for each physical port. A virtual connection must be made before data packets can be forwarded. With our applications, SmartBits enables customers to measure and analyze the connection layer performance, including the connection call set up and tear down rate, simultaneous connection capacity and call setup latency. These measurements enable network equipment manufacturers to improve the performance of their devices and enable network service providers to deploy systems that are compatible with a variety of technologies including ATM, Frame Relay, VLAN, IP Multicast and TCP. - Policy-Based Network Analysis. Our policy-based network analysis allows for testing of different classes of service based on service level agreements or applications. Policy affects the quality of service of each IP flow forwarded by the network device. SmartBits products built with our second generation core engine enable customers to measure and analyze the quality of service implementation and performance for each class of IP flow. The standard measurement of packet forwarding throughput, packet forwarding error, forwarding latency 41 43 and jitter can be measured and tracked for each class of service provided by the packet forwarding devices. With these measurements customers can verify and measure quality of service implementation and improve performance through real traffic, at capacity level testing. This enables network service providers, particularly providers of virtual private networks and voice over IP, to validate and meet quality of service obligations under service level agreements. SALES AND MARKETING Our direct sales force markets and sells our products in the United States, France, the United Kingdom, Denmark and Ireland and our distributors market and sell our products in 35 countries throughout the world. As of April 30, 1999, our sales group employed a direct sales team composed of 24 sales professionals, 15 sales engineers worldwide and 5 inside sales personnel worldwide. Sales engineers are important to the sales process, since they are the primary vehicles through which we provide value-added services to customers such as training and troubleshooting. We are dedicated to establishing new international distributor relationships and servicing the needs of current distributors. International revenues represented 16.7% of our revenues in 1996, 26.1% of our revenues in 1997, 25.5% of our revenues in 1998 and 29.6% of our revenues in the first three months of 1999. Our marketing strategy is to target network equipment manufacturers, service providers and enterprises. Our marketing team creates the product roadmap, defines innovative products to address the business needs of our markets, and works to ensure timely delivery of products to meet and exceed customer expectations. We partner with key trade publications and leading industry test laboratories to create user awareness and demand for our products. Awareness and educational initiatives also include trade shows, seminars, white papers, application notes, mailing pieces, trade publications and advertising. Our marketing group is also responsible for professional services that include training, testing consultancy and support for large scale tests. We maintain knowledge of new technology innovations by participating in technology forums and industry standard bodies such as the Institute of Electrical and Electronic Engineers, the Internet Engineering Task Force, the Gigabit Ethernet Alliance, and ATM, ADSL, Quality of Service and Frame Relay forums. As of April 30, 1999, the marketing group employed 24 people with extensive experience in the test, measurement and network equipment marketplace. The marketing group also uses the services of outside consultants. CUSTOMER SUPPORT We believe that superior technical services and support are critical to customer satisfaction and the development of customer relationships. We also believe that achieving high levels of customer satisfaction through, among other things, the development of an extensive quality assurance infrastructure differentiates us from our competitors and increases customer loyalty. We have divided our customer support organization into two distinct units, customer service and support engineering, to better meet customer needs. Both customer service organizations are responsible for providing ongoing technical support and training for our customers and distributors. Customers receive telephone and e-mail support, and for a fee, receive new releases of our software and firmware. As of April 30, 1999, we employed 13 customer support and support engineering personnel. We believe that customer feedback obtained through technical support is critical to our research and development efforts. Our support engineering unit concentrates on supporting major accounts such as the larger network equipment manufacturers and supports sales engineers and sales representatives. This unit also resolves more sophisticated customer problems that cannot be solved over the telephone by identifying the problem, communicating with our research and development team to develop a solution, testing the solution and delivering it to the customer. This group does 42 44 on-site customer visits when necessary and develops new product training programs for customer service representatives, systems engineers and sales professionals. RESEARCH AND DEVELOPMENT We believe that research and development is critical to our business. Our research and development efforts are focused on developing products for the network performance analysis market and further enhancing existing products. Our development efforts include: - anticipating and addressing the performance analysis needs of network equipment manufacturers, service providers and enterprises; - focusing on emerging high growth networking technologies; - emphasizing more intelligent performance analysis; and - improving the ease of use and scalability of SmartBits. Our future success depends on our ability to continue to enhance our existing products and to develop products that solve the needs of our customers. We closely monitor changing customer needs by communicating directly with our customer base and distributors. We also receive input from active participation in industry groups responsible for establishing technical standards. Our research and development organization is composed of multiple project groups. Each group consists of engineers dedicated to four activities: hardware, firmware, software or quality assurance. Hardware engineers design, develop and debug complex logic designs using field programmable gate arrays and hardware description language, multiple microprocessors, memories and high speed components to create cost efficient hardware designs that enable complete flexibility in transmitted data. Firmware engineers create implementations of real-time sensitive network traffic and protocol generators. These software components are the engines of the SmartBits platform. Software engineers include application engineers and application user interface engineers. Application engineers use compilers to produce software applications that are used by network equipment manufacturers to rapidly create tailored tests for their unique needs in manufacturing, quality assurance and customer support. Quality assurance engineers ensure products are functioning according to specifications prior to release and work closely with customer service in addressing customer concerns. Development schedules for technology products are inherently difficult to predict, and there can be no assurance that we will introduce any proposed new products in a timely fashion. Also, there can be no assurance that our product development efforts will result in commercially successful products or that our products will not contain software errors or other performance problems or be rendered obsolete by changing technology or new product announcements by other companies. Additionally, if we are to successfully introduce new products in the future, we must recruit additional personnel, competition for whom is intense. We have made and will continue to make significant investments in research and development. Our research and development expenditures were $1.7 million in 1996, $3.5 million in 1997, $8.6 million in 1998 and $2.7 million in the first three months of 1999. As of April 30, 1999, our research and development staff consisted of 75 employees. MANUFACTURING Our manufacturing operations consist primarily of materials planning and procurement, warehousing, distribution, quality control, logistics, final assembly and test. We outsource the assembly of printed circuit boards to third party contract manufacturers. We use a variety of independent third-party contract assembly companies to perform printed circuit board assembly. 43 45 This manufacturing process enables us to satisfy specific customer demands with minimal capital and human resources. As of April 30, 1999, there were 45 employees in manufacturing. We are dependent upon sole or limited source suppliers for key components and parts used in our products, including microprocessors and integrated circuits. We purchase sole or limited source components through purchase orders and have no guaranteed supply arrangements with these suppliers. In addition, the availability of many of these components is dependent in part on our ability to provide our suppliers with accurate forecasts of our future requirements. Any extended interruption in the supply of any of the key components currently obtained from a sole or limited source, or in the time necessary to transition to a replacement supplier's product or replacement component into our products, could disrupt our operations and materially adversely affect our business in any given period. We also purchase components from foreign suppliers, the supply of which could be adversely affected by changing tariff and regulatory structures, particularly those affecting the import and export of electronics and technology. We may also be subject to increases in component costs, which could also have a material adverse effect on our business, results of operations and financial condition. Lead times for materials and components ordered by us vary and depend on factors such as the specific supplier, contract terms and demand for a component at a given time. We acquire materials, complete standard subassemblies and assemble fully-configured systems based on our sales forecasts and historical purchasing patterns. If orders do not match forecasts or substantially deviate from historical patterns, we may have excess or inadequate inventory of materials and components. COMPETITION We face competition from the following sources: network equipment manufacturers that develop in-house products; test equipment manufacturers such as Hewlett-Packard; start-up companies focused on network performance measurement such as IXIA Communications and Antara; companies specializing in ATM performance testing such as Adtech and RADCOM; software-based network traffic simulators such as Ganymede Software and Optimal Networks. We may also face competition from other companies such as Network Associates and some of our distributors that sell networking products with functionality complementary to SmartBits. Some of our competitors and potential competitors have greater resources, name recognition and sales capabilities than we do. Competitive factors in the network performance analysis market include: - breadth of product features; - product quality, reliability and functionality; - conformance to industry-standard technologies; - pricing; - marketing and sales resources; - customer service and support; and - reputation. The network performance analysis market became increasingly competitive in 1998 which affected our business. Any further increase in competition in the network performance analysis market could result in increased pressure on us to reduce prices for our products and could result in a reduction in our revenues and/or in our margins, each of which could adversely impact our results of operations. In addition, increased competition could prevent us from increasing our market share, or cause us to lose our existing market share, either of which would adversely affect our business and could impact our profitability. We cannot predict whether our 44 46 current or future competitors will develop or market technologies and products that offer higher performance or are more cost-effective than our current or future products. To remain competitive, we must continue to develop products and product enhancements which offer higher performance at a lower cost. Our failure to do so would adversely affect our revenues and results of operations. PROPRIETARY RIGHTS Although we believe that our success is more dependent upon our technical expertise than our proprietary rights, our future success and ability to compete is dependent in part upon our proprietary technology. We rely on a combination of contractual rights and copyright, patent, trademark and trade secret laws to establish and protect our proprietary technology. Currently, we have one U.S. patent application pending. We generally enter into confidentiality agreements with our employees, consultants, resellers, customers and potential customers. We also strictly limit access to and distribution of our source code, and further limit the disclosure and use of other proprietary information. We cannot assure you that the steps taken by us in this regard will be adequate to prevent misappropriation of our technology or that our competitors will not independently develop technologies that are substantially equivalent or superior to our technology. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain or use our products or technology. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the United States. We are also subject to the risk of adverse claims and litigation alleging infringement of the intellectual property rights of others. Third parties may assert infringement claims in the future with respect to our current or future products. Any assertion, regardless of its merit, could require us to pay damages or settlement amounts and could require us to develop non-infringing technology or pay for a license to the technology that is the subject of asserted infringement. Any litigation or potential litigation could result in product delays, increased costs or both. In addition, the cost of any litigation and the resulting distraction of our management resources could adversely affect our results of operations. We also cannot assure you that any licenses of technology necessary for our business will be available or that, if available, such licenses can be obtained on commercially reasonable terms. Our failure to obtain such licenses, or to protect our proprietary technology, could have a material adverse effect on our business and results of operations. FACILITIES Beginning in June 1999, our principal operations will be conducted out of one leased building located in Calabasas, California with a total area of 107,169 square feet. This lease will expire on August 31, 2009. We maintain an additional 50,000 square feet that we are seeking to sublease in Chatsworth, California under a lease that expires on August 31, 2002. We also maintain seven branch sales offices and three research and development facilities in the United States. Our European operations are headquartered in Guyancourt, France. We believe our existing facilities are adequate to meet our needs for the immediate future and that future growth can be accommodated by leasing additional or alternative space near our current facilities. EMPLOYEES As of April 30, 1999, we had 226 full-time employees. Of these, 75 were involved in engineering, 82 in sales, marketing and customer support, 45 in operations, and 24 in finance and administration. We consider that our relations with our employees are good. We have not experienced any interruption of operations as a result of labor disagreements. LEGAL PROCEEDINGS We are not currently a party to any material legal proceedings. 45 47 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS Our directors and executive officers are as follows:
NAME AGE POSITION ---- --- -------- Barry Phelps............................. 52 President, Chief Executive Officer and Director Gil Cabral............................... 51 Vice President, Finance, Chief Financial Officer and Secretary James Jordan............................. 62 Vice President, Sales Gene Zhang............................... 43 Vice President, Engineering Mark Fishburn............................ 52 Vice President, Marketing Dwight Olson............................. 48 Vice President, Operations Stephane Johnson......................... 43 Vice President, International Sales Walter Kortschak(1)(2)................... 40 Chairman of the Board Richard Moley(1)......................... 60 Director Robert H. Sheridan III(2)................ 36 Director Michael West(2).......................... 49 Director
- --------------- (1) Member of the compensation committee (2) Member of the audit committee Set forth below is information regarding the business experience during the past five years for each of our officers and directors. Barry Phelps has served as our President and Chief Executive Officer since November 1997 and has served as a director of our company since January 1998. From November 1996 to November 1997, Mr. Phelps served as our Vice President, Finance and Chief Financial Officer. Prior to joining our company, Mr. Phelps served as Chairman and Chief Executive Officer of MICOM Communications Corporation from February 1992 to November 1996 and Vice President, Chief Financial Officer from August 1988 to January 1992. MICOM was acquired by Nortel Networks in June 1996. Prior to serving as Vice President, Chief Financial Officer of MICOM, he served as Controller of MICOM from July 1987 to August 1988. From 1973 to 1987, Mr. Phelps served in various financial management positions at Burroughs Corporation and its successor, Unisys Corporation. Gil Cabral has served as our Vice President, Finance, Chief Financial Officer and Secretary since October 1997. Prior to joining our company, Mr. Cabral served as President and Chief Operations Officer of MICOM from August 1988 to September 1997. From August 1985 to August 1988, he served as Vice President, Operations and Vice President Finance and Administration for MICOM. Prior to that, Mr. Cabral spent 13 years with GTE Corporation in various financial management positions. James Jordan has served as our Vice President, Sales since December 1996. Prior to joining our company, Mr. Jordan managed the Southern California sales region for Network General Corporation from January 1991 to October 1994. From January 1986 to December 1990, Mr. Jordan ran his own sales representation firm. Gene Zhang has served as our Vice President, Engineering since April 1996. From January 1988 to April 1996, Mr. Zhang held various positions at Wandel & Goltermann Technologies, Inc., including Director of Engineering and Business Unit Manager. Mark Fishburn has served as our Vice President, Marketing since March 1997. From July 1993 until he joined our company, Mr. Fishburn founded and was President of Achieve, Inc. From 46 48 October 1984 through June 1993, Mr. Fishburn held various management positions at Retix, including UK Managing Director and Vice President, General Manager of OSI Software Products. Dwight Olson has served as our Vice President, Operations since September 1997. From January 1997 to August 1997, Mr. Olson was Vice President of Operations at Whisper Communications, Inc. From July 1984 to January 1997, Mr. Olson held various operations management positions at MICOM, including Vice President Operations from 1988 to 1997. Prior to joining MICOM, Mr. Olson held management positions with Northern Telecom and ITT Electronics. Stephane Johnson has served as our Vice President, International Sales since September 1996. From January 1993 to August 1996, Mr. Johnson was with Experdata France, a subsidiary of Philips Communication Systems B.V., serving as Directeur General. From March 1987 to December 1992, Mr. Johnson was the President and CEO of Experdata, Inc. Prior to Experdata, Inc., from September 1981 to February 1987, Mr. Johnson held various technical, sales and operations management positions at TITN, Inc., a subsidiary of Alcatel N.V. Walter Kortschak has served as our Chairman of the Board since August 1997. Mr. Kortschak is a General Partner of Summit Partners, L.P., a private equity investment firm, where he has been employed since June 1989. Summit Partners and its affiliates manage a number of venture capital funds, including Summit Ventures IV, L.P. and Summit Investors III, L.P., which are stockholders of our company. Mr. Kortschak also serves as a director of E-Tek Dynamics, Inc., HMT Technology Corporation and several privately held companies. Richard Moley has served as a director since September 1997. Mr. Moley was Senior Vice President, Wide Area Business Unit, of Cisco from July 1996 to July 1997. He served as President and Chief Executive Officer of StrataCom, Inc. from June 1986 to July 1996, when StrataCom was acquired by Cisco. Mr. Moley serves on the board of directors of Linear Technology Corp., CMC Industries, Inc., Cidco, Inc. and Echelon, Inc. Robert H. Sheridan III has served as a director since August 1997. Mr. Sheridan is a Managing Director of Bank of America Capital Investors, the principal investment group within Bank of America Corporation, and a Managing Director of BA Capital Company, L.P., which is a stockholder of Netcom Systems. Prior to joining a predecessor of Bank of America Capital Investors in January 1994, Mr. Sheridan worked in the corporate bank division of a predecessor of Bank of America Corporation from June 1989 to January 1994. Mr. Sheridan serves as a director of Cumulus Media, Inc. Michael West has served as a director since March 1998. From September 1997 to January 1998, Mr. West served as an Executive Vice President at Lucent Technologies following its acquisition of Octel Communications Corporation. Before that, Mr. West was employed by Octel Communications Corporation from September 1986 to September 1997, most recently as President and Chief Operating Officer. Mr. West also served as a director of Octel Communications Corporation from February 1995 to September 1997. Mr. West also serves on the board of directors of several private companies. Our executive officers are appointed by the board of directors and serve until their successors are elected or appointed. There are no family relationships among any of our directors or executive officers. BOARD COMPOSITION AND ELECTION We currently have authorized six directors and have one vacancy on the board of directors. Upon the closing of the offering, we will have authorized five directors. In accordance with the terms of our certificate of incorporation, the terms of office of our board of directors will be divided into three classes: Class I, whose term will expire at the annual meeting of stockholders 47 49 to be held in 2000, Class II, whose term will expire at the annual meeting of stockholders to be held in 2001 and Class III, whose term will expire at the annual meeting of stockholders to be held in 2002. The Class I director is Mr. Sheridan, the Class II directors are Messrs. Kortschak and Moley and the Class III directors are Messrs. Phelps and West. At each annual meeting of stockholders after the initial classification, the successors to directors whose terms will then expire will be elected to serve from the time of election and qualification until the third annual meeting following election. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of our directors. This classification of the board of directors may have the effect of delaying or preventing changes in control or our company. Our directors may be removed for cause by the affirmative vote of the holders of a majority of our common stock. Voting Agreement In connection with our recapitalization in the third quarter of 1997, Netcom Systems and certain of our directors, executive officers and stockholders became parties to a stockholders agreement under which certain stockholders have agreed to vote their shares to preserve the number of authorized directors of our company at six and to elect certain representatives to serve as our directors. Together, these persons and entities will hold 25,446,769 shares, or % of our outstanding common stock following consummation of the offering. Accordingly, these stockholders are able to elect all of our directors, will retain the voting power to approve all matters requiring stockholder approval and have significant influence over our business affairs. The provisions of the stockholders agreement will survive the offering and will remain in effect until terminated by a vote of investors in the recapitalization owning two-thirds of shares held by all such investors. BOARD COMMITTEES We have established an audit committee and a compensation committee. The audit committee consists of Messrs. Sheridan, West and Kortschak. The functions of the audit committee are to review our annual budget and to meet with our independent auditors to review our internal accounting procedures and financial management practices. The compensation committee consists of Messrs. Moley and Kortschak. The functions of the compensation committee are to determine salaries, incentives and other forms of compensation for our directors, officers and other employees and to administer our stock plans. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION None of the members of the compensation committee of the board of directors is currently or has been, at any time since our formation, an officer or employee of Netcom Systems. None of our executive officers serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on our board of directors or compensation committee. DIRECTOR COMPENSATION Our outside directors currently receive no cash compensation for services provided in that capacity but are reimbursed for out-of-pocket expenses they incur in connection with their attendance at meetings of the Board. Directors are eligible to participate in our stock plans and, following this offering, employee directors will also be eligible to participate in our 1998 48 50 Employee Stock Purchase Plan. Upon the closing of this offering, each outside director will be granted options to purchase common stock under the 1998 Stock Plan as follows: - each new outside director shall automatically be granted a nonstatutory stock option to purchase 6,000 shares of common stock on the first, second, third, fourth and fifth anniversaries of the date on which such person first becomes an outside director; and - each outside director shall automatically be granted a subsequent option to purchase 6,000 shares on the date of our annual meeting of stockholders, if on that date he or she shall have served on the board for at least 18 months. Each option shall have a term of 10 years. The shares subject to each option shall vest in full on the date of grant. The exercise price of each option shall be 100% of the fair market value per share of our common stock on the date of grant. For a more complete discussion of the options granted to our directors, see "Employee Benefit Plans." EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL AGREEMENTS We routinely deliver written offer letters containing provisions on salary bonuses, benefits and stock option grants to prospective members of management and other employees. In addition, we have entered into employment and change-in-control agreements as described below. We entered into a written employment agreement with James Jordan, Vice President, Sales, in December 1994. The agreement, as amended over time, sets forth Mr. Jordan's base salary, sales commissions and bonuses as well as certain benefits to which Mr. Jordan is entitled. The original term of the agreement was one year and the agreement has been renewed annually each year since 1994. If not renewed by November 30 of any year, the agreement will automatically terminate on December 1 of that year. Pursuant to this agreement, Mr. Jordan agreed not to directly or indirectly compete with us in the manufacture or sale of products which are identical or similar to our products for one year following termination of his employment. In September 1996, we entered into a written employment agreement with Barry Phelps, our President and Chief Executive Officer. The agreement, as amended over time, provides for certain bonuses and acceleration of options, each of which has been paid or effected to date. In addition, the agreement with Mr. Phelps requires that we provide three months' prior notice if we wish to terminate Mr. Phelps' employment for convenience. We entered into a written employment agreement with Stephane Johnson, Vice President, International Sales, in September 1996. The agreement sets forth Mr. Johnson's base salary, sales commissions and bonuses as well as other benefits to which Mr. Johnson is entitled. The original term of the agreement was one year and the agreement has been renewed annually each year since 1996. If not renewed by August 31 of any year, the agreement will automatically terminate on September 1 of such year. The agreement with Mr. Johnson provides that if Mr. Johnson is involuntarily terminated without cause at any time after September 1, 1997, we will continue to pay Mr. Johnson's salary and other benefits for three months following the effective date of his termination. Pursuant to this agreement, Mr. Johnson agreed not to directly or indirectly compete with us in the manufacture or sale of products which are identical or similar to those of our company for one year following termination of his employment. In June 1997, we and Netcom Systems Europe entered into a written employment agreement with Henry Hamon, who served as Netcom Systems Europe's General Manager until February 1999. Currently, Mr. Hamon is on unpaid sabbatical from Netcom Systems Europe. The agreement with Mr. Hamon sets forth his base salary, sales commissions and bonuses. The term of employment covered by the agreement extended to February 1, 1999. After February 1, 1999, we may terminate the agreement for cause, as defined under French law, subject to a three month notice period. Pursuant to this agreement, Mr. Hamon agreed not to engage in any other 49 51 employment, occupation, consulting or other business activity directly related to our business for a period of six months following termination. In May 1998, we entered into change-in-control agreements with each of our executive officers. These agreements provide that if the executive officer's employment is involuntarily terminated at any time within 24 months after a change-in-control other than for cause, then the executive officer shall be entitled to acceleration of all options and a severance payment equal to one year of the executive officer's base compensation for our fiscal year then in effect plus the executive officer's bonus calculated at one hundred percent of target for our fiscal year then in effect. Any severance payments are payable in a lump sum on or prior to the termination date. In addition, for a period of 12 months following termination, the executive officer shall continue to participate in our health and dental insurance benefit plans. A change-in-control is defined as: - the acquisition by a third party of beneficial ownership of our securities representing 50% or more of the total voting power represented by our then outstanding voting securities; or - a change in the composition of our board of directors as a result of which fewer than a majority of the directors are incumbent directors or who are elected, or nominated for election, to the board with the affirmative votes of at least a majority of the incumbent directors at the time of the election or nomination; or - a merger or consolidation of us with any other corporation, other than a merger or consolidation which would result in our voting securities outstanding immediately prior thereto continuing to represent at least 50% of the total voting power represented by our voting securities or the surviving entity outstanding immediately after the merger or consolidation; or - the approval by our stockholders of a plan of complete liquidation or of an agreement for the sale or disposition by us of all or substantially all of our assets. 50 52 EXECUTIVE COMPENSATION The following table sets forth the compensation awarded or paid by us to our Chief Executive Officer and to the other four most highly compensated executive officers (collectively the "Named Executive Officers") during the fiscal year ended December 31, 1998. Other annual compensation listed in the following table represents sales commissions earned by that officer. Other annual compensation in the form of perquisite and other personal benefits, securities or property has been omitted in those cases where the aggregate amount of such compensation is the lesser of either $50,000 or 10% of the total of annual salary and bonus reported for the Named Executive Officer. SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION AWARDS ------------ NUMBER OF ANNUAL COMPENSATION SECURITIES --------------------------------- UNDERLYING NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OTHER($) OPTIONS(#) --------------------------- --------- -------- ---------- ------------ Barry Phelps................................. $199,050 $13,610 -- -- President and Chief Executive Officer James Jordan................................. 151,792 -- $ 325,886 800,000 Vice President, Sales Henry Hamon(1)............................... 93,157 -- 289,657 -- General Manager, Netcom Systems Europe Stephane Johnson............................. 243,723 -- 92,642 -- Vice President, International Sales Gene Zhang................................... 157,678 31,450 -- -- Vice President, Engineering
- --------------- (1) Mr. Hamon is currently on an unpaid sabbatical from Netcom Systems. 51 53 OPTION GRANTS DURING YEAR ENDED DECEMBER 31, 1998 In 1998, we granted employees, consultants and directors options to purchase 1,961,100 shares of common stock, excluding options to purchase 250,000 shares of common stock regranted upon the cancellation of other options in connection with the repricing of options in November 1998. The following table sets forth each grant of stock options made during the fiscal year ended December 31, 1998 to each of the Named Executive Officers: Potential realizable values for the following table are: - net of exercise price before taxes; - based on the assumption that our common stock appreciates at the annual rate shown, compounded annually, from the date of grant until the expiration of the ten-year term; and - based on the assumption that the option is exercised at the exercise price and sold on the last day of its term at the appreciated price. These numbers are calculated based on Securities and Exchange Commission requirements and do not reflect our projection or estimate of future stock price growth. No stock appreciation rights were granted during the fiscal year.
INDIVIDUAL GRANTS ----------------------------------------------------- POTENTIAL REALIZABLE OF NUMBER OF PERCENTAGE ASSUMED ANNUAL RATES OF SECURITIES OF TOTAL OPTIONS STOCK PRICE APPRECIATION FOR UNDERLYING GRANTED TO EXERCISE OPTION TERM OPTIONS EMPLOYEES IN PRICE EXPIRATION ----------------------------- NAME GRANTED(#) 1998 ($/SH) DATE 5%($) 10%($) ---- ---------- ---------------- -------- ---------- ------------- ------------- Barry Phelps.................. -- -- -- -- -- -- James Jordan(1)............... 800,000 40.80% $2.00 1/08/08 $1,006,231 $2,549,988 Henry Hamon................... Stephane Johnson.............. -- -- -- -- -- -- Gene Zhang.................... -- -- -- -- -- --
- --------------- (1) The option granted to Mr. Jordan has a vesting schedule as follows: 33 1/3% vests on the first, second and third anniversaries of the vesting commencement date. The exercise price per share of Mr. Jordan's option is equal to the fair value of the common stock on the date of grant as determined in good faith by the board of directors. AGGREGATE OPTION EXERCISES IN 1998 AND YEAR-END OPTION VALUES The following table sets forth information concerning option exercises for the fiscal year ended December 31, 1998 and exercisable and unexercisable options held as of December 31, 1998 by the Named Executive Officers. The fair market value of our common stock at the close of business on December 31, 1998 was determined by our Board of Directors to be $7.50 per share.
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED SHARES UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS ACQUIRED AT DECEMBER 31, 1998 AT DECEMBER 31, 1998 ON VALUE --------------------------- --------------------------- NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- -------- -------- ----------- ------------- ----------- ------------- Barry Phelps.......... -- -- 159,168 510,833 $ 963,342 $3,073,331 James Jordan.......... 150,000 $900,000 266,667 533,333 1,466,669 2,933,332 Henry Hamon........... -- -- 77,444 347,889 464,664 2,117,334 Stephane Johnson...... -- -- 106,334 299,000 648,004 1,802,333 Gene Zhang............ -- -- 78,333 301,667 469,998 1,810,002
52 54 EMPLOYEE BENEFIT PLANS 1993 Stock Plan A total of 3,922,000 shares of common stock have been reserved for issuance under our Amended and Restated 1993 Non-Statutory Stock Option and Purchase Plan, as amended, or the 1993 Stock Plan. Under the 1993 Stock Plan, as of March 31, 1999, options to purchase 2,106,221 shares were outstanding, 1,815,779 shares of common stock had been purchased pursuant to exercises of stock options and no shares were available for future grant. The 1993 Stock Plan provides for the grant of nonstatutory stock options, or options not intended to qualify within the meaning of Section 422 of the Internal Revenue Code, to our key employees. The 1993 Stock Plan is administered by a committee appointed by the board of directors, which determines the terms of options granted, including the exercise price and the number of shares subject to each option. The committee also determines the schedule upon which options become exercisable. The term of options granted under the 1993 Stock Plan is ten years or five years in the case of an employee holding more than 10% of the voting power of all classes of our stock. Options granted under the 1993 Stock Plan are not transferable by the optionee except by will or the laws of descent and distribution, and each option is exercisable during the lifetime of the optionee only by the optionee. Options granted under the 1993 Stock Plan must generally be exercised within three months after an optionee's termination of employment or within 12 months after an optionee's termination by disability or death, respectively. If an optionee dies while employed by us or within 90 days following termination of employment, the person to whom the optionee's rights pass by will or the laws of descent or distribution may exercise the option for a period of 12 months. In no event may the option be exercised later than the expiration of the option's term. The option agreements pursuant to the 1993 Stock Plan provide that in the event of a merger of our company with or into another corporation, or a sale of substantially all of our assets, each outstanding option shall be assumed or an equivalent option or right substituted for by the successor corporation or a parent or subsidiary of the successor corporation. If the successor corporation refuses to assume or substitute the outstanding options, each outstanding option will be fully vested and exercisable. Further, the administrator shall notify the optionee that the option or stock purchase right, or SPR, shall be fully exercisable for a period of 15 days from the date of such notice, and the option or SPR will terminate upon the expiration of such period. In addition, the option agreements under the 1993 Stock Plan authorize the board of directors, or a committee of the board of directors, to accelerate the vesting of any outstanding option prior to the effective date of a proposed dissolution or liquidation of Netcom Systems. 1997 Stock Plan A total of 4,959,550 shares of common stock have been reserved for issuance under our Second Amended and Restated 1997 Stock Plan, as amended, or the 1997 Stock Plan. Under the 1997 Stock Plan, as of March 31, 1999, options to purchase 3,857,544 shares were outstanding, 125,706 shares of common stock had been purchased pursuant to exercises of stock options and 976,300 shares were available for future grant, although we do not plan to grant any additional options pursuant to this plan following this offering. The 1997 Stock Plan provides for the grant of incentive stock options within the meaning of Section 422 of the Internal Revenue Code, nonstatutory stock options and SPRs to our employees, directors and consultants. Nonstatutory stock options and SPRs may be granted to our employees, directors and consultants. Incentive stock options may be granted only to employees. The 1997 Stock Plan is administered by the board of directors, or a committee appointed by the board of directors, which determines the terms of options granted, including the exercise price and the 53 55 number of shares subject to each option. The board of directors also determines the schedule upon which options become exercisable. Generally, options granted under the 1997 Stock Plan vest 20% after the first year and monthly thereafter for four years. The maximum term of options granted under the 1997 Stock Plan is 10 years. Options and SPRs granted under the 1997 Stock Plan are not transferable by the optionee except by will or by the laws of descent or distribution, and each option and SPR is exercisable during the lifetime of the optionee only by that optionee. Options granted under the 1997 Stock Plan must generally be exercised within three months after the end of optionee's status as our employee, director or consultant, or within 12 months after such optionee's termination by disability or death, to the extent the optionee is vested on the date of termination. However, an option may not be exercised later than the expiration of the option's term. The 1997 Stock Plan provides that in the event of a merger of us with or into another corporation, or a sale of substantially all of our assets, each outstanding option and SPR shall be: - assumed; - exchanged for an equivalent option or right; or - substituted by the successor corporation or a parent or subsidiary of the successor corporation. If the outstanding options and SPRs are not assumed or substituted for by the successor corporation, each option and SPR shall vest and be exercisable as to 20% of the optioned stock to the extent that 20% of the optioned stock has not already vested. The administrator shall notify the optionee that 20% of the option or SPR shall be exercisable for a period of 15 days from the date of such notice, and the option or SPR will terminate upon the expiration of such period. If any person or entity becomes the beneficial owner of more than 50% of our outstanding common stock, then the vesting of each outstanding option will be accelerated by one year. Finally, in the event of our proposed dissolution or liquidation, the board of directors, or any of its committees, in its discretion may accelerate the vesting of any outstanding option or SPR prior to the effective date of the proposed transaction. 1998 Stock Plan A total of 2,000,000 shares of common stock, plus annual increases, beginning in 2000, equal to the lesser of: - 4,000,000 shares, - 5% of our outstanding shares on that date, and - a lesser amount determined by the board of directors, are currently reserved for issuance pursuant to our 1998 Stock Plan. Unless terminated sooner, the 1998 Stock Plan will terminate automatically in May 2008. The 1998 Stock Plan provides for the discretionary grant of incentive stock options to employees, the grant of nonstatutory stock options and SPRs to employees, directors and consultants, and the automatic grant of nonstatutory stock options to non-employee directors. The 1998 Stock Plan may be administered by the board of directors or a committee of the board. The administrator has the power to determine the terms of the options or SPRs granted, including: - the exercise price of the option or SPR; - the number of shares subject to each option or SPR; - the exercisability thereof; and - the form of consideration payable upon such exercise. 54 56 In addition, the administrator has the authority to amend, suspend or terminate the 1998 Stock Plan, provided that no such action shall impair the rights of any optionee, unless mutually agreed upon in writing. The exercise price of all incentive stock options granted under the 1998 Stock Plan must be at least equal to the fair market value of the common stock on the date of grant. The exercise price of nonstatutory stock options and SPRs granted under the 1998 Stock Plan is determined by the administrator, but with respect to nonstatutory stock options intended to qualify as "performance-based compensation" within the meaning of Section 162(m) of the Internal Revenue Code, the exercise price must be at least equal to the fair market value of the common stock on the date of grant. With respect to any participant who owns stock possessing more than 10% of the voting power of all classes of our outstanding capital stock, the exercise price of any incentive stock option granted must be at least equal 110% of the fair market value on the grant date and the term of such incentive stock option must not exceed five years. The term of all other incentive stock options granted under the 1998 Stock Plan may not exceed ten years. In the case of SPRs, unless the administrator determines otherwise, the restricted stock purchase agreement will grant us a repurchase option exercisable upon the voluntary or involuntary termination of the purchaser's service with us for any reason, including death or disability. The purchase price for shares repurchased pursuant to the restricted stock purchase agreement will be the original price paid by the purchaser and may be paid by cancellation of any indebtedness of the purchaser to us. The repurchase option will lapse at a rate determined by the administrator. The 1998 Stock Plan provides that each non-employee director will automatically be granted a nonstatutory stock option to purchase: - 6,000 shares of common stock on the first, second, third, fourth and fifth anniversaries of the date such person first becomes a non-employee director, except for any employee director who subsequently becomes a non-employee director ; and - 6,000 shares on the date of our annual meeting, if he or she has served on the board for at least 18 months. Each option automatically granted to a non-employee director will have a term of 10 years. The shares subject to each option will vest as to 100% of the optioned stock on the date of grant. The exercise price of each option will be 100% of the fair market value per share of the common stock on the date of grant. Options and SPRs granted under the 1998 Stock Plan are generally not transferable by the optionee, except by will or the laws of descent or distribution, and are exercisable during the lifetime of the optionee only by that optionee. Options granted under the 1998 Stock Plan must generally be exercised within three months after the end of optionee's status as an employee, director or consultant of our company, or within 12 months after such optionee's termination by disability or death, but in no event later than the expiration of the option's term. The 1998 Stock Plan provides that in the event of a merger of our company with or into another corporation, or a sale of substantially all of our assets, each outstanding option and SPR must be assumed or an equivalent option substituted for by the successor corporation or a parent or subsidiary of the successor corporation. If the outstanding options and SPRs are not assumed or substituted for, the optionee will fully vest in and have the right to exercise the option or SPR as to all of the optioned stock, including shares as to which it would not otherwise be exercisable. The administrator shall notify the optionee that the option or SPR shall be fully exercisable for a period of 15 days from the date of such notice, and the option or SPR will terminate upon the expiration of such period. In addition, if any person or entity becomes the beneficial owner of more than 50% of our outstanding common stock, then the vesting of each outstanding option will be accelerated by one year. Finally, in the event of our proposed 55 57 dissolution or liquidation, the board of directors, or any of its committees, in its discretion may accelerate the vesting of any outstanding option or SPR prior to the effective date of the proposed transaction. 1998 Employee Stock Purchase Plan Our 1998 Employee Stock Purchase Plan, as amended, or the 1998 Purchase Plan, was adopted by the board of directors in May 1998 and was approved by the stockholders in June 1998. A total of 150,000 shares of common stock has been reserved for issuance under the 1998 Purchase Plan, plus annual increases beginning on January 1, 2000 equal to the lesser of 1,000,000 shares, 1% of the outstanding shares or a lesser amount determined by the board of directors. The 1998 Purchase Plan, which is intended to qualify under Section 423 of the Internal Revenue Code, contains successive six-month offering periods. The offering periods generally start on the first trading day on or after February 15 and August 15 of each year and end on the last trading day of that six-month period. The first offering period commences on the effective date of this offering and ends on the last trading day on or before February 14, 2000. Employees are eligible to participate if they are customarily employed by us or any participating subsidiary for at least 20 hours per week and more than five months in any calendar year. However, the 1998 Purchase Plan excludes from participation any employee who: - immediately after the grant, owns stock and/or options to purchase stock representing 5% or more of the total combined voting power or value of all classes of our capital stock; or - has rights to purchase stock under all of our employee stock purchase plans that accrue at a rate which exceed $25,000 worth of stock for each calendar year. The 1998 Purchase Plan permits participants to purchase common stock through payroll deductions of up to 15% of the participant's "compensation." Compensation is defined as the participant's base straight time gross earnings, commissions, overtime and bonuses but exclusive of any other compensation. The maximum number of shares a participant may purchase during a single offering period is 2,500 shares. Amounts deducted and accumulated by the participant are used to purchase shares of common stock at the end of each offering period. The price of stock purchased under the 1998 Purchase Plan is 85% of the lower of the fair market value of the common stock at the beginning or end of the offering period. Participants may end their participation at any time during an offering period, and they will be paid their payroll deductions credited to their account without interest. Upon termination of employment a participant will be deemed to have elected to withdraw from the 1998 Purchase Plan. Payroll deductions credited to a participant's account and any rights granted under the 1998 Purchase Plan are not transferable by a participant other than by will, the laws of descent and distribution, or as otherwise provided under the 1998 Purchase Plan. The 1998 Purchase Plan provides that, in the event of our merger with or into another corporation or a sale of substantially all of our assets, each outstanding option may be assumed or substituted for by the successor corporation. If the successor corporation refuses to assume or substitute for the outstanding options, the offering period then in progress will be shortened and a new exercise date will be set. In addition, in the event of a proposed dissolution or liquidation of us the offering period then in progress will be shortened and a new exercise date will be set. The board of directors has the authority to amend or terminate the 1998 Purchase Plan, except that no such action make a change in any option previously granted which may adversely affect the rights of any participant, provided that the board of directors may terminate an offering period on any exercise date if the Board determines that the termination of the 1998 Purchase 56 58 Plan is in our best interests and our stockholders' best interests. The 1998 Purchase Plan will become effective on the consummation of this offering and will terminate in 10 years, unless sooner terminated by the board of directors. 401(k) Plan We maintain a tax-qualified retirement and deferred savings plan for our employees, commonly known as a 401(k) plan. The 401(k) plan provides that each participant may contribute up to 15% of his or her pre-tax gross compensation up to a statutory limit, which was $10,000 in calendar year 1998. Under the 401(k) plan, we may make discretionary matching contributions. Our contribution to the 401(k) plan in 1998 was $275,000 in the aggregate for all employees. A matching contribution made by our company vests at 25% per year commencing on the first anniversary of a participant's date of employment with our company. All amounts contributed by participants and earnings on such contributions are fully vested at all times. LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS Our certificate of incorporation limits the liability of directors and executive officers to the maximum extent permitted by Delaware law. Delaware law provides that directors of a corporation will not be personally liable for monetary damages for breach of their fiduciary duties as directors, except liability for: - breach of their duty of loyalty to the corporation or its stockholders; - acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; - unlawful payments of dividends or unlawful stock repurchases or redemptions; or - any transaction from which the director derived an improper personal benefit. This limitation of liability does not apply to liabilities arising under the federal or state securities laws and does not affect the availability of equitable remedies such as injunctive relief or rescission. Our bylaws provide that we shall indemnify our directors, officers, employees and other agents to the fullest extent permitted by law. We believe that indemnification under our bylaws covers at least negligence and gross negligence on the part of indemnified parties. Our bylaws also permit us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions on behalf of Netcom Systems, regardless of whether the bylaws permit such indemnification. We have entered into agreements to indemnify our directors and executive officers, in addition to the indemnification provided for in our bylaws. These agreements, among other things, indemnify our directors and executive officers for certain expenses including attorneys' fees, judgments, fines and settlement amounts incurred by any such person in any action or proceeding, including any action by or in the right of our company arising out of such person's services as a director, officer, employee, agent or fiduciary of our company, any subsidiary of our company or any other company or enterprise to which the person provides services at our request. We believe that these provisions and agreements are necessary to attract and retain qualified persons as directors and executive officers. At present, there is no pending litigation or proceeding involving a director or officer in which indemnification is required or permitted, and we are not aware of any threatened litigation or proceeding that may result in a claim for such indemnification. 57 59 CERTAIN TRANSACTIONS In the third quarter of 1997, we underwent a recapitalization involving: - a $50.0 million term loan pursuant to a credit agreement with NationsBank, N.A., as administrative agent, BankBoston, N.A. as co-agent and other financial institutions, - the issuance of 485,184 shares of redeemable preferred stock for $48.5 million, - the issuance of 22,903,436 shares of convertible preferred stock for $48.5 million, and - the repurchase of approximately 80% of our then-outstanding common stock at $15.292 per share for $156.2 million. The purchasers of redeemable preferred stock and convertible preferred stock, and the holders of common stock repurchased in the recapitalization included, among others, the following directors, executive officers and holders of more than 5% of our common stock:
NUMBER OF SHARES NUMBER OF SHARES NUMBER OF SHARES OF REDEEMABLE OF CONVERTIBLE OF COMMON STOCK PREFERRED STOCK PREFERRED STOCK REPURCHASED ---------------- ---------------- ---------------- Barry Phelps.............................. -- -- 26,666 Henry Hamon............................... -- -- 506,667 Marc Hamon................................ -- -- 8,000,000 Stephane Johnson.......................... -- -- 26,666 James Jordan.............................. -- -- 840,000 Gene Zhang................................ -- -- 80,000 Richard Moley............................. 2,500 118,013 -- BA Capital Company, L.P.(1)............... 80,000 3,776,454 -- Summit Ventures IV, L.P.(2)............... 236,856 11,180,936 -- Spitfire Capital Partners L.P.(3)......... 15,000 708,085 -- Northstar Investors, LLC(4)............... 145,092 6,849,166 --
- --------------- (1) These shares were originally purchased by NationsBanc Capital Corp., the predecessor to BA Capital Company, L.P. Our director Robert H. Sheridan III is an affiliate of BA Capital Company, L.P. as well as NationsBanc Montgomery Securities LLC, an underwriter for this offering. Mr. Sheridan disclaims beneficial ownership of the shares held by BA Capital Company, L.P. except to the extent of his proportionate partnership interest therein. (2) Our director Walter Kortschak is a general partner of Summit Ventures IV, L.P. Mr. Kortschak disclaims beneficial ownership of the shares held by Summit Ventures IV, L.P. except to the extent of his proportionate partnership interest therein. (3) Current and former employees of both NationsBanc Montgomery Securities LLC and Thomas Weisel Partners LLC, both underwriters of this offering, are limited partners of Spitfire Capital Partners L.P. (4) Northstar Investors, LLC, an affiliate of NationsBanc Montgomery Securities LLC, has subsequently distributed its shares to its members, some of whom are affiliates or employees of NationsBanc Montgomery Securities LLC or Thomas Weisel Partners LLC. The purchasers of our convertible preferred stock are parties to a stockholders agreement in which they have agreed to vote their shares to preserve the number of authorized directors and to elect representatives to serve as directors. Barry Phelps, our President and Chief Executive Officer and a director, Gene Zhang, our Vice President, Engineering, and Stephane Johnson, our Vice President, International Sales, are also parties to this agreement. The parties to the stockholders agreement hold 25,446,769 shares, or % of our outstanding common stock following consummation of the offering. Accordingly, the parties to this stockholders agreement can control the election of our directors. 58 60 The parties to the stockholders agreement are entitled to certain rights of registration pursuant to a registration agreement between such persons and our company, including certain demand and piggyback registration rights. See "Description of Capital Stock -- Registration Rights of Certain Holders." In September 1997, we purchased all of the outstanding shares of Netcom Systems Europe, a company organized under the laws of France. In connection with such purchase, Henry Hamon, brother of Marc Hamon, received $150,000 in consideration for the sale of his shares in Netcom Systems Europe to us. All of our securities referenced above were purchased or sold at prices equal to the fair market value of such securities, as determined by our board of directors, on the date of repurchase or issuance. In 1997, we loaned $670,000 to Marc Hamon, a 5% stockholder, as an advance on Mr. Hamon's salary. The loan was repaid in full on July 29, 1997. At that time, interest charges of approximately $6,645 were paid by Mr. Hamon. In the past, we have granted options to our executive officers and directors. We intend to grant options to our officers and directors in the future. We have entered into employment agreements with Barry Phelps, our President and Chief Executive Officer, James Jordan, our Vice President, Sales, Stephane Johnson, our Vice President International Sales, and Henry Hamon, who served as Netcom Systems Europe's General Manager until February 1999. We have also entered into change-in-control agreements with each of our executive officers. The terms of these employment agreements and change-in-control agreements are described in detail under "-- Employment Contracts and Termination of Employment and Change-in-Control Agreements." We have entered into indemnification agreements with our officers and directors containing provisions which may require us to indemnify our officers and directors against liabilities that may arise by reason of their status or service as officers or directors, other than liabilities arising from willful misconduct of a culpable nature, and to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified. We also intend to execute such agreements with our future directors and executive officers. 59 61 PRINCIPAL STOCKHOLDERS The following table sets forth as of March 31, 1999, and as adjusted to reflect the sale of the shares of common stock offered hereby, certain information with respect to the beneficial ownership of the common stock as to: - each person known by us to own beneficially more than 5% of the outstanding shares of our common stock, - each of the Named Executive Officers, - each of our directors, and - all of our directors and executive officers as a group. Except as otherwise indicated, and subject to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of common stock held by them. Applicable percentage ownership in the table is based on 25,689,275 shares of common stock outstanding as of March 31, 1999 and shares outstanding immediately following the completion of this offering. Beneficial ownership is determined in accordance with the rules of the SEC. Shares of common stock subject to options that are presently exercisable or exercisable within 60 days of March 31, 1999 are deemed outstanding for the purpose of computing the percentage ownership of the person or entity holding options or warrants, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person or entity. If any shares are issued upon exercise of options, warrants or other rights to acquire our capital stock that are presently outstanding or granted in the future or reserved for future issuance under our stock plans, there will be further dilution to new public investors.
PERCENTAGE OF SHARES BENEFICIALLY OWNED NUMBER OF SHARES --------------------------------- BENEFICIAL OWNER BENEFICIALLY OWNED BEFORE OFFERING AFTER OFFERING ---------------- --------------------- --------------- --------------- 5% Stockholders Summit Partners(1)...................... 11,333,705 44.1% BA Capital Company, L.P.(2)............. 3,776,454 14.7 TA Associates Group(3).................. 3,734,771 14.5 Marc Hamon(4)........................... 2,010,000 7.8 Named Executive Officers Barry Phelps(5)......................... 226,111 * James Jordan(6)......................... 626,667 2.4 Henry Hamon(7).......................... 304,000 1.1 Stephane Johnson(8)..................... 117,334 * Gene Zhang(9)........................... 170,000 * Directors Walter Kortschak(10).................... 11,343,705 44.1 Robert H. Sheridan, III(11)............. 3,786,454 14.7 Richard Moley(12)....................... 128,013 * Michael West(13)........................ 7,000 * All officers and directors as a group (12 persons)(14)..................... 16,734,417 62.5
- --------------- * Less than 1% (1) The address of record for each member of Summit Partners is 499 Hamilton Avenue, Suite 200, Palo Alto, CA 94301. Includes 152,769 shares of common stock held by Summit Investors III, L.P. and 11,180,936 shares of common stock held by Summit Ventures IV, L.P. 60 62 (2) The address of record for BA Capital Company, L.P. is 25th Floor, 100 North Tryon, Charlotte, NC 28255. (3) The address of record for each member of the TA Associates Group is c/o TA Associates, Inc., High Street Tower, Suite 2,500, 125 High Street, Boston, MA 02110. Includes 3,092,498 shares of common stock held by TA/Advent VIII, L.P., 580,423 shares of common stock held by Advent Atlantic and Pacific III, L.P., and 61,850 shares of common stock held by TA Venture Investors, L.P. TA/Advent VIII, L.P., Advent Atlantic & Pacific III, L.P., and TA Venture Investors L.P. are part of an affiliated group of investment partnerships referred to, collectively, as the TA Associates Group. The general partner of TA/ Advent VIII, L.P., is TA Associates VIII, LLC and the general partner of Advent Atlantic & Pacific III, L.P. is TA Associates AAP III Partners, L.P. TA Associates, Inc. is the managing member of TA Associates VIII, LLC and is the general partner of TA Associates AAP III Partners, L.P. Individually, no stockholder, director or officer of TA Associates, Inc. is deemed to have or share voting or investment power with respect to TA Associates, Inc. Principals and employees of TA Associates, Inc. comprise the general partners of TA Venture Investors, L.P. (4) The address of record for Marc Hamon is c/o Netcom Systems, Inc., 20550 Nordhoff Street, Chatsworth, CA 91311. Shares beneficially owned prior to the offering include an aggregate of 10,000 shares issuable pursuant to options exercisable within 60 days of March 31, 1999. Does not include 304,000 shares beneficially owned by Henry Hamon, Mr. Marc Hamon's adult brother. (5) Shares beneficially owned prior to the offering include an aggregate of 192,778 shares issuable pursuant to options exercisable within 60 days of March 31, 1999. (6) Shares beneficially owned prior to the offering include an aggregate of 266,667 shares issuable pursuant to options exercisable within 60 days of March 31, 1999. (7) Shares beneficially owned prior to the offering include an aggregate of 204,000 shares issuable pursuant to options exercisable within 60 days of March 31, 1999. Does not include 2,010,000 shares beneficially owned by Marc Hamon, Mr. Henry Hamon's adult brother. Mr. Henry Hamon is currently on an unpaid leave of absence from Netcom Systems. (8) Shares beneficially owned prior to the offering consists of an aggregate of 117,334 shares issuable pursuant to options exercisable within 60 days of March 31, 1999. (9) Shares beneficially owned prior to the offering include an aggregate of 160,000 shares issuable pursuant to options exercisable within 60 days of March 31, 1999. (10) Shares beneficially owned prior to the offering include an aggregate of 10,000 shares issuable pursuant to options exercisable within 60 days of March 31, 1999. Also consists of 11,333,705 shares held by Summit Partners prior to the offering. Walter Kortschak, a general partner of Summit Ventures IV, L.P., is a director of our company. Mr. Kortschak disclaims beneficial ownership of the shares held by Summit Partners except to the extent of his proportionate partnership therein. (11) Shares beneficially owned prior to the offering include an aggregate of 10,000 shares issuable pursuant to options exercisable within 60 days of March 31, 1999. Also consists of 3,776,454 shares held by BA Capital Company, L.P. Robert H. Sheridan, III, is a director of Netcom Systems and is the Senior Vice President of BA Equity Management GP, LLC, which is the general partner of BA Equity Management, L.P., which is the sole member of BA SBIC Management, which is the general partner of BA Capital Company, L.P. Mr. Sheridan disclaims beneficial ownership of the shares held by BA Capital Company, L.P. except to the extent of his proportionate partnership therein. (12) Shares beneficially owned prior to the offering include an aggregate of 10,000 shares issuable pursuant to options exercisable within 60 days of March 31, 1999. (13) Shares beneficially owned prior to the offering include an aggregate of 7,000 shares issuable pursuant to options exercisable within 60 days of March 31, 1999. (14) Shares beneficially owned prior to the offering include an aggregate of 1,102,912 shares issuable pursuant to options exercisable within 60 days of March 31, 1999. Also includes 11,333,705 shares held by Summit Partners and 3,776,454 shares held by BA Capital Company, L.P. 61 63 DESCRIPTION OF CAPITAL STOCK GENERAL Upon completion of the offering, the total number of shares which we have authority to issue will be 200,000,000 shares of common stock, $0.001 par value, and 5,000,000 shares of undesignated preferred stock, $0.001 par value. As of March 31, 1999, there were 25,689,275 shares of common stock outstanding which were held of record by 99 stockholders, and no shares of undesignated preferred stock outstanding. Upon completion of the offering, we will have outstanding shares of common stock. COMMON STOCK The holders of common stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders. Holders of common stock have no preemptive or subscription rights and there are no redemption rights with respect to such shares. The outstanding shares of common stock are, and the shares of common stock offered hereby will be, fully paid and nonassessable. PREFERRED STOCK Our board of directors is authorized, without further stockholder action, to issue preferred stock in one or more series and to fix the voting rights, liquidation preferences, dividend rights, repurchase rights, conversion rights, redemption rights and terms, including sinking fund provisions, and other rights and preferences, of the preferred stock. Although there is no current intention to do so, our board of directors may, without stockholder approval, issue shares of a class or series of preferred stock with voting and conversion rights which could adversely affect the voting power or dividend rights of the holders of common stock and may have the effect of delaying, deferring or preventing a change in control of our company. OPTIONS As of March 31, 1999, we had outstanding options to purchase a total of 5,963,765 shares of common stock pursuant to the 1993 Stock Plan and the 1997 Stock Plan, and outstanding options to purchase an additional 800,000 shares outside of our stock option plans. We have issued no options pursuant to our 1998 Stock Plan. Recommendations for option grants under the stock option plans or otherwise are made by the compensation committee, subject to ratification by the full board of directors. The compensation committee may issue options with varying vesting schedules, but all options granted pursuant to the stock plans must be exercised within 10 years from the date of grant. REGISTRATION RIGHTS OF CERTAIN HOLDERS The holders of 25,446,769 shares of common stock issued prior to this offering are entitled to certain registration rights with respect to the registration of these shares under the Securities Act of 1933. These rights are provided under the terms of the Registration Agreement between us and the holders of the registrable securities. If, following the offering, we register any of our common stock either for our own account or for the account of other security holders, the holders of registrable securities are entitled to include their shares of common stock in the registration. A holder's right to include shares in an underwritten registration statement is subject to the ability of the underwriters to limit the number of shares included in the offering. Beginning 180 days after the closing of this offering, the holders of 22,903,436 of the registrable securities may also require us to register all or a portion of their shares on Form S-2 or S-3 when it becomes available to us. However, among other limitations, the proposed aggregate selling 62 64 price of those shares must be at least $1.0 million. In addition, beginning 180 days after the closing of this offering, the holders of 22,903,436 of the registrable securities may also require us to register all or a portion of their shares on Form S-1. However, among other limitations, the proposed aggregate selling price of those shares must be at least $3.0 million. We must bear all registration expenses and all selling expenses relating to registrable securities, except that we are only be responsible for expenses for the first four registrations on Form S-1 at the request of the holders of registrable securities. If holders of registrable securities, by exercising their rights, cause a large number of securities to be registered and sold in the public market, those sales could have an adverse effect on the price of our common stock. In addition, if we initiate a registration and include registrable securities pursuant to the exercise of registration rights, the sale of these registrable securities may have an adverse effect on our ability to raise capital. OUR CHARTER AND BYLAWS CONTAIN PROVISIONS WHICH MAY DELAY OR PREVENT A CHANGE OF CONTROL Provisions of our certificate of incorporation and our bylaws may have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of our company. These provisions could limit the price that investors might be willing to pay in the future for shares of our common stock. For example, these provisions permit us to issue preferred stock without any vote or further action by the stockholders and eliminate the right of stockholders to act by written consent without a meeting. These provisions could have the effect of delaying or preventing a change in control of our company. In addition, we are subject to Section 203 of the Delaware General Corporation Law which, subject to certain exceptions, prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that a stockholder became an interested stockholder, unless: - prior to that date, the board of directors approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder; or - upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock outstanding at the time the transaction commenced; or - on or following that date the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders, by the affirmative vote of at least 66 2/3% of the outstanding voting stock that is not owned by the interested stockholder. TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar with respect to the common stock will be Boston EquiServe, L.P. located at 150 Royall Street, Canton, Massachusetts, and its telephone number is (781) 575-2000. 63 65 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no public market for our common stock and any sale of substantial amounts of common stock in the open market may adversely affect the market price of our common stock. Upon completion of the offering, we will have outstanding shares of common stock. Of these shares, the shares sold in the offering will be freely tradable without restriction or further registration under the Securities Act unless purchased by "affiliates" as that term is defined in Rule 144 of the Securities Act. The remaining 25,689,275 shares of common stock held by existing stockholders were issued and sold by us in reliance on exemptions from the registration requirements of the Securities Act. Of these shares, shares will be subject to "lock-up" agreements described below on the effective date of the offering. On the effective date of the offering, shares not subject to the lock-up agreements described below will be eligible for sale pursuant to Rule 144(k). In addition, 90 days after the effective date of this offering, shares not subject to the lock-up agreements described below will be eligible for sale pursuant to Rule 701. Upon expiration of the lock-up agreements 180 days after the effective date of the offering, shares will become eligible for sale, subject in some cases to the limitations of Rule 144. In addition, holders of stock options could exercise their options and sell the shares issued upon exercise as described below.
DATE OF AVAILABILITY FOR SALE NUMBER ----------------------------- ------------- Immediately................................................. shares 90th day after the date of this prospectus.................. shares 180th day after the date of this prospectus................. shares
In addition, we have 2,976,300 shares of our common stock available for future grant pursuant to our stock plans, and 6,763,765 shares subject to outstanding options at March 31, 1999. of such outstanding options are also subject to the 180-day lockup. The outstanding options not subject to a lock-up will be available for sale beginning 90 days following the effective date of the offering, assuming the options are vested and exercised. We intend to register, prior to the expiration of the lock-up all of the shares of common stock reserved for issuance under our stock option plans and an additional 150,000 shares of common stock reserved for issuance under our 1998 Employee Stock Purchase Plan. This registration will permit the resale of vested shares by non-affiliates in the public market without restriction beginning on expiration of the lock-up. Each of our officers, directors and substantially all other stockholders have agreed with BT Alex. Brown not to sell or otherwise dispose of any their shares for a period of 180 days after the date of this prospectus. BT Alex. Brown, however, may in its sole discretion, at any time and without notice, release all or any portion of the shares subject to lock-up agreements. RULE 144 In general, under Rule 144 as currently in effect, beginning 90 days after the date of this prospectus, a person who has beneficially owned shares of our common stock for at least one year would be entitled to sell, within any three-month period, a number of shares that does not exceed the greater of: - 1% of the number of shares of common stock then outstanding, which will equal approximately shares immediately after this offering; or - the average weekly trading volume of the common stock on the Nasdaq National Market System during the four calendar weeks preceding the filing of a notice on Form 144 with respect to such sale. 64 66 Sales under Rule 144 are also subject to other requirements regarding the manner of sale, notice filing and the availability of current public information about us. RULE 144(k) Under Rule 144(k), a person who is not deemed to have been our affiliate at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, would be entitled to sell such shares under Rule 144(k) without regard to the requirements described above. Therefore, unless otherwise restricted, "144(k) shares" may be sold immediately upon the completion of this offering. RULE 701 In general, any employee, director, officer, consultant or advisor who purchases shares from us in connection with a compensatory stock or option plan or other written agreement before the effective date of the offering is entitled to resell such shares 90 days after the effective date of the offering in reliance on Rule 144, without having to comply with certain restrictions, including the holding period, contained in Rule 144. The SEC has indicated that Rule 701 will apply to typical stock options granted by an issuer before it becomes subject to the reporting requirements of the Securities Exchange Act of 1934, along with the shares acquired upon exercise of such options, including exercises after the date of this prospectus. 65 67 UNDERWRITING Subject to the terms and conditions of the underwriting agreement, the underwriters named below, through their representatives BT Alex. Brown Incorporated, Dain Rauscher Wessels, a division of Dain Rauscher Incorporated, NationsBanc Montgomery Securities LLC and Thomas Weisel Partners, the underwriters' representatives, have individually agreed to purchase from us the following numbers of shares of common stock at the initial public offering price less the underwriting discounts and commissions set forth on the cover page of this prospectus:
NUMBER OF UNDERWRITER SHARES ----------- ----------- BT Alex. Brown Incorporated................................. Dain Rauscher Wessels, a division of Dain Rauscher Incorporated.............................................. NationsBanc Montgomery Securities LLC....................... Thomas Weisel Partners LLC.................................. ----------- Total.................................................. ===========
The underwriting agreement provides that the obligations of the underwriters are subject to specified conditions and that the underwriters will purchase all shares of the common stock offered in the offering if any of the shares are purchased. We have been advised by the underwriters' representatives that the underwriters propose to offer the shares of common stock to the public at the initial public offering price set forth on the cover page of this prospectus and to dealers at that price less a concession not in excess of $ per share. The underwriters may allow, and the dealers may re-allow, a concession not in excess of $ per share to other dealers. After the initial public offering, the offering price and other selling terms may be changed by the underwriters' representatives. Some of our stockholders have granted the underwriters an option, exercisable not later than 30 days after the date of this prospectus, to purchase up to additional shares of common stock at the initial public offering price less the underwriting discounts and commissions described on the cover page of this prospectus. If the underwriters exercise the option, each of the underwriters will have a firm commitment to purchase approximately the same percentage of the option shares that the number of shares of common stock to be purchased by it in the above table bears to the total number of shares to be sold in the offering. The underwriters may exercise the option only to cover over-allotments made in connection with the sale of the common stock offered in the offering. If purchased, the underwriters will offer the option shares on the same terms as those on which the shares are being offered. At our request, the underwriters have reserved up to shares of common stock for sale, at the initial public offering price, to employees and friends of ours through a directed share program. The number of shares of common stock available for sale to the general public in the public offering will be reduced to the extent that employees and friends purchase the reserved shares. AMOUNTS PAYABLE TO THE UNDERWRITERS
NO EXERCISE FULL EXERCISE ----------- ------------- Per Share................................................. $ $ Total..................................................... $
We and the selling stockholders have agreed to indemnify the underwriters against liabilities, including liabilities under the Securities Act of 1933. Each of our officers, directors and a substantial majority of our stockholders and optionholders have agreed with BT Alex. Brown Incorporated not to offer, pledge, sell, contract 66 68 to sell or otherwise transfer or dispose of, or enter into any transaction which is designed to, or could be expected to result in the disposition of any portion of, any common stock for a period of 180 days after the date of this prospectus, without the prior written consent of BT Alex. Brown Incorporated, except in the case of gifts, transfers to immediate family members, transfers from partnerships or corporations to their beneficial owners, and transfers of shares purchased in this offering. Such consent may be given at any time without public notice. We have entered into a similar agreement, except that we may issue, and grant options to purchase, shares of common stock or any securities convertible into, exercisable for or exchangeable for shares of common stock, pursuant to the exercise of outstanding options and our issuance of options and stock granted under our existing stock option and stock purchase plans. The underwriters' representatives have advised us that the underwriters do not intend to confirm sales to any account over which they exercise discretionary authority. Prior to this offering, there has been no public market for our common stock. Consequently, the initial public offering price for the common stock will be determined by negotiation among us and the underwriters' representatives. Among the factors considered in negotiations are prevailing market conditions, our results of operations in recent periods, the market capitalizations and stages of development of other companies that we and the underwriters' representatives believe to be comparable to us, estimates of our business potential, the present stage of our development and other factors deemed relevant. In order to facilitate the offering of the common stock, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the market price of the common stock. Specifically, the underwriters may over-allot shares of the common stock in connection with this offering, thereby creating a short position in the underwriters' syndicate account. Additionally, to cover over-allotments or to stabilize the market price of the common stock, the underwriters may bid for, and purchase, shares of the common stock in the open market. Any of these activities may maintain the market price of the common stock at a level above that which might otherwise prevail in the open market. The underwriters are not required to engage in these activities, and, if commenced, the activities may be discontinued at any time. The underwriters' representatives, on behalf of the underwriters, also may reclaim selling concessions allowed to an underwriter or dealer, if the syndicate repurchases shares distributed by that underwriter or dealer. Thomas Weisel Partners LLC, one of the representatives of the underwriters, was organized and registered as a broker-dealer in December 1998. Since December 1998, Thomas Weisel Partners has been named as a lead or co-manager on 32 filed public offerings of equity securities, of which 12 have been completed, and has acted as a syndicate member in an additional ten public offerings of equity securities. BA Capital Company, L.P. and certain other persons and entities related to or affiliated with NationsBanc Montgomery Securities LLC own 5,582,216 shares of our convertible preferred stock. The shares owned by these entities will represent % of our outstanding capital stock after this offering. In addition, Thomas W. Weisel and other members and employees of Thomas Weisel Partners LLC own 479,647 shares of our convertible preferred stock or % of our outstanding capital stock after this offering. All of these shares were acquired from us on the same terms as every other purchaser of our convertible preferred stock or were acquired by transfer from another stockholder. This offering will be conducted in accordance with the provisions of Rule 2720(b)(15) of the rules of the National Association of Securities Dealers, Inc. In accordance with those provisions, BT Alex. Brown Incorporated will serve as a "qualified independent underwriter" and will recommend the maximum offering price for the shares of common stock we are offering in this prospectus. As the qualified independent underwriter, BT Alex. Brown Incorporated has performed due diligence with respect to the information contained in this prospectus and has participated in the preparation of this prospectus. The price of common stock offered in this 67 69 prospectus will not be higher than the maximum public offering price recommended by BT Alex. Brown Incorporated. LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for us by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California. Steven E. Bochner, a member of Wilson Sonsini Goodrich & Rosati, and other attorneys of Wilson Sonsini Goodrich & Rosati beneficially own 11,802 shares of our common stock. In addition, WS Investment Company 97B, an investment fund for the benefit of attorneys of Wilson Sonsini Goodrich & Rosati, owns 11,801 shares of our common stock. Certain legal matters in connection with the offering will be passed upon for the underwriters by Gray Cary Ware & Freidenrich LLP, Palo Alto, California. EXPERTS The financial statements included in this prospectus and elsewhere in the registration statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said report. WHERE YOU CAN FIND MORE INFORMATION We have filed with the SEC a registration statement on Form S-1, including exhibits, schedules and amendments filed with this registration statement, under the Securities Act with respect to the common stock to be sold under this prospectus. Prior to the offering we were not required to file reports with the SEC. This prospectus does not contain all the information set forth in the registration statement. For further information about our company and the shares of common stock to be sold in the offering, please refer to the registration statement. Statements made in this prospectus concerning the contents of any contract, agreement or other document filed as an exhibit to the registration statement are summaries of the terms of contract, agreements or documents and are not necessarily complete. Complete exhibits have been filed with the registration statement. The registration statement and exhibits may be inspected, without charge, and copies may be obtained at prescribed rates, at the SEC's Public Reference facility maintained by the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The registration statement and other information filed with the SEC is available at the web site maintained by the SEC on the worldwide web at http://www.sec.gov. We intend to furnish our stockholders with annual reports containing financial statements audited by our independent accountants and quarterly reports for the first three quarters of each fiscal year containing unaudited financial statements. 68 70 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Report of Independent Public Accountants.................... F-2 Consolidated Balance Sheets as of December 31, 1997 and 1998 (audited), and as of March 31, 1999 and Pro Forma March 31, 1999 (unaudited)...................................... F-3 Consolidated Statements of Income for each of the three years in the period ended December 31, 1998 (audited), and for the three months ended March 31, 1998 and 1999 (unaudited)............................................... F-4 Consolidated Statements of Class A Redeemable Preferred Stock, Stockholders' Investment and Comprehensive Income for each of the three years in the period ended December 31, 1998 (audited), and for the three months ended March 31, 1999 (unaudited)...................................... F-5 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1998 (audited), and for the three months ended March 31, 1998, and 1999 (unaudited)............................................... F-6 Notes to Consolidated Financial Statements.................. F-7
F-1 71 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Netcom Systems, Inc.: We have audited the accompanying consolidated balance sheets of NETCOM SYSTEMS, INC. (a Delaware corporation) and subsidiaries as of December 31, 1997 and 1998, and the related consolidated statements of income, Class A redeemable preferred stock, stockholders' investment and comprehensive income and cash flows for each of the three years in the period ended December 31, 1998. 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 financial statements referred to above present fairly, in all material respects, the financial position of Netcom Systems, Inc. and subsidiaries as of December 31, 1997 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Los Angeles, California February 22, 1999 F-2 72 NETCOM SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, MARCH 31, 1999 ----------------------------- ----------------------------- 1997 1998 ACTUAL PRO FORMA ------------- ------------- ------------- ------------- (UNAUDITED) ASSETS Current Assets: Cash and cash equivalents................................. $ 17,708,000 $ 19,597,000 $ 17,970,000 $ 17,970,000 Short-term investments.................................... -- 14,731,000 16,339,000 16,339,000 Accounts receivable, net of allowance for doubtful accounts of $350,000 in 1997, $675,000 in 1998 and $489,000 in 1999........................................ 9,508,000 9,360,000 10,151,000 10,151,000 Inventories............................................... 2,885,000 2,676,000 3,201,000 3,201,000 Prepaid expenses and other................................ 100,000 915,000 997,000 997,000 Income taxes receivable................................... -- 455,000 455,000 455,000 Deferred income taxes..................................... 1,224,000 2,228,000 1,571,000 1,571,000 ------------- ------------- ------------- ------------- Total current assets................................ 31,425,000 49,962,000 50,684,000 50,684,000 ------------- ------------- ------------- ------------- Property and Equipment, at cost: Machinery and equipment................................... 1,318,000 3,367,000 3,839,000 3,839,000 Office equipment.......................................... 466,000 1,215,000 1,388,000 1,388,000 Leasehold improvements.................................... 305,000 -- -- -- Construction-in-process................................... -- 333,000 2,471,000 2,471,000 ------------- ------------- ------------- ------------- 2,089,000 4,915,000 7,698,000 7,698,000 Less--accumulated depreciation and amortization............. (405,000) (1,251,000) (1,602,000) (1,602,000) ------------- ------------- ------------- ------------- 1,684,000 3,664,000 6,096,000 6,096,000 ------------- ------------- ------------- ------------- Other Assets: Income taxes receivable................................... 455,000 -- -- -- Deferred income taxes..................................... 247,000 178,000 142,000 142,000 Deferred financing costs.................................. 275,000 215,000 200,000 200,000 Deposits.................................................. 43,000 136,000 142,000 142,000 ------------- ------------- ------------- ------------- 1,020,000 529,000 484,000 484,000 ------------- ------------- ------------- ------------- $ 34,129,000 $ 54,155,000 $ 57,264,000 $ 57,264,000 ============= ============= ============= ============= LIABILITIES AND STOCKHOLDERS' INVESTMENT Current Liabilities: Current portion of notes payable.......................... $ 2,500,000 $ 10,000,000 $ 10,000,000 $ 10,000,000 Accounts payable.......................................... 2,916,000 2,108,000 3,106,000 3,106,000 Accrued expenses.......................................... 2,243,000 4,853,000 4,236,000 4,236,000 Deferred revenue.......................................... 454,000 503,000 593,000 593,000 Income taxes payable...................................... -- 696,000 1,700,000 1,700,000 ------------- ------------- ------------- ------------- Total current liabilities........................... 8,113,000 18,160,000 19,635,000 19,635,000 ------------- ------------- ------------- ------------- Notes payable, net of current portion....................... 47,500,000 37,500,000 35,000,000 35,000,000 ------------- ------------- ------------- ------------- Commitments and Contingencies (Note 10) Class A redeemable preferred stock, $0.001 par value: Authorized-485,184 shares; Issued and outstanding-485,184 shares in 1997, 1998 and 1999.................................................... 49,520,000 52,579,000 53,363,000 53,363,000 ------------- ------------- ------------- ------------- Stockholders' Investment: Class B convertible preferred stock, $0.001 par value: Authorized-22,903,437 shares; Issued and outstanding-22,903,436 shares in 1997, 1998 and 1999 and no shares in pro forma 1999.............. 48,518,000 48,518,000 48,518,000 -- Common stock, $0.001 par value: Authorized-50,000,000 shares; Issued and outstanding -- 2,527,840 shares in 1997 and 2,778,639 shares in 1998, 2,785,839 shares in 1999 and 25,689,275 shares in pro forma 1999................... 3,000 3,000 3,000 26,000 Additional paid-in capital................................ 9,976,000 11,576,000 12,547,000 61,042,000 Deferred compensation..................................... -- (390,000) (1,217,000) (1,217,000) Note receivable for stock purchase........................ (120,000) -- -- -- Retained deficit.......................................... (129,356,000) (113,833,000) (110,576,000) (110,576,000) Accumulated other comprehensive income (loss)............. (25,000) 42,000 (9,000) (9,000) ------------- ------------- ------------- ------------- (71,004,000) (54,084,000) (50,734,000) (50,734,000) ------------- ------------- ------------- ------------- $ 34,129,000 $ 54,155,000 $ 57,264,000 $ 57,264,000 ============= ============= ============= =============
The accompanying notes are an integral part of these consolidated balance sheets. F-3 73 NETCOM SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, --------------------------------------- ------------------------- 1996 1997 1998 1998 1999 ----------- ----------- ----------- ----------- ----------- (UNAUDITED) Revenues................................... $27,454,000 $56,273,000 $73,474,000 $18,011,000 $19,513,000 Cost of goods sold......................... 3,256,000 7,248,000 15,912,000 3,048,000 4,873,000 ----------- ----------- ----------- ----------- ----------- Gross profit........................... 24,198,000 49,025,000 57,562,000 14,963,000 14,640,000 ----------- ----------- ----------- ----------- ----------- Operating expenses: Research and development................. 1,681,000 3,527,000 8,588,000 1,662,000 2,665,000 Sales and marketing...................... 1,466,000 3,713,000 12,956,000 2,271,000 4,087,000 General and administrative............... 1,342,000 3,452,000 3,799,000 776,000 855,000 Amortization of deferred compensation.... -- -- 60,000 -- 133,000 ----------- ----------- ----------- ----------- ----------- 4,489,000 10,692,000 25,403,000 4,709,000 7,740,000 ----------- ----------- ----------- ----------- ----------- Income from operations................. 19,709,000 38,333,000 32,159,000 10,254,000 6,900,000 Other income (expense): Interest income.......................... 244,000 640,000 1,433,000 232,000 440,000 Interest expense......................... -- (1,233,000) (3,545,000) (900,000) (724,000) Other income (expense)................... -- (69,000) 92,000 (14,000) (44,000) ----------- ----------- ----------- ----------- ----------- 244,000 (662,000) (2,020,000) (682,000) (328,000) ----------- ----------- ----------- ----------- ----------- Income before provision for income taxes............................... 19,953,000 37,671,000 30,139,000 9,572,000 6,572,000 Provision for income taxes................. 8,142,000 14,875,000 11,557,000 3,924,000 2,531,000 ----------- ----------- ----------- ----------- ----------- Net income................................. 11,811,000 22,796,000 18,582,000 5,648,000 4,041,000 Less: accrued preferred stock dividends.... -- (1,002,000) (3,059,000) (735,000) (784,000) ----------- ----------- ----------- ----------- ----------- Net income applicable to common shares..... $11,811,000 $21,794,000 $15,523,000 $ 4,913,000 $ 3,257,000 =========== =========== =========== =========== =========== Net income per common share: Basic net income per common share........ $ 1.08 $ 2.70 $ 5.74 $ 1.92 $ 1.17 =========== =========== =========== =========== =========== Weighted average number of common shares outstanding............................ 10,939,979 8,074,625 2,702,342 2,559,107 2,784,586 =========== =========== =========== =========== =========== Diluted net income per common and common equivalent shares outstanding.......... $ 0.89 $ 1.27 $ 0.63 $ 0.19 $ 0.13 =========== =========== =========== =========== =========== Weighted average number of common and common equivalent shares outstanding... 13,298,643 17,987,601 29,542,164 29,064,358 30,335,074 =========== =========== =========== =========== =========== Pro forma net income per common share: Basic net income per common share........ $ 0.73 $ 0.16 =========== =========== Weighted average number of common shares outstanding............................ 25,605,778 25,688,022 =========== =========== Diluted net income per common and common equivalent shares outstanding.......... $ 0.63 $ 0.13 =========== =========== Weighted average number of common and common equivalent shares outstanding... 29,542,164 30,335,074 =========== ===========
The accompanying notes are an integral part of these consolidated statements. F-4 74 NETCOM SYSTEMS, INC. AND SUBSIDIARIES STATEMENTS OF CLASS A REDEEMABLE PREFERRED STOCK, STOCKHOLDERS' INVESTMENT AND COMPREHENSIVE INCOME
CLASS A CLASS B REDEEMABLE CONVERTIBLE PREFERRED STOCK PREFERRED STOCK COMMON STOCK --------------------- ------------------------- ---------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ------- ----------- ----------- ----------- ----------- -------- BALANCE, December 31, 1995....................... -- $ -- -- $ -- 10,920,500 $ 11,000 Net income...................................... -- -- -- -- -- -- Comprehensive income............................ Cash distributions to shareholders.............. -- -- -- -- -- -- Issuance of common stock for services........... -- -- -- -- 39,500 -- ------- ----------- ----------- ----------- ----------- -------- BALANCE, December 31, 1996....................... -- -- -- -- 10,960,000 11,000 Issuance of common stock........................ -- -- -- -- 100,000 -- Exercise of employee stock options.............. -- -- -- -- 1,367,646 2,000 Issuance of stock options as compensation to non-employees................................. -- -- -- -- -- -- Tax benefit from non-qualified stock options.... -- -- -- -- -- -- ------- ----------- ----------- ----------- ----------- -------- BALANCE, August 29, 1997, prior to Recapitalization................................ -- -- -- -- 12,427,646 13,000 Net income...................................... -- -- -- -- -- -- Foreign currency translation adjustments........ -- -- -- -- -- -- Comprehensive income............................ Recapitalization................................ 485,184 48,518,000 22,903,436 48,518,000 (10,215,642) (10,000) Acquisition of Netcom Systems Europe............ -- -- -- -- -- -- Exercise of employee stock options.............. -- -- -- -- 315,836 -- Accrued dividends on redeemable preferred stock......................................... 1,002,000 -- -- -- -- ------- ----------- ----------- ----------- ----------- -------- BALANCE, December 31, 1997....................... 485,184 49,520,000 22,903,436 48,518,000 2,527,840 3,000 Net income...................................... -- -- -- -- -- -- Foreign currency translation adjustments........ -- -- -- -- -- -- Comprehensive income............................ Exercise of employee stock options.............. -- -- -- -- 250,799 -- Deferred compensation........................... -- -- -- -- -- -- Deferred compensation amortization.............. -- -- -- -- -- -- Tax benefit from non-qualified stock options.... -- -- -- -- -- -- Repayment of note receivable.................... -- -- -- -- -- Accrued dividends on redeemable preferred stock......................................... 3,059,000 -- -- -- -- ------- ----------- ----------- ----------- ----------- -------- BALANCE, December 31, 1998....................... 485,184 52,579,000 22,903,436 48,518,000 2,778,639 3,000 Net income...................................... -- -- -- -- -- -- Foreign currency translation adjustments........ -- -- -- -- -- -- Comprehensive income............................ Exercise of employee stock options.............. -- -- -- -- 7,200 -- Deferred compensation........................... -- -- -- -- -- -- Deferred compensation amortization.............. -- -- -- -- -- -- Accrued dividends on redeemable preferred stock......................................... -- 784,000 -- -- -- -- ------- ----------- ----------- ----------- ----------- -------- BALANCE, March 31, 1999.......................... 485,184 $53,363,000 22,903,436 $48,518,000 2,785,839 $ 3,000 ======= =========== =========== =========== =========== ======== ADDITIONAL RETAINED PAID-IN DEFERRED NOTE COMPREHENSIVE EARNINGS CAPITAL COMPENSATION RECEIVABLE INCOME (DEFICIT) ----------- ------------ ---------- ------------- ------------- BALANCE, December 31, 1995....................... $ 221,000 $ -- $ -- $ 3,622,000 Net income...................................... -- -- -- $11,811,000 11,811,000 ----------- Comprehensive income............................ 11,811,000 ----------- Cash distributions to shareholders.............. -- -- -- (2,700,000) Issuance of common stock for services........... 49,000 -- -- -- ----------- ----------- --------- ------------- BALANCE, December 31, 1996....................... 270,000 -- -- 12,733,000 Issuance of common stock........................ 600,000 -- (600,000) -- Exercise of employee stock options.............. 1,895,000 -- -- -- Issuance of stock options as compensation to non-employees................................. 15,000 -- -- -- Tax benefit from non-qualified stock options.... 6,916,000 -- -- -- ----------- ----------- --------- ------------- BALANCE, August 29, 1997, prior to Recapitalization................................ 9,696,000 -- (600,000) 12,733,000 Net income...................................... -- -- -- 22,796,000 22,796,000 Foreign currency translation adjustments........ -- -- -- (25,000) -- ----------- Comprehensive income............................ 22,771,000 ----------- Recapitalization................................ (10,000) -- 480,000 (161,896,000) Acquisition of Netcom Systems Europe............ -- -- -- (1,987,000) Exercise of employee stock options.............. 290,000 -- -- -- Accrued dividends on redeemable preferred stock......................................... -- -- -- (1,002,000) ----------- ----------- --------- ------------- BALANCE, December 31, 1997....................... 9,976,000 -- (120,000) (129,356,000) Net income...................................... -- -- -- 18,582,000 18,582,000 Foreign currency translation adjustments........ -- -- -- 67,000 -- ----------- Comprehensive income............................ 18,649,000 ----------- Exercise of employee stock options.............. 290,000 -- -- -- Deferred compensation........................... 450,000 (450,000) -- -- Deferred compensation amortization.............. -- 60,000 -- -- Tax benefit from non-qualified stock options.... 860,000 -- -- -- Repayment of note receivable.................... -- -- 120,000 -- Accrued dividends on redeemable preferred stock......................................... -- -- -- (3,059,000) ----------- ----------- --------- ------------- BALANCE, December 31, 1998....................... 11,576,000 (390,000) -- (113,833,000) Net income...................................... -- -- -- 4,041,000 4,041,000 Foreign currency translation adjustments........ (51,000) ----------- Comprehensive income............................ $ 3,990,000 =========== Exercise of employee stock options.............. 11,000 -- -- -- Deferred compensation........................... 960,000 (960,000) -- -- Deferred compensation amortization.............. -- 133,000 -- -- Accrued dividends on redeemable preferred stock......................................... -- -- -- (784,000) ----------- ----------- --------- ------------- BALANCE, March 31, 1999.......................... $12,547,000 $(1,217,000) $ -- $(110,576,000) =========== =========== ========= ============= ACCUMULATED OTHER TOTAL COMPREHENSIVE STOCKHOLDERS' INCOME INVESTMENT ------------- ------------- BALANCE, December 31, 1995....................... $ -- $ 3,854,000 Net income...................................... -- 11,811,000 Comprehensive income............................ Cash distributions to shareholders.............. -- (2,700,000) Issuance of common stock for services........... -- 49,000 -------- ------------- BALANCE, December 31, 1996....................... -- 13,014,000 Issuance of common stock........................ -- -- Exercise of employee stock options.............. -- 1,897,000 Issuance of stock options as compensation to non-employees................................. -- 15,000 Tax benefit from non-qualified stock options.... -- 6,916,000 -------- ------------- BALANCE, August 29, 1997, prior to Recapitalization................................ -- 21,842,000 Net income...................................... -- 22,796,000 Foreign currency translation adjustments........ (25,000) (25,000) Comprehensive income............................ Recapitalization................................ -- (112,918,000) Acquisition of Netcom Systems Europe............ -- (1,987,000) Exercise of employee stock options.............. -- 290,000 Accrued dividends on redeemable preferred stock......................................... -- (1,002,000) -------- ------------- BALANCE, December 31, 1997....................... (25,000) (71,004,000) Net income...................................... -- 18,582,000 Foreign currency translation adjustments........ 67,000 67,000 Comprehensive income............................ Exercise of employee stock options.............. -- 290,000 Deferred compensation........................... -- -- Deferred compensation amortization.............. -- 60,000 Tax benefit from non-qualified stock options.... -- 860,000 Repayment of note receivable.................... -- 120,000 Accrued dividends on redeemable preferred stock......................................... -- (3,059,000) -------- ------------- BALANCE, December 31, 1998....................... 42,000 (54,084,000) Net income...................................... -- 4,041,000 Foreign currency translation adjustments........ (51,000) (51,000) Comprehensive income............................ Exercise of employee stock options.............. -- 11,000 Deferred compensation........................... -- -- Deferred compensation amortization.............. -- 133,000 Accrued dividends on redeemable preferred stock......................................... -- (784,000) -------- ------------- BALANCE, March 31, 1999.......................... $ (9,000) $ (50,734,000) ======== =============
The accompanying notes are an integral part of these consolidated statements. F-5 75 NETCOM SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ------------------------------------------ ------------------------- 1996 1997 1998 1998 1999 ----------- ------------- ------------ ----------- ----------- (UNAUDITED) Cash Flows From Operating Activities: Net income................................. $11,811,000 $ 22,796,000 $ 18,582,000 $ 5,648,000 $ 4,041,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization............ 25,000 319,000 922,000 145,000 351,000 Provision for doubtful accounts.......... 50,000 250,000 325,000 50,000 30,000 Deferred compensation amortization....... -- -- 60,000 -- 133,000 Interest expense relating to deferred financing costs........................ -- 20,000 60,000 15,000 15,000 Issuance of common stock or stock options for services........................... 49,000 15,000 -- -- -- Loss on retirement of property and equipment.............................. -- -- 249,000 -- -- Change in operating assets and liabilities: Accounts receivable.................... (4,803,000) (2,096,000) (177,000) (1,152,000) (821,000) Inventories............................ (410,000) (2,334,000) 209,000 (583,000) (525,000) Prepaid expenses and other............. 224,000 (19,000) (815,000) (44,000) (82,000) Income taxes receivable................ -- (455,000) -- 455,000 -- Deferred income taxes.................. (669,000) (632,000) (935,000) (161,000) 693,000 Deposits............................... (15,000) (25,000) (93,000) (1,000) (6,000) Accounts payable....................... 377,000 1,994,000 (808,000) (1,586,000) 998,000 Accrued expenses....................... 528,000 1,266,000 2,610,000 1,333,000 (617,000) Deferred revenue....................... 205,000 249,000 49,000 (28,000) 90,000 Income taxes payable................... 2,157,000 3,324,000 1,556,000 3,329,000 1,004,000 ----------- ------------- ------------ ----------- ----------- Net cash provided by operating activities........................ 9,529,000 24,672,000 21,794,000 7,420,000 5,304,000 ----------- ------------- ------------ ----------- ----------- Cash Flows From Investing Activities: Purchases of property and equipment........ (400,000) (1,371,000) (3,151,000) (718,000) (2,783,000) Purchases of investments, net.............. -- -- (14,731,000) -- (1,608,000) Cash used in acquisition of Netcom Systems Europe, net of cash acquired............. -- (2,374,000) -- -- -- ----------- ------------- ------------ ----------- ----------- Net cash used in investing activities........................ (400,000) (3,745,000) (17,882,000) (718,000) (4,391,000) ----------- ------------- ------------ ----------- ----------- Cash Flows From Financing Activities: Distributions to stockholders.............. (2,700,000) -- -- -- -- Proceeds from repayment of note receivable............................... -- -- 120,000 -- -- Borrowings under notes payable, net of deferred financing costs................. -- 49,705,000 -- -- -- Payments on notes payable.................. -- -- (2,500,000) -- (2,500,000) Net proceeds from sale of preferred stock.................................... -- 91,322,000 -- -- -- Exercise of stock options.................. -- 2,187,000 290,000 2,000 11,000 Repurchase of common stock................. -- (155,722,000) -- -- -- ----------- ------------- ------------ ----------- ----------- Net cash provided by (used in) financing activities.............. (2,700,000) (12,508,000) (2,090,000) 2,000 (2,489,000) ----------- ------------- ------------ ----------- ----------- Effect of Exchange Rate Changes on Cash and Cash Equivalents........................... -- (25,000) 67,000 (22,000) (51,000) ----------- ------------- ------------ ----------- ----------- Net Increase (Decrease) in Cash and Cash Equivalents................................ 6,429,000 8,394,000 1,889,000 6,682,000 (1,627,000) Cash and Cash Equivalents, beginning of period..................................... 2,885,000 9,314,000 17,708,000 17,708,000 19,597,000 ----------- ------------- ------------ ----------- ----------- Cash and Cash Equivalents, end of period..... $ 9,314,000 $ 17,708,000 $ 19,597,000 $24,390,000 $17,970,000 =========== ============= ============ =========== ===========
The accompanying notes are an integral part of these consolidated statements. F-6 76 NETCOM SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. LINE OF BUSINESS Netcom Systems, Inc. and subsidiaries (the Company), is a leading provider of network performance analysis systems for network equipment manufacturers, network service providers and enterprises. The Company's flagship platform, SmartBits, analyzes networking equipment, including infrastructure and enterprise switches and routers, and broadband access devices, such as cable modems and xDSL devices, to determine performance, reliability, scalability, interoperability, quality of service and proof of service, before deployment on the network. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries Netcom Systems Europe S.A.R.L. and Netcom (Barbados) Limited, a Foreign Sales Corporation. All significant intercompany transactions and accounts have been eliminated. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. The Company's cash and cash equivalents balance, of which a significant portion exceeds federally insured limits at December 31, 1998, was on deposit with two financial institutions. INVESTMENTS The Company accounts for its investments under the provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." At December 31, 1998, short-term investments consisted of corporate commercial paper. As defined by the standard, the Company has classified its investments in these debt securities as "held-to-maturity" investments and all investments are recorded at their amortized cost basis, which approximated their fair value at December 31, 1998. All short-term investments mature by March 1999. CONCENTRATION OF CREDIT RISK During 1996, the Company had sales to two customers which represented 27 percent of sales. During 1997, the Company had sales to the same two customers which represented 22 percent of sales. At December 31, 1997, the two customers comprised 27 percent of accounts receivable. During 1998, the Company had sales to one of the customers which represented F-7 77 NETCOM SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 12 percent of sales. At December 31, 1998, there were no customers with an accounts receivable balance greater than 10 percent of total accounts receivable. INVENTORIES Inventories include costs of materials, labor and manufacturing overhead, and are stated at the lower of cost (first-in, first-out) or market. Inventories consisted of the following at December 31:
1997 1998 ---------- ---------- Raw materials............................................... $ 708,000 $ 893,000 Work-in-process............................................. 1,845,000 930,000 Finished goods.............................................. 332,000 853,000 ---------- ---------- $2,885,000 $2,676,000 ========== ==========
DEPRECIATION AND AMORTIZATION Property and equipment are stated at cost, less accumulated depreciation and amortization, which is computed on a straight-line basis over 1.5 to 7 years. Ordinary repairs and maintenance are charged to operations as incurred. Expenditures which extend the useful life of property and equipment are capitalized. When assets are sold or otherwise disposed of, the cost and related accumulated depreciation or amortization are removed from the accounts and any resulting gain or loss is included in operations. DEFERRED FINANCING COSTS Deferred financing costs are amortized over the life of the related debt and are presented net of accumulated amortization of $20,000 and $80,000 at December 31, 1997 and 1998, respectively. REVENUE RECOGNITION The Company realizes revenues from sales of hardware products, from the licensing of related software and from maintenance contracts. Revenues on product sales are recognized at the time of shipment, net of estimated allowances for product returns. Revenues related to software licenses and software maintenance are recognized in accordance with the American Institute of Certified Public Accountants (AICPA) Statement of Position No. 97-2, "Software Revenue Recognition." Post-contract support obligations are insignificant and are accrued for at the time of the sale. Maintenance revenues for customer support and software updates are deferred and recognized ratably over the term of the maintenance period (generally one year). FOREIGN CURRENCY TRANSLATION The functional currency of the Company's foreign subsidiaries is the local foreign currency. The Company translates the assets and liabilities of its foreign subsidiaries to U.S. dollars at the rates of exchange in effect at the end of the year. Revenues and expenses are translated at the average rates of exchange for the year. Translation adjustments and the effects of exchange rate changes on intercompany transactions of long-term investment nature, which are not significant, F-8 78 NETCOM SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) are included in stockholders' investment in the December 31, 1997 and 1998 consolidated balance sheets. Gains and losses resulting from foreign currency transactions denominated in a currency other than the functional currency are included in "other income (expense)" in the 1997 and 1998 statements of income and comprehensive income. SOFTWARE DEVELOPMENT COSTS In accordance with SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed," development costs related to software products are expensed as incurred until the technological feasibility of the product has been established. Technological feasibility in the Company's circumstances occurs when a working model is completed. After technological feasibility is established, additional costs would be capitalized. The Company believes its process for developing software is essentially completed concurrent with the establishment of technological feasibility, and, accordingly, no software development costs have been capitalized to date. OTHER FINANCIAL INSTRUMENTS The Company has entered into an interest-rate swap agreement to modify the interest characteristics of its outstanding long-term debt. An interest-rate swap agreement is determined by matching principal balance and terms with that of a specific debt obligation. Such an agreement involves the exchange of amounts based on a fixed interest rate for amounts based on variable interest rates over the life of the agreement without an exchange of the notional amount upon which payments are based. The differential to be paid or received as interest rates change is accrued and recognized as an adjustment of interest expense related to the debt (the accrual method of accounting). The related amount payable to or receivable from counterparties is included in accrued liabilities or other assets, respectively. WARRANTY The Company warrants its products against defects in materials and workmanship for a period of one year. The Company provides for estimated warranty costs when products are shipped. DEFERRED COMPENSATION During 1998, the Company recorded deferred compensation in the amount of $450,000, which related to the granting of employee stock options below fair market value. The deferred compensation will be amortized over five years (the vesting period of the options) using an accelerated method. COMPREHENSIVE INCOME During 1997 and 1998, "Other Comprehensive Income" related solely to foreign currency translation adjustments. During 1997 and 1998, translation gains (losses) net of tax, were $(25,000) and $67,000, respectively. Comprehensive income was $11,811,000, $22,771,000 and $18,649,000 in 1996, 1997 and 1998, respectively. Accumulated Other Comprehensive Income (Loss) as of December 31, 1997 and 1998 was $(25,000) and $42,000, respectively. F-9 79 NETCOM SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) STATEMENTS OF CASH FLOWS Cash paid for income taxes was $4,998,000, $12,315,000 and $10,935,000 in 1996, 1997 and 1998, respectively. Cash paid for interest was $977,000 and $3,310,000 in 1997 and 1998, respectively. There was no cash paid for interest in 1996. During 1997, the Company issued 100,000 shares of common stock in exchange for a note receivable in the amount of $600,000. In addition, $480,000 of the note receivable was reduced upon the repurchase of 80,000 shares of the common stock by the Company (see Note 3). Also in 1997, the Company received a $6,916,000 tax benefit from the exercise of non-qualified stock options and also accrued $1,002,000 of dividends relating to the Company's Class A redeemable preferred stock. In 1998, the Company received an $860,000 tax benefit from the exercise of non-qualified stock options, accrued $3,059,000 of dividends relating to the Company's Class A redeemable preferred stock and recorded $450,000 of deferred compensation. These non-cash transactions are excluded from the 1997 and 1998 statements of cash flows. STOCK BASED COMPENSATION The Company adopted SFAS No. 123, "Accounting for Stock Based Compensation" (SFAS 123) in 1997. As allowed by SFAS 123, the Company has elected to continue to measure compensation cost under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and comply with the pro forma disclosure requirements of the new standard (see Note 12). RECLASSIFICATIONS Certain reclassifications have been made to prior year's amounts to conform to the current year presentation. RECENT ACCOUNTING PRONOUNCEMENTS In March 1998 and December 1998, the American Institute of Certified Public Accounts (AICPA) issued Statements of Position (SOP) 98-4 and 98-9, "Software Revenue Recognition," which provide guidance on applying generally accepted accounting principles in recognizing revenue on software transactions. SOP 98-4 is effective for the Company's year ending December 1999. SOP 98-9 is effective for the Company's year ending December 2000. Earlier application is encouraged as of the beginning of the year or interim periods for which financial statements or information have not been issued. Retroactive application of the provisions of this SOP is prohibited. The Company has assessed the provisions of SOP 98-4 and 98-9 and does not expect that adoption will have a material impact on its financial statements. In March 1998, the AICPA issued SOP 98-1, "Software for Internal Use," which provides guidance in accounting for the costs of computer software developed or obtained for internal use. SOP 98-1 is effective for the Company's year ending December 31, 1999. The Company does not expect the adoption of SOP 98-1 to have a material impact on its financial statements. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). The Company is required to adopt SFAS 133 on January 1, 2000. SFAS 133 established methods for accounting for derivative financial instruments and hedging F-10 80 NETCOM SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) activities related to those instruments as well as other hedging activities. The Company has not yet determined what the effect of SFAS 133 will be on its financial statements. NET INCOME PER COMMON SHARE The Company adopted SFAS No. 128, "Earnings per Share" (EPS) in 1997. The statement requires presentation of basic EPS, which is computed by dividing reported earnings available to common shareholders by the weighted average shares outstanding. SFAS No. 128 also requires the calculation of diluted EPS, which is similar to basic EPS except that the numerator is reduced by income attributed to preferred shareholders and the denominator is increased for the assumed conversion of common share equivalents. The following schedule summarizes the information used to compute historical basic and diluted net income per common and common equivalent share for the years ended December 31, 1996, 1997 and 1998, and for the unaudited three month periods ended March 31, 1998 and 1999 (in thousands, except per share data):
THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, ----------------------------- ---------------- 1996 1997 1998 1998 1999 ------- -------- -------- ------- ------ Net income.................................. $11,811 $ 22,796 $ 18,582 $ 5,648 $4,041 Less: preferred stock dividends............. -- (1,002) (3,059) (735) (784) ------- -------- -------- ------- ------ Net income applicable to common shares...... $11,811 $ 21,794 $ 15,523 $ 4,913 $3,257 ======= ======== ======== ======= ====== Weighted average number of common shares used to compute basic net income per common share.............................. 10,940 8,075 2,702 2,559 2,784 Dilutive effect of stock options............ 1,179 2,069 3,936 3,602 4,647 Dilutive effect of convertible preferred stock..................................... -- 7,844 22,904 22,903 22,904 ------- -------- -------- ------- ------ Weighted average number of common shares used to compute diluted net income per common and common equivalent share........ 13,299 17,988 29,542 29,064 30,335 ======= ======== ======== ======= ====== Basic net income per common share........... $ 1.08 $ 2.70 $ 5.74 $ 1.92 $ 1.17 ======= ======== ======== ======= ====== Diluted net income per common and common equivalent share.......................... $ 0.89 $ 1.27 $ 0.63 $ 0.19 $ 0.13 ======= ======== ======== ======= ======
3. RECAPITALIZATION On August 29, 1997, the Company, its common stockholders (the Sellers) and certain investors (the Purchasers) entered into a Recapitalization Agreement (the Recapitalization) pursuant to which the Company reconstituted its capital structure through the sale of certain newly issued equity securities, the establishment of senior debt obligations and the repurchase of certain of its outstanding common shares. The Recapitalization was accomplished as a result of three related transactions, which are summarized as follows: 1. The Investment. Subject to the terms and conditions of the Recapitalization Agreement, the Purchasers invested an aggregate of $97,037,000 in exchange for an aggregate of 485,184 shares of Class A redeemable preferred stock, $0.001 par value (redeemable F-11 81 NETCOM SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. RECAPITALIZATION (CONTINUED) preferred), and an aggregate of 22,903,436 shares of Class B convertible preferred stock, $0.001 par value (convertible preferred). The per share purchase prices of the redeemable preferred and convertible preferred sold in the Recapitalization were $100.00 and $2.12, respectively. Immediately following the closing of the Recapitalization, the Purchasers held approximately 78.9 percent of the voting equity securities of the Company on a fully diluted basis (i.e. approximately 78.9 percent of the total number of outstanding shares together with shares issuable upon exercise of outstanding options). In connection with the Investment, the Company incurred $5,715,000 of directly related costs, which have been recorded as a charge to "Retained Deficit" in the accompanying December 31, 1997 consolidated financial statements. The total net proceeds from the sale of the redeemable preferred and the convertible preferred was $91,322,000. See Note 6 for details relating to the redeemable preferred and convertible preferred. 2. The Senior Credit Facility. The Company entered into a credit agreement with two banks pursuant to which the Company borrowed $50,000,000 through a term loan facility and obtained a commitment for a $10,000,000 revolving line of credit. See Note 5 for details relating to the credit facility. 3. The Redemption. Subject to the terms and conditions of the Recapitalization Agreement, the Company purchased 80 percent of the outstanding shares of common stock held by each stockholder of the Company (including shares issued upon exercise of vested stock options) at the approximate price of $15.29 per share. Immediately prior to the Recapitalization, the Company had 11,060,000 shares of common stock outstanding and approximately 1,709,000 shares relating to outstanding vested stock options. The total aggregate number of common shares repurchased by the Company (after the exercise of stock options) was 10,215,642 and the total aggregate cash paid by the Company to the stockholders was $155,722,000. As part of the redemption, the Company also reduced the outstanding amount of a $600,000 note receivable due from a stockholder by $480,000. Following the closing of the Recapitalization, the Company's common stock (through an independent appraisal approved by the Company's board of directors) was valued at $1.50 per share. 4. ACQUISITION OF NETCOM SYSTEMS EUROPE S.A.R.L. Effective September 15, 1997, the Company acquired all of the outstanding common shares of Netcom Systems Europe S.A.R.L. (NSE), a research and development, sales and distribution company located near Paris, France. On the date of acquisition, NSE was owned by two brothers of a Company stockholder and then president. The purchase price was $3,000,000, plus $142,000 of directly related costs. The Company has accounted for the acquisition using the purchase method, and the results of operations of the acquired business are included in the Company's operations since acquisition. Because the acquired company was a related entity, the Company has recorded any premium paid in the transaction ($1,987,000) as an increase to retained deficit in the accompanying 1997 financial statements. F-12 82 NETCOM SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. ACQUISITION OF NETCOM SYSTEMS EUROPE S.A.R.L. (CONTINUED) The following is a summary of the purchase price allocation: Current assets and other tangible assets.................... $1,755,000 Current liabilities assumed................................. (600,000) ---------- Net assets acquired......................................... 1,155,000 Purchase price.............................................. 3,142,000 ---------- Charge to retained deficit.................................. $1,987,000 ==========
5. CREDIT FACILITY In August 1997, in connection with the Recapitalization, the Company entered into a credit agreement with two banks pursuant to which the Company borrowed $50,000,000 under a term loan facility and also received a commitment for a $10,000,000 revolving line of credit. Both the term loan and the line of credit are unsecured and mature in August 2002. The line of credit facility also contains a $2,000,000 letter of credit subfacility. During 1998, the commitment on the line of credit was reduced to $2,000,000. Borrowings under both the term loan and the line of credit bear interest, at the Company's election, at the "Base Rate" or the "LIBOR Rate." Interest is payable quarterly. The Base Rate is the higher of (a) the prime rate or (b) the federal funds overnight rate plus 0.5 percent per year. The LIBOR Rate is a per annum rate of 30, 60, 90 or 180 days LIBOR, plus a margin based on the Company's leverage ratio, ranging from 0.875 percent to 1.5 percent per year. Through December 31, 1998, the Company has selected the LIBOR Rate. However, the Company has an interest rate swap agreement with the banks that results in the Company paying a fixed rate of 6.11 percent on $25,000,000 of the outstanding balance through October 5, 1999. At December 31, 1998, the interest rate in effect on the $22,500,000 remaining outstanding balance was 6.35 percent through June 2, 1999. The term loan is due and payable in quarterly installments beginning on October 31, 1998. The amount of the installments will initially be $2,500,000 per quarter, rising to $5,000,000 per quarter on April 30, 2002. The credit agreement contains certain financial and negative covenants, all of which the Company was in compliance with at December 31, 1998. At December 31, 1998, $47,500,000 was outstanding on the term loan and no amount was outstanding on the line of credit. Future principal maturities under the term loan facility at December 31, 1998 are as follows: 1999........................................................ $10,000,000 2000........................................................ 10,000,000 2001........................................................ 10,000,000 2002........................................................ 17,500,000 ----------- $47,500,000 ===========
In April 1999, the credit agreement was amended so that if the Company was to repay its Class A redeemable preferred stock obligations from proceeds of a public offering of its common stock, then an additional $10,000,000 would become due on the term loan in 1999 thereby making 1999 principal maturities $20,000,000. F-13 83 NETCOM SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. PREFERRED STOCK CLASS A REDEEMABLE PREFERRED STOCK In August 1997, in connection with the Recapitalization, the Company sold 485,184 shares of Class A redeemable preferred stock (redeemable preferred) at the price of $100 per share. The redeemable preferred accrues a preferential dividend at the rate of 6 percent per annum of the original purchase price and has a liquidation value of $100 per share, plus all accrued but unpaid dividends. The Company is required to redeem the stock in three equal annual installments beginning September 2002 at the liquidation value. In addition, all shares of redeemable preferred will be redeemed by the Company in the event that a change in control or certain events related to the Company's solvency occur. The Company may voluntarily redeem shares of the redeemable preferred at any time. The per share price for any redemption of shares of redeemable preferred will be equal to the original per share purchase price plus an amount equal to all accrued but unpaid dividends thereon. Except for certain protective provisions and as otherwise required by law, the shares of redeemable preferred will have no voting rights. If the Company issues securities in a public offering registered with the Securities and Exchange Commission and does not redeem all shares of redeemable preferred with the proceeds thereof, the dividend rate on the redeemable preferred will increase by an increment of 1.5 percent thirty days following such issuance and will increase by an additional 1.5 percent at the end of each successive 90 day period (up to a maximum of 12 percent) until the redeemable preferred is redeemed in full. Although the redeemable preferred dividends will accrue if not paid, the dividends of the redeemable preferred will be paid only when and as declared by the Company's board of directors. No dividend on any other class or series of stock may be paid until all accrued dividends on the redeemable preferred have been paid. During 1997 and 1998, $1,002,000 and $3,059,000 of dividends, respectively, were accrued on the redeemable preferred, none of which has been declared by the Company's board of directors. CLASS B CONVERTIBLE PREFERRED STOCK Also in August 1997, and in connection with the Recapitalization, the Company sold 22,903,436 shares of Class B convertible preferred stock (convertible preferred) at the approximate price of $2.12 per share. Holders of convertible preferred will be entitled to dividends when and as declared by the Company's board of directors. In addition, in the event the Company declares a dividend on its common stock, holders of convertible preferred will be entitled to a simultaneous dividend in an amount equal to the dividend they would have received had they converted their convertible preferred to common stock immediately prior to the record date for the dividend. Upon any liquidation, dissolution or winding up of the Company, each holder of convertible preferred will be entitled to be paid, before any payment is made on any other class or series of capital stock (other than redeemable preferred), an amount equal to the greater of (a) the original purchase price of the convertible preferred plus all declared but unpaid dividends thereon or (b) the amount which such holder would have received had all shares of convertible preferred been converted to common stock immediately prior to such liquidation, dissolution or winding up. At the option of the holders of at least 66.7 percent of the outstanding shares of convertible preferred following the occurrence of a change in control of the Company or certain events related to the Company's solvency, the Company must redeem all shares of convertible preferred. F-14 84 NETCOM SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. PREFERRED STOCK (CONTINUED) The per share price for any redemption of shares of convertible preferred will be equal to the original per share purchase price plus an amount equal to all declared but unpaid dividends thereon. The convertible preferred may be converted into common stock at any time by the holders thereof. In addition, each share of convertible preferred will automatically be converted into common stock upon the election of the holders of at least 66.7 percent of the outstanding shares of convertible preferred or upon the closing of a firm commitment underwritten public offering of common stock pursuant to an effective registration statement under the Securities Act of 1933, as amended (the Securities Act), in which (a) the aggregate price paid by the public is at least $75,000,000, (b) the price per share paid by the public for such shares is at least 300 percent of the original purchase price of the convertible preferred (as adjusted for certain dilutive issuances, subdivision or combination of the common stock, recapitalizations and the like) and (c) all of the shares of the redeemable preferred are redeemed with the proceeds of such offering. Each share of convertible preferred will initially be convertible into one share of common stock, subject to adjustment for certain dilutive issuances, subdivision or combination of the common stock, recapitalizations and the like. 7. COMMON STOCK In January 1997, the Company increased the authorized number of its common shares to 60,000,000 and effected a two-for-one stock split of its common stock. In September 1997, the Company amended its Articles of Incorporation to increase the number of authorized shares of its common stock to 100,000,000. In May 1998, the Company's board of directors approved an additional two-for-one stock split of its common stock. Also in May 1998, the Company's board of directors approved the Company's reincorporation in the State of Delaware, and the subsequent amendment to the certificate of incorporation, the effects of which have been reflected in these financial statements. In September 1998, the Company effected a two-for-one reverse stock split of its common stock and reduced the authorized shares to 50,000,000. All shares of common stock and common stock options included in these financial statements have been restated to give retroactive effect to the stock splits for all periods presented. In March 1997, the Company sold 100,000 shares of its common stock at a price of $6.00 per share in exchange for a note receivable in the amount of $600,000. In connection with the Recapitalization, $480,000 of the note receivable was reduced upon the repurchase of 80,000 shares of the common stock by the Company. During 1998, the remaining balance of $120,000 was repaid. 8. INCOME TAXES The Company accounts for income taxes under the provisions of SFAS 109, "Accounting for Income Taxes." Under SFAS 109, deferred income tax assets or liabilities are computed based on the temporary difference between the financial statement and income tax bases of assets and liabilities using the current enacted marginal income tax rate. Deferred income tax expenses or credits are based on the changes in the deferred income tax assets or liabilities from period to period. F-15 85 NETCOM SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. INCOME TAXES (CONTINUED) The provision for income taxes for the years ended December 31, 1996, 1997 and 1998 is as follows:
1996 1997 1998 ---------- ----------- ----------- Current: Federal........................................ $6,956,000 $12,175,000 $ 9,770,000 State.......................................... 1,855,000 3,332,000 2,536,000 Foreign........................................ -- -- 186,000 ---------- ----------- ----------- 8,811,000 15,507,000 12,492,000 Deferred......................................... (669,000) (632,000) (935,000) ---------- ----------- ----------- Provision for income taxes....................... $8,142,000 $14,875,000 $11,557,000 ========== =========== ===========
Differences between the provision for income taxes and income taxes at the statutory federal income tax rate for the years ended December 31, 1996, 1997 and 1998 are as follows (in thousands):
1996 1997 1998 ------------- -------------- -------------- Income tax at statutory federal rate...... $6,984 35.0% $13,185 35.0% $10,549 35.0% State income taxes, net of federal benefit................................. 1,175 5.9 2,145 5.7 1,616 5.4 Foreign taxes at rates less than domestic................................ -- -- -- (28) -- Research credits.......................... (50) (0.3) (480) (1.3) (300) (1.0) Foreign sales corporation tax benefit..... -- -- -- -- (297) (1.0) Other items, net.......................... 33 0.2 25 0.1 17 -- ------ ---- ------- ---- ------- ---- $8,142 40.8% $14,875 39.5% $11,557 38.4% ====== ==== ======= ==== ======= ====
During 1997, the Company recorded pre-tax income from U.S. operations in the amount of $37,866,000 and a pre-tax loss from foreign operations in the amount of $195,000. Consequently, there was no income tax liability relating to foreign operations as of December 31, 1997. During 1998, the Company recorded pre-tax income from U.S. operations in the amount of $29,597,000 and pre-tax income from foreign operations in the amount of $542,000. The Company does not provide U.S. federal income taxes on the undistributed earnings of its foreign operations. The Company's policy is to leave the income permanently invested in the country of origin. Such amounts will only be distributed to the United States to the extent any federal income tax can be fully offset by foreign tax credits. F-16 86 NETCOM SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. INCOME TAXES (CONTINUED) A detail of the Company's net deferred tax asset as of December 31, 1997 and 1998 is as follows:
1997 1998 ---------- ---------- Accrued vacation............................................ $ 119,000 $ 153,000 State taxes................................................. 595,000 844,000 Depreciation................................................ (21,000) -- Allowance for doubtful accounts............................. 144,000 277,000 Inventory reserve........................................... 139,000 477,000 Accrued warranty............................................ 41,000 123,000 Deferred revenue............................................ 186,000 206,000 Other....................................................... 21,000 148,000 ---------- ---------- Total current deferred asset........................... 1,224,000 2,228,000 Net operating loss carryforward............................. 247,000 178,000 ---------- ---------- $1,471,000 $2,406,000 ========== ==========
At December 31, 1997, the Company had a federal net operating loss carryforward (NOL) of approximately $700,000, which was primarily due to the timing of the Company's changing of its year-end from July 31 to December 31 (which was effective in December 1997) and the significant tax benefit of $6,916,000 it received from the exercise of stock options during the period from July 31, 1997 to December 31, 1997. Due to the income tax laws relating to the changing of year-ends, the Company can realize the NOL over a six year period. At December 31, 1998, the NOL carryforward was approximately $509,000. Under SFAS 109, deferred tax assets may be recognized for temporary differences that will result in deductible amounts in future periods and for loss carryforwards. A valuation allowance is recognized if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized. The Company has not recorded a valuation allowance as of December 31, 1997 or 1998. F-17 87 NETCOM SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. GEOGRAPHIC INFORMATION The Company markets and sells its products from its operations in the United States and France. Direct sales in Europe are primarily to customers in France and The United Kingdom. Information regarding operations in different countries is as follows (revenues are attributed to countries based on location of customer):
1996 1997 1998 ----------- ----------- ----------- Revenues: United States................................. $22,863,000 $41,596,000 $54,735,000 Japan......................................... 1,268,000 4,181,000 4,408,000 Canada........................................ 210,000 2,330,000 2,983,000 United Kingdom................................ 381,000 1,599,000 2,767,000 Taiwan........................................ 777,000 2,563,000 2,755,000 Other foreign countries....................... 1,955,000 4,004,000 5,826,000 ----------- ----------- ----------- Total................................. $27,454,000 $56,273,000 $73,474,000 =========== =========== =========== Property and equipment: United States................................. $ 491,000 $ 1,553,000 $ 3,203,000 France........................................ -- 131,000 461,000 ----------- ----------- ----------- Total................................. $ 491,000 $ 1,684,000 $ 3,664,000 =========== =========== ===========
10. COMMITMENTS AND CONTINGENCIES LEASE COMMITMENTS The Company leases its primary facility and sales and distribution offices under noncancellable leases accounted for as operating leases expiring at various dates through August 2002. The Company leases its primary facility from a stockholder of its common stock (see Note 11). Total rental expense under all operating leases was $155,000, $405,000 and $490,000 in 1996, 1997 and 1998, respectively. During 1998, the Company entered into a 10 year lease agreement for a new primary facility. The agreement calls for average monthly rental payments of approximately $84,000. The Company expects the agreement to become effective beginning May 1999. In connection with the lease agreement, the Company has purchase commitments relating to tenant improvements for the new facility in the approximate amount of $3,500,000 and purchase commitments for machinery and office equipment in the approximate amount of $1,000,000. In January 1999, the Company entered into a letter of credit agreement with a bank to guarantee payment of the tenant improvements. The Company has pledged $3,500,000 of its short-term investments as security against the agreement. The credit agreement is expected to expire in July 1999. F-18 88 NETCOM SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. COMMITMENTS AND CONTINGENCIES (CONTINUED) Minimum commitments under existing operating leases are as follows:
YEARS ENDING DECEMBER 31, ------------------------- 1999........................................................ $ 1,061,000 2000........................................................ 1,368,000 2001........................................................ 1,421,000 2002........................................................ 1,293,000 2003........................................................ 969,000 Thereafter.................................................. 5,722,000 ----------- $11,834,000 ===========
CHANGE-IN-CONTROL AGREEMENTS In May 1998, the Company entered into Change-in-Control Agreements with each of its executive officers. Such agreements provide that if the executive officer's employment with the Company is involuntarily terminated at any time within twenty-four months after a change in control other than for cause (each as defined therein), then the executive officer shall be entitled to receive a severance payment equal to one year of the executive officer's base compensation for the Company's fiscal year then in effect, plus the executive officer's bonus calculated at one hundred percent of target for the Company's fiscal year then in effect. 11. RELATED PARTY TRANSACTIONS During 1996 and 1997 (through the acquisition date of NSE), the Company had sales of $953,000 and $3,109,000 to NSE. On March 27, 1997, the Company sold shares of its common stock to the lessor of its primary facility. In August 1997, the Company entered into a new five year lease agreement with the lessor. The initial monthly base rent under the agreement is $37,440, with provisions for increasing monthly payments at various stages during the lease term. Rent under the lease agreements from March 27, 1997 through December 31, 1997 was approximately $342,000 and in 1998 was approximately $449,000. 12. STOCK BASED COMPENSATION PLANS STOCK OPTION PLANS The Company has three stock option plans (the 1993 Stock Plan, the amended and restated 1997 Stock Plan and the 1998 Stock Plan) under which the Company is authorized to issue incentive and non-qualified stock options to its directors, officers, employees and consultants totaling up to approximately 9,882,000 shares of common stock. Options are generally granted at exercise prices not less than the fair market value on the date of grant and expire ten years after the date of grant. Options granted under these plans generally vest over a five year period. Following the Recapitalization, all options with exercise prices above $1.50 per share (options representing 2,235,000 shares) were cancelled and regranted at the exercise price of $1.50 per share (the newly established fair market value of the Company's common stock). F-19 89 NETCOM SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. STOCK BASED COMPENSATION PLANS (CONTINUED) The following summarizes option activity for 1996, 1997 and 1998 (in thousands, except exercise price data):
1996 1997 1998 ------------------ ------------------ ------------------ WTD. AVG. WTD. AVG. WTD. AVG. FIXED OPTIONS SHARES EX. PRICE SHARES EX. PRICE SHARES EX. PRICE ------------- ------ --------- ------ --------- ------ --------- Outstanding at beginning of year....... 2,100 $1.52 3,922 $2.16 4,694 $ 1.44 Granted................................ 1,822 2.88 4,703 2.04 2,211 4.98 Exercised.............................. -- -- (1,683) 1.28 (251) 1.16 Cancelled.............................. -- -- (2,248) 3.90 (449) 10.00 ----- ----- ------ ----- ----- ------ Outstanding at year-end................ 3,922 $2.16 4,694 $1.44 6,205 $ 2.10 ===== ===== ====== ===== ===== ====== Options exercisable at year-end........ 410 $0.38 103 $1.42 874 $ 1.32 ===== ===== ====== ===== ===== ====== Weighted average fair value of options granted during the year.............. $0.16 $0.56 $ 1.02 ===== ===== ======
The following table summarizes information about the options outstanding at December 31, 1998:
NUMBER OF SHARES WEIGHTED AVERAGE NUMBER OF SHARES RANGE OF OUTSTANDING AT REMAINING EXERCISABLE AT EXERCISE PRICES DECEMBER 31, 1998 CONTRACTUAL LIFE DECEMBER 31, 1998 --------------- ----------------- ---------------- ----------------- $0.05 - 0.10.................... 67,000 6.3 67,000 0.38 - 0.50.................... 53,000 6.3 10,000 1.25.................... 479,000 7.2 226,000 1.50.................... 3,806,000 8.7 571,000 2.00.................... 1,172,000 9.0 -- 3.00 - 4.50.................... 147,000 9.3 -- 7.50.................... 502,000 9.6 -- --------- ------- 6,226,000 874,000 ========= =======
As permitted by SFAS 123, the Company continues to apply the accounting rules of APB 25 governing the recognition of compensation expense from its Stock Option Plans. Such accounting rules measure compensation expense on the first date at which both the number of shares and the exercise price are known. Under the Company's plans, this would typically be the grant date. To the extent that the exercise price equals or exceeds the market value of the stock on the grant date, no expense is recognized. As options are generally granted at exercise prices not less than the fair market value on the date of grant, no compensation expense is recognized under this accounting treatment in the accompanying statements of income and comprehensive income. However, under the provisions of SFAS 123, options (and other equity instruments) granted to non-employees are excluded from the pro forma disclosure requirements and must be recorded as compensation expense at fair value in the accompanying statements of income. During the year ended December 31, 1997, the fair value of options granted to non-employees, which was charged to compensation expense in the accompanying statements of income and comprehensive income, was $15,000. Had the Company applied the fair value based method of accounting, F-20 90 NETCOM SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. STOCK BASED COMPENSATION PLANS (CONTINUED) which is not required, to all grants of options, under SFAS 123, the Company's net income would have been decreased by the following pro forma amounts:
1996 1997 1998 ----------- ----------- ----------- Net income -- as reported....................... $11,811,000 $22,796,000 $18,582,000 Net income -- pro forma......................... $11,737,000 $22,139,000 $17,589,000
These pro forma amounts were determined by estimating the fair value of each option on its grant date using the Black-Scholes option-pricing model. Assumptions of 5.5 percent to 6.6 percent for risk free interest rate, five years for expected life and no expected dividends or volatility were applied to all grants for each year presented. EMPLOYEE STOCK PURCHASE PLAN The Company's 1998 Employee Stock Purchase Plan (the "1998 Purchase Plan") was approved by the board of directors in May 1998. A total of 150,000 shares of common stock has been reserved for issuance under the 1998 Purchase Plan. No shares have been issued under this plan. 13. EMPLOYEE SAVINGS PLAN In 1997, the Company established an employee 401(k) savings plan covering all eligible employees. The Company's contributions to the plan for 1997 and 1998 were $45,000 and $275,000, respectively. 14. UNAUDITED INFORMATION INTERIM FINANCIAL INFORMATION The unaudited financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information presented not misleading. These unaudited financial statements reflect, in the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to fairly present the results of operations, changes in cash flows and financial position as of and for the periods presented. These unaudited financial statements should be read in conjunction with the audited financial statements and related notes, thereto. The results for the interim presented are not necessarily indicative of results to be expected for a full year. PRO FORMA BALANCE SHEET PRESENTATION Under the terms of the Company's agreements with the holders of the Class B convertible preferred stock (see Note 6), all of such preferred stock will be converted automatically into shares of common stock upon the closing of an initial public offering of the Company's common stock, meeting specified requirements. The unaudited pro forma information at March 31, 1999 reflects the conversion of the Class B convertible preferred stock into 22,903,436 shares of common stock as if the conversion occurred on March 31, 1999. F-21 91 NETCOM SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 14. UNAUDITED INFORMATION (CONTINUED) PRO FORMA NET INCOME PER COMMON SHARE Unaudited pro forma net income per common and common equivalent share for the year ended December 31, 1998 and for the three month period ended March 31, 1999, was based on the weighted average number of common and common equivalent shares outstanding during the period. The unaudited pro forma weighted average number of common shares used to compute basic net income per common share assumes that all of the Class B convertible preferred stock had been converted to common stock as of the original issuance date (August 29, 1997). The unaudited pro forma weighted average number of common shares used to compute diluted net income per common share also includes shares issuable upon the assumed exercise of stock options, computed in accordance with the treasury stock method. The following schedule summarizes the information used to compute pro forma basic and diluted net income per common and common equivalent share for the year ended December 31, 1998 and the three month period ended March 31, 1999 (in thousands, except per share data):
1998 1999 ------- ------- Net income.................................................. $18,582 $ 4,041 ======= ======= Pro forma weighted average number of common shares used to compute basic net income per common share................. 25,606 25,688 Dilutive effect of stock options............................ 3,936 4,647 ------- ------- Pro forma weighted average number of common shares used to compute diluted net income per common share............... 29,542 30,335 ======= ======= Basic net income per common share........................... $ 0.73 $ 0.16 ======= ======= Diluted net income per common share......................... $ 0.63 $ 0.13 ======= =======
STOCK BASED COMPENSATION PLANS The following summarizes option activity for the three month period ended March 31, 1999:
SHARES WEIGHTED AVERAGE FIXED OPTIONS (IN THOUSANDS) EXERCISE PRICE ------------- -------------- ---------------- Outstanding at beginning of period......................... 6,205 $2.10 Granted.................................................. 626 7.50 Exercised................................................ (7) 1.58 Canceled................................................. (60) 3.73 ----- ----- Outstanding at end of period............................... 6,764 $2.57 ===== ===== Options exercisable at end of period....................... 1,891 $1.52 ===== ===== Weighted average fair value of options granted during the period................................................... $1.78 =====
F-22 92 NETCOM SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 14. UNAUDITED INFORMATION (CONTINUED) During the three month period ended March 31, 1999, the Company continued to apply the accounting rules of APB 25. Had the Company applied the fair value based method of accounting to all grants of option, under SFAS 123, the Company's net income would have been decreased by the following pro forma amount: Net income -- as reported................................... $4,041,000 Net income -- pro forma..................................... $3,804,000
The pro forma amount was determined by estimating the fair value of each option on its grant date using the Black-Scholes option-pricing model. Assumptions of 6.5 percent for risk free interest rate, five years for expected life and no expected dividends or volatility were applied to all grants for the period presented. COMPREHENSIVE INCOME During the three month period ended March 31, 1999, "Other Comprehensive Income" related solely to foreign currency translated adjustments. During the period, translation losses, net of tax, were $51,000. Comprehensive income was $3,990,000 during the period. "Accumulated Other Comprehensive Loss" as of March 31, 1999 was $9,000. SUPPLEMENTAL CASH FLOW INFORMATION There was no cash paid for income taxes during the three month period ended March 31, 1998. Cash paid for income taxes was $857,000 during the three month period ended March 31, 1999. Cash paid for interest during the three month period ended March 31, 1998 was $773,000. Cash paid for interest during the three month period ended March 31, 1999 was $409,000. During the three month period ended March 31, 1999, the Company recorded deferred compensation in the amount of $960,000. This non-cash transaction is excluded from the March 31, 1999 statement of cash flows. DEFERRED COMPENSATION During the three month period ended March 31, 1999, the Company recorded deferred compensation in the amount of $960,000, which related to the granting of employee stock options below fair market value. Amortization relating to deferred compensation was $133,000 during the period. COMMON STOCK In April 1999, the Company recorded compensation in the amount of $272,000, which related to the issuance of 22,000 shares of its common stock to a consultant for past services performed. The compensation was recorded based on the fair value of the shares on the date of issuance. In May 1999, the Company's board of directors approved an increase of the authorized shares of the Company's common stock to 200,000,000. F-23 93 - ------------------------------------------------------ - ------------------------------------------------------ YOU MAY RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS PROSPECTUS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR THE SALE OF COMMON STOCK MEANS THAT INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AFTER THE DATE OF THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THESE SHARES OF COMMON STOCK IN ANY CIRCUMSTANCES UNDER WHICH THE OFFER OR SOLICITATION IS UNLAWFUL. ------------------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary.................... 3 Risk Factors.......................... 6 Forward-Looking Statements............ 16 Use of Proceeds....................... 17 Dividend Policy....................... 17 Capitalization........................ 18 Dilution.............................. 19 Selected Consolidated Financial Data................................ 20 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 21 Business.............................. 32 Management............................ 46 Certain Transactions.................. 58 Principal Stockholders................ 60 Description of Capital Stock.......... 62 Shares Eligible for Future Sale....... 64 Underwriting.......................... 66 Legal Matters......................... 68 Experts............................... 68 Where You Can Find More Information......................... 68 Index to Consolidated Financial Statements.......................... F-1 - -------------------------------------------- DEALER PROSPECTUS DELIVERY OBLIGATION: UNTIL , 1999 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS THAT BUY, SELL OR TRADE IN THESE SHARES OF COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN UNDERWRITER AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. - -------------------------------------------- - --------------------------------------------
- ------------------------------------------------------ - ------------------------------------------------------ SHARES [LOGO] COMMON STOCK ------------------------- PROSPECTUS ------------------------- BT ALEX. BROWN DAIN RAUSCHER WESSELS A DIVISION OF DAIN RAUSCHER INCORPORATED NATIONSBANC MONTGOMERY SECURITIES LLC THOMAS WEISEL PARTNERS LLC , 1999 - ------------------------------------------------------ - ------------------------------------------------------ 94 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by Netcom Systems in connection with the sale of common stock being registered. All amounts are estimates except the registration fee, the NASD filing fee and the Nasdaq National Market System listing fee.
AMOUNT TO BE PAID ---------- Registration Fee............................................ $ 23,978 NASD Filing Fee............................................. 9,125 The Nasdaq National Market System Listing Fee............... 100,000 Printing.................................................... 125,000 Legal Fees and Expenses..................................... 250,000 Accounting Fees and Expenses................................ 125,000 Registrar and Transfer Agent Fees........................... 10,000 Miscellaneous............................................... 56,897 -------- Total............................................. $700,000 ========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the Delaware General Corporation Law permits a corporation to include in its charter documents, and in agreements between the corporation and its directors and officers, provisions expanding the scope of indemnification beyond that specifically provided by the current law. Article VII of the Registrant's Certificate of Incorporation provides for the indemnification of directors to the fullest extent permissible under Delaware law. Article VI of the Registrant's bylaws provides for the indemnification of officers, directors and third parties acting on behalf of the corporation if such person acted in good faith and in a manner reasonably believed to be in and not opposed to the best interest of the corporation, and, with respect to any criminal action or proceeding, the indemnified party had no reason to believe his conduct was unlawful. The Registrant has entered into indemnification agreements with its directors and executive officers, in addition to indemnification provided for in the Registrant's bylaws, and intends to enter into indemnification agreements with any new directors and executive officers in the future. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES (a) During the three years prior to the date hereof, the Registrant has issued and sold the following unregistered securities: (1) On July 10, 1996, the Registrant sold 39,500 shares of common stock to one investor in consideration of services rendered. (2) On January 16, 1997, the Registrant effected a 2-for-1 stock split of its common stock for no consideration. (3) On March 26, 1997, the Registrant sold 100,000 shares of common stock to one investor at a per share purchase price of $6.00. II-1 95 (4) On August 27, 1997, the Registrant sold 1,367,646 shares upon the exercise of options at prices ranging from $0.05 per share to $1.50 per share. (5) On August 29, 1997, the Registrant sold 482,684 shares of Class A Redeemable Preferred Stock, which will be redeemed upon the closing of this offering, to 12 investors at a price of $100.00 per share, payable in cash. (6) On August 29, 1997, the Registrant sold 22,785,424 shares of Class B Convertible Preferred Stock, which will automatically convert to common stock upon the closing of this offering, to 12 investors at an as-converted price of $2.1184 per share, payable in cash. (7) On September 10, 1997, the Registrant sold 2,500 shares of Class A Redeemable Preferred Stock, which will be redeemed upon the closing of this offering, to one investor at a price of $100.00 per share, payable in cash. (8) On September 10, 1997, the Registrant sold 118,013 shares of Class B Convertible Preferred Stock, which will automatically convert to common stock upon the closing of this offering, to one investors at an as-converted price of $2.1184 per share, payable in cash. (9) On October 13, 1997, the Registrant sold 33,333 shares upon the exercise of options at prices ranging from $1.25 to $1.50 per share. (10) On October 16, 1997, the Registrant sold 534 shares upon the exercise of options at a price of $1.25 per share. (11) On October 17, 1997, the Registrant sold 21,067 shares upon the exercise of options at prices ranging from $0.05 to $1.50 per share. (12) On October 20, 1997, the Registrant sold 34,785 shares upon the exercise of options at prices ranging from $0.10 to $1.50 per share. (13) On October 21, 1997, the Registrant sold 24,347 shares upon the exercise of options at prices ranging from $0.05 to $1.50. (14) On October 22, 1997, the Registrant sold 800 shares upon the exercise of options at a price of $1.50 per share. (15) On October 23, 1997, the Registrant sold 20,000 shares upon the exercise of options at a price of $1.25 per share. (16) On October 27, 1997, the Registrant sold 17,190 shares upon the exercise of options at a price of $1.50 per share. (17) On October 28, 1997, the Registrant sold 6,000 shares upon the exercise of options at a price of $0.50 per share. (18) On November 17, 1997, the Registrant sold 2,000 shares upon the exercise of options at a price of $1.50 per share. (19) On November 20, 1997, the Registrant sold 1,334 shares upon the exercise of options at a price of $1.25 per share. (20) On January 7, 1998, the Registrant sold 33,333 shares upon the exercise of options at a price of $0.375 per share. (21) On May 5, 1998, the Registrant sold 150,000 shares upon the exercise of options at a price of $1.50 per share. (22) On May 11, 1998, the Registrant sold 66,666 shares upon the exercise of options at a price of $0.375 per share. II-2 96 (23) On June 4, 1998, the Registrant sold 800 shares upon the exercise of options at a price of $1.50 per share. (24) On January 6, 1999, the Registrant sold 6,000 shares upon the exercise of options at a price of $1.50 per share. (25) On March 5, 1999, the Registrant sold 1,200 shares upon the exercise of options at a price of $2.00 per share. (b) There were no underwriters, brokers or finders employed in connection with any of the transactions set forth above. (c) The sales of the above securities described in items (a)(1), (3) and (5) through (8) were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act as transactions by an issuer not involving a public offering and the sales of the above securities described in items (a)(4) and (9) through (25) were deemed to be exempt from registration under the Securities Act in reliance on Rule 701 promulgated under Section 3(b) of the Securities Act as transactions pursuant to compensatory benefit plans and contracts relating to compensation as provided under such Rule 701. The recipients of securities in each such transaction represented their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the instruments representing such securities issued in such transactions. All recipients had adequate access, through their relationships with the Registrant, to information about the Registrant. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) EXHIBITS 1.1* Form of Underwriting Agreement. 3.1 Certificate of Incorporation of Registrant, as currently in effect. 3.2* Form of Restated Certificate of Incorporation of Registrant, to be filed immediately following the closing of the offering made under this Registration Statement. 3.3 Bylaws of Netcom Systems. 4.1* Specimen Common Stock Certificate. 5.1 Form of Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation. 10.1 Amended and Restated 1993 Non-Statutory Stock Option Plan, as amended, and form of Stock Option Agreement thereunder. 10.2 Second Amended and Restated 1997 Stock Plan, as amended, and form of Stock Option Agreement thereunder. 10.3 1998 Stock Plan, as amended, and form of Stock Option Agreement thereunder. 10.4 1998 Employee Stock Purchase Plan, as amended. 10.5 Recapitalization Agreement, dated August 29, 1997, between Registrant and certain stockholders. 10.6 Credit Agreement, dated August 29, 1997, between Registrant, the lenders named therein, BankBoston, N.A., as co-agent, and NationsBanc of Texas, N.A., as administrative agent. 10.7 Registration Agreement, dated August 29, 1997, as amended, between Registrant and certain stockholders. 10.8 Stockholders agreement, dated August 29, 1997, as amended, between Registrant and certain stockholders.
II-3 97 10.9 Standard Industrial/Commercial Single-Tenant-Lease-Net, dated March 28, 1996, as amended, between Registrant and Nordhoff Industrial Complex. 10.10 Form of Indemnification Agreement between Registrant and each director and executive officer. 10.11 Form of Change-in-Control Agreement between Registrant and certain executive officers. 10.12 401(k) Plan. 10.13 Industrial Real Estate Lease, dated June 25, 1998, between Registrant and Cypress Land Company. 10.14* Letter Agreement, dated September 24, 1996, between Registrant and Barry Phelps. 10.15* Employment Agreement, dated September 1, 1996, between Registrant and Stephane Johnson as amended on November 19, 1996. 10.16* Employment Agreement, dated December 1, 1994, between Registrant and James Jordan. 10.17* Employment Agreement between Registrant and Henry Hamon. 10.18 First Amendment to Credit Agreement, dated May 13, 1999, among Registrant, the lenders named therein, and NationsBank, N.A. (successor by merger to NationsBank of Texas, N.A.), as administrative agent. 11.1 Calculation of earnings per share (contained in Notes 2 and 14 of the Notes to Consolidated Financial Statements). 21.1 List of Subsidiaries of Registrant. 23.1 Consent of Arthur Andersen LLP, Independent Public Accountants. 23.2 Consent of Counsel (included in Exhibit 5.1). 24.1 Power of Attorney (see page II-6). 27.1 Financial Data Schedule (Fiscal 1998). 27.2 Financial Data Schedule (First Quarter 1999).
- --------------- * To be filed by amendment. (b) FINANCIAL STATEMENT SCHEDULES Schedules have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto. ITEM 17. UNDERTAKINGS Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the provisions described in Item 14, 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. II-4 98 The undersigned registrant hereby undertakes to provide to the Underwriter at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the Underwriter to permit prompt delivery to each purchaser. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in the form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-5 99 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Chatsworth, State of California, on the 14th day of May, 1999. NETCOM SYSTEMS, INC. By: /s/ BARRY PHELPS ------------------------------------ Barry Phelps President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints, jointly and severally, Barry Phelps and Gil Cabral, each of them acting individually, as his or her attorney-in-fact, each with full power of substitution, for him or her any and all capacities, to sign any and all amendments (including, without limitation, post-effective Amendments and any amendments or abbreviated registration statements increasing the amount of securities for which registration is being sought) to this Registration Statement, with all exhibits and any and all documents required to be filed with respect thereto, with the Securities and Exchange Commission or any regulatory authority, granting unto such attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in order to effectuate the same as fully to all intents and purposes as he or she might or could do if personally present, hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, or their substitute or substitutes, may lawfully do or cause to be done. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ BARRY PHELPS President, Chief Executive May 14, 1999 - ----------------------------------------------------- Officer and Director Barry Phelps /s/ GIL CABRAL Vice President, Finance, Chief May 14, 1999 - ----------------------------------------------------- Financial Officer and Secretary Gil Cabral /s/ WALTER G. KORTSCHAK Director May 14, 1999 - ----------------------------------------------------- Walter G. Kortschak /s/ RICHARD MOLEY Director May 14, 1999 - ----------------------------------------------------- Richard Moley /s/ ROBERT H. SHERIDAN III Director May 14, 1999 - ----------------------------------------------------- Robert H. Sheridan III /s/ MICHAEL WEST Director May 14, 1999 - ----------------------------------------------------- Michael West
II-6 100 EXHIBIT INDEX
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION OF DOCUMENT PAGE ------- ------------------------------------------------------------ ------------ 1.1* Form of Underwriting Agreement. 3.1 Certificate of Incorporation of Registrant, as currently in effect. 3.2* Form of Restated Certificate of Incorporation of Registrant, to be filed immediately following the closing of the offering made under this Registration Statement. 3.3 Bylaws of Netcom Systems. 4.1* Specimen Common Stock Certificate. 5.1 Form of Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation. 10.1 Amended and Restated 1993 Non-Statutory Stock Option Plan, as amended, and form of Stock Option Agreement thereunder. 10.2 Second Amended and Restated 1997 Stock Plan, as amended, and form of Stock Option Agreement thereunder. 10.3 1998 Stock Plan, as amended, and form of Stock Option Agreement thereunder. 10.4 1998 Employee Stock Purchase Plan, as amended. 10.5 Recapitalization Agreement, dated August 29, 1997, between Registrant and certain stockholders. 10.6 Credit Agreement, dated August 29, 1997, between Registrant, the lenders named therein, BankBoston, N.A., as co-agent, and NationsBanc of Texas, N.A., as administrative agent. 10.7 Registration Agreement, dated August 29, 1997, as amended, between Registrant and certain stockholders. 10.8 Stockholders agreement, dated August 29, 1997, as amended, between Registrant and certain stockholders. 10.9 Standard Industrial/Commercial Single-Tenant-Lease-Net, dated March 28, 1996, as amended, between Registrant and Nordhoff Industrial Complex. 10.10 Form of Indemnification Agreement between Registrant and each director and executive officer. 10.11 Form of Change-in-Control Agreement between Registrant and certain executive officers. 10.12 401(k) Plan. 10.13 Industrial Real Estate Lease, dated June 25, 1998, between Registrant and Cypress Land Company. 10.14* Letter Agreement, dated September 24, 1996, between Registrant and Barry Phelps. 10.15* Employment Agreement, dated September 1, 1996, between Registrant and Stephane Johnson as amended on November 19, 1996. 10.16* Employment Agreement, dated December 1, 1994, between Registrant and James Jordan. 10.17* Employment Agreement between Registrant and Henry Hamon.
101
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION OF DOCUMENT PAGE ------- ------------------------------------------------------------ ------------ 10.18 First Amendment to Credit Agreement, dated May 13, 1999, among Registrant, the lenders named therein, and NationsBank, N.A. (successor by merger to NationsBank of Texas, N.A.), as administrative agent. 11.1 Calculation of earnings per share (contained in Notes 2 and 14 of the Notes to Financial Statement). 21.1 List of Subsidiaries of Registrant. 23.1 Consent of Arthur Andersen LLP, Independent Public Accountants. 23.2 Consent of Counsel (included in Exhibit 5.1). 24.1 Power of Attorney (see page II-6). 27.1 Financial Data Schedule (Fiscal 1998). 27.2 Financial Data Schedule (First Quarter 1999).
- --------------- * To be filed by amendment. EX-3.1 2 CERTIFICATE OF INCORPORATION OF REGISTRANT 1 EXHIBIT 3.1 FIRST AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF NETCOM SYSTEMS, INC. (a Delaware corporation, originally incorporated on May 15, 1998) Barry Phelps and Gilbert Cabral hereby certify that: 1. They are, respectively, the President and Secretary of Netcom Systems, Inc., a Delaware corporation. 2. The Certificate of Incorporation of this corporation is hereby amended and restated in its entirety to read as follows: "ARTICLE I The name of the Corporation is Netcom Systems, Inc. ARTICLE II The address of the Corporation's registered office in the State of Delaware is 1209 Orange Street, Wilmington, Delaware 19801, County of New Castle. The name of its registered agent at such address is The Corporation Trust Company. ARTICLE III The nature of the business or purposes to be conducted or promoted by the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. ARTICLE IV A. AUTHORIZED SHARES The total number of shares of capital stock which the Corporation has authority to issue is 73,388,621 shares, consisting of: (1) 485,184 shares of Class A Redeemable Preferred Stock, $0.001 par value per share (the "Class A Preferred"); 2 (2) 22,903,437 shares of Class B Convertible Preferred Stock, $0.001 par value per share (the "Class B Preferred"); and (3) 50,000,000 shares of Common Stock, $0.001 par value per share (the "Common Stock"). The Class A Preferred and the Class B Preferred are hereafter collectively referred to as the "Preferred Stock." B. CLASS A REDEEMABLE PREFERRED STOCK Section 1. Dividends. 1A. General Obligation. When and as declared by the Corporation's Board of Directors and to the extent permitted under the Delaware General Corporation Law, the Corporation shall pay preferential dividends in cash to the holders of the Class A Preferred as provided in this Section 1. Except as otherwise provided herein, dividends on each share of the Class A Preferred (a "Share") shall accrue on a daily basis at the rate of 6.0% per annum of the sum of the Liquidation Value thereof plus all accumulated and unpaid dividends thereon from and including the date of issuance of such Share to and including the first to occur of (i) the date on which the Liquidation Value of such Share (plus all accrued and unpaid dividends thereon) is paid to the holder thereof in connection with the liquidation of the Corporation or the redemption of such Share by the Corporation or (ii) the date on which such Share is otherwise acquired by the Corporation. Such dividends shall accrue whether or not they have been declared and whether or not there are profits, surplus or other funds of the Corporation legally available for the payment of dividends, and such dividends shall be cumulative such that (except as expressly permitted by Section 3 below) all accrued and unpaid dividends shall be fully paid or declared with funds irrevocably set apart for payment before any dividends, distributions, redemptions or other payments may be made with respect to any Junior Securities. The date on which the Corporation initially issues any Share (or, if earlier, any security which is subsequently converted into a Share pursuant to a merger of the Corporation with another corporation) shall be deemed to be the "date of issuance" of such Share regardless of the number of times transfer of such Share is made on the stock records maintained by or for the Corporation and regardless of the number of certificates which may be issued to evidence such Share. 1B. Dividend Reference Dates. To the extent not paid on March 31, June 30, September 30 and December 31 of each year, beginning December 31, 1997 (the "Dividend Reference Dates"), all dividends which have accrued on each Share outstanding during the three-month period (or other period in the case of the initial Dividend Reference Date) ending upon each such Dividend Reference Date shall be accumulated and shall remain accumulated dividends with respect to such Share until paid to the holder thereof. 1C. Distribution of Partial Dividend Payments. If at any time the Corporation pays less than the total amount of dividends then accrued with respect to the Class A Preferred, such payment shall be distributed pro rata among the holders thereof based upon the aggregate accrued but unpaid dividends on the Shares held by each such holder. -2- 3 Section 2. Liquidation. Upon any liquidation, dissolution or winding up of the Corporation (whether voluntary or involuntary), each holder of Class A Preferred shall be entitled to be paid, before any distribution or payment is made upon any Junior Securities, an amount in cash equal to the aggregate Liquidation Value of all Shares held by such holder (plus all accrued and unpaid dividends thereon), and the holders of Class A Preferred shall not be entitled to any further payment. If upon any liquidation, dissolution or winding up of the Corporation the Corporation's assets to be distributed among the holders of the Class A Preferred are insufficient to permit payment to such holders of the aggregate amount which they are entitled to be paid under this Section 2, then the entire assets available to be distributed to the Corporation's stockholders shall be distributed pro rata among such holders of Class A Preferred based upon the aggregate Liquidation Value (plus all accrued and unpaid dividends) of the Class A Preferred held by each such holder. Not less than 30 days prior to the payment date stated therein, the Corporation shall mail written notice of any such liquidation, dissolution or winding up to each record holder of Class A Preferred, setting forth in reasonable detail the amount of proceeds to be paid with respect to each Share in connection with such liquidation, dissolution or winding up. Neither the consolidation or merger of the Corporation into or with any other entity or entities (whether or not the Corporation is the surviving entity), nor the sale or transfer by the Corporation of all or any part of its assets, nor the reduction of the capital stock of the Corporation nor any other form of recapitalization or reorganization affecting the Corporation shall be deemed to be a liquidation, dissolution or winding up of the Corporation within the meaning of this Section 2. Section 3. Priority of Class A Preferred on Dividends and Redemptions. So long as any Class A Preferred remains outstanding, without the prior written consent of the holders of at least 66 2/3% of the outstanding shares of Class A Preferred, the Corporation shall not, nor shall it permit any Subsidiary to, redeem, purchase or otherwise acquire directly or indirectly any Junior Securities (other than (i) repurchases of Common Stock from present or former employees or consultants of the Corporation or any of its Subsidiaries upon termination of employment or consultancy in accordance with arrangements approved by the Corporation's Board of Directors so long as no Event of Noncompliance is in existence immediately prior to or is otherwise caused by any such repurchase and (ii) repurchases of Common Stock and options to purchase Common Stock in accordance with the terms and conditions of the Recapitalization Agreement and the Stock Purchase Agreements), nor shall the Corporation directly or indirectly pay or declare any dividend or make any distribution upon any Junior Securities (other than dividends payable in shares of Common Stock issued upon the outstanding shares of Common Stock). Section 4. Redemptions. 4A. Scheduled Redemptions. The Corporation shall redeem the corresponding percentage specified below of the outstanding Shares of Class A Preferred on September 1 of each year, commencing in 2002 and ending in 2004 (the "Scheduled Redemption Dates"), at a price per Share equal to the Liquidation Value thereof (plus all accrued and unpaid dividends thereon):
Scheduled Redemption Date Specified Percentage ------------------------- -------------------- September 1, 2002 33 1/3% September 1, 2003 50%
-3- 4 September 1, 2004 100%
4B. Special Redemptions. In the event of a Change in Ownership or a Fundamental Change, the Corporation shall, immediately prior to or contemporaneously with the consummation of such Change in Ownership or Fundamental Change (and, in the case of a Fundamental Change, before any distribution or payment is made upon any Junior Securities), redeem all of the outstanding Class A Preferred at a price per Share equal to the Liquidation Value thereof (plus all accrued and unpaid dividends thereon). 4C. Redemption with Proceeds of Public Offering. The Corporation shall apply the net cash proceeds from any Public Offering remaining after deduction of all discounts, underwriters' commissions and other reasonable expenses to redeem Shares of Class A Preferred at a price per Share equal to the Liquidation Value thereof (plus all accrued and unpaid dividends thereon). The Corporation shall send written notice of any redemption of Class A Preferred pursuant to this paragraph 4C by reputable overnight courier service (charges prepaid) to each record holder of Class A Preferred not less than three business days prior to the Corporation's expected receipt of such proceeds. Such redemption shall take place on a date fixed by the Corporation, which date shall not be more than three days after the Corporation's receipt of such proceeds. Except as to the Shares so redeemed, redemptions of Shares pursuant to this paragraph 4C shall not relieve the Corporation of its obligation to redeem Shares on the Scheduled Redemption Dates or pursuant to paragraph 4B above. 4D. Optional Redemptions. The Corporation may, at any time and from time to time, redeem all or any portion of the Shares of Class A Preferred then outstanding. Upon any such redemption, the Corporation shall pay a price per Share equal to the Liquidation Value thereof (plus all accrued and unpaid dividends thereon). Redemptions of Shares pursuant to this paragraph 4D shall not relieve the Corporation of its obligation to redeem Shares on the Scheduled Redemption Dates or pursuant to paragraphs 4B or 4C above. 4E. Redemption Payments. For each Share which is to be redeemed hereunder, the Corporation shall be obligated on the Redemption Date to pay to the holder thereof (upon surrender by such holder at the Corporation's principal office of the certificate representing such Share) an amount in immediately available funds equal to the Liquidation Value of such Share (plus all accrued and unpaid dividends thereon). If the funds of the Corporation legally available for redemption of Shares on any Redemption Date are insufficient to redeem the total number of Shares to be redeemed on such date, those funds which are legally available shall be used to redeem the maximum possible number of Shares pro rata among the holders of the Shares to be redeemed based upon the aggregate number of Shares held by each such holder. At any time thereafter when additional funds of the Corporation are legally available for the redemption of Shares, such funds shall immediately be used to redeem the balance of the Shares which the Corporation has become obligated to redeem on any Redemption Date but which it has not redeemed. 4F. Notice of Redemption. Except as otherwise provided in paragraph 4C, the Corporation shall mail written notice of each redemption of any Class A Preferred to each record holder thereof not more than 30 nor less than ten days prior to the date on which such redemption is to be made. In case fewer than the total number of Shares represented by any certificate are -4- 5 redeemed, a new certificate representing the number of unredeemed Shares shall be issued to the holder thereof without cost to such holder within three business days after surrender of the certificate representing the redeemed Shares. 4G. Determination of the Number of Each Holder's Shares to be Redeemed. The number of Shares of Class A Preferred to be redeemed from each holder thereof in redemptions hereunder shall be the number of Shares determined by multiplying the total number of Shares to be redeemed times a fraction, the numerator of which shall be the total number of Shares then held by such holder and the denominator of which shall be the total number of Shares then outstanding. 4H. Dividends After Redemption Date. No Share shall be entitled to any dividends accruing after the date on which the Liquidation Value of such Share (plus all accrued and unpaid dividends thereon) is paid to the holder of such Share. On such date, all rights of the holder of such Share shall cease, and such Share shall no longer be deemed to be issued and outstanding. 4I. Redeemed or Otherwise Acquired Shares. Any Shares which are redeemed or otherwise acquired by the Corporation shall be canceled and retired and shall not be reissued, sold or transferred. 4J. Other Redemptions or Acquisitions. The Corporation shall not, nor shall it permit any Subsidiary to, redeem or otherwise acquire any Shares of Class A Preferred, except as expressly authorized herein. Section 5. Voting Rights. 5A. General. Except as otherwise provided in paragraph 5B below and as otherwise provided by applicable law, the Class A Preferred shall have no voting rights. Notwithstanding the foregoing, each holder of Class A Preferred shall be entitled to notice of all stockholders meetings at the same time and in the same manner as notice is given to all stockholders entitled to vote at such meetings. 5B. Protective Provisions. So long as any Class A Preferred remains outstanding, the Corporation shall not, without the vote or written consent of the holders of at least 66 2/3% of the Class A Preferred then outstanding: (i) authorize, issue or enter into any agreement providing for the issuance (contingent or otherwise) of, (a) any notes or debt securities containing equity features (including, without limitation, any notes or debt securities convertible into or exchangeable for capital stock or other equity securities or containing profit participation features), (b) any capital stock or other equity securities (or any securities convertible into or exchangeable for any capital stock or other equity securities) which are senior to or on a parity with the Class A Preferred with respect to the payment of dividends, redemptions or distributions upon liquidation or otherwise or (c) any additional shares of Class A Preferred; (ii) sell or transfer or permit any Subsidiary to sell or transfer more than 25% of the assets of the Corporation and its Subsidiaries on a consolidated basis (computed on the -5- 6 basis of the greater of (i) book value in accordance with generally accepted accounting principles consistently applied or (ii) fair market value determined in the reasonable good faith judgment of the Corporation's Board of Directors) in any transaction or series of transactions (including any sale or other disposition of capital stock of any of the Corporation's Subsidiaries (whether by merger, consolidation or otherwise), but excluding sales of inventory in the ordinary course of business); (iii) merge or consolidate with any Person or permit any Subsidiary to merge or consolidate with any Person (other than a merger or consolidation between or among Wholly-Owned Subsidiaries or a merger which is effected solely to change the state of incorporation of the Corporation from California to Delaware); (iv) liquidate, dissolve or effect a recapitalization or reorganization in any form of transaction (including, without limitation, any reorganization into a limited liability company, a partnership or any other non-corporate entity which is treated as a partnership for federal income tax purposes, but excluding any stock split, stock dividend, stock combination or like event); (v) increase the number of authorized shares of Class A Preferred or alter, change or otherwise impair or adversely affect the rights, preferences or powers or the relative preferences and priorities of the holders of the Class A Preferred; or (vi) make any amendment to the Corporation's Certificate of Incorporation or Bylaws. Section 6. Events of Noncompliance. 6A. Definition. An Event of Noncompliance shall have occurred if: (i) the Corporation fails to redeem all of the outstanding Class A Preferred with the net cash proceeds from the Corporation's initial Public Offering of Common Stock, whether or not such payment is legally permissible or is prohibited by any agreement to which the Corporation is subject; (ii) the Corporation fails to make any other redemption payment with respect to the Class A Preferred which it is required to make hereunder, whether or not such payment is legally permissible or is prohibited by any agreement to which the Corporation is subject; (iii) the Corporation or any material Subsidiary makes an assignment for the benefit of creditors or admits in writing its inability to pay its debts generally as they become due; or an order, judgment or decree is entered adjudicating the Corporation or any material Subsidiary bankrupt or insolvent; or any order for relief with respect to the Corporation or any material Subsidiary is entered under the Federal Bankruptcy Code; or the Corporation or any material Subsidiary petitions or applies to any tribunal for the appointment of a custodian, trustee, receiver or liquidator of the Corporation or any material Subsidiary or of any substantial part of the assets of the Corporation or any material Subsidiary, or commences any proceeding (other than a proceeding for the voluntary liquidation and dissolution of a Subsidiary) relating to the Corporation or any material Subsidiary under any bankruptcy, reorganization, arrangement, insolvency, readjustment -6- 7 of debt, dissolution or liquidation law of any jurisdiction; or any such petition or application is filed, or any such proceeding is commenced, against the Corporation or any material Subsidiary and either (a) the Corporation or any such material Subsidiary by any act indicates its approval thereof, consent thereto or acquiescence therein or (b) such petition, application or proceeding is not dismissed within 60 days; or (iv) the Corporation or any Subsidiary defaults in the performance of any obligation or agreement or there shall otherwise occur an event of default under any agreement to which the Corporation or any Subsidiary is a party if the effect of such default or event of default is to cause an amount exceeding $2,000,000 to become due prior to its stated maturity. 6B. Consequences of Events of Noncompliance. (i) If an Event of Noncompliance of the type described in subparagraph 6A(i) has occurred and continues for a period of 30 days, the dividend rate on the Class A Preferred shall increase immediately by an increment of one and one-half percentage points (1 1/2%). Thereafter, until such time as no such Event of Noncompliance exists, the dividend rate shall increase automatically at the end of each succeeding 90-day period by an additional increment of one and one-half percentage points (1 1/2%) (but in no event shall the dividend rate exceed 12%). Any increase of the dividend rate resulting from the operation of this subparagraph shall terminate as of the close of business on the date on which no such Event of Noncompliance exists. (ii) If an Event of Noncompliance has occurred (other than an Event of Noncompliance of the type described in subparagraph 6A(i) or subparagraph 6A(iii)), the holder or holders of at least 66 2/3% of the Class A Preferred then outstanding may demand (by written notice delivered to the Corporation) immediate redemption of all or any portion of the Class A Preferred owned by such holder or holders at a price per Share equal to the Liquidation Value thereof (plus all accrued and unpaid dividends thereon). The Corporation shall give prompt written notice of such election to the other holders of Class A Preferred (but in any event within five days after receipt of the initial demand for redemption from the holder or holders of at least 66 2/3% of the Class A Preferred then outstanding), and each such other holder may demand immediate redemption of all or any portion of such holder's Class A Preferred by giving written notice thereof to the Corporation within seven days after receipt of the Corporation's notice. The Corporation shall redeem all Class A Preferred as to which rights under this paragraph 6B have been exercised within 30 days after receipt of the initial demand for redemption from the holder or holders of at least 66 2/3% of the Class A Preferred then outstanding. (iii) If an Event of Noncompliance of the type described in subparagraph 6A(iii) has occurred, all of the Class A Preferred then outstanding shall be subject to immediate redemption by the Corporation (without any action on the part of the holders of the Class A Preferred) at a price per Share equal to the Liquidation Value thereof (plus all accrued and unpaid dividends thereon). The Corporation shall immediately redeem all Class A Preferred upon the occurrence of such Event of Noncompliance. -7- 8 (iv) If any Event of Noncompliance exists, each holder of Class A Preferred shall also have any other rights which such holder is entitled to under any contract or agreement at any time and any other rights which such holder may have pursuant to applicable law. Section 7. Registration of Transfer. The Corporation shall keep at its principal office a register for the registration of Class A Preferred. Upon the surrender of any certificate representing Class A Preferred at such place, the Corporation shall, at the request of the record holder of such certificate, execute and deliver (at the Corporation's expense) a new certificate or certificates in exchange therefor representing in the aggregate the number of Shares represented by the surrendered certificate. Each such new certificate shall be registered in such name and shall represent such number of Shares as is requested by the holder of the surrendered certificate and shall be substantially identical in form to the surrendered certificate, and dividends shall accrue on the Class A Preferred represented by such new certificate from the date to which dividends have been fully paid on such Class A Preferred represented by the surrendered certificate. Section 8. Replacement. Upon receipt of evidence reasonably satisfactory to the Corporation (an affidavit of the registered holder shall be satisfactory) of the ownership and the loss, theft, destruction or mutilation of any certificate evidencing Shares of Class A Preferred, and in the case of any such loss, theft or destruction, upon receipt of indemnity reasonably satisfactory to the Corporation or, in the case of any such mutilation upon surrender of such certificate, the Corporation shall (at its expense) execute and deliver in lieu of such certificate a new certificate of like kind representing the number of Shares of such class represented by such lost, stolen, destroyed or mutilated certificate and dated the date of such lost, stolen, destroyed or mutilated certificate, and dividends shall accrue on the Class A Preferred represented by such new certificate from the date to which dividends have been fully paid on such lost, stolen, destroyed or mutilated certificate. Section 9. Definitions. "Change in Ownership" means any sale, transfer or issuance or series of sales, transfers and/or issuances of shares (or agreement to sell, transfer or issue shares) of the Corporation's capital stock by the Corporation or any holders thereof which results in any Person or group of Persons (as the term "group" is used under the Securities Exchange Act of 1934, as amended), other than the holders of Common Stock and Class B Preferred as of the date of the Recapitalization Agreement, owning capital stock of the Corporation possessing the voting power (under ordinary circumstances and without regard to cumulative voting rights) to elect a majority of the Corporation's Board of Directors. A Change in Ownership shall be deemed to have occurred under the circumstances described in this Section 9 notwithstanding that all or certain holders of Class B Preferred exercise their rights under paragraph 4A of Subdivision C of this Article IV in connection therewith. "Common Stock" means the Corporation's Common Stock and any other capital stock of any class of the Corporation hereafter authorized which is not limited to a fixed sum or percentage of par or stated value in respect to the rights of the holders thereof to participate in dividends or in the distribution of assets upon any liquidation, dissolution or winding up of the Corporation. -8- 9 "Fundamental Change" means (a) any sale or transfer of (or any agreement to sell or transfer) more than 50% of the assets of the Corporation and its Subsidiaries on a consolidated basis (computed on the basis of the greater of (i) book value in accordance with generally accepted accounting principles consistently applied or (ii) fair market value determined in the reasonable good faith judgment of the Corporation's Board of Directors) in any transaction or series of related transactions (other than sales of inventory in the ordinary course of business) and (b) any merger or consolidation (or any agreement to merge or consolidate) to which the Corporation is a party, except for (x) a merger which is effected solely to change the state of incorporation of the Corporation or (y) a merger in which the Corporation is the surviving corporation, the terms of the Class A Preferred are not changed or altered in any respect, the Class A Preferred is not exchanged for cash, securities or other property, and after giving effect to such merger, the holders of Common Stock and Class B Preferred as of the date of the Recapitalization Agreement shall continue to own the Corporation's outstanding capital stock possessing the voting power (under ordinary circumstances and without regard to cumulative voting rights) to elect a majority of the Corporation's Board of Directors. A Fundamental Change shall be deemed to have occurred under the circumstances described in this Section 9 notwithstanding that all or certain holders of Class B Preferred exercise their rights under paragraph 4A of Subdivision C of this Article IV in connection therewith. "Junior Securities" means any capital stock or other equity securities of the Corporation, except for the Class A Preferred. "Liquidation Value" of any Share as of any particular date shall be equal to $100. "Person" means an individual, a partnership, a corporation, a limited liability company, an association, a joint stock company, a trust, a joint venture, an unincorporated organization and a governmental entity or any department, agency or political subdivision thereof. "Public Offering" means any offering by the Corporation of its equity or debt securities to the public pursuant to an effective registration statement under the Securities Act of 1933, as then in effect, or any comparable statement under any similar federal statute then in force. "Recapitalization Agreement" means the Recapitalization Agreement, dated on or about August 28, 1997, by and among the Netcom Systems, Inc., a California corporation, the Purchasers referred to therein and the Sellers referred to therein (as the same may be amended from time to time in accordance with its terms). "Redemption Date" as to any Share means the applicable date specified herein with respect to any redemption; provided that no such date shall be a Redemption Date unless the Liquidation Value of such Share (plus all declared and unpaid dividends thereon) is actually paid in full on such date, and if not so paid in full, the Redemption Date shall be the date on which such amount is fully paid. "Stock Purchase Agreements" has the meaning given to such term in the Recapitalization Agreement. -9- 10 "Shareholders Agreement" has the meaning given to such term in the Recapitalization Agreement (as such Shareholders Agreement may be amended from time to time in accordance with its terms). "Subsidiary" means, with respect to any Person, any corporation, limited liability company, partnership, association or other business entity of which (i) if a corporation, a majority of the total voting power of shares of stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by that Person or one or more of the other Subsidiaries of that Person or a combination thereof, or (ii) if a limited liability company, partnership, association or other business entity, a majority of the partnership or other similar ownership interest thereof is at the time owned or controlled, directly or indirectly, by that Person or one or more Subsidiaries of that Person or a combination thereof. For purposes hereof, a Person or Persons shall be deemed to have a majority ownership interest in a limited liability company, partnership, association or other business entity if such Person or Persons shall be allocated a majority of the limited liability company, partnership, association or other business entity gains or losses or shall be or control the managing general partner of such limited liability company, partnership, association or other business entity. "Wholly-Owned Subsidiary" means, with respect to any Person, a Subsidiary of which all of the issued and outstanding capital stock or other ownership interests are owned by such Person or another Wholly-Owned Subsidiary of such Person. Section 10. Amendment. No amendment or modification shall be binding or effective with respect to any provision of Sections 1 to 11 of this Subdivision B without the prior written consent of the holders of at least 66 2/3% of the Class A Preferred outstanding at the time such action is taken; provided that no change in the terms hereof may be accomplished by merger or consolidation of the Corporation with another Person unless the Corporation has obtained the prior written consent of the holders of at least 66 2/3% of the Class A Preferred then outstanding. Section 11. Notices. All notices, demands or other communications to be given or delivered hereunder shall be in writing and shall be deemed to have been given when delivered personally to the recipient or one (1) business day after being sent to the recipient by reputable overnight courier service (charges prepaid) or five (5) business days after being mailed to the recipient by certified or registered mail, return receipt requested and postage prepaid. Such notices, demands and other communications shall be sent (i) to the Corporation, at its principal executive offices and (ii) to any stockholder, at such holder's address as it appears in the stock records of the Corporation (unless otherwise indicated by any such holder). -10- 11 C. CLASS B CONVERTIBLE PREFERRED STOCK Effective upon the filing of this First Amended and Restated Certificate of Incorporation, each outstanding share of Class B Convertible Preferred Stock shall become, without action of the holder thereof, one half (1/2) of a share of Class B Convertible Preferred Stock. Section 1. Dividends. 1A. General. When and as declared by the Corporation's Board of Directors and to the extent permitted under the Delaware General Corporation Law (and subject to the terms of the Class A Preferred), the Corporation shall pay preferential dividends to the holders of the Class B Preferred pro rata among the holders thereof based upon the number of shares of Class B Preferred (the "Shares") held by each such holder. 1B. Participating Dividends. In the event that the Corporation declares or pays any dividends upon the Common Stock (whether payable in cash, securities or other property) other than dividends payable solely in shares of Common Stock, the Corporation shall also declare and pay to the holders of the Class B Preferred at the same time that it declares and pays such dividends to the holders of the Common Stock, the dividends which would have been declared and paid with respect to the Common Stock issuable upon conversion of the Class B Preferred had all of the outstanding Class B Preferred been converted immediately prior to the record date for such dividend, or if no record date is fixed, the date as of which the record holders of Common Stock entitled to such dividends are to be determined. Section 2. Liquidation. Upon any liquidation, dissolution or winding up of the Corporation (whether voluntary or involuntary), each holder of Class B Preferred shall be entitled to be paid, after payment to the holders of the Class A Preferred of the aggregate amounts which they are entitled to be paid under Section 2 of Subdivision B of this Article IV but before any distribution or payment is made upon any Junior Securities, an amount in cash equal to the greater of (i) the aggregate Liquidation Value of all shares of Class B Preferred held by such holder (plus an additional amount in cash equal to all declared and unpaid dividends thereon) or (ii) the consideration which would have been paid with respect to the Common Stock issuable upon conversion of the Class B Preferred held by such holder upon any such liquidation, dissolution or winding up of the Corporation (whether voluntary or involuntary) had all of the outstanding Class B Preferred been converted into shares of Conversion Stock immediately prior to such liquidation, dissolution or winding up of the Corporation (plus an additional amount in cash equal to all declared and unpaid dividends on the Class B Preferred held by such holder immediately prior to such deemed conversion), and upon the payment of the greater of the amounts determined pursuant to clauses (i) and (ii) above, the holders of Class B Preferred shall not be entitled to any further payment. If upon any such liquidation, dissolution or winding up of the Corporation the amount payable pursuant to clause (i) above is greater than the amount payable pursuant to clause (ii) above and the Corporation's assets to be distributed among the holders of the Class B Preferred are insufficient to permit payment to such holders of the aggregate amount which they are entitled to be paid pursuant to clause (i) above, then the entire assets available to be distributed to the Corporation's stockholders (after payment to the holders of the Class A Preferred of the aggregate amounts which they are entitled to be paid under Section 2 of Subdivision B of this Article IV) shall be distributed pro rata -11- 12 among such holders of Class B Preferred based upon the aggregate Liquidation Value (plus all declared and unpaid dividends thereon) of the Class B Preferred held by each such holder. Not less than 30 days prior to the payment date stated therein, the Corporation shall mail written notice of any such liquidation, dissolution or winding up to each record holder of Class B Preferred, setting forth in reasonable detail the amount of proceeds payable under each of clause (i) and clause (ii) above with respect to each Share and each share of Common Stock in connection with such liquidation, dissolution or winding up. Neither the consolidation or merger of the Corporation into or with any other entity or entities (whether or not the Corporation is the surviving entity), nor the sale or transfer by the Corporation of all or any part of its assets, nor the reduction of the capital stock of the Corporation nor any other form of recapitalization or reorganization affecting the Corporation shall be deemed to be a liquidation, dissolution or winding up of the Corporation within the meaning of this Section 2. Section 3. Priority of Class B Preferred on Dividends and Redemptions. So long as any Class B Preferred remains outstanding, without the prior written consent of the holders of at least 662/3% of the outstanding shares of Class B Preferred, the Corporation shall not, nor shall it permit any Subsidiary to, redeem, purchase or otherwise acquire directly or indirectly any Junior Securities (other than (i) repurchases of Common Stock from present or former employees or consultants of the Corporation or its Subsidiaries upon termination of employment or consultancy in accordance with arrangements approved by the Corporation's Board of Directors so long as no Event of Noncompliance is in existence immediately prior to or is otherwise caused by any such repurchase and (ii) repurchases of Common Stock in accordance with the terms and conditions of the Recapitalization Agreement and the Stock Purchase Agreements), nor shall the Corporation directly or indirectly pay or declare any dividend or make any distribution upon any Junior Securities (other than dividends payable in shares of Common Stock issued upon the outstanding shares of Common Stock). Section 4. Redemptions. 4A. Special Redemptions. (i) If a Change in Ownership has occurred or the Corporation obtains knowledge that a Change in Ownership is proposed to occur, the Corporation shall give prompt written notice of such Change in Ownership describing in reasonable detail the material terms and date of consummation thereof to each holder of Class B Preferred, but in any event such notice shall be given not later than five days after the occurrence of such Change in Ownership, and the Corporation shall give each holder of Class B Preferred prompt written notice of any material change in the terms or timing of such transaction. The holder or holders of at least 66 2/3% of the Class B Preferred then outstanding may elect to require the Corporation to redeem all or any portion of the Class B Preferred owned by such holder or holders at a price per Share equal to the Liquidation Value thereof (plus all declared and unpaid dividends thereon) by giving written notice to the Corporation of such election prior to the later of (a) 15 days after receipt of the Corporation's notice and (b) ten days prior to the consummation of the Change in Ownership (the "Expiration Date"). The Corporation shall give prompt written notice of any such election to all other holders of Class B Preferred within five days after the receipt thereof, and each such holder shall have until the later of (a) the Expiration Date or (b) five days after receipt of such second notice to request redemption hereunder (by giving -12- 13 written notice to the Corporation) of all or any portion of the Class B Preferred owned by such holder. Upon receipt of such election(s), the Corporation shall be obligated to redeem (after making any distributions or payments upon or with respect to the Class A Preferred required pursuant to paragraph 4B of Subdivision B of this Article IV) the aggregate number of Shares specified therein on the later of (a) the occurrence of the Change in Ownership or (b) five days after the Corporation's receipt of such election(s). If any proposed Change in Ownership does not occur, all requests for redemption in connection therewith shall be automatically rescinded, or if there has been a material change in the terms or the timing of the transaction, any holder of Class B Preferred may rescind such holder's request for redemption by giving written notice of such rescission to the Corporation within five days following receipt by such holder of the Corporation's notice regarding such material change. (ii) If a Fundamental Change is proposed to occur, the Corporation shall give written notice of such Fundamental Change describing in reasonable detail the material terms and date of consummation thereof to each holder of Class B Preferred not more than 30 days nor less than 15 days prior to the consummation of such Fundamental Change, and the Corporation shall give each holder of Class B Preferred prompt written notice of any material change in the terms or timing of such transaction. The holder or holders of at least 66 2/3% of the Class B Preferred then outstanding may elect to require the Corporation to redeem all or any portion of the Class B Preferred owned by such holder or holders at a price per Share equal to the Liquidation Value thereof (plus all declared and unpaid dividends thereon) by giving written notice to the Corporation of such election prior to the later of (a) ten days prior to the consummation of the Fundamental Change or (b) ten days after receipt of notice from the Corporation. The Corporation shall give prompt written notice of such election to all other holders of Class B Preferred (but in any event within five days prior to the consummation of the Fundamental Change), and each such holder shall have until two days after the receipt of such notice to request redemption (by written notice given to the Corporation) of all or any portion of the Class B Preferred owned by such holder. Upon receipt of such election(s), the Corporation shall be obligated to redeem (after making any distributions or payments upon or with respect to the Class A Preferred required pursuant to paragraph 4B of Subdivision B of this Article IV but prior to making any distribution or payment upon or with respect to any Junior Securities) the aggregate number of Shares specified therein upon the consummation of such Fundamental Change. If any proposed Fundamental Change does not occur, all requests for redemption in connection therewith shall be automatically rescinded, or if there has been a material change in the terms or the timing of the transaction, any holder of Class B Preferred may rescind such holder's request for redemption by delivering written notice thereof to the Corporation within five days following receipt by such holder of the Corporation's notice regarding such material change. 4B. Redemption Payments. For each Share which is to be redeemed hereunder, the Corporation shall be obligated on the Redemption Date to pay to the holder thereof (upon surrender by such holder at the Corporation's principal office of the certificate representing such Share) an amount in immediately available funds equal to the Liquidation Value of such Share (plus all declared and unpaid dividends thereon). If the funds of the Corporation legally available for redemption of Shares pursuant to paragraph 4A above on any Redemption Date (after making any distributions or payments upon or with respect to the Class A Preferred required pursuant to Subdivision B of this Article IV) are insufficient to redeem the total number of Shares to be -13- 14 redeemed on such date, those funds which are legally available shall be used to redeem the maximum possible number of Shares pro rata among the Shares to be redeemed based upon the aggregate number of Shares held by each such holder. At any time thereafter when additional funds of the Corporation are legally available for the redemption of Shares, such funds shall immediately be used to redeem the balance of the Shares which the Corporation has become obligated to redeem on any Redemption Date but which it has not redeemed. In case fewer than the total number of Shares represented by any certificate are redeemed, a new certificate representing the number of unredeemed Shares shall be issued to the holder thereof without cost to such holder within three business days after surrender of the certificate representing the redeemed Shares. 4C. Determination of the Number of Each Holder's Shares to be Redeemed. The number of Shares of Class B Preferred to be redeemed from each holder thereof in redemptions hereunder shall be the number of Shares determined by multiplying the total number of Shares to be redeemed times a fraction, the numerator of which shall be the total number of Shares then held by such holder and the denominator of which shall be the total number of Shares then outstanding. 4D. Dividend After Redemption Date. No Share shall be entitled to any dividends accruing after the date on which the Liquidation Value of such Share (plus all accrued and unpaid dividends thereon) is paid to the holder of such Share. On such date, all rights of the holder of such Share shall cease, and such Share shall no longer be deemed issued and outstanding. 4E. Redeemed or Otherwise Acquired Shares. Any Shares which are redeemed or otherwise acquired by the Corporation shall be canceled and retired and shall not be reissued, sold or transferred. 4F. Other Redemptions or Acquisitions. The Corporation shall not, nor shall it permit any Subsidiary to, redeem or otherwise acquire any Shares of Class B Preferred, except as expressly authorized herein. Section 5. Voting Rights. 5A. Election of Directors. For so long as any Class B Preferred remains outstanding, the holders of the Class B Preferred, voting separately as a single class to the exclusion of all other classes of the Corporation's capital stock and with each share of Class B Preferred entitled to one vote, shall be entitled to elect three (3) directors to serve on the Corporation's Board of Directors until their successors are duly elected by the holders of the Class B Preferred or until any such director is removed from office by the holders of a majority of the then outstanding Class B Preferred. In addition, for so long as any Class B Preferred remains outstanding, the holders of the outstanding Class B Preferred and the holders of the outstanding Common Stock, voting together as a class, on an as-if-converted-to Common Stock basis with respect to the Class B Preferred, shall have the right to elect two (2) directors to serve on the Corporation's Board of Directors until their successors are duly elected by the holders of Class B Preferred and Common Stock as provided above or until any such director is removed from office by the holders of the outstanding Class B Preferred and the holders of the outstanding Common Stock. For so long as any Class B Preferred remains outstanding, the Corporation shall not, without the vote or prior written consent of the holders of at least 66 2/3% of the Class B Preferred then outstanding, make any amendment to the -14- 15 Corporation's Certificate of Incorporation or Bylaws changing the authorized number of directors on the Company's Board of Directors to a number other than six (6). The provisions of this paragraph 5A shall automatically terminate and be of no further force and effect at such time as all Shares of Class B Preferred shall cease to be outstanding (whether as a result of any redemption, conversion or otherwise). 5B. General. The holders of the Class B Preferred shall be entitled to notice of all stockholder meetings in accordance with the Corporation's bylaws, and, except in the election of directors of the Corporation as to which the holders of Class B Preferred shall have the voting rights set forth in paragraph 5A but in addition to any circumstances in which the holders of the Class B Preferred shall be entitled to vote as a separate class under the Delaware General Corporation Law, the holders of the Class B Preferred shall be entitled to vote on all matters submitted to the stockholders for a vote together with the holders of Common Stock voting together as a single class with each share of Common Stock entitled to one vote per share and each Share of Class B Preferred entitled to a number of votes (including fractions thereof) equal to the number of shares of Common Stock (including fractions thereof) issuable upon conversion of such Share as of the record date for such vote (or, if no record date is specified, as of the date of such vote). 5C. Protective Provisions. So long as any Class B Preferred remains outstanding, the Corporation shall not, without the vote or written consent of the holders of at least 66 2/3% of the Class B Preferred then outstanding: (i) authorize, issue or enter into any agreement providing for the issuance (contingent or otherwise) of, (a) any notes or debt securities containing equity features (including, without limitation, any notes or debt securities convertible into or exchangeable for capital stock or other equity securities or containing profit participation features), (b) any capital stock or other equity securities (or any securities convertible into or exchangeable for any capital stock or other equity securities) which are senior to or on a parity with the Class B Preferred with respect to the payment of dividends, redemptions or distributions upon liquidation or otherwise or (c) any additional shares of Class B Preferred; (ii) sell or transfer or permit any Subsidiary to sell or transfer more than 25% of the assets of the Corporation and its Subsidiaries on a consolidated basis (computed on the basis of the greater of (i) book value in accordance with generally accepted accounting principles consistently applied or (ii) fair market value determined in the reasonable good faith judgment of the Corporation's Board of Directors) in any transaction or series of transactions (including any sale or other disposition of capital stock of any of the Corporation's Subsidiaries (whether by merger, consolidation or otherwise), but excluding sales of inventory in the ordinary course of business); (iii) merge or consolidate with any Person or permit any Subsidiary to merge or consolidate with any Person (other than a merger or consolidation between or among Wholly-Owned Subsidiaries or a merger which is effected solely to change the state of incorporation of the Corporation from California to Delaware); (iv) liquidate, dissolve or effect a recapitalization or reorganization in any form of transaction (including, without limitation, any reorganization into a limited liability -15- 16 company, a partnership or any other non-corporate entity which is treated as a partnership for federal income tax purposes, but excluding any stock split, stock dividend, stock combination or like event); (v) increase the number of authorized shares of Class B Preferred or alter, change or otherwise impair or adversely affect the rights, preferences or powers or the relative preferences and priorities of the holders of the Class B Preferred; or (vi) make any amendment to the Corporation's Certificate of Incorporation or Bylaws. Section 6. Conversion. 6A. Conversion Procedure. (i) At any time and from time to time, any holder of Class B Preferred may convert all or any portion of the Class B Preferred held by such holder into a number of shares of Conversion Stock computed by multiplying the number of Shares to be converted by $2.1184 and dividing the result by the Conversion Price then in effect. (ii) Except as otherwise provided herein, each conversion of Class B Preferred shall be deemed to have been effected as of the close of business on the date on which the certificate or certificates representing the Class B Preferred to be converted have been surrendered for conversion at the principal office of the Corporation. At the time any such conversion has been effected, the rights of the holder of the Shares converted as a holder of Class B Preferred shall cease and the Person or Persons in whose name or names any certificate or certificates for shares of Conversion Stock are to be issued upon such conversion shall be deemed to have become the holder or holders of record of the shares of Conversion Stock represented thereby. (iii) The conversion rights of any Share subject to redemption hereunder shall terminate on the Redemption Date for such Share unless the Corporation has failed to pay to the holder thereof the redemption price therefor determined pursuant to paragraph 4A above or paragraph 8B below. (iv) Notwithstanding any other provision hereof, if a conversion of Class B Preferred is to be made in connection with a Qualified Public Offering, a Change in Ownership, a Fundamental Change or other transaction affecting the Corporation or any holder of Class B Preferred, the conversion of any Shares of Class B Preferred may, at the election of the holder thereof, be conditioned upon the consummation of such transaction, in which case such conversion shall be deemed to be effective immediately prior to the consummation of such transaction. (v) Promptly (and in any event withing two business days in the case of subparagraph (a) below) after a conversion has been effected (including a conversion pursuant to paragraph 6H below), the Corporation shall deliver to the converting holder: -16- 17 (a) a certificate or certificates representing the number of shares of Conversion Stock issuable by reason of such conversion in such name or names and such denomination or denominations as the converting holder has specified; (b) payment in an amount equal to all dividends declared with respect to each Share converted which have not been paid prior thereto in accordance with the provisions of subparagraph (vi) below, plus the amount payable under subparagraph (x) below with respect to such conversion; and (c) a certificate representing any Shares of Class B Preferred which were represented by the certificate or certificates delivered to the Corporation in connection with such conversion but which were not converted. (vi) If the Corporation is not permitted under applicable law to pay any portion of any declared and unpaid dividends on the Class B Preferred being converted, the Corporation shall pay such dividends to the converting holder as soon thereafter as funds of the Corporation are legally available for such payment. At the request of any such converting holder, the Corporation shall provide such holder with written evidence of its obligation to such holder. Notwithstanding the foregoing provisions of this subparagraph (vi), if for any reason the Corporation is unable to pay any portion of the declared and unpaid dividends on the Class A Preferred being converted, such dividends may, at the converting holder's option, be converted into an additional number of shares of Conversion Stock determined by dividing the amount of the unpaid dividends to be applied for such purpose by the Conversion Price then in effect. (vii) The issuance of certificates for shares of Conversion Stock upon conversion of Class B Preferred shall be made without charge to the holders of such Class B Preferred for any issuance tax in respect thereof (so long as such certificates are issued in the name of the record holder of such Class B Preferred) or other cost incurred by the Corporation in connection with such conversion and the related issuance of shares of Conversion Stock. Upon conversion of each Share of Class B Preferred, the Corporation shall take all such actions as are necessary in order to ensure that the Conversion Stock issuable with respect to such conversion shall be validly issued, fully paid and nonassessable, free and clear of all taxes (other than any taxes relating to any dividends paid with respect thereto), liens, charges and encumbrances with respect to the issuance thereof. (viii) The Corporation shall not close its books against the transfer of Class B Preferred or of Conversion Stock issued or issuable upon conversion of Class B Preferred in any manner which interferes with the timely conversion of Class B Preferred. The Corporation shall assist and cooperate with any holder of Shares required to make any governmental filings or obtain any governmental approval prior to or in connection with any conversion of Shares hereunder (including, without limitation, making any filings required to be made by the Corporation). (ix) The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Conversion Stock, solely for the purpose of issuance upon the conversion of the Class B Preferred, such number of shares of Conversion Stock issuable upon the conversion of all outstanding Class B Preferred. All shares of Conversion Stock which are so -17- 18 issuable shall, when issued, be duly and validly issued, fully paid and nonassessable and free from all taxes, liens and charges. The Corporation shall take all such actions as may be necessary to ensure that all such shares of Conversion Stock may be so issued without violation of any applicable law or governmental regulation or any requirements of any domestic securities exchange upon which shares of Conversion Stock may be listed (except for official notice of issuance which shall be immediately delivered by the Corporation upon each such issuance). The Corporation shall not take any action which would cause the number of authorized but unissued shares of Conversion Stock to be less than the number of such shares required to be reserved hereunder for issuance upon conversion of the Class B Preferred. (x) If any fractional interest in a share of Conversion Stock would, except for the provisions of this subparagraph (x), be delivered upon any conversion of the Class B Preferred, the Corporation, in lieu of delivering the fractional share therefor, shall pay an amount to the holder thereof equal to the Market Price of such fractional interest as of the date of conversion. 6B. Conversion Price. (i) The initial Conversion Price shall be $2.1184. In order to prevent dilution of the conversion rights granted under this Section 6, the Conversion Price shall be subject to adjustment from time to time pursuant to this paragraph 6B. (ii) If and whenever the Corporation issues or sells, or in accordance with paragraph 6C below is deemed to have issued or sold, any shares of Common Stock for a consideration per share less than the Conversion Price in effect immediately prior to the time of such issue or sale, then immediately upon such issue or sale or deemed issue or sale the Conversion Price shall be reduced to the Conversion Price determined by dividing (a) the sum of (1) the product derived by multiplying the Conversion Price in effect immediately prior to such issue or sale by the number of shares of Common Stock Deemed Outstanding immediately prior to such issue or sale, plus (2) the consideration, if any, received by the Corporation upon such issue or sale, by (b) the number of shares of Common Stock Deemed Outstanding immediately after such issue or sale. (iii) Notwithstanding the foregoing, there shall be no adjustment to the Conversion Price hereunder with respect to the granting of stock options to employees, officers, directors and consultants of the Corporation and its Subsidiaries or the exercise thereof for an aggregate of 17,363,100 shares of Common Stock (as such number of shares is appropriately adjusted for subsequent stock splits, stock combinations, stock dividends and recapitalizations). 6C. Effect on Conversion Price of Certain Events. For purposes of determining the adjusted Conversion Price under paragraph 6B above, the following shall be applicable: (i) Issuance of Rights or Options. If the Corporation in any manner grants or sells any Options and the price per share for which Common Stock is issuable upon the exercise of such Options, or upon conversion or exchange of any Convertible Securities issuable upon exercise of such Options, is less than the Conversion Price in effect immediately prior to the time of the granting or sale of such Options, then the total maximum number of shares of Common Stock issuable upon the exercise of such Options or upon conversion or exchange of the total maximum -18- 19 amount of such Convertible Securities issuable upon the exercise of such Options shall be deemed to be outstanding and to have been issued and sold by the Corporation at the time of the granting or sale of such Options for such price per share. For purposes of this paragraph, the "price per share for which Common Stock is issuable" shall be determined by dividing (A) the total amount, if any, received or receivable by the Corporation as consideration for the granting or sale of such Options, plus the minimum aggregate amount of additional consideration payable to the Corporation upon exercise of all such Options, plus in the case of such Options which relate to Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable to the Corporation upon the issuance or sale of such Convertible Securities and the conversion or exchange thereof, by (B) the total maximum number of shares of Common Stock issuable upon the exercise of such Options or upon the conversion or exchange of all such Convertible Securities issuable upon the exercise of such Options. No further adjustment of the Conversion Price shall be made when Convertible Securities are actually issued upon the exercise of such Options or when Common Stock is actually issued upon the exercise of such Options or the conversion or exchange of such Convertible Securities. (ii) Issuance of Convertible Securities. If the Corporation in any manner issues or sells any Convertible Securities and the price per share for which Common Stock is issuable upon conversion or exchange thereof is less than the Conversion Price in effect immediately prior to the time of such issue or sale, then the maximum number of shares of Common Stock issuable upon conversion or exchange of such Convertible Securities shall be deemed to be outstanding and to have been issued and sold by the Corporation at the time of the issuance or sale of such Convertible Securities for such price per share. For the purposes of this paragraph, the "price per share for which Common Stock is issuable" shall be determined by dividing (A) the total amount received or receivable by the Corporation as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Corporation upon the conversion or exchange thereof, by (B) the total maximum number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities. No further adjustment of the Conversion Price shall be made when Common Stock is actually issued upon the conversion or exchange of such Convertible Securities, and if any such issue or sale of such Convertible Securities is made upon exercise of any Options for which adjustments of the Conversion Price had been or are to be made pursuant to other provisions of this Section 6, no further adjustment of the Conversion Price shall be made by reason of such issue or sale. (iii) Change in Option Price or Conversion Rate. If the purchase price provided for in any Options, the additional consideration, if any, payable upon the conversion or exchange of any Convertible Securities or the rate at which any Convertible Securities are convertible into or exchangeable for Common Stock changes at any time, the Conversion Price in effect at the time of such change shall be immediately adjusted to the Conversion Price which would have been in effect at such time had such Options or Convertible Securities still outstanding provided for such changed purchase price, additional consideration or conversion rate, as the case may be, at the time initially granted, issued or sold. (iv) Treatment of Expired Options and Unexercised Convertible Securities. Upon the expiration of any Option or the termination of any right to convert or exchange any Convertible Security without the exercise of any such Option or right, the Conversion Price then in -19- 20 effect hereunder shall be adjusted immediately to the Conversion Price which would have been in effect at the time of such expiration or termination had such Option or Convertible Security, to the extent outstanding immediately prior to such expiration or termination, never been issued. (v) Calculation of Consideration Received. If any Common Stock, Option or Convertible Security is issued or sold or deemed to have been issued or sold for cash, the consideration received therefor shall be deemed to be the amount received by the Corporation therefor (net of discounts, commissions and related expenses). If any Common Stock, Option or Convertible Security is issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the Corporation shall be the fair value of such consideration, except where such consideration consists of securities, in which case the amount of consideration received by the Corporation shall be the Market Price thereof as of the date of receipt. If any Common Stock, Option or Convertible Security is issued to the owners of the non-surviving entity in connection with any merger in which the Corporation is the surviving corporation, the amount of consideration therefor shall be deemed to be the fair value of such portion of the net assets and business of the non-surviving entity as is attributable to such Common Stock, Option or Convertible Security, as the case may be. The fair value of any consideration other than cash and securities shall be determined in good faith by the Corporation's Board of Directors. (vi) Integrated Transactions. In case any Option is issued in connection with the issue or sale of other securities of the Corporation, together comprising one integrated transaction in which no specific consideration is allocated to such Option by the parties thereto, the Option shall be deemed to have been issued for such consideration as shall be determined in good faith by the Corporation's Board of Directors. (vii) Treasury Shares. The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Corporation or any Subsidiary, and the disposition of any shares so owned or held shall be considered an issue or sale of Common Stock. (viii) Record Date. If the Corporation takes a record of the holders of Common Stock for the purpose of entitling them (a) to receive a dividend or other distribution payable in Common Stock, Options or in Convertible Securities or (b) to subscribe for or purchase Common Stock, Options or Convertible Securities, then such record date shall be deemed to be the date of the issuance or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or upon the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be. 6D. Subdivision or Combination of Common Stock. If the Corporation at any time subdivides (by any stock split, stock dividend, recapitalization or otherwise) one or more classes of its outstanding shares of Common Stock into a greater number of shares (without providing for a proportional subdivision of the Class B Convertible Preferred Stock), the Conversion Price in effect immediately prior to such subdivision shall be proportionately reduced, and if the Corporation at any time combines (by reverse stock split or otherwise) one or more classes of its outstanding shares of Common Stock into a smaller number of shares (without providing for a proportional -20- 21 combination of the Class B Convertible Preferred Stock), the Conversion Price in effect immediately prior to such combination shall be proportionately increased. 6E. Organic Change. Prior to the consummation of any Organic Change, the Corporation shall make appropriate provisions (in form and substance satisfactory to the holders of at least 66 2/3% of the Class B Preferred then outstanding) to ensure that each of the holders of Class B Preferred shall thereafter have the right to acquire and receive, in lieu of or in addition to (as the case may be) the shares of Conversion Stock immediately theretofore acquirable and receivable upon the conversion of such holder's Class B Preferred, such shares of stock, securities or assets as such holder would have received in connection with such Organic Change if such holder had converted its Class B Preferred immediately prior to such Organic Change (plus all declared and unpaid dividends on the Class B Preferred held by such holder immediately prior to such Organic Change). In each such case, the Corporation shall also make appropriate provisions (in form and substance satisfactory to the holders of at least 66 2/3% of the Class B Preferred then outstanding) to ensure that the provisions of this Section 6 and Sections 7 and 8 below shall thereafter be applicable to the Class B Preferred (including, in the case of any such consolidation, merger or sale in which the successor entity or purchasing entity is other than the Corporation, an immediate adjustment of the Conversion Price to the value for the Common Stock reflected by the terms of such consolidation, merger or sale, and a corresponding immediate adjustment in the number of shares of Conversion Stock acquirable and receivable upon conversion of Class B Preferred, if the value so reflected is less than the Conversion Price in effect immediately prior to such consolidation, merger or sale). The Corporation shall not effect any such consolidation, merger or sale, unless prior to the consummation thereof, the successor entity (if other than the Corporation) resulting from such consolidation or merger or the entity purchasing such assets assumes by written instrument (in form and substance satisfactory to the holders of at least 66 2/3% of the Class B Preferred then outstanding), the obligation to deliver to each such holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holder may be entitled to acquire. Each holder of Class B Preferred shall have the right to elect the benefits of either this paragraph 6E or, to the extent applicable, paragraph 4A above in connection with any such Organic Change. 6F. Certain Events. If any event occurs of the type contemplated by the provisions of this Section 6 but not expressly provided for by such provisions (including, without limitation, the granting of stock appreciation rights, phantom stock rights or other rights with equity features), then the Corporation's Board of Directors shall make an appropriate adjustment in the Conversion Price so as to protect the rights of the holders of Class B Preferred; provided that no such adjustment shall increase the Conversion Price as otherwise determined pursuant to this Section 6 or decrease the number of shares of Conversion Stock issuable upon conversion of each Share of Class B Preferred. 6G. Notices. (i) Promptly after any adjustment of the Conversion Price, the Corporation shall give written notice thereof to all holders of Class B Preferred, setting forth in reasonable detail and certifying the calculation of such adjustment. -21- 22 (ii) The Corporation shall give written notice to all holders of Class B Preferred at least 20 days prior to the date on which the Corporation closes its books or takes a record (a) with respect to any dividend or distribution upon Common Stock, (b) with respect to any pro rata subscription offer to holders of Common Stock or (c) for determining rights to vote with respect to any Organic Change, dissolution or liquidation. (iii) The Corporation shall also give written notice to the holders of Class B Preferred at least 20 days prior to the date on which any Organic Change shall take place. 6H. Automatic Conversion. (i) All of the outstanding shares of Class B Preferred shall automatically convert into Conversion Stock upon the closing of a Qualified Public Offering. The Corporation shall deliver notice of such mandatory conversion to all holders of Class B Preferred at least three business days prior to such closing. (ii) All of the outstanding Shares of Class B Preferred shall automatically convert into Conversion Stock upon the written consent of the holders of at least 66 2/3% of the Class B Preferred then outstanding. The Corporation shall provide written notice of such automatic conversion to all holders of Class B Preferred at least three business days prior to such conversion. Section 7. Purchase Rights. If at any time the Corporation grants, issues or sells any Options, Convertible Securities or rights to purchase stock, warrants, securities or other property pro rata to the record holders of any class of Common Stock (the "Purchase Rights"), then each holder of Class B Preferred shall be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which such holder could have acquired if such holder had held the number of shares of Conversion Stock acquirable upon conversion of such holder's Class B Preferred immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or if no such record is taken, the date as of which the record holders of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights. Section 8. Events of Noncompliance. 8A. Definition. An Event of Noncompliance shall have occurred if: (i) the Corporation fails to make any redemption payment with respect to the Class B Preferred which it is required to make hereunder, whether or not such payment is legally permissible or is prohibited by any agreement to which the Corporation is subject; (ii) the Corporation or any material Subsidiary makes an assignment for the benefit of creditors or admits in writing its inability to pay its debts generally as they become due; or an order, judgment or decree is entered adjudicating the Corporation or any material Subsidiary bankrupt or insolvent; or any order for relief with respect to the Corporation or any material Subsidiary is entered under the Federal Bankruptcy Code; or the Corporation or any material Subsidiary petitions or applies to any tribunal for the appointment of a custodian, trustee, receiver or liquidator of the Corporation or any material Subsidiary or of any substantial part of the assets of -22- 23 the Corporation or any material Subsidiary, or commences any proceeding (other than a proceeding for the voluntary liquidation and dissolution of a Subsidiary) relating to the Corporation or any material Subsidiary under any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation law of any jurisdiction; or any such petition or application is filed, or any such proceeding is commenced, against the Corporation or any material Subsidiary and either (a) the Corporation or any such material Subsidiary by any act indicates its approval thereof, consent thereto or acquiescence therein or (b) such petition, application or proceeding is not dismissed within 60 days; or (iii) the Corporation or any Subsidiary defaults in the performance of any obligation or agreement or there shall otherwise occur an event of default under any agreement to which the Corporation or any Subsidiary is a party if the effect of such default or event of default is to cause an amount exceeding $5,000,000 to become due prior to its stated maturity. 8B. Consequences of Events of Noncompliance. (i) If an Event of Noncompliance has occurred (other than an Event of Noncompliance of the type described in subparagraph 8A(ii)), the holder or holders of at least 662/3% of the Class B Preferred then outstanding may demand (by written notice delivered to the Corporation) immediate redemption of all or any portion of the Class B Preferred owned by such holder or holders at a price per Share equal to the Liquidation Value thereof (plus all declared and unpaid dividends thereon). The Corporation shall give prompt written notice of such election to the other holders of Class B Preferred (but in any event within five days after receipt of the initial demand for redemption from the holder or holders of at least 662/3% of the Class B Preferred then outstanding), and each such other holder may demand immediate redemption of all or any portion of such holder's Class B Preferred by giving written notice thereof to the Corporation within seven days after receipt of the Corporation's notice. The Corporation shall redeem all Class B Preferred as to which rights under this paragraph 8B have been exercised within 30 days after receipt of the initial demand for redemption from the holder or holders of at least 662/3% of the Class B Preferred then outstanding. (ii) If an Event of Noncompliance of the type described in subparagraph 8A(ii) has occurred, all of the Class B Preferred then outstanding shall be subject to immediate redemption by the Corporation (without any action on the part of the holders of the Class B Preferred) at a price per Share equal to the Liquidation Value thereof (plus all declared and unpaid dividends thereon). The Corporation shall immediately redeem all Class B Preferred upon the occurrence of such Event of Noncompliance. (iii) If any Event of Noncompliance exists, each holder of Class B Preferred shall also have any other rights which such holder is entitled to under any contract or agreement at any time and any other rights which such holder may have pursuant to applicable law. Section 9. Registration of Transfer. The Corporation shall keep at its principal office a register for the registration of Class B Preferred. Upon the surrender of any certificate representing Class B Preferred at such place, the Corporation shall, at the request of the record holder of such certificate, execute and deliver (at the Corporation's expense) a new certificate or certificates -23- 24 in exchange therefor representing in the aggregate the number of Shares represented by the surrendered certificate. Each such new certificate shall be registered in such name and shall represent such number of Shares as is requested by the holder of the surrendered certificate and shall be substantially identical in form to the surrendered certificate, and dividends shall accrue on the Class B Preferred represented by such new certificate from the date to which dividends have been fully paid on such Class B Preferred represented by the surrendered certificate. Section 10. Replacement. Upon receipt of evidence reasonably satisfactory to the Corporation (an affidavit of the registered holder shall be satisfactory) of the ownership and the loss, theft, destruction or mutilation of any certificate evidencing Shares of Class B Preferred, and in the case of any such loss, theft or destruction, upon receipt of indemnity reasonably satisfactory to the Corporation or, in the case of any such mutilation upon surrender of such certificate, the Corporation shall (at its expense) execute and deliver in lieu of such certificate a new certificate of like kind representing the number of Shares of such class represented by such lost, stolen, destroyed or mutilated certificate and dated the date of such lost, stolen, destroyed or mutilated certificate, and dividends shall accrue on the Class B Preferred represented by such new certificate from the date to which dividends have been fully paid on such lost, stolen, destroyed or mutilated certificate. Section 11. Definitions. "Change in Ownership" means any sale, transfer or issuance or series of sales, transfers and/or issuances of shares (or agreement to sell, transfer or issue shares) of the Corporation's capital stock by the Corporation or any holders thereof which results in any Person or group of Persons (as the term "group" is used under the Securities Exchange Act of 1934, as amended), other than the holders of Common Stock and Class B Preferred as of the date of the Recapitalization Agreement, owning capital stock of the Corporation possessing the voting power (under ordinary circumstances and without regard to cumulative voting rights) to elect a majority of the Corporation's Board of Directors. A Change in Ownership shall be deemed to have occurred under the circumstances described in this Section 11 notwithstanding that all or certain holders of Class B Preferred exercise their rights under paragraph 4A in connection therewith. "Common Stock" means the Corporation's Common Stock and any other capital stock of any class of the Corporation hereafter authorized which is not limited to a fixed sum or percentage of par or stated value in respect to the rights of the holders thereof to participate in dividends or in the distribution of assets upon any liquidation, dissolution or winding up of the Corporation. "Common Stock Deemed Outstanding" means, at any given time, the number of shares of Common Stock actually outstanding at such time, plus the number of shares of Common Stock deemed to be outstanding pursuant to subparagraphs 6C(i) and 6C(ii) hereof whether or not the Options or Convertible Securities are actually exercisable at such time. "Conversion Stock" means shares of Common Stock; provided that if there is a change such that the securities issuable upon conversion of the Class B Preferred are issued by an entity other than the Corporation or there is a change in the type or class of securities so issuable, then the term "Conversion Stock" shall mean one share of the security issuable upon conversion of -24- 25 the Class B Preferred if such security is issuable in shares, or shall mean the smallest unit in which such security is issuable if such security is not issuable in shares. "Convertible Securities" means any stock or securities directly or indirectly convertible into or exchangeable for Common Stock. "Fundamental Change" means (a) any sale or transfer of (or any agreement to sell or transfer) more than 50% of the assets of the Corporation and its Subsidiaries on a consolidated basis (computed on the basis of the greater of (i) book value in accordance with generally accepted accounting principles consistently applied or (ii) fair market value determined in the reasonable good faith judgment of the Corporation's Board of Directors) in any transaction or series of related transactions (other than sales of inventory in the ordinary course of business) and (b) any merger or consolidation (or any agreement to merge or consolidate) to which the Corporation is a party, except for (x) a merger which is effected solely to change the state of incorporation of the Corporation or (y) a merger in which the Corporation is the surviving corporation, the terms of the Class B Preferred are not changed or altered in any respect, the Class B Preferred is not exchanged for cash, securities or other property, and after giving effect to such merger, the holders of Common Stock and Class B Preferred as of the date of the Recapitalization Agreement shall continue to own the Corporation's outstanding capital stock possessing the voting power (under ordinary circumstances and without regard to cumulative voting rights) to elect a majority of the Corporation's Board of Directors. A Fundamental Change shall be deemed to have occurred under the circumstances described in this Section 11 notwithstanding that all or certain holders of Class B Preferred exercise their rights under paragraph 4A in connection therewith. "Junior Securities" means any capital stock or other equity securities of the Corporation, except for the Class A Preferred and the Class B Preferred. "Liquidation Value" of any Share as of any particular date shall be equal to $2.1184. "Market Price" of any security means the average of the closing prices of such security's sales on the principal securities exchanges on which such security may at the time be listed, or, if there has been no sales on any such exchange on any day, the average of the highest bid and lowest asked prices on all such exchanges at the end of such day, or, if on any day such security is not so listed, the average of the representative bid and asked prices quoted in the NASDAQ System as of 4:00 P.M., New York time, or, if on any day such security is not quoted in the NASDAQ System, the average of the highest bid and lowest asked prices on such day in the domestic over-the-counter market as reported by the National Quotation Bureau, Incorporated, or any similar successor organization, in each such case averaged over a period of 21 days consisting of the day prior to the day as of which "Market Price" is being determined and the 20 consecutive business days prior to such day. If at any time such security is not listed on any securities exchange or quoted in the NASDAQ System or the over-the-counter market, the "Market Price" shall be the fair value thereof determined in good faith by the Corporation's Board of Directors. "Options" means any rights, warrants or options to subscribe for or purchase Common Stock or Convertible Securities. -25- 26 "Organic Change" means any recapitalization, reorganization, reclassification, consolidation, merger, sale of all or substantially all of the Corporation's assets or other transaction, in each case which is effected in such a manner that the holders of Common Stock are entitled to receive (either directly or upon subsequent liquidation) stock, securities or assets with respect to or in exchange for Common Stock. "Person" means an individual, a partnership, a corporation, a limited liability company, an association, a joint stock company, a trust, a joint venture, an unincorporated organization and a governmental entity or any department, agency or political subdivision thereof. "Public Offering" means any offering by the Corporation of its equity or debt securities to the public pursuant to an effective registration statement under the Securities Act of 1933, as then in effect, or any comparable statement under any similar federal statute then in force. "Qualified Public Offering" means a firm commitment underwritten Public Offering of shares of the Corporation's Common Stock in which (i) the aggregate price paid by the public for the shares shall be at least $75,000,000, (ii) the price per share paid by the public for such shares shall be at least 300% of the Conversion Price in effect immediately prior to the closing of the sale of such shares pursuant to the Public Offering, and (iii) all of the shares of Class A Preferred are redeemed with the proceeds of such Public Offering pursuant to Section 4C of Subdivision B to this Article IV. "Recapitalization Agreement" means the Recapitalization Agreement, dated on or about August 28, 1997, by and among Netcom Systems, Inc., a California corporation, the Purchasers referred to therein and the Sellers referred to therein (as the same may be amended from time to time in accordance with its terms). "Redemption Date" as to any Share means the applicable date specified herein with respect to any redemption; provided that no such date shall be a Redemption Date unless the Liquidation Value of such Share (plus all declared and unpaid dividends thereon) is actually paid in full on such date, and if not so paid in full, the Redemption Date shall be the date on which such amount is fully paid. "Shareholders Agreement" has the meaning given to such term in the Recapitalization Agreement (as such Shareholders Agreement may be amended from time to time in accordance with its terms). "Stock Purchase Agreements" has the meaning given to such term in the Recapitalization Agreement. "Subsidiary" means, with respect to any Person, any corporation, limited liability company, partnership, association or other business entity of which (i) if a corporation, a majority of the total voting power of shares of stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by that Person or one or more of the other Subsidiaries of that Person or a combination thereof, or (ii) if a limited liability company, partnership, association or -26- 27 other business entity, a majority of the partnership or other similar ownership interest thereof is at the time owned or controlled, directly or indirectly, by that Person or one or more Subsidiaries of that Person or a combination thereof. For purposes hereof, a Person or Persons shall be deemed to have a majority ownership interest in a limited liability company, partnership, association or other business entity if such Person or Persons shall be allocated a majority of the limited liability company, partnership, association or other business entity gains or losses or shall be or control the managing general partner of such limited liability company, partnership, association or other business entity. "Wholly-Owned Subsidiary" means, with respect to any Person, a Subsidiary of which all of the issued and outstanding capital stock or other ownership interests are owned by such Person or another Wholly-Owned Subsidiary of such Person. Section 12. Amendment. No amendment, modification shall be binding or effective with respect to any provision of Sections 1 to 13 of this Subdivision C without the prior written consent of the holders of at least 662/3% of the Class B Preferred outstanding at the time such action is taken; provided that no change in the terms hereof may be accomplished by merger or consolidation of the Corporation with another corporation or entity unless the Corporation has obtained the prior written consent of the holders of at least 662/3% of the Class B Preferred then outstanding. Section 13. Notices. All notices, demands or other communications to be given or delivered hereunder shall be in writing and shall be deemed to have been given when delivered personally to the recipient or one (1) business day after being sent to the recipient by reputable overnight courier service (charges prepaid) or five (5) business days after being mailed to the recipient by certified or registered mail, return receipt requested and postage prepaid. Such notices, demands and other communications shall be sent (i) to the Corporation, at its principal executive offices and (ii) to any stockholder, at such holder's address as it appears in the stock records of the Corporation (unless otherwise indicated by any such holder). D. COMMON STOCK Effective upon the filing of this First Amended and Restated Certificate of Incorporation, each outstanding share of Common Stock shall become, without action of the holder thereof, one half (1/2) of a share of Common Stock. Section 1. Voting Rights. 1A. Election of Directors. For so long as any Class B Preferred remains outstanding, the holders of Common Stock, voting separately as a single class to the exclusion of all other classes of the Corporation's capital stock and with each share of Common Stock entitled to one vote, shall be entitled to elect one (1) director to serve on the Corporation's Board of Directors until such director's successor is duly elected by the holders of the Common Stock or such director is removed from office by the holders of the Common Stock. In addition, for so long as any Class B Preferred remains outstanding, the holders of Common Stock and the holders of Class B Preferred shall have the right to elect two (2) directors to serve on the Corporation's Board of Directors as -27- 28 provided in paragraph 5A of Subdivision C of this Article IV. At such time as all Shares of Class B Preferred shall cease to be outstanding, the holders of the Common Stock, voting separately as a single class to the exclusion of all other classes of the Corporation's capital stock and with each share of Common Stock entitled to one vote, shall be entitled to elect all of the directors to serve on the Corporation's Board of Directors until their successors are duly elected by the holders of the Common Stock or until any such director is removed from office by the holders of the Common Stock. 1B. General. The holders of the Common Stock shall be entitled to notice of all stockholders meetings in accordance with the Corporation's Bylaws, and, except as required by applicable law and except in the election of directors of the Corporation as to which the holders of the Common Stock shall have the voting rights set forth in paragraph 1A above, the holders of the Common Stock shall be entitled to one vote per share on all matters submitted to the stockholders of the Corporation for a vote. Section 2. Dividends. When and as declared by the Corporation's Board of Directors and to the extent permitted under the Delaware General Corporation Law, the holders of the Common Stock shall be entitled to receive dividends on such Common Stock. The rights of the holders of Common Stock to receive dividends are subject to the provisions of the Class A Preferred and Class B Preferred. Section 3. Liquidation. Subject to the provisions of the Class A Preferred and Class B Preferred, the holders of the Common Stock shall be entitled to participate in all distributions to the holders of capital stock of the Corporation in any liquidation, dissolution or winding up of the Corporation. ARTICLE V The Corporation is to have perpetual existence. ARTICLE VI Section 1. The management of the business and the conduct of the affairs of the Corporation shall be vested in the Board of Directors. The number of directors which shall constitute the whole Board of Directors shall be fixed in the manner designated in the Bylaws of the Corporation. Section 2. In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to make, alter, amend or repeal the Bylaws of the Corporation. Section 3. Elections of directors need not be by written ballot unless a stockholder demands election by written ballot at the meeting and before voting begins or unless the Bylaws of the Corporation shall so provide. ARTICLE VII -28- 29 Section 1. To the fullest extent permitted by the Delaware General Corporation Law as the same exists or as may hereafter be amended, a director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. Section 2. The Corporation may indemnify to the fullest extent permitted by law any person made or threatened to be made a party to an action or proceeding, whether criminal, civil, administrative or investigative, by reason of the fact that he, his testator or intestate is or was a director, officer, employee or agent of the Corporation or any predecessor of the Corporation or serves or served at any other enterprise as a director, officer, employee or agent at the request of the Corporation or any predecessor to the Corporation. Section 3. Neither any amendment nor repeal of this Article VII, nor the adoption of any provision of this Corporation's Certificate of Incorporation inconsistent with this Article VII, shall eliminate or reduce the effect of this Article VII, in respect of any matter occurring, or any action or proceeding accruing or arising or that, but for this Article VII, would accrue or arise, prior to such amendment, repeal or adoption of an inconsistent provision. ARTICLE VIII Meetings of stockholders may be held within or without the State of Delaware, as the Bylaws may provide. The books of the Corporation may be kept (subject to any provision contained in the statutes) outside of the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the Bylaws of the Corporation. ARTICLE IX Vacancies created by newly created directorships, created in accordance with the Bylaws of this Corporation, may be filled by the vote of a majority, although less than a quorum, of the directors then in office, or by a sole remaining director. ARTICLE X Section 1. At any time following the closing of the first sale of Common Stock of the Corporation pursuant to a registration statement declared effective by the Securities and Exchange Corporation under the Securities Act of 1933, as amended, stockholders of the Corporation may not take any action by written consent in lieu of a meeting and any action contemplated by stockholders after such time must be taken at a duly called annual or special meeting of stockholders. Section 2. The number of directors which constitute the whole Board of Directors of the Corporation shall be fixed exclusively by one or more resolution adopted from time to time by the Board of Directors. The Board of Directors shall be divided into three classes designated as Class I, Class II, and Class III, respectively. Directors shall be assigned to each class in accordance with a resolution or resolutions adopted by the Board of Directors. At the first annual meeting of stockholders following the date hereof, the term of office of the Class I directors shall expire and Class I directors shall be elected for a full term of three years. At the second annual meeting of -29- 30 stockholders following the date hereof, the term of office of the Class II directors shall expire and Class II directors shall be elected for a full term of three years. At the third annual meeting of stockholders following the date hereof, the term of office of the Class III directors shall expire and Class III directors shall be elected for a full term of three years. At each succeeding annual meeting of stockholders, directors shall be elected for a full term of three years to succeed the directors of the class whose terms expire at such annual meeting. Section 3. Advance notice of new business and stockholder nominations for the election of directors shall be given in the manner and to the extent provided in the Bylaws of the Corporation. -30- 31 ARTICLE XI The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation." * * * -31- 32 3. The foregoing First Amended and Restated Certificate of Incorporation has been duly approved by the required vote of the stockholders in accordance with the Certificate of Incorporation and the provisions of Sections 242 and 245 of the Delaware General Corporation Law. The undersigned parties hereby acknowledge that the foregoing First Amended and Restated Certificate of Incorporation is their act and deed and that the facts stated herein are true. Executed at Chatsworth, California, this 29th day of September, 1998. - ------------------------------------- --------------------------------------- Barry Phelps, President Gilbert Cabral, Secretary EX-3.3 3 BYLAWS OF NETCOM SYSTEMS 1 EXHIBIT 3.3 BYLAWS OF NETCOM SYSTEMS, INC. (a Delaware corporation) as amended on May 13, 1999 ARTICLE I CORPORATE OFFICES 1.1 REGISTERED OFFICE The address of the corporation's registered office in the State of Delaware is 1209 Orange Street, Wilmington, Delaware 19801, County of New Castle. The name of its registered agent at such address is The Corporation Trust Company. 1.2 OTHER OFFICES The board of directors may at any time establish other offices at any place or places where the corporation is qualified to do business. ARTICLE II MEETINGS OF STOCKHOLDERS 2.1 PLACE OF MEETINGS Meetings of stockholders shall be held at any place, within or outside the State of Delaware, designated by the board of directors. In the absence of any such designation, stockholders' meetings shall be held at the registered office of the corporation. 2.2 ANNUAL MEETING The annual meeting of stockholders shall be held each year on a date and at a time designated by the board of directors. At the meeting, directors shall be elected and any other proper business may be transacted. -1- 2 2.3 SPECIAL MEETING A special meeting of the stockholders may be called at any time by the board of directors, or by the chairman of the board, or by the president. 2.4 NOTICE OF STOCKHOLDERS' MEETINGS All notices of meetings with stockholders shall be in writing and shall be sent or otherwise given in accordance with Section 2.5 of these bylaws not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder entitled to vote at such meeting. The notice shall specify the place, date, and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. 2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE Written notice of any meeting of stockholders, if mailed, is given when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the corporation. An affidavit of the secretary or an assistant secretary or of the transfer agent of the corporation that the notice has been given shall, in the absence of fraud, be prima facie evidence of the facts stated therein. 2.6 QUORUM The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute or by the certificate of incorporation. If, however, such quorum is not present or represented at any meeting of the stockholders, then the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present or represented. At such adjourned meeting at which a quorum is present or represented, any business may be transacted that might have been transacted at the meeting as originally noticed. 2.7 ADJOURNED MEETING; NOTICE When a meeting is adjourned to another time or place, unless these bylaws otherwise require, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the corporation may transact any business that might have been transacted at the original meeting. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. -2- 3 2.8 VOTING The stockholders entitled to vote at any meeting of stockholders shall be determined in accordance with the provisions of Section 2.11 of these bylaws, subject to the provisions of Sections 217 and 218 of the General Corporation Law of Delaware (relating to voting rights of fiduciaries, pledgors and joint owners of stock and to voting trusts and other voting agreements). 2.9 WAIVER OF NOTICE Whenever notice is required to be given under any provision of the General Corporation Law of Delaware or of the certificate of incorporation or these bylaws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in any written waiver of notice unless so required by the certificate of incorporation or these bylaws. 2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING Unless otherwise provided in the certificate of incorporation, any action required by this chapter to be taken at any annual or special meeting of stockholders of the corporation, or any action that may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice, and without a vote if a consent in writing, setting forth the action so taken, is signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. If the action which is consented to is such as would have required the filing of a certificate under any section of the General Corporation Law of Delaware if such action had been voted on by stockholders at a meeting thereof, then the certificate filed under such section shall state, in lieu of any statement required by such section concerning any vote of stockholders, that written notice and written consent have been given as provided in Section 228 of the General Corporation Law of Delaware. In the event of the delivery, in the manner provided hereby, to the corporation of the requisite written consent or consents to take corporate action and/or any related revocation or revocations, the corporation may engage independent inspectors of elections for the purpose of performing promptly a ministerial review of the validity of the consents and revocations. For the -3- 4 purpose of permitting the inspectors to perform such review, in the event such inspectors are appointed, no action by written consent without a meeting shall be effective until such date as such appointed independent inspectors certify to the corporation that the consents delivered to the corporation in accordance herewith represent at least the minimum number of votes that would be necessary to take the corporate action. Nothing contained in these Bylaws shall in any way be construed to suggest or imply that the board of directors or any stockholder shall not be entitled to contest the validity of any consent or revocation thereof, whether before or after any certification by any independent inspectors, or to take any other action (including, without limitation, the commencement, prosecution or defense of any litigation with respect thereto, and the seeking of injunctive relief in such litigation). Every written consent shall bear the date of signature of each stockholder who signs the consent and no written consent shall be effective to take the corporate action referred to therein unless, within sixty (60) days of the earliest dated written consent received in accordance herewith, a written consent or consents signed by a sufficient number of holders to take such action are delivered to the corporation in the manner prescribed herein. 2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS (i) Actions other than Written Consent. For the purpose of determining the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or the allotment of any rights, or entitled to exercise any rights in respect of any change, conversion, or exchange of stock, or other lawful purpose (other than the expression of consent to corporate action in writing without a meeting) the directors may fix, in advance, a record date, which, in the case of a meeting of stockholders, shall not be more than 60 days nor less than 10 days before the date of such meeting. If no record date is fixed, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held and the record date for determining stockholders for any other purpose pursuant to this Section 2.11(i) shall be at the close of business on the day on which the board of directors adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at any meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the board of directors may fix a new record date for the adjourned meeting. (ii) Action by Written Consent. In order that the corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the board of directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the board of directors. Any stockholder of record seeking to have the stockholders authorize or take corporate action by written consent shall, by -4- 5 written notice to the secretary, request the board of directors to fix a record date. The board of directors may, at any time within ten (10) days after the date on which such a request is received, adopt a resolution fixing the record date (unless a record date has previously been fixed by the first sentence of this Section 2.11(ii)). If no record date has been fixed by the board of directors pursuant to the first sentence of this Section 2.11(ii) or otherwise within ten (10) days of the date on which such a request is received, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the board of directors is required by applicable law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the corporation by delivery to its registered office in Delaware, its principal place of business, or to any officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the board of directors and prior action by the board of directors is required by applicable law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the date on which the board of directors adopts the resolution taking such prior action. 2.12 PROXIES Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for him by a written proxy, signed by the stockholder and filed with the secretary of the corporation, but no such proxy shall be voted or acted upon after three (3) years from its date, unless the proxy provides for a longer period. A proxy shall be deemed signed if the stockholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by the stockholder or the stockholder's attorney-in-fact. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Section 212(c) of the General Corporation Law of Delaware. 2.13 LIST OF STOCKHOLDERS ENTITLED TO VOTE The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. -5- 6 2.14 NOMINATIONS AND PROPOSALS Nominations of persons for election to the board of directors of the corporation and the proposal of business to be considered by the stockholders may be made at any meeting of stockholders only (a) pursuant to the corporation's notice of meeting, (b) by or at the direction of the board of directors or (c) by any stockholder of the corporation who was a stockholder of record at the time of giving of notice provided for in these bylaws, who is entitled to vote at the meeting and who complies with the notice procedures set forth in this Section 2.14. For nominations or other business to be properly brought before a stockholders meeting by a stockholder pursuant to clause (c) of the preceding sentence, the stockholder must have given timely notice thereof in writing to the secretary of the corporation and such other business must otherwise be a proper matter for stockholder action. To be timely, a stockholder's notice shall be delivered to the secretary at the principal executive offices of the corporation not later than the close of business on the 60th day nor earlier than the close of business on the 90th day prior to the meeting; provided, however, that in the event that less than 65 days notice of the meeting is given to stockholders, notice by the stockholder to be timely must be so delivered not earlier than the close of business on the seventh (7th) day following the day on which the notice of meeting was mailed. In no event shall the public announcement of an adjournment of a stockholders meeting commence a new time period for the giving of a stockholder's notice as described above. Such stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (or any successor thereto) and Rule 14a-11 thereunder (or any successor thereto) (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (b) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (c) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (i) the name and address of such stockholder, as they appear on the corporation's books, and of such beneficial owner, and (ii) the class and number of shares of the corporation which are owned beneficially and of record by such stockholder and such beneficial owner. Notwithstanding any provision herein to the contrary, no business shall be conducted at a stockholders meeting except in accordance with the procedures set forth in this Section 2.14. -6- 7 ARTICLE III DIRECTORS 3.1 POWERS Subject to the provisions of the General Corporation Law of Delaware and any limitations in the certificate of incorporation or these bylaws relating to action required to be approved by the stockholders or by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the board of directors. 3.2 NUMBER OF DIRECTORS Unless otherwise provided for in our certificate of incorporation, the authorized number of directors shall be five (5). This number may be changed by a duly adopted amendment to the certificate of incorporation or by an amendment to this bylaw adopted by the vote or written consent of the holders of a majority of the stock issued and outstanding and entitled to vote or by resolution of a majority of the board of directors. No reduction of the authorized number of directors shall have the effect of removing any director before that director's term of office expires. 3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS Except as provided in the certificate of incorporation and Section 3.4 of these bylaws, directors shall be elected at each annual meeting of stockholders to hold office until the next annual meeting. Directors need not be stockholders unless so required by the certificate of incorporation or these bylaws, wherein other qualifications for directors may be prescribed. Each director, including a director elected to fill a vacancy, shall hold office until his successor is elected and qualified or until his earlier resignation or removal. Elections of directors need not be by written ballot. 3.4 RESIGNATION AND VACANCIES Any director may resign at any time upon written notice to the corporation. When one or more directors so resigns and the resignation is effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each director so chosen shall hold office as provided in this section in the filling of other vacancies. -7- 8 Unless otherwise provided in the certificate of incorporation or these bylaws: (i) Vacancies and newly created directorships resulting from any increase in the authorized number of directors elected by all of the stockholders having the right to vote as a single class may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director. (ii) Whenever the holders of any class or classes of stock or series thereof are entitled to elect one or more directors by the provisions of the certificate of incorporation, vacancies and newly created directorships of such class or classes or series may be filled by a majority of the directors elected by such class or classes or series thereof then in office, or by a sole remaining director so elected. If at any time, by reason of death or resignation or other cause, the corporation should have no directors in office, then any officer or any stockholder or an executor, administrator, trustee or guardian of a stockholder, or other fiduciary entrusted with like responsibility for the person or estate of a stockholder, may call a special meeting of stockholders in accordance with the provisions of the certificate of incorporation or these bylaws, or may apply to the Court of Chancery for a decree summarily ordering an election as provided in Section 211 of the General Corporation Law of Delaware. If, at the time of filling any vacancy or any newly created directorship, the directors then in office constitute less than a majority of the whole board (as constituted immediately prior to any such increase), then the Court of Chancery may, upon application of any stockholder or stockholders holding at least ten (10) percent of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office as aforesaid, which election shall be governed by the provisions of Section 211 of the General Corporation Law of Delaware as far as applicable. 3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE The board of directors of the corporation may hold meetings, both regular and special, either within or outside the State of Delaware. Unless otherwise restricted by the certificate of incorporation or these bylaws, members of the board of directors, or any committee designated by the board of directors, may participate in a meeting of the board of directors, or any committee, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. -8- 9 3.6 FIRST MEETINGS The first meeting of each newly elected board of directors shall be held at such time and place as shall be fixed by the vote of the stockholders at the annual meeting and no notice of such meeting shall be necessary to the newly elected directors in order legally to constitute the meeting, provided a quorum shall be present. In the event of the failure of the stockholders to fix the time or place of such first meeting of the newly elected board of directors, or in the event such meeting is not held at the time and place so fixed by the stockholders, the meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the board of directors, or as shall be specified in a written waiver signed by all of the directors. 3.7 REGULAR MEETINGS Regular meetings of the board of directors may be held without notice at such time and at such place as shall from time to time be determined by the board. 3.8 SPECIAL MEETINGS; NOTICE Special meetings of the board of directors for any purpose or purposes may be called at any time by the chairman of the board, the president, any vice president, the secretary or any two (2) directors. Notice of the time and place of special meetings shall be delivered personally or by telephone to each director or sent by first-class mail or telegram, charges prepaid, addressed to each director at that director's address as it is shown on the records of the corporation. If the notice is mailed, it shall be deposited in the United States mail at least four (4) days before the time of the holding of the meeting. If the notice is delivered personally or by telephone or by telegram, it shall be delivered personally or by telephone or to the telegraph company at least forty-eight (48) hours before the time of the holding of the meeting. Any oral notice given personally or by telephone may be communicated either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. The notice need not specify the purpose or the place of the meeting, if the meeting is to be held at the principal executive office of the corporation. 3.9 QUORUM At all meetings of the board of directors, a majority of the authorized number of directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the board of directors, except as may be otherwise specifically provided by statute or by the certificate of incorporation. If a quorum is not present at any meeting of the board of directors, then the directors present thereat -9- 10 may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present. 3.10 WAIVER OF NOTICE Whenever notice is required to be given under any provision of the General Corporation Law of Delaware or of the certificate of incorporation or these bylaws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the directors, or members of a committee of directors, need be specified in any written waiver of notice unless so required by the certificate of incorporation or these bylaws. 3.11 ADJOURNED MEETING; NOTICE If a quorum is not present at any meeting of the board of directors, then the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present. 3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING Unless otherwise restricted by the certificate of incorporation or these bylaws, any action required or permitted to be taken at any meeting of the board of directors, or of any committee thereof, may be taken without a meeting if all members of the board or committee, as the case may be, consent thereto in writing and the writing or writings are filed with the minutes of proceedings of the board or committee. 3.13 FEES AND COMPENSATION OF DIRECTORS Unless otherwise restricted by the certificate of incorporation or these bylaws, the board of directors shall have the authority to fix the compensation of directors. 3.14 APPROVAL OF LOANS TO OFFICERS The corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the corporation or of its subsidiary, including any officer or employee who is a director of the corporation or its subsidiary, whenever, in the judgment of the directors, such loan, guaranty or assistance may reasonably be expected to benefit the corporation. The loan, guaranty or other assistance may be with or without interest and may be unsecured, or -10- 11 secured in such manner as the board of directors shall approve, including, without limitation, a pledge of shares of stock of the corporation. Nothing contained in this section shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the corporation at common law or under any statute. 3.15 REMOVAL OF DIRECTORS Unless otherwise restricted by statute, by the certificate of incorporation or by these bylaws, any director or the entire board of directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors. No reduction of the authorized number of directors shall have the effect of removing any director prior to the expiration of such director's term of office. ARTICLE IV COMMITTEES 4.1 COMMITTEES OF DIRECTORS The board of directors may, by resolution passed by a majority of the whole board, designate one or more committees, with each committee to consist of one or more of the directors of the corporation. The board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the board of directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the board of directors or in the bylaws of the corporation, shall have and may exercise all the powers and authority of the board of directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers that may require it; but no such committee shall have the power or authority to (i) amend the certificate of incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the board of directors as provided in Section 151(a) of the General Corporation Law of Delaware, fix any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the corporation), (ii) adopt an agreement of merger or consolidation under Sections 251 or 252 of the General Corporation Law of Delaware, (iii) recommend to the stockholders the sale, -11- 12 lease or exchange of all or substantially all of the corporation's property and assets, (iv) recommend to the stockholders a dissolution of the corporation or a revocation of a dissolution, or (v) amend the bylaws of the corporation; and, unless the board resolution establishing the committee, the bylaws or the certificate of incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend, to authorize the issuance of stock, or to adopt a certificate of ownership and merger pursuant to Section 253 of the General Corporation Law of Delaware. 4.2 COMMITTEE MINUTES Each committee shall keep regular minutes of its meetings and report the same to the board of directors when required. 4.3 MEETINGS AND ACTION OF COMMITTEES Meetings and actions of committees shall be governed by, and held and taken in accordance with, the provisions of Article III of these bylaws, Section 3.5 (place of meetings and meetings by telephone), Section 3.7 (regular meetings), Section 3.8 (special meetings and notice), Section 3.9 (quorum), Section 3.10 (waiver of notice), Section 3.11 (adjournment and notice of adjournment), and Section 3.12 (action without a meeting), with such changes in the context of those bylaws as are necessary to substitute the committee and its members for the board of directors and its members; provided, however, that the time of regular meetings of committees may also be called by resolution of the board of directors and that notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The board of directors may adopt rules for the government of any committee not inconsistent with the provisions of these bylaws. ARTICLE V OFFICERS 5.1 OFFICERS The officers of the corporation shall be a president, one or more vice presidents, a secretary, and a treasurer. The corporation may also have, at the discretion of the board of directors, a chairman of the board, one or more assistant vice presidents, assistant secretaries, assistant treasurers, and any such other officers as may be appointed in accordance with the provisions of Section 5.3 of these bylaws. Any number of offices may be held by the same person. -12- 13 5.2 ELECTION OF OFFICERS The officers of the corporation, except such officers as may be appointed in accordance with the provisions of Sections 5.3 or 5.5 of these bylaws, shall be chosen by the board of directors, subject to the rights, if any, of an officer under any contract of employment. 5.3 SUBORDINATE OFFICERS The board of directors may appoint, or empower the president to appoint, such other officers and agents as the business of the corporation may require, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in these bylaws or as the board of directors may from time to time determine. 5.4 REMOVAL AND RESIGNATION OF OFFICERS Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by an affirmative vote of the majority of the board of directors at any regular or special meeting of the board or, except in the case of an officer chosen by the board of directors, by any officer upon whom such power of removal may be conferred by the board of directors. Any officer may resign at any time by giving written notice to the corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. 5.5 VACANCIES IN OFFICES Any vacancy occurring in any office of the corporation shall be filled by the board of directors. 5.6 CHAIRMAN OF THE BOARD The chairman of the board, if such an officer be elected, shall, if present, preside at meetings of the board of directors and exercise and perform such other powers and duties as may from time to time be assigned to him by the board of directors or as may be prescribed by these bylaws. If there is no president, then the chairman of the board shall also be the chief executive officer of the corporation and shall have the powers and duties prescribed in Section 5.7 of these bylaws. -13- 14 5.7 PRESIDENT Subject to such supervisory powers, if any, as may be given by the board of directors to the chairman of the board, if there be such an officer, the president shall be the chief executive officer of the corporation and shall, subject to the control of the board of directors, have general supervision, direction, and control of the business and the officers of the corporation. He shall preside at all meetings of the stockholders and, in the absence or nonexistence of a chairman of the board, at all meetings of the board of directors. He shall have the general powers and duties of management usually vested in the office of president of a corporation and shall have such other powers and duties as may be prescribed by the board of directors or these bylaws. 5.8 VICE PRESIDENT In the absence or disability of the president, the vice presidents, if any, in order of their rank as fixed by the board of directors or, if not ranked, a vice president designated by the board of directors, shall perform all the duties of the president and when so acting shall have all the powers of, and be subject to all the restrictions upon, the president. The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the board of directors, these bylaws, the president or the chairman of the board. 5.9 SECRETARY The secretary shall keep or cause to be kept, at the principal executive office of the corporation or such other place as the board of directors may direct, a book of minutes of all meetings and actions of directors, committees of directors, and stockholders. The minutes shall show the time and place of each meeting, whether regular or special (and, if special, how authorized and the notice given), the names of those present at directors' meetings or committee meetings, the number of shares present or represented at stockholders' meetings, and the proceedings thereof. The secretary shall keep, or cause to be kept, at the principal executive office of the corporation or at the office of the corporation's transfer agent or registrar, as determined by resolution of the board of directors, a share register, or a duplicate share register, showing the names of all stockholders and their addresses, the number and classes of shares held by each, the number and date of certificates evidencing such shares, and the number and date of cancellation of every certificate surrendered for cancellation. The secretary shall give, or cause to be given, notice of all meetings of the stockholders and of the board of directors required to be given by law or by these bylaws. He shall keep the seal of the corporation, if one be adopted, in safe custody and shall have such other powers and perform such other duties as may be prescribed by the board of directors or by these bylaws. -14- 15 5.10 TREASURER The treasurer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings, and shares. The books of account shall at all reasonable times be open to inspection by any director. The treasurer shall deposit all money and other valuables in the name and to the credit of the corporation with such depositaries as may be designated by the board of directors. He shall disburse the funds of the corporation as may be ordered by the board of directors, shall render to the president and directors, whenever they request it, an account of all of his transactions as treasurer and of the financial condition of the corporation, and shall have such other powers and perform such other duties as may be prescribed by the board of directors or these bylaws. 5.11 ASSISTANT SECRETARY The assistant secretary, or, if there is more than one, the assistant secretaries in the order determined by the stockholders or board of directors (or if there be no such determination, then in the order of their election) shall, in the absence of the secretary or in the event of his or her inability or refusal to act, perform the duties and exercise the powers of the secretary and shall perform such other duties and have such other powers as the board of directors or the stockholders may from time to time prescribe. 5.12 ASSISTANT TREASURER The assistant treasurer, or, if there is more than one, the assistant treasurers, in the order determined by the stockholders or board of directors (or if there be no such determination, then in the order of their election), shall, in the absence of the treasurer or in the event of his or her inability or refusal to act, perform the duties and exercise the powers of the treasurer and shall perform such other duties and have such other powers as the board of directors or the stockholders may from time to time prescribe. 5.13 AUTHORITY AND DUTIES OF OFFICERS In addition to the foregoing authority and duties, all officers of the corporation shall respectively have such authority and perform such duties in the management of the business of the corporation as may be designated from time to time by the board of directors or the stockholders. -15- 16 ARTICLE VI INDEMNITY 6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS The corporation shall, to the maximum extent and in the manner permitted by the General Corporation Law of Delaware, indemnify each of its directors and officers against expenses (including attorneys' fees), judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any proceeding, arising by reason of the fact that such person is or was an agent of the corporation. For purposes of this Section 6.1, a "director" or "officer" of the corporation includes any person (i) who is or was a director or officer of the corporation, (ii) who is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was a director or officer of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. 6.2 INDEMNIFICATION OF OTHERS The corporation shall have the power, to the extent and in the manner permitted by the General Corporation Law of Delaware, to indemnify each of its employees and agents (other than directors and officers) against expenses (including attorneys' fees), judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any proceeding, arising by reason of the fact that such person is or was an agent of the corporation. For purposes of this Section 6.2, an "employee" or "agent" of the corporation (other than a director or officer) includes any person (i) who is or was an employee or agent of the corporation, (ii) who is or was serving at the request of the corporation as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was an employee or agent of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. 6.3 INSURANCE The corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and 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 indemnify him against such liability under the provisions of the General Corporation Law of Delaware. -16- 17 ARTICLE VII RECORDS AND REPORTS 7.1 MAINTENANCE AND INSPECTION OF RECORDS The corporation shall, either at its principal executive office or at such place or places as designated by the board of directors, keep a record of its stockholders listing their names and addresses and the number and class of shares held by each stockholder, a copy of these bylaws as amended to date, accounting books, and other records. Any stockholder of record, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose the corporation's stock ledger, a list of its stockholders, and its other books and records and to make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to such person's interest as a stockholder. In every instance where an attorney or other agent is the person who seeks the right to inspection, the demand under oath shall be accompanied by a power of attorney or such other writing that authorizes the attorney or other agent to so act on behalf of the stockholder. The demand under oath shall be directed to the corporation at its registered office in Delaware or at its principal place of business. The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. 7.2 INSPECTION BY DIRECTORS Any director shall have the right to examine the corporation's stock ledger, a list of its stockholders, and its other books and records for a purpose reasonably related to his position as a director. The Court of Chancery is hereby vested with the exclusive jurisdiction to determine whether a director is entitled to the inspection sought. The Court may summarily order the corporation to permit the director to inspect any and all books and records, the stock ledger, and the stock list and to make copies or extracts therefrom. The Court may, in its discretion, -17- 18 prescribe any limitations or conditions with reference to the inspection, or award such other and further relief as the Court may deem just and proper. 7.3 ANNUAL STATEMENT TO STOCKHOLDERS The board of directors shall present at each annual meeting, and at any special meeting of the stockholders when called for by vote of the stockholders, a full and clear statement of the business and condition of the corporation. 7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS The chairman of the board, the president, any vice president, the treasurer, the secretary or assistant secretary of this corporation, or any other person authorized by the board of directors or the president or a vice president, is authorized to vote, represent, and exercise on behalf of this corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of this corporation. The authority granted herein may be exercised either by such person directly or by any other person authorized to do so by proxy or power of attorney duly executed by such person having the authority. ARTICLE VIII GENERAL MATTERS 8.1 CHECKS From time to time, the board of directors shall determine by resolution which person or persons may sign or endorse all checks, drafts, other orders for payment of money, notes or other evidences of indebtedness that are issued in the name of or payable to the corporation, and only the persons so authorized shall sign or endorse those instruments. 8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS The board of directors, except as otherwise provided in these bylaws, may authorize any officer or officers, or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation; such authority may be general or confined to specific instances. Unless so authorized or ratified by the board of directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. -18- 19 8.3 STOCK CERTIFICATES; PARTLY PAID SHARES The shares of the corporation shall be represented by certificates, provided that the board of directors of the corporation may provide by resolution or resolutions that some or all of any or all classes or series of its stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the corporation. Notwithstanding the adoption of such a resolution by the board of directors, every holder of stock represented by certificates and upon request every holder of uncertificated shares shall be entitled to have a certificate signed by, or in the name of the corporation by the chairman or vice-chairman of the board of directors, or the president or vice-president, and by the treasurer or an assistant treasurer, or the secretary or an assistant secretary of such corporation representing the number of shares registered in certificate form. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate has ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. The corporation may issue the whole or any part of its shares as partly paid and subject to call for the remainder of the consideration to be paid therefor. Upon the face or back of each stock certificate issued to represent any such partly paid shares, upon the books and records of the corporation in the case of uncertificated partly paid shares, the total amount of the consideration to be paid therefor and the amount paid thereon shall be stated. Upon the declaration of any dividend on fully paid shares, the corporation shall declare a dividend upon partly paid shares of the same class, but only upon the basis of the percentage of the consideration actually paid thereon. 8.4 SPECIAL DESIGNATION ON CERTIFICATES If the corporation is authorized to issue more than one class of stock or more than one series of any class, then the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate that the corporation shall issue to represent such class or series of stock; provided, however, that, except as otherwise provided in Section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements there may be set forth on the face or back of the certificate that the corporation shall issue to represent such class or series of stock a statement that the corporation will furnish without charge to each stockholder who so requests the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. -19- 20 8.5 LOST CERTIFICATES Except as provided in this Section 8.5, no new certificates for shares shall be issued to replace a previously issued certificate unless the latter is surrendered to the corporation and cancelled at the same time. The corporation may issue a new certificate of stock or uncertificated shares in the place of any certificate theretofore issued by it, alleged to have been lost, stolen or destroyed, and the corporation may require the owner of the lost, stolen or destroyed certificate, or his legal representative, to give the corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate or uncertificated shares. 8.6 CONSTRUCTION; DEFINITIONS Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the Delaware General Corporation Law shall govern the construction of these bylaws. Without limiting the generality of this provision, the singular number includes the plural, the plural number includes the singular, and the term "person" includes both a corporation and a natural person. 8.7 DIVIDENDS The directors of the corporation, subject to any restrictions contained in the certificate of incorporation, may declare and pay dividends upon the shares of its capital stock pursuant to the General Corporation Law of Delaware. Dividends may be paid in cash, in property, or in shares of the corporation's capital stock. The directors of the corporation may set apart out of any of the funds of the corporation available for dividends a reserve or reserves for any proper purpose and may abolish any such reserve. Such purposes shall include but not be limited to equalizing dividends, repairing or maintaining any property of the corporation, and meeting contingencies. 8.8 FISCAL YEAR The fiscal year of the corporation shall be fixed by resolution of the board of directors and may be changed by the board of directors. 8.9 SEAL This corporation may have a corporate seal, which may be adopted or altered at the pleasure of the board of directors, and may use the same by causing it or a facsimile thereof, to be impressed or affixed or in any other manner reproduced. -20- 21 8.10 TRANSFER OF STOCK Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate, and record the transaction in its books. 8.11 STOCK TRANSFER AGREEMENTS The corporation shall have power to enter into and perform any agreement with any number of stockholders of any one or more classes of stock of the corporation to restrict the transfer of shares of stock of the corporation of any one or more classes owned by such stockholders in any manner not prohibited by the General Corporation Law of Delaware. 8.12 REGISTERED STOCKHOLDERS The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends and to vote as such owner, shall be entitled to hold liable for calls and assessments the person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of another person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. ARTICLE IX AMENDMENTS The original or other bylaws of the corporation may be adopted, amended or repealed by the stockholders entitled to vote; provided, however, that the corporation may, in its certificate of incorporation, confer the power to adopt, amend or repeal bylaws upon the directors. The fact that such power has been so conferred upon the directors shall not divest the stockholders of the power, nor limit their power to adopt, amend or repeal bylaws. -21- 22 ARTICLE X DISSOLUTION If it should be deemed advisable in the judgment of the board of directors of the corporation that the corporation should be dissolved, the board, after the adoption of a resolution to that effect by a majority of the whole board at any meeting called for that purpose, shall cause notice to be mailed to each stockholder entitled to vote thereon of the adoption of the resolution and of a meeting of stockholders to take action upon the resolution. At the meeting a vote shall be taken for and against the proposed dissolution. If a majority of the outstanding stock of the corporation entitled to vote thereon votes for the proposed dissolution, then a certificate stating that the dissolution has been authorized in accordance with the provisions of Section 275 of the General Corporation Law of Delaware and setting forth the names and residences of the directors and officers shall be executed, acknowledged, and filed and shall become effective in accordance with Section 103 of the General Corporation Law of Delaware. Upon such certificate's becoming effective in accordance with Section 103 of the General Corporation Law of Delaware, the corporation shall be dissolved. Whenever all the stockholders entitled to vote on a dissolution consent in writing, either in person or by duly authorized attorney, to a dissolution, no meeting of directors or stockholders shall be necessary. The consent shall be filed and shall become effective in accordance with Section 103 of the General Corporation Law of Delaware. Upon such consent's becoming effective in accordance with Section 103 of the General Corporation Law of Delaware, the corporation shall be dissolved. If the consent is signed by an attorney, then the original power of attorney or a photocopy thereof shall be attached to and filed with the consent. The consent filed with the Secretary of State shall have attached to it the affidavit of the secretary or some other officer of the corporation stating that the consent has been signed by or on behalf of all the stockholders entitled to vote on a dissolution; in addition, there shall be attached to the consent a certification by the secretary or some other officer of the corporation setting forth the names and residences of the directors and officers of the corporation. -22- 23 ARTICLE XI CUSTODIAN 11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES The Court of Chancery, upon application of any stockholder, may appoint one or more persons to be custodians and, if the corporation is insolvent, to be receivers, of and for the corporation when: (i) at any meeting held for the election of directors the stockholders are so divided that they have failed to elect successors to directors whose terms have expired or would have expired upon qualification of their successors; or (ii) the business of the corporation is suffering or is threatened with irreparable injury because the directors are so divided respecting the management of the affairs of the corporation that the required vote for action by the board of directors cannot be obtained and the stockholders are unable to terminate this division; or (iii) the corporation has abandoned its business and has failed within a reasonable time to take steps to dissolve, liquidate or distribute its assets. 11.2 DUTIES OF CUSTODIAN The custodian shall have all the powers and title of a receiver appointed under Section 291 of the General Corporation Law of Delaware, but the authority of the custodian shall be to con tinue the business of the corporation and not to liquidate its affairs and distribute its assets, except when the Court of Chancery otherwise orders and except in cases arising under Sections 226(a)(3) or 352(a)(2) of the General Corporation Law of Delaware. -23- 24 CERTIFICATE OF ADOPTION OF BYLAWS OF NETCOM SYSTEMS, INC. (a Delaware corporation) Adoption by Incorporator The undersigned person appointed in the Certificate of Incorporation to act as the Incorporator of Netcom Systems, Inc. hereby adopts the foregoing bylaws, comprising twenty-two pages, as the Bylaws of the corporation. Executed this 20th day of May, 1998. /s/ TODD CLEARY --------------------------------------- Todd Cleary, Incorporator -24- EX-5.1 4 OPINION OF WILSON SONSINI GOODRICH & ROSATI 1 EXHIBIT 5.1 Netcom Systems, Inc. 20550 Nordhoff Street Chatsworth, CA 91311 Re: Registration Statement on Form S-1 Ladies and Gentlemen: We have examined the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on May 14, 1999, (as such may be amended or supplemented, the "Registration Statement"), in connection with the registration under the Securities Act of 1933, as amended, of shares of Common Stock of Netcom Systems, Inc. with a maximum aggregate offering price of $86,250,000 (the "Shares"). The Shares to be offered by the Company are to be sold to the underwriters as described in such Registration Statement for the sale to the public or issued to the Representatives of the underwriters. As your counsel in connection with the transaction, we have examined the proceedings proposed to be taken in connection with said sale and issuance of the Shares. It is our opinion that, upon approval by the pricing committee duly authorized by the Company's Board of Directors, the Shares when issued and sold in the manner referred to in the Registration Statement will be legally and validly issued, fully paid and nonassessable. We consent to the use of this opinion as an exhibit to the Registration Statement, and further consent to the use of our name wherever appearing in the Registration Statement, including the prospectus constituting a part hereof, and any amendment thereto. Very truly yours, WILSON SONSINI GOODRIGH & ROSATI Professional Corporation /s/ WILSON SONSINI GOODRICH & ROSATI EX-10.1 5 AMENDED 1993 NON-STATUTORY STOCK OPTION PLAN 1 EXHIBIT 10.1 AMENDED AND RESTATED 1993 NON-STATUTORY STOCK OPTION AND PURCHASE PLAN OF NETCOM SYSTEMS, INC., a California corporation This 1993 Non-Statutory Stock Option and Purchase Plan is amended and restated as of February 18, 1997 and the number of shares set forth in Section 4 hereof reflects the two for one stock split effected in January 1997. 1. Purpose of Plan. The purpose of this Plan is to strengthen NETCOM SYSTEMS, INC. (hereinafter the "Corporation") by providing non-statutory incentive stock options as a means to attract, retain, and motivate corporate personnel. 2. Administration of Plan. This plan shall be administered by a Compensation Committee (hereinafter the "Committee") composed of members selected by, and serving at the pleasure of, the Board of Directors. The Committee shall have the power to make all determinations necessary for the administration of the Plan, subject to the restrictions on committee powers set forth in Section 311 of the California Corporations Code. 3. Grant of Options. The Corporation is hereby authorized to grant nonstatutory stock options, i.e., stock options which are intended NOT to be "incentive stock options" incentive stock options as defined in Internal Revenue Code Section 422A, to key employees of the Corporation. Options may not be granted to employees who own stock possessing more than 10 percent of the total combined voting power of all classes of stock of the corporation, or of its parent or subsidiary, except pursuant to the restrictions set forth in Paragraphs 6 and 7. Any option granted under this Plan shall be granted within 10 years from the date this Plan is adopted, or the date this Plan is approved by the shareholders pursuant to Paragraph 13, whichever is earlier. 4. Stock Subject to Plan. The aggregate number of shares that may be issued pursuant to options granted under this Plan shall be 5,000,000 shares of the Corporation's voting common stock. 5. Aggregate Fair Market Value. The aggregate fair market value of the stock, as determined in good faith by the Committee at the time the option is granted, with respect to which incentive stock options are exercisable for the first time by an employee during any calendar year (under all incentive stock option plans of the Corporation and its parent and subsidiary corporations) shall not exceed $100,000.00. 6. Exercise of Option. Any option granted pursuant to this Plan shall contain provisions, established by the Committee, setting forth the manner of exercising the option. However, no option granted under this Plan shall be exercisable by its terms after the expiration of 10 years from the 2 grant of the option, and no option granted to a person who owns stock possessing more than 10 percent of the total combined voting power of all classes of the Corporation's stock shall be exercisable by its terms after the expiration of five years from the date of the grant. The option may be subject to earlier termination as provided in Paragraph 9. The optionee shall have the right to receive property at the time of exercising the option, so long as the property is subject to inclusion in income under Internal Revenue Code Section 83. 7. Option Price. The price for a share of stock subject to an option granted pursuant to this Plan shall not be less than the fair market value for the stock at the time the option is granted, as determined in good faith by the Committee at the time the option is granted. However, when an option is granted to a person who owns stock possessing more than 10 percent of the total combined voting power of all classes of the Corporation's stock, the purchase price per share of the stock subject to the option shall not be less than 110 percent of the fair market value of the stock at the time the option is granted, as determined by the Committee in good faith at the time the option is granted. 8. Options Nontransferable. Except as provided in paragraph 9 of this Plan, the terms of any option granted under this Plan shall make the option nontransferable by the optionee except by will or the laws of descent and distribution, and exercisable only by the optionee during his or her lifetime. 9. Termination of Employment. Unless earlier cancelled by the Corporation or breach of the option agreement, an optionee's option shall expire three months after termination of employment for reasons other than death or disability, subject to earlier termination pursuant to Paragraph 6 of this Plan. An optionee's option shall expire 12 months after termination of employment due to permanent and total disability, as defined in Internal Revenue Code Section 22(e)(3), subject to earlier termination pursuant to Paragraph 6 of this Plan. If an optionee should die while employed by the Corporation, or its parent, subsidiary, or successor as defined in Section 425(a) of the Internal Revenue Code, or within the 90-day period after termination of employment, and more than one year after the grant of the option, the person to whom the optionee's rights pass by will or the laws of descent and distribution may exercise the option for any of the shares not previously exercised during Employee's lifetime, within 12 months after the optionee's death, subject to earlier termination pursuant to Paragraph 6 of this Plan. 10. Stock Subject to Option. a. The Corporation shall at all times during the term of this Plan reserve the number of shares of its common stock required to meet the requirements of this Plan, and shall pay all fees and expenses necessarily incurred by the Corporation in connection with the exercise of options under this Plan. b. In the event of a stock split, reverse stock split, stock dividend, combination, or reclassification of the Corporation's stock, an appropriate and proportionate adjustment shall be -2- 3 made in the number of shares to which stock options may be granted. A corresponding change shall be made to the number and kind of shares, and the exercise price per share, of unexercised options. 11. Merger, Consolidation, or Dissolution of Corporation. a. Following the merger of one or more corporations into the Corporation, or any consolidation of the Corporation and one or more corporations in which the Corporation is the surviving corporation, the exercise of options under this Plan shall apply to the shares of the surviving corporation. b. Notwithstanding any other provision of this Plan, all options under this Plan shall terminate on the dissolution or liquidation of the Corporation, or on any merger or consolidation in which the Corporation is not the surviving corporation. 12. Other Option Terms. Any option granted pursuant to this Plan shall contain any other terms that the Board of Directors, the Corporation's legal counsel, or the Committee deems necessary. 13. Effective Date of Plan. This Plan shall be effective upon approval by the outstanding shares or unanimous written consent of the shareholders of the Corporation. 14. Amendment and Termination of Plan. The Board of Directors may at any time amend or terminate this Plan. No option may be granted after termination of this Plan. The amendment or termination of the Plan shall not, however, alter any optionee's rights or obligations under an option previously granted, unless the optionee consents to that alteration. 15. Financial Disclosure. Optionees under this Plan shall receive, on a periodic basis, financial and other information regarding the Corporation during the period the options are outstanding, in the form of annual shareholder reports or otherwise. This provision does not require the use of financial statements. -3- 4 AMENDMENT NO. 1 TO THE 1993 NON-STATUTORY STOCK OPTION AND PURCHASE PLAN OF NETCOM SYSTEMS, INC., a California corporation This Amendment No. 1 to the 1993 Non-Statutory Stock Option and Purchase Plan (the "Plan") of Netcom Systems, Inc. (the "Company") is executed on February 18, 1997, by the Company at the direction of the Company's Board of Directors and a majority-in-interest of the Company's shareholders. 1. Amendment to Section 4 . Effective as of the date set forth above, Section 4 of the Plan is hereby amended in its entirety to read as follows: "4. Stock Subject to Plan. The aggregate number of shares that may be issued pursuant to options granted under this Plan shall be 4,000,000 shares of the Corporation's voting common stock." With the exception of the amendment set forth above, the Plan shall remain in full force and effect in accordance with its terms. This Amendment No. 1 to the Plan is hereby executed by the President of the Company as of the date set forth above. - ----------------------------------- Marc Hamon -1- 5 AMENDMENT NO. 2 TO THE 1993 NON-STATUTORY STOCK OPTION AND PURCHASE PLAN OF NETCOM SYSTEMS, INC., a California corporation This Amendment No. 2 to the 1993 Non-Statutory Stock Option and Purchase Plan (the "Plan") of Netcom Systems, Inc. (the "Company") is executed on August 28, 1997, by the Company at the direction of the Company's Board of Directors and a majority-in-interest of the Company's shareholders. 1. Amendment to Section 4. Effective as of the date set forth above, Section 4 of the Plan is hereby amended in its entirety to read as follows: "4. Stock Subject to Plan. The aggregate number of shares that may be issued pursuant to options granted under this Plan shall be 3,922,000 shares of the Corporation's voting common stock." With the exception of the amendment set forth above, the Plan shall remain in full force and effect in accordance with its terms. This Amendment No. 2 to the Plan is hereby executed by the President of the Company as of the date set forth above. - ----------------------------------- Marc Hamon -1- 6 AMENDMENT NO. 3 TO THE 1993 NON-STATUTORY STOCK OPTION AND PURCHASE PLAN OF NETCOM SYSTEMS, INC. a California corporation This Amendment No. 3 to the 1993 Non-Statutory Stock Option and Purchase Plan (the "Plan") of Netcom Systems, Inc. (the "Company") is executed on April 10, 1998, by the Company at the direction of the Company's Board of Directors. Section 10 of the Plan is hereby amended to add a new subparagraph (c) as follows: "(c) Change in Control. Effective upon the consummation of a Change in Control (as defined below) of the Company, the number of shares under each Option granted hereunder as to which such Option is vested and fully exercisable shall be accelerated such that each Option shall be immediately vested as to that additional number of shares as would be vested on the date one year following consummation of a Change in Control if all conditions to such vesting were satisfied. For purposes of the foregoing, a "Change in Control" shall be deemed to have occurred upon any person or entity, together with all affiliates (as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) thereof becoming the beneficial owner (as defined under Section 13(d) of the Exchange Act and Rule 13d-3 thereunder) of more than 50% of the Company's then outstanding shares of Common Stock." With the exception of the amendment set forth above, the Plan shall remain in full force and effect in accordance with its terms. -2- 7 AMENDMENT NO. 4 TO THE 1993 NON-STATUTORY STOCK OPTION AND PURCHASE PLAN OF NETCOM SYSTEMS, INC., a California corporation This Amendment No. 4 to the 1993 Non-Statutory Stock Option and Purchase Plan (the "Plan") of Netcom Systems, Inc. (the "Company") is executed on May 12, 1998 at the direction of the Company's Board of Directors. 1. Deletion of Sections 10(b) and 11. Effective as of the date set forth above, Sections 10(b) and 11 of the Plan are hereby deleted in their entirety. With the exception of the amendment set forth above, the Plan shall remain in full force and effect in accordance with its terms. -3- 8 STOCK OPTION AGREEMENT (NON-STATUTORY STOCK OPTION) This STOCK OPTION AGREEMENT (this "Agreement") is made and entered into on the execution date of the Option Certificate to which it is attached (the "Certificate"), by and between NETCOM SYSTEMS, INC., a California corporation (the "Company"), and the employee named in the Certificate ("Employee"). Pursuant to the 1993 Non-Statutory Stock Option and Purchase Plan of the Company (the "Plan"), the Board of Directors of the Company has authorized the grant to Employee of a non-statutory stock option (the "Option") to purchase shares of the Company's no par value Common Stock (the "Common Stock"), upon the terms and subject to the conditions set forth in this Agreement and in the Plan. The Company and Employee agree as follows: 1. Grant of Option. The Company hereby grants to Employee the right and option (the "Option"), upon the terms and subject to the conditions set forth in this Agreement, to purchase all or any portion of that number of shares of the Common Stock (the "Shares") set forth in the Certificate, at the option exercise price set forth in the Certificate (the "Exercise Price"). 2. Term of Option. The Option shall terminate and expire on the Option Expiration Date set forth in the Certificate, unless sooner terminated as provided herein. 3. Installments. a. Subject to the provisions of Paragraphs 3(b), 6 and 19(h) of this Agreement, the Option shall become exercisable in installments. Each installment shall include the number of Shares, and shall become exercisable (in whole or in part) upon and after the dates set forth under the caption "Exercise Schedule" in the Certificate. The installments shall be cumulative, i.e., the Option may be exercised, as to any or all Shares covered by an installment, at any time or times after the installment first becomes exercisable and until expiration or termination of the Option. b. Notwithstanding anything to the contrary contained in this Agreement, the Option may not be exercised, in whole or in part, unless and until any then applicable requirements of all state and federal laws and regulatory agencies shall have been fully complied with to the satisfaction of the Company and its counsel. 4. Exercise of Option. There is no obligation to exercise the Option, in whole or in part. The Option may be exercised, in whole or in part, only by delivery to the Company of both: -1- 9 a. Written notice of exercise in form and substance identical to Exhibit "A" attached to this Agreement stating the number of shares of Common Stock then being purchased (the "Purchased Shares"); and b. Payment of the Exercise Price of the Purchased Shares, either in cash, by check drawn payable to the order of the Company, or by any combination of the above methods of payment. Following receipt of the notice and payment referred to above, the Company shall issue and deliver to Employee a stock certificate or stock certificates evidencing the Purchased Shares; provided, however, that the Company shall not be obligated to issue a fraction or fractions of a share of its Common Stock, and may pay to Employee, in cash or by check, the fair market value of any fraction or fractions of a share exercised by Employee, which fair market value shall be determined by the Board of Directors of the Company (or a committee thereof) as of the date of such exercise. 5. Employment. In consideration for the grant of the Option, Employee agrees to remain in the employ of, and continue to render services to, the Company, any Subsidiary of the Company, or any Parent of the Company, as the Board of Directors (or a committee thereof) of the Company may from time to time direct, for a period of one year from the date of this Agreement. This provision shall not obligate the Company, or any Subsidiary or Parent of the Company, to continue to employ Employee for any period whatsoever. The sole remedy to the Company should Employee breach his or her obligations under this Paragraph 5 shall be to cancel this Agreement and the Option granted under this Agreement. For the purposes of this Agreement, the terms "Subsidiary" and "Parent" shall mean any present or future corporation which would be a "subsidiary corporation" or a "parent corporation," respectively, of the Company, as those terms are defined in Section 425 of the Internal Revenue Code of 1986 (the "Code"). 6. Termination of Employment. If Employee shall cease to be employed by the Company, or any Subsidiary or any Parent of the Company, for any reason other than death or permanent disability (see subparagraph (c)) or as provided in subparagraph (b), subject to the cancellation remedy available to the Company under Paragraph 5 of this Agreement, Employee shall have the right to exercise the Option at any time within 90 days after such termination of employment and prior to the date of Option termination under Paragraph 2 of this Agreement, to the extent that his or her right to exercise the Option had accrued pursuant to the provisions of Paragraph 3 of this Agreement and had not previously been exercised at the date of such termination; and to the extent unexercised at the end of period, the Option shall terminate. The Board of Directors of the Company (or a committee thereof), in its sole and absolute discretion, shall determine whether or not authorized leaves of absence shall constitute termination of employment for the purposes of this Agreement. a. If Employee shall cease to be employed by the Company, or any Subsidiary or any Parent of the Company, because of Employee's involuntary termination for the convenience of the employer and not for cause, Employee shall have the right to exercise the Option, at any time within 90 days after such termination of employment and prior to the date of Option termination -2- 10 under Paragraph 2 of this Agreement, but only (1) to the extent the Option has vested as of the effective date of Employee's termination and (2) to the extent that his or her right to exercise the Option otherwise had accrued pursuant to the provisions of Paragraph 3 of this Agreement and had not previously been exercised at the date of such termination; and to the extent unexercised at the end of this period, the Option shall terminate. b. If Employee shall die or become permanently disabled while in the employ of the Company, any Subsidiary or any Parent of the Company, then the Employee, the Employee's executors or administrators or any person or persons acquiring the Option directly from Employee by bequest or inheritance, may exercise the Option, to the extent that his or her right to exercise the Option had accrued pursuant to the provisions of Paragraph 3 of this Agreement and had not previously been exercised, at any time with one year after Employee's death or permanent disability, but not later than the Option Expiration Date set forth in the Certificate; to the extent unexercised at the end of that period, the Option shall terminate. If, prior to Employee's death or permanent disability, Employee shall not have remained in the employ of, or shall not have continued to render services to, the Company, any Subsidiary or any Parent for a period of one year from the date of Agreement, the Option shall terminate as of the date of Employee's death or permanent disability. 7. Restrictions on Purchased Shares. Employee shall not sell, transfer, assign, pledge, hypothecate or otherwise dispose of any of the Purchased Shares unless and until all of the following have occurred: a. The Purchased Shares are disposed of pursuant to and in conformity with an effective registration statement filed with the Securities and Exchange Commission pursuant to the Securities Act of 1933, as amended (the "Act"), or Employee delivers to the Company a written opinion of counsel, satisfactory to the Company and its counsel, to the effect that the proposed disposition is exempt from the registration and prospectus delivery requirements of the Act; and b. Employee delivers to the Company a written opinion of counsel, satisfactory in form and substance to the Company and its counsel, to the effect that the proposed disposition will not result in a violation of the securities laws of any state of the United States; and c. Employee has complied with the provisions of Paragraph 9 of this Agreement with respect to the Purchased Shares. Any attempted transfer which is not in full compliance with this Paragraph 7 shall be null and void ab initio, and of no force or effect. 8. Option of Company to Repurchase Shares. a. Option to Repurchase. If at any time, prior to such time as the Company shall issue and sell any shares of any class of securities of the Company pursuant to an effective registration statement filed with the Securities and Exchange Commission under the Act, Employee shall cease to be employed by the Company, or any Subsidiary or any Parent of the Company, -3- 11 regardless of the cause therefor, the Company shall have the option to repurchase all, but not less than all, of the Purchased Shares beneficially owned by Employee on the terms set forth in Paragraph 8. The Company may exercise its option to repurchase by delivering to Employee or his or her representative, as the case may be, written notice of its election to purchase the Purchased Shares within 180 days of the date of termination of Employee's employment; and upon receipt of such written notice, Employee shall be obligated to sell his or her Purchased Shares to the Company and shall sell such shares, on the terms and conditions contained in this Paragraph 8. b. Repurchase Price. The per share price to be paid by the Company for the Purchased Shares shall be the greater of: - The per share exercise price for the Purchased Shares (adjusted, if applicable, for all stock splits, stock dividends and reorganizations); or - The per share fair market value of the Purchased Shares, with Fair Market Value determined in a manner consistent with Paragraph 4(b) of this Agreement, and the following: i. At any time, and from time to time, the Board of Directors of the Company (or a committee thereof) may, but shall not be obligated to, determine, by a majority vote, the per share fair market value of the Common Stock of the Company as of the end of the most recently ended fiscal year of the Company, and, if this determination is made, shall cause written notice of such valuation to be sent to Employee. In the absence of fraud, the valuation so determined shall become conclusive and binding upon Employee unless he or she delivers a written notice of disagreement to the Company within 15 days following receipt of a notice of valuation. Any determination of value made pursuant to this Paragraph 8(b)(1) shall remain effective for a period of 15 months from the date of the mailing of the notice to Employee or until a subsequent determination of value shall be made by the Board of Directors (or a committee thereof), whichever first occurs. During this period, the per share fair market value for all Purchased Shares owned by Employee (unless Employee has filed a notice of disagreement) shall be the valuation determined pursuant to this Paragraph 8(b)(1), plus the net after-tax earnings, or minus the net after-tax losses, per share of Common Stock of the Company for the period commencing with the first day of the first month following the month which was used as the determining date for valuation and ending upon the last day of the fiscal quarter ending prior to the month in which the Company exercises its option to repurchase under this Paragraph 8, less all cash dividends paid or payable with respect to the Purchased Shares during such period and during the period from the end of such quarter to the closing of the purchase and sale of the Purchased Shares. ii. If Employee has filed a notice of disagreement to a valuation in effect under Paragraph 8(b)(1), or if there is no valuation in effect under Paragraph 8(b)(1) at such time as the Company exercises its option to purchase Purchased Shares from Employee, the Company shall submit to Employee an estimate of the per share fair market value of the Purchased Shares (which may be the same or different from the most recent valuation by the Board of Directors (or a committee thereof)). Such valuation shall be conclusive unless Employee responds in a like -4- 12 manner within 30 days following receipt of the Company's estimate. If Employee and the Company do not reach agreement as to the per share fair market value within 45 days following the Company's exercise of its option to repurchase, the determination of the per share fair market value shall be made by arbitration in Los Angeles County, California. To institute arbitrationon proceedings, the Company shall appoint an independent qualified appraiser and notify Employee of its appointment. If Employee does not deliver written notice of appointment of another independent qualified appraiser within 10 days after receipt of the Company's notice, the Company's appraiser shall determine the per share fair market value. If Employee does deliver a notice of appointment, the two appraisers shall appoint a third independent qualified appraiser who shall determine the per share fair market value of the Purchased Shares; the determination of the per share fair market value completed in the manner provided in this Paragraph 8(b)(2) shall be conclusive and binding upon Employee and the Company; in no event, however, shall the per share fair market value determined by such appraiser or appraisers be outside of the range of estimates of the per share fair market value submitted by the Company and Employee. The cost of the appraiser(s) shall be paid by the party whose estimate of the per share fair market value most varies from the value determined by the appraiser(s), unless the parties' estimates vary equally, in which event the cost of the appraiser(s) shall be borne equally between them. c. Payment of Repurchase Price. Within 30 days of the later to occur of (1) the exercise by the Company of its option to repurchase, or (2) the determination of the per share fair market value pursuant to Paragraph 8(b)(2) of this Agreement, the Company shall pay the repurchase price for Purchased Shares against Employee's delivery to the Company of certificates representing the Purchased Shares, together with collateral instruments of transfer executed in blank. 9. Right of First Refusal. a. Prior to such time as the Company shall issue and sell any shares of any class of securities of the Company pursuant to an effective registration statement filed with the Securities and Exchange Commission under the Act, - Employee shall not have the right or power to pledge or hypothecate any of the Purchased Shares, and - Without complying with the provisions of this Paragraph 9, Employee shall not have the right or power to sell, transfer, assign or otherwise dispose of any of the Purchased Shares to any person or entity other than the Company. If Employee desires to sell, transfer, assign or otherwise dispose of any of the Purchased Shares in any transaction, Employee shall first give the Company a written offer (the "Offer") to purchase such Purchased Shares for the same price and on the same terms as in the proposed transaction, and such offer: i. Shall remain open for at least 30 days from the date of its transmittal; -5- 13 ii. Shall state its exact termination date; iii. Shall name the person or persons with whom the proposed transaction is to be effected; iv. Shall state the price, closing date, and all other terms and conditions of the proposed transaction; and v. Shall make reference to this Paragraph 9. If the proposed transaction provides for consideration other than cash or promissory notes, the Offer shall be deemed an offer for cash to the extent of the fair market value of such other consideration and the notice shall state Employee's estimate of such fair market value, which estimate shall be conclusive and binding upon Employee, but not on the Company. If the Company and the Employee cannot reach agreement with respect to the fair market value of such other consideration prior to the expiration of the Offer, the question shall be submitted to arbitration under the procedure set forth in Paragraph 8 of this Agreement and the Offer shall be deemed to remain open until ten days after the fair market value of such other consideration has been determined by arbitration. b. The Company may accept the Offer by delivering written notice of acceptance to Employee prior to the expiration of the Offer; and Employee shall thereupon transfer such Purchased Shares to the Company on the terms and conditions set forth in the Offer (as the same may be modified by arbitration). c. If the Company does not accept the Offer prior to its expiration, the Offer shall terminate, and Employee shall be free to transfer such Shares in the manner and in the time period disclosed in the Offer. If the transaction has not been so effected within 90 days following termination of the Offer, such Purchased Shares shall again be subject to all of the provisions of this Paragraph 9. 10. Method of Payment upon Repurchase. Payment for all Shares repurchased under Paragraphs 8 or 9 of Agreement shall be made by check or cash; however, if the Board of Directors of the Company determines, on advice of counsel, that the Company cannot then legally purchase such Shares by payment of check or cash, and if the Company has not assigned its rights to purchase such Shares pursuant to Paragraph 18(c) of this Agreement, the Company may make a written offer to pay for such Shares with its non-negotiable notes, subordinated to all other creditors of the Company and maturing at such time as the Company may legally be able to pay for such Shares, and Employee, or his or her representative, as the case may be, may accept such offer in writing within fifteen days from the date of receipt thereof. If such offer is not accepted, the Company shall have no further obligation to purchase such Purchased Shares under Paragraphs 8 or 9 of this Agreement. 11. Adjustments upon Recapitalization. Subject to any required action by the stockholders of the Company: -6- 14 a. If the outstanding shares of the Common Stock shall be divided into a greater number of shares, or a dividend in Common Stock shall be paid in respect of the Common Stock, the Exercise Price in effect immediately prior to such subdivision or at the record date of such dividend shall, simultaneously with the effectiveness of such subdivision or immediately after the record date of such dividend, be proportionately reduced, and conversely, if the outstanding shares of the Common Stock shall be combined into a smaller number of shares, the Exercise Price in effect immediately prior to such combination shall, simultaneously with the effectiveness of such combination, be proportionately increased. b. When any adjustment is required to be made in the Exercise Price, the number of Shares purchasable upon the exercise of the Option shall be changed to that number of Shares determined by: i. Multiplying an amount equal to the number of Shares purchasable on the exercise of the Option immediately prior to such adjustment by the Exercise Price in effect immediately prior to such adjustment, and then ii. Dividing that product by the Exercise Price in effect immediately after such adjustment. c. In case of any capital reorganization, any reclassification of the Common Stock (other than a recapitalization described in Paragraph 11(a) of this Agreement), or the consolidation or merger of the Company with another person where the Company is the "surviving corporation," as defined in Paragraph 11(h) of this Agreement (collectively, "Reorganizations"), Employee shall thereafter be entitled upon exercise of the Option to purchase the kind and number of shares of stock or other securities or property of the Company receivable upon such Reorganization by a holder of the number of shares of the Common Stock which the Option entitles Employee to purchase from the Company prior to such Reorganization; and in any such case, appropriate adjustment shall be made in the application of the provisions set forth in this Agreement with respect to Employee's rights and interests thereafter, to the end that the provisions set forth in this Agreement (including the specified changes and other adjustments to the Exercise Price) shall thereafter be applicable in relation to any Shares or other property thereafter purchasable upon exercise of the Option. d. If the Company is dissolved or liquidated, or is a party to a merger or consolidation in which the Company is not the "surviving corporation" (as defined in Paragraph 11(h) of this Agreement), then the Option will terminate on the effective date of the dissolution, liquidation, merger or consolidation; provided, however, that the Employee shall have the right during a 30-day period ending on the fifth day prior to the dissolution, liquidation, merger or consolidation, to exercise the Option, to the extent the Option then has become vested, in whole or in part, and without regard to the installment provisions contained in Paragraph 3(a) of this Agreement. -7- 15 e. To the extent that the foregoing adjustments relate to stock or securities of the Company, such adjustments shall be made by the Board of Directors of the Company (or a committee thereof), and its determination shall be final, binding and conclusive. f. The provisions of this Paragraph 11 are intended to be exclusive, and Employee shall have no other rights upon the occurrence of any of the events described in this Paragraph 11. g. The grant of the Option shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes in its capital or business structure, or to merge, consolidate, dissolve or liquidate, or to sell or transfer all or any part of its business or assets. h. The determination as to which party to a Reorganization is the it "surviving corporation" shall be made on the basis of the relative equity interests of the shareholders in the corporation existing after the Reorganization, as follows: if following any Reorganization the holders of outstanding voting securities of the Company prior to the Reorganization own equity securities possessing more than 50% of the voting power of the corporation existing after the Reorganization (excluding any shares in any collation other than the Company owned by such holders prior to such Reorganization), then for purposes of this Agreement, the Company shall be the surviving corporation. In all other cases, the Company shall not be the surviving corporation. 12. Waiver of Rights To Purchase Stock. By signing this Agreement, Employee acknowledges and agrees that neither the Company nor any other person or entity is under any obligation to sell or transfer to Employee any option or equity security of the Company, other than the shares of Common Stock subject to the Option and any other right or option to purchase Common Stock which was previously granted to Employee by the Board of Directors of the Company (or a committee thereof). By signing this Agreement, Employee specifically waives all rights which he or she may have had prior to the date of this Agreement to receive any option or equity security of the Company, other than an option or equity security granted to the Employee by the Board of Directors of the Company (or a committee thereof). 13. Investment Intent. Employee represents, warrants, and agrees that if he or she exercises the Option in whole or in part, he or she will acquire the Shares upon such exercise for the purpose of investment and not with a view to the distribution of such Shares, and that upon each exercise of the Option he or she will furnish to the Company a written statement to such effect, executed under penalty of perjury under the laws of the State of California, in the form attached hereto as Exhibit B. 14. Legends on Stock Certificates; Section 260.141.11 Statement. Employee agrees that the Company may place on each certificate representing the Purchased Shares the following legends: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN TAKEN FOR INVESTMENT AND ARE EXEMPT FROM REGISTRATION PURSUANT TO -8- 16 SECTION 4(2) OF THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") AND SECTION 25102(f) OF THE CALIFORNIA CORPORATIONS CODE. ACCORDINGLY, THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT, OR REGISTERED OR QUALIFIED UNDER ANY STATE SECURITIES LAW. THESE SECURITIES MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF UNLESS THEY HAVE BEEN FIRST REGISTERED OR QUALIFIED UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAW, OR UNLESS SUCH SECURITIES ARE FROM REGISTRATION OR QUALIFICATION UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAW. IN ADDITION, THESE SECURITIES MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT IN ACCORDANCE WITH THE TERMS OF AN AGREEMENT BETWEEN THE ISSUER AND THE REGISTERED HOLDER HEREOF WHICH PROVIDES, AMONG OTHER THINGS, THAT THE ISSUER HAS A RIGHT OF FIRST REFUSAL ON ANY PROPOSED SALE OR OTHER TRANSFER OF THE SECURITIES EVIDENCED BY THIS CERTIFICATE. A COPY OF SUCH AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICE OF THE ISSUER. IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION FOR WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES. Upon exercise of the Option, the Company shall deliver to Employee a copy of Section 260.141.11 of the California Corporation Commissioner's Regulations. 15. No Rights as Shareholder. Employee shall have no rights as a shareholder with respect to the Shares until the date of the issuance to Employee of a stock certificate or stock certificates evidencing the Shares. Except as may be provided in Paragraph 11 of this Agreement, no adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property) or distributions or other rights for which the record date is prior to the date such stock certificate is issued. 16. Modification. Subject to the terms and conditions and within the limitations of the Plan and/or this Agreement, the Board of Directors of the Company (or a committee thereof) may modify and extend or renew the Option, or accept the surrender of and authorize the grant of a new option in substitution for the Option (to the extent not previously exercised). No modification of the Option shall, without the consent of Employee, alter or impair any rights of Employee under the Option. -9- 17 17. Character of Option. The Option is intended to be a non-statutory stock option, i.e., a stock option which is intended not to be an "incentive stock option" as that term is defined in Section 422A of the Code. 18. Withholding. Employee shall make any arrangement required by the Company (including accepting a lesser number of shares of Stock upon exercise) to insure the proper withholding of the amount of tax, if any, required to be withheld by the Company or a Parent or Subsidiary of the Company as a result of the exercise of the Option. 19. General Provisions. a. Further Assurances. Employee shall promptly take all actions and execute all documents requested by the Company which the Company deems to be reasonably necessary to effectuate the terms and intent of this Agreement. b. Notices. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed to have been duly given if personally delivered or if mailed by first class, certified mail, return receipt requested, postage prepaid: i. If to the Company, to: Netcom Systems, Inc. Attn: Chief Executive Officer 20500 Nordhoff Street Chatsworth, California 91311 ii. If to Employee, to the address of Employee set forth in the records of the Company, or to such other address or addresses as may have been furnished by either party in writing to the other party hereto. Any such notice, request, demand or other communication shall be deemed to have been given two business days following the date actually set. c. Transfer of Rights under this Agreement. The Company may at any time transfer and assign its rights and delegate its obligations under this Agreement to any other person, corporation, firm or entity, including its officers, directors and shareholders, with or without consideration. d. Option Non-Transferable. Employee may not assign or transfer the Option except by will or the laws of descent and distribution, and only Employee may exercise the Option during his or her lifetime. -10- 18 e. Successors. Except to the extent specifically limited by the term and provisions of this Agreement, this Agreement is binding upon the parties to this Agreement and their respective successors, assigns, heirs and personal representatives. f. Choice of Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California, which shall apply in all respects, including statutes of limitation. g. Attorneys' Fees. In the event that any action, suit or other proceeding is instituted upon any breach of this Agreement, the prevailing party shall be paid by the other party thereto an amount equal to all of the prevailing party's costs and expenses, including attorneys' fees, in each and every such action, suit or proceeding (including any and all appeals or petitions therefrom). As used in this Agreement, "attorneys' fees" shall mean the full and actual cost of any legal services actually performed in connection with the matter involved, calculated on the basis of the usual fee customarily charged by the attorney performing such services, and shall not be limited to reasonable attorneys' fees as defined in any statute or rule of court. h. The Plan. This Agreement is made pursuant to the Plan, and it is intended, and shall be interpreted in a manner, to comply therewith. Any provision of this Agreement inconsistent with the Plan shall be superseded and governed by the Plan. i. Miscellaneous. Titles and captions contained in this Agreement are inserted only as a matter of convenience and for reference, and in no way define, limit, extend or describe the scope of this Agreement or the intent of any provision hereof. Except as specifically provided herein, neither this Agreement nor any right pursuant hereto or interest herein shall be assignable by any of the parties hereto without the prior written consent of the other parties hereto. The Signature Page to this Agreement consists of the last page of the Certificate. -11- 19 EXHIBIT "A" NOTICE OF EXERCISE [To be signed only upon exercise of the Option] TO: Netcom Systems, Inc. The undersigned, the holder of the enclosed Stock Option Agreement (Non-Statutory Stock Option), hereby irrevocably elects to exercise the purchase rights represented by the Option and to purchase thereunder shares of Common Stock of Netcom Systems, Inc. (the "Company"), and herewith encloses payment of $_______________ in full payment of the purchase price of the Shares. DATED: ____________________19__. --------------------------------------- Signature [Signature must conform in all respects to name of holder as specified on the face of the Option.] --------------------------------------- Address --------------------------------------- City, State, Zip --------------------------------------- No. of Shares [Insert here the number of shares called for on the face of the Option (or, in the case of a partial exercise, the number of shares being exercised), in either case without any adjustment for additional Common Stock, other securities or property which, pursuant to the adjustment provisions of the Option, may be deliverable upon exercise.] -12- 20 EXHIBIT "B" REPRESENTATION LETTER [To be signed only upon exercise of the Option] [DATE] Netcom Systems, Inc. Attn: Marc Hamon, President 20500 Nordhoff Street Chatsworth, CA 91311 Re: Representations by Proposed Shareholder Gentlemen: As a proposed stockholder of Netcom Systems, Inc., and in order to assure you that the proposed issuance of shares with the requirements for exemption from qualification afforded by Corporations Code, I hereby represent and warrant to you the following: 19. I have a preexisting personal or business relationship with you, consisting of contacts of such nature and duration as would enable me to be aware of your general business and financial circumstances. In addition, by reason of my own business or financial experience, I have the capacity to protect my own interests in connection with the transaction. 20. I am acquiring the shares of Netcom Systems, Inc. for my own account, and not with a view to or for sale in connection with any distribution of those shares. I declare under penalty of perjury, under the laws of the State of California, that the foregoing is true and correct. Very truly yours, ---------------------------------------- [SIGNATURE OF OPTIONEE ---------------------------------------- [NAME OF OPTIONEE] cc: J. Anthony Vittal -13- 21 NETCOM SYSTEMS, INC. AMENDMENT NO. 1 TO 1993 STOCK OPTION AGREEMENT This Amendment No. 1 to 1993 Stock Option Agreement is made and entered into effective as of _____________, 1998 by and between Netcom Systems, Inc. (the "Company") and the Optionee whose name appears on the last page hereof (the "Optionee"). Optionee and the Company hereby agree that Section 11 of each Stock Option Agreement between Optionee and the Company granted under the Company's 1993 Stock Option Plan (the "Agreement(s)") is hereby amended to read in its entirety as follows: "11. Adjustments Upon Changes in Capitalization, Dissolution, Merger or Asset Sale. (a) Changes in Capitalization. Subject to any required action by the stockholders of the Company, the number of Shares covered by this Option, as well as the Exercise Price, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board of Directors of the Company, whose determination in that respect shall be final, binding and conclusive. 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 of Common Stock subject to this Option. (b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, the Company shall notify the Employee as soon as practicable prior to the effective date of such proposed transaction. The Board of Directors of the Company, or any committee thereof, in its discretion may provide for the Employee to have the right to exercise the Option until ten (10) days prior to such transaction as to all of the Shares covered thereby, including Shares as to which the Option would not otherwise be exercisable. In addition, the Board of Directors of the Company, or any committee thereof, may provide that any Company repurchase option applicable to any Shares purchased upon exercise of the Option shall lapse as to all such Shares, provided the proposed dissolution or liquidation takes place at the time and in the manner contemplated. To the extent it has not been previously exercised, the Option will terminate immediately prior to the consummation of such proposed action. -14- 22 (c) Merger or Asset Sale. In the event of a merger of the Company with or into another corporation, or the sale of substantially all of the assets of the Company, the Option shall be assumed or an equivalent option or right substituted by the successor corporation or a parent or subsidiary of the successor corporation. In the event that the successor corporation refuses to assume or substitute for the Option, the Employee shall fully vest in and have the right to exercise the Option as to all of the Shares, including Shares as to which it would not otherwise be vested or exercisable. If the Option becomes fully vested and exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Company shall notify the Employee in writing or electronically that the Option shall be fully vested and exercisable for a period of fifteen (15) days from the date of such notice, and the Option shall terminate upon the expiration of such period. For the purposes of this paragraph, the Option shall be considered assumed if, following the merger or sale of assets, the option or right confers the right to purchase or receive, for each Share subject to the Option immediately prior to the merger or sale of assets, the consideration (whether stock, cash, or other securities or property) received in the merger or sale of assets by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the merger or sale of assets is not solely common stock of the successor corporation or its parent, the Board of Directors of the Company, or any committee thereof, may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of the Option, for each Share subject to the Option, to be solely common stock of the successor corporation or its parent equal in fair market value to the per share consideration received by holders of Common Stock in the merger or sale of assets." With the exception of the amendment set forth above, the Agreement(s) shall remain in full force and effect in accordance with its terms. - --------------------------------------- Name of Optionee - ---------------------------------------- (Signature) -15- EX-10.2 6 AMENDED AND RESTATED 1997 STOCK PLAN 1 EXHIBIT 10.2 SECOND AMENDED AND RESTATED 1997 STOCK PLAN OF NETCOM SYSTEMS, INC.(1) 1. Purposes of the Plan. The purposes of this Stock Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to Employees, Directors and Consultants and to promote the success of the Company's business. Options granted under the Plan may be Incentive Stock Options or Nonstatutory Stock Options, as determined by the Administrator at the time of grant. Stock Purchase Rights may also be granted under the Plan. 2. Definitions. As used herein, the following definitions shall apply: (a) "Administrator" means the Board or any of its Committees as shall be administering the Plan in accordance with Section 4 hereof. (b) "Applicable Laws" means the requirements relating to the administration of stock option plans under U.S. state corporate laws, U.S. federal and state securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws of any other country or jurisdiction where Options or Stock Purchase Rights are granted under the Plan. (c) "Board" means the Board of Directors of the Company. (d) "Code" means the Internal Revenue Code of 1986, as amended. (e) "Committee" means a committee of Directors appointed by the Board in accordance with Section 4 hereof. (f) "Common Stock" means the Common Stock of the Company. (g) "Company" means Netcom Systems, Inc., a California corporation. (h) "Consultant" means any person who is engaged by the Company or any Parent or Subsidiary to render consulting or advisory services to such entity. (i) "Director" means a member of the Board of Directors of the Company. - ---------- (1) As amended March 10, 1998 2 (j) "Disability" means total and permanent disability as defined in Section 22(e)(3) of the Code. (k) "Employee" means any person, including Officers and Directors, employed by the Company or any Parent or Subsidiary of the Company. A Service Provider shall not cease to be an Employee in the case of (i) any leave of absence approved by the Company or (ii) transfers between locations of the Company or between the Company, its Parent, any Subsidiary, or any successor. For purposes of Incentive Stock Options, no such leave may exceed ninety days, unless reemployment upon expiration of such leave is guaranteed by statute or contract. If reemployment upon expiration of a leave of absence approved by the Company is not so guaranteed, on the 181st day of such leave any Incentive Stock Option held by the Optionee shall cease to be treated as an Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory Stock Option. Neither service as a Director nor payment of a director's fee by the Company shall be sufficient to constitute "employment" by the Company. (l) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (m) "Fair Market Value" means, as of any date, the value of Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading day prior to the time of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; (ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean between the high bid and low asked prices for the Common Stock on the last market trading day prior to the day of determination; or (iii) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Administrator. (n) "Incentive Stock Option" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code. (o) "Nonstatutory Stock Option" means an Option not intended to qualify as an Incentive Stock Option. (p) "Officer" means any employee whose annual aggregate direct remuneration from the Company exceeds $60,000 and who is appointed by the Board to a position of significant managerial responsibility. -2- 3 (q) "Option" means a stock option granted pursuant to the Plan. (r) "Option Agreement" means a written or electronic agreement between the Company and an Optionee evidencing the terms and conditions of an individual Option grant. The Option Agreement is subject to the terms and conditions of the Plan. (s) "Option Exchange Program" means a program whereby outstanding Options are exchanged for Options with a lower exercise price. (t) "Optioned Stock" means the Common Stock subject to an Option or a Stock Purchase Right. (u) "Optionee" means the holder of an outstanding Option or Stock Purchase Right granted under the plan. (v) "Parent" means a "parent corporation," whether now or hereafter existing, as defined in Section 424(e) of the Code. (w) "Plan" means this 1997 Stock Plan. (x) "Restricted Stock" means shares of Common Stock acquired pursuant to a grant of a Stock Purchase Right under Section 11 below. (y) "Section 16(b)" means Section 16(b) of the Securities Exchange Act of 1934, as amended. (z) "Service Provider" means an Employee, Director or Consultant. (aa) "Share" means a share of the Common Stock, as adjusted in accordance with Section 12 below. (bb) "Stock Purchase Right" means a right to purchase Common Stock pursuant to Section 11 below. (cc) "Subsidiary" means a "subsidiary corporation," whether now or hereafter existing, as defined in Section 424(f) of Code. 3. Stock Subject to the Plan. Subject to the provisions of Section 12 of the Plan, the maximum aggregate number of Shares which may be subject to option and sold under the Plan is 3,959,550 Shares. The Shares may be authorized but unissued, or reacquired Common Stock. If an Option or Stock Purchase Right expires or becomes unexercisable without having been exercised in full, or is surrendered pursuant to an Option Exchange Program, -3- 4 the unpurchased Shares which were subject thereto shall become available for future grant or sale under the Plan (unless the Plan has terminated). However, Shares that have actually been issued under the Plan, upon exercise of either an Option or Stock Purchase Right, shall not be returned to the Plan and shall not become available for future distribution under the Plan, except that if Shares of Restricted Stock are repurchased by the Company at their original purchase price, such Shares shall become available for future grant under the Plan. 4. Administration of the Plan. (a) Administrator. The Plan shall be administered by the Board or a Committee appointed by the Board, which Committee shall be constituted to comply with Applicable Laws. (b) Powers of the Administrator. Subject to the provisions of the Plan and, in the case of a Committee, the specific duties delegated by the Board to such Committee, and subject to the approval of any relevant authorities, the Administrator shall have the authority in its discretion: (i) to determine the Fair Market Value; (ii) to select the Service Providers to whom Options and Stock Purchase Rights may from time to time be granted hereunder; (iii) to determine the number of Shares to be covered by each such award granted hereunder; (iv) to approve forms of agreement for use under the Plan; (v) to determine the terms and conditions, of any Option or Stock Purchase Right granted hereunder. Such terms and conditions include, but are not limited to, the exercise price, the time or times when Options or Stock Purchase Rights may be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Option or Stock Purchase Right or the Common Stock relating thereto, based in each case on such factors as the Administrator, in its sole discretion, shall determine; (vi) to determine whether and under what circumstances an Option may be settled in cash under subsection 9(e) instead of Common Stock; (vii) to reduce the exercise price of any Option to the then current Fair Market Value if the Fair Market Value of the Common Stock covered by such Option has declined since the date the Option was granted; (viii) to initiate an Option Exchange Program; -4- 5 (ix) to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and regulations relating to sub-plans established for the purpose of qualifying for preferred tax treatment under foreign tax laws; (x) to allow Optionees to satisfy withholding tax obligations by electing to have the Company withhold from the Shares to be issued upon exercise of an Option or Stock Purchase Right that number of Shares having a Fair Market Value equal to the amount required to be withheld. The Fair Market Value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined. All elections by Optionees to have Shares withheld for this purpose shall be made in such form and under such conditions as the Administrator may deem necessary or advisable; and (xi) to construe and interpret the terms of the Plan and awards granted pursuant to the Plan. (c) Effect of Administrator's Decision. All decisions, determinations and interpretations of the Administrator shall be final and binding on all Optionees. 5. Eligibility. (a) Nonstatutory Stock Options and Stock Purchase Rights may be granted to Service Providers. Incentive Stock Options may be granted only to Employees. (b) Each Option shall be designated in the Option Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designation, to the extent that the aggregate Fair Market Value of the Shares with respect to which Incentive Stock Options are exercisable for the first time by the Optionee during any calendar year (under all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such Options shall be treated as Nonstatutory Stock Options. For purposes of this Section 5(b), Incentive Stock Options shall be taken into account in the order in which they were granted. The Fair Market Value of the Shares shall be determined as of the time the Option with respect to such Shares is granted. (c) Neither the Plan nor any Option or Stock Purchase Right shall confer upon any Optionee any right with respect to continuing the Optionee's relationship as a Service Provider with the Company, nor shall it interfere in any way with his or her right or the Company's right to terminate such relationship at any time, with or without cause. 6. Term of Plan. The Plan shall become effective upon its adoption by the Board. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 14 of the Plan. 7. Term of Option. The term of each Option shall be stated in the Option Agreement; provided, however, that the term shall be no more than ten (10) years from the date of grant thereof. In the case of an Incentive Stock Option granted to an Optionee who, at the time the Option is -5- 6 granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Option shall be five (5) years from the date of grant or such shorter term as may be provided in the Option Agreement. 8. Option Exercise Price and Consideration. (a) The per share exercise price for the Shares to be issued upon exercise of an Option shall be such price as is determined by the Administrator, but shall be subject to the following: (i) In the case of an Incentive Stock Option (A) granted to an Employee who, at the time of grant of such Option, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant. (B) granted to any other Employee, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. (ii) In the case of a Nonstatutory Stock Option (A) granted to a Service Provider who, at the time of grant of such Option, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the exercise price shall be no less than 110% of the Fair Market Value per Share on the date of the grant. (B) granted to any other Service Provider, the per Share exercise price shall be no less than 85% of the Fair Market Value per Share on the date of grant. (iii) Notwithstanding the foregoing, Options may be granted with a per Share exercise price other than as required above pursuant to a merger or other corporate transaction. (b) The consideration to be paid for the Shares to be issued upon exercise of an Option, including the method of payment, shall be determined by the Administrator (and, in the case of an Incentive Stock Option, shall be determined at the time of grant). Such consideration may consist of (1) cash, (2) check, (3) promissory note, (4) other Shares which (x) in the case of Shares acquired upon exercise of an Option, have been owned by the Optionee for more than six months on the date of surrender, and (y) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which such Option shall be exercised, (5) consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan, or (6) any combination of the foregoing methods of payment. In making its determination as to the type of consideration to accept, the Administrator shall consider if acceptance of such consideration may be reasonably expected to benefit the Company. -6- 7 9. Exercise of Option. (a) Procedure for Exercise; Rights as a Shareholder. Any Option granted hereunder shall be exercisable according to the terms hereof at such times and under such conditions as determined by the Administrator and set forth in the Option Agreement. Except in the case of Options granted to Officers, Directors and Consultants, Options shall become exercisable at a rate of no less than 20% per year over five (5) years from the date the Options are granted. Unless the Administrator provides otherwise, vesting of Options granted hereunder shall be tolled during any unpaid leave of absence. An Option may not be exercised for a fraction of a Share. An Option shall be deemed exercised when the Company receives: (i) written or electronic notice of exercise (in accordance with the Option Agreement) from the person entitled to exercise the Option, and (ii) full payment for the Shares with respect to which the Option is exercised. Full payment may consist of any consideration and method of payment authorized by the Administrator and permitted by the Option Agreement and the Plan. Shares issued upon exercise of an Option shall be issued in the name of the Optionee or, if requested by the Optionee, in the name of the Optionee and his or her spouse. Until the Shares are issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Shares, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such Shares promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Shares are issued, except as provided in Section 12 of the Plan. Exercise of an Option in any manner shall result in a decrease in the number of Shares thereafter available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (b) Termination of Relationship as a Service Provider. If an Optionee ceases to be a Service Provider, such Optionee may exercise his or her Option within such period of time as is specified in the Option Agreement (of at least thirty (30) days) to the extent that the Option is vested on the date of termination (but in no event later than the expiration of the term of the Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for three (3) months following the Optionee's termination. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified by the Administrator, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (c) Disability of Optionee. If an Optionee ceases to be a Service Provider as a result of the Optionee's Disability, the Optionee may exercise his or her Option within such period of time as is specified in the Option Agreement (of at least six (6) months) to the extent the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, -7- 8 the Option shall remain exercisable for twelve (12) months following the Optionee's termination. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (d) Death of Optionee. If an Optionee dies while a Service Provider, the Option may be exercised within such period of time as is specified in the Option Agreement (of at least six (6) months) to the extent that the Option is vested on the date of death (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement) by the Optionee's estate or by a person who acquires the right to exercise the Option by bequest or inheritance. In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twelve (12) months following the Optionee's termination. If, at the time of death, the Optionee is not vested as to the entire Option, the Shares covered by the unvested portion of the Option shall immediately revert to the Plan. If the Option is not so exercised within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (e) Buyout Provisions. The Administrator may at any time offer to buy out for a payment in cash or Shares, an Option previously granted, based on such terms and conditions as the Administrator shall establish and communicate to the Optionee at the time that such offer is made. 10. Non-Transferability of Options and Stock Purchase Rights. Options and Stock Purchase Rights may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. 11. Stock Purchase Rights. (a) Rights to Purchase. Stock Purchase Rights may be issued either alone, in addition to, or in tandem with other awards granted under the Plan and/or cash awards made outside of the Plan. After the Administrator determines that it will offer Stock Purchase Rights under the Plan, it shall advise the offeree in writing or electronically of the terms, conditions and restrictions related to the offer, including the number of Shares that such person shall be entitled to purchase, the price to be paid, and the time within which such person must accept such offer. The terms of the offer shall comply in all respects with Section 260.140.42 of Title 10 of the California Code of Regulations. The offer shall be accepted by execution of a Restricted Stock purchase agreement in the form determined by the Administrator. (b) Repurchase Option. Unless the Administrator determines otherwise, the Restricted Stock purchase agreement shall grant the Company a repurchase option exercisable upon the voluntary or involuntary termination of the purchaser's service with the Company for any reason (including death or disability). The purchase price for Shares repurchased pursuant to the Restricted Stock purchase agreement shall be the original price paid by the purchaser and may be paid by cancellation of any indebtedness of the purchaser to the Company. The repurchase option shall lapse -8- 9 at such rate as the Administrator may determine. Except with respect to Shares purchased by Officers, Directors and Consultants, the repurchase option shall in no case lapse at a rate of less than 20% per year over five years from the date of purchase. (c) Other Provisions. The Restricted Stock purchase agreement shall contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Administrator in its sole discretion. (d) Rights as a Shareholder. Once the Stock Purchase Right is exercised, the purchaser shall have rights equivalent to those of a shareholder and shall be a shareholder when his or her purchase is entered upon the records of the duly authorized transfer agent of the Company. No adjustment shall be made for a dividend or other right for which the record date is prior to the date the Stock Purchase Right is exercised, except as provided in Section 12 of the Plan. 12. Adjustments Upon Changes in Capitalization, Merger or Asset Sale. (a) Changes in Capitalization. Subject to any required action by the shareholders of the Company, the number of shares of Common Stock covered by each outstanding Option or Stock Purchase Right, and the number of shares of Common Stock which have been authorized for issuance under the Plan but as to which no Options or Stock Purchase Rights have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option or Stock Purchase Right, as well as the price per share of Common Stock covered by each such outstanding Option or Stock Purchase Right, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company. The conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. 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 of Common Stock subject to an Option or Stock Purchase Right. (b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, the Administrator shall notify each Optionee as soon as practicable prior to the effective date of such proposed transaction. The Administrator in its discretion may provide for an Optionee to have the right to exercise his or her Option until fifteen (15) days prior to such transaction as to all of the Optioned Stock covered thereby, including Shares as to which the Option would not otherwise be exercisable. In addition, the Administrator may provide that any Company repurchase option applicable to any Shares purchased upon exercise of an Option or Stock Purchase Right shall lapse as to all such Shares, provided the proposed dissolution or liquidation takes place at the time and in the manner contemplated. To the extent it has not been previously exercised, an -9- 10 Option or Stock Purchase Right will terminate immediately prior to the consummation of such proposed action. (c) Merger or Asset Sale. In the event of a merger of the Company with or into another corporation, or the sale of substantially all of the assets of the Company, each outstanding Option and Stock Purchase Right shall (i) be assumed, (ii) exchanged for an equivalent option or right substituted by the successor corporation or a Parent or Subsidiary of the successor corporation or (iii) terminate, all as provided for herein. In the event that the successor corporation refuses to assume or substitute for the Option or Stock Purchase Right, to the extent that 20% of the Optioned Stock has not already vested, Optionee shall vest in and have the right to exercise the Option or Stock Purchase Right as to 20% of the Optioned Stock. If 20% of an Option or Stock Purchase Right becomes vested and exercisable, as provided for in the preceding sentence, in lieu of assumption or substitution in the event of a merger or sale of assets, the Administrator shall notify the Optionee in writing or electronically that 20% of the Option or Stock Purchase Right shall be exercisable for a period of fifteen (15) days from the date of such notice, and the Option or Stock Purchase Right shall terminate upon the expiration of such period. All Optioned Stock that is not assumed or accelerated as provided for herein, shall terminate and be of no further force and effect. For the purposes of this paragraph, the Option or Stock Purchase Right shall be considered assumed if, following the merger or sale of assets, the option or right confers the right to purchase or receive, for each Share of Optioned Stock subject to the Option or Stock Purchase Right immediately prior to the merger or sale of assets, the consideration (whether stock, cash, or other securities or property) received in the merger or sale of assets by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the merger or sale of assets is not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of the Option or Stock Purchase Right, for each Share of Optioned Stock subject to the Option or Stock Purchase Right, to be solely common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock in the merger or sale of assets. (d) Change in Control. In the event of a change in control of the Company whereby those persons and entities who constitute the shareholders of the Company immediately prior to such change of control event, fail to hold at least 50% of the outstanding capital stock of the Company following such change of control event or any sale of all or substantially all of the Company's assets (collectively, "Change of Control Events"), then, immediately prior to any such Change of Control Event, 20% of any stock option granted within one year from the date of such Change of Control Event shall become immediately vested and exercisable. 13. Time of Granting Options and Stock Purchase Rights. The date of grant of an Option or Stock Purchase Right shall, for all purposes, be the date on which the Administrator makes the determination granting such Option or Stock Purchase Right, or such other date as is determined by the Administrator. Notice of the determination shall be given to each Employee or Consultant to -10- 11 whom an Option or Stock Purchase Right is so granted within a reasonable time after the date of such grant. 14. Amendment and Termination of the Plan. (a) Amendment and Termination. The Board may at any time amend, alter, suspend or terminate the Plan. (b) Shareholder Approval. The Board shall obtain shareholder approval of any Plan amendment to the extent necessary and desirable to comply with Applicable Laws. (c) Effect of Amendment or Termination. No amendment, alteration, suspension or termination of the Plan shall impair the rights of any Optionee, unless mutually agreed otherwise between the Optionee and the Administrator, which agreement must be in writing and signed by the Optionee and the Company. Termination of the Plan shall not affect the Administrator's ability to exercise the powers granted to it hereunder with respect to Options granted under the Plan prior to the date of such termination. 15. Conditions Upon Issuance of Shares. (a) Legal Compliance. Shares shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares shall comply with Applicable Laws and shall be further subject to the approval of counsel for the Company with respect to such compliance. (b) Investment Representations. As a condition to the exercise of an Option, the Administrator may require the person exercising such Option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required. 16. Inability to Obtain Authority. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 17. Reservation of Shares. The Company, during the term of this Plan, shall at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. -11- 12 18. Shareholder Approval. The Plan shall be subject to approval by the shareholders of the Company within twelve (12) months after the date the Plan is adopted. Such shareholder approval shall be obtained in the degree and manner required under Applicable Laws. 19. Information to Optionees and Purchasers. The Company shall provide to each Optionee and to each individual who acquires Shares pursuant to the Plan, not less frequently than annually during the period such Optionee or purchaser has one or more Options or Stock Purchase Rights outstanding, and, in the case of an individual who acquires Shares pursuant to the Plan, during the period such individual owns such Shares, copies of annual financial statements. The Company shall not be required to provide such statements to key employees whose duties in connection with the Company assure their access to equivalent information. -12- 13 AMENDMENT NO. 1 TO THE SECOND AMENDED AND RESTATED 1997 STOCK OPTION PLAN OF NETCOM SYSTEMS, INC. a California corporation This Amendment No. 1 to the Second Amended and Restated 1997 Stock Option Plan (the "Plan") of Netcom Systems, Inc. (the "Company") is executed on April 10, 1998, by the Company at the direction of the Company's Board of Directors. Section 12(d) of the Plan is hereby amended read as follows: "(d) Change in Control. Effective upon the consummation of a Change in Control (as defined below) of the Company, the number of shares under each Option granted hereunder as to which such Option is vested and fully exercisable shall be accelerated such that each Option shall be immediately vested as to that additional number of shares as would be vested on the date one year following consummation of a Change in Control if all conditions to such vesting were satisfied. For purposes of the foregoing, a "Change in Control" shall be deemed to have occurred upon any person or entity, together with all affiliates (as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) thereof becoming the beneficial owner (as defined under Section 13(d) of the Exchange Act and Rule 13d-3 thereunder) of more than 50% of the Company's then outstanding shares of Common Stock." With the exception of the amendment set forth above, the Plan shall remain in full force and effect in accordance with its terms. -13- 14 AMENDMENT NO. 2 TO THE SECOND AMENDED AND RESTATED 1997 STOCK OPTION PLAN OF NETCOM SYSTEMS, INC. a Delaware corporation This Amendment No. 2 to the Second Amended and Restated 1997 Stock Option Plan (the "Plan") of Netcom Systems, Inc. (the "Company") is executed on January 21, 1999, by the Company at the direction of the Company's Board of Directors. The first paragraph of Section 3 of the Plan is hereby amended to read as follows: "Stock Subject to the Plan. Subject to the provisions of Section 12 of the Plan, the maximum aggregate number of Shares which may be subject to option and sold under the Plan is 4,959,500 Shares. The Shares may be authorized but unissued, or reacquired Common Stock." With the exception of the amendment set forth above, the Plan shall remain in full force and effect in accordance with its terms. -1- 15 1997 STOCK PLAN STOCK OPTION AGREEMENT Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Option Agreement. I. NOTICE OF STOCK OPTION GRANT The undersigned Optionee has been granted an Option to purchase Common Stock of the Company, subject to the terms and conditions of the Plan and this Option Agreement, as follows: Grant Number Date of Grant Vesting Commencement Date Exercise Price per Share $ Total Number of Shares Granted Total Exercise Price $ Type of Option: Incentive Stock Option --- Nonstatutory Stock Option --- Term/Expiration Date: Vesting Schedule: This Option shall be exercisable, in whole or in part, according to the following vesting schedule: 20% of the Shares subject to the Option shall vest on the first anniversary of the Vesting Commencement Date and the remainder of the Shares shall vest 1/48 per month thereafter, subject to Optionee's continuing to be a Service Provider on such dates. -2- 16 Termination Period: This Option shall be exercisable for three months after Optionee ceases to be a Service Provider. Upon Optionee's death or disability, this Option may be exercised for such longer period as provided in the Plan. In no event may Optionee exercise this Option after the Term/Expiration Date as provided above. II. AGREEMENT 1. Grant of Option. The Plan Administrator of the Company hereby grants to the Optionee named in the Notice of Grant (the "Optionee"), an option (the "Option") to purchase the number of Shares set forth in the Notice of Grant, at the exercise price per Share set forth in the Notice of Grant (the "Exercise Price"), and subject to the terms and conditions of the Plan, which is incorporated herein by reference. Subject to Section 14(c) of the Plan, in the event of a conflict between the terms and conditions of the Plan and this Option Agreement, the terms and conditions of the Plan shall prevail. If designated in the Notice of Grant as an Incentive Stock Option ("ISO"), this Option is intended to qualify as an Incentive Stock Option as defined in Section 422 of the Code. Nevertheless, to the extent that it exceeds the $100,000 rule of Code Section 422(d), this Option shall be treated as a Nonstatutory Stock Option ("NSO"). 2. Exercise of Option. (a) Right to Exercise. This Option shall be exercisable during its term in accordance with the Vesting Schedule set out in the Notice of Grant and with the applicable provisions of the Plan and this Option Agreement. (b) Method of Exercise. This Option shall be exercisable by delivery of an exercise notice in the form attached as Exhibit A (the AExercise Notice@) which shall state the election to exercise the Option, the number of Shares with respect to which the Option is being exercised, and such other representations and agreements as may be required by the Company. The Exercise Notice shall be accompanied by payment of the aggregate Exercise Price as to all Exercised Shares. This Option shall be deemed to be exercised upon receipt by the Company of such fully executed Exercise Notice accompanied by the aggregate Exercise Price. No Shares shall be issued pursuant to the exercise of an Option unless such issuance and such exercise complies with Applicable laws. Assuming such compliance, for income tax purposes the Shares shall be considered transferred to the Optionee on the date on which the Option is exercised with respect to such Shares. -3- 17 3. Optionee's Representations. In the event the Shares have not been registered under the Securities Act of 1933, as amended, at the time this Option is exercised, the Optionee shall, if required by the Company, concurrently with the exercise of all or any portion of this Option, deliver to the Company his or her Investment Representation Statement in the form attached hereto as Exhibit B, and shall read the applicable rules of the Commissioner of Corporations attached to such Investment Representation Statement. 4. Lock-Up Period. Optionee hereby agrees that, if so requested by the Company or any representative of the underwriters (the "Managing Underwriter") in connection with any registration of the offering of any securities of the Company under the Securities Act, Optionee shall not sell or otherwise transfer any Shares or other securities of the Company during the 180-day period (or such other period as may be requested in writing by the Managing Underwriter and agreed to in writing by the Company) (the "Market Standoff Period") following the effective date of a registration statement of the Company filed under the Securities Act. Such restriction shall apply only to the first registration statement of the Company to become effective under the Securities Act that includes securities to be sold on behalf of the Company to the public in an underwritten public offering under the Securities Act. The Company may impose stop-transfer instructions with respect to securities subject to the foregoing restrictions until the end of such Market Standoff Period. 5. Method of Payment. Payment of the aggregate Exercise Price shall be by any of the following, or a combination thereof, at the election of the Optionee: (a) cash or check; (b) consideration received by the Company under a formal cashless exercise program adopted by the Company in connection with the Plan; or (c) surrender of other Shares which, (i) in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more than six (6) months on the date of surrender, and (ii) have a Fair Market Value on the date of surrender equal to the aggregate Exercise Price of the Exercised Shares. 6. Restrictions on Exercise. This Option may not be exercised until such time as the Plan has been approved by the shareholders of the Company, or if the issuance of such Shares upon such exercise or the method of payment of consideration for such shares would constitute a violation of any Applicable Law. 7. Non-Transferability of Option. This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee only by Optionee. The terms of the Plan and this Option Agreement shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee. -4- 18 8. Term of Option. This Option may be exercised only within the term set out in the Notice of Grant, and may be exercised during such term only in accordance with the Plan and the terms of this Option. 9. Tax Consequences. Set forth below is a brief summary as of the date of this Option of some of the federal tax consequences of exercise of this Option and disposition of the Shares. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES. (a) Exercise of ISO. If this Option qualifies as an ISO, there will be no regular federal income tax liability upon the exercise of the Option, although the excess, if any, of the Fair Market Value of the Shares on the date of exercise over the Exercise Price will be treated as an adjustment to the alternative minimum tax for federal tax purposes and may subject the Optionee to the alternative minimum tax in the year of exercise. (b) Exercise of Nonstatutory Stock Option. There may be a regular federal income tax liability upon the exercise of a Nonstatutory Stock Option. The Optionee will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the Fair Market Value of the Shares on the date of exercise over the Exercise Price. If Optionee is an Employee or a former Employee, the Company will be required to withhold from Optionee's compensation or collect from Optionee and pay to the applicable taxing authorities an amount in cash equal to a percentage of this compensation income at the time of exercise, and may refuse to honor the exercise and refuse to deliver Shares if such withholding amounts are not delivered at the time of exercise. (c) Disposition of Shares. In the case of an NSO, if Shares are held for at least one year, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax purposes. In the case of an ISO, if Shares transferred pursuant to the Option are held for at least one year after exercise and of at least two years after the Date of Grant, any gain realized on disposition of the Shares will also be treated as long-term capital gain for federal income tax purposes. If Shares purchased under an ISO are disposed of within one year after exercise or two years after the Date of Grant, any gain realized on such disposition will be treated as compensation income (taxable at ordinary income rates) to the extent of the difference between the Exercise Price and the lesser of (1) the Fair Market Value of the Shares on the date of exercise, or (2) the sale price of the Shares. Any additional gain will be taxed as capital gain, short-term or long-term depending on the period that the ISO Shares were held. (d) Notice of Disqualifying Disposition of ISO Shares. If the Option granted to Optionee herein is an ISO, and if Optionee sells or otherwise disposes of any of the Shares acquired pursuant to the ISO on or before the later of (1) the date two years after the Date of Grant, or (2) the date one year after the date of exercise, the Optionee shall immediately notify the Company in writing of such -5- 19 disposition. Optionee agrees that Optionee may be subject to income tax withholding by the Company on the compensation income recognized by the Optionee. 10. Entire Agreement; Governing Law. The Plan is incorporated herein by reference. The Plan and this Option Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and Optionee with respect to the subject matter hereof, and may not be modified adversely to the Optionee's interest except by means of a writing signed by the Company and Optionee. This agreement is governed by the internal substantive laws but not the choice of law rules of California. 11. No Guarantee of Continued Service. OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE IN ANY WAY WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE OPTIONEE'S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT CAUSE. Optionee acknowledges receipt of a copy of the Plan and represents that he or she is familiar with the terms and provisions thereof, and hereby accepts this Option subject to all of the terms and provisions thereof. Optionee has reviewed the Plan and this Option in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option and fully understands all provisions of the Option. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions arising under the Plan or this Option. Optionee further agrees to notify the Company upon any change in the residence address indicated below. -6- 20 OPTIONEE: NETCOM SYSTEMS, INC. - ------------------------------------- ---------------------------------------- Signature By - ------------------------------------- ---------------------------------------- Print Name Title - ------------------------------------- - ------------------------------------- Residence Address -7- 21 EXHIBIT A 1997 STOCK PLAN EXERCISE NOTICE Netcom Systems, Inc. 20500 Nordhoff Street Chatsworth, CA 91311 Attention: Secretary 1. Exercise of Option. Effective as of today, ___________, ____, the undersigned ("Optionee") hereby elects to exercise Optionee's option to purchase _________ shares of the Common Stock (the "Shares") of Netcom Systems, Inc. (the "Company") under and pursuant to the 1997 Stock Plan (the "Plan") and the Stock Option Agreement dated ________, ______ (the "Option Agreement"). 2. Delivery of Payment. Purchaser herewith delivers to the Company the full purchase price of the Shares, as set forth in the Option Agreement. 3. Representations of Optionee. Optionee acknowledges that Optionee has received, read and understood the Plan and the Option Agreement and agrees to abide by and be bound by their terms and conditions. 4. Rights as Shareholder. Until the issuance of the Shares (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Shares shall be issued to the Optionee as soon as practicable after the Option is exercised. No adjustment shall be made for a dividend or other right for which the record date is prior to the date of issuance except as provided in Section 12 of the Plan. 5. Company's Right of First Refusal. Before any Shares held by Optionee or any transferee (either being sometimes referred to herein as the "Holder") may be sold or otherwise transferred (including transfer by gift or operation of law), the Company or its assignee(s) shall have a right of first refusal to purchase the Shares on the terms and conditions set forth in this Section (the "Right of First Refusal"). (a) Notice of Proposed Transfer. The Holder of the Shares shall deliver to the Company a written notice (the "Notice") stating: (i) the Holder's bona fide intention to sell or otherwise transfer such Shares; (ii) the name of each proposed purchaser or other transferee ("Proposed Transferee"); (iii) the number of Shares to be transferred to each Proposed Transferee; and (iv) the bona fide cash price or other consideration for which the Holder proposes to transfer the Shares (the "Offered Price"), and the Holder shall offer the Shares at the Offered Price to the Company or its assignee(s). 22 (b) Exercise of Right of First Refusal. At any time within thirty (30) days after receipt of the Notice, the Company and/or its assignee(s) may, by giving written notice to the Holder, elect to purchase all, but not less than all, of the Shares proposed to be transferred to any one or more of the Proposed Transferees, at the purchase price determined in accordance with subsection (c) below. (c) Purchase Price. The purchase price ("Purchase Price") for the Shares purchased by the Company or its assignee(s) under this Section shall be the Offered Price. If the Offered Price includes consideration other than cash, the cash equivalent value of the non-cash consideration shall be determined by the Board of Directors of the Company in good faith. (d) Payment. Payment of the Purchase Price shall be made, at the option of the Company or its assignee(s), in cash (by check), by cancellation of all or a portion of any outstanding indebtedness of the Holder to the Company (or, in the case of repurchase by an assignee, to the assignee), or by any combination thereof within 30 days after receipt of the Notice or in the manner and at the times set forth in the Notice. (e) Holder's Right to Transfer. If all of the Shares proposed in the Notice to be transferred to a given Proposed Transferee are not purchased by the Company and/or its assignee(s) as provided in this Section, then the Holder may sell or otherwise transfer such Shares to that Proposed Transferee at the Offered Price or at a higher price, provided that such sale or other transfer is consummated within 120 days after the date of the Notice, that any such sale or other transfer is effected in accordance with any applicable securities laws and that the Proposed Transferee agrees in writing that the provisions of this Section shall continue to apply to the Shares in the hands of such Proposed Transferee. If the Shares described in the Notice are not transferred to the Proposed Transferee within such period, a new Notice shall be given to the Company, and the Company and/or its assignees shall again be offered the Right of First Refusal before any Shares held by the Holder may be sold or otherwise transferred. (f) Exception for Certain Family Transfers. Anything to the contrary contained in this Section notwithstanding, the transfer of any or all of the Shares during the Optionee's lifetime or on the Optionee's death by will or intestacy to the Optionee's immediate family or a trust for the benefit of the Optionee's immediate family shall be exempt from the provisions of this Section. "Immediate Family" as used herein shall mean spouse, lineal descendant or antecedent, father, mother, brother or sister. In such case, the transferee or other recipient shall receive and hold the Shares so transferred subject to the provisions of this Section, and there shall be no further transfer of such Shares except in accordance with the terms of this Section. (g) Termination of Right of First Refusal. The Right of First Refusal shall terminate as to any Shares upon the first sale of Common Stock of the Company to the general public pursuant to a registration statement filed with and declared effective by the Securities and Exchange Commission under the Securities Act of 1933, as amended. 6. Tax Consultation. Optionee understands that Optionee may suffer adverse tax consequences as a result of Optionee's purchase or disposition of the Shares. Optionee represents that Optionee has consulted with any tax consultants Optionee deems advisable in connection with the purchase or dis position of the Shares and that Optionee is not relying on the Company for any tax advice. 7. Restrictive Legends and Stop-Transfer Orders. -2- 23 (a) Legends. Optionee understands and agrees that the Company shall cause the legends set forth below or legends substantially equivalent thereto, to be placed upon any certificate(s) evidencing ownership of the Shares together with any other legends that may be required by the Company or by state or federal securities laws: THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE ACT OR, IN THE OPINION OF COMPANY COUNSEL SATISFACTORY TO THE ISSUER OF THESE SECURITIES, SUCH OFFER, SALE OR TRANSFER, PLEDGE OR HYPO THECATION IS IN COMPLIANCE THEREWITH. THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER AND A RIGHT OF FIRST REFUSAL HELD BY THE ISSUER OR ITS ASSIGNEE(S) AS SET FORTH IN THE EXERCISE NOTICE BETWEEN THE ISSUER AND THE ORIGINAL HOLDER OF THESE SHARES, A COPY OF WHICH MAY BE OBTAINED AT THE PRINCIPAL OFFICE OF THE ISSUER. SUCH TRANSFER RESTRICTIONS AND RIGHT OF FIRST REFUSAL ARE BINDING ON TRANSFEREES OF THESE SHARES. IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES. Optionee understands that transfer of the Shares may be restricted by Section 260.141.11 of the Rules of the California Corporations Commissioner, a copy of which is attached to Exhibit B, the Investment Representation Statement. (b) Stop-Transfer Notices. Optionee agrees that, in order to ensure compliance with the restrictions referred to herein, the Company may issue appropriate "stop transfer" instructions to its transfer agent, if any, and that, if the Company transfers its own securities, it may make appropriate notations to the same effect in its own records. (c) Refusal to Transfer. The Company shall not be required (i) to transfer on its books any Shares that have been sold or otherwise transferred in violation of any of the provisions of this Agreement or (ii) to treat as owner of such Shares or to accord the right to vote or pay dividends to any purchaser or other transferee to whom such Shares shall have been so transferred. 8. Successors and Assigns. The Company may assign any of its rights under this Agreement to single or multiple assignees, and this Agreement shall inure to the benefit of the successors and assigns of the Company. Subject to the restrictions on transfer herein set forth, this Agreement shall be binding upon Optionee and his or her heirs, executors, administrators, successors and assigns. -3- 24 9. Interpretation. Any dispute regarding the interpretation of this Agreement shall be submitted by Optionee or by the Company forthwith to the Administrator which shall review such dispute at its next regular meeting. The resolution of such a dispute by the Administrator shall be final and binding on all parties. 10. Governing Law; Severability. This Agreement is governed by the internal substantive laws but not the choice of law rules, of California. 11. Entire Agreement. The Plan and Option Agreement are incorporated herein by reference. This Agreement, the Plan, the Option Agreement and the Investment Representation Statement con stitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and Optionee with respect to the subject matter hereof, and may not be modified adversely to the Optionee's interest except by means of a writing signed by the Company and Optionee. Submitted by: Accepted by: OPTIONEE: NETCOM SYSTEMS, INC. - ---------------------------------- ------------------------------------- Signature By - ---------------------------------- ------------------------------------- Print Name Its Address: Address: - ---------------------------------- 20500 Nordhoff St. Chatsworth, CA 91311 - ---------------------------------- ----------------------------------- Date Received -4- 25 EXHIBIT B INVESTMENT REPRESENTATION STATEMENT OPTIONEE: COMPANY: NETCOM SYSTEMS, INC. SECURITY: COMMON STOCK AMOUNT: DATE: In connection with the purchase of the above-listed Securities, the undersigned Optionee represents to the Company the following: (a) Optionee is aware of the Company's business affairs and financial condition and has acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Securities. Optionee is acquiring these Securities for investment for Optionee's own account only and not with a view to, or for resale in connection with, any "distribution" thereof within the meaning of the Securities Act of 1933, as amended (the "Securities Act"). (b) Optionee acknowledges and understands that the Securities constitute "restricted securities" under the Securities Act and have not been registered under the Securities Act in reliance upon a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of Optionee's investment intent as expressed herein. In this connection, Optionee understands that, in the view of the Securities and Exchange Commission, the statutory basis for such exemption may be unavailable if Optionee's representation was predicated solely upon a present intention to hold these Securities for the minimum capital gains period specified under tax statutes, for a deferred sale, for or until an increase or decrease in the market price of the Securities, or for a period of one year or any other fixed period in the future. Optionee further understands that the Securities must be held indefinitely unless they are subsequently registered under the Securities Act or an exemption from such registration is available. Optionee further acknowledges and understands that the Company is under no obligation to register the Securities. Optionee understands that the certificate evidencing the Securities will be imprinted with a legend which prohibits the transfer of the Securities unless they are registered or such registration is not required in the opinion of counsel satisfactory to the Company, a legend prohibiting their transfer without the consent of the Commissioner of Corporations of the State of California and any other legend required under applicable state securities laws. 26 (c) Optionee is familiar with the provisions of Rule 701 and Rule 144, each promulgated under the Securities Act, which, in substance, permit limited public resale of "restricted securities" acquired, directly or indirectly from the issuer thereof, in a non-public offering subject to the satisfaction of certain conditions. Rule 701 provides that if the issuer qualifies under Rule 701 at the time of the grant of the Option to the Optionee, the exercise will be exempt from registration under the Securities Act. In the event the Company becomes subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, ninety (90) days thereafter (or such longer period as any market stand-off agreement may require) the Securities exempt under Rule 701 may be resold, subject to the satisfaction of certain of the conditions specified by Rule 144, including: (1) the resale being made through a broker in an unsolicited "broker's transaction" or in transactions directly with a market maker (as said term is defined under the Securities Exchange Act of 1934); and, in the case of an affiliate, (2) the availability of certain public information about the Company, (3) the amount of Securities being sold during any three month period not exceeding the limitations specified in Rule 144(e), and (4) the timely filing of a Form 144, if applicable. In the event that the Company does not qualify under Rule 701 at the time of grant of the Option, then the Securities may be resold in certain limited circumstances subject to the provisions of Rule 144, which requires the resale to occur not less than two years after the later of the date the Securities were sold by the Company or the date the Securities were sold by an affiliate of the Company, within the meaning of Rule 144; and, in the case of acquisition of the Securities by an affiliate, or by a non-affiliate who subsequently holds the Securities less than three years, the satisfaction of the conditions set forth in sections (1), (2), (3) and (4) of the paragraph immediately above. (d) Optionee further understands that in the event all of the applicable requirements of Rule 701 or 144 are not satisfied, registration under the Securities Act, compliance with Regulation A, or some other registration exemption will be required; and that, notwithstanding the fact that Rules 144 and 701 are not exclusive, the Staff of the Securities and Exchange Commission has expressed its opinion that persons proposing to sell private placement securities other than in a registered offering and otherwise than pursuant to Rules 144 or 701 will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales, and that such persons and their respective brokers who participate in such transactions do so at their own risk. Optionee understands that no assurances can be given that any such other registration exemption will be available in such event. (e) Optionee understands that the certificate evidencing the Securities will be imprinted with a legend which prohibits the transfer of the Securities without the consent of the Commissioner of Corporations of California. Optionee has read the applicable Commissioner's Rules with respect to such restriction, a copy of which is attached. Signature of Optionee: -2- 27 -------------------------------- Date:___________________, 19____ -3- 28 ATTACHMENT 1 STATE OF CALIFORNIA - CALIFORNIA ADMINISTRATIVE CODE Title 10. Investment - Chapter 3. Commissioner of Corporations 260.141.11: Restriction on Transfer. (a) The issuer of any security upon which a restriction on transfer has been imposed pursuant to Sections 260.102.6, 260.141.10 or 260.534 shall cause a copy of this section to be delivered to each issuee or transferee of such security at the time the certificate evidencing the security is delivered to the issuee or transferee. (b) It is unlawful for the holder of any such security to consummate a sale or transfer of such security, or any interest therein, without the prior written consent of the Commissioner (until this condition is removed pursuant to Section 260.141.12 of these rules), except: (1) to the issuer; (2) pursuant to the order or process of any court; (3) to any person described in Subdivision (i) of Section 25102 of the Code or Section 260.105.14 of these rules; (4) to the transferor's ancestors, descendants or spouse, or any custodian or trustee for the account of the transferor or the transferor's ancestors, descendants, or spouse; or to a transferee by a trustee or custodian for the account of the transferee or the transferee's ancestors, descendants or spouse; (5) to holders of securities of the same class of the same issuer; (6) by way of gift or donation inter vivos or on death; (7) by or through a broker-dealer licensed under the Code (either acting as such or as a finder) to a resident of a foreign state, territory or country who is neither domiciled in this state to the knowledge of the broker-dealer, nor actually present in this state if the sale of such securities is not in violation of any securities law of the foreign state, territory or country concerned; (8) to a broker-dealer licensed under the Code in a principal transaction, or as an underwriter or member of an underwriting syndicate or selling group; (9) if the interest sold or transferred is a pledge or other lien given by the purchaser to the seller upon a sale of the security for which the Commissioner's written consent is obtained or under this rule not required; (10) by way of a sale qualified under Sections 25111, 25112, 25113 or 25121 of the Code, of the securities to be transferred, provided that no order under Section 25140 or subdivision (a) of Section 25143 is in effect with respect to such qualification; (11) by a corporation to a wholly owned subsidiary of such corporation, or by a wholly owned subsidiary of a corporation to such corporation; (12) by way of an exchange qualified under Section 25111, 25112 or 25113 of the Code, provided that no order under Section 25140 or subdivision (a) of Section 25143 is in effect with respect to such qualification; (13) between residents of foreign states, territories or countries who are neither domiciled nor actually present in this state; (14) to the State Controller pursuant to the Unclaimed Property Law or to the administrator of the unclaimed property law of another state; or (15) by the State Controller pursuant to the Unclaimed Property Law or by the administrator of the unclaimed property law of another state if, in either such case, such person (i) discloses to potential purchasers at the sale that transfer of the securities is restricted under this rule, (ii) delivers to each purchaser a copy of this rule, and (iii) advises the Commissioner of the name of each purchaser; (16) by a trustee to a successor trustee when such transfer does not involve a change in the beneficial ownership of the securities; (17) by way of an offer and sale of outstanding securities in an issuer transaction that is subject to the qualification requirement of Section 25110 of the Code but exempt from that qualification requirement by subdivision (f) of Section 25102; provided that any such transfer is on the condition that any certificate evidencing the security issued to such transferee shall contain the legend required by this section. (c) The certificates representing all such securities subject to such a restriction on transfer, whether upon initial issuance or upon any transfer thereof, shall bear on their face a legend, prominently stamped or printed thereon in capital letters of not less than 10-point size, reading as follows: "IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES." EX-10.3 7 1998 STOCK PLAN 1 Exhibit 10.3 NETCOM SYSTEMS, INC. 1998 STOCK PLAN AS AMENDED ON MAY 13, 1999 1. Purposes of the Plan. The purposes of this 1998 Stock Plan are: - to attract and retain the best available personnel for positions of substantial responsibility, - to provide additional incentive to Employees, Directors and Consultants, and - to promote the success of the Company's business. Options granted under the Plan may be Incentive Stock Options or Nonstatutory Stock Options, as determined by the Administrator at the time of grant. Stock Purchase Rights may also be granted under the Plan. 2. Definitions. As used herein, the following definitions shall apply: (a) "Administrator" means the Board or any of its Committees as shall be administering the Plan, in accordance with Section 4 of the Plan. (b) "Applicable Laws" means the requirements relating to the administration of stock option plans under U. S. state corporate laws, U.S. federal and state securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws of any foreign country or jurisdiction where Options or Stock Purchase Rights are, or will be, granted under the Plan. (c) "Board" means the Board of Directors of the Company. (d) "Code" means the Internal Revenue Code of 1986, as amended. (e) "Committee" means a committee of Directors appointed by the Board in accordance with Section 4 of the Plan. (f) "Common Stock" means the common stock of the Company. (g) "Company" means Netcom Systems, Inc., a Delaware corporation. (h) "Consultant" means any person, including an advisor, engaged by the Company or a Parent or Subsidiary to render services to such entity. 2 (i) "Director" means a member of the Board. (j) "Disability" means total and permanent disability as defined in Section 22(e)(3) of the Code. (k) "Employee" means any person, including Officers and Directors, employed by the Company or any Parent or Subsidiary of the Company. A Service Provider shall not cease to be an Employee in the case of (i) any leave of absence approved by the Company or (ii) transfers between locations of the Company or between the Company, its Parent, any Subsidiary, or any successor. For purposes of Incentive Stock Options, no such leave may exceed ninety days, unless reemployment upon expiration of such leave is guaranteed by statute or contract. If reemployment upon expiration of a leave of absence approved by the Company is not so guaranteed, on the 181st day of such leave any Incentive Stock Option held by the Optionee shall cease to be treated as an Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory Stock Option. Neither service as a Director nor payment of a director's fee by the Company shall be sufficient to constitute "employment" by the Company. (l) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (m) "Fair Market Value" means, as of any date, the value of Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading day prior to the time of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; (ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a Share of Common Stock shall be the mean between the high bid and low asked prices for the Common Stock on the last market trading day prior to the day of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; or (iii) In the absence of an established market for the Common Stock, the Fair Market Value shall be determined in good faith by the Administrator. (n) "Incentive Stock Option" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder. -2- 3 (o) "Inside Director" means a Director who is an Employee. (p) "Nonstatutory Stock Option" means an Option not intended to qualify as an Incentive Stock Option. (q) "Notice of Grant" means a written or electronic notice evidencing certain terms and conditions of an individual Option or Stock Purchase Right grant. The Notice of Grant is part of the Option Agreement. (r) "Officer" means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (s) "Option" means a stock option granted pursuant to the Plan. (t) "Option Agreement" means an agreement between the Company and an Optionee evidencing the terms and conditions of an individual Option grant. The Option Agreement is subject to the terms and conditions of the Plan. (u) "Option Exchange Program" means a program whereby outstanding Options are surrendered in exchange for Options with a lower exercise price. (v) "Optioned Stock" means the Common Stock subject to an Option or Stock Purchase Right. (w) "Optionee" means the holder of an outstanding Option or Stock Purchase Right granted under the Plan. (x) "Outside Director" means a Director who is not an Employee. (y) "Parent" means a "parent corporation," whether now or hereafter existing, as defined in Section 424(e) of the Code. (z) "Plan" means this 1998 Stock Plan. (aa) "Restricted Stock" means shares of Common Stock acquired pursuant to a grant of Stock Purchase Rights under Section 11 of the Plan. (bb) "Restricted Stock Purchase Agreement" means a written agreement between the Company and the Optionee evidencing the terms and restrictions applying to stock purchased under a Stock Purchase Right. The Restricted Stock Purchase Agreement is subject to the terms and conditions of the Plan and the Notice of Grant. -3- 4 (cc) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3, as in effect when discretion is being exercised with respect to the Plan. (dd) "Section 16(b)" means Section 16(b) of the Exchange Act. (ee) "Service Provider" means an Employee, Director or Consultant. (ff) "Share" means a share of the Common Stock, as adjusted in accordance with Section 14 of the Plan. (gg) "Stock Purchase Right" means the right to purchase Common Stock pursuant to Section 11 of the Plan, as evidenced by a Notice of Grant. (hh) "Subsidiary" means a "subsidiary corporation", whether now or hereafter existing, as defined in Section 424(f) of the Code. 3. Stock Subject to the Plan. Subject to the provisions of Section 14 of the Plan, the maximum aggregate number of Shares which may be optioned and sold under the Plan is 2,000,000 Shares, plus an annual increase to be added on the first day of the Company's fiscal year (beginning in 2000) equal to the lesser of (i) 4,000,000 Shares, (ii) 5% of the outstanding Shares on such date or (iii) a lesser amount determined by the Board. The Shares may be authorized, but unissued, or reacquired Common Stock. If an Option or Stock Purchase Right expires or becomes unexercisable without having been exercised in full, or is surrendered pursuant to an Option Exchange Program, the unpurchased Shares which were subject thereto shall become available for future grant or sale under the Plan (unless the Plan has terminated); provided, however, that Shares that have actually been issued under the Plan, whether upon exercise of an Option or Right, shall not be returned to the Plan and shall not become available for future distribution under the Plan, except that if Shares of Restricted Stock are repurchased by the Company at their original purchase price, such Shares shall become available for future grant under the Plan. 4. Administration of the Plan. (a) Procedure. (i) Multiple Administrative Bodies. The Plan may be administered by different Committees with respect to different groups of Service Providers. (ii) Section 162(m). To the extent that the Administrator determines it to be desirable to qualify Options granted hereunder as "performance-based compensation" within the -4- 5 meaning of Section 162(m) of the Code, the Plan shall be administered by a Committee of two or more "outside directors" within the meaning of Section 162(m) of the Code. (iii) Rule 16b-3. To the extent desirable to qualify transactions hereunder as exempt under Rule 16b-3, the transactions contemplated hereunder shall be structured to satisfy the requirements for exemption under Rule 16b-3. (iv) Other Administration. Other than as provided above, the Plan shall be administered by (A) the Board or (B) a Committee, which committee shall be constituted to satisfy Applicable Laws. (b) Powers of the Administrator. Subject to the provisions of the Plan, and in the case of a Committee, subject to the specific duties delegated by the Board to such Committee, the Administrator shall have the authority, in its discretion: (i) to determine the Fair Market Value; (ii) to select the Service Providers to whom Options and Stock Purchase Rights may be granted hereunder; (iii) to determine the number of shares of Common Stock to be covered by each Option and Stock Purchase Right granted hereunder; (iv) to approve forms of agreement for use under the Plan; (v) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any Option or Stock Purchase Right granted hereunder. Such terms and conditions include, but are not limited to, the exercise price, the time or times when Options or Stock Purchase Rights may be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Option or Stock Purchase Right or the shares of Common Stock relating thereto, based in each case on such factors as the Administrator, in its sole discretion, shall determine; (vi) to reduce the exercise price of any Option or Stock Purchase Right to the then current Fair Market Value if the Fair Market Value of the Common Stock covered by such Option or Stock Purchase Right shall have declined since the date the Option or Stock Purchase Right was granted; (vii) to institute an Option Exchange Program; (viii) to construe and interpret the terms of the Plan and awards granted pursuant to the Plan; -5- 6 (ix) to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and regulations relating to sub-plans established for the purpose of qualifying for preferred tax treatment under foreign tax laws; (x) to modify or amend each Option or Stock Purchase Right (subject to Section 15(c) of the Plan), including the discretionary authority to extend the post-termination exercisability period of Options longer than is otherwise provided for in the Plan; (xi) to allow Optionees to satisfy withholding tax obligations by electing to have the Company withhold from the Shares to be issued upon exercise of an Option or Stock Purchase Right that number of Shares having a Fair Market Value equal to the amount required to be withheld. The Fair Market Value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined. All elections by an Optionee to have Shares withheld for this purpose shall be made in such form and under such conditions as the Administrator may deem necessary or advisable; (xii) to authorize any person to execute on behalf of the Company any instrument required to effect the grant of an Option or Stock Purchase Right previously granted by the Administrator; (xiii) to make all other determinations deemed necessary or advisable for administering the Plan. (c) Effect of Administrator's Decision. The Administrator's decisions, determinations and interpretations shall be final and binding on all Optionees and any other holders of Options or Stock Purchase Rights. 5. Eligibility. Nonstatutory Stock Options and Stock Purchase Rights may be granted to Service Providers. Incentive Stock Options may be granted only to Employees. 6. Limitations. (a) Each Option shall be designated in the Option Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designation, to the extent that the aggregate Fair Market Value of the Shares with respect to which Incentive Stock Options are exercisable for the first time by the Optionee during any calendar year (under all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such Options shall be treated as Nonstatutory Stock Options. For purposes of this Section 6(a), Incentive Stock Options shall be taken into account in the order in which they were granted. The Fair Market Value of the Shares shall be determined as of the time the Option with respect to such Shares is granted. -6- 7 (b) Neither the Plan nor any Option or Stock Purchase Right shall confer upon an Optionee any right with respect to continuing the Optionee's relationship as a Service Provider with the Company, nor shall they interfere in any way with the Optionee's right or the Company's right to terminate such relationship at any time, with or without cause. (c) The following limitations shall apply to grants of Options: (i) No Service Provider shall be granted, in any fiscal year of the Company, Options to purchase more than 2,000,000 Shares. (ii) The foregoing limitation shall be adjusted proportionately in connection with any change in the Company's capitalization as described in Section 14. (iii) If an Option is cancelled in the same fiscal year of the Company in which it was granted (other than in connection with a transaction described in Section 14), the cancelled Option will be counted against the limit set forth in subsection (i) above. For this purpose, if the exercise price of an Option is reduced, the transaction will be treated as a cancellation of the Option and the grant of a new Option. 7. Term of Plan. Subject to Section 19 of the Plan, the Plan shall become effective upon its adoption by the Board. It shall continue in effect for a term of ten (10) years unless terminated earlier under Section 16 of the Plan. 8. Term of Option. The term of each Option shall be stated in the Option Agreement. In the case of an Incentive Stock Option, the term shall be ten (10) years from the date of grant or such shorter term as may be provided in the Option Agreement. Moreover, in the case of an Incentive Stock Option granted to an Optionee who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Incentive Stock Option shall be five (5) years from the date of grant or such shorter term as may be provided in the Option Agreement. 9. Option Exercise Price and Consideration. (a) Exercise Price. The per share exercise price for the Shares to be issued pursuant to exercise of an Option shall be determined by the Administrator, subject to the following: (i) In the case of an Incentive Stock Option (A) granted to an Employee who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of -7- 8 stock of the Company or any Parent or Subsidiary, the per Share exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant. (B) granted to any Employee other than an Employee described in paragraph (A) immediately above, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. (ii) In the case of a Nonstatutory Stock Option, the per Share exercise price shall be determined by the Administrator. In the case of a Nonstatutory Stock Option intended to qualify as "performance-based compensation" within the meaning of Section 162(m) of the Code, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. (iii) Notwithstanding the foregoing, Options may be granted with a per Share exercise price of less than 100% of the Fair Market Value per Share on the date of grant pursuant to a merger or other corporate transaction. (b) Waiting Period and Exercise Dates. At the time an Option is granted, the Administrator shall fix the period within which the Option may be exercised and shall determine any conditions which must be satisfied before the Option may be exercised. (c) Form of Consideration. The Administrator shall determine the acceptable form of consideration for exercising an Option, including the method of payment. In the case of an Incentive Stock Option, the Administrator shall determine the acceptable form of consideration at the time of grant. Such consideration may consist entirely of: (i) cash; (ii) check; (iii) promissory note; (iv) other Shares which (A) in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more than six months on the date of surrender, and (B) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised; (v) consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan; -8- 9 (vi) a reduction in the amount of any Company liability to the Optionee, including any liability attributable to the Optionee's participation in any Company-sponsored deferred compensation program or arrangement; (vii) any combination of the foregoing methods of payment; or (viii)such other consideration and method of payment for the issuance of Shares to the extent permitted by Applicable Laws. 10. Exercise of Option. (a) Procedure for Exercise; Rights as a Stockholder. Any Option granted hereunder shall be exercisable according to the terms of the Plan and at such times and under such conditions as determined by the Administrator and set forth in the Option Agreement. Unless the Administrator provides otherwise, vesting of Options granted hereunder shall be tolled during any unpaid leave of absence. An Option may not be exercised for a fraction of a Share. An Option shall be deemed exercised when the Company receives: (i) written or electronic notice of exercise (in accordance with the Option Agreement) from the person entitled to exercise the Option, and (ii) full payment for the Shares with respect to which the Option is exercised. Full payment may consist of any consideration and method of payment authorized by the Administrator and permitted by the Option Agreement and the Plan. Shares issued upon exercise of an Option shall be issued in the name of the Optionee or, if requested by the Optionee, in the name of the Optionee and his or her spouse. Until the Shares are issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such Shares promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Shares are issued, except as provided in Section 14 of the Plan. Exercising an Option in any manner shall decrease the number of Shares thereafter available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (b) Termination of Relationship as a Service Provider. If an Optionee ceases to be a Service Provider, other than upon the Optionee's death or Disability, the Optionee may exercise his or her Option within such period of time as is specified in the Option Agreement to the extent that the Option is vested on the date of termination (but in no event later than the expiration of the term -9- 10 of such Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for three (3) months following the Optionee's termination. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified by the Administrator, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (c) Disability of Optionee. If an Optionee ceases to be a Service Provider as a result of the Optionee's Disability, the Optionee may exercise his or her Option within such period of time as is specified in the Option Agreement to the extent the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twelve (12) months following the Optionee's termination. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (d) Death of Optionee. If an Optionee dies while a Service Provider, the Option may be exercised within such period of time as is specified in the Option Agreement (but in no event later than the expiration of the term of such Option as set forth in the Notice of Grant), by the Optionee's estate or by a person who acquires the right to exercise the Option by bequest or inheritance, but only to the extent that the Option is vested on the date of death. In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twelve (12) months following the Optionee's termination. If, at the time of death, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall immediately revert to the Plan. The Option may be exercised by the executor or administrator of the Optionee's estate or, if none, by the person(s) entitled to exercise the Option under the Optionee's will or the laws of descent or distribution. If the Option is not so exercised within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (e) Buyout Provisions. The Administrator may at any time offer to buy out for a payment in cash or Shares an Option previously granted based on such terms and conditions as the Administrator shall establish and communicate to the Optionee at the time that such offer is made. 11. Stock Purchase Rights. (a) Rights to Purchase. Stock Purchase Rights may be issued either alone, in addition to, or in tandem with other awards granted under the Plan and/or cash awards made outside of the Plan. After the Administrator determines that it will offer Stock Purchase Rights under the Plan, it shall advise the offeree in writing or electronically, by means of a Notice of Grant, of the terms, -10- 11 conditions and restrictions related to the offer, including the number of Shares that the offeree shall be entitled to purchase, the price to be paid, and the time within which the offeree must accept such offer. The offer shall be accepted by execution of a Restricted Stock Purchase Agreement in the form determined by the Administrator. (b) Repurchase Option. Unless the Administrator determines otherwise, the Restricted Stock Purchase Agreement shall grant the Company a repurchase option exercisable upon the voluntary or involuntary termination of the purchaser's service with the Company for any reason (including death or Disability). The purchase price for Shares repurchased pursuant to the Restricted Stock Purchase Agreement shall be the original price paid by the purchaser and may be paid by cancellation of any indebtedness of the purchaser to the Company. The repurchase option shall lapse at a rate determined by the Administrator. (c) Other Provisions. The Restricted Stock Purchase Agreement shall contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Administrator in its sole discretion. (d) Rights as a Stockholder. Once the Stock Purchase Right is exercised, the purchaser shall have the rights equivalent to those of a stockholder, and shall be a stockholder when his or her purchase is entered upon the records of the duly authorized transfer agent of the Company. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Stock Purchase Right is exercised, except as provided in Section 14 of the Plan. 12. Formula Option Grants to Outside Directors. All grants of Options to Outside Directors pursuant to this Section shall be automatic and nondiscretionary and shall be made strictly in accordance with the following provisions: (a) All Options granted pursuant to this Section shall be Nonstatutory Stock Options and, except as otherwise provided herein, shall be subject to the other terms and conditions of the Plan. (b) No person shall have any discretion to select which Outside Directors shall be granted Options under this Section or to determine the number of Shares to be covered by such Options. (c) Each person who first becomes an Outside Director following the effective date of this Plan, as determined in accordance with Section 7 hereof, shall be automatically granted an Option to purchase 6,000 Shares (each, a "First Option") on each of the first, second, third, fourth and fifth anniversaries of the date on which such person first becomes an Outside Director, so long as such person is serving as an Outside Director on such dates whether through election by the stockholders of the Company or appointment by the Board to fill a vacancy; provided, however, that -11- 12 an Inside Director who ceases to be an Inside Director but who remains a Director shall not receive any First Options. (d) Each Outside Director shall be automatically granted an Option to purchase 6,000 Shares (a "Subsequent Option") on the date of each annual meeting of the stockholders of the Company, if as of such date, he or she shall have served on the Board for at least the preceding eighteen (18) months. Subsequent Options shall be in addition to First Options. (e) Notwithstanding the provisions of subsections (c) and (d) hereof, any exercise of an Option granted before the Company has obtained stockholder approval of the Plan in accordance with Section 20 hereof shall be conditioned upon obtaining such stockholder approval of the Plan in accordance with Section 20 hereof. (f) The terms of each Option granted pursuant to this Section shall be as follows: (i) the term of the Option shall be ten (10) years. (ii) the exercise price per Share shall be 100% of the Fair Market Value per Share on the date of grant of the Option. (iii) subject to Section 14 hereof, the First Options and the Subsequent Options shall vest and become exercisable as to 100% of the Shares subject to the Option on its date of grant. 13. Non-Transferability of Options and Stock Purchase Rights. Unless determined otherwise by the Administrator, an Option or Stock Purchase Right may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. If the Administrator makes an Option or Stock Purchase Right transferable, such Option or Stock Purchase Right shall contain such additional terms and conditions as the Administrator deems appropriate. 14. Adjustments Upon Changes in Capitalization, Dissolution, Merger or Asset Sale. (a) Changes in Capitalization. Subject to any required action by the stockholders of the Company, the number of shares of Common Stock covered by each outstanding Option and Stock Purchase Right, and the number of shares of Common Stock which have been authorized for issuance under the Plan but as to which no Options or Stock Purchase Rights have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option or Stock Purchase Right, as well as the price per share of Common Stock covered by each such outstanding Option or Stock Purchase Right, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in -12- 13 the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. 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 of Common Stock subject to an Option or Stock Purchase Right. (b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, the Administrator shall notify each Optionee as soon as practicable prior to the effective date of such proposed transaction. The Administrator in its discretion may provide for an Optionee to have the right to exercise his or her Option until ten (10) days prior to such transaction as to all of the Optioned Stock covered thereby, including Shares as to which the Option would not otherwise be exercisable. In addition, the Administrator may provide that any Company repurchase option applicable to any Shares purchased upon exercise of an Option or Stock Purchase Right shall lapse as to all such Shares, provided the proposed dissolution or liquidation takes place at the time and in the manner contemplated. To the extent it has not been previously exercised, an Option or Stock Purchase Right will terminate immediately prior to the consummation of such proposed action. (c) Merger or Asset Sale. In the event of a merger of the Company with or into another corporation, or the sale of substantially all of the assets of the Company, each outstanding Option and Stock Purchase Right shall be assumed or an equivalent option or right substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation refuses to assume or substitute for the Option or Stock Purchase Right, the Optionee shall fully vest in and have the right to exercise the Option or Stock Purchase Right as to all of the Optioned Stock, including Shares as to which it would not otherwise be vested or exercisable. If an Option or Stock Purchase Right becomes fully vested and exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Administrator shall notify the Optionee in writing or electronically that the Option or Stock Purchase Right shall be fully vested and exercisable for a period of fifteen (15) days from the date of such notice, and the Option or Stock Purchase Right shall terminate upon the expiration of such period. For the purposes of this paragraph, the Option or Stock Purchase Right shall be considered assumed if, following the merger or sale of assets, the option or right confers the right to purchase or receive, for each Share of Optioned Stock subject to the Option or Stock Purchase Right immediately prior to the merger or sale of assets, the consideration (whether stock, cash, or other securities or property) received in the merger or sale of assets by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the merger or sale of assets is not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the -13- 14 consideration to be received upon the exercise of the Option or Stock Purchase Right, for each Share of Optioned Stock subject to the Option or Stock Purchase Right, to be solely common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock in the merger or sale of assets. (d) Change in Control. Effective upon the consummation of a Change in Control (as defined below) of the Company, the number of shares under each Option granted hereunder as to which such Option is vested and fully exercisable shall be accelerated such that each Option shall be immediately vested as to that additional number of shares as would be vested on the date one year following consummation of a Change in Control if all conditions to such vesting were satisfied. For purposes of the foregoing, a "Change in Control" shall be deemed to have occurred upon any person or entity, together with all affiliates (as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) thereof becoming the beneficial owner (as defined under Section 13(d) of the Exchange Act and Rule 13d-3 thereunder) of more than 50% of the Company's then outstanding shares of Common Stock. 15. Date of Grant. The date of grant of an Option or Stock Purchase Right shall be, for all purposes, the date on which the Administrator makes the determination granting such Option or Stock Purchase Right, or such other later date as is determined by the Administrator. Notice of the determination shall be provided to each Optionee within a reasonable time after the date of such grant. 16. Amendment and Termination of the Plan. (a) Amendment and Termination. The Board may at any time amend, alter, suspend or terminate the Plan. (b) Stockholder Approval. The Company shall obtain stockholder approval of any Plan amendment to the extent necessary and desirable to comply with Applicable Laws. (c) Effect of Amendment or Termination. No amendment, alteration, suspension or termination of the Plan shall impair the rights of any Optionee, unless mutually agreed otherwise between the Optionee and the Administrator, which agreement must be in writing and signed by the Optionee and the Company. Termination of the Plan shall not affect the Administrator's ability to exercise the powers granted to it hereunder with respect to Options granted under the Plan prior to the date of such termination. -14- 15 17. Conditions Upon Issuance of Shares. (a) Legal Compliance. Shares shall not be issued pursuant to the exercise of an Option or Stock Purchase Right unless the exercise of such Option or Stock Purchase Right and the issuance and delivery of such Shares shall comply with Applicable Laws and shall be further subject to the approval of counsel for the Company with respect to such compliance. (b) Investment Representations. As a condition to the exercise of an Option or Stock Purchase Right, the Company may require the person exercising such Option or Stock Purchase Right to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required. 18. Inability to Obtain Authority. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 19. Reservation of Shares. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. 20. Stockholder Approval. The Plan shall be subject to approval by the stockholders of the Company within twelve (12) months after the date the Plan is adopted. Such stockholder approval shall be obtained in the manner and to the degree required under Applicable Laws. -15- 16 NETCOM SYSTEMS, INC. 1998 STOCK PLAN STOCK OPTION AGREEMENT Unless otherwise defined herein, the terms defined in the 1998 Stock Plan shall have the same defined meanings in this Stock Option Agreement. I. NOTICE OF STOCK OPTION GRANT [Optionee's Name and Address] You have been granted an option to purchase Common Stock of the Company, subject to the terms and conditions of the Plan and this Option Agreement, as follows: Grant Number _________________________ Date of Grant _________________________ Vesting Commencement Date _________________________ Exercise Price per Share $________________________ Total Number of Shares Granted _________________________ Total Exercise Price $_________________________ Type of Option: ___ Incentive Stock Option ___ Nonstatutory Stock Option Term/Expiration Date: _________________________ Vesting Schedule: This Option may be exercised, in whole or in part, in accordance with the following schedule: [20% of the Shares subject to the Option shall vest twelve months after the Vesting Commencement Date, and 1/60 of the Shares subject to the Option shall vest each month thereafter, subject to the Optionee continuing to be a Service Provider on such dates]. 17 Termination Period: This Option may be exercised for thirty (30) after Optionee ceases to be a Service Provider. Upon the death or Disability of the Optionee, this Option may be exercised for one year after Optionee ceases to be a Service Provider. In no event shall this Option be exercised later than the Term/Expiration Date as provided above. II. AGREEMENT 1. Grant of Option. The Plan Administrator of the Company hereby grants to the Optionee named in the Notice of Grant attached as Part I of this Agreement (the "Optionee") an option (the "Option") to purchase the number of Shares, as set forth in the Notice of Grant, at the exercise price per share set forth in the Notice of Grant (the "Exercise Price"), subject to the terms and conditions of the Plan, which is incorporated herein by reference. Subject to Section 16(c) of the Plan, in the event of a conflict between the terms and conditions of the Plan and the terms and conditions of this Option Agreement, the terms and conditions of the Plan shall prevail. If designated in the Notice of Grant as an Incentive Stock Option ("ISO"), this Option is intended to qualify as an Incentive Stock Option under Section 422 of the Code. However, if this Option is intended to be an Incentive Stock Option, to the extent that it exceeds the $100,000 rule of Code Section 422(d) it shall be treated as a Nonstatutory Stock Option ("NSO"). 2. Exercise of Option. (a) Right to Exercise. This Option is exercisable during its term in accordance with the Vesting Schedule set out in the Notice of Grant and the applicable provisions of the Plan and this Option Agreement. (b) Method of Exercise. This Option is exercisable by delivery of an exercise notice, in the form attached as Exhibit A (the "Exercise Notice"), which shall state the election to exercise the Option, the number of Shares in respect of which the Option is being exercised (the "Exercised Shares"), and such other representations and agreements as may be required by the Company pursuant to the provisions of the Plan. The Exercise Notice shall be completed by the Optionee and delivered to the Company. The Exercise Notice shall be accompanied by payment of the aggregate Exercise Price as to all Exercised Shares. This Option shall be deemed to be exercised upon receipt by the Company of such fully executed Exercise Notice accompanied by such aggregate Exercise Price. No Shares shall be issued pursuant to the exercise of this Option unless such issuance and exercise complies with Applicable Laws. Assuming such compliance, for income tax purposes the Exercised Shares shall be considered transferred to the Optionee on the date the Option is exercised with respect to such Exercised Shares. -2- 18 3. Method of Payment. Payment of the aggregate Exercise Price shall be by any of the following, or a combination thereof, at the election of the Optionee: (a) cash; (b) check; (c) consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan; or (d) surrender of other Shares which (i) in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more than six (6) months on the date of surrender, AND (ii) have a Fair Market Value on the date of surrender equal to the aggregate Exercise Price of the Exercised Shares. 4. Non-Transferability of Option. This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee only by the Optionee. The terms of the Plan and this Option Agreement shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee. 5. Term of Option. This Option may be exercised only within the term set out in the Notice of Grant, and may be exercised during such term only in accordance with the Plan and the terms of this Option Agreement. 6. Tax Consequences. Some of the federal tax consequences relating to this Option, as of the date of this Option, are set forth below. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES. (a) Exercising the Option. (i) NSO. The Optionee may incur regular federal income tax liability upon exercise of a NSO. The Optionee will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the Fair Market Value of the Exercised Shares on the date of exercise over their aggregate Exercise Price. If the Optionee is an Employee or a former Employee, the Company will be required to withhold from his or her compensation or collect from Optionee and pay to the applicable taxing authorities an amount in cash equal to a percentage of this compensation income at the time of exercise, and may refuse to honor the exercise and refuse to deliver Shares if such withholding amounts are not delivered at the time of exercise. -3- 19 (ii) ISO. If this Option qualifies as an ISO, the Optionee will have no regular federal income tax liability upon its exercise, although the excess, if any, of the Fair Market Value of the Exercised Shares on the date of exercise over their aggregate Exercise Price will be treated as an adjustment to alternative minimum taxable income for federal tax purposes and may subject the Optionee to alternative minimum tax in the year of exercise. In the event that the Optionee ceases to be an Employee but remains a Service Provider, any Incentive Stock Option of the Optionee that remains unexercised shall cease to qualify as an Incentive Stock Option and will be treated for tax purposes as a Nonstatutory Stock Option on the date three (3) months and one (1) day following such change of status. (b) Disposition of Shares. (i) NSO. If the Optionee holds NSO Shares for at least one year, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax purposes. (ii) ISO. If the Optionee holds ISO Shares for at least one year after exercise and two years after the grant date, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax purposes. If the Optionee disposes of ISO Shares within one year after exercise or two years after the grant date, any gain realized on such disposition will be treated as compensation income (taxable at ordinary income rates) to the extent of the excess, if any, of the lesser of (A) the difference between the Fair Market Value of the Shares acquired on the date of exercise and the aggregate Exercise Price, or (B) the difference between the sale price of such Shares and the aggregate Exercise Price. Any additional gain will be taxed as capital gain, short-term or long-term depending on the period that the ISO Shares were held. (c) Notice of Disqualifying Disposition of ISO Shares. If the Optionee sells or otherwise disposes of any of the Shares acquired pursuant to an ISO on or before the later of (i) two years after the grant date, or (ii) one year after the exercise date, the Optionee shall immediately notify the Company in writing of such disposition. The Optionee agrees that he or she may be subject to income tax withholding by the Company on the compensation income recognized from such early disposition of ISO Shares by payment in cash or out of the current earnings paid to the Optionee. 7. Entire Agreement; Governing Law. The Plan is incorporated herein by reference. The Plan and this Option Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and Optionee with respect to the subject matter hereof, and may not be modified adversely to the Optionee's interest except by means of a writing signed by the Company and Optionee. This agreement is governed by the internal substantive laws, but not the choice of law rules, of California. -4- 20 8. NO GUARANTEE OF CONTINUED SERVICE. OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (AND NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED AN OPTION OR PURCHASING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE OPTIONEE'S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT CAUSE. By your signature and the signature of the Company's representative below, you and the Company agree that this Option is granted under and governed by the terms and conditions of the Plan and this Option Agreement. Optionee has reviewed the Plan and this Option Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option Agreement and fully understands all provisions of the Plan and Option Agreement. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions relating to the Plan and Option Agreement. Optionee further agrees to notify the Company upon any change in the residence address indicated below. OPTIONEE: NETCOM SYSTEMS, INC. - ----------------------------------- --------------------------------------- Signature By - ------------------------------------ -------------------------------------- Print Name Title - ------------------------------------ Residence Address - ------------------------------------ -5- 21 EXHIBIT A 1998 STOCK PLAN EXERCISE NOTICE Netcom Systems, Inc. 20500 Nordhoff Street Chatsworth, CA 91311 Attention: [Secretary] 1. Exercise of Option. Effective as of today, ________________, 199__, the undersigned ("Purchaser") hereby elects to purchase ______________ shares (the "Shares") of the Common Stock of Netcom Systems, Inc. (the "Company") under and pursuant to the 1998 Stock Plan (the "Plan") and the Stock Option Agreement dated ________________, 19___ (the "Option Agreement"). The purchase price for the Shares shall be $____________, as required by the Option Agreement. 2. Delivery of Payment. Purchaser herewith delivers to the Company the full purchase price for the Shares. 3. Representations of Purchaser. Purchaser acknowledges that Purchaser has received, read and understood the Plan and the Option Agreement and agrees to abide by and be bound by their terms and conditions. 4. Rights as Stockholder. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the Shares, no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Shares so acquired shall be issued to the Optionee as soon as practicable after exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date of issuance, except as provided in Section 14 of the Plan. 5. Tax Consultation. Purchaser understands that Purchaser may suffer adverse tax consequences as a result of Purchaser's purchase or disposition of the Shares. Purchaser represents that Purchaser has consulted with any tax consultants Purchaser deems advisable in connection with the purchase or disposition of the Shares and that Purchaser is not relying on the Company for any tax advice. 6. Entire Agreement; Governing Law. The Plan and Option Agreement are incorporated herein by reference. This Agreement, the Plan and the Option Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and Purchaser with respect to the subject matter 22 hereof, and may not be modified adversely to the Purchaser's interest except by means of a writing signed by the Company and Purchaser. This agreement is governed by the internal substantive laws, but not the choice of law rules, of California. Submitted by: Accepted by: PURCHASER: NETCOM SYSTEMS, INC. - ---------------------------------- ------------------------------------- Signature By - ---------------------------------- ------------------------------------- Print Name Its Address: Address: _________________________________ 20500 Nordhoff Street _________________________________ Chatsworth, CA 91311 ------------------------------------- Date Received -2- EX-10.4 8 1998 EMPLOYEE STOCK PURCHASE PLAN 1 EXHIBIT 10.4 NETCOM SYSTEMS, INC. 1998 EMPLOYEE STOCK PURCHASE PLAN AS AMENDED ON MAY 13, 1999 1. Purpose. The purpose of the 1998 Employee Stock Purchase Plan is to provide employees of the Company and its Designated Subsidiaries with an opportunity to purchase Common Stock of the Company through accumulated payroll deductions. It is the intention of the Company to have the Plan qualify as an "Employee Stock Purchase Plan" under Section 423 of the Internal Revenue Code of 1986, as amended. The provisions of the Plan, accordingly, shall be construed so as to extend and limit participation in a manner consistent with the requirements of that section of the Code. 2. Definitions. (a) "Board" shall mean the Board of Directors of the Company. (b) "Code" shall mean the Internal Revenue Code of 1986, as amended. (c) "Common Stock" shall mean the Common Stock of the Company. (d) "Company" shall mean Netcom Systems, Inc., a Delaware corporation, and any Designated Subsidiary of the Company. (e) "Compensation" shall mean all base straight time gross earnings, commissions, overtime and bonuses, but exclusive of any other compensation. (f) "Designated Subsidiary" shall mean any Subsidiary which has been designated by the Board from time to time in its sole discretion as eligible to participate in the Plan. (g) "Employee" shall mean any individual who is an Employee of the Company for tax purposes whose customary employment with the Company is at least twenty (20) hours per week and more than five (5) months in any calendar year. For purposes of the Plan, the employment relationship shall be treated as continuing intact while the individual is on sick leave or other leave of absence approved by the Company. Where the period of leave exceeds 90 days and the individual's right to reemployment is not guaranteed either by statute or by contract, the employment relationship shall be deemed to have terminated on the 91st day of such leave. (h) "Enrollment Date" shall mean the first day of each Offering Period. (i) "Exercise Date" shall mean the last day of each Offering Period. (j) "Fair Market Value" shall mean, as of any date, the value of Common Stock determined as follows: 2 (1) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading day on the date of such determination, as reported in The Wall Street Journal or such other source as the Board deems reliable, or; (2) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean of the closing bid and asked prices for the Common Stock on the date of such determination, as reported in The Wall Street Journal or such other source as the Board deems reliable, or; (3) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Board, or; (4) For purposes of the Enrollment Date of the first Offering Period under the Plan, the Fair Market Value shall be the initial price to the public as set forth in the final prospectus included within the registration statement in Form S-1 filed with the Securities and Exchange Commission for the initial public offering of the Company's Common Stock (the "Registration Statement"). (k) "Offering Period" shall mean a period of approximately six (6) months during which an option granted pursuant to the Plan may be exercised, commencing on the first Trading Day on or after February 15 and terminating on the last Trading Day in the period ending the following August 14, or commencing on the first Trading Day on or after August 15 and terminating on the last Trading Day in the period ending the following February 14; provided, however, that the first Offering Period under the Plan shall commence with the first Trading Day on or after the date on which the Securities and Exchange Commission declares the Company's Registration Statement effective and ending on the last Trading Day on or before February 14, 2000. The duration of Offering Periods may be changed pursuant to Section 4 of this Plan. (l) "Plan" shall mean this 1998 Employee Stock Purchase Plan. (m) "Purchase Price" shall mean an amount equal to 85% of the Fair Market Value of a share of Common Stock on the Enrollment Date or on the Exercise Date, whichever is lower; provided, however, that the Purchase Price may be adjusted by the Board pursuant to Section 20. (n) "Reserves" shall mean the number of shares of Common Stock covered by each option under the Plan which have not yet been exercised and the number of shares of Common Stock which have been authorized for issuance under the Plan but not yet placed under option. -2- 3 (o) "Subsidiary" shall mean a corporation, domestic or foreign, of which not less than 50% of the voting shares are held by the Company or a Subsidiary, whether or not such corporation now exists or is hereafter organized or acquired by the Company or a Subsidiary. (p) "Trading Day" shall mean a day on which national stock exchanges and the Nasdaq System are open for trading. 3. Eligibility. (a) Any Employee who shall be employed by the Company on a given Enrollment Date shall be eligible to participate in the Plan. (b) Any provisions of the Plan to the contrary notwithstanding, no Employee shall be granted an option under the Plan (i) to the extent that, immediately after the grant, such Employee (or any other person whose stock would be attributed to such Employee pursuant to Section 424(d) of the Code) would own capital stock of the Company and/or hold outstanding options to purchase such stock possessing five percent (5%) or more of the total combined voting power or value of all classes of the capital stock of the Company or of any Subsidiary, or (ii) to the extent that his or her rights to purchase stock under all employee stock purchase plans of the Company and its subsidiaries accrues at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) worth of stock (determined at the fair market value of the shares at the time such option is granted) for each calendar year in which such option is outstanding at any time. 4. Offering Periods. The Plan shall be implemented by consecutive Offering Periods with a new Offering Period commencing on the first Trading Day on or after February 15 and August 15 of each year, or on such other date as the Board shall determine, and continuing thereafter until terminated in accordance with Section 20 hereof; provided, however, that the first Offering Period under the Plan shall commence with the first Trading Day on or after the date on which the Securities and Exchange Commission declares the Company's Registration Statement effective and ending on the last Trading Day on or before February 14, 2000. The Board shall have the power to change the duration of Offering Periods (including the commencement dates thereof) with respect to future offerings without stockholder approval if such change is announced at least five (5) days prior to the scheduled beginning of the first Offering Period to be affected thereafter. 5. Participation. (a) An eligible Employee may become a participant in the Plan by completing a subscription agreement authorizing payroll deductions in the form of Exhibit A to this Plan and filing it with the Company's payroll office prior to the applicable Enrollment Date. (b) Payroll deductions for a participant shall commence on the first payroll following the Enrollment Date and shall end on the last payroll in the Offering Period to which such -3- 4 authorization is applicable, unless sooner terminated by the participant as provided in Section 10 hereof. -4- 5 6. Payroll Deductions. (a) At the time a participant files his or her subscription agreement, he or she shall elect to have payroll deductions made on each pay day during the Offering Period in an amount not exceeding fifteen percent (15%) of the Compensation which he or she receives on each pay day during the Offering Period. (b) All payroll deductions made for a participant shall be credited to his or her account under the Plan and shall be withheld in whole percentages only. A participant may not make any additional payments into such account. (c) A participant may discontinue his or her participation in the Plan as provided in Section 10 hereof, or may increase or decrease the rate of his or her payroll deductions during the Offering Period by completing or filing with the Company a new subscription agreement authorizing a change in payroll deduction rate. The Board may, in its discretion, limit the number of parti cipation rate changes during any Offering Period. The change in rate shall be effective with the first full payroll period following five (5) business days after the Company's receipt of the new subscription agreement unless the Company elects to process a given change in participation more quickly. A participant's subscription agreement shall remain in effect for successive Offering Periods unless terminated as provided in Section 10 hereof. (d) Notwithstanding the foregoing, to the extent necessary to comply with Section 423(b)(8) of the Code and Section 3(b) hereof, a participant's payroll deductions may be decreased to zero percent (0%) at any time during an Offering Period. Payroll deductions shall recommence at the rate provided in such participant's subscription agreement at the beginning of the first Offering Period which is scheduled to end in the following calendar year, unless terminated by the participant as provided in Section 10 hereof. (e) At the time the option is exercised, in whole or in part, or at the time some or all of the Company's Common Stock issued under the Plan is disposed of, the participant must make adequate provision for the Company's federal, state, or other tax withholding obligations, if any, which arise upon the exercise of the option or the disposition of the Common Stock. At any time, the Company may, but shall not be obligated to, withhold from the participant's compensation the amount necessary for the Company to meet applicable withholding obligations, including any withholding required to make available to the Company any tax deductions or benefits attributable to sale or early disposition of Common Stock by the Employee. 7. Grant of Option. On the Enrollment Date of each Offering Period, each eligible Employee participating in such Offering Period shall be granted an option to purchase on the Exercise Date of such Offering Period (at the applicable Purchase Price) up to a number of shares of the Company's Common Stock determined by dividing such Employee's payroll deductions accumulated prior to such Exercise Date and retained in the Participant's account as of the Exercise Date by the applicable Purchase Price; provided that in no event shall an Employee be permitted to -5- 6 purchase during each Offering Period more than 2,500 shares (subject to any adjustment pursuant to Section 19), and provided further that such purchase shall be subject to the limitations set forth in Sections 3(b) and 12 hereof. Exercise of the option shall occur as provided in Section 8 hereof, unless the participant has withdrawn pursuant to Section 10 hereof. The Option shall expire on the last day of the Offering Period. 8. Exercise of Option. Unless a participant withdraws from the Plan as provided in Section 10 hereof, his or her option for the purchase of shares shall be exercised automatically on the Exercise Date, and the maximum number of full shares subject to option shall be purchased for such participant at the applicable Purchase Price with the accumulated payroll deductions in his or her account. No fractional shares shall be purchased; any payroll deductions accumulated in a participant's account which are not sufficient to purchase a full share shall be retained in the participant's account for the subsequent Offering Period, subject to earlier withdrawal by the participant as provided in Section 10 hereof. Any other monies left over in a participant's account after the Exercise Date shall be returned to the participant. During a participant's lifetime, a participant's option to purchase shares hereunder is exercisable only by him or her. 9. Delivery. As promptly as practicable after each Exercise Date on which a purchase of shares occurs, the Company shall arrange the delivery to each participant, as appropriate, of a certificate representing the shares purchased upon exercise of his or her option. 10. Withdrawal. (a) A participant may withdraw all but not less than all the payroll deductions credited to his or her account and not yet used to exercise his or her option under the Plan at any time by giving written notice to the Company in the form of Exhibit B to this Plan. All of the participant's payroll deductions credited to his or her account shall be paid to such participant promptly after receipt of notice of withdrawal and such participant's option for the Offering Period shall be automatically terminated, and no further payroll deductions for the purchase of shares shall be made for such Offering Period. If a participant withdraws from an Offering Period, payroll deductions shall not resume at the beginning of the succeeding Offering Period unless the participant delivers to the Company a new subscription agreement. (b) A participant's withdrawal from an Offering Period shall not have any effect upon his or her eligibility to participate in any similar plan which may hereafter be adopted by the Company or in succeeding Offering Periods which commence after the termination of the Offering Period from which the participant withdraws. 11. Termination of Employment. Upon a participant's ceasing to be an Employee for any reason, he or she shall be deemed to have elected to withdraw from the Plan and the payroll deductions credited to such participant's account during the Offering Period but not yet used to exercise the option shall be returned to such participant or, in the case of his or her death, to the person or persons entitled thereto under Section 15 hereof, and such participant's option shall be -6- 7 automatically terminated. The preceding sentence notwithstanding, a participant who receives payment in lieu of notice of termination of employment shall be treated as continuing to be an Employee for the participant's customary number of hours per week of employment during the period in which the participant is subject to such payment in lieu of notice. 12. Interest. No interest shall accrue on the payroll deductions of a participant in the Plan. 13. Stock. (a) Subject to adjustment upon changes in capitalization of the Company as provided in Section 19 hereof, the maximum number of shares of the Company's Common Stock which shall be made available for sale under the Plan shall be 150,000 shares, plus an annual increase to be added on the first day of the Company's fiscal year (beginning in 2000) equal to the lesser of (i) 1,000,000 shares (as adjusted pursuant to Section 19 below), (ii) 1% of the outstanding shares on such date or (iii) a lesser amount determined by the Board. If, on a given Exercise Date, the number of shares with respect to which options are to be exercised exceeds the number of shares then available under the Plan, the Company shall make a pro rata allocation of the shares remaining available for purchase in as uniform a manner as shall be practicable and as it shall determine to be equitable. (b) The participant shall have no interest or voting right in shares covered by his option until such option has been exercised. (c) Shares to be delivered to a participant under the Plan shall be registered in the name of the participant or in the name of the participant and his or her spouse. 14. Administration. The Plan shall be administered by the Board or a committee of members of the Board appointed by the Board. The Board or its committee shall have full and exclusive discretionary authority to construe, interpret and apply the terms of the Plan, to determine eligibility and to adjudicate all disputed claims filed under the Plan. Every finding, decision and determination made by the Board or its committee shall, to the full extent permitted by law, be final and binding upon all parties. 15. Designation of Beneficiary. (a) A participant may file a written designation of a beneficiary who is to receive any shares and cash, if any, from the participant's account under the Plan in the event of such parti cipant's death subsequent to an Exercise Date on which the option is exercised but prior to delivery to such participant of such shares and cash. In addition, a participant may file a written designation of a beneficiary who is to receive any cash from the participant's account under the Plan in the event of such participant's death prior to exercise of the option. If a participant is married and the -7- 8 designated beneficiary is not the spouse, spousal consent shall be required for such designation to be effective. (b) Such designation of beneficiary may be changed by the participant at any time by written notice. In the event of the death of a participant and in the absence of a beneficiary validly designated under the Plan who is living at the time of such participant's death, the Company shall deliver such shares and/or cash to the executor or administrator of the estate of the participant, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its discretion, may deliver such shares and/or cash to the spouse or to any one or more dependents or relatives of the participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate. 16. Transferability. Neither payroll deductions credited to a participant's account nor any rights with regard to the exercise of an option or to receive shares under the Plan may be assigned, transferred, pledged or otherwise disposed of in any way (other than by will, the laws of descent and distribution or as provided in Section 15 hereof) by the participant. Any such attempt at assignment, transfer, pledge or other disposition shall be without effect, except that the Company may treat such act as an election to withdraw funds from an Offering Period in accordance with Section 10 hereof. 17. Use of Funds. All payroll deductions received or held by the Company under the Plan may be used by the Company for any corporate purpose, and the Company shall not be obligated to segregate such payroll deductions. 18. Reports. Individual accounts shall be maintained for each participant in the Plan. Statements of account shall be given to participating Employees at least annually, which statements shall set forth the amounts of payroll deductions, the Purchase Price, the number of shares purchased and the remaining cash balance, if any. 19. Adjustments Upon Changes in Capitalization, Dissolution, Liquidation, Merger or Asset Sale. (a) Changes in Capitalization. Subject to any required action by the stockholders of the Company, the Reserves, the maximum number of shares each participant may purchase per Offering Period (pursuant to Section 7), as well as the price per share and the number of shares of Common Stock covered by each option under the Plan which has not yet been exercised shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration". Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. 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, -8- 9 shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an option. (b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, the Offering Period then in progress shall be shortened by setting a new Exercise Date (the "New Exercise Date"), and shall terminate immediately prior to the consummation of such proposed dissolution or liquidation, unless provided otherwise by the Board. The New Exercise Date shall be before the date of the Company's proposed dissolution or liquidation. The Board shall notify each participant in writing, at least ten (10) business days prior to the New Exercise Date, that the Exercise Date for the participant's option has been changed to the New Exercise Date and that the participant's option shall be exercised automatically on the New Exercise Date, unless prior to such date the participant has withdrawn from the Offering Period as provided in Section 10 hereof. (c) Merger or Asset Sale. In the event of a proposed sale of all or substantially all of the assets of the Company, or the merger of the Company with or into another corporation, each outstanding option shall be assumed or an equivalent option substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation refuses to assume or substitute for the option, the Offering Period then in progress shall be shortened by setting a new Exercise Date (the "New Exercise Date"). The New Exercise Date shall be before the date of the Company's proposed sale or merger. The Board shall notify each participant in writing, at least ten (10) business days prior to the New Exercise Date, that the Exercise Date for the participant's option has been changed to the New Exercise Date and that the participant's option shall be exercised automatically on the New Exercise Date, unless prior to such date the participant has withdrawn from the Offering Period as provided in Section 10 hereof. 20. Amendment or Termination. (a) The Board of Directors of the Company may at any time and for any reason terminate or amend the Plan. Except as provided in Sections 19 and 20 hereof, no such termination can affect options previously granted, provided that an Offering Period may be terminated by the Board of Directors on any Exercise Date if the Board determines that the termination of the Plan is in the best interests of the Company and its stockholders. Except as provided in Section 19 hereof, no amendment may make any change in any option theretofore granted which adversely affects the rights of any participant. To the extent necessary to comply with Section 423 of the Code (or any other applicable law, regulation or stock exchange rule), the Company shall obtain stockholder approval in such a manner and to such a degree as required. (b) Without stockholder consent and without regard to whether any participant rights may be considered to have been "adversely affected," the Board (or its committee) shall be entitled to change the Offering Periods, limit the frequency and/or number of changes in the amount withheld during an Offering Period, establish the exchange ratio applicable to amounts withheld in a currency other than U.S. dollars, permit payroll withholding in excess of the amount designated by a -9- 10 participant in order to adjust for delays or mistakes in the Company's processing of properly completed withholding elections, establish reasonable waiting and adjustment periods and/or accounting and crediting procedures to ensure that amounts applied toward the purchase of Common Stock for each participant properly correspond with amounts withheld from the participant's Compensation, and establish such other limitations or procedures as the Board (or its committee) determines in its sole discretion advisable which are consistent with the Plan. (c) In the event the Board determines that the ongoing operation of the Plan may result in unfavorable financial accounting consequences, the Board may, in its discretion and, to the extent necessary or desirable, modify or amend the Plan to reduce or eliminate such accounting consequence including, but not limited to: (1) altering the Purchase Price for any Offering Period including an Offering Period underway at the time of the change in Purchase Price; (2) shortening any Offering Period so that Offering Period ends on a new Exercise Date, including an Offering Period underway at the time of the Board action; and (3) allocating shares. Such modifications or amendments shall not require stockholder approval or the consent of any Plan participants. 21. Notices. All notices or other communications by a participant to the Company under or in connection with the Plan shall be deemed to have been duly given when received in the form specified by the Company at the location, or by the person, designated by the Company for the receipt thereof. 22. Conditions Upon Issuance of Shares. Shares shall not be issued with respect to an option unless the exercise of such option and the issuance and delivery of such shares pursuant thereto shall comply with all applicable provisions of law, domestic or foreign, including, without limitation, the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an option, the Company may require the person exercising such option to represent and warrant at the time of any such exercise that the shares are being pur chased only for investment and without any present intention to sell or distribute such shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned applicable provisions of law. -10- 11 23. Term of Plan. Subject to Section 19, the Plan shall become effective upon the date of the Company's initial public offering of its equity securities registered on Form S-1 with the Securities and Exchange Commission. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 20 hereof. -11- 12 EXHIBIT A NETCOM SYSTEMS, INC. 1998 EMPLOYEE STOCK PURCHASE PLAN SUBSCRIPTION AGREEMENT _____ Original Application Enrollment Date: __________ _____ Change in Payroll Deduction Rate _____ Change of Beneficiary(ies) 1. _____________________________________ hereby elects to participate in the Netcom Systems, Inc. 1998 Employee Stock Purchase Plan (the "Employee Stock Purchase Plan") and subscribes to purchase shares of the Company's Common Stock in accordance with this Subscription Agreement and the Employee Stock Purchase Plan. 2. I hereby authorize payroll deductions from each paycheck in the amount of ____% of my Compensation on each payday (not to exceed 15%) during the Offering Period in accordance with the Employee Stock Purchase Plan. (Please note that no fractional percentages are permitted.) 3. I understand that said payroll deductions shall be accumulated for the purchase of shares of Common Stock at the applicable Purchase Price determined in accordance with the Employee Stock Purchase Plan. I understand that if I do not withdraw from an Offering Period, any accumulated payroll deductions will be used to automatically exercise my option. 4. I have received a copy of the complete Employee Stock Purchase Plan. I understand that my participation in the Employee Stock Purchase Plan is in all respects subject to the terms of the Plan. I understand that my ability to exercise the option under this Subscription Agreement is subject to stockholder approval of the Employee Stock Purchase Plan. 5. Shares purchased for me under the Employee Stock Purchase Plan should be issued in the name(s) of (Employee or Employee and Spouse only): __________ 6. I understand that if I dispose of any shares received by me pursuant to the Plan within 2 years after the Enrollment Date (the first day of the Offering Period during which I purchased such shares), I will be treated for federal income tax purposes as having received ordinary income at the time of such disposition in an amount equal to the excess of the fair market value of the shares at the time such shares were purchased by me over the price which I paid for the shares. I hereby agree to notify the Company in writing within 30 days after the date of any disposition of shares and I will make adequate provision for Federal, state or other tax 13 withholding obligations, if any, which arise upon the disposition of the Common Stock. The Company may, but will not be obligated to, withhold from my compensation the amount necessary to meet any applicable withholding obligation including any withholding necessary to make available to the Company any tax deductions or benefits attributable to sale or early disposition of Common Stock by me. If I dispose of such shares at any time after the expiration of the 2-year holding period, I understand that I will be treated for federal income tax purposes as having received income only at the time of such disposition, and that such income will be taxed as ordinary income only to the extent of an amount equal to the lesser of (1) the excess of the fair market value of the shares at the time of such disposition over the purchase price which I paid for the shares, or (2) 15% of the fair market value of the shares on the first day of the Offering Period. The remainder of the gain, if any, recognized on such disposition will be taxed as capital gain. 7. I hereby agree to be bound by the terms of the Employee Stock Purchase Plan. The effectiveness of this Subscription Agreement is dependent upon my eligibility to participate in the Employee Stock Purchase Plan. 8. In the event of my death, I hereby designate the following as my beneficiary(ies) to receive all payments and shares due me under the Employee Stock Purchase Plan: NAME: (Please print) _______________________________________________________ (First) (Middle) (Last) - ------------------------- -------------------------------------------------- Relationship -------------------------------------------------- (Address) Employee's Social Security Number: --------------------------------------------------- Employee's Address: --------------------------------------------------- --------------------------------------------------- --------------------------------------------------- -2- 14 I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME. Dated: ___________________ ________________________________________________ Signature of Employee ------------------------------------------------ Spouse's Signature (If beneficiary other than spouse) -3- 15 EXHIBIT B NETCOM SYSTEMS, INC. 1998 EMPLOYEE STOCK PURCHASE PLAN NOTICE OF WITHDRAWAL The undersigned participant in the Offering Period of the Netcom Systems, Inc. 1998 Employee Stock Purchase Plan which began on ___________ 19____ (the "Enrollment Date") hereby notifies the Company that he or she hereby withdraws from the Offering Period. He or she hereby directs the Company to pay to the undersigned as promptly as practicable all the payroll deductions credited to his or her account with respect to such Offering Period. The undersigned understands and agrees that his or her option for such Offering Period will be automatically terminated. The undersigned understands further that no further payroll deductions will be made for the purchase of shares in the current Offering Period and the undersigned shall be eligible to participate in succeeding Offering Periods only by delivering to the Company a new Subscription Agreement. Name and Address of Participant: ---------------------------------------- ---------------------------------------- ---------------------------------------- Signature: ---------------------------------------- Date: ----------------------------------- EX-10.5 9 RECAPITALIZATION AGREEMENT 1 EXHIBIT 10.5 [EXECUTION COPY] ================================================================================ RECAPITALIZATION AGREEMENT BY AND AMONG NETCOM SYSTEMS, INC., THE PURCHASERS NAMED HEREIN AND THE SELLERS NAMED HEREIN ================================================================================ August 29, 1997 2 RECAPITALIZATION AGREEMENT THIS RECAPITALIZATION AGREEMENT (this "Agreement") is made and entered into as of August 29, 1997, by and among the Persons listed on the Schedule of Purchasers attached hereto (each, a "Purchaser" and collectively, the "Purchasers"), Netcom Systems, Inc., a California corporation (the "Company"), and the Persons listed on the Schedule of Sellers attached hereto (each, a "Seller" and collectively, the "Sellers"). The Purchasers, the Company and the Sellers are sometimes collectively referred to herein as the "Parties" and individually as a "Party." Capitalized terms used herein and not otherwise defined herein have the meanings given to such terms in Section 9 below. WHEREAS, the Company desires to reconstitute its capital structure through the sale of certain newly issued equity securities, the incurrence of certain senior debt obligations and the repurchase of certain of its outstanding equity securities, in each case on the terms and subject to the conditions set forth herein; WHEREAS, the Purchasers desire to purchase certain newly issued equity securities of the Company on the terms and subject to the conditions set forth herein; and WHEREAS, the Sellers desire the Company to repurchase certain equity securities of the Company held by the Sellers on the terms and subject to the conditions set forth herein. NOW, THEREFORE, in consideration of the mutual covenants, agreements and understandings herein contained, the Parties hereby agree as follows: Section 1. Recapitalization. 1A. Authorization. (i) The Company shall, and the Sellers shall cause the Company to, authorize the filing under the laws of the State of California of amended and restated articles of incorporation of the Company in the form of Exhibit A attached hereto (as so amended and restated, the "Articles of Incorporation"). The Articles of Incorporation shall be duly filed by the Company on or prior to the Closing Date and shall be in full force and effect under the laws of the State of California as of the Closing. (ii) The Company shall, and the Sellers shall cause the Company to, authorize the purchase by the Company of all of the outstanding capital stock of Netcom Systems Europe, a limited liability company organized under the laws of the Republic of France ("Netcom Europe"), from Henri Hamon and Elie Hamon for an aggregate purchase price of not more than $3,000,000. (iii) The Company shall, and the Sellers shall cause the Company to, authorize the issuance and sale to the Purchasers of an aggregate of 482,684 shares of its Class A Redeemable 3 Preferred Stock, no par value per share (the "Redeemable Preferred Stock"), having the rights and preferences set forth in Exhibit A attached hereto. (iv) The Company shall, and the Sellers shall cause the Company to, authorize the issuance and sale to the Purchasers of an aggregate of 22,785,424 shares of its Class B Convertible Preferred Stock, no par value per share (the "Convertible Preferred Stock" and, together with the Redeemable Preferred Stock, the "Preferred Stock"), having the rights and preferences set forth in Exhibit A attached hereto. The Convertible Preferred Stock shall be initially convertible into 22,785,424 shares of the Company's Common Stock, no par value per share (the "Common Stock"), as set forth in Exhibit A attached hereto. (v) The Company shall authorize the repurchase from the Sellers of an aggregate of 9,133,332 shares of the Company's Common Stock (the "Repurchased Shares") for an aggregate purchase price equal to $139,666,913 (the "Repurchase Price"). The Repurchase Price shall be paid in the manner provided in Paragraph 1D below. The number of Repurchased Shares to be repurchased from each Seller is set forth on the Schedule of Sellers attached hereto. (vi) The Company shall authorize the repurchase from the Other Sellers of an aggregate of 447,645 shares of the Company's Common Stock pursuant to the Stock Purchase Agreement for an aggregate purchase price equal to $6,845,387. 1B. Investment Transaction. On the basis of the representations, warranties, covenants and agreements set forth herein and subject to the satisfaction or waiver of the conditions set forth in Section 2 below, each of the Purchasers and the Company agrees to and shall consummate, and the Sellers shall cause the Company to consummate, at the Closing, the following transaction (the "Investment Transaction"): the Company shall sell to each Purchaser, and each Purchaser shall purchase from the Company, the number of shares of Redeemable Preferred Stock and Convertible Preferred Stock set forth opposite such Purchaser's name on the Schedule of Purchasers attached hereto, upon payment of immediately available funds in the amount set forth opposite such Purchaser's name on the Schedule of Purchasers attached hereto, payable in the manner set forth in Paragraph 1D(i) below. The aggregate purchase price for such shares of Redeemable Preferred Stock shall be equal to $48,268,400 (the "Redeemable Preferred Stock Purchase Price") and the aggregate purchase price for such shares of Convertible Preferred Stock shall be equal to $48,268,400 (the "Convertible Preferred Stock Purchase Price" and, together with the Redeemable Preferred Stock Purchase Price, the "Purchase Price"). 1C. Repurchase Transaction. On the basis of the representations, warranties, covenants and agreements set forth herein and subject to the satisfaction or waiver of the conditions set forth in Section 3 below and the consummation of the Investment Transaction and the Senior Debt Transaction, the Company and each of the Sellers agrees to and shall consummate, at the Closing, the following transaction (the "Repurchase Transaction"): the Company shall repurchase from each Seller the number of Repurchased Shares set forth opposite such Seller's name on the Schedule of Sellers attached hereto and shall pay to each such Seller (in the manner set forth in -2- 4 Paragraphs 1D(iv) and 1D(v) below) the portion of the Repurchase Price set forth opposite such Seller's name on the Schedule of Sellers attached hereto. The Company shall report the Repurchase Transaction as a redemption within the meaning of Section 302 of the Code in which Section 302(b)(2) applies. All of the consideration paid by the Company in the Repurchase Transaction shall be separately allocable to the Repurchased Shares. 1D. Closing. The closing of each of the Investment Transaction and the Repurchase Transaction (the "Closing") shall take place at the offices of Wilson, Sonsini, Goodrich & Rosati, 650 Page Mill Road, Palo Alto, California 94304, or at such other place as may be mutually agreeable to each of the Parties, at 10:00 a.m., local time, on August 29, 1997, or, if any of the conditions to Closing set forth in Section 2 and Section 3 below have not been satisfied or waived by the Party entitled to the benefit thereof on or prior to such date, on the second business day following satisfaction or waiver of such conditions (the "Closing Date"). The Investment Transaction and the Repurchase Transaction shall each constitute a separate transaction hereunder. At the Closing, the Parties shall consummate the transactions contemplated by this Agreement in the following order: (i) Each Purchaser shall deliver to the Company such Purchaser's portion of the Purchase Price as set forth opposite such Purchaser's name on the Schedule of Purchasers attached hereto, by wire transfer of immediately available funds to an account designated by the Company. (ii) The Company shall deliver to each Purchaser stock certificates evidencing the shares of Redeemable Preferred Stock and Convertible Preferred Stock to be issued to such Purchaser as set forth opposite such Purchaser's name on the Schedule of Purchasers attached hereto, registered in such Purchaser's name, upon payment of such Purchaser's portion of the Purchase Price in the manner described in clause (i) above. (iii) The Company shall consummate the Senior Debt Transaction. (iv) The Company shall pay to each Seller by wire transfer of immediately available funds to an account designated by such Seller an amount equal to the "Closing Cash Amount" set forth opposite such Seller's name on the Schedule of Sellers attached hereto. (v) The Company shall deliver $7,111,765 of the Repurchase Price to the Escrow Agent for deposit into an escrow account (the "Escrow Account") established pursuant to the terms of an escrow agreement in the form of Exhibit B attached hereto (the "Escrow Agreement") among the Company, the Seller Representative, the Purchaser Representatives (as defined in the Escrow Agreement) and the Escrow Agent. The Escrow Amount shall be available to satisfy amounts owing to the Company Parties pursuant to Paragraph 8B below. (vi) Each Seller shall deliver to the Company the stock certificate or certificates evidencing the Repurchased Shares held by such Seller upon payment of the Repurchase -3- 5 Price in the manner described in the first sentence of clause (iv) and clause (v) above, duly endorsed in blank or accompanied by duly executed stock powers. The Company shall deliver to each such Seller a new stock certificate or certificates representing any shares of Common Stock owned by such Seller which were represented by the certificates delivered pursuant to this clause (vi) but which were not repurchased by the Company in connection with the Repurchase Transaction. Section 2. Conditions of the Purchasers' Obligations at the Closing. The obligation of the Purchasers to purchase and pay for the Preferred Stock at the Closing is subject to the satisfaction as of the Closing of the following conditions: 2A. Representations and Warranties; Covenants. The representations and warranties contained in Sections 5 and 6 hereof shall be true and correct in all material respects at and as of the date hereof and at and as of the Closing as though then made and as though the Closing Date was substituted for the date of this Agreement throughout such representations and warranties, except to the extent of any changes expressly contemplated by this Agreement and except for any representations and warranties that speak only as of a certain date (which representations and warranties shall be true and correct in all material respects as of such date), and the Company and the Sellers shall have performed in all material respects all of the covenants required to be performed by the Company and the Sellers hereunder prior to the Closing. 2B. Amendment of Articles of Incorporation. The Articles of Incorporation shall have been amended and restated in the form of Exhibit A attached hereto, shall be in full force and effect under the laws of the State of California as of the Closing as so amended and restated and shall not have been further amended or modified. 2C. Amendment of Bylaws. The Company's Bylaws (the "Bylaws") shall have been amended and restated in the form of Exhibit C attached hereto, shall be in full force and effect as of the Closing as so amended and restated and shall not have been further amended or modified. 2D. Shareholders Agreement. The Company and the Sellers shall have entered into a shareholders agreement in the form of Exhibit D attached hereto (the "Shareholders Agreement"), and the Shareholders Agreement shall be in full force and effect as of the Closing and shall not have been amended or modified. 2E. Registration Agreement. The Company and the Sellers shall have entered into a registration agreement in the form of Exhibit E attached hereto (the "Registration Agreement"), and the Registration Agreement shall be in full force and effect as of the Closing and shall not have been amended or modified. 2F. [Intentionally Omitted.] -4- 6 2G. Escrow Agreement. The Company, the Seller Representative and the Escrow Agent shall have entered into the Escrow Agreement, and the Escrow Agreement shall be in full force and effect as of the Closing and shall not have been amended or modified. 2H. Stock Purchase Agreement. The Company and all of the other parties thereto (the "Other Sellers") shall have entered into a Stock Purchase Agreement in the form of Exhibit F attached hereto (the "Stock Purchase Agreement"), and the Stock Purchase Agreement shall be in full force and effect as of the Closing and shall not have been amended or modified. The transactions contemplated by the Stock Purchase Agreement shall have been consummated on the First Repurchase Date and the Stock Purchase Agreement shall have been consummated simultaneously with the Closing hereunder in accordance with the terms thereof. 2I. Opinion of the Company's and the Sellers' Counsel. The Purchasers shall have received from Wilson Sonsini Goodrich & Rosati, counsel for the Company and the Sellers, an opinion in the form of Exhibit G attached hereto, which shall be addressed to the Purchasers and dated as of the Closing Date. 2J. Senior Debt Financing. The Company shall have obtained senior debt financing in an amount not less than $60,000,000 (consisting of a term loan or loans in the aggregate amount of $50,000,000 and a revolving credit facility in the amount of not less than $10,000,000) on terms satisfactory to the Purchasers. 2K. Repurchase Transaction. The Company and the Sellers shall have simultaneously consummated the Repurchase Transaction in the manner set forth in Paragraph 1D above. 2L. Release of Liens. The Company shall have obtained releases of all Liens (other than any Permitted Encumbrances) encumbering the assets and properties of the Company and its Subsidiaries. 2M. Audit. The Purchasers shall have received and shall be satisfied with the audited balance sheet of the Company as of July 31, 1997, and the related statements of income and cash flows (or the equivalent) for the fiscal year then ended (together with the opinion from Arthur Andersen LLP to be delivered in connection therewith), and the matters set forth in the management letters delivered with respect thereto. 2N. Litigation. No suit, action or other proceeding shall be pending before any court or governmental or regulatory official, body or authority in which it is sought to restrain or prohibit the transactions contemplated hereby or that could reasonably be expected to have a Material Adverse Effect (other than any such suit, action or proceeding brought by any of the Parties against any of the other Parties), and no injunction, judgment, order, decree or ruling with respect thereto shall be in effect. -5- 7 2O. Filings. The Company shall have made all filings required to be made by the Company and shall have obtained all permits and other authorizations required to be obtained by the Company under all applicable laws (including federal and state securities laws) to consummate the transactions contemplated by this Agreement in compliance with such laws (other than any securities law filings required to be made after the Closing, which filings shall be made promptly after the Closing). 2P. Third Party Consents and Approvals. The Company shall have received or obtained all shareholder and material third party consents and approvals that are necessary for the consummation of the transactions contemplated hereby or that are required in order to prevent a breach of or default under, a termination or modification of, or acceleration of the terms of, any contract, agreement or document required to be listed on the attached Contracts Schedule (collectively, the "Third Party Approvals"), in each case on terms and conditions reasonably satisfactory to the Purchasers. 2Q. Governmental Consents and Approvals. The Parties shall have received or obtained all governmental and regulatory consents and approvals that are necessary for the consummation of the transactions contemplated hereby, in each case on terms and conditions satisfactory to the Purchasers, and the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "Hart-Scott-Rodino Act"), shall have expired or been terminated (collectively, the "Governmental Approvals"). 2R. Material Adverse Change. Since July 31, 1997, there shall have been no material adverse change or material adverse development in the business, financial condition, operating results, assets, operations, business prospects, cash flow, net worth or customer, supplier or employee relations of the Company. 2S. Expenses. At the Closing, the Company shall have paid or reimbursed the Purchasers for their fees and expenses as provided in Paragraph 11A below. 2T. Real Estate Matters. The Purchasers shall have received a letter of consent and estoppel certificate from each lessor of the Leased Real Property in form and substance reasonably satisfactory to the Purchasers and their special counsel and such other endorsements and affidavits and related items as the Bank may request. 2U. Solvency Opinion. The Purchasers shall have received an opinion from Houlihan Lokey Howard & Zukin to the effect that, immediately following the Closing and after giving effect to the transactions contemplated hereby, (i) the fair market value and present fair saleable value of the Company's assets exceed the Company's stated liabilities and identified contingent liabilities, (ii) the Company should be able to pay its debts as they become absolute and mature, and (iii) the capital remaining in the Company after the consummation of the transactions contemplated by this Agreement will not be unreasonably small for the business in which the Company is engaged and as proposed to be conducted following the Closing. -6- 8 2V. Proceedings. All corporate proceedings taken or required to be taken by the Company and the Sellers and the Other Sellers at or prior to the Closing in connection with the transactions contemplated hereby shall have been taken and all documents incident thereto shall be reasonably satisfactory in form and substance to the Purchasers and their special counsel. 2W. Closing Documents. At the Closing, the Company shall have delivered to the Purchasers all of the following documents (except that the documents referred to in clause (v) below shall only be delivered to the SBIC Purchaser): (i) a certificate of an officer of the Company, dated the Closing Date, stating that the conditions specified in Section 1 and Paragraphs 2A through 2V (other than Paragraphs 2D, 2E, 2G, 2I, 2J, 2S, 2T and 2V), inclusive, have been fully satisfied; (ii) certified copies of (a) the resolutions duly adopted by the Company's board of directors authorizing the execution, delivery and performance of this Agreement and each of the other agreements contemplated hereby, the adoption and filing of the Articles of Incorporation referred to in Paragraph 2B, the amendment and restatement of the Bylaws referred to in Paragraph 2C, the Investment Transaction, the Repurchase Transaction, the Senior Debt Transaction and the other transactions contemplated hereby and (b) the resolutions duly adopted by the Company's shareholders adopting the amendment and restatement of the Articles of Incorporation referred to in Paragraph 2B the amendment and restatement of the Bylaws referred to in Paragraph 2C and approving the amendment and restatement of the Stock Option Plans; (iii) certified copies of the Articles of Incorporation and the Bylaws, each as in effect at the Closing; (iv) copies of all Third Party Approvals and Governmental Approvals (including all blue sky law filings and waivers of all preemptive rights and rights of first refusal); (v) copies of (a) duly completed and executed SBA Forms 480, 652 and 1031 (Parts A and B), (b) a business plan showing the Company's financial projections (including balance sheets and income and cash flow statements) for a five-year period, (c) a written certification from the Company regarding its intended use of the proceeds from the Financing and (d) a list, after giving effect to the transactions contemplated hereby, of (1) the name of each of the Company's directors, (2) the name and title of each of the Company's officers and (3) the name of each of the Company's shareholders setting forth the number and class of shares held; (vi) good standing certificates of the Company from its jurisdiction of incorporation and each jurisdiction in which the Company is qualified to do business as a foreign corporation, in each case dated as of a recent date prior to the Closing Date; and -7- 9 (vii) such other documents relating to the transactions contemplated by this Agreement as the Purchasers or their special counsel may reasonably request. 2X. Waiver. Any condition specified in this Section 2 may be waived if consented to in writing by the Requisite Purchasers. Section 3. Conditions of the Obligations of the Company and the Sellers at the Closing. The obligation of the Company and the Sellers to consummate the transactions contemplated hereby is subject to the satisfaction as of the Closing of the following conditions: 3A. Representations and Warranties; Covenants. The representations and warranties contained in Section 7 hereof shall be true and correct in all material respects at and as of the date hereof and at and as of the Closing as though then made and as though the Closing Date was substituted for the date of this Agreement throughout such representations and warranties, except to the extent of any changes expressly contemplated by this Agreement and except for any representations and warranties that speak only as of a certain date (which representations and warranties shall be true and correct in all material respects as of such date), and the Purchasers shall have performed in all material respects all of the covenants required to be performed by the Purchasers hereunder prior to the Closing. 3B. Amendment of Articles of Incorporation. The Articles of Incorporation shall be in full force and effect under the laws of the State of California as of the Closing. 3C. Shareholders Agreement. The Purchasers shall have entered into the Shareholders Agreement, and the Shareholders Agreement shall be in full force and effect as of the Closing and shall not have been amended or modified. 3D. Registration Agreement. The Purchasers shall have entered into the Registration Agreement, and the Registration Agreement shall be in full force and effect as of the Closing and shall not have been amended or modified. 3E. Escrow Agreement. The Purchaser Representatives and the Escrow Agent shall have entered into the Escrow Agreement, and the Escrow Agreement shall be in full force and effect as of the Closing and shall not have been amended or modified. 3F. Litigation. No suit, action or other proceeding shall be pending before any court or governmental or regulatory official, body or authority in which it is sought to restrain or prohibit the transactions contemplated hereby (other than any such suit, action or proceeding brought by any of the Parties against any of the other Parties), and no injunction, judgment, order, decree or ruling with respect thereto shall be in effect. 3G. Governmental Consents and Approvals. The Parties shall have received or obtained all Governmental Approvals that are necessary for the consummation of the transactions -8- 10 contemplated hereby, and the waiting period under the Hart-Scott-Rodino Act shall have expired or been terminated. 3H. Investment Transaction. The Purchasers shall have immediately prior thereto purchased the Preferred Stock and the Company shall have received payment therefor in full, in the manner set forth in Paragraph 1D above. 3I. Expenses. At the Closing, the Company shall have paid or reimbursed the Sellers for their fees and expenses as provided in Paragraph 11A below. 3J. Waiver. Any condition specified in this Section 3 may be waived if consented to in writing by the Company and the Seller Representative. Section 4. Pre-Closing Covenants and Agreements. Each of the Parties agrees as follows with respect to the period between the date of this Agreement and the Closing: 4A. General. Each of the Parties shall use reasonable best efforts to take all action and to do all things necessary, proper or advisable in order to consummate and make effective the transactions contemplated by this Agreement (including satisfaction, but not waiver, of the conditions set forth in Sections 2 and 3 above). On the date hereof, the Company shall (and shall cause the Other Sellers to) execute and deliver the Stock Purchase Agreement. At the Closing, the applicable Parties shall execute and deliver the Escrow Agreement, the Shareholders Agreement, the Registration Agreement and the other agreements and instruments contemplated hereby to be executed and delivered at the Closing. 4B. Maintenance of Business. The Company shall, and the Sellers shall cause the Company to, (i) maintain its assets in good operating condition and repair (normal wear and tear excepted), (ii) maintain insurance reasonably comparable to that in effect on the date of the Latest Balance Sheet, (iii) maintain inventory, supplies and spare parts at customary operating levels consistent with current practices, and replace in accordance with past practice any inoperable, worn out or obsolete assets with modern assets of comparable quality, (iv) maintain its books, accounts and records in accordance with past custom and practice as used in the preparation of the Latest Balance Sheet and the financial statements described in Paragraph 5E below, and (v) maintain in full force and effect the existence of all Intellectual Property Rights. 4C. Third Party Notices and Consents. The Company shall, and the Sellers shall cause the Company to, use reasonable best efforts to give required notices to third parties and obtain any required third party consents in connection with the matters contemplated by this Agreement. 4D. Governmental Notices and Consents. Each of the Parties shall give any notices to, make any filings with, and use reasonable best efforts to obtain, any authorizations, consents and approvals of governments and governmental agencies in connection with the matters contemplated by this Agreement. Without limiting the generality of the foregoing, each of the -9- 11 Parties shall use reasonable best efforts to obtain an early termination of the waiting period under the Hart-Scott-Rodino Act, and shall make any further filings pursuant thereto that may be necessary, proper or advisable in connection therewith, and the Company shall pay all filing and other fees related to any filings under the Hart-Scott-Rodino Act. 4E. Operation of Business. The Company shall, and the Sellers shall cause the Company to, operate its business only in the usual and ordinary course of business consistent with past practice and use reasonable best efforts to preserve the goodwill and organization of its business and the relationships with its customers, suppliers, employees and other Persons having business relations with the Company. Without limiting the generality of the foregoing, prior to the Closing, the Company shall not: (i) take or omit to take any action that would require disclosure under Paragraph 5M below or that would otherwise result in a material breach of any of the representations, warranties or covenants made by the Company or the Sellers in this Agreement; (ii) take any action or omit to take any action which act or omission would reasonably be anticipated to have a Material Adverse Effect; (iii) (a) enter into any contract out of the ordinary course of business or restricting in any material respect the conduct of its business, (b) make any loans or Investments (other than advances to the Company's employees in the ordinary course of business consistent with past custom and practice), (c) increase any officer's or employee's compensation, incentive arrangements or other benefits, except for increases or bonuses made in the ordinary course of business consistent with past custom and practice (it being understood, however, that no bonuses or other extraordinary compensation may be paid (or authorized) to the Seller Representative prior to the Closing), (d) redeem, purchase or otherwise acquire directly or indirectly any of its issued and outstanding capital stock, or any outstanding rights or securities exercisable or exchangeable for or convertible into its capital stock, or make any distribution or dividend to any of its shareholders or other Persons, (e) amend its articles of incorporation or bylaws or issue or agree to issue any capital stock or any rights to acquire, or securities convertible into or exchangeable for, any of its capital stock, (f) directly or indirectly engage in any transaction, arrangement or contract with any officer, director, shareholder or other insider or Affiliate of the Company which is not in the ordinary course of business consistent with past practice and at arm's length, (g) execute any guaranty, issue any debt or borrow any money, or (h) buy or sell any assets out of the ordinary course of business consistent with past practice; or (iv) enter into any transaction, arrangement or contract except on an arm's-length basis in the ordinary course of business consistent with past custom and practice. -10- 12 Notwithstanding the foregoing, nothing in this Paragraph 4E shall prohibit the Company from taking any action or omitting to take any action as required or as expressly contemplated by this Agreement. 4F. Full Access. The Company shall, and the Sellers shall cause the Company to, afford, and cause its officers, directors, employees, attorneys, accountants and other agents to afford, to the Purchasers and their accounting, legal and other representatives and potential lenders, as well as their respective officers, employees, affiliates and other agents, full and complete access at all reasonable times and during normal business hours to the Company's personnel and to business, financial, legal, tax, compensation and other data and information concerning the Company's affairs and operations. 4G. Compliance with Agreements and Laws. The Company shall, and the Sellers shall cause the Company to, (i) comply with all material obligations pursuant to any contract or agreement, whether oral or written, express or implied and (ii) comply with all material applicable laws. 4H. Payment of Obligations. The Company shall, and the Sellers shall cause the Company to, pay and discharge when payable all Taxes, assessments and governmental charges imposed upon its properties or upon the income or profits therefrom (in each case before the same becomes delinquent and before penalties accrue thereon unless contested in good faith by appropriate proceedings) and pay and discharge all claims for labor, materials or supplies in the ordinary course of business consistent with past practice. 4I. Notice of Material Developments. Each Party shall give prompt written notice to the other Parties of (i) any known material variances in any of its representations or warranties contained in Sections 5, 6 or 7 below, as the case may be, (ii) any known breach of any covenant hereunder by such Party and (iii) any other material development affecting the ability of such Party to consummate the transactions contemplated by this Agreement. 4J. Exclusivity. None of the Company, the Sellers or any of their respective Affiliates, representatives, officers, employees, directors, or agents shall, directly or indirectly, (i) submit, solicit, initiate, encourage or discuss any proposal or offer from any Person (other than the Purchasers in connection with the transactions contemplated hereby) or enter into any agreement or accept any offer relating to or consummate any (a) reorganization, liquidation, dissolution or recapitalization of the Company, (b) merger or consolidation involving the Company, (c) purchase or sale of any assets or capital stock (or any rights to acquire, or securities convertible into or exchangeable for, any such capital stock) of the Company (other than a purchase or sale of inventory in the ordinary course of business consistent with past custom and practice or a purchase of stock as contemplated by this Agreement), or (d) similar transaction or business combination involving the Company or its assets (each of the foregoing transactions described in clauses (a) through (d), a "Company Transaction") or (ii) furnish any information with respect to, assist or participate in or facilitate in any other manner any effort or attempt by any Person to do or seek to do any of the -11- 13 foregoing. The Company and each of the Sellers agree to notify the Purchasers immediately if any Person makes any proposal, offer, inquiry or contact with respect to a Company Transaction. In the event that any of the Company or the Sellers breaches the provisions of this Paragraph 4J and the transactions contemplated hereby are not consummated for any reason, the Company shall promptly reimburse the Purchasers and their Affiliates for all out-of-pocket fees and expenses incurred before or after the date of this Agreement by the Purchasers and their Affiliates related to the transactions contemplated hereby, including fees and expenses of legal counsel, accountants and other consultants and advisors retained by the Purchasers in connection with the transactions contemplated hereby. The foregoing provisions are in addition to, and not in derogation of, any statutory or other remedy that the Purchasers may have for a breach of this Paragraph 4J. 4K. Tax Matters. Without the prior written consent of the Purchasers, the Company shall not make or change any election, change an annual accounting period, adopt or change any accounting method, file any amended Tax Return, enter into any closing agreement, settle any Tax claim or assessment relating to the Company, surrender any right to claim a refund of Taxes, consent to any extension or waiver of the limitation period applicable to any Tax claim or assessment relating to the Company, or take any other similar action, or omit to take any action relating to the filing of any Tax Return or the payment of any Tax, if such election, adoption, change, amendment, agreement, settlement, surrender, consent or other action or omission would have the effect of materially increasing the present or future Tax liability or decreasing any present or future Tax asset of the Company or the Purchasers. 4L. Actions with Respect to Repurchased Shares. Each Seller agrees that such Seller shall not sell, redeem, convert, assign, exchange, transfer, pledge or otherwise dispose of or encumber any interest in such Seller's Repurchased Shares (or any other shares of Common Stock) or any stock options, except as expressly contemplated by this Agreement. 4M. Employees. The Company shall give the Purchasers prompt written notice if any executive or key employee of the Company or any group of employees of the Company terminates employment with the Company or if the Company or any of the Sellers has knowledge that any executive or key employee of the Company or group of employees of the Company has any plans to terminate employment with the Company. Section 5. Representations and Warranties of the Company and the Sellers. As a material inducement to the Purchasers to enter into this Agreement and purchase the Preferred Stock hereunder, the Company and each of the Sellers hereby represent and warrant to the Purchasers as follows: 5A. Organization, Corporate Power and Licenses. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of California and is qualified to do business in every jurisdiction in which its ownership of property or conduct of business requires it to qualify, except where the failure to so qualify would not have a Material Adverse Effect. The Company possesses all requisite corporate power and authority necessary to -12- 14 own and operate its properties, to carry on its businesses as now conducted and presently proposed to be conducted and to carry out the transactions contemplated by this Agreement. The copies of the Company's charter documents and bylaws which have been furnished to the Purchasers' special counsel reflect all amendments made thereto at any time prior to the date of this Agreement and are correct and complete and will be amended prior to the Closing as required by Paragraphs 2B and 2C above. 5B. Capital Stock and Related Matters. (i) As of the date hereof, the authorized capital stock of the Company consists of 30,000,000 shares of Common Stock, of which 11,060,000 shares are issued and outstanding and are held beneficially and of record by the Sellers as set forth on the Capitalization Schedule attached hereto (free and clear of all Encumbrances) and of which 5,200,000 shares are reserved for issuance upon exercise of stock options authorized pursuant to the Stock Option Plans. As of the Closing and immediately thereafter (and after giving effect to the issuance of the Preferred Stock), the authorized capital stock of the Company shall consist of (a) 482,684 shares of Redeemable Preferred Stock, all of which shall be issued and outstanding, (b) 22,790,000 shares of Convertible Preferred Stock, of which 22,785,424 shall be issued and outstanding and (c) 50,000,000 shares of Common Stock, of which 2,212,000 shares shall be issued and outstanding and 22,790,000 shares shall be reserved for issuance upon conversion of the Convertible Preferred Stock and 6,268,397 shares shall be reserved for issuance upon exercise of stock options authorized pursuant to the Stock Option Plans. Except as set forth in the immediately preceding sentence or on the Capitalization Schedule, the Company does not have and as of the Closing Date will not have outstanding any, stock or securities convertible or exchangeable for any shares of its capital stock or containing any profit participation features, nor any rights or options to subscribe for or to purchase its capital stock or any stock or securities convertible into or exchangeable for its capital stock or any stock appreciation rights or phantom stock plans, other than, as of the Closing Date, any options granted pursuant to the Stock Option Plans as of the Closing Date. The Company is not subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any shares of its capital stock or any warrants, options or other rights to acquire its capital stock, other than as expressly provided in or contemplated by this Agreement and, as of the Closing, pursuant to the Articles of Incorporation and the Shareholders Agreement. As of the date hereof and as of the Closing and immediately thereafter, all of the outstanding shares of the Company's capital stock are or shall be validly issued, fully paid and nonassessable. (ii) There are no statutory or contractual shareholder preemptive rights or rights of first refusal or other similar restrictions with respect to the issuance of the Preferred Stock hereunder or the issuance of any Common Stock upon the conversion of the Convertible Preferred Stock. Except for such violation or violations which individually or in the aggregate have not had and would not reasonably be expected to have a Material Adverse Effect, the Company has not violated any applicable federal or state securities laws in connection with the offer, sale or issuance of any of its capital stock and the offer, sale and issuance of the Preferred Stock hereunder, the grant of any stock options under the Stock Option Plans and the issuance of Common Stock upon the -13- 15 conversion of the Convertible Preferred Stock does not require registration under the Securities Act or any applicable state securities laws. Except for the Shareholders Agreement to be executed and delivered at the Closing, there are no agreements or understandings between the Company's shareholders or among any other Person with respect to the voting or transfer of the Company's capital stock or with respect to any other aspect of the Company's governance. 5C. Subsidiaries; Investments. Except with respect to the contemplated Netcom Europe transaction and as set forth on the attached Investments and Subsidiaries Schedule, the Company does not own or hold the right to acquire any shares of stock or any other security or interest in any other Person. Except as set forth on the Investments and Subsidiaries Schedule attached hereto, the Company has never had any Subsidiaries and the Company does not have any obligation to make any Investments in any Person. 5D. Authorization; No Breach. The execution, delivery and performance of this Agreement and all of the other agreements and instruments contemplated hereby to which the Company is a party, the offering, sale and issuance of the Preferred Stock hereunder, the repurchase of the Repurchased Shares pursuant hereto, the consummation of the transactions contemplated by the Stock Purchase Agreement, the consummation of the Senior Debt Transaction, the issuance of Common Stock upon the conversion of the Convertible Preferred Stock, the amendment and restatement of the Articles of Incorporation and the amendment and restatement of the Bylaws have been duly authorized by the Company. This Agreement and the Stock Purchase Agreement each constitute a valid and binding obligation of the Company, enforceable in accordance with their respective terms, and the Articles of Incorporation, when filed under the laws of the State of California in accordance with the terms hereof, and all other agreements and instruments contemplated hereby to which the Company is a party, when executed and delivered by the Company in accordance with the terms hereof, shall each constitute a valid and binding obligation of the Company, enforceable in accordance with their respective terms. Except as set forth on the attached Restrictions Schedule, the execution and delivery by the Company of this Agreement and all other agreements and instruments contemplated hereby to which the Company is a party, the offering, sale and issuance of the Preferred Stock hereunder, the repurchase of the Repurchased Shares pursuant hereto, the consummation of the transactions contemplated by the Stock Purchase Agreement, the consummation of the Senior Debt Transaction, the issuance of Common Stock upon the conversion of the Convertible Preferred Stock, the amendment and restatement of the Articles of Incorporation, the amendment and restatement of the Bylaws and the fulfillment of and compliance with the respective terms hereof and thereof by the Company do not and shall not (i) conflict with or result in a breach of the terms, conditions or provisions of, (ii) constitute a default under (whether with or without the passage of time, the giving of notice or both), (iii) result in the creation of any Lien upon the Company's capital stock or material assets pursuant to, (iv) give any third party the right to modify, terminate or accelerate any obligation under, (v) result in a violation of, or (vi) require any authorization, consent, approval, exemption or other action by or notice or declaration to, or filing with, any third party or any court or administrative or governmental body or agency pursuant to, the Company's articles of incorporation or bylaws, or any material law, statute, rule or regulation to which the Company is subject, or any material agreement, instrument, order, judgment or decree to -14- 16 which the Company is subject. Neither the Company nor any of the Sellers is a party to or bound by any written or oral agreement or understanding with respect to a Company Transaction other than this Agreement, and all of them have terminated all discussions with third parties (other than the Purchasers) regarding Company Transactions (other than any unsolicited communications from third parties as to which the Company and the Sellers have responded that they are unable to discuss a Company Transaction). 5E. Financial Statements. Attached hereto as the Financial Statements Schedule are the following financial statements: (i) the audited balance sheet of the Company as of July 31, 1996 and the audited balance sheet of the Company as of July 31, 1997 (the "Latest Balance Sheet"), and the related statements of income and cash flows (or the equivalent) for the fiscal years then ended; and (ii) the unaudited balance sheet of the Company as of July 31, 1995 and the related statements of income and cash flows (or the equivalent) for the fiscal year then ended. Each of the foregoing financial statements (including in all cases the notes thereto, if any) is accurate and complete, is consistent with the books and records of the Company (which, in turn, are accurate and complete), fairly presents the financial condition and operating results of the Company and has been prepared in accordance with GAAP consistently applied as of the dates of each such financial statement, subject in the case of the unaudited financial statements to the absence of footnote disclosures (none of which footnote disclosures would, alone or in the aggregate, be materially adverse to the business, operations, assets, liabilities, financial condition, operating results, cash flow or net worth of the Company). 5F. Absence of Undisclosed Liabilities. Except as set forth on the attached Liabilities Schedule, the Company does not have any obligation or liability (whether accrued, absolute, contingent, unliquidated or otherwise, whether due or to become due and regardless of when asserted) arising out of transactions entered into at or prior to the date hereof, or any action or inaction at or prior to the date hereof, or any state of facts existing at or prior to the date hereof, other than: (i) liabilities set forth on the liabilities side of the Latest Balance Sheet (including any notes thereto), (ii) liabilities that would not be required under GAAP to be set forth on a balance sheet (or any notes thereto), (iii) liabilities and obligations which have arisen after the date of the Latest Balance Sheet in the ordinary course of business (none of which is a liability resulting from noncompliance with any applicable laws, breach of contract, breach of warranty (in excess of any warranty reserve specifically established with respect thereto and included on the Latest Balance Sheet), tort, infringement, claim or lawsuit) and (iv) other liabilities and obligations expressly disclosed in the Schedules referred to in this Section 5. 5G. Accounts Receivable. Except as set forth on the attached Accounts Receivable Schedule, all accounts receivable reflected on the Latest Balance Sheet and all accounts -15- 17 receivable to be reflected on the Company's books and records as of the Closing Date (net of allowances for doubtful accounts as reflected thereon and as determined in accordance with GAAP consistently applied) are or shall be valid receivables arising in the ordinary course of business, and are or shall be current and subject to no valid counterclaims or setoffs. No Person has any Lien on such receivables or any part thereof, and no agreement for deduction, free goods, discount or other deferred price or quantity adjustment has been made with respect to any such receivables. 5H. Inventories. Except as set forth on the attached Inventories Schedule, the inventory shown on the Latest Balance Sheet and the inventory to be shown on the Company's books and records as of the Closing Date (net of the reserves applicable thereto as reflected thereon and as determined in accordance with GAAP consistently applied), consists or shall consist of a quantity and quality usable and saleable in the ordinary course of business, and is not excess, obsolete or damaged (as determined in accordance with GAAP). 5I. Product Warranty; Product Certifications. (i) All products and equipment manufactured, sold, leased or delivered by the Company and all services rendered by the Company have been in conformity in all material respects with all applicable contractual commitments and all express and implied warranties, and to the best of the Company's knowledge, the Company does not have any liability (and, to the Company's knowledge, there is no reasonable basis for any present or future action, suit, proceeding, hearing, investigation, charge, complaint, claim or demand against it giving rise to any such liability) for replacement or repair thereof or other damages in connection therewith in excess of any warranty reserve established with respect thereto and included on the Latest Balance Sheet. No products or equipment manufactured, sold, leased or delivered by the Company and no services rendered by the Company are subject to any guaranty, warranty or other indemnity beyond the applicable standard terms and conditions of such sale, lease or service (including as a result of any course of conduct between the Company and any Person or as a result of any statements in any of the Company's product or promotional literature). The attached Product Warranty Schedule includes copies of such standard terms and conditions of sale, lease and service for the Company (containing applicable guaranty, warranty and indemnity provisions). The Company has not been notified in writing of any claims for (and the Company has no knowledge of any threatened claims for) any extraordinary product returns, warranty obligations or product services relating to any of its products or services. (ii) The Company holds all material product registrations, accreditations and other certifications required for the conduct of its business (all of such registrations, accreditations and certifications being referred to herein as "Product Certifications"). The Company is in compliance with the terms and conditions of all such Product Certifications and no notices have been received by the Company alleging the failure to hold any Product Certification. To the Company's knowledge, there is no reasonable basis for any present or future action rescinding any such Product Certifications and no loss or expiration of any such Product Certifications has had or would reasonably be expected to have a Material Adverse Effect. All of such Product Certifications will be held by the Company on identical terms immediately following the Closing. -16- 18 5J. Product Liability. To the best of the Company's knowledge, except as set forth on the attached Product Liability Schedule, the Company does not have any liability (and, to the Company's knowledge, there is no reasonable basis for any present or future action, suit, proceeding, hearing, investigation, charge, complaint, claim or demand against it giving rise to any liability) arising out of any injury to individuals or property as a result of the ownership, possession or use of any products or equipment manufactured, sold, leased or delivered by the Company or with respect to any services rendered by the Company. 5K. Product Recall, etc. Except as set forth on the attached Product Recall Schedule, there have been no product or equipment recalls, withdrawals or seizures with respect to any products or equipment manufactured, sold, leased or delivered by the Company or with respect to any services rendered by the Company. 5L. No Material Adverse Effect. Since July 31, 1997, there has occurred no fact, event or circumstance which has had or would reasonably be expected to have a Material Adverse Effect. Since July 31, 1997, the Company has conducted its business only in the ordinary course of business consistent with past practice. 5M. Absence of Certain Developments. Except as expressly contemplated by this Agreement or as set forth on the attached Developments Schedule, since July 31, 1997, the Company has not: (i) issued any notes, bonds or other debt securities or any capital stock or other equity securities or any securities or rights convertible, exchangeable or exercisable into any capital stock or other equity securities; (ii) borrowed any amount or incurred or become subject to any material liabilities, except current liabilities incurred in the ordinary course of business consistent with past practice and liabilities under contracts entered into in the ordinary course of business; (iii) discharged or satisfied any material Lien or paid any material obligation or liability, other than current liabilities paid in the ordinary course of business; (iv) declared, set aside or made any payment or distribution of cash or other property to any of the Company's shareholders with respect to such shareholder's capital stock or other equity securities or purchased, redeemed or otherwise acquired any shares of its capital stock or other equity securities (including any warrants, options or other rights to acquire its capital stock or other equity securities); (v) mortgaged or pledged any of its properties or assets or subjected them to any Lien, except for Permitted Encumbrances; -17- 19 (vi) sold, assigned, transferred, leased, licensed or otherwise encumbered any of its material tangible assets, except in the ordinary course of business consistent with past practice, or canceled any material debts or claims; (vii) sold, assigned, transferred, leased, licensed or otherwise encumbered any Intellectual Property Rights or other intangible assets, disclosed any material proprietary confidential information to any Person (other than to the Purchasers and other than in the ordinary course of business consistent with past practice in circumstances in which it has imposed reasonable confidentiality restrictions), or abandoned or knowingly permitted to lapse any Intellectual Property Rights; (viii) made or granted any bonus or any wage or salary increase to any employee or group of employees (except as required by pre-existing contracts described on the attached Contracts Schedule or in the ordinary course of business consistent with past practice), or made or granted any increase in any employee benefit plan or arrangement, or amended or terminated any existing employee benefit plan or arrangement or adopted any new employee benefit plan or arrangement; (ix) suffered any extraordinary losses or waived any rights of material value (whether or not in the ordinary course of business or consistent with past practice); (x) made capital expenditures or commitments therefor that aggregate in excess of $250,000; (xi) delayed or postponed the payment of any accounts payable or any other liability or obligation or agreed or negotiated with any party to extend the payment date of any accounts payable or accelerated the collection of any accounts or notes receivable; (xii) made any loans or advances to, guarantees for the benefit of, or any Investments in, any Persons (other than advances to the Company's employees in the ordinary course of business consistent with past practice); (xiii) made any charitable contributions or pledges exceeding in the aggregate $10,000; (xiv) suffered any damage, destruction or casualty loss exceeding in the aggregate $25,000, whether or not covered by insurance; (xv) made any change in any method of accounting or accounting policies, other than those required by GAAP which have been disclosed in writing to the Purchasers, or made any write-down in the value of its inventory that is material or that is other than in the usual, regular and ordinary course of business consistent with past practice; -18- 20 (xvi) made any Investment in or taken any steps to incorporate any Subsidiary; (xvii) amended its articles of incorporation, by-laws or other organizational documents; (xviii) entered into any agreement or arrangement prohibiting or restricting it from freely engaging in any business or otherwise restricting the conduct of its business; (xix) entered into any contract other than in the ordinary course of business consistent with past practice, entered into any other material transaction, whether or not in the ordinary course of business or consistent with past practice, or materially changed any business practice; or (xx) agreed, whether orally or in writing, to do any of the foregoing. 5N. Assets. (i) Except as set forth on the attached Assets Schedule, the Company has good and valid title to, a valid leasehold interest in, or a valid license to use, the material properties and assets, tangible or intangible, used by it, located on its premises or shown on the Latest Balance Sheet or acquired thereafter, free and clear of all Liens, except for properties and assets disposed of in the ordinary course of business since the date of the Latest Balance Sheet and except for Liens disclosed on the Latest Balance Sheet (including any notes thereto) and Permitted Encumbrances. (ii) Except as set forth on the attached Assets Schedule, all of the Company's material buildings, equipment, machinery, fixtures, improvements and other material tangible assets (whether owned or leased) are in good condition and repair (ordinary wear and tear excepted) and are fit for use in the ordinary course of the Company's business as presently conducted and as presently proposed to be conducted. All such assets have been installed and maintained in all material respects in accordance with all applicable laws, regulations and ordinances. (iii) Except as set forth on the attached Assets Schedule, the Company owns, has a valid leasehold interest in, or has a valid license to use, all of the material assets, properties and rights, whether tangible or intangible, necessary for the conduct of its business as presently conducted and as presently proposed to be conducted. 5O. Tax Matters. (i) Except as set forth on the attached Taxes Schedule: (a) the Company has filed all Tax Returns which it is required to file under applicable laws and regulations, and all such Tax Returns are complete and correct in -19- 21 all material respects and have been prepared in material compliance with all applicable laws and regulations; (b) the Company has paid all material Taxes due and owing by it (whether or not such Taxes are shown or required to be shown on a Tax Return) and has withheld and paid over to the appropriate taxing authority all material Taxes which it is required to withhold from amounts paid or owing to any employee, shareholder, creditor or other third party; (c) the accrual for Taxes on the Latest Balance Sheet would be adequate to pay all Tax liabilities of the Company if its current tax year were treated as ending on the date of the Latest Balance Sheet (excluding any amount recorded which is attributable solely to timing differences between book and Tax income); (d) the assessment of any additional Taxes for periods for which Tax Returns have been filed by the Company shall not exceed the recorded liability therefor on the Latest Balance Sheet (excluding any amount recorded which is attributable solely to timing differences between book and Tax income); (e) the federal income Tax Returns of the Company have never been audited; (f) the Company has not received from any foreign, federal, state or local taxing authority (including jurisdictions where the Company has not filed Tax Returns) any (i) written notice indicating an intent to open an audit or other review, (ii) request for information related to Tax matters or (iii) notice of deficiency or proposed adjustment for any amount of Tax proposed, asserted or assessed by any taxing authority against the Company; (g) no foreign, federal, state or local tax audits or administrative or judicial Tax proceedings are pending or, to the Company's knowledge, being conducted with respect to the Company; (h) no claim has ever been made by a taxing authority in a jurisdiction where the Company does not file Tax Returns that the Company is or may be subject to Taxes assessed by such jurisdiction; (i) the Company has not been a member of an Affiliated Group or filed or been included in a combined, consolidated or unitary income Tax Return; (j) the Company is not a party to or bound by any Tax allocation or Tax sharing agreement; -20- 22 (k) there are no Liens for Taxes (other than for current Taxes not yet due and payable) upon the assets of the Company; and (l) the Company shall not be required to (i) as a result of a change in method of accounting for a taxable period ending on or prior to the Closing Date, include any adjustment in taxable income for any taxable period (or portion thereof) ending after the Closing Date, (ii) as a result of any "closing agreement," as described in Section 7121 of the Code (or any corresponding provision of state, local or foreign income Tax law) executed on or before the Closing Date, include any item of income in, or exclude any item of deduction from, taxable income for any taxable period (or portion thereof) ending after the Closing Date, (iii) as a result of any sale reported on the installment method where such sale occurred on or prior to the Closing Date, include any item of income in, or exclude any item of deduction from, taxable income for any taxable period (or portion thereof) ending after the Closing Date, or (iv) as a result of any prepaid amount received on or prior to the Closing Date, include any item of income in, or exclude any item of deduction from, taxable income for any taxable period (or portion thereof) ending after the Closing Date. (ii) The Company has not made an election under Section 341(f) of the Code. The Company is not presently liable for the Taxes of another Person (1) under Treas. Reg. Section 1.1502-6 (or comparable provisions of state, local or foreign law), (2) as a transferee or successor or (3) by contract or indemnity or otherwise. (iii) The materiality qualifications in clauses (i)(a) and (i)(b) in this Paragraph 5O are included for disclosure purposes only and shall be disregarded for purposes of determining whether there has been a breach of the representations and warranties contained in such clauses and for purposes of determining the amount of any resulting Loss and indemnification with respect thereto. 5P. Contracts and Commitments. (i) Except as expressly contemplated by this Agreement or as set forth on the attached Contracts Schedule, the attached Intellectual Property Schedule, the attached Employees Schedule, or the attached Employee Benefits Schedule, the Company is not a party to or bound by any written or oral: (a) pension, profit sharing, stock option, employee stock purchase or other plan or arrangement providing for deferred or other compensation to employees or any other employee benefit plan or material arrangement or practice; (b) collective bargaining agreement or any other contract with any labor union, or severance agreements, programs, policies or arrangements; -21- 23 (c) management agreement, contract for the employment of any officer, individual employee or other Person on a full-time, part-time, consulting or other basis providing annual cash or other compensation in excess of $50,000 or providing for the payment of any cash or other compensation or benefits upon the consummation of the transactions contemplated hereby; (d) contract or agreement requiring the consent of any party thereto upon a change in control of the Company, containing any provision which would result in a modification of any rights or obligations of any party thereunder upon a change in control of the Company or which would provide any party any remedy (including rescission or liquidated damages) in the event of a change in control of the Company; (e) contract under which it has advanced or loaned monies to any other Person or otherwise agreed to advance, loan or invest any funds (other than advances to the Company's employees in the ordinary course of business consistent with past practice); (f) agreement or indenture relating to borrowed money or other Indebtedness or the mortgaging, pledging or otherwise placing a Lien on any material asset or material group of assets of the Company or any letter of credit arrangements; (g) guaranty of any obligation for borrowed money or otherwise (other than endorsements made for collection in the ordinary course of business); (h) lease or agreement under which the Company is lessee of or holds or operates any property, real or personal, owned by any other Person, except for any lease of personal property under which the aggregate annual rental payments do not exceed $25,000; (i) lease or agreement under which the Company is lessor of or permits any third party to hold or operate any property, real or personal, owned or controlled by the Company; (j) license or royalty agreements; (k) nondisclosure or confidentiality agreements (other than those entered into in the ordinary course of business with customers, suppliers and employees); (l) contract or group of related contracts with the same party or group of affiliated parties for the purchase of raw materials, commodities, supplies, products, equipment or other personal property or for the receipt of services under which the undelivered balance of such products and services has a selling price in excess of $50,000 (other than purchase orders entered into in the ordinary course of business or contracts disclosed elsewhere in connection with this Paragraph 5P); -22- 24 (m) contract or group of related contracts with the same party or group of affiliated parties for the sale of raw materials, commodities, supplies, products or other personal property or for the furnishing of services under which the undelivered balance of such products or services due from the Company has a selling price in excess of $50,000 (other than purchase orders entered into in the ordinary course of business or contracts disclosed elsewhere in connection with this Paragraph 5P); (n) other contract or group of related contracts with the same party or group of affiliated parties continuing over a period of more than six months from the date or dates thereof, not terminable by the Company upon 30 days' or less notice without penalty or involving more than $50,000 (other than purchase orders entered into in the ordinary course of business or contracts disclosed elsewhere in connection with this Paragraph 5P); (o) contract or group of related contracts requiring the payment of any fee, penalty or other amount by the Company in the event of any failure to perform or late performance of such contract or contracts by the Company; (p) contract relating to the marketing, sale, advertising or promotion of its products; (q) warranty agreement with respect to products sold or leased (other than any such agreement containing the standard terms and conditions described on the attached Product Warranty Schedule) or indemnity agreement with any supplier under which it is obligated to indemnify such supplier against product liability claims; (r) agreements relating to the ownership of or investments in any business or enterprise, including investments in joint ventures and minority equity investments; (s) assignment, license, indemnification or other agreement with respect to any intangible property (including any Intellectual Property Rights); (t) agreement under which it has granted any Person any registration rights (including demand or piggyback registration rights); (u) sales representative, sales or distribution agreement or material agreement relating to brokers or agents or the export and/or import of any goods or equipment; (v) power of attorney or other similar agreement or grant of agency; (w) contract or agreement prohibiting it from freely engaging in any business or competing anywhere in the world; or -23- 25 (x) other agreement which is material to its operations or business prospects or involves an annual consideration in excess of $100,000, whether or not in the ordinary course of business. (ii) With respect to the Company's obligations thereunder and, to the Company's knowledge, with respect to the obligations of the other parties thereto, all of the contracts, agreements and instruments set forth or required to be set forth on the attached Contracts Schedule are valid, binding and enforceable in accordance with their respective terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and other laws of general application effecting enforcement of creditors' rights generally, rules of law governing specific performance, injunctive relief or other equitable remedies, and limitations of public policy; and shall be in full force and effect without penalty in accordance with their terms upon consummation of the transactions contemplated hereby. The Company has performed all material obligations required to be performed by it and is not in default under or in breach of nor in receipt of any claim of default or breach under any contract, agreement or instrument set forth or required to be set forth on the attached Contracts Schedule; no event has occurred which with the passage of time or the giving of notice or both would result in a default, breach or event of noncompliance by the Company under any such contract, agreement or instrument; the Company does not have any present expectation or intention of not fully performing on a timely basis all such obligations required to be performed by the Company under any contract, agreement or instrument to which the Company is subject; no partially-filled or unfilled customer purchase order or sales order is subject to cancellation or any other material modification by the other party thereto or is subject to any penalty, right of set-off or other charge by the other party thereto for late performance or delivery; and the Company does not have any knowledge of any cancellation or anticipated cancellation or any material breach by the other parties to any contract, agreement, instrument or commitment to which it is a party. The Company is not a party to any contract, agreement or commitment the performance of which could reasonably be expected to have a Material Adverse Effect. (iii) The Purchasers' special counsel has been supplied with a true and correct copy of each of the written instruments, plans, contracts and agreements and an accurate description of each of the oral arrangements, contracts and agreements which are referred to on the attached Contracts Schedule, together with all amendments, waivers or other changes thereto. 5Q. International Trade Laws and Regulations. Except as set forth on the attached International Trade Compliance Schedule: (i) The Company and each of the Sellers have complied and are in compliance with all International Trade Laws and Regulations applicable to such Person in connection with the conduct of the Company's business (including as the same relates to recordkeeping requirements). (ii) Neither the Company nor any of the Sellers are or have been the subject of any civil or criminal investigation, litigation, audit, penalty, proceeding or assessment, liquidated damages proceeding or claim, forfeiture or forfeiture action, claim for additional customs duties or -24- 26 fees, denial orders, suspension of export privileges, governmental sanctions, or any other action, proceeding or claim by any foreign, federal, state or local governmental agency involving or otherwise relating to any alleged or actual violation of International Trade Laws and Regulations or relating to any alleged or actual underpayment of customs duties, fees, taxes or other amounts owed pursuant to any International Trade Laws and Regulations and, to the knowledge of the Company, there is no basis for any of the foregoing. (iii) Neither the Company nor any of the Sellers have made or provided any material false statement or material omission to any agency of any federal, state or local government, purchaser of products, or foreign government or foreign agency, in connection with the exportation of merchandise (including with respect to export licenses, exceptions, and other export authorizations and any filings required for or related to exportation of any item), the importation of merchandise (including the valuation or classification of imported merchandise, the duty treatment of imported merchandise, the eligibility of imported merchandise for favorable duty rates or other special treatment, country-of-origin marking, NAFTA Certificates, or other statements or certificates concerning origin, quota or visa rights) or other approvals required by a foreign government or agency or any other requirement relating to any International Trade Laws and Regulations. (iv) Neither the Company nor any of the Sellers have made any payment, offer, gift, promise to give, or authorized or otherwise participated in, assisted or facilitated any payment or gift related to the Company's business that is prohibited by the United States Foreign Corrupt Practices Act. (v) Neither the Company nor any of the Sellers have engaged in or otherwise participated in, assisted or facilitated any transaction related to the Company's business that is prohibited by any applicable embargo or related trade restriction imposed by the United States Office of Foreign Assets Control or any other agency of the United States government. (vi) The attached International Trade Compliance Schedule sets forth a list of each foreign jurisdiction to which the Company exports any products, equipment, software or technology, each foreign jurisdiction from which the Company imports any products, equipment, software or technology and each foreign jurisdiction to which the Company's products, equipment, software or technology (or products of such technology) are reexported. 5R. Intellectual Property Rights. (i) The attached Intellectual Property Schedule contains a complete and accurate list of all (a) patented or registered Intellectual Property Rights owned or, to the Company's knowledge, used by the Company, (b) pending patent applications and applications for other registrations of Intellectual Property Rights filed by or on behalf of the Company, and (c) material unregistered Intellectual Property Rights owned or used by the Company. The attached Intellectual Property Schedule also contains a complete and accurate list of all material licenses and other rights granted by the Company to any third party with respect to any Intellectual Property Rights and all -25- 27 material licenses and other rights granted by any third party to the Company with respect to any Intellectual Property Rights, in each case identifying the subject Intellectual Property Rights. The Company owns and possesses sufficient title to and ownership of, or has sufficient valid and enforceable licenses to, all Intellectual Property Rights necessary for the operation of its business as presently conducted and as presently proposed to be conducted, free and clear of all Liens. Without limiting the generality of the foregoing, the Company owns and possesses all right, title and interest in and to all Intellectual Property Rights created or developed by or under the direction or supervision of any of the Sellers relating to the business of the Company. To the knowledge of the Company, it is not and will not be necessary to utilize any Intellectual Property Rights of any of its employees developed, invented or made prior to their employment by the Company except for any such Intellectual Property Rights that have previously been assigned to the Company. Except as set forth on the attached Intellectual Property Schedule, the loss or expiration of any Intellectual Property Right or related group of Intellectual Property Rights owned or used by the Company has not had and would not reasonably be expected to have a Material Adverse Effect, and no loss or expiration of any Intellectual Property Right is pending or, to the Company's knowledge, threatened or reasonably foreseeable. The Company has taken commercially reasonable steps to maintain and protect its trade secrets. To the Company's knowledge, the owners of any Intellectual Property Rights licensed to the Company have taken commercially reasonable action to maintain and protect the Intellectual Property Rights which are subject to such licenses. (ii) Except as set forth on the attached Intellectual Property Schedule, (a) there have been no claims made against the Company asserting the invalidity, misuse or unenforceability of any of the Intellectual Property Rights owned or used by the Company and, to the Company's knowledge, there is no basis for any such claim, (b) the Company has not received any notices of, and has no knowledge of any facts which indicate a likelihood of, any infringement or misappropriation by, or conflict with, any third party with respect to any Intellectual Property Rights (including any demand or request that the Company license any rights from a third party), (c) the conduct of the Company's business has not infringed, misappropriated or conflicted with and does not infringe, misappropriate or conflict with any Intellectual Property Rights of other Persons, and (d) to the Company's knowledge, the Intellectual Property Rights owned by or licensed to the Company have not been infringed, misappropriated or conflicted by other Persons. The transactions contemplated by this Agreement will have no material adverse effect on the Company's right, title or interest in and to the Intellectual Property Rights listed on the Intellectual Property Schedule and all of such Intellectual Property Rights shall be owned or available for use by the Company on substantially identical terms and conditions immediately after the Closing. 5S. Litigation, etc. Except as set forth on the attached Litigation Schedule, there are no (and, during the five years preceding the date hereof, there have not been any) actions, suits, proceedings (including any arbitration proceedings), orders or, to the Company's knowledge, investigations or claims pending or, to the Company's knowledge, threatened against the Company (or to the Company's knowledge, pending or threatened against any of the officers, directors or employees of the Company with respect to its business or proposed business activities), or pending or threatened by the Company against any Person, at law or in equity, or before or by any -26- 28 governmental department, commission, board, bureau, agency or instrumentality (including any actions, suits, proceedings or investigations with respect to the transactions contemplated by this Agreement); the Company is not subject to any arbitration proceedings under collective bargaining agreements or otherwise or, to the Company's knowledge, any governmental investigations or inquiries; and, to the Company's knowledge, there is no basis for any of the foregoing. The foregoing includes, without limitation, actions pending or threatened involving the prior employment of any of the Company's employees, their use in connection with the Company's businesses of any information or techniques allegedly proprietary to any of their former employers or their obligations under any agreements with prior employers. Except as set forth thereon, the Company is fully insured with respect to each of the matters set forth on the attached Litigation Schedule. The Company is not subject to any judgment, order or decree of any court or other governmental agency, and the Company has not received any opinion or memorandum or advice from its legal counsel to the effect that it is exposed, from a legal standpoint, to any liability which could have a Material Adverse Effect. 5T. Brokerage. Except for the Company's obligations to Broadview Associates, LLC for up to $682,000 and Montgomery Securities for up to $1,653,610 in each case pursuant to the agreements described on the Contracts Schedule attached hereto, there are and shall be no claims for brokerage commissions, finders' fees or similar compensation in connection with the transactions contemplated by this Agreement based on any arrangement or agreement to which the Company is a party or to which the Company is subject. 5U. Insurance. The attached Insurance Schedule contains a description of each insurance policy maintained by the Company with respect to its properties, assets and business, and each such policy shall be in full force and effect as of the Closing. The Company is not in default with respect to its obligations under any insurance policy maintained by it, and the Company has never been denied insurance coverage. Except as set forth on the attached Insurance Schedule, the Company has no self-insurance or co-insurance programs and, to the Company's knowledge, the reserves set forth on the Latest Balance Sheet are adequate to cover all anticipated liabilities with respect to any such self-insurance or co-insurance programs. 5V. Employees. To the Company's knowledge, as of the date hereof, no executive or key employee of the Company and no group of employees of the Company has any plans to terminate employment with the Company. The Company has no material labor relations problems (including any union organization activities, threatened or actual strikes or work stoppages or material grievances). The Employees Schedule attached hereto contains a correct and complete list of all employees of the Company who are not citizens of the United States and who are not permanent residents of the United States (together with a listing of each such employee's work authorization status and work authorization expiration date). None of the Company, the Sellers nor, to Company's knowledge, any of its other employees or consultants are subject to any noncompete, nondisclosure, confidentiality, employment, consulting or other agreement or judgment, decree or order of any court or administrative agency, relating to, affecting or in conflict with the present or proposed business activities of the Company or such Person's duties to the Company, except for -27- 29 agreements between the Company and its present and former employees. The Company has not received any notice alleging that any violation of any such agreements has occurred. The Employees Schedule attached hereto contains a correct and complete list of all employees and consultants of the Company which have executed and delivered to the Company any (i) agreement providing for the nondisclosure by such Person of any confidential information of the Company or (ii) agreement providing for the assignment or license by such Person to the Company of any Intellectual Property Rights (an "Inventions Agreement"). No current employee or consultant of the Company has, pursuant to an agreement specified in clause (ii) of the preceding sentence, excluded works or inventions made prior to his or her employment with the Company from any Inventions Agreement between the Company and such Person. 5W. ERISA. (i) The Company does not have any obligation to contribute to (or any other liability, including current or potential withdrawal liability, with respect to) any "multiemployer plan" (as defined in Section 3(37) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")). (ii) The Company does not maintain or have any obligation to contribute to (or any other liability with respect to) any plan or arrangement, whether or not terminated, which provides medical, health, life insurance or other welfare-type benefits for current or future retired or terminated employees or any dependents of such employees (except for limited continued medical benefit coverage required to be provided under Section 4980B of the Code ("COBRA") or as required under applicable state law). (iii) The Company does not maintain, contribute to or have any actual or potential liability under (or with respect to) any employee plan which is a "defined benefit plan" (as defined in Section 3(35) of ERISA). (iv) The Company does not maintain, contribute to or have any actual or potential liability under (or with respect to) any employee plan which is a "defined contribution plan" (as defined in Section 3(34) of ERISA), whether or not terminated, other than the Netcom Systems, Inc. 401(k) Plan (the "401(k) Plan"). The 401(k) Plan is listed on the Employee Benefits Schedule. (v) Except as set forth on the attached Employee Benefits Schedule under the heading "Other Plans" (the "Other Plans"), the Company does not maintain, contribute to or have any actual or potential liability under (or with respect to) any material plan or arrangement providing benefits or remuneration to current or former employees or independent contractors, including any employment contract, bonus or incentive plan, plan for deferred compensation, employee health or other welfare benefit plan, severance arrangement or other material policy, program or arrangement, whether or not terminated. -28- 30 (vi) With respect to the 401(k) Plan and the Other Plans set forth on the attached Employee Benefits Schedule (the "Plans"), all required payments, premiums, contributions, reimbursements or accruals for all periods ending prior to or as of the Closing Date shall have been made or properly accrued. None of the Plans has any material unfunded liabilities which are not reflected on the Latest Balance Sheet. (vii) The Plans and all related trusts, insurance contracts and funds have been maintained, funded and administered in compliance in all material respects with the applicable provisions of ERISA, the Code and other applicable laws. The Company has timely complied with all reporting and disclosure obligations as they apply to the Plans, and the Company has complied with the requirements of COBRA. To the Company's knowledge, none of the Company or any trustee or administrator of any Plan has engaged in any transaction with respect to the Plans which would subject the Company or any trustee or administrator of the Plans, or any party dealing with any such Plan, nor do the transactions contemplated by this Agreement constitute transactions which would subject any such party, to either a civil penalty assessed pursuant to Part 502(i) of ERISA, or any other penalty or excise tax or the tax or penalty on prohibited transactions imposed by Section 4975 of the Code or any other penalty or excise tax. No actions, suits or claims with respect to the assets of the Plans (other than routine claims for benefits) are pending or, to the Company's knowledge, threatened which could result in or subject the Company to any liability and there are no circumstances which would give rise to or be expected to give rise to any such actions, suits or claims. (viii) A favorable determination letter from the Internal Revenue Service has been received by the Company with respect to the 401(k) Plan to the effect that it is qualified under Section 401(a) of the Code (including requirements imposed by the Tax Reform Act of 1986 and subsequent legislation), and, to the Company's knowledge, there are no circumstances which would cause the 401(k) Plan to lose such qualified status. (ix) The Company has provided the Purchasers with (a) the most recent favorable determination letter issued with respect to the 401(k) Plan and (b) true and complete copies of all documents pursuant to which the Plans are maintained and administered, including the most recent summary plan description. (x) For purposes of this Paragraph 5W, the term "Company" includes all organizations under common control with the Company pursuant to Section 414 of the Code. 5X. Compliance with Laws; Permits; Certain Operations. Except as set forth on the attached Compliance Schedule: (i) The Company has complied and is in compliance with all applicable laws, ordinances, codes, rules, requirements and regulations of foreign, federal, state and local governments and all agencies thereof relating to the operation of its business and the maintenance and operation of its properties and assets. No notices have been received by and, to the Company's -29- 31 knowledge, no claims have been filed or threatened against the Company alleging a violation of any such laws, ordinances, codes, rules, requirements or regulations. (ii) The Company holds and is in compliance with all permits, licenses, bonds, approvals, certificates, registrations, accreditations and other authorizations of all foreign, federal, state and local governmental agencies required for the conduct of its business and the ownership of its properties (including as the same relate to International Trade Laws and Regulations and Environmental and Safety Requirements), and the attached Permits Schedule sets forth a list of all of such material permits, licenses, bonds, approvals, certificates, registrations, accreditations and other authorizations. No notices have been received by the Company alleging the failure to hold any of the foregoing. All of such material permits, licenses, bonds, approvals, accreditations, certificates, registrations and authorizations will be available for use by the Company immediately after the Closing. 5Y. Environmental and Safety Matters. (i) Except as set forth on the attached Environmental Schedule: (a) The Company has complied with and is in compliance with all Environmental and Safety Requirements. The Company has not received any oral or written notice, report or information regarding any actual or alleged violation of Environmental and Safety Requirements or any liabilities or potential liabilities relating to it or its facilities arising under Environmental and Safety Requirements. (b) Neither this Agreement nor the consummation of the transactions contemplated hereby will result in any obligations for site investigation or cleanup, or notification to or consent of any government agencies or third parties under any Environmental and Safety Requirements (including any so called "transaction-triggered" or "responsible property transfer" laws and regulations). (c) To the best of the Company's knowledge, none of the following exists at any property or facility owned, occupied or operated by the Company: (1) underground storage tanks; (2) asbestos-containing material in any form or condition; (3) materials or equipment containing polychlorinated biphenyls; or (4) landfills, surface impoundments or other disposal areas. -30- 32 (d) The Company has not treated, stored, disposed of, arranged for or permitted the disposal of, transported, handled or Released any substance (including any hazardous substance) or owned, occupied or operated any facility or property in a manner that has given or could give rise to any liabilities (including any liability for response costs, corrective action costs, personal injury, natural resource damages, property damage or attorneys fees or any investigative, corrective or remedial obligations) pursuant to CERCLA or any other Environmental and Safety Requirements. (e) The Company has not, either expressly or by operation of law, assumed or undertaken any liability or corrective, investigatory or remedial obligation of any other Person relating to any Environmental and Safety Requirements. (f) No Environmental Lien has attached to any property owned, leased or operated by the Company. 5Z. Affiliated Transactions. Except as set forth on the attached Affiliated Transactions Schedule, no officer, director, shareholder, employee or Affiliate of the Company or, to the Company's knowledge, any individual related by blood, marriage or adoption to any such individual or any entity in which any such Person or individual owns any beneficial interest, is a party to any agreement, contract, commitment or transaction with the Company or has any material interest in any material property used by the Company (including any Intellectual Property Rights). 5AA. Names and Locations. Except as set forth on the attached Names and Locations Schedule, during the five-year period prior to the execution and delivery of this Agreement, the Company has not used any name or names under which it has invoiced account debtors, maintained records concerning its assets or otherwise conducted business. All of the tangible assets and properties of the Company are located at the locations set forth on the attached Names and Locations Schedule. 5BB. Suppliers and Customers. The Suppliers and Customers Schedule attached hereto accurately sets forth a list of the top ten customers and suppliers of the Company by dollar volume of sales and purchases, respectively, for each of the fiscal years ended July 31, 1997 and July 31, 1996. The Company has not received any indication from any material supplier to the effect that, and the Company has no reason to believe that, such supplier will stop, materially decrease the rate of, or materially change the terms (whether related to payment, price or otherwise) with respect to, supplying materials, products or services to the Company (whether as a result of the consummation of the transactions contemplated hereby or otherwise). The Company has not received any indication from any material customer of the Company to the effect that, and the Company has no reason to believe that, such customer will stop, or materially decrease the rate of, buying products of the Company (whether as a result of the consummation of the transactions contemplated hereby or otherwise). -31- 33 5CC. Real Property. The Company does not own any real property. The Real Property Schedule attached hereto sets forth a list of all of the leases, subleases and licenses ("Leases") of real property (the "Leased Real Property") in which the Company has a leasehold, subleasehold and licensed interest. The Company holds a valid and existing leasehold, subleasehold or license interest under each of the Leases. With respect to each Lease listed on the attached Real Property Schedule, there are no disputes, oral agreements, or forbearance programs in effect as to such Lease and the Company has not assigned, transferred, conveyed, mortgaged, deeded in trust or encumbered any interest in the Lease. Except for the Leased Real Property, there is no real property which is leased or otherwise used in the Company's business. 5DD. Regulatory Status. Since its date of incorporation, the Company has not been, and as of the Closing Date shall not be, a "United States real property holding corporation," as defined in Section 897(c)(2) of the Code and in Section 1.897-2(b) of the Treasury Regulations issued thereunder. The Company is not an "investment company" or an "affiliated person" of, or "promoter" or "principal underwriter" for, an "investment company," as such terms are defined under the Investment Company Act of 1940, as amended. 5EE. Margin Securities. The Company is not engaged in the business of extending credit for the purpose of buying or carrying "margin securities" within the meaning of Regulations G, T, U or X promulgated by the Board of Governors of the Federal Reserve Board. 5FF. Small Business Matters. The Company acknowledges that the SBIC Purchaser is a federally licensed SBIC under the SBIC Act. The Company, together with its "affiliates" (as that term is defined in 13 CFR Section 121.103), is a "small business concern" within the meaning of the SBIC Regulations, including 13 CFR Section 121.301. The information regarding the Company and its affiliates set forth in SBA Form 480, Form 652 and Parts A and B of Form 1031 delivered at the Closing will be accurate and complete. The Company does not presently engage in any activities for which an SBIC is prohibited from providing funds by the SBIC Regulations (including 13 CFR Section 107.720). 5GG. Disclosure. To the knowledge of the Sellers (other than Henri Hamon and Stephane Johnson), there is no fact which the Company has not disclosed to the Purchasers in writing and of which any of its shareholders, officers, directors or executive employees is aware which has had or would reasonably be expected to have a Material Adverse Effect. Section 6. Representations and Warranties of the Sellers. As a material inducement to the Purchasers to enter into this Agreement and purchase the Preferred Stock hereunder, each Seller, with respect to itself and not jointly with respect to any of the other Sellers, hereby represents and warrants to the Purchasers and the Company as follows: 6A. Capacity; Power and Authority. Such Seller possesses all requisite capacity, power and authority necessary to carry out the transactions contemplated by this Agreement. -32- 34 6B. Authorization; No Breach. This Agreement and all other agreements contemplated hereby to which such Seller is a party, when executed and delivered by such Seller in accordance with the terms hereof, shall each constitute a valid and binding obligation of such Seller, enforceable against such Seller in accordance with its terms. The execution and delivery by such Seller of this Agreement and all other agreements contemplated hereby to which such Seller is a party, the repurchase of the Repurchased Shares from such Seller hereunder, and the fulfillment of and compliance with the respective terms hereof and thereof by such Seller, do not and shall not (i) conflict with or result in a breach of the terms, conditions or provisions of, (ii) constitute a default under (whether with or without the passage of time, the giving of notice or both), (iii) result in the creation of any lien, security interest, charge or encumbrance upon such Seller's assets pursuant to, (iv) give any third party the right to modify, terminate or accelerate any obligation under, (v) result in a violation of, or (vi) require any authorization, consent, approval, exemption or other action by or notice or declaration to, or filing with, any third party or any court or administrative or governmental body or agency pursuant to, or any law, statute, rule or regulation to which such Seller is subject, or any agreement, instrument, order, judgment or decree to which such Seller is subject, except for any filing, notice or authorization required pursuant to the Hart-Scott-Rodino Act. 6C. Title to Shares, etc. Such Seller is the record and beneficial owner of, and has good and marketable title to, the Repurchased Shares set forth opposite such Seller's name on the Schedule of Sellers attached hereto, free and clear of all Liens, agreements, voting trusts, proxies and other arrangements or restrictions of any kind whatsoever (collectively, "Encumbrances"). At the Closing, such Seller shall sell to the Company good and marketable title to such Repurchased Shares free and clear of all Encumbrances. 6D. Brokerage. There are no claims for brokerage commissions, finders' fees or similar compensation in connection with the transactions contemplated by this Agreement based on any arrangement or agreement to which such Seller is a party or to which such Seller is subject. Such Seller shall pay, and hold the Company and the Purchasers and the other Sellers harmless against, any liability, loss or expense (including reasonable attorneys' fees and out-of-pocket expenses) arising in connection with any such claim. 6E. Litigation, etc. There are no actions, suits, proceedings (including any arbitration proceedings), orders, investigations or claims pending or, to such Seller's knowledge, threatened against or affecting such Seller in which it is sought to restrain or prohibit or to obtain damages or other relief in connection with the transactions contemplated hereby. 6F. Company Transactions. Such Seller is not a party to or bound by any agreement with respect to a Company Transaction other than this Agreement, and such Seller has terminated all discussions with third parties (other than the Purchasers) regarding Company Transactions. -33- 35 Section 7. Representations and Warranties of the Purchasers. As a material inducement to the Company and the Sellers to enter into this Agreement and take the actions set forth in Section 1, each Purchaser, with respect to itself and not jointly with respect to any of the other Purchasers, hereby represents and warrants to the Company and the Sellers as follows: 7A. Organization, Power and Authority. Such Purchaser (if not a natural person) is duly organized, validly existing and in good standing under the laws of its jurisdiction of organization. Such Purchaser possesses all requisite power and authority necessary to carry out the transactions contemplated by this Agreement. 7B. Authorization; No Breach. The execution, delivery and performance of this Agreement and all other agreements contemplated hereby to which such Purchaser is a party have been duly authorized by such Purchaser. This Agreement and all other agreements contemplated hereby to which such Purchaser is a party, when executed and delivered by such Purchaser in accordance with the terms hereof, shall each constitute a valid and binding obligation of such Purchaser, enforceable in accordance with its terms. The execution and delivery by such Purchaser of this Agreement and all other agreements contemplated hereby to which such Purchaser is a party, the purchase of the Preferred Stock hereunder, and the fulfillment of and compliance with the respective terms hereof and thereof by such Purchaser, do not and shall not (i) conflict with or result in a breach of the terms, conditions or provisions of, (ii) constitute a default under (whether with or without the passage of time, the giving of notice or both), (iii) give any third party the right to modify, terminate or accelerate any obligation under, (iv) result in a violation of, or (v) require any authorization, consent, approval, exemption or other action by or notice or declaration to, or filing with, any court or administrative or governmental body or agency pursuant to, the organizational documents of such Purchaser, or any material law, statute, rule or regulation to which such Purchaser is subject, or any material agreement, instrument, order, judgment or decree to which such Purchaser is subject, except for any filing, notice or authorization required pursuant to the Hart-Scott-Rodino Act or the SBIC Act. 7C. Brokerage. There are no claims for brokerage commissions, finders' fees or similar compensation in connection with the transactions contemplated by this Agreement based on any arrangement or agreement to which such Purchaser is a party or to which such Purchaser is subject. Such Purchaser shall pay, and hold the Company and the Sellers and the other Purchasers harmless against, any liability, loss or expense (including reasonable attorneys' fees and out-of-pocket expenses) arising in connection with any such claim. 7D. Investment Representations. (i) Such Purchaser is acquiring the Restricted Securities to be purchased by it hereunder for its own account, not as a nominee or agent, with the present intention of holding such securities for purposes of investment, and such Purchaser has no intention of selling such securities in a public distribution in violation of the federal securities laws or any applicable state securities laws; provided that nothing contained herein shall prevent such Purchaser or any subsequent holder -34- 36 of such Restricted Securities from transferring such securities in compliance with the provisions of Paragraph 11C below. (ii) Such Purchaser is an "accredited investor" as defined in Rule 501(a) under the Securities Act. (iii) Such Purchaser understands that the purchase of the Restricted Securities involves substantial risk. Such Purchaser or its officers, members or partners has experience as an investor in securities of companies in the development or growth stage and acknowledges that such Purchaser is able to fend for itself, can bear the economic risk of such Purchaser's investment in the Restricted Securities and has such knowledge and experience in financial or business matters that such Purchaser is capable of evaluating the merits and risks of its investment in the Restricted Securities. (iv) Such Purchaser understands that the Restricted Securities to be purchased by it hereunder have not been registered under the Securities Act on the basis that the sale provided for in this Agreement is exempt from the registration provisions thereof and that the Company's reliance on such exemption is predicated in part upon the representations of such Purchaser set forth herein. (v) Such Purchaser acknowledges that the offer and sale of the Restricted Securities to such Purchaser has not been accomplished by the publication of any advertisement. (vi) Such Purchaser has consulted its own tax advisor and is not relying on the Company or any Seller for tax advice. Section 8. Indemnification and Other Agreements. 8A. Survival of Representations and Warranties. The representations and warranties in this Agreement shall survive the Closing as follows: (i) the representations and warranties in Paragraph 5O (Tax Matters), Paragraph 5Q (International Trade Laws and Regulations), Paragraph 5W (ERISA), Paragraph 5X (Compliance with Laws; Permits; Certain Operations), Paragraph 5Y (Environmental and Safety Matters) and Paragraph 5FF (Small Business Matters) shall terminate when the applicable statutes of limitations with respect to the liabilities in question expire (after giving effect to any extensions or waivers thereof), plus thirty (30) days; (ii) the representations and warranties in Paragraph 5B (Capital Stock and Related Matters), Paragraph 5T (Brokerage), Paragraph 6A (Capacity; Power and Authority), Paragraph 6C (Title to Shares), Paragraph 6D (Brokerage), Paragraph 6F (Company Transactions), Paragraph 7D (Brokerage), the first and second and last sentences of Paragraph 5D (Authorization; No Breach), the first sentence of Paragraph 6B (Authorization; No Breach) and the first and second sentences of Paragraph 7B (Authorization; No Breach) shall not terminate; -35- 37 (iii) the representations and warranties in Paragraph 5R (Intellectual Property Matters) shall terminate on the second anniversary of the Closing Date; and (iv) all other representations and warranties in this Agreement and the Schedules and Exhibits attached hereto or in any writing delivered by any Party to another Party in connection with this Agreement shall terminate sixty (60) days after the receipt by the Purchasers of the Company's audited financial statements for the fiscal year ended July 31, 1998 (together with a duly executed opinion with respect thereto from the Company's independent public accountants); provided that any representation or warranty in respect of which indemnity may be sought under Paragraph 8B, and the indemnity with respect thereto, shall survive the time at which it would otherwise terminate pursuant to this Paragraph 8A if notice of the inaccuracy or breach or potential inaccuracy or breach thereof giving rise to such right or potential right of indemnity shall have been given to the Party against whom such indemnity may be sought prior to such time. The representations and warranties in this Agreement shall survive for the periods set forth in this Paragraph 8A and shall in no event be affected by any investigation, inquiry or examination made for or on behalf of any Party, or the knowledge of any Party's officers, directors, shareholders, employees or agents or the acceptance by any Party of any certificate or opinion hereunder. 8B. General Indemnification. (i) Indemnification by the Sellers. Each of the Sellers shall indemnify each of the Company and the Purchasers and their respective Affiliates, shareholders (other than the Sellers), partners, officers, directors, employees, agents, representatives, successors and permitted assigns (collectively, the "Company Parties") and save and hold each of them harmless against and pay on behalf of or reimburse such Company Parties as and when incurred for any loss, liability, demand, claim, action, cause of action, cost, damage, deficiency, Tax, penalty, fine or expense, whether or not arising out of third party claims (including interest, penalties, reasonable attorneys' fees and expenses and all amounts paid in investigation, defense or settlement of any of the foregoing) (collectively, "Losses"), which any such Company Party may suffer, sustain or become subject to, as a result of, in connection with, relating or incidental to or by virtue of: (a) any breach of any representation or warranty of the Company or the Sellers under Section 5 (other than Paragraph 5R) or Section 6 of this Agreement; (b) any breach of any representation or warranty of the Company or the Sellers under Paragraph 5R of this Agreement; (c) any nonfulfillment or breach of any covenant or agreement by the Company or any of the Sellers under this Agreement required to be performed or complied with by the Company or any of the Sellers at or prior to the Closing; (d) any nonfulfillment or breach of any covenant or agreement by any of the Sellers under this Agreement required to be performed or complied with by any of the Sellers after the Closing; or (e) any claim by any Person (other than the Purchasers) with respect to, or arising as a result of, any Company Transaction (other than the Company Transaction that is the subject of this Agreement); provided that the Sellers shall not have any liability under clauses (a), (c), (d) or (e) above (other than with respect to the representations and warranties contained in Paragraph 5B and Paragraph 6C and the covenants and agreements contained in this Section 8) unless the aggregate of all Losses relating -36- 38 thereto for which the Sellers would, but for this proviso, be liable exceeds on a cumulative basis an amount equal to $250,000, and then the Sellers shall be liable only to the extent of such excess; and provided further that the Sellers shall not have any liability under clause (b) above unless the aggregate of all Losses relating thereto for which the Sellers would, but for this proviso, be liable exceeds on a cumulative basis an amount equal to $1,000,000, and then the Sellers shall be liable only to the extent of such excess; and provided further that the Sellers' aggregate liability under clauses (a), (b), (c) and (d) above (other than with respect to the representations and warranties contained in Paragraph 5B and Paragraph 6C and the covenants and agreements contained in this Section 8) shall in no event exceed $15,000,000 (it being understood, however, that nothing in this Agreement (including this Paragraph 8B) shall limit or restrict any of the Company Parties' right to maintain or recover any amounts in connection with any action or claim based upon fraudulent misrepresentation or deceit). All indemnification payments for the benefit of the Company under this Paragraph 8B shall be deemed to be adjustments to the Repurchase Price set forth in Paragraph 1A above. All indemnification payments for the benefit of any Purchaser under this Paragraph 8B shall be deemed to be adjustments to the Purchase Price set forth in Paragraph 1B above. In no event shall the Sellers' obligations in respect of the indemnification provided for in this Paragraph 8B, or any expense reimbursement obligation of the Company provided for herein, be treated as subordinated indebtedness of the Company or as a restricted payment pursuant to any agreement to which the Company is a party or be otherwise restricted or deferred. Subject to the limitations set forth above, if and to the extent any provision of this Paragraph 8B is unenforceable for any reason, each Seller hereby agrees to make the maximum contribution to the payment and satisfaction of any Loss for which indemnification is provided for in this Paragraph 8B which is permissible under applicable laws. Notwithstanding any provision herein to the contrary, in no event shall the Sellers be obligated to make duplicative indemnity payments hereunder (i.e., if the Company incurs a Loss for which it is entitled to (and actually receives) indemnification from the Sellers hereunder, the Sellers shall not thereafter be liable to the Purchasers or any other Company Parties for the same Loss, unless the Purchasers or any such other Company Parties have also incurred a Loss with respect to the matter which gave rise to such indemnification obligation). Except with respect to injunctive relief, the Company and the Purchasers acknowledge and agree (on behalf of themselves and the other Company Parties) that from and after the Closing their sole and exclusive remedy with respect to any and all claims relating to the subject matter of this Agreement shall be pursuant to the indemnification provisions set forth in this Paragraph 8B. (ii) Indemnification by the Purchasers. Each Purchaser shall, with respect to the representations, warranties, covenants and agreements made by such Purchaser and not with respect to the representations, warranties, covenants or agreements made by any of the other Purchasers, indemnify the Company and its Affiliates, shareholders, officers, directors, employees, agents, representatives, successors and permitted assigns (collectively, the "Purchaser Indemnified Parties") and hold them harmless against any Losses which the Purchaser Indemnified Parties may suffer, sustain or become subject to, as a result of, in connection with, relating or incidental to or by virtue of: (a) any breach of any representation or warranty of such Purchaser under Section 7 of this Agreement; or (b) any nonfulfillment or breach of any covenant or agreement by such Purchaser under this Agreement. -37- 39 (iii) Nature of Certain Indemnification Obligations. The representations and warranties of each of the Sellers in Section 6 of this Agreement and the covenants and agreements made by each of the Sellers under this Agreement (other than as specifically set forth in this Paragraph 8B) in such Seller's individual capacity that are required to be performed or complied with by such Seller after the Closing (such as those set forth in Paragraphs 8D and 8E of this Agreement) are several obligations. This means that the particular Seller making the representation, warranty, covenant or agreement will be solely responsible for any Losses the Company Parties may suffer as a result of any breach or nonfulfillment of any such representations, warranties, covenants or agreements. The other representations and warranties made in or pursuant to this Agreement and the covenants and agreements made by the Company and the Sellers under this Agreement that are required to be performed or complied with by the Company or the Sellers at or prior to the Closing are subject to the following provisions. Each Seller shall be responsible to the extent provided in this Paragraph 8B only for its Pro Rata Share of any particular Loss the Company Parties may suffer as a result of any breach or nonfulfillment of such representations, warranties, covenants and agreements. "Pro Rata Share" means with respect to the share of any Seller in a particular Loss that fraction equal to the portion of the Repurchase Price allocable to the Repurchased Shares held by such Seller over the Repurchase Price. (iv) Calculation of Losses; Manner of Payment. The Parties shall make appropriate adjustments for tax consequences and insurance coverage in determining the amount of any Losses for purposes of this Paragraph 8B. Any indemnification of the Company Parties or the Purchaser Indemnified Parties pursuant to this Paragraph 8B shall be effected by wire transfer of immediately available funds from one or more of the Sellers or the Purchasers, as the case may be, to an account designated by any Company Party or Purchaser Indemnified Party, as the case may be, within 15 days after the determination thereof. Any such indemnification payments shall include interest at the Applicable Rate calculated on the basis of the actual number of days elapsed over 360, from the date any such Loss is suffered or sustained to the date of payment. Any amounts owing from the Sellers pursuant to this Paragraph 8B shall first be made to the extent possible from the Escrow Funds (as defined in the Escrow Agreement) in the Escrow Account and thereafter shall be made directly by the Sellers in accordance with the terms of this Paragraph 8B(iv). (v) Defense of Third Party Claims. Any Person making a claim for indemnification under this Paragraph 8B (an "Indemnitee") shall notify the indemnifying party (an "Indemnitor") of the claim in writing promptly after receiving written notice of any action, lawsuit, proceeding, investigation or other claim against it (if by a third party), describing the claim, the amount thereof (if known and quantifiable) and the basis thereof; provided that the failure to so notify an Indemnitor shall not relieve the Indemnitor of its obligations hereunder except to the extent that (and only to the extent that) such failure shall have caused the damages for which the Indemnitor is obligated to be greater than such damages would have been had the Indemnitee given the Indemnitor prompt notice hereunder. Any Indemnitor shall be entitled to participate in the defense of such action, lawsuit, proceeding, investigation or other claim giving rise to an Indemnitee's claim for indemnification at such Indemnitor's expense, and at its option (subject to the limitations set forth below) shall be entitled to assume the defense thereof by appointing a reputable counsel reasonably -38- 40 acceptable to the Indemnitee to be the lead counsel in connection with such defense; provided that, prior to the Indemnitor assuming control of such defense it shall first verify to the Indemnitee in writing that such Indemnitor shall be responsible (with no reservation of any rights) for all liabilities and obligations relating to such claim for indemnification (to the extent provided in this Paragraph 8B) and that it shall provide indemnification (whether or not otherwise required hereunder) to the Indemnitee (to the extent provided in this Paragraph 8B) with respect to such action, lawsuit, proceeding, investigation or other claim giving rise to such claim for indemnification hereunder; and provided further, that: (1) the Indemnitee shall be entitled to participate in the defense of such claim and to employ counsel of its choice for such purpose; provided that the fees and expenses of such separate counsel shall be borne by the Indemnitee (other than any reasonable fees and expenses of such separate counsel that are incurred prior to the date the Indemnitor effectively assumes control of such defense which, notwithstanding the foregoing, shall be borne by the Indemnitor); (2) the Indemnitor shall not be entitled to assume control of such defense and shall pay the fees and expenses of counsel retained by the Indemnitee if (A) the claim for indemnification relates to or arises in connection with any criminal proceeding, action, indictment, allegation or investigation; (B) the claim seeks an injunction or equitable relief against the Indemnitee; (C) the Indemnitee has been advised in writing by counsel that a reasonable likelihood exists of a conflict of interest between the Indemnitor and the Indemnitee; (D) upon petition by the Indemnitee, the appropriate court rules that the Indemnitor failed or is failing to vigorously prosecute or defend such claim; or (E) the Indemnitee reasonably believes that the Loss relating to the claim could exceed the maximum amount that such Indemnitee could then be entitled to recover under the applicable provisions of Paragraph 8B; and (3) if the Indemnitor shall control the defense of any such claim, the Indemnitor shall obtain the prior written consent of the Indemnitee before entering into any settlement of a claim or ceasing to defend such claim if, pursuant to or as a result of such settlement or cessation, injunctive or other equitable relief will be imposed against the Indemnitee or if such settlement does not expressly and unconditionally release the Indemnitee from all liabilities and obligations with respect to such claim, without prejudice. (vi) Certain Waivers and Consents. Each Seller hereby agrees that such Seller shall not make any claim for indemnification against the Company (whether pursuant to the Articles of Incorporation or any indemnification agreement existing between the Company and such Seller or under applicable law or otherwise) by reason of the fact that such Seller is or was a shareholder, director, officer, employee or agent of the Company or is or was serving at the request of the Company as a partner, trustee, director, officer, employee or agent of another entity (whether such -39- 41 claim is for judgments, damages, penalties, fines, costs, amounts paid in settlement, losses, expenses or otherwise) with respect to any action, suit, proceeding, complaint, claim or demand brought by any of the Company Parties against such Seller pursuant to this Agreement and such Seller hereby acknowledges and agrees that such Seller shall have no claims or right to contribution or indemnity from the Company with respect to any amounts paid by the Sellers pursuant to this Paragraph 8B. Except as provided in the immediately preceding sentence, nothing in this Paragraph 8B(vi), however, shall prohibit, restrict or modify any right of the Sellers to receive indemnification from the Company to the extent such Seller is otherwise entitled to indemnification pursuant to the Articles of Incorporation or any indemnification agreement existing between the Company and such Seller and applicable law with respect to any claim which does not give rise to or evidence the existence of a breach of any of the representations, warranties, covenants or agreements of the Company or the Sellers contained in this Agreement and which does not give rise to or evidence the existence of an indemnification obligation by the Sellers pursuant to this Paragraph 8B. Each of the Purchasers and the Sellers hereby consents to the consummation of the Repurchase Transaction and the transactions contemplated by the Stock Purchase Agreement pursuant to Sections 502, 503 and 506 of the General Corporation Law of the State of California as in effect as of the date hereof and as of the Closing Date. Each of the Purchasers and the Sellers has received historical financial information regarding the Company (including the Latest Balance Sheet) and has also received pro forma financial information after giving effect to the Repurchase Transaction and the transactions contemplated by the Stock Purchase Agreements. 8C. Press Release and Announcements. Unless required by law (in which case each Party agrees to consult with the other Parties prior to any such disclosure as to the form and content of such disclosure), no press releases or other releases of information related to this Agreement or the transactions contemplated hereby will be issued or released prior to the Closing without the consent of the Company, the Requisite Purchaser and the Seller Representative. 8D. Non-Compete; Non-Solicitation. (i) Each Seller (which, for purposes of this Paragraph 8D only, shall exclude Richard Bass) acknowledges that such Seller is familiar with the trade secrets of the Company and with other confidential information concerning the Company, including all (a) inventions, technology and research and development of the Company, (b) customers and clients and customer and client lists of the Company, (c) products (including products under development) and services of the Company and related costs and pricing structures and manufacturing techniques, (d) accounting and business methods and practices of the Company and (e) similar and related confidential information and trade secrets of the Company. Each Seller further acknowledges that such Seller's services have been and shall be of special, unique and extraordinary value to the Company, that such Seller (in the case of the Seller Representative) is the founder of the Company and that each such Seller has been substantially responsible for the growth and development of the Company and the creation and preservation of the Company's goodwill. Each Seller acknowledges and agrees that the Company would be irreparably damaged if such Seller were to provide services to any Person competing with the Company or engaged in a similar business and that such competition by such Seller would result -40- 42 in a significant loss of goodwill by the Company. Each Seller further acknowledges and agrees that the covenants and agreements set forth in this Paragraph 8D were a material inducement to the Purchasers to enter into this Agreement and to perform their obligations hereunder, and that the Purchasers would not obtain the benefit of the bargain set forth in this Agreement as specifically negotiated by the Parties if such Seller breached the provisions of this Paragraph 8D. Therefore, in further consideration of the Repurchase Price to be paid to the Sellers hereunder for the Repurchased Shares (which Repurchase Price is being funded in part with the proceeds from the Investment Transaction hereunder) and the goodwill of the Company sold by the Sellers, each Seller agrees that until the second anniversary of the date of such Seller's termination of employment with the Company and its Subsidiaries, such Seller shall not directly or indirectly own any interest in, manage, control, participate in (whether as an officer, director, employee, partner, agent, representative or otherwise), consult with, render services for, or in any other manner engage anywhere in the Restricted Territories in any business competing with, or similar to, the business of the Company and any of its Subsidiaries, including any business engaged in the design, manufacture, assembly, development, sale or distribution of network test and measurement equipment (including as the same is used in the LAN and WAN equipment markets); provided that nothing herein shall prohibit such Seller from being a passive owner of not more than 5% of the outstanding stock of any class of a corporation which is publicly traded so long such Seller has no active participation in the business of such Person, and provided, further, that, notwithstanding anything herein to the contrary, in the event that either Jing Zhang or Stephane Johnson is involuntarily terminated by the Company without Cause, the obligations of such Seller pursuant to this Paragraph 8D shall terminate at the earlier of (x) the first anniversary of the date of such Seller's termination of employment with the Company and its Subsidiaries or (y) such time following such Seller's termination of Employment with the Company and its Subsidiaries as the Company shall cease to pay such Seller an amount, in accordance with the Company's regular payroll practices, equal to the base salary payable to such Seller immediately prior to the termination of such Seller's employment with the Company and its Subsidiaries. For purposes of this Agreement, "Cause" shall mean (a) Seller's continued failure to perform his duties and responsibilities in good faith and to the best of his ability for a period of thirty days after written notice thereof from the Company to Seller; (b) Seller personally engaging in fraud, (c) a Seller being convicted of a felony; (d) a Seller breaching any material term of this Agreement or any other agreement with the Company which continues uncured for a period of thirty days after written notice; (e) a Seller's commencement of employment with another employer while he is an employee of the Company; or (f) material nonconformance with the Company's standard business practices and policies generally known by Company's employees, made known or made available to a Seller or delivered in writing to a Seller. In addition, for purposes of this Agreement, "Restrictive Territories" shall mean (i) the California counties of Los Angeles, Orange, San Bernadino, San Diego, Ventura, Fresno, Alameda, Alpine, Amador, Butte, Calaveras, Colusa, Contra Costa, Del Norte, El Dorado, Glenn, Humboldt, Imperial, Inyo, Kern, Kings, Lake, Lassen, Madera, Marin, Mariposa, Mendocino, Merced, Modoc, Mono, Monterey, Napa, Nevada, Placer, Plumas, Riverside, Sacramento, San Benito, San Francisco, San Joaquin, San Luis Obispo, San Mateo, Santa Barbara, Santa Clara, Santa Cruz, Shasta, Sierra, Siskiyou, Solano, Sonoma, Stanislaus, Sutter, Tehama, Trinity, Tulare, Tuolumne, Yolo and Yuba, and (ii) any other states, possessions, territories or jurisdictions of the United States of America and all other countries, nations, territories and areas -41- 43 of the world. Each Seller acknowledges that the business of the Company and its Subsidiaries has been conducted on a worldwide scale (including as the same relates to the design, production, promotion, marketing and sale of its products and services), that a significant percentage of the Company's sales are made in foreign jurisdictions and that the geographic restrictions set forth above are reasonable and necessary to protect the goodwill of the Company's business being sold by the Sellers pursuant to this Agreement. (ii) For so long as a Seller has continuing obligations under Paragraph 8D(i) above, such Seller shall not directly, or indirectly through another entity, (a) induce or attempt to induce any employee of the Company or any of its Subsidiaries to leave the employ of the Company or such Subsidiary, or in any way interfere with the relationship between the Company or any of its Subsidiaries and any employee thereof, (b) hire any person who was an employee of the Company or any of its Subsidiaries at any time during the six month period immediately prior to the date on which such hiring would take place (it being conclusively presumed by the Parties so as to avoid any disputes under this Paragraph 8D(ii) that any such hiring within such six month period is in violation of clause (a) above), or (c) call on, solicit or service any customer, supplier, licensee, licensor or other business relation of the Company or any of its Subsidiaries in order to induce or attempt to induce such Person to cease doing business with the Company or such Subsidiary, or in any way interfere with the relationship between any such customer, supplier, licensee or business relation and the Company or any of its Subsidiaries (including making any negative statements or communications about the Company or any of its Subsidiaries). (iii) If, at the time of enforcement of the covenants contained in this Paragraph 8D (the "Restrictive Covenants"), a court shall hold that the duration, scope or area restrictions stated herein are unreasonable under circumstances then existing, the Parties agree that the maximum duration, scope or area reasonable under such circumstances shall be substituted for the stated duration, scope or area and that the court shall be allowed to revise the restrictions contained herein to cover the maximum period, scope and area permitted by law. Each Seller has consulted with legal counsel regarding the Restrictive Covenants and based on such consultation has determined and hereby acknowledges that the Restrictive Covenants are reasonable in terms of duration, scope and area restrictions and are necessary to protect the goodwill of the Company's business and the substantial investment in the Company made by the Purchasers hereunder. Each Seller further acknowledges and agrees that the Restrictive Covenants are being entered into by such Seller solely in connection with the sale by such Seller of the goodwill of the Company's business and not directly or indirectly in connection with such Seller's employment or other relationship with the Company. (iv) If a Seller breaches, or threatens to commit a breach of, any of the Restrictive Covenants, the Company shall have the following rights and remedies, each of which rights and remedies shall be independent of the others and severally enforceable, and each of which is in addition to, and not in lieu of, any other rights and remedies available to the Company at law or in equity: -42- 44 (a) the right and remedy to have the Restrictive Covenants specifically enforced by any court of competent jurisdiction, it being agreed that any breach or threatened breach of the Restrictive Covenants would cause irreparable injury to the Company and that money damages would not provide an adequate remedy to the Company; and (b) the right and remedy to require such Seller to account for and pay over to the Company any profits, monies, accruals, increments or other benefits derived or received by such Seller as the result of any transactions constituting a breach of the Restrictive Covenants. (v) In the event of any breach or violation by a Seller of any of the Restrictive Covenants, the time period of such covenant with respect to such Seller shall be tolled until such breach or violation is resolved. 8E. Confidentiality. The Purchasers acknowledge that all "confidential information" (as defined in the Confidentiality Agreement) provided to them by the Company is subject to the terms of a Confidentiality Agreement between the Company and one or more of the Purchasers (the "Confidentiality Agreement"), the terms of which are incorporated herein by reference. If the transactions contemplated hereby are not consummated, the Purchasers shall return to the Company and keep confidential all information and materials regarding the Company and the Sellers reasonably designated by the Company as confidential (except to the extent (i) disclosure of such information is required by law, (ii) the information was previously known to the Purchasers or (iii) the information becomes publicly known except through the actions or inactions of the Purchasers). Effective upon the consummation of the transactions contemplated hereby, the Confidentiality Agreement shall terminate. Whether or not the transactions contemplated hereby are consummated, the Company and the Sellers shall return to the Purchasers and keep confidential all information and materials regarding any of the Purchasers reasonably designated by any of the Purchasers as confidential (except to the extent (i) disclosure of such information is required by law, (ii) the information was previously known to the Company or the Sellers or (iii) the information becomes publicly known except through the actions or inactions of the Company or the Sellers). If the transactions contemplated hereby are consummated, each Seller agrees not to disclose or use at any time, either during such Seller's employment or consultancy with the Company or thereafter, any Confidential Information (whether or not such information is or was developed by such Seller), except to the extent that such disclosure or use is directly related to and required by the performance of such Seller's duties to the Company. Such Seller further agrees to take all appropriate steps to safeguard such Confidential Information and to protect it against disclosure, misuse, espionage, loss and theft. In the event any Seller is required by law to disclose any Confidential Information, such Seller shall promptly notify the Company in writing, which notification shall include the nature of the legal requirement and the extent of the required disclosure, and shall cooperate with the Company to preserve the confidentiality of such information consistent with applicable law. -43- 45 8F. Intellectual Property Rights Protection. The Sellers shall provide the Company and its Subsidiaries and their respective successors, assigns or other legal representatives full and reasonable cooperation and assistance at the Company's or such Subsidiary's request and expense in the protection of all Intellectual Property Rights now or hereafter owned or used by the Company or any of its Subsidiaries against any claims or demands of invalidity or unenforceability, and in the prosecution or defense of any interference, opposition, reexamination, reissue, infringement or other proceeding that may arise in connection with the Company's or any of its Subsidiaries' right, title and interest in and to such Intellectual Property Rights, including execution and delivery of any and all affidavits, testimonies, declarations, oaths, exhibits, assignments, powers of attorney or other documentation as may be reasonably required. 8G. Dispute Resolution. (i) In the event of any dispute or disagreement between the Parties following the Closing as to the interpretation of any provision of this Agreement or the performance of any obligations hereunder, the matter, upon the written request of any Party, shall be referred to representatives of the Parties for decision (the "Representatives"). The Representatives shall promptly meet in a good faith effort to resolve the dispute. If the Representatives do not agree upon a decision within 30 calendar days after reference of the matter to them, each of the Parties shall be free to exercise the remedies available to it under Paragraph 8G(ii) below. (ii) Any controversy, dispute or claim arising out of or relating in any way to this Agreement or the transactions arising hereunder which is not resolved by negotiation pursuant to Paragraph 8G(i) above shall be settled exclusively by arbitration in the City of Los Angeles, California. Such arbitration shall be administered by the Center for Public Resources Institute for Dispute Resolutions (the "Institute") in accordance with its then prevailing Rules for Non-Administered Arbitration of Business Disputes (except as otherwise provided herein) by one independent and impartial arbitrator who shall be selected by the Sellers and the Purchasers in accordance with such Rules. Notwithstanding anything to the contrary provided in Paragraph 11O hereof, the arbitration shall be governed by the United States Arbitration Act, 9 U.S.C. Section 1 et seq. The fees and expenses of the Institute and the arbitrator shall be shared equally by the Company on the one hand and the Sellers on the other hand and advanced by them from time to time as required; provided that at the conclusion of the arbitration, the arbitrator shall award costs and expenses (including the costs of the arbitration previously advanced and the fees and expenses of attorneys, accountants and other experts) and interest at the Applicable Rate to the prevailing Party or Parties. The arbitrator shall permit and facilitate such discovery as the Party initiating such claim shall reasonably request. The arbitrator shall render his or her award within 90 days of the conclusion of the arbitration hearing. The arbitrator shall be expressly empowered to determine the amount of any Losses subject to indemnification hereunder in accordance with the terms and provisions of this Agreement. Notwithstanding anything to the contrary provided in this Paragraph 8G(ii) and without prejudice to the above procedures, any Party may apply to any court of competent jurisdiction for temporary injunctive or other provisional judicial relief if such action is necessary to avoid irreparable damage or to preserve the status quo until such time as the arbitrator is selected and -44- 46 available to hear such Party's request for temporary relief. The award rendered by the arbitrator shall be final and not subject to judicial review (absent manifest error), and judgment thereon may be entered in any court of competent jurisdiction. Notwithstanding anything to the contrary provided in Paragraph 8G(i) or this Paragraph 8G(ii), the Company or the Purchasers may elect to enforce any of the provisions of Paragraphs 8D or 8E or the Exhibits attached hereto by application to a court of competent jurisdiction for equitable or legal relief (including damages or injunctive relief) rather than pursuant to the above procedures. 8H. Further Assurances. In case at any time after the Closing any further action is necessary or desirable to carry out the purposes of this Agreement or the transactions contemplated hereby, each of the Parties will take such further action (including the execution and delivery of such further instruments and documents) as any other Party may reasonably request, all at the sole cost and expense of the requesting Party (unless the requesting Party is entitled to indemnification therefor under Paragraph 8B above). 8I. Option Re-Pricing. Promptly following the Closing, the Company shall secure an independent third party valuation regarding the fair market value of the Company's Common Stock. In the event that the subsequently determined fair market value of the Company's Common Stock is less than the exercise price of any stock options issued and outstanding as of the Closing, the Company shall take all necessary action to re-price such stock options to match the then-assessed fair market value of the Company's Common Stock. 8J. Option Grants. The Parties acknowledge that, following the Closing, the Company intends to grant options to purchase an aggregate of 1,285,000 shares of the Company's Common Stock to the holders of options to purchase the Company's Common Stock immediately prior to the Closing (other than James C. Jordan), and that the exercise price for such options shall be equal to the fair market value of the Company's Common Stock at the time of grant. Section 9. Definitions. For the purposes of this Agreement, the following terms have the meanings set forth below: "Affiliate" of any particular Person means any other Person controlling, controlled by or under common control with such particular Person, where "control" means the possession, directly or indirectly, of the power to direct the management and policies of a Person whether through the ownership of voting securities, contract or otherwise. "Affiliated Group" means any affiliated group as defined in Code Section 1504 that has filed a consolidated return for federal income tax purposes (or any similar group under state, local or foreign law) for a period during which the Company or any of its Subsidiaries was a member. "Agreement" has the meaning set forth in the Preamble. -45- 47 "Applicable Rate" means the base rate basis charged by the Bank from time to time pursuant to the Senior Loan Documents. "Articles of Incorporation" has the meaning set forth in Paragraph 1A(i). "Bank" means NationsBank of Texas, N.A., a national banking association. "Bylaws" has the meaning set forth in Paragraph 2C. "CERCLA" means the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended. "Closing" has the meaning set forth in Paragraph 1D. "Closing Date" has the meaning set forth in Paragraph 1D. "COBRA" has the meaning set forth in Paragraph 5W(ii). "Code" means the Internal Revenue Code of 1986, as amended, and any reference to any particular Code section shall be interpreted to include any revision of or successor to that section regardless of how numbered or classified. "Common Stock" has the meaning set forth in Paragraph 1A(i). "Company Parties" has the meaning set forth in Paragraph 8B(i). "Company Transaction" has the meaning set forth in Paragraph 4J. "Confidential Information" means all information of a confidential or proprietary nature (whether or not specifically labeled or identified as "confidential"), in any form or medium, that is or was disclosed to, or developed or learned by, any Seller and that relates to the business, products, services or research or development of the Company or its Subsidiaries or their respective suppliers, distributors or customers. Confidential Information includes, but is not limited to, the following: (i) internal business information (including information relating to strategic and staffing plans and practices, business, training, marketing, promotional and sales plans and practices, cost, rate and pricing structures and accounting and business methods); (ii) identities of, individual requirements of, specific contractual arrangements with, and information about, the Company's suppliers, distributors and customers and their confidential information; (iii) trade secrets, know-how, compilations of data and analyses, techniques, systems, formulae, research, records, reports, manuals, documentation, models, data and data bases relating thereto; (iv) inventions, innovations, improvements, developments, methods, designs, analyses, drawings, reports and all similar or related information (whether or not patentable) and (v) other Intellectual Property Rights. Confidential Information shall not include information that a Seller can demonstrate is publicly known through -46- 48 no wrongful act or breach of any obligation of confidentiality or was rightfully received by such Seller from a third party without a breach of any obligation of confidentiality by such third party. "Confidentiality Agreement" has the meaning set forth in Paragraph 8E. "Encumbrances" has the meaning set forth in Paragraph 6C. "Environmental Lien" shall mean any Lien, whether recorded or unrecorded, in favor of any governmental entity, relating to any liability of the Company arising under any Environmental and Safety Requirements. "Environmental and Safety Requirements" shall mean all federal, state, local and foreign statutes, regulations, ordinances and other provisions having the force or effect of law, all judicial and administrative orders and determinations, all contractual obligations and all common law, in each case concerning public health and safety, worker health and safety and pollution or protection of the environment (including, without limitation, all those relating to the presence, use, production, generation, handling, transport, treatment, storage, disposal, distribution, labeling, testing, processing, discharge, Release, threatened Release, control or cleanup of any hazardous or otherwise regulated materials, substances or wastes, chemical substances or mixtures, pesticides, pollutants, contaminants, toxic chemicals, petroleum products or byproducts, asbestos, polychlorinated biphenyls, noise, radiation or radon), each as amended and as now or hereafter in effect. "ERISA" has the meaning set forth in Paragraph 5W(i). "Escrow Account" has the meaning set forth in Paragraph 1D(iii). "Escrow Agent" means First Trust of California, National Association. "Escrow Agreement" has the meaning set forth in Paragraph 1D(v). "Escrow Amount" has the meaning set forth in the Escrow Agreement. "Exchange Act" means, the Securities Exchange Act of 1934, as amended, or any similar federal law then in force. "401(k) Plan" has the meaning set forth in Paragraph 5W(iv). "Financing" means the purchase of Preferred Stock by the SBIC Purchaser hereunder. "GAAP" means United States generally accepted accounting principles. "Governmental Approvals" has the meaning set forth in Paragraph 2Q. -47- 49 "Hart-Scott-Rodino Act" has the meaning set forth in Paragraph 2Q. "Indebtedness" means at a particular time, without duplication, (i) any indebtedness for borrowed money or issued in substitution for or exchange of indebtedness for borrowed money, (ii) any indebtedness evidenced by any note, bond, debenture or other debt security, (iii) any indebtedness for the deferred purchase price of property or services with respect to which a Person is liable, contingently or otherwise, as obligor or otherwise (other than trade payables and other current liabilities incurred in the ordinary course of business which are not more than six months past due), (iv) any commitment by which a Person assures a creditor against loss (including contingent reimbursement obligations with respect to letters of credit), (v) any indebtedness guaranteed in any manner by a Person (including guarantees in the form of an agreement to repurchase or reimburse), (vi) any obligations under capitalized leases with respect to which a Person is liable, contingently or otherwise, as obligor, guarantor or otherwise, or with respect to which obligations a Person assures a creditor against loss, (vii) any indebtedness secured by a Lien on a Person's assets and (viii) any unsatisfied obligation for "withdrawal liability" to a "multiemployer plan" as such terms are defined under ERISA. "Indemnitee" has the meaning set forth in Paragraph 8B(v). "Indemnitor" has the meaning set forth in Paragraph 8B(v). "Institute" has the meaning set forth in Paragraph 8G(ii). "Intellectual Property Rights" means all (i) patents, patent applications, patent disclosures and inventions, (ii) internet domain names, trademarks, service marks, trade dress, trade names, logos and corporate names and registrations and applications for registration thereof together with all of the goodwill associated therewith, (iii) copyrights (registered or unregistered) and copyrightable works and registrations and applications for registration thereof, (iv) mask works and registrations and applications for registration thereof, (v) computer software, data, data bases and documentation thereof, (vi) trade secrets and other confidential information (including ideas, formulas, compositions, inventions (whether patentable or unpatentable and whether or not reduced to practice), know-how, manufacturing and production processes and techniques, research and development information, drawings, specifications, designs, plans, proposals, technical data, copyrightable works, financial and marketing plans and customer and supplier lists and information), and (vii) copies and tangible embodiments thereof (in whatever form or medium). "International Trade Laws and Regulations" shall mean all federal, state, local and foreign statutes, executive orders, proclamations, regulations, rules, directives, decrees, ordinances and similar provisions having the force or effect of law and all judicial and administrative orders, rulings, determinations and common law concerning the importation of merchandise, the export or reexport of products, services and technology, the terms and conduct of international transactions, making or receiving international payments and the authorization to hold an ownership interest in a business located in a country other than the United States, including but not limited to the Tariff -48- 50 Act of 1930 as amended and other laws administered by the United States Customs Service, regulations issued or enforced by the United States Customs Service, the Export Administration Act of 1979 as amended, the Export Administration Regulations, the International Emergency Economic Powers Act, the Arms Export Control Act, the International Traffic in Arms Regulations, any other export controls administered by an agency of the United States government, Executive Orders of the President regarding embargoes and restrictions on trade with designated countries and Persons, the embargoes and restrictions administered by the United States Office of Foreign Assets Control, the Foreign Corrupt Practices Act, the antiboycott regulations administered by the United States Department of Commerce, the antiboycott regulations administered by the United States Department of the Treasury, legislation and regulations of the United States and other countries implementing the North American Free Trade Agreement (NAFTA), antidumping and countervailing duty laws and regulations, laws and regulations by other countries concerning the ability of U.S. Persons to own businesses and conduct business in those countries, restrictions by other countries on holding foreign currency and repatriating funds and other laws and regulations adopted by the governments or agencies of other countries relating to the same subject matter as the United States statutes and regulations described above. "Investment" as applied to any Person means (i) any direct or indirect purchase or other acquisition by such Person of any notes, obligations, instruments, stock, securities or ownership interests (including partnership interests and joint venture interests) of any other Person and (ii) any capital contribution by such Person to any other Person. "Investment Transaction" has the meaning set forth in Paragraph 1B. "Latest Balance Sheet" has the meaning set forth in Paragraph 5E(i). "Leased Real Property" has the meaning set forth in Paragraph 5CC. "Lien" or "Liens" means any mortgage, pledge, security interest, encumbrance, lien or charge of any kind (including any conditional sale or other title retention agreement or lease in the nature thereof), any sale of receivables with recourse against the Company, any filing or agreement to file a financing statement as debtor under the Uniform Commercial Code or any similar statute (other than to reflect ownership by a third party of property leased to the Company under a lease which is not in the nature of a conditional sale or title retention agreement), or any subordination arrangement in favor of another Person. "Loss" or "Losses" has the meaning set forth in Paragraph 8B(i). "Material Adverse Effect" means a material and adverse effect upon the business, operations, assets, liabilities, financial condition, operating results, cash flow, net worth or employee, customer or supplier relations of the Company. "Netcom Europe" has the meaning set forth in Paragraph 1A(ii). -49- 51 "Other Plans" has the meaning set forth in Paragraph 5W(v). "Other Sellers" has the meaning set forth in Paragraph 2H. "Party" or "Parties" has the meaning set forth in the Preamble. "Permitted Encumbrances" shall mean (i) statutory liens for current Taxes or other governmental charges not yet due and payable or the amount or validity of which is being contested in good faith by appropriate proceedings by the Company and for which appropriate reserves have been established in accordance with GAAP; (ii) mechanics', carriers', workers', repairers' and similar statutory liens arising or incurred in the ordinary course of business for amounts which are not delinquent and which are not, individually or in the aggregate, material to the Company's business; (iii) zoning, entitlement, building and other land use regulations imposed by governmental agencies having jurisdiction over the Leased Real Property which are not violated by the current use and operation of the Leased Real Property; (iv) covenants, conditions, restrictions, easements and other similar matters of record affecting title to the Leased Real Property which do not materially impair the occupancy or use of the Leased Real Property for the purposes for which it is currently used in connection with the Company's business; (v) Liens of landlords or lessors under leases arising by contract or operation of law; (vi) Liens arising from purchase money or capitalized leases for capital assets used in Company's business and rights of lessors under capital leases; provided that no such Liens shall extend to any assets of the Company other than those financed by such purchase money obligation or capital lease (and the proceeds thereof); (vii) Liens incurred to secure the purchase price, cost of construction or improvement of property or Liens incurred to secure the Indebtedness incurred to finance such purchase price or cost; provided that (a) any such Lien shall attach only to the property so purchased, constructed or improved, and (b) the amount of Indebtedness secured by any such Liens hall not exceed the purchase price of such property; (viii) Liens in favor of customs and revenue authorities which secure payment of customs in connection with the importation of goods in the ordinary course of business; (ix) Liens which constitute rights of set-off of a customary nature or bankers' Liens on amounts on deposit, whether arising by contract or by operation of law, in connection with arrangements entered into with depository institutions in the ordinary course of business; and (x) Liens on insurance policies or the proceed of insurance policies incurred solely to secure the financing of premiums owing with respect thereto. "Person" means an individual, a partnership, a corporation, a limited liability company, an association, a joint stock company, a trust, a joint venture, an unincorporated organization and a governmental entity or any department, agency or political subdivision thereof. "Plans" has the meaning set forth in Paragraph 5W(vi). "Preferred Stock" has the meaning set forth in Paragraph 1A(iii). "Product Certifications" has the meaning set forth in Paragraph 5I(ii). -50- 52 "Purchase Price" has the meaning set forth in Paragraph 1B. "Purchaser Indemnified Parties" has the meaning set forth in Paragraph 8B(ii). "Purchaser" or "Purchasers" has the meaning set forth in the Preamble. "Registration Agreement" has the meaning set forth in Paragraph 2E. "Release" shall have the meaning set forth in CERCLA. "Representatives" has the meaning set forth in Paragraph 8G(i). "Repurchase Price" has the meaning set forth in Paragraph 1A(v); provided that, for purposes of Paragraph 8B(iii), "Repurchase Price" means $146,242,089. "Repurchase Transaction" has the meaning set forth in Paragraph 1C. "Repurchased Shares" has the meaning set forth in Paragraph 1A(v). "Requisite Purchasers" means those Purchasers holding at least 66-2/3% of the Common Stock issued or issuable upon conversion of the Convertible Preferred Stock held (or to be purchased) by all of the Purchasers. "Restrictive Covenants" has the meaning set forth in Paragraph 8D(iii). "Restricted Securities" means (i) the Preferred Stock issued hereunder, (ii) the Common Stock issued upon conversion of the Convertible Preferred Stock issued hereunder, (iii) any other securities of the Company held by any of the Parties (including any Common Stock held by the Sellers) as of the Closing Date and (iv) any securities issued or exchanged with respect to the securities referred to in clauses (i), (ii) and (iii) above by way of a stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization. As to any particular Restricted Securities, such securities shall cease to be Restricted Securities when they have been (a) effectively registered under the Securities Act and disposed of in accordance with the registration statement covering them, (b) been distributed to the public through a broker, dealer or market maker pursuant to Rule 144 (or any similar provision then in force) under the Securities Act or become eligible for sale pursuant to Rule 144(k) (or any similar provision then in force) under the Securities Act or (c) been otherwise transferred and new certificates for them not bearing the Securities Act legend set forth in Paragraph 11C(v) have been delivered by the Company in accordance with Paragraph 11C(v). Whenever any particular securities cease to be Restricted Securities, the holder thereof shall be entitled to receive from the Company, without expense, new securities of like tenor not bearing a Securities Act legend of the character set forth in Paragraph 11C(v). -51- 53 "SBA" means the United States Small Business Administration, and any successor agency performing the functions thereof. "SBIC" means a Small Business Investment Company licensed by the SBA under the SBIC Act. "SBIC Act" means the Small Business Investment Act of 1958, as amended. "SBIC Purchaser" means NationsBanc Capital Corp. "SBIC Regulations" means the SBIC Act and the regulations issued by the SBA thereunder, codified at Title 13 of the Code of Federal Regulations ("13 CFR"), Parts 107 and 121. "Securities Act" means the Securities Act of 1933, as amended, or any similar federal law then in force. "Seller or Sellers" has the meaning set forth in the preamble. "Seller Representative" means Marc Hamon. "Senior Debt Transaction" means the financing to be provided to the Company at the Closing pursuant to the Senior Loan Documents. "Senior Loan Documents" means the Credit Agreement, dated as of the Closing Date, by and among the Company, the Bank and the other lenders named therein, and all other agreements and instruments contemplated thereby, in each case as the same may be amended or modified from time to time in accordance with their respective terms. "Shareholders Agreement" has the meaning set forth in Paragraph 2D. "Stock Option Plans" has the meaning set forth in Paragraph 2F. "Stock Purchase Agreement" has the meaning set forth in Paragraph 2H. "Subsidiary" means, with respect to any Person, any corporation, limited liability company, partnership, association or other business entity of which (i) if a corporation, a majority of the total voting power of shares of stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by that Person or one or more of the other Subsidiaries of that Person or a combination thereof, or (ii) if a limited liability company, partnership, association or other business entity, a majority of the partnership or other similar ownership interest thereof is at the time owned or controlled, directly or indirectly, by that Person or one or more Subsidiaries of that Person or a combination thereof. For purposes hereof, a Person or Persons shall be deemed to have -52- 54 a majority ownership interest in a limited liability company, partnership, association or other business entity if such Person or Persons shall be allocated a majority of limited liability company, partnership, association or other business entity gains or losses or shall be or control any managing director or general partner of such limited liability company, partnership, association or other business entity. "Tax" or "Taxes" means federal, state, county, local, foreign or other income, gross receipts, ad valorem, franchise, profits, sales or use, transfer, registration, excise, utility, environmental, communications, real or personal property, capital stock, license, payroll, wage or other withholding, employment, social security, severance, stamp, occupation, alternative or add-on minimum, estimated and other taxes of any kind whatsoever (including deficiencies, penalties, additions to tax, and interest attributable thereto) whether disputed or not. "Tax Return" means any return, information report or filing with respect to Taxes, including any schedules attached thereto and including any amendment thereof. "Third Party Approvals" has the meaning set forth in Paragraph 2P. "Treasury Regulations" means the United States Treasury Regulations promulgated under the Code, and any reference to any particular Treasury Regulation section shall be interpreted to include any final or temporary revision of or successor to that section regardless of how numbered or classified. Section 10. Termination. 10A. Conditions of Termination. This Agreement may be terminated at any time prior to the Closing: (i) by the mutual written consent of the Parties; (ii) by the Requisite Purchasers if there has been a material misrepresentation, material breach of warranty or material breach of a covenant by the Company or any Seller in the representations and warranties or covenants set forth in this Agreement or the Schedules and Exhibits attached hereto, which in the case of any breach of covenant has not been cured within twenty (20) days after written notification thereof by the Requisite Purchasers to the Company and the Sellers; (iii) by the Company and the Sellers if there has been a material misrepresentation, material breach of warranty or material breach of covenant by the Purchasers in the representations and warranties or covenants set forth in this Agreement or the Schedules and Exhibits attached hereto, which in the case of any breach of covenant has not been cured within twenty (20) days after written notification thereof by the Company and the Sellers to the Purchasers; or -53- 55 (iv) by the Requisite Purchasers or the Company and the Sellers if the transactions contemplated hereby have not been consummated by September 15, 1997; provided that the Party electing termination pursuant to this clause (iv) is not in breach of any of its representations, warranties, covenants or agreements contained in this Agreement or the Schedules and Exhibits attached hereto. In the event of termination by either the Requisite Purchasers or the Company and the Sellers pursuant to this Paragraph 10A, written notice thereof (describing in reasonable detail the basis therefor) shall forthwith be delivered to the other Parties. 10B. Effect of Termination. In the event of termination of this Agreement by either the Requisite Purchasers or the Company and the Seller Representative as provided above, this Agreement shall forthwith become void and of no further force and effect, except that the covenants and agreements set forth in the last two sentences of Paragraph 4J and Paragraphs 8E, 10A, 10B, 11A, 11B, 11D, 11E, 11F, 11G, 11H, 11I, 11J, 11M, 11O, 11P, 11Q and 11R shall survive such termination indefinitely, and except that nothing in Paragraph 10A or this Paragraph 10B shall be deemed to release any Party from any liability for any breach by such Party of the terms and provisions of this Agreement or to impair the right of any Party to compel specific performance by another Party of its obligations under this Agreement. Section 11. Miscellaneous. 11A. Fees and Expenses. Each Party shall pay all of its own fees and expenses (including fees and expenses of legal counsel, accountants, investment bankers and other representatives and consultants) in connection with this Agreement and the consummation of the transactions contemplated hereby; provided that upon the consummation of the Closing hereunder, the Company shall pay all such fees and expenses incurred by the Parties or reimburse the Parties for such fees and expenses. In addition, the Company shall pay, and shall hold each Purchaser harmless against liability for the payment of, all stamp and other Taxes which may be payable in respect of the execution and delivery of this Agreement or the issuance, delivery or acquisition of any Preferred Stock or the issuance of any Common Stock upon conversion of the Convertible Preferred Stock. If any legal action or other proceeding relating to this Agreement, the agreements contemplated hereby, the transactions contemplated hereby or thereby or the enforcement of any provision of this Agreement or the agreements contemplated hereby is brought against any Party, the prevailing Party in such action or proceeding shall be entitled to recover all reasonable expenses relating thereto (including attorneys' fees and expenses) from the Party against which such action or proceeding is brought in addition to any other relief to which such prevailing Party may be entitled. 11B. Remedies. The Purchasers shall have all rights and remedies set forth in this Agreement and the Articles of Incorporation and all rights and remedies which the Purchasers have been granted at any time under any other agreement or contract executed in connection with the transactions contemplated hereby and, with respect to any additional rights the Purchasers may have against the Company, all of the rights which the Purchasers have under applicable law. Each of the -54- 56 Parties acknowledges and agrees that the other Parties would be damaged irreparably in the event any of the provisions of this Agreement are not performed in accordance with their specific terms or otherwise are breached. Accordingly, each of the Parties agrees that the other Parties shall be entitled to an injunction or injunctions to prevent breaches of the provisions of this Agreement and to enforce specifically this Agreement and the terms and provisions hereof in any action instituted in any court of the United States or any state thereof having jurisdiction over the Parties and the matter. 11C. Transfer of Restricted Securities. (i) Restricted Securities are transferable only pursuant to (a) public offerings registered under the Securities Act, (b) Rule 144 or Rule 144A of the Securities and Exchange Commission (or any similar rule or rules then in force) if such rule is available and (c) subject to the conditions specified in subparagraph (ii) below, any other legally available means of transfer. (ii) In connection with the transfer of any Restricted Securities (other than a transfer described in clause (a) or (b) of subparagraph (i) above), the holder thereof shall deliver written notice to the Company describing in reasonable detail the transfer or proposed transfer, together with an opinion of Kirkland & Ellis, Wilson Sonsini Goodrich & Rosati or other counsel which (to the Company's reasonable satisfaction) is knowledgeable in securities law matters to the effect that such transfer of Restricted Securities may be effected without registration of such Restricted Securities under the Securities Act. In addition, if the holder of the Restricted Securities delivers to the Company an opinion of Kirkland & Ellis, Wilson Sonsini Goodrich & Rosati or such other counsel that no subsequent transfer of such Restricted Securities shall require registration under the Securities Act, the Company shall promptly upon such contemplated transfer deliver new certificates or instruments, as the case may be, for such Restricted Securities which do not bear the Securities Act legend set forth in Paragraph 11C(v) below. If the Company is not required to deliver new certificates or instruments, as the case may be, for such Restricted Securities not bearing such legend, the holder thereof shall not transfer the same until the prospective transferee has confirmed to the Company in writing its agreement to be bound by the conditions contained in this Paragraph 11C(ii) and Paragraph 11C(v) below. (iii) Upon the request of a holder of Restricted Securities, the Company shall promptly supply to such holder or such holder's prospective transferees all information regarding the Company required to be delivered in connection with a transfer pursuant to Rule 144A of the Securities and Exchange Commission. (iv) If any Restricted Securities become eligible for sale pursuant to Rule 144(k), the Company shall, upon the request of the holder of such Restricted Securities, remove the legend set forth in Paragraph 11C(v) from the certificates or instruments, as the case may be, representing such Restricted Securities. -55- 57 (v) Each certificate or instrument representing Restricted Securities shall be imprinted with a legend in substantially the following form: "The securities represented hereby have not been registered under the Securities Act of 1933, as amended. The transfer of the securities represented hereby is subject to the conditions specified in the Recapitalization Agreement dated as of August 29, 1997, by and among the issuer (the "Company") and certain investors, and the Company reserves the right to refuse the transfer of such securities until such conditions have been fulfilled with respect to such transfer. A copy of such conditions shall be furnished by the Company to the holder hereof upon written request and without charge." 11D. Consent to Amendments. This Agreement may be amended, or any provision of this Agreement may be waived; provided that any such amendment or waiver shall be binding upon the Company only if set forth in a writing executed by the Company and referring specifically to the provision alleged to have been amended or waived, any such amendment or waiver shall be binding upon the Sellers only if set forth in a writing executed by the Seller Representative and referring specifically to the provision alleged to have been amended or waived, and any such amendment or waiver shall be binding upon the Purchasers only if set forth in a writing executed by the Requisite Purchasers and referring specifically to the provision alleged to have been amended or waived. No course of dealing between or among the Parties shall be deemed effective to modify, amend or discharge any part of this Agreement or any rights or obligations of any Party under or by reason of this Agreement. 11E. Successors and Assigns. (i) This Agreement and all covenants and agreements contained herein and rights, interests or obligations hereunder, by or on behalf of any of the Parties hereto, shall bind and inure to the benefit of the respective successors and assigns of the Parties hereto whether so expressed or not, except that neither this Agreement nor any of the covenants and agreements herein or rights, interests or obligations hereunder may be assigned or delegated by any Seller, or assigned or delegated by the Company prior to the Closing, without the prior written consent of the Requisite Purchasers. (ii) Each of the Purchasers may (at any time prior to the Closing), in its sole discretion, assign in whole or in part its rights and obligations pursuant to this Agreement (including the right to purchase any Preferred Stock) to one or more of its Affiliates, and each of the Purchasers may, in its sole discretion, direct the Company to convey any Preferred Stock to one or more of its Affiliates subject to compliance with applicable securities laws. In connection with any such assignment, the assigning Purchaser shall cause the prospective assignee to execute and deliver to the Parties a counterpart to this Agreement and the Shareholders Agreement and an acknowledgment by such Person agreeing to be bound by all terms and provisions hereof as a "Purchaser" hereunder and as "Investor" and "Shareholder" under the Shareholders Agreement. Each -56- 58 of the Purchasers and, following the Closing, the Company and its Subsidiaries may assign its rights pursuant to this Agreement, including its rights to indemnification, to any of its lenders as collateral security. Each of the Purchasers and, following the Closing, the Company and its Subsidiaries may assign this Agreement and its rights and obligations hereunder in connection with a merger or consolidation involving the Company or any of its Subsidiaries or in connection with a sale of stock or assets of the Company or any of its Subsidiaries or other disposition of the Company or any of its Subsidiaries. 11F. Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement or the application of any such provision to any Person or circumstance shall be held to be prohibited by, illegal or unenforceable under applicable law in any respect by a court of competent jurisdiction, such provision shall be ineffective only to the extent of such prohibition or illegality or unenforceability, without invalidating the remainder of such provision or the remaining provisions of this Agreement. 11G. Counterparts. This Agreement may be executed simultaneously in counterparts (including by means of telecopied signature pages), any one of which need not contain the signatures of more than one Party, but all such counterparts taken together shall constitute one and the same Agreement. 11H. Descriptive Headings; Interpretation. The headings and captions used in this Agreement and the table of contents to this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Any capitalized terms used in any Schedule or Exhibit attached hereto and not otherwise defined therein shall have the meanings set forth in this Agreement. The use of the word "including" herein shall mean "including without limitation." The Parties intend that each representation, warranty and covenant contained herein shall have independent significance. If any Party has breached any representation, warranty or covenant contained herein in any respect, the fact that there exists another representation, warranty or covenant relating to the same subject matter (regardless of the relative levels of specificity) which the Party has not breached shall not detract from or mitigate the fact that the Party is in breach of the first representation, warranty or covenant. 11I. Entire Agreement. This Agreement and the agreements and documents referred to herein contain the entire agreement and understanding between the Parties with respect to the subject matter hereof and supersede all prior agreements and understandings (including that certain letter agreement, dated July 20, 1997, between Summit Partners, L.P., Montgomery Securities and the Company), whether written or oral, relating to such subject matter in any way. 11J. No Third-Party Beneficiaries. This Agreement is for the sole benefit of the Parties and their permitted successors and assigns and nothing herein expressed or implied shall give or be construed to give any Person, other than the Parties and such permitted successors and assigns, any legal or equitable rights hereunder. -57- 59 11K. Schedules. Nothing in any Schedule attached hereto shall be adequate to disclose an exception to a representation or warranty made in this Agreement unless such Schedule identifies the exception with particularity. Without limiting the generality of the foregoing, the mere listing (or inclusion of a copy) of a document or other item shall not be adequate to disclose an exception to a representation or warranty made in this Agreement, unless the representation or warranty has to do with the existence of the document or other item itself. No exceptions to any representations or warranties disclosed on one Schedule shall constitute an exception to any other representations or warranties made in this Agreement unless the substance of such exception is disclosed as provided herein on each such other applicable Schedule or a specific cross-reference to a disclosure on another Schedule is made. 11L. Cooperation on Tax Matters. The Parties shall cooperate fully, as and to the extent reasonably requested by each Party and at the requesting Party's expense, in connection with any audit, litigation or other proceeding with respect to Taxes. Such cooperation shall include the retention and (upon any Party's request) the provision of records and information which are reasonably relevant to any such audit, litigation or other proceeding and making employees available on a mutually convenient basis to provide additional information and explanation of any material provided hereunder. The Parties agree (i) to retain all books and records with respect to Tax matters pertinent to the Company and its Subsidiaries relating to any taxable period beginning before the Closing Date until the expiration of the statute of limitations (and, to the extent notified by any Party, any extensions thereof) applicable to such taxable periods, and to abide by all record retention agreements entered into with any taxing authority, and (ii) to give each Party reasonable written notice prior to transferring, destroying or discarding any such books and records and, if any Party so requests, the Purchasers, the Company or the Sellers, as the case may be, shall allow such party to take possession of such books and records. 11M. Schedules and Exhibits. All Schedules and Exhibits attached hereto or referred to herein are hereby incorporated in and made a part of this Agreement as if set forth in full herein. 11N. Treatment of the Preferred Stock. The Company covenants and agrees that (i) so long as federal income tax laws prohibit a deduction for distributions made by the Company with respect to preferred stock, it shall treat all distributions paid by it on the Preferred Stock as nondeductible dividends on all of its tax returns, (ii) it shall treat the Preferred Stock as preferred stock in all of its financial statements and other reports and shall treat all distributions paid by it on the Preferred Stock as dividends on preferred stock in such statements and reports. The Company agrees that the "issue price" of the Redeemable Preferred Stock for purposes of Code Section 305 is equal to $100 per share. Accordingly, the Company will not report the Redeemable Preferred Stock as having any constructive distributions under Code Section 305. The Company agrees that the Convertible Preferred Stock is stock which participates in corporate growth to a significant extent within the meaning of Treasury Regulation 1.305-5(a), and hence will not be treated as preferred stock for purposes of Code Section 305 and the regulations thereunder. Accordingly, the Company has determined -58- 60 that there will not be constructive dividends under Treasury Regulation Section 1.305-5(b) with respect to the Convertible Preferred Stock. 11O. Governing Law. The corporate law of the State of California shall govern all issues and questions concerning the relative rights and obligations of the Company and the holders of its equity securities. All other issues and questions concerning the construction, validity, enforcement and interpretation of this Agreement and the Schedules and Exhibits hereto shall be governed by, and construed in accordance with, the laws of the State of California without giving effect to any choice of law or conflict of law rules or provisions (whether of the State of California or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of California. In furtherance of the foregoing, the internal law of the State of California shall control the interpretation and construction of this Agreement (and all Schedules and Exhibits hereto), even though under that jurisdiction's choice of law or conflict of law analysis, the substantive law of some other jurisdiction would ordinarily apply. 11P. Notices. All notices, demands or other communications to be given or delivered under or by reason of the provisions of this Agreement shall be in writing and shall be deemed to have been given when delivered personally to the recipient, one day after being sent to the recipient by reputable overnight courier service (charges prepaid), upon machine-generated acknowledgment of receipt after transmittal by facsimile or five days after being mailed to the recipient by certified or registered mail, return receipt requested and postage prepaid. Such notices, demands and other communications shall be sent to the Purchasers, the Sellers and the Company at the addresses indicated below or to such other address or to the attention of such other person as the recipient party has specified by prior written notice to the sending party. The Company Netcom Systems, Inc. 20550 Nordoff Street Chatsworth, California 91311 Attn: Chief Executive Officer Phone: (818) 700-5100 Facsimile: (818) 700-5109 -59- 61 with a copy to: (which shall not constitute notice to the Company) Wilson Sonsini Goodrich & Rosati 650 Page Mill Road Palo Alto, California 94304 Attn: Steven E. Bochner, Esq. Phone: (415) 354-4110 Facsimile: (415) 496-4084 Summit Partners, L.P. 499 Hamilton Avenue, Suite 200 Palo Alto, California 94301 Attn: Mr. Walter G. Kortschak Phone: (415) 321-1166 Facsimile: (415) 321-1188 Northstar Investors, LLC c/o Montgomery Securities 600 Montgomery Street San Francisco, California 94111 Attn: Mr. Derek Lemke Phone: (415) 627-2682 Facsimile: (415) 249-5704 NationsBanc Capital Corp. NationsBank Corporate Center 10th Floor 100 North Tryon Charlotte, North Carolina 28255 Attn: Mr. Robert H. Sheridan III Phone: (704) 386-5109 Facsimile: (704) 386-6432 -60- 62 Kirkland & Ellis 200 East Randolph Drive Chicago, Illinois 60601 Attn: Ted H. Zook, Esq. Phone: (312) 861-2294 Facsimile: (312) 861-2200 Fennesbresque, Clark, Swindell & Hay NationsBank Corporate Center 29th Floor 100 North Tryon Street Charlotte, North Carolina 28202 Attn: John S. Chinuntdet, Esq. Phone: (704) 338-4716 Facsimile: (704) 347-3838 The Sellers: To the Sellers at their respective addresses listed on the Schedule of Sellers attached hereto. with a copy to: (which shall not constitute notice to the Sellers) Wilson Sonsini Goodrich & Rosati 650 Page Mill Road Palo Alto, California 94304 Attn: Steven E. Bochner, Esq. Phone: (415) 354-4110 Facsimile: (415) 496-4084 The Purchasers: To the Purchasers at their respective addresses listed on the Schedule of Purchasers attached hereto -61- 63 with copy to: (which shall not constitute notice to the Purchasers) Kirkland & Ellis 200 East Randolph Drive Chicago, Illinois 60601 Attn: Ted H. Zook, Esq. Phone: (312) 861-2294 Facsimile: (312) 861-2200 Fennesbresque, Clark, Swindell & Hay NationsBank Corporate Center 29th Floor 100 North Tryon Street Charlotte, North Carolina 28202 Attn: John S. Chinuntdet, Esq. Phone: (704) 338-4716 Facsimile: (704) 347-3838 11Q. No Strict Construction. The Parties have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the Parties, and no presumption or burden of proof shall arise favoring or disfavoring any Party by virtue of the authorship of any of the provisions of this Agreement. * * * * * -62- 64 IN WITNESS WHEREOF, the parties hereto have executed this Recapitalization Agreement on the date first written above. NETCOM SYSTEMS, INC. By: ------------------------------------- Its: ------------------------------------ SUMMIT VENTURES IV., L.P. By: Summit Partners, IV, L.P., its General Partner By: Stamps, Woodsum & Co. IV, its General Partner By: ------------------------------------- General Partner SUMMIT INVESTORS III, L.P. By: ------------------------------------- Authorized Signatory NATIONSBANC CAPITAL CORP. By: ------------------------------------- Todd A. Binkowski, its Authorized Signatory NORTHSTAR INVESTORS, LLC By: ------------------------------------- Its: ------------------------------------ [Signature Page to Recapitalization Agreement] 65 SPITFIRE CAPITAL PARTNERS, L.P. By: MS Spitfire, LLC, its General Partner By: ------------------------------------- William B. Bunting Its: ------------------------------------ Peter Mooney, as nominee for BROADVIEW PARTNERS GROUP By: ------------------------------------- Its: ------------------------------------ BAIN SECURITIES, INC. By: ------------------------------------- Leonard C. Banos, its Vice President WS INVESTMENT COMPANY 97B By: ------------------------------------- Its: ------------------------------------ WSGR PROFIT SHARING TRUST FBO STEVEN E. BOCHNER By: ------------------------------------- Its: ------------------------------------ ---------------------------------------- Steven E. Bochner ---------------------------------------- Nevan C. Elam ---------------------------------------- Todd Cleary [Signature Page to Recapitalization Agreement] 66 ---------------------------------------- Marc Hamon ---------------------------------------- Henri Hamon ---------------------------------------- James C. Jordan ---------------------------------------- Jing Zhang ---------------------------------------- Warren B. Phelps III ---------------------------------------- Stephane Johnson ---------------------------------------- Richard Bass [Signature Page to Recapitalization Agreement] 67 SCHEDULE OF PURCHASERS
Number of Purchase Number of Purchase Total Shares of Price for Shares of Price for Purchase Redeemable Redeemable Convertible Convertible Price for Preferred Preferred Preferred Preferred Preferred Name and Address Stock Stock Stock Stock Stock - ------------------------------------------------------------------------------------------- ---------------- ---------------- Summit Ventures IV, L.P. 236,856 $ 23,685,576 11,180,936 $23,685,576 $47,371,152 c/o Summit Partners, L.P. 499 Hamilton Avenue Suite 200 Palo Alto, California 94301 Attn: Walter G. Kortschak Phone: (415) 321-1166 Facsimile: (415) 321-1188 Summit Investors III, L.P. 3,236 323,624 152,769 323,624 647,248 c/o Summit Partners, L.P. 499 Hamilton Avenue Suite 200 Palo Alto, California 94301 Attn: Walter G. Kortschak Phone: (415) 321-1166 Facsimile: (415) 321-1188 NationsBanc Capital Corp. 80,000 8,000,000 3,776,454 8,000,000 16,000,000 c/o NationsBank Capital Investors NationsBank Corporate Center, 10th Floor 100 North Tryon Charlotte, North Carolina 28255 Attn: Robert H. Sheridan III Phone: (704) 386-5109 Facsimile: (704) 386-6432 Northstar Investors, LLC 145,092 14,509,200 6,849,166 14,509,200 29,018,400 c/o Montgomery Securities 600 Montgomery Street San Francisco, California 94111 Attn: Derek Lemke Phone: (415) 627-2682 Facsimile: (415) 249-5704 Spitfire Capital Partners, L.P. 15,000 1,500,000 708,085 1,500,000 3,000,000 c/o Montgomery Securities 600 Montgomery Street San Francisco, California 94111 Attn: William Bunting Phone: (415 ) 627-2426 Facsimile: (415) 249-5704
68
Number of Purchase Number of Purchase Total Shares of Price for Shares of Price for Purchase Redeemable Redeemable Convertible Convertible Price for Preferred Preferred Preferred Preferred Preferred Name and Address Stock Stock Stock Stock Stock - ------------------------------------------------------------------------------------------- ---------------- -------------- Bain Securities, Inc. 500 50,000 23,603 50,000 100,000 c/o Bain & Company, Inc. Two Cooley Place Boston, Massachusetts 02116 Attn: Leonard C. Bands Phone: (617) 572-3178 Facsimile: (617) 572-3266 Peter Mooney, as nominee for 1,500 150,000 70,808 150,000 300,000 Broadview Partners Group c/o Broadview Associates 950 Tower Lane 18th Floor Foster City, California 94404 Attn: Stephen S. Smith Phone: (415) 378-4700 Facsimile: (415) 378-4710 WS Investment Company 97B 250 25,000 11,801 25,000 50,000 c/o Wilson, Sonsini, Goodrich & Rosati 650 Page Mill Road Palo Alto, California 94304 Attn: Steven E. Bochner, Esq. Phone: (415) 354-4110 Facsimile: (415) 496-4084 WSGR Profit Sharing Trust 100 10,000 4,721 10,000 20,000 FBO Steven E. Bochner 650 Page Mill Road Palo Alto, California 94304 Attn: Steven E. Bochner, Esq. Phone: (415) 354-4110 Facsimile: (415) 496-4084 Steven E. Bochner 93 9,300 4,343 9,200 18,500 c/o Wilson, Sonsini, Goodrich & Rosati 650 Page Mill Road Palo Alto, California 94304 Attn: Steven E. Bochner, Esq. Phone: (415) 354-4110 Facsimile: (415) 496-4084 Nevam C. Elam 50 500 2,360 5,000 10,000 c/o Wilson, Sonsini, Goodrich & Rosati 650 Page Mill Road Palo Alto, California 94304 Attn: Steven E. Bochner, Esq. Phone: (415) 354-4110 Facsimile: (415) 496-4084
69
Number of Purchase Number of Purchase Total Shares of Price for Shares of Price for Purchase Redeemable Redeemable Convertible Convertible Price for Preferred Preferred Preferred Preferred Preferred Name and Address Stock Stock Stock Stock Stock - ------------------------------------------------------------------------------------------- ---------------- ---------------- Todd Cleary 7 700 378 800 1,500 c/o Wilson, Sonsini, Goodrich & Rosati 650 Page Mill Road Palo Alto, California 94304 Attn: Steven E. Bochner, Esq. Phone: (415) 354-4110 Facsimile: (415) 496-4084 ------- ----------- ---------- ----------- ----------- 482,684 $48,268,400 22,785,424 $48,268,400 $96,536,800 ======= =========== ========== =========== ===========
70 SCHEDULE OF SELLERS
Number of Repurchased Repurchase Exercise Net Repurchase Escrow Closing Cash Name and Address Shares Price Price Price Amount Amount ---------------- ----------- ------------ ------------ -------------- ------------ ------------- Marc Hamon 8,000,000 $122,336,000 -- $122,336,000 $ 6,273,979 $116,062,021 20550 Nordoff Street Chatsworth, California 91311 James C. Jordan 840,000 12,845,280 795,000 12,050,280 617,996 11,432,284 20550 Nordoff Street Chatsworth, California 91311 Warren B. Phelps III 26,666 407,776 33,332 374,444 19,204 355,240 20550 Nordoff Street Chatsworth, California 91311 Jing Zhang 80,000 1,223,360 133,333 1,090,027 55,902 1,034,125 20550 Nordoff Street Chatsworth, California 91311 Stephane Johnson 26,666 407,776 33,332 374,444 19,204 355,240 20550 Nordoff Street Chatsworth, California 91311 Richard Bass 160,000 2,446,720 0 2,446,720 125,480 2,321,240 ------------ ------------ ------------ ------------ ------------ ------------ 9,133,332 $139,666,912 $ 994,997 $138,671,915 $ 7,111,765 $131,560,150 ============ ============ ============ ============ ============ ============
EX-10.6 10 CREDIT AGREEMENT 1 EXHIBIT 10.6 CREDIT AGREEMENT THIS CREDIT AGREEMENT is dated as of August 29, 1997, among NETCOM SYSTEMS, INC., a California corporation (the "Borrower"), the Lenders from time to time party hereto, BANKBOSTON, N.A., as documentation agent, and NATIONSBANK OF TEXAS, N.A., a national banking association, as administrative agent for the Lenders. BACKGROUND The Lenders have been requested to provide the Borrower funds to (a) consummate the Netcom Recapitalization (as hereinafter defined), (b) refinance a portion of the existing debt of the Borrower (including trade payables), (c) pay certain fees and expenses related to the Netcom Recapitalization, (d) finance acquisitions and to finance the repurchase of the Netcom Preferred Stock, in each case to the extent permitted hereunder, and (e) finance the ongoing working capital and general corporate requirements of the Borrower and its Subsidiaries (as hereinafter defined). The Lenders have agreed to provide such financing, subject to the terms and conditions set forth below. In consideration of the mutual covenants and agreements contained herein, and other good and valuable consideration hereby acknowledged, the parties hereto agree as follows: ARTICLE 1 Definitions Section 1.1 Defined Terms. For purposes of this Agreement: "Acquisition" means any transaction pursuant to which the Borrower or any of its Subsidiaries, (a) whether by means of a capital contribution or purchase or other acquisition of stock or other securities or other equity participation or interest, (i) acquires more than 50% of the equity interest in any Person pursuant to a solicitation by the Borrower or such Subsidiary of tenders of equity securities of such Person, or through one or more negotiated block, market, private or other transactions, or a combination of any of the foregoing, or (ii) makes any corporation a Subsidiary of the Borrower or such Subsidiary, or causes any corporation, other than a Subsidiary of the Borrower or such Subsidiary, to be merged into the Borrower or such Subsidiary (or agrees to be merged into any other corporation other than a wholly-owned Subsidiary (excluding directors' qualifying shares) of the Borrower or such Subsidiary), or (b) purchases all or substantially all of the business or assets of any Person or of any operating division of any Person. "Acquisition Consideration" means the consideration given by the Borrower or any of its Restricted Subsidiaries for an Acquisition, including but not limited to the fair market value of any 2 cash, property, stock or services given, the amount of any Indebtedness assumed or incurred by the Borrower or any Restricted Subsidiary of the Borrower in connection with such Acquisition and any and all obligations of the Borrower or any Restricted Subsidiary of the Borrower under or in connection with any incentive, earn-out or other similar arrangements incurred by it in connection with such Acquisition. "Administrative Agent" means NationsBank of Texas, N.A., a national banking association, as administrative agent for Lenders, or such successor administrative agent appointed pursuant to Section 10.1(b) hereof. "Advance" means any amount advanced by the Lenders to the Borrower pursuant to Article 2 hereof on the occasion of any borrowing. "Affiliate" means, as applied to any Person, any other Person that, directly or indirectly, through one or more Persons, Controls or is Controlled By or Under Common Control with, such Person. "Agreement" means this Credit Agreement, as amended, modified, supplemented or restated from time to time. "Agreement Date" means the date of this Agreement. "Applicable Base Rate Margin" means 0.00%. "Applicable Environmental Laws" means applicable laws pertaining to the protection of human health or the protection of the environment, including without limitation, the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986 (as amended from time to time, "CERCLA"), the Resource Conservation and Recovery Act of 1976, as amended by the Used Oil Recycling Act of 1980, the Solid Waste Disposal Act amendments of 1980, and the Hazardous and Solid Waste Amendments of 1984 (as amended from time to time, "RCRA"). "Applicable Law" means (a) in respect of any Person, all provisions of constitutions, statutes, rules, regulations and final orders of governmental bodies or regulatory agencies applicable to such Person and its properties, including, without limiting the foregoing, all orders and decrees of all Tribunals in proceedings or actions to which the Person in question is a party, and (b) in respect of contracts relating to interest or finance charges that are made or performed in the State of Texas, "Applicable Law" shall mean the laws of the United States of America, including without limitation 12 USC Sections 85 and 86, as amended from time to time, and any other statute of the United States of America now or at any time hereafter prescribing the maximum rates of interest on loans and extensions of credit, and the laws of the State of Texas. 2 3 "Applicable LIBOR Rate Margin" means the following per annum percentages, applicable in the following situations:
Applicability Percentage - ------------- ---------- (a) Initial Pricing Period 1.25% (b) Subsequent Pricing Period (1) The Leverage Ratio is greater than or equal to 1.50 to 1 1.50% (2) The Leverage Ratio is less than 1.50 to 1 but greater 1.25% than or equal to 1.00 to 1 (3) The Leverage Ratio is less than 1.00 0.875%
During the Subsequent Pricing Period, the Applicable LIBOR Rate Margin payable by the Borrower on the LIBOR Advances outstanding hereunder shall be subject to reduction or increase, as applicable and as set forth in the table above, on a quarterly basis according to the Leverage Ratio, determined as of the end of the most recent fiscal quarter of the Borrower; provided, that each adjustment in the LIBOR Basis as a result of a change in the Applicable LIBOR Rate Margin shall be effective on the Business Day of receipt by the Administrative Agent of the financial statements required to be delivered pursuant to Section 6.2 or 6.3 hereof, as applicable, for each such fiscal quarter, and the corresponding Compliance Certificate required pursuant to Section 6.4 hereof. If such financial statements and Compliance Certificate are not received by the Administrative Agent by the date required, the Applicable LIBOR Rate Margin shall be 1.25% until such time as such financial statements and Compliance Certificate are received. "Assignees" means any assignee of a Lender pursuant to an Assignment Agreement and shall have the meaning ascribed thereto in Section 11.6 hereof. "Assignment Agreement" has the meaning specified in Section 11.6 hereof. "Authorized Signatory" means any Senior Officer and such other senior personnel of the Borrower as may be duly authorized and designated in writing by the Borrower to execute documents, agreements and instruments on behalf of the Borrower, and to request Advances and Letters of Credit hereunder. "Base Cash Flow" means, for any date of calculation, calculated for the Borrower and its Restricted Subsidiaries on a consolidated basis, an amount equal to the sum of (a) EBITDA, minus (b) Capital Expenditures, minus (c) cash taxes. "Base Rate Advance" means any Advance bearing interest at the Base Rate Basis. 3 4 "Base Rate Basis" means, for any day, a per annum interest rate equal to the higher of (a) the sum of (i) 0.50% plus (ii) the Federal Funds Rate on such day plus (iii) the Applicable Base Rate Margin or (b) the sum of (i) the Prime Rate on such day plus (ii) the Applicable Base Rate Margin. The Base Rate Basis shall be adjusted automatically without notice as of the opening of business on the effective date of each change in the Prime Rate or Federal Funds Rate, as applicable, to account for such change. "Basle Accord" means the proposals for risk-based capital framework described by the Basle Committee on Banking Regulations and Supervisory Practices in its paper entitled "International Convergence of Capital Management and Capital Standards" dated July 1988, as amended, modified, and supplemented and in effect from time to time or any replacement thereof. "Business Day" means a day on which commercial banks are open (a) for the transaction of business in Dallas, Texas and San Francisco, California, and (b) with respect to any LIBOR Advance, for the transaction of international business (including dealings in U.S. Dollar deposits) in London, England. "Capital Expenditures" means, for any period, expenditures made by the Borrower and its Restricted Subsidiaries to acquire or construct fixed assets, plant and equipment (including renewals, improvements and replacements during such period and the aggregate amount of items leased or acquired under Capitalized Lease Obligations at the cost of the item) computed in accordance with GAAP. "Capitalized Lease Obligations" means that portion of any obligation of the Borrower or any Restricted Subsidiary of the Borrower as lessee under a lease which at the time would be required to be capitalized on a balance sheet of the Borrower or such Restricted Subsidiary prepared in accordance with GAAP. "Change of Control" means the occurrence of any of the following events after the Agreement Date: (a) any Person or any Persons acting together which would constitute a "group" (a "Group") for purposes of Section 13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or any successor provision thereto, other than the holders of the Netcom Convertible Preferred Stock as of the close of business on the Agreement Date, together with any Affiliates or Related Persons thereof, shall beneficially own (as defined in Rule 13d-3 of the Securities and Exchange Commission under the Exchange Act or any successor provision thereto) more than 50% of the aggregate Voting Power of the Borrower; or (b) any "Change of Control", "Change in Ownership", "Change in Control" or similar event or circumstance, however designated, under any agreement or document governing any Institutional Debt, the Netcom Convertible Preferred Stock or the Netcom Redeemable Preferred Stock. "Code" means the Internal Revenue Code of 1986, as amended. 4 5 "Commitments" means, collectively, the Revolving Credit Commitment and the Term Loan Commitment, as reduced from time to time in the case of the Revolving Credit Commitment pursuant to Section 2.6 hereof. "Compliance Certificate" means a certificate, signed by an Authorized Signatory, in substantially the form of Exhibit C, appropriately completed. "Control" or "Controlled By" or "Under Common Control" means possession, directly or indirectly, of power to direct or cause the direction of management or policies (whether through ownership of voting securities, by contract or otherwise); provided, however, that in any event any Person which beneficially owns, directly or indirectly, 20% or more (in number of votes) of the securities having ordinary voting power for the election of directors of a corporation shall be conclusively presumed to control such corporation. "Controlled Group" means as of the applicable date, as to any Person not an individual, all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) which are under common control with such Person and which, together with such Person, are treated as a single employer under Section 414(b), (c), (m) or (o) of the Code; provided, however, that the Subsidiaries of the Borrower shall be deemed to be members of the Borrower's Controlled Group; provided, further, however, that no Person that is Controlled By any of the owners of the Netcom Preferred Stock shall be deemed to be members of the Borrower's Controlled Group. "Debtor Relief Laws" means any applicable liquidation, conservatorship, bankruptcy, moratorium, rearrangement, insolvency, reorganization or similar debtor relief Laws affecting the rights of creditors generally from time to time in effect and applicable to the relevant case. "Default" means an Event of Default and/or any of the events specified in Section 8.1, regardless of whether there shall have occurred any passage of time or giving of notice that would be necessary in order to constitute such event an Event of Default. "Default Rate" means a simple per annum interest rate equal to (a) with respect to Base Rate Advances, the lesser of (i) the Highest Lawful Rate or (ii) the Base Rate Basis then in effect plus 2.00% or (b) with respect to LIBOR Advances, the lesser of (i) the Highest Lawful Rate or (ii) the LIBOR Basis then in effect plus 2.00%. "Determining Lenders" means, on any date of determination, any combination of Lenders having 51% of the aggregate principal amount of Advances then outstanding; provided, however, that if there are no Advances outstanding hereunder, "Determining Lenders" means any combination of Lenders whose Specified Percentages aggregate 51%. "Dividend" means, as to any Person, (a) any declaration or payment of any dividend (other than a stock dividend) on, or the making of any distribution on account of, any Equity Interests of 5 6 such Person and (b) any purchase, redemption, or other acquisition or retirement for value of any Equity Interests of such Person. "Documentation Agent" means BankBoston, N.A. "Dollar" or "$" means the lawful currency of the United States of America. "Domestic Cash and Cash Equivalents" means with respect to the Borrower and each Domestic Subsidiary of the Borrower (a) cash, (b) securities issued or directly and fully guaranteed or insured by the United States Government, or any agency or instrumentality thereof, or any state or municipality having maturities of not more than one year from the date of acquisition, (c) certificates of deposit and time deposits with maturities of one year or less from the date of acquisition, bankers' acceptances with maturities not exceeding one year and overnight bank deposits, in each case with any Lender or with any domestic commercial bank having a combined capital and surplus in excess of $100,000,000, (d) repurchase obligations with a term of not more than seven days for underlying securities of the types described in clauses (b) and (c) entered into with any financial institution meeting the qualifications specified in clause (c) above, (e) commercial paper issued by any Lender or the parent corporation of any Lender, and commercial paper rated A-1 or the equivalent thereof by Standard & Poor's Ratings Group, a Division of The McGraw-Hill Companies, Inc., a New York corporation, or P-1 or the equivalent thereof by Moody's Investors Service, Inc., and in each case maturing within 270 days after the date of acquisition, and (f) a readily redeemable "money market fund" or "money market mutual fund" advised by a bank described in clause (c) hereof, or an investment advisor registered under Section 203 of the Investment Advisors Act of 1940, that has and maintains an investment policy limiting its investments primarily to instruments of the types described in clauses (a) through (e) hereof and having on the date of such Investment total assets of at least $100,000,000.00. "Domestic Subsidiary" means any Subsidiary of the Borrower other than a Foreign Subsidiary. "EBIT" means, for any period, determined in accordance with GAAP on a consolidated basis for the Borrower and its Restricted Subsidiaries, the sum of (a) Pretax Net Income (excluding therefrom, to the extent included in determining Pretax Net Income, any items of extraordinary gain, including net gains on the sale of assets other than asset sales in the ordinary course of business, and adding thereto, to the extent included in determining Pretax Net Income, any items of extraordinary loss, including net losses on the sale of assets other than asset sales in the ordinary course of business), plus (b) interest expense (including, without limitation, all commissions, discounts, fees payable hereunder and other amounts payable in connection with any Indebtedness permitted hereunder and interest expense pursuant to Capitalized Lease Obligations). "EBITDA" means, for any period, determined in accordance with GAAP on a consolidated basis for the Borrower and its Restricted Subsidiaries, the sum of (a) EBIT, plus (b) depreciation, amortization and other non-cash charges and expenses (to the extent included in determining EBIT), 6 7 (c) accrued but unpaid dividends on the Netcom Convertible Preferred Stock and the Netcom Redeemable Preferred Stock (to the extent included in determining EBIT), plus (d) fees and expenses in connection herewith and in connection with the Netcom Recapitalization, plus (e) fees and expenses in connection with Acquisitions permitted hereunder, plus (f) write-up of assets as permitted by purchase accounting (APB Nos. 16 and 17) in connection with the acquisition of assets permitted hereunder. "Eligible Assignee" means (a) any Lender; (b) a commercial bank organized under the laws of the United States, or any state thereof, and having total assets in excess of $1,000,000,000; (c) a savings and loan association or savings bank organized under the laws of the United States, or any state thereof, having total assets in excess of $1,000,000,000, and not in receivership or conservatorship; and (d) a commercial bank organized under the laws of any other country which is a member of the Organization for Economic Cooperation and Development, or a political subdivision of any such country, and having total assets in excess of $1,000,000,000, provided that such bank is acting through a branch or agency located in the country in which it is organized or another country which is described in this clause; provided that, no Affiliate of the Borrower shall qualify as an Eligible Assignee and provided, further, that after the occurrence and during the continuance of any Event of Default, the term "Eligible Assignee" shall also include a finance company, insurance company or other financial institution or fund (whether a corporation, partnership, trust or other entity) that is engaged in making, purchasing or otherwise investing in commercial loans in the ordinary course of its business and having a combined capital and surplus of at least $100,000,000 and the central bank of any country which is a member of the Organization for Economic Cooperation and Development. "Equity Interest" means, as to any Person, the equity interests in such Person, including, without limitation, the shares of each class of capital stock in any Person that is a corporation, and each class of partnership interest (including, without limitation, general, limited and preference units) in any Person that is a partnership, and each class of member interest in any Person that is a limited liability company. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and any regulation promulgated thereunder. "ERISA Event" means, with respect to the Borrower and its Subsidiaries, (a) a Reportable Event (other than a Reportable Event not subject to the provision for 30-day notice to the PBGC pursuant to regulations issued under Section 4043 of ERISA), (b) the withdrawal of any such Person or any member of its Controlled Group from a Plan subject to Title IV of ERISA during a plan year in which it was a "substantial employer" as defined in Section 4001(a)(2) of ERISA, (c) the filing of a notice of intent to terminate under Section 4041(c) of ERISA, (d) the institution of proceedings to terminate a Plan by the PBGC, (e) the failure to make required contributions which could result in the imposition of a lien under Section 412 of the Code or Section 302 of ERISA, or (f) any other event or condition which might reasonably be expected to constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan or the 7 8 imposition of any liability under Title IV of ERISA other than PBGC premiums due but not delinquent under Section 4007 of ERISA. "Event of Default" means any of the events specified in Section 8.1, provided that any requirement for notice or lapse of time has been satisfied. "Excluded Matters" has the meaning specified in Section 5.9(a) hereof. "Federal Funds Rate" means, for any day, the 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 on such day, as published by the Federal Reserve Bank of Dallas on the Business Day next succeeding such day, provided that (a) if such day is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day, and (b) if no such rate is so published on such next succeeding Business Day, the Federal Funds Rate for such day shall be the average of the quotations for the day for such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by it. "Fee Letters" has the meaning specified in Section 2.4(b) hereof. "Fixed Charges" means, for any date of calculation, calculated for the Borrower and its Restricted Subsidiaries on a consolidated basis, the sum of, without duplication, (a) scheduled principal payments in respect of Indebtedness, plus (b) cash interest expense (including cash interest expense pursuant to Capitalized Lease Obligations), net of interest income, minus (c) amortization of discount and debt issuance costs and fees and expenses payable or amortized in connection with the Netcom Recapitalization, to the extent included in cash interest expense. "Fixed Charge Coverage Ratio" means the ratio of Base Cash Flow to Fixed Charges for the four consecutive fiscal quarters ending on the date of calculation. "Foreign Cash and Cash Equivalents" means with respect to each Foreign Subsidiary of the Borrower (a) cash, (b) securities issued or directly and fully guaranteed or insured by the government or any agency or instrumentality thereof, or any state or municipality of the jurisdiction of organization of such Foreign Subsidiary having maturities of not more than one year from the date of acquisition, (c) certificates of deposit and time deposits with maturities of one year or less from the date of acquisition, bankers' acceptances with maturities not exceeding one year and overnight bank deposits, in each case with any foreign commercial bank having a combined capital and surplus in excess of $100,000,000, (d) repurchase obligations with a term of not more than seven days for underlying securities of the types described in clauses (b) and (c) entered into with any financial institution meeting the qualifications specified in clause (c) above, and (e) a readily redeemable "money market fund" or "money market mutual fund" advised by a bank described in clause (c) hereof. 8 9 "Foreign Restricted Subsidiary" means any Foreign Subsidiary (i) designated by the Borrower as a Foreign Restricted Subsidiary in writing to the Administrative Agent, and (ii) 65% of whose Equity Interest shall be pledged to the Administrative Agent to secure the Obligations, pursuant to documentation reasonably acceptable to the Administrative Agent, provided the Lenders shall have received such board resolutions, officers' certificates, corporate and other documents and opinions of counsel as the Administrative Agent shall reasonably request in connection with such pledge. "Foreign Subsidiary" means any Subsidiary of the Borrower which is not organized under the laws of any state of the United States of America or the District of Columbia. "GAAP" means (i) as applied to periods of time prior to and including April 30, 1998, accounting principles previously utilized by the Borrower as reflected in the quarterly financial statements prepared by the Borrower prior to the Agreement Date and (ii) as applied to periods of time after April 30, 1998, generally accepted accounting principles applied on a consistent basis, set forth in the Opinions of the Accounting Principles Board of the American Institute of Certified Public Accountants, or their successors which are applicable in the circumstances as of the date in question. The requirement that such principles be applied on a consistent basis shall mean that the accounting principles applied in a current period are comparable in all material respects to those applied in a preceding period. "Guarantor" means each direct and indirect Restricted Subsidiary of the Borrower, other than any Foreign Restricted Subsidiary. "Guaranty" or "Guaranteed", means (a) as applied to an obligation of another Person, (i) a guaranty, direct or indirect, in any manner, of any part or all of such obligation, and (ii) an agreement, direct or indirect, contingent or otherwise, the practical effect of which is to assure in any way the payment or performance (or payment of damages in the event of nonperformance) of any part or all of such obligation, including, without limiting the foregoing, any reimbursement obligations with respect to amounts which may be drawn by beneficiaries of outstanding letters of credit and (b) an agreement, direct or indirect, contingent or otherwise, to maintain the net worth, working capital, earnings or other financial performance of another Person; provided, however, Guaranty does not mean (y) the endorsement of instruments for collection or deposit in the ordinary course of business and (z) customary indemnities given in connection with asset sales in the ordinary course of business. "Highest Lawful Rate" means at the particular time in question the maximum rate of interest which, under Applicable Law, the Lenders are then permitted to charge on the Obligations. If the maximum rate of interest which, under Applicable Law, the Lenders are permitted to charge on the Obligations shall change after the date hereof, the Highest Lawful Rate shall be automatically increased or decreased, as the case may be, from time to time as of the effective time of each change in the Highest Lawful Rate without notice to the Borrower. 9 10 "Indebtedness" means, with respect to any Person, without duplication, (a) all obligations for borrowed money, (b) all obligations evidenced by bonds, debentures, notes or similar instruments, (c) all obligations under conditional sale or other title retention agreements relating to property or assets purchased by such Person, (d) all obligations issued or assumed as the deferred purchase price of property or services (excluding trade accounts payable in the ordinary course of business), (e) all obligations secured by any Lien on any property or asset owned by such Person, whether or not the obligation secured thereby shall have been assumed, valued, in the case of Indebtedness not assumed, at the lesser of the amount of such Indebtedness or the fair market value of all property securing such Indebtedness, (f) to the extent not otherwise included, all Capitalized Lease Obligations of such Person, all obligations in respect of letters of credit, bankers' acceptances and similar instruments, and all net obligations under Interest Hedge Agreements, (g) the principal portion of all obligations of such Person under any synthetic lease, tax retention operating lease, off-balance sheet loan or similar off-balance sheet financing product where such transaction is considered borrowed money indebtedness for tax purposes but is classified as an Operating Lease pursuant to GAAP, (h) all preferred stock issued by such Person and required by the terms thereof to be redeemed, or for which mandatory sinking fund payments are due, by a fixed date, and (i) any Guaranty of such Person of any obligation of another Person constituting obligations of a type set forth above. "Indemnified Matters" has the meaning specified in Section 5.9(a) hereof. "Indemnitees" has the meaning specified in Section 5.9(a) hereof. "Initial Pricing Period" means the period from and including the Agreement Date to and including the Rate Adjustment Date. "Institutional Debt" means unsecured Indebtedness for borrowed money which may be raised by the Borrower after the Agreement Date in the private placement or public debt markets pursuant to terms satisfactory to the Determining Lenders, with only such changes and amendments as are not prohibited by Section 7.17 hereof, and which shall include Subordinated Debt. "Interest Hedge Agreements" means any and all agreements, devices or arrangements designed to protect at least one of the parties thereto from the fluctuations of interest rates, exchange rates or forward rates applicable to such party's assets, liabilities or exchange transactions, including, but not limited to, dollar-denominated or cross-currency interest rate exchange agreements, forward currency exchange agreements, interest rate cap, swap or collar protection agreements, and forward rate currency or interest rate options, as the same may be amended or modified and in effect from time to time, and any and all cancellations, buy backs, reversals, terminations or assignments of any of the foregoing. "Interest Period" means the period beginning on the day any LIBOR Advance is made and ending one, two, three or six months thereafter (as the Borrower shall select); provided, however, that all of the foregoing provisions are subject to the following: 10 11 (i) if any Interest Period would otherwise end on a day which is not a Business Day, such Interest Period shall be extended to the next succeeding Business Day, unless, with respect to a LIBOR Advance, the result of such extension would be to extend such Interest Period into another calendar month, in which event such Interest Period shall end on the immediately preceding Business Day; (ii) any Interest Period with respect to a LIBOR Advance 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 end on the last Business Day of a calendar month; (iii) the Borrower may not select any Interest Period which ends after the date of a scheduled principal payment on the Advances unless, after giving effect to such selection, the aggregate unpaid principal amount of the LIBOR Advances for which Interest Periods end after such scheduled principal payment shall be equal to or less than the principal amount to which the Advances are required to be reduced after such scheduled principal payment is made; (iv) the Borrower may not select any Interest Period in respect of LIBOR Advances having an aggregate amount less than $500,000; and (v) there shall be outstanding at any one time no more than five Interest Periods in the aggregate. "Investment" means any direct or indirect purchase or other acquisition of, or beneficial interest in, capital stock or other securities of any other Person which is not an Acquisition, or any direct or indirect loan, advance (other than loans or advances to employees for moving and travel expenses, drawing accounts and similar expenditures in the ordinary course of business) or capital contribution to, or investment in any other Person, including without limitation the purchase of accounts receivable of any other Person that are not current assets or do not arise in the ordinary course of business. "Issuing Bank" means NationsBank of Texas, N.A., a national banking association, in its capacity as issuer of the Letters of Credit. "Law" means any statute, law, ordinance, regulation, rule, order, writ, injunction, or decree of any Tribunal. "Lender" means each financial institution shown on the signature pages hereof so long as such financial institution maintains a portion of the Commitments or is owed any part of the Obligations (including the Administrative Agent in its individual capacity), and each Assignee that hereafter becomes a party hereto pursuant to Section 11.6 hereof, subject to the limitations set forth therein. 11 12 "L/C Related Documents" has the meaning specified in Section 2.15(e) hereof. "Letter of Credit" has the meaning specified in Section 2.15(a) hereof. "Letter of Credit Agreement" has the meaning specified in Section 2.15(b) hereof. "Letter of Credit Facility" has the meaning specified in Section 2.15(a) hereof. "Leverage Ratio" means, for any date of calculation, the ratio of Total Debt as of the date of determination to EBITDA calculated for the four consecutive fiscal quarters immediately preceding the date of calculation. For purpose of calculation of the Leverage Ratio only, with respect to assets not owned at all times during the four fiscal quarters immediately preceding the date of calculation of EBITDA, there shall be included in EBITDA the proforma EBITDA of any assets acquired during any such four fiscal quarters for the twelve months preceding the date of calculation. "LIBOR Advance" means an Advance which the Borrower requests to be made as a LIBOR Advance or which is reborrowed as a LIBOR Advance, in accordance with the provisions of Section 2.2 hereof. "LIBOR Basis" means a simple per annum interest rate equal to the lesser of (a) the Highest Lawful Rate, or (b) the sum of the LIBOR Rate plus the Applicable LIBOR Rate Margin. The LIBOR Basis shall, with respect to LIBOR Advances subject to reserve or deposit requirements, be subject to premiums for such reserve or deposit requirements assessed by each Lender to the extent incurred by such Lender, which are payable by the Borrower directly to each Lender. Once determined, the LIBOR Basis shall remain unchanged during the applicable Interest Period. "LIBOR Lending Office" means, with respect to a Lender, the office designated as its LIBOR Lending Office on Schedule 1 attached hereto, and, to the extent that same does not result in increased costs to the Borrower, such other office of the Lender or any of its Affiliates hereafter designated by notice to the Borrower and the Administrative Agent. "LIBOR Rate" means, for any LIBOR Advance for any Interest Period therefor, the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) appearing on Telerate Page 3750 (or any successor page) as the London interbank offered rate for deposits in Dollars at approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period for a term comparable to such Interest Period. If for any reason such rate is not available, the term "LIBOR Rate" shall mean, for any LIBOR Advance for any Interest Period therefor, the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) appearing on Reuters Screen LIBO Page as the London interbank offered rate for deposits in Dollars at approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period for a term comparable to such Interest Period; provided, however, if more than one rate is specified on Reuters Screen LIBO Page, the applicable rate shall be the arithmetic mean of all such rates. 12 13 "Lien" means, with respect to any property, any mortgage, lien, pledge, collateral assignment, hypothecation, charge, security interest, title retention agreement, levy, execution, seizure, attachment, garnishment or other similar encumbrance of any kind in respect of such property, whether or not choate, vested or perfected. "Litigation" means any proceeding, claim, lawsuit, arbitration, and/or investigation by or before any Tribunal, including, without limitation, proceedings, claims, lawsuits, and/or investigations under or pursuant to any environmental, occupational, safety and health, antitrust, unfair competition, securities, Tax or other Law, or under or pursuant to any contract, agreement or other instrument. "Loan Documents" means this Agreement, the Notes, the L/C Related Documents, the Fee Letters, any Interest Hedge Agreements entered into with any Lender, and any other document or agreement executed or delivered from time to time by the Borrower or any Restricted Subsidiary of the Borrower in connection herewith. "Material Adverse Effect" means any act or circumstance or event that (a) causes an Event of Default, (b) would reasonably be expected to be material and adverse to the business, financial condition or results of operations of the Borrower and its Restricted Subsidiaries taken as a whole, or (c) in any manner whatsoever does or would reasonably be expected to materially and adversely affect (i) the validity or enforceability of the Loan Documents in any material respect, (ii) the ability of the Borrower and its Restricted Subsidiaries taken as a whole to perform their respective Obligations under the Loan Documents, or (iii) the rights and remedies of the Lenders or the Administrative Agent under the Loan Documents in any material respect. "Multiemployer Plan" means, as to any Person, at any time, a "multiemployer plan" within the meaning of Section 4001(a)(3) of ERISA and to which such Person or any member of its Controlled Group is making, or is obligated to make contributions or has made, or been obligated to make, contributions. "NationsBank" means NationsBank of Texas, N.A., a national banking association, in its capacity as a Lender. "Necessary Authorization" means any right, franchise, license, permit, consent, approval or authorization from, or any filing or registration with, any Tribunal or any Person necessary to enable the Borrower or any Restricted Subsidiary of the Borrower to maintain and operate its business and properties. "Net Cash Proceeds" means, with respect to any sale, lease, transfer or other disposition of any asset by any Person, the amount of cash received by such Person in connection with such transaction (including cash proceeds of any property received in consideration of any such sale, lease, transfer or other disposition) after deducting therefrom the aggregate, without duplication, of the following amounts to the extent properly attributable to such transaction or to the asset that is the 13 14 subject thereof: (i) reasonable brokerage commissions, legal fees, finder's fees, financial advisory fees, accounting fees, underwriting fees, investment banking fees and other similar commissions and fees, and expenses, in each case, to the extent paid or payable by such Person; (ii) filing, recording or registration fees or charges or similar fees or charges paid by such Person; (iii) taxes paid or payable by such Person or any shareholder, partner or member of such Person to governmental taxing authorities as a result of such sale or other disposition; (iv) payment of the outstanding principal amount of, premium or penalty, if any, and interest on any Indebtedness that is secured by a Lien on the asset in question and that is required to be repaid under the terms thereof as a result of such asset sale; and (v) reasonable reserves established in good faith by the Borrower for escrows, purchase price adjustments and indemnification obligations (provided, however, that upon satisfaction or elimination of the applicable contingency(ies) for which any such reserve was established any funds remaining in such reserve shall constitute Net Cash Proceeds and shall immediately be distributed in accordance with the terms hereof. "Netcom Articles of Incorporation" means the Second Amended and Restated Articles of Incorporation, dated as of August 22, 1997. "Netcom Convertible Preferred Stock" means that certain convertible preferred stock of the Borrower issued pursuant to the Netcom Recapitalization Agreement. "Netcom Escrow Agreement" means that certain Netcom Systems, Inc. Escrow Agreement, dated as of August 29, 1997, among the Borrower, the purchaser representatives named therein, the seller representative named therein and the escrow agent named therein. "Netcom Preferred Stock" means, collectively, the Netcom Convertible Preferred Stock and the Netcom Redeemable Preferred Stock. "Netcom Recapitalization" means the purchase by the Borrower of at least 10,215,644 shares of its shares of its common Equity Interests and the issuance by the Borrower of the Netcom Convertible Preferred Stock and the Netcom Redeemable Preferred Stock pursuant to the Netcom Recapitalization Agreement. "Netcom Recapitalization Agreement" means that certain Recapitalization Agreement, dated as of August 29, 1997, by and among the Borrower, the purchasers named therein and the sellers named therein. "Netcom Recapitalization Documents" means, collectively, the Netcom Recapitalization Agreement, the Netcom Articles of Incorporation, the Netcom Escrow Agreement, the Netcom Registration Agreement and the Netcom Shareholders' Agreement. "Netcom Redeemable Preferred Stock" means that certain redeemable preferred stock of the Borrower issued pursuant to the Netcom Recapitalization Agreement. 14 15 "Netcom Registration Agreement" means that certain Netcom Systems, Inc. Registration Agreement, dated as of August 29, 1997, among the Borrower, the investors named therein and the shareholders of the Borrower named therein. "Netcom Shareholders' Agreement" means that certain Netcom Systems, Inc. Shareholders Agreement, dated as of August 29, 1997, among the Borrower, the investors named therein and the existing shareholders of the Borrower named therein. "Net Income" means net earnings (or deficit) after taxes of the Borrower and its Subsidiaries, on a consolidated basis, determined in accordance with GAAP. "Notes" means, collectively, the Revolving Credit Notes and the Term Loan Notes. "Notice of Borrowing" has the meaning specified in Section 2.2(a) hereof. "Notice of Issuance" has the meaning specified in Section 2.15(b) hereof. "Obligations" means (a) all obligations of any nature (whether matured or unmatured, fixed or contingent, including the Reimbursement Obligations) of the Borrower or any other Obligor to any Lender or the Administrative Agent under any of the Loan Documents as they may be amended from time to time, and (b) all obligations of the Borrower or any other Obligor for losses, damages, expenses or any other liabilities of any kind that any Lender may suffer by reason of a breach by the Borrower or any other Obligor of any obligation, covenant or undertaking with respect to any Loan Document payable by the Borrower or any other Obligor under any Loan Document. "Obligor" means any of the Borrower and the Guarantors. "Operating Lease" means any operating lease, as defined in the Financial Accounting Standard Board Statement of Financial Accounting Standards No. 13, dated November, 1976 or otherwise in accordance with GAAP, except to the extent included in the definition of "Indebtedness". "Participant" has the meaning specified in Section 11.6(c) hereof. "Participation" has the meaning specified in Section 11.6(c) hereof. "Payment Date" means the last day of the Interest Period for any LIBOR Advance. "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "Permitted Distributions" means, collectively: 15 16 (a) redemptions of, or dividends with respect to, the Netcom Preferred Stock if, and to the extent that, (i) immediately prior to and after giving effect to each such dividend, redemption or dividend, the Leverage Ratio of the Borrower is not greater than 0.75 to 1.00, (ii) no Default or Event of Default would exist immediately prior to or after giving effect to such redemption or dividend, (iii) at least 5 Business Days prior to the date of declaration or payment (whichever is earlier) of any such redemption or dividend, the Administrative Agent shall have received a Compliance Certificate from the Borrower evidencing compliance with the requirements of clauses (i) and (ii) above, and (iv) contemporaneously with the making or payment of any such redemption or dividend, the Borrower shall have paid to the Lenders, in addition to any other payments and/or prepayments required hereunder, an amount equal to three times the amount of such redemption or dividend, for application to the Obligations in accordance with the provisions of Section 2.5(d) hereof; (b) Dividends or reductions of Indebtedness if, and to the extent that, (i) immediately prior to, or contemporaneously with, such Dividend or reduction of Indebtedness, the Borrower receives Net Cash Proceeds from the sale, or other disposition of Equity Interests in the Borrower (other than in connection with a Public Equity Offering) or capital contributions to the Borrower in an amount sufficient to make the Dividends and reductions of Indebtedness and the payments to the Lenders required hereby, (ii) no Default or Event of Default would exist immediately prior to or after giving effect to such redemption or dividend, (iii) at least 5 Business Days prior to the date of declaration or payment (whichever is earlier) of any such Dividend or reduction of Indebtedness, the Administrative Agent shall have received a certificate from the Borrower evidencing compliance with the requirements of clause (ii) above, and (iv) contemporaneously with the making or payment of any such Dividend or reduction of Indebtedness, the Borrower shall have paid to the Lenders the amounts required by Section 2.5(d). (c) payments or distributions in respect of Institutional Debt (other than Subordinated Debt) in connection with sales of assets of the Borrower or any Restricted Subsidiary as to which the Borrower is required to make a mandatory prepayment of the Obligations pursuant to Section 2.5(c) hereof if, and to the extent that, (i) such Institutional Debt contractually ranks, pari passu in right of payments with the Obligations and the payments or distributions contemplated to be made by the Borrower are contractually required to be made pursuant to the terms of the applicable documentation evidencing such Institutional Debt, (ii) no Default or Event of Default would exist immediately prior to or after giving effect to such payment or distribution, (iii) at least 5 Business Days prior to the date of declaration or payment (whichever is earlier) of any such payment or distribution, the Administrative Agent shall have received a certificate from the Borrower evidencing compliance with the requirements of clause (ii) above, and (iv) contemporaneously with the making or payment of any such payment or distribution, the Borrower shall have paid to the Lenders the amounts required by Section 2.5(c). (d) redemption of Equity Interests of the Borrower with respect to such Equity Interests owned by officers, directors and employees of the Borrower or any of its Subsidiaries if, and to the extent that, (i) such redemptions are made pursuant to the terms of any subscription 16 17 agreement or option or similar agreement entered into by the Borrower in the ordinary course of business, (ii) contemporaneously, with each such redemption, the Borrower shall have sold Equity Interests to other officers, directors or employees of the Borrower or any of its Subsidiaries, for cash, in amounts equal to, or greater than, the amount expended by the Borrower with respect to such redemption and (iii) no Default or Event of Default would exist immediately prior to or after giving effect to such redemption. "Permitted Liens" means, as applied to any Person: (a) Any Lien in favor of the Lenders to secure the Obligations hereunder; (b) Liens for taxes, assessments, governmental charges, levies or claims (i) not exceeding $50,000 or (ii) that are not yet delinquent or that are being diligently contested in good faith by appropriate proceedings in accordance with Section 5.6 hereof and for which adequate reserves shall have been set aside on such Person's books to the extent required by GAAP, but only so long as no foreclosure, restraint, sale or similar proceedings have been commenced with respect thereto; (c) Liens of carriers, landlords, warehousemen, mechanics, laborers and materialmen and other similar Liens incurred in the ordinary course of business (i) for sums not exceeding $50,000, (ii) sums not yet due or (iii) for sums being contested in good faith, if such reserve or appropriate provision, if any, as shall be required by GAAP shall have been made therefor; (d) Liens incurred or deposits made in the ordinary course of business in connection with worker's compensation, unemployment insurance or similar legislation; (e) Easements, right-of-way, restrictions and other similar encumbrances on the use of real property which do not interfere in any material respect with the ordinary conduct of the business of such Person; (f) Liens created to secure the purchase price of assets acquired, developed or constructed (or existing on property at the time such property is acquired, developed or constructed) by such Person or created to secure Indebtedness permitted by Section 7.1(c) or 7.1(h) hereof, which is incurred solely for the purpose of financing the acquisition of such assets and incurred at the time, or within 90 days after the date, of acquisition or which exists against such assets at the time of acquisition, development or construction thereof, so long as each such Lien shall at all times be confined solely to the asset or assets so acquired, developed or constructed (and proceeds and products thereof and accessions, replacements and substitutions therefor), and refinancings thereof so long as any such Lien remains solely on the asset or assets acquired (and the proceeds and products thereof and accessions, replacements and substitutions therefor) and the amount of Indebtedness related thereto is not increased; (g) Any Liens which are described on Schedule 2 hereto, and Liens resulting from the refinancing of the related Indebtedness, provided that the Indebtedness secured thereby shall not be 17 18 increased and the Liens shall not cover additional assets of the Borrower unless otherwise expressly permitted hereby; (h) Liens arising from filing Uniform Commercial Code financing statements for precautionary purposes relating solely to true leases of personal property permitted by this Agreement under which the Borrower or any of its Subsidiaries is a lessee or other precautionary or notice filings relating to obligations not constituting Indebtedness; (i) Any zoning or similar law or right reserved to or vested in any Tribunal to control or regulate the use of any real property; (j) Liens incurred or deposits made to secure the performance of bids, tenders, leases, trade contracts (other than for Indebtedness), statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business; (k) Attachment or judgment Liens in existence for less than sixty days after the entry of the applicable judgment or with respect to which execution has been stayed or the payment of which is covered in full (subject to a customary deductible) by insurance maintained with responsible insurance companies; (l) Leases or subleases and licenses and sublicenses granted to others in the ordinary course of the Borrower's or any of its Subsidiaries' business, not interfering in any material respect with the business of the Borrower and its Restricted Subsidiaries taken as a whole, and any interest or title of a lessor, licensor or under any lease or license; (m) Liens securing reimbursement of obligations in respect of documentary letters of credit; provided, that such Liens attach only to the documents, the goods covered thereby and the proceeds thereof; (n) Liens in favor of customs and revenues authorities which secure payment of customs duties in connection with the importation of goods; (o) Liens on insurance policies and the proceeds thereof securing the financing of the premiums with respect thereto; (p) Liens of landlords arising in the ordinary course of business under lease contracts (only to the extent that same cover tangible personal property located on or at the real property covered by the applicable lease contract) or by operation of law; (q) Liens consisting of rights of set-off of a customary nature or bankers' liens on amounts on deposit, whether arising by contract or operation of law, incurred in the ordinary course of business; 18 19 (r) Liens encumbering customary initial deposits and margin deposits, and similar Liens and margin deposits, and similar Liens attaching to commodity trading accounts or other brokerage accounts incurred in the ordinary course of business, securing Indebtedness under any Interest Hedge Agreement; (s) Liens on Equity Interests of any Unrestricted Subsidiary; and (t) Any replacements or renewals of Liens (but no increases in the Indebtedness secured thereby) permitted by clauses (f), (g) and (h) hereof. "Person" means an individual, corporation, partnership, limited liability company, trust or unincorporated organization, or a government or any agency or political subdivision thereof. "Plan" means an employee benefit plan as defined in Section 3(3) of ERISA (including a Multiemployer Plan) pursuant to which any employees of the Borrower, its Subsidiaries or any member of their Controlled Group participate. "Pretax Net Income" means net profit (or loss) before taxes of the Borrower and its Subsidiaries, on a consolidated basis, determined in accordance with GAAP. "Prime Rate" means, at any time, the prime interest rate announced or published by the Reference Lender from time to time as its reference rate for the determination of interest rates for loans of varying maturities in United States dollars to United States residents of varying degrees of creditworthiness and being quoted at such time by the Reference Lender as its "prime rate;" it being understood that such rate may not be the lowest rate of interest charged by the Reference Lender. "Public Equity Offering" means an offering of common stock of the Borrower for cash pursuant to an effective registration statement under the Securities Act of 1933, as amended, at a time when, or as a consequence of which, the common stock of the Borrower is listed on a national securities exchange or quoted on the national market system of NASDAQ. "Quarterly Date" means the last day of each January, April, July and October, beginning October 31, 1997. "Rate Adjustment Date" means the date which is the date that the Lenders receive the financial statements for the fiscal quarter ending January 31, 1998, required to be delivered pursuant to Section 6.1 hereof. "Reference Lender" means NationsBank; provided that if NationsBank's Commitments shall terminate and it shall have no Advances and Letters of Credit outstanding hereunder, NationsBank shall cease to be the Reference Lender, and Administrative Agent (after consultation with Borrower) shall, with notice to Borrower and Lenders, designate another Lender as the Reference Lender. 19 20 "Reimbursement Obligations" means, in respect of any Letter of Credit as at any date of determination, the sum of (a) the maximum aggregate amount which is then available to be drawn under such Letter of Credit plus (b) the aggregate amount of all drawings under such Letter of Credit not theretofore reimbursed by the Borrower. "Related Person" of a Person means (a) any Affiliate of such Person, (b) any individual or entity who directly or indirectly holds 10% or more of any class of Equity Interests of such Person, (c) any relative of such Person by blood, marriage or adoption not more remote than first cousin and (d) any officer or director of such Person. No Lender hereunder shall be deemed to be a Related Person. "Release Date" means the date on which the Notes have been paid, all other Obligations due and owing have been paid and performed in full, and the Commitments have been terminated. "Reportable Event" has the meaning set forth in Section 4043(c) of ERISA. "Responsible Officer" means, of any Person, the President, chief operating officer, chief executive officer, chief financial officer, treasurer or any other executive officer of such Person. "Restricted Payments" means, collectively, (a) Dividends, and (b) any (i) payment or prepayments of principal, premium or penalty on any Subordinated Debt of the Borrower or any Subsidiary of the Borrower, (ii) defeasance, redemption, purchase, repurchase or other acquisition or retirement for value, in whole or in part, of any Institutional Debt (including, without limitation, the setting aside of assets or the deposit of funds therefor), (iii) prepayment of interest on any Institutional Debt and (iv) prepayment of principal, premium or penalty on any Institutional Debt. "Restricted Subsidiary" means any direct or indirect Subsidiary of the Borrower other than an Unrestricted Subsidiary. "Revolving Commitment Fee" has the meaning specified in Section 2.4(a) hereof. "Revolving Commitment Maturity Date" means August 28, 2002, or the earlier date of termination in whole of the Revolving Credit Commitment pursuant to Section 2.6 or 8.2 hereof. "Revolving Credit Advance" means an Advance made pursuant to Section 2.1(a) hereof. "Revolving Credit Commitment" means $10,000,000.00 as reduced pursuant to Section 2.6. "Revolving Credit Notes" means the promissory notes of Borrower evidencing Revolving Credit Advances hereunder, substantially in the form of Exhibit A hereto, together with any extension, renewal, or amendment thereof, or substitution therefor. "Rights" means rights, remedies, powers and privileges. 20 21 "Senior Officer" means any of the Chief Executive Officer, President, Chief Financial Officer, any Vice President or the Treasurer of the Borrower. "Solvent" means, with respect to any Person, that as of the date of determination, (a) the fair saleable value of the assets of such Person is greater than the total amount of liabilities (including contingent and unliquidated liabilities) of such Person, (b) such Person is able to pay the probable liabilities on such Person's then existing debts as they become absolute and matured considering all financing alternatives and potential asset sales reasonably available to such Person, and (c) such Person does not have unreasonably small capital with which to carry on its business. In computing the amount of contingent or unliquidated liabilities at any time, such liabilities will be computed at the amount which, in light of all the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability discounted to present value at rates believed to be reasonable by such Person. "Special Counsel" means the law firm of Donohoe, Jameson & Carroll, P.C., or such other legal counsel as the Administrative Agent may select. "Specified Percentage" means, as to any Lender, the percentage indicated beside its name on the signature pages hereof or, if applicable, in its most recent Assignment Agreement. "Subordinated Debt" means any Indebtedness of the Borrower or any Subsidiary of the Borrower having maturities and terms, and which is subordinated to payment of the Obligations in a manner, approved in writing by the Administrative Agent, with only such changes or amendments as are not prohibited by Section 7.19 hereof. "Subsequent Pricing Period" means the period from and including the date which is the first day following the end of the Initial Pricing Period to the termination of the Commitments and the payment in full of the Obligations. "Subsidiary" of any Person means any corporation, partnership, joint venture, trust or estate or other Person of which (or in which) more than 50% of: (a) the outstanding capital stock having voting power to elect a majority of the Board of Directors of such corporation (irrespective of whether at the time capital stock of any other class or classes of such corporation shall or might have voting power upon the occurrence of any contingency), (b) the interest in the capital or profits of such partnership or joint venture, (c) the beneficial interest of such trust or estate, or (d) the equity interest of such other Person, 21 22 is at the time directly or indirectly owned by such Person, by such Person and one or more of its Subsidiaries or by one or more of such Person's Subsidiaries. "Subsidiary Guaranty" means a guaranty, substantially in the form of Exhibit E hereto, executed by each Restricted Domestic Subsidiary of the Borrower, as amended, supplemented, modified, renewed or otherwise restated from time to time. "Taxes" has the meaning specified in Section 2.14 hereof. "Term Loan Advance" means an Advance made pursuant to Section 2.1(b) hereof. "Term Loan Commitment" means $50,000,000 as terminated pursuant to Section 2.1(b) hereof. "Term Loan Maturity Date" means August 28, 2002, or the earlier date of acceleration of the Term Loan Advances pursuant to Section 8.2 hereof. "Term Loan Notes" means the promissory notes of the Borrower evidencing Term Loan Advances hereunder, substantially in the form of Exhibit B hereto, together with any extension, renewal or amendment thereof, or substitution therefor. "Total Debt" means, as of any date of determination, determined for the Borrower and its Restricted Subsidiaries on a consolidated basis, (i) indebtedness for borrowed money, (ii) obligations evidenced by bonds, debentures, notes or other similar instruments, (iii) non-contingent obligations to pay the deferred purchase price of property or services other than trade payables incurred in the ordinary course of business, and (iv) Capitalized Lease Obligations. "Tribunal" means any state, commonwealth, federal, foreign, territorial, or other court or government body, subdivision, agency, department, commission, board, bureau, or instrumentality of a governmental or other regulatory or public body or authority. "UCC" means the Uniform Commercial Code of the relevant jurisdiction, as amended from time to time. "Unrestricted Subsidiaries" means, collectively, (i) the direct and indirect Foreign Subsidiaries of the Borrower other than Restricted Foreign Subsidiaries and (ii) such direct or indirect Domestic Subsidiaries of the Borrower as the Borrower shall from time to time designate as Unrestricted Subsidiaries in writing to the Administrative Agent. "Unused Portion" means an amount equal to the result of (i) the Revolving Credit Commitment minus (ii) the sum of (A) the outstanding Revolving Credit Advances plus (B) outstanding Reimbursement Obligations in respect of the Letters of Credit. 22 23 "Voting Power" means, with respect to any Person, the power ordinarily (without the occurrence of a contingency) to elect the members of the board of directors (or persons performing similar functions). Section 1.2 Amendments and Renewals. Each definition of an agreement in this Article 1 shall include such agreement as amended to date, and as amended or renewed from time to time in accordance with its terms. Section 1.3 Construction. The terms defined in this Article 1 (except as otherwise expressly provided in this Agreement) for all purposes shall have the meanings set forth in Section 1.1 hereof, and the singular shall include the plural, and vice versa, unless otherwise specifically required by the context. All accounting terms used in this Agreement which are not otherwise defined herein shall be construed in accordance with GAAP on a consolidated basis for the Borrower and its Subsidiaries, unless otherwise expressly stated herein. ARTICLE 2 Advances Section 2.1 The Advances. (a) Revolving Credit Advances. Each Lender severally agrees, upon the terms and subject to the conditions of this Agreement, to make Revolving Credit Advances to the Borrower from time to time in an aggregate principal amount not to exceed its Specified Percentage of the Revolving Credit Commitment less its Specified Percentage of the aggregate principal amount of all Reimbursement Obligations then outstanding (assuming compliance with all conditions to drawing), for the purposes set forth in Section 5.8 hereof. Subject to Section 2.9 hereof, Revolving Credit Advances may be repaid and then reborrowed. Notwithstanding any provision in any Loan Document to the contrary, in no event shall the sum of the principal amount of all outstanding Revolving Credit Advances and Reimbursement Obligations exceed the Revolving Credit Commitment. (b) Term Loan Advances. Each Lender severally agrees, upon the terms and subject to the conditions of this Agreement, to make a Term Loan Advance to the Borrower on the Agreement Date in a principal amount not to exceed its Specified Percentage of the Term Loan Commitment for the purposes set forth in Section 5.8 hereof. Notwithstanding any provision in any Loan Document to the contrary, in no event shall the principal amount of all outstanding Term Loan Advances exceed the Term Loan Commitment. Immediately upon the making of the Term Loan Advances, the Term Loan Commitment shall be automatically terminated. Term Loan Advances may not be repaid and then reborrowed. 23 24 (c) Any Advance shall, at the option of the Borrower as provided in Section 2.2 hereof (and, in the case of LIBOR Advances, subject to the provisions of Article 9 hereof), be made as a Base Rate Advance or a LIBOR Advance; provided that there shall not be outstanding, at any one time, more than five LIBOR Advances. Section 2.2 Manner of Borrowing and Disbursement. (a) Base Rate Advances. In the case of Base Rate Advances, the Borrower, through an Authorized Signatory, shall give the Administrative Agent prior to 1:00 p.m., Dallas, Texas time, on the date of any proposed Base Rate Advance irrevocable written notice, or irrevocable telephonic notice followed within one Business Day by written notice, in substantially the form of Exhibit F hereto (a "Notice of Borrowing") (provided, however, that the Borrower's failure to confirm any telephonic notice in writing shall not invalidate any notice so given), of its intention to borrow a Base Rate Advance hereunder. Such notice of borrowing shall specify the requested funding date, which shall be a Business Day, and the amount of the proposed aggregate Base Rate Advances to be made by Lenders. (b) LIBOR Advances. In the case of LIBOR Advances, the Borrower, through an Authorized Signatory, shall give the Administrative Agent at least three Business Days' irrevocable written notice, or irrevocable telephonic notice followed within one Business Day by written notice (provided, however, that the Borrower's failure to confirm any telephonic notice in writing shall not invalidate any notice so given) pursuant to a Notice of Borrowing, of its intention to borrow a LIBOR Advance hereunder. Notice shall be given to the Administrative Agent prior to 1:00 p.m., Dallas, Texas time, in order for such Business Day to count toward the minimum number of Business Days required. LIBOR Advances shall in all cases be subject to Article 9 hereof. For LIBOR Advances, the notice of borrowing shall specify the requested funding date, which shall be a Business Day, the amount of the proposed aggregate LIBOR Advances to be made by Lenders and the Interest Period selected by the Borrower, provided that no such Interest Period shall extend past the Revolving Commitment Maturity Date or the Term Loan Maturity Date, as appropriate, or prohibit or impair the Borrower's ability to comply with Section 2.5 or 2.8 hereof. (c) Continuation/Conversion. Subject to Sections 2.1 and 2.9 hereof, the Borrower shall have the option (i) to convert at any time all or any part of the outstanding Base Rate Advances to LIBOR Advances and all or any part of the outstanding LIBOR Advances to Base Rate Advances or (ii) upon expiration of any Interest Period applicable to a LIBOR Advance, to continue all or any portion of such LIBOR Advance equal to $500,000 and integral multiples of $100,000 in excess of that amount as a LIBOR Advance and the succeeding Interest Period(s) of such continued LIBOR Advance shall commence on the last day of the Interest Period of the LIBOR Advance to be continued; provided, however, (a) LIBOR Advances may only be converted into Base Rate Advances on the expiration date of the Interest Period applicable thereto unless, contemporaneously with any such conversion, the Borrower reimburses the Lenders in accordance with Section 2.9 hereof and (b) notwithstanding anything in this Agreement to the contrary, no outstanding Advance may be continued as, or converted into, a LIBOR Advance when any Default or Event of Default has 24 25 occurred and is continuing. At least three Business Days prior to a proposed conversion/continuation date, the Borrower, through an Authorized Signatory, shall give the Administrative Agent irrevocable written notice, or irrevocable telephonic notice followed within one Business Day by written notice (provided, however, that the Borrower's failure to confirm any telephonic notice in writing shall not invalidate any notice so given), stating (i) the proposed conversion/continuation date (which shall be a Business Day), (ii) the amount of the Advance to be converted/continued, (iii) in the case of a conversion to, or a continuation of, a LIBOR Advance, the requested Interest Period, and (iv) in the case of a conversion of a Base Rate Advance to a LIBOR Advance or continuation of a LIBOR Advance, stating that no Default or Event of Default has occurred and is continuing. If the Borrower shall fail to give any notice in accordance with this Section 2.2(c), the Borrower shall be deemed irrevocably to have requested that such LIBOR Advance be converted to a Base Rate Advance in the same principal amount and that any Base Rate Advance be continued as a Base Rate Advance. Notice shall be given to the Administrative Agent prior to 1:00 p.m., Dallas, Texas time, in order for such Business Day to count toward the minimum number of Business Days required. (d) Minimum Amount. The aggregate amount of Base Rate Advances to be made by the Lenders on any day shall be in a principal amount which is at least $100,000; provided, however, that such amount may equal the unused amount of the applicable Commitment. The aggregate amount of LIBOR Advances having the same Interest Period and to be made by the Lenders on any day shall be in a principal amount which is at least $500,000 and which is an integral multiple of $100,000. (e) Notice and Disbursement. The Administrative Agent shall promptly notify the Lenders of each notice received from the Borrower pursuant to this Section. Each Lender shall, not later than 2:00 p.m., Dallas, Texas time, on the date of any Advance, deliver to the Administrative Agent, at its address set forth herein, such Lender's Specified Percentage of such Advance in immediately available funds in accordance with the Administrative Agent's instructions. Prior to 2:30 p.m., Dallas, Texas time, on the date of any Advance hereunder, the Administrative Agent shall, subject to satisfaction of the applicable conditions set forth in Article 3, disburse the amounts made available to the Administrative Agent by the Lenders by (i) transferring such amounts by wire transfer pursuant to the Borrower's instructions, or (ii) in the absence of such instructions, crediting such amounts to the account of the Borrower maintained with the Administrative Agent. All Advances shall be made by each Lender according to its Specified Percentage. Section 2.3 Interest. (a) On Base Rate Advances. (i) The Borrower shall pay interest on the outstanding unpaid principal amount of the Base Rate Advances outstanding from time to time, until such Base Rate Advances are due (whether at maturity, by reason of acceleration, by scheduled reduction, or otherwise) or repaid at a simple interest rate per annum equal to the Base Rate Basis for the Base Rate 25 26 Advances as in effect from time to time. If at any time the Base Rate Basis would exceed the Highest Lawful Rate, interest payable on the Base Rate Advances shall be limited to the Highest Lawful Rate, but the Base Rate Basis shall not thereafter be reduced below the Highest Lawful Rate until the total amount of interest accrued on the Base Rate Advances equals the amount of interest that would have accrued if the Base Rate Basis had been in effect at all times; provided, that subject to the provisions of Section 11.9 hereof, if at any time the Highest Lawful Rate continuously exceeds the Base Rate Basis until the Advances are due (whether at maturity, by reason of acceleration, by scheduled reduction or otherwise), the total amount of interest accrued on the Base Rate Advances for such period shall be calculated at the Highest Lawful Rate and no other amounts of accrued interest shall be due from the Borrower. (ii) Interest on the Base Rate Advances shall be computed on the basis of a year of 365 or 366 days, as appropriate, for the actual number of days elapsed, and shall be payable in arrears on each Quarterly Date and on the Revolving Commitment Maturity Date and the Term Loan Maturity Date, as appropriate. (b) On LIBOR Advances. (i) The Borrower shall pay interest on the unpaid principal amount of each LIBOR Advance, from the date such Advance is made until it is due (whether at maturity, by reason of acceleration, by scheduled reduction, or otherwise) or repaid, at a rate per annum equal to the LIBOR Basis for such LIBOR Advance. The Administrative Agent, whose determination shall be prima facie evidence of the LIBOR Basis, shall determine the LIBOR Basis on the second Business Day prior to the applicable funding, conversion or continuation date and shall notify the Borrower and the Lenders of such LIBOR Basis. (ii) Subject to Section 11.9 hereof, interest on each LIBOR Advance shall be computed on the basis of a 360-day year for the actual number of days elapsed, and shall be payable in arrears on the applicable Payment Date and on the Revolving Commitment Maturity Date and the Term Loan Maturity Date, as appropriate; provided, however, that if the Interest Period for such LIBOR Advance exceeds three months, interest shall also be due and payable in arrears on each three-month anniversary of the commencement of such Interest Period during such Interest Period. (c) Interest After an Event of Default. (i) After an Event of Default specified in Section 8.1(b) as a result of the failure to make any required principal or interest payment on the Loans or any required payment of fees under Sections 2.4(a) or 2.15(f), and during any continuance thereof, at the option of the Determining Lenders, the Obligations shall bear interest at a rate per annum equal to the Default Rate. Such interest shall be payable on the earlier of demand or the Revolving Commitment Maturity Date and the Term Loan Maturity Date, as appropriate, and shall accrue until the earlier of (i) waiver or cure of the applicable Event of Default, (ii) agreement by the Determining Lenders to rescind the charging of interest at the Default Rate, or (iii) payment in full 26 27 of the Obligations. The Lenders shall not be required to accelerate the maturity of the Advances, to exercise any other rights or remedies under the Loan Documents, or to give notice to the Borrower of the decision to charge interest at the Default Rate. Section 2.4 Fees. (a) Revolving Commitment Fee. Subject to Section 11.9 hereof, the Borrower agrees to pay to the Administrative Agent, for the account of the Lenders according to their Specified Percentages, a commitment fee on the daily average Unused Portion during the period commencing on the Agreement Date and ending on the Revolving Commitment Maturity Date (which fee shall be (i) payable in arrears on each Quarterly Date and on the Revolving Commitment Maturity Date, (ii) fully earned when due and, subject to Section 11.9 hereof, nonrefundable when paid and (iii) subject to Section 11.9 hereof, computed on the basis of a 365 or 366-day year, as applicable, for the actual number of days elapsed) at the rate of 0.375% per annum. (b) Other Fees. Subject to Section 11.9 hereof, the Borrower agrees to pay to the Administrative Agent, for the account of the Administrative Agent and/or the Documentation Agent, as applicable, the fees on the dates and in the amounts specified in the letter agreements (collectively, the "Fee Letters"), dated as of, or prior to, the Agreement Date, among the Borrower, the Administrative Agent and/or the Documentation Agent. Section 2.5 Prepayments. (a) Voluntary Advance Prepayments. Upon one Business Day's prior telephonic notice (to be promptly followed by written notice) by an Authorized Signatory to the Administrative Agent, LIBOR Advances may be voluntarily prepaid but only so long as the Borrower concurrently reimburses the Lenders in accordance with Section 2.9 hereof. Any notice of prepayment shall be irrevocable. Subject to the other provisions of this Agreement, Base Rate Advances may be voluntarily prepaid, in whole or in part, without prior notice to the Administrative Agent or any Lender. (b) Mandatory Prepayment. On or before the date of any reduction of the Revolving Credit Commitment, the Borrower shall prepay applicable outstanding Revolving Credit Advances in an amount necessary to reduce the sum of outstanding Revolving Credit Advances and Reimbursement Obligations to an amount less than or equal to the Revolving Credit Commitment as so reduced. To the extent required by the immediately preceding sentence, the Borrower shall first prepay all Base Rate Advances and shall thereafter prepay LIBOR Advances. To the extent that any prepayment requires that a LIBOR Advance be repaid on a date other than the last day of its Interest Period, the Borrower shall reimburse each Lender in accordance with Section 2.9 hereof. To the extent that outstanding Revolving Credit Advances exceed the Revolving Credit Commitment after any reduction thereof, the Borrower shall repay any such excess amount and all accrued interest attributable to such excess Revolving Credit Advances on the date of such reduction. 27 28 (c) Prepayments from Sales of Assets. Within two Business Days (or, if later, at the end of any Interest Period for any LIBOR Advance outstanding on the date of receipt by the Borrower, but in any event not later than thirty days) after receipt of Net Cash Proceeds from the sale or disposition after the date hereof by the Borrower or any Restricted Subsidiary of any assets, (other than sales or dispositions of Equity Interests of any such Restricted Subsidiary or assets expressly permitted pursuant to clauses (a) through (c), (e), (f), (g), (h) or (i) of Section 7.5 hereof), the Borrower shall prepay the Term Loan Advances (and, thereafter, the Revolving Credit Advances when there are no Term Loan Advances outstanding) in a principal amount equal to 75% of the amount of such Net Cash Proceeds (the "Asset Sale Prepayment Amount"), provided, however to the extent that any Institutional Debt (other than Subordinated Debt) is required to be prepaid pursuant to the terms of the applicable documentation governing such Institutional Debt, the Asset Sale Prepayment Amount shall be adjusted to be an amount (the "Adjusted Asset Sale Prepayment Amount") equal to the Asset Sale Prepayment Amount multiplied by a fraction, the numerator of which is the outstanding principal amount of Advances and the denominator of which is the sum of the outstanding principal amount or accreted value of Advances and such Institutional Debt, provided that to the extent an amount of such Net Cash Proceeds equal to the Asset Sale Prepayment Amount less the Adjusted Asset Sale Prepayment Amount is not utilized to redeem or repay Institutional Debt in accordance with the terms of the applicable documents in respect of such Institutional Debt, such excess amount shall be applied to repay Term Loan Advances (and, thereafter, the Revolving Credit Advances when there are no Term Loss Advances outstanding). Each such prepayment of Term Loan Advances pursuant to this Section 2.5(c) shall be applied pro rata to the unpaid scheduled installment payments of the Term Loans. Any such prepayment of Revolving Credit Advances pursuant to this Section 2.5(c) shall permanently reduce the Revolving Credit Commitment by the amount of such prepayment. (d) Prepayment from Sales of Equity Interests. Within two Business Days (or, if later, at the end of any Interest Period for any LIBOR Advance outstanding on the date of receipt by the Borrower, but in any event not later than thirty days) after receipt of Net Cash Proceeds from the sale or disposition after the date hereof to any Person of any Equity Interests of the Borrower or any of its Restricted Subsidiaries, the Borrower shall apply (i) with respect to a Public Equity Offering of such Equity Interests, 100% of such aggregate Net Cash Proceeds and (ii) with respect to any disposition of such Equity Interests which is not a Public Equity Offering; 75% of such aggregate Net Cash Proceeds, except for the sale or disposition of Equity Interests the proceeds of which are utilized to purchase Equity Interests with respect to Permitted Distributions under clause (d) of the definition thereof, to prepay the Term Loan Advances (and, thereafter, the Revolving Credit Advances when there are no Term Loan Advances outstanding). Each such prepayment of the Term Loan Advances pursuant to this Section 2.5(d) shall be applied pro rata to the unpaid scheduled installment payments of the Term Loan Advances. Any such prepayment of Revolving Credit Advances pursuant to this Section 2.5(d) shall permanently reduce the Revolving Credit Commitment by the amount of such prepayment. (e) Prepayment from Issuance of Institutional Debt. Within two Business Days (or, if later, at the end of any Interest Period for any LIBOR Advance outstanding on the date of receipt by 28 29 the Borrower, but in any event not later than thirty days) after the receipt of Net Cash Proceeds from the issuance of Institutional Debt (other than permitted refinancings pursuant to Section 7.1(d)) by the Borrower or any Restricted Subsidiary of the Borrower, the Borrower shall apply 100% of such aggregate Net Cash Proceeds to prepay the Term Loan Advances (and, thereafter, the Revolving Credit Advances when there are no Term Loan Advances outstanding). Each such prepayment of the Term Loan Advances pursuant to this Section 2.5(e) shall be applied pro rata to the unpaid scheduled installment payments of the Term Loan Advances. Any such prepayment of Revolving Credit Advances pursuant to this Section 2.5(e) shall permanently reduce the Revolving Credit Commitment by the amount of such prepayment. (f) Payments, Generally. Any prepayment of any Advance shall be accompanied by interest accrued on the principal amount being prepaid. Any payment required to be made pursuant to Sections 2.5(d), (e) or (f) above shall first prepay all Base Rate Advances and shall thereafter prepay LIBOR Advances. Any voluntary partial payment of a Base Rate Advance shall be in a principal amount which is at least $100,000. Any voluntary partial payment of a LIBOR Advance shall be in a principal amount which is at least $250,000 and which is an integral multiple of $50,000, and to the extent that any prepayment of a LIBOR Advance is made on a date other than the last day of its Interest Period, the Borrower shall reimburse each Lender in accordance with Section 2.9 hereof. Any voluntary prepayment of any Term Loan Advance shall be applied pro rata to the unpaid scheduled installment payments of the Term Loan Advances. Section 2.6 Reduction of Revolving Credit Commitment. (a) Voluntary Reduction. The Borrower shall have the right, upon not less than 5 Business Days' notice by an Authorized Signatory to the Administrative Agent (if telephonic, to be confirmed by telex or in writing on or before the date of reduction or termination), which shall promptly notify the Lenders, to terminate or reduce the Revolving Credit Commitment. Each partial termination shall be in an aggregate amount which is at least $500,000 and which is an integral multiple of $100,000, and no voluntary reduction in the Revolving Credit Commitment shall cause any LIBOR Advance to be repaid prior to the last day of its Interest Period unless the Borrower shall reimburse each Lender in accordance with Section 2.9 hereof. (b) Mandatory Reduction. On the Revolving Credit Commitment Maturity Date, the Revolving Credit Commitment shall be automatically reduced to zero. In addition, the Revolving Credit Commitment shall be permanently reduced by the amount of any prepayment of Revolving Credit Advances required pursuant to Sections 2.5(c), (d) and (e) hereof. (c) General Requirements. Upon any reduction of the Revolving Credit Commitment pursuant to this Section, the Borrower shall immediately make a repayment of Revolving Credit Advances in accordance with Section 2.5(b) hereof. The Borrower shall reimburse each Lender in connection with any such payment in accordance with Section 2.9 hereof to the extent applicable. The Borrower shall not have any right to rescind any termination or reduction. Once reduced, the Revolving Credit Commitment may not be increased or reinstated. 29 30 Section 2.7 Non-Receipt of Funds by the Administrative Agent. Unless the Administrative Agent shall have been notified by a Lender prior to the date of any proposed Advance (which notice shall be effective upon receipt) that such Lender does not intend to make the proceeds of such Advance available to the Administrative Agent, the Administrative Agent may assume that such Lender has made such proceeds available to the Administrative Agent on such date, and the Administrative Agent may in reliance upon such assumption (but shall not be required to) make available to the Borrower a corresponding amount. If such corresponding amount is not in fact made available to the Administrative Agent by such Lender, the Administrative Agent shall be entitled to recover such amount on demand from such Lender (or, if such Lender fails to pay such amount forthwith upon such demand, from the Borrower) together with interest thereon in respect of each day during the period commencing on the date such amount was available to the Borrower and ending on (but excluding) the date the Administrative Agent receives such amount from (a) the Lender, at a per annum rate equal to the lesser of (i) the Highest Lawful Rate or (ii) the Federal Funds Rate, or (b) the Borrower, at the per annum rate applicable at the time to such Advance. No Lender shall be liable for any other Lender's failure to fund an Advance hereunder. Section 2.8 Payment of Principal of Advances. (a) Revolving Credit Advances. To the extent not otherwise required to be paid earlier as provided herein, the principal amount of the Revolving Credit Advances shall be due and payable on the Revolving Commitment Maturity Date. (b) Term Loan Advances. To the extent not otherwise required to be paid earlier as provided herein, the principal amount of the Term Loan Advances shall be repaid on each Quarterly Date and on the Term Loan Maturity Date in such amounts as set forth next to each such date below:
Amount of Reduction of Quarterly Date Term Loan Advances as of each Date -------------- ---------------------------------- October 31, 1998 $2,500,000 January 31, 1999 $2,500,000 April 30, 1999 $2,500,000 July 31, 1999 $2,500,000 October 31, 1999 $2,500,000 January 31, 2000 $2,500,000 April 30, 2000 $2,500,000 July 31, 2000 $2,500,000 October 31, 2000 $2,500,000 January 31, 2001 $2,500,000 April 30, 2001 $2,500,000 July 31, 2001 $2,500,000 October 31, 2001 $2,500,000 January 31, 2002 $2,500,000
30 31
Amount of Reduction of Quarterly Date Term Loan Advances as of each Date -------------- ---------------------------------- April 30, 2002 $5,000,000 July 31, 2002 $5,000,000 Maturity Date $5,000,000 or such other amount of Term Loan Advances then outstanding
Section 2.9 Reimbursement. Whenever any Lender shall sustain or incur any losses or reasonable out-of-pocket expenses in connection with (a) failure by the Borrower to borrow any LIBOR Advance after having given notice of its intention to borrow in accordance with Section 2.2 hereof (whether by reason of the Borrower's election not to proceed or the non-fulfillment of any of the conditions set forth in Article 3 hereof), (b) any prepayment for any reason of any LIBOR Advance in whole or in part (including, but not limited to, a prepayment pursuant to Section 9.3(b) hereof) on other than the last day of an Interest Period applicable to such LIBOR Advance, or (c) any prepayment of any of its LIBOR Advances that is not made on any date specified in a notice of prepayment given by the Borrower, the Borrower agrees to pay to any such Lender, within 30 days after demand by such Lender, an amount sufficient to compensate such Lender for all such losses (excluding loss of anticipated profits) and out-of-pocket expenses, subject to Section 11.9 hereof; provided, that the Borrower shall not be liable for any such losses and out-of-pocket expenses that are attributable to such Lender's gross negligence or willful misconduct and provided further that any claim for any such losses or expenses shall be made by the applicable Lender within 90 days after such Lender becomes aware of the facts or circumstances giving rise thereto. A certificate as to any amounts payable to any Lender under this Section 2.9 submitted to the Borrower by such Lender shall certify that such amounts were actually incurred by such Lender and shall show in reasonable detail an accounting of the amount payable and the calculations used to determine in good faith such amount and shall be prima facie evidence of such amount. Section 2.10 Manner of Payment. (a) Each payment (including prepayments) by the Borrower of the principal of or interest on the Advances, fees, and any other amount owed under this Agreement or any other Loan Document shall be made not later than 2:00 p.m. (Dallas, Texas time) on the date specified for payment under this Agreement to the Administrative Agent at the Administrative Agent's office, in lawful money of the United States of America constituting immediately available funds. (b) If any payment under this Agreement or any other Loan Document shall be specified to be made upon a day which is not a Business Day, it shall be made on the next succeeding day which is a Business Day, unless, with respect to a payment due in respect of a LIBOR Advance, such Business Day falls in another calendar month, in which case payment shall be made on the preceding Business Day. Any extension of time shall in such case be included in computing interest and fees, if any, in connection with such payment. 31 32 (c) The Borrower agrees to pay principal, interest, fees and all other amounts due under the Loan Documents without deduction for set-off or counterclaim or any deduction whatsoever except, to the extent permitted hereunder, applicable withholding taxes. (d) If some but less than all amounts due from the Borrower are received by the Administrative Lender, the Administrative Lender shall apply such amounts in the following order of priority: (i) to the payment of the Administrative Lender's expenses incurred on behalf of the Lenders then due and payable to the Lenders, if any; (ii) to the payment of all other fees then due and payable; (iii) to the payment of interest then due and payable on the Advances; (iv) to the payment of all other amounts not otherwise referred to in this clause (d) then due and payable under the Loan Documents; and (v) to the payment of principal then due and payable on the Advances. (e) Except where otherwise expressly provided in this Agreement, each payment by the Borrower in respect of obligations relating to the Advances (whether for principal, interest, fees or otherwise) shall be made to the Administrative Lender for the Lenders pro rata in accordance with their respective Specified Percentages. Section 2.11 LIBOR Lending Offices. Each Lender's initial LIBOR Lending Office is set forth opposite its name in Schedule 1 attached hereto. Each Lender shall have the right at any time and from time to time to designate a different office of itself or of any Affiliate of such Lender as such Lender's LIBOR Lending Office, and to transfer any outstanding LIBOR Advance to such LIBOR Lending Office. No such designation or transfer shall result in any liability on the part of the Borrower for increased costs or expenses resulting solely from such designation or transfer (except any such transfer which is made by a Lender pursuant to Section 9.2 or 9.3 hereof, or otherwise for the purpose of complying with Applicable Law). Increased costs for expenses resulting from a change in law occurring subsequent to any such designation or transfer shall be deemed not to result solely from such designation or transfer; provided, that each Lender agrees to use its best efforts to redesignate any LIBOR Lending Office affected by such change in law to any other LIBOR Lending Office available to such Lender (consistent with regulatory requirements) if, in the reasonable opinion of such Lender, such redesignation can be affected without material cost to such Lender. Section 2.12 Sharing of Payments. If any Lender shall obtain a payment (whether voluntary or involuntary, due to the exercise of any right of set-off, or otherwise) on account of its Advances (other than pursuant to Sections 2.4(b), 2.14, 2.15(d), 9.3 or 9.5) in excess of its share of payments made by the Borrower according to its Specified Percentage, then in each case, such Lender shall purchase from each other Lender such participation in the Advances made by such other Lender as shall be necessary to cause such purchasing Lender to share a ratable portion of the excess payment with each other Lender (based on its Specified Percentage); provided, however, that if all or any portion of such excess payment is thereafter recovered from such purchasing Lender, the purchase shall be rescinded and the purchase price restored to the extent of such recovery, but without interest. The Borrower agrees that any Lender so purchasing a participation from another Lender pursuant to this Section, to the fullest extent permitted by law, may exercise all its rights of payment 32 33 (including the right of set-off) with respect to such participation as fully as if such Lender were the direct creditor of the Borrower in the amount of such participation. Section 2.13 Calculation of LIBOR Rate. The provisions of this Agreement relating to calculation of the LIBOR Rate are included only for the purpose of determining the rate of interest or other amounts to be paid hereunder that are based upon such rate, it being understood that each Lender shall be entitled to fund and maintain its funding of all or any part of a LIBOR Advance as it sees fit. Section 2.14 Taxes. (a) Any and all payments by the Borrower hereunder shall be made, in accordance with Section 2.10, free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges and withholdings, and all liabilities with respect thereto, excluding, in the case of each Lender and the Administrative Agent, (i) taxes imposed on, based upon or measured by its overall net income, net worth or capital, and franchise taxes, doing business taxes or minimum taxes imposed on it, by the jurisdiction under the laws of which such Lender or the Administrative Agent (as the case may be) is organized or in which it has its applicable lending office or any political subdivision thereof; (ii) taxes imposed by reason of failure by the Lender or the Administrative Agent to comply with the requirements of paragraph (e) of this Section 2.14; and (iii) in the case of any Lender, any taxes in the nature of transfer, stamp, recording or documentary taxes resulting from a transfer (other than as a result of foreclosure) by such Lender of all or any portion of its interest in this Agreement, the Notes or any other Loan Documents (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes"). If the Borrower shall be required by Law to deduct or withhold any Taxes from or in respect of any sum payable hereunder to any Lender or the Administrative Agent, (x) the sum payable shall be increased as may be necessary so that after making all required deductions for Taxes (including deductions applicable to additional sums payable under this Section 2.14) such Lender or the Administrative Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (y) the Borrower shall make such deductions and (z) the Borrower shall pay the full amount of Taxes deducted to the relevant taxation authority or other authority in accordance with Applicable Law. (b) In addition, the Borrower agrees to pay any and all stamp and documentary taxes and any and all other excise and property taxes, charges and similar levies (other than taxes described in clause (iii) of the first sentence of Section 2.14(a)) that arise from any payment made hereunder or from the execution, delivery or registration of, or otherwise with respect to, this Agreement or any other Loan Document (hereinafter referred to as "Other Taxes"). (c) The Borrower will indemnify each Lender and the Administrative Agent for the full amount of Taxes and Other Taxes (including, without limitation, any Taxes or Other Taxes imposed by any jurisdiction on amounts payable under this Section 2.14) paid by such Lender or the Administrative Agent (as the case may be) and all liabilities (including penalties, additions to tax, 33 34 interest and reasonable expenses) arising therefrom or with respect thereto whether or not such Taxes or Other Taxes were correctly or legally asserted, other than penalties, additions to tax, interest and expenses which are finally judicially determined by a court of competent jurisdiction to have arisen as a result of gross negligence or wilful misconduct on the part of such Lender or the Administrative Agent. Any claim made by the Administrative Agent or a Lender under this Section 2.14 (c) shall be made by the Administrative Agent or such Lender within 90 days after the Administrative Agent or the applicable Lender (as the case may be) becomes aware of the fact or circumstance giving rise thereto. This indemnification by the Borrower shall be made within 30 days from the date such Lender or the Administrative Agent (as the case may be) makes written demand therefor. (d) As soon as practicable after the date of any payment of Taxes, the Borrower will furnish to the Administrative Agent the original or a certified copy of a receipt evidencing payment thereof. For purposes of this Section 2.14 the terms "United States" and "United States Person" shall have the meanings set forth in Section 7701 of the Code. (e) Each Lender which is not a United States Person hereby agrees that: (i) it shall, no later than the Agreement Date (or, in the case of a Lender which becomes a party hereto pursuant to Section 11.6 after the Agreement Date, the date upon which such Lender becomes a party hereto) and at such times as necessary in the reasonable determination of the Borrower, deliver to the Borrower through the Administrative Agent, with a copy to the Administrative Agent: (A) if any lending office is located in the United States, two (2) accurate and complete signed originals of Internal Revenue Service Form 4224 or any successor form thereto ("Form 4224"), (B) if any lending office is located outside the United States, two (2) accurate and complete signed originals of Internal Revenue Service Form 1001 or any successor form thereto ("Form 1001"), in each case establishing that such Lender is on the date of delivery thereof entitled to receive payments of principal, interest, fees, or other amounts payable at such lending office or lending offices under this Agreement or any other Loan Document free from deduction or withholding of United States federal income tax; (ii) if at any time such Lender changes its lending office or lending offices or selects an additional lending office it shall, at the same time or reasonably promptly thereafter, but only to the extent the forms previously delivered by it hereunder are not effective with respect to such changed or additional lending office or lending offices, deliver to the Borrower through the Administrative Agent, with a copy to the Administrative Agent, in replacement for the forms previously delivered by it hereunder: 34 35 (A) if such changed or additional lending office is located in the United States, two (2) accurate and complete signed originals of Form 4224; or (B) otherwise, two (2) accurate and complete signed originals of Form 1001, in each case establishing that such Lender is on the date of delivery thereof entitled to receive payments of principal, interest, fees, or other amounts payable at such changed or additional lending office under this Agreement or any other Loan Document free from deduction of withholding of United States federal income tax; (iii) it shall, before or promptly after the occurrence of any event (including the passing of time but excluding any event mentioned in clause (ii) above) requiring a change in the most recent Form 4224 or Form 1001 previously delivered by such Lender and if the delivery of the same be lawful, deliver to the Borrower through the Administrative Agent, with a copy to the Administrative Agent, two (2) accurate and complete original signed copies of Form 4224 or Form 1001, in each case establishing that such Lender is on the date of delivery thereof entitled to receive payments of principal, interest, fees, or other amounts payable under this Agreement or any other Loan Document free from deduction or withholding of United States federal income tax, in replacement for the forms previously delivered by such Lender; (iv) it shall, promptly upon the request of the Borrower to that effect, deliver to the Borrower such other forms or similar documentation as may be required from time to time by any applicable law, treaty, rule or regulation in order to establish such Lender's tax status for withholding purposes; and (v) it shall notify the Borrower promptly after any event (including an amendment to or a change in any applicable law or regulation or in the written interpretation thereof by any regulatory authority or any judicial authority or by ruling applicable to such Lender of any governmental authority charged with the interpretation or administration of any law) shall occur that results in such Lender no longer being capable of receiving payments under this Agreement without any deduction or withholding of United States federal income tax. (f) Without prejudice to the survival of any other agreement of the Borrower hereunder, the agreements and obligations of the Borrower contained in this Section 2.14 shall survive the payment in full of the Obligations. (g) Each Lender (and the Administrative Agent with respect to payments to the Administrative Agent for its own account) agrees that (i) it will take all reasonable actions by all usual means to maintain all exemptions, if any, available to it from United States withholding taxes (whether available by treaty, existing administrative waiver or by virtue of the location of any 35 36 Lender's lending office), (ii) it will use reasonable efforts (consistent with its internal policy and legal and regulatory restrictions) to change the jurisdiction of its lending office, if the making of such a change would avoid the need for, or reduce the amount of, any such additional amounts which may thereafter accrue and would not, in the reasonable judgment of such Lender, be disadvantageous to such Lender, and (iii) otherwise cooperate with the Borrower to minimize amounts payable by the Borrower under this Section 2.14; provided, however, no Lender nor the Administrative Agent shall be obligated by reason of this Section 2.14(g) to (a) disclose any information regarding its tax affairs or tax computations or reorder its tax or other affairs or tax or other planning or (b) contest the payment of any Taxes or Other Taxes. Subject to the foregoing, to the extent the Borrower pays sums pursuant to this Section 2.14 and the Lender or the Administrative Agent receives a refund of any or all of such sums, the party receiving such refund shall promptly pay over all such refunded sums to the Borrower, provided that no Default or Event of Default is in existence at such time. At such time, if any, that such Default or Event of Default is cured or waived, the party receiving such refund shall promptly pay over all such refunded sums to the Borrower. (h) If the Borrower becomes obligated to pay additional amounts described in this Section 2.14 to any Lender, the Borrower may designate a financial institution reasonably acceptable to the Administrative Agent to replace such Lender by purchasing for cash and receiving an assignment of such Lender's pro rata share of the Commitments and the Rights of such Lender under the Loan Documents without recourse to or warranty by, or expense to, such Lender, for a purchase price equal to the outstanding amounts owed to such Lender (including such additional amounts owing to such Lender pursuant to this Section 2.14). Upon execution of an Assignment Agreement, such other financial institution shall be deemed to be a "Lender" for all purposes of this Agreement as set forth in Section 11.6 hereof. Section 2.15 Letters of Credit. (a) The Letter of Credit Facility. The Borrower may request the Issuing Bank, on the terms and conditions hereinafter set forth, to issue, and the Issuing Bank shall, if so requested, issue, letters of credit (the "Letters of Credit") for the account of the Borrower from time to time on any Business Day from the date of the initial Advance until the Revolving Commitment Maturity Date in an aggregate maximum drawable amount (assuming compliance with all conditions to drawing) not to exceed, at any time outstanding, the lesser of (i) $2,000,000 (or the U.S. dollar equivalent thereof in foreign currencies acceptable to the Issuing Bank) (the "Letter of Credit Facility") and (ii) an amount equal to the Revolving Credit Commitment minus the aggregate principal amount of Revolving Credit Advances then outstanding. No Letter of Credit shall have an expiration date (including all rights of renewal) later than the earlier of (i) the Revolving Commitment Maturity Date or (ii) one year after the date of issuance thereof. Immediately upon the issuance of each Letter of Credit, the Issuing Bank shall be deemed to have sold and transferred to each Lender, and each Lender shall be deemed to have purchased and received from the Issuing Bank, in each case irrevocably and without any further action by any party, an undivided interest and participation in such Letter of Credit, each drawing thereunder and the obligations of the Borrower under this Agreement in respect thereof in an amount equal to the product of (x) such Lender's Specified 36 37 Percentage times (y) the maximum amount available to be drawn under such Letter of Credit (assuming compliance with all conditions to drawing). Within the limits of the Letter of Credit Facility, and subject to the limits referred to above, the Borrower may request the issuance of Letters of Credit under this Section 2.15(a), repay any Revolving Credit Advances resulting from drawings thereunder pursuant to Section 2.15(c) and request the issuance of additional Letters of Credit under this Section 2.15(a). (b) Request for Issuance. Each Letter of Credit shall be issued upon notice, given not later than 1:00 p.m. (Dallas, Texas time) on the second Business Day prior to the date of the proposed issuance of such Letter of Credit (or such shorter period of time as may be acceptable to the Issuing Bank), by the Borrower to the Issuing Bank. Each Letter of Credit shall be issued upon notice given in accordance with the terms of any separate agreement between the Borrower and the Issuing Bank in form and substance reasonably satisfactory to the Borrower and the Issuing Bank providing for the issuance of Letters of Credit pursuant to this Agreement and containing terms and conditions not inconsistent with this Agreement (a "Letter of Credit Agreement"), provided that if any such terms and conditions (other than any contractual choice of law to govern any such Letter of Credit) are inconsistent with this Agreement, this Agreement shall control. Each such notice of issuance of a Letter of Credit by the Borrower (a "Notice of Issuance") shall be by telecopier, specifying therein, in the case of a Letter of Credit, the requested (i) date of such issuance (which shall be a Business Day), (ii) maximum amount of such Letter of Credit, (iii) expiration date of such Letter of Credit, (iv) name and address of the beneficiary of such Letter of Credit, and (v) form of such Letter of Credit and specifying such other information as shall be required pursuant to the relevant Letter of Credit Agreement. If the requested terms of such Letter of Credit are acceptable to the Issuing Bank in its reasonable discretion, the Issuing Bank will, upon fulfillment of the applicable conditions set forth in Article 3 hereof, make such Letter of Credit available to the Borrower at its office referred to in Section 11.1 or as otherwise agreed with the Borrower in connection with such issuance. (c) Drawing and Reimbursement. The payment by the Issuing Bank of a draft drawn under any Letter of Credit shall constitute for all purposes of this Agreement the making by the Issuing Bank of a Revolving Credit Advance, which shall bear interest at the Base Rate Basis, in the amount of such draft (but without any requirement for compliance with the conditions set forth in Article 3 hereof). In the event that a drawing under any Letter of Credit is not reimbursed by the Borrower by 12:00 noon (Dallas, Texas time) on the first Business Day after such drawing, the Issuing Bank shall promptly notify Administrative Agent and each other Lender. Each such Lender shall, on the first Business Day following such notification, make a Revolving Credit Advance, which shall bear interest at the Base Rate Basis, and shall be used to repay the applicable portion of the Issuing Bank's Advance with respect to such Letter of Credit, in an amount equal to the amount of its participation in such drawing for application to reimburse the Issuing Bank (but without any requirement for compliance with the applicable conditions set forth in Article 3 hereof) and shall make available to the Administrative Agent for the account of the Issuing Bank, by deposit at the Administrative Agent's office, in same day funds, the amount of such Advance. In the event that any Lender fails to make available to the Administrative Agent for the account of the Issuing Bank the 37 38 amount of such Advance, the Issuing Bank shall be entitled to recover such amount on demand from such Lender together with interest thereon at a rate per annum equal to the lesser of (i) the Highest Lawful Rate or (ii) the Federal Funds Rate. (d) Increased Costs. If, (i) any change after the Agreement Date in any Law or in the interpretation thereof by any Tribunal charged with the administration thereof or (ii) compliance by a Lender with any Law or any guideline or requirement from any central bank or Tribunal (whether or not having the force of law) adopted or promulgated after the Agreement Date (including any implementation of the Basle Accord or similar guideline or requirement adopted, promulgated or becoming effective after the Agreement Date) shall either (A) impose, modify or deem applicable any reserve, special deposit or similar requirement against letters of credit or guarantees issued by, or assets held by, or deposits in or for the account of, the Issuing Bank or any Lender or any corporation controlling the Issuing Bank or any Lender or (B) impose on the Issuing Bank or any Lender or any corporation controlling the Issuing Bank or any Lender any other condition regarding this Agreement or any Letter of Credit, and the result of any event referred to in the preceding clause (A) or (B) shall be to materially increase the cost to the Issuing Bank or any corporation controlling the Issuing Bank of issuing or maintaining any Letter of Credit or to any Lender or any corporation controlling such Lender of purchasing any participation therein or making any Advance pursuant to Section 2.15(c), then, within 10 days after demand by the Issuing Bank or such Lender, the Borrower shall, subject to Section 11.9 hereof, pay to the Issuing Bank or such Lender, from time to time as specified by the Issuing Bank or such Lender, additional amounts that shall be sufficient to compensate the Issuing Bank or such Lender or any corporation controlling such Lender for such increased cost. Any claim by the Issuing Bank or any Lender under this Section 2.15 (d) shall be made within 90 days after the Issuing Bank or such Lender (as the case may be) becomes aware of the fact or circumstance giving rise thereto. A certificate as to the amount of such increased cost, submitted to the Borrower by the Issuing Bank or such Lender, shall certify that such increased costs were actually incurred by the Issuing Bank or such Lender and shall show in reasonable detail an accounting of the amount payable and the calculation used to determine in good faith such amount and shall constitute prima facie evidence of such amount. In determining such amount, the Issuing Bank or such Lender may use any reasonable averaging or attribution method which provides for the allocation of such amounts among its affected customers in good faith and on an equitable basis. Nothing in this Section 2.15(d) shall provide the Borrower or any Subsidiary of the Borrower the right to inspect the records, files or books of the Issuing Bank or any Lender. If the Borrower becomes obligated to pay additional amounts described in this Section 2.15(d) to any Lender, the Borrower may designate a financial institution reasonably acceptable to the Administrative Agent to replace such Lender by purchasing for cash and receiving an assignment of such Lender's pro rata share of the Commitments and the Rights of such Lender under the Loan Documents without recourse to or warranty by, or expenses to, such Lender, for a purchase price equal to the outstanding amounts owing to such Lender (including such additional amounts owing to such Lender pursuant to this Section 2.15(d)). Upon execution of an Assignment Agreement, such other financial institution shall be deemed to be a "Lender" for all purposes of this Agreement as set forth in Section 11.6 hereof. The obligations of the Borrower under this Section 2.15(d) shall survive termination of this Agreement. The Issuing Bank or any Lender claiming any additional 38 39 compensation under this Section 2.15(d) shall use reasonable efforts (consistent with legal and regulatory restrictions) to reduce or eliminate any such additional compensation which may thereafter accrue and which efforts would not, in the reasonable judgment of the Issuing Bank or such Lender, be otherwise disadvantageous. (e) Obligations Absolute. The obligations of the Borrower under this Agreement with respect to any Letter of Credit, any Letter of Credit Agreement and any other agreement or instrument relating to any Letter of Credit or any Revolving Credit Advance pursuant to Section 2.15(c) shall be unconditional and irrevocable, and shall be paid strictly in accordance with the terms of this Agreement, such Letter of Credit Agreement and such other agreement or instrument under all circumstances, including, without limitation, the following circumstances: (i) any lack of validity or enforceability of this Agreement, any other Loan Document, any Letter of Credit Agreement, any Letter of Credit or any other agreement or instrument relating thereto (collectively, the "L/C Related Documents"); (ii) (A) any change in the time, manner or place of payment of, or in any other term of, all or any of the Obligations of the Borrower in respect of the Letters of Credit or any Revolving Credit Advance pursuant to Section 2.15(c) or (B) any other amendment or waiver of or any consent to departure from all or any of the L/C Related Documents; (iii) the existence of any claim, set-off, defense (other than final payment) or other right that the Borrower may have at any time against any beneficiary or any transferee of a Letter of Credit (or any Persons for whom any such beneficiary or any such transferee may be acting), the Issuing Bank, any Lender or any other Person, whether in connection with this Agreement, the transactions contemplated hereby or by the L/C Related Documents or any unrelated transaction; (iv) any statement or any other document presented under a Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (v) payment by the Issuing Bank under a Letter of Credit against presentation of a draft or certificate that does not comply with the terms of the Letter of Credit, except for any payment made upon the Issuing Bank's gross negligence or wilful misconduct; (vi) any release or amendment or waiver of or consent to departure from any guarantee, for all or any of the Obligations of the Borrower in respect of the Letters of Credit or any Revolving Credit Advance pursuant to Section 2.15(c); or (vii) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing, including, without limitation, any other circumstance that might 39 40 otherwise constitute a defense available to, or a discharge of, the Borrower or a guarantor, other than the Issuing's Bank gross negligence or wilful misconduct. (f) Compensation for Letters of Credit. (i) Credit Fee. Subject to Section 11.9 hereof, the Borrower shall pay to the Administrative Agent for the account of the Lenders according to their Specified Percentages, a per annum fee (which shall be payable quarterly in arrears on each Quarterly Date and on the Revolving Commitment Maturity Date) equal to the product of the Applicable LIBOR Rate Margin in effect from time to time multiplied by the average daily amount available for drawing under all outstanding Letters of Credit. Subject to Section 11.9 hereof, such fee shall be computed on the basis of a year consisting of 365 or 366 days, as applicable, for the actual number of days elapsed. (ii) Fronting Fee. Subject to Section 11.9 hereof, the Borrower shall pay to the Administrative Agent for the account of the Issuing Bank a per annum fronting fee (which shall be payable quarterly in arrears on each Quarterly Date and on the Revolving Commitment Maturity Date) in an amount equal to the product of (a) 0.125% times (y) the average daily amount available for drawing under all outstanding Letters of Credit. Subject to Section 11.9 hereof, such fee shall be computed on the basis of a 360-day year for the actual number of days elapsed. (iii) Administrative Fee. Subject to Section 11.9 hereof, the Borrower shall pay, with respect to each amendment, renewal or transfer of each Letter of Credit and each drawing made thereunder, reasonable documentary and processing charges in accordance with the Issuing Bank's standard schedule for such charges in effect at the time of such amendment, renewal, transfer or drawing, as the case may be. (g) L/C Cash Collateral Account. (i) Upon the occurrence of an Event of Default and demand by the Administrative Agent pursuant to Section 8.2(c) (except in the case of an Event of Default specified in Section 8.1(f) or (g) hereof, to the extent permitted by applicable law, without any demand or taking of any other action by the Administrative Agent or any Lender), the Borrower will promptly pay to the Administrative Agent in immediately available funds an amount equal to the maximum amount then available to be drawn under the Letters of Credit then outstanding. Any amounts so received by the Administrative Agent shall be deposited by the Administrative Agent in a deposit account maintained by the Issuing Bank (the "L/C Cash Collateral Account"). (ii) As security for the payment of all Reimbursement Obligations and for any other Obligations, the Borrower hereby grants, conveys, assigns, pledges, sets over and transfers to the Administrative Agent (for the benefit of the Issuing Bank and Lenders), and 40 41 creates in the Administrative Agent's favor (for the benefit of the Issuing Bank and Lenders) a Lien in, all money, instruments and securities at any time held in or acquired in connection with the L/C Cash Collateral Account, together with all proceeds thereof. The L/C Cash Collateral Account shall be under the sole dominion and control of the Administrative Agent and the Borrower shall have no right to withdraw or to cause the Administrative Agent to withdraw any funds deposited in the L/C Cash Collateral Account. At any time and from time to time, upon the Administrative Agent's request, the Borrower promptly shall execute and deliver any and all such further instruments and documents, including UCC financing statements, as may be necessary, appropriate or desirable in the Administrative Agent's judgment to obtain the full benefits (including perfection and priority) of the security interest created or intended to be created by this paragraph (ii) and of the rights and powers herein granted. The Borrower shall not create or suffer to exist any Lien on any amounts or investments held in the L/C Cash Collateral Account other than the Lien granted under this paragraph (ii). (iii) The Administrative Agent shall (A) apply any funds in the L/C Cash Collateral Account on account of Reimbursement Obligations when the same become due and payable, (B) after the Revolving Commitment Maturity Date, apply any proceeds remaining in the L/C Cash Collateral Account first to pay any unpaid Obligations then outstanding hereunder and then to refund any remaining amount to the Borrower. (iv) The Borrower, no more than once in any calendar month, may direct the Administrative Agent to invest the funds held in the L/C Cash Collateral Account (so long as the aggregate amount of such funds exceeds any relevant minimum investment requirement) in (A) Cash and Cash Equivalents or direct obligations of the United States or any agency thereof, or obligations guaranteed by the United States or any agency thereof, (B) one or more other types of investments permitted by the Determining Lenders, in each case with such maturities as the Borrower, with the consent of the Determining Lenders, may specify, or (C) any combination of the investments described in clause (A) and (B) above, pending application of such funds on account of Reimbursement Obligations or on account of other Obligations, as the case may be. In the absence of any such direction from the Borrower, the Administrative Agent shall invest the funds held in the L/C Cash Collateral Account (so long as the aggregate amount of such funds exceeds any relevant minimum investment requirement) in one or more types of investments with the consent of the Determining Lenders with such maturities as the Borrower, with the consent of the Determining Lenders, may specify, pending application of such funds on account of Reimbursement Obligations or on account of other Obligations, as the case may be. All such investments shall be made in the Administrative Agent's name for the account of the Lenders, subject to the ownership interest therein of the Borrower. The Borrower recognizes that any losses or taxes with respect to such investments shall be borne solely by the Borrower, and the Borrower agrees to hold the Administrative Agent and the Lenders harmless from any and all such losses and taxes, except to the extent that such losses or taxes are finally judicially determined by a court of competent jurisdiction to be the result of gross negligence 41 42 or wilful misconduct of the Administrative Agent. Administrative Agent may liquidate any investment held in the L/C Cash Collateral Account in order to apply the proceeds of such investment on account of the Reimbursement Obligations as provided in Section 2.15(g)(iii) hereof (or on account of any other Obligation then due and payable, as the case may be) without regard to whether such investment has matured and without liability for any penalty or other fee incurred (with respect to which the Borrower hereby agrees to reimburse the Administrative Agent) as a result of such application; provided, that the Administrative Agent shall use its best efforts to first liquidate such investments, if any, which will not result in any penalty or other fee to the Borrower. (v) After the establishment of the L/C Cash Collateral Account pursuant to Section 2.15(g)(i) hereof, the Borrower shall pay to the Administrative Agent the fees customarily charged by the Issuing Bank with respect to the maintenance of accounts similar to the L/C Cash Collateral Account. (vi) At such time as no Event of Default is in existence, the Administrative Agent shall return any amount remaining in the L/C Cash Collateral Account to the Borrower. ARTICLE 3 Conditions Precedent Section 3.1 Conditions Precedent to the Initial Advances and the Initial Letters of Credit. The obligation of each Lender to make the initial Advance and the obligation of the Issuing Bank to issue the initial Letter of Credit is subject to (i) receipt by the Administrative Agent of the following items which are to be delivered, in form and substance reasonably satisfactory to each Lender, with a copy (except for the Notes and this Agreement) for each Lender, and (ii) satisfaction of the following conditions which are to be satisfied: (a) A loan certificate of each Obligor certifying as to the accuracy, in all material respects, of its representations and warranties in the Loan Documents, certifying, in the case of any such Obligor, that no Default or Event of Default has occurred, and including a certificate of incumbency with respect to each Authorized Signatory, and including (i) a copy of the articles or certificate of incorporation or other organizational documents of such Obligor, certified to be true, complete and correct by the secretary of state of its state of organization, (ii) a copy of a certificate of good standing and a certificate of existence for its state of organization and, in the case of any such Obligor, each state in which it is qualified to do business, (iii) a copy of such Obligor's bylaws, partnership agreement or similar document, certified to be true, complete and correct by its secretary or general partner, as the case may be, and (iv) a copy of corporate or similar resolutions authorizing the execution, delivery and performance of the Loan Documents to be executed by such Obligor; 42 43 (b) a duly executed Revolving Credit Note and Term Loan Note payable to the order of each Lender and in an amount for each Lender equal to its Specified Percentage of each Commitment, respectively; (c) UCC searches in appropriate jurisdictions with respect to the Borrower, its property(ies) and its business(es); (d) opinions of counsel to each Obligor addressed to the Lenders and in form and substance satisfactory to the Lenders, dated the Agreement Date, and covering certain of the matters set forth in Sections 4.1(a), (b), (c), (h), (m), (n) and (p) and such other matters incident to the transactions contemplated hereby as the Administrative Agent or Special Counsel may reasonably request; (e) reimbursement for the Administrative Agent for Special Counsel's reasonable and customary fees (on an hourly basis) and expenses rendered through the date hereof, to the extent invoiced on or prior to the Agreement Date; (f) evidence that all proceedings of each Obligor taken in connection with the transactions contemplated by this Agreement and the other Loan Documents shall be reasonably satisfactory in form and substance to the Lenders and Special Counsel; and the Lenders shall have received copies of all documents or other evidence which the Administrative Agent, Special Counsel or any Lender may reasonably request in connection with such transactions; (g) any fees or expenses required to be paid pursuant to the Fee Letters; (h) simultaneously with the making of the initial Advance, executed UCC-3 Termination Statements to be filed in appropriate jurisdictions to terminate all Liens against the Borrower and its Subsidiaries other than Permitted Liens (or written agreements from each holder of such Liens to promptly execute such Termination Statements); (i) all Netcom Recapitalization Documents, which shall be in substance and form reasonably satisfactory to the Determining Lenders; (j) consummation of the Netcom Recapitalization shall simultaneously occur on terms and conditions set forth in the Netcom Recapitalization Documents; (k) evidence satisfactory to the Administrative Agent that (i) the Netcom Convertible Preferred Stock has been issued and the Borrower has received at least $48,268,400 in gross proceeds thereof, and (ii) the Netcom Redeemable Preferred Stock has been issued and the Borrower has received at least $48,268,400 in gross proceeds thereof; 43 44 (l) a pro forma balance sheet of the Borrower and its Subsidiaries taking into account the Netcom Recapitalization and such other information relating to the Netcom Recapitalization as the Determining Lenders may require; (m) the Administrative Agent shall have received an opinion from Houlihan Lokey Howard & Zukin Financial Advisors, Inc., addressed to the Administrative Agent and the Lenders, in form and substance acceptable to the Administrative Agent; and (n) in form and substance reasonably satisfactory to the Lenders and Special Counsel, such other documents, instruments and certificates as the Administrative Agent or any Lender may reasonably require in connection with the transactions contemplated hereby, including without limitation, evidence of the status, organization or authority of the Borrower or any Subsidiary of the Borrower, and the enforceability of the Obligations. Section 3.2 Conditions Precedent to All Advances and Letters of Credit. The obligation of each Lender to make each Advance hereunder (including the initial Advance) and the obligation of the Issuing Bank to issue each Letter of Credit (including the initial Letter of Credit) is subject to fulfillment of the following conditions immediately prior to or contemporaneously with each such Advance or issuance: (a) With respect to each Advance and each issuance of a Letter of Credit, all of the representations and warranties of the Borrower under this Agreement, which, pursuant to Section 4.2 hereof, are made at and as of the time of each such Advance or issuance, shall be true and correct in all material respects, both before and after giving effect to the application of the proceeds of the Advance or Letter of Credit. (b) The incumbency of the Authorized Signatories shall be as stated in the certificate of incumbency delivered in the Borrower's loan certificate pursuant to Section 3.1(a) or as subsequently modified and reflected in a certificate of incumbency delivered to the Administrative Agent. The Lenders may, without waiving this condition, consider it fulfilled and a representation by the Borrower made to such effect if no written notice to the contrary, dated on or before the date of such Advance or Letter of Credit, is received by the Administrative Agent from the Borrower prior to the making of such Advance or issuance of such Letter of Credit; (c) There shall not exist a Default or Event of Default hereunder; (d) The aggregate Advances and Letters of Credit, after giving effect to such proposed Advance or Letter of Credit, shall not exceed the maximum principal amount then permitted to be outstanding hereunder; (e) No order, judgment, injunction or decree of any Tribunal shall purport to enjoin or restrain any Lender or the Issuing Bank from making any Advance or issuing any Letter of Credit; 44 45 (f) There shall be no Litigation pending against, or, to the Borrower's current actual knowledge, threatened against the Borrower or any of its Restricted Subsidiaries, or in any other manner relating directly and adversely to the Borrower or any of its Restricted Subsidiaries, or any of their respective properties, in any court or before any arbitrator of any kind or before or by any governmental body which could reasonably be expected to have a Material Adverse Effect; and (g) There shall have occurred no material adverse change in the business, assets, condition (financial or otherwise), results of operations or business of the Borrower and its Restricted Subsidiaries, taken as a whole, since July 31, 1997 (but after giving effect to the Netcom Recapitalization). Notwithstanding the above, the obligation of each Lender to make a Revolving Credit Advance pursuant to Section 2.15(c) shall be absolute and unconditional and shall not be affected by any circumstances, including, without limitation, (i) the occurrence of any Default or Event of Default, (ii) the failure of the Borrower to satisfy any condition set forth in this Section 3.2, or (iii) any other circumstance, happening or event whatsoever. Section 3.3 Conditions Precedent to Conversions and Continuations. The obligation of the Lenders to convert any existing Base Rate Advance into a LIBOR Advance or to continue any existing LIBOR Advance is subject to the condition precedent that on the date of such conversion or continuation no Event of Default shall have occurred and be continuing or would result from the making of such conversion or continuation. The acceptance of the benefits of each such conversion and continuation shall constitute a representation and warranty by the Borrower to each of the Lenders that no Event of Default shall have occurred and be continuing or would result from the making of such conversion or continuation. ARTICLE 4 Representations and Warranties Section 4.1 Representations and Warranties. The Borrower hereby represents and warrants to each Lender as follows: (a) Organization; Power; Qualification. As of the Agreement Date, the respective jurisdiction of organization or incorporation and percentage ownership by the Borrower of the Subsidiaries listed on Schedule 4 are true and correct. As of the Agreement Date, Schedule 4 is a complete and accurate listing (after giving effect to the Netcom Recapitalization), showing with respect to the Borrower and each Subsidiary of the Borrower (a) its mailing address, which is its principal place of business, (b) the classes of its Equity Interests and the number of amount of its Equity Interests authorized and outstanding, (c) each record and beneficial owner of its outstanding Equity Interests, and (d) all outstanding options, rights, rights of conversion, redemption, purchase or repurchase, rights of first refusal and similar rights relating to the Equity Interests. All of the 45 46 outstanding Equity Interests of the Borrower and each Restricted Subsidiary of the Borrower is validly issued, fully paid and non-assessable. Each of the Borrower and its Restricted Subsidiaries is a corporation or other legal Person duly organized, validly existing and in good standing under the laws of its state of incorporation or organization. Each of the Borrower and its Restricted Subsidiaries has the legal power and authority to own its properties and to carry on its business as now being and hereafter proposed to be conducted. Each of the Borrower and its Restricted Subsidiaries is authorized to do business, duly qualified and in good standing in the jurisdiction as set forth in Schedule 7 and no qualification or authorization is necessary in any other jurisdictions in which the character of its properties or the nature of its business requires such qualification or authorization, except where the failure to be so qualified or authorized would not reasonably be expected to have a Material Adverse Effect. (b) Authorization. The Borrower has legal power and has taken all necessary legal action to authorize it to borrow and request Letters of Credit hereunder. Each of the Borrower and its Restricted Subsidiaries has legal power and has taken all necessary legal action to execute, deliver and perform the Loan Documents to which it is party in accordance with the terms thereof, and to consummate the transactions contemplated thereby. Each Loan Document has been duly executed and delivered by the Borrower or the Restricted Subsidiary of the Borrower executing it. Each of the Loan Documents to which the Borrower or any of its Restricted Subsidiaries is a party is a legal, valid and binding obligation of the Borrower or such Restricted Subsidiary, as applicable, enforceable in accordance with its terms, subject, to enforcement of remedies, to the following qualifications: (i) equitable principles generally, and (ii) Debtor Relief Laws (insofar as any such law relates to the bankruptcy, insolvency or similar event of the Borrower or any Restricted Subsidiary of the Borrower). (c) Compliance with Other Loan Documents and Contemplated Transactions. The execution, delivery and performance by the Borrower and its Restricted Subsidiaries of the Loan Documents to which each is a party, and the consummation of the transactions contemplated thereby, do not and will not (i) require any consent or approval necessary on or prior to the Agreement Date not already obtained, (ii) violate any Applicable Law, (iii) conflict with, result in a breach of, or constitute a default under the certificate of incorporation or by-laws or other applicable organizational documents of the Borrower or any Restricted Subsidiary of the Borrower, (iv) conflict with, result in a breach of, or constitute a default under any Necessary Authorization, indenture, agreement or other instrument, to which the Borrower or any Restricted Subsidiary of the Borrower is a party or by which they or their respective properties may be bound, the effect of which would reasonably be expected to have a Material Adverse Effect, or (v) result in or require the creation or imposition of any Lien (other than Liens in favor of the Lenders to secure the Obligations hereunder) upon or with respect to any property now owned or hereafter acquired by the Borrower or any Restricted Subsidiary of the Borrower. (d) Business. The Borrower and its Restricted Subsidiaries are engaged primarily in the businesses of the development, manufacturing, sale and distribution of network equipment and testing instrumentation and activities reasonably related or incidental thereto. 46 47 (e) Licenses, etc. All Necessary Authorizations have been duly obtained, and are in full force and effect without any known conflict with the rights of others and free from any unduly burdensome restrictions, unless the failure to obtain or have in effect such Necessary Authorizations would not reasonably be expected to result in a Material Adverse Effect. The Borrower and its Subsidiaries are and will continue to be in compliance with all provisions thereof, except to the extent that any such failure to comply would not reasonably be expected to have a Material Adverse Effect. No circumstance exists which would reasonably be expected to impair the utility of the Necessary Authorization or the right to renew such Necessary Authorization the effect of which could reasonably be expected to have a Material Adverse Effect. No Necessary Authorization is the subject of any pending or, to the best of the knowledge of the Senior Officers of Borrower, threatened challenge, suspension, cancellation or revocation, the effect of which would reasonably be expected to have a Material Adverse Effect. (f) Compliance with Law. The Borrower and its Restricted Subsidiaries are in compliance in all respects with all Applicable Laws, except where the failure to so comply would not reasonably be expected to have a Material Adverse Effect. (g) Title to Properties. The Borrower and its Restricted Subsidiaries have good title to, or a valid leasehold or subleasehold interest in, all of their material assets. None of their assets are subject to any Liens, except Permitted Liens. No financing statement or other Lien filing (except relating to Permitted Liens) is on file in any state or jurisdiction that names the Borrower or any of its Restricted Subsidiaries as debtor or covers (or purports to cover) any assets of the Borrower or any of its Restricted Subsidiaries. The Borrower and its Restricted Subsidiaries have not signed any such financing statement or filing, nor any security agreement authorizing any Person to file any such financing statement or filing (except relating to Permitted Liens). (h) Litigation. Except as reflected on Schedule 3 hereto, as of the Agreement Date, there is no Litigation pending against, or, to the current actual knowledge of Borrower's Senior Officers, threatened against the Borrower or any of its Restricted Subsidiaries, or in any other manner relating directly and adversely to the Borrower or any of its Restricted Subsidiaries, or any of their respective properties, in any court or before any arbitrator of any kind or before or by any governmental body in which the amount claimed in an aggregate amount (excluding liabilities for which credit worthy insurance companies have acknowledged coverage) exceeds $1,000,000. (i) Taxes. All federal, material state and other material tax returns of the Borrower and its Subsidiaries required by law to be filed have been duly filed, or extensions have been timely filed, and all material Taxes shown to be due and payable on such returns, have been paid prior to the time when any penalties would attach thereto, unless the same are being diligently contested in accordance with Section 5.6 hereof. The charges, accruals and reserves on the books of the Borrower and its Restricted Subsidiaries in respect of their Taxes are, in the reasonable judgment of the Borrower, adequate. (j) Financial Statements; Material Liabilities. 47 48 (i) The Borrower has heretofore delivered to Lenders the audited balance sheets of the Borrower and its Subsidiaries as at July 31, 1997, and the related statements of earnings and changes in shareholders' equity and statement of cash flows for the twelve-month period then ended. Such financial statements were prepared in conformity with GAAP (other than as set forth in the respective audit reports attached thereto) and fairly present, in all material respects, the financial position of the Borrower and its Subsidiaries as at the date thereof and the combined results of operations and cash flows for the periods covered thereby. (ii) The projected financial statements of the Borrower and its Subsidiaries delivered to the Lenders prior to or on the Agreement Date (taking into effect the Netcom Recapitalization) are based on good faith estimates and assumptions made by the management of the Borrower and believed to be reasonable at the time made, it being recognized by the Lenders that such projections as to future events are not to be viewed as facts and that actual results during the period or periods covered by any such projections may differ in material respects from the projected results. (iii) The financial statements of the Borrower and its Restricted Subsidiaries delivered to the Lenders pursuant to Sections 6.1, 6.2 and 6.3 hereof fairly present in all material respects their respective financial condition and their respective results of operations as of the dates and for the periods shown, all in accordance with GAAP, subject, with respect to the financial statements delivered pursuant to Section 6.1 and 6.2 hereof, to normal year-end adjustments and the absence of footnotes. The latest of such financial statements reflects all material liabilities, direct and contingent, of the Borrower and each Restricted Subsidiary of the Borrower that are required to be disclosed in accordance with GAAP, subject, with respect to the financial statements delivered pursuant to Section 6.1 and 6.2 hereof, the absence of footnotes and appropriate year-end adjustments. (k) No Adverse Change. There has occurred no material adverse change in the business, assets, condition (financial or otherwise), results of operations or business of the Borrower and its Restricted Subsidiaries, taken as a whole, since July 31, 1997 (but after giving effect to the Netcom Recapitalization). (l) ERISA. None of the Borrower or its Controlled Group maintains, contributes to or has any liability with respect to any Plan subject to Title IV of ERISA. Each such Plan (other than any Multiemployer Plan) is in compliance in all material respects with the applicable provisions of ERISA, the Code, and any other applicable Law, except to the extent that failure to so comply would not reasonably be expected to have a Material Adverse Effect. With respect to each Plan (other than any Multiemployer Plan) of the Borrower and each member of its Controlled Group, all reports required under ERISA or any other Applicable Law to be filed with any Tribunal, the failure of which to file could reasonably be expected to result in liability of the Borrower or any member of its Controlled Group in excess of $500,000, have been duly filed. All such reports are true and correct in all material respects as of the date given. No Plan of the Borrower or any member of its 48 49 Controlled Group has been terminated under Section 4041(c) of ERISA nor has any accumulated funding deficiency (as defined in Section 412(a) of the Code) been incurred (without regard to any waiver granted under Section 412 of the Code), nor has any funding waiver from the Internal Revenue Service been received or requested, the result of which would reasonably be expected to have a Material Adverse Effect. None of the Borrower or any member of its Controlled Group has failed to make any contribution or pay any amount due or owing as required under the terms of any such Plan, or by Section 412 of the Code or Section 302 of ERISA by the due date under Section 412 of the Code and Section 302 of ERISA, the result of which would reasonably be expected to have a Material Adverse Effect. There has been no ERISA Event or any event requiring disclosure under Section 4041(c)(3)(C) or 4063(a) of ERISA with respect to any Plan or its related trust of the Borrower or any member of its Controlled Group since the effective date of ERISA, the result of which would reasonably be expected to have a Material Adverse Effect. The present value of the benefit liabilities, as defined in Title IV of ERISA, of each Plan subject to Title IV of ERISA (other than a Multiemployer Plan) of the Borrower and each member of its Controlled Group does not exceed by more than $500,000 the present value of the assets of each such Plan as of the most recent valuation date using each such Plan's actuarial assumptions at such date. There are no pending, or to the Borrower's knowledge threatened, claims, lawsuits or actions (other than routine claims for benefits in the ordinary course) asserted or instituted against, and neither the Borrower nor any member of its Controlled Group has knowledge of any threatened litigation or claims against, the assets of any Plan or its related trust or against any fiduciary of a Plan with respect to the operation of such Plan, the result of which would reasonably be expected to have a Material Adverse Effect. None of the Borrower or, to the Borrower's knowledge, any member of its Controlled Group has engaged in any prohibited transactions, within the meaning of Section 406 of ERISA or Section 4975 of the Code, in connection with any Plan the result of which would reasonably be expected to have a Material Adverse Effect. None of the Borrower or any member of its Controlled Group has withdrawn from any Multiemployer Plan, nor has incurred or reasonably expects to incur (A) any liability under Title IV of ERISA (other than premiums due under Section 4007 of ERISA to the PBGC), (B) any withdrawal liability (and no event has occurred which with the giving of notice under Section 4219 of ERISA would result in such liability) under Section 4201 of ERISA as a result of a complete or partial withdrawal (within the meaning of Section 4203 or 4205 of ERISA) from a Multiemployer Plan, or (C) any liability under Section 4062 of ERISA to the PBGC or to a trustee appointed under Section 4042 of ERISA, the result of which would reasonably be expected to have a Material Adverse Effect. None of the Borrower, any member of its Controlled Group, or any organization to which the Borrower or any member of its Controlled Group is a successor or parent corporation within the meaning of ERISA Section 4069(b), has engaged in a transaction within the meaning of ERISA Section 4069, the result of which would reasonably be expected to have a Material Adverse Effect. None of the Borrower or any member of its Controlled Group maintains or has established any Plan (other than a Multiemployer Plan) which is a welfare benefit plan within the meaning of Section 3(1) of ERISA and which provides for continuing benefits or coverage for any participant or any beneficiary of any participant after such participant's termination of employment, except as may be required by any Applicable Law, the result of which would reasonably be expected to have a Material Adverse Effect. Each of Borrower and its Controlled Group which maintains a Plan which is a welfare benefit plan within the meaning of Section 3(1) 49 50 of ERISA has complied in all material respects with any applicable notice and continuation requirements of the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended, and the regulations thereunder. None of the Borrower or any member of its Controlled Group maintains or has established a multiemployer welfare benefit arrangement within the meaning of Section 3(40)(A) of ERISA. (m) Compliance with Regulations G, T, U and X. The Borrower is not engaged principally or as one of its important activities in the business of extending credit for the purpose of purchasing or carrying any margin stock within the meaning of Regulations G, T, U and X of the Board of Governors of the Federal Reserve System, and no part of the proceeds of the Advances or Letters of Credit will be used to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying any margin stock in any manner which might cause the borrowing of any Advances or the application of any proceeds thereof to violate Regulations G, T, U and X of the Board of Governors of the Federal Reserve System. No more than 25% of the assets of the Borrower and its Restricted Subsidiaries consist of margin stock. (n) Required Consents. The Borrower and its Restricted Subsidiaries are not required to obtain any material Necessary Authorization on or prior to the Agreement Date that has not already been obtained from, or effect any material filing or registration that has not already been effected with, any Tribunal in connection with the execution and delivery of this Agreement or any other Loan Document, or the performance thereof, in accordance with their respective terms, including any borrowings hereunder. (o) Absence of Default. The Borrower and its Restricted Subsidiaries are in compliance in all material respects with all of the provisions of their respective certificates of incorporation, by-laws and other organizational documents, and no event has occurred or failed to occur, which has not been remedied or waived, the occurrence or non-occurrence of which constitutes, or which with the passage of time or giving of notice or both would constitute, (i) an Event of Default or (ii) a default by the Borrower or any of its Restricted Subsidiaries under any indenture, agreement or other instrument, or any judgment, decree or order to which the Borrower or any of its Restricted Subsidiaries or by which they or any of their respective properties is bound, the result of which with respect to any default set forth in clause (ii) would reasonably be expected to have a Material Adverse Effect. (p) Governmental Regulation. Neither the Borrower nor any of its Restricted Subsidiaries is subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act, the Interstate Commerce Act or the Investment Company Act of 1940. Neither the entering into or performance by the Borrower of this Agreement nor the issuance of the Notes violates any provision of such act or requires any consent, approval, or authorization of, or registration with, the Securities and Exchange Commission or any other Tribunal pursuant to any provisions of such act. 50 51 (q) Environmental Matters. No substance deemed hazardous by any Applicable Environmental Law, has been placed (i) on any real property fee title to which is now owned by the Borrower or any of its Restricted Subsidiaries or (ii) by Borrower or any of its Restricted Subsidiaries on any real property leased by the Borrower or any of its Restricted Subsidiaries, in either case in a manner which does not comply with Applicable Environmental Laws, except to the extent that the failure to so comply would not reasonably be expected to have a Material Adverse Effect. The Borrower and its Restricted Subsidiaries are not in violation of or subject to any existing, pending or, to the best knowledge of the Borrower's Senior Officers, threatened investigation or inquiry by any Tribunal or to any remedial obligations under any Applicable Environmental Laws, the effect of which would reasonably be expected to have a Material Adverse Effect. The Borrower and its Restricted Subsidiaries have not failed to obtain any permits, licenses or similar authorizations (other than certificates of occupancy and building permits and other authorizations required to construct, occupy, operate or use any buildings, improvements, fixtures, and equipment forming a part of any real property owned or leased by the Borrower or any Restricted Subsidiary of the Borrower) that are required by any Applicable Environmental Laws, except to the extent that the failure to so obtain would not reasonably be expected to have a Material Adverse Effect. No hazardous substances or solid wastes have been disposed of or otherwise released (i) on or to the real property fee title to which is owned by the Borrower or any of its Restricted Subsidiaries or (ii) by Borrower or any of its Restricted Subsidiaries on or to any real property leased by Borrower or any of its Restricted Subsidiaries, all within the meaning of the Applicable Environmental Laws, the effect of which would reasonably be expected to have a Material Adverse Effect. (r) Certain Fees. Except for fees and expenses incurred in connection with the Netcom Recapitalization, no broker's, finder's or other fee or commission will be payable by the Borrower (other than to the Lenders hereunder) with respect to the making of the Commitments or the Advances hereunder. The Borrower agrees to indemnify and hold harmless the Administrative Agent and each Lender from and against any claims, demand, liability, proceedings, costs or expenses asserted with respect to or arising in connection with any such fees or commissions, including those related to the Netcom Recapitalization. (s) Patents, Etc. The Borrower and its Restricted Subsidiaries have collectively obtained or applied for or licensed or otherwise obtained the right to use all patents, trademarks, service marks, trade names, copyrights, and other rights, free from Liens (except Permitted Liens), that are necessary for the operation of their business as presently conducted and as proposed to be conducted, except to the extent that the failure to so obtain, apply, license or obtain the right to use would not reasonably be expected to have a Material Adverse Effect. Nothing has come to the knowledge of Senior Officers of the Borrower or any of its Restricted Subsidiaries to the effect that (i) any process, method, part or other material presently contemplated to be employed by the Borrower or any Restricted Subsidiary of the Borrower infringes any valid and enforceable patent, trademark, service mark, trade name, copyright, license or other right owned by any other Person, or (ii) there is pending or overtly threatened any claim or litigation against or affecting the Borrower or any Restricted 51 52 Subsidiary of the Borrower contesting its right to sell or use any such process, method, part or other material, which would reasonably be expected to have a Material Adverse Effect. (t) Disclosure. All factual information furnished by the Borrower or any of its Restricted Subsidiaries in writing to the Administrative Agent or any Lender in connection with this Agreement or the other Loan Documents is, and all other such factual information hereafter furnished by or on behalf of the Borrower or any of its Restricted Subsidiaries in writing to the Administrative Agent or any Lender in connection with this Agreement will be, true and accurate in all material respects on the date as of which such information is dated or certified and not incomplete by omitting to state any material fact necessary to make such information not misleading at such time in light of the circumstances under which such information was provided; provided, however, the Lenders acknowledge that financial projections and budgets are based on good faith estimates and assumptions made by the management of the Borrower at the time made, it being recognized by the Lenders that projections and budgets as to future events are not to be viewed as facts and that actual results during the period or periods covered by such projections and budgets may differ in material respects from the projected results. There is no fact known to any of the Senior Officers of the Borrower and not known to the public generally that would reasonably be expected to have a Material Adverse Effect, which has not been set forth in this Agreement or in the documents, certificates and statements furnished to the Lenders by or on behalf of the Borrower in connection with the transactions contemplated hereby. (u) Solvency. The Borrower is, and Borrower and its Subsidiaries on a consolidated basis are, Solvent. (v) Labor Relations. Except as provided on Schedule 8, neither the Borrower nor any Restricted Subsidiary is a party to a collective bargaining agreement or similar agreement, and the Borrower and each Restricted Subsidiary is in compliance in all material respects with all Laws respecting employment and employment practices, terms and conditions of employment, wages and hours and other laws related to the employment of its employees, except where the failure to comply would not reasonably be expected to result in a Material Adverse Effect, and there are no arrears in the payment of wages, withholding or social security taxes, unemployment insurance premiums or other similar obligations of the Borrower or any Restricted Subsidiary or for which the Borrower or any Restricted Subsidiary may be responsible other than in the ordinary course of business, except for such unpaid or unwithheld arrears which would not reasonably be expected to result in a Material Adverse Effect. There is no strike, work stoppage or labor dispute with any union or group of employees pending or overtly threatened involving Borrower or any Restricted Subsidiary that would reasonably be expected to have a Material Adverse Effect. (w) Common Enterprise. The operations of the Borrower and its Restricted Subsidiaries require financing on a basis such that the credit supplied can be made available from time to time to the Borrower and various of the Restricted Subsidiaries, as required for the continued successful operation of the Borrower and its Restricted Subsidiaries as a whole. The Borrower and its Restricted Subsidiaries expect to derive benefit (and the boards of directors of the Borrower and its 52 53 Restricted Subsidiaries have determined that the Borrower and the Restricted Subsidiaries may reasonably be expected to derive benefit), directly or indirectly, from the credit extended by Lenders hereunder, both in their separate capacities and as members of the group of companies, since the successful operation and condition of the Borrower and its Restricted Subsidiaries is dependent on the continued successful performance of the functions of the group as a whole. Section 4.2 Survival of Representations and Warranties, etc. All representations and warranties made under this Agreement and the other Loan Documents shall be deemed to be made at and as of the Agreement Date and at and as of the date of each Advance and the date of issuance of each Letter of Credit, and each shall be true and correct in all material respects when made, except to the extent (a) previously fulfilled in accordance with the terms hereof, (b) previously waived in writing by the Determining Lenders with respect to any particular factual circumstance or permitted by the terms of this Agreement or (c) such representations and warranties specifically relate to an earlier date, in which case such representations and warranties shall have been true and correct in all material respects on and as of such date. All such representations and warranties shall survive, and not be waived by, the execution hereof by any Lender, any investigation or inquiry by any Lender, or by the making of any Advance or the issuance of any Letter of Credit under this Agreement. ARTICLE 5 General Covenants So long as any of the Obligations (other than contingent indemnity Obligations which expressly survive the termination of this Agreement) are outstanding and unpaid or any Commitment is outstanding (whether or not the conditions to borrowing have been or can be fulfilled): Section 5.1 Preservation of Existence and Similar Matters. The Borrower shall, and shall cause each Restricted Subsidiary of the Borrower to: (a) except as otherwise permitted pursuant to Section 7.4 hereof, preserve and maintain, or timely obtain and thereafter preserve and maintain, its existence, rights, franchises, licenses, authorizations, consents, privileges and all other Necessary Authorizations from any Tribunal, the loss of which would reasonably be expected to have a Material Adverse Effect; and (b) except as otherwise permitted pursuant to Section 7.4 hereof, qualify and remain qualified and authorized to do business in each jurisdiction in which the character of its properties or the nature of its business requires such qualification or authorization, unless the failure to do so would not reasonably be expected to have a Material Adverse Effect. Section 5.2 Business; Compliance with Applicable Law. The Borrower and its Restricted Subsidiaries shall (a) engage primarily in the businesses set forth in Section 4.1(d) hereof and those 53 54 businesses reasonably related or incidental thereto, and (b) comply in all respects with the requirements of all Applicable Law, except where the failure to so comply would not reasonably be expected to have a Material Adverse Effect. Section 5.3 Maintenance of Properties. The Borrower shall, and shall cause each Restricted Subsidiary of the Borrower to, maintain or cause to be maintained all its properties (whether owned or held under lease) in adequate operating condition and repair for purposes of their current use with due regard to the age thereof, taken as a whole, subject to ordinary wear and tear, and from time to time make or cause to be made all appropriate (in the reasonable judgment of the Borrower) repairs, renewals, replacements, additions, betterments and improvements thereto in accordance with past practice, except where the failure to so maintain, repair, renew, replace or improve would not reasonably be expected to have a Material Adverse Effect. Section 5.4 Accounting Methods and Financial Records. The Borrower shall, and shall cause each Restricted Subsidiary of the Borrower to, maintain a system of accounting established and administered in accordance with GAAP, keep adequate records and books of account in which complete entries will be made and all transactions reflected in accordance with GAAP, and keep accurate and complete records of its respective assets. Section 5.5 Insurance. The Borrower shall, and shall cause each Restricted Subsidiary of the Borrower to, maintain insurance from responsible companies in such amounts and against such risks as shall be customary and usual in the industry for companies of similar size and capability. Section 5.6 Payment of Taxes and Claims. The Borrower shall, and shall cause each Restricted Subsidiary of the Borrower to, pay and discharge all material taxes to which they are subject prior to the date on which penalties attach thereto, and all lawful material claims for labor, materials and supplies which, if unpaid, might by Law become a Lien upon any of its properties; except that no such tax or claim need be paid which is being diligently contested in good faith by appropriate proceedings and for which adequate reserves shall have been set aside on the appropriate books, but only so long as any Lien related thereto is a Permitted Lien. The Borrower shall, and shall cause each Restricted Subsidiary of the Borrower to, timely file all material information returns (or extensions of such filing deadlines) required by federal, state or local tax authorities. Section 5.7 Visits and Inspections. The Borrower shall, and shall cause each Subsidiary of the Borrower to, promptly permit representatives of the Administrative Agent or any Lender from time to time after reasonable notice by the Administrative Agent or any Lender to (a) visit and inspect the properties of the Borrower and its Restricted Subsidiaries as often as the Administrative Agent or any Lender shall reasonably deem advisable, (b) audit, inspect and make extracts from and copies of the Borrower's and each such Restricted Subsidiary's books and records, and (c) discuss with the Borrower's and each such Restricted Subsidiary's directors, officers, employees and auditors, in the presence of a Senior Officer of the Borrower, its business, assets, liabilities, financial positions and results of operations, provided that such representatives of the Administrative Agent or any 54 55 Lender shall keep confidential all information obtained pursuant to this Section 5.7 to the extent required by Section 11.14. The Borrower shall pay the reasonable out-of-pocket expenses related to inspections and audits performed (a) by, or on behalf of, any initial Lender on any single occasion prior to July 31, 1998, (b) at any time by the Administrative Agent and (c) after the occurrence and during the continuance of an Event of Default by each Lender. Except after the occurrence and during the continuance of an Event of Default, all such visits and inspections shall be conducted during normal business hours. Following the occurrence and during the continuance of an Event of Default, such visits and inspections shall be conducted at any time requested by the Administrative Agent or any Lender without any requirement for reasonable notice. Section 5.8 Use of Proceeds. The proceeds of the Advances shall be used by the Borrower to (a) consummate the Netcom Recapitalization and pay certain outstanding Indebtedness of the Borrower and its Restricted Subsidiaries and trade payables, (b) pay certain fees and expenses related to the Netcom Recapitalization, (c) finance acquisitions and to finance the repurchase of the Netcom Preferred Stock, in each case to the extent permitted hereunder, and (d) finance the ongoing working capital and general corporate requirements of the Borrower and its Restricted Subsidiaries. SECTION 5.9 INDEMNITY. (a) THE BORROWER AGREES TO DEFEND, PROTECT, INDEMNIFY AND HOLD HARMLESS THE ADMINISTRATIVE AGENT, EACH LENDER, EACH OF THEIR RESPECTIVE AFFILIATES, AND EACH OF THEIR RESPECTIVE (INCLUDING SUCH AFFILIATES') OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, ATTORNEYS, SHAREHOLDERS AND CONSULTANTS (INCLUDING, WITHOUT LIMITATION, THOSE RETAINED IN CONNECTION WITH THE SATISFACTION OR ATTEMPTED SATISFACTION OF ANY OF THE CONDITIONS SET FORTH HEREIN) OF EACH OF THE FOREGOING (COLLECTIVELY, "INDEMNITEES") FROM AND AGAINST ANY AND ALL LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, CLAIMS, REASONABLE COSTS, REASONABLE OUT-OF-POCKET EXPENSES AND REASONABLE DISBURSEMENTS OF ANY KIND OR NATURE WHATSOEVER (INCLUDING, WITHOUT LIMITATION, THE REASONABLE FEES AND DISBURSEMENTS OF COUNSEL FOR SUCH INDEMNITEES IN CONNECTION WITH ANY INVESTIGATIVE, ADMINISTRATIVE OR JUDICIAL PROCEEDING, WHETHER OR NOT SUCH INDEMNITEES SHALL BE DESIGNATED A PARTY THERETO), IMPOSED ON, INCURRED BY, OR ASSERTED AGAINST SUCH INDEMNITEES (WHETHER DIRECT, INDIRECT OR CONSEQUENTIAL AND WHETHER BASED ON ANY FEDERAL, STATE, OR LOCAL LAWS AND REGULATIONS, UNDER COMMON LAW OR AT EQUITABLE CAUSE, OR ON CONTRACT, TORT OR OTHERWISE, ARISING FROM OR CONNECTED WITH THE PAST, PRESENT OR FUTURE OPERATIONS OF THE BORROWER OR ANY SUBSIDIARY OF THE BORROWER OR THEIR RESPECTIVE PREDECESSORS IN INTEREST, OR THE PAST, PRESENT OR FUTURE ENVIRONMENTAL CONDITION OF PROPERTY OF THE BORROWER OR ANY SUBSIDIARY OF THE BORROWER), 55 56 RELATING TO OR ARISING OUT OF THIS AGREEMENT, THE OTHER LOAN DOCUMENTS, OR ANY ACT, EVENT OR TRANSACTION OR ALLEGED ACT, EVENT OR TRANSACTION RELATING THERETO, INCLUDING IN CONNECTION WITH, OR AS A RESULT, IN WHOLE OR IN PART, OF ANY ORDINARY NEGLIGENCE OF ADMINISTRATIVE AGENT OR ANY LENDER (OTHER THAN THOSE MATTERS RAISED EXCLUSIVELY BY A PARTICIPANT AGAINST THE ADMINISTRATIVE AGENT OR ANY LENDER AND NOT THE BORROWER), OR THE USE OR INTENDED USE OF THE PROCEEDS OF THE ADVANCES OR LETTERS OF CREDIT HEREUNDER, OR IN CONNECTION WITH ANY INVESTIGATION OF ANY POTENTIAL MATTER COVERED HEREBY, BUT EXCLUDING (I) ANY CLAIM OR LIABILITY THAT ARISES AS THE RESULT OF THE GROSS NEGLIGENCE OR WILFUL MISCONDUCT OF ANY INDEMNITEE, AS FINALLY JUDICIALLY DETERMINED BY A COURT OF COMPETENT JURISDICTION, AND (II) MATTERS RAISED BY ONE LENDER AGAINST ANOTHER LENDER OR BY ANY SHAREHOLDERS OF A LENDER AGAINST A LENDER OR ITS MANAGEMENT (COLLECTIVELY, EXCEPT FOR THE MATTERS REFERRED TO CLAUSES (I) OR (II) ABOVE, "INDEMNIFIED MATTERS", AND THE MATTERS REFERRED TO IN CLAUSES (I) OR (II) ABOVE, COLLECTIVELY, "EXCLUDED MATTERS"). TO THE EXTENT THAT ANY INDEMNIFIED MATTER INVOLVES ONE OR MORE INDEMNITEES, SUCH INDEMNITEES SHALL USE THE SAME LEGAL COUNSEL UNLESS ANY INDEMNITEE IN ITS REASONABLE DISCRETION DETERMINES THAT CONFLICTS EXIST OR MAY ARISE IN CONNECTION WITH SUCH REPRESENTATION. (b) WITHOUT DUPLICATION, THE BORROWER SHALL PERIODICALLY, UPON REQUEST, REIMBURSE EACH INDEMNITEE FOR ITS REASONABLE OUT-OF-POCKET LEGAL AND OTHER ACTUAL REASONABLE EXPENSES (INCLUDING THE REASONABLE COST OF ANY INVESTIGATION AND PREPARATION) INCURRED IN CONNECTION WITH ANY INDEMNIFIED MATTER; PROVIDED, HOWEVER, THAT IF AN INDEMNITEE IS REIMBURSED HEREUNDER FOR SUCH AMOUNT, THE AMOUNT SO PAID SHALL BE REFUNDED TO THE BORROWER IF AND TO THE EXTENT IT IS FINALLY JUDICIALLY DETERMINED THAT THE INDEMNIFIED MATTER IN QUESTION WAS AN EXCLUDED MATTER. THE REIMBURSEMENT, INDEMNITY AND CONTRIBUTION OBLIGATIONS UNDER THIS SECTION SHALL BE IN ADDITION TO ANY LIABILITY WHICH THE BORROWER MAY OTHERWISE HAVE, SHALL EXTEND UPON THE SAME TERMS AND CONDITIONS TO EACH INDEMNITEE, AND SHALL BE BINDING UPON AND INURE TO THE BENEFIT OF ANY SUCCESSORS, ASSIGNS, HEIRS AND PERSONAL REPRESENTATIVES OF THE BORROWER, THE ADMINISTRATIVE AGENT, THE LENDERS AND ALL OTHER INDEMNITEES. THIS SECTION SHALL SURVIVE ANY TERMINATION OF THIS AGREEMENT AND PAYMENT OF THE OBLIGATIONS. 56 57 Section 5.10 Environmental Law Compliance. The use which the Borrower or any Restricted Subsidiary of the Borrower intends to make of any real property which is owned or leased by it will not result in the disposal or other release of any hazardous substance or solid waste on or to such real property which is in violation of Applicable Environmental Laws, the effect of which would reasonably be expected to have a Material Adverse Effect. As used herein, the terms "hazardous substance" and "release" as used in this Section shall have the meanings specified in CERCLA (as defined in the definition of Applicable Environmental Laws), and the terms "solid waste" and "disposal" shall have the meanings specified in RCRA (as defined in the definition of Applicable Environmental Laws); provided, however, that if CERCLA or RCRA is amended so as to broaden or lessen the meaning of any term defined thereby, such broader or lesser meaning shall apply subsequent to the effective date of such amendment; and provided further, to the extent that any other law applicable to the Borrower, any Restricted Subsidiary or any of their properties establishes a meaning for "hazardous substance," "release," "solid waste," or "disposal" which is broader or lesser than that specified in either CERCLA or RCRA, such broader or lesser meaning shall apply. Section 5.11 Further Assurances. At any time or from time to time upon request by the Administrative Agent, the Borrower or any Restricted Subsidiary of the Borrower shall execute and deliver such further documents and do such other acts and things as the Administrative Agent may reasonably request in order to effect fully the purposes of this Agreement and the other Loan Documents and to provide for payment of the Obligations in accordance with the terms of this Agreement and the other Loan Documents. Without limiting the generality of the foregoing, the Borrower agrees to update and deliver to the Administrative Agent Schedule 4 hereto (with respect to the identities, jurisdictions of incorporation and initial ownership of the Borrower's direct and indirect Subsidiaries) at the time of delivery of the financial statements set forth in Sections 6.2 and 6.3 hereof if the information provided therein is not complete and correct. Section 5.12 Restricted Domestic Subsidiaries. At any time that any Person becomes a Restricted Domestic Subsidiary, (a) such Subsidiary shall execute a Subsidiary Guaranty of the Obligations and (b) the Lenders shall receive such board resolutions, officer's certificates, corporate and other documents and opinions of counsel as the Administrative Agent shall reasonably request in connection with the actions described in clause (a) above. ARTICLE 6 Information Covenants So long as any of the Obligations (other than contingent indemnity Obligations which expressly survive the termination of this Agreement) are outstanding and unpaid or any Commitment is outstanding (whether or not the conditions to borrowing have been or can be fulfilled), the Borrower shall furnish or cause to be furnished to each Lender: 57 58 Section 6.1 Monthly Financials. As soon as available in any event within 30 days after the end of each month prior to July, 1998, monthly financial reports of the Borrower (and its Subsidiaries with which it prepares consolidated financial statements) on a consolidated basis, including a balance sheet as at the end of the preceding calendar month and statements of income and retained earnings and a related statement of cash flows for such month (prepared in accordance with GAAP), such figures for the corresponding month of the preceding fiscal year and comparisons to the budget for such month. Such financial statements shall be certified by the chief financial officer of the Borrower to be (to his knowledge) complete and accurate, to fairly present the financial condition of the Borrower and its Subsidiaries and to be prepared in accordance with GAAP; Section 6.2 Quarterly Financial Statements and Information. Within 60 after the end of each fiscal quarter of each fiscal year (other than the end of a fiscal quarter which coincides with the end of a fiscal year), the consolidated balance sheets of the Borrower and its Restricted Subsidiaries as at the end of such fiscal quarter and the related consolidated statements of income for such fiscal quarter and for the elapsed portion of the year ended with the last day of such fiscal quarter, and consolidated statements of cash flow for the elapsed portion of the year ended with the last day of such fiscal quarter, all of which shall be certified by the chief executive officer, president, chief financial officer, treasurer or other officer of the Borrower acceptable to the Administrative Agent, to, in his or her opinion acting solely in his or her capacity as an officer of the Borrower, present fairly in all material respects, in accordance with GAAP (except for the absence of footnotes), the financial position and results of operations of the Borrower and its Restricted Subsidiaries as at the end of and for such fiscal quarter, and for the elapsed portion of the year ended with the last day of such fiscal quarter, subject only to normal year-end adjustments. Section 6.3 Annual Financial Statements and Information; Certificate of No Default. (a) Within 120 days after the end of each fiscal year, a copy of (i) the consolidated and consolidating balance sheets of the Borrower and its Restricted Subsidiaries, as of the end of the current and prior fiscal years and (ii) the consolidated and consolidating statements of earnings and consolidated statements of changes in shareholders' equity, and statements of cash flow as of and through the end of such fiscal year, all of which are prepared in accordance with GAAP, and, with respect to the consolidated financial statements, certified by independent certified public accountants reasonably acceptable to the Determining Lenders (provided, however, any big six public accounting firm shall be acceptable to the Lenders), whose opinion shall be in scope and substance in accordance with generally accepted auditing standards and shall be unqualified as to scope of audit and going concern. (b) As soon as available, but in any event within 90 days following the end of each fiscal year, a copy of the annual consolidated operating budget of the Borrower and its Subsidiaries for the succeeding fiscal year. Section 6.4 Compliance Certificate. At the time financial statements are furnished pursuant to Sections 6.2 and 6.3 hereof, the Compliance Certificate, completed as provided therein. 58 59 Section 6.5 Copies of Other Reports and Notices. (a) Promptly upon their becoming available, a copy of (i) all reports or letters submitted to the Borrower or any Restricted Subsidiary of the Borrower by accountants in connection with any annual, interim or special audit, including without limitation any report prepared in connection with the annual audit referred to in Section 6.3 hereof, and any other comment letter submitted to management in connection with any such audit, (ii) each regular, periodic or other report and any registration statement (other than statements on Form S-8) or prospectus (or material written communication in respect of any thereof) filed by the Borrower or any Restricted Subsidiary of the Borrower with any securities exchange, with the Securities and Exchange Commission or any successor agency, and (iii) all press releases concerning financial aspects of the Borrower or any Restricted Subsidiary of the Borrower; (b) Promptly upon any Senior Officer of the Borrower becoming aware that (i) the holder(s) of any note(s) or other evidence of indebtedness or other security of the Borrower or any Restricted Subsidiary of the Borrower in excess of $500,000 in the aggregate has given notice or taken any action with respect to a breach, failure to perform, claimed default or event of default thereunder or (ii) any event, circumstance or condition which would reasonably be expected to be classified as a Material Adverse Effect, a written notice specifying the details thereof (or the nature of any claimed default or event of default) and what action is being taken or is proposed to be taken with respect thereto; (c) Promptly upon any Senior Officer of the Borrower becoming aware that any party to any Capitalized Lease Obligations in excess of $500,000 or Operating Lease in which the annual rentals thereunder exceed $250,000, has given notice or taken any action with respect to a breach, failure to perform, claimed default or event of default thereunder, a written notice specifying the details thereof (or the nature of any claimed default or event of default) and what action is being taken or is proposed to be taken with respect thereto; (d) Promptly upon receipt thereof, information with respect to and copies of any notices received from any Tribunal relating to any order, ruling, law, information or policy that relates to a breach of or noncompliance with any Law, and could reasonably be expected to result in the payment of money by the Borrower or any Restricted Subsidiary of the Borrower in an amount of $500,000 or more in the aggregate, or otherwise have a Material Adverse Effect, or result in the loss or suspension of any Necessary Authorization where such loss could reasonably be expected to have a Material Adverse Effect; and (e) From time to time and promptly upon each request, such material data, certificates, reports, statements, documents or further information regarding the assets, business, liabilities, financial position, or results of operations of the Borrower and its Subsidiaries, as the Administrative Agent may reasonably request. 59 60 Section 6.6 Notice of Litigation, Default and Other Matters. Prompt notice of the following events after any Senior Officer of the Borrower has knowledge or notice thereof: (a) The commencement of all Litigation and investigations by or before any Tribunal, and all actions and proceedings in any court or before any arbitrator involving claims for damages (including punitive damages) in excess of $250,000 (after deducting the amount with respect to which creditworthy insurance companies have acknowledged coverage), against or in any other way relating directly to the Borrower, any Restricted Subsidiary of the Borrower, or any of their respective properties or businesses; and (b) Promptly upon the happening of any condition or event of which any Senior Officer of the Borrower has current actual knowledge which constitutes a Default, a written notice specifying the nature and period of existence thereof and what action is being taken or is proposed to be taken with respect thereto. Section 6.7 ERISA Reporting Requirements. (a) Promptly and in any event (i) within 30 days after any Senior Officer of the Borrower or any member of its Controlled Group has current actual knowledge that any ERISA Event described in clause (a) of the definition of ERISA Event or any event described in Section 4063(a) of ERISA with respect to any Plan of the Borrower or any member of its Controlled Group has occurred, and (ii) within 10 days after any Senior Officer of the Borrower or any member of its Controlled Group has current actual knowledge that any other ERISA Event with respect to any Plan of the Borrower or any member of its Controlled Group has occurred or a request for a minimum funding waiver under Section 412 of the Code has been made with respect to any Plan of the Borrower or any member of its Controlled Group, a written notice describing such event and describing what action is being taken or is proposed to be taken with respect thereto, together with a copy of any notice of such event that is given to the PBGC; (b) Promptly and in any event within ten Business Days after receipt thereof directly by the Borrower with respect to any member of its Controlled Group from the PBGC, copies of each notice received by the Borrower or any member of its Controlled Group of the PBGC's intention to terminate any Plan or to have a trustee appointed to administer any Plan; (c) Promptly and in any event within 30 days after request by the Administrative Agent, copies of each annual report (including Schedule B thereto, if applicable) with respect to each Plan subject to Title IV of ERISA of which Borrower or any member of its Controlled Group is the "plan sponsor"; (d) Promptly, and in any event within 10 Business Days after receipt thereof, a copy of any correspondence the Borrower or any member of its Controlled Group receives from the Plan Sponsor (as defined by Section 4001(a)(10) of ERISA) of any Plan concerning potential withdrawal liability pursuant to Section 4219 or 4202 of ERISA, and a statement from the chief financial officer 60 61 of the Borrower or such member of its Controlled Group setting forth details as to the events giving rise to such potential withdrawal liability and the action which the Borrower or such member of its Controlled Group is taking or proposes to take with respect thereto; (e) Notification within 30 days of any material increases in the benefits provided under any existing Plan which is not a Multiemployer Plan, or the establishment of any new Plans, or the commencement of contributions to any Plan to which the Borrower or any member of its Controlled Group was not previously contributing, which could reasonably be expected in any such case to result in an additional material liability to the Borrower; (f) Notification within three Business Days after any Senior Officer of the Borrower or any member of its Controlled Group knows that the Borrower or any such member of its Controlled Group has filed or intends to file a notice of intent to terminate any Plan under a distress termination within the meaning of Section 4041(c) of ERISA and a copy of such notice; and (g) Within three Business Days after receipt of written notice of commencement thereof, notice of all actions, suits and proceedings before any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, affecting the Borrower or any member of its Controlled Group with respect to any Plan, except those which, in the aggregate, if adversely determined could not reasonably be expected to have a Material Adverse Effect. ARTICLE 7 Negative Covenants So long as any of the Obligations (other than contingent indemnity Obligations which expressly survive the termination of this Agreement) are outstanding and unpaid or any Commitment is outstanding (whether or not the conditions to borrowing have been or can be fulfilled): Section 7.1 Indebtedness. The Borrower shall not, and shall not permit any Restricted Subsidiary of the Borrower to, create, assume, incur or otherwise become or remain obligated in respect of, or permit to be outstanding, or suffer to exist any Indebtedness, except: (a) Indebtedness under the Loan Documents; (b) Accounts payable and accrued liabilities incurred in the ordinary course of business; (c) Indebtedness, including in respect of Capitalized Lease Obligations, incurred to purchase or to finance (or to refinance within 90 days after the purchase or lease thereof) the purchase of, capital assets, not to exceed, together with Indebtedness permitted pursuant to clauses (h) and (q) of this Section 7.1, $2,500,000 in the aggregate principal amount outstanding at any one time; 61 62 (d) Institutional Debt (including renewals, replacements and refinancings thereof); provided that the Net Cash Proceeds of such Institutional Debt (and any additional Net Cash Proceeds attributable to all such renewals, replacements and/or refinancings) are applied in accordance with, and to the extent required by, Section 2.5(e) hereof. (e) Hedging obligations under Interest Hedge Agreements entered into with any Lender; (f) Indebtedness existing on the Agreement Date which is described on Schedule 6 hereto, including renewals, replacements and refinancings (but no increases, unless otherwise expressly permitted hereunder) thereof; (g) Indebtedness in respect of endorsement of negotiable instruments in the ordinary course of business; (h) Indebtedness assumed in connection with Acquisitions permitted under Section 7.6 or any other asset or property acquisition permitted hereby not to exceed, together with Indebtedness permitted pursuant to clauses (c) and (q) of this Section 7.1, $2,500,000 in the aggregate principal amount outstanding at any one time; (i) Indebtedness owing to the Borrower or any Restricted Subsidiary by the Borrower or any Restricted Subsidiary of the Borrower, which Indebtedness is subordinated to the Obligations and evidenced by an entry on the financial records of the Borrower and any such Restricted Subsidiary of the Borrower; (j) Guaranties by the Borrower or Restricted Subsidiaries of the Borrower of Indebtedness of the Borrower or other Restricted Subsidiaries of the Borrower, to the extent such underlying Indebtedness is permitted hereunder; (k) Indebtedness to the extent permitted under Section 7.3 hereof; (l) Indebtedness incurred in connection with the financing of insurance premiums; (m) Indebtedness consisting of promissory notes issued by the Borrower or any of its Restricted Subsidiaries to officers, directors and employees of the Borrower or any of its Subsidiaries issued to purchase or redeem shares of common Equity Interests of the Borrower pursuant to the terms of any subscription agreement or option or similar agreement entered into in the ordinary course of business by the Borrower not to exceed $500,000 in aggregate principal amount outstanding at any time; (n) Indebtedness incurred by the Borrower or any of its Restricted Subsidiaries in the form of indemnification obligations, reserves, adjustment of sale price or similar obligations, or from guarantees or letter of credit, surety bonds or performance bonds securing the performance of the 62 63 Borrower or any such Subsidiary pursuant to such agreements, in connection with the disposition of any business, assets or Subsidiaries of the Borrower or any of its Subsidiaries; (o) Indebtedness which may be deemed to exist pursuant to any performance, surety, statutory, appeal or similar bond obtained in the ordinary course of business; (p) Indebtedness consisting of obligations in respect of incentive, earn-out or other similar arrangements incurred in connection with Acquisitions, subject to the limitations on Acquisition Consideration under Section 7.6 hereof; and (q) Other Indebtedness not to exceed, together with Indebtedness permitted pursuant to clauses (c) and (h) of this Section 7.1, $2,500,000 in the aggregate principal amount outstanding at any one time. Section 7.2 Liens. The Borrower shall not, and shall not permit any Restricted Subsidiary of the Borrower to, create, assume, incur, permit or suffer to exist, directly or indirectly, any Lien on any of its assets, whether now owned or hereafter acquired, except Permitted Liens. The Borrower shall not, and shall not permit any Restricted Subsidiary to, agree with any other Person that it shall not create, assume, incur, permit or suffer to exist or to be created, assumed, incurred or permitted to exist, directly or indirectly, any Lien on any of its assets other than in respect of Indebtedness permitted by Sections 7.1(c), (d), (h) and (q), provided that such agreement relates only to the assets purchased or acquired. Section 7.3 Investments. The Borrower shall not, and shall not permit any Restricted Subsidiary of the Borrower to, make any Investment, except that the Borrower and any Restricted Subsidiary of the Borrower may purchase or otherwise acquire and own: (a) Domestic Cash and Cash Equivalents, deposit accounts and Foreign Cash and Cash Equivalents (provided that the Borrower and its Domestic Subsidiaries may not purchase, acquire or own any Foreign Cash and Cash Equivalents); (b) Accounts receivable that arise in the ordinary course of business and are payable on standard terms; (c) Investments in existence on the Agreement Date which are described on Schedule 5 hereto; (d) Investments which are Acquisitions permitted pursuant to Section 7.6 hereof; (e) Investments in the form of Interest Hedge Agreements permitted by Section 7.1(e) hereof; 63 64 (f) Net Investments in, and expenditures in respect of, Acquisitions of Unrestricted Subsidiaries and joint ventures in an aggregate amount after the Agreement Date not to exceed (calculated for such Investment or expenditure immediately prior to the date of such Investment or Acquisition) 5% of the lesser of (i) consolidated total assets of the Borrowers and its Subsidiaries or (ii) EBITDA for the immediately preceding four fiscal quarters (which for purposes of this section shall be calculated for the Borrower and its Subsidiaries); (g) Investments in the Borrower and Investments in Restricted Subsidiaries of the Borrower (i) which have executed a Subsidiary Guaranty and (ii) which have delivered to the Lenders such board resolutions, officer's certificates, corporate and other documents and opinions of counsel as the Administrative Agent shall reasonably request; (h) Net Investments in, and expenditures in respect of, Foreign Restricted Subsidiaries in an aggregate amount after the Agreement Date not to exceed (calculated for such Investment or expenditure immediately prior to the date of such Investment or Acquisition) the lesser of (i) 17% of consolidated total assets of the Borrower and its Subsidiaries or (ii) 20% of EBITDA for the immediately preceding four fiscal quarters (which for purposes of this clause (h) shall be calculated for the Borrower and its Subsidiaries); (i) Investments consisting of non-cash consideration received in connection with a sale of assets permitted by Section 7.5 not to exceed 25% (on a sale-by-sale basis) of the consideration for any such sale; (j) Investments arising from transactions by the Borrower or any of its Restricted Subsidiaries with customers or suppliers in the ordinary course of business, including prepayments and other credits made in the ordinary course of business, endorsements of negotiable instruments, debt obligations and other investments received in connection with the bankruptcy or reorganization of customers and suppliers and in settlement of delinquent obligations of, and other disputes with, customers and suppliers; (k) Investments which are Capital Expenditures; (l) Investments which are loans to management, officers and employees of the Borrower or any of its Subsidiaries, the proceeds of which are used solely to purchase Equity Interests of the Borrower; (m) Investments in the form of the repurchase of common Equity Interests of the Borrower pursuant to the Netcom Recapitalization; (n) Investments which are pledges and deposits permitted under Section 7.2 hereof; (o) Investments otherwise permitted under Section 7.7 hereof; 64 65 (p) Investments which are deposits made in the ordinary course of business consistent with past practices to secure the performance of leases; and (q) Other Investments not to exceed $250,000 in the aggregate amount outstanding at any one time. Section 7.4 Liquidation, Merger. The Borrower shall not, and shall not permit any Restricted Subsidiary of the Borrower to, at any time: (a) liquidate or dissolve itself (or suffer any liquidation or dissolution) or otherwise wind up, except that a Restricted Subsidiary of the Borrower may liquidate or dissolve into the Borrower or a Restricted Subsidiary of the Borrower; or (b) enter into any merger or consolidation unless (i) with respect to a merger or consolidation involving the Borrower, the Borrower shall be the surviving corporation, or if the merger or consolidation involves a Restricted Subsidiary of the Borrower which is a Guarantor and not the Borrower, such Restricted Subsidiary shall be the surviving corporation, (ii) with respect to a merger or consolidation involving an Unrestricted Subsidiary or a Restricted Foreign Subsidiary, such Unrestricted Subsidiary or Restricted Foreign Subsidiary may merge into the Borrower (which shall be the surviving corporation) or a Restricted Subsidiary of the Borrower (which Restricted Subsidiary shall be the surviving entity), (iii) such transaction shall not be utilized to circumvent compliance with any term or provision herein and (iv) no Default or Event of Default shall then be in existence or occur as a result of such transaction. Section 7.5 Sales of Assets. The Borrower shall not, and shall not permit any Restricted Subsidiary of the Borrower to, sell, transfer or otherwise dispose of, any of its assets except (a) inventory in the ordinary course of business, (b) obsolete or worn-out assets, (c) sales of assets in which the Net Cash Proceeds from the disposition thereof (to the extent not applied pursuant to clause (d) immediately following) are reinvested, within 120 days before or after such disposition, in productive assets used in the business of the Borrower and its Restricted Subsidiaries, (d) asset sales the Net Cash Proceeds of which are applied in accordance with Section 2.5(c) hereof, (e) sales of accounts receivable permitted by Section 7.13 hereof, (f) sales, leases, licenses, transfers and other dispositions of assets by the Borrower or any Restricted Subsidiary to the Borrower or any Restricted Subsidiary, (g) other sales or dispositions of assets having an aggregate fair market value not exceeding $250,000 during any fiscal year of the Borrower, (h) Investments permitted under Section 7.3 hereof, and (i) liquidations, dissolutions and mergers permitted by Section 7.4 hereof. Section 7.6 Acquisitions. The Borrower shall not, and shall not permit any Restricted Subsidiary of the Borrower to, make any Acquisitions; provided, however, if immediately prior to and after giving effect to the proposed Acquisition there shall not exist a Default or Event of Default, the Borrower or any Restricted Subsidiary of the Borrower may make Acquisitions so long as (i) such Acquisition shall not be opposed by the board of the directors of the Person being acquired, (ii) Lenders shall have received written notice at least 15 Business Days prior to the date of such 65 66 Acquisition, (iii) the Administrative Agent shall have received at least 5 Business Days prior to the date of such Acquisition a Compliance Certificate setting forth the covenant calculations on a pro forma basis (after giving effect to such Acquisition and the cost and expense savings related thereto) immediately after giving effect to the proposed Acquisition, (iv) the assets, property or business acquired shall be in the business described in Section 4.1(d) hereof, (v) if such Acquisition results in a Restricted Domestic Subsidiary, (A) such Subsidiary shall execute a Subsidiary Guaranty of the Obligations and (B) the Lenders receive such board resolutions, officer's certificates and opinions of counsel as the Administrative Agent shall reasonably request in connection with the actions described in clause (A) above, and (vi) if such Acquisition results in a Foreign Restricted Subsidiary, (A) 65% of such Subsidiary's Equity Interests shall be pledged to secure the obligations and (B) the Lenders receive such board resolutions, officer's certificates and opinions of counsel as the Administrative Agent shall reasonably request with clause (A) immediately preceding. Notwithstanding anything in this Section 7.6 or any other provision of this Agreement to the contrary, (a) Acquisition Consideration for Acquisitions during any fiscal year may not exceed $10,000,00 in aggregate amount (excluding the Acquisition described in Schedule 5 hereto), and (b) the aggregate amount of expenditures in respect of Acquisitions of, and Investments in, Unrestricted Subsidiaries by the Borrower and the Restricted Subsidiaries after the Agreement Date shall not exceed the amount permitted by Section 7.3(f) hereof. Section 7.7 Restricted Payments. The Borrower shall not, and shall not permit any Restricted Subsidiary of the Borrower to, directly or indirectly declare, pay or make any Restricted Payments except (a) Dividends payable by a Restricted Subsidiary to the Borrower, (b) to purchase, redeem, retire or otherwise acquire shares of Equity Interests of the Borrower, or options or warrants to purchase shares of such Equity Interests, held by officers, directors or employees of the Borrower or any of its Restricted Subsidiaries pursuant to a compensation plan or arrangement in connection with the death, disability or termination of employment of any such officer, director or employee in all such cases taken as a whole, so long as the aggregate cash payments shall not exceed $250,000 in aggregate principal amount during any fiscal year, (c) Permitted Distributions; (d) Investments pursuant to Section 7.3 and (e) refinancings of Institutional Debt pursuant to Section 7.1(d); provided, however, the Borrower shall not pay or make any Restricted Payments permitted by this Section 7.7 unless there shall exist no Default or Event of Default prior to or after giving effect to any such proposed Restricted Payment. Section 7.8 Affiliate Transactions. The Borrower shall not, and shall not permit any Restricted Subsidiary of the Borrower to, at any time engage in any transaction with an Affiliate (other than the Borrower or any other Obligor) on terms materially less advantageous to the Borrower or such Restricted Subsidiary than would be the case if such transaction had been effected with a non-Affiliate; provided, that the Borrower and the Restricted Subsidiaries of the Borrower may (i) pay reasonable and customary fees and expenses to their respective directors, (ii) pay compensation to their respective officers and employees, (iii) pay the transaction fees and expenses in connection with the Netcom Recapitalization and (iv) provide goods and services to the Borrower and the other Subsidiaries of the Borrower at a cost basis or any other fair and reasonable basis customarily utilized to allocate charges among a consolidated group of entities. 66 67 Section 7.9 Compliance with ERISA. The Borrower shall not, and shall not permit any Restricted Subsidiary of the Borrower to, directly or indirectly, or permit any member of its Controlled Group to directly or indirectly, (a) terminate any Plan so as likely to result in liability to the Borrower or any member of its Controlled Group taken as a whole which would reasonably be expected to have a Material Adverse Effect, (b) permit to exist any ERISA Event, or any other event or condition with respect to a Plan which would reasonably be expected to have a Material Adverse Effect, (c) make a complete or partial withdrawal (within the meaning of Section 4201 of ERISA) from any Multiemployer Plan which would reasonably be expected to have a Material Adverse Effect on the Borrower or any member of its Controlled Group taken as a whole, or (d) enter into any new Plan or modify any existing Plan so as to increase its obligations thereunder which would reasonably be expected to have a Material Adverse Effect. Section 7.10 Maximum Leverage Ratio. At the end of each fiscal quarter occurring during the periods indicated below, the Borrower shall not permit the Leverage Ratio (as calculated as of the last Business Day of each such fiscal quarter) to be greater than the ratio set forth below opposite the period in which such fiscal quarter occurs:
Period Ratio ------ --------- From and including the Agreement Date to and including October 31, 1997 2.50 to 1 From and including November 1, 1997 to and including October 31, 1999 2.00 to 1 From and including November 1, 1999 to and including October 31, 2000 1.50 to 1 From and including November 1, 2000 and thereafter 1.00 to 1
Section 7.11 Minimum Fixed Charge Coverage Ratio. At the end of each fiscal quarter occurring during the periods indicated below, the Borrower shall not permit the Fixed Charge Coverage Ratio (as calculated on the last Business Day of each such fiscal quarter) to be less than the ratio set forth below opposite the period in which such fiscal quarter occurs: From and including the Agreement Date to and including October 31, 1999 1.50 to 1 From and including November 1, 1999 and thereafter 1.25 to 1
Section 7.12 Minimum EBITDA and Net Income. The Borrower shall not permit EBITDA or Net Income (as calculated in each case as of the last Business Day of each such fiscal quarter) to be less than $1.00 at the end of (and calculated with respect to) any fiscal quarter ending during this Agreement. Additionally, the Borrower shall not permit EBITDA (which for purposes of this sentence shall be calculated for the Borrower and its Restricted Domestic Subsidiaries) to be less than $30,000,000 for any fiscal year during the term of this Agreement. Section 7.13 Sale or Discount of Receivables. The Borrower shall not, and shall not permit any Restricted Subsidiary of the Borrower to, directly or indirectly, sell, with or without recourse, 67 68 for discount or otherwise, any notes or accounts receivable other than (a) in the ordinary course of business consistent with such practices of the Borrower prior to the Agreement Date or (b) discounting or sale of past-due receivables for collection in the ordinary course of business and in accordance with the past practices of the Borrower or the applicable Restricted Subsidiary. Section 7.14 Business. Neither the Borrower nor any Restricted Subsidiary of the Borrower shall primarily conduct any business other than the business described in Section 4.1(d) hereof and other businesses permitted to be acquired hereunder. Section 7.15 Fiscal Year. Neither the Borrower nor any Restricted Subsidiary of the Borrower shall change its fiscal year from July 31. Section 7.16 Amendment of Organizational Documents. The Borrower shall not, and shall not permit any Restricted Subsidiary of the Borrower to, amend its articles of incorporation, bylaws or other applicable organizational documents in any manner that would reasonably be expected to (a) result in a Material Adverse Effect or (b) materially impair or materially and adversely affect the Rights of the Administrative Agent or any Lender under any Loan Documents. Section 7.17 Amendments and Waivers of Institutional Debt. The Borrower shall not, and shall not permit any Restricted Subsidiary to, change or amend (or take any action or fail to take any action the result of which is an effective amendment or change) or accept any waiver or consent with respect to, any document, instrument or agreement relating to any Institutional Debt that would result in (a) an increase in the principal, interest, overdue interest, fees or other amounts payable under the Institutional Debt, (b) an acceleration in any date fixed for payment or prepayment of principal, interest, fees or other amounts payable under the Institutional Debt (including, without limitation, as a result of any redemption), (c) a reduction in any percentage of holders of the Institutional Debt required under the terms of the Institutional Debt to take (or refrain from taking) any action under the Institutional Debt, (d) a change in any covenant under the Institutional Debt making such covenant more restrictive, (e) a change in any default or event of default (however designated) under the Institutional Debt which makes such default or event of default more restrictive, (f) a change in the definition of "Change of Control" as provided in the Institutional Debt which would result in such definition being more restrictive than such definition in this Agreement, (g) a change in any of the subordination provisions of the Institutional Debt, (h) a change in any covenant, term or provision in the Institutional Debt which would result in such term or provision being more restrictive than the terms of this Agreement and the other Loan Documents or (i) a change in any term or provision of the Institutional Debt that could have, in any material respect, an adverse effect on the interest of the Lenders. Section 7.18 Sale and Leaseback. The Borrower shall not, and shall not permit any Restricted Subsidiary of the Borrower to, directly or indirectly, enter into any arrangement whereby it sells or transfers any of its assets, and thereafter rents or leases such assets. 68 69 ARTICLE 8 Default Section 8.1 Events of Default. Each of the following shall constitute an Event of Default, whatever the reason for such event, and whether voluntary, involuntary, or effected by operation of law or pursuant to any judgment or order of any court or any order, rule or regulation of any governmental or non-governmental body: (a) Any representation or warranty made by the Borrower or any Restricted Subsidiary under any Loan Document shall prove to have been incorrect or misleading in any material respect when made; (b) The Borrower shall fail to pay any (i) principal under any Note when due, (ii) interest under any Note or any fees payable under Section 2.4(a) or Section 2.15(f) hereof within two Business Days after the date due, or (iii) other fees payable hereunder or any other costs, fees, expenses or other amounts payable hereunder or under any other Loan Document within five Business Days after the date due; (c) The Borrower or any Restricted Subsidiary shall default in the performance or observance of any agreement or covenant contained Section 5.1 hereof or in Article 7 (other than Section 7.9) hereof; (d) Any Obligor or any Restricted Subsidiary of the Borrower shall default in the performance or observance of any other agreement or covenant contained in this Agreement not specifically referred to elsewhere in this Section 8.1, and such default shall not be cured within a period of thirty days after the earlier of notice from the Administrative Agent thereof or actual notice thereof by a Responsible Officer of any Obligor or such Restricted Subsidiary; (e) Any Obligor or any Restricted Subsidiary of the Borrower shall default in the performance or observance of any agreement or covenant in any of the Loan Documents (other than this Agreement) and such default shall not be cured within a period of thirty days after the earlier of notice from the Administrative Agent thereof or actual notice thereof by a Responsible Officer of any Obligor or such Restricted Subsidiary; (f) There shall be commenced an involuntary proceeding or an involuntary petition shall be filed in a court having competent jurisdiction seeking (i) relief in respect of any Obligor or any Restricted Subsidiary of the Borrower, or a substantial part of the property or the assets of such Obligor or Restricted Subsidiary of the Borrower, under Title 11 of the United States Code, as now constituted or hereafter amended, or any other applicable Federal, state or foreign bankruptcy law or other similar law, (ii) the appointment of a receiver, liquidator, assignee, trustee, custodian, sequestrator or similar official of any Obligor or any Restricted Subsidiary of the Borrower, or of any substantial part of their respective properties, or (iii) the winding-up or liquidation of the affairs of 69 70 any Obligor or any Restricted Subsidiary of the Borrower, and any such proceeding or petition shall continue unstayed and in effect for a period of 60 consecutive days; (g) Any Obligor or any Restricted Subsidiary of the Borrower shall (i) file a petition, answer or consent seeking relief under Title 11 of the United States Code, as now constituted or hereafter amended, or any other applicable Federal, state or foreign bankruptcy law or other similar law, (ii) consent to the institution of proceedings thereunder or to the filing of any such petition or to the appointment or taking of possession of a receiver, liquidator, assignee, trustee, custodian, sequestrator or other similar official of any Obligor or any Restricted Subsidiary of the Borrower or of substantially all of its properties, (iii) file an answer admitting the material allegations filed against it in any such proceeding, (iv) make a general assignment for the benefit of creditors, (v) become unable, admit in writing its ability or fail generally to pay its debts as they become due, or (vi) any Obligor or any Restricted Subsidiary of the Borrower shall take any corporate action in furtherance of any such action; (h) A final judgment or judgments shall be entered by any court against any Obligor or any Restricted Subsidiary of the Borrower for the payment of money which exceeds $500,000 in the aggregate in excess of insurance, or a warrant of attachment or execution or similar process shall be issued or levied against property of any Obligor which, together with all other such property of the Borrower and its Restricted Subsidiaries subject to other such process, exceeds in value $500,000 in the aggregate, and if such judgment or award is not insured or, within 60 days after the entry, issue or levy thereof, such judgment, warrant or process shall not have been paid or discharged or stayed pending appeal, or if, after the expiration of any such stay, such judgment, warrant or process shall not have been paid or discharged; (i) With respect to any Plan of the Borrower or any member of its Controlled Group: (i) the Borrower, any such member, or any other party-in-interest or disqualified person (other than any Lender) shall engage in transactions which in the aggregate would reasonably be expected to result in a direct or indirect liability to the Borrower or any member of its Controlled Group under Section 409 or 502 of ERISA or Section 4975 of the Code; (ii) the Borrower or any member of its Controlled Group shall incur any accumulated funding deficiency, as defined in Section 412 of the Code, or request a funding waiver from the Internal Revenue Service for contributions; (iii) the Borrower or any member of its Controlled Group shall incur any withdrawal liability as a result of a complete or partial withdrawal within the meaning of Section 4203 or 4205 of ERISA, or any other liability with respect to a Plan, unless the amount of such liability has been funded within the Plan or pursuant to one or more insurance contracts; (iv) the Borrower or any member of its Controlled Group shall fail to make a required contribution by the due date under Section 412 of the Code or Section 302 of ERISA which would result in the imposition of a lien under Section 412 of the Code or Section 302 of ERISA; (v) the Borrower, any member of its Controlled Group or any Plan sponsor shall notify the PBGC of an intent to terminate, or the PBGC shall institute proceedings to terminate, or the PBGC shall institute proceedings to terminate, any Plan subject to Title IV of ERISA; (vi) a Reportable Event shall occur with respect to a Plan subject to Title IV of ERISA, and within 15 days after the reporting of such Reportable Event to the Administrative Agent, the Administrative Agent 70 71 shall have notified the Borrower in writing that the Determining Lenders have made a determination that, on the basis of such Reportable Event, there are reasonable grounds for the termination of such Plan by the PBGC or for the appointment by the appropriate United States District Court of a trustee to administer such Plan and as a result thereof an Event of Default shall have occurred hereunder; (vii) a trustee shall be appointed by a court of competent jurisdiction to administer any Plan or the assets thereof; or (viii) any ERISA Event with respect to a Plan subject to Title IV of ERISA shall have occurred, and 30 days thereafter (A) such ERISA Event, other than such event described in clause (f) of the definition of ERISA Event herein, (if correctable) shall not have been corrected and (B) the then present value of such Plan's benefit liabilities, as defined in Title IV of ERISA, shall exceed the then current value of assets accumulated in such Plan; provided, however, that the events listed in subsections (i) - (viii) above shall constitute Events of Default only if the maximum aggregate unpaid liability which the Borrower or any member of its Controlled Group has a reasonable likelihood of incurring under the applicable provisions of ERISA resulting from an event or events exceeds $500,000; (j) Any Obligor or any Subsidiary of the Borrower shall default in the payment of any Indebtedness in an aggregate amount of $1,250,000 or more beyond any grace period provided with respect thereto, or any other event or condition shall exist under any agreement or instrument under which such Indebtedness is created or evidenced beyond any applicable grace period, if the effect of such event or condition is to permit or cause the holder of such Indebtedness (or a trustee on behalf of any such holder) to (i) cause such Indebtedness to become due or prepaid prior to its date of maturity or (ii) require the any Obligor or any Subsidiary of the Borrower to purchase, prepay or redeem such Indebtedness; (k) Any Obligor shall assert in writing that any provision of any Loan Document is invalid or not binding on or enforceable against any Obligor or any material provision of any Loan Document shall for any reason cease to be valid and binding on or enforceable against any party to it (other than the Administrative Agent or any Lender) other than in accordance with its terms; or (l) A Change of Control shall occur. Section 8.2 Remedies. If an Event of Default shall have occurred and shall be continuing: (a) With the exception of an Event of Default specified in Section 8.1(f) or (g) hereof, the Administrative Agent may at its election, and shall upon the direction of the Determining Lenders, terminate the Commitments and/or declare the principal of and interest on the Advances and all Obligations and other amounts owed under the Loan Documents to be forthwith due and payable without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived, except for notices expressly set forth in the Loan Documents. (b) Upon the occurrence of an Event of Default specified in Section 8.1(f) or (g) hereof, such principal, interest and other amounts shall thereupon and concurrently therewith become due and payable and the Commitments shall forthwith terminate, all without any action by the 71 72 Administrative Agent, any Lender or any holders of the Notes and without presentment, demand, protest or other notice of any kind, all of which are expressly waived, anything in the Loan Documents to the contrary notwithstanding. (c) If any Letter of Credit shall be then outstanding, the Administrative Agent may at its election, and shall upon the direction of the Determining Lenders shall, demand upon the Borrower to, and forthwith upon such demand (but in the case of an Event of Default specified in Section 8.1(f) or (g) hereof, without any demand or taking of any other action by the Administrative Agent or any Lender), the Borrower shall, pay to the Administrative Agent in same day funds at the office of the Administrative Agent for deposit in the L/C Cash Collateral Account, an amount equal to the maximum amount available to be drawn under the Letters of Credit then outstanding. (d) The Administrative Agent and the Lenders may exercise all of the Rights granted to them under the Loan Documents or under Applicable Law. (e) The Rights of the Administrative Agent and the Lenders hereunder shall be cumulative, and not exclusive. ARTICLE 9 Changes in Circumstances Section 9.1 LIBOR Basis Determination Inadequate. If with respect to any proposed LIBOR Advance for any Interest Period, (i) any Lender determines that deposits in dollars (in the applicable amount) are not being offered to that Lender in the relevant market for such Interest Period or (ii) the Determining Lenders determine that the LIBOR Rate for such proposed LIBOR Advance does not adequately cover the cost to such Lender of making and maintaining such proposed LIBOR Advance for such Interest Period, such Lender or Determining Lenders, as the case may be, shall forthwith give notice thereof to the Borrower, whereupon until such Lender or Determining Lenders, as the case may be, notify the Borrower that the circumstances giving rise to such situation no longer exist, the obligation of such Lender to make LIBOR Advances shall be suspended; provided, however, such Lender or the Determining Lenders, as the case may be, shall promptly notify the Borrower if the circumstances giving rise to such situation no longer exist. Section 9.2 Illegality. If after the Agreement Date any change in applicable law, rule or regulation, or adoption thereof, or any change in any interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Lender (or its LIBOR Lending Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency, shall make it unlawful or impossible for such Lender (or its LIBOR Lending Office) to make, maintain or fund its LIBOR Advances, such Lender shall so notify the Borrower and the Administrative Agent. Before giving any notice to the Borrower pursuant to this Section, 72 73 the notifying Lender shall designate a different LIBOR Lending Office or other lending office if such designation will avoid the need for giving such notice and will not, in the sole judgment of the Lender, be materially disadvantageous to the Lender. Upon receipt of such notice, notwithstanding anything contained in Article 2 hereof, the Borrower shall repay in full the then outstanding principal amount of each LIBOR Advance owing to the notifying Lender, together with accrued interest thereon and any reimbursement required under Section 2.9 hereof, on either (a) the last day of the Interest Period applicable to such Advance, if the Lender may lawfully continue to maintain and fund such Advance to such day, or (b) immediately, if the Lender may not lawfully continue to fund and maintain such Advance to such day or if the Borrower so elects. Concurrently with repaying each affected LIBOR Advance owing to such Lender if the Borrower does not terminate this Agreement, notwithstanding anything contained in Article 2 hereof, the Borrower may, without any requirement to satisfy the conditions precedent set forth in Section 3.1, 3.2 or 3.3, borrow a Base Rate Advance from such Lender, and such Lender shall make such Base Rate Advance, in an amount such that the outstanding principal amount of the Advances owing to such Lender shall equal the outstanding principal amount of the Advances owing immediately prior to such repayment. Section 9.3 Increased Costs. (a) If after the Agreement Date any change in or adoption of any law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof or compliance by any Lender (or its LIBOR Lending Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency: (i) shall subject a Lender (or its LIBOR Lending Office) to any Tax (net of any tax benefit engendered thereby) with respect to its LIBOR Advances or its obligation to make such Advances, or shall change the basis of taxation of payments to a Lender (or to its LIBOR Lending Office) of the principal of or interest on its LIBOR Advances or in respect of any other amounts due under this Agreement, as the case may be, or its obligation to make such Advances (except for changes in (A) the rate of tax on the overall net income, net worth or capital of the Lender and franchise taxes, doing business taxes or minimum taxes imposed upon such Lender and (B) withholding taxes of any Tribunal other than the United States of America or any state thereof); or (ii) shall impose, modify or deem applicable any reserve (including, without limitation, any imposed by the Board of Governors of the Federal Reserve System), special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, a Lender's LIBOR Lending Office or shall impose on the Lender (or its LIBOR Lending Office) or on the London interbank market any other condition affecting its LIBOR Advances or its obligation to make such Advances (but excluding any reserves or deposits that are included in the calculation of LIBOR Basis); 73 74 and the result of any of the foregoing is to increase the cost to a Lender (or its LIBOR Lending Office) of making or maintaining any LIBOR Advances, or to reduce the amount of any sum received or receivable by a Lender (or its LIBOR Lending Office) with respect thereto, by an amount deemed by a Lender to be material, then, within 30 days after demand by a Lender, the Borrower agrees to pay to such Lender such additional amount as will compensate such Lender for such increased costs or reduced amounts, subject to Section 11.9 hereof. The affected Lender will as soon as practicable notify the Borrower of any event of which it has knowledge, occurring after the date hereof, which will entitle such Lender to compensation pursuant to this Section and will designate a different LIBOR Lending Office or other lending office if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the reasonable judgment of the affected Lender made in good faith, be disadvantageous to such Lender. (b) A certificate of any Lender claiming compensation under this Section and setting forth the additional amounts to be paid to it hereunder shall certify that such amounts or costs were actually incurred by such Lender and shall show in reasonable detail an accounting of the amount payable and the calculations used to determine in good faith such amount and shall be conclusive absent demonstrable error. In determining such amount, a Lender may use any reasonable averaging and attribution methods. Nothing in this Section 9.3 shall provide the Borrower or any Subsidiary of the Borrower the right to inspect the records, files or books of any Lender. If a Lender demands compensation under this Section, the Borrower may at any time, upon at least five Business Days' prior notice to the Lender, after reimbursement to the Lender by the Borrower in accordance with this Section of all costs incurred, prepay in full the then outstanding LIBOR Advances of the Lender, together with accrued interest thereon to the date of prepayment, along with any reimbursement required under Section 2.9 hereof. Concurrently with prepaying such LIBOR Advances, the Borrower may, without any requirement to satisfy the conditions precedent set forth in Section 3.1, 3.2 or 3.3, borrow a Base Rate Advance from the Lender, and the Lender shall make such Base Rate Advance, in an amount such that the outstanding principal amount of the Advances owing to such Lender shall equal the outstanding principal amount of the Advances owing immediately prior to such prepayment. Section 9.4 Effect On Base Rate Advances. If notice has been given pursuant to Section 9.1, 9.2 or 9.3 hereof suspending the obligation of a Lender to make LIBOR Advances, or requiring LIBOR Advances of a Lender to be repaid or prepaid, then, unless and until the Lender notifies the Borrower that the circumstances giving rise to such repayment no longer apply, all Advances which would otherwise be made by such Lender as LIBOR Advances shall be made instead as Base Rate Advances. Section 9.5 Capital Adequacy. If (a) the introduction of or any change in or in the interpretation of any law, rule or regulation after the Agreement Date or (b) compliance by a Lender with any Law or any guideline or request from any central bank or other governmental authority (whether or not having the force of law) adopted or promulgated after the Agreement Date (including any implementation of the Basle Accord or similar guideline or requirement adopted, promulgated or becoming effective after the Agreement Date) affects or would affect the amount of capital 74 75 required or expected to be maintained by a Lender or any corporation controlling such Lender, and such Lender determines that the amount of such capital is increased by or based upon the existence of such Lender's commitment or Advances hereunder and other commitments or advances of such Lender of this type, then, within 30 days after demand by such Lender, subject to Section 11.9, the Borrower shall immediately pay to such Lender, from time to time as specified by such Lender, additional amounts sufficient to compensate such Lender with respect to such circumstances, to the extent that such Lender reasonably determines in good faith such increase in capital to be allocable to the existence of such Lender's Commitments hereunder. A certificate as to any additional amounts payable to any Lender under this Section 9.5 submitted to the Borrower by such Lender shall certify that such amounts were actually incurred by such Lender or corporation controlling such Lender and shall show in reasonable detail an accounting of the amount payable and the calculations used to determine in good faith such amount and shall constitute prima facie evidence of such amount. In determining such amount, such Lender or a corporation controlling such Lender may use any reasonable averaging and attribution methods which provides for the allocation of such amounts among its affected customers in good faith on an equitable basis. Any claim by any Lender under this Section 9.5 shall be made within 90 days after such Lender becomes aware of the fact or circumstance giving rise thereto. Notwithstanding the foregoing, nothing in this Section 9.5 shall provide the Borrower or any Subsidiary of the Borrower the right to inspect the records, files or books of any Lender or any corporation controlling such Lender. Section 9.6 Replacement Lender. If the Borrower becomes obligated to pay additional amounts to any Lender described in Section 9.2, 9.3 or 9.5, the Borrower may designate a financial institution reasonably acceptable to the Administrative Agent to replace such Lender by purchasing for cash and receiving an assignment of such Lender's pro rata share of such Lender's Commitment and the Rights of such Lender under the Loan Documents without recourse to or warranty by, or expense to, such Lender, for a purchase price equal to the outstanding amounts owing to such Lender (including such additional amounts owing to such Lender pursuant to Section 9.3 or 9.5). Upon execution of an Assignment Agreement, such other financial institution shall be deemed to be a "Lender" for all purposes of this Agreement as set forth in Section 11.6 hereof. ARTICLE 10 Agreement Among Lenders Section 10.1 Agreement Among Lenders. The Lenders agree among themselves that: (a) Administrative Agent. Each Lender hereby appoints the Administrative Agent as its nominee in its name and on its behalf, to receive all documents and items to be furnished hereunder; to act as nominee for and on behalf of all Lenders under the Loan Documents; to, except as otherwise expressly set forth herein, take such action as may be requested by the Determining Lenders, provided that, (i) unless and until the Administrative Agent shall have received such requests, the Administrative Agent may take such administrative action, or refrain from taking such administrative 75 76 action, as it may deem advisable and in the best interests of the Lenders, and (ii) the Administrative Agent shall not be required to take any action that exposes the Administrative Agent to personal liability or that is contrary to any Loan Document or Applicable Law; to arrange the means whereby the proceeds of the Advances of the Lenders are to be made available to the Borrower; to distribute promptly to each Lender information, requests and documents received from the Borrower, and each payment (in like funds received) with respect to any of such Lender's Advances, or the ratable amount of fees or other amounts; and to deliver to the Borrower requests, demands, approvals and consents received from the Lenders. Administrative Agent agrees to promptly distribute to each Lender, at such Lender's address set forth below information, requests, documents and payments received from the Borrower. The Administrative Agent shall have no trustee or other fiduciary relationship in respect of any Lender by reason of this Agreement or any other Loan Document. The Administrative Agent shall have no duties or responsibilities except those expressly set forth in this Agreement. The duties of the Administrative Agent are mechanical and administrative in nature. (b) Replacement of Administrative Agent. Should the Administrative Agent or any successor Administrative Agent ever cease to be a Lender hereunder, or should the Administrative Agent or any successor Administrative Agent ever resign as Administrative Agent, or should the Administrative Agent or any successor Administrative Agent ever be removed with cause or without cause by the action of all Lenders (other than the Administrative Agent), then the Lender appointed by the other Lenders (with the consent of the Borrower, which consent shall not be unreasonably withheld) shall forthwith become the Administrative Agent, and the Borrower and the Lenders shall execute such documents as any Lender may reasonably request to reflect such change at no cost to the Borrower. If the Administrative Agent also then serves in the capacity of the Issuing Bank, such resignation or removal shall constitute resignation or removal of the Issuing Bank and the successor Administrative Agent shall serve in the capacity of the Issuing Bank. Any resignation or removal of the Administrative Agent or any successor Administrative Agent shall become effective upon the appointment by the Lenders of a successor Administrative Agent; provided, however, if no successor Administrative Agent shall have been so appointed and shall have accepted such appointment within 30 days after the retiring Administrative Agent's giving of notice of resignation or the Lenders' removal of the retiring Administrative Agent, then the retiring Administrative Agent may, on behalf of the Lenders, appoint a successor Administrative Agent, which shall be a commercial bank organized under the Laws of the United States of America or of any State thereof and having a combined capital and surplus of at least $500,000,000. Upon the acceptance of any appointment as the Administrative Agent hereunder by a successor Administrative Agent, such successor Administrative Agent shall thereupon succeed to and become vested with all the rights and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations under the Loan Documents, provided that if the retiring or removed Administrative Agent is unable to appoint a successor Administrative Agent, the Administrative Agent shall, after the expiration of a 60 day period from the date of notice, be relieved of all obligations as Administrative Agent hereunder. Notwithstanding any Administrative Agent's resignation or removal hereunder, the provisions of this Article shall continue to inure to its benefit as to any actions taken or omitted to be taken by it while it was the Administrative Agent under this Agreement. 76 77 (c) Expenses. Each Lender shall pay its pro rata share, based on its Specified Percentage, of any expenses paid by the Administrative Agent directly and solely in connection with any of the Loan Documents if Administrative Agent does not receive reimbursement therefor from other sources within 60 days after the date incurred. Any amount so paid by the Lenders to the Administrative Agent shall be returned by the Administrative Agent pro rata to each paying Lender to the extent later paid by the Borrower or any other Person on the Borrower's behalf to the Administrative Agent. (d) Delegation of Duties. The Administrative Agent may execute any of its duties hereunder by or through officers, directors, employees, attorneys or agents, and shall be entitled to (and shall be protected in relying upon) advice of counsel concerning all matters pertaining to its duties hereunder. (e) Reliance by Administrative Agent. The Administrative Agent and its officers, directors, employees, attorneys and agents shall be entitled to rely and shall be fully protected in relying on any writing, resolution, notice, consent, certificate, affidavit, letter, cablegram, telegram, telex or teletype message, statement, order, or other document or conversation reasonably believed by it or them in good faith to be genuine and correct and to have been signed or made by the proper Person and, with respect to legal matters, upon opinions of counsel selected by the Administrative Agent. The Administrative Agent may, in its reasonable judgment, deem and treat the payee of any Note as the owner thereof for all purposes hereof. (f) Limitation of Administrative Agent's Liability. Neither the Administrative Agent nor any of its officers, directors, employees, attorneys, shareholders or agents shall be liable for any action taken or omitted to be taken by it or them hereunder in good faith and believed by it or them to be within the discretion or power conferred to it or them by the Loan Documents or be responsible for the consequences of any error of judgment, except for its or their own gross negligence or wilful misconduct. Except as aforesaid, the Administrative Agent shall be under no duty to enforce any rights with respect to any of the Advances, or any security therefor. The Administrative Agent shall not be compelled to do any act hereunder or to take any action towards the execution or enforcement of the powers hereby created or to prosecute or defend any suit in respect hereof, unless indemnified to its reasonable satisfaction against loss, cost, liability and expense. The Administrative Agent shall not be responsible in any manner to any Lender for the effectiveness, enforceability, genuineness, validity or due execution of any of the Loan Documents, or for any representation, warranty, document, certificate, report or statement made herein or furnished in connection with any Loan Documents, or be under any obligation to any Lender to ascertain or to inquire as to the performance or observation of any of the terms, covenants or conditions of any Loan Documents on the part of the Borrower. TO THE EXTENT NOT REIMBURSED BY THE BORROWER, EACH LENDER HEREBY SEVERALLY INDEMNIFIES AND HOLDS HARMLESS THE ADMINISTRATIVE AGENT, PRO RATA ACCORDING TO ITS SPECIFIED PERCENTAGE, FROM AND AGAINST ANY AND ALL LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES AND/OR DISBURSEMENTS OF ANY KIND OR NATURE WHATSOEVER WHICH MAY BE IMPOSED ON, ASSERTED AGAINST, 77 78 OR INCURRED BY THE ADMINISTRATIVE AGENT (IN SUCH CAPACITY) IN ANY WAY WITH RESPECT TO ANY LOAN DOCUMENTS OR ANY ACTION TAKEN OR OMITTED BY THE ADMINISTRATIVE AGENT UNDER THE LOAN DOCUMENTS (INCLUDING ANY NEGLIGENT ACTION OF THE ADMINISTRATIVE AGENT), EXCEPT TO THE EXTENT THE SAME ARE FINALLY DETERMINED BY A COURT OF COMPETENT JURISDICTION TO RESULT FROM GROSS NEGLIGENCE OR WILFUL MISCONDUCT BY THE ADMINISTRATIVE AGENT. THE INDEMNITY PROVIDED IN THIS SECTION 10.1(f) SHALL SURVIVE TERMINATION OF THIS AGREEMENT. (g) Liability Among Lenders. No Lender shall incur any liability (other than the sharing of expenses and other matters specifically set forth herein and in the other Loan Documents) to any other Lender, except for acts or omissions in bad faith. (h) Rights as Lender. With respect to its commitment hereunder, the Advances made by it and the Notes issued to it, the Administrative Agent shall have the same rights as a Lender and may exercise the same as though it were not the Administrative Agent, and the term "Lender" or "Lenders" shall, unless the context otherwise indicates, include the Administrative Agent in its individual capacity. The Administrative Agent or any Lender may accept deposits from, act as trustee under indentures of, and generally engage in any kind of business with, the Borrower and any of its Affiliates, and any Person who may do business with or own securities of the Borrower or any of its Affiliates, all as if the Administrative Agent were not the Administrative Agent hereunder and without any duty to account therefor to the Lenders. Section 10.2 Lender Credit Decision. Each Lender acknowledges that it has, independently and without reliance upon the Administrative Agent or any other Lender and based upon the financial statements referred to in Sections 4.1(j), 6.1, 6.2 and 6.3 hereof, and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon the Administrative Agent or any other Lender and based upon such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement and the other Loan Documents. Each Lender also acknowledges that its decision to fund the initial Advances shall constitute evidence to the Administrative Agent that such Lender has deemed all of the conditions set forth in Section 3.1 to have been satisfied. Section 10.3 Benefits of Article. None of the provisions of this Article shall inure to the benefit of any Person other than Lenders and, with respect to Section 10.1(b), the Borrower; consequently, no such other Person shall be entitled to rely upon, or to raise as a defense, in any manner whatsoever, the failure of the Administrative Agent or any Lender to comply with such provisions. ARTICLE 11 78 79 Miscellaneous Section 11.1 Notices. (a) All notices and other communications under this Agreement shall be in writing (except in those cases where giving notice by telephone is expressly permitted) and shall be deemed to have been given on the date personally delivered or sent by telecopy (answer back received), or three Business Days after deposit in the mail, designated as certified mail, return receipt requested, postage-prepaid, or one Business Day after being entrusted to a reputable commercial overnight delivery service, addressed to the party to which such notice is directed at its address determined as provided in this Section. All notices and other communications under this Agreement shall be given to the parties hereto at the following addresses: (i) If to the Borrower, at: 20500 Nordhoff Street Chatsworth, California 91311 Attention: Chief Financial Officer Telephone: (818) 700-5100 Telecopier: (818) 709-0827 (ii) If to the Administrative Agent, at: NationsBank of Texas, N.A. 901 Main Street, 67th Floor Dallas, Texas 75202-3714 Attention: Yousuf Omar Telephone: (214) 508-3347 Telecopier: (214) 508-0980 (iii) If to a Lender, at its address shown below its name on the signature pages hereof, or if applicable, set forth in its Assignment Agreement. (b) Any party hereto may change the address to which notices shall be directed by giving 10 days' written notice of such change to the other parties. Section 11.2 Expenses. The Borrower shall promptly pay: -------- (a) all reasonable out-of-pocket expenses of the Administrative Agent in connection with the preparation, negotiation, execution and delivery of this Agreement and the other Loan Documents, the transactions contemplated hereunder and thereunder, and the making of Advances hereunder, including without limitation the reasonable fees and disbursements of Special Counsel; 79 80 (b) all reasonable out-of-pocket expenses, including reasonable attorneys' fees, of the Administrative Agent in connection with the transactions contemplated in this Agreement and the other Loan Documents and the preparation, negotiation, execution and delivery of any waiver, amendment or consent by the Administrative Agent relating to this Agreement or the other Loan Documents; and (c) all reasonable out-of-pocket costs, expenses and attorneys' fees of the Administrative Agent and each Lender incurred for enforcement, collection, restructuring, refinancing and "workout", or otherwise incurred in obtaining performance under the Loan Documents, which in each case shall include without limitation reasonable fees and expenses of consultants, counsel for the Administrative Agent and any Lender. Section 11.3 Waivers. The rights and remedies of the Lenders under this Agreement and the other Loan Documents shall be cumulative and not exclusive of any rights or remedies which they would otherwise have. No failure or delay by the Administrative Agent or any Lender in exercising any right shall operate as a waiver of such right. The Lenders expressly reserve the right to require strict compliance with the terms of this Agreement in connection with any funding of a request for an Advance. In the event that any Lender decides to fund an Advance at a time when the Borrower is not in strict compliance with the terms of this Agreement, such decision by such Lender shall not be deemed to constitute an undertaking by the Lender to fund any further requests for Advances or preclude the Lenders from exercising any rights available under the Loan Documents or at law or equity. Any waiver or indulgence granted by the Lenders shall not constitute a modification of this Agreement, except to the extent expressly provided in such waiver or indulgence, or constitute a course of dealing by the Lenders at variance with the terms of the Agreement such as to require further notice by the Lenders of the Lenders' intent to require strict adherence to the terms of the Agreement in the future. Any such actions shall not in any way affect the ability of the Administrative Agent or the Lenders, in their discretion, to exercise any rights available to them under this Agreement or under any other agreement, whether or not the Administrative Agent or any of the Lenders are a party thereto, relating to the Borrower. Section 11.4 Calculation by the Lenders Conclusive and Binding. Any mathematical calculation required or expressly permitted to be made by the Administrative Agent or any Lender under this Agreement shall constitute prima facie evidence of any amount calculated. Section 11.5 Set-Off. In addition to any rights now or hereafter granted under Applicable Law and not by way of limitation of any such rights, upon the occurrence and during the continuation of an Event of Default, each Lender and any subsequent holder of any Note, and any assignee of any Note is hereby authorized by the Borrower at any time or from time to time, without notice to the Borrower or any other Person, any such notice being hereby expressly waived, to set-off, appropriate and apply any deposits (general or special (except trust and escrow accounts), time or demand, including without limitation Indebtedness evidenced by certificates of deposit, in each case whether matured or unmatured) and any other Indebtedness at any time held or owing by such Lender or holder to or for the credit or the account of the Borrower, against and on account of the Obligations 80 81 and other liabilities of the Borrower to such Lender or holder which are then due and payable, irrespective of whether or not (a) the Lender or holder shall have made any demand hereunder, or (b) the Lender or holder shall have declared the principal of and interest on the Advances and other amounts due hereunder to be due and payable as permitted by Section 8.2. Any sums obtained by any Lender or by any assignee or subsequent holder of any Note shall be subject to pro rata treatment of all Obligations and other liabilities hereunder in accordance with each Lender's Specified Percentage. Section 11.6 Assignment. (a) The Borrower may not assign or transfer any of its rights or obligations hereunder or under the other Loan Documents without the prior written consent of the Lenders. (b) No Lender shall be entitled to assign or grant a participation in its interest in this Agreement, its Notes or its Advances, except as hereinafter set forth. (c) Each Lender may sell participations to one or more banks or other entities (the "Participants") in or to all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of the Advances or Reimbursement Obligations owing to it and the Note or Notes held by it) (the "Participations"); provided, however, that (i) such Lender's obligations under this Agreement (including, without limitation, its Commitment to the Borrower hereunder) shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) such Lender shall remain the holder of any such Note for all purposes of this Agreement, (iv) the Borrower, the Administrative Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement and (v) no Participant under any such Participation shall have any right to approve any amendment or waiver of any provision of any Loan Document, or any consent to any departure by the Borrower therefrom, except to the extent that such amendment, waiver or consent would (A) reduce or postpone any date fixed for payment of principal of, or interest on, the Notes or any fees or other amounts payable hereunder or (B) increase the commitment of any Participant, in each case to the extent subject to such Participation. Notwithstanding the foregoing, the Borrower agrees that Participants shall be entitled to the benefits of Article 9 hereof as though they were Lenders and the Lenders may, subject to Section 11.14 hereof, provide copies of all financial information received from the Borrower to such Participants. (d) Each Lender may assign to one or more Eligible Assignees its rights and obligations under this Agreement and the other Loan Documents; provided, however, that (i) each such assignment shall be subject to the prior written consent of the Administrative Agent and Borrower, which consent shall not be unreasonably withheld (provided, however, notwithstanding anything herein to the contrary, no consent of the Borrower is required for any assignment during any time that an Event of Default has occurred and is continuing), (ii) no such assignment shall be in a principal amount of Commitments less than $10,000,000, unless the Commitments of a Lender are less than $10,000,000, in which case such assignment may be in the aggregate amount of such 81 82 Lender's Commitments, (iii) the applicable Lender, Administrative Agent and Eligible Assignee shall execute and deliver to the Administrative Agent an Assignment and Acceptance Agreement (an "Assignment Agreement") in substantially the form of Exhibit D hereto, together with the Notes subject to such assignment and (iv) the Eligible Assignee executing the Assignment, shall deliver to the Administrative Agent a processing fee of $3,500. Upon such execution, delivery and acceptance from and after the effective date specified in each Assignment, which effective date shall be at least three Business Days after the execution thereof, (A) the Eligible Assignee thereunder shall be party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment, have the rights and obligations of a Lender hereunder and (B) the applicable Lender shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment, relinquish such rights and be released from such obligations under this Agreement. (e) Notwithstanding anything in clause (d) above to the contrary, any Lender may assign and pledge all or any portion of its Advances and Notes to any Federal Reserve Bank as collateral security pursuant to Regulation A of F.R.S. Board and any Operating Circular issued by such Federal Reserve Bank; provided, however, that no such assignment under this clause (e) shall release the assignor Lender from its obligations hereunder. (f) Upon its receipt of an Assignment Agreement executed by a Lender and an Eligible Assignee, and any Note or Notes subject to such assignment, the Borrower shall, subject to the Borrower's rights under Section 11.6(d), within five Business Days after its receipt of such Assignment Agreement execute and deliver to the Administrative Agent in exchange for the surrendered Notes new Notes to the order of such Eligible Assignee in an amount equal to the portion of the Advances and Commitments assigned to it pursuant to such Assignment Agreement and new Notes to the order of the assignor Lender in an amount equal to the portion of the Advances and Commitments retained by it hereunder. Such new Notes shall be in an aggregate principal amount equal to the aggregate principal amount of such surrendered Notes, shall be dated the effective date of such Assignment Agreement and shall otherwise be in substantially the form of Exhibits A and B hereto. (g) Any Lender may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 11.6, disclose to the Eligible Assignee or Participant or proposed Eligible Assignee or participant, any information relating to the Borrower furnished to such Lender by or on behalf of the Borrower, provided such Person agrees in writing to handle such information in accordance with the standards set forth in Section 11.14 hereof. (h) Except as specifically set forth in this Section 11.6, nothing in this Agreement or any other Loan Documents, expressed or implied, is intended to or shall confer on any Person other than the respective parties hereto and thereto and their successors and assignees permitted hereunder and thereunder any benefit or any legal or equitable right, remedy or other claim under this Agreement or any other Loan Documents. 82 83 (i) Notwithstanding anything in this Section 11.6 to the contrary, no Eligible Assignee or Participant (nor the assigning or participating Lender) shall be entitled to receive (whether individually or collectively) any greater payment under Section 2.14 or Section 9.3 or Section 9.5 than such assigning or participating Lender would have been entitled to receive with respect to the interest assigned or participated to such Eligible Assignee or Participant. Section 11.7 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all such separate counterparts shall together constitute but one and the same instrument. Section 11.8 Severability. Any provision of this Agreement or any other Loan Document which is for any reason prohibited or found or held invalid or unenforceable by any court or governmental agency shall be ineffective to the extent of such prohibition or invalidity or unenforceability without invalidating the remaining provisions hereof or thereof in such jurisdiction or affecting the validity or enforceability of such provision in any other jurisdiction. Section 11.9 Interest and Charges. It is not the intention of any parties to this Agreement to make an agreement in violation of the laws of any applicable jurisdiction relating to usury. Regardless of any provision in any Loan Documents, no Lender shall ever be entitled to receive, collect or apply, as interest on the Obligations, any amount in excess of the Highest Lawful Amount. If any Lender or participant ever receives, collects or applies, as interest, any such excess, such amount which would be excessive interest shall be deemed a partial repayment of principal and treated hereunder as such; and if principal is paid in full, any remaining excess shall be paid to the Borrower. In determining whether or not the interest paid or payable, under any specific contingency, exceeds the Highest Lawful Rate, the Borrower and the Lenders shall, to the maximum extent permitted under Applicable Law, (a) characterize any nonprincipal payment as an expense, fee or premium rather than as interest, (b) exclude voluntary prepayments and the effect thereof, and (c) amortize, prorate, allocate and spread in equal parts, the total amount of interest throughout the entire contemplated term of the Obligations so that the interest rate is uniform throughout the entire term of the Obligations; provided, however, that if the Obligations are paid and performed in full prior to the end of the full contemplated term thereof, and if the interest received for the actual period of existence thereof exceeds the Highest Lawful Rate, the Lenders shall refund to the Borrower the amount of such excess or credit the amount of such excess against the total principal amount of the Obligations owing, and, in such event, the Lenders shall not be subject to any penalties provided by any laws for contracting for, charging or receiving interest in excess of the Highest Lawful Rate. This Section shall control every other provision of all agreements pertaining to the transactions contemplated by or contained in the Loan Documents. Section 11.10 Headings. Headings used in this Agreement are for convenience only and shall not be used in connection with the interpretation of any provision hereof. Section 11.11 Amendment and Waiver. The provisions of this Agreement may not be amended, modified or waived except by the written agreement of the Borrower and the Determining 83 84 Lenders; provided, however, that no such amendment, modification or waiver shall be made (a) without the consent of all Lenders, if it would (i) increase the Specified Percentage or commitment of any Lender, or (ii) extend or postpone the date of maturity of, extend the due date for any payment of principal or interest on, reduce the amount of any installment of principal or interest on, or reduce the rate of interest on, any Advance, the Reimbursement Obligations or other amount owing under any Loan Documents to which such Lender is entitled, or (iii) release any guaranty of the Obligations (except pursuant to this Agreement or the other Loan Documents), or (iv) reduce the fees payable hereunder to which such Lender is entitled, or (v) revise this Section 11.11, or (vi) waive the date for payment of any principal, interest or fees hereunder or (vii) amend the definition of "Determining Lenders" or "Specified Percentage"; (b) without the consent of the Administrative Agent, if it, would alter the rights, duties or obligations of the Administrative Agent; or (c) without the consent of the Issuing Bank, if it would alter the rights, duties or obligations of the Issuing Bank. Neither this Agreement nor any term hereof may be amended orally, nor may any provision hereof be waived orally but only by an instrument in writing signed by the Administrative Agent and, in the case of an amendment, by the Borrower. Section 11.12 Exception to Covenants. Neither the Borrower nor any Subsidiary of the Borrower shall be deemed to be permitted to take any action or fail to take any action which is permitted as an exception to any of the covenants contained herein or which is within the permissible limits of any of the covenants contained herein if such action or omission would result in the breach of any other covenant contained herein. Section 11.13 No Liability of Issuing Bank. The Borrower assumes all risks of the acts or omissions of any beneficiary or transferee of any Letter of Credit with respect to its use of such Letter of Credit. Neither the Issuing Bank nor any Lender nor any of their respective officers or directors shall be liable or responsible for: (a) the use that may be made of any Letter of Credit or any acts or omissions of any beneficiary or transferee in connection therewith; (b) the validity, sufficiency or genuineness of documents, or of any endorsement thereon, even if such documents should prove to be in any or all respects invalid, insufficient, fraudulent or forged; (c) payment by the Issuing Bank against presentation of documents that do not comply with the terms of a Letter of Credit, including failure of any documents to bear any reference or adequate reference to the Letter of Credit; or (d) any other circumstances whatsoever in making or failing to make payment under any Letter of Credit, except that the Borrower shall have a claim against the Issuing Bank, and the Issuing Bank shall be liable to the Borrower, to the extent of any direct, but not consequential, damages suffered by the Borrower that a court of competent jurisdiction finally judicially determines were caused by (i) the Issuing Bank's wilful misconduct or gross negligence or (ii) the Issuing Bank's wilful failure to make lawful payment under a Letter of Credit after the presentation to it of a draft and certificates strictly complying with the terms and conditions of the Letter of Credit. In furtherance and not in limitation of the foregoing, the Issuing Bank may accept documents that appear on their face to be in order, without responsibility for further investigation, regardless of any notice or information to the contrary. 84 85 Section 11.14 Confidentiality. Each Lender and the Administrative Agent agrees (on behalf of itself and each of its Affiliates, directors, officers, employees and representatives) to use reasonable efforts to keep confidential, in accordance with customary procedures for handling confidential information of this nature and in accordance with safe and sound banking practices, any non-public information supplied to it by the Borrower or any of its Affiliates pursuant to this Agreement, provided that nothing herein shall limit the disclosure of any such information (a) to the extent required by statute, rule, regulation or judicial process, (b) to counsel for any Lender or the Administrative Agent, (c) to bank examiners, auditors or accountants of any Lender, (d) to the Administrative Agent or any other Lender or any Affiliate thereof, (e) in connection with any Litigation to which any one or more of Lenders is a party, (f) to the extent necessary in connection with the exercise of any remedy under this Agreement or any other Loan Document, or (g) to any Eligible Assignee or Participant (or prospective Eligible Assignee or Participant) so long as such Eligible Assignee or Participant (or prospective Eligible Assignee or Participant) agrees to handle such information in accordance with the provisions of this Section 11.14. Section 11.15 No Duties of Documentation Agent. The Borrower and each Lender acknowledge that the Documentation Agent shall have no duties, responsibilities or liabilities in its capacity as Documentation Agent hereunder. SECTION 11.16 GOVERNING LAW. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS (WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAWS) AND THE UNITED STATES OF AMERICA. THE LOAN DOCUMENTS ARE PERFORMABLE IN DALLAS COUNTY, TEXAS, AND THE BORROWER AND EACH SURETY, GUARANTOR, ENDORSER AND ANY OTHER PARTY EVER LIABLE FOR PAYMENT OF ANY MONEY PAYABLE WITH RESPECT TO THE LOAN DOCUMENTS, JOINTLY AND SEVERALLY WAIVE THE RIGHT TO BE SUED ELSEWHERE. WITHOUT EXCLUDING ANY OTHER JURISDICTION, THE BORROWER, THE ADMINISTRATIVE AGENT AND EACH LENDER EACH AGREES THAT THE STATE AND FEDERAL COURTS OF TEXAS LOCATED IN DALLAS, TEXAS, SHALL HAVE JURISDICTION OVER PROCEEDINGS IN CONNECTION WITH THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS AND HEREBY SUBMITS WITH RESPECT TO ITSELF AND ITS PROPERTY TO THE JURISDICTION OF ANY SUCH COURT FOR THE PURPOSE OF ANY SUIT, ACTION, PROCEEDING OR JUDGMENT RELATING TO OR ARISING OUT OF THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT. SECTION 11.17 WAIVER OF JURY TRIAL. EACH OF THE BORROWER, THE ADMINISTRATIVE AGENT, THE DOCUMENT AGENT AND THE LENDERS HEREBY KNOWINGLY VOLUNTARILY, IRREVOCABLY AND INTENTIONALLY WAIVE, TO THE MAXIMUM EXTENT PERMITTED BY LAW, ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR CLAIM ARISING OUT OF OR RELATED TO ANY OF THE LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED 85 86 THEREBY. THIS PROVISION IS A MATERIAL INDUCEMENT TO EACH LENDER ENTERING INTO THIS AGREEMENT AND MAKING ANY ADVANCES HEREUNDER. SECTION 11.18 ENTIRE AGREEMENT. THIS WRITTEN AGREEMENT, TOGETHER WITH THE OTHER LOAN DOCUMENTS, REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES REGARDING THE SUBJECT MATTER HEREIN AND THEREIN AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES HERETO. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. Section 11.19 Consent by Administrative Agent and the Lenders. The Administrative Agent and each of the Lenders hereby consents to the consummation of the transactions contemplated by the Netcom Recapitalization Documents pursuant to Section 506 of the General Corporation Law of the State of California as in effect as of the Agreement Date. The Administrative Agent and each of the Lenders has received historical financial information regarding the Borrower (including audited financial statements, as of July 31, 1997, for the Borrower) and have also received pro forma balance sheets giving effect to the transactions contemplated by the Netcom Recapitalization Documents. 86 87 IN WITNESS WHEREOF, this Credit Agreement is executed as of the date first set forth above. BORROWER: NETCOM SYSTEMS, INC. By: ------------------------------------- Name: -------------------------------- Title: ------------------------------- ADMINISTRATIVE AGENT: NATIONSBANK OF TEXAS, N.A., as Administrative Agent By: ------------------------------------- Name: -------------------------------- Title: ------------------------------- DOCUMENTATION AGENT: BANKBOSTON, N.A. By: ------------------------------------- Name: -------------------------------- Title: ------------------------------- 87 88 LENDERS: NATIONSBANK OF TEXAS, N.A., as a Lender and Issuing Bank Specified Percentage: 50% By: ------------------------------------- Name: -------------------------------- Title: ------------------------------- 901 Main Street, 67th Floor Dallas, Texas 75202 Attn: Yousuf Omar BANKBOSTON, N.A. Specified Percentage: 50% By: ------------------------------------- Name: -------------------------------- Title: ------------------------------- 435 Tasso Street, Suite 250 Palo Alto, California 94301 with a copy to: BankBoston, N.A. High Technology Division 100 Federal Street MS 01-08-06 Boston, Massachusetts 02110 88 89 SCHEDULE 1 LIBOR LENDING OFFICES NATIONSBANK OF TEXAS, N.A. 901 Main Street, 67th Floor Dallas, Texas 75202 BANKBOSTON, N.A. 100 Federal Street MS 01-08-06 Boston, Massachusetts 02110 90 SCHEDULE 2 EXISTING LIENS None 91 SCHEDULE 3 EXISTING LITIGATION None 92 SCHEDULE 4 CAPITALIZATION
STATE OF PERCENTAGE NAME INCORPORATION CLASS OF STOCK OF OWNERSHIP OWNER ---- ------------- -------------- ------------ ----- Netcom Systems, Inc. California Common Stock 90.0% Marc Hamon Common Stock 1.8% Jim Jordan Common Stock 4.5% Henry Hamon Common Stock 1.8% Dick Bass Common Stock ** Harley Shanko Common Stock ** Jerry Kattel Preferred Stock* 49.1% Summit Ventures IV, L.P. Preferred Stock* ** Summit Investors II, L.P. Preferred Stock* 16.6% NationsBanc Capital Corp. Preferred Stock* 30.1% Northstar Investors, LLC Preferred Stock* 3.1% Spitfire Capital Partners, L.P. Preferred Stock* ** Bain Securities, Inc. Preferred Stock* ** Peter Mooney, as nominee for Broadview Partners Group Preferred Stock* ** WS Investment Company 97B Preferred Stock* ** WSGR Profit Sharing Trust Preferred Stock* ** Steven E. Bochner Preferred Stock* ** Nevan C. Elam Preferred Stock* ** Todd Cleary
- ---------- * Netcom Redeemable Preferred Stock and Netcom Convertible Preferred Stock. ** Less than 1%. 93 SCHEDULE 5 EXISTING INVESTMENTS The Company has entered into a Letter of Intent with Henry Hamon and Elie Hamon concerning a proposed Stock Purchase Agreement whereby the Company would purchase all of the outstanding shares of the French Societe a Responsabilite Limitee Netcom Systems Europe, a company organized under the laws of the Republic of France, held by Messrs. Hamon. 94 SCHEDULE 6 EXISTING INDEBTEDNESS None 95 SCHEDULE 7 AUTHORIZATION, QUALIFICATION AND GOOD STANDING The Borrower may be required to qualify to do business in Massachusetts, New Hampshire and North Carolina, but it is not yet qualified to do business in such states. As of the Agreement Date, the Borrower is in the process of qualifying to do business in such states. 96 SCHEDULE 8 LABOR RELATIONS None 97 Execution Copy ================================================================================ $60,000,000 CREDIT AGREEMENT AMONG NETCOM SYSTEMS, INC. CERTAIN LENDERS NAMED HEREIN BANKBOSTON, N.A., AS DOCUMENTATION AGENT AND NATIONSBANK OF TEXAS, N.A., AS ADMINISTRATIVE AGENT August 29, 1997 ================================================================================ 98 TABLE OF CONTENTS
Page ---- ARTICLE 1 Definitions Section 1.1 Defined Terms..................................................1 Section 1.2 Amendments and Renewals.......................................23 Section 1.3 Construction..................................................23 ARTICLE 2 Advances Section 2.1 The Advances..................................................23 Section 2.2 Manner of Borrowing and Disbursement..........................24 Section 2.3 Interest......................................................25 Section 2.4 Fees..........................................................27 Section 2.5 Prepayments...................................................27 Section 2.6 Reduction of Revolving Credit Commitment......................29 Section 2.7 Non-Receipt of Funds by the Administrative Agent..............30 Section 2.8 Payment of Principal of Advances..............................30 Section 2.9 Reimbursement.................................................31 Section 2.10 Manner of Payment.............................................31 Section 2.11 LIBOR Lending Offices.........................................32 Section 2.12 Sharing of Payments...........................................32 Section 2.13 Calculation of LIBOR Rate.....................................33 Section 2.14 Taxes.........................................................33 Section 2.15 Letters of Credit.............................................36 ARTICLE 3 Conditions Precedent Section 3.1 Conditions Precedent to the Initial Advances and the Initial Letters of Credit.....................................42 Section 3.2 Conditions Precedent to All Advances and Letters of Credit....44 Section 3.3 Conditions Precedent to Conversions and Continuations.........45 ARTICLE 4 Representations and Warranties Section 4.1 Representations and Warranties................................45 Section 4.2 Survival of Representations and Warranties, etc...............53 ARTICLE 5 General Covenants Section 5.1 Preservation of Existence and Similar Matters.................53 Section 5.2 Business; Compliance with Applicable Law......................53 Section 5.3 Maintenance of Properties.....................................54
99 TABLE OF CONTENTS (CONTINUED)
Page ---- Section 5.4 Accounting Methods and Financial Records......................54 Section 5.5 Insurance.....................................................54 Section 5.6 Payment of Taxes and Claims...................................54 Section 5.7 Visits and Inspections........................................54 Section 5.8 Use of Proceeds...............................................55 Section 5.9 Indemnity.....................................................55 Section 5.10 Environmental Law Compliance..................................57 Section 5.11 Further Assurances............................................57 Section 5.12 Restricted Domestic Subsidiaries..............................57 ARTICLE 6 Information Covenants Section 6.1 Monthly Financials............................................58 Section 6.2 Quarterly Financial Statements and Information................58 Section 6.3 Annual Financial Statements and Information; Certificate of No Default ....................................58 Section 6.4 Compliance Certificate........................................58 Section 6.5 Copies of Other Reports and Notices...........................59 Section 6.6 Notice of Litigation, Default and Other Matters...............60 Section 6.7 ERISA Reporting Requirements..................................60 ARTICLE 7 Negative Covenants Section 7.1 Indebtedness..................................................61 Section 7.2 Liens.........................................................63 Section 7.3 Investments...................................................63 Section 7.4 Liquidation, Merger...........................................65 Section 7.5 Sales of Assets...............................................65 Section 7.6 Acquisitions..................................................65 Section 7.7 Restricted Payments...........................................66 Section 7.8 Affiliate Transactions........................................66 Section 7.9 Compliance with ERISA.........................................67 Section 7.10 Maximum Leverage Ratio........................................67 Section 7.11 Minimum Fixed Charge Coverage Ratio...........................67 Section 7.12 Minimum EBITDA and Net Income.................................67 Section 7.13 Sale or Discount of Receivables...............................68 Section 7.14 Business......................................................68 Section 7.15 Fiscal Year...................................................68 Section 7.16 Amendment of Organizational Documents.........................68 Section 7.17 Amendments and Waivers of Institutional Debt..................68 Section 7.18 Sale and Leaseback............................................68
100 TABLE OF CONTENTS (CONTINUED)
Page ---- ARTICLE 8 Default Section 8.1 Events of Default.............................................69 Section 8.2 Remedies......................................................71 ARTICLE 9 Changes in Circumstances Section 9.1 LIBOR Basis Determination Inadequate..........................72 Section 9.2 Illegality....................................................72 Section 9.3 Increased Costs...............................................73 Section 9.4 Effect On Base Rate Advances..................................74 Section 9.5 Capital Adequacy..............................................74 Section 9.6 Replacement Lender............................................75 ARTICLE 10 Agreement Among Lenders Section 10.1 Agreement Among Lenders.......................................75 Section 10.2 Lender Credit Decision........................................78 Section 10.3 Benefits of Article...........................................78 ARTICLE 11 Miscellaneous Section 11.1 Notices.......................................................79 Section 11.2 Expenses......................................................79 Section 11.3 Waivers.......................................................80 Section 11.4 Calculation by the Lenders Conclusive and Binding.............80 Section 11.5 Set-Off.......................................................80 Section 11.6 Assignment....................................................81 Section 11.7 Counterparts..................................................83 Section 11.8 Severability..................................................83 Section 11.9 Interest and Charges..........................................83 Section 11.10 Headings......................................................83 Section 11.11 Amendment and Waiver..........................................84 Section 11.12 Exception to Covenants........................................84 Section 11.13 No Liability of Issuing Bank..................................84 Section 11.14 Confidentiality...............................................85 Section 11.15 No Duties of Documentation Agent..............................85 Section 11.16 Governing Law.................................................85 Section 11.17 Waiver of Jury Trial..........................................85 Section 11.18 Entire Agreement..............................................86 Section 11.19 Consent by Administrative Agent and the Lenders...............86
101 TABLE OF CONTENTS (CONTINUED) Schedules and Exhibits Schedule 1: LIBOR Lending Offices Schedule 2: Existing Liens Schedule 3: Existing Litigation Schedule 4: Capitalization Schedule 5: Existing Investments Schedule 6: Existing Indebtedness Schedule 7: Authorizstion, Qualification and Good Standing Schedule 8: Labor Relations Exhibit A: Revolving Credit Note Exhibit B: Term Loan Note Exhibit C: Compliance Certificate Exhibit D: Assignment and Acceptance Exhibit E: Subsidiary Guaranty Exhibit F: Notice of Borrowing 102 TABLE OF CONTENTS (CONTINUED)
Page ---- Section 1. Recapitalization..................................................................1 1A. Authorization...............................................................1 1B. Investment Transaction......................................................2 1C. Repurchase Transaction......................................................2 1D. Closing.....................................................................3 Section 2. Conditions of the Purchasers' Obligations at the Closing..........................3 2A. Representations and Warranties; Covenants...................................4 2B. Amendment of Articles of Incorporation......................................4 2C. Amendment of Bylaws.........................................................4 2D. Shareholders Agreement......................................................4 2E. Registration Agreement......................................................4 2F. [Intentionally Omitted.]....................................................4 2G. Escrow Agreement............................................................4 2H. Stock Purchase Agreement....................................................4 2I. Opinion of the Company's and the Sellers' Counsel...........................4 2J. Senior Debt Financing.......................................................5 2K. Repurchase Transaction......................................................5 2L. Release of Liens............................................................5 2M. Audit.......................................................................5 2N. Litigation..................................................................5 2O. Filings.....................................................................5 2P. Third Party Consents and Approvals..........................................5 2Q. Governmental Consents and Approvals.........................................5 2R. Material Adverse Change.....................................................6 2S. Expenses....................................................................6 2T. Real Estate Matters.........................................................6 2U. Solvency Opinion............................................................6 2V. Proceedings. ..............................................................6 2W. Closing Documents...........................................................6 2X. Waiver......................................................................7 Section 3. Conditions of the Obligations of the Company and the Sellers at the Closing.......7 3A. Representations and Warranties; Covenants...................................7 3B. Amendment of Articles of Incorporation......................................7 3C. Shareholders Agreement......................................................7 3D. Registration Agreement......................................................8 3E. Escrow Agreement............................................................8 3F. Litigation..................................................................8 3G. Governmental Consents and Approvals.........................................8
-i- 103 TABLE OF CONTENTS (CONTINUED)
Page ---- 3H. Investment Transaction......................................................8 3I. Expenses....................................................................8 3J. Waiver......................................................................8 Section 4. Pre-Closing Covenants and Agreements..............................................8 4A. General.....................................................................8 4B. Maintenance of Business.....................................................8 4C. Third Party Notices and Consents............................................9 4D. Governmental Notices and Consents...........................................9 4E. Operation of Business.......................................................9 4F. Full Access................................................................10 4G. Compliance with Agreements and Laws........................................10 4H. Payment of Obligations.....................................................10 4I. Notice of Material Developments............................................10 4J. Exclusivity................................................................10 4K. Tax Matters................................................................11 4L. Actions with Respect to Repurchased Shares.................................11 4M. Employees..................................................................11 Section 5. Representations and Warranties of the Company and the Sellers....................11 5A. Organization, Corporate Power and Licenses.................................11 5B. Capital Stock and Related Matters..........................................12 5C. Subsidiaries; Investments..................................................13 5D. Authorization; No Breach. .................................................13 5E. Financial Statements.......................................................14 5F. Absence of Undisclosed Liabilities.........................................14 5G. Accounts Receivable........................................................14 5H. Inventories................................................................14 5I. Product Warranty; Product Certifications...................................15 5J. Product Liability..........................................................15 5K. Product Recall, etc........................................................15 5L. No Material Adverse Effect.................................................16 5M. Absence of Certain Developments............................................16 5N. Assets.....................................................................17 5O. Tax Matters................................................................18 5P. Contracts and Commitments..................................................20 5Q. International Trade Laws and Regulations...................................22 5R. Intellectual Property Rights...............................................23 5S. Litigation, etc. ..........................................................24 5T. Brokerage..................................................................25 5U. Insurance..................................................................25
-ii- 104 TABLE OF CONTENTS (CONTINUED)
Page ---- 5V. Employees..................................................................25 5W. ERISA......................................................................26 5X. Compliance with Laws; Permits; Certain Operations..........................27 5Y. Environmental and Safety Matters...........................................28 5Z. Affiliated Transactions....................................................28 5AA. Names and Locations........................................................29 5BB. Suppliers and Customers....................................................29 5CC. Real Property..............................................................29 5DD. Regulatory Status..........................................................29 5EE. Margin Securities..........................................................29 5FF. Small Business Matters.....................................................29 5GG. Disclosure.................................................................30 Section 6. Representations and Warranties of the Sellers....................................30 6A. Capacity; Power and Authority..............................................30 6B. Authorization; No Breach. .................................................30 6C. Title to Shares, etc.......................................................30 6D. Brokerage..................................................................30 6E. Litigation, etc. ..........................................................31 6F. Company Transactions.......................................................31 Section 7. Representations and Warranties of the Purchasers.................................31 7A. Organization, Power and Authority..........................................31 7B. Authorization; No Breach. .................................................31 7C. Brokerage..................................................................31 7D. Investment Representations.................................................32 Section 8. Indemnification and Other Agreements.............................................32 8A. Survival of Representations and Warranties.................................32 8B. General Indemnification. ..................................................33 8C. Press Release and Announcements. ..........................................37 8D. Non-Compete; Non-Solicitation..............................................37 8F. Intellectual Property Rights Protection....................................40 8G. Dispute Resolution.........................................................40 8H. Further Assurances.........................................................41 8I. Option Re-Pricing..........................................................41 Section 9. Definitions......................................................................42 Section 10. Termination.....................................................................49
-iii- 105 TABLE OF CONTENTS (CONTINUED)
Page ---- 10A. Conditions of Termination..................................................49 10B. Effect of Termination......................................................49 Section 11. Miscellaneous...................................................................50 11A. Fees and Expenses..........................................................50 11B. Remedies...................................................................50 11C. Transfer of Restricted Securities..........................................50 11D. Consent to Amendments......................................................51 11E. Successors and Assigns.....................................................52 11F. Severability...............................................................52 11G. Counterparts...............................................................52 11H. Descriptive Headings; Interpretation.......................................52 11I. Entire Agreement...........................................................53 11J. No Third-Party Beneficiaries...............................................53 11K. Schedules..................................................................53 11L. Cooperation on Tax Matters.................................................53 11M. Schedules and Exhibits.....................................................54 11N. Treatment of the Preferred Stock...........................................54 11O. Governing Law..............................................................54 11P. Notices....................................................................54 11Q. No Strict Construction.....................................................57
EXHIBITS AND SCHEDULES Exhibit A - Amended and Restated Articles of Incorporation Exhibit B - Escrow Agreement Exhibit C - Amended and Restated Bylaws Exhibit D - Shareholders Agreement Exhibit E - Registration Agreement Exhibit F - Stock Purchase Agreement Exhibit G - Opinion of Counsel for the Company and the Sellers Disclosure Schedules: Schedule of Purchasers Schedule of Sellers Contracts Schedule Capitalization Schedule Investments and Subsidiaries Schedule -iv- 106 TABLE OF CONTENTS (CONTINUED) Restrictions Schedule Financial Statements Schedule Liabilities Schedule Accounts Receivable Schedule Inventories Schedule Product Warranty Schedule Product Liability Schedule Product Recall Schedule Developments Schedule Assets Schedule Taxes Schedule Intellectual Property Schedule Employees Schedule Employee Benefits Schedule International Trade Compliance Schedule Litigation Schedule Insurance Schedule Employees Schedule Compliance Schedule Permits Schedule Environmental Schedule Affiliated Transactions Schedule Names and Locations Schedule Suppliers and Customers Schedule Company is not presently chedule -v- EX-10.7 11 REGISTRATION AGREEMENT 1 EXHIBIT 10.7 [EXECUTION COPY] NETCOM SYSTEMS, INC. REGISTRATION AGREEMENT THIS AGREEMENT is made as of August 29, 1997, by and among Netcom Systems, Inc., a California corporation (the "Company"), the parties listed as Investors on the Schedule of Investors attached hereto (collectively, the "Investors") and the parties listed as Existing Shareholders on the Schedule of Existing Shareholders attached hereto (collectively, the "Existing Shareholders"). WHEREAS, the parties to this Agreement are parties to a Recapitalization Agreement dated as of August 29, 1997 (as the same may be amended and modified from time to time in accordance with its terms, the "Recapitalization Agreement"); WHEREAS, in order to induce the Investors to enter into the Recapitalization Agreement, the Company has agreed to provide the registration rights set forth in this Agreement; WHEREAS, the execution and delivery of this Agreement is a condition to the Closing under the Recapitalization Agreement; and WHEREAS, unless otherwise provided in this Agreement, capitalized terms used herein shall have the meanings set forth in paragraph 8 hereof. NOW, THEREFORE, the parties hereto agree as follows: 1. Demand Registrations. (a) Requests for Registration. At any time after the Closing under the Recapitalization Agreement, the holders of at least 66 2/3% of the Investor Registrable Securities may request registration under the Securities Act of all or any portion of their Registrable Securities on Form S-1 or any similar long-form registration ("Long-Form Registrations"), and the holders of at least 25% of the Investor Registrable Securities may request registration under the Securities Act of all or any portion of their Investor Registrable Securities on Form S-2 or S-3 or any similar short-form registration ("Short-Form Registrations") if the Company is eligible to use any such short form. All registrations requested pursuant to this paragraph 1(a) are referred to herein as "Demand Registrations." Each request for a Demand Registration shall specify the approximate number of Registrable Securities requested to be registered and the anticipated per share price range for such offering. Within ten days after receipt of a request for a Demand Registration, the Company shall give written notice of such requested registration to all other holders of Registrable Securities and, subject to paragraph 1(d) below, shall include in such registration all Registrable Securities with respect to which the Company has received written requests for inclusion therein within 20 days after the receipt of the Company's notice. 2 (b) Long-Form Registrations. The holders of Investor Registrable Securities shall be entitled to request (i) four Long-Form Registrations in which the Company shall pay all Registration Expenses ("Company-paid Long-Form Registrations") and (ii) an unlimited number of Long-Form Registrations in which the holders of Investor Registrable Securities shall pay their share of the Registration Expenses as set forth in paragraph 5 hereof; provided that the aggregate offering value of the Registrable Securities requested to be included in any Long-Form Registration must equal at least $3,000,000. A registration shall not count as one of the permitted Company-paid Long-Form Registrations until it has become effective, and neither the last nor any subsequent Company-paid Long-Form Registration shall count as one of the permitted Company-paid Long-Form Registrations unless the holders of Investor Registrable Securities are able to register and sell at least 75% of the Investor Registrable Securities requested to be included in such registration; provided that in any event the Company shall pay all Registration Expenses in connection with any registration initiated as a Company-paid Long-Form Registration whether or not it has become effective and whether or not such registration has counted as one of the permitted Company-paid Long-Form Registrations hereunder. (c) Short-Form Registrations. In addition to the Long-Form Registrations provided pursuant to paragraph 1(b) above, the holders of Investor Registrable Securities shall be entitled to request an unlimited number of Short-Form Registrations in which the Company shall pay all Registration Expenses; provided that the aggregate offering value of the Registrable Securities requested to be included in any Short-Form Registration must equal at least $1,000,000. Demand Registrations shall be Short-Form Registrations whenever the Company is permitted to use any applicable short form. After the Company has become subject to the reporting requirements of the Securities Exchange Act, the Company shall use its reasonable best efforts to make Short-Form Registrations on Form S-3 available for the sale of Registrable Securities. The Company shall pay all Registration Expenses in connection with any registration initiated as a Short-Form Registration whether or not it has become effective. (d) Priority on Demand Registrations. The Company shall not include in any Demand Registration any securities which are not Registrable Securities without the prior written consent of the holders of at least 66 2/3% of the Investor Registrable Securities included in such registration. If a Demand Registration is an underwritten offering and the managing underwriters advise the Company in writing that in their opinion the number of Registrable Securities and, if permitted hereunder, other securities requested to be included in such offering exceeds the number of Registrable Securities and other securities, if any, which can be sold in an orderly manner in such offering within a price range acceptable to the holders of at least 66 2/3% of the Investor Registrable Securities included in such registration, the Company shall include in such registration (i) first, the Registrable Securities requested to be included in such registration, pro rata among the holders of such Registrable Securities on the basis of the number of Registrable Securities owned by each such holder and (ii) second, any other securities requested to be included in such registration; provided that, notwithstanding the foregoing, in connection with the first two registrations of Investor Registrable Securities pursuant to this Agreement (whether pursuant to a Demand Registration or a Piggyback Registration), if any such registration is a Demand Registration, the Company shall include (i) first, the Investor Registrable Securities requested to be included in such registration, pro rata among the holders of such Investor Registrable Securities on the basis of the number of Investor - 2 - 3 Registrable Securities owned by each such holder, (ii) second, the Other Registrable Securities requested to be included in such registration, pro rata among the holders of such Other Registrable Securities on the basis of the number of Other Registrable Securities owned by each such holder and (iii) third, any other securities requested to be included in such registration (it being understood, however, that neither the last nor any subsequent registration subject to this proviso shall count as one of the two registrations subject to this proviso unless the holders of Investor Registrable Securities are able to register and sell at least 75% of the Investor Registrable Securities requested to be included in such registration). (e) Expenses. Any Persons other than holders of Registrable Securities who participate in Demand Registrations which are not at the Company's expense must pay their share of the Registration Expenses as provided in paragraph 5 hereof. (f) Selection of Underwriters. The Company (acting through its Board of Directors) shall select the investment banker(s) and manager(s) to administer any offerings under this paragraph 1. (g) Other Registration Rights. Except as provided in this Agreement, the Company shall not grant to any Persons the right to request the Company to register any equity securities of the Company (whether as a demand registration or piggyback registration), or any securities convertible or exchangeable into or exercisable for such securities, without the prior written consent of the holders of at least 66 2/3% of the Investor Registrable Securities; provided that the Company may grant rights to other Persons to participate in Piggyback Registrations so long as such rights are subordinate to the rights of the holders of Investor Registrable Securities with respect to such Piggyback Registrations. (h) Restrictions on Demand Registrations. The Company shall not be obligated to effect any Demand Registration within 180 days after the effective date of the Company's initial public offering of Common Stock under the Securities Act or within 90 days after the effective date of a previous Demand Registration or a previous registration in which the holders of Investor Registrable Securities were given piggyback rights pursuant to paragraph 2 hereof. The Company may postpone for up to 90 days (up to 60 days in the case of clause (ii) below) the filing or the effectiveness of a registration statement for a Demand Registration if the Company's Board of Directors determines in its reasonable good faith judgment that such Demand Registration would reasonably be expected to have (i) a material adverse effect on (or require premature disclosure of) any proposal or plan by the Company or any of its Subsidiaries to engage in any acquisition of assets (other than in the ordinary course of business) or any merger, consolidation, tender offer, reorganization or similar transaction or (ii) a material adverse effect on the Company's business or stock price; provided that in such event, the holders of Investor Registrable Securities initially requesting such Demand Registration shall be entitled to withdraw such request and, if such request is withdrawn, such Demand Registration shall not count as one of the permitted Demand Registrations hereunder and the Company shall pay all Registration Expenses in connection with such registration. The Company may delay a Demand Registration hereunder only once in any twelve-month period. - 3 - 4 2. Piggyback Registrations. (a) Right to Piggyback. Whenever the Company proposes to register any of its securities under the Securities Act (other than pursuant to a Demand Registration or a registration on Form S-4 or S-8 or any successor or similar forms) and the registration form to be used may be used for the registration of Registrable Securities (a "Piggyback Registration"), the Company shall give prompt written notice to all holders of Registrable Securities of its intention to effect such a registration and, subject to paragraphs 2(c) and 2(d) below, shall include in such registration all Registrable Securities with respect to which the Company has received written requests for inclusion therein within 20 days after the receipt of the Company's notice. (b) Piggyback Expenses. The Registration Expenses of the holders of Registrable Securities shall be paid by the Company in all Piggyback Registrations whether or not such registration is consummated. (c) Priority on Primary Registrations. If a Piggyback Registration is an underwritten primary registration on behalf of the Company, and the managing underwriters advise the Company in writing that in their opinion the number of securities requested to be included in such registration exceeds the number which can be sold in such offering without adversely affecting the marketability of the offering, the Company shall include in such registration (i) first, the securities the Company proposes to sell, (ii) second, the Registrable Securities requested to be included in such registration, pro rata among the holders of such Registrable Securities on the basis of the number of Registrable Securities owned by each such holder and (iii) third, any other securities requested to be included in such registration; provided that, notwithstanding the foregoing, in connection with the first two registrations of Investor Registrable Securities pursuant to this Agreement (whether pursuant to a Demand Registration or a Piggyback Registration), if any such registration is to be made in connection with an underwritten primary registration on behalf of the Company, the Company shall include (i) first, the securities the Company proposes to sell, (ii) second, the Investor Registrable Securities requested to be included in such registration, pro rata among the holders of such Investor Registrable Securities on the basis of the number of Investor Registrable Securities owned by each such holder, (iii) third, the Other Registrable Securities requested to be included in such registration, pro rata among the holders of such Other Registrable Securities on the basis of the number of Other Registrable Securities owned by each such holder and (iv) fourth, any other securities requested to be included in such registration (it being understood, however, that neither the last nor any subsequent registration subject to this proviso shall count as one of the two registrations subject to this proviso unless the holders of Investor Registrable Securities are able to register and sell at least 75% of the Investor Registrable Securities requested to be included in such registration). (d) Priority on Secondary Registrations. If a Piggyback Registration is an underwritten secondary registration on behalf of holders of the Company's securities (other than the holders of Investor Registrable Securities), and the managing underwriters advise the Company in writing that in their opinion the number of securities requested to be included in such registration exceeds the number which can be sold in such offering without adversely affecting the marketability of the offering, the Company shall include in such registration (i) first, the securities requested to be - 4 - 5 included therein by the holders requesting such registration and the Registrable Securities requested to be included in such registration, pro rata among the holders of such securities on the basis of the number of securities owned by each such holder and (ii) second, any other securities requested to be included in such registration; provided that, notwithstanding the foregoing, in connection with the first two registrations of Investor Registrable Securities pursuant to this Agreement (whether pursuant to a Demand Registration or a Piggyback Registration), if any such registration is to be made in connection with an underwritten secondary registration on behalf of holders of the Company's securities (other than the holders of Investor Registrable Securities), the Company shall include (i) first, the securities requested to be included therein by the holders requesting such registration and the Investor Registrable Securities requested to be included in such registration, pro rata among the holders of such securities on the basis of the number of securities owned by each such holder, (ii) second, the Other Registrable Securities requested to be included in such registration, pro rata among the holders of such Other Registrable Securities on the basis of the number of Other Registrable Securities owned by each such holder and (iii) third, any other securities requested to be included in such registration (it being understood, however, that neither the last nor any subsequent registration subject to this proviso shall count as one of the two registrations subject to this proviso unless the holders of Investor Registrable Securities are able to register and sell at least 75% of the Investor Registrable Securities requested to be included in such registration). (e) Withdrawal by the Company. If, at any time after giving written notice of its intention to register any of its securities as set forth in paragraph 2(a) and prior to the effective date of such registration statement filed in connection with such registration, the Company's board of directors shall determine in its good faith judgment for any reason not to register such securities, the Company may, at its election, give written notice of such determination to each holder of Registrable Securities and thereupon shall be relieved of its obligation to register any Registrable Securities in connection with such registration (but not from its obligation to pay the Registration Expenses in connection therewith as provided herein). 3. Holdback Agreements. (a) No holder of Registrable Securities shall effect any public sale or distribution (including sales pursuant to Rule 144) of equity securities of the Company, or any securities convertible into or exchangeable or exercisable for such securities, during the seven days prior to and the 180-day period beginning on the effective date of the Company's initial public offering of its Common Stock under the Securities Act or during the seven days prior to and the 90-day period beginning on the effective date of the next registered public offering of the Company's Common Stock (except as part of such underwritten registration), unless the underwriters managing the registered public offering otherwise agree in writing. (b) The Company (i) shall not effect any public sale or distribution of its equity securities, or any securities convertible into or exchangeable or exercisable for such securities, during the seven days prior to and the 180-day period beginning on the effective date of the Company's initial public offering of its Common Stock under the Securities Act or during the seven days prior to and the 90-day period beginning on the effective date of (A) the next registered public - 5 - 6 offering of the Company's Common Stock and (B) any underwritten Demand Registration or any underwritten Piggyback Registration in which Registrable Securities are included (except as part of such underwritten registration or pursuant to registrations on Form S-8 or any successor or similar form), unless the underwriters managing the registered public offering otherwise agree, and (ii) shall cause each holder of at least 2% of its Common Stock, or any securities convertible into or exchangeable or exercisable for Common Stock, purchased from the Company at any time after the date of this Agreement (other than in a registered public offering) to agree not to effect any public sale or distribution (including sales pursuant to Rule 144) of any such securities during such periods (except as part of such underwritten registration, if otherwise permitted), unless the underwriters managing the registered public offering otherwise agree in writing. 4. Registration Procedures. Whenever the holders of Registrable Securities have requested that any Registrable Securities be registered pursuant to this Agreement, the Company shall use its best efforts to effect the registration and the sale of such Registrable Securities in accordance with the intended method of disposition thereof, and pursuant thereto the Company shall as expeditiously as possible: (a) prepare and file with the Securities and Exchange Commission a registration statement with respect to such Registrable Securities and use its best efforts to cause such registration statement to become effective; provided that before filing a registration statement or prospectus or any amendments or supplements thereto, the Company shall (if requested) furnish to the counsel selected by the holders of at least 66 2/3% of the Investor Registrable Securities covered by such registration statement copies of all such documents proposed to be filed, which documents shall be subject to the review and comment of such counsel; (b) notify each holder of Registrable Securities of the effectiveness of each registration statement filed hereunder and prepare and file with the Securities and Exchange Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective for a period of either (i) not less than 120 days or, if such registration statement relates to an underwritten offering, such longer period as in the opinion of counsel for the underwriters a prospectus is required by law to be delivered in connection with sales of Registrable Securities by any underwriter or dealer or (ii) such shorter period as will terminate when all of the securities covered by such registration statement have been disposed of in accordance with the intended methods of disposition by the seller or sellers thereof as set forth in such registration statement (but in any event not before the expiration of any longer period required under the Securities Act), and to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement until such time as all such securities have been disposed of in accordance with the intended methods of disposition by the seller or sellers thereof set forth in such registration statement and the prospectus used in connection therewith; (c) furnish to each seller of Registrable Securities such number of copies of such registration statement, each amendment and supplement thereto, the prospectus included in such - 6 - 7 registration statement (including each preliminary prospectus) and such other documents as such seller may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such seller; (d) use its best efforts to register or qualify such Registrable Securities under such other securities or blue sky laws of such jurisdictions as any seller (including any underwriter) reasonably requests and do any and all other acts and things which may be reasonably necessary or advisable to enable such seller to consummate the disposition in such jurisdictions of the Registrable Securities owned by such seller; provided that the Company shall not be required to (i) qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this subparagraph, (ii) subject itself to taxation in any such jurisdiction or (iii) consent to general service of process in any such jurisdiction; (e) notify each seller of such Registrable Securities, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event as a result of which the prospectus included in such registration statement contains an untrue statement of a material fact or omits any fact necessary to make the statements therein not misleading, and, at the request of any such seller, the Company shall prepare a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus shall not contain an untrue statement of a material fact or omit to state any fact necessary to make the statements therein not misleading; (f) cause all such Registrable Securities to be listed on each securities exchange on which similar securities issued by the Company are then listed and, if not so listed, to be listed on the NASD automated quotation system and, if listed on the NASD automated quotation system, use its best efforts to secure designation of all such Registrable Securities covered by such registration statement as a NASDAQ "national market system security" within the meaning of Rule 11Aa2-1 of the Securities and Exchange Commission or, failing that, to secure NASDAQ authorization for such Registrable Securities and, without limiting the generality of the foregoing, to arrange for at least two market makers to register as such with respect to such Registrable Securities with the NASD; (g) provide a transfer agent and registrar for all such Registrable Securities not later than the effective date of such registration statement; (h) enter into such customary agreements (including underwriting agreements in customary form) and take all such other actions as the holders of at least 66 2/3% of the Investor Registrable Securities being sold or the underwriters, if any, reasonably request in order to expedite or facilitate the disposition of such Registrable Securities (including effecting a stock split or a combination of shares); (i) make available for inspection by any seller of Registrable Securities, any underwriter participating in any disposition pursuant to such registration statement and any attorney, - 7 - 8 accountant or other agent retained by any such seller or underwriter, all necessary financial and other records, pertinent corporate documents and properties of the Company, and cause the Company's officers, directors, employees and independent accountants to supply all information reasonably requested by any such seller, underwriter, attorney, accountant or agent in connection with such registration statement; (j) otherwise use its best efforts to comply with all applicable rules and regulations of the Securities and Exchange Commission, and make available to its security holders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve months beginning with the first day of the Company's first full calendar quarter after the effective date of the registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder; (k) permit any holder of Registrable Securities which holder, in its sole and exclusive judgment, might be deemed to be an underwriter or a controlling person of the Company, to participate in the preparation of such registration or comparable statement and to require the insertion therein of material, furnished to the Company in writing, which in the reasonable judgment of such holder and its counsel should be included; (l) in the event of the issuance of any stop order suspending the effectiveness of a registration statement, or of any order suspending or preventing the use of any related prospectus or suspending the qualification of any Common Stock included in such registration statement for sale in any jurisdiction, the Company shall use its best efforts promptly to obtain the withdrawal of such order; (m) use its best efforts to cause such Registrable Securities covered by such registration statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable the sellers thereof to consummate the disposition of such Registrable Securities; and (n) obtain a cold comfort letter from the Company's independent public accountants in customary form and covering such matters of the type customarily covered by cold comfort letters as the holders of at least 66 2/3% of the Investor Registrable Securities being sold reasonably request. 5. Registration Expenses. (a) All expenses incident to the Company's performance of or compliance with this Agreement, including without limitation all registration and filing fees, fees and expenses of compliance with securities or blue sky laws, printing expenses, messenger and delivery expenses, fees and disbursements of custodians, and fees and disbursements of counsel for the Company and all independent certified public accountants, underwriters (excluding discounts and commissions payable with respect to Registrable Securities, which shall be paid by the holders of such Registrable Securities) and other Persons retained by the Company (all such expenses being herein called "Registration Expenses"), shall be borne as provided in this Agreement, except that the Company - 8 - 9 shall, in any event, pay its internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit or quarterly review, the expense of any liability insurance and the expenses and fees for listing the securities to be registered on each securities exchange on which similar securities issued by the Company are then listed or on the NASD automated quotation system. (b) In connection with each Demand Registration and each Piggyback Registration, the Company shall reimburse the holders of Registrable Securities included in such registration for the reasonable fees and disbursements of one counsel chosen by the holders of at least 66 2/3% of the Investor Registrable Securities included in such registration. (c) To the extent Registration Expenses are not required to be paid by the Company, each holder of securities included in any registration hereunder shall pay those Registration Expenses allocable to the registration of such holder's securities so included, and any Registration Expenses not so allocable shall be borne by all sellers of securities included in such registration in proportion to the aggregate selling price of the securities to be so registered. 6. Indemnification. (a) The Company agrees to indemnify, to the extent permitted by law, each holder of Registrable Securities, its officers and directors and each Person who controls such holder (within the meaning of the Securities Act) against all losses, claims, damages, liabilities and expenses caused by, or relating to any action or proceeding arising out of or based upon, any untrue or alleged untrue statement of material fact contained in any registration statement, prospectus or preliminary prospectus or any amendment thereof or supplement thereto or any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as the same are caused by or contained in any information furnished in writing to the Company by such holder expressly for use therein or by such holder's failure to deliver a copy of the registration statement or prospectus or any amendments or supplements thereto after the Company has furnished such holder with a sufficient number of copies of the same. In connection with an underwritten offering, the Company shall indemnify such underwriters, their officers and directors and each Person who controls such underwriters (within the meaning of the Securities Act) to the same extent as provided above with respect to the indemnification of the holders of Registrable Securities, except with respect to any information supplied by any underwriter for use in such registration statement, prospectus or other offering document and except that with respect to any untrue statement or omission or alleged untrue statement or omission made in any preliminary prospectus, the indemnity agreement contained in this paragraph 6(a) shall not inure to the benefit of the underwriter from whom the Person asserting any such losses, claims, damages, liabilities or expenses purchased shares concerned (or to the benefit of any Person controlling such underwriter) to the extent that any such loss, claim, damage, liability or expense of the underwriter or controlling Person results from an untrue statement or omission in the preliminary prospectus which was corrected in the prospectus if a copy of the prospectus was not sent or given to such Person as required by the Securities Act. - 9 - 10 (b) In connection with any registration statement in which a holder of Registrable Securities is participating, each such holder shall furnish to the Company in writing such information and affidavits as the Company reasonably requests for use in connection with any such registration statement or prospectus and, to the extent permitted by law, shall indemnify the Company, its directors and officers and each Person who controls the Company (within the meaning of the Securities Act) against any losses, claims, damages, liabilities and expenses resulting from any untrue or alleged untrue statement of material fact contained in the registration statement, prospectus or preliminary prospectus or any amendment thereof or supplement thereto or any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein not misleading, but only to the extent that such untrue statement or omission is contained in any information or affidavit so furnished in writing by such holder; provided that the obligation to indemnify shall be individual, not joint and several, for each holder and shall be limited to the net amount of proceeds received by such holder from the sale of Registrable Securities pursuant to such registration statement. (c) Any Person entitled to indemnification hereunder shall (i) give prompt written notice to the indemnifying party of any claim with respect to which it seeks indemnification (provided that the failure to give such prompt notice shall not impair any Person's right to indemnification hereunder to the extent such failure has not prejudiced the indemnifying party) and (ii) unless in such indemnified party's reasonable judgment a conflict of interest between such indemnified and indemnifying parties may exist with respect to such claim, permit such indemnifying party to assume the defense of such claim with counsel reasonably satisfactory to the indemnified party. If such defense is assumed, the indemnifying party shall not be subject to any liability for any settlement made by the indemnified party without its consent (but such consent shall not be unreasonably withheld). An indemnifying party who is not entitled to, or elects not to, assume the defense of a claim shall not be obligated to pay the fees and expenses of more than one counsel for all parties indemnified by such indemnifying party with respect to such claim, unless in the reasonable judgment of any indemnified party a conflict of interest may exist between such indemnified party and any other of such indemnified parties with respect to such claim. (d) The indemnification provided for under this Agreement shall remain in full force and effect regardless of any investigation made by or on behalf of the indemnified party or any officer, director or controlling Person of such indemnified party and shall survive the transfer of securities. Each indemnifying party also agrees to make such provisions, as are reasonably requested by any indemnified party, for contribution to such party in the event the indemnification provided for herein is unavailable for any reason. 7. Participation in Underwritten Registrations. No Person may participate in any registration hereunder which is underwritten unless such Person (i) agrees to sell such Person's securities on the basis provided in any underwriting arrangements approved by the Person or Persons entitled hereunder to approve such arrangements and (ii) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents required under the terms of such underwriting arrangements. - 10 - 11 8. Definitions. (a) "Investor Registrable Securities" means (i) any Common Stock issued or issuable upon conversion of the Convertible Preferred Stock issued pursuant to the Recapitalization Agreement, (ii) any securities issued or issuable with respect to the securities referred to in clause (i) above by way of a stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization and (iii) any other shares of Common Stock held by Persons holding securities described in clauses (i) or (ii) above. (b) "Other Registrable Securities" means (i) any Common Stock held by the Existing Shareholders and (ii) any Common Stock issued or issuable with respect to the Common Stock referred to in clause (i) above by way of a stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization. As to any particular Other Registrable Securities held by any Existing Shareholder, such securities shall cease to be Other Registrable Securities when the aggregate number of Other Registrable Securities held by such Person does not exceed one percent of the number of shares of Common Stock then outstanding as shown by the most recent report or statement published by the Company and such Person has held such securities for at least one year. (c) "Registrable Securities" means, collectively, the Investor Registrable Securities and the Other Registrable Securities. As to any particular Registrable Securities, such securities shall cease to be Registrable Securities when they have been distributed to the public pursuant to an offering registered under the Securities Act or sold to the public through a broker, dealer or market maker in compliance with Rule 144 under the Securities Act (or any similar rule then in force) or repurchased by the Company or any Subsidiary. For purposes of this Agreement, a Person shall be deemed to be a holder of Registrable Securities, and the Registrable Securities shall be deemed to be in existence, whenever such Person has the right to acquire directly or indirectly such Registrable Securities (upon conversion or exercise in connection with a transfer of securities or otherwise, but disregarding any restrictions or limitations upon the exercise of such right), whether or not such acquisition has actually been effected, and such Person shall be entitled to exercise the rights of a holder of Registrable Securities hereunder (it being understood, however, that any Registrable Securities which are not shares of Common Stock shall be converted into or exercised for shares of Common Stock immediately prior to the closing of any registration pursuant to which such Common Stock is to be sold). (d) Unless otherwise stated, other capitalized terms contained herein have the meanings set forth in the Recapitalization Agreement. 9. Miscellaneous. (a) No Inconsistent Agreements. Except as provided for herein, the Company shall not hereafter enter into any agreement with respect to its securities which is inconsistent with or violates the rights granted to the holders of Registrable Securities in this Agreement. - 11 - 12 (b) Remedies. Any Person having rights under any provision of this Agreement shall be entitled to enforce such rights specifically, to recover damages caused by reason of any breach of any provision of this Agreement and to exercise all other rights granted by law. The parties hereto agree and acknowledge that money damages may not be an adequate remedy for any breach of the provisions of this Agreement and that any party may in its sole discretion apply to any court of law or equity of competent jurisdiction (without posting any bond or other security) for specific performance and for other injunctive relief in order to enforce or prevent violation of the provisions of this Agreement. (c) Amendments and Waivers. Except as otherwise provided herein, the provisions of this Agreement may be amended or waived only upon the prior written consent of the Company, the holders of at least 66 2/3% of the Investor Registrable Securities and the holders of a majority of the Other Registrable Securities (but only to the extent that the holders of Other Registrable Securities would be adversely affected by such amendment or waiver). (d) Successors and Assigns. All covenants and agreements in this Agreement by or on behalf of any of the parties hereto shall bind and inure to the benefit of the respective successors and assigns of the parties hereto whether so expressed or not. In addition, whether or not any express assignment has been made, the provisions of this Agreement which are for the benefit of purchasers or holders of Registrable Securities are also for the benefit of, and enforceable by, any subsequent holder of Registrable Securities. (e) Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of this Agreement. (f) Counterparts. This Agreement may be executed simultaneously in two or more counterparts (including by means of telecopied signature pages), any one of which need not contain the signatures of more than one party, but all such counterparts taken together shall constitute one and the same Agreement. (g) Descriptive Headings. The descriptive headings of this Agreement are inserted for convenience only and do not constitute a part of this Agreement. (h) Governing Law. All issues and questions concerning the construction, validity, interpretation and enforcement of this Agreement shall be governed by, and construed in accordance with, the laws of the State of California, without giving effect to any choice of law or conflict of law rules or provisions (whether of the State of California or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of California. (i) Notices. All notices, demands or other communications to be given or delivered under or by reason of the provisions of this Agreement shall be in writing and shall be deemed to have been given when delivered personally to the recipient, sent to the recipient by - 12 - 13 reputable overnight courier service (charges prepaid) or five days after being mailed to the recipient by certified or registered mail, return receipt requested and postage prepaid. Such notices, demands and other communications shall be sent to each Investor at the address indicated on the Schedule of Investors attached hereto and to each Existing Shareholder at the address indicated on the Schedule of Existing Shareholders attached hereto and to the Company at the address indicated below: To the Company: Netcom Systems, Inc. 20550 Nordhoff Street Chatsworth, California 91311 Attn: Chief Executive Officer with a copy to: (which shall not constitute notice to the Company) Wilson Sonsini Goodrich & Rosati 650 Page Mill Road Palo Alto, California 94304-1050 Attn: Steven E. Bochner, Esq. or to such other address or to the attention of such other person as the recipient party has specified by prior written notice to the sending party. * * * * * - 13 - 14 IN WITNESS WHEREOF, the parties have executed this Registration Agreement as of the date first written above. NETCOM SYSTEMS, INC. By: ------------------------------------- Its: ------------------------------------ SUMMIT VENTURES IV, L.P. By: Summit Partners IV, L.P., its General Partner By: Stamps, Woodsum & Co. IV, its General Partner By: ------------------------------------- General Partner SUMMIT INVESTORS III, L.P. By: ------------------------------------- Authorized Signatory NATIONSBANC CAPITAL CORP. By: ------------------------------------- Todd A. Binkowski, its Authorized Signatory NORTHSTAR INVESTORS, LLC By: ------------------------------------- Its: ------------------------------------ [Signature Page to Registration Agreement] 15 SPITFIRE CAPITAL PARTNERS, L.P. By: MS Spitfire LLC, its General Partner ------------------------------------- By: ------------------------------------- William B. Bunting Its: ------------------------------------ PETER MOONEY, AS NOMINEE FOR THE ` BROADVIEW PARTNERS GROUP By: ------------------------------------- Its: ------------------------------------ BAIN SECURITIES, INC. By: ------------------------------------- Leonard C. Banos, its Vice President WS INVESTMENT COMPANY 97B By: ------------------------------------- Its: ------------------------------------ WSGR PROFIT SHARING TRUST FBO STEVEN E. BOCHNER By: ------------------------------------- Its: ------------------------------------ ---------------------------------------- Steven E. Bochner ---------------------------------------- Nevan C. Elam ---------------------------------------- Todd Cleary [Signature Page to Registration Agreement] 16 ---------------------------------------- Marc Hamon ---------------------------------------- Henri Hamon ---------------------------------------- James Jordan ---------------------------------------- Warren B. Phelps III ---------------------------------------- Jing Zhang ---------------------------------------- Stephane Johnson ---------------------------------------- Richard Bass [Signature Page to Registration Agreement] 17 SCHEDULE OF INVESTORS Summit Ventures IV, L.P. WS Investment Company 97B 499 Hamilton Avenue c/o Wilson Sonsini Goodrich & Rosati Palo Alto, California 94301 650 Page Mill Road Attn.: Mr. Walter G. Kortschak Palo Alto, California 94304 Attn: Steven E. Bochner, Esq. Summit Investors III, L.P. 499 Hamilton Avenue WSGR Profit Sharing Trust FBO Palo Alto, California 94301 Steven E. Bochner Attn: Mr. Walter G. Kortschak c/o Wilson Sonsini Goodrich & Rosati 650 Page Mill Road NationsBanc Capital Corp. Palo Alto, California 94304 NationsBank Corporate Center Attn: Steven E. Bochner, Esq. 10th Floor 100 North Tryon Steven E. Bochner Charlotte, North Carolina 28255 c/o Wilson Sonsini Goodrich & Rosati Attn: Mr. Robert H. Sheridan III 650 Page Mill Road Palo Alto, California 94304 Northstar Investors, LLC c/o Montgomery Securities Nevan C. Elam 600 Montgomery Street c/o Wilson Sonsini Goodrich & Rosati San Francisco, California 94111 650 Page Mill Road Attn: Mr. Derek Lemke Palo Alto, California 94304 Spitfire Capital Partners, L.P. c/o Montgomery Securities Todd Cleary 600 Montgomery Street c/o Wilson Sonsini Goodrich & Rosati San Francisco, California 94111 650 Page Mill Road Attn: Mr. William B. Bunting Palo Alto, California 94304 Peter Mooney as nominee for the Broadview Partners Group with a copy to: c/o Broadview Associates (which shall not constitute notice to the Investors) 950 Tower Lane 18th Floor Foster City, California 94404 Kirkland & Ellis Attn: Mr. Stephen S. Smith 200 East Randolph Drive Chicago, Illinois 60601 Bain Securities, Inc. Attn: Ted H. Zook, Esq. c/o Bain & Company, Inc. Two Copley Place Fennebresque, Clark, Swindell & Hay Boston, Massachusetts 02116 NationsBank Corporate Center Attn: Leonard C. Banos 29th Floor 100 North Tryon Street Charlotte, North Carolina 28202 Attn: John S. Chinuntdet, Esq.
18 SCHEDULE OF EXISTING SHAREHOLDERS Marc Hamon Netcom Systems, Inc. 20550 Nordhoff Street Chatsworth, California 91311 Henri Hamon Netcom Systems Europe 4, rue de Galilee Immeuble Le Bellevue ZAC du Moulin a vent 78280 Guyancourt, France James Jordan Netcom Systems, Inc. 20550 Nordhoff Street Chatsworth, California 91311 Warren B. Phelps III Netcom Systems, Inc. 20550 Nordhoff Street Chatsworth, California 91311 Jing Zhang Netcom Systems, Inc. 20550 Nordhoff Street Chatsworth, California 91311 Stephane Johnson Netcom Systems, Inc. 20550 Nordhoff Street Chatsworth, California 91311 Richard Bass Point of View, Inc. 410 Boylston Street 5th Floor Boston, Massachusetts 02116 with a copy to: (which shall not constitute notice to the Existing Shareholders) Wilson Sonsini Goodrich & Rosati 650 Page Mill Road Palo Alto, California 94304 Attn: Steven E Bochner, Esq. 19 NETCOM SYSTEMS, INC. AMENDMENT NO. 1 TO REGISTRATION AGREEMENT THIS AMENDMENT NO. 1 TO REGISTRATION AGREEMENT (this "Amendment") is made as of September 25, 1997, by and among Netcom Systems, Inc., a California corporation (the "Company"), the parties listed as Investors on the Schedule of Investors attached hereto (collectively, the "Investors"), the parties listed as Existing Shareholders on the Schedule of Existing Shareholders attached hereto (collectively, the "Existing Shareholders") and Richard Moley ("Moley"). WHEREAS, the Company, the Investors and the Existing Shareholders are parties to that certain Registration Agreement dated as of August 29, 1997 (the "Agreement"). WHEREAS, Moley is purchasing shares of the Company's Class A Redeemable Preferred Stock and Class B Convertible Preferred Stock pursuant to a Preferred Stock Purchase Agreement, dated as of the date hereof, by and between the Company and Moley (the "Purchase Agreement"). WHEREAS, the Company, the Existing Shareholders and the Investors desire to enter into this Amendment for the purposes of making Moley a party to the Agreement. NOW, THEREFORE, the parties hereto agree as follows: 1. Investor. For all purposes of the Agreement (as amended by this Amendment), the term "Investor" shall include Moley. 2. Investor Registrable Securities. For all purposes of the Agreement (as amended by this Amendment), the term "Investor Registrable Securities" shall include (i) any Common Stock of the Company issued or issuable upon conversion of the Class B Convertible Preferred Stock of the Company issued pursuant to the Purchase Agreement, (ii) any securities issued or issuable with respect to the securities referred to in clause (i) above by way of a stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization and (iii) any other shares of Common Stock held by Persons (as such term is defined in the Agreement) holding securities described in clauses (i) or (ii) above. 3. Severability. Whenever possible, each provision of this Amendment shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of this Amendment. 4. Counterparts. This Amendment may be executed simultaneously in two or more counterparts (including by means of telecopied signature pages), any one of which need not contain the signatures of more than one party, but all such counterparts taken together shall constitute one and the same Amendment. 5. Descriptive Headings. The descriptive headings of this Amendment are inserted for convenience only and do not constitute a part of this Amendment. 6. Governing Law. All issues and questions concerning the construction, validity, interpretation and enforcement of this Amendment shall be governed by, and construed in accordance with, the laws of the State of California, without giving effect to any choice of law or conflict of law rules or provisions (whether - 1 - 20 of the State of California or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of California. 7. Notices. All notices and other communications to Moley provided for or permitted under the Agreement (as amended by this Amendment) shall be made at the address of Moley set forth in the Company's books and records. 8. Full Force and Effect. Except as amended hereby, the Agreement shall remain in full force and effect. * * * * * - 2 - 21 IN WITNESS WHEREOF, the parties have executed this Amendment No. 1 to Registration Agreement as of the date first written above. NETCOM SYSTEMS, INC. By: ------------------------------------- Its: ------------------------------------ SUMMIT VENTURES IV, L.P. By: Summit Partners IV, L.P., its General Partner By: Stamps, Woodsum & Co. IV, its General Partner By: ------------------------------------- General Partner SUMMIT INVESTORS III, L.P. By: ------------------------------------- Authorized Signatory NATIONSBANC CAPITAL CORP. By: ------------------------------------- Todd A. Binkowski, its Authorized Signatory NORTHSTAR INVESTORS, LLC By: ------------------------------------- Its: ------------------------------------ [Amendment No. 1 to Registration Agreement] 22 SPITFIRE CAPITAL PARTNERS, L.P. By: MS Spitfire LLC, its General Partner By: ------------------------------------- William B. Bunting Its: ------------------------------------ PETER MOONEY, AS NOMINEE FOR THE BROADVIEW PARTNERS GROUP By: ------------------------------------- Its: ------------------------------------ BAIN SECURITIES, INC. By: ------------------------------------- Leonard C. Banos, its Vice President WS INVESTMENT COMPANY 97B By: ------------------------------------- Its: ------------------------------------ WSGR PROFIT SHARING TRUST FBO STEVEN E. BOCHNER By: ------------------------------------- Its: ------------------------------------ ---------------------------------------- Steven E. Bochner ---------------------------------------- Nevan C. Elam ---------------------------------------- Todd Cleary [Amendment No. 1 to Registration Agreement] 23 ---------------------------------------- Marc Hamon ---------------------------------------- Henri Hamon ---------------------------------------- James Jordan ---------------------------------------- Warren B. Phelps III ---------------------------------------- Jing Zhang ---------------------------------------- Stephane Johnson ---------------------------------------- Richard Bass ---------------------------------------- Richard Moley [Amendment No. 1 to Registration Agreement] 24 SCHEDULE OF INVESTORS Summit Ventures IV, L.P. WS Investment Company 97B 499 Hamilton Avenue c/o Wilson Sonsini Goodrich & Rosati Palo Alto, California 94301 650 Page Mill Road Attn.: Mr. Walter G. Kortschak Palo Alto, California 94304 Attn: Steven E. Bochner, Esq. Summit Investors III, L.P. 499 Hamilton Avenue WSGR Profit Sharing Trust FBO Palo Alto, California 94301 Steven E. Bochner Attn: Mr. Walter G. Kortschak c/o Wilson Sonsini Goodrich & Rosati 650 Page Mill Road NationsBanc Capital Corp. Palo Alto, California 94304 NationsBank Corporate Center Attn: Steven E. Bochner, Esq. 10th Floor 100 North Tryon Steven E. Bochner Charlotte, North Carolina 28255 c/o Wilson Sonsini Goodrich & Rosati Attn: Mr. Robert H. Sheridan III 650 Page Mill Road Palo Alto, California 94304 Northstar Investors, LLC c/o Montgomery Securities Nevan C. Elam 600 Montgomery Street c/o Wilson Sonsini Goodrich & Rosati San Francisco, California 94111 650 Page Mill Road Attn: Mr. Derek Lemke Palo Alto, California 94304 Spitfire Capital Partners, L.P. Todd Cleary c/o Montgomery Securities c/o Wilson Sonsini Goodrich & Rosati 600 Montgomery Street 650 Page Mill Road San Francisco, California 94111 Palo Alto, California 94304 Attn: Mr. William B. Bunting Peter Mooney as nominee for the Broadview Partners Group c/o Broadview Associates 950 Tower Lane 18th Floor Foster City, California 94404 Attn: Mr. Stephen S. Smith Bain Securities, Inc. c/o Bain & Company, Inc. Two Copley Place Boston, Massachusetts 02116 Attn: Leonard C. Banos
25 SCHEDULE OF EXISTING SHAREHOLDERS Marc Hamon Netcom Systems, Inc. 20550 Nordhoff Street Chatsworth, California 91311 Henri Hamon Netcom Systems Europe 4, rue de Galilee Immeuble Le Bellevue ZAC du Moulin a vent 78280 Guyancourt, France James Jordan Netcom Systems, Inc. 20550 Nordhoff Street Chatsworth, California 91311 Warren B. Phelps III Netcom Systems, Inc. 20550 Nordhoff Street Chatsworth, California 91311 Jing Zhang Netcom Systems, Inc. 20550 Nordhoff Street Chatsworth, California 91311 Stephane Johnson Netcom Systems, Inc. 20550 Nordhoff Street Chatsworth, California 91311 Richard Bass Point of View, Inc. 410 Boylston Street 5th Floor Boston, Massachusetts 02116 EX-10.8 12 STOCKHOLDERS AGREEMENT 1 EXHIBIT 10.8 [EXECUTION COPY] NETCOM SYSTEMS, INC. SHAREHOLDERS AGREEMENT THIS SHAREHOLDERS AGREEMENT (this "Agreement") is made and entered into as of August 29, 1997, by and among Netcom Systems, Inc., a California corporation (the "Company"), each of the Persons listed on the Schedule of Investors attached hereto (each, an "Investor" and collectively, the "Investors") and each of the Persons listed on the Schedule of Existing Shareholders attached hereto (each, an "Existing Shareholder" and collectively, the "Existing Shareholders"). The Investors and the Existing Shareholders are collectively referred to herein as the "Shareholders" and individually as a "Shareholder." Except as otherwise provided herein, capitalized terms used herein are defined in paragraph 9 hereof. The Investors shall purchase shares of the Company's Class A Redeemable Preferred Stock and Class B Convertible Preferred Stock pursuant to a Recapitalization Agreement, dated as of August 29, 1997, by and among the Investors, the Existing Shareholders and the Company (as the same may be amended from time to time in accordance with its terms, the "Recapitalization Agreement"). The Existing Shareholders are holders on the date hereof of shares of the Company's Common Stock and/or options to purchase shares of the Company's Common Stock. The Company and the Shareholders desire to enter into this Agreement for the purposes, among others, of (i) establishing the composition of the Company's board of directors (the "Board"), (ii) assuring continuity in the management and ownership of the Company and (iii) limiting the manner and terms by which Shares may be transferred. The execution and delivery of this Agreement is a condition to the Closing under the Recapitalization Agreement. NOW, THEREFORE, in consideration of the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties to this Agreement hereby agree as follows: 1. Board of Directors. (a) From and after the Closing (as defined in the Recapitalization Agreement) and until the provisions of this paragraph 1 cease to be effective, each holder of Shares shall vote all of his, her or its Shares which are voting shares and any other voting securities of the Company over which such holder has voting control and shall take all other necessary or desirable actions within his, her or its control (whether in his, her or its capacity as a shareholder, director, member of a board committee or officer of the Company or otherwise, and including attendance at meetings in person or by proxy for purposes of obtaining a quorum and execution of written consents in lieu of meetings), and the Company shall take all necessary or desirable actions within its control (including calling special board and shareholder meetings), so that: (i) the authorized number of directors on the Board shall be established at five (5) directors; 2 (ii) the following representatives shall be elected to the Board: (A) one representative designated by the Existing Shareholders (the "Existing Shareholder Director"), which representative shall be designated pursuant to the first sentence of paragraph 1A of Section 1 of Subdivision D of Article V of the Articles of Incorporation so long as any Convertible Preferred Stock remains outstanding or pursuant to the second sentence of paragraph 1A of Subdivision D of Article V of the Articles of Incorporation at such time as there is no Convertible Preferred Stock outstanding (in either case, determined by a vote of the Existing Shareholders owning a majority of the Shares held by all of the Existing Shareholders), with Marc Hamon serving as the Existing Shareholder Director as of the date hereof; (B) three representatives designated by the Investors (the "Investor Directors"), which representatives shall be designated pursuant to paragraph 5A of Section 5 of Subdivision C of Article V of the Articles of Incorporation so long as any Convertible Preferred Stock remains outstanding or pursuant to the second sentence of paragraph 1A of Subdivision D of Article V of the Articles of Incorporation at such time as there is no Convertible Preferred Stock outstanding (in either case, determined by a vote of the Investors owning at least 66 2/3% of the Shares held by all of the Investors), one of which (who shall initially be Walter G. Kortschak) to be selected by Summit, one of which (who shall initially be Robert H. Sheridan III) to be selected by NCC and one of which (who shall initially be William B. Bunting) to be selected by Northstar so long as such representative is reasonably acceptable to Summit; and (C) one representative (the "Other Director") mutually designated by the Investors (determined by a vote of the Investors owning at least 66 2/3% of the Shares held by all of the Investors) and the Existing Shareholders (determined by a vote of the Existing Shareholders owning a majority of the Shares held by all of the Existing Shareholders), which representative shall be designated pursuant to paragraph 5A of Section 5 of Subdivision C of Article V of the Articles of Incorporation so long as any Convertible Preferred Stock remains outstanding or pursuant to the second sentence of paragraph 1A of Subdivision D of Article V of the Articles of Incorporation at such time as there is no Convertible Preferred Stock outstanding; (iii) for so long as any Investor shall hold any Shares, one of the Investor Directors shall serve as Chairman of the Board having the powers and duties of such office as set forth in the Company's bylaws, with Walter G. Kortschak serving as Chairman of the Board as of the date hereof; (iv) the composition of the board of directors of each of the Company's Subsidiaries (a "Sub Board") shall be the same as that of the Board (subject to the requirements of any jurisdiction that the Sub Board include only residents of such jurisdiction or that the Sub Board also include one or more residents of such jurisdiction); -2- 3 (v) (A) a three member Compensation Committee of the Board shall be established and shall include the three Investor Directors and (B) any other committees established by the Board or a Sub Board shall (to the extent possible) be proportionately equivalent to that of the Board; (vi) (A) the removal from the Board or a Sub Board (with or without cause) of the Existing Shareholder Director shall be at the written request of the Existing Shareholders (determined by a vote of the Existing Shareholders owning a majority of the Shares held by all of the Existing Shareholders), but only upon such written request and under no other circumstances, (B) the removal from the Board or a Sub Board (with or without cause) of any Investor Director shall be at the written request of the Investor who is entitled to select such Investor Director pursuant to subparagraph (ii)(B) above, but only upon such written request and under no other circumstances and (C) the removal from the Board or a Sub Board (with or without cause) of the Other Director shall be at the mutual written request of the Investors (determined by a vote of the Investors owning at least 66 2/3% of the Shares held by all of the Investors) and the Existing Shareholders (determined by a vote of the Existing Shareholders owning a majority of the Shares held by all of the Existing Shareholders), but only upon such mutual written request and under no other circumstances; and (vii) (A) in the event that the Existing Shareholder Director ceases to serve as a member of the Board or a Sub Board during his or her term of office, the resulting vacancy on the Board or a Sub Board shall be filled by a representative designated as provided in subparagraph (ii)(A) above, (B) in the event that any Investor Director ceases to serve as a member of the Board or a Sub Board during his or her term of office, the resulting vacancy on the Board or a Sub Board shall be filled by the Investor who is entitled to select such Investor Director as provided in subparagraph (ii)(B) above, and (C) in the event that the Other Director ceases to serve as a member of the Board or a Sub Board during his or her term of office, the resulting vacancy on the Board or a Sub Board shall be filled by a representative designated as provided in subparagraph (ii)(C) above. (b) The Company shall pay the reasonable out-of-pocket expenses incurred by each director in connection with attending the meetings of the Board or a Sub Board and any committees thereof. So long as any Investor Director, Other Director or Existing Shareholder Director serves on the Board or a Sub Board, the Company's Articles of Incorporation and bylaws shall provide for indemnification and exculpation of directors to the fullest extent permitted under applicable law. (c) If any party fails to designate a representative to fill a directorship pursuant to the terms of this paragraph 1, the individual previously holding such directorship shall be elected to such position, or if such individual fails or declines to serve, the election of an individual to such directorship shall be accomplished in accordance with the Company's Articles of Incorporation and bylaws and applicable law; provided that the Shareholders shall vote to remove such individual if the party or parties which failed to designate such directorship so direct. -3- 4 (d) The right of each of Summit, NCC and Northstar to select one of the Investor Directors under this paragraph 1 shall terminate at such time as such Person (together with its Affiliates) shall hold less than 25% of the Shares held by such Person immediately following the Closing, and at such time the remaining Investor or Investors holding more than 25% of the Shares held by such Persons immediately following the Closing shall have the right to designate a representative(s) to fill the vacant Investor Director or Investor Directors' positions (determined by a vote of such remaining Investors owning at least 66 2/3% of the Shares held by all such remaining Investors). (e) The provisions of this paragraph 1 shall survive the Company's initial Public Offering (unless terminated in connection therewith by Pa vote of the Investors owning at least 66 2/3% of the Shares held by all of the Investors) and shall remain in full force and effect thereafter until terminated by a vote of the Investors owning at least 66 2/3% of the Shares held by all of the Investors. 2. Representations and Warranties. Each Shareholder represents and warrants that (i) this Agreement has been duly authorized, executed and delivered by such Shareholder and constitutes the valid and binding obligation of such Shareholder, enforceable in accordance with its terms, and (ii) such Shareholder has not granted and is not a party to any proxy, voting trust or other agreement which is inconsistent with, conflicts with or violates any provision of this Agreement. No holder of Shares shall grant any proxy or become party to any voting trust or other agreement which is inconsistent with, conflicts with or violates any provision of this Agreement. 3. Restrictions on Transfer of Shares. (a) General. No holder of Shares shall sell, transfer, assign, pledge or otherwise dispose of (whether with or without consideration and whether voluntarily or involuntarily or by operation of law) any interest in any Shares (a "Transfer"), except pursuant to a Public Sale or an Approved Sale (an "Exempt Transfer") or the provisions of this paragraph 3. Prior to making any Transfer other than an Exempt Transfer, each Existing Shareholder transferring any Shares (a "Transferring Shareholder") shall deliver a written notice (a "Sale Notice") to the Company and the Shareholders other than the Transferring Shareholder (the "Other Shareholders") in order to allow the Company and the Investors to exercise the rights granted pursuant to paragraphs 3(b) and 3(c) below and the Existing Shareholders to exercise the rights granted pursuant to paragraph 3(c) below. Prior to making any transfer other than an Exempt Transfer, each Investor transferring any shares of Common Stock (a "Transferring Shareholder") shall deliver a written notice (a "Sale Notice") to the Other Shareholders in order to allow the Other Shareholders to exercise the rights granted pursuant to paragraph 3(c) below. The Sale Notice shall disclose in reasonable detail the identity of the prospective transferee(s), the number of Shares to be transferred and the terms and conditions of the proposed Transfer. In no event shall any Transfer of Shares pursuant to this paragraph 3 be made by any Existing Shareholder for any consideration other than cash payable upon consummation of such Transfer or in installments over time. No Shareholder shall consummate any Transfer until 30 days after the Sale Notice has been given to the Company and the Other Shareholders (the "Election Period"), unless the parties to the Transfer have been finally determined pursuant to this paragraph 3 prior to the expiration of such 30-day period. The date of the first to occur of such events is referred to herein as the "Authorization Date." -4- 5 (b) First Refusal Rights Applicable to Existing Shareholders. The Company may elect to purchase all or any portion of an Existing Shareholder's Shares to be transferred upon the same terms and conditions as those set forth in the Sale Notice by delivering a written notice of such election to such Existing Shareholder and the Investors within 20 days after the Sale Notice has been delivered to the Company. If the Company has not elected to purchase all of such Existing Shareholder's Shares to be transferred, the Investors may elect to purchase the remaining Shares to be transferred upon the same terms and conditions as those set forth in the Sale Notice by delivering written notice of such election to such Existing Shareholder within 25 days after the Sale Notice has been given to the Investors. If more than one of the Investors elects to purchase such Shares, the Shares to be sold shall be allocated among the Investors pro rata according to the number of Shares owned by each such Investor. If the Company and/or the Investors have not elected to purchase all of such Existing Shareholder's Shares specified in the Sale Notice, such Existing Shareholder may Transfer the Shares specified in the Sale Notice, subject to the provisions of paragraph 3(c) below, at a price and on terms no more favorable to the transferee(s) thereof than specified in the Sale Notice during the 30-day period immediately following the Authorization Date. Any such Existing Shareholder's Shares not transferred within such 30-day period shall be subject to the provisions of this paragraph 3 upon subsequent Transfer. If the Company or any of the Investors have elected to purchase any Shares hereunder, the Transfer of such shares shall be consummated as soon as practical after the delivery of the election notice(s) to the Transferring Shareholder, but in any event within 15 days after the expiration of the Election Period. The Company and/or the Investors may assign their rights under this paragraph 3(b) to one or more designees. (c) Participation Rights. If the Company and/or the Investors have not elected to purchase all of the Shares to be transferred by an Existing Shareholder pursuant to paragraph 3(b) above, or in the event of a Transfer of shares of Common Stock by an Investor, each Other Shareholder may elect to participate in the contemplated Transfer by delivering written notice to the Transferring Shareholder and the Company within 30 days after receipt by such Other Shareholder of the Sale Notice. If any Other Shareholder has elected to participate in such Transfer, the Transferring Shareholder and the electing Other Shareholder(s) shall be entitled to sell in the con templated Transfer, at the same price and on the same terms, a number of shares of Common Stock equal to the product of (i) the quotient determined by dividing the percentage of Shares owned by such Person by the aggregate percentage of Shares owned by the Transferring Shareholder and all electing Other Shareholder(s) and (ii) the number of shares of Common Stock to be sold in the contemplated sale. For example, if the Sale Notice contemplated a sale of 100 shares of Common Stock, and if the Transferring Shareholder was at such time the owner of 30% of all Shares and if one Other Shareholder elected to participate and such Other Shareholder owned 20% of all Shares, the Transferring Shareholder would be entitled to sell 60 shares of Common Stock (30% divided by 50% x 100 shares of Common Stock) and the electing Other Shareholder would be entitled to sell 40 shares of Common Stock (20% divided by 50% x 100 shares of Common Stock). The Transferring Shareholder shall use his, her or its best efforts to obtain the agreement of the prospective transferee(s) to the participation of the Other Shareholders in the contemplated Transfer and shall not Transfer any shares of Common Stock to the prospective transferee(s) if such trans- -5- 6 feree(s) refuses to allow the participation of the Other Shareholders. Each Shareholder transferring shares of Common Stock pursuant to this paragraph 3(c) shall pay its pro rata share (based on the number of shares of Common Stock to be sold) of the expenses incurred by the Shareholders in connection with such Transfer and shall be obligated to join on a pro rata basis (based on the number of shares of Common Stock to be sold) in any indemnification or other obligations that the Transferring Shareholder agrees to provide in connection with such Transfer (other than any such obligations that relate specifically to a particular Shareholder such as indemnification with respect to representations and warranties given by a Shareholder regarding such Shareholder's title to and ownership of shares of Common Stock). (d) Certain Permitted Transfers. The restrictions contained in this paragraph 3 shall not apply with respect to any Transfer of Shares by any Shareholder (i) in the case of any Shareholder which is an individual, pursuant to applicable laws of descent and distribution or among such Shareholder's Family Group or (ii) in the case of an Investor, among its Affiliates or among any of the other Investors or their Affiliates (collectively referred to herein as "Permitted Transferees"); provided that such restrictions shall continue to be applicable to the Shares after any such Transfer and the transferees of such Shares shall agree in writing to be bound by the provisions of this Agreement as a condition precedent to any such Transfer. An individual Shareholder's "Family Group" means such Shareholder's spouse and descendants (whether natural or adopted) or any trust, family partnership or other entity established solely for the benefit of such Shareholder and/or such Shareholder's spouse and/or descendants. An Investor's "Affiliate" means any other Person directly or indirectly controlling, controlled by or under common control with such Investor and any partner or member of an Investor which is a partnership or limited liability company. Notwithstanding the foregoing, no party hereto shall avoid the provisions of this Agreement by making one or more transfers to one or more Permitted Transferees and then disposing of all or any portion of such party's interest in any such Permitted Transferee. (e) Termination of Restrictions. The restrictions set forth in this paragraph 3 shall continue with respect to each Share following any Transfer thereof (other than an Exempt Transfer or a Transfer to the Company or an Investor or its designee pursuant to paragraph 3(b) above or a Transfer pursuant to paragraph 3(c) above); provided that all such restrictions shall terminate upon the consummation of a Public Offering. 4. Holdback Agreement. No Shareholder shall effect any public sale or distribution (including sales pursuant to Rule 144 or any similar provision then in force) under the Securities Act of any Shares or of any other capital stock or equity securities of the Company, or any securities convertible into or exchangeable or exercisable for such stock or securities, during the seven days prior to, and the 180-day period beginning on, the effective date of the Company's initial public offering of its Common Stock under the Securities Act or during the seven days prior to, and the 90-day period beginning on the effective date of the next registered public offering of the Company's Common Stock (except as part of such underwritten registration), unless the underwriters managing the registration otherwise agree. The restrictions on transfer set forth in this paragraph 4 shall continue with respect to each Share until the date on which such Share has been transferred in a Public Sale. -6- 7 5. Sale of the Company. (a) If the Board and the holders of at least 66 2/3% of the Shares held by the Investors approve a sale of all or substantially all of the Company's assets determined on a consolidated basis or a sale or exchange of all or substantially all of the Company's outstanding capital stock (whether by merger, sale, recapitalization, consolidation, reorganization, combination or otherwise) to any Person or Persons (an "Approved Sale"), each holder of Shares shall vote for, consent to and raise no objections against such Approved Sale and shall waive any dissenters' rights, appraisal rights or similar rights in connection therewith. If the Approved Sale is structured as a sale of stock, each holder of Shares shall agree to sell all of his, her or its Shares and rights to acquire Shares on the terms and conditions approved by the Board and the holders of at least 66 2/3% of the Shares held by the Investors. Each holder of Shares shall take all necessary and desirable actions in his, her or its capacity as a shareholder in connection with the consummation of the Approved Sale as requested by the Company (including attendance at meetings in person or by proxy for purposes of obtaining a quorum and execution of written consents in lieu of meetings). (b) The obligations of the holders of Shares with respect to an Approved Sale are subject to the satisfaction of the following conditions: (i) upon the consummation of the Approved Sale, all of the holders of Common Stock shall receive the same form and amount of consideration per share of Common Stock, or if any holders of Common Stock are given an option as to the form and amount of consideration to be received, all holders shall be given the same option; and (ii) in connection with the Approved Sale all holders of Shares representing then currently exercisable rights to acquire shares of Common Stock (including all holders of Convertible Preferred Stock) shall only be permitted to either (A) exercise such rights (including conversion rights in the case of the holders of Convertible Preferred Stock) prior to the consummation of the Approved Sale and participate in such sale as holders of Common Stock or (B) upon the consummation of the Approved Sale, receive in exchange for such rights consideration equal to the amount determined by multiplying (1) the same amount of consideration per share of Common Stock received by the holders of Common Stock in connection with the Approved Sale less the exercise price (if any) per share of Common Stock of such rights to acquire Common Stock by (2) the number of shares of Common Stock represented by such then currently exercisable rights and shall not be entitled to exercise their rights under paragraph 4A of Subdivision C of Article V of the Company's Articles of Incorporation in connection with any such Approved Sale and receive the aggregate consideration provided for thereunder in preference to the holders of Common Stock. (c) Each holder of Shares shall bear his, her or its pro rata share (based upon the number of Shares held by such holder) of the costs of any Approved Sale to the extent such costs are incurred for the benefit of all holders of Shares and are not otherwise paid by the Company or the acquiring party and shall be obligated to join on a pro rata basis (based on the number of Shares held by such holder) in any indemnification or other obligations that the Investors holding at least [66 2/3%] of the Shares held by all of the Investors agree to provide in connection with such Approved Sale (other than any such obligations that relate specifically to a holder of Shares such as indemnification with respect to representations and warranties given by a holder regarding such holder's title to and ownership of Shares). -7- 8 (d) In order to secure each Existing Shareholder's obligation to vote his, her or its Shares and other voting securities of the Company in accordance with the provisions of this paragraph 5, each Existing Shareholder hereby appoints the Investor Representative as his, her or its true and lawful proxy and attorney-in-fact, with full power of substitution, to vote all of his, her or its Shares and other voting securities of the Company for the approval and consummation of an Approved Sale and all such other matters as expressly provided for in this paragraph 5. The Investor Representative may exercise the irrevocable proxy granted to it hereunder at any time any Existing Stockholder fails to comply with the provisions of this paragraph 5. The proxies and powers granted by each Existing Shareholder pursuant to this paragraph 5(d) are coupled with an interest and are given to secure the performance of each Existing Shareholder's obligations and duties under this paragraph 5. Such proxies and powers shall be irrevocable for so long as such Existing Shareholder holds any Shares and shall survive the death, incompetency, disability, bankruptcy or dissolution of such Existing Shareholder and the subsequent holders of his, her or its Shares. (e) The provisions of this paragraph 5 shall terminate upon the consummation of a Public Offering. 6. First Refusal Rights Applicable to Issuances of Common Stock. (a) Except for issuances of Common Stock (a) to the Company's and any of its Subsidiaries' employees, consultants, lenders or lessors as approved by the Board or the Compensation Committee (including pursuant to options or other rights to acquire Common Stock approved by the Board or the Compensation Committee), (b) in connection with the acquisition of another company or business or (c) pursuant to a Public Offering, if the Company authorizes the issuance or sale of any shares of Common Stock or any securities (including debt securities) containing options or rights to acquire any shares of Common Stock (other than as a dividend on the outstanding shares of Common Stock) or any securities exchangeable for or convertible into Common Stock or such securities exchangeable for or convertible into Common Stock, the Company shall first offer to sell to each Investor holding any Shares and to each of the Existing Shareholders holding any Shares, a portion of such shares or securities equal to the quotient determined by dividing (1) the number of shares of Common Stock held by such Person (including the number of shares of Common Stock issuable upon conversion of the Convertible Preferred Stock) by (2) the total number of shares of Common Stock then outstanding (including the number of shares of Common Stock issuable upon conversion of the Convertible Preferred Stock). Each Investor and each of the Existing Shareholders shall be entitled to purchase such shares or securities at the most favorable price and on the most favorable terms as such shares or securities are to be offered or sold to any other Persons; provided that if all Persons entitled to purchase or receive such stock or securities are required to also purchase other securities of the Company, each Investor and each of the Existing Shareholders exercising their rights pursuant to this paragraph shall also be required to purchase the same strip of securities (on the same terms and conditions) that such other Persons are required to purchase. The purchase price for all shares and securities offered to the Investors and the Existing Shareholders shall be payable in cash or, to the extent otherwise consistent with the terms offered to any other Persons, installments over time. (b) In order to exercise its purchase rights hereunder, an Investor or an Existing Shareholder must within 20 days after receipt of written notice from the Company describing in -8- 9 reasonable detail the shares or securities being offered, the purchase price therefor, the payment terms and such Investor's or such Existing Shareholder's percentage allotment, deliver a written notice to the Company describing its election hereunder. If all of the shares and securities offered to the Investors and the Existing Shareholders are not fully subscribed by the Investors and the Existing Shareholders, the remaining stock and securities shall be reoffered by the Company to any of the Investors or the Existing Shareholders purchasing such Person's full allotment upon the terms set forth in this paragraph, except that such holders must exercise their purchase rights within five days after receipt of such reoffer. (c) Upon the expiration of the offering periods described above, the Company shall be entitled to sell such shares or securities which the Investors and the Existing Shareholders have not elected to purchase during the 60 days following such expiration on terms and conditions no more favorable to the purchasers thereof than those offered to the Investors and the Existing Shareholders. Any shares or securities offered or sold by the Company after such 60-day period must be reoffered to the Investors and the Existing Shareholders pursuant to the terms of this paragraph 6. (d) The rights of the Investors and the Existing Shareholders under this paragraph 6 shall terminate upon the consummation of a Public Offering. 7. Legend. Each certificate evidencing Shares and each certificate issued in exchange for or upon the Transfer of any Shares (if such shares remain Shares after such Transfer) shall be stamped or otherwise imprinted with a legend in substantially the following form: "The securities represented by this certificate are subject to a Shareholders Agreement dated as of August 29, 1997, among the issuer of such securities (the "Company") and certain of the Company's shareholders, as amended and modified from time to time. A copy of such Shareholders Agreement shall be furnished without charge by the Company to the holder hereof upon written request." The Company shall imprint such legend on certificates evidencing Shares outstanding as of the date hereof. The legend set forth above shall be removed from the certificates evidencing any shares which cease to be Shares in accordance with paragraph 9 hereof. 8. Transfers; Future Sales. Prior to any holder of Shares Transferring any Shares (other than pursuant to an Exempt Transfer) to any Person, such holder shall cause the prospective transferee to be bound by this Agreement and to execute and deliver to the Company and the other Shareholders a counterpart of this Agreement. Transferees of Shares held by Investors shall be deemed to be Investors hereunder. Transferees of Shares held by Existing Shareholders (other than the Investors or their designees, who shall be deemed to be Investors hereunder) shall be deemed to be Existing Shareholders hereunder (except that no such transferees from the Existing Shareholders shall have the right to participate in any sale of shares of Common Stock by the Investors pursuant to paragraph 3(c) above). The provisions of this paragraph 8 shall terminate upon the consummation of a Public Offering. -9- 10 9. Definitions. "Articles of Incorporation" means the Company's articles of incorporation as in effect from time to time. "Closing" has the meaning given to such term in the Recapitalization Agreement. "Common Stock" means the Company's common stock, no par value per share. "Convertible Preferred Stock" means the Company's Class B Convertible Preferred Stock, no par value per share. "Event of Noncompliance" has the meaning given to such term in the Articles of Incorporation. "Financing" has the meaning given to such term in the Recapitalization Agreement. "Investor Representative" means Summit. "NCC" means NationsBanc Capital Corp., a Texas corporation. "Northstar" means Northstar Investors, LLC, a Delaware limited liability company. "Person" means an individual, a partnership, a corporation, a limited liability company, an association, a joint stock company, a trust, a joint venture, an unincorporated organization and a governmental entity or any department, agency or political subdivision thereof. "Public Offering" means any offering by the Company of its Common Stock to the public pursuant to an effective registration statement under the Securities Act or any comparable statement under any similar federal statute then in force. "Public Sale" means any sale of Shares to the public pursuant to an offering registered under the Securities Act or to the public through a broker, dealer or market maker pursuant to the provisions of Rule 144 adopted under the Securities Act (or any similar provision then in force). "SBA" has the meaning given to such term in the Recapitalization Agreement. "SBIC Purchaser" has the meaning given to such term in the Recapitalization Agreement. "SBIC Regulations" has the meaning given to such term in the Recapitalization Agreement. "Securities Act" means the Securities Act of 1933, as amended from time to time. -10- 11 "Shares" means (i) any Common Stock purchased or otherwise acquired or held by any Shareholder, (ii) any Common Stock issued or issuable directly or indirectly upon the conversion, exercise or exchange of any securities purchased or otherwise acquired by any Shareholder which are convertible into or exercisable or exchangeable for Common Stock (including the Convertible Preferred Stock and any stock options granted by the Company) and (iii) any capital stock or other equity securities issued or issuable directly or indirectly with respect to the securities referred to in clauses (i) or (ii) above by way of a stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization. As to any particular securities constituting Shares hereunder, such securities shall cease to be Shares when they have been (x) effectively registered under the Securities Act and disposed of in accordance with the registration statement covering them or (y) sold to the public through a broker, dealer or market maker pursuant to Rule 144 (or any similar provision then in force) under the Securities Act. "Subsidiary" means, with respect to any Person, any corporation, limited liability company, partnership, association or other business entity of which (i) if a corporation, a majority of the total voting power of shares of stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by that Person or one or more Subsidiaries of that Person or a combination thereof, or (ii) if a limited liability company, partnership, association or other business entity, a majority of the limited liability company, partnership or other similar ownership interest thereof is at the time owned or controlled, directly or indirectly, by that Person or one or more Subsidiaries of that Person or a combination thereof. For purposes hereof, a Person or Persons shall be deemed to have a majority ownership interest in a limited liability company, partnership, association or other business entity if such Person or Persons shall be allocated a majority of the limited liability company, partnership, association or other business entity gains or losses or shall be or control the managing director, managing member or general partner of such limited liability company, partnership, association or other business entity. "Summit" means Summit Ventures IV, L.P., a Delaware limited partnership. 10. Financial Statements and Other Information. So long as any Investor or Existing Shareholder holds any Shares, the Company shall deliver to such Investor or Existing Shareholder, as the case may be: (a) Not later than 30 days prior to the last day of each fiscal year, capital and operating expense budgets, projections of sources and applications of funds and profit and loss projections (prepared in accordance with generally accepted accounting principles, consistently applied) for the Company (and each of the Subsidiaries with which it prepares consolidated financial statements) on a consolidated basis for each month of the next succeeding fiscal year, all itemized in reasonable detail and prepared by Company. Any material revisions made in such budgets or projections shall be furnished promptly to each Investor and Existing Shareholder; (b) As soon as available and in any event within 90 days after the end of each fiscal year, audited financial statements of the Company (and the Subsidiaries with which it prepares consolidated financial statements) on a consolidated and consolidating basis, including a balance sheet as at the end of such fiscal year, statements of income and retained earnings and a related -11- 12 statement of cash flows for such fiscal year and the figures for the preceding year, together with all notes thereto, prepared in reasonable detail and in accordance with generally accepted accounting principles consistently applied and accompanied by the report thereof of an independent accounting firm of recognized national standing as may be selected by the Company, (i) stating, among other things, that in the course of their audit, nothing has come to their attention suggesting that a condition or event has occurred that constitutes an Event of Noncompliance or a default or event of default under the Senior Loan Documents (as such term is defined in the Recapitalization Agreement) and (ii) containing no exceptions or qualifications (except for qualifications regarding specific contingent liabilities) (or if there was such a condition or event, specifying the same); (c) As soon as available and in any event within 45 days after the end of each fiscal quarter, unaudited financial statements of the Company (and the Subsidiaries with which it prepares consolidated financial statements) on a consolidated and consolidating basis, including a balance sheet as at the end of the preceding fiscal quarter, statements of income and retained earnings and a related statement of cash flows for such quarter (prepared in accordance with generally accepted accounting principles, consistently applied), such figures for the corresponding fiscal quarter of the preceding fiscal year and comparisons to the budget for such fiscal quarter. Such financial statements shall be certified by the chief financial officer of the Company to be (to his knowledge) complete and accurate, to fairly present the financial condition of the Company and its Subsidiaries and to be prepared in accordance with generally accepted accounting principles, consistently applied; (d) As soon as available in any event within 30 days after the end of each month, monthly financial reports of the Company (and the Subsidiaries with which it prepares consolidated financial statements) on a consolidated basis, including a balance sheet as at the end of the preceding calendar month and statements of income and retained earnings and a related statement of cash flows for such month (prepared in accordance with generally accepted accounting principles, consistently applied), such figures for the corresponding month of the preceding fiscal year and comparisons to the budget for such month. Such financial statements shall be certified by the chief financial officer of the Company to be (to his knowledge) complete and accurate, to fairly present the financial condition of the Company and its Subsidiaries and to be prepared in accordance with generally accepted accounting principles, consistently applied; (e) As soon as reasonably possible and in any event within 30 days after the end of each month, a statement signed by the chief financial officer of the Company, setting forth in reasonable detail a consolidated report setting forth operational data reasonably requested by each Investor; (f) Promptly, and in no event more than ten days after receipt thereof, copies of all audit reports, so-called "management letters" and other communications and reports submitted to the Company or any of its Subsidiaries by independent certified public accountants in connection with each interim or special audit of the Company or any of its Subsidiaries made by such accountants; and (g) Promptly, but in any event within ten days after the Company has knowledge thereof, (i) written notice of any actual or anticipated material adverse change in the operations or -12- 13 financial condition of the Company or any of its Subsidiaries, and (ii) copies of any report of any Person with respect to the condition of the Company or any Subsidiary citing any material adverse condition at the Company or such Subsidiary. 11. SBIC Regulatory Provisions. (a) Number of Stockholders. As long as the SBIC Purchaser holds any Class A Redeemable Preferred Stock of the Company or any Shares, the Company shall notify the SBIC Purchaser (i) at least 15 days prior to taking any action after which the number of record holders of the Company's voting stock would be increased from fewer than 50 to 50 or more, and (ii) of any other action or occurrence after which the number of record holders of the Company's voting stock was increased (or would increase) from fewer than 50 to 50 or more, as soon as practicable after the Company becomes aware that such other action or occurrence has occurred or is proposed to occur. (b) Use of Proceeds. At the same time the Company delivers its annual audited financials hereunder and at such other times as the SBIC Purchaser reasonable requests, the Company shall deliver to the SBIC Purchaser a written statement certified by the Company's president or chief financial officer describing in reasonable detail the use of the proceeds of the Financing by the Company and its Subsidiaries. In addition to any other rights granted hereunder, the Company shall grant the SBIC Purchaser and the SBA access to the Company's books and records for the purpose of verifying the use of such proceeds and verifying the certifications made by the Company in SBA Forms 480 and 652 delivered pursuant to the Recapitalization Agreement and for the purpose of determining whether the principal business activity of the Company and its Subsidiaries continues to constitute an eligible business activity (within the meaning of the SBIC Regulations). (c) Economic Impact Information. Promptly after the end of each fiscal year, the Company shall deliver to the SBIC Purchaser a written assessment of the economic impact of the SBIC Purchaser's investment in the Company, specifying the full-time equivalent jobs created or retained in connection with the investment, the impact of such SBIC Purchaser's Financing on the revenues and profits of the Company and its Subsidiaries and on taxes paid by the Company and its employees. (d) Prohibited Activities. Neither the Company nor any of its Subsidiaries shall engage in any activities for which an SBIC is prohibited from providing funds by the SBIC Regulations (including 13 CFR Section 107.720). 12. Inspection Rights. The Company shall permit any representatives designated by any Investor and any Existing Shareholder (so long as such Investor or Existing Shareholder holds any Shares), upon reasonable notice and during normal business hours and at such other times as any such holder may reasonably request (and, in the Company's discretion, subject to the execution of a satisfactory confidentiality agreement), to visit and inspect any of the properties of the Company and its Subsidiaries and examine the corporate and financial records of the Company and its Subsidiaries. -13- 14 13. Transfers in Violation of Agreement. Any Transfer or attempted Transfer of any Shares in violation of any provision of this Agreement shall be void, and the Company shall not record such Transfer on its books or treat any purported transferee of such Shares as the owner of such Shares for any purpose. 14. Amendment and Waiver. Except as otherwise provided herein, no modification, amendment or waiver of any provision of this Agreement shall be effective against the Company or the Shareholders unless such modification, amendment or waiver is approved in writing by the Company, the Investors holding at least 66 2/3% of the Shares then held by the Investors and the Existing Shareholders holding a majority of the Shares then held by the Existing Shareholders. The failure of any party to enforce any of the provisions of this Agreement shall in no way be construed as a waiver of such provisions and shall not affect the right of such party thereafter to enforce each and every provision of this Agreement in accordance with its terms. 15. Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability shall not affect the validity, legality or enforceability of any other provision of this Agreement in such jurisdiction or affect the validity, legality or enforceability of any provision in any other jurisdiction, but this Agreement shall be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein. 16. Entire Agreement. Except as otherwise expressly set forth herein, this Agreement embodies the complete agreement and understanding among the parties hereto with respect to the subject matter hereof and supersedes and preempts any prior understandings, agreements or representations by or among the parties, written or oral, which may have related to the subject matter hereof in any way. 17. Successors and Assigns. Except as otherwise expressly provided herein, this Agreement shall bind and inure to the benefit of and be enforceable by the Company and its successors and assigns and the Shareholders and any subsequent holders of Shares and the respective successors and assigns of each of them, so long as they hold Shares; provided that the rights of the Existing Shareholders under paragraphs 1, 3(c), 6 and 12 above may not be assigned without the prior written approval of the holders of at least 66 2/3% of the Shares held by the Investors. 18. Counterparts. This Agreement may be executed in multiple counterparts (including by means of telecopied signature pages), each of which shall be an original and all of which taken together shall constitute one and the same agreement. 19. Remedies. The parties hereto shall be entitled to enforce their rights under this Agreement specifically, to recover damages by reason of any breach of any provision of this Agreement and to exercise all other rights existing in their favor. The parties hereto agree and acknowledge that money damages would not be an adequate remedy for any breach of the provisions of this Agreement and that the Company and any Shareholder may in its sole discretion apply to any court of law or equity of competent jurisdiction for specific performance and/or injunctive relief -14- 15 (without posting a bond or other security) in order to enforce or prevent any violation of the provisions of this Agreement. 20. Notices. Any notice provided for in this Agreement shall be in writing and shall be either personally delivered, or mailed first class mail (postage prepaid) or sent by reputable overnight courier service (charges prepaid) to the Company at the address set forth below and to any other recipient at the address indicated on the schedules hereto and to any subsequent holder of Shares subject to this Agreement at such address as indicated by the Company's records, or at such address or to the attention of such other Person as the recipient party has specified by prior written notice to the sending party. Notices shall be deemed to have been given hereunder when delivered personally, five days after deposit in the U.S. mail and one day after deposit with a reputable overnight courier service (charges prepaid). The Company's address is: Netcom Systems, Inc. 20550 Nordhoff Street Chatsworth, California 91311 Attention: Chief Executive Officer with a copy to: (which shall not constitute notice to the Company) Wilson, Sonsini, Goodrich & Rosati 650 Page Mill Road Palo Alto, California 94304-1050 Attn: Steven E. Bochner, Esq. 21. Governing Law. All issues and questions concerning the construction, validity, interpretation and enforcement of this Agreement and the exhibits and schedules hereto shall be governed by, and construed in accordance with, the laws of the State of California without giving effect to any choice of law or conflict of law rules or provisions (whether of the State of California or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of California. 22. Business Days. If any time period for giving notice or taking action hereunder expires on a day which is a Saturday, Sunday or legal holiday in the state in which the Company's chief executive office is then located, the time period shall automatically be extended to the business day immediately following such Saturday, Sunday or legal holiday. 23. Descriptive Headings, etc. The descriptive headings of this Agreement are inserted for convenience only and do not constitute a part of this Agreement. The use of the term "including" herein shall mean "including without limitation." 24. No Strict Construction. The parties hereto have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question or intent or interpretation arises, this Agreement shall be construed as it was drafted jointly by the parties hereto, and no presumption or burden of proof shall arise favoring or disfavoring any party hereto by virtue of the authorship of any of the provisions of this Agreement. * * * * * -15- 16 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day and year first above written. NETCOM SYSTEMS, INC. By: ------------------------------------- Its: ------------------------------------ SUMMIT VENTURES IV, L.P. By: Summit Partners IV, L.P., its General Partner By: Stamps, Woodsum& Co. IV, its General Partner By: ------------------------------------- General Partner SUMMIT INVESTORS III, L.P. By: ------------------------------------- Authorized Signatory NATIONSBANC CAPITAL CORP. By: ------------------------------------- Todd A. Binkowski, its Authorized Signatory NORTHSTAR INVESTORS, LLC By: ------------------------------------- Its: ------------------------------------ [Signature Page to Shareholders Agreement] 17 SPITFIRE CAPITAL PARTNERS, L.P. By: MS Spitfire LLC, its General Partner By: ------------------------------------- William B. Bunting, its Authorized Signatory PETER MOONEY, AS NOMINEE FOR THE BROADVIEW PARTNERS GROUP By: ------------------------------------- Its: ------------------------------------ BAIN SECURITIES, INC. By: ------------------------------------- Leonard C. Banos, its Vice President WS INVESTMENT COMPANY 97B By: ------------------------------------- Its: ------------------------------------ WSGR PROFIT SHARING TRUST FBO STEVEN E. BOCHNER By: ------------------------------------- Its: ------------------------------------ ---------------------------------------- Steven E. Bochner ---------------------------------------- Nevan C. Elam ---------------------------------------- Todd Cleary [Signature Page to Shareholders Agreement] 18 ---------------------------------------- Marc Hamon ---------------------------------------- Henri Hamon ---------------------------------------- James Jordan ---------------------------------------- Warren B. Phelps III ---------------------------------------- Jing Zhang ---------------------------------------- Stephane Johnson ---------------------------------------- Richard Bass [Signature Page to Shareholders Agreement] 19 Consent and Community Property Waiver The undersigned hereby acknowledges that the undersigned has read this Agreement and understands its contents. The undersigned is aware that this Agreement provides for the purchase of shares of Common Stock from the undersigned's spouse. The undersigned hereby acknowledges and agrees that the interest of the undersigned's spouse in such Common Stock is subject to this Agreement and any interest the undersigned may have in such Common Stock shall be irrevocably bound by this Agreement and further that the undersigned's community property interest, if any, shall be similarly bound by this Agreement. The undersigned has sought legal advice with respect to such waiver and has determined after carefully reviewing this Agreement that the undersigned will waive such community property right. ---------------------------------------- By: [Spouse's Name] - ------------------------------------ Witness 20 SCHEDULE OF INVESTORS
Name and Address - ---------------- Summit Ventures IV, L.P. WS Investment Company 97B 499 Hamilton Avenue c/o Wilson Sonsini Goodrich & Rosati Palo Alto, California 94301 650 Page Mill Road Attn: Mr. Walter G. Kortschak Palo Alto, California 94304 Attn: Steven E Bochner, Esq. Summit Investors III, L.P. 499 Hamilton Avenue WSGR Profit Sharing Trust FBO Palo Alto, California 94301 Steven E. Bochner Attn: Mr. Walter G. Kortschak c/o Wilson Sonsini Goodrich & Rosati 650 Page Mill Road NationsBanc Capital Corp. Palo Alto, California 94304 NationsBank Corporate Center Attn: Steven E Bochner, Esq. 10th Floor 100 North Tryon Steven E. Bochner Charlotte, North Carolina 28255 c/o Wilson Sonsini Goodrich & Rosati Attn: Mr. Robert H. Sheridan III 650 Page Mill Road Palo Alto, California 94304 Northstar Investors, LLC c/o Montgomery Securities Nevan C. Elam 600 Montgomery Street c/o Wilson Sonsini Goodrich & Rosati San Francisco, California 94111 650 Page Mill Road Attn: Mr. Derek Lemke Palo Alto, California 94304 Spitfire Capital Partners, L.P. Todd Cleary c/o Montgomery Securities c/o Wilson Sonsini Goodrich & Rosati 600 Montgomery Street 650 Page Mill Road San Francisco, California 94111 Palo Alto, California 94304 Attn: Mr. William B. Bunting Peter Mooney as nominee for the Broadview Partners Group c/o Broadview Associates 950 Tower Lane 18th Floor Foster City, California 94404 Attn: Mr. Stephen S. Smith Bain Securities, Inc. c/o Bain & Company, Inc. Two Copley Place Boston, Massachusetts 02116 Attn: Mr. Leonard C. Banos
21 with a copy to: - --------------- (which shall not constitute notice to the Investors) Kirkland & Ellis 200 East Randolph Drive Chicago, Illinois 60601 Attn: Ted H. Zook, Esq. Fennebresque, Clark, Swindell & Hay 100 North Tryon Street, Suite 2900 Charlotte, North Carolina 28202-4011 Attn: John S. Chinuntdet, Esq. 22 SCHEDULE OF EXISTING SHAREHOLDERS Name and Address - ---------------- Marc Hamon Netcom Systems, Inc. 20550 Nordhoff Street Chatsworth, California 91311 Henri Hamon Netcom Systems Europe 4, rue de Galilee Immeuble Le Bellevue ZAC du Moulin a vent 78280 Guyancourt, France James Jordan Netcom Systems, Inc. 20550 Nordhoff Street Chatsworth, California 91311 Warren B. Phelps III Netcom Systems, Inc. 20550 Nordhoff Street Chatsworth, California 91311 Jing Zhang Netcom Systems, Inc. 20550 Nordhoff Street Chatsworth, California 91311 Stephane Johnson Netcom Systems, Inc. 20550 Nordhoff Street Chatsworth, California 91311 Richard Bass Point of View, Inc. 410 Boylston Street 5th Floor Boston, Massachusetts 02116 with a copy to: - --------------- (which shall not constitute notice to the Existing Shareholders) Wilson Sonsini Goodrich & Rosati 650 Page Mill Road Palo Alto, California 94304 Attn: Steven E. Bochner, Esq. 23 NETCOM SYSTEMS, INC. AMENDMENT NO. 1 TO SHAREHOLDERS AGREEMENT THIS AMENDMENT NO. 1 TO SHAREHOLDERS AGREEMENT (this "Amendment") is made and entered into as of September 25, 1997, by and among Netcom Systems, Inc., a California corporation (the "Company"), each of the Persons listed on the Schedule of Investors attached hereto (each, an "Investor" and collectively, the "Investors"), each of the Persons listed on the Schedule of Existing Shareholders attached hereto (each, an "Existing Shareholder" and collectively, the "Existing Shareholders") and Richard Moley ("Moley"). WHEREAS, the Company, the Investors and the Existing Shareholders are parties to that certain Shareholders Agreement dated as of August 29, 1997 (the "Agreement"). WHEREAS, Moley is purchasing shares of the Company's Class A Redeemable Preferred Stock and Class B Convertible Preferred Stock pursuant to a Preferred Stock Purchase Agreement, dated as of the date hereof, by and between the Company and Moley. WHEREAS, the Company, the Existing Shareholders and the Investors desire to enter into this Amendment for the purposes of making Moley a party to the Agreement. NOW, THEREFORE, in consideration of the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties to this Amendment hereby agree as follows: 1. Investor. For all purposes of the Agreement (as amended by this Amendment), the term "Investor" shall include Moley. 2. Notices. All notices and other communications to Moley provided for or permitted under the Agreement (as amended by this Amendment) shall be made at the address of Moley set forth in the Company's books and records. 3. Governing Law. All issues and questions concerning the construction, validity, interpretation and enforcement of this Agreement and the exhibits and schedules hereto shall be governed by, and construed in accordance with, the laws of the State of California without giving effect to any choice of law or conflict of law rules or provisions (whether of the State of California or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of California. 4. Descriptive Headings, etc. The descriptive headings of this Agreement are inserted for convenience only and do not constitute a part of this Agreement. The use of the term "including" herein shall mean "including without limitation." 5. Full Force and Effect. Except as amended hereby, the Agreement shall remain in full force and effect. * * * * * -1- 24 IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 1 to Shareholders Agreement on the day and year first above written. NETCOM SYSTEMS, INC. By: ------------------------------------- Its: ------------------------------------ SUMMIT VENTURES IV, L.P. By: Summit Partners IV, L.P., its General Partner By: Stamps, Woodsum& Co. IV, its General Partner By: ------------------------------------- General Partner SUMMIT INVESTORS III, L.P. By: ------------------------------------- Authorized Signatory NATIONSBANC CAPITAL CORP. By: ------------------------------------- Todd A. Binkowski, its Authorized Signatory NORTHSTAR INVESTORS, LLC By: ------------------------------------- Its: ------------------------------------ [Amendment No. 1 to Shareholders Agreement] 25 SPITFIRE CAPITAL PARTNERS, L.P. By: MS Spitfire LLC, its General Partner By: ------------------------------------- William B. Bunting, its Authorized Signatory PETER MOONEY, AS NOMINEE FOR THE BROADVIEW PARTNERS GROUP By: ------------------------------------- Its: ------------------------------------ BAIN SECURITIES, INC. By: ------------------------------------- Leonard C. Banos, its Vice President WS INVESTMENT COMPANY 97B By: ------------------------------------- Its: ------------------------------------ WSGR PROFIT SHARING TRUST FBO STEVEN E. BOCHNER By: ------------------------------------- Its: ------------------------------------ ---------------------------------------- Steven E. Bochner ---------------------------------------- Nevan C. Elam ---------------------------------------- Todd Cleary [Amendment No. 1 to Shareholders Agreement] 26 ---------------------------------------- Marc Hamon ---------------------------------------- Henri Hamon ---------------------------------------- James Jordan ---------------------------------------- Warren B. Phelps III ---------------------------------------- Jing Zhang ---------------------------------------- Stephane Johnson ---------------------------------------- Richard Bass ---------------------------------------- Richard Moley [Amendment No. 1 to Shareholders Agreement 27 SCHEDULE OF INVESTORS
Name and Address - ---------------- Summit Ventures IV, L.P. WS Investment Company 97B 499 Hamilton Avenue c/o Wilson Sonsini Goodrich & Rosati Palo Alto, California 94301 650 Page Mill Road Attn: Mr. Walter G. Kortschak Palo Alto, California 94304 Attn: Steven E Bochner, Esq. Summit Investors III, L.P. 499 Hamilton Avenue WSGR Profit Sharing Trust FBO Palo Alto, California 94301 Steven E. Bochner Attn: Mr. Walter G. Kortschak c/o Wilson Sonsini Goodrich & Rosati 650 Page Mill Road NationsBanc Capital Corp. Palo Alto, California 94304 NationsBank Corporate Center Attn: Steven E Bochner, Esq. 10th Floor 100 North Tryon Steven E. Bochner Charlotte, North Carolina 28255 c/o Wilson Sonsini Goodrich & Rosati Attn: Mr. Robert H. Sheridan III 650 Page Mill Road Palo Alto, California 94304 Northstar Investors, LLC c/o Montgomery Securities Nevan C. Elam 600 Montgomery Street c/o Wilson Sonsini Goodrich & Rosati San Francisco, California 94111 650 Page Mill Road Attn: Mr. Derek Lemke Palo Alto, California 94304 Spitfire Capital Partners, L.P. Todd Cleary c/o Montgomery Securities c/o Wilson Sonsini Goodrich & Rosati 600 Montgomery Street 650 Page Mill Road San Francisco, California 94111 Palo Alto, California 94304 Attn: Mr. William B. Bunting Peter Mooney as nominee for the Broadview Partners Group c/o Broadview Associates 950 Tower Lane 18th Floor Foster City, California 94404 Attn: Mr. Stephen S. Smith Bain Securities, Inc. c/o Bain & Company, Inc. Two Copley Place Boston, Massachusetts 02116 Attn: Mr. Leonard C. Banos
28 SCHEDULE OF EXISTING SHAREHOLDERS Name and Address - ---------------- Marc Hamon Netcom Systems, Inc. 20550 Nordhoff Street Chatsworth, California 91311 Henri Hamon Netcom Systems Europe 4, rue de Galilee Immeuble Le Bellevue ZAC du Moulin a vent 78280 Guyancourt, France James Jordan Netcom Systems, Inc. 20550 Nordhoff Street Chatsworth, California 91311 Warren B. Phelps III Netcom Systems, Inc. 20550 Nordhoff Street Chatsworth, California 91311 Jing Zhang Netcom Systems, Inc. 20550 Nordhoff Street Chatsworth, California 91311 Stephane Johnson Netcom Systems, Inc. 20550 Nordhoff Street Chatsworth, California 91311 Richard Bass Point of View, Inc. 410 Boylston Street 5th Floor Boston, Massachusetts 02116 29 NETCOM SYSTEMS, INC. AMENDMENT NO. 2 TO SHAREHOLDERS AGREEMENT THIS AMENDMENT NO. 2 TO SHAREHOLDERS AGREEMENT (this "Amendment") is made and entered into as of January 8, 1998, by and among Netcom Systems, Inc., a California corporation (the "Company"), each of the Persons listed on the Schedule of Investors attached hereto (each, an "Investor" and collectively, the "Investors"), each of the Persons listed on the Schedule of Existing Shareholders attached hereto (each, an "Existing Shareholder" and collectively, the "Existing Shareholders"). WHEREAS, the Company, the Investors and the Existing Shareholders are parties to that certain Shareholders Agreement dated as of August 29, 1997, as amended (the "Agreement"). WHEREAS, The parties hereto wish to amend certain provisions of the Agreement relating to the voting of shares of capital stock of the Company as set forth herein. NOW, THEREFORE, in consideration of the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties to this Amendment hereby agree as follows: 1. Restatement. Section 1 of the Agreement is amended and restated in its entirety to read as follows: 1. Board of Directors. (a) From and after the Closing (as defined in the Recapitalization Agreement) and until the provisions of this paragraph 1 cease to be effective, each holder of Shares shall vote all of his, her or its Shares which are voting shares and any other voting securities of the Company over which such holder has voting control and shall take all other necessary or desirable actions within his, her or its control (whether in his, her or its capacity as a shareholder, director, member of a board committee or officer of the Company or otherwise, and including attendance at meetings in person or by proxy for purposes of obtaining a quorum and execution of written consents in lieu of meetings), and the Company shall take all necessary or desirable actions within its control (including calling special board and shareholder meetings), so that: (i) the authorized number of directors on the Board shall be established at six (6) directors; (ii) the following representatives shall be elected to the Board: -1- 30 (A) one representative designated by the Existing Shareholders (the "Existing Shareholder Director"), which representative shall be designated pursuant to the first sentence of paragraph 1A of Section 1 of Subdivision D of Article V of the Articles of Incorporation so long as any Convertible Preferred Stock remains outstanding or pursuant to the second sentence of paragraph 1A of Subdivision D of Article V of the Articles of Incorporation at such time as there is no Convertible Preferred Stock outstanding (in either case, determined by a vote of the Existing Shareholders owning a majority of the Shares held by all of the Existing Shareholders), with Marc Hamon serving as the Existing Shareholder Director as of the date hereof; (B) three representatives designated by the Investors (the "Investor Directors"), which representatives shall be designated pursuant to paragraph 5A of Section 5 of Subdivision C of Article V of the Articles of Incorporation so long as any Convertible Preferred Stock remains outstanding or pursuant to the second sentence of paragraph 1A of Subdivision D of Article V of the Articles of Incorporation at such time as there is no Convertible Preferred Stock outstanding (in either case, determined by a vote of the Investors owning at least 66 2/3% of the Shares held by all of the Investors), one of which (who shall initially be Walter G. Kortschak) to be selected by Summit, one of which (who shall initially be Robert H. Sheridan III) to be selected by NCC and one of which (who shall initially be William B. Bunting) to be selected by Northstar so long as such representative is reasonably acceptable to Summit; and (C) two representatives (the "Other Directors") mutually designated by the Investors (determined by a vote of the Investors owning at least 66 2/3% of the Shares held by all of the Investors) and the Existing Shareholders (determined by a vote of the Existing Shareholders owning a majority of the Shares held by all of the Existing Shareholders), which representatives shall be designated pursuant to paragraph 5A of Section 5 of Subdivision C of Article V of the Articles of Incorporation so long as any Convertible Preferred Stock remains outstanding or pursuant to the second sentence of paragraph 1A of Subdivision D of Article V of the Articles of Incorporation at such time as there is no Convertible Preferred Stock outstanding; (iii) for so long as any Investor shall hold any Shares, one of the Investor Directors shall serve as Chairman of the Board having the powers and duties of such office as set forth in the Company's bylaws, with Walter G. Kortschak serving as Chairman of the Board as of the date hereof; (iv) the composition of the board of directors of each of the Company's Subsidiaries (a "Sub Board") shall be the same as that of the Board (subject to the requirements of any jurisdiction that the Sub Board include only -2- 31 residents of such jurisdiction or that the Sub Board also include one or more residents of such jurisdiction); (v) (A) a three member Compensation Committee of the Board shall be established and shall include the three Investor Directors and (B) any other committees established by the Board or a Sub Board shall (to the extent possible) be proportionately equivalent to that of the Board; (vi) (A) the removal from the Board or a Sub Board (with or without cause) of the Existing Shareholder Director shall be at the written request of the Existing Shareholders (determined by a vote of the Existing Shareholders owning a majority of the Shares held by all of the Existing Shareholders), but only upon such written request and under no other circumstances, (B) the removal from the Board or a Sub Board (with or without cause) of any Investor Director shall be at the written request of the Investor who is entitled to select such Investor Director pursuant to subparagraph (ii)(B) above, but only upon such written request and under no other circumstances and (C) the removal from the Board or a Sub Board (with or without cause) of any Other Director shall be at the mutual written request of the Investors (determined by a vote of the Investors owning at least 66 2/3% of the Shares held by all of the Investors) and the Existing Shareholders (determined by a vote of the Existing Shareholders owning a majority of the Shares held by all of the Existing Shareholders), but only upon such mutual written request and under no other circumstances; and (vii) (A) in the event that the Existing Shareholder Director ceases to serve as a member of the Board or a Sub Board during his or her term of office, the resulting vacancy on the Board or a Sub Board shall be filled by a representative designated as provided in subparagraph (ii)(A) above, (B) in the event that any Investor Director ceases to serve as a member of the Board or a Sub Board during his or her term of office, the resulting vacancy on the Board or a Sub Board shall be filled by the Investor who is entitled to select such Investor Director as provided in subparagraph (ii)(B) above, and (C) in the event that any Other Director ceases to serve as a member of the Board or a Sub Board during his or her term of office, the resulting vacancy on the Board or a Sub Board shall be filled by a representative designated as provided in subparagraph (ii)(C) above. (b) The Company shall pay the reasonable out-of-pocket expenses incurred by each director in connection with attending the meetings of the Board or a Sub Board and any committees thereof. So long as any Investor Director, Other Director or Existing Shareholder Director serves on the Board or a Sub Board, the Company's Articles of Incorporation and bylaws shall provide for indemnification and exculpation of directors to the fullest extent permitted under applicable law. (c) If any party fails to designate a representative to fill a directorship pursuant to the terms of this paragraph 1, the individual previously holding such directorship shall be elected to such position, or if such individual fails or declines to serve, the election of an individual to such directorship shall be accomplished in accordance with the -3- 32 Company's Articles of Incorporation and bylaws and applicable law; provided that the Shareholders shall vote to remove such individual if the party or parties which failed to designate such directorship so direct. (d) The right of each of Summit, NCC and Northstar to select one of the Investor Directors under this paragraph 1 shall terminate at such time as such Person (together with its Affiliates) shall hold less than 25% of the Shares held by such Person immediately following the Closing, and at such time the remaining Investor or Investors holding more than 25% of the Shares held by such Persons immediately following the Closing shall have the right to designate a representative(s) to fill the vacant Investor Director or Investor Directors' positions (determined by a vote of such remaining Investors owning at least 66 2/3% of the Shares held by all such remaining Investors). (e) The provisions of this paragraph 1 shall survive the Company's initial Public Offering (unless terminated in connection therewith by a vote of the Investors owning at least 66 2/3% of the Shares held by all of the Investors) and shall remain in full force and effect thereafter until terminated by a vote of the Investors owning at least 66 2/3% of the Shares held by all of the Investors." 2. Governing Law. All issues and questions concerning the construction, validity, interpretation and enforcement of this Agreement and the exhibits and schedules hereto shall be governed by, and construed in accordance with, the laws of the State of California without giving effect to any choice of law or conflict of law rules or provisions (whether of the State of California or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of California. 3. Descriptive Headings, etc. The descriptive headings of this Agreement are inserted for convenience only and do not constitute a part of this Agreement. The use of the term "including" herein shall mean "including without limitation." 4. Full Force and Effect. Except as amended hereby, the Agreement shall remain in full force and effect. * * * * * -4- 33 IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 1 to Shareholders Agreement on the day and year first above written. NETCOM SYSTEMS, INC. By: ------------------------------------- Its: ------------------------------------ SUMMIT VENTURES IV, L.P. By: Summit Partners IV, L.P., its General Partner By: Stamps, Woodsum& Co. IV, its General Partner By: ------------------------------------- General Partner SUMMIT INVESTORS III, L.P. By: ------------------------------------- Authorized Signatory NATIONSBANC CAPITAL CORP. By: ------------------------------------- Todd A. Binkowski, its Authorized Signatory SPITFIRE CAPITAL PARTNERS, L.P. By: MS Spitfire LLC, its General Partner By: ------------------------------------- William B. Bunting, its Authorized Signatory [Amendment No. 2 to Shareholders Agreement] -5- 34 PETER MOONEY, AS NOMINEE FOR THE BROADVIEW PARTNERS GROUP By: ------------------------------------- Its: ------------------------------------ BAIN SECURITIES, INC. By: ------------------------------------- Leonard C. Banos, its Vice President WS INVESTMENT COMPANY 97B By: ------------------------------------- Its: ------------------------------------ WSGR PROFIT SHARING TRUST FBO STEVEN E. BOCHNER By: ------------------------------------- Its: ------------------------------------ ADVENT ATLANTIC AND PACIFIC III By: ------------------------------------- Its: ------------------------------------ CHASE VENTURE CAPITAL ASSOC., L.P. By: ------------------------------------- Its: ------------------------------------ [Amendment No. 2 to Shareholders Agreement] -6- 35 TA ADVENT VIII By: ------------------------------------- Its: ------------------------------------ TA VENTURE INVESTORS By: ------------------------------------- Its: ------------------------------------ ---------------------------------------- Steven E. Bochner ---------------------------------------- Nevan C. Elam ---------------------------------------- Todd Cleary ---------------------------------------- Marc Hamon ---------------------------------------- Henri Hamon ---------------------------------------- James Jordan ---------------------------------------- Warren B. Phelps III [Amendment No. 2 to Shareholders Agreement] -7- 36 ---------------------------------------- Jing Zhang ---------------------------------------- Stephane Johnson ---------------------------------------- Richard Bass ---------------------------------------- Richard Moley ---------------------------------------- David A. Baylor ---------------------------------------- Richard J. Cadenasso ---------------------------------------- Allen Chozen ---------------------------------------- Lewis W. Coleman ---------------------------------------- David V. Crowder ---------------------------------------- Frank M. Dunlevy ---------------------------------------- Clark L. Gerhardt, Jr. [Amendment No. 2 to Shareholders Agreement] -8- 37 ---------------------------------------- Seth J. Gersch ---------------------------------------- Ansel M. Hall ---------------------------------------- John D. Hershey ---------------------------------------- Wilson T. Hileman, Jr. ---------------------------------------- Brett A. Hodess ---------------------------------------- Benjamin Howe ---------------------------------------- Murray C. Huneke ---------------------------------------- David M. Jacquin ---------------------------------------- Craig R. Johnson ---------------------------------------- Scott C. Kovalik ---------------------------------------- David S. Lehmann [Amendment No. 2 to Shareholders Agreement] -9- 38 ---------------------------------------- Mark L. Lehmann ---------------------------------------- Derek Lemke-von Ammon ---------------------------------------- Jack G. Levin ---------------------------------------- Robert D. Long ---------------------------------------- Karl L. Matthies ---------------------------------------- J. Sanford Miller ---------------------------------------- Bernard M. Notas ---------------------------------------- Harry K. Plant ---------------------------------------- Bruce G. Potter ---------------------------------------- David B. Readerman ---------------------------------------- Rand L. Rosenberg [Amendment No. 2 to Shareholders Agreement] -10- 39 ---------------------------------------- Joseph M. Schell ---------------------------------------- Rex Sherry ---------------------------------------- Peter B. Stoneberg ---------------------------------------- Thomas A. Thornhill, III ---------------------------------------- John P. Tinker ---------------------------------------- Otto V. Tschudi ---------------------------------------- Thomas W. Weisel ---------------------------------------- Michael L. Yagemann [Amendment No. 2 to Shareholders Agreement] -11- 40 SCHEDULE OF INVESTORS
Name and Address - ---------------- Summit Ventures IV, L.P. Summit Investors III, L.P. 499 Hamilton Avenue 499 Hamilton Avenue Palo Alto, California 94301 Palo Alto, California 94301 Attn: Mr. Walter G. Kortschak Attn: Mr. Walter G. Kortschak NationsBanc Capital Corp. TA Venture Investors NationsBank Corporate Center c/o TA Associates, Inc. 10th Floor High Street Tower, Suite 2500 100 North Tryon 125 High Street Charlotte, North Carolina 28255 Boston, MA 02110 Attn: Mr. Robert H. Sheridan III Attn: Mr. Thomas Alber Spitfire Capital Partners, L.P. Peter Mooney as nominee for c/o Montgomery Securities the Broadview Partners Group 600 Montgomery Street c/o Broadview Associates San Francisco, California 94111 950 Tower Lane Attn: Mr. William B. Bunting 18th Floor Foster City, California 94404 Attn: Mr. Stephen S. Smith Bain Securities, Inc. WS Investment Company 97B c/o Bain & Company, Inc. c/o Wilson Sonsini Goodrich & Rosati Two Copley Place 650 Page Mill Road Boston, Massachusetts 02116 Palo Alto, California 94304 Attn: Mr. Leonard C. Banos Attn: Steven E Bochner, Esq. WSGR Profit Sharing Trust FBO Steven E. Bochner Steven E. Bochner c/o Wilson Sonsini Goodrich & Rosati c/o Wilson Sonsini Goodrich & Rosati 650 Page Mill Road 650 Page Mill Road Palo Alto, California 94304 Palo Alto, California 94304 Attn: Steven E Bochner, Esq. Nevan C. Elam Todd Cleary c/o Wilson Sonsini Goodrich & Rosati c/o Wilson Sonsini Goodrich & Rosati 650 Page Mill Road 650 Page Mill Road Palo Alto, California 94304 Palo Alto, California 94304 Richard Moley Chase Venture Capital Assoc., L.P. 19910 Robin Way 380 Madison Avenue Saratoga, CA 95070 New York, NY 10017 Attn: Jeff Walker
-12- 41 TA Advent VIII Advent Atlantic and Pacific III c/o TA Associates, Inc. c/o TA Associates, Inc. High Street Tower, Suite 2500 High Street Tower, Suite 2500 125 High Street 125 High Street Boston, MA 02110 Boston, MA 02110 Attn: Mr. Thomas Alber Attn: Mr. Thomas Alber David A. Baylor Richard J. Cadenasso c/o Montgomery Securities c/o Montgomery Securities 600 Montgomery Street 600 Montgomery Street San Francisco, California 94111 San Francisco, California 94111 Allen Chozen Lewis W. Coleman c/o Montgomery Securities c/o Montgomery Securities 600 Montgomery Street 600 Montgomery Street San Francisco, California 94111 San Francisco, California 94111 David V. Crowder Frank M. Dunlevy c/o Montgomery Securities c/o Montgomery Securities 600 Montgomery Street 600 Montgomery Street San Francisco, California 94111 San Francisco, California 94111 Clark L. Gerhardt, Jr. Seth J. Gersch c/o Montgomery Securities c/o Montgomery Securities 600 Montgomery Street 600 Montgomery Street San Francisco, California 94111 San Francisco, California 94111 Ansel M. Hall John D. Hershey c/o Montgomery Securities c/o Montgomery Securities 600 Montgomery Street 600 Montgomery Street San Francisco, California 94111 San Francisco, California 94111 Wilson T. Hileman, Jr. Brett A. Hodess c/o Montgomery Securities c/o Montgomery Securities 600 Montgomery Street 600 Montgomery Street San Francisco, California 94111 San Francisco, California 94111 Benjamin Howe Murray C. Huneke c/o Montgomery Securities c/o Montgomery Securities 600 Montgomery Street 600 Montgomery Street San Francisco, California 94111 San Francisco, California 94111 David M. Jacquin Craig R. Johnson c/o Montgomery Securities c/o Montgomery Securities 600 Montgomery Street 600 Montgomery Street San Francisco, California 94111 San Francisco, California 94111
-13- 42 Scott C. Kovalik David S. Lehmann c/o Montgomery Securities c/o Montgomery Securities 600 Montgomery Street 600 Montgomery Street San Francisco, California 94111 San Francisco, California 94111 Mark L. Lehmann Derek Lemke-von Ammon c/o Montgomery Securities c/o Montgomery Securities 600 Montgomery Street 600 Montgomery Street San Francisco, California 94111 San Francisco, California 94111 Jack G. Levin Robert D. Long c/o Montgomery Securities c/o Montgomery Securities 600 Montgomery Street 600 Montgomery Street San Francisco, California 94111 San Francisco, California 94111 Karl L. Matthies J. Sanford Miller c/o Montgomery Securities c/o Montgomery Securities 600 Montgomery Street 600 Montgomery Street San Francisco, California 94111 San Francisco, California 94111 Bernard M. Notas Harry K. Plant c/o Montgomery Securities c/o Montgomery Securities 600 Montgomery Street 600 Montgomery Street San Francisco, California 94111 San Francisco, California 94111 Bruce G. Potter David B. Readerman c/o Montgomery Securities c/o Montgomery Securities 600 Montgomery Street 600 Montgomery Street San Francisco, California 94111 San Francisco, California 94111 Rand L. Rosenberg Joseph M. Schell c/o Montgomery Securities c/o Montgomery Securities 600 Montgomery Street 600 Montgomery Street San Francisco, California 94111 San Francisco, California 94111 Rex Sherry Peter B. Stoneberg c/o Montgomery Securities c/o Montgomery Securities 600 Montgomery Street 600 Montgomery Street San Francisco, California 94111 San Francisco, California 94111 Thomas A. Thornhill, III John P. Tinker c/o Montgomery Securities c/o Montgomery Securities 600 Montgomery Street 600 Montgomery Street San Francisco, California 94111 San Francisco, California 94111
-14- 43 Otto V. Tschudi Thomas W. Weisel c/o Montgomery Securities c/o Montgomery Securities 600 Montgomery Street 600 Montgomery Street San Francisco, California 94111 San Francisco, California 94111 Michael L. Yagemann c/o Montgomery Securities 600 Montgomery Street San Francisco, California 94111
-15- 44 SCHEDULE OF EXISTING SHAREHOLDERS Name and Address - ---------------- Marc Hamon Netcom Systems, Inc. 20550 Nordhoff Street Chatsworth, California 91311 Henri Hamon Netcom Systems Europe 4, rue de Galilee Immeuble Le Bellevue ZAC du Moulin a vent 78280 Guyancourt, France James Jordan Netcom Systems, Inc. 20550 Nordhoff Street Chatsworth, California 91311 Warren B. Phelps III Netcom Systems, Inc. 20550 Nordhoff Street Chatsworth, California 91311 Jing Zhang Netcom Systems, Inc. 20550 Nordhoff Street Chatsworth, California 91311 Stephane Johnson Netcom Systems, Inc. 20550 Nordhoff Street Chatsworth, California 91311 Richard Bass Point of View, Inc. 410 Boylston Street 5th Floor Boston, Massachusetts 02116 -16- EX-10.9 13 STANDARD INDUSTRIAL/COMMERCIAL TENANT-LEASE-NET 1 EXHIBIT 10.9 AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE - NET (Do not use this form for Multi-Tenant Property) 1. Basic Provisions ("Basic Provisions") 1.1 Parties: This Lease ("Lease"), dated for reference purposes only, March 28, 1996, is made by and between Nordhoff Industrial Complex, a California General Partnership ("Lessor") and Netcom Systems, Inc., a California corporation ("Lessee"), (collectively, the "Parties," or individually a "Party"). 1.2 Premises: That certain real property, including all improvements therein or to be provided by Lessor under the terms of this Lease, and commonly known by the street address of 20500 Nordhoff Street, Chatsworth, located in the County of Los Angeles, State of California, and generally described as (describe briefly the nature of the property) an approximately 23,014 square foot concrete tilt-up building situated on approximately 47,045 square feet of land, zoned MR-2. CC&R's attached hereto and made a part of this Lease by reference ("Premises"). (See Paragraph 2 for further provisions.) 1.3 Term: Five (5) years and 0 months ("Original Term") commencing April 15, 1996 ("Commencement Date") and ending April 14, 2001 ("Expiration Date"). (See Paragraph 3 for further provisions. 1.4 Early Possession: See Addendum Paragraph 49 ("Early Possession Date"). (See Paragraphs 3.2 and 3.3 for further provisions.) 1.5 Base Rent: $16,800.00 per month ("Base Rent"), payable on the first day of each month commencing See Addendum 49. (See Paragraph 4 for further provisions.) [X] If this box is checked, there are provisions in this Lease for the Base Rent to be adjusted. 1.6 Base Rent Paid Upon Execution: $16,800.00 as Base Rent for the Base rent for first month of Lease term. 1.7 Security Deposit: $16,800.00 ("Security Deposit"). (See Paragraph 5 for further provisions.) 1.8 Permitted Use: Assembly, distribution and sales of computer network test equipment and related legal uses. (See Paragraph 6 for further provisions.) 1.9 Insuring Party: Lessor is the "Insuring Party" unless otherwise stated herein. (See Paragraph 8 for further provisions.) 1.10 Real Estate Brokers: The following real estate brokers (collectively, the "Brokers") and brokerage relationships exist in this transaction and are consented to by the Parties (check applicable boxes): DELPHI BUSINESS PROPERTIES represents [ ] Lessor exclusively ("Lessor's Broker"); [X] both Lessor and Lessee, and represents [ ] Lessee exclusively ("Lessee's Broker"); [ ] both Lessee and Lessor. (See Paragraph 15 for further provisions.) 1.11 Guarantor. The obligations of the Lessee under this Lease are to be guaranteed by: N/A ("Guarantor"). (See Paragraph 37 for further provisions.) 1.12 Addenda. Attached hereto is an Addendum or Addenda consisting of Paragraphs 49 through 61 and Exhibits ___ all of which constitute a part of this Lease. 2 2. Premises. 2.1 Letting. Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the Premises, for the term, at the rental, and upon all of the terms, covenants and conditions set forth in this Lease. Unless otherwise provided herein, any statement of square footage set forth in this Lease, or that may have been used in calculating rental, is an approximation which Lessor and Lessee agree is reasonable and the rental based thereon is not subject to revision whether or not the actual square footage is more or less. 2.2 Condition. Lessor shall deliver the Premises to Lessee clean and free of debris on the Commencement Date and warrants to Lessee that the existing plumbing, fire sprinkler system, lighting, air conditioning, heating, and loading doors, if any, in the Premises, other than those constructed by Lessee, shall in good operating condition on the Commencement Date. If a non-compliance with said warranty exists as of the Commencement Date, Lessor shall, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify same at Lessor's expense. If Lessee does not give Lessor written notice of a non-compliance with this warranty within thirty (30) days after the Commencement Date, correction of that non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense. 2.3 Compliance with Covenants, Restrictions and Building Code. Lessor warrants to Lessee that the improvements on the Premises comply with all applicable covenants or restrictions of record and applicable building codes, regulations and ordinances in effect on the Commencement Date. Said warranty does not apply to the use to which Lessee will put the Premises or to any Alterations or Utility Installations (as defined in Paragraph 7.3(a)) made or to be made by Lessee. If the Premises do not comply with said warranty, Lessor shall, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify the same at Lessor's expense. If Lessee does not give Lessor written notice of a non-compliance with this warranty within six (6) months following the Commencement Date, correction of that non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense. 2.4 Acceptance of Premises. Lessee hereby acknowledges: (a) that it has been advised by the Brokers to satisfy itself with respect to the condition of the Premises (including but not limited to the electrical and fire sprinkler systems, security, environmental aspects, compliance with Applicable Law, as defined in Paragraph 6.3) and the present and future suitability of the Premises for Lessee's intended use, (b) that Lessee has made such investigation as it deems necessary with reference to such matters and assumes all responsibility therefor as the same relate to Lessee's occupancy of the Premises and/or the term of this Lease, and (c) that neither Lessor, nor any of Lessor's agents, has made any oral or written representations or warranties with respect to the said matters other than as set forth in this Lease. 2.5 Lessee Prior Owner/Occupant. The warranties made by Lessor in this Paragraph 2 shall be of no force or effect if immediately prior to the date set forth in Paragraph 1.1 Lessee was the owner or occupant of the Premises. In such event, Lessee shall, at Lessee's sole cost and expense, correct any non-compliance of the Premises with said warranties. 3. Term. 3.1 Term. The Commencement Date, Expiration Date and Original Term of this Lease are as specified in Paragraph 1.3. 3.2 Early Possession. If Lessee totally or partially occupies the Premises prior to the Commencement Date, the obligation to pay Base Rent shall be abated for the period of such early possession. All other terms of this Lease, however, (including but not limited to the obligations to pay Real Property Taxes and insurance premiums and to maintain the Premises) shall be in effect during such period. Any such early possession shall not affect nor advance the Expiration Date of the Original Term. 3.3 Delay in Possession. If for any reason Lessor cannot deliver possession of the Premises to Lessee as agreed herein by the Early Possession Date, if one is specified in Paragraph 1.4, -2- 3 or, if no Early Possession Date is specified, by the Commencement Date, Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease, or the obligations of Lessee hereunder, or extend the term hereof, but in such case, Lessee shall not, except as otherwise provided herein, be obligated to pay rent or perform any other obligation of Lessee under the terms of this Lease until Lessor delivers possession of the Premises to Lessee. If possession of the Premises is not delivered to Lessee within sixty (60) days after the Commencement Date, Lessee may, at its option, by notice in writing to Lessor within ten (10) days thereafter, cancel this Lease, in which event the Parties shall be discharged from all obligations hereunder; provided, however, that if such written notice by Lessee is not received by Lessor within said ten (10) day period, Lessee's right to cancel this Lease shall terminate and be of no further force or effect. Except as may be otherwise provided, and regardless of when the term actually commences, if possession is not tendered to Lessee when required by this Lease and Lessee does not terminate this Lease, as aforesaid, the period free of the obligation to pay Base Rent, if any, that Lessee would otherwise have enjoyed shall run from the date of delivery of possession and continue for a period equal to what Lessee would otherwise have enjoyed under the terms hereof, but minus any days of delay caused by the acts, changes or omissions of Lessee. 4. Rent. 4.1 Base Rent. Lessee shall cause payment of Base Rent and other rent or charges, as the same may be adjusted from time to time, to be received by Lessor in lawful money of the United States, without offset or deduction, on or before the day on which it is due under the terms of this Lease. Base Rent and all other rent and charges for any period during the term hereof which is for less than one (1) full calendar month shall be prorated based upon the actual number of days of the calendar month involved. Payment of Base Rent and other charges shall be made to Lessor at its address stated herein or to such other persons or at such other addresses as Lessor may from time to time designate in writing to Lessee. 5. Security Deposit. Lessee shall deposit with Lessor upon execution hereof the Security Deposit set forth in Paragraph 1.7 as security for Lessee's faithful performance of Lessee's obligations under this Lease. If Lessee fails to pay Base Rent or other rent or charges due hereunder, or otherwise Defaults under this Lease (as defined in Paragraph 13.1), Lessor may use, apply or retain all or any portion of said Security Deposit for the payment of any amount due Lessor or to reimburse or compensate Lessor for any liability, cost, expense, loss or damage (including attorneys' fees) which Lessor may suffer or incur by reason thereof. If Lessor uses or applies all or any portion of said Security Deposit, Lessee shall within ten (10) days after written request therefor deposit moneys with Lessor sufficient to restore said Security Deposit to the full amount required by this Lease. Any time the Base Rent increases during the term of this Lease, Lessee shall, upon written request from Lessor, deposit additional moneys with Lessor sufficient to maintain the same ratio between the Security Deposit and the Base Rent as those amounts are specified in the Basic Provisions. Lessor shall not be required to keep all or any part of the Security Deposit separate from its general accounts. Lessor shall, at the expiration or earlier termination of the term hereof and after Lessee has vacated the Premises, return to Lessee (or, at Lessor's option, to the last assignee, if any, of Lessee's interest herein), that portion of the Security Deposit not used or applied by Lessor. Unless otherwise expressly agreed in writing by Lessor, no part of the Security Deposit shall be considered to be held in trust, to bear interest or other increment for its use, or to be prepayment for any moneys to be paid by Lessee under this Lease. 6. Use. 6.1 Use. Lessee shall use and occupy the Premises only for the purposes set forth in Paragraph 1.8, or any other use which is comparable thereto, and for no other purpose. Lessee shall not use or permit the use of the premises in a manner that creates waste or a nuisance, or that disturbs owners and/or occupants of, or causes damage to, neighboring premises or properties. Lessor hereby agrees to not unreasonably withhold or delay its consent to any written request by Lessee, Lessees assignees or subtenants, and by prospective assignees and subtenants of the Lessee, its assignees and subtenants, for a modification of said permitted purpose for which the premises may be used or occupied, so long as the same will not impair structural integrity of the improvements on the Premises, the mechanical or electrical systems therein, is not significantly more burdensome to the Premises and the improvements thereon, and is otherwise permissible pursuant to this Paragraph 6. If Lessor elects to withhold such -3- 4 consent, Lessor shall within five (5) business days give a written notification of the same, which notice shall include an explanation of Lessor's reasonable objections to the change in use. 6.2 Hazardous Substances. (a) Reportable Uses Require Consent. The term "Hazardous Substance" as used in this Lease shall mean any product, substance, chemical, material or waste whose presence, nature, quantity and/or intensity of existence use, manufacture, disposal, transportation, spill, release or effect, either by itself or in combination with other materials expected to be on the Premises, is either: (i) potentially injurious to the public health, safety or welfare, the environment or the Premises, (ii) regulated or monitored by any governmental authority, or (iii) a basis for liability of Lessor to any governmental agency or third party under any applicable statute or common law theory Hazardous Substance shall include, but not be limited to, hydrocarbons, petroleum, gasoline, crude oil or any products, by-products or fractions thereof. Lessee shall not engage in any activity in, on or about the Premises which constitutes a Reportable Use (as hereinafter defined) of Hazardous Substances without the express prior written consent of Lessor and compliance in a timely manner (at Lessee's sole cost and expense) with all Applicable Law (as defined in Paragraph 6.3). "Reportable Use" shall mean (i) the installation or use of any above or below ground storage tank, (ii) the generation, possession, storage, use, transportation, or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plan is required to be filed with, any governmental authority. Reportable Use shall also include Lessee's being responsible for the presence in, on or about the Premises of a Hazardous Substance with respect to which any Applicable Law requires that a notice be given to persons entering or occupying the Premises or neighboring properties. Notwithstanding the foregoing, Lessee may, without Lessor's prior consent, but in compliance with all Applicable Law, use any ordinary and customary materials reasonably required to be used by Lessee in the normal course of Lessee's business permitted on the Premises, so long as such use is not a Reportable Use and does not expose the Premises or neighboring properties to any meaningful risk of contamination or damage or expose Lessor to any liability therefor. In addition, Lessor may (but without any obligation to do so) condition its consent to the use or presence of any Hazardous Substance, activity or storage tank by Lessee upon Lessee's giving Lessor such additional assurances as Lessor, in its reasonable discretion, deems necessary to protect itself, the public, the Premises and the environment against damage, contamination or injury and/or liability therefrom or therefor, including, but not limited to, the installation (and removal on or before Lease expiration or earlier termination) of reasonably necessary protective modifications to the Premises (such as concrete encasements) and/or the deposit of an additional Security Deposit under Paragraph 5 hereof. (b) Duty to Inform Lessor. If Lessee knows, or has reasonable cause to believe, that a Hazardous Substance, or a condition involving or resulting from same, has come to be located in, on, under or about the Premises, other than as previously consented to by Lessor, Lessee shall immediately give written notice of such fact to Lessor. Lessee shall also immediately give Lessor a copy of any statement, report, notice, registration, application, permit, business plan, license, claim, action or proceeding given to, or received from, any governmental authority or private party, or persons entering or occupying the Premises, concerning the presence, spill, release, discharge of, or exposure to, any Hazardous Substance or contamination in, on, or about the Premises, including but not limited to all such documents as may be involved in any Reportable Uses involving the Premises. (c) Indemnification. Lessee shall indemnify, protect, defend and hold Lessor, its agents, employees, lenders and ground lessor, if any, and the Premises, harmless from and against any and all loss of rents and/or damages, liabilities, judgments, costs, claims, liens, expenses, penalties, permits and attorney's and consultant's fees arising out of or involving any Hazardous Substance or storage tank brought onto the Premises by or for Lessee or under Lessee's control. Lessee's obligations under this Paragraph 6 shall include, but not be limited to, the effects of any contamination or injury to person, property or the environment created or suffered by Lessee, and the cost of investigation including consultant's and attorney's fees and testing), removal, remediation, restoration and/or abatement thereof, or of any contamination therein involved, and shall survive the expiration or earlier termination of this Lease. No termination, cancellation or release agreement entered into by Lessor and Lessee shall release Lessee from its obligations under this Lease with respect to Hazardous Substances or storage tanks, unless specifically so agreed by Lessor in writing at the time of such agreement. -4- 5 6.3 Lessee's Compliance with Law. Except as otherwise provided in this Lease, Lessee, shall, at Lessee's sole cost and expense, fully, diligently and in a timely manner, comply with all "Applicable Law," which term is used in this Lease to include all laws, rules, regulations, ordinances, directives, covenants, easements and restrictions of record, permits, the requirements of any applicable fire insurance underwriter or rating bureau, and the recommendations of Lessor's engineers and/or consultants, relating in any manner to the Premises (including but not limited to matters pertaining to (i) industrial hygiene, (ii) environmental conditions on, in, under or about the Premises, including soil and groundwater conditions, and (iii) the use, generation, manufacture, production, installation, maintenance, removal, transportation, storage, spill or release of any Hazardous Substance or storage tank), now in effect or which may hereafter come into effect, and whether or not reflecting a change in policy from any previously existing policy. Lessee shall, within five (5) days after receipt of Lessor's written request, provide Lessor with copies of all documents and information, including, but not limited to, permits, registrations, manifests, applications, reports and certificates, evidencing Lessee's compliance with any Applicable Law specified by Lessor, and shall immediately upon receipt, notify Lessor in writing (with copies of any documents involved) of any threatened or actual claim, notice, citation, warning, complaint or report pertaining to or involving failure by Lessee or the Premises to comply with any Applicable Law. 6.4 Inspection; Compliance. Lessor and Lessor's Lender(s) (as defined in Paragraph 8.3(a)) shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times, for the purpose of inspecting the condition of the Premises and for verifying compliance by Lessee with this Lease and all Applicable Laws (as defined in Paragraph 6.3), and to employ experts and/or consultants in connection therewith and/or to advise Lessor with respect to Lessee's activities, including but not limited to the installation, operation, use, monitoring, maintenance, or removal of any Hazardous Substance or storage tank on or from the Premises. The costs and expenses of any such inspections shall be paid by the party requesting same, unless a Default or Breach of this Lease, violation of Applicable Law, or a contamination, caused or materially contributed to by Lessee is found to exist or be imminent, or unless the inspection is requested or ordered by a governmental authority as the result of any such existing or imminent violation or contamination. In any such case, Lessee shall upon request reimburse Lessor or Lessor's Lender, as the case may be, for the costs and expenses of such inspections. 7. Maintenance; Repairs; Utility Installations; Trade Fixtures and Alterations. 7.1 Lessee's Obligations. (a) Subject to the provisions of Paragraphs 2.2 (Lessor's warranty as to condition), 2.3 (Lessor's warranty as to compliance with covenants, etc), 7.2 (Lessor's obligations to repair), 9 (damage and destruction), and 14 (condemnation), Lessee shall, at Lessee's sole cost and expense and at all times, keep the Premises and every part thereof in good order, condition and repair, structural and non-structural (whether or not such portion of the Premises requiring repairs, or the means of repairing the same, are reasonably or readily accessible to Lessee, and whether or not the need for such repairs occurs as a result of Lessee's use, any prior use, the elements or the age of such portion of the Premises), including, without limiting the generality of the foregoing, all equipment or facilities serving the Premises, such as plumbing, heating, air conditioning, ventilating, electrical, lighting facilities, boilers, fired or unfired pressure vessels, fire sprinkler and/or standpipe and hose or other automatic fire extinguishing system, including fire alarm and/or smoke detection systems and equipment, fire hydrant fixtures, walls (interior and exterior), foundations, ceilings, roofs, floors, windows, doors, plate glass, skylights, landscaping, driveways, parking lots, fences, retaining walls, signs, sidewalks and parkways located in, on, about, or adjacent to the Premises. Lessee shall not cause or permit any Hazardous Substance to be spilled or released in, on, under or about the Premises (including through the plumbing or sanitary sewer system) and shall promptly, at Lessee's expense, take all investigatory and/or remedial action reasonably recommended, whether or not formally ordered or required, for the cleanup of any contamination of, and for the maintenance, security and/or monitoring of the Premises, the elements surrounding same, or neighboring properties, that was caused or materially contributed to by Lessee, or pertaining to or involving any Hazardous Substance and/or storage tank brought onto the Premises by or for Lessee or under its control. Lessee, in keeping the Premises in good order, condition and repair, shall exercise and perform good maintenance practices. Lessee's obligations shall include restorations, replacements or renewals when necessary to keep the Premises and all improvements -5- 6 thereon or a part thereof in good order, condition and state of repair. If Lessee occupies the Premises for seven (7) years or more, Lessor may require Lessee to repaint the exterior of the buildings on the Premises as reasonably required, but not more frequently than once every seven (7) years. (b) Lessee shall, at Lessee's sole cost and expense, procure and maintain contracts, with copies to Lessor, in customary form and substance for, and with contractors specializing and experienced in, the inspection, maintenance and service of the following equipment and improvements, if any, located on the Premises: (i) heating, air conditioning and ventilation equipment, (ii) boiler, fired or unfired pressure vessels, (iii) fire sprinkler and/or standpipe and hose or other automatic fire extinguishing systems, including fire alarm and/or smoke detection, (iv) landscaping and irrigation systems, (v) roof covering and drain maintenance and (vi) asphalt and parking lot maintenance. 7.2 Lessor's Obligations. Except for the warranties and agreements of Lessor contained in Paragraphs 2.2 (relating to condition of the Premises), 2.3 (relating to compliance with covenants, restrictions and building code), 9 (relating to destruction of the Premises) and 14 (relating to condemnation of the Premises), it is intended by the Parties hereto that Lessor have no obligation, in any manner whatsoever, to repair and maintain the Premises, the improvements located thereon, or the equipment therein, whether structural or non structural, all of which obligations are intended to be that of the Lessee under Paragraph 7.1 hereof. It is the intention of the Parties that the terms of this Lease govern the respective obligations of the Parties as to maintenance and repair of the Premises. Lessee and Lessor expressly waive the benefit of any statute now or hereafter in effect to the extent it is inconsistent with the terms of this Lease with respect to, or which affords Lessee the right to make repairs at the expense of Lessor or to terminate this Lease by reason of, any needed repairs. 7.3 Utility Installations; Trade Fixtures; Alterations. (a) Definitions; Consent Required. The term "Utility Installations" is used in this Lease to refer to all carpeting, window coverings, air lines, power panels, electrical distribution, security, fire protection systems, communication systems, lighting fixtures, heating, ventilating, and air conditioning equipment, plumbing, and fencing in, on or about the Premises. The term "Trade Fixtures" shall mean Lessee's machinery and equipment that can be removed without doing material damage to the Premises. The term "Alterations" shall mean any modification of the improvements on the Premises from that which are provided by Lessor under the terms of this Lease, other than Utility Installations or Trade Fixtures, whether by addition or deletion. "Lessee Owned Alterations and/or Utility Installations" are defined as Alterations and/or Utility Installations made by lessee that are not yet owned by Lessor as defined in Paragraph 7.4(a). Lessee shall not make any Alterations or Utility Installations in, on, under or about the Premises without Lessor's prior written consent. Lessee may, however, make non-structural Utility Installations to the interior of the Premises (excluding the roof), as long as they are not visible from the outside, do not involve puncturing, relocating or removing the roof or any existing walls, and the cumulative cost thereof during the term of this Lease as extended does not exceed $25,000. (b) Consent. Any Alterations or Utility Installations that Lessee shall desire to make and which require the consent of the Lessor shall be presented to Lessor in written form with proposed detailed plans. All consents given by Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific consent, shall be deemed conditioned upon: (i) Lessee's acquiring all applicable permits required by governmental authorities, (ii) the furnishing of copies of such permits together with a copy of the plans and specifications for the Alteration or Utility Installation to Lessor prior to commencement of the work thereon, and (iii) the compliance by Lessee with all conditions of said permits in a prompt and expeditious manner. Any Alterations or Utility Installations by Lessee during the term of this Lease shall be done in a good and workmanlike manner, with good and sufficient materials, and in compliance with all Applicable Law. Lessee shall promptly upon completion thereof furnish Lessor with as-built plans and specifications therefor. Lessor may (but without obligation to do so) condition its consent to any requested Alteration or Utility Installation that costs $10,000 or more upon Lessee's providing Lessor with a lien and completion bond in an amount equal to one and one-half times the estimated cost of such Alteration or Utility Installation and/or upon Lessee's posting an additional Security Deposit with Lessor under Paragraph 36 hereof. -6- 7 (c) Indemnification. Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use on the Premises, which claims are or may be secured by any mechanics' or materialmen's lien against the Premises or any interest therein. Lessee shall give Lessor not less than ten (10) days' notice prior to the commencement of any work in, on or about the Premises, and Lessor shall have the right to post notices of non-responsibility in or on the Premises as provided by law. If Lessee shall, in good faith, contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense defend and protect itself, Lessor and the Premises against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof against the Lessor or the Premises. If Lessor shall require, Lessee shall furnish to Lessor a surety bond satisfactory to Lessor in an amount equal to one and one-half times the amount of such contested lien claim or demand, indemnifying Lessor against liability for the same, as required by law for the holding of the Premises free from the effect of such lien or claim. In addition, Lessor may require Lessee to pay Lessor's attorney's fees and costs in participating in such action if Lessor shall decide it is to its best interest to do so. 7.4 Ownership; Removal; Surrender; and Restoration. (a) Ownership. Subject to Lessor's right to require their removal or become the owner thereof as hereinafter provided in this Paragraph 7.4, all Alterations and Utility Additions made to the Premises by Lessee shall be the property of and owned by Lessee, but considered a part of the Premises. Lessor may, at any time and at its option, elect in writing to Lessee to be the owner of all or any specified part of the Lessee Owned Alterations and Utility Installations. Unless otherwise instructed per subparagraph 7.4(b) hereof, all Lessee Owned Alterations and Utility Installations shall, at the expiration or earlier termination of this Lease, become the property of Lessor and remain upon and be surrendered by Lessee with the Premises. (b) Removal. Unless otherwise agreed in writing, Lessor may require that any or all Lessee Owned Alterations or Utility Installations be removed by the expiration or earlier termination of this Lease, notwithstanding their installation may have been consented to by Lessor. Lessor may require the removal at any time of all or any part of any Lessee Owned Alterations or Utility Installations made without the required consent of Lessor. (c) Surrender/Restoration. Lessee shall surrender the Premises by the end of the last day of the Lease term or any earlier termination date, with all of the improvements, parts and surfaces thereof clean and free of debris and in good operating order, condition and state of repair, ordinary wear and tear excepted. "Ordinary wear and tear" shall not include any damage or deterioration that would have been prevented by good maintenance practice or by Lessee performing all of its obligations under this Lease. Except as otherwise agreed or specified in writing by Lessor, the Premises, as surrendered, shall include the Utility Installations. The obligation of Lessee shall include the repair of any damage occasioned by the installation, maintenance or removal of Lessee's Trade Fixtures, furnishings, equipment, and Alterations and/or Utility Installations, as well as the removal of any storage tank installed by or for Lessee, and the removal, replacement, or remediation of any soil, material or ground water contaminated by Lessee, all as may then be required by Applicable Law and/or good practice. Lessee's Trade Fixtures shall remain the property of Lessee and shall be removed by Lessee subject to its obligation to repair and restore the Premises per this Lease. 8. Insurance; Indemnity. 8.1 Payment for Insurance. Regardless of whether the Lessor or Lessee is the Insuring Party, Lessee shall pay for all insurance required under this Paragraph 8 except to the extent of the cost attributable to liability insurance carried by Lessor in excess of $1,000,000 per occurrence. Premiums for policy periods commencing prior to or extending beyond the Lease term shall be prorated to correspond to the Lease term. Payment shall be made by Lessee to Lessor within ten (10) days following receipt of an invoice for any amount due. 8.2 Liability Insurance. (a) Carried by Lessee. Lessee shall obtain and keep in force during the term of this Lease a Commercial General Liability policy of insurance protecting Lessee and Lessor (as an -7- 8 additional insured) against claims for bodily injury, personal injury and property damage based upon, involving or arising out of the ownership, use, occupancy or maintenance of the premises and all areas appurtenant thereto. Such insurance shall be on an occurrence basis providing single limit coverage in an amount not less than $1,000,000 per occurrence with an Additional Insured-Managers or Lessors of Premises" Endorsement and contain the "Amendment of the Pollution Exclusion" for damage caused by heat, smoke or fumes from a hostile fire. The policy shall not contain any intra-insured exclusions as between insured persons or organizations, but shall include coverage for liability assumed under this Lease as an "insure a contact" for the performance of Lessee's indemnity obligations under this Lease. The limits of said insurance required by this Lease or as carried by Lessee shall not, however, limit the liability of Lessee nor relieve Lessee of any obligation hereunder. All insurance to be carried by Lessee shall be primary to and not contributory with any similar insurance carried by Lessor, whose insurance shall be considered excess insurance only. (b) Carried by Lessor. In the event Lessor is the Insuring Party, Lessor shall also maintain liability insurance described in Paragraph 8.2(a), above, in addition to, and not in lieu of, the insurance required to be maintained by Lessee. Lessee shall not be named as an additional insured therein. 8.3 Properly Insurance-Building, Improvements and Rental Value. (a) Building and Improvements. The Insuring Party shall obtain and keep in force during the term of this Lease a policy or policies in the name of Lessor, with loss payable to Lessor and to the holders of any mortgages, deeds of trust or ground leases on the Premises ("Lender(s)"), insuring loss or damage to the Premises. The amount of such insurance shall be equal to the full replacement cost of the Premises, as the same shall exist from time to time, or the amount required by Lenders, but in no event more than the commercially reasonable and available insurable value thereof if, by reason of the unique nature or age of the improvements involved, such latter amount is less than full replacement cost. If Lessor is the Insuring Party, however, Lessee Owned Alterations and Utility Installations shall be insured by Lessee under Paragraph 8.4 rather than by Lessor. If the coverage is available and commercially appropriate, such policy or policies shall insure against all risks of direct physical loss or damage (except the perils of flood and/or earthquake unless required by a Lender), including coverage for any additional costs resulting from debris removal and reasonable amounts of coverage for the enforcement of any ordinance or law regulating the reconstruction or replacement of any undamaged sections of the Premises required to be demolished or removed by reason of the enforcement of any building, zoning, safety or land use laws as the result of a covered cause of loss. Said policy or policies shall also contain an agreed valuation provision in lieu of any coinsurance clause, waiver of subrogation, and inflation guard protection causing an increase in the annual property insurance coverage amount by a factor of not less than the adjusted U.S. Department of Labor Consumer Price Index for All Urban Consumers for the city nearest to where the Premises are located. If such insurance coverage has a deductible clause, the deductible amount shall not exceed $1,000 per occurrence, and Lessee shall be liable for such deductible amount in the event of an Insured Loss, as defined in Paragraph 9.1(c). (b) Rental Value. The Insuring Party shall, in addition, obtain and keep in force during the term of this Lease a policy or policies in the name of Lessor, with loss payable to Lessor and Lender(s), insuring the loss of the full rental and other charges payable by Lessee to Lessor under this Lease for one (1) year (including all real estate taxes, insurance costs, and any scheduled rental increases). Said insurance shall provide that in the event the Lease is terminated by reason of an insured loss, the period of indemnity for such coverage shall be extended beyond the date of the completion of repairs or replacement of the Premises, to provide for one full year's loss of rental revenues from the date of any such loss. Said insurance shall contain an agreed valuation provision in lieu of any coinsurance clause, and the amount of coverage shall be adjusted annually to reflect the projected rental income, property taxes, insurance premium costs and other expenses, if any, otherwise payable by Lessee, for the next twelve (12) month period. Losses shall be liable for any deductible amount in the event of such loss. (c) Adjacent Premises. If the Premises are part of a larger building, or if the Premises are part of a group of buildings owned by Lessor which are adjacent to the Premises, the Lessee -8- 9 shall pay for any increase in the premiums for the property insurance of such building or buildings if said increase is caused by Lessee's acts, omissions, use or occupancy of the Premises. (d) Tenant's Improvements. If the Lessor is the Insuring Party, the Lessor shall not be required to insure Lessee Owned Alterations and Utility Installations unless the item in question has become the property of Lessor under the terms of this Lease. If Lessee is the Insuring Party, the policy carried by Lessee under this Paragraph 8.3 shall insure Lessee Owned Alterations and Utility Installations. 8.4 Lessee's Property Insurance. Subject to the requirements of Paragraph 8.5, Lessee at its cost shall either by separate policy or, at Lessor's option, by endorsement to a policy already carried, maintain insurance coverage on all of Lessee's personal property, Lessee Owned Alterations and Utility Installations in, on, or about the Premises similar in coverage to that carried by the Insuring Party under Paragraph 8.3. Such insurance shall be full replacement cost coverage with a deductible of not to exceed $1,000 per occurrence. The proceeds from any such insurance shall be used by Lessee for the replacement of personal property or the restoration of Lessee Owned Alterations and Utility Installations. Lessee shall be the Insuring Party with respect to the insurance required by this Paragraph 8.4 and shall provide Lessor with written evidence that such insurance is in force. 8.5 Insurance Policies. Insurance required hereunder shall be in companies duly licensed to transact business in the state where the Premises are located, and maintaining during the policy term a "General Policyholders Rating" of at least B +, V, or such other rating as may be required by a Lender having a lien on the Premises, as set forth in the most current issue of "Best's Insurance Guide." Lessee shall not do or permit to be done anything which shall invalidate the insurance policies referred to in this Paragraph 8. If Lessee is the Insuring Party, Lessee shall cause to be delivered to Lessor certified copies of policies of such insurance or certificates evidencing the existence and amounts of such insurance with the insureds and loss payable clauses as required by this Lease. No such policy shall be cancellable or subject to modification except after thirty (30) days' prior written notice to Lessor. Lessee shall at least thirty (30) days prior to the expiration of such policies, furnish Lessor with evidence of renewals or "insurance binders" evidencing renewal thereof, or Lessor may order such insurance and charge the cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon demand. If the Insuring Party shall fail to procure and maintain the insurance required to be carried by the Insuring Party under this Paragraph 8, the other Party may, but shall not be required to, procure and maintain the same, but at Lessee's expense. 8.6 Waiver of Subrogation. Without affecting any other rights or remedies, Lessee and Lessor ("Waiving Party") each hereby release and relieve the other, and waive their entire right to recover damages (whether in contract or in tort) against the other, for loss of or damage to the Waiving Party's property arising out of or incident to the perils required to be insured against under Paragraph 8. The effect of such releases and waivers of the right to recover damages shall not be limited by the amount of insurance carried or required, or by any deductibles applicable thereto. 8.7 Indemnity. Except for Lessor's negligence and/or breach of express warranties, Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor and its agents, Lessor's master or ground lessor, partners and Lenders, from and against any and all claims, loss of rents and/or damages, costs, liens, judgments, penalties, permits, attorney's and consultant's fees, expenses and/or liabilities arising out of involving, or in dealing with, the occupancy of the Premises by Lessee, the conduct of Lessee's business, any act, omission or neglect of Lessee, its agents, contractors, employees or invitees, and out of any Default or Breach by Lessee in the performance in a timely manner of any obligation on Lessee's part to be performed under this Lease. The foregoing shall include, but not be limited to, the defense or pursuit of any claim or any action or proceeding involved therein, and whether or not (in the case of claims made against Lessor) litigated and/or reduced to judgment, and whether well founded or not. In case any action or proceeding be brought against Lessor by reason of any of the foregoing matters, Lessee upon notice from Lessor shall defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be so indemnified. 8.8 Exemption of Lessor from Liability. Lessor shall not be liable for injury or damage to the person or goods, wares, merchandise or other property of Lessee, Lessee's employees, -9- 10 contractors, invitees, customers, or any other person in or about the Premises, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, fire sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, or from any other cause, whether the said injury or damage results from conditions arising upon the Premises or upon other portions of the building of which the Premises are a part, or from other sources or places, and regardless of whether the cause of such damage or injury or the means of repairing the same is accessible or not. Lessor shall not be liable for any damages arising from any act or neglect of any other tenant of Lessor. Notwithstanding Lessor's negligence or breach of this Lease, Lessor shall under no circumstances be liable for injury to Lessee's business or for any loss of income or profit therefrom. 9. Damage or Destruction. 9.1 Definitions. (a) "Premises Partial Damage" shall mean damage or destruction to the improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, the repair cost of which damage or destruction is less than 50% of the then Replacement Cost of the Premises immediately prior to such damage or destruction, excluding from such calculation the value of the land and Lessee Owned Alterations and Utility Installations. (b) "Premises Total Destruction" shall mean damage or destruction to the Premises, other than Lessee Owned Alterations and Utility Installations the repair cost of which damage or destruction is 50% or more of the then Replacement Cost of the Premises immediately prior to such damage or destruction, excluding from such calculation the value of the land and Lessee Owned Alterations and Utility Installations. (c) "Insured Loss" shall mean damage or destruction to improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, which was caused by an event required to be covered by the insurance described in Paragraph 8.3(a), irrespective of any deductible amounts or coverage limits involved. (d) "Replacement Cost" shall mean the cost to repair or rebuild the improvements owned by Lessor at the time of the occurrence to their condition existing immediately prior thereto, including demolition, debris removal and upgrading required by the operation of applicable building codes, ordinances or laws, and without deduction for depreciation. (e) "Hazardous Substance Condition" shall mean the occurrence or discovery of a condition involving the presence of, or a contamination by, a Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the Premises. 9.2 Partial Damage - Insured Loss. If a Premises Partial Damage that is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility Installations) as soon as reasonably possible and this Lease shall continue in full force and effect; provided, however, that Lessee shall, at Lessor's election, make the repair of any damage or destruction the total cost to repair of which is $10,000 or less, and, in such event, Lessor shall make the insurance proceeds available to Lessee on a reasonable basis for that purpose. Notwithstanding the foregoing, if the required insurance was not in force or the insurance proceeds are not sufficient to effect such repair, the Insuring Party shall promptly contribute the shortage in proceeds (except as to the deductible which is Lessee's responsibility) as and when required to complete said repairs. In the event, however, the shortage in proceeds was due to the fact that, by reason of the unique nature of the improvements, full replacement cost insurance coverage was not commercially reasonable and available, Lessor shall have no obligation to pay for the shortage in insurance proceeds or to fully restore the unique aspects of the Premises unless Lessee provides Lessor with the funds to cover same, or adequate assurance thereof, within ten (10) days following receipt of written notice of such shortage and request therefor. If Lessor receives said funds or adequate assurance thereof within said ten (10) day period, the party responsible for making the repairs shall complete them as soon as reasonably possible and this Lease shall remain in full force and effect. If Lessor does not receive such funds or assurance within said period, Lessor may nevertheless elect by written notice to -10- 11 Lessee within ten (10) days thereafter to make such restoration and repair as is commercially reasonable with Lessor paying any shortage in proceeds, in which case this Lease shall remain in full force and effect. If in such case Lessor does not so elect, then this Lease shall terminate sixty (60) days following the occurrence of the damage or destruction. Unless otherwise agreed, Lessee shall in no event have any right to reimbursement from Lessor for any funds contributed by Lessee to repair any such damage or destruction. Premises Partial Damage due to flood or earthquake shall be subject to Paragraph 9.3 rather than Paragraph 9.2, notwithstanding that there may be some insurance coverage, but the net proceeds of any such insurance shall be made available for the repairs if made by either Party. 9.3 Partial Damage - Uninsured Loss. If a Premises Partial Damage that is not an Insured Loss occurs, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 13), Lessor may at Lessor's option, either: (i) repair such damage as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) give written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such damage of Lessor's desire to terminate this Lease as of the date sixty (60) days following the giving of such notice. In the event Lessor elects to give such notice of Lessor's intention to terminate this Lease, Lessee shall have the right within ten (10) days after the receipt of such notice to give written notice to Lessor of Lessee's commitment to pay for the repair of such damage totally at Lessee's expense and without reimbursement from Lessor. Lessee shall provide Lessor with the required funds or satisfactory assurance thereof within thirty (30) days following Lessee's said commitment. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such repairs as soon as reasonably possible and the required funds are available. If Lessee does not give such notice and provide the funds or assurance thereof within the times specified above, this Lease shall terminate as of the date specified in Lessor's notice of termination. 9.4 Total Destruction. Notwithstanding any other provision hereof, if a Premises Total Destruction occurs (including any destruction required by any authorized public authority), this Lease shall terminate sixty (60) days following the date of such Premises Total Destruction, whether or not the damage or destruction is an Insured Loss or was caused by a negligent or willful act of Lessee. In the event, however, that the damage or destruction was caused by Lessee, Lessor shall have the right to recover Lessor's damages from Lessee except as released and waived in Paragraph 8.6. 9.5 Damage Near End of Term. If at any time during the last six (6) months of the term of this Lease there is damage for which the cost to repair exceeds one (1) month's Base Rent, whether or not an Insured Loss, Lessor may, at Lessor's option, terminate this Lease effective sixty (60) days following the date of occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within thirty (30) days after the date of occurrence of such damage. Provided, however, if Lessee at that time has an exercisable option to extend this Lease or to purchase the Premises, then Lessee may preserve this Lease by, within twenty (20) days following the occurrence of the damage, or before the expiration of the time provided in such option for its exercise, whichever is earlier ("Exercise Period"), (i) exercising such option and (ii) providing Lessor with any shortage in insurance proceeds (or adequate assurance thereof) needed to make the repairs. If Lessee duly exercises such option during said Exercise Period and provides Lessor with funds (or adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor's expense repair such damage as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee falls to exercise such option and provide such funds or assurance during said Exercise Period, then Lessor may at Lessor's option terminate this Lease as of the expiration of said sixty (60) day period following the occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within ten (10) days after the expiration of the Exercise Period, notwithstanding any term or provision in the grant of option to the contrary. 9.6 Abatement of Rent; Lessee's Remedies. (a) In the event of damage described in Paragraph 9.2 (Partial Damage - Insured), whether or not Lessor or Lessee repairs or restores the Premises, the Base Rent, Real Property Taxes, insurance premiums, and other charges, if any, payable by Lessee hereunder for the period during which such damage, its repair or the restoration continues (not to exceed the period for which rental value insurance is required under Paragraph 8.3(b)), shall be abated in proportion to the degree to which -11- 12 Lessee's use of the Premises is impaired. Except for abatement of Bass Rent, Real Property Taxes, insurance premiums, and other charges, if any, as aforesaid, all other obligations of Lessee hereunder shall be performed by Lessee, and Lessee shall have no claim against Lessor for any damage suffered by reason of any such repair or restoration. (b) If Lessor shall be obligated to repair or restore the Premises under the provisions of this Paragraph 9 and shall not commence, in a substantial and meaningful way, the repair or restoration of the Premises within ninety (90) days after such obligation shall accrue, Lessee may, at any time prior to the commencement of such repair or restoration, give written notice to Lessor and to any Lenders of which Lessee has actual notice of Lessee's election to terminate this Lease on a date not less than sixty (60) days following the giving of such notice. If Lessee gives such notice to Lessor and such Lenders and such repair or restoration is not commenced within thirty (30) days after receipt of such notice, this Lease shall terminate as of the date specified in said notice. If Lessor or a Lender commences the repair or restoration of the Premises within thirty (30) days after receipt of such notice, this Lease shall continue in full force and effect. "Commence" as used in this Paragraph shall mean either the unconditional authorization of the preparation of the required plans, or the beginning of the actual work on the Premises, whichever first occurs. 9.7 Hazardous Substance Conditions. If a Hazardous Substance Condition occurs, unless Lessee is legally responsible therefor (in which case Lessee shall make the investigation and remediation thereof required by Applicable Law and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 13), Lessor may at Lessor's option either (i) investigate and remediate such Hazardous Substance Condition, if required, as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) if the estimated cost to investigate and remediate such condition exceeds twelve (12) times the then monthly Base Rent or $100,000, whichever is greater, give written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such Hazardous Substance Condition of Lessor's desire to terminate this Lease as of the date sixty (60) days following the giving of such notice. In the event Lessor elects to give such notice of Lessor's intention to terminate this Lease, Lessee shall have the right within ten (10) days after the receipt of such notice to give written notice to Lessor of Lessee's commitment to pay for the investigation and remediation of such Hazardous Substance Condition totally at Lessee's expense and without reimbursement from Lessor except to the extent of an amount equal to twelve (12) times the then monthly Base Rent or $100,000, whichever is greater. Lessee shall provide Lessor with the funds required of Lessee or satisfactory assurance thereof within thirty (30) days following Lessee's said commitment. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such investigation and remediation as soon as reasonably possible and the required funds are available. If Lessee does not give such notice and provide the required funds or assurance thereof within the times specified above, this Lease shall terminate as of the date specified in Lessor's notice of termination. If a Hazardous Substance Condition occurs for which Lessee is not legally responsible, there shall be abatement of Lessee's obligations under this Lease to the same extent as provided in Paragraph 9.6(a) for a period of not to exceed twelve (12) months. 9.8 Termination - Advance Payments. Upon termination of this Lease pursuant to this Paragraph 9, an equitable adjustment shall be made concerning advance Base Rent and any other advance payments made by Lessee to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's Security Deposit as has not been, or is not then required to be, used by Lessor under the terms of this Lease. 9.9 Waive Statutes. Lessor and Lessee agree that the terms of this Lease shall govern the effect of any damage to or destruction of the Premises with respect to the termination of this Lease and hereby waive the provisions of any present or future statute to the extent inconsistent herewith. 10. Real Property Taxes. 10.1 (a) Payment of Taxes. Lessee shall pay the Real Property Taxes, as defined in Paragraph 10.2, applicable to the Premises during the term of this Lease. Subject to Paragraph 10.1(b), all such payments shall be made at least ten (10) days prior to the delinquency date of the applicable installment. Lessee shall promptly furnish Lessor with satisfactory evidence that such taxes have been paid. If any such taxes to be paid by Lessee shall cover any period of time prior to or -12- 13 after the expiration or earlier termination of the term hereof, Lessee's share of such taxes shall be equitably prorated to cover only the period of time within the tax fiscal year this Lease is in effect, and Lessor shall reimburse Lessee for any overpayment after such proration. If Lessee shall fail to pay any Real Property Taxes required by this Lease to be paid by Lessee, Lessor shall have the right to pay the same, and Lessee shall reimburse Lessor therefor upon demand. (b) Advance Payment. In order to insure payment when due and before delinquency of any or all Real Property Taxes, Lessor reserves the right, at Lessor's option, to estimate the current Real Property Taxes applicable to the Premises, and to require such current year's Real Property Taxes to be paid in advance to Lessor by Lessee, either: (i) in a lump sum amount equal to the installment due, at least twenty (20) days prior to the applicable delinquency rate, or (ii) monthly in advance with the payment of the Base Rent. If Lessor elects to require payment monthly in advance, the monthly payment shall be that equal monthly amount which, over the number of months remaining before the month in which the applicable tax installment would become delinquent (and without interest thereon), would provide a fund large enough to fully discharge before delinquency the estimated installment of taxes to be paid. When the actual amount of the applicable tax bill is known, the amount of such equal monthly advance payment shall be adjusted as required to provide the fund needed to pay the applicable taxes before delinquency. If the amounts paid to Lessor by Lessee under the provisions of this Paragraph are insufficient to discharge the obligations of Lessee to pay such Real Property Taxes as the same become due, Lessee shall pay to Lessor, upon Lessor's demand, such additional sums as are necessary to pay such obligations. All moneys paid to Lessor under this Paragraph may be intermingled with other moneys of Lessor and shall not bear interest. In the event of a Breach by Lessee in the performance of the obligations of Lessee under this Lease, then any balance of funds paid to Lessor under the provisions of this Paragraph may, subject to proration as provided in Paragraph 10.1(a), at the option of Lessor, be treated as an additional Security Deposit under Paragraph 5. 10.2 Definition of "Real Property Taxes." As used herein, the term "Real Property Taxes" shall include any form of real estate tax or assessment, general, special, ordinary or extraordinary, and any license fee, commercial rental tax, improvement bond or bonds, levy or tax (other than inheritance, personal income or estate taxes) imposed upon the Premises by any authority having the direct or indirect power to tax, including any city, state or federal government, or any school, agricultural, sanitary, fire, street, drainage or other improvement district thereof, levied against any legal or equitable interest of Lessor in the Premises or in the real property of which the Premises are a part, Lessor's right to rent or other income therefrom, and/or Lessor's business of leasing the Premises. The term "Real Property Taxes" shall also include any tax, fee, levy, assessment or charge, or any increase therein, imposed by reason of events occurring, or changes in applicable law taking effect, during the term of this Lease, including but not limited to a change in the ownership of the Premises or in the improvements thereon, the execution of this Lease, or any modification, amendment or transfer thereof, and whether or not contemplated by the Parties. 10.3 Joint Assessment. If the Premises are not separately assessed, Lessee's liability shall be an equitable proportion of the Real Property Taxes for all of the land and improvements included within the tax parcel assessed, such proportion to be determined by Lessor from the respective valuations assigned in the assessor's work sheets or such other information as may be reasonably available. Lessor's reasonable determination thereof, in good faith, shall be conclusive. 10.4 Personal Property Taxes. Lessee shall pay prior to delinquency all taxes assessed against and levied upon Lessee Owned Alterations, Utility Installations, Trade Fixtures, furnishings, equipment and all personal property of Lessee contained in the Premises or elsewhere. When possible, Lessee shall cause its Trade Fixtures, furnishings, equipment and all other personal property to be assessed and billed separately from the real property of Lessor. If any of Lessee's said personal property shall be assessed with Lessor's real property, Lessee shall pay Lessor the taxes attributable to Lessee within ten (10) days after receipt of a written statement setting forth the taxes applicable to Lessee's property or, at Lessor's option, as provided in Paragraph 10.1(b). 11. Utilities. Lessee shall pay for all water, gas, heat, light, power, telephone, trash disposal and other utilities and services supplied to the Premises, together with any taxes thereon. If any such services are not separately metered to Lessee, Lessee shall pay a reasonable proportion, to be determined by Lessor, of all charges jointly metered with other premises. -13- 14 12. Assignment and Subletting. 12.1 Lessor's Consent Required. (a) Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or otherwise transfer or encumber (collectively, "assignment") or sublet all or any part of Lessee's interest in this Lease or in the Premises without Lessor's prior written consent given under and subject to the terms of Paragraph 36. (b) A change in the control of Lessee shall constitute an assignment requiring Lessor's consent. The transfer, on a cumulative basis, of twenty-five percent (25%) or more of the voting control of Lessee shall constitute a change in control for this purpose. (c) The involvement of Lessee or its assets in any transaction, or series of transactions (by way of merger, sale, acquisition, financing, refinancing, transfer, leveraged buy-out or otherwise), whether or not a formal assignment or hypothecation of this Lease or Lessee's assets occurs, which results or will result in a reduction of the Net Worth of Lessee, as hereinafter defined, by an amount equal to or greater than twenty-five percent (25%) of such Net Worth of Lessee as it was represented to Lessor at the time of the execution by Lessor of this Lease or at the time of the most recent assignment to which Lessor has consented, or as it exists immediately prior to said transaction or transactions constituting such reduction, at whichever time said Net Worth of Lessee was or is greater, shall be considered an assignment of this Lease by Lessee to which Lessor may reasonably withhold its consent. "Net Worth of Lessee" for purposes of this Lease shall be the net worth of Lessee (excluding any guarantors) established under generally accepted accounting principles consistently applied. (d) An assignment or subletting of Lessee's interest in this Lease without Lessor's specific prior written consent shall, at Lessor's option, be a Default curable after notice per Paragraph 13.1(c), or a noncurable Breach without the necessity of any notice and grace period. If Lessor elects to treat such unconsented to assignment or subletting as a noncurable Breach, Lessor shall have the right to either: (i) terminate this Lease, or (ii) upon thirty (30) days written notice ("Lessor's Notice"), increase the monthly Base Rent to fair market rental value or one hundred ten percent (110%) of the Base Rent then in effect, whichever is greater. Pending determination of the new fair market rental value, if disputed by Lessee, Lessee shall pay the amount set forth in Lessor's Notice, with any overpayment credited against the next installment(s) of Base Rent coming due, and any underpayment for the period retroactively to the effective date of the adjustment being due and payable immediately upon the determination thereof. Further, in the event of such Breach and market value adjustment, (i) the purchase price of any option to purchase the Premises held by Lessee shall be subject to similar adjustment to the then fair market value (without the Lease being considered an encumbrance or any deduction for depreciation or obsolescence, and considering the Premises at its highest and best use and in good condition), or one hundred ten percent (110%) of the price previously in effect, whichever is greater, (ii) any index-oriented rental or price adjustment formulas contained in this Lease shall be adjusted to require that the base index be determined with reference to the index applicable to the time of such adjustment, and (iii) any fixed rental adjustments scheduled during the remainder of the Lease term shall be increased in the same ratio as the new market rental bears to the Base Rent in effect immediately prior to the market value adjustment. (e) Lessee's remedy for any breach of this Paragraph 12.1 by Lessor shall be limited to compensatory damages and injunctive relief. 12.2 Terms and Conditions Applicable to Assignment and Subletting. (a) Regardless of Lessor's consent, any assignment or subletting shall not: (i) be effective without the express written assumption by such assignee or sublessee of the obligations of Lessee under this Lease, (ii) release Lessee of any obligations hereunder, or (iii) alter the primary liability of Lessee for the payment of Base Rent and other sums due Lessor hereunder or for the performance of any other obligations to be performed by Lessee under this Lease. (b) Lessor may accept any rent or performance of Lessee's obligations from any person other than Lessee pending approval or disapproval of an assignment. Neither a delay in the -14- 15 approval or disapproval of such assignment nor the acceptance of any rent or performance shall constitute a waiver or estoppel of Lessor's right to exercise its remedies for the Default or Breach by Lessee of any of the terms, covenants or conditions of this Lease. (c) The consent of Lessor to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting by Lessee or to any subsequent or successive assignment or subletting by the sublessee. However, Lessor may consent to subsequent sublettings and assignments of the sublease or any amendments or modifications thereto without notifying Lessee or anyone else liable on the Lease or sublease and without obtaining their consent, and such action shall not relieve such persons from liability under this Lease or sublease. (d) In the event of any Default or Breach of Lessee's obligations under this Lease, Lessor may proceed directly against Lessee, any Guarantors or any one else responsible for the performance of the Lessee's obligations under this Lease, including the sublessee, without first exhausting Lessor's remedies against any other person or entity responsible therefor to Lessor, or any security held by Lessor or Lessee. (e) Each request for consent to an assignment or subletting shall be in writing, accompanied by information relevant to Lessor's determination as to the financial and operational responsibility and appropriateness of the proposed assignee or sublessee, including but not limited to the intended use and/or required modification of the Premises, if any, together with a non-refundable deposit of $1,000 or ten percent (10%) of the current monthly Base Rent, whichever is greater, as reasonable consideration for Lessor's considering and processing the request for consent. Lessee agrees to provide Lessor with such other or additional information and/or documentation as may be reasonably requested by Lessor. (f) Any assignee of, or sublessee under, this Lease shall, by reason of accepting such assignment or entering into such sublease, be deemed, for the benefit of Lessor, to have assumed and agreed to conform and comply with each and every term, covenant, condition and obligation herein to be observed or performed by Lessee during the term of said assignment or sublease, other than such obligations as are contrary to or inconsistent with provisions of an assignment or sublease to which Lessor has specifically consented in writing. (g) The occurrence of a transaction described in Paragraph 12.1(c) shall give Lessor the right (but not the obligation) to require that the Security Deposit be increased to an amount equal to six (6) times the then monthly Base Rent, and Lessor may make the actual receipt by Lessor of the amount required to establish such Security Deposit a condition to Lessor's consent to such transaction. (h) Lessor, as a condition to giving its consent to any assignment or subletting, may require that the amount and adjustment structure of the rent payable under this Lease be adjusted to what is then the market value and/or adjustment structure for property similar to the Premises as then constituted. 12.3 Additional Terms and Conditions Applicable to Subletting. The following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included In all subleases under this Lease whether or not expressly incorporated therein: (a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest in all rentals and income arising from any sublease of all or a portion of the Premises heretofore or hereafter made by Lessee, and Lessor may collect such rent and income and apply same toward Lessee's obligations under this Lease, provided, however, that until a Breach (as defined in Paragraph 13.1) shall occur in the performance of Lessee's obligations under this Lease, Lessee may, except as otherwise provided in this Lease, receive, collect and enjoy the rents accruing under such sublease. Lessor shall not, by reason of this or any other assignment of such sublease to Lessor, nor by reason of the collection of the rents from a sublessee, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee's obligations to such sublessee under such sublease. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Lessor stating that a Breach exists in the performance of Lessee's obligations under this Lease, to pay to Lessor -15- 16 the rents and other charges due and to become due under the sublease. Sublessees shall rely upon any such statement and request from Lessor and shall pay such rents and other charges to Lessor without any obligation or right to inquire as to whether such Breach exists and notwithstanding any notice from or claim from Lessee to the contrary. Lessee shall have no right or claim against said sublessee, or, until the Breach has been cured, against Lessor, for any such rents and other charges so paid by said sublessee to Lessor. (b) In the event of a Breach by Lessee in the performance of its obligations under this Lease, Lessor, at its option and without any obligation to do so, may require any sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of the sublessor under such sublease from the time of the exercise of said option to the expiration of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to such sublessor or for any other prior Defaults or Breaches of such sublessor under such sublease. (c) Any matter or thing requiring the consent of the sublessor under a sublease shall also require the consent of Lessor herein. (d) No sublessee shall further assign or sublet all or any part of the Premises without Lessor's prior written consent. (e) Lessor shall deliver a copy of any notice of Default or Breach by Lessee to the sublessee, who shall have the right to cure the Default of Lessee within the grace period, if any, specified in such notice. The sublessee shall have a right of reimbursement and offset from and against Lessee for any such Defaults cured by the sublessee. 13. Default; Breach; Remedies. 13.1 Default; Breach. Lessor and Lessee agree that if an attorney is consulted by Lessor in connection with a Lessee Default or Breach (as hereinafter defined), $350.00 is a reasonable minimum sum per such occurrence for legal services and costs in the preparation and service of a notice of Default, and that Lessor may include the cost of such services and costs in said notice as rent due and payable to cure said Default. A "Default" is defined as a failure by the Lessee to observe, comply with or perform any of the terms, covenants, conditions or rules applicable to Lessee under this Lease. A "Breach" is defined as the occurrence of any one or more of the following Defaults, and, where a grace period for cure after notice is specified herein, the failure by Lessee to cure such Default prior to the expiration of the applicable grace period, shall entitle Lessor to pursue the remedies set forth in Paragraphs 13.2 and/or 13.3: (a) The vacating of the Premises without the intention to reoccupy same, or the abandonment of the Premises. (b) Except as expressly otherwise provided in this Lease, the failure by Lessee to make any payment of Base Rent or any other monetary payment required to be made by Lessee hereunder, whether to Lessor or to a third party, as and when due, the failure by Lessee to provide Lessor with reasonable evidence of insurance or surety bond required under this Lease, or the failure of Lessee to fulfill any obligation under this Lease which endangers or threatens life or property, where such failure continues for a period of three (3) days following written notice thereof by or on behalf of Lessor to Lessee. (c) Except as expressly otherwise provided in this Lease, the failure by Lessee to provide Lessor with reasonable written evidence (in duly executed original form, if applicable) of (i) compliance with Applicable Law per Paragraph 6.3, (ii) the inspection, maintenance and service contracts required under Paragraph 7.1(b), (iii) the recision of an unauthorized assignment or subletting per Paragraph 12.1(b), (iv) a Tenancy Statement per Paragraphs 16 or 37, (v) the subordination or non-subordination of this Lease per Paragraph 30, (vi) the guaranty of the performance of Lessee's obligations under this Lease if required under Paragraphs 1.11, and 37, (vii) the execution of any document requested under Paragraph 42 (easements), or (viii) any other documentation or information which Lessor may reasonably require of Lessee under the terms of this Lease, where any such failure continues for a period of ten (10) days following written notice by or on behalf of Lessor to Lessee. -16- 17 (d) A Default by Lessee as to the terms, covenants, conditions or provisions of this Lease, or of the rules adopted under Paragraph 40 hereof, that are to be observed, complied with or performed by Lessee, other than those described in subparagraphs (a), (b) or (c), above, where such Default continues for a period of thirty (30) days after written notice thereof by or on behalf of Lessor to Lessee; provided, however, that if the nature of Lessee's Default is such that more than thirty (30) days are reasonably required for its cure, then it shall not be deemed to be a Breach of this Lease by Lessee if Lessee commences such cure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion. (e) The occurrence of any of the following events: (i) The making by lessee of any general arrangement or assignment for the benefit of creditors; (ii) Lessee's becoming a "debtor" as defined in 11 U.S.C. Section 101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within thirty (30) days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged within thirty (30) days; provided, however, in the event that any provision of this subparagraph (e) is contrary to any applicable law, such provision shall be of no force or effect, and not affect the validity of the remaining provisions. (f) The discovery by Lessor that any financial statement given to Lessor by Lessee or any Guarantor of Lessee's obligations hereunder was materially false. (g) If the performance of Lessee's obligations under this Lease is guaranteed: (i) the death of a guarantor, (ii) the termination of a guarantor's liability with respect to this Lease other than in accordance with the terms of such guaranty, (iii) a guarantor's becoming insolvent or the subject of a bankruptcy filing, (iv) a guarantor's refusal to honor the guaranty, or (v) a guarantor's breach of its guaranty obligation on an anticipatory breach basis, and Lessee's failure, within sixty (60) days following written notice by or on behalf of Lessor to Lessee of any such event, to provide Lessor with written alternative assurance or security, which, when coupled with the then existing resources of Lessee, equals or exceeds the combined financial resources of Lessee and the guarantors that existed at the time of execution of this Lease. 13.2 Remedies. If Lessee fails to perform any affirmative duty or obligation of Lessee under this Lease, within ten (10) days after written notice to Lessee (or in case of an emergency, without notice), Lessor may at its option (but without obligation to do so), perform such duty or obligation on Lessee's behalf, including but not limited to the obtaining of reasonably required bonds, insurance policies, or governmental licenses, permits or approvals. The costs and expenses of any such performance by Lessor shall be due and payable by Lessee to Lessor upon invoice therefor. If any check given to Lessor by Lessee shall not be honored by the bank upon which it is drawn, Lessor, at its option, may require all future payments to be made under this Lease by Lessee to be made only by cashier's check. In the event of a Breach of this Lease by Lessee, as defined in Paragraph 13.1, with or without further notice or demand, and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such Breach, Lessor may: (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease and the term hereof shall terminate and Lessee shall immediately surrender possession of the Premises to Lessor. In such event Lessor shall be entitled to recover from Lessee: (i) the worth at the time of the award of the unpaid rent which had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided; (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Lessee proves could be reasonably avoided; and (iv) any other amount necessary to compensate Lessor for all the detriment proximately caused by the Lessee's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including but not limited to the cost of recovering possession of the Premises, expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys' fees, and that portion -17- 18 of the leasing commission paid by Lessor applicable to the unexpired term of this Lease. The worth at the time of award of the amount referred to in provision (iii) of the prior sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). Efforts by Lessor to mitigate damages caused by Lessee's Default or Breach of this Lease shall not waive Lessor's right to recover damages under this Paragraph. If termination of this Lease is obtained through the provisional remedy of unlawful detainer, Lessor shall have the right to recover in such proceeding the unpaid rent and damages as are recoverable therein, or Lessor may reserve therein the right to recover all or any part thereof in a separate suit for such rent and/or damages. If a notice and grace period required under subparagraphs 13.1 (b), (c) or (d) was not previously given, a notice to pay rent or quit, or to perform or quit, as the case may be, given to Lessee under any statute authorizing the forfeiture of leases for unlawful detainer shall also constitute the applicable notice for grace period purposes required by subparagraphs 13.1 (b), (c) or (d). In such case, the applicable grace period under subparagraphs 13.1 (b), (c) or (d) and under the unlawful detainer statute shall run concurrently after the one such statutory notice, and the failure of Lessee to cure the Default within the greater of the two such grace periods shall constitute both an unlawful detainer and a Breach of this Lease entitling Lessor to the remedies provided for in this Lease and/or by said statute. (b) Continue the Lease and Lessee's right to possession in effect (in California under California Civil Code Section 1951.4) after Lessee's Breach and abandonment and recover the rent as it becomes due, provided Lessee has the right to sublet or assign, subject only to reasonable limitations. See Paragraphs 12 and 36 for the limitations on assignment and subletting which limitations Lessee and Lessor agree are reasonable. Acts of maintenance or preservation, efforts to relet the Premises, or the appointment of a receiver to protect the Lessor's interest under the Lease, shall not constitute a termination of the Lessee's right to possession. (c) Pursue any other remedy now or hereafter available to Lessor under the laws or judicial decisions of the state wherein the Premises are located. (d) The expiration or termination of this Lease and/or the termination of Lessee's right to possession shall not relieve Lessee from liability under any indemnity provisions of this Lease as to matters occurring or accruing during the term hereof or by reason of Lessee's occupancy of the Premises. 13.3 Inducement Recapture In Event Of Breach. Any agreement by Lessor for free or abated rent or other charges applicable to the Premises, or for the giving or paying by Lessor to or for Lessee of any cash or other bonus, inducement or consideration for Lessee's entering into this Lease, all of which concessions are hereinafter referred to as "Inducement Provisions," shall be deemed conditioned upon Lessee's full and faithful performance of all of the terms, covenants and conditions of this Lease to be performed or observed by Lessee during the term hereof as the same may be extended. Upon the occurrence of a Breach of this Lease by Lessee, as defined in Paragraph 13.1, any such inducement Provision shall automatically be deemed deleted from this Lease and of no further force or effect, and any rent, other charge, bonus, inducement or consideration theretofore abated, given or paid by Lessor under such an Inducement Provision shall be immediately due and payable by Lessee to Lessor, and recoverable by Lessor as additional rent due under this Lease, notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by Lessor of rent or the cure of the Breach which initiated the operation of this Paragraph shall not be deemed a waiver by Lessor of the provisions of this Paragraph unless specifically so stated in writing by Lessor at the time of such acceptance. 13.4 Late Charges. Lessee hereby acknowledges that late payment by Lessee to Lessor of rent and other sums due hereunder will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed upon Lessor by the terms of any ground lease, mortgage or trust deed covering the Premises. Accordingly, if any installment of rent or any other sum due from Lessee shall not be received by Lessor or Lessor's designee within five (5) days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a late charge equal to six percent (6%) of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of late payment by Lessee. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's Default or Breach with respect to such overdue amount, nor prevent -18- 19 Lessor from exercising any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for three (3) consecutive installments of Base Rent, then notwithstanding Paragraph 4.1 or any other provision of this Lease to the contrary, Base Rent shall, at Lessor's option, become due and payable quarterly in advance. 13.5 Breach by Lessor. Lessor shall not be deemed in breach of this Lease unless Lessor fails within a reasonable time to perform an obligation required to be performed by Lessor. For purposes of this Paragraph 13.5, a reasonable time shall in no event be less than thirty (30) days after receipt by Lessor, and by the holders of any ground lease, mortgage or deed of trust covering the Premises whose name and address shall have been furnished Lessee in writing for such purpose, of written notice specifying wherein such obligation of Lessor has not been performed; provided, however, that if the nature of Lessor's obligation is such that more than thirty (30) days after such notice are reasonably required for its performance, then Lessor shall not be in breach of this Lease if performance is commenced within such thirty (30) day period and thereafter diligently pursued to completion. 14. Condemnation. If the Premises or any portion thereof are taken under the power of eminent domain or sold under the threat of the exercise of said power (all of which are herein called "condemnation"), this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever first occurs. If more than ten percent (10%) of the floor area of the Premises, or more than twenty-five percent (25%) of the land area not occupied by any building, is taken by condemnation, Lessee may, at Lessee's option, to be exercised in writing within ten (10) days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within ten (10) days after the condemning authority shall have taken possession) terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the Base Rent shall be reduced in the same proportion as the rentable floor area of the Premises taken bears to the total rentable floor area of the building located on the Premises. No reduction of Base Rent shall occur if the only portion of the Premises taken is land on which there is no building. Any award for the taking of all or any part of the Premises under the power of eminent domain or any payment made under threat of the exercise of such power shall be the property of Lessor, whether such award shall be made as compensation for diminution in value of the leasehold or for the taking of the fee, or as severance damages; provided, however, that Lessee shall be entitled to any compensation separately awarded to Lessee for Lessee's relocation expenses and/or loss of Lessee's Trade Fixtures. In the event that this Lease is not terminated by reason of such condemnation, Lessor shall to the extent of its net severance damages received, over and above the legal and other expenses incurred by Lessor in the condemnation matter, repair any damage to the Premises caused by such condemnation, except to the extent that Lessee has been reimbursed therefor by the condemning authority. Lessee shall be responsible for the payment of any amount in excess of such net severance damages required to complete such repair. 15. Broker's Fee. 15.1 The Brokers named in Paragraph 1.10 are the procuring causes of this Lease. 15.2 Upon execution of this Lease by both Parties, Lessor shall pay to said Brokers jointly, or in such separate shares as they may mutually designate in writing, a fee as set forth in a separate written agreement between Lessor and said Brokers (or in the event there is no separate written agreement between Lessor and said Brokers, the sum of $Sep agreement) for brokerage services rendered by said Brokers to Lessor in this transaction. 15.3 Lessee and Lessor each represent and warrant to the other that it has had no dealings with any person, firm, broker or finder (other than the Brokers, if any named in Paragraph 1.10) in connection with the negotiation of this Lease and/or the consummation of the transaction contemplated hereby, and that no broker or other person, firm or entity other than said named Brokers is entitled to any commission or finder's fee in connection with said transaction. Lessee and Lessor do each hereby agree to indemnify, protect, defend and hold the other harmless from and against liability for compensation or charges which may be claimed by any such unnamed broker, finder or other similar party by reason of any dealings or actions of the indemnifying Party, including any costs, expenses, attorneys' fees reasonably incurred with respect thereto. -19- 20 15.4 Lessor and Lessee hereby consent to and approve all agency relationships, including any dual agencies, indicated in Paragraph 1.10. 16. Tenancy Statement. 16.1 Each Party (as "Responding Party" ) shall within ten (10) days after written notice from the other Party (the "Requesting Party") execute, acknowledge and deliver to the Requesting Party a statement in writing in form similar to the then most current "Tenancy Statement" form published by the American Industrial Real Estate Association, plus such additional information, confirmation and/or statements as may be reasonably requested by the Requesting Party. 16.2 If Lessor desires to finance, refinance, or sell the Premises, any part thereof, or the building of which the Premises are a part, Lessee and all Guarantors of Lessee's performance hereunder shall deliver to any potential lender or purchaser designated by Lessor such financial statements of Lessee and such Guarantors as may be reasonably required by such lender or purchaser, including but not limited to Lessee's financial statements for the past three (3) years. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth. 17. Lessor's Liability. The term "Lessor" as used herein shall mean the owner or owners at the time in question of the fee title to the Premises, or, if this is a sublease, of the Lessee's interest in the prior lease. In the event of a transfer of Lessor's title or interest in the Premises or in this Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit) any unused Security Deposit held by Lessor at the time of such transfer or assignment. Except as provided in Paragraph 15, upon such transfer or assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor shall be relieved of all liability with respect to the obligations and/or covenants under this Lease thereafter to be performed by the Lessor. Subject to the foregoing, the obligations and/or covenants in this Lease to be performed by the Lessor shall be binding only upon the Lessor as hereinabove defined. 18. Severability. The invalidity of any provision of this Lease, as determined by a court of competent jurisdiction, shall in no way affect the validity of any other provision hereof. 19. Interest on Past-Due Obligations. Any monetary payment due Lessor hereunder, other than late charges, not received by Lessor within thirty (30) days following the date on which it was due, shall bear interest from the thirty-first (31st) day after it was due at the rate of 12% per annum, but not exceeding the maximum rate allowed by law, in addition to the late charge provided for in Paragraph 13.4. 20. Time of Essence. Time is of the essence with respect to the performance of all obligations to be performed or observed by the Parties under this Lease. 21. Rent Defined. All monetary obligations of Lessee to Lessor under the terms of this Lease are deemed to be rent. 22. No Prior or Other Agreements; Broker Disclaimer. This Lease contains all agreements between the Parties with respect to any matter mentioned herein, and no other prior or contemporaneous agreement. or understanding shall be effective. Lessor and Lessee each represents and warrants to the Brokers that it has made, and is relying solely upon, its own investigation as to the nature, quality, character and financial responsibility of the other Party to this Lease and as to the nature, quality and character of the Premises. Brokers have no responsibility with respect thereto or with respect to any default or breach hereof by either Party. 23. Notices. 23.1 All notices required or permitted by this Lease shall be in writing and may be delivered in person (by hand or by messenger or courier service) or may be sent by regular, certified or registered mail or U.S. Postal Service Express Mail, with postage prepaid, or by facsimile transmission, and shall be deemed sufficiently given if served in a manner specified in this Paragraph 23. The addresses noted adjacent to a Party's signature on this Lease shall be that Party's address for delivery or -20- 21 mailing of notice purposes. Either Party may by written notice to the other specify a different address for notice purposes, except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for the purpose of mailing or delivering notices to Lessee. A copy of all notices required or permitted to be given to Lessor hereunder shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate by written notice to Lessee. 23.2 Any notice sent by registered or certified mail, return receipt requested, shall be deemed given on the date of delivery shown on the receipt card, or if no delivery date is shown, the postmark thereon. If sent by regular mail the notice shall be deemed given forty-eight (48) hours after the same is addressed as required herein and mailed with postage prepaid. Notices delivered by United States Express Mail or overnight courier that guarantees next day delivery shall be deemed given twenty-four (24) hours after delivery of the same to the United States Postal Service or courier. If any notice is transmitted by facsimile transmission or similar means, the same shall be deemed served or delivered upon telephone confirmation of receipt of the transmission thereof, provided a copy is also delivered via delivery or mail. If notice is received on a Sunday or legal holiday, it shall be deemed received on the next business day. 24. Waivers. No waiver by Lessor of the Default or Breach of any term, covenant or condition hereof by Lessee, shall be deemed a waiver of any other term, covenant or condition hereof, or of any subsequent Default or Breach by Lessee of the same or of any other term, covenant or condition hereof. Lessor's consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor's consent to, or approval of, any subsequent or similar act by Lessee, or be construed as the basis of an estoppel to enforce the provision or provisions of this Lease requiring such consent. Regardless of Lessor's knowledge of a Default or Breach at the time of accepting rent, the acceptance of rent by Lessor shall not be a waiver of any preceding Default or Breach by Lessee of any provision hereof, other than the failure of Lessee to pay the particular rent so accepted. Any payment given Lessor by Lessee may be accepted by Lessor on account of moneys or damages due Lessor, notwithstanding any qualifying statements or conditions made by Lessee in connection therewith, which such statements and/or conditions shall be of no force or effect whatsoever unless specifically agreed to in writing by Lessor at or before the time of deposit of such payment. 25. Recording. Either Lessor or Lessee shall, upon request of the other, execute, acknowledge and deliver to the other a short form memorandum of this Lease for recording purposes. The Party requesting recordation shall be responsible for payment of any fees or taxes applicable thereto. 26. No Right To Holdover. Lessee has no right to retain possession of the Premises or any part thereof beyond the expiration or earlier termination of this Lease. 27. Cumulative Remedies. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. 28. Covenants and Conditions. All provisions of this Lease to be observed or performed by Lessee are both covenants and conditions. 29. Binding Effect; Choice of Law. This Lease shall be binding upon the parties, their personal representatives, successors and assigns and be governed by the laws of the State in which the Premises are located. Any litigation between the Parties hereto concerning this Lease shall be initiated in the county in which the Premises are located. 30. Subordination; Attornment; Non-Disturbance. 30.1 Subordination. This Lease and any Option granted hereby shall be subject and subordinate to any ground lease, mortgage, deed of trust, or other hypothecation or security device (collectively, "Security Device" ), now or hereafter placed by Lessor upon the real property of which the Premises are a part, to any and all advances made on the security thereof, and to all renewals, modifications, consolidations, replacements and extensions thereof. Lessee agrees that the Lenders holding any such Security Device shall have no duty, liability or obligation to perform any of the obligations of Lessor under this Lease, but that in the event of Lessor's default with respect to any such -21- 22 obligation, Lessee will give any Lender whose name and address have been furnished Lessee in writing for such purpose notice of Lessor's default and allow such Lender thirty (30) days following receipt of such notice for the cure of said default before invoking any remedies Lessee may have by reason thereof. If any Lender shall elect to have this Lease and/or any Option granted hereby superior to the lien of its Security Device and shall give written notice thereof to Lessee, this Lease and such Options shall be deemed prior to such Security Device, notwithstanding the relative dates of the documentation or recordation thereof. 30.2 Attornment. Subject to the non-disturbance provisions of Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party who acquires ownership of the Premises by reason of a foreclosure of a Security Device, and that in the event of such foreclosure, such new owner shall not: (i) be liable for any act or omission of any prior lessor or with respect to events occurring prior to acquisition of ownership, (ii) be subject to any offsets or defenses which Lessee might have against any prior lessor, or (iii) be bound by prepayment of more than one (1) month's rent. 30.3 Non-Disturbance. With respect to Security Devices entered into by Lessor after the execution of this Lease, Lessee's subordination of this Lease shall be subject to receiving assurance (a "non-disturbance agreement") from the Lender that Lessee's possession and this Lease, including any options to extend the term hereof, will not be disturbed so long as Lessee is not in Breach hereof and attorns to the record owner of the Premises. 30.4 Self-Executing. The agreements contained in this Paragraph 30 shall be effective without the execution of any further documents; provided, however, that, upon written request from Lessor or a Lender in connection with a sale, financing or refinancing of the Premises, Lessee and Lessor shall execute such further writings as may be reasonably required to separately document any such subordination or non-subordination, attornment and/or non-disturbance agreement as is provided for herein. 31. Attorney's Fees. If any Party or Broker brings an action or proceeding to enforce the terms hereof or declare rights hereunder, the Prevailing Party (as hereafter defined) or Broker in any such proceeding, action, or appeal thereon, shall be entitled to reasonable attorney's fees. Such fees may be awarded in the same suit or recovered in a separate suit, whether or not such action or proceeding is pursued to decision or judgment. The term, "Prevailing Party" shall include, without limitation, a Party or Broker who substantially obtains or defeats the relief sought, as the case may be, whether by compromise, settlement, judgment, or the abandonment by the other Party or Broker of its claim or defense. The attorney's fees award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorney's fees reasonably incurred. Lessor shall be entitled to attorney's fees, costs and expenses incurred in the preparation and service of notices of Default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such Default or resulting Breach. 32. Lessor's Access; Showing Premises; Repairs. Lessor and Lessor's agents shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times for the purpose of showing the same to prospective purchasers, lenders, or lessees, and making such alterations, repairs, improvements or additions to the Premises or to the building of which they are a part, as Lessor may reasonably deem necessary. Lessor may at any time place on or about the Premises or building any ordinary "For Sale" signs and Lessor may at any time during the last one hundred twenty (120) days of the term hereof place on or about the Premises any ordinary "For Lease" signs. All such activities of Lessor shall be without abatement of rent or liability to Lessee. 33. Auctions. Lessee shall not conduct, nor permit to be conducted, either voluntarily or involuntarily, any auction upon the Premises without first having obtained Lessor's prior written consent. Notwithstanding anything to the contrary in this Lease, Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to grant such consent. 34. Signs. Lessee shall not place any sign upon the "Premises, except that Lessee may, with Lessor's prior written consent, install (but not on the roof) such signs as are reasonably required to advertise Lessee's own business. The installation of any sign on the Premises by or for Lessee shall be subject to the provisions of Paragraph 7 (Maintenance, Repairs, Utility Installations, Trade Fixtures and -22- 23 Alterations). Unless otherwise expressly agreed herein, Lessor reserves all rights to the use of the roof and the right to install, and all revenues from the installation of, such advertising signs on the Premises, including the roof, as do not unreasonably interfere with the conduct of Lessee's business. 35. Termination; Merger. Unless specifically stated otherwise in writing by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual termination or cancellation hereof, or a termination hereof by Lessor for Breach by Lessee, shall automatically terminate any sublease or lesser estate in the Premises; provided, however, Lessor shall, in the event of any such surrender, termination or cancellation, have the option to continue any one or all of any existing subtenancies. Lessor's failure within ten (10) days following any such event to make a written election to the contrary by written notice to the holder of any such lesser interest, shall constitute Lessor's election to have such event constitute the termination of such interest. 36. Consents. (a) Except for Paragraph 33 hereof (Auctions) or as otherwise provided herein, wherever in this Lease the consent of a Party is required to an act by or for the other Party, such consent shall not be unreasonably withheld or delayed. Lessor's actual reasonable costs and expenses (including but not limited to architects', attorneys', engineers' or other consultants' fees) incurred in the consideration of, or response to, a request by Lessee for any Lessor consent pertaining to this Lease or the Premises, including but not limited to consents to an assignment, a subletting or the presence or use of a Hazardous Substance, practice or storage tank, shall be paid by Lessee to Lessor upon receipt of an invoice and supporting documentation therefor. Subject to Paragraph 12.2(e) (applicable to assignment or subletting), Lessor may, as a condition to considering any such request by Lessee, require that Lessee deposit with Lessor an amount of money (in addition to the Security Deposit held under Paragraph 5) reasonably calculated by Lessor to represent the cost Lessor will incur in considering and responding to Lessee's request. Except as otherwise provided, any unused portion of said deposit shall be refunded to Lessee without interest. Lessor's consent to any act, assignment of this Lease or subletting of the Premises by Lessee shall not constitute an acknowledgment that no Default or Breach by Lessee of this Lease exists, nor shall such consent be deemed a waiver of any then existing Default or Breach, except as may be otherwise specifically stated in writing by Lessor at the time of such consent. (b) All conditions to Lessor's consent authorized by this Lease are acknowledged by Lessee as being reasonable. The failure to specify herein any particular condition to Lessor's consent shall not preclude the imposition by Lessor at the time of consent of such further or other conditions as are then reasonable with reference to the particular matter for which consent is being given. 37. Guarantor. 37.1 If there are to be any Guarantors of this Lease per Paragraph 1.11, the form of the guaranty to be executed by each such Guarantor shall be in the form most recently published by the American Industrial Real Estate Association, and each said Guarantor shall have the same obligations as Lessee under this Lease, including but not limited to the obligation to provide the Tenancy Statement and information called for by Paragraph 16. 37.2 It shall constitute a Default of the Lessee under this Lease if any such Guarantor fails or refuses, upon reasonable request by Lessor to give: (a) evidence of the due execution of the guaranty called for by this Lease, including the authority of the Guarantor (and of the party signing on Guarantor's behalf) to obligate such Guarantor on said guaranty, and including in the case of a corporate Guarantor, a certified copy of a resolution of its board of directors authorizing the making of such guaranty, together with a certificate of incumbency showing the signature of the persons authorized to sign on its behalf, (b) current financial statements of Guarantor as may from time to time be requested by Lessor, (c) a Tenancy Statement, or (d) written confirmation that the guaranty is still in effect. 38. Quiet Possession. Upon payment by Lessee of the rent for the Premises and the observance and performance of all of the covenants, conditions and provisions on Lessee's part to be -23- 24 observed and performed under this Lease, Lessee shall have quiet possession of the Premises for the entire term hereof subject to all of the provisions of this Lease. 39. Options. 39.1 Definition. As used in this Paragraph 39 the word "Option" has the following meaning: (a) the right to extend the term of this Lease or to renew this Lease or to extend or renew any lease that Lessee has on other property of Lessor; (b) the right of first refusal to lease the Premises or the right of first offer to lease the Premises or the right of first refusal to lease other property of Lessor or the right of first offer to lease other property of Lessor; (c) the right to purchase the Premises, or the right of first refusal to purchase the Premises, or the right of first offer to purchase the Premises, or the right to purchase other property of Lessor, or the right of first refusal to purchase other property of Lessor, or the right of first offer to purchase other property of Lessor. 39.2 Options Personal To Original Lessee. Each Option granted to Lessee in this Lease is personal to the original Lessee named in Paragraph 1.1 hereof, and cannot be voluntarily or involuntarily assigned or exercised by any person or entity other than said original Lessee while the original Lessee is in full and actual possession of the Premises and without the intention of thereafter assigning or subletting. The Options, if any, herein granted to Lessee are not assignable, either as a part of an assignment of this Lease or separately or apart therefrom, and no Option may be separated from this Lease in any manner, by reservation or otherwise. 39.3 Multiple Options. In the event that Lessee has any Multiple Options to extend or renew this Lease, a later Option cannot be exercised unless the prior Options to extend or renew this Lease have been validly exercised. 39.4 Effect of Default on Options. (a) Lessee shall have no right to exercise an Option, notwithstanding any provision in the grant of Option to the contrary: (i) during the period commencing with the giving of any notice of Default under Paragraph 13.1 and continuing until the noticed Default is cured, or (ii) during the period of time any monetary obligation due Lessor from Lessee is unpaid (without regard to whether notice thereof is given Lessee), or (iii) during the time Lessee is in Breach of this Lease, or (iv) in the event that Lessor has given to Lessee three (3) or more notices of Default under Paragraph 13.1, whether or not the Defaults are cured, during the twelve (12) month period immediately preceding the exercise of the Option. (b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee's inability to exercise an Option because of the provisions of Paragraph 39.4(a). (c) All rights of Lessee under the provisions of an Option shall terminate and be of no further force or effect, notwithstanding Lessee's due and timely exercise of the Option, if, after such exercise and during the term of this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee for a period of thirty (30) days after such obligation becomes due (without any necessity of Lessor to give notice thereof to Lessee), or (ii) Lessor gives to Lessee three (3) or more notices of Default under Paragraph 13.1 during any twelve (12) month period, whether or not the Defaults are cured, or (iii) if Lessee commits a Breach of this Lease. 40. Multiple Buildings. If the Premises are part of a group of buildings controlled by Lessor, Lessee agrees that it will abide by, keep and observe all reasonable rules and regulations which Lessor may make from time to time for the management, safety, care, and cleanliness of the grounds, the parking and unloading of vehicles and the preservation of good order, as well as for the convenience of other occupants or tenants of such other buildings and their invitees, and that Lessee will pay its fair share of common expenses incurred in connection therewith. 41. Security Measures. Lessee hereby acknowledges that the rental payable to Lessor hereunder does not include the cost of guard service or other security measures, and that Lessor shall -24- 25 have no obligation whatsoever to provide same. Lessee assumes all responsibility for the protection of the Premises, Lessee, its agents and invitees and their property from the acts of third parties. 42. Reservations. Lessor reserves to itself the right, from time to time, to grant, without the consent or joinder of Lessee, such easements, rights and dedications that Lessor deems necessary, and to cause the recordation of parcel maps and restrictions, so long as such easements, rights, dedications, maps and restrictions do not unreasonably interfere with the use of the Premises by Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to effectuate any such easement rights, dedication, map or restrictions. 43. Performance Under Protest. If at any time a dispute shall arise as to any amount or sum of money to be paid by one Party to the other under the provisions hereof, the Party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment and there shall survive the right on the part of said Party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said Party to pay such sum or any part thereof, said Party shall be entitled to recover such sum or so much thereof as it was not legally required to pay under the provisions of this Lease. 44. Authority. If either Party hereto is a corporation, trust, or general or limited partnership, each individual executing this Lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Lease on its behalf. If Lessee is a corporation, trust or partnership, Lessee shall, within thirty (30) days after request by Lessor, deliver to Lessor evidence satisfactory to Lessor of such authority. 45. Conflict. Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions. 46. Offer. Preparation of this Lease by Lessor or Lessor's agent and submission of same to Lessee shall not be deemed an offer to lease to Lessee. This Lease is not intended to be binding until executed by all Parties hereto. 47. Amendments. This Lease may be modified only in writing, signed by the Parties in Interest at the time of the modification. The parties shall amend this Lease from time to time to reflect any adjustments that are made to the Base Rent or other rent payable under this Lease. As long as they do not materially change Lessee's obligations hereunder, Lessee agrees to make such reasonable non-monetary modifications to this Lease as may be reasonably required by an institutional, insurance company, or pension plan Lender in connection with the obtaining of normal financing or refinancing of the property of which the Premises are a part. 48. Multiple Parties. Except as otherwise expressly provided herein, if more than one person or entity is named herein as either Lessor or Lessee, the obligations of such Multiple Parties shall be the joint and several responsibility of all persons or entities named herein as such Lessor or Lessee. LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS EASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR SUBMISSION TO YOUR ATTORNEY FOR HIS APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED TO EVALUATE THE CONDITION OF THE PROPERTY AS TO THE POSSIBLE PRESENCE OF ASBESTOS, STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKER(S) OR THEIR AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES; THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF -25- 26 THEIR OWN COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. IF THE SUBJECT PROPERTY IS LOCATED IN A STATE OTHER THAN CALIFORNIA, AN ATTORNEY FROM THE STATE WHERE THE PROPERTY IS LOCATED SHOULD BE CONSULTED. The parties hereto have executed this Lease at the place on the dates specified above to their respective signatures. Executed at Los Angeles, California Executed at Los Angeles, California on March 29, 1996 on March 29, 1996 by LESSOR: by LESSEE: NORDHOFF INDUSTRIAL COMPLEX, NETCOM SYSTEMS, INC., a California General Partnership a California Corporation By By --------------------------------- -------------------------------------- Name Printed: Gerald L. Katell Name Printed: Marc Hamon Title: General Partner Title: President By By --------------------------------- -------------------------------------- Name Printed: Name Printed: Title: Title: Address: 1455 Atlantic Drive Address: 21818 Lassen Street, Unit 6 Pacific Palisades, CA 90272 Chatsworth CA 91311 Tel. No. (___) 459-7200 Tel. No. (818) 704-5109 Fax No. (___) 459-9856 Fax No. (818) 709-7881 NOTICE: These forms are often modified to meet changing requirements of law and industry needs. Always write or call to make sure you are utilizing the most current form: American Industrial Real Estate Association, 345 South Figueroa Street, Suite M-1, Los Angeles, CA 90071. (213) 687-8777. Fax. No. (213) 687-8616. ADDENDUM TO STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE- NET March 28, 1996 By and between Nordhoff Industrial Complex, a California General Partnership, Lessor, and Netcom Systems, Inc., a California corporation, Lessee This Addendum is attached to and made apart of the above referenced instrument, and all references herein to the Lease shall include this Addendum. 49. Commencement Date. The "Commencement Date" hereunder shall be April 15, 1996, or such later date as Lessor delivers possession of the Premises to Lessee in the condition required hereunder. Lessee shall not be entitled to possession of the Premises prior to the Commencement Date, except upon such terms and conditions as may hereafter be agreed to in writing between Lessor and Lessee. Lessee shall not be required to pay Base Rent for the second and fourth month of the Lease Term, and the Base Rent paid upon execution as set forth in paragraph in paragraph 1.6 shall be credited to the first month of the Lease Term. In the event the Commencement Date is a day other than the first day of a calendar month, the Base Rent payable three months after the Commencement Date shall be for the prorated portion of the balance of such month, and thereafter, commencing on the first day of the next following calendar month, the full amount of the Base Rent shall be payable on the first day of each calendar month. A prorated Base Rent shall be payable for the last partial month of the Lease Term. This lease shall commence on the later of April 15, 1996 or on the date on which the Lessor completes the tenant improvements as defined in paragraph 51 below. 50. See attached Addendum to Standard Lease-Rent Adjustments-Initial Term, made a part hereof by reference. -26- 27 51. Lessor Tenant Improvements. Prior to commencement date, Lessor, at Lessors sole cost and expense shall complete the following: a. Paint the interior office space to match the existing paint color. b. Replace the existing carpet with carpet of like quality and color. In addition, Lessor shall insure that the Premises conforms to the ADA if required. Any required corrective work shall not be required to be completed by the commencement date, but shall be completed as expeditiously as possible. 52. Lessee Tenant Improvements. Lessor shall construct the tenant improvements as stated within this paragraph, upon submission of a plan by Lessee. However, prior to construction Lessee shall pay to Lessor the actual cost of these improvements plus a construction management fee which are an actual cost to the Lessor. The work pursuant to this paragraph shall be completed in a timely workmanlike manner, but the work pursuant to this paragraph shall not effect the commencement date. Lessee tenant improvements are as follows: a. Add two (2) doors. b. Relocate three (3) doors in three (3) offices to opposite walls. c. Remove three (3) walls that divide three offices. d. Close off three (3) doors. 53. Holdover Rent. If, not withstanding the provisions of the Lease, Lessee is a holdover tenant following expiration of the Lease Term, Lessee shall be obligated to pay during any such Holdover tenancy an amount equal to 150% of all rent that was payable hereunder during the last month of the Lease Term. 54. Option to Extend. Provided Lessee has not been and is not in default of any term or condition of this Lease as of the commencement of the renewal term, lessee shall have the one option to renew the term of the lease for one additional five year term, on the same terms and conditions of the Lease, except that the Base Rent shall be adjusted to the then prevailing market rental rate for a comparable leases in the comparable areas of the West San Fernando Valley Area. Such option shall be exercised (if at all) by Lessee giving Lessor at least 270 days prior irrevocable written notice. The prevailing market rental shall be determined in the following manner: Prevailing market rental rate shall be determined taking into account all relevant factors, including (to the extent relevant) number of months of free rent, if any (which shall be part of the determination of the rental rate), Lessee improvement obligations, moving allowances, and leasing commissions and costs. The term "comparable leases" shall not include leases entered into under special circumstances affecting the economics of the tenancies, including following the exercise of options to lease space at other than then current prevailing market rate, the lease of awkward or unusually shaped space or space without windows or other usual amenities, leases entered into under conditions where the Lessor was forced to lease the space by external legal, economic, or other pressures not generally applicable to the market, or the sublease or space by a sublessor not primarily in the business of leasing space. Prior to the date which is five (5) months before the expiration of the then current term, and assuming that Lessee has properly exercised its option to renew, Lessor shall give Lessee notice of Lessor's proposed prevailing market rental value for the Premises. Lessee shall give Lessor written notice within thirty (30) days thereafter as to whether or not Lessee agrees with Lessor's proposed prevailing market rental value. If Lessee disagrees with Lessor's proposed prevailing market rental value, the parties shall negotiate in good faith to resolve their differences for a period of thirty (30) days. Upon the expiration of such thirty (30) day period, if the parties are not in agreement as to such fair market rental value by giving written notice to the other party, such notice containing the name of an appraiser appointed by such initiating party. Within fifteen (15) days thereafter, the party receiving such notice shall appoint its own appraiser and give notice thereof to the initiating party. If the second -27- 28 appraiser is not appointed within such fifteen day period, then the appraiser selected by the initiating party shall determine the fair market rental value of the Premises, and such appraisal shall be binding upon the parties. If the second appraiser is timely appointed, then the two appraisers shall confer and attempt to agree on the prevailing market value. If the two appraisers are unable to agree, but the higher appraisal is no more than ten percent (10%) higher than the lower appraisal, then the prevailing market rental value shall be the average of the two appraisals. If the higher appraisal is more than ten percent (10%) greater than the lower appraisal, the two appraisers shall together select a third appraiser who shall also determine the prevailing market rental value. If three appraisers are ultimately appointed and any two appraisers agree on the prevailing market rental value, the value agreed upon by the two appraisers shall be the prevailing market rental value. If the three appraisers all determine different prevailing market rental values, then the prevailing market rental value shall be the average of the two closest appraisals. All appraisers shall be members of the MAI and shall have at least ten (10) years' experience appraising similar property in the West San Fernando Valley Area. Each party shall bear the cost of the appraiser appointed by such party, and the parties shall share equally in the cost of the third appraiser, if appointed. If the two appraisers initially appointed are unable to agree on a third appraiser, then either party shall have the right to apply to the presiding judge of the Superior Court having jurisdiction over the Premises for the appointment of a third appraiser. The rent determined in accordance to the foregoing shall be subject to adjustments pursuant to the attached Addendum to Standard Lease paragraph 59-Rent Adjustments - Extended Term. 55. Sublease Profits. Lessee shall pay to Lessor, as additional Base Rent, fifty percent (50%) of any "profits" from any sublease of the Premises or a portion thereof or an assignment of the Lease. For purpose of this paragraph, "Profits" shall mean the amount by which (i) all rentals and other payments received by Lessee during the preceding calendar month from or on behalf of subtenants hereunder exceeds (ii) the sum of (x) all Base Rent paid hereunder during the proceeding calendar month, plus (y) all attorney fees, brokerage commissions, and other direct out-of-pocket payments made by Lessee to obtain subtenants or an assignment, plus (z) the cost to Lessee of all Leasehold improvements (this is excluding furniture, equipment and machinery) made to obtain such subtenants or assignee, all amortized over the term of any sublease or assignment. 56. Dispute Resolution. The parties hereto agree that any dispute of controversy arising out of or relating to this Lease, or to the interpretation, performance, or breach thereof, shall be heard and decided by means of a reference pursuant to Section 638 et seq. of the Code of Civil Procedure of the State of California. Such reference shall be made to a retired judge of the Superior Court of the State of California (the "Referee") who shall hear such dispute or controversy until the final determination thereof pursuant to Article VI, Section 21, of the California Constitution, Section 638 et seq. of the California Code of Civil Procedure, and Rule 244 (a) of the California Rules of Court. The term "Referee" as used herein is intended to refer to and include the term "Temporary Judge" as used in the said provisions of the California Constitution and the California Rules of Court. The Referee shall be selected by mutual agreement of the Parties from the list of retired judges maintained by the Superior Court of the State of California for the County of Los Angeles, Central District. If the Parties are unable to agree upon a retired judge to serve as the Referee, then upon petition by either Party to the presiding judge of the Superior Court of the State of California for the County of Los Angeles, Central District (or such other judge as the presiding judge may designate for such purpose), such judge shall in his or her sole discretion select the particular retired judge who shall serve as the Referee. The cost of the Referee shall initially be divided equally between the Parties, it being understood and agreed that, upon judgment, the prevailing Party shall be entitled to reimbursement from the other Party of all costs of litigation, including the cost of the Referee. 57. Option to Purchase - Right of First Presentation. Before Lessor shall, during the original term hereof, sell the Property, Lessor shall give Lessee written notice (a "Purchase Notice") specifying a proposal for the purchase price of the Property, the closing date of the purchase, and a list of the responsibility for closing expenses. Lessor shall not be obligated to have received any offer to purchase the Property at the time the Purchase Notice is given. Lessee shall have ten (10) days following the -28- 29 Purchase Notice to elect irrevocably to purchase the Property identified on the terms specified in the Purchase Notice, which election shall be evidenced by written notice given by Lessee to Lessor (a "Purchase Acceptance Notice"). If Lessee fails timely to give a Purchase Acceptance Notice, Lessor shall be free to sell the Property to any other party or parties at a price not less than the price set forth in the Purchase Notice, for a period of 12 months following delivery of the Purchase Notice. 58. Title. Lessee is entering into this Lease subject to all matters of title of record with respect to the Premises, which specifically include, but are not limited to, that certain instrument entitled Declaration of Protective Covenants for Nordhoff Industrial Complex, recorded as Instrument No. 79- 812910 on July 24, 1979 in the official records of Los Angeles County, California. 59. See attached Addendum to Standard Lease-Rent Adjustments-Extended Term. 60. Lessor Liability. Notwithstanding any other provision of this Lease, in no event shall Lessor be liable to Lessee for any consequential damages or any damages to Lessee's business or lost profits. Furthermore, all liability of Lessor under the Lease shall be limited to Lessor's interest in the Premises. Lessor's interest in the Premises shall be deemed to include any proceeds of any insurance policy held by Lessor relating to the Premises. No recourse shall be had by Lessee for any reason to any assets of Lessor, or Lessor's partners, other than Lessor's interest in the Premises. 61. Financial Information. If at any time during the Lease Term Lessee is not a publicly held company, then (i) Lessee shall provide Lessor with financial statements and information concerning Lessee in substantially the same form as would be publicly available if Lessee were a company subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, and (ii) Lessee authorizes Lessor to obtain any and all information concerning the financial condition and credit of Lessee, including credit reports, that Lessor may deem necessary or appropriate in connection with this Lease, including all such information as may be required by any person to whom Lessor intends to grant a Security Device. Lessee consents to having Lessor disclose this Lease to any person as may be necessary to obtain credit information concerning Lessee. LESSOR: LESSEE: NORDHOFF INDUSTRIAL COMPLEX, NETCOM SYSTEMS, INC. a California General Partnership a California Corporation By: By: --------------------------------- ------------------------------------- Name Printed: Gerald L. Katell Name Printed: Marc Harmon Date: Date: -29- 30 RENT ADJUSTMENT(S) --- INITIAL LEASE TERM ADDENDUM TO STANDARD LEASE Dated March 28, 1996 By and Between (Lessor) NORDHOFF INDUSTRIAL COMPLEX (Lessee) NETCOM SYSTEMS, INC. Property Address: 20500 NORDHOFF STREET, CHATSWORTH, CA 91311 Paragraph 50 A. RENT ADJUSTMENTS: INITIAL LEASE TERM The monthly rent for each month of the adjustment period(s) specified below shall be increased using the method(s) indicated below: (Check Method(s) to be Used and Fill in Appropriately) [X] I. Cost of Living Adjustment(s) (COL) (a) On (Fill in COL Adjustment Date(s): November 1, 1997; May 1, 1999; November 1, 2000 the monthly rent payable under paragraph 1.5 ("Base Rent") of the attached Lease shall be adjusted by the change, if any, from the Base Month specified below, in the Consumer Price Index of the Bureau of Labor Statistics of the U.S. Department of Labor for (select one): [ ] CPIW (Urban Wage Earners and Clerical Workers) or [ ] CPI U (All Urban Consumers), for (Fill in Urban Area): Los Angeles - Anaheim - Riverside, All Items (1982-1984 = 100), herein referred to as "C.P.I." (b) The monthly rent payable in accordance with paragraph AI(a) of this Addendum shall be calculated as follows: the Base Rent set forth in paragraph 1.5 of the attached Lease, shall be multiplied by a fraction the numerator of which shall be the C.P. I. of the calendar month 2 (two) months prior to the month(s) specified in paragraph AI(a) above during which the adjustment is to take effect, and the denominator of which shall be the C. P.I. of the calendar month which is two (2) months prior to (select one): X the first month of the term of this Lease as set forth in paragraph 1.3 ("Base Month") or [ ] (Fill in Other "Base Month"): ___________________. The sum so calculated shall constitute the new monthly rent hereunder, but in no event, shall any such new monthly rent be less than the rent payable for the month immediately preceding the date for rent adjustment. (c) In the event the compilation and/or publication of the C.P.I. shall be transferred to any other governmental department or bureau or agency or shall be discontinued, then the index most nearly the same as the C.P.I. shall be used to make such calculation. In the event that Lessor and Lessee cannot agree on such alternative index, then the matter shall be submitted for decision to the American Arbitration Association in accordance with the then rules of said association and the decision of the arbitrators shall be binding upon the parties. The cost of said Arbitrators shall be paid equally by Lessor and Lessee. (d) Said increases shall not exceed ten (10%) percent, nor be less than four (4%) percent, per adjustment period. (a) On (Fill in MRV Adjustment Date(s): ________________________ the ________________________________________________________________________________ monthly rent payable under paragraph 1.5 ("Base Rent") of the attached Lease shall be adjusted to the "Market Rental Value" of the property as follows: 1) Four months prior to the Market Rental Value (MRV) Adjustment Date(s) described above, Lessor and Lessee shall meet to establish an agreed upon new MRV for the specified term. If agreement cannot be reached, then: i) Lessor and Lessee shall immediately appoint a mutually acceptable appraiser or broker to establish the new MRV within the next 30 days. Any associated costs will be split equally between the parties, or -30- 31 ii) Both Lessor and Lessee shall each immediately select and pay the appraiser or broker of their choice to establish a MRV within the next 30 days. If, for any reason, either one of the appraisals is not completed within the next 30 days, as stipulated, then the appraisal that is completed at that time shall automatically become the new MRV. If both appraisals are completed and the two appraisers/brokers cannot agree on a reasonable average MRV then they shall immediately select a third mutually acceptable appraiser/broker to establish a third MRV within the next 30 days. The average of the two appraisals closest. Initials: Initials: --------- --------- RENT ADJUSTMENT(S) NOTICE: These forms are often modified to meet changing requirements of law and industry needs. Always write or call to make sure you are utilizing the most current form: American Industrial Real Estate Association, 345 South Figueroa Street, Suite M-1, Los Angeles, CA 90071. (213) 687-8777. Fax No. (213) 687-8616. -31- 32 RENT ADJUSTMENT(S) --- EXTENDED LEASE TERM ADDENDUM TO STANDARD LEASE Dated March 28, 1996 By and Between (Lessor) NORDHOFF INDUSTRIAL COMPLEX (Lessee) NETCOM SYSTEMS, INC. Property Address: 20500 NORDHOFF STREET, CHATSWORTH, CA 91311 Paragraph 59 A. RENT ADJUSTMENTS: EXTENDED LEASE TERM The monthly rent for each month of the adjustment period(s) specified below shall be increased using the method(s) indicated below: (Check Method(s) to be Used and Fill in Appropriately) I. Cost of Living Adjustment(s) (COL) (a) On (Fill in COL Adjustment Date(s): November 1, 2002, May 1, 2004; November 1, 2005 the monthly rent payable under paragraph 1.5 ("Base Rent") of the attached Lease shall be adjusted by the change, if any, from the Base Month specified below, in the Consumer Price Index of the Bureau of Labor Statistics of the U.S. Department of Labor for (select one): [X] CPI W (Urban Wage Earners and Clerical Workers) or [ ] CPI U (All Urban Consumers), for (Fill in Urban Area): Los Angeles - Anaheim - Riverside, All Items (1982)-1984 = 100), herein referred to as "C.P.I." (b) The monthly rent payable in accordance with paragraph AI(a) of this Addendum shall be calculated as follows: the Base Rent set forth in paragraph 1.5 of the attached Lease, shall be multiplied by a fraction the numerator of which shall be the C.P.I. of the calendar month 2 (two) months prior to the month(s) specified in paragraph AI(a) above during which the adjustment is to take effect, and the denominator of which shall be the C.P.I. of the calendar month which is two (2) months prior to (select one): [ ] the first month of the term of this Lease as set forth in paragraph 1.3 ("Base Month") or /X/ (Fill in Other "Base Month"): May 2001. The sum so calculated shall constitute the new monthly rent hereunder, but in no event, shall any such new monthly rent be less than the rent payable for the month immediately preceding the date for rent adjustment. (c) In the event the compilation and/or publication of the C.P.I. shall be transferred to any other governmental department or bureau or agency or shall be discontinued, then the index most nearly the same as the C.P.I. shall be used to make such calculation. In the event that Lessor and Lessee cannot agree on such alternative index, then the matter shall be submitted for decision to the American Arbitration Association in accordance with the then rules of said association and the decision of the arbitrators shall be binding upon the parties. The cost of said Arbitrators shall be paid equally by Lessor and Lessee. (d) Said increase shall not exceed ten (10%) percent, nor be less than four (4%) percent, per adjustment period. Initials: Initials: --------- --------- RENT ADJUSTMENT(S) -32- 33 NOTICE: These forms are often modified to meet changing requirements of law and industry needs. Always write or call to make sure you are utilizing the most current form: American Industrial Real Estate Association, 345 South Figueroa Street, Suite M-1, Los Angeles, CA 90071. (213) 687-8777. Fax No. (213) 687-8616. -33- 34 NORDHOFF INDUSTRIAL COMPLEX FIRST AMENDMENT TO STANDARD INDUSTRIAL LEASE/COMMERCIAL LEASE This First Amendment is dated May 20, 1996 and is by and between Nordhoff Industrial Complex, a California General Partnership ("Landlord"), and Netcom Systems, Inc., a California Corporation ("Tenant"). The following changes are made to the original lease dated March 28, 1996 (the "Lease") between Landlord and Tenant: 1. Paragraph 7.4 (b). is deleted and replaced with the following new paragraph: 7.4. Ownership; Removal, Surrender; and Restoration. (b) Removal. Unless otherwise agreed in writing, Lessor may require that any or all Lessee Owned Alterations or Utility Installations be removed by the expiration or earlier termination of this Lease, notwithstanding their installation may have been consented to by Lessor. Lessor may require the removal at any time of all or any part of any Lessee Owned Alterations or Utility Installations made without the required consent of Lessor. Lessee shall, at the Lessee's sole expense, promptly repair any damage to the Premises resulting from the removal of Lessee Owned Alterations including signage. The building repair shall be of first class quality and workmanship. Upon removal of signage, the building shall be repaired, sealed with a waterproofing material and painted to match the existing color. Except as specifically set forth by this First Amendment, the Lease shall remain in full force and effect. IN WITNESS WHEREOF, the parties hereto have executed this First Amendment as of the date and year first written above. LESSOR: LESSEE: NORDHOFF INDUSTRIAL COMPLEX, NETCOM SYSTEMS, INC., a California General Partnership a California Corporation By: By: --------------------------------- ------------------------------------- Name Printed: Gerald L. Katell Name Printed: Marc Hamon Date: 8/9/96 Date: 7/29/96 -34- 35 SECOND AMENDMENT TO LEASE This Second Amendment to Standard Industrial/Commercial Single-Tenant Lease - Net (the "Second Amendment") is entered into as of this 26th day of March, 1997 by and between Nordhoff Industrial Complex, a California general partnership, ("Lessor") and Netcom Systems, Inc., a California corporation ("Lessee") with reference to the following recitals. RECITALS: A. On or about March 28, 1996, Lessor and Lessee entered into a Standard Industrial/Commercial Single-Tenant Lease - Net (the "ORIGINAL LEASE") for that certain premises located at 20500 Nordhoff Street in Chatsworth, California (the "EXISTING PREMISES"). On or about May 20, 1996, Lessor and Lessee entered into a "FIRST AMENDMENT to Standard Industrial Lease/Commercial Lease (the "First Amendment"). The Original Lease and the First Amendment are hereinafter collectively referred to as the "LEASE". B. Lessor and Lessee wish to amend the Lease on the terms and conditions set forth below. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. New Premises. On the Effective Date (as defined below), Lessee shall deliver possession of the Existing Premises to Lessor and from and after the Effective Date the "Premises" for purposes of the Lease shall mean the real property and improvements commonly known as 20550 Nordhoff Street (for purposes of this Second Amendment the "NEW PREMISES") and generally depicted on Exhibit "A" attached hereto. 2. Delivery of Existing Premises. On the Effective Date, Lessee shall deliver possession of the Existing Premises to Lessor in the condition required by Paragraph 7.4(c) of the Original Lease. Lessee acknowledges and agrees that all of Lessee's personal property must be removed from the Existing Premises on or before the Effective Date. 3. Extended Term. The term of the Lease is hereby extended to the date which is five (5) years after the Effective Date. Provided, however, if the Effective Date occurs on a date other than the first day of a calendar month, the term of the Lease shall be from the Effective Date until the date which is five (5) years after the first day of the calendar month immediately following the calendar month in which the Effective Date occurs. 4. New Base Rent. Prior to the Effective Date, Lessee shall continue to pay the Base Rent and all other charges described in the Lease as if this Second Amendment had not been entered into. From and after the Effective Date, the Base Rent shall be determined as follows: (a) Initial Base Rent. Commencing on the Effective Date and continuing until the date which is twenty (20) calendar months after the Effective Date, the monthly Base Rent shall be Thirty Seven Thousand Four Hundred Forty Dollars ($37,440) (the "NEW BASE RENT"). Provided, however, if the Effective Date occurs on a date other than the first day of a calendar month, the New Base Rent shall commence on the Effective Date and continue until the date which is twenty (20) months after the first day of the calendar month immediately following the calendar month in which the Effective Date occurs. The first day after the last day of the twenty (20) month period referred to above is hereinafter referred to as the "FIRST ADJUSTMENT DATE". (b) Adjustments to Base Rent During Initial Term. On the First Adjustment Date and on the date which is twenty (20) months after the First Adjustment Date (hereinafter the "NEW COL ADJUSTMENT DATES"), the New Base Rent shall be increased in accordance with the terms and conditions of the addendum to the Original Lease entitled "Rent Adjustment(s) --- Initial Lease Term" (hereinafter the "PRIMARY TERM RENT ADJUSTMENT ADDENDUM"). As of the Effective Date, the "COL Adjustment Dates" described in the Primary Term Rent Adjustment Addendum shall be deleted and the New COL Adjustment Dates shall be substituted in their place. As of the Effective 36 Date, the Base Month (as defined in the Primary Term Rent Adjustment Addendum) shall be the calendar month which is two (2) months prior to the Effective Date. (c) Adjustments to Base Rent During Option Term. If the term of the Lease is extended pursuant to paragraph 54 of the "Addendum to Standard Industrial/Commercial Single- Tenant Lease - Net" (the "ADDENDUM") attached to the Original Lease, the prevailing market Base Rent determined in accordance with paragraph 54 for the option term shall continue to be subject to adjustment in accordance with the addendum to the Original Lease entitled "Rent Adjustment(s): Extended Lease Term" (hereinafter the "EXTENDED TERM RENT ADJUSTMENT ADDENDUM"). As of the Effective Date, the "COL Adjustment Dates" described in the Extended Term Rent Adjustment Addendum shall be deleted and the following new COL Adjustment Dates shall be substituted in their place: the date which is twenty (20) calendar months after the first day of the option term and the date which is forty (40) calendar months after the first day of the option term. As of the Effective Date, the Base Month (as defined in the Extended Term Rent Adjustment Addendum) shall be the calendar month which is two (2) months prior to the first day of the option term. 5. Security Deposit. As of the Effective Date, Lessee shall pay to Lessor Twenty Thousand Six Hundred Forty Dollars ($20,640) and this amount shall be added to Lessee's existing Security Deposit (as defined in Paragraph 1.7 of the original Lease). 6. Effective Date. (a) Definition of Effective Date. Lessor anticipates that the Improvements will be Substantially Completed (as defined below) on or about June 1, 1997. For purposes of this Amendment, the Effective Date shall be the date which is two (2) days after the date on which the construction of the Improvements (as defined in the Work Letter Agreement attached hereto) are Substantially Complete. The Improvements shall be deemed to be "SUBSTANTIALLY COMPLETE" on the earlier to occur of the following dates: (i) the date the Improvements are substantially complete (except for minor "punch-list" items that do not unreasonably interfere with Lessee's use or enjoyment of the New Premises and except for completion of any trade fixtures, utility installations or other improvements being installed by Lessee) or (ii) the date Lessee commences business operations in the New Premises. If the Effective Date occurs on a date other than the first day of a calendar month, the Base Rent due during the calendar month in which the Effective Date occurs shall be prorated on a per diem basis based on the Base Rent due under the Lease prior to the Effective Date and the Base Rent due under the Lease after the Effective Date. (b) Lessee Delays. For purposes of this Second Amendment, "LESSEE DELAYS" means any delay in the completion of the Improvements resulting from any act or failure to act by Lessee or Lessee's employees, agents, independent contractors, consultants and/or any other person performing or required to perform services on behalf of Lessee. For each day that the Substantial Completion of the Improvements is delayed due to a Lessee Delay, Lessee shall pay to Lessor Six Hundred Eighty Eight Dollars ($688). 7. Early Entry. Lessee shall have the right to enter the New Premises prior to the Substantial Completion of the Improvements to install phone systems, furniture, fixtures and other equipment, and early entry for such purposes shall not constitute the commencement of business operations by Lessee at the New Premises. Lessee agrees that: (i) Lessee shall not materially interfere with Lessor or Lessor's contractors completing work within the New Premises; (ii) Lessee, together with its employees, agents and independent contractors will be subject to and will work under the direction of Lessor's contractor; (iii) prior to entry upon the New Premises by Lessee, Lessee agrees to pay for and provide to Lessor certificates evidencing the existence and the amounts of liability insurance for the New Premises; and (iv) Lessee and its agents and contractors agree to comply with all applicable laws, regulations, permits and other approvals required to perform its work at the New Premises. 8. Improvements to Premises. (a) Improvements Paid for by Lessor. Lessor agrees to pay, at Lessor's sole cost and expense, for the following items: -2- 37 (i) the cost of installing the exterior windows identified on Exhibit "B" attached hereto (the "EXTERIOR WINDOWS"). The Exterior Windows shall be of the same general type, design and quality as the existing exterior windows at the New Premises; (ii) the cost of installing new carpet inside the New Premises (the "NEW CARPET"). The New Carpet shall be of a quality that is comparable to the quality of the carpet in Lessee's Existing Premises and the color of the carpet shall be reasonably acceptable to Lessor; (iii) the cost of painting the interior walls of the New Premises with paint of a quality that is comparable to the quality of the paint in Lessee's Existing Premises; (iv) the cost of replacing the existing air conditioning units on the roof of the New Premises; (v) the cost of repairing faucets, toilets or other broken fixtures in the bathrooms presently located in the New Premises; (vi) to the extent required by the existing City of Los Angeles (the "CITY") ordinances relating to seismic safety, the cost of causing the ceiling of the New Premises to comply with such laws; and (vii) if at the time Lessee obtains a permit from the City for the construction of the Improvements (as defined in the Work Letter Agreement attached hereto as Exhibit "C"), the City requires that certain improvements be made to the Premises to comply with the requirements of Title 24, fifty percent (50%) of the cost of constructing such improvements shall be paid by Lessor and fifty percent (50%) of the cost shall be paid by Lessee. (b) Other Lessee Improvements. Lessor agrees to cause the Improvements to be constructed by a contractor selected by Lessor. Lessee shall pay all costs of constructing the Improvements. The cost of constructing the Improvements shall mean all costs of any type or nature incurred by Lessor to cause the Improvements to be constructed including, but not limited to, architectural and engineering fees, the cost of labor and materials, the cost of insurance and permits and any construction management or similar fees paid by Lessor to its management company. The estimated cost of constructing the Improvements shall be paid by Lessee to Lessor in weekly progress payments (or in longer intervals, at Lessor's discretion), based on Lessor's determination of the amount of work completed and the monies owed to third parties involved in the construction of the Improvements (e.g., contractors, subcontractors, materialmen, Lessor's management company). The progress payments shall be paid by Lessee to Lessor within five (5) days after demand by Lessor. It is the intention of Lessor and Lessee that Lessor not be obligated to advance any cost of constructing the Improvements and that Lessor receive all amounts payable with respect to the construction of the Improvements prior to Lessor being obligated to pay such amounts to third parties. It shall be a default by Lessee under the Lease if Lessee fails to pay the monies requested by Lessor as provided above within the required five (5) day periods. (c) Paragraphs 51 and 52 of the Addendum shall not apply to the New Premises. 9. Repairs to New Premises. Lessor shall repair at its sole cost and expense any latent structural defects in the New Premises. Except as otherwise provided in this paragraph 9 and in paragraph 8 above, Lessee acknowledges that it is accepting the New Premises in its "as is" condition without any representation or warranty from Lessor. 10. Option to Purchase. Paragraph 57 of the Addendum is hereby deleted in its entirety. 11. Earthquake Insurance. Notwithstanding anything to the contrary contained in the Lease (including, but not limited to, Paragraph 8.3(a) of the Original Lease), from and after the date of this Second Amendment, Lessee shall reimburse Lessor for the cost of any earthquake insurance purchased by Lessor for the New Premises; provided, however, in no event shall such reimbursement exceed Three Thousand Dollars ($3,000.00) in any one calendar year. -3- 38 12. Signs. Lessor shall have the right to place "for sale" and/or "for lease" signs on the Premises from and after the date of this Second Amendment. 13. Parking. Part of the Premises is composed of a parking lot area. Lessee shall be entitled to use up to one hundred seventy-nine (179) parking spaces in the parking lot area. Lessor reserves the right to permit other persons or entities to use the remaining parking spaces in the parking lot area. 14. Brokers. Lessee and Lessor each represent and warrant to the other that neither have had any dealings with any person, firm, broker or finder other than Delphi Business Properties ("Broker") in connection with the negotiation of this Second Amendment and/or consummation of the transaction contemplated hereby, and that no broker or other person, firm or entity other than Broker is entitled to any commission or finder's fee in connection with this Amendment. Lessee and Lessor hereby agree to indemnify, defend, protect and hold harmless the other from and against liability for compensation or charges which may be claimed by any broker, finder or other similar party (other than Broker) by reason of any dealings or actions of the indemnifying party, including any costs, expenses, or attorneys' fees reasonably incurred with respect thereto. 15. General. If there is a conflict between the terms and conditions of this Second Amendment and the terms and conditions of the Lease, the terms and conditions of this Second Amendment shall control. Except as modified by this Second Amendment, all terms and conditions of the Lease shall remain unmodified and in full force and effect. Unless otherwise defined herein, capitalized terms used in this Second Amendment shall have the same meaning as capitalized terms used in the Lease. 16. Counterparts and Facsimile. This Second Amendment may be executed in counterparts. Each counterpart shall be deemed an original, and all counterparts shall be deemed the same instrument with the same effect as if all parties hereto had signed the same signature page. In addition, a copy of this Second Amendment executed by a party hereto and telecopied to the other party shall be deemed to constitute delivery of an originally executed copy of this Second Amendment to the other party. A facsimile signature shall be enforceable to the same extent as an original signature. IN WITNESS WHEREOF, the parties hereby execute this Second Amendment as of the date first written above. "LESSOR" Nordhoff Industrial Complex, a California general partnership By: ------------------------------------- Gerald L. Katell, General Partner "LESSEE" Netcom Systems, Inc., a California corporation By: ------------------------------------- Marc Hamon, President -4- 39 EXHIBIT "A" New Premises 40 EXHIBIT "B" Exterior Windows 41 EXHIBIT "C" WORK LETTER AGREEMENT This Work Letter Agreement ("AGREEMENT") is entered into by and between Netcom Systems, Inc. ("Lessor") and Nordhoff Industrial Complex ("LESSEE"). Concurrently with the execution of this Agreement, Lessor and Lessee have entered into a Second Amendment to Lease (the "SECOND AMENDMENT"). In consideration of the mutual covenants hereinafter contained, Lessor and Lessee hereby agree as follows: 1. Lessee Improvement Coordinator. Within three (3) days after the Second Amendment is executed by Lessor and Lessee, Lessor and Lessee shall each designate in writing the name of one person who shall be that party's tenant improvement representative. All communication concerning the tenant improvements shall be directed to the appropriate party's tenant improvement representative. Lessee shall not have the right or authority to instruct Lessor's contractor to take any action. Any action Lessee desires Lessor's contractor to take shall be communicated by Lessee to Lessor's tenant improvement representative, and Lessor's tenant improvement representative shall give the necessary instructions to the contractor. 2. Plans and Specifications. (a) Plans. Attached hereto as Exhibit 1 and incorporated herein by this reference are plans and specifications (the "PLANS") which have been approved by Lessor and Lessee. The Plans describe the improvements (the "IMPROVEMENTS") which will be made to the Premises by Lessor. Lessor shall construct the Improvements using Lessor's building standard materials (the "STANDARDS"). Except as set forth in the Plans, Lessor shall not be obligated to make any other improvements to the Premises. 3. Specifications for Building Standard Improvements. Specifications and details for the Standards are available from Lessor. No deviations shall be permitted from the Standards. 4. Construction of Improvements. (a) Construction. Within a reasonable period following the receipt of a building permit, Lessor shall instruct its contractor to commence construction of the Improvements. (b) Completion. Lessor shall endeavor to cause the contractor to substantially complete construction of the Improvements in a diligent manner, but Lessor shall not be liable for any loss or damage as a result of delays in construction or delivery of possession of the Premises. 5. Change Orders. If Lessee desires to make any change in the Plans which is reasonable and practical (which shall be conclusively determined by Lessor), such change may only be requested by the delivery to Lessor by Lessee of a proposed written "CHANGE ORDER" specifically setting forth the requested change. Lessor shall have five (5) days from the receipt of the proposed Change Order to provide Lessee with Lessor's disapproval of the proposed change stating the reason(s) for such disapproval, or if Lessor approves the proposed change, the following items: (i) a summary of any increase in the cost caused by such change (the "CHANGE ORDER COST"), (ii) a statement of the number of days of any delay caused by such proposed change (the "CHANGE ORDER DELAY"), and (iii) a statement of the cost of the Change Order Delay (the "CHANGE ORDER DELAY EXPENSE"), which Change Order Delay Expense shall be the product of the number of days of delay multiplied by Six Hundred Eighty Eight Dollars ($688). Lessee shall then have three (3) business days to approve the Change Order Cost, the Change Order Delay and the Change Order Delay Expense. If Lessee approves these items, Lessor shall promptly execute the Change Order and cause the appropriate changes to the Plans to be made. If Lessee fails to respond to Lessor within said three (3) business day period, the Change Order Cost, the Change Order Delay and the Change Order Delay Expense shall be deemed disapproved by Lessee and Lessor shall have no obligation to perform any work set forth in the proposed Change Order. The Change Order Cost shall include all costs associated with the Change Order, including, without limitation, architectural fees, engineering 42 fees and construction costs, as conclusively determined by Lessor. The Change Order Delay shall include all delays caused by the Change Order, including, without limitation, all design and construction delays, as conclusively determined by Lessor. The Change Order Cost and the Change Order Delay Expense shall be paid by Lessee to Lessor by check within five (5) days after the Change Order is approved by Lessee. -2- 43 EXHIBIT 1 PLANS EX-10.10 14 FORM OF INDEMNIFICATION AGREEMENT 1 EXHIBIT 10.10 NETCOM SYSTEMS, INC. INDEMNIFICATION AGREEMENT This Indemnification Agreement ("Agreement") is effective as of ________ __, 1998 by and between Netcom Systems, Inc., a Delaware corporation (the "Company"), and ______________ ("Indemnitee"). WHEREAS, the Company desires to attract and retain the services of highly qualified individuals, such as Indemnitee, to serve the Company and its related entities; WHEREAS, in order to induce Indemnitee to continue to provide services to the Company, the Company wishes to provide for the indemnification of, and the advancement of expenses to, Indemnitee to the maximum extent permitted by law; WHEREAS, the Company and Indemnitee recognize the continued difficulty in obtaining liability insurance for the Company's directors, officers, employees, agents and fiduciaries, the sig nificant increases in the cost of such insurance and the general reductions in the coverage of such insurance; WHEREAS, the Company and Indemnitee further recognize the substantial increase in corporate litigation in general, subjecting directors, officers, employees, agents and fiduciaries to expensive litigation risks at the same time as the availability and coverage of liability insurance has been severely limited; WHEREAS, the Company and Indemnitee desire to continue to have in place the additional protection provided by an indemnification agreement and to provide indemnification and advancement of expenses to the Indemnitee to the maximum extent permitted by Delaware law; WHEREAS, the Company and Indemnitee are parties to that certain Indemnification Agreement dated June 16, 1997 (the "Prior Agreement") entered into when the Company was a California corporation; WHEREAS, the Company has reincorporated or expects shortly to reincorporate in Delaware; and WHEREAS, in view of the considerations set forth above, the Company and Indemnitee desire to amend and restate the Prior Agreement as set forth herein; 2 NOW, THEREFORE, the Company and Indemnitee hereby agree that, effective upon the closing of the merger between Netcom Systems, Inc., a California corporation and Netcom Systems, Inc., a Delaware corporation, the Prior Agreement is amended and restated in its entirety to read as set forth below. 1. Certain Definitions. (a) "Change in Control" shall mean, and shall be deemed to have occurred if, on or after the date of this Agreement, (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company acting in such capacity or a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing more than 50% of the total voting power represented by the Company's then outstanding Voting Securities, (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company and any new director whose election by the Board of Directors or nomination for election by the Company's stockholders was approved by a vote of at least two thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof, or (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation other than a merger or consolidation which would result in the Voting Securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into Voting Securities of the surviving entity) at least 80% of the total voting power represented by the Voting Securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of (in one transaction or a series of related transactions) all or substantially all of the Company's assets. (b) "Claim" shall mean with respect to a Covered Event: any threatened, pending or completed action, suit, proceeding or alternative dispute resolution mechanism, or any hearing, inquiry or investigation that Indemnitee in good faith believes might lead to the institution of any such action, suit, proceeding or alternative dispute resolution mechanism, whether civil, criminal, administrative, investigative or other. (c) References to the "Company" shall include, in addition to Netcom Systems, Inc., any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger to which Netcom Systems, Inc. (or any of its wholly owned subsidiaries) is a party which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees, agents or fiduciaries, so that if Indemnitee is or was a director, officer, employee, agent or fiduciary of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee, agent or fiduciary of -2- 3 another corporation, partnership, joint venture, employee benefit plan, trust or other enterprise, Indemnitee shall stand in the same position under the provisions of this Agreement with respect to the resulting or surviving corporation as Indemnitee would have with respect to such constituent corporation if its separate existence had continued. (d) "Covered Event" shall mean any event or occurrence related to the fact that Indemnitee is or was a director, officer, employee, agent or fiduciary of the Company, or any subsidiary of the Company, or is or was serving at the request of the Company as a director, officer, employee, agent or fiduciary of another corporation, partnership, joint venture, trust or other enterprise, or by reason of any action or inaction on the part of Indemnitee while serving in such capacity. (e) "Expenses" shall mean any and all expenses (including attorneys' fees and all other costs, expenses and obligations incurred in connection with investigating, defending, being a witness in or participating in (including on appeal), or preparing to defend, to be a witness in or to participate in, any action, suit, proceeding, alternative dispute resolution mechanism, hearing, inquiry or investigation), judgments, fines, penalties and amounts paid in settlement (if such settlement is approved in advance by the Company, which approval shall not be unreasonably withheld), actually and reasonably incurred, of any Claim and any federal, state, local or foreign taxes imposed on the Indemnitee as a result of the actual or deemed receipt of any payments under this Agreement. (f) "Expense Advance" shall mean a payment to Indemnitee pursuant to Section 3 of Expenses in advance of the settlement of or final judgement in any action, suit, proceeding or alternative dispute resolution mechanism, hearing, inquiry or investigation which constitutes a Claim. (g) "Independent Legal Counsel" shall mean an attorney or firm of attorneys, selected in accordance with the provisions of Section 2(d) hereof, who shall not have otherwise performed services for the Company or Indemnitee within the last three years (other than with respect to matters concerning the rights of Indemnitee under this Agreement, or of other indemnitees under similar indemnity agreements). (h) References to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on Indemnitee with respect to an employee benefit plan; and references to "serving at the request of the Company" shall include any service as a director, officer, employee, agent or fiduciary of the Company which imposes duties on, or involves services by, such director, officer, employee, agent or fiduciary with respect to an employee benefit plan, its participants or its beneficiaries; and if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan, Indemnitee shall be deemed to have acted in a manner "not opposed to the best interests of the Company" as referred to in this Agreement. -3- 4 (i) "Reviewing Party" shall mean, subject to the provisions of Section 2(d), any person or body appointed by the Board of Directors in accordance with applicable law to review the Company's obligations hereunder and under applicable law, which may include a member or members of the Company's Board of Directors, Independent Legal Counsel or any other person or body not a party to the particular Claim for which Indemnitee is seeking indemnification. (j) "Section" refers to a section of this Agreement unless otherwise indicated. (k) "Voting Securities" shall mean any securities of the Company that vote generally in the election of directors. 2. Indemnification. (a) Indemnification of Expenses. Subject to the provisions of Section 2(b) below, the Company shall indemnify Indemnitee for Expenses to the fullest extent permitted by law if Indemnitee was or is or becomes a party to or witness or other participant in, or is threatened to be made a party to or witness or other participant in, any Claim (whether by reason of or arising in part out of a Covered Event), including all interest, assessments and other charges paid or payable in connection with or in respect of such Expenses. (b) Review of Indemnification Obligations. Notwithstanding the foregoing, in the event any Reviewing Party shall have determined (in a written opinion, in any case in which Independent Legal Counsel is the Reviewing Party) that Indemnitee is not entitled to be indemnified hereunder under applicable law, (i) the Company shall have no further obligation under Section 2(a) to make any payments to Indemnitee not made prior to such determination by such Reviewing Party, and (ii) the Company shall be entitled to be reimbursed by Indemnitee (who hereby agrees to reimburse the Company) for all Expenses theretofore paid in indemnifying Indemnitee; provided, however, that if Indemnitee has commenced or thereafter commences legal proceedings in a court of competent jurisdiction to secure a determination that Indemnitee is entitled to be indemnified hereunder under applicable law, any determination made by any Reviewing Party that Indemnitee is not entitled to be indemnified hereunder under applicable law shall not be binding and Indemnitee shall not be required to reimburse the Company for any Expenses theretofore paid in indemnifying Indemnitee until a final judicial determination is made with respect thereto (as to which all rights of appeal therefrom have been exhausted or lapsed). Indemnitee's obligation to reimburse the Company for any Expenses shall be unsecured and no interest shall be charged thereon. (c) Indemnitee Rights on Unfavorable Determination; Binding Effect. If any Reviewing Party determines that Indemnitee substantively is not entitled to be indemnified hereunder in whole or in part under applicable law, Indemnitee shall have the right to commence litigation seeking an initial determination by the court or challenging any such determination by such Reviewing Party or any aspect thereof, including the legal or factual bases therefor, and, subject to the provisions of Section 15, the Company hereby consents to service of process and to appear in any -4- 5 such proceeding. Absent such litigation, any determination by any Reviewing Party shall be conclusive and binding on the Company and Indemnitee. (d) Selection of Reviewing Party; Change in Control. If there has not been a Change in Control, any Reviewing Party shall be selected by the Board of Directors, and if there has been such a Change in Control (other than a Change in Control which has been approved by a majority of the Company's Board of Directors who were directors immediately prior to such Change in Control), any Reviewing Party with respect to all matters thereafter arising concerning the rights of Indemnitee to indemnification of Expenses under this Agreement or any other agreement or under the Company's Certificate of Incorporation or Bylaws as now or hereafter in effect, or under any other applicable law, if desired by Indemnitee, shall be Independent Legal Counsel selected by Indemnitee and approved by the Company (which approval shall not be unreasonably withheld). Such counsel, among other things, shall render its written opinion to the Company and Indemnitee as to whether and to what extent Indemnitee would be entitled to be indemnified hereunder under applicable law and the Company agrees to abide by such opinion. The Company agrees to pay the reasonable fees of the Independent Legal Counsel referred to above and to indemnify fully such counsel against any and all expenses (including attorneys' fees), claims, liabilities and damages arising out of or relating to this Agreement or its engagement pursuant hereto. Notwithstanding any other provision of this Agreement, the Company shall not be required to pay Expenses of more than one Independent Legal Counsel in connection with all matters concerning a single Indemnitee, and such Independent Legal Counsel shall be the Independent Legal Counsel for any or all other Indemnitees unless (i) the Company otherwise determines or (ii) any Indemnitee shall provide a written statement setting forth in detail a reasonable objection to such Independent Legal Counsel representing other Indemnitees. (e) Mandatory Payment of Expenses. Notwithstanding any other provision of this Agreement other than Section 10 hereof, to the extent that Indemnitee has been successful on the merits or otherwise, including, without limitation, the dismissal of an action without prejudice, in defense of any Claim, Indemnitee shall be indemnified against all Expenses incurred by Indemnitee in connection therewith. 3. Expense Advances. (a) Obligation to Make Expense Advances. Upon receipt of a written undertaking by or on behalf of the Indemnitee to repay such amounts if it shall ultimately be determined that the Indemnitee is not entitled to be indemnified therefor by the Company, the Company shall make Expense Advances to Indemnitee. (b) Form of Undertaking. Any written undertaking by the Indemnitee to repay any Expense Advances hereunder shall be unsecured and no interest shall be charged thereon. (c) Determination of Reasonable Expense Advances. The parties agree that for the purposes of any Expense Advance for which Indemnitee has made written demand to the -5- 6 Company in accordance with this Agreement, all Expenses included in such Expense Advance that are certified by affidavit of Indemnitee's counsel as being reasonable shall be presumed conclusively to be reasonable. 4. Procedures for Indemnification and Expense Advances. (a) Timing of Payments. All payments of Expenses (including without limitation Expense Advances) by the Company to the Indemnitee pursuant to this Agreement shall be made to the fullest extent permitted by law as soon as practicable after written demand by Indemnitee therefor is presented to the Company, but in no event later than forty-five (45) business days after such written demand by Indemnitee is presented to the Company, except in the case of Expense Advances, which shall be made no later than twenty (20) business days after such written demand by Indemnitee is presented to the Company. (b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a condition precedent to Indemnitee's right to be indemnified or Indemnitee's right to receive Expense Advances under this Agreement, give the Company notice in writing as soon as practicable of any Claim made against Indemnitee for which indemnification will or could be sought under this Agreement. Notice to the Company shall be directed to the Chief Executive Officer of the Company at the address shown on the signature page of this Agreement (or such other address as the Company shall designate in writing to Indemnitee). In addition, Indemnitee shall give the Company such information and cooperation as it may reasonably require and as shall be within Indemnitee's power. (c) No Presumptions; Burden of Proof. For purposes of this Agreement, the termination of any Claim by judgment, order, settlement (whether with or without court approval) or conviction, or upon a plea of nolo contendere, or its equivalent, shall not create a presumption that Indemnitee did not meet any particular standard of conduct or have any particular belief or that a court has determined that indemnification is not permitted by this Agreement or applicable law. In addition, neither the failure of any Reviewing Party to have made a determination as to whether Indemnitee has met any particular standard of conduct or had any particular belief, nor an actual determination by any Reviewing Party that Indemnitee has not met such standard of conduct or did not have such belief, prior to the commencement of legal proceedings by Indemnitee to secure a judicial determination that Indemnitee should be indemnified under this Agreement or applicable law, shall be a defense to Indemnitee's claim or create a presumption that Indemnitee has not met any particular standard of conduct or did not have any particular belief. In connection with any determi nation by any Reviewing Party or otherwise as to whether the Indemnitee is entitled to be indemnified hereunder, the burden of proof shall be on the Company to establish that Indemnitee is not so entitled. -6- 7 (d) Notice to Insurers. If, at the time of the receipt by the Company of a notice of a Claim pursuant to Section 4(b) hereof, the Company has liability insurance in effect which may cover such Claim, the Company shall give prompt notice of the commencement of such Claim to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such Claim in accordance with the terms of such policies. (e) Selection of Counsel. In the event the Company shall be obligated hereunder to provide indemnification for or make any Expense Advances with respect to the Expenses of any Claim, the Company, if appropriate, shall be entitled to assume the defense of such Claim with counsel approved by Indemnitee (which approval shall not be unreasonably withheld) upon the delivery to Indemnitee of written notice of the Company's election to do so. After delivery of such notice, approval of such counsel by Indemnitee and the retention of such counsel by the Company, the Company will not be liable to Indemnitee under this Agreement for any fees or expenses of separate counsel subsequently employed by or on behalf of Indemnitee with respect to the same Claim; provided that, (i) Indemnitee shall have the right to employ Indemnitee's separate counsel in any such Claim at Indemnitee's expense and (ii) if (A) the employment of separate counsel by Indemnitee has been previously authorized by the Company, (B) Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and Indemnitee in the conduct of any such defense, or (C) the Company shall not continue to retain such counsel to defend such Claim, then the fees and expenses of Indemnitee's separate counsel shall be Expenses for which Indemnitee may receive indemnification or Expense Advances hereunder. 5. Additional Indemnification Rights; Nonexclusivity. (a) Scope. The Company hereby agrees to indemnify the Indemnitee to the fullest extent permitted by law, notwithstanding that such indemnification is not specifically authorized by the other provisions of this Agreement, the Company's Certificate of Incorporation, the Company's Bylaws or by statute. In the event of any change after the date of this Agreement in any applicable law, statute or rule which expands the right of a Delaware corporation to indemnify a member of its board of directors or an officer, employee, agent or fiduciary, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits afforded by such change. In the event of any change in any applicable law, statute or rule which narrows the right of a Delaware corporation to indemnify a member of its board of directors or an officer, employee, agent or fiduciary, such change, to the extent not otherwise required by such law, statute or rule to be applied to this Agreement, shall have no effect on this Agreement or the parties' rights and obligations hereunder except as set forth in Section 10(a) hereof. (b) Nonexclusivity. The indemnification and the payment of Expense Advances provided by this Agreement shall be in addition to any rights to which Indemnitee may be entitled under the Company's Certificate of Incorporation, its Bylaws, any other agreement, any vote of stockholders or disinterested directors, the General Corporation Law of the State of Delaware, or -7- 8 otherwise. The indemnification and the payment of Expense Advances provided under this Agreement shall continue as to Indemnitee for any action taken or not taken while serving in an indemnified capacity even though subsequent thereto Indemnitee may have ceased to serve in such capacity. 6. No Duplication of Payments. The Company shall not be liable under this Agreement to make any payment in connection with any Claim made against Indemnitee to the extent Indemnitee has otherwise actually received payment (under any insurance policy, provision of the Company's Certificate of Incorporation, Bylaws or otherwise) of the amounts otherwise payable hereunder. 7. Partial Indemnification. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of Expenses incurred in connection with any Claim, but not, however, for all of the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion of such Expenses to which Indemnitee is entitled. 8. Mutual Acknowledgement. Both the Company and Indemnitee acknowledge that in certain instances, federal law or applicable public policy may prohibit the Company from indem nifying its directors, officers, employees, agents or fiduciaries under this Agreement or otherwise. Indemnitee understands and acknowledges that the Company has undertaken or may be required in the future to undertake with the Securities and Exchange Commission to submit the question of indemnification to a court in certain circumstances for a determination of the Company's right under public policy to indemnify Indemnitee. 9. Liability Insurance. To the extent the Company maintains liability insurance applicable to directors, officers, employees, agents or fiduciaries, Indemnitee shall be covered by such policies in such a manner as to provide Indemnitee the same rights and benefits as are provided to the most favorably insured of the Company's directors, if Indemnitee is a director; or of the Com pany's officers, if Indemnitee is not a director of the Company but is an officer; or of the Company's key employees, agents or fiduciaries, if Indemnitee is not an officer or director but is a key employee, agent or fiduciary. 10. Exceptions. Notwithstanding any other provision of this Agreement, the Company shall not be obligated pursuant to the terms of this Agreement: (a) Excluded Action or Omissions. To indemnify Indemnitee for Expenses resulting from acts, omissions or transactions for which Indemnitee is prohibited from receiving indemnification under this Agreement or applicable law; provided, however, that notwithstanding any limitation set forth in this Section 10(a) regarding the Company's obligation to provide indemnification, Indemnitee shall be entitled under Section 3 to receive Expense Advances hereunder with respect to any such Claim unless and until a court having jurisdiction over the Claim shall have made a final judicial determination (as to which all rights of appeal therefrom have been -8- 9 exhausted or lapsed) that Indemnitee has engaged in acts, omissions or transactions for which Indemnitee is prohibited from receiving indemnification under this Agreement or applicable law. (b) Claims Initiated by Indemnitee. To indemnify or make Expense Advances to Indemnitee with respect to Claims initiated or brought voluntarily by Indemnitee and not by way of defense, counterclaim or crossclaim, except (i) with respect to actions or proceedings brought to establish or enforce a right to indemnification under this Agreement or any other agreement or insurance policy or under the Company's Certificate of Incorporation or Bylaws now or hereafter in effect relating to Claims for Covered Events, (ii) in specific cases if the Board of Directors has approved the initiation or bringing of such Claim, or (iii) as otherwise required under Section 145 of the Delaware General Corporation Law, regardless of whether Indemnitee ultimately is determined to be entitled to such indemnification or insurance recovery, as the case may be. (c) Lack of Good Faith. To indemnify Indemnitee for any Expenses incurred by the Indemnitee with respect to any action instituted (i) by Indemnitee to enforce or interpret this Agreement, if a court having jurisdiction over such action determines as provided in Section 13 that each of the material assertions made by the Indemnitee as a basis for such action was not made in good faith or was frivolous, or (ii) by or in the name of the Company to enforce or interpret this Agreement, if a court having jurisdiction over such action determines as provided in Section 13 that each of the material defenses asserted by Indemnitee in such action was made in bad faith or was frivolous. (d) Claims Under Section 16(b). To indemnify Indemnitee for expenses and the payment of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 16(b) of the Securities Exchange Act of 1934, as amended, or any similar successor statute; provided, however, that notwithstanding any limitation set forth in this Section 10(d) regarding the Company's obligation to provide indemnification, Indemnitee shall be entitled under Section 3 to receive Expense Advances hereunder with respect to any such Claim unless and until a court having jurisdiction over the Claim shall have made a final judicial determination (as to which all rights of appeal therefrom have been exhausted or lapsed) that Indemnitee has violated said statute. 11. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall constitute an original. 12. Binding Effect; Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors, assigns (including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business or assets of the Company), spouses, heirs and personal and legal representatives. The Company shall require and cause any successor (whether direct or indirect, and whether by purchase, merger, consolidation or otherwise) to all, substantially all, or a substantial part, of the business or assets of the Company, by written agreement in form and substance satisfactory to Indemnitee, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such suc- -9- 10 cession had taken place. This Agreement shall continue in effect regardless of whether Indemnitee continues to serve as a director, officer, employee, agent or fiduciary (as applicable) of the Company or of any other enterprise at the Company's request. 13. Expenses Incurred in Action Relating to Enforcement or Interpretation. In the event that any action is instituted by Indemnitee under this Agreement or under any liability insurance policies maintained by the Company to enforce or interpret any of the terms hereof or thereof, Indemnitee shall be entitled to be indemnified for all Expenses incurred by Indemnitee with respect to such action (including without limitation attorneys' fees), regardless of whether Indemnitee is ulti mately successful in such action, unless as a part of such action a court having jurisdiction over such action makes a final judicial determination (as to which all rights of appeal therefrom have been exhausted or lapsed) that each of the material assertions made by Indemnitee as a basis for such action was not made in good faith or was frivolous; provided, however, that until such final judicial determination is made, Indemnitee shall be entitled under Section 3 to receive payment of Expense Advances hereunder with respect to such action. In the event of an action instituted by or in the name of the Company under this Agreement to enforce or interpret any of the terms of this Agreement, Indemnitee shall be entitled to be indemnified for all Expenses incurred by Indemnitee in defense of such action (including without limitation costs and expenses incurred with respect to Indemnitee's counterclaims and cross-claims made in such action), unless as a part of such action a court having jurisdiction over such action makes a final judicial determination (as to which all rights of appeal therefrom have been exhausted or lapsed) that each of the material defenses asserted by Indemnitee in such action was made in bad faith or was frivolous; provided, however, that until such final judicial determination is made, Indemnitee shall be entitled under Section 3 to receive payment of Expense Advances hereunder with respect to such action. 14. Notice. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed duly given (i) if delivered by hand and signed for by the party addressed, on the date of such delivery, or (ii) if mailed by domestic certified or registered mail with postage prepaid, on the third business day after the date postmarked. Addresses for notice to either party are as shown on the signature page of this Agreement, or as subsequently modified by written notice. 15. Consent to Jurisdiction. The Company and Indemnitee each hereby irrevocably consent to the jurisdiction of the courts of the State of Delaware for all purposes in connection with any action or proceeding which arises out of or relates to this Agreement and agree that any action instituted under this Agreement shall be commenced, prosecuted and continued only in the Court of Chancery of the State of Delaware in and for New Castle County, which shall be the exclusive and only proper forum for adjudicating such a claim. 16. Severability. The provisions of this Agreement shall be severable in the event that any of the provisions hereof (including any provision within a single section, paragraph or sentence) are held by a court of competent jurisdiction to be invalid, void or otherwise unenforceable, and the remaining provisions shall remain enforceable to the fullest extent permitted by law. Furthermore, to -10- 11 the fullest extent possible, the provisions of this Agreement (including without limitation each portion of this Agreement containing any provision held to be invalid, void or otherwise unenforceable, that is not itself invalid, void or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable. 17. Choice of Law. This Agreement, and all rights, remedies, liabilities, powers and duties of the parties to this Agreement, shall be governed by and construed in accordance with the laws of the State of Delaware without regard to principles of conflicts of laws. 18. Subrogation. In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable the Company effectively to bring suit to enforce such rights. 19. Amendment and Termination. No amendment, modification, termination or cancellation of this Agreement shall be effective unless it is in writing signed by both the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed to be or shall constitute a waiver of any other provisions hereof (whether or not similar), nor shall such waiver constitute a continuing waiver. 20. Integration and Entire Agreement. This Agreement sets forth the entire understanding between the parties hereto and supersedes and merges all previous written and oral negotiations, commitments, understandings and agreements relating to the subject matter hereof between the parties hereto. 21. No Construction as Employment Agreement. Nothing contained in this Agreement shall be construed as giving Indemnitee any right to be retained in the employ of the Company or any of its subsidiaries or affiliated entities. -11- 12 IN WITNESS WHEREOF, the parties hereto have executed this Indemnification Agreement as of the date first above written. NETCOM SYSTEMS, INC. By: ---------------------------------- Name: -------------------------------- Title: ------------------------------- Address: Netcom Systems, Inc. 20550 Nordhoff Street Chatsworth, California 91311 AGREED TO AND ACCEPTED ---------------------------------------- -12- EX-10.11 15 FORM OF CHANGE-IN-CONTROL AGREEMENT 1 EXHIBIT 10.11 CHANGE IN CONTROL AGREEMENT This Change in Control Agreement (the "Agreement") is made and entered into effective as of May 6, 1998, by and between Netcom Systems, Inc., a California corporation (the "Company") and the employee of the Company whose name appears on the last page hereof (the "Employee"). R E C I T A L S A. The Employee is and has been employed by the Company. B. The Company and the Employee desire to enter into this Agreement to provide additional financial security and benefits to the Employee and to encourage the Employee to continue his employment with the Company. C. Certain capitalized terms used in the Agreement are defined in Section 3 below. A G R E E M E N T In consideration of the mutual covenants herein contained, and in consideration of the continuing employment of the Employee by the Company, the parties agree as follows: 1. Employment Relationship. The Company and the Employee acknowledge that the Employee's employment is and shall continue to be at-will, as defined under applicable law. If the Employee's employment terminates for any reason, the Employee shall not be entitled to any payments, benefits, damages, awards or compensation other than as provided by this Agreement, or as may otherwise be available in accordance with the Company's established employee plans and policies at the time of termination. 2. Severance Benefits. (a) Termination As Part of or Following A Change of Control. Subject to Sections 4 and 5 below, if the Employee's employment with the Company terminates at any time within twenty-four months after a Change of Control, then the Employee shall be entitled to receive severance benefits as follows: (i) Involuntary Termination. If the Employee's employment terminates as a result of Involuntary Termination other than for Cause, the Employee shall be entitled to receive a severance payment equal to one year of the Employee's base compensation for the Company's fiscal year then in effect plus Employee's bonus calculated at one hundred percent of target for the Company's fiscal year then in effect. Any severance payments to which the Employee is entitled pursuant to this Section 2(a)(i) shall be paid to the Employee (or to the Employee's estate or beneficiary in the event of the Employee's death) in a lump sum on or prior to the Employee's Termination Date. In addition, if the 2 Employee's employment terminates as a result of Involuntary Termination other than for Cause, then for the one year period commencing on the Employee's Termination Date, Employee shall continue to participate in the Company's health and dental insurance benefit plans in accordance with the rules established for individual participation in such plans, as such rules may be amended from time to time. (ii) Voluntary Resignation; Termination For Cause. If the Employee voluntarily resigns from the Company (other than as an Involuntary Termination), or if the Company terminates the Employee's employment for Cause, then the Employee shall not be entitled to receive severance or other benefits except for those (if any) as may then be established under the Company's then existing severance and benefits plans and policies at the time of such resignation or termination. (iii) Disability; Death. If the Company terminates the Employee's employment as a result of the Employee's Disability, or if the Employee's employment terminates due to the death of the Employee, then the Employee shall not be entitled to receive severance or other benefits except for those (if any) as may then be established under the Company's then existing severance and benefits plans and policies at the time of such Disability or death. (b) Options. Subject to Sections 4 and 5 below, in the event Employee becomes entitled to severance benefits pursuant to Section 2(a)(i) above, then the unvested portion of any stock option(s) held by the Employee granted by the Company (or any successor in interest thereto to the extent that such options were granted in exchange for options granted by the Company), shall, as of Employee's Termination Date, immediately vest and become exercisable in full, and the Employee shall have the right to exercise such additional vested portion of such stock option(s) at such time. 3. Definition of Terms. The following terms referred to in this Agreement shall have the following meanings: (a) Cause. "Cause" shall mean (i) any act of personal dishonesty taken by the Employee in connection with his responsibilities as an employee and intended to result in substantial personal enrichment of the Employee, (ii) conviction of a felony that is demonstrably injurious to the Company, (iii) a willful act by the Employee which constitutes gross misconduct and which is demonstrably injurious to the Company, and (iv) continued violations by the Employee of the Employee's obligations as an employee of the Company that are demonstrably willful and deliberate on the Employee's part after there has been delivered to the Employee a written demand for performance from the Company which describes the basis for the Company's belief that the Employee has not substantially performed his duties, and Employee has been given fourteen (14) days to perform after receipt of such written demand. (b) Change of Control. "Change of Control" shall mean the occurrence of any of the following events: (i) The acquisition by any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) (other than the Company or a person that directly or indirectly controls, -2- 3 is controlled by, or is under common control with, the Company) of the "beneficial ownership" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the total voting power represented by the Company's then outstanding voting securities; or (ii) A change in the composition of the Board of Directors of the Company (the "Board") as a result of which fewer than a majority of the directors are Incumbent Directors. "Incumbent Directors" shall mean directors who either (A) are directors of the Company as of the date hereof, or (B) are elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination; or (iii) A merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the approval by the stockholders of the Company of a plan of complete liquidation of the Company or of an agreement for the sale or disposition by the Company of all or substantially all the Company's assets. (c) Disability. "Disability" shall mean that the Employee has been unable to substantially perform his duties under this Agreement as the result of his incapacity due to physical or mental illness for at least 26 weeks, and such incapacity is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Employee or the Employee's legal representative (such Agreement as to acceptability not to be unreasonably withheld). (d) Exchange Act. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. (e) Involuntary Termination. "Involuntary Termination" shall mean (i) without the Employee's express written consent, the significant reduction of the Employee's duties, authority or responsibilities relative to the Employee's duties, authority and responsibilities as in effect immediately prior to such reduction or the assignment to the Employee of such reduced duties, authority or responsibilities; (ii) without the Employee's express written consent, a substantial reduction, without good business reasons, of the facilities and perquisites (including office space and location) available to the Employee immediately prior to such reduction; (iii) without the Employee's express written consent, a reduction by the Company in the base compensation of the Employee as in effect immediately prior to such reduction; (iv) a material reduction by the Company in the kind or level of employee benefits to which the Employee is entitled immediately prior to such reduction with the result that the Employee's overall benefits package is significantly reduced; (v) the relocation of the Employee to a facility or a location more than 30 miles from the Employee's then present location, without the Employee's express written consent; (vi) any purported termination of the Employee by the Company which is not effected for Disability or for Cause, or any purported termination for which the grounds -3- 4 relied upon are not valid; or (vii) the failure of the Company to obtain the assumption of this agreement by any successors contemplated in Section 6 below. (f) Termination Date. "Termination Date" shall mean (i) if the Employee's employment is terminated by the Company for Disability, thirty (30) days after notice of termination is given to the Employee (provided that the Employee shall not have returned to the performance of the Employee's duties on a full-time basis during such thirty (30)-day period), (ii) if the Employee's employment is terminated by the Company for any other reason, the date on which the Company delivers notice of termination to the Company or such later date, not to exceed ninety (90) days, specified in the notice of termination, or (iii) if the Agreement is terminated by the Employee, the date on which the Employee delivers notice of termination to the Company. 4. Limitation on Payments. (a) In the event that the severance and other benefits provided for in this Agreement or otherwise payable to the Employee (i) constitute "parachute payments" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code") and (ii) but for this Section 4 would be subject to the excise tax imposed by Section 4999 of the Code, then the Employee's severance benefits under Section 2 shall be payable either (i) in full, or (ii) as to such lesser amount which would result in no portion of such severance benefits being subject to excise tax under Section 4999 of the Code, whichever of the foregoing amounts, taking into account the applicable federal, state and local income taxes and the excise tax imposed by Section 4999, results in the receipt by the Employee on an after-tax basis, of the greatest amount of severance benefits under this Agreement, notwithstanding that all or some portion of such severance benefits may be taxable under Section 4999 of the Code. (b) If a reduction in the payments and benefits that would otherwise be paid or provided to the Employee under the terms of this Agreement is necessary to comply with the provisions of Section 4(a), the Employee shall be entitled to select which payments or benefits will be reduced and the manner and method of any such reduction of such payments or benefits (including but not limited to the number of options that would vest under Section 2(b)) subject to reasonable limitations (including, for example, express provisions under the Company's benefit plans) (so long as the requirements of Section 4(a) are met). Within fifteen (15) days after the amount of any required reduction in payments and benefits is finally determined in accordance with the provisions of Section 4(c), the Employee shall notify the Company in writing regarding which payments or benefits are to be reduced. If no notification is given by the Employee, the Company will determine which amounts to reduce. If, as a result of any reduction required by Section 4(a), amounts previously paid to the Employee exceed the amount to which the Employee is entitled, the Employee will promptly return the excess amount to the Company. (c) Unless the Company and the Employee otherwise agree in writing, any determination required under this Section 4 shall be made in writing by the Company's independent public accountants (the "Accountants"), whose determination shall be conclusive and binding upon the Employee and the Company for all purposes. For purposes of making the calculations required by this -4- 5 Section 4, the Accountants may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of Sections 280G and 4999 of the Code. The Company and the Employee shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make a determination under this Section. The Company shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this Section 4. 5. Certain Business Combinations. In the event it is determined by the Board, upon receipt of a written opinion of the Company's independent public accountants, that the enforcement of any Section or subsection of this Agreement, including, but not limited to, Section 2(b) hereof, which allows for the acceleration of vesting of options to purchase shares of the Company's common stock upon a termination in connection with a Change of Control, would preclude accounting for any proposed business combination of the Company involving a Change of Control as a pooling of interests, and the Board otherwise desires to approve such a proposed business transaction which requires as a condition to the closing of such transaction that it be accounted for as a pooling of interests, then any such Section of this Agreement shall be null and void, but only if the absence of enforcement of such Section would preserve the pooling treatment. For purposes of this Section 5, the Board's determination shall require the unanimous approval of the disinterested Board members. 6. Successors. (a) Company's Successors. Any successor to the Company (whether direct or indirect and whether by purchase, lease, merger, consolidation, liquidation or otherwise) to all or substantially all of the Company's business and assets shall assume the obligations under this Agreement and agree expressly to perform the obligations under this Agreement in the same manner and to the same extent as the Company would be required to perform such obligations in the absence of a succession. For all purposes under this Agreement, the term "Company" shall include any successor to the Company's business and assets which executes and delivers the assumption agreement described in this Section 6(a) or which becomes bound by the terms of this Agreement by operation of law. (b) Employee's Successors. The terms of this Agreement and all rights of the Employee hereunder shall inure to the benefit of, and be enforceable by, the Employee's personal or legal representatives, executors, administrators, successors, heirs, devisees and legatees. 7. Notice. (a) General. Notices and all other communications contemplated by this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or when mailed by U.S. registered or certified mail, return receipt requested and postage prepaid. In the case of the Employee, mailed notices shall be addressed to him at the home address which he most recently communicated to the Company in writing. In the case of the Company, mailed notices shall be addressed to its corporate headquarters, and all notices shall be directed to the attention of its Chief Financial Officer. -5- 6 (b) Notice of Termination. Any termination by the Company for Cause or by the Employee as a result of an Involuntary Termination shall be communicated by a notice of termination to the other party hereto given in accordance with Section 7(a) of this Agreement. Such notice shall indicate the specific termination provision in this Agreement relied upon, shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination under the provision so indicated, and shall specify the Termination Date (which shall be not more than ninety (90) days after the giving of such notice). The failure by the Employee to include in the notice any fact or circumstance which contributes to a showing of Involuntary Termination shall not waive any right of the Employee hereunder or preclude the Employee from asserting such fact or circumstance in enforcing his rights hereunder. 8. Miscellaneous Provisions. (a) No Duty to Mitigate. The Employee shall not be required to mitigate the amount of any payment contemplated by this Agreement (whether by seeking new employment or in any other manner), nor shall any such payment be reduced by any earnings that the Employee may receive from any other source. (b) Waiver. No provision of this Agreement shall be modified, waived or discharged unless the modification, waiver or discharge is agreed to in writing and signed by the party hereto whose interests are adversely affected thereby (provided that Employee may not sign on behalf of the Company for such purpose). No waiver by either party of any breach of, or of compliance with, any condition or provision of this Agreement by the other party shall be considered a waiver of any other condition or provision or of the same condition or provision at another time. (c) Whole Agreement. No agreements, representations or understandings (whether oral or written and whether express or implied) which are not expressly set forth in this Agreement have been made or entered into by either party with respect to the subject matter hereof. This Agreement shall replace and supersede any prior agreement between the parties hereto relating to the accrual of any benefits to the Employee in connection with a change in control or organic change to the Company (other than stock option agreements, if any) and all such agreements shall henceforth be void and of no further force and effect. (d) Choice of Law. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California. (e) Severability. The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision hereof, which shall remain in full force and effect. (f) Arbitration. Any dispute or controversy arising out of, relating to or in connection with this Agreement shall be settled exclusively by binding arbitration in San Jose, California, in accordance with the California Code of Civil Procedure section 1280 et seq., as amended, -6- 7 including, but not limited to, sections 1283, 1283.05 and 1283.1, such that the full degree of discovery permitted under the aforementioned statutes will be allowed in any dispute hereunder. Judgment may be entered on the arbitrator's award in any court having jurisdiction. The prevailing party shall be awarded its counsel fees and expenses, including costs of arbitration. Punitive damages shall not be awarded. (g) No Assignment of Benefits. The rights of any person to payments or benefits under this Agreement shall not be made subject to option or assignment, either by voluntary or involuntary assignment or by operation of law, including (without limitation) bankruptcy, garnishment, attachment or other creditor's process, and any action in violation of this Section 8(g) shall be void. (h) Employment Taxes. All payments made pursuant to this Agreement will be subject to withholding of applicable income and employment taxes. (i) Assignment by Company. The Company may assign its rights under this Agreement to an affiliate, and an affiliate may assign its rights under this Agreement to another affiliate of the Company or to the Company; provided, however, that no assignment shall be made if the net worth of the assignee is less than the net worth of the Company at the time of assignment. In the case of any such assignment, the term "Company" when used in a section of this Agreement shall mean the corporation that actually employs the Employee. (j) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together will constitute one and the same instrument. * * * * -7- 8 IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Company by its duly authorized officer, as of the day and year first above written. COMPANY: NETCOM SYSTEMS, INC. By: ------------------------------------- Title: ---------------------------------- EMPLOYEE: ----------------------------------- Name: ----------------------------------- -8- EX-10.12 16 401(K) PLAN 1 EXHIBIT 10.12 CONNECTICUT GENERAL LIFE INSURANCE COMPANY DEFINED CONTRIBUTION PLAN BASIC PLAN DOCUMENT NUMBER 03 The Plan set forth herein may be adopted by an Employer and accepted by the Plan Administrator and, if applicable, the Trustee by executing an Adoption Agreement, which together shall constitute the Employer's Plan, for the exclusive benefit of its eligible Employees and their Beneficiaries, as fully as if set forth in said Adoption Agreement; provided, however, no Employer may adopt this Plan except with the consent of Connecticut General Life Insurance Company. ARTICLE I - DEFINITIONS 1.1 Accrued Benefit. The term Accrued Benefit means the value of the Participant's Account on any applicable date. 1.2 Additional Matching Contributions. The term Additional Matching Contributions means additional discretionary Matching Contributions made to the Plan by the Employer, as authorized by its Board of Directors by resolution. Additional Matching Contributions shall be treated as Matching Contributions for nondiscrimination testing and allocation purposes. 1.3 Adoption Agreement. The term Adoption Agreement means the prescribed agreement by which the Employer adopts this Plan, and which sets forth the elective provisions of this Plan as specified by the Employer. 1.4 Alternate Payee. The term Alternate Payee means a person, other than the Participant, identified under a QDRO to be a recipient of part or all of the Participant's benefit under the Plan. 1.5 Annuity. The term Annuity means a series of payments made over a specified period of time. 1.6 Annuity Contract. The term Annuity Contract means the group annuity contract form issued by the Insurance Company to fund the benefits provided under this Plan, as such contract may be amended from time to time in accordance with the terms thereof. The Employer will specify and communicate to its Employees the types of investments available under this Plan and Annuity Contract. 1.7 Annuity Starting Date. The term Annuity Starting Date means the first day of the first period for which an amount is paid as an Annuity or any other form. 1.8 Beneficiary. The term Beneficiary means the beneficiary or beneficiaries entitled to any benefits under a Participant's Account hereunder upon the death of a Participant, Beneficiary or Alternate Payee pursuant to a QDRO. If any Life Insurance Policy is purchased on the life of a 2 Participant hereunder, the Beneficiary under such Policy shall be designated separately therein. However, any such Beneficiary designation shall be subject to the terms of Section 3C. A Participant's Beneficiary shall be his Spouse, if any, unless the Participant designates a person or persons other than his Spouse as Beneficiary with his Spouse's written consent. A Participant may designate a Beneficiary on the form approved by the Plan Administrator. If any distribution is made to a Beneficiary in the form of an Annuity, and if such Annuity provides for a death benefit, then such Beneficiary shall also have a right to designate a beneficiary and to change that beneficiary from time to time. As an alternative to receiving the benefit in the form of an Annuity, the Beneficiary may elect to receive a single cash payment or any other form of payment provided by the Employer's election in the Adoption Agreement. If no Beneficiary has been designated pursuant to the provisions of this Section, or if no Beneficiary survives the Participant and he has no surviving Spouse, then the Beneficiary under the Plan shall be the deceased Participant's surviving children in equal shares or, if there are no surviving children, the Participant's estate. If a Beneficiary dies after becoming entitled to receive a distribution under the Plan but before distribution is made to him in full, and if no other Beneficiary has been designated to receive the balance of the distribution in that event, the estate of the deceased Beneficiary shall be the Beneficiary for the balance of the distribution. If the Employer so elects in the Adoption Agreement, an Alternate Payee and/or Beneficiary shall be allowed to direct the investment of his segregated portion of the Participant's Account, pursuant to Section 5A. An individual who is designated as an Alternate Payee in a QDRO relating to a Participant's benefits under this Plan shall be treated as a Beneficiary hereunder, to the extent provided by such order. 1.9 Board of Directors. The term Board of Directors means the Employer's board of directors or other comparable governing body. 1.10 CODA. The term CODA means cash or deferred arrangement as described in Code section 401(k) and the regulations thereunder. 1.11 Code. The term Code means the Internal Revenue Code of 1986, as amended from time to time. 1.12 Compensation. The term Compensation means Compensation as defined below. For any Self-Employed Individual covered under the Plan, Compensation shall mean Earned Income. Compensation shall include only that Compensation which is actually paid to the Participant during the applicable Determination Period. Except as provided elsewhere in this Plan, the "Determination Period" shall be the period elected by the Employer in the Adoption Agreement. If the Employer makes no election, the Determination Period shall be the Plan Year. -2- 3 An Employer may elect in the Adoption Agreement to use one of the following definitions of Compensation for purposes of allocating all contributions: (a) Wages, Tips, and Other Compensation Box on Form W-2. (Information required to be reported under Code sections 6041, 6051 and 6052). Wages within the meaning of Code section 3401(a) and all other payments of compensation to an Employee by the Employer (in the course of the Employer's trade or business) for which the Employer is required to furnish the Employee a written statement under Code sections 6041(d), 6051(a)(3), and 6052. Compensation must be determined without regard to any rules under Code section 3401(a) that limit the remuneration included in wages based on the nature or location of the employment or the services performed (such as the exception for agricultural labor in Code section 3401(a)(2)). (b) Section 3401(a) Wages. Wages as defined in Code section 3401(a) for the purposes of income tax withholding at the source but determined without regard to any rules that limit the remuneration included in wages based on the nature or location of the employment or the services performed (such as the exception for agricultural labor in Code section 3401(a)(2)). (c) 415 Safe-Harbor Compensation. Wages, salaries, and fees for professional services and other amounts received (without regard to whether or not an amount is paid in cash) for personal services actually rendered in the course of employment with the Employer maintaining the Plan to the extent that the amounts are includable in gross income (including, but not limited to, commissions paid salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, bonuses, fringe benefits, and reimbursements or other expense allowances under a nonaccountable plan as described in Code section 1.62-2(c)), and excluding the following: (1) Employer contributions to a plan of deferred compensation which are not includable in the Employee's gross income for the taxable year in which contributed, or Employer contributions under a simplified employee pension plan to the extent such contributions are deductible by the Employee, or any distributions from a plan of deferred compensation; (2) Amounts realized from the exercise of a non-qualified stock option, or when restricted stock (or property) held by the Employee either becomes freely transferable or is no longer subject to a substantial risk of forfeiture; (3) Amounts realized from the sale, exchange or other disposition of stock acquired under a qualified stock option; and (4) Other amounts which received special tax benefits, or contributions made by the Employer (whether or not under a salary reduction agreement) towards the purchase of an annuity contract described in Code section 403(b) (whether or not the contributions are actually excludable from the gross income of the Employee). -3- 4 (d) Modified Wages, Tips, and Other Compensation Box on Form W-2. Compensation as defined in subsection (a) above, but reduced by all of the following items (even if includable in gross income): reimbursements or other expense allowances, fringe benefits (cash or noncash), moving expenses, deferred compensation, and welfare benefits. This definition may not be used by standardized plans or plans using a contribution or allocation formula that is integrated with Social Security. (e) Modified Section 3401(a) Wages. Compensation as defined in subsection (c) above, but reduced by all of the following items (even if includable in gross income): reimbursements or other expense allowances, fringe benefits (cash or noncash), moving expenses, deferred compensation, and welfare benefits. This definition may not be used by standardized plans or plans using a contribution or allocation formula that is integrated with Social Security. (f) Modified 415 Safe-Harbor Compensation. Compensation as defined in subsection (d) above, but reduced by all of the following items (even if includable in gross income): reimbursements or other expense allowances, fringe benefits (cash or noncash), moving expenses, deferred compensation, and welfare benefits. This definition may not be used by standardized plans or plans using a contribution or allocation formula that is integrated with Social Security. (g) Regular or Base Salary or Wages. Regular or base salary or wages (excluding overtime and bonuses) received during the applicable period by the Employee from the Employer. This definition may not be used by standardized plans or plans using a contribution or allocation formula that is integrated with Social Security. (h) Regular or Base Salary Wages plus Overtime And/or Bonuses. Regular or base salary or wages, plus either or both overtime and/or bonuses, as elected by the Employer in the Adoption Agreement, received during the applicable period by the Employee from the Employer. This definition may not be used by standardized plans or plans using a contribution or allocation formula that is integrated with Social Security. (i) A Reasonable Alternative Definition of Compensation, as that term is used in Code section 414(s)(3) and the regulations thereunder, provided that the definition does not favor Highly Compensated Employees and satisfies the nondiscrimination requirements under Code section 414(s). This definition may not be used by standardized plans or plans using a contribution or allocation formula that is integrated with Social Security. Notwithstanding the above, if elected by the Employer in the Adoption Agreement, Compensation shall include any amount which is contributed by the Employer pursuant to a salary reduction agreement and which is not includable in the gross income of the Employee under Code sections 125, 402(e)(3), 402(h)(1)(B) or 403(b). For years beginning on or after January 1, 1989, and before January 1, 1994, the annual Compensation of each Participant taken into account for determining all benefits provided under the Plan for any Plan Year shall not exceed $200,000. This limitation shall be adjusted by the -4- 5 Secretary at the same time and in the same manner as under Code section 415(d) (unless a lesser amount is elected by the Employer in the Adoption Agreement), except that the dollar increase in effect on January 1 of any calendar year is effective for Plan Years beginning in such calendar year and the first adjustment to the $200,000 limitation is effective on January 1, 1990. For Plan Years beginning on or after January 1, 1994, the annual Compensation of each Participant taken into account for determining all benefits provided under the Plan for any Plan Year shall not exceed $150,000, as adjusted for increases in the cost-of-living in accordance with Code section 401(a)(17)(B). The cost-of-living adjustment in effect for a calendar year applies to any Determination Period beginning in such calendar year. If a Determination Period consists of fewer than 12 calendar months, then the annual compensation limit is an amount equal to the annual compensation limit for the calendar year in which the compensation period begins, multiplied by the ratio obtained by dividing the number of full months in the period by 12. In determining the Compensation of a Participant for purposes of this limit, the rules of Code section 414(q)(6) shall apply, except in applying such rules, the term "family" shall include only the spouse of the Participant and any lineal descendants of the Participant who have not attained age 19 before the close of the year. If, as a result of the application of such rules, the adjusted annual Compensation limit is exceeded, then (except for purposes of determining the portion of Compensation up to the integration level if this Plan uses a contribution or allocation formula that is integrated with Social Security), the limit shall be prorated among the affected individuals in proportion to each such individual's Compensation as determined under this Section prior to the application of this limit. If Compensation for any prior Determination Period is taken into account in determining an Employee's contributions or benefits for the current year, the Compensation for such prior Determination Period is subject to the applicable annual compensation limit in effect for that prior period. For this purpose, in determining allocations in Plan Years beginning on or before January 1, 1989, the annual compensation limit in effect for Determination Periods before that date is $200,000. In addition, in determining allocations in Plan Years beginning on or after January 1, 1994, the annual compensation limit in effect for Determination Periods beginning before that date is $150,000. 1.13 Considered Net Profits. The term Considered Net Profits means the entire amount of the accumulated or current operating profits (excluding capital gains from the sale or involuntary conversion of capital or business assets) of the Employer after all expenses and charges other than (1) the Employer contribution to this and any other qualified plan, and (2) federal, state or local taxes based upon or measured by income, as determined by the Employer, either on an estimated basis or a final basis, in accordance with the generally accepted accounting principles used by the Employer. When, for any Plan Year, the amount of Considered Net Profits has been determined by the Employer, and the Employer contribution made on the basis of such determination, such determination and contribution shall be final and conclusive and shall not be subject to change -5- 6 because of any adjustments in income or expense which may be required by the Internal Revenue Service or otherwise. Such determination and contribution shall not be open to question by any Participant either before or after the Employer contribution has been made. In the case of an Employer that is a non-profit entity, the term Considered Net Profits means the entire amount of the accumulated or current operating surplus (excluding capital gains from the sale or involuntary conversion of capital or business assets) of the Employer after all expenses and charges other than (1) the contribution made by the Employer to the Plan, and (2) federal, state or local taxes based upon or measured by income, in accordance with the generally accepted accounting principles used by the Employer. 1.14 Contribution Period. The term Contribution Period means that regular period, specified by the Employer in its Adoption Agreement, for which the Employer shall make Employer contributions, if any, and that regular period specified by the Employer in its Adoption Agreement, for which Participants may make Employee Contributions, if any, and Elective Deferral Contributions, if any. The first Contribution Period may be an irregular period, not longer than one month, commencing not prior to the Effective Date. However, the first Contribution Period for Elective Deferral Contributions may not commence before the later of the Plan's Effective Date or adoption date. 1.15 Davis-Bacon Act. The term Davis-Bacon Act means the Davis-Bacon Act (40 U.S.C. section 276(a) et seq., as amended from time to time), which guarantees minimum wages to laborers and mechanics employed on Federal government contracts for the construction, alteration, or repair of public buildings or works. The minimums are the amounts found by the Secretary of Labor to be prevailing for similar workers in the area in which the work is to be done. The term "wages" as used in the Davis-Bacon Act includes, in addition to the basic hourly rate of pay, contributions irrevocably made to trustees for pension benefits for laborers and mechanics employed on Federal government contracts and the cost of other fringe benefits. However, overtime pay is to be computed only on the basis of the basic hourly rate of pay. 1.16 Disability. The term Disability means a Participant's incapacity to engage in any substantial gainful activity because of a medically determinable physical or mental impairment which can be expected to result in death, or which has lasted or can be expected to last for a continuous period of not less than 12 months. The performance and degree of such impairment shall be supported by medical evidence. All Participants in similar circumstances shall be treated alike. If elected by the Employer in the Adoption Agreement, nonforfeitable contributions will be made to the Plan on behalf of each disabled Participant who is not a Highly Compensated Employee (within the meaning of Section 1.29 of the Plan). 1.17 Disability Retirement Date. The term Disability Retirement Date means the first day of the month after the Plan Administrator has determined that a Participant's incapacity is a Disability. A Participant who retires from the Service of the Employer as of his Disability -6- 7 Retirement Date shall have a Vesting Percentage of 100% and shall be entitled to receive a distribution of the entire value of his Participant's Account and any Life Insurance Policies, or the values thereof, as of his Disability Retirement Date, subject to the provisions of Section 3A and Section 3C. 1.18 Early Retirement Date. If the Employer has specified in its Adoption Agreement that Early Retirement is permitted, then the term Early Retirement Date means the first day of the month coinciding with or next following the date a Participant is separated from Service with the Employer for any reason other than death or Disability, provided that on such date the Participant has attained the conditions specified by the Employer in its Adoption Agreement and has not attained his Normal Retirement Age. A Participant who retires from the Service of the Employer on his Early Retirement Date shall have a Vesting Percentage of 100% and shall be entitled to receive a distribution of the entire value of his Participant's Account and any Life Insurance Policies, or the values thereof, as of his Early Retirement Date, subject to the provisions of Section 3A and Section 3C. If a Participant separates from Service before satisfying the age requirement for Early Retirement, but has satisfied the Service requirement, the Participant shall be 100% vested as of his Termination of Employment date, but he will not be eligible for a distribution of the entire value of his Participant's Account until satisfying such age requirement. 1.19 Earned Income. The term Earned Income means the net earnings from self-employment in the trade or business with respect to which the Plan is established, and for which the personal services of the individual are a material income-producing factor. Net earnings will be determined without regard to items not included in gross income and the deductions allocable to such items. Net earnings are reduced by contributions made by the Employer to a qualified plan to the extent deductible under Code section 404. Net earnings shall be determined with regard to the deductions allowed to the taxpayer by Code section 164(f) for taxable years beginning after December 31, 1989. 1.20 Effective Date. The term Effective Date means the date specified by the Employer in its Adoption Agreement as the Effective Date of the Plan. 1.21 Elective Deferral Contributions. The term Elective Deferral Contributions means contributions made by the Employer to the Plan at the election of the Participant, in lieu of cash compensation, and shall include contributions made pursuant to a Salary Deferral Agreement or other deferral mechanism. With respect to any taxable year, a Participant's elective deferral is the sum of all Employer contributions made on behalf of such Participant pursuant to an election to defer under any CODA, any simplified employee pension cash or deferred arrangement as described in section 402(h)(1)(B), any eligible deferred compensation plan as described in section 457, any plan described in section 501(c)(18), and any Employer contributions made on the behalf of a Participant -7- 8 for the purchase of an annuity contract under section 403(b) pursuant to a salary reduction agreement. Elective Deferral Contributions shall not include those contributions properly distributed as Excess Annual Additions, as defined in Section 4C.1(b). 1.22 Employee. The term Employee means any employee of the Employer maintaining the Plan or any other employer required to be aggregated with such Employer under Code sections 414(b), (c), (m), or (o). The term Employee also includes any Leased Employee deemed to be an Employee of the Employer in accordance with Code sections 414(n) or (o). 1.23 Employee Contributions. The term Employee Contributions means contributions to this Plan or any other plan, that are designated or treated at the time of contribution as after-tax contributions made by the Employee and are allocated to a separate account to which attributable earnings and losses are allocated. Such term includes Required Employee Contributions, Voluntary Employee Contributions, Prior Required Employee Contributions, and Prior Voluntary Employee Contributions. 1.24 Employer. The term Employer means the employer that adopts this Plan. In the case of a group of Employers that constitutes a controlled group of corporations (as defined in Code section 414(b)) or that constitutes trades or businesses (whether or not incorporated) that are under common control (as defined in section 414(c)) or that constitutes an affiliated service group (as defined in section 414(m)), Service with all such employers shall be considered Service with the Employer for purposes of eligibility and vesting. The term Employer shall also mean any Adopting Employer as defined in Section 6E.2. A state or local government or political subdivision thereof, or any agency or instrumentality thereof, or any organization exempt from tax under Subtitle A of the code, may not elect a 401(k) option (CODA) in the Adoption Agreement. 1.25 Entry Date. The term Entry Date means either the Effective Date or each applicable date thereafter as specified by the Employer in its Adoption Agreement, when an Employee who has fulfilled the eligibility requirements commences participation in the Plan. If an Employee is not in the active Service of the Employer as of his initial Entry Date, his subsequent Entry Date shall be the date he returns to the active Service of the Employer, provided he still meets the eligibility requirements. If an Employee does not enroll as a Participant as of his initial Entry Date, his subsequent Entry Date shall be the applicable Entry Date as specified by the Employer in the Adoption Agreement when the Employee actually enrolls as a Participant. -8- 9 1.26 ERISA. The term ERISA means the Employee Retirement Income Security Act of 1974 (PL93-406) as it may be amended from time to time, and any regulations issued pursuant thereto as such Act and such regulations affect this Plan and Trust. 1.27 Fiduciary. The term Fiduciary means any or all of the following, as applicable: (a) Any Person who exercises any discretionary authority or control respecting the management of the Plan or its assets; (b) Any Person who renders investment advice for a fee or other compensation, direct or indirect, respecting any monies or other property of the Plan or has authority or responsibility to do so; (c) Any Person who has discretionary authority or responsibility in the administration of the Plan; (d) Any Person who has been designated by a Named Fiduciary pursuant to authority granted by the Plan, who acts to carry out a fiduciary responsibility, subject to any exceptions granted directly or indirectly by ERISA. 1.28 Forfeiture. The term Forfeiture means the amount, if any, by which the value of a Participant's Account exceeds his Vested Interest upon the occurrence of an immediate Break-in-Service, a 1-Year Break-in-Service or 5 consecutive 1-Year Breaks-in-Service, as elected by the Employer in its Adoption Agreement pursuant to Section 3D.5, following such Participant's Termination of Employment. 1.29 Highly Compensated Employee. The term Highly Compensated Employee includes both Highly Compensated Active Employees and Highly Compensated Former Employees. As elected by the Employer in the Adoption Agreement, the method to determine Highly Compensated Employees shall be: (a) Traditional Method: A "Highly Compensated Active Employee" includes any Employee who performs service for the Employer during the Determination Year and who, during the Look-Back Year; (1) Received Compensation from the Employer in excess of $75,000 (as adjusted pursuant to Code section 415(d)); or (2) Received Compensation from the Employer in excess of $50,000 (as adjusted pursuant to Code section 415(d)) and was a member of the top-paid group for such year; or -9- 10 (3) Was an officer of the Employer and received Compensation during such year that is greater than 50 percent of the dollar limitation in effect under Code section 415(b)(1)(A). The term Highly Compensated Employee also includes: (1) Employees who are described in the preceding sentence if the term "Determination Year" is substituted for the term "Look-Back Year" and who are one of the 100 employees who received the most Compensation from the Employer during the Determination Year; and (2) Employees who are 5-percent owners at any time during the Look-Back Year or Determination Year. If no officer has satisfied the Compensation requirement of (3) above during either a Determination Year or Look-Back Year, the highest paid officer for such year shall be treated as a Highly Compensated Employee. For this purpose, the Determination Year shall be the Plan Year. The Look-Back Year shall be the period elected by the Employer in the Adoption Agreement. A "Highly Compensated Former Employee" includes any Employee who separated from Service (or was deemed to have separated) prior to the Determination Year, performs no service for the Employer during the Determination Year, and was a highly compensated active employee for either the separation year or any Determination Year ending on or after the Employee's 55th birthday. If an Employee is, during a Determination Year or Look-Back Year, a family member of either a 5-percent owner who is an active or former Employee or a Highly Compensated Employee who is one of the 10 most Highly Compensated Employees ranked on the basis of Compensation paid by the Employer during-such year (a "Top 10 Highly Compensated Employee"), then the family member and the 5-percent owner or Top 10 Highly Compensated Employee shall be aggregated. In such case, the family member and 5-percent owner or Top 10 Highly Compensated Employee shall be treated as a single Employee receiving Compensation and Plan contributions or benefits equal to the sum of such Compensation and contributions or benefits of the family member and 5-percent owner or Top 10 Highly Compensated Employee. For purposes of this Section, the term "family member" includes the Spouse, lineal ascendants and descendants of the Employee or former Employee and the spouses of such lineal ascendants and descendants. The determination of who is a Highly Compensated Employee, including the determinations of the number and identity of the Employees in the top-paid group, the top 100 Employees, the number of Employees treated as officers and the Compensation that is considered, will be made in accordance with Code section 414(q) and the regulations thereunder. For purposes of this definition, Compensation shall mean compensation as defined in Code section 415(c)(3) except that elective or salary reduction contributions to a cafeteria plan, CODA or tax-sheltered annuity shall be included in Compensation. -10- 11 (b) Simplified Method For Employers In More than One Geographic Area: If elected by the Employer in the Adoption Agreement, the Traditional Method above will be modified by substituting $50,000 for $75,000 in (1) and by disregarding (2). This simplified definition of Highly Compensated Employee will apply to Employers that maintain significant business activities (and employ Employees) in at least two significant, separate geographic areas. (c) Alternative Simplified Method: If elected by the Employer in the Adoption Agreement, Highly Compensated Employees shall be determined as follows: A Highly Compensated Active Employee includes any Employee who performs service for the Employer during the Determination Year and who: (1) Is a 5-percent owner; or (2) Received Compensation from the Employer in excess of $75,000 (as adjusted pursuant to Code section 415(d)); or (3) Received Compensation from the Employer in excess of $50,000 (as adjusted pursuant to Code section 415(d)) and was a member of the top-paid group for such year; or (4) Was an officer of the Employer and received Compensation during such year that is greater than 50 percent of the dollar limitation in effect under Code section 415(b)(1)(A). Under this simplified definition, the look-back provisions of Code section 414(q) do not apply. (d) Alternative Simplified Method With Snapshot: If the Alternative Simplified Method of determining Highly Compensated Employees is selected by the Employer, the Employer may elect in the Adoption Agreement to substantiate that the Plan complies with the nondiscrimination requirements on the basis of the Employer's work force on a single day during the Plan Year, provided that day is reasonably representative of the Employer's work force and the Plan's coverage throughout the Plan Year. The day elected by the Employer and indicated on the Adoption Agreement shall be the "Snapshot Day." To apply the Alternative Simplified Method on a snapshot basis: (1) The Employer determines who is a Highly Compensated Employee on the basis of the data as of the Snapshot Day, except as provided in (3) below. (2) If the determination of who is a Highly Compensated Employee is made earlier than the last day of the Plan Year, the Employee's Compensation that is used to determine an Employee's status must be protected for the Plan Year under a reasonable method established by the Employer. -11- 12 (3) If there are Employees not employed on the Snapshot Day who are taken into account in testing, they must be determined to be either Highly Compensated Employees or non-Highly Compensated Employees. In addition to those Employees who are determined to be Highly Compensated Employees on the Plan's Snapshot Day, the Employer must treat as a Highly Compensated Employee any eligible Employee for the Plan Year who: (a) Terminated employment prior to the Snapshot Day and was a Highly Compensated Employee in the prior Plan Year; (b) Terminated employment prior to the Snapshot Day and (i) was a 5-percent owner, or (ii) has Compensation for the Plan Year greater than or equal to the projected Compensation of any Employee who is treated as a Highly Compensated Employee on the Snapshot Day (except for Employees who are Highly Compensated Employees solely because they are 5 percent owners or officers), or (iii) was an officer and has Compensation greater than or equal to the projected Compensation of any other officer who is a Highly Compensated Employee on the Snapshot Day solely because that person is an officer; or (c) Becomes employed after the Snapshot Day and (i) is a 5 percent owner, or (ii) has Compensation for the Plan Year greater than or equal to the projected Compensation of any Employee who is treated as a Highly Compensated Employee on the Snapshot Day (except for Employees who are Highly Compensated Employees solely because they are 5-percent owners or officers), or (iii) is an officer and has Compensation greater than or equal to the projected Compensation of any officer who is a Highly Compensated Employee on the Snapshot Day solely because that person is an officer. 1.30 Insurance Company. The term Insurance Company means Connecticut General Life Insurance Company, a legal reserve life insurance company of Hartford, Connecticut. If any company other than Connecticut General Life Insurance Company has issued any Life Insurance Policy held by the Trustee under the Plan, then with respect to such Policy only and matters pertaining directly thereto, the term Insurance Company shall be deemed to refer to such other issuing company. 1.31 Late Retirement Date. The term Late Retirement Date means the first day of the month coinciding with or next following the date a Participant is separated from Service with the Employer after his Normal Retirement Age, for any reason other than death. 1.32 Leased Employee. The term Leased Employee means any person (other than an Employee of the recipient Employer) who, pursuant to an agreement between the recipient Employer and any other person ("leasing organization"), has performed services for the recipient Employer (or for the recipient Employer and related persons determined in accordance with Code section 414(n)(6)) on a substantially full-time basis for a period of at least one year, and such services are of a type historically performed by employees in the business field of the recipient Employer. Contributions or benefits provided a Leased Employee by the leasing organization which are -12- 13 attributable to services performed for the recipient Employer shall be treated as provided by the recipient Employer. A Leased Employee shall not be considered an Employee of the recipient Employer if: such employee is covered by a money purchase pension plan of the leasing organization providing: (a) a nonintegrated employer contribution rate of at least 10 percent of compensation, as defined in Code section 415(c)(3), but including amounts contributed by the employer pursuant to a salary reduction agreement which are excludable from the Leased Employee's gross income under Code section 125, section 402(e)(3), section 402(h)(1)(B) or section 403(b), (b) immediate participation, and (c) full and immediate vesting; and Leased Employees do not constitute more than 20 percent of the recipient's non-highly compensated work force. 1.33 Life Annuity. The term Life Annuity means an Annuity payable over the life or life expectancy of one or more individuals. 1.34 Life Insurance Policy. The term Life Insurance Policy (or Policy) means a policy of individual life insurance purchased from the Insurance Company on the life of any Participant. 1.35 Matching Contributions. The term Matching Contributions means contributions made by the Employer to the Plan for a Participant on account of either Elective Deferral Contributions or Required Employee Contributions. In addition, any Forfeiture reallocated as a Matching Contribution shall be considered a Matching Contribution for purposes of this Plan. If elected by the Employer in the Adoption Agreement, Matching Contributions shall be made out of Considered Net Profits in an amount specified by the Employer in its Adoption Agreement for each $1.00 contributed as either an Elective Deferral Contribution or a Required Employee Contribution, as further specified by the Employer in its Adoption Agreement. The term Matching Contributions shall include Additional Matching Contributions. Should there be insufficient Considered Net Profits of the Employer for such Employer contribution, the amount of such Matching Contributions may be diminished to the amount that can be made from the Employer's Considered Net Profits. The Employer may designate at the time of contribution that all or a portion of such Matching Contributions be treated as Qualified Matching Contributions. If elected by the Employer in the Adoption Agreement, Partners shall not be entitled to receive Matching Contributions. If Partners are entitled to receive Matching Contributions, such Contributions shall be considered Elective Deferral Contributions for all purposes under this Plan. 1.36 Money Purchase Pension Contributions. The term Money Purchase Pension Contributions means contributions made to the Plan by the Employer in accordance with a definite formula as specified in the Adoption Agreement. -13- 14 1.37 Named Fiduciary. The term Named Fiduciary means the Administrator and any other Fiduciary designated by the Employer, and any successor thereto. 1.38 Nonelective Contributions. The term Nonelective Contributions means contributions made to the Plan by the Employer in accordance with a definite formula as specified in the Adoption Agreement. The Employer may designate at the time of contribution that the Nonelective Contribution shall be treated as a Qualified Nonelective Contribution. 1.39 Non-Trusteed. The term Non-Trusteed means that the Employer has specified in the Adoption Agreement that there will not be a Trust as a part of the Plan. Contributions under a Non-Trusteed plan will be made directly to the Insurance Company. If the Employer specifies in the Adoption Agreement that the Plan is Non-Trusteed, then the terms and provisions of this Plan relating to the Trust shall be of no force or effect. 1.40 Normal Retirement Age. The term Normal Retirement Age means the age selected in the Adoption Agreement. If the Employer enforces a mandatory retirement age, the Normal Retirement Age is the lesser of that mandatory age or the age specified in the Adoption Agreement. Notwithstanding the vesting schedule elected by the Employer in the Adoption Agreement, an Employee's right to his or her account balance shall be nonforfeitable upon the attainment of Normal Retirement Age. 1.41 Normal Retirement Date. The term Normal Retirement Date means the first day of the month coinciding with or next following the date a Participant attains his Normal Retirement Age. If a Participant retires from the Service of the Employer on his Normal Retirement Date, he shall receive a distribution of the entire value of his Participant's Account, as of his Normal Retirement Date, subject to the provisions of Section 3A and Section 3C. 1.42 Owner-Employee. The term Owner-Employee means an individual who is a sole proprietor, or who is a Partner owning more than 10 percent of either the capital or profits interest of the Partnership. 1.43 Participant. The term Participant means any person who has a Participant's Account in the Plan and/or Trust. If elected by the Employer in the Adoption Agreement, for purposes of the investment of contributions as described in Section 5A, the term Participant shall include former Participants, Beneficiaries, and Alternate Payees. Former Participants shall include those Participants who upon Termination of Employment elected to defer distribution in accordance with Section 3A of the Plan. 1.44 Participant's Account. The term Participant's Account means the sum of the following sub-accounts maintained on behalf of each Participant. -14- 15 (a) Money Purchase Pension Contributions, if any, plus any income and minus any loss thereon; (b) Nonelective Contributions, if any, plus any income and minus any loss thereon; (c) Matching Contributions, if any, plus any income and minus any loss thereon; (d) Qualified Nonelective Contributions, if any, plus any income and minus any loss thereon; (e) Qualified Matching Contributions, if any, plus any income and minus any loss thereon; (f) Prior Employer Contributions, if any, plus any income and minus any loss thereon; (g) Elective Deferral Contributions, if any, plus any income and minus any loss thereon; (h) Employee Contributions, if any, plus any income and minus any loss thereon; (i) QVEC Contributions, if any, plus any income and minus any loss thereon. (j) Rollover Contributions, if any, plus any income and minus any loss thereon; A Participant's Account shall be invested in accordance with rules established by the Plan Administrator that shall be applied in a consistent and nondiscriminatory manner. 1.45 Participant's Employer Stock Account. The term Participant's Employer Stock Account means that portion, if any, of the Participant's Account which is invested in shares of the Employer's stock. Such Participant's Employer Stock Account shall be credited with dividends paid, if any. Such Participant's Employer Stock Account will be valued on each day that the public exchange, over which the Employer's stock, is traded, is open for unrestricted trading. Amounts that are invested in the Participant's Employer Stock Account may be invested in any short term account prior to actual investment in the Participant's Employer Stock Account. As elected by the Employer in the Adoption Agreement: (a) The Trustee will vote the shares of the Employer's stock invested in the Participant's Employer Stock Account; or -15- 16 (b) The Trustee will vote the shares of the Employer's stock in accordance with any instructions received by the Trustee from the Participant. The Trustee may request voting instructions from the Participants provided this is done in a consistent and nondiscriminatory manner. The ability of a Participant who is subject to the reporting requirements of section 16(a) of the Securities Exchange Act of 1934 (the "Act") to make withdrawals or investment changes involving the Participant's Employer Stock Account may be restricted by the Plan Administrator to comply with the rules under section 16(b) of the Act. A money purchase pension plan making an initial investment in shares of the Employer's stock after December 31, 1974, may not acquire shares to the extent that the aggregate fair market value of the Employer's stock held by the Plan will exceed 10 percent of the fair market value of the assets of the Plan. 1.46 Partner. The term Partner means a member of a Partnership. 1.47 Partnership. The term Partnership means a partnership as defined in Code section 7701(a)(2) and the regulations thereunder and includes a syndicate, group, pool, joint venture, or other unincorporated organization through or by means of which any business, financial operation, or venture is carried on, and which is not a corporation or a trust or estate within the meaning of the Code. A joint undertaking merely to share expenses is not a Partnership. In addition, mere co-ownership of property which is maintained, kept in repair, and rented or leased does not constitute a Partnership. 1.48 Person. The term Person means any natural person, partnership, corporation, trust or estate. 1.49 Plan. The term Plan means this Connecticut General Life Insurance Company Defined Contribution Plan and the Adoption Agreement as adopted by the Employer and as both may be amended from time to time. 1.50 Plan Administrator. The term Plan Administrator means the Person or Persons designated by the Employer in its Adoption Agreement and any successor(s) thereto. If more than one Person shall be designated, the committee thus formed shall be known as the Administrative Committee and all references in the Plan to the Plan Administrator shall be deemed to apply to the Administrative Committee. The Plan Administrator shall signify in writing his acceptance of his responsibility as a Named Fiduciary. 1.51 Plan Year. The term Plan Year means the 12-consecutive month period specified by the Employer in the Adoption Agreement. If the Plan Year changes to a different 12-consecutive month period, the first new Plan Year shall begin before the end of the last old Plan Year. In this event, the period beginning on -16- 17 the first day of the last old Plan Year and ending on the day before the first day of the first new Plan Year shall be treated as a short Plan Year for purposes of determining Highly Compensated Employees, performing the Nondiscrimination Tests set forth in Section 4A, and applying the Top-Heavy provisions of Section 7A. However, Service will be credited in accordance with the provisions of Section 2A.8. 1.52 Prevailing Wage Law. The term Prevailing Wage Law means any statute or ordinance that requires the Employer to pay its Employees working on public contracts at wage rates not less than those determined pursuant to that statute classes of workers in the geographical area where the contract is performed, including the Davis-Bacon Act and similar Federal, state, or municipal prevailing wage statutes. 1.53 Prior Employer Contributions. The term Prior Employer Contributions means contributions made by the Employer prior to the date indicated on the Adoption Agreement. 1.54 Prior Required Employee Contributions. The term Prior Required Employee Contributions means Employee post-tax contributions that the Employer required as either a condition of participation, or for receiving an Employer contribution, prior to the date indicated on the Adoption Agreement. 1.55 Prior Voluntary Employee Contributions. The term Prior Voluntary Employee Contributions means post-tax contributions made voluntarily by an Employee prior to the date indicated on the Adoption Agreement. 1.56 QDRO. The term QDRO means a Qualified Domestic Relations Order as determined in accordance with Code section 414(p) and regulations thereunder. 1.57 Qualified Matching Contributions. The term Qualified Matching Contributions means Matching Contributions which are subject to the distribution and nonforfeitability requirements of Code section 401(k) when made. 1.58 Qualified Nonelective Contributions. The term Qualified Nonelective Contributions means Nonelective Contributions made by the Employer and allocated to Participants' accounts that the Participants may not elect to receive in cash until distributed from the Plan; that are nonforfeitable when made; and that are distributable only in accordance with the distribution provisions that are applicable to Elective Deferral Contributions and Qualified Matching Contributions. 1.59 QVEC Contributions. The term QVEC Contributions means voluntary amounts contributed by the Participant prior to January 1, 1987, which the Participant designated in writing were eligible for a tax deduction under Code section 219(a). -17- 18 QVEC Contributions will be maintained in a separate account, which will be nonforfeitable (i.e., 100% vested) at all times. The account will share in the gains and losses under the Plan in the same manner as described in Section 5A.3 of the Plan. 1.60 Required Employee Contributions. The term Required Employee Contributions means Employee post-tax contributions that the Employer requires either as a condition of participation or for receipt of an Employer contribution. 1.61 Rollover Contribution. The term Rollover Contribution means an amount representing all or part of a distribution from a pension or profit sharing plan meeting the requirements of Code section 401(a), which is eligible for rollover to this Plan in accordance with the requirements set forth in Code section 402 (including Direct Rollovers) or Code section 408(d)(3), whichever is applicable. 1.62 Salary Deferral Agreement. The term Salary Deferral Agreement means an agreement between a Participant and the Employer to defer receipt of a portion of the Participant's Compensation by making Elective Deferral Contributions to the Plan. 1.63 Self-Employed Individual. The term Self-Employed Individual means an individual who has Earned Income for the taxable year from the trade or business for which the Plan is established; also, an individual who would have Earned Income but for the fact that the trade or business had no net profits for the taxable year. 1.64 Serious Financial Hardship. The term Serious Financial Hardship means an immediate and heavy financial need of the Participant where such Participant lacks the available resources to meet the hardship. The Plan Administrator shall make a determination of whether a Serious Financial Hardship exists in accordance with the applicable provisions of Section 3E. 1.65 Shareholder-Employee. The term Shareholder-Employee means an Employee or officer of an electing small business S corporation who owns (or is considered as owning within the meaning of Code section 318(a)(1)), on any day during the taxable year of such corporation, more than 5% of the outstanding stock of the corporation. 1.66 Social Security Integration Level. The term Social Security Integration Level means the Social Security Taxable Wage Base or such lesser amount specified by the Employer in the Adoption Agreement. If the Social Security Taxable Wage Base is amended, the Social Security Integration Level will be deemed to have been amended. 1.67 Social Security Taxable Wage Base. The term Social Security Taxable Wage Base means the contribution and benefit base in effect under section 230 of the Social Security Act at the beginning of the Plan Year. 1.68 Sponsoring Organization. The term Sponsoring Organization means Connecticut General Life Insurance Company, a legal reserve life insurance company of Hartford, Connecticut. -18- 19 1.69 Spouse. The term Spouse means the lawful wife of a male Participant, or the lawful husband of a female Participant. However, a former Spouse will be treated as the Spouse or surviving Spouse and a current Spouse will not be treated as the Spouse or surviving Spouse to the extent provided under a QDRO. 1.70 Straight Life Annuity. The term Straight Life Annuity means an annuity payable in equal installments for the life of the Participant, and that terminates upon the Participant's death. 1.71 Termination of Employment. The term Termination of Employment means a severance of the Employer-Employee relationship which occurs prior to a Participant's Normal Retirement Age for any reason other than Early Retirement, Disability, or death. 1.72 True-Up Contributions. The term True-Up Contributions means Additional Matching Contributions made to the Plan by the Employer so that total Matching Contributions for each Participant are calculated on an annual basis rather than on the basis selected by the Employer in the Adoption Agreement. 1.73 Trust. The term Trust means the Trust Agreement if the Employer specifies in the Adoption Agreement that the Plan is Trusteed. The Trust Agreement is entered into by the Employer, the Plan Administrator and the Trustee by completing and signing the Adoption Agreement, which Trust Agreement forms a part of, and implements the provisions of the Plan as it applies to the Employer. If the Employer specifies in the Adoption Agreement that the Plan is Non-Trusteed, then the terms and provisions of this Plan relating to the Trust shall be of no force and effect. 1.74 Trustee. The term Trustee means the trustee(s) designated by the Employer in its Adoption Agreement, if applicable, and any successor(s) thereto. 1.75 Vested Interest. The term Vested Interest means the nonforfeitable right to an immediate or deferred benefit on any date in the amount which is equal to the sum of (a), (b) and (c) below: (a) The value on that date of that portion of the Participant's Account that is attributable to and derived from Employee Contributions, if any; (b) The value on that date of the portion of the Participant's Account attributable to Elective Deferral Contributions, if any; Qualified Nonelective Contributions, if any; QVEC Contributions, if any; Rollover Contributions, if any; and Qualified Matching Contributions, if any; (c) The value on that date of that portion of the Participant's Account that is attributable to and derived from contributions made by the Employer (and Forfeitures, if any), multiplied by his Vesting Percentage determined on the date applicable. -19- 20 Employer contributions described in subsection (c), plus the earnings thereon, shall be, at any relevant time, a part of the Participant's Vested Interest equal to an amount ("X") determined by the following formula: X = P(AB+D)-D For purposes of applying this formula: P = The Participant's Vesting Percentage at the relevant time. AB = The account balance attributable to such contributions, plus the earnings thereon, at the relevant time. D = The amount of any distribution. 1.76 Vesting Percentage. The term Vesting Percentage means the Participant's nonforfeitable interest in Money Purchase Pension Contributions, Matching Contributions, Nonelective Contributions, or Prior Employer Contributions credited to his Participant's Account, plus any income and minus any loss thereon. The Vesting Percentage for each such Employer contribution is computed in accordance with one of the schedules listed below, based on Years of Service with the Employer, as specified by the Employer in its Adoption Agreement: (a) 100% full and immediate; (b) 100% after 3 Years of Service; (c) 20% per Year of Service, 100% at 5 Years of Service; (d) 20% after 3 Years of Service, 20% per Year of Service thereafter, 100% at 7 Years of Service; (e) 20% after 2 Years of Service, 20% per Year of Service thereafter, 100% at 6 Years of Service; (f) 100% after 5 Years of Service; (g) 25% after 1 Year of Service, 100% after 4 Years of Service; (h) Other. However, if a Participant dies prior to attaining his Normal Retirement Age, his Vesting Percentage shall be 100%. -20- 21 1.77 Voluntary Employee Contributions. The term Voluntary Employee Contributions means post-tax contributions made voluntarily by an Employee. ARTICLE II - GENERAL PROVISIONS 2A. SERVICE 2A.1 Service. The term Service means active employment with the Employer as an Employee. 2A.2 Absence from Employment. Absence from employment on account of a leave of absence authorized by the Employer pursuant to the Employer's established leave policy will be counted as employment with the Employer provided that such leave of absence is of not more than two years' duration. Absence from employment on account of active duty with the Armed Forces of the United States will be counted as employment with the Employer. If the Employee does not return to active employment with the Employer, his Service will be deemed to have ceased on the date the Plan Administrator receives notice that the Employee will not return. The Employer's leave policy shall be applied in a uniform and nondiscriminatory manner to all Participants under similar circumstances. For purposes of determining an Employee's eligibility and vesting status for periods while the Employee is absent from work for reasons covered under the Family and Medical Leave Act, Service will be credited in accordance with and to the extent required by the provisions of the Family and Medical Leave Act. If the Employer has elected in the Adoption Agreement to determine Service based upon 1,000 Hours, then the following Sections 2A.3 through 2A.8 shall apply. 2A.3 Hour of Service. The term Hour of Service means: (a) Each hour for which an Employee is directly or indirectly paid, or entitled to payment, by the Employer for the performance of duties. These hours shall be credited to the Employee for the Computation Period or Periods, as defined in Section 2A.5, in which the duties were performed; and (b) Each hour for which an Employee is paid or entitled to payment, by the Employer on account of a period of time during which no duties are performed (irrespective of whether the employment relationship has terminated) due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence. No more than 501 Hours of Service will be credited under this paragraph for a single Computation Period (whether or not the period occurs in a single Computation Period). Hours under this paragraph will be calculated and credited pursuant to section 2530.200b-2 of the Department of Labor regulations which are incorporated herein by this reference; and -21- 22 (c) Each hour for which back pay, irrespective of mitigation of damages, has been either awarded or agreed to by the Employer. The same Hours of Service will not be credited under subsection (a) or subsection (b), as the case may be, and under this subsection (c). These hours shall be credited to the Employee for the Computation Period or periods to which the award or agreement pertains rather than the Computation Period in which the award, agreement or payment is made; and Hours of Service will be credited for employment with other members of an affiliated service group (under Code section 414(m)), a controlled group of corporations (under Code section 414(b)), or a group of trades or businesses under common control (under Code section 414(c)), of which the adopting Employer is a member, and any other entity required to be aggregated with the Employer pursuant to Code section 414(o). Hours of Service will also be credited for any individual considered an Employee for purposes of this Plan under Code sections 414(n) or 414(o). Solely for purposes of determining whether a 1-Year Break-in-Service, as defined in Section 2A.4, for participation and vesting purposes has occurred in a Computation Period, an individual who is absent from work for maternity or paternity reasons shall receive credit for the Hours of Service which would otherwise have been credited to such individual but for such absence, or in any case in which such hours cannot be determined, eight (8) Hours of Service per day of such absence. For purposes of this paragraph, an absence from work for maternity or paternity reasons means an absence (1) by reason of the pregnancy of the individual, (2) by reason of a birth of a child of the individual, (3) by reason of the placement of a child with the individual in connection with the adoption of such child by such individual, or (4) for purposes of caring for such child for a period beginning immediately following such birth or placement. The Hours of Service credited under this paragraph shall be credited (1) in the Computation Period in which the absence begins if the crediting is necessary to prevent a Break-in-Service in that period, or (2) in all other cases, in the following Computation Period. Service shall be determined on the basis of the method selected in the Adoption Agreement. 2A.4 1-Year Break-in-Service. The term 1-Year Break-in-Service means any Computation Period during which an Employee fails to complete more than 500 Hours of Service. 2A.5 Year(s) of Service. The term Year(s) of Service means a 12-consecutive month period ("Computation Period") during which an Employee has completed at least 1,000 Hours of Service. (a) Eligibility Computation Period. For purposes of determining Years of Service and Breaks-in-Service for eligibility, the 12-consecutive month period shall begin with the date on which the Employee first performs an Hour of Service for the Employer and, where additional periods are necessary, succeeding anniversaries of his employment commencement date. The employment commencement date is the date on which the Employee first performs an Hour of Service for the Employer maintaining the Plan. -22- 23 (b) Vesting Computation Period. As elected by the Employer in the Adoption Agreement, for computing Years of Service and Breaks-in-Service for vesting, the 12-consecutive month period: (1) Shall be the Plan Year; or (2) Shall begin with the date on which the Employee first performs an Hour of Service for the Employer and, where additional periods are necessary, succeeding anniversaries of that date. However, active participation as of the last day of the Plan Year is not required in order for a Participant to be credited with a Year of Service for vesting purposes. (c) Contribution Computation Period. If the Employer specifies an annual Contribution Period in its Adoption Agreement for the purpose of determining a Participant's eligibility to receive a contribution, the 12-consecutive month period shall be any Plan Year during which the Participant is credited with at least 1,000 Hours of Service. However, when an Employee first becomes a Participant or resumes active participation in the Plan following a 1-Year Break-in-Service on a date other than the first day of the Plan Year, all Hours of Service credited to the Participant during that Plan Year, including those Hours credited prior to the date the Employee enrolls (or reenrolls) as an Participant in the Plan shall be counted. Furthermore, the Employer may require in its Adoption Agreement that a Participant be a Participant as of the last day of the Plan Year in order to be eligible to receive a contribution for a Plan Year. (d) If in its Adoption Agreement the Employer permits Early Retirement, the 12-consecutive month period for determining Early Retirement shall be the Plan Year. However, active participation as of the last day of the Plan Year is not required in order for a Participant to be credited with a Year of Service. Service with a predecessor organization of the Employer shall be treated as Service with the Employer for the purposes of subsections (a), (b) and (d) above in any case in which the Employer maintains the plan of such predecessor organization. In addition, if elected by the Employer in the Adoption Agreement, service with a predecessor organization of the Employer shall be treated as Service with the Employer, even if the Employer does not maintain the plan of such predecessor organization. If elected in the Adoption Agreement, service with a subsidiary or affiliate of the Employer that is not related to the Employer under the provisions of Code sections 414(b), (c) or (m) shall be treated as Service with the Employer for purposes of (a), (b) and (d) above. 2A.6 Determining Vesting Percentage. Vesting credit shall be given for each Year of Service except those periods specifically excluded in the Adoption Agreement. -23- 24 If a Participant completes less than 1,000 Hours of Service during a Plan Year while remaining in the service of the Employer, his Vesting Percentage shall not be increased for such Plan Year. However, at such time as the Participant again completes at least 1,000 Hours of Service in any subsequent Plan Year, his Vesting Percentage shall then take into account all Years of Service with the Employer except those specifically excluded in the Adoption Agreement. If an individual who ceases to be an Employee and is subsequently rehired as an Employee enrolls (or reenrolls) in the Plan, upon his participation (or reparticipation) his Vesting Percentage shall then take into account all Years of Service except those specifically excluded in the Adoption Agreement. In the case of a Participant who has 5 consecutive 1-Year Breaks-in-Service, all Years of Service after such Breaks-in-Service will be disregarded for the purpose of vesting the Employer-derived account balance that accrued before such breaks. However, both pre-break and post-break Service will count for the purpose of vesting the Employer-derived account balance that accrues after such Breaks-in-Service. Both accounts will share in the earnings and losses of the fund. In the case of a Participant who does not have 5-consecutive 1-Year Breaks-in-Service, both the pre-break and post-break Service will count in vesting both the pre-break and post-break Employer-derived account balance. 2A.7 Excluded Years of Service for Vesting. In determining the Vesting Percentage of an Employee, all Years of Service with the Employer(s) maintaining the Plan shall be taken into account, except that the following periods may be excluded, as specified by the Employer in its Adoption Agreement: (a) Years of Service prior to the time a Participant attained age 18; (b) Years of Service during which the Employer did not maintain the Plan or a predecessor plan; (c) Years of Service during a period for which the Employee made no Required Employee Contributions; (d) Years of Service prior to any 1-Year Break-in-Service, until the Employee completes one Year of Service following such 1-Year Break-in-Service. (e) In the case of an Employee who has no Vested Interest in Employer contributions, Years of Service before any period of consecutive 1-Year Breaks-in-Service if the number of such consecutive 1-Year Breaks-in-Service equals or exceeds the greater of (i) 5, or (ii) the total number of Years of Service before such break. -24- 25 For the purposes of this Section, a predecessor plan shall mean a plan of the Employer that was terminated within five years preceding or following the Effective Date of this Plan. 2A.8 Change in Plan Years. If the Plan Year is changed, the following special rules shall apply. (a) Vesting Computation Periods. If the Vesting Computation Period is the Plan Year, Years of Service and 1-Year Breaks-in-Service shall be measured over two overlapping 12-consecutive month periods. The first such period shall begin on the first day of the last old Plan Year and the second such period shall begin on the first day of the first new Plan Year, thereby creating an overlap. All Hours of Service performed during the overlap period must be counted in both Vesting Computation Periods. A Participant who completes at least 1,000 Hours of Service during each such period shall be credited with two Years of Service for Vesting. (b) Contribution Computation Periods. To determine a Participant's eligibility to receive a contribution for a short Plan Year, the 1,000 Hours of Service requirement shall be prorated by multiplying by a fraction, the numerator of which is the number of full months in the short Plan Year and the denominator of which is 12. If the Employer has elected in the Adoption Agreement to determine Service based upon Elapsed Time, then the following Sections 2A.9 and 2A.10 shall apply. 2A.9 Elapsed Time. If the Employer has selected an eligibility requirement in the Adoption Agreement that is or includes a fractional Year(s) of Service requirement, the provisions of this Section shall apply. (a) For purposes of determining an Employee's initial or continued eligibility to participate in the Plan, or the Participant's Vested Interest in Employer contributions, an Employee will receive credit for the aggregate of all time period(s) commencing with the Employee's first day of employment or reemployment and ending on the date a Break-in-Service (as defined in this Section) begins. The first day of employment or reemployment is the first day the Employee performs an Hour of Service. An Employee will also receive credit for any Period of Severance of less than 12-consecutive months. Fractional periods of a year will be expressed in terms of days. (b) For purposes of this Section, "Hour of Service" shall mean each hour for which an Employee is paid or entitled to payment for the performance of duties for the Employer. (c) For purposes of this Section, a "Break-in-Service" is a Period of Severance of at least 12 consecutive months. (d) A "Period of Severance" is a continuous period of time during which the Employee is not employed by the Employer. Such period begins on the date the Employee retires, -25- 26 quits or is discharged, or if earlier, the 12-month anniversary of the date on which the Employee was otherwise first absent from Service. (e) In the case of an individual who is absent from work for maternity or paternity reasons, the 12-consecutive month period beginning on the first anniversary of the first day of such absence shall not constitute a Break-in-Service. For purposes of this paragraph, an absence from work for maternity or paternity reasons means an absence (1) by reason of the pregnancy of the individual, (2) by reason of the birth of a child of the individual, (3) by reason of the placement of a child with the individual in connection with the adoption of such child by such individual, or (4) for purposes of caring for such child for a period beginning immediately following such birth or placement. Each Employee will share in Employer contributions for the period beginning on the date the Employee commences participation under the Plan and ending on the date on which such Employee severs employment with the Employer or is no longer a member of an eligible class of Employees. (f) If the Employer is a member of an affiliated service group (under Code section 414(m)), a controlled group of corporations (under Code section 414(b)), a group of trades or businesses under common control (under Code section 414(c)) or any other entity required to be aggregated with the Employer pursuant to Code section 414(o), Service will be credited for any employment for any period of time for any other member of such group. Service will also be credited for any individual required under Code section 414(n) or Code section 414(o) to be considered an Employee of any Employer aggregated under Code sections 414(b), (c), or (m) of such group. 2A.10 Excluded Periods of Service for Vesting. In determining the Vesting Percentage of an Employee, all Periods of Service with the Employer(s) maintaining the Plan shall be taken into account, except that the following periods may be excluded, as specified by the Employer in its Adoption Agreement: (a) Periods of Service prior to the time a Participant attained age 18; (b) Periods of Service during which the Employer did not maintain the Plan or a predecessor plan; (c) Periods of Service during which the Employee made no Required Employee Contributions; (d) Periods of Service prior to any one-year Period of Severance, until the Employee completes a one-year period of Service following such Period of Severance; (e) In the case of an Employee who has no Vested Interest in Employer contributions, Periods of Service before any Period of Severance if the number of consecutive one- -26- 27 year Periods of Severance equals or exceeds the greater of (i) 5, or (ii) the total number of one-year Periods of Service before such Period of Severance. For the purposes of this Section, a predecessor plan shall mean a plan of the Employer that was terminated within five years preceding or following the Effective Date of this Plan. 2B. ELIGIBILITY, ENROLLMENT AND PARTICIPATION 2B.1 Eligibility. Each Employee shall be eligible to participate in the Plan and receive an appropriate allocation of Employer contributions as of the Entry Date following the day he meets the following requirements, if any, specified by the Employer in its Adoption Agreement, relating to: (a) Required service; (b) Minimum attained age; (c) Job class requirements. In addition to the eligibility conditions stated above, the Employer may specify in the Adoption Agreement certain groups of Employees who are not eligible to participate in the Plan. Notwithstanding the foregoing, if the Employer's Plan as set forth herein replaces or amends a preceding plan, then those Employees participating under the Plan as written prior to such replacement or amendment shall be eligible to be Participants hereunder without regard to length of Service or minimum attained age otherwise required herein. 2B.2 Enrollment. Each eligible Employee may enroll as of his Entry Date by completing and delivering to the Plan Administrator an enrollment form and, if applicable, a payroll deduction authorization and/or a Salary Deferral Agreement. 2B.3 Reemployed Participant. In the case of an individual who ceases to be an Employee and is subsequently rehired as an Employee, the following provisions shall apply in determining eligibility to again participate in the Plan: (a) If the Employee had met the eligibility requirements as specified in Section 2B.1, such Employee will become a Participant in the Plan in accordance with Section 2B.2 as of the date he is reemployed as an Employee. (b) If the Employee had not formerly met the eligibility requirements specified in Section 2B.1, such Employee will become a Participant in the Plan after meeting the requirements of Section 2B.1 in accordance with Section 2B.2. -27- 28 2B.4 Eligible Class. If a Participant becomes ineligible to participate because he is no longer a member of an eligible class of Employees, such Employee shall participate immediately upon his return to an eligible class of Employees. If such Participant incurs a Break-in-Service, eligibility will be determined under the Break-in-Service rules of the Plan. If an Employee who is not a member of the eligible class of Employees becomes a member of the eligible class, such Employee shall participate immediately if such Employee has satisfied the minimum age and Service requirements and would have previously become a Participant had he been in the eligible class. If such Participant incurs a Break-in-Service, eligibility will be determined under the Break-in-Service rules of the Plan. 2B.5 Waiver of Participation. Notwithstanding any provision of the Plan to the contrary, if Required Employee Contributions are elected by the Employer in the Adoption Agreement, any Employee in accordance with the rules of the Plan may decline to become a Participant or cease to be a Participant by filing a written waiver of participation with the Plan Administrator in the manner prescribed. Such waiver must be filed prior to the date such Employee is eligible to become a Participant, or in the case of a current Participant, in the last month of the Plan Year immediately preceding the Plan Year for which he wishes to cease being a Participant. Any Employee who files such a waiver shall not become a Participant, or if a current Participant, shall elect to cease to be such as of the first day of the succeeding Plan Year; and such Employee shall not receive any additional Compensation or other sums by reason of his waiver of participation. Any such waiver may be rescinded by an Employee who is not a Partner effective on the first day of the first Plan Year following one or more Plan Years commencing after the filing of such waiver in which he was not a Participant, in which event he shall become a Participant, or again become a Participant, as the case may be, effective as of such date. A Partner may make a one-time irrevocable waiver of participation upon the later of his commencement of employment with the Employer or the date he is first eligible to participate in the Plan. No Employee who is eligible to participate in a standardized plan may waive participation or voluntarily reduce his or her Compensation for purposes of this Plan. 2B.6 Trades or Businesses Controlled by Owner-Employees. If this Plan provides contributions or benefits for one or more Owner-Employees who control both the business for which this Plan is established and one or more other trades or businesses, this Plan and any plans established for other trades or businesses must, when looked at as a single plan, satisfy Code sections 401(a) and (d) for the Employees of this and all other trades or businesses. If the Plan provides contributions or benefits for one or more Owner-Employees who control one or more other trades or businesses, the employees of the other trades or businesses must be included in a plan which satisfies Code sections 401(a) and (d) and which provides contributions and benefits not less favorable than those provided for Owner-Employees under this Plan. -28- 29 If an individual is covered as an Owner-Employee under the plans of two or more trades or businesses which he does not control and the individual controls a trade or business, then the contributions or benefits of the Employees under the plan of the trades or businesses which he does control must be as favorable as those provided for him under the most favorable plan of the trade or business which he does not control. For purposes of the preceding paragraphs, an Owner-Employee or two or more Owner-Employees will be considered to control a trade or business if the Owner-Employee or two or more Owner-Employees together: (1) own the entire interest in an unincorporated trade or business, or (2) in the case of a partnership, own more than 50 percent of either the capital interest or the profits interest in the partnership. For purposes of the preceding sentence, an Owner-Employee or two or more Owner-Employees shall be treated as owning any interest in a Partnership that is owned, directly or indirectly, by a Partnership which such Owner-Employee or such two or more Owner-Employees are considered to control within the meaning of the preceding sentence. 2C. CONTRIBUTIONS AND ALLOCATIONS 2C.1 Profit Sharing/Thrift Plan with 401(k) Feature. (a) Contributions - Employer. For each Plan Year, as specified in the Adoption Agreement, the Employer shall make one or more of the following contributions. (1) Elective Deferral Contributions. (2) Matching Contributions. (3) Nonelective Contributions. (b) Contributions - Participant. For each Plan Year, as specified in the Adoption Agreement, each Participant may make periodic Required Employee Contributions or Voluntary Employee Contributions. For Plans that contain a CODA, a Participant may elect to make a Voluntary Employee Contribution in a lump sum. Such lump sum Voluntary Employee Contribution may be made (1) as of the Effective Date, or (2) as elected by the Employer in the Adoption Agreement. Voluntary Employee Contributions shall be subject to the terms of Section 4B. (c) Fail-Safe Contribution. The Employer reserves the right to make a discretionary Nonelective Contribution to the Plan for any Plan Year, if the Employer determines -29- 30 that such a contribution is necessary to ensure the Actual Deferral Percentage test or the Actual Contribution Percentage test will be satisfied for that Plan Year. Such amount shall be designated by the Employer at the time of contribution as a Qualified Nonelective Contribution and shall be known as a Fail-Safe Contribution. The Fail-Safe Contribution shall be made on behalf of all eligible non-Highly Compensated Employees who are Participants and who are considered under the Actual Deferral Percentage test or, if applicable, the Actual Contribution Percentage test, and shall be allocated to the Participant's Account of each such Participant in an amount equal to a fixed percentage of such Participant's Compensation. The fixed percentage shall be equal to the minimum fixed percentage necessary to be contributed by the Employer on behalf of each eligible non-Highly Compensated Employee who is a Participant so that the Actual Deferral Percentage test or, if applicable, the Actual Contribution Percentage test, is satisfied. (d) Contributions - Changes. For each Plan Year, a Participant may change the amount of his Required Employee Contributions, Voluntary Employee Contributions, or Elective Deferral Contributions as often as the Plan Administrator allows (on a consistent and nondiscriminatory basis), on certain dates prescribed by the Plan Administrator. (e) Contributions - Timing. (1) Elective Deferral Contributions shall be paid by the Employer to the Trust or the Insurance Company, as elected by the Employer in the Adoption Agreement, but never later than 90 days following the date of deferral. (2) Matching Contributions made on other than an annual basis shall be paid to the Trust or Insurance Company, as elected by the Employer in the Adoption Agreement. Matching Contributions, including Additional Matching Contributions, made on an annual basis shall be paid to the Trust or the Insurance Company, as applicable, at the end of the Plan Year, or as soon as possible on or after the last day of such Plan Year, but in no event later than the date prescribed by law for filing the Employer's income tax return, including any extension thereof. To the extent that Matching Contributions are used to purchase Life Insurance Policies, then such contributions for any Plan Year may be paid to the Trust when premiums for such Policies are due during the Plan Year. (3) Nonelective Contributions made on other than an annual basis shall be paid to the Trust or Insurance Company, as applicable, as elected by the Employer in the Adoption Agreement. Nonelective Contributions made on an annual basis shall be paid to the Trust or the Insurance Company, as applicable, at the end of the Plan Year, or as soon as possible on or after the last day of such Plan Year, but in any event not later than the date prescribed by law for filing the Employer's income tax return, including any extension thereof. To the extent that Nonelective Contributions are used to purchase Life Insurance Policies, then such contributions for any Plan Year may be paid to the Trust when premiums for such Policies are due during the Plan Year. -30- 31 (4) Employee Contributions shall be transferred by the Employer to the Trust or the Insurance Company, as elected by the Employer in the Adoption Agreement, but never later than 90 days following the date such contributions are made by the Employee. (5) The Fail-Safe Contribution for any Plan Year as determined above shall be paid to the Insurance Company at the end of the Plan Year, or as soon as possible on or after the last day of such Plan Year, but in no event later than the date which is prescribed by law for filing the Employer's income tax return, including any extensions thereof. (f) Contributions - Allocations. The allocation of Nonelective Contributions shall be made in accordance with (1), (2), (3) or (4) below, as specified by the Employer in the Adoption Agreement. (1) Formula A: Compensation Ratio - Not Integrated with Social Security. The allocation to each Participant shall be made in the proportion that the Compensation paid to each Participant eligible to receive an allocation bears to the Compensation paid to all Participants eligible to receive an allocation. (2) Formula B: Integrated with Social Security - Step Rate Method. Base Contribution: An amount equal to a percentage (as specified in the Adoption Agreement) of the Compensation of each Participant up to the Social Security Integration Level; Excess Contribution: In addition, an amount equal to a percentage (as specified in the Adoption Agreement) of the Participant's Compensation which is in excess of the Social Security Integration Level, subject to the Limitations on Allocations in accordance with Section 4B. This Excess Contribution percentage shall not exceed the lesser of: (A) twice the Base Contribution or (B) the Base Contribution plus the greater of: (i) the old age insurance portion of the Old Age Survivor Disability (OASDI) tax rate; or (ii) 5.7%. If the Employer has elected in the Adoption Agreement to use a Social Security Integration Level that in any Plan Year is the greater of $10,000 or 20% but less than 100% of the Social Security Taxable Wage Base, then the 5.7% limitation specified in 2C.1(f)(2)(B)(ii) shall be adjusted in accordance with the following table: -31- 32
IF THE SOCIAL SECURITY INTEGRATION LEVEL - ------------------------------------------------------------ ADJUST IS MORE THAN BUT NOT MORE THAN 5.7% TO ------------ ----------------- ------- the greater of $10,000 or 20% 80% of the Social Security 4.3% of the Social Security Taxable Taxable Wage Base Wage Base 80% of the Social Security 100% of the Social Security 5.4% Taxable Wage Base Taxable Wage Base
In the case of any Participant who has exceeded the Cumulative Permitted Disparity Limit described in Section 2C.1(g), Nonelective Contributions shall be allocated in an amount equal to the Excess Contribution percentage of two times such Participant's total Compensation for the Plan Year. Any remaining Nonelective Contributions or Forfeitures will be allocated to each Participant's Account in the ratio that each Participant's total Compensation for the Plan Year bears to all Participants' total Compensation for that Plan Year. (3) Formula B: Integrated with Social Security - Maximum Disparity Method. Subject to the Limitations on Allocations specified in Section 4B, for each Plan Year the allocation to each Participant shall be made in accordance with the following: (A) An amount equal to 5.7% of the sum of each Participant's total Compensation plus Compensation that is in excess of the Social Security Integration Level shall be allocated to each Participant's Account. If the Employer does not contribute such amount for all Participants, an amount shall be allocated to each Participant's Account equal to the same proportion that each Participant's total Compensation plus Compensation that is in excess of the Social Security Integration Level bears to the total Compensation plus Compensation in excess of the Social Security Integration Level of all Participants in the Plan. In the case of any Participant who has exceeded the Cumulative Permitted Disparity Limit described in Section 2C.1(g), two times such Participant's total Compensation for the Plan Year will be taken into account. If the Employer has elected in the Adoption Agreement to use a Social Security Integration Level that in any Plan Year is the greater of $10,000 or 20% but less than 100% of the Social Security Taxable Wage Base, then the 5.7% limitation specified in this subsection shall be adjusted in accordance with the following table: -32- 33
IF THE SOCIAL SECURITY INTEGRATION LEVEL - ------------------------------------------------------------ ADJUST IS MORE THAN BUT NOT MORE THAN 5.7% TO ------------ ----------------- ------- the greater of $10,000 or 20% 80% of the Social Security 4.3% of the Social Security Taxable Taxable Wage Base Wage Base 80% of the Social Security 100% of the Social Security 5.4% Taxable Wage Base Taxable Wage Base
(B) The balance of the Nonelective Contribution (if any) shall be allocated to the Participant's Account in the proportion that each Participant's Compensation bears to the total Compensation of all Participants. (4) Formula C: Flat Dollar Amount. The allocation to each Participant shall be a flat dollar amount as elected by the Employer in the Adoption Agreement. Formula C may not be elected under a standardized plan. (g) Allocation Requirements. Employer contributions shall be allocated to the accounts of Participants in accordance with the allocation requirement as specified by the Employer in its Adoption Agreement. If the Employer has adopted a standardized plan, the allocation of any nonannual contribution made by the Employer shall be made to each Participant who is a Participant on any day of the Contribution Period regardless of Hours of Service. Annual Overall Permitted Disparity Limit. Notwithstanding the preceding paragraph, for any Plan Year this Plan benefits any Participant who benefits under another qualified plan or simplified employee pension plan, as defined in Code section 408(k), maintained by the Employer that provides for permitted disparity (or imputes disparity), Employer contributions and Forfeitures will be allocated to the account of each Participant who either completes more than 500 Hours of Service during the Plan Year or who is employed as of the last day of the Plan Year in the ratio that such Participant's total Compensation bears to the total Compensation of all Participants. Cumulative Permitted Disparity Limit. Effective for Plan Years beginning on or after January 1, 1995, the Cumulative Permitted Disparity Limit for a Participant is 35 total cumulative permitted disparity years. Total cumulative permitted years mean the number of years credited to the Participant for allocation or accrual purposes under this Plan, any other qualified plan or simplified employee pension plan (whether or not terminated) ever maintained by the Employer. For purposes of determining the Participant's Cumulative Permitted Disparity Limit, all years ending in the same calendar year are treated as the same year. If the Participant has not benefitted under a -33- 34 defined benefit or target benefit plan for any year beginning on or after January 1, 1994, the Participant has no Cumulative Permitted Disparity Limit. (h) Forfeitures. Forfeitures will be used in the manner elected in the Adoption Agreement as follows: (1) To reduce Employer contributions or pay Plan expenses; or (2) Allocated in accordance with the allocation formula elected in the Adoption Agreement; or (3) First, to reduce Employer contributions or pay Plan expenses, with any remaining Forfeitures allocated in accordance with the allocation formula elected in the Adoption Agreement. (i) Expenses. The Employer may contribute to the Plan the amount necessary to pay any reasonable expenses of administering the Plan. In lieu of the Employer contributing the amount necessary to pay such charges, these expenses may be paid from Plan assets. (j) Special Rules - Elective Deferral Contributions. (1) Each Participant may elect to defer his Compensation in an amount specified in the Adoption Agreement, subject to the limitations of this Section. A Salary Deferral Agreement (or modification of an earlier Salary Deferral Agreement) may not be made with respect to Compensation which is currently available on or before the date the Participant executed such election, or if later, the later of the date the Employer adopts this CODA, or the date such arrangement first becomes effective. Any elections made pursuant to this Section shall become effective as soon as administratively feasible. (2) If elected by the Employer in the Adoption Agreement, each Participant may elect to defer and have allocated for a Plan Year all or a portion of any cash bonus paid during the Plan Year. A deferral election may not be made with respect to cash bonuses which are currently available on or before the date the Participant executed such election. (3) Elective Deferral Contributions will be allocated to the Participant's Account and shall be 100 percent vested and nonforfeitable at all times. (4) During any taxable year, no Participant shall be permitted to have Elective Deferral Contributions made under this Plan, or any other qualified plan maintained by the Employer, in excess of the dollar limitation contained in Code section 402(g) in effect at the beginning of such taxable year. If a Participant takes a withdrawal of Elective Deferral Contributions due to a Serious Financial Hardship, as provided in Section 3E.5, his Elective Deferral Contributions for his taxable year immediately following the taxable year of such distribution may -34- 35 not exceed the Code section 402(g) limit for such taxable year less the amount of Elective Deferral Contributions made for the Participant in the taxable year of the distribution. (5) Elective Deferral Contributions that are not in excess of the limits described in subsection (4) above shall be subject to the Limitations on Allocations in accordance with Section 4B. Elective Deferral Contributions that are in excess of the limits described in (4) above shall also be subject to the Section 4B limitations, as further provided in Section 4C.2. (6) An Employee's eligibility to make Elective Deferral Contributions under a CODA may not be conditioned upon the completion of more than one (1) Year-of-Service or the attainment of more than age twenty-one (21). (7) A Participant may modify the amount of Elective Deferral Contributions such Participant makes to the Plan as often as the Plan Administrator allows, as specified in the Adoption Agreement, but in no event not less frequently than once per calendar year. Such modification may be made by filing a written notice with the Plan Administrator within the time period prescribed by the Plan Administrator. (k) Suspension of Contributions. (1) Elective Deferral Contributions. The following provisions shall apply with respect to suspension of Elective Deferral Contributions. (A) Voluntary Suspension. A Participant may elect to suspend his Salary Deferral Agreement for Elective Deferral Contributions by filing a written notice thereof with the Plan Administrator. Such Contributions shall be suspended on the date specified in such notice, which date must be at least 15 days after such notice is filed. The notice shall specify the period for which such suspension shall be effective. (B) Suspension for Leave. A Participant who is absent from employment on account of an authorized unpaid leave of absence or military leave shall have his Salary Deferral Agreement suspended during such leave. Such suspension of contributions shall be effective on the date payment of Compensation by the Employer to him ceases, and shall remain in effect until payment of Compensation resumes. (C) Withdrawal Suspension. A Participant who elects a withdrawal in accordance with Section 3E may have his Elective Deferral Contributions suspended on the date such election becomes effective. Such suspension shall remain in effect for the number of months specified therein. -35- 36 (D) Non-Elective Suspension. A Participant who ceases to meet the eligibility requirements as specified in Section 2B.1 but who remains in the employ of the Employer shall have his Elective Deferral Contributions suspended, effective as of the date he ceases to meet the eligibility requirements. Such suspension shall remain in effect until he again meets such eligibility requirements. The Participant may elect to reactivate his Salary Deferral Agreement for Elective Deferral Contributions by filing a written notice thereof with the Plan Administrator. The Salary Deferral Agreement shall be reactivated following the expiration of the suspension period described above. (2) Required Employee Contributions. The following provisions shall apply with respect to suspension of Required Employee Contributions by Participants. In the event that a Participant suspends his Required Employee Contributions, he shall automatically have his Voluntary Employee Contributions suspended for the same period of time. (A) Voluntary Suspension. A Participant may elect to suspend his payroll deduction authorization for his Required Employee Contributions by filing a written notice thereof with the Plan Administrator. Such notice shall be effective, and his applicable contributions shall be suspended, on the date specified in such notice, which date must be at least 15 days after such notice is filed. The notice shall specify the period for which such suspension shall be effective. Such period must be a minimum of one month and may extend indefinitely. (B) Suspension for Leave. A Participant who is absent from employment on account of an authorized unpaid leave of absence or military leave shall have his payroll deduction authorization for Required Employee Contributions suspended during such leave. Such suspension of contributions shall be effective on the date payment of Compensation by the Employer to him ceases, and shall remain in effect until payment of Compensation resumes. (C) Withdrawal Suspension. A Participant who elects a withdrawal in accordance with Section 3E may have his Required Employee Contributions suspended on the date such election becomes effective. Such suspension shall remain in effect for the number of months specified under the provisions of Section 3E. (D) Involuntary Suspension. A Participant who ceases to meet the eligibility requirements as specified in Section 2B.1 but who remains in the employ of the Employer shall have his Required Employee Contributions suspended, effective as of the date he ceases to meet the eligibility requirements. Such suspension shall remain in effect until he again meets such eligibility requirements. The Participant may elect to reactivate his payroll deduction authorization by filing a written notice thereof with the Plan Administrator. The payroll deduction authorization shall be reactivated following the expiration of the suspension period described above. -36- 37 (3) Voluntary Employee Contributions. The following provisions apply with respect to suspension of Voluntary Employee Contributions by Participants. (A) Voluntary Suspension. A Participant may elect to suspend his payroll deduction authorization for his Voluntary Employee Contributions by filing a written notice thereof with the Plan Administrator. Such notice shall be effective, and his applicable contributions shall be suspended, on the date specified in such contributions shall be suspended, on the date specified in such notice, which date must be at least 15 days after such notice is filed. The notice shall specify the period for which such suspension shall be effective. (B) Suspension for Leave. A Participant who is absent from employment on account of an authorized unpaid leave of absence or military leave shall have his payroll deduction order for Voluntary Employee Contributions suspended during such leave. Such suspension of contributions shall be effective on the date payment of Compensation by the Employer to him ceases, and shall remain in effect until payment of Compensation resumes. (C) Withdrawal Suspension. A Participant who elects a withdrawal in accordance with Section 3E may have his Voluntary Employee Contributions suspended on the date such election becomes effective. Such suspension shall remain in effect for the number of months specified therein. (D) Involuntary Suspension. A Participant who ceases to meet the eligibility requirements as specified in Section 2B.1 but who remains in the employ of the Employer shall have his Voluntary Employee Contributions suspended, effective as of the date he ceases to meet the eligibility requirements. Such suspension shall remain in effect until he again meets such eligibility requirements. The Participant may elect to reactivate his payroll deduction authorization by filing a written notice thereof with the Plan Administrator. The payroll deduction authorization shall be reactivated following the expiration of the suspension period described above. 2C.2 Money Purchase Pension Plan. (a) Contributions - Employer. As specified in the Adoption Agreement, the Employer shall contribute an amount equal to a fixed percentage of each Participant's Compensation, a flat dollar amount, or an amount integrated with Social Security in accordance with (1), (2) or (3) below: (1) Formula A: Not Integrated with Social Security. An amount equal to a percentage from 1% to 25% of the Compensation of each Participant, as elected by the Employer in the Adoption Agreement, subject to the Limitations on Allocations in accordance with Section 4B. (2) Formula B: Flat Dollar Amount. An amount, as elected by the Employer in the Adoption Agreement. Formula B may not be elected under a standardized plan. -37- 38 (3) Formula C: Integrated with Social Security. Base Contribution: An amount equal to a percentage (as specified in tile Adoption Agreement) of Compensation of each Participant up to the Social Security Integration Level; Excess Contribution: In addition, an amount equal to a percentage (as specified in the Adoption Agreement) of the Participant's Compensation which is in excess of the Social Security Integration Level, subject to the Limitations on Allocations in accordance with Section 4B. This Excess Contribution percentage shall not exceed the lesser of: (A) twice the Base Contribution or (B) the Base Contribution plus the greater of: (i) old age insurance portion of the Old Age Survivor Disability (OASDI) tax rate; or (ii) 5.7%. If the Employer has elected in the Adoption Agreement to use a Social Security Integration Level that in any Plan Year is the greater of $10,000 or 20% but less than 100% of the Social Security Taxable Wage Base, then the 5.7% limitation specified in 2C.2(a)(3)(B)(ii) shall be adjusted in accordance with the following table:
IF THE SOCIAL SECURITY INTEGRATION LEVEL - ------------------------------------------------------------ ADJUST IS MORE THAN BUT NOT MORE THAN 5.7% TO ------------ ----------------- ------- the greater of $10,000 or 20% 80% of the Social Security 4.3% of the Social Security Taxable Taxable Wage Base Wage Base 80% of the Social Security 100% of the Social Security 5.4% Taxable Wage Base Taxable Wage Base
However, in the case of any Participant who has exceeded the Cumulative Permitted Disparity Limit described below, the Employer will contribute for each Participant who either completes more than 500 Hours of Service during the Plan Year or is employed on the last day of the Plan Year, an amount equal to the Excess Contribution percentage multiplied by the Participant's total Compensation. Annual Overall Permitted Disparity Limit. Notwithstanding the preceding provisions of this Section 2C.2(a), for any Plan Year this Plan benefits any Participant who benefits under another qualified plan or simplified employee pension plan, as defined in Code -38- 39 section 408(k), maintained by the Employer that provides for permitted disparity (or imputes disparity), Employer contributions and Forfeitures will be allocated to the account of each Participant who either completes more than 500 Hours of Service during the Plan Year or who is employed as of the last day of the Plan Year in the ratio that such Participant's total Compensation bears to the total Compensation of all Participants. Cumulative Permitted Disparity Limit. Effective for Plan Years beginning on or after January 1, 1995, the Cumulative Permitted Disparity Limit for a Participant is 35 total cumulative permitted disparity years. Total cumulative permitted years mean the number of years credited to the Participant for allocation or accrual purposes under this Plan, any other qualified plan or simplified employee pension plan (whether or not terminated) ever maintained by the Employer. For purposes of determining the Participant's Cumulative Permitted Disparity Limit, all years ending in the same calendar year are treated as the same year. If the Participant has not benefitted under a defined benefit or target benefit plan for any year beginning on or after January 1, 1994, the Participant has no Cumulative Permitted Disparity Limit. (b) Contributions - Participant. The Plan Administrator will not accept Required Employee Contributions or Voluntary Employee Contributions that are made for Plan Years beginning after the Plan Year in which this document is being adopted by the Employer. Required Employee Contributions and Voluntary Employee Contributions for Plan Years beginning after December 31, 1986, but before the Plan Year in which this document is adopted, will be limited so as to meet the nondiscrimination test of Code section 401(m) as provided in Section 4A.4. (c) Contributions - Timing. Contributions made on other than an annual basis shall be paid to the Trust or Insurance Company, as applicable, not less frequently than monthly or every four weeks. Contributions made on an annual basis shall be paid to the Trust or the Insurance Company, as applicable, at the end of the Plan Year, or as soon as possible on or after the last day of such Plan Year, but in any event not later than the date prescribed by law for filing the Employer's income tax return, including any extension thereof. To the extent that contributions are used to purchase Life Insurance Policies, such contributions for any Plan Year may be paid to the Trust when premiums for such Policies are due during the Plan Year. (d) Contributions - Allocation. Employer Contributions shall be allocated to the Participants' Account in accordance with the allocation requirements as specified by the Employer in the Adoption Agreement. If the Employer has adopted a standardized plan, the allocation of any nonannual contribution made by the Employer shall be made for each Participant who is a Participant on any day of the Contribution Period regardless of Hours of Service. (e) Forfeitures. Forfeitures will be used in the manner elected in the Adoption Agreement as follows: (1) To reduce Employer contributions or pay Plan expenses; or -39- 40 (2) Allocated in the same manner elected in the Adoption Agreement for the allocation of Employer contributions; or (3) First, to reduce Employer contributions or pay Plan expenses, with any remaining Forfeitures allocated in the same manner elected in the Adoption Agreement for the allocation of Employer contributions. (f) Expenses. The Employer may contribute to the Plan the amount necessary to pay any applicable expense charges and administration charges. In lieu of the Employer contributing the amount necessary to pay such charges, these expenses may be paid from Plan assets. 2C.3 Rollover Contributions. If elected by the Employer in the Adoption Agreement, and without regard to the limitations imposed under Section 4B, the Plan may receive Rollover Contributions on behalf of an Employee, if the Employee is so entitled under Code sections 402(c), 403(a)(4), or 408(d)(3)(A). Contributions may be rolled over either directly or indirectly, in the form of cash, and may be all or a portion of the funds eligible for rollover. Receipt of Rollover Contributions shall be subject to the approval of the Plan Administrator. Before approving the receipt of a Rollover Contribution, the Plan Administrator may request any documents or other information from an Employee or opinions of counsel which the Plan Administrator deems necessary to establish that such amount is a Rollover Contribution. If Rollover Contributions are elected by the Employer in the Adoption Agreement, they may be received from an Employee who is not otherwise eligible to participate in the Plan. Rollover Contributions may be withdrawn by such Employee pursuant to the provisions of the Adoption Agreement and Section 3E. In addition, such Employee may direct the investment and transfer of amounts in his Participant's Account pursuant to the terms of Section 5A. Upon Termination of Employment, such Employee shall be entitled to a distribution of his Participant's Account. 2C.4 Contributions Subject to Davis-Bacon Act. If the Employer designates under the Adoption Agreement that Employer contributions are to be made in different amounts for different contracts subject to the Davis-Bacon Act or other Prevailing Wage Law, the Employer shall file with the Plan Administrator an irrevocable written designation for each Prevailing Wage Law project, stating the hourly contribution rate to be contributed to the Plan by the Employer for each class of Employees working on the project in order to comply with the Prevailing Wage Law applicable to the project. The contribution rate designation shall be irrevocable with respect to work on that project, although the hourly contribution rate may be increased prospectively by the filing of a new written contribution rate designation with the Plan Administrator. 2C.5 QVEC Contributions. The Plan Administrator will not accept QVEC Contributions which are made for a taxable year beginning after December 31, 1986. Contributions made prior to that date will be maintained in a separate account that will be nonforfeitable at all times. The account will share in the gains and losses under the Plan in the same manner as described in Section 5A.3 of the Plan. No part of the QVEC Contributions portion of the Participant's Account -40- 41 will be used to purchase Life Insurance Policies. No part of the QVEC Contributions portion of the Participant's Account will be available for loans. Subject to Section 3C, Joint and Survivor Annuity Requirements (if applicable), the Participant may withdraw any part of his QVEC Contributions by making a written application to the Plan Administrator. ARTICLE III - DISTRIBUTIONS 3A. TIMING AND FORM OF BENEFITS 3A.1 Payment of Benefits. The rules and procedures for electing the timing and form of distribution effective for each Participant or Beneficiary shall be formulated and administered by the Plan Administrator in a consistent manner for all Participants in similar circumstances. For money purchase and target benefit plans, the normal form of distribution shall be a Life Annuity. For a profit sharing plan, the normal form of distribution shall be cash. For any plan, the distribution shall be made within an administratively reasonable time following the date the application for distribution is filed with the Plan Administrator. If elected by the Employer in the Adoption Agreement, a Participant, or his Beneficiary as the case may be, may elect to receive distribution of all or a portion of his Vested Interest in one or a combination of the following forms of payment: (a) Single sum cash payment; (b) Life Annuity; (c) Installment Payments (i.e., a series of periodic single-sum cash payments over time, with no life contingency); (d) Installment Refund Annuity (i.e., an Annuity that provides for fixed monthly payments for a period certain of not less than 3 nor more than 15 years. If a Participant dies before the period certain expires, the Annuity will be paid to the Participant's Beneficiary for the remainder of the period certain. The period certain shall be chosen by the Participant at the time the Annuity is purchased with the Participant's Vested Interest. The Installment Refund Annuity is not a Life Annuity and in no event shall the period certain extend to a period which equals or exceeds the life expectancy of the Participant); (e) Employer stock, to the extent the Participant is invested therein. All distributions are subject to the provisions of Section 3C, Joint and Survivor Annuity Requirements. If the value of a Participant's Vested Interest has never exceeded $3,500 at anytime, the Employer shall indicate in the Adoption Agreement whether a distribution shall be made in the form of a single sum cash payment upon such Participant's Termination of Employment -41- 42 and may not be deferred or the Participant may elect to defer distribution until the April 1 following the calendar year in which he reaches age 70-1/2. If the Employer permits Participants to defer such distributions, failure to make an election will be deemed to be an election to defer to the April 1 following the calendar year in which the Participant reaches age 70-1/2. If the Participant's Vested Interest exceeds (or at the time of any prior distribution exceeded) $3,500, and such amount is immediately distributable, the Participant and the Participant's Spouse, if required (or where either the Participant or the Spouse has died, the survivor) must consent to any distribution of such account balance. The consent of the Participant and the Participant's Spouse, if required, shall be obtained in writing within the 90-day period ending on the Annuity Starting Date. The "Annuity Starting Date" is the first day of the first period for which an amount is paid as an Annuity or any other form. An account balance is considered immediately distributable if any part of the account balance could be distributed to the Participant (or surviving Spouse) before the Participant attains (or would have attained if not deceased) the later of Normal Retirement Age or age 62. Instead of consenting to a distribution, the Participant may elect to defer the distribution until the April 1 following the calendar year in which he reaches age 70-1/2. Failure to make an election will be deemed to be an election to defer to the April 1 following the calendar year in which he reaches age 70-1/2. The Plan Administrator shall notify the Participant and the Participant's Spouse of the right to defer any distribution. Such notification shall include a general description of the material features and an explanation of the relative values of the optional forms of benefit available under the Plan in a manner that would satisfy the notice requirements of Code section 417(a)(3), and shall be provided no less than 30 days and no more than 90 days prior to the Annuity Starting Date. If the distribution is one to which Code sections 401(a)(11) and 417 do not apply, such distribution may commence less than 30 days after the notice required under Code regulation section 1.411(a)-11(c) is given, provided that: (a) The Plan Administrator clearly informs the Participant that the Participant has a right to a period of at least 30 days after receiving the notice to consider the decision of whether or not to elect a distribution (and, if applicable, a particular distribution option); and (b) The Participant, after receiving the notice, affirmatively elects a distribution. Notwithstanding the foregoing, only the Participant need consent to the commencement of a distribution in the form of a Qualified Joint and Survivor Annuity while the account balance is immediately distributable. Furthermore, if payment in the form of a Qualified Joint and Survivor Annuity is not required with respect to the Participant pursuant to Section 3C.6 of the Plan, only the Participant need consent to the distribution of an account balance that is -42- 43 immediately distributable. Neither the consent of the Participant nor the Participant's Spouse shall be required to the extent that a distribution is required to satisfy Code section 401(a)(9) or section 415. In addition, upon termination of this Plan, if the Plan does not offer an annuity option (purchased from a commercial provider) and if the Employer or any entity within the same controlled group as the Employer does not maintain another defined contribution plan (other than an employee stock ownership plan as defined in Code section 4975(e)(7)), the Participant's account balance will, without the Participant's consent, be distributed to the Participant. However, if any entity within the same controlled group as the Employer maintains another defined contribution plan (other than an employee stock ownership plan as defined in Code section 4975(e)(7), then the Participant's account balance will be transferred without the Participant's consent to the other plan if the Participant does not consent to an immediate distribution. For purposes of determining the applicability of the foregoing consent requirements to distributions made before the first day of the first Plan Year beginning after December 31, 1988, the Participant's vested account balance shall not include amounts attributable to QVEC Contributions made between December 31, 1981 and January 1, 1987, plus gains and minus losses thereon ("accumulated QVEC Contributions"). The terms of any annuity contract purchased and distributed by the Plan to a Participant or Spouse shall comply with the requirements of this Plan. A Participant who terminates employment and does not consent to an immediate distribution shall have his distribution deferred. Such a distribution shall commence no later than the April 1 following the date the Participant attains age of 70-1/2. Loans may not be initiated for Participants covered by this paragraph except if, after his Termination of Employment, the Participant is still a party-in-interest (as defined in ERISA). A Participant who continues to maintain an account balance under the Plan may elect to withdraw an amount which is equal to any whole percentage (not to exceed 100%) from his Participant's Account. Such an election shall be made in accordance with Section 3E. Such Participant as described herein shall have the authority to direct the transfer of his Vested Interest in accordance with Section 5A.2. The election to defer distribution may be revoked at any time by submitting a written request to the Plan Administrator. Any Forfeiture attributable to withdrawals shall be subject to the requirements of Sections 3D.1 and 3E.8 of the Plan. A Participant whose Termination of Employment is on or after his Early Retirement Date may elect to defer the distribution subject to the requirements of Section 3B. 3A.2 Commencement of Benefits. Unless the Participant elects otherwise, distribution of benefits will begin no later than the 60th day after the latest of the close of the Plan Year in which: (a) The Participant attains age 65 (or Normal Retirement Age, if earlier); (b) The 10th anniversary of the year in which the Participant commenced participation in the Plan occurs; or, (c) The Participant terminates Service with the Employer. -43- 44 Notwithstanding the foregoing, the failure of a Participant and Spouse to consent to a distribution, if required, while a benefit is immediately distributable within the meaning of Section 3A.1 of the Plan, shall be deemed to be an election to defer distribution to the date the Participant attains age 70-1/2. However, in no event shall distribution of that portion of a Participant's Account attributable to Elective Deferral Contributions, Qualified Matching Contributions, and Qualified Nonelective Contributions be made prior to the earliest of the Participant's Retirement, death, Disability, separation from Service, attainment of age 59-1/2, or, with respect to Elective Deferral Contributions only, due to Serious Financial Hardship, unless such distribution is made on account of: (a) The Employer's sale, to an unrelated entity, of its interest in a subsidiary (within the meaning of Code section 409(d)(3)), where the Employer continues to maintain this Plan and the Participant continues employment with the subsidiary; or (b) The Employer's sale, to an unrelated corporation, of substantially all assets (within the meaning of Code section 409(d)(2)) used in its trade or business, where the Employer continues to maintain this Plan and the Participant continues employment with the employer acquiring such assets; or (c) The termination of the Plan, as provided in Section 7B, without the establishment of another defined contribution plan, other than an employee stock ownership plan (as defined in Code sections 4975(e) or 409) or a simplified employee pension plan as defined in Code section 408(k). All distributions that may be made in accordance with one or more of the preceding distributable events are subject to the spousal and Participant consent requirements (if applicable) of Code sections 401(a)(11) and 417. In addition, distributions made after March 31, 1988, which are triggered by any of the events described in the immediately preceding paragraphs (a), (b), or (c), must be made in a lump sum. 3A.3 From Life Insurance Policies. The Trustee shall arrange with the Insurance Company any distribution due to any Participant during his lifetime from any Life Insurance Policy or Policies on his life. The manner of distribution shall be a transfer of the values of said Policy or Policies to the Participant's Account for distribution as a portion thereof in accordance with this Section. Subject to Section 3c, Joint and Survivor Annuity Requirements, the Policies on a participant's life will be converted to cash or an Annuity or distributed to the Participant upon commencement of benefits. In the event of any conflict between the terms of this Plan and the terms of any Life Insurance Policy purchased hereunder, the Plan provisions shall control. -44- 45 3A.4 Nontransferable. Any Annuity Contract distributed herefrom must be nontransferable. 3A.5 Alternate Payee Special Distribution. Distributions pursuant to Section 5D.8 may be made without regard to the age or employment status of the Participant. 3B. MINIMUM DISTRIBUTION REQUIREMENTS 3B.1 Definitions. (a) Applicable Life Expectancy. The term Applicable Life Expectancy means the Life Expectancy (or joint and last survivor expectancy) calculated using the attained age of the Participant (or Designated Beneficiary) as of the Participant's (or Designated Beneficiary's) birthday in the applicable calendar year reduced by one for each calendar year which has elapsed since the date Life Expectancy was first calculated. If Life Expectancy is being recalculated, the Applicable Life Expectancy shall be the Life Expectancy so recalculated. The applicable calendar year shall be the first Distribution Calendar Year, and if Life Expectancy is being recalculated, such succeeding calendar year. (b) Designated Beneficiary. The term Designated Beneficiary means the individual who is designated as the Beneficiary under the Plan in accordance with Code section 401(a)(9) and the regulations thereunder. If a Participant's Beneficiary, as determined in accordance with Section 1.8, is his estate, such Participant shall be treated as having no Designated Beneficiary. (c) Distribution Calendar Year. The term Distribution Calendar Year means a calendar year for which a minimum distribution is required. For distributions beginning before the Participant's death, the first Distribution Calendar Year is the calendar year immediately preceding the calendar year which contains the Participant's Required Beginning Date. For distributions beginning after the Participant's death, the first Distribution Calendar Year is the calendar year in which distributions are required to begin pursuant to Section 3B.3 below. (d) 5-Percent Owner. For purposes of this Section, the term 5-Percent Owner means a 5-percent owner as defined in Code section 416(i) (determined in accordance with section 416 but without regard to whether the Plan is Top-Heavy) at any time during the Plan Year ending with or within the calendar year in which such Employee attains age 66-1/2 or any later Plan Year. (e) Life Expectancy. The term Life Expectancy means life expectancy and joint and last survivor expectancy as computed by use of the expected return multiples in Tables V and VI of section 1.72-9 of the Income Tax Regulations. Unless otherwise elected by the Participant (or Spouse, in the case of distributions described in Section 3B.3(b)(2)) by the time distributions are required to begin, Life -45- 46 Expectancies shall be recalculated annually. Such election shall be irrevocable as to the Participant (or Spouse) and shall apply to all subsequent years. The Life Expectancy of a non-Spouse Beneficiary may not be recalculated. (f) Participant's Benefit. The term Participant's Benefit means: (1) The Participant's Vested Interest as of the last valuation date in the calendar year immediately preceding the Distribution Calendar Year ("Valuation Calendar Year") increased by the amount of any contributions or Forfeitures allocated to the Participant's Account as of dates in the Valuation Calendar Year after the valuation date and decreased by distributions made in the Valuation Calendar Year after the valuation date. (2) Exception for second Distribution Calendar Year. For purposes of paragraph (1) above, if any portion of the minimum distribution for the first Distribution Calendar Year is made in the second Distribution Calendar Year on or before the Required Beginning Date, the amount of the minimum distribution made in the second Distribution Calendar Year shall be treated as if it had been made in the immediately preceding Distribution Calendar Year. (g) Required Beginning Date. The term Required Beginning Date means: (1) General Rule. The first Required Beginning Date of a Participant is the first day of April of the calendar year following the calendar year in which the Participant attains age 70-1/2. (2) Transitional Rules. The Required Beginning Date of a Participant who attains age 70-1/2 before January 1, 1988, shall be determined in accordance with (A) or (B) below: (A) Non-5-Percent Owners. The Required Beginning Date of a Participant who is not a 5-Percent Owner is the first day of April of the calendar year following the calendar year in which the later of retirement or attainment of age 70-1/2 occurs. (B) 5-Percent Owners. The Required Beginning Date of a Participant who is a 5-Percent Owner during any year beginning after December 31, 1979 is the first day of April following the later of: (i) The calendar year in which the Participant attains age (ii) The earlier of the calendar year which ends with or within the Plan Year in which the Participant becomes a 5-Percent Owner, or the calendar year in which the Participant retires. -46- 47 The Required Beginning Date of a Participant who is not a 5-Percent Owner who attained age 70-1/2 during 1988 and who has not retired as of January 1, 1989 is April 1, 1990. (3) Once distributions have begun to a 5-Percent Owner under this Section, they must continue to be distributed, even if the Participant ceases to be a 5-Percent Owner in a later year. 3B.2 Distribution Requirements. (a) Except as otherwise provided in Section 3C, joint and Survivor Annuity Requirements, the requirements of this Section 3B shall apply to any distribution of a Participant's Accrued Benefit and will take precedence over any inconsistent provisions of this Plan. Unless otherwise specified, the provisions of this Section apply to calendar years beginning after December 31, 1984. (b) All distributions required under this Section 3B shall be determined and made in accordance with regulations under section 401(a)(9), including the minimum distribution incidental benefit requirement of regulations section 1.401(a)(9)-2. A Participant's entire Vested Interest must be distributed or begin to be distributed no later than the Participant's Required Beginning Date. (c) Limits on Distribution Periods. As of the first Distribution Calendar Year, distributions, if not made in a single sum, may only be made over one of the following periods (or a combination thereof): (1) The life of the Participant; (2) The life of the Participant and a Designated Beneficiary; (3) A period certain not extending beyond the Life Expectancy of the Participant; or (4) A period certain not extending beyond the joint and last survivor expectancy of the Participant and a Designated Beneficiary. (d) Determination of amount to be distributed each year. If the Participant's Vested Interest is to be distributed in other than a single sum, the following minimum distribution rules shall apply on or after the Required Beginning Date: (1) If the Participant's entire Vested Interest is to be distributed over (1) a period not extending beyond the Life Expectancy of the Participant or the joint life and last survivor expectancy of the Participant and the Participant's Designated Beneficiary or (2) a period not -47- 48 extending beyond the Life Expectancy of the Designated Beneficiary, the amount required to be distributed for each calendar year, beginning with distributions for the first Distribution Calendar Year, must at least equal the quotient obtained by dividing the Participant's benefit by the Applicable Life Expectancy. (2) For calendar years beginning before January 1, 1989, if the Participant's Spouse is not the Designated Beneficiary, the method of distribution selected must assure that at least 50% of the present value of the amount available for distribution is paid within the Life Expectancy of the Participant. (3) For calendar years beginning after December 31, 1988, the amount to be distributed each year, beginning with distributions for the first Distribution Calendar Year, shall not be less than the quotient obtained by dividing the Participant's benefit by the lesser of (1) the Applicable Life Expectancy or (2) if the Participant's Spouse is not the Designated Beneficiary, the applicable divisor determined from the table set forth in regulations section 1.401(a)(9)-2, Q&A-4. Distributions after the death of the Participant shall be distributed using the Applicable Life Expectancy in Section 3B.2(d)(1) above, as the relevant divisor without regard to regulations section 1.401(a)(9)-2. (4) The minimum distribution required for the Participant's first Distribution Calendar Year must be made on or before the Participant's Required Beginning Date. The minimum distribution for other calendar years, including the minimum distribution for the Distribution Calendar Year in which the Employee's Required Beginning Date occurs, must be made on or before December 31 of that Distribution Calendar Year. (e) Other Forms. If the Participant's benefit is distributed in the form of an Annuity purchased from an Insurance Company, distributions thereunder shall be made in accordance with the requirements of Code section 401(a)(9) and the regulations thereunder. 3B.3 Death Distribution Provisions. Upon the death of the Participant, the following distribution provisions shall take effect: (a) Distributions Beginning Before Death. If the Participant dies after distribution of his entire Vested Interest has begun, the remaining portion of such entire Vested Interest will continue to be distributed at least as rapidly as under the method of distribution being used prior to the Participant's death. (b) Distributions Beginning After Death. If the Participant dies before distribution of his entire Vested Interest begins, distribution of the Participant's entire Vested Interest shall be completed by December 31 of the calendar year containing the fifth anniversary of the Participant's death except to the extent that an election is made to receive distributions in accordance with (1) or (2) below: -48- 49 (1) If any portion of the Participant's entire Vested Interest is payable to a Designated Beneficiary, distributions may be made over the Life Expectancy of the Designated Beneficiary commencing on or before December 31 of the calendar year immediately following the calendar year in which the Participant died; (2) If the Designated Beneficiary is the Participant's surviving Spouse, the date distributions are required to begin in accordance with (1) above shall not be earlier than the later of (i) December 31 of the calendar year immediately following the calendar year in which the Participant died and (ii) December 31 of the calendar year in which the Participant would have attained age 70-1/2. If the Participant has not made an election pursuant to this Section 3B.3(b) by the time of his or her death, the Participant's Designated Beneficiary must elect the method of distribution no later than the earlier of (1) December 31 of the calendar year in which distributions would be required to begin under this Section, or (2) December 31 of the calendar year which contains the fifth anniversary of the Participant's date of death. If the Participant has no Designated Beneficiary, or if the Designated Beneficiary does not elect a method of distribution, distribution of the Participant's entire Vested Interest must be completed by December 31 of the calendar year containing the fifth anniversary of the Participant's death and will be paid in the form of a single sum cash payment. (c) For purposes of Section 3B.3(b) above, if the surviving Spouse dies after the Participant, but before payments to such Spouse begin, the provisions of this Section, with the exception of paragraph (b)(2) therein, shall be applied as if the surviving Spouse were the Participant. (d) For purposes of this Section, distribution of a Participant's entire Vested Interest pursuant to Section 3B.3(b) is considered to begin on the Participant's Required Beginning Date (or, if paragraph (c) above is applicable, the date distribution is required to begin to the Surviving Spouse). If distribution in the form of an Annuity irrevocably commences to the Participant before the Required Beginning Date, the date distribution is considered to begin is the date distribution actually commences. 3B.4 Transitional Rule. (a) Notwithstanding the other requirements of this Section 3B and subject to the requirements of Section 3C, Joint and Survivor Annuity Requirements, distribution on behalf of any Employee, including a 5-Percent Owner, may be made in accordance with all of the following requirements (regardless of when such distribution commences): (1) The distribution by the Plan is one which would not have disqualified such Plan under Code section 401(a)(9) as in effect prior to amendment by the Deficit Reduction Act of 1984. -49- 50 (2) The distribution is in accordance with a method of distribution designated by the Employee whose entire Vested Interest in the Plan is being distributed or, if the Employee is deceased, by a Beneficiary of such Employee. (3) Such designation was in writing, was signed by the Employee or the Beneficiary, and was made before January 1, 1984. (4) The Employee had accrued a benefit under the Plan as of December 31, 1983. (5) The method of distribution designated by the Employee or the Beneficiary specifies the time at which distribution will commence, the period over which distributions will be made, and in the case of any distribution upon the Employee's death, the Beneficiaries of the Employee listed in order of priority. (b) A distribution upon death will not be covered by this transitional rule unless the information in the designation contains the required information described above with respect to the distribution to be made upon the death of the Employee. (c) For any distribution that commences before January 1, 1984, but continues after December 31, 1983, the Employee or the Beneficiary, to whom such distribution is being made, will be presumed to have designated the method of distribution under which the distribution is being made if the method of distribution was specified in writing and the distribution satisfies the requirements in subsections (a)(1) and (5). (d) If a designation is revoked, any subsequent distribution must satisfy the requirements of Code section 401(a)(9) and related regulations. If a designation is revoked subsequent to the date distributions are required to begin, the Plan must distribute by the end of the calendar year following the calendar year in which the revocation occurs the total amount not yet distributed which would have been required to have been distributed to satisfy Code section 401(a)(9) and related regulations, except for the TEFRA section 242(b)(2) election. For calendar years beginning after December 31, 1988, such distributions must meet the minimum distribution incidental benefit requirements in regulations section 1.401(a)(9)-2. Any changes in the designation will be considered to be a revocation of the designation. However, the mere substitution or addition of another Beneficiary (one not named in the designation) under the designation will not be considered to be a revocation of the designation, so long as such substitution or addition does not alter the period over which distributions are to be made under the designation, directly or indirectly (for example, by altering the relevant measuring life). In the case in which an amount is transferred or rolled from one plan to another plan, the rules in Q&A J-2 and Q&A J-3 shall apply. -50- 51 3C. JOINT AND SURVIVOR ANNUITY REQUIREMENTS 3C.1 Applicability. Except as provided in Section 3C.6, the provisions of this Section 3C shall apply to any Participant who is credited with at least one Hour of Service with the Employer on or after August 23, 1984, and such other Participants as provided in Section 3C.7. 3C.2 Definitions. The following definitions shall apply to this Section 3C. (a) Earliest Retirement Age. The term Earliest Retirement Age means the earliest date on which, under the Plan, the Participant could elect to receive retirement benefits. (b) Election Period. The term Election Period means the period which begins on the first day of the Plan Year in which the Participant attains age 35 and ends on the date of the Participant's death. If a Participant separates from service prior to the first day of the Plan Year in which he attains age 35, with respect to the Vested Account Balance as of the date of separation, the election period shall begin on the date of separation. Pre-age 35 waiver: A Participant who will not yet attain age 35 as of the end of any current Plan Year may make a special Qualified Election to waive the Qualified Preretirement Survivor Annuity for the period beginning on the date of such election and ending on the first day of the Plan Year in which the Participant will attain age 35. Such election shall not be valid unless the Participant receives a written explanation of the Qualified Preretirement Survivor Annuity in such terms as are comparable to the explanation required under Section 3C.5(a). Except as provided in Section 3C.6, Qualified Preretirement Survivor coverage will be automatically reinstated as of the first day of the Plan Year in which the Participant attains age 35. Any new waiver on or after such date shall be subject to the full requirements of this Section 3C. (c) Qualified Election. The term Qualified Election means a waiver of a Qualified Joint and Survivor Annuity or a Qualified Preretirement Survivor Annuity. Any waiver of a Qualified Joint and Survivor Annuity or a Qualified Preretirement Survivor Annuity shall not be effective unless: (a) the Participant's Spouse consents in writing to the election; (b) the election designates a specific Beneficiary, including any class of beneficiaries or any contingent beneficiaries, which may not be changed without spousal consent (or the Spouse expressly permits designations by the Participant without any further spousal consent); (c) the Spouse's consent acknowledges the effect of the election; and (d) the Spouse's consent is witnessed by a Plan representative or notary public. Additionally, a Participant's waiver of the Qualified Joint and Survivor Annuity shall not be effective unless the election designates a form of benefit payment which may not be changed without spousal consent (or the Spouse expressly permits designations by the Participant without any further spousal consent). If it is established to the satisfaction of a Plan representative that there is no Spouse or that the Spouse cannot be located, a waiver will be deemed a Qualified Election. -51- 52 Any consent by a Spouse obtained under this provision (or establishment that the consent of a Spouse may not be obtained) shall be effective only with respect to such Spouse. A consent that permits designations by the Participant without any requirement of further consent by such Spouse must acknowledge that the Spouse has the right to limit consent to a specific Beneficiary, and a specific form of benefit where applicable, and that the Spouse voluntarily elects to relinquish either or both of such rights. A revocation of a prior waiver may be made by a Participant without the consent of the Spouse at any time before the commencement of benefits. The number of revocations shall not be limited. No consent obtained under this provision shall be valid unless the Participant has received notice as provided in Section 3C.5 below. (d) Qualified Joint and Survivor Annuity. The term Qualified Joint and Survivor Annuity means an immediate Annuity for the life of the Participant with a survivor Annuity for the life of the Spouse which is not less than 50 percent and not more than 100 percent of the amount of the Annuity which is payable during the joint lives of the Participant and the Spouse and which is the amount of benefit which can be purchased with the Participant's Vested Account Balance. The percentage of the survivor annuity binder the Plan shall be 50 percent (unless a different percentage is elected by the Participant). (e) Vested Account Balance. The term Vested Account Balance means the aggregate value of the Participant's vested account balances derived from contributions made by both the Participant and Employer, whether vested before or upon death, including the proceeds of insurance contracts, if any, on the Participant's life and Rollover Contributions. The provisions of this Section 3C shall apply to a Participant who is vested in amounts attributable to Employer contributions, Employee Contributions (or both) made under this Plan at the time of death or distribution. 3C.3 Qualified Joint and Survivor Annuity. Unless an optional form of benefit is selected pursuant to a Qualified Election within the 90-day period ending on the Annuity Starting Date, a married Participant's Vested Account Balance will be paid in the form of a Qualified Joint and Survivor Annuity and an unmarried Participant's Vested Account Balance will be paid in the form of a Life Annuity. The Participant may elect to have such Annuity distributed upon attainment of the Earliest Retirement Age under the Plan. 3C.4 Qualified Preretirement Survivor Annuity. Unless an optional form of benefit has been selected within the Election Period pursuant to a Qualified Election, if a Participant dies before the Annuity Starting Date, then no less than 50 percent (or 100 percent if so elected in the Adoption Agreement) of the Participant's Vested Account Balance shall be applied toward the purchase of an Annuity for the life of the surviving Spouse. If less than 100 percent is selected, then the remaining portion of the Vested Account Balance shall be paid to the Participant's Beneficiary. If less than 100 percent of the Vested Account Balance is paid to the surviving Spouse, the amount of Employee Contributions allocated to the surviving Spouse will be in the same proportion as the Employee Contributions bears to the total Vested Account Balance of the Participant. The surviving Spouse may elect to have such Annuity distributed within a reasonable period after the Participant's death. -52- 53 3C.5 Notice Requirements. (a) In the case of a Qualified Joint and Survivor Annuity, the Plan Administrator shall no less than 30 days and no more than 90 days prior to the Annuity Starting Date provide each Participant with a written explanation of: (i) the terms and conditions of a Qualified Joint and Survivor Annuity; (ii) the Participant's right to make and the effect of an election to waive the Qualified Joint and Survivor Annuity form of benefit; (iii) the rights of a Participant's Spouse; and (iv) the right to make, and the effect of, a revocation of a previous election to waive the Qualified Joint and Survivor Annuity. (b) In the case of a Qualified Preretirement Survivor Annuity, the Plan Administrator shall provide each Participant within the applicable period (described in subsection (c) below) for such Participant a written explanation of the Qualified Preretirement Survivor Annuity in such terms and in such manner as would be comparable to the explanation provided for meeting the requirements of Section 3C.5(a) applicable to a Qualified Joint and Survivor Annuity. (c) The "applicable period" for a Participant is whichever of the following periods ends last: (i) the period beginning with the first day of the Plan Year in which the Participant attains age 32 and ending with the close of the Plan Year preceding the Plan Year in which the Participant attains age 35; (ii) a reasonable period, ending after the individual becomes a Participant; (iii) a reasonable period ending after the Qualified Joint and Survivor Annuity is no longer fully subsidized; (iv) a reasonable period ending after this Section 3C first applies to the Participant. Notwithstanding the foregoing, notice must be provided within a reasonable period ending after separation from Service before attaining age 35. For purposes of applying the preceding paragraph, a reasonable period ending after the enumerated events described in (ii), (iii) and (iv) is the end of the two-year period beginning one year prior to the date the applicable event occurs, and ending one year after that date. In the case of a participant who separates from Service before the Plan Year in which he attains age 35, notice shall be provided within the two-year period beginning one year prior to separation and ending one year after separation. If such a Participant thereafter returns to employment with the Employer, the applicable period for such Participant shall be redetermined. (d) Notwithstanding the other requirements of this Section, the respective notices prescribed by this Section need not be given to a Participant if (1) the Plan "fully subsidizes" the costs of a Qualified Joint and Survivor Annuity or Qualified Preretirement Survivor Annuity, and (2) the Plan does not allow the Participant to waive the Qualified Joint and Survivor Annuity or Qualified Preretirement Survivor Annuity and does not allow a married Participant to designate a nonspouse Beneficiary. For purposes of this Section 3C.5(d), a Plan fully subsidizes the costs of a benefit if no increase in cost or decrease in benefits to the Participant may result from the Participant's failure to elect another benefit. -53- 54 3C.6 Safe Harbor Rules. (a) This Section shall apply to a Participant in a profit sharing plan, and to any distribution made on or after the first day of the first Plan Year beginning after December 31, 1988, from or under a separate account attributable solely to accumulated QVEC Contributions (as described in Section 3A.1), and maintained on behalf of a Participant in a money purchase pension plan (including a target benefit plan), if the following conditions are met: (1) the Participant does not or cannot elect payments in the form of a Life Annuity; and (2) on the death of a Participant, the Participant's Vested Account Balance will be paid to the Participant's surviving Spouse, but if there is no surviving Spouse, or if the surviving Spouse has consented in a manner conforming to a Qualified Election, then to the Participant's designated Beneficiary. (b) The surviving Spouse may elect to have distribution of the Vested Account Balance commence within the 90-day period following the date of the Participant's death. The account balance shall be adjusted for gains or losses occurring after the Participant's death in accordance with the provisions of the Plan governing the adjustment of account balances for other types of distributions. (c) The Participant may waive the spousal death benefit described in this Section 3C.6 at any time provided that no such waiver shall be effective unless it satisfies the conditions of Section 3C.2(c) (other than the notification requirement referred to therein) that would apply to the Participant's waiver of the Qualified Preretirement Survivor Annuity. (d) If this Section 3C.6 is operative, then the other provisions of this Section 3C, other than Section 3C.7, shall be inoperative. This Section 3C.6 shall not be operative with respect to a Participant in a profit sharing plan if the plan is a direct or indirect transferee of a defined benefit plan, money purchase plan, a target benefit plan, stock bonus, or profit sharing plan that is subject to the survivor annuity requirements of Code sections 401(a)(11) and 417. (e) For purposes of this Section 3C.6, the term Vested Account Balance shall mean, in the case of a money purchase pension plan or a target benefit plan, the Participant's separate account balance attributable solely to accumulated QVEC Contributions (as described in Section 3A.1). In the case of a profit sharing plan, the term Vested Account Balance shall have the same meaning as provided in Section 3C.2(e). 3C.7 Transitional Rules. (a) Any living Participant not receiving benefits on August 23, 1984, who would otherwise not receive the benefits prescribed by the previous Sections of this Section 3C must be given the opportunity to elect to have the prior Sections of this Section 3C apply if such Participant is credited with at least one Hour of Service under this Plan or a predecessor plan in a Plan Year -54- 55 beginning on or after January 1, 1976, and such Participant had at least 10 years of vesting Service when he separated from Service. (b) Any living Participant not receiving benefits on August 23, 1984, who was credited with at least one Hour of Service under this Plan or a predecessor plan on or after September 2, 1974, and who is not otherwise credited with any Service in a Plan Year beginning on or after January 1, 1976, must be given the opportunity to have his benefits paid in accordance with Section 3C.7(d). (c) The respective opportunities to elect (as described in Sections 3C.7(a) and 3C.7(b) above) must be afforded to the appropriate Participants during the period commencing on August 23, 1984, and ending on the date benefits would otherwise commence to said Participants. (d) Any Participant who has elected pursuant to Section 3C.7(b), and any Participant who does not elect under Section 3C.7(a), or who meets the requirements of Section 3C.7(a), except that such Participant does not have at least 10 years of vesting Service when he separates from Service, shall have his benefits distributed in accordance with all of the following requirements if benefits would have been payable in the form of a Life Annuity: (1) Automatic Joint and Survivor Annuity. If benefits in the form of a Life Annuity become payable to a married Participant who: (A) Begins to receive payments under the Plan on or after Normal Retirement Age; or (B) Dies on or after Normal Retirement Age while still working for the Employer; or (C) Begins to receive payments on or after the Qualified Early Retirement Age; or (D) Separates from Service on or after attaining Normal Retirement Age (or the Qualified Early Retirement Age) and after satisfying the eligibility requirements for the payment of benefits under the Plan and thereafter dies before beginning to receive such benefits; then such benefits will be received under this Plan in the form of a Qualified Joint and Survivor Annuity, unless the Participant has elected otherwise during the Election Period. The Election Period must begin at least 6 months before the Participant attains Qualified Early Retirement Age and end not more than 90 days before the commencement of benefits. Any election hereunder will be in writing and may be changed by the Participant at any time. (2) Election of Early Survivor Annuity. A Participant who is employed after attaining the Qualified Early Retirement Age will be given the opportunity to elect, during the -55- 56 Election Period, to have a survivor Annuity payable on death. If the Participant elects the survivor Annuity, payments under such Annuity must not be less than the payments which would have been made to the Spouse under the Qualified Joint and Survivor Annuity if the Participant had retired on the day before his or her death. Any election under this provision will be in writing and may be changed by the Participant at any time. The Election Period begins on the later of (1) the 90th day before the Participant attains the Qualified Early Retirement Age, or (2) the date on which participation begins, and ends on the date the Participant terminates employment. (3) For purposes of this Section 3C.7(d): (A) Qualified Early Retirement Age is the latest of: (i) The earliest date, under the Plan, on which the Participant may elect to receive retirement benefits; (ii) The first day of the 120th month beginning before the Participant reaches Normal Retirement Age; or (iii) The date the Participant begins participation. (B) Qualified Joint and Survivor Annuity is an Annuity for the life of the Participant with a survivor Annuity for the life of the Spouse as described in Section 3C.2(d). 3D. TERMINATION OF EMPLOYMENT 3D.1 Distribution. A Participant who terminates employment shall be entitled to receive a distribution of his entire Vested Interest. Such distribution shall be further subject to the terms and conditions of Section 3C. The method used, as elected by the Employer in the Adoption Agreement, is one of the following: (a) Immediate (Cash-Out Method). If at the time of his Termination of Employment the Participant is not 100% vested and does not take a distribution from the portion of his Vested Interest that is attributable to contributions made by the Employer, the non-vested portion of his Participant's Account will become a Forfeiture upon the date such terminated Participant incurs 5 consecutive 1-Year Breaks-in-Service. However, if at the time of his Termination of Employment the Participant is not 100% vested and does take a distribution from the portion of his Vested Interest that is attributable to contributions made by the Employer, or if the Participant is 0% vested, the non-vested portion of his Participant's Account will become a Forfeiture immediately upon the Participant's Termination of Employment date. If a Participant whose non-vested portion of his Participant's Account became a Forfeiture in accordance with the terms of the preceding paragraph is later rehired by the Employer -56- 57 and re-enrolls in the Plan before incurring 5 consecutive 1-Year Breaks-in-Service, then the amount of the Forfeiture shall be restored to the Participant's Account by the Employer in accordance with the repayment provision elected by the Employer in the Adoption Agreement and described in Section 3D.2. (b) 1-Year Break-in-Service (Cash-Out Method). If at the time of his Termination of Employment the Participant is not 100% vested and does not take a distribution from the portion of his Vested Interest that is attributable to contributions made by the Employer, the non-vested portion of his Participant's Account will become a Forfeiture upon the date such terminated Participant incurs 5 consecutive 1-Year Breaks-in-Service. However, if at the time of his Termination of Employment the Participant is not 100% vested and does take a distribution from the portion of his Vested Interest that is attributable to contributions made by the Employer, or if the Participant is 0% vested, the non-vested portion of his Participant's Account will become a Forfeiture upon the date such terminated Participant incurs a 1-Year Break-in-Service. If a terminated Participant, whose non-vested portion of his Participant's Account became a Forfeiture in accordance with the terms of the preceding paragraph, is later rehired by the Employer and re-enrolls in the Plan before incurring 5 consecutive 1-Year Breaks-in-Service, then the amount of the Forfeiture shall be restored to the Participant's Account by the Employer in accordance with the repayment provision elected by the Employer in the Adoption Agreement and described in Section 3D.2. (c) 5 Consecutive 1-Year Breaks-in-Service. If at the time of his Termination of Employment the Participant is not 100% vested, the non-vested portion of his Participant's Account will become a Forfeiture upon the date the terminated Participant incurs 5 consecutive 1-Year Breaks-in-Service. 3D.2 Repayment of Prior Distribution. If a terminated Participant is later rehired by the Employer and re-enrolls in the Plan, the following Optional Payback or Required Payback provisions, as elected by the Employer in the Adoption Agreement, will apply: (a) Optional Payback: (1) If the Participant was 0% vested at his Termination of Employment and did not incur 5 consecutive 1-Year Breaks-in-Service after such date, the amount which became a Forfeiture, if any, shall be restored by the Employer at the time such Participant re-enrolls in the Plan. (2) If the Participant was vested but not 100% vested at his Termination of Employment and did not incur 5 consecutive 1-Year Breaks-in-Service after such date, the amount which became a Forfeiture, if any, shall be restored by the Employer at the time such Participant re-enrolls in the Plan. In addition, the Participant may repay the full amount of the distribution -57- 58 attributable to Employer contributions, if any, made at his Termination of Employment. Such repayment of Employer contributions, however, must be made before the Participant has incurred 5 consecutive 1-Year Breaks-in-Service following the date he received the distribution or five years after the Participant is rehired by the Employer, whichever is earlier. (3) If the Participant had incurred 5 consecutive 1-Year Breaks-in-Service after his termination of Employment, the amount of the Participant's Account that became a Forfeiture shall remain a Forfeiture and such Participant shall be prohibited from repaying a distribution made at his Termination of Employment. (b) Required Payback: (1) If the Participant was 0% vested at his Termination of Employment and did not incur 5 consecutive 1-Year Breaks-in-Service after such date, the amount which became a Forfeiture, if any, shall be restored by the Employer at the time such Participant re-enrolls in the Plan. (2) If the Participant was vested but not 100% vested at his Termination of Employment and did not incur 5 consecutive 1-Year Breaks-in-Service after such date, the Participant shall be required to repay the full amount of the distribution attributable to Employer contributions, if any, made at his Termination of Employment. Such repayment of Employer contributions, however, must be made before the Participant has incurred 5 consecutive 1-Year Breaks-in-Service following the date he received the distribution or five years after the Participant is rehired by the Employer, whichever is earlier. When the Participant makes such repayment, the amount which became a Forfeiture, if any, shall be restored by the Employer at the same time such repayment is made. However, if the Participant does not repay the distribution made in accordance with this Section 3D within the period of time specified above, that Forfeiture shall remain a Forfeiture. (3) If the Participant had incurred 4 consecutive 1-Year Breaks-in-Service after his Termination of Employment, the amount of the Participant's Account that became a Forfeiture shall remain a Forfeiture and such Participant shall be prohibited from repaying the distribution made at his Termination of Employment. 3D.3 Life Insurance Policy. If all or any portion of the value of any Life Insurance Policy on the Participant's life will become a Forfeiture, the Participant shall have the right to buy such policy from the Trustee for the then value of such policy less the value of any Vested Interest therein, within 30 days after written notice from the Trustee is mailed to his last known address. 3D.4 No Further Rights or Interest. A Participant shall have no further interest in or any rights to any portion of his Participant's Account that becomes a Forfeiture due to his Termination of Employment once the Participant incurs 5 consecutive 1-Year Breaks-in-Service in accordance with Section 2A.4. -58- 59 3D.5 Forfeiture. Any Forfeiture arising in accordance with the provisions of Section 3D.1 shall be treated as follows: Any amount of Forfeitures shall be used in accordance with (a), (b), or (c) below, in the manner set forth in Section 2C. (a) Employer Credit. Forfeitures shall be used by the Employer to reduce and in lieu of the Employer contribution next due under Section 2C, or to pay Plan expenses, at the earliest opportunity after such Forfeiture becomes available. (b) Reallocation. Forfeitures shall be allocated in accordance with the allocation formula of the contributions from which they arose. (c) Employer Credit and Reallocation of Remainder. Forfeitures shall first be used to reduce and in lieu of the Employer contribution next due under Section 2C, or to pay Plan expenses, at the earliest opportunity after such Forfeiture becomes available. Any Forfeitures remaining following use as an Employer credit shall be allocated in accordance with the allocation formula of the contributions from which they arose. Notwithstanding anything above to the contrary, if Forfeitures are generated immediately or upon the occurrence of a 1-Year Break-in-Service, and a former Participant returns to employment with the Employer after Forfeitures are generated but prior to the occurrence of 5 consecutive 1-Year Breaks-in-Service, Forfeitures, if any, will first be used to make whole the nonvested account of such Participant, equal to the value of the nonvested account at the time the Participant terminated employment with the Employer in accordance with the applicable provisions of Section 3D.2. In the event that the available Forfeitures are not sufficient to make whole the nonvested account, the Employer will make an additional contribution sufficient to make the nonvested account whole. 3D.6 Lost Participant. If a benefit is forfeited because the Participant or Beneficiary cannot be found, as discussed in Section 5D.7, such benefit will be reinstated if a claim is made by the Participant or Beneficiary. 3D.7 Deferral of Distribution. If elected by the Employer, and as discussed in Section 3A.1, a Participant who terminates employment and does not consent to an immediate distribution shall have his distribution deferred (and may be responsible for all fees and expenses associated with maintaining his account in a deferred status). 3E. WITHDRAWALS 3E.1 Withdrawal - Employee Contributions. (a) Required Employee Contributions. If the Employer has elected in its Adoption Agreement to allow for a withdrawal of Required Employee Contributions and earnings -59- 60 thereon, then a Participant may elect to withdraw from his Participant's Account an amount equal to any whole percentage (not exceeding 100%) of his entire Vested Interest in his Participant's Account attributable to Required Employee Contributions plus any income and minus any loss thereon. On the date the election becomes effective, the Participant shall be suspended from making any further contributions to the Plan, and from having any Matching Contributions made on his behalf for a period, as elected by the Employer in its Adoption Agreement. (b) Voluntary Employee Contributions. If the Employer has elected in its Adoption Agreement to allow for withdrawal of Voluntary Employee Contributions and earnings thereon, then a Participant may elect to withdraw from his Participant's Account an amount which is equal to any whole percentage (not exceeding 100%) of the entire Vested Interest in his Participant's Account attributable to Voluntary Employee Contributions plus any income and minus any loss thereon. (c) Prior Required Employee Contributions. If the Employer has elected in its Adoption Agreement to allow for a withdrawal of Prior Required Employee Contributions and earnings thereon, then a Participant may elect to withdraw from his Participant's Account an amount equal to any whole percentage (not exceeding 100%) of his entire Vested Interest in his Participant's Account attributable to Prior Required Employee Contributions plus any income and minus any loss thereon. (d) Prior Voluntary Employee Contributions. If the Employer has elected in its Adoption Agreement to allow for withdrawal of Prior Voluntary Employee Contributions and earnings thereon, then a Participant may elect to withdraw from his Participant's Account an amount which is equal to any whole percentage (not exceeding 100%) of the entire Vested Interest in his Participant's Account attributable to Prior Voluntary Employee Contributions plus any income and minus any loss thereon. If a Participant elects a withdrawal under the provisions of this Section, he may not elect another withdrawal under this Section for an additional period specified by the Employer in its Adoption Agreement. The Participant shall notify the Plan Administrator in writing of his election to make a withdrawal under this Section. Any such election shall be effective as of the date specified in such notice, which date must be at least 15 days after notice is filed. No Forfeitures will occur solely as a result of an Employee's withdrawal of Employee Contributions. 3E.2 Withdrawal - Elective Deferral Contributions. If the Participant has attained age 59-1/2, and if selected by the Employer in its Adoption Agreement, the Participant may elect to withdraw from his Participant's Account an amount which is equal to any whole percentage (not exceeding 100%) of his Vested Interest in his Participant's Account attributable to his Elective Deferral Contributions and earnings thereon. -60- 61 The Participant shall notify the Plan Administrator in writing of his election to make a withdrawal under this Section. Any such election shall be effective as of the date specified in such notice, which date must be at least 15 days after notice is filed. 3E.3 Withdrawal - Employer Contributions. If the Employer has specified in its Adoption Agreement that withdrawals of Matching Contributions, Nonelective Contributions, or Prior Employer Contributions, if applicable, are permitted, a Participant, who has been a Participant for at least 60 consecutive months, may elect to withdraw from his Participant's Account an amount equal to a whole percentage (not to exceed 100%) of his Vested Interest in his Participant's Account attributable to Matching Contributions (and reallocated Forfeitures, if applicable), Nonelective Contributions, (and reallocated Forfeitures, if applicable), or Prior Employer Contributions (and reallocated Forfeitures, if applicable), along with earnings. On the date the election becomes effective, the Participant may be suspended from making Employee Contributions and Elective Deferral Contributions, if any, and from having Employer contributions made on his behalf for a period of time, as selected by the Employer in its Adoption Agreement. In lieu of or in addition to the 60-months of participation requirement, the Employer may specify in the Adoption Agreement that withdrawal of Employer contributions, to the extent vested, shall be available upon or following the attainment of age 59-1/2. In the event a Participant's suspension period occurs during a year (or years) when no Employer contributions are made, such suspension shall be taken into account when the next Employer contribution(s) is made. The Participant shall notify the Plan Administrator in writing of his election to make a withdrawal under this Section. Any such election shall be effective as of the date specified in such notice, which date must be at least 15 days after notice is filed. 3E.4 Withdrawal for Serious Financial Hardship of Contributions Other than Elective Deferral Contributions. Except as provided in Sections 7B.1 and 7B.7(e), if the Plan is a profit sharing plan or a thrift plan, and if the Employer has elected in its Adoption Agreement to permit withdrawals due to the occurrence of events that constitute Serious Financial Hardships to a Participant, such Participant may withdraw all or a portion of his Vested Interest (excluding Elective Deferral Contributions, Qualified Nonelective Contributions, Qualified Matching Contributions, and earnings on these contributions). Such Serious Financial Hardship must be shown by positive evidence submitted to the Plan Administrator that the hardship is of sufficient magnitude to impair the Participant's financial security. Withdrawals shall be determined in a consistent and nondiscriminatory manner, and shall not affect the Participant's rights under the Plan to make additional withdrawals or to continue to be a Participant. 3E.5 Withdrawal for Serious Financial Hardship of Elective Deferral Contributions. If the Employer has selected in its Adoption Agreement, a distribution may be made on account of Serious Financial Hardship if subparagraphs (a) and (b) of this Section are satisfied. The funds available for withdrawal shall be the portion of a Participant's Account attributable to Elective Deferral Contributions, including any earnings credited to such contributions as of the end of the last Plan -61- 62 Year ending before July 1, 1989 ("pre-1989 earnings"), and if applicable, Qualified Matching Contributions credited to the Participant's Account as of the end of the last Plan Year ending before July 1, 1989, Qualified Nonelective Contributions credited to the Participant's Account as of the end of the last Plan Year ending before July 1, 1989, and any pre-1989 earnings attributable to Qualified Matching Contributions, or Qualified Nonelective Contributions. Qualified Matching Contributions credited to the Participant's Account after the end of the last Plan Year ending before July 1, 1989, Qualified Nonelective Contributions credited to the Participant's Account after the end of the last Plan Year ending before July 1, 1989, and earnings on Elective Deferral Contributions, Qualified Matching Contributions, and Qualified Nonelective Contributions credited after the end of the last Plan Year ending before July 1, 1989 shall not be eligible for withdrawal under this Section. For purposes of this Section, a distribution may be made on account of a hardship only if the distribution is made on account of an immediate and heavy financial need of the Employee where such Employee lacks other available resources. (a) The following are the only financial needs considered immediate and heavy for purposes of this Section: (i) Expenses for medical care described in Code section 213(d) previously incurred by the Employee, the Employee's Spouse, or any dependents of the Employee (as defined in Code section 152) or necessary for these persons to obtain medical care described in Code section 213(d); (ii) Costs directly related to the purchase of a principal residence for the Employee (excluding mortgage payments); (iii) Payments necessary to prevent the eviction of the Employee from the Employee's principal residence or foreclosure on the mortgage on that residence; or (iv) Tuition payments, related educational fees and amounts distributed for the payment of room-and-board expenses for the next 12 months of post-secondary education for the Employee, his or her Spouse, or any of his or her dependents. (b) To the extent the amount of distribution requested does not exceed the amount required to relieve the Participant's financial need, such distribution will be considered as necessary to satisfy an immediate and heavy financial need of the Employee only if: (i) The Employee has obtained all distributions, other than hardship distributions, and all nontaxable loans under all plans maintained by the Employer; (ii) All plans maintained by the Employer provide that the Employee's Elective Deferral Contributions and if applicable, Employee Contributions, will be suspended for 12 months after the receipt of the hardship distribution; -62- 63 (iii) The distribution is not in excess of the amount of the immediate and heavy financial need (including amounts necessary to pay any federal, state, or local income taxes or penalties reasonably anticipated to result from the distribution); and (iv) All plans maintained by the Employer provide that the Employee may not make Elective Deferral Contributions for the Employee's taxable year immediately following the taxable year of the hardship distribution in excess of the applicable limit under Code section 402(g) for such taxable year less the amount of such Employee's Elective Deferral Contributions for the taxable year of the hardship distribution. 3E.6 Withdrawal - QVEC Contributions and Rollover Contributions. If selected by the Employer in its Adoption Agreement, a Participant may elect to withdraw from his Participant's Account as often during each Plan Year as elected by the Employer in the Adoption Agreement, any amount up to 100% of his entire Vested Interest in his Participant's Account attributable to his QVEC Contributions or Rollover Contributions along with earnings thereon. The Participant shall notify the Plan Administrator in writing of his election to make a withdrawal under this Section. Any such election shall be effective as of the date specified in such notice, which date must be at least 15 days after notice is filed. 3E.7 Notification. The Participant shall notify the Plan Administrator in writing of his election to make a withdrawal under Section 3E. Any such election shall be effective as of the date specified in such notice, which date must be at least 15 days after such notice is filed. Payment of the withdrawal shall be subject to the terms and conditions of Section 3A. All withdrawals made under the provisions of Section 3E shall be subject to the spousal consent requirements of Section 3C, as applicable. 3E.8 Vesting Continuation. In the event a partially vested Participant takes a withdrawal of less than 100% of his Vested Interest in accordance with Section 3E.3 or 3E.4 or 3E.5, the remaining portion of his Participant's Account attributable to Employer contributions shall vest according to the formula as set forth in Section 1.75. 3E.9 Withdrawal - Participant's Employer Stock Account. The ability of a Participant who is subject to the reporting requirements of section 16(a) of the Securities Exchange Act of 1934 (the "Act") to make withdrawals or investment changes involving the Participant's Employer Stock Account may be restricted by the Plan Administrator to comply with the rules under section 16(b) of the Act. 3E.10 Withdrawal by Terminated Participants. Terminated Participants who have deferred distribution of their benefit may make withdrawals from the Plan in the same manner as selected by the Employer in its Adoption Agreement for withdrawals preceding termination. -63- 64 3F. DIRECT ROLLOVERS 3F.1 Definitions. (a) Direct Rollover. The term Direct Rollover means a payment by the Plan to the Eligible Retirement Plan specified by the Distributee. (b) Distributee. The term Distributee means an Employee or former Employee. In addition, the Employee's or former Employee's surviving Spouse and the Employee's or former Employee's Spouse who is the Alternate Payee under a QDRO, are Distributees with regard to the interest of the Spouse or former Spouse. (c) Eligible Retirement Plan. The term Eligible Retirement Plan means an individual retirement account described in Code section 408(a), an individual retirement annuity described in Code section 408(b), an annuity plan described in Code section 403(a), or a qualified plan described in Code section 401(a), that accepts the Distributee's Eligible Rollover Distribution. However, in the case of an Eligible Rollover Distribution to the surviving Spouse, an Eligible Retirement Plan is an individual retirement account or an individual retirement annuity. (d) Eligible Rollover Distribution. The term Eligible Rollover Distribution means any distribution of all or any portion of the balance to the credit of the Distributee, except that an Eligible Rollover Distribution does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or Life Expectancy) of the Distributee or the joint lives (or joint life expectancies) of the Distributee and the Distributee's designated Beneficiary, or for a specified period of ten years or more; any distribution to the extent such distribution is required under Code section 401(a)(9); and the portion of any distribution that is not includable in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities); and any other distribution(s) that is reasonably expected to total less than $200 during a "year." 3F.2 Direct Rollovers. This Section applies to distributions made on or after January 1, 1993. Notwithstanding any provision of the Plan to the contrary that would otherwise limit a Distributee's election under this Section, a Distributee may elect, at the time and in the manner prescribed by the Plan Administrator, to have any portion of an Eligible Rollover Distribution that is equal to at least $500 paid directly to an Eligible Retirement Plan specified by the Distributee in a Direct Rollover. -64- 65 ARTICLE IV - LEGAL LIMITATIONS ON CONTRIBUTIONS 4A. NONDISCRIMINATION TESTS 4A.1 Definitions. (a) Actual Contribution Percentage. The term Actual Contribution Percentage (ACP) means the average of the Actual Contribution Ratios of the Eligible Participants in a group. (b) Actual Contribution Ratio. The term Actual Contribution Ratio means the ratio (expressed as a percentage) of a Participant's Contribution Percentage Amounts to that Participant's Compensation for the Plan Year (whether or not the Employee was a Participant for the entire Plan Year). (c) Actual Deferral Percentage. The term Actual Deferral Percentage (ADP) means the average of the Actual Deferral Ratios for a specified group of Participants. (d) Actual Deferral Ratio. The term Actual Deferral Ratio means the ratio (expressed as a percentage) of a Participant's Deferral Percentage Amounts to that Participant's Compensation for such Plan Year. The Actual Deferral Ratio for an Employee who is eligible to be a Participant but fails to make Elective Deferral Contributions shall be zero. (e) Aggregate Limit. The term Aggregate Limit means the sum of: (i) 125 percent of the greater of the ADP of the non-Highly Compensated Employees for the Plan Year or the ACP of non-Highly Compensated Employees under the plan subject to Code section 401(m) for the Plan Year beginning with or within the Plan Year of the CODA and (ii) the lesser of 200% or two plus the lesser of such ADP or ACP. "Lesser" is substituted for "greater" in "(i)," above, and "greater" is substituted for "lesser" after "two plus the" in "(ii)" if it would result in a larger Aggregate Limit. (f) Contribution Percentage Amounts. The term Contribution Percentage Amounts means the sum of the Employee Contributions, Matching Contributions, Qualified Matching Contributions (to the extent not taken into account for purposes of the ADP test) and Qualified Nonelective Contributions (to the extent not taken into account for purposes of the ADP test) made under the Plan on behalf of the Participant for the Plan Year. Such Contribution Percentage Amounts shall not include Matching Contributions that are forfeited either to correct Excess Aggregate Contributions or because the contributions to which they relate are Excess Elective Deferral Contributions, Excess Contributions, or Excess Aggregate Contributions. The Employer may elect to use Elective Deferrals in the Contribution Percentage Amounts as long as the ADP test (as described in Section 4A.2) is met before the Elective Deferrals are used in the ACP test (as described in Section 4A.4) and the ADP test continues to be met following the exclusion of those Elective Deferrals that are used to meet the ACP test. -65- 66 (g) Deferral Percentage Amounts. The term Deferral Percentage Amounts means any Elective Deferral Contributions made pursuant to the Participant's deferral election, including Excess Elective Deferral Contributions of Highly Compensated Employees, but excluding Elective Deferral Contributions that are taken into account in the ACP test (provided the ADP test is satisfied both with and without exclusion of these Elective Deferral Contributions). In addition, the Employer may choose to make Qualified Nonelective Contributions and Qualified Matching Contributions. (h) Eligible Participant. The term Eligible Participant means any Employee who is eligible to make an Employee Contribution or Elective Deferral Contribution (if the Employer takes such contributions into account in the calculation of the Actual Contribution Ratio), or to receive a Matching Contribution (including Forfeitures) or a Qualified Matching Contribution. If an Employee Contribution is required as a condition of participation in the Plan, any Employee who would be a Participant in the Plan if such Employee made the Required Employee Contribution shall be treated as an Eligible Participant on behalf of whom no Employee Contributions are made. If the Employer has elected in its Adoption Agreement to provide for Elective Deferral Contributions, then Sections 4A.2 through 4A.5 shall apply. 4A.2 Actual Deferral Percentage Test. The ADP for Participants who are Highly Compensated Employees for each Plan Year and the ADP for Participants who are non-Highly Compensated Employees for the same Plan Year must satisfy one of the following tests: (a) The ADP for Participants who are Highly Compensated Employees for the Plan Year shall not exceed the ADP for Participants who are non-Highly Compensated Employees for the same Plan Year multiplied by 1.25; or (b) The ADP for Participants who are Highly Compensated Employees for the Plan Year shall not exceed the ADP for Participants who are non-Highly Compensated Employees for the same Plan Year multiplied by 2.0, provided that the ADP for Participants who are Highly Compensated Employees does not exceed the ADP for Participants who are non-Highly Compensated Employees by more than two (2) percentage points. 4A.3 Special Rules - ADP Test. (a) The ADP for any Participant who is a Highly Compensated Employee for the Plan Year and who is eligible to have Elective Deferral Contributions (and Qualified Nonelective Contributions or Qualified Matching Contributions, or both, if treated as Elective Deferrals for purposes of the ADP test) allocated to his accounts under two or more CODAs maintained by the Employer, shall be determined as if such Elective Deferral Contributions (and, if applicable, such Qualified Nonelective Contributions or Qualified Matching Contributions, or both) were made under a single CODA. If a Highly Compensated Employee participates in two or more CODAs that have different Plan Years, such CODAs are treated as a single CODA with respect to the Plan Years ending with or within the same calendar year. Notwithstanding the foregoing, certain plans shall be treated as separate if mandatorily disaggregated under regulations under Code section 401(k). -66- 67 (b) If this Plan satisfies the requirements of Code sections 401(k), 401(a)(4), or 410(b) only if aggregated with one or more other plans, or if one or more other plans satisfy the requirements of such Code sections only if aggregated with this Plan, then this Section shall be applied by determining the ADP of Employees as if all such plans were a single plan. For Plan Years beginning after December 31, 1989, plans may be aggregated in order to satisfy Code section 401(k) only if they have the same Plan Year. (c) If a Highly Compensated Employee is subject to the family aggregation rules of section 414(q)(6) because that Participant is either a 5-percent owner or one of the top 10 Highly Compensated Employees, the combined Actual Deferral Ratio for the family group (which is treated as one Highly Compensated Employee) must be determined by combining the Elective Deferral Contributions (and Qualified Nonelective Contributions or Qualified Matching Contributions, or both, if treated as Elective Deferral Contributions for purposes of the ADP test), and Compensation for the Plan Year of all the family members (as defined in section 414(q)(6)). Such family members shall be disregarded as separate Employees in determining the ADP for both Highly Compensated Employees and non-Highly Compensated Employees. (d) For purposes of determining the ADP test, Elective Deferral Contributions, Qualified Nonelective Contributions and Qualified Matching Contributions must be made before the last day of the 12-month period immediately following the Plan Year to which such contributions relate. (e) The Employer shall maintain records sufficient to demonstrate satisfaction of the ADP test and the amount of Qualified Nonelective Contributions or Qualified Matching Contributions, or both, used in such test. (f) The determination and treatment of the Deferral Percentage Amounts of any Participant shall satisfy such other requirements as may be prescribed by the Secretary of the Treasury. (g) If the Employer determines before the end of the Plan Year that the Plan may not satisfy the ADP test for the Plan Year, the Employer may require that the amounts of Elective Deferral Contributions being allocated to the accounts of Highly Compensated Employees be reduced to the extent necessary to prevent Excess Contributions from being made to the Plan. Although the Employer may reduce the amounts of Elective Deferral Contributions that may be allocated to the Participant's Accounts of Highly Compensated Employees, the affected Employees shall continue to participate in the Plan. When the situation that resulted in the reduction of Elective Deferral Contributions ceases to exist, the Employer shall reinstate the amounts of Elective Deferral Contributions elected by the affected Participants in their Salary Deferral Agreement to the fullest extent possible. -67- 68 If the Employer has elected in its Adoption Agreement, to provide for Employee Contributions and/or Matching Contributions required to be tested under Code section 401(m), then Sections 4A.4 and 4A.5 shall apply. 4A.4 Actual Contribution Percentage Test. The ACP for Participants who are Highly Compensated Employees for each Plan Year and the ACP for Participants who are non-Highly Compensated Employees for the same Plan Year must satisfy one of the following tests: (a) The ACP for Participants who are Highly Compensated Employees for the Plan Year shall not exceed the ACP for Participants who are non-Highly Compensated Employees for the same Plan Year multiplied by 1.25; or (b) The ACP for Participants who are Highly Compensated Employees for the Plan Year shall not exceed the ACP for Participants who are non-Highly Compensated Employees for the same Plan Year multiplied by two (2), provided that the ACP for Participants who are Highly Compensated Employees does not exceed the ACP for Participants who are non-Highly Compensated Employees by more than two (2) percentage points. 4A.5 Special Rules - ADP/ACP Tests. (a) Multiple Use: If one or more Highly Compensated Employees participates in both a CODA and a plan subject to the ACP test maintained by the Employer, and the sum of the ADP and ACP of those Highly Compensated Employees subject to either or both tests exceeds the Aggregate Limit, then the ACP of those Highly Compensated Employees who also participate in a CODA will be reduced (beginning with such Highly Compensated Employee whose Actual Contribution Ratio is the highest) so that the limit is not exceeded. The amount by which each Highly Compensated Employee's Contribution Percentage Amounts are reduced shall be treated as an Excess Aggregate Contribution. The ADP and ACP of the Highly Compensated Employees are determined after any corrections required to meet the ADP and ACP tests. Multiple use does not occur if both the ADP and ACP of the Highly Compensated Employees does not exceed 1.25 multiplied by the ADP and ACP of the non-Highly Compensated Employees. (b) For purposes of this Section, the Actual Contribution Ratio for any Participant who is a Highly Compensated Employee and who is eligible to have Contribution Percentage Amounts allocated to his account under two or more plans described in Code section 401(a), or CODAs that are maintained by the Employer, shall be determined as if the total of such Contribution Percentage Amounts was made under each plan. If a Highly Compensated Employee participates in two or more CODAs that have different Plan Years, all CODAs ending with or within the same calendar year are treated as a single CODA. Notwithstanding the foregoing, certain plans shall be treated as separate if mandatorily disaggregated under regulations under Code section 401(m). (c) If this Plan satisfies the requirements of Code sections 401(m), 401(a)(4) or 410(b) only if aggregated with one or more other plans, or if one or more other plans satisfy the requirements of such sections of the Code only if aggregated with this Plan, then this Section shall be -68- 69 applied by determining the Actual Contribution Ratio of Employees as if all such plans were a single plan. For Plan Years beginning after December 31, 1989, plans may be aggregated in order to satisfy Code section 401(m) only if they have the same Plan Year. (d) For purposes of determining the Actual Contribution Ratio of a Participant who is a 5-percent owner or one of the Top 10 Highly Compensated Employees, the Contribution Percentage Amounts and Compensation for such Participant shall include the Contribution Percentage Amounts and Compensation for the Plan Year of family members (as defined in Code section 414(q)(6)). Such family members shall be disregarded as separate Employees in determining the ACP for Highly Compensated Employees and non-Highly Compensated Employees. (e) For purposes of determining the ACP test, Employee Contributions are considered to have been made in the Plan Year in which contributed to the Plan. Qualified Matching Contributions and Qualified Nonelective Contributions are considered made for a Plan Year if made no later than the end of the 12-month period beginning on the day after the close of the Plan Year. (f) The Employer shall maintain records sufficient to demonstrate satisfaction of the ACP test and the amount of Qualified Nonelective Contributions or Qualified Matching Contributions, or both, used in such test. (g) The determination and treatment of the Contribution Percentage Amounts of any Participant shall satisfy such other requirements as may be prescribed by the Secretary of the Treasury. 4B. LIMITATIONS ON ALLOCATIONS 4B.1 Definitions. The following definitions apply for purposes of Section 4B. (a) Annual Additions. The term Annual Additions means the sum of the following amounts credited to a Participant's Account for the Limitation Year: (1) All contributions made by the Employer which shall include: Elective Deferral Contributions; Money Purchase Pension Contributions; Matching Contributions; Nonelective Contributions; Qualified Nonelective Contributions; Qualified Matching Contributions; Prior Employer Contributions; (2) Employee Contributions; (3) Forfeitures; and -69- 70 (4) Amounts allocated after March 31, 1984 to an individual medical account, as defined in Code section 415(l)(2), which is part of a pension or annuity plan maintained by the Employer, are treated as Annual Additions to a defined contribution plan. Also, amounts derived from contributions paid or accrued after December 31, 1985 in taxable years ending after such date, which are attributable to post-retirement medical benefits allocated to the separate account of a Key Employee as defined in Code section 419A(d)(3), under a welfare benefit fund as defined in Code section 419(e), maintained by the Employer, are treated as Annual Additions to a defined contribution plan; and (5) Allocations under a simplified employee pension plan. For this purpose, any Excess Annual Additions applied under Sections 4C.3 or 4B.5(f) in the Limitation Year to reduce Employer contributions will be considered Annual Additions for such Limitation Year. (b) Compensation. As elected by the Employer in the Adoption Agreement, the term Compensation means all of a Participant's: (1) Wages, Tips, and Other Compensation Box on Form W-2. (Information required to be reported under Code sections 6041, 6051 and 6052). Wages within the meaning of Code section 3401(a) and all other payments of compensation to an Employee by the Employer (in the course of the Employer's trade or business) for which the Employer is required to furnish the Employee a written statement under Code sections 6041(d), 6051(a)(3), and 6052. Compensation must be determined without regard to any rules under Code section 3401(a) that limit the remuneration included in wages based on the nature or location of the employment or the services performed (such as the exception for agricultural labor in Code section 3401(a)(2)). (2) Section 3401(a) Wages. Wages as defined in Code section 3401(a) for the purposes of income tax withholding at the source but determined without regard to any rules that limit the remuneration included in wages based on the nature or location of the employment or the services performed (such as the exception for agricultural labor in Code section 3401(a)(2)). (3) 415 Safe-Harbor Compensation. Wages, salaries, and fees for professional services and other amounts received (without regard to whether or not an amount is paid in cash) for personal services actually rendered in the course of employment with the Employer maintaining the Plan to the extent that the amounts are includable in gross income (including, but not limited to, commissions paid salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, bonuses, fringe benefits, and reimbursements or other expense allowances under a nonaccountable plan as described in Code section 1.62-2(c)), and excluding the following: (A) Employer contributions to a plan of deferred compensation which are not includable in the Employee's gross income for the taxable year in which contributed, -70- 71 or Employer contributions under a simplified employee pension plan to the extent such contributions are deductible by the Employee, or any distributions from a plan of deferred compensation; (B) Amounts realized from the exercise of a non-qualified stock option, or when restricted stock (or property) held by the Employee either becomes freely transferable or is no longer subject to a substantial risk of forfeiture; (C) Amounts realized from the sale, exchange or other disposition of stock acquired under a qualified stock option; and (D) Other amounts which received special tax benefits, or contributions made by the Employer (whether or not under a salary reduction agreement) towards the purchase of an annuity contract described in Code section 403(b) (whether or not the contributions are actually excludable from the gross income of the Employee). For any Self-Employed Individual, Compensation means Earned Income. For Limitation Years beginning after December 31, 1991, for purposes of applying the limitations of this Section 4B, Compensation for a Limitation Year is the Compensation actually paid or includable in gross income during such Limitation Year. Notwithstanding the preceding sentence, Compensation for a Participant in a defined contribution plan who is permanently and totally disabled (as defined in Code section 22(e)(3)) is the Compensation such Participant would have received for the Limitation Year if the Participant had been paid at the rate of Compensation paid immediately before becoming permanently and totally disabled; such imputed Compensation for the disabled Participant may be taken into account only if the Participant is not a Highly Compensated Employee and contributions made on behalf of such Participant are nonforfeitable when made. (c) Defined Benefit Fraction. The term Defined Benefit Fraction means a fraction, the numerator of which is the sum of the Participant's Projected Annual Benefits under all the defined benefit plans (whether or not terminated) maintained by the Employer, and the denominator of which is the lesser of 125 percent of the dollar limitation determined for the Limitation Year under Code sections 415(b) and (d), or 140 percent of the Highest Average Compensation including any adjustments under Code section 415(b). Notwithstanding the above, if the Participant was a Participant as of the first day of the Limitation Year beginning after December 31, 1986 in one or more defined benefit plans maintained by the Employer which were in existence on May 6, 1986, the denominator of this fraction will not be less than 125 percent of the sum of the annual benefits under such plans which the Participant had accrued as of the later of the close of the last Limitation Year beginning before January 1, 1987, disregarding any changes in the terms and conditions of the Plan after May 5, 1986. The preceding sentence applies only if the defined benefit plans individually and in the aggregate -71- 72 satisfied the requirements of Code section 415 for all Limitation Years beginning before January 1, 1987. Notwithstanding the foregoing, for any Top-Heavy Plan Year, 100 shall be substituted for 125 unless the extra minimum allocation is being made pursuant to the Employer's election in the Adoption Agreement. However, for any Plan Year in which this Plan is a Super Top-Heavy Plan, 100 shall be substituted for 125 in any event. (d) Defined Contribution Dollar Limitation. The term Defined Contribution Dollar Limitation means $30,000 or if greater, one-fourth of the defined benefit dollar limitation set forth in Code section 415(b)(1) as in effect for the Limitation Year. (e) Defined Contribution Fraction. The term Defined Contribution Fraction means a fraction, the numerator of which is the sum of the Annual Additions to the Participant's accounts under all the defined contribution plans (whether or not terminated) maintained by the Employer for the current and all prior Limitation Years (including the Annual Additions attributable to the Participant's nondeductible employee contributions to all defined benefit plans, whether or not terminated, maintained by the Employer, and the Annual Additions attributable to all welfare benefit funds, as defined in Code section 419(e), individual medical accounts, as defined in Code section 415(l)(2), and simplified employee pension plans, as defined in Code section 408(k), maintained by the Employer), and the denominator of which is the sum of the maximum aggregate amounts for the current and all prior Limitation Years of service with the Employer (regardless of whether a defined contribution plan was maintained by the Employer). The maximum aggregate amount in any Limitation Year is the lesser of 125 percent of the dollar limitation determined under Code sections 415(b) and (d) in effect under Code section 415(c)(1)(A) or 35 percent of the Participant's Compensation for such year. If the Employee was a Participant as of the end of the first day of the first Limitation Year beginning after December 31, 1986, in one or more defined contribution plans maintained by the Employer which were in existence on May 6, 1986, the numerator of this fraction will be adjusted if the sum of this fraction and the Defined Benefit Fraction would otherwise exceed 1.0 under the terms of this Plan. Under the adjustment, an amount equal to the product of (1) the excess of the sum of the fractions over 1.0 times (2) the denominator of this fraction, will be permanently subtracted from the numerator of this fraction. The adjustment is calculated using the fractions as they would be computed as of the end of the last Limitation Year beginning before January 1, 1987, and disregarding any changes in the terms and conditions of the Plan made after May 5, 1986, but using the section 415 limitation applicable to the first Limitation Year beginning on or after January 1, 1987. Notwithstanding the foregoing, for any Top-Heavy Plan Year, 100 shall be substituted for 125 unless the extra minimum allocation is being made pursuant to the Employer's election in the Adoption Agreement. However, for any Plan Year in which this Plan is a Super Top-Heavy Plan, 100 shall be substituted for 125 in any event. -72- 73 The Annual Additions for any Limitation Year beginning before January 1, 1987 shall not be recomputed to treat all Employee Contributions as Annual Additions. (f) Employer. For purposes of this Section 4B, the term Employer means the Employer that adopts this Plan, and all members of a controlled group of corporations (as defined in Code section 414(b) as modified by section 415(h)), a group of commonly controlled trades or businesses (as defined in Code section 414(c) as modified by section 415(h)) or affiliated service groups (as defined in Code section 414(m)) of which the adopting Employer is a part and any other entity required to be aggregated with the Employer pursuant to regulations under Code section 414(o). (g) Highest Average Compensation. The term Highest Average Compensation means the average Compensation for the three consecutive Years of Service with the Employer that produces the highest average. A Year of Service with the Employer is the 12-consecutive month period defined in Section 2A.5. (h) Limitation Year. The term Limitation Year means a calendar year, or the 12-consecutive month period elected by the Employer in the Limitation Year section of the Adoption Agreement. All qualified plans maintained by the Employer must use the same Limitation Year. If the Limitation Year is amended to a different 12-consecutive month period, the new Limitation Year must begin on a date within the Limitation Year in which the amendment is made. (i) Master or Prototype Plan. The term Master or Prototype Plan means a plan the form of which is the subject of a favorable opinion letter from the national office of the Internal Revenue Service. (j) Maximum Permissible Amount. The term Maximum Permissible Amount means the maximum Annual Additions that may be contributed or allocated to a Participant's Account under the Plan for any Limitation Year, which shall not exceed the lesser of: (1) The Defined Contribution Dollar Limitation, or (2) 25 percent of the Participant's Compensation for the Limitation Year. The Compensation limitation referred to in (2) above, shall not apply to any contribution for medical benefits (within the meaning of Code section 401(h) or 419A(f)(2)) which is otherwise treated as Annual Additions under Code sections 415(l)(1) or 419A(d)(2). If a short Limitation Year is created because of an amendment changing the Limitation Year to a different 12-consecutive month period, the Maximum Permissible Amount will not exceed the Defined Contribution Dollar Limitation multiplied by the following fraction:
Number of months in the short Limitation Year --------------------------------------------- 12
-73- 74 (k) Projected Annual Benefit. The term Projected Annual Benefit means the annual retirement benefit (adjusted to an actuarially equivalent Straight Life Annuity if such benefit is expressed in a form other than a Straight Life Annuity or Qualified Joint and Survivor Annuity) to which the Participant would be entitled under the terms of the Plan assuming: (1) The Participant will continue employment until Normal Retirement Age under the Plan (or current age, if later); and (2) The Participant's Compensation for the current Limitation Year and all other relevant factors used to determine benefits under the Plan will remain constant for all future Limitation Years. 4B.2 Basic Limitation. If the Participant does not participate in, and has never participated in another qualified plan or welfare benefit fund maintained by the Employer, as defined in Code section 419(e), or an individual medical account, as defined in Code section 415(l)(2), maintained by the Employer, or a simplified employee pension, as defined in Code section 408(k), maintained by the Employer, which provides Annual Additions as defined in Section 4B.1(a), the amount of Annual Additions which may be credited to the Participant's Account for any Limitation Year will not exceed the lesser of the Maximum Permissible Amount or any other limitation contained in this Plan. If the Employer contributions that would otherwise be contributed or allocated to the Participant's Account would cause the Annual Additions for the Limitation Year to exceed the Maximum Permissible Amount, the amount contributed or allocated will be reduced so that the Annual Additions for the Limitation Year will equal the Maximum Permissible Amount. 4B.3 Estimated Maximum Permissible Amount. Prior to determining the Participant's actual Compensation for the Limitation Year, the Employer may determine the Maximum Permissible Amount for a Participant on the basis of a reasonable estimation of the Participant's Compensation for the Limitation Year, uniformly determined for all Participants similarly situated. 4B.4 Actual Maximum Permissible Amount. As soon as administratively feasible after the end of the Limitation Year, the Maximum Permissible Amount for the Limitation Year will be determined on the basis of the Participant's actual Compensation for the Limitation Year. 4B.5 Participants Covered by Another Prototype Defined Contribution Plan. (a) This Section applies if, in addition to this Plan, the Participant is covered under another qualified Master or Prototype defined contribution Plan maintained by the Employer, or a welfare benefit fund, as defined in Code section 419(e), maintained by the Employer, or an individual medical account as defined in Code section 415(l)(2), maintained by the Employer, or a simplified employee pension plan, as defined in Code section 408(k), that provides Annual Additions as defined in Section 4B.1(a), during any Limitation Year. The Annual Additions which may be credited to a Participant's Account under this Plan for any such Limitation Year will not exceed the Maximum Permissible Amount reduced by the Annual Additions credited to a Participant's account under the other qualified Master and Prototype defined contribution Plans, -74- 75 welfare benefit funds, individual medical accounts, and simplified employee pension plans for the same Limitation Year. If the Annual Additions with respect to the Participant under other qualified Master and Prototype defined contribution Plans, welfare benefit funds, individual medical accounts, and simplified employee pension plans maintained by the Employer are less than the Maximum Permissible Amount and the Employer contributions that would otherwise be contributed or allocated to the Participant's Account under this Plan would cause the Annual Additions for the Limitation Year to exceed this limitation, the amount contributed or allocated will be reduced so that the Annual Additions under all such plans and funds for the Limitation Year will equal the Maximum Permissible Amount. If the Annual Additions with respect to the Participant under such other qualified master and prototype defined contribution plans, welfare benefit funds, individual medical accounts, and simplified employee pension plans, in the aggregate are equal to or greater than the Maximum Permissible Amount, no amount will be contributed or allocated to the Participant's Account under this Plan for the Limitation Year. (b) Prior to determining the Participant's actual Compensation for the Limitation Year, the Employer may determine the estimated Maximum Permissible Amount for a Participant in the manner described in Section 4B.3. (c) As soon as is administratively feasible after the end of the Limitation Year, the Maximum Permissible Amount for the Limitation Year will be determined on the basis of the Participant's actual Compensation for the Limitation Year. (d) If, pursuant to Section 4B.5(c), or as a result of the allocation of Forfeitures, a Participant's Annual Additions under this Plan and such other plans would result in Excess Annual Additions as defined in Section 4C.1(b) for a Limitation Year, the Excess Annual Additions will be deemed to consist of the Annual Additions last allocated, except that Annual Additions attributable to a simplified employee pension plan will be deemed to have been allocated first, followed by Annual Additions to a welfare benefit fund or individual medical account, regardless of the actual allocation date. (e) If Excess Annual Additions were allocated to a Participant on an allocation date of this Plan which coincides with an allocation date of another plan, the Excess Annual Additions attributed to this Plan will be the product of: (1) The total Excess Annual Additions allocated as of such date, multiplied by (2) The ratio of (i) the Annual Additions allocated to the Participant for the Limitation Year as of such date under this Plan to (ii) the total Annual Additions allocated to the Participant for the Limitation Year as of such date under this and all the other qualified Master or Prototype defined contribution Plans. (f) Any Excess Annual Additions attributed to this Plan will be disposed of in the manner described in Section 4C.3. \ -75- 76 4B.6 Participants Covered by Non-Prototype Defined Contribution Plan. If the Participant is covered under another qualified defined contribution plan maintained by the Employer which is not a Master or Prototype Plan, Annual Additions which may be credited to the Participant's Account under this Plan for any Limitation Year will be limited in accordance with Section 4B.5 as though the other plan were a Master or Prototype Plan, unless the Employer provides other limitations in the Limitations on Allocations section of the Adoption Agreement. 4B.7 Participants Covered by Defined Benefit Plan. If the Employer maintains, or at any time maintained, a qualified defined benefit plan covering any Participant in this Plan, the sum of the Participant's Defined Benefit Plan Fraction and Defined Contribution Plan Fraction will not exceed 1.0 in any Limitation Year. The Annual Additions which may be credited to the Participant's Account under this Plan for any Limitation Year will be limited in accordance with the Limitations on Allocations section of the Adoption Agreement. 4C. TREATMENT OF EXCESSES 4C.1 Definitions. (a) Excess Aggregate Contributions. The term Excess Aggregate Contributions means, with respect to any Plan Year, the excess of: (1) The aggregate Contribution Percentage Amounts taken into account in computing the ACP of Highly Compensated Employees for such Plan Year, over (2) The maximum Contribution Percentage Amounts permitted by the ACP test (determined by reducing the Contribution Percentage Amounts made on behalf of Highly Compensated Employees in order of their Actual Contribution Ratios beginning with the highest of such ratios). Such determination shall be made after first determining Excess Elective Deferral Contributions, pursuant to Section 4C.2(a) and then determining Excess Contributions pursuant to Section 4C.4. (b) Excess Annual Additions. The term Excess Annual Additions means the excess of the Participant's Annual Additions for the Limitation Year over the Maximum Permissible Amount. (c) Excess Contributions. The term Excess Contributions means, with respect to any Plan Year, the excess of: (1) The aggregate Deferral Percentage Amounts taken into account in computing the ADP of Highly Compensated Employees for such Plan Year, over (2) The maximum Deferral Percentage Amounts permitted by the ADP test (determined by reducing the Deferral Percentage Amounts made on behalf of Highly -76- 77 Compensated Employees in order of their Actual Deferral Ratios, beginning with the highest of such ratios). (d) Excess Elective Deferral Contributions. The term Excess Elective Deferral Contributions means those Elective Deferral Contributions that are includable in a Participant's gross income under Code section 402(g) to the extent such Participant's Elective Deferral Contributions for a taxable year exceed the dollar limitation under such Code section. Excess Elective Deferral Contributions shall be treated as Annual Additions under the Plan pursuant to Section 4B, unless such amounts are distributed in accordance with the provisions of Section 4C.2(a), below. 4C.2 Excess Elective Deferral Contributions. (a) In the event that Elective Deferral Contributions made during a calendar year exceed the limit specified in Section 2C.1(j)(4), then the Excess Elective Deferral Contributions, plus any income and minus any loss allocable thereto, shall be distributed to the Participant by the April 15 following the calendar year in which such amount was contributed, provided that the Participant notifies the Plan Administrator no later than 30 days in advance of his intent to withdraw such Excess Elective Deferral Contributions, or is deemed to notify the Plan Administrator. A Participant is deemed to notify the Plan Administrator of any Excess Elective Deferral Contributions that arise by taking into account only those Elective Deferrals made to this Plan and any other plans of this Employer. The spousal consent provisions of Section 3C shall not apply to any distribution of Excess Elective Deferral Contributions. (b) Excess Elective Deferral Contributions shall be adjusted for any income or loss for the Employee's tax year. The income or loss allocable to excess Elective Deferral Contributions is an amount determined by multiplying the sum of the income or loss allocable to the Participant's Elective Deferral Contribution account for the taxable year by a fraction, the numerator of which is such Participant's Excess Elective Deferral Contributions for the taxable year, and the denominator of which is equal to the sum of the Participant's Account balance attributable to Elective Deferral Contributions as of the beginning of the taxable year plus the Participant's Elective Deferral Contributions for the taxable year. Income for the gap period (the period from the end of the taxable year to the date of distribution) shall not be allocated to Excess Elective Deferral Contributions. (c) Matching Contributions, as defined in Section 1.35, that are attributable to Excess Elective Deferral Contributions shall be forfeited, and as such, shall be applied to reduce Employer contributions or pay Plan expenses. 4C.3 Excess Annual Additions. If, pursuant to Section 4B.4 or as a result of the allocation of Forfeitures, there are Excess Annual Additions, the excess will be disposed of using any of the following methods: (a) Employee Contributions or Elective Deferral Contributions or both, to the extent they would reduce the Excess Annual Additions, will be returned to the Participant. The -77- 78 Contributions returned in accordance with the preceding shall include any gains or losses attributable to such Contributions. Employee Contributions so returned will be disregarded with respect to the ACP test. Elective Deferral Contributions so returned will be disregarded with respect to the Elective Deferral limitation described in Section 2C.1(j)(4) of the Plan and the ADP test. (b) If, after the application of paragraph (a), Excess Annual Additions still exist and the Participant is covered by the Plan at the end of the Limitation Year, the Excess Annual Additions in the Participant's Account, other than Employee Contributions and Elective Deferral Contributions, will be used to reduce Employer contributions (including any allocation of Forfeitures) for such Participant in the next Limitation Year, and each succeeding Limitation Year, if necessary. (c) If, after the application of paragraph (a), Excess Annual Additions still exist and the Participant is not covered by the Plan at the end of a Limitation Year, the Excess Annual Additions will be held unallocated in a suspense account. The suspense account will be applied to reduce future Employer contributions (including allocation of any Forfeiture) for all remaining Participants in the next Limitation Year, and each succeeding Limitation Year if necessary. (d) If a suspense account is in existence at any time during the Limitation Year pursuant to this Section, it will not participate in the allocation of the Trust or Insurance Company's gains and losses. If a suspense account is in existence at any time during a particular Limitation Year, all amounts in the suspense account must be allocated and reallocated to the Participants' Account before any Employer or Employee Contributions may be made to the Plan for that Limitation Year. Except as provided in Section 4C.3(a), Excess Annual Additions may not be distributed to Participants or former Participants. 4C.4 Excess Contributions. (a) Notwithstanding any other provision of this Plan, Excess Contributions, plus any income and minus any loss allocable thereto, shall be distributed no later than the last day of each Plan Year to Participants to whose Participants' Accounts such Excess Contributions were allocated for the preceding Plan Year. If such excess amounts are distributed more than 2-1/2 months after the last day of the Plan Year in which such excess amounts arose, a ten percent excise tax will be imposed on the Employer maintaining the Plan with respect to such amounts. Such distributions shall be made to Highly Compensated Employees on the basis of the respective portions of the Excess Contributions attributable to each of such Employees. The distribution of Excess Contributions made to the family members of a family group that was combined for purposes of determining a Highly Compensated Employee's Actual Deferral Ratio shall be allocated among the family members in proportion to the Deferral Percentage Amounts (including any amounts required to be taken into account under Sections -78- 79 4A.3(a) and (b) of the Plan) of each family member that is combined to determine the Actual Deferral Ratio. (b) Excess Contributions shall be treated as Annual Additions, as defined in Section 4B.1, under the Plan in the Limitation Year in which they arose. (c) Excess Contributions shall be adjusted for any income or loss for the Plan Year. The income or loss allocable to Excess Contributions is an amount determined by multiplying the sum of the income or loss allocable to the Participant's Account for Deferral Percentage Amounts for the Plan Year, by a fraction, the numerator of which is such Participant's Excess Contributions for the Plan Year and the denominator of which is equal to the sum of the Participant's Account balance attributable to Deferral Percentage Amounts as of the beginning of the Plan Year plus the Participant's Deferral Percentage Amounts for the Plan Year. Income for the gap period (the period from the end of the Plan Year to the date of distribution) shall not be allocated to Excess Contributions. (d) Excess Contributions shall be distributed from the Participant's Account for Elective Contributions and Qualified Matching Contributions (if applicable) in proportion to the Participant's Elective Deferral Contributions and Qualified Matching Contributions (to the extent used in the ADP test) for the Plan Year. Excess Contributions shall be distributed from the Participant's Qualified Nonelective Contribution Account only to the extent that such Excess Contributions exceed the balance in the Participant's Account for Elective Contributions and Qualified Matching Contributions. (e) Matching Contributions, as defined in Section 1.35, that are attributable to Excess Contributions, shall be forfeited, and as such, shall be applied to reduce Employer contributions or pay Plan expenses. 4C.5 Excess Aggregate Contributions. (a) Notwithstanding any other provision of this Plan, Excess Aggregate Contributions, plus any income and minus any loss allocable thereto, shall be forfeited, if forfeitable, or if not forfeitable, distributed no later than the last day of each Plan Year to Participants to whose Participants' Accounts such Excess Aggregate Contributions were allocated for the preceding Plan Year. If such Excess Aggregate Contributions are distributed more than 2-1/2 months after the last day of the Plan Year in which such excess amounts arose, a ten percent excise tax will be imposed on the Employer maintaining the Plan with respect to those amounts. The distribution of Excess Aggregate Contributions made to the family members of a family group that was combined for purposes of determining a Highly Compensated Employee's Actual Contribution Ratio shall be allocated among the family members in proportion to the Contribution Percentage Amounts (including any amounts required to be taken into account under Sections 4A.5(a) and (b) of the Plan) of each family member that is combined to determine the Actual Contribution Ratio. -79- 80 (b) Excess Aggregate Contributions shall be treated as Annual Additions, as defined in Section 4B.1, in the Limitation Year in which they arose. (c) Excess Aggregate Contributions shall be adjusted for any income or loss for the Plan Year. The income or loss allocable to Excess Aggregate Contributions is an amount determined by multiplying the sum of the income or loss allocable to the Participant's Account for Contribution Percentage Amounts for the Plan Year by a fraction, the numerator of which is such Participant's Excess Aggregate Contributions for the Plan Year, and the denominator of which is equal to the sum of the Participant's Account balance attributable to Contribution Percentage Amounts as of the beginning of the Plan Year plus the Participant's Contribution Percentage Amounts for the Plan Year. Income for the gap period (the period from the end of the Plan Year to the date of distribution) shall not be allocated to Excess Aggregate Contributions. (d) Excess Aggregate Contributions shall be forfeited, if forfeitable, or distributed on a pro-rata basis from the Participant's Account for Employee Contributions, Matching Contributions, and Qualified Matching Contributions (and, if applicable, the Participant's Qualified Nonelective Contributions or Elective Deferral Contributions, or both). (e) Forfeitures of Excess Aggregate Contributions shall be applied to reduce Employer contributions or pay Plan expenses. (f) Matching Contributions as defined in Section 1.35 that are attributable to Excess Aggregate Contributions shall be forfeited, and as such, shall be applied to reduce Employer contributions or pay Plan expenses. ARTICLE V - PARTICIPANT PROVISIONS 5A. ANNUITY CONTRACT AND PARTICIPANT'S ACCOUNT 5A.1 Participant's Account. A Participant's Account shall be maintained on behalf of each Participant until such Account is distributed in accordance with the terms of this Plan. Each Participant shall have the exclusive authority to direct the investment of Employee Contributions, Elective Deferral Contributions, QVEC Contributions and Rollover Contributions, if applicable, from among the investment options selected by the Employer. If selected by the Employer in its Adoption Agreement, the Participant, Beneficiary and/or Alternate Payee additionally shall have the exclusive authority to direct the investment of contributions made by the Employer from among the investment choices selected by the Employer. 5A.2 Investment Transfers. Each Participant, Beneficiary, and/or Alternate Payee shall have the exclusive authority to direct the transfer of amounts between the investment funds designated by the Employer attributable to his Employee Contributions, Elective Deferral Contributions, QVEC Contributions and Rollover Contributions, if applicable. -80- 81 If the Employer selects in its Adoption Agreement to grant the Participant exclusive authority to direct the investment of contributions made by the Employer, the Participant, Beneficiary, and/or Alternate Payee shall also have the exclusive authority to transfer contributions made by the Employer from among the investment choices selected by the Employer. The transfer of amounts between investment funds shall be subject to the rules of the investment funds in which the Participant's Account is invested or is to be invested. The Plan Administrator or the Participant, Beneficiary, and/or Alternate Payee as the case may be, may change such amounts as often as the Plan Administrator may allow in accordance with the terms of the investment funds in which the Participant's Account is being invested. The ability of a Participant who is subject to the reporting requirements of section 16(a) of the Securities and Exchange Act of 1934 (the "Act") to make withdrawals or investment changes involving the Participant's Employer Stock Account may be restricted by the Plan Administrator to comply with rules under section 16(b) of the Act. 5A.3 Participant's Account Valuation. A Participant's Account shall be maintained on behalf of each Participant until such Account is distributed in accordance with the terms of this Plan. At least once per year, as of the last day of the Plan Year, each Participant's Account shall be adjusted, in the ratio that the Participant's Account balance bears to all account balances invested into the same investment vehicle, for any earnings, gains, losses, contributions, withdrawals, expenses, and loans attributable to such Plan Year, in order to obtain a new valuation of the Participant's Account. The assets of the Plan will be valued annually at fair market value as of the last day of each Plan Year. 5B. LIFE INSURANCE POLICIES 5B.1 Optional Purchase of Life Insurance. If the Employer in its Adoption Agreement shall permit the purchase of life insurance on the lives of some or all Participants hereunder, each eligible Participant may elect that a portion of the Contribution made on his behalf shall be applied to the purchase of a Life Insurance Policy or Policies on his life. The application for each Policy shall be signed by the Participant and by the Trustee and shall conform to the requirements of the Insurance Company, including any requested evidence of insurability, and the requirements of this Section. All Life Insurance Policies shall be issued so as to permit a common billing date. Any Policy on the life of a Participant who can qualify for waiver of premium thereunder and participant account contribution disability benefits thereunder may include such benefits if applied for by the Participant. The Plan Administrator may adopt reasonable rules regarding the purchase of Life Insurance Policies provided such rules are administered in a consistent and nondiscriminatory manner. No application shall be made hereunder for any Life Insurance Policy on the life of a Participant acceptable to the Insurance Company at standard premium rates for a face amount of less that $1,000 for the first, or any additional Policy issued on the Participant's life. -81- 82 5B.2 Premiums on Life Insurance Policies. The premiums on all Life Insurance Policies on the life of a Participant shall be paid from the portion of his Participant's Account attributable to contributions made by the Employer, to the extent sufficient therefor, otherwise in one of the following manners: (a) By a loan against the Participant's Policy or Policies, under the automatic premium loan provision thereof, or (b) By payment out of his Participant's Account. If the Participant is not acceptable to the Insurance Company as a standard risk at standard rates, a Policy with the same premium but a lesser death benefit may be purchased. 5B.3 Limitations on Premiums. In no case shall the cumulative total premiums paid on all Policies held on the life of a Participant hereunder exceed an amount equal to the applicable percentage set forth below of all Contributions (other than Employee Contributions) and Forfeitures theretofore allocated or currently due on his behalf: (a) 49% in the case of ordinary life insurance or similar policies. (b) 25% in the case of term insurance policies or a combination of policies, with premiums on ordinary life insurance or similar policies being given half weight. If such cumulative total premiums would otherwise exceed this amount, the necessary steps to avoid this result shall be taken by reduction of the Participant's life insurance coverage by changing all or a portion of his coverage to paid-up life insurance or by selling the excess portion to the Participant. 5B.4 Disposal. A Participant who no longer wishes to have any part of his allocable share of Contributions used to pay the premiums for any Life Insurance Policy or Policies may withdraw a prior election by written notice to the Trustee to that effect. Any Policy shall be disposed of in accordance with its provisions as the Trustee shall direct. 5B.5 Rights under Policies. Each Policy shall provide that the Trustee shall have the right to receive any or all payments that may be due during the Participant's lifetime. Any death benefit shall be payable directly to the Beneficiary named in the Policy and the Participant shall have the right, subject to the terms of Section 3C, either directly or through the Trustee, to change the Beneficiary from time to time and to elect settlement options under the policy for the benefit of the Beneficiary. The Trustee shall have the right to exercise all other options and privileges contained in the policy and shall exercise such rights and privileges in a manner consistent with the terms of the Plan. -82- 83 5B.6 Loans. No loans shall be made against any of the Policies hereunder either from the Insurance Company or any other source unless such loans are made in order to pay amounts then due as premiums thereon. 5B.7 Conditions of Coverage. Except as may be otherwise provided in any conditional or binding receipt issued by the Insurance Company, there shall be no coverage and no death benefit payable under any Policy to be purchased from the Insurance Company until such Policy shall have been delivered and the premium therefor shall have been paid to the Insurance Company as a premium for that Policy. Neither the Employer nor the Trustee shall have any responsibility as to the effectiveness of any Life Insurance Policy purchased from the Insurance Company hereunder nor be under any liability or obligation to pay any amount to any Participant or his Beneficiary by reason of any failure or refusal by the Insurance Company to make such payment. 5B.8 Policy Not Yet in Force. If at the death of any Participant, the Trustee shall be holding any amount intended for the purchase of any Life Insurance Policy on the Participant's life, but coverage under such Policy shall not yet be in force, the Trustee shall credit such amount to the Participant's Account to be disposed of as a portion thereof. 5B.9 Value of Policy. The value of any Policy on the life of a living Participant for any purpose under this Plan shall be that amount which the Insurance Company would pay upon surrender of such Policy in accordance with its usual rules and practices. 5B.10 Dividends. If dividends are allowed on any Life Insurance Policy, they shall be used to provide additional benefits under the Policy. 5B.11 Distribution. No life insurance protection shall continue in force under the Plan subsequent to a Participant's retirement or Termination of Employment, whichever occurs first. As of such date, any Life Insurance Policy shall be distributed to the Participant in accordance with its terms and the terms of Section 3C.3. 5B.12 Application. The Trustee, if the Plan is trusteed, or custodian, if the Plan has a custodial account, shall apply for and will be the owner of any Life Insurance Policy purchased under the terms of this Plan. The Life Insurance Policy(ies) must provide that proceeds will be payable to the Trustee (or custodian, if applicable). However, the Trustee (or custodian) shall be required to pay over all proceeds of the Life Insurance Policy(ies) to the Participant's designated Beneficiary in accordance with the distribution provisions of this Plan. A Participant's Spouse will be the designated Beneficiary of the proceeds in all circumstances unless a Qualified Election has been made in accordance with Section 3C.2(c), Joint and Survivor Annuity Requirements, if applicable. Under no circumstances shall the Trust (or custodial account) retain any part of the proceeds. In the event of any conflict between the provisions of this Plan and any Life Insurance Policies or annuity contracts issued pursuant to the Plan, the Plan provisions shall control. -83- 84 5C. LOANS 5C.1 Loans to Participants. If the Employer has specified in its Adoption Agreement that loans are permitted, then the Plan Administrator may make a bona fide loan to a Participant, in an amount which, when added to the outstanding balance of all other loans to the Participant from all qualified plans of the Employer, does not exceed the lesser of $50,000 reduced by the excess of the Participant's highest outstanding loan balance during the 12 months preceding the date on which the loan is made over the outstanding loan balance on the date the new loan is made, or 50% of the Participant's Vested Interest in his Participant's Account excluding amounts attributable to QVEC Contributions. Notwithstanding any provision in this paragraph to the contrary, loans may not exceed a Participant's Vested Interest attributable to such contributions. In the event of default, foreclosure on the note and attachment of security will not occur until a distributable event occurs in the Plan. No loans will be made to any Shareholder-Employee or Owner-Employee or to family members of Shareholder-Employees or Owner-Employees, as defined in Code section 267(c)(4). The loan shall be made under such terms, security interest, and conditions as the Plan Administrator deems appropriate, provided, however, that: (a) Loans shall be made available to all Participants and parties-in-interest (as defined in ERISA and including Employees and Beneficiaries), on a reasonably equivalent basis. (b) Loans shall not be made available to Highly Compensated Employees on a basis greater than the basis made available to other Employees. (c) Loans must bear a reasonable rate of interest. (d) Loans are adequately secured. (e) Unless the provisions of Section 3C.6 apply to a Participant, loans may be made only after a Participant obtains the consent of his Spouse, if any, to use his Participant's Account as security for the loan. Spousal consent shall be obtained no earlier than the beginning of the 90-day period that ends on the date on which the loan is to be so secured. The consent must be in writing, must acknowledge the effect of the loan, and must be witnessed by a Plan representative or notary public. Such consent shall thereafter be binding with respect to the consenting Spouse or any subsequent Spouse with respect to that loan. A new consent shall be required if the Participant's Account is used for renegotiation, extension, renewal or other revision of the loan. (f) Loans must be made in accordance with and subject to all of the provisions of this Section SC. -84- 85 If a valid spousal consent has been obtained in accordance with (e), then, notwithstanding any other provision of this Plan, the portion of the Participant's Vested Interest used as a security interest held by the Plan by reason of a loan outstanding to the Participant shall be taken into account for purposes of determining the amount of the account balance payable at the time of death or distribution, but only if the reduction is used as repayment of the loan. If less than 100% of the Participant's Vested Interest in his Participant's Account (determined without regard to the preceding sentence) is payable to the surviving Spouse, then the Participant's Account shall be adjusted by first reducing the Vested Interest by the amount of the security used as repayment of the loan, and then determining the benefit payable to the surviving Spouse. 5C.2 Loan Procedures. The Plan Administrator shall establish a written set of procedures, set forth in the summary plan description or any other established set of procedures, which becomes a part of such Plan by which all loans will be administered. Such rules, which are incorporated herein by reference, will include, but not be limited to the following: (a) The person or persons authorized to administer the loan program, identified by name or position; (b) The loan application procedure; (c) The basis for approving or denying loans; (d) Any limits on the types of loans permitted; (e) The procedure for determining a "reasonable" interest rate; (f) Acceptable collateral; (g) Default conditions; and (h) Steps which will be taken to preserve Plan assets in the event of default. 5D. PARTICIPANTS' RIGHTS 5D.1 General Rights of Participants and Beneficiaries. The Plan is established and the Plan or Trust assets are held for the exclusive purpose of providing benefits for such Employees and their Beneficiaries as have qualified to participate under the terms of the Plan. 5D.2 Filing a Claim for Benefits. A Participant or Beneficiary, or the Employer acting in his behalf, shall notify the Plan Administrator of a claim of benefits under the Plan. Such request shall be in writing to the Plan Administrator and shall set forth the basis of such claim and shall authorize the Plan Administrator to conduct such examinations as may be necessary to determine the validity of the claim and to take such steps as may be necessary to facilitate the payment of any benefits to which the Participant or Beneficiary may be entitled under the terms of the Plan. -85- 86 5D.3 Denial of Claim. Whenever a claim for benefits by any Participant or Beneficiary has been denied by a Plan Administrator, a written notice, prepared in a manner calculated to be understood by the Participant, must be provided, setting forth (1) the specific reasons for the denial; (2) the specific reference to pertinent Plan provisions on which the denial is based; (3) a description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary; and (4) an explanation of the Plan's claim review procedure. 5D.4 Remedies Available to Participants. A Participant or Beneficiary (1) may request a review by a Named Fiduciary, other than the Plan Administrator, upon written application to the Plan; (2) may review pertinent Plan documents; and (3) may submit issues and comments in writing to a Named Fiduciary. A Participant or Beneficiary shall have 60 days after receipt by the claimant of written notification of a denial of a claim to request a review of a denied claim. A decision by a Named Fiduciary shall be made promptly and not later than 60 days after the Named Fiduciary's receipt of a request for review, unless special circumstances require an extension of the time for processing in which case a decision shall be rendered as soon as possible, but not later than 120 days after receipt of a request for review. The decision on review by a Named Fiduciary shall be in writing and shall include specific reasons for the decision, written in a manner calculated to be understood by the claimant, and specific references to the pertinent Plan provisions on which the decision is based. A Participant or Beneficiary shall be entitled, either in his own name or in conjunction with any other interested parties, to bring such actions in law or equity or to undertake such administrative actions or to seek such relief as may be necessary or appropriate to compel the disclosure of any required information, to enforce or protect his rights, to recover present benefits due to him or to clarify his rights to future benefits under the Plan. 5D.5 Limitation of Rights. Participation hereunder shall not grant any Participant the right to be retained in the Service of the Employer or any other rights or interest in the Plan or Trust fund other than those specifically herein set forth. 5D.6 100% Vested Contributions. Each Participant, regardless of his length of Service with the Employer, shall be fully vested (100%) at all times in any portion of his Participant's Account attributable to the following contributions, as applicable: (a) Employee Contributions and earnings thereon; (b) Elective Deferral Contributions and earnings thereon; (c) Qualified Matching Contributions and earnings thereon; (d) Qualified Nonelective Contributions and earnings thereon; -86- 87 (e) Rollover Contributions and earnings thereon; (f) QVEC Contributions and earnings thereon. 5D.7 Reinstatement of Benefit. In the event any portion of a benefit which is payable to a Participant or a Beneficiary shall remain unpaid on account of the inability of the Plan Administrator, after diligent effort, to locate such Participant or Beneficiary, the amount so distributable shall be treated as a Forfeiture under Section 3D. If a claim is made by the Participant or Beneficiary for any benefit forfeited under this Section, such benefit must be reinstated by the Employer. 5D.8 Non-Alienation. It is a condition of the Plan, and all rights of each Participant shall be subject thereto, that no right or interest of any Participant in the Plan shall be assignable or transferable in whole or in part, either directly or by operation of law or otherwise, including, but without limitation, execution, levy, garnishment, attachment, pledge, bankruptcy or in any other manner, and no right or interest of any Participant in the Plan shall be liable for or subject to any obligation or liability of such Participant. The preceding sentence shall not preclude the enforcement of a federal tax levy made pursuant to Code section 6331 or the collection by the United States on a judgement resulting from an unpaid tax assessment. The preceding paragraph shall also apply to the creation, assignment, or recognition of a right to any benefit payable with respect to a Participant pursuant to a domestic relations order, unless such order is determined to be a QDRO. A domestic relations order entered before January 1, 1985 will be treated as a QDRO if payment of benefits pursuant to the order has commenced as of such date, and may be treated as a QDRO if payment of benefits has not commenced as of such date, even though the order does not satisfy the requirements of Code section 414(p). ARTICLE VI - OVERSEER PROVISIONS 6A. FIDUCIARY DUTIES AND RESPONSIBILITIES 6A.1 General Fiduciary Standard of Conduct. Each Fiduciary of the Plan shall discharge his duties hereunder solely in the interest of the Participants and their Beneficiaries and for the exclusive purpose of providing benefits to Participants and their Beneficiaries and defraying reasonable expenses of administering the Plan. Each Fiduciary shall act with the care, skill, prudence and diligence under the circumstances that a prudent man acting in a like capacity and familiar with such matters would use in conducting an enterprise of like character and with like aims, in accordance with the documents and instruments governing this Plan, insofar as such documents and instruments are consistent with this standard. 6A.2 Service in Multiple Capacities. Any Person or group of Persons may serve in more than one Fiduciary capacity with respect to this Plan, specifically including service both as Trustee and Plan Administrator. -87- 88 6A.3 Limitations on Fiduciary Liability. Nothing in this Plan shall be construed to prevent any Fiduciary from receiving any benefit to which he may be entitled as a Participant or Beneficiary in this Plan, so long as the benefit is computed and paid on a basis which is consistent with the terms of this Plan as applied to all other Participants and Beneficiaries. Nor shall this Plan be interpreted to prevent any Fiduciary from receiving any reasonable compensation for services rendered, or for the reimbursement of expenses properly and actually incurred in the performance of his duties with the Plan; except that no Person so serving who already receives full-time pay from an Employer shall receive compensation from this Plan, except for reimbursement of expenses properly and actually incurred. 6A.4 Investment Manager. If an Investment Manager has been appointed pursuant to Section 6B.7 of this Plan, he is required to acknowledge in writing that he has undertaken a Fiduciary responsibility with respect to the Plan. The Insurance Company's liability as a Fiduciary is limited to that arising from its management of any assets of the Plan held by the Insurance Company in its separate accounts. 6B. THE PLAN ADMINISTRATOR 6B.1 Designation and Acceptance. The Employer shall designate a Person or Persons to serve as Plan Administrator under the Plan and such Persons, by joining in the execution of the Adoption Agreement, accepts such appointment and agrees to act in accordance with the terms of the Plan. 6B.2 Duties and Responsibility. The Plan Administrator shall administer the Plan for the exclusive benefit of the Participants and their Beneficiaries in a nondiscriminatory manner subject to the specific terms of the Plan. The Plan Administrator shall perform all such duties as are necessary to operate, administer, and manage the Plan in accordance with the terms thereof. This shall include notification to the Insurance Company of any adjustment made to a Participant's Account as a result of Excess Annual Additions as defined in Section 4C.1(b). The Plan Administrator shall comply with the regulatory provisions of ERISA and shall furnish to each Participant (a) a summary plan description, (b) upon written request, a statement of his total benefits accrued and his vested benefits if any and (c) the information necessary to elect the benefits available under the Plan. The Plan Administrator shall also file the appropriate annual reports and any other data which may be required by appropriate regulatory agencies. Furthermore, the Plan Administrator shall take the necessary steps to notify the appropriate interested parties whenever an application is made to the Secretary of the Treasury for a determination letter in accordance with Code section 7476 as amended. 6B.3 Special Duties. If the Employer that adopts this Plan is not the Plan Administrator, and the Plan provides for either Employee Contributions or Matching Contributions to be made, the Plan Administrator shall: -88- 89 (a) Maintain records that enable it to monitor the adopting Employer's compliance with the requirements of Code section 401(m); (b) Perform the ACP test, as described in Section 4A.4, for the Employer on an annual basis; and (c) Notify the Employer if it is required to correct Excess Aggregate Contributions. 6B.4 Expenses and Compensation. The expenses necessary to administer the Plan shall be taken from Participants' Accounts unless paid by the Employer, including but not limited to those involved in retaining necessary professional assistance from an attorney, an accountant, an actuary, or an investment advisor. Nothing shall prevent the Plan Administrator from receiving reasonable compensation for services rendered in administering this Plan, provided the Plan Administrator is not a full-time Employee of any Employer adopting this Plan. 6B.5 Information from Employer. To enable the Plan Administrator to perform his functions, the Employer shall supply full and timely information to the Plan Administrator on all matters relating to this Plan as the Plan Administrator may require. 6B.6 Administrative Committee; Multiple Signatures. In the event that more than one Person has been duly nominated to serve on the Administrative Committee and has signified in writing the acceptance of such designation, the signature(s) of one or more Persons may be accepted by an interested party as conclusive evidence that the Administrative Committee has duly authorized the action therein set forth and as representing the will of and binding upon the whole Administrative Committee. No Person receiving such documents or written instructions and acting in good faith and in reliance thereon shall be obliged to ascertain the validity of such action under the terms of this Plan. The Administrative Committee shall act by a majority of its members at the time in office, and such action may be taken either by a vote at a meeting or in writing without a meeting. 6B.7 Resignation and Removal; Appointment of Successor. The Plan Administrator, or any member of the Administrative Committee, may resign at any time by delivering to the Employer a written notice of resignation, to take effect at a date specified therein, which shall not be less than 30 days after the delivery thereof, unless such notice shall be waived. The Plan Administrator may be removed with or without cause by the Employer by delivery of written notice of removal, to take effect at a date specified therein, which shall be not less than thirty (30) days after delivery thereof, unless such notice shall be waived. The Employer, upon receipt of or giving notice of the resignation or removal of the Plan Administrator, shall promptly designate a successor Plan Administrator who must signify acceptance of this position in writing. In the event no successor is appointed, the Board of Directors of the Employer will function as the Administrative Committee until a new Plan Administrator has been appointed and has accepted such appointment. -89- 90 6B.8 Investment Manager. The Plan Administrator may appoint, in writing, an Investment Manager or Managers to whom is delegated the authority to manage, acquire, invest or dispose of all or any part of the Plan or Trust assets. With regard to the assets entrusted to his care, the Investment Manager shall provide written instructions and directions to the Employer or Trustee, as applicable, who shall in turn be entitled to rely upon such written direction. This appointment and delegation shall be evidenced by a signed written agreement. 6B.9 Delegation of Duties. The Plan Administrator shall have the power, to the extent permitted by law, to delegate the performance of such Fiduciary and non-Fiduciary duties, responsibilities and functions as the Plan Administrator shall deem advisable for the proper management and administration of the Plan in the best interests of the Participants and their Beneficiaries. 6C. TRUST AGREEMENT This agreement entered into by and among the Employer, the Plan Administrator and the Trustee pursuant to the Adoption Agreement completed and signed by the Employer, the Plan Administrator and Trustee, hereby establishes the Trust with the following provisions to form a part of and implement the provisions of the Plan: 6C.1 Creation and Acceptance of Trust. The Trustee, by joining in the execution of the Adoption Agreement, accepts the Trust hereby created and agrees to act in accordance with the express terms and conditions herein stated. 6C.2 Trustee Capacity; Co-Trustees. The Trustee may be a Bank, Trust Company or other corporation possessing trust powers under applicable State or Federal law or one or more individuals or any combination thereof. When two or more persons serve as Trustee, they are specifically authorized, by a written agreement between themselves, to allocate specific responsibilities, obligations or duties among themselves. An original copy of such written agreement is to be delivered to the Plan Administrator. 6C.3 Resignation and Removal; Appointment of Successor Trustee. Any Trustee may resign at any time by delivering to the Plan Administrator a written notice of resignation, to take effect at a date specified therein, which shall not be less than 30 days after the delivery thereof, unless such notice shall be waived. The Trustee may be removed with or without cause by the Board of Directors by delivery of a written notice of removal, to take effect at a date specified therein, which shall not be less than 30 days after delivery thereof, unless such notice shall be waived. In the case of the resignation or removal of a Trustee, the Trustee shall have the right to a settlement of its account, which may be made, at the option of the Trustee, either (1) by judicial -90- 91 settlement in an action instituted by the Trustee in a court of competent jurisdiction, or (2) by written agreement of settlement between the Trustee and the Plan Administrator. Upon such settlement, all right, title and interest of such Trustee in the assets of the Trust and all rights and privileges under this Agreement theretofore vested in such Trustee shall vest in the successor Trustee, and thereupon all future liability of such Trustee shall terminate; provided, however, that the Trustee shall execute, acknowledge and deliver all documents and written instruments which are necessary to transfer and convey the right, title and interest in the Trust assets, and all rights and privileges to the successor Trustee. The Board of Directors, upon receipt of notice of the resignation or removal of the Trustee, shall promptly designate a successor Trustee, whose appointment is subject to acceptance of this Trust in writing and shall notify the Insurance Company in writing of such successor Trustee. 6C.4 Taxes, Expenses and Compensation of Trustee. The Trustee shall deduct from and charge against the Trust fund any taxes paid by it which may be imposed upon the Trust fund or the income thereof or which the Trustee is required to pay with respect to the interest of any person therein. The Employer shall pay the Trustee annually its expenses in administering the Trust and a reasonable compensation for its service as Trustee hereunder if the Trustee is not an Employee of the Plan, at a rate to be agreed upon from time to time. The reasonable compensation shall include that for any extraordinary services. 6C.5 Trustee Entitled to Consultation. The Trustee shall be entitled to advice of counsel, which may be counsel for the Plan or the Employer, in any case in which the Trustee shall deem such advice necessary. With the exception of those powers and duties specifically allocated to the Trustee by the express terms of this Plan, it shall not be the responsibility of the Trustee to interpret the terms of the Plan or Trust and the Trustee may request, and is entitled to receive guidance and written direction from the Plan Administrator on any point requiring construction or interpretation of the Plan documents. 6C.6 Rights, Powers and Duties of Trustee. The Trustee shall have the following rights, powers, and duties: (a) The Trustee shall be responsible for the safekeeping and administering of the assets of this Plan and Trust in accordance with the provisions of this Agreement and any amendments thereto. The duties of the Trustee under this Agreement shall be determined solely by the express provisions of this Agreement and no other further duties or responsibilities shall be implied. Subject to the terms of this Plan and Trust, the Trustee shall be fully protected and shall incur no liability in acting in, reliance upon the written instructions or directions of the Plan Administrator or a duly designated Investment Manager or any other Named Fiduciary. -91- 92 (b) The Trustee shall have all powers necessary or convenient for the orderly and efficient performance of its duties hereunder, including but not limited to those specified in this Section. The Trustee may appoint one or more administrative agents or contract for the performance of such administrative and service functions as it may deem necessary for the effective installation and operation of the Plan and Trust. (c) The Trustee shall have the power to collect and receive any and all monies and other property due hereunder and to give full discharge and acquittance therefor; to settle, compromise or submit to arbitration any claims, debts or damages due or owing to or from the Trust; to commence or defend suits or legal proceedings wherever, in its judgment, any interest of the Trust requires it; and to represent the Trust in all suits or legal proceedings in any court of law or equity or before any other body or tribunal. It shall have the power generally to do all acts, whether or not expressly authorized, which the Trustee in the exercise of its Fiduciary responsibility may deem necessary or desirable for the protection of the Trust and the assets thereof. (d) The Trustee shall make application to the Insurance Company for the Annuity Contract required hereunder and shall take all necessary steps to obtain any Life Insurance Policies elected on the lives of Participants hereunder. In applying for the Annuity Contract, the Trustee may indicate that, unless it directs the Insurance Company otherwise, it shall be entitled to receive all cash payments for further distribution to Participants and Beneficiaries. (e) The Trustee may temporarily hold cash balances and shall be entitled to deposit any such funds received in a bank account or bank accounts in the name of the Trust in any bank or banks selected by the Trustee, including the banking department of the Trustee, pending disposition of such funds in accordance with the Trust. Any such deposit may be made with or without interest. (f) The Trustee shall obtain and deal with any Life Insurance Policies or other assets of this Trust held or received under this Plan only in accordance with the written directions from the Plan Administrator. The Trustee shall be under no duty to determine any facts or the propriety of any action taken or omitted by it in good faith pursuant to instructions from the Plan Administrator. (g) All contributions made to the Trust fund under this Plan shall be paid by the Trustee to the Insurance Company under the Annuity Contract within 30 days after the date such contributions were due under the Plan. However, in lieu of holding any contributions made to the Trust fund, the Trustee may direct that all such contributions be made directly to the Insurance Company under the Annuity Contract or any Life Insurance Policy. The Employer shall keep the Trustee informed of all contributions made directly to the Insurance Company in accordance with the Trustee's instructions. (h) If the whole or any part of the Trust shall become liable for the payment of any estate, inheritance, income or other tax which the Trustee shall be required to pay, the Trustee shall have full power and authority to pay such tax out of, any monies or other property in its hands for the -92- 93 account of the person whose interest hereunder is so liable. Prior to making any payment, the Trustee may require such releases or other documents from any lawful taxing authority as it shall deem necessary. The Trustee shall not be liable for any nonpayment of tax when it distributes an interest hereunder on instructions from the Plan Administrator. (i) The Trustee shall keep a full, accurate and detailed record of all transactions of the Trust which the Plan Administrator shall have the right to examine at any time during the Trustee's regular business hours. Following the close of the fiscal year of the Trust, or as soon as practical thereafter, the Trustee shall furnish the Plan Administrator with a statement of account. This account shall set forth all receipts, disbursements and other transactions effected by the Trustee during said year. The Plan Administrator shall promptly notify the Trustee in writing of its approval or disapproval of the account. The Plan Administrator's failure to disapprove the account within 60 days after receipt shall be considered an approval. The approval by the Plan Administrator shall be binding as to all matters embraced in any statement to the same extent as if the account of the Trustee had been settled by judgment or decree of a court of competent jurisdiction under which the Trustee, Plan Administrator, Employer and all persons having or claiming any interest in the Trust were parties; provided, however, that the Trustee may have its account judicially settled if it so desires. (j) If, at any time, there shall be a dispute as to the person to whom payment or delivery of monies or property should be made by the Trustee, or regarding any action to be taken by the Trustee, the Trustee may postpone such payment, delivery or action, retaining the funds or property involved, until such dispute shall have been resolved in a court of competent jurisdiction or the Trustee shall have been indemnified to its satisfaction or until it has received written direction from the Plan Administrator. (k) Anything in this instrument to the contrary notwithstanding, it shall be understood that the Trustee shall have no duty or responsibility with respect to the determination of matters pertaining to the eligibility of any Employee to become or remain a Participant hereunder, the amount of benefit to which any Participant or Beneficiary shall be entitled hereunder, all such responsibilities being vested in the Plan Administrator. The Trustee shall have no duty to collect any contribution from the Employer and shall not be concerned with the amount of any contribution nor the application of any contribution formula. 6C.7 Evidence of Trustee Action. In the event that the Trustee comprises two or more Trustees, then those Trustees may designate one such Trustee to transmit all decisions of the Trustee and to sign all necessary notices and other reports on behalf of the Trustee. All notices and other reports bearing the signature of the individual Trustee so designated shall be deemed to bear the signatures of all the individual Trustees and all parties dealing with the Trustee are entitled to rely on any such notices and other reports as authentic and as representing the action of the Trustee. -93- 94 6C.8 Investment Policy. This Plan has been established for the sole purpose of providing benefits to the Participants and their Beneficiaries. In determining its investments hereunder, the Trustee shall take account of the advice provided by the Plan Administrator as to funding policy and the short and long-range needs of the Plan based on the evident and probable requirements of the Plan as to the time benefits shall be payable and the requirements therefor. 6C.9 Period of the Trust. If it shall be determined that the applicable State law requires a limitation on the period during which the Employer's Trust shall continue, then such Trust shall not continue for a period longer than 21 years following the death of the last of those Participants including future Participants who are living at the Effective Date hereof. At least 180 days prior to the end of the twenty-first year as described in the first sentence of this Section the Employer, the Plan Administrator and the Trustee shall provide for the establishment of a successor trust and transfer of Plan assets to the Trustee. If applicable State law requires no such limitation, then this Section shall not be operative. 6D. THE INSURANCE COMPANY 6D.1 Duties and Responsibilities. The Insurance Company shall issue the Annuity Contract and any Policies hereunder and thereby assumes all the duties and responsibilities set forth therein. The terms of the Annuity Contract may be changed as provided therein without amending this Plan, provided such changes shall conform (1) to the requirements for qualification under Code section 401(a), as amended from time to time and (2) to ERISA, as amended from time to time. 6D.2 Relation to Employer, Plan Administrator and Participants. The Insurance Company may receive the statement of the Plan Administrator or, if the Plan Administrator so designates, the Employer or the Trustee, as conclusive evidence of any of the matters decided in the Plan, and the Insurance Company shall be fully protected in taking or permitting any action on the basis thereof and shall incur no liability or responsibility for so doing. The Insurance Company shall not be required to look into the terms of the Plan, to question any action by the Employer or the Plan Administrator or any Participant nor to determine that such action is properly taken under the Plan. The Insurance Company shall be fully discharged from any and all liability with respect to any payment to any Participant hereunder in accordance with the terms of the Annuity Contract or of any Policies under the Plan. The Insurance Company shall not be required to take any action contrary to its normal rules and practices. 6D.3 Relation to Trustee. The Insurance Company shall not be required to look into the terms of the Plan or question any action of the Trustee, and the Insurance Company shall not be responsible for seeing that any action of the Trustee is authorized by the terms hereof. The Insurance Company shall be under no obligation to take notice of any change in Trustee until evidence of such change satisfactory to the Insurance Company shall have been given to the Insurance Company in writing at its home office. -94- 95 6E. ADOPTING EMPLOYER 6E.1 Election to Become Adopting Employer. With the consent of the Employer and Trustee, if any, any employer, which along with the Employer is included in a group of employers which constitute a controlled group of corporations (as defined in Code section 414(b)) or which constitutes trade or businesses (whether or not incorporated) which are under common control (as defined in section 414(c)) or which constitutes an affiliated service group as defined in section 414(m) and is identified as an Adopting Employer in the Adoption Agreement, may adopt this Plan and all of its provisions. 6E.2 Definition. Any employer eligible to adopt this Plan under the provisions of Section 6E.1 and which adopts this Plan and all of its provisions, shall be known as an Adopting Employer and shall be included within the term Employer, as defined in Section 1.24. 6E.3 Effective Date of Plan. The effective date of the Plan for an Adopting Employer on other than the date specified in the Adoption Agreement shall be the first day of the Plan Year in which such Adopting Employer adopts this Plan. 6E.4 Forfeitures. Forfeitures of any nonvested portion of a Participant's Account, as selected by the Employer in the Adoption Agreement, shall be allocated only to other Participants who are employed by the Adopting Employer who made the contributions to such Participant's Account, or shall be used as a credit only for such Adopting Employer. 6E.5 Contributions. All contributions made by an Adopting Employer shall be determined separately by each Adopting Employer and shall be paid to and held by the Plan for the exclusive benefit of the Employees of such Adopting Employer and the Beneficiaries of such Employees, subject to all the terms and conditions of this Plan. The Plan Administrator shall keep separate books and records concerning the affairs of each Adopting Employer and as to the accounts and credits of the Employees of each Adopting Employer. 6E.6 Expenses. Subject to Section 6B.3, the expenses necessary to administer the Plan of any Adopting Employer shall be taken from accounts of Participants who are Employees of such Adopting Employer unless paid for by such Adopting Employer. The expenses necessary to administer the Plan for each Adopting Employer shall be determined by the ratio of the value of all Participants' Accounts of such Adopting Employers to the total value of all Participants' Accounts of each Adopting Employer. 6E.7 Substitution of Plans. Subject to the provisions of Section 7C, any Adopting Employer shall be permitted to withdraw from its participation in this Plan. The consent of the Employer or any other Adopting Employer shall not be required. 6E.8 Termination of Plans. If any Adopting Employer elects to terminate its Plan pursuant to Sections 7B.4, 7B.5 and 7B.6, such termination shall in no way affect the Plan of any other Adopting Employer. -95- 96 6E.9 Amendment. Amendment of this Plan by the Employer or any Adopting Employer shall only be by the written consent of the Employer and each and every Adopting Employer and with the consent of the Trustee, if any, where such consent is necessary in accordance with the terms of this Plan. 6E.10 Plan Administrator's Authority. The Plan Administrator shall have authority to make any and all necessary rules or regulations, binding upon all Adopting Employers and all Participants, to effectuate the purpose of this Section 6E. ARTICLE VII - SPECIAL CIRCUMSTANCES WHICH MAY AFFECT THE PLAN 7A. TOP-HEAVY PROVISIONS 7A.1 Definitions. (a) Annual Compensation. The term Annual Compensation means Compensation as defined in the Compensation section of the Adoption Agreement, but including amounts contributed by the Employer pursuant to a salary reduction agreement which are excludable from the Employee's gross income under Code section 125, section 402(e)(3), section 402(h)(1)(B) or section 403(b). (b) Determination Date. The term Determination Date means for any Plan Year subsequent to the first Plan Year, the last day of the preceding Plan Year. For the first Plan Year of the Plan, it means the last day of that year. (c) Determination Period. The term Determination Period means the Plan Year containing the Determination Date and the four preceding Plan Years. (d) Key Employee. The term Key Employee means any Employee or former Employee (and the Beneficiaries of such Employee) who at any time during the Determination Period was: (1) An officer of the Employer if such individual's Annual Compensation exceeds 50 percent of the dollar limitation under Code section 415(b)(1)(A); or (2) An owner (or considered an owner under Code section 318) of one of the ten largest interests in the Employer if such individual's Annual Compensation exceeds 100 percent of the dollar limitation under Code section 415(c)(1)(A); or (3) A 5-percent owner of the Employer; or (4) A 1-percent owner of the Employer who has Annual Compensation of more than $150,000. -96- 97 The determination of who is a Key Employee will be made in accordance with Code section 416(I)(1) and related regulations. (e) Permissive Aggregation Group. The term Permissive Aggregation Group means the Required Aggregation Group of plans plus any other plan or plans of the Employer which, when considered as a group with the Required Aggregation Group, would continue to satisfy the requirements of Code sections 401(a)(4) and 410. (f) Present Value. Present Value shall be based only on the interest and mortality rates specified in the Adoption Agreement. (g) Required Aggregation Group. The term Required Aggregation Group means (1) each qualified plan of the Employer in which at least one Key Employee participates or participated at any time during the Determination Period (regardless of whether the plan has terminated), and (2) any other qualified plan of the Employer which enables a plan described in (1) to meet the requirements of Code sections 401(a)(4) or 410. (h) Top-Heavy Plan. For any Plan Year beginning after December 31, 1983, this Plan is Top-Heavy if any of the following conditions exists: (1) If the Top-Heavy Ratio for this Plan exceeds 60 percent and this Plan is not part of any Required Aggregation Group or Permissive Aggregation Group of plans. (2) If this Plan is a part of a Required Aggregation Group of plans but not part of a Permissive Aggregation Group and the Top-Heavy Ratio for the group of plans exceeds 60 percent. (3) If this Plan is a part of a Required Aggregation Group and part of a Permissive Aggregation Group of plans and the Top-Heavy Ratio for the Permissive Aggregation Group exceeds 60 percent. (i) Top-Heavy Ratio. The term Top-Heavy Ratio means: (1) If the Employer maintains one or more defined contribution plans (including any simplified employee pension plan) and the Employer has not maintained any defined benefit plan which during the 5-year period ending on the Determination Date(s) has or has had accrued benefits, the Top-Heavy Ratio for this Plan alone or for the Required or Permissive Aggregation Group, as appropriate, is a fraction, the numerator of which is the sum of the account balances of all Key Employees as of the Determination Date(s) (including any part of any account balance distributed in the 5-year period ending on the Determination Date(s)), and the denominator of which is the sum of all account balances (including any part of any account balance distributed in the 5-year period ending on the Determination Date(s)), both computed in accordance with Code section 416 and related regulations. Both the numerator and denominator of the Top-Heavy Ratio -97- 98 are increased to reflect any contribution not actually made as of the Determination Date, but which is required to be taken into account on that date under Code section 416 and related regulations. (2) If the Employer maintains one or more defined contribution plans (including any simplified employee pension plans as defined in Code section 408(k)) and the Employer maintains or has maintained one or more defined benefit plans, which during the 5-year period ending on the Determination Date(s) has or has had any accrued benefits, the Top-Heavy Ratio for any Required or Permissive Aggregation Group as appropriate is a fraction, the numerator of which is the sum of account balances under the aggregated defined contribution plan or plans for all Key Employees, determined in accordance with (1) above, and the Present Value of accrued benefits under the aggregated defined benefit plan or plans for all Key Employees as of the Determination Date(s), and the denominator of which is the sum of the account balances under the aggregated defined contribution plan or plans for all Participants, determined in accordance with (1) above, and the Present Value of accrued benefits under the defined benefit plan or plans for all Participants as of the Determination Date(s), all determined in accordance with Code section 416 and related regulations. The accrued benefits under a defined benefit plan in both the numerator and denominator of the Top-Heavy Ratio are increased for any distribution of an accrued benefit made in the 5-year period ending on the Determination Date. (3) For purposes of (1) and (2) above, the value of account balances and the Present Value of accrued benefits will be determined as of the most recent Valuation Date that falls within or ends with the 12-month period ending on the Determination Date, except as provided in Code section 416 and the regulations thereunder for the first and second plan years of a defined benefit plan. The account balances and accrued benefits of a Participant (1) who is not a Key Employee but who was a Key Employee in a prior year, or (ii) who has not been credited with at least one Hour of Service with any Employer maintaining the Plan at any time during the 5-year period ending on the Determination Date shall be disregarded. The calculation of the Top-Heavy Ratio, and the extent to which distributions, rollovers, and transfers are taken into account, will be made in accordance with Code section 416 and the regulations thereunder. QVEC Contributions will not be taken into account for purposes of computing the Top-Heavy Ratio. When aggregating plans, the value of account balances and accrued benefits will be calculated with reference to the Determination Dates that fall within the same calendar year. The accrued benefit of a Participant other than a Key Employee shall be determined under (a) the method, if any, that uniformly applies for accrual purposes under all defined benefit plans maintained by the Employer, or (b) if there is no such method, as if such benefit accrued not more rapidly than the slowest accrual rate permitted under the fractional rule of Code section 411(b)(1)(C). (j) Valuation Date. The term Valuation Date means the date specified in the Top-Heavy Provisions section of the Adoption Agreement as of which account balances or accrued benefit are valued for purposes of calculating the Top-Heavy Ratio. 7A.2 Minimum Allocation. For any Plan Year in which the Plan is Top-Heavy, the following will apply: -98- 99 (a) Except as otherwise provided in (c) and (d) below, the Employer contributions and Forfeitures allocated on behalf of any Participant who is not a Key Employee shall not be less than the lesser of three percent of such Participant's Compensation or in the case where the Employer has no defined benefit plan which designates this Plan to satisfy Code section 401, the largest percentage of Employer contributions and Forfeitures, as limited by Code section 401(a)(17), allocated on behalf of any Key Employee for that year. The Minimum Allocation is determined without regard to any Social Security contribution. This Minimum Allocation shall be made even though, under other Plan provisions, the Participant would not otherwise be entitled to receive an allocation, or would have received a lesser allocation for the year because of (1) the Participant's failure to complete 1,000 Hours of Service (or any equivalent provided in the Plan), or (2) the Participant's failure to make Required Employee Contributions to the Plan, or (3) Compensation less than a stated amount. (b) For purposes of computing the Minimum Allocation, Compensation shall mean Compensation as defined in the Compensation section of the Adoption Agreement as limited by Code section 401(a)(17). Notwithstanding the above, if elected by the Employer in the Adoption Agreement, Compensation shall include any amount which is contributed by the Employer pursuant to a salary reduction agreement and which is not includable in the Employee's gross income under Code sections 125, 401(a)(8), 402(h) or 403(b). (c) The provision in (a) above shall not apply to any Participant who was not employed by the Employer on the last day of the Plan Year. (d) The provision in (a) above shall not apply to any Participant to the extent the Participant is covered under any other plan or plans of the Employer and the Employer has provided in the Top-Heavy Provisions section of the Adoption Agreement that the Minimum Allocation or benefit requirement applicable to Top-Heavy plans will be met in the other plan or plans. (e) The Minimum Allocation required (to the extent required to be nonforfeitable under Code section 416(b)) may not be forfeited under Code sections 411(a)(3)(B) or 411(a)(3)(D). (f) Neither Elective Deferral Contributions nor Matching Contributions may be taken into account for the purpose of satisfying this Minimum Allocation Requirement. 7A.3 Minimum Vesting Schedule. For any Plan Year in which this Plan is Top-Heavy, one of the minimum vesting schedules as elected by the Employer in the Adoption Agreement will automatically apply to the Plan. The minimum vesting schedule applies to all benefits within the meaning of Code section 411(a)(7) except those attributable to Employee Contributions, Elective Deferral Contributions, QVEC Contributions and Rollover Contributions including benefits accrued before the effective date of Code section 416 and benefits accrued before the Plan became Top-Heavy. Further, no decrease in a Participant's nonforfeitable percentage may occur in the event the Plan's status as Top-Heavy changes for any Plan Year. However, this Section does not apply to the -99- 100 account balances of any Employee who does not have an Hour of Service after the Plan has initially become Top-Heavy. Such Employee's account balance attributable to Employer contributions and Forfeitures will be determined without regard to this Section. 7B. AMENDMENT, TERMINATION OR MERGER OF THE PLAN 7B.1 Amendment of Elections under Adoption Agreement by Employer. The party elected by the Employer in the Adoption Agreement shall have the right from time to time to change the elections under its Adoption Agreement in a manner consistent with the Plan, provided that such amendment or modification shall be in accordance with the Board of Director's resolution, if applicable, that describes the amendment procedure and provided further that the written amendment or modification is signed by the party elected by the Employer in the Adoption Agreement. The amendment must be accepted by the Sponsoring Organization. Upon any such change in the Elections under the Adoption Agreement, the Plan Administrator, the Trustee and the Sponsoring Organization shall be furnished a copy thereof. If the Plan's vesting schedule is amended, or the Plan is amended in any way that directly or indirectly affects the computation of the Participant's nonforfeitable percentage or if the Plan is deemed amended by an automatic change to a top-heavy vesting schedule, each Participant with at least 3 years of Service with the Employer may elect, in writing, within a reasonable period after the adoption of the amendment or change, to have the nonforfeitable Percentage computed under the Plan without regard to such amendment or change. For Participants who do not have at least 1 Hour of Service in any Plan Year beginning after December 31, 1988, the preceding sentence shall be applied by substituting "5 years of Service" for "3 years of Service" where such language appears. The period during which the election must be made by the Participant shall begin no later than the date the Plan amendment is adopted and end no later than after the latest of the following dates: (a) The date which is 60 days after the day the amendment is adopted; (b) The date which is 60 days after the day the amendment becomes effective; or (c) The date which is 60 days after the day the Participant is issued written notice of the amendment by the Employer or Plan Administrator. Such written election by a Participant shall be made to the Plan Administrator, who shall then give written notice to the Insurance Company. No amendment to the Plan shall be effective to the extent that it has the effect of decreasing a Participant's Accrued Benefit. Notwithstanding the preceding sentence, a Participant's Account balance may be reduced to the extent permitted under Code section 412(c)(8). For purposes of this paragraph, a Plan amendment which has the effect of decreasing a Participant's Account balance or eliminating an optional form of benefit, with respect to benefits attributable to service before the amendment, shall be treated as reducing an Accrued Benefit. Furthermore, if the vesting -100- 101 schedule of a Plan is amended, in the case of an Employee who is a Participant as of the later of the date such amendment is adopted or the date it becomes effective, the nonforfeitable percentage (determined as of such date) of such Employee's Employer-Derived Accrued Benefit will not be less than the percentage computed under the Plan without regard to such amendment. In the event of an amendment to a money purchase pension plan (including a target benefit plan) to convert it to a profit sharing plan (including a thrift plan or plan with a 401(k) feature), the resulting plan shall separately account in each affected Participant's Account for amounts attributable to coverage under the money purchase plan, including future earnings on such amounts. On and after the date of such amendment, these money purchase plan amounts shall remain subject to the money purchase plan restrictions on distribution. The Employer may (1) change the choice of options in the Adoption Agreement, (2) add overriding language in the Adoption Agreement when such language is necessary to satisfy Code sections 415 or 416 because of the required aggregation of multiple plans, and (3) add certain model amendments published by the Internal Revenue Service which specifically provide that their adoption will not cause the Plan to be treated as individually designed. An Employer that amends the Plan for any other reason, including a waiver of the minimum funding requirements under Code section 412(d), will no longer participate in this prototype plan and will be considered to have an individually designed plan. 7B.2 Amendment of Plan, Trust, and Form of Adoption Agreement. The Sponsoring Organization may amend this Plan and Trust, and the form of the Adoption Agreement, and the Employer in adopting this Plan and the Plan Administrator and the Trustee in accepting appointment as Plan Administrator and as Trustee, shall be deemed to have consented to any such amendment by executing the Adoption Agreement, provided that the written consent of the Trustee and the Plan Administrator to any change affecting their duties or responsibilities shall first be obtained. Upon any such amendment by the Sponsoring Organization, the Plan Administrator, the Employer and the Trustee shall be furnished with a copy thereof. 7B.3 Conditions of Amendment. Neither the Sponsoring Organization nor the Employer shall make any amendment which would cause the Plan to lose its status as a qualified plan within the meaning of Code section 401(a). 7B.4 Termination of the Plan. The Employer intends to continue the Plan indefinitely for the benefit of its Employees, but reserves the right to terminate the Plan at any time by resolution of its Board of Directors. Upon such termination, the liability of the Employer to make Employer contributions hereunder shall terminate. The Plan shall terminate automatically upon complete discontinuance of Employer contributions hereunder, if the Plan is a profit sharing plan or a thrift plan. 7B.5 Full Vesting. Upon the termination or partial termination of the Plan, or upon complete discontinuance of Employer contributions, the rights of all affected Participants in and to the amounts credited to each such Participant's Account and to any Policies on each Participant's life -101- 102 shall be 100% vested and nonforfeitable. Thereupon, each Participant shall receive a total distribution of his Participant's Account (including any amounts in the Forfeiture Account allocated in accordance with Section 7B.6) in accordance with the terms and conditions of Section 2A. If the Plan terminates, the assets will be distributed from the Trust as soon as administratively feasible. 7B.6 Application of Forfeitures. Upon the termination of the Plan, any amount in the Forfeiture account which has not been applied as of such termination to reduce the Employer contribution, or has not been allocated as of such termination, shall be credited on a pro-rata basis to each Participant's Account in the same manner as the last Employer contribution made under the Plan. 7B.7 Merger with Other Plan. In the case of any merger with or transfer of assets or liabilities to any other qualified plan after September 2, 1974: (a) The sum of the account balances in each plan shall equal the fair market value (determined as of the date of the merger or transfer as if the plan had then terminated) of the entire plan assets. (b) The assets or liabilities of each plan shall be combined to form the assets of the plan as merged (or transferred), and each Participant in the plan merged (or transferred) shall have an account balance equal to the sum of the account balances the Participant had in the plans immediately prior to the merger (or transfer). (c) Immediately after the merger (or transfer), each Participant in the plan merged (or transferred) shall have an account balance equal to the sum of the account balances the Participant had in the plans immediately prior to the merger (or transfer). (d) Immediately after the merger (or transfer), each Participant in the plan merged (or transferred) shall be entitled to the same optional benefit forms as they were entitled to immediately prior to the merger (or transfer). (e) In the event of a merger (or transfer) of a money purchase pension plan (including a target benefit plan) and a profit sharing plan (including a thrift plan or plan with a 401(k) feature), the resulting plan shall separately account in each affected Participant's Account for amounts attributable to coverage under the money purchase plan, including future earnings on such amounts. On and after the date of such merger (or transfer), these money purchase plan amounts shall remain subject to the money purchase plan restrictions on distribution. 7B.8 Transfer from Other Plans. If elected in the Adoption Agreement, the Employer may cause all or any of the assets held in another qualified pension or profit sharing plan meeting the requirements of Code section 401(a) to be transferred to the Plan pursuant to a merger or consolidation of this Plan with such other plan or for any other allowable purpose. Upon receipt of such assets, the Plan shall separately account for such amounts in each affected Participant's -102- 103 Account. Such transfer shall be made without regard to the Limitations on Allocations imposed in Section 4B. 7B.9 Transfer to Other Plans. Upon written direction from the Employer, the Plan shall transfer some or all of the assets held under this Plan to another qualified pension or profit sharing plan meeting the requirements of Code section 401(a) and sponsored by the Employer. 7B.10 Approval by the Internal Revenue Service. Notwithstanding any other provisions of this Plan, the Employer's adoption of this Plan is subject to the condition precedent that the Employer's Plan shall be approved and qualified by the Internal Revenue Service as meeting the requirements of Code section 401(a) and, if applicable, that the Trust established hereunder shall be entitled to exemption under the provisions of Code section 501(a). In the event the Plan initially fails to qualify and the Internal Revenue Service issues a final ruling that the Employer's Plan or Trust fails to so qualify as of the Effective Date, all liability of the Employer to make further Employer contributions hereunder shall cease. The Insurance Company, Plan Administrator, Trustee and any other Named Fiduciary shall be notified immediately by the Employer, in writing, of such failure to qualify. Upon such notification, the value of the Participants' Accounts, including the then value of any Life Insurance Policies, shall be distributed in cash subject to the terms and conditions of Section 5B. That portion of such distribution which is attributable to Participant's Employee Contributions, if any, shall be paid to the Participant, and the balance of such distribution shall be paid to the Employer. Upon the death of any Participant prior to the actual surrender of a Life Insurance Policy or Policies on his life, the death benefit shall be payable to the Participant's Beneficiary. If the Employer's Plan fails to attain or retain qualification, such Plan will no longer participate in this prototype plan and will be considered an individually designed plan. 7B.11 Subsequent Unfavorable Determination. If the Employer is notified subsequent to initial favorable qualification that the Plan is no longer qualified within the meaning of Code section 401(a) or, if applicable, that the Trust is no longer entitled to exemption under the provisions of Code section 501(a), and if the Employer shall fail within a reasonable time to make any necessary changes in order that the Plan shall so qualify, the Participants' Accounts, including any Life Insurance Policies or the values thereof, shall be fully vested and nonforfeitable and shall be disposed of in the manner set forth in Sections 7B.5 and 7B.6 above. 7C. SUBSTITUTION OF PLANS 7C.1 Substitution of Plans. Subject to the provisions of Section 7B.7, the Employer may substitute an individually designed plan or a master or another prototype plan for this Plan without terminating this Plan as embodied herein, and this shall be deemed to constitute an amendment and restatement in its entirety of this Plan as heretofore adopted by the Employer; provided, however that the Employer shall have certified to the Insurance Company and the Trustee, if applicable, that this Plan is being continued on a restated basis which meets the requirements of Code section 401(a) and ERISA. -103- 104 Any such changes shall be subject to the provisions of Sections 7B.1 and 7B.2 of the Plan. 7C.2 Transfer of Assets. Upon 90 days' written notification from the Employer and the Trustee (unless the Insurance Company shall accept a shorter period of notification) that a different plan meeting the requirements set forth in Section 7C.1 above has been executed and entered into by the Plan Administrator and the Employer, and after the Insurance Company and the Trustee have been furnished the Employer's certification in writing that the Employer intends to continue the Plan as a qualified plan under Code section 401(a) and ERISA, the Insurance Company shall transfer the value of all Participants' Accounts under the Annuity Contract to the Trustee or such person or persons as may be entitled to receive the same, in accordance with the terms of the Annuity Contract. The Trustee shall likewise make a similar transfer, including all Life Insurance Policies, or the values thereof, to such person or persons as may be entitled to receive same. The Insurance Company and the Trustee may rely fully on the representations or directions of the Employer with respect to any such transfer and shall be fully protected and discharged with respect to any such transfer made in accordance with such representations, instructions, or directions. 7C.3 Substitution for Pre-Existing Master or Prototype Plan. This Plan is designed: (a) For adoption by an Employer not previously covered under a master or prototype plan sponsored by Connecticut General Life Insurance Company; or (b) For adoption by an Employer in substitution for a pre-existing master or prototype plan sponsored by Connecticut General Life Insurance Company. If this Plan is adopted in substitution for such a pre-existing master or prototype plan, it shall be deemed to amend the Employer's prior Plan in its entirety effective as of the date specified in the Employer's Adoption Agreement. The Employer's Plan as so amended shall continue in full force and effect and no termination thereof shall be deemed to have occurred. 7C.4 Partial Substitution or Partial Transfer of the Plan or Assets. In the event this Plan is adopted as the result of a partial substitution or partial transfer of the Plan or the assets under the prior Plan as a result of a merger, spinoff, consolidation or any other allowable purpose, the Plan and all transactions allowable under it are subject to the rules established by the Employer to address the orderly transition of the Plan or assets. ARTICLE VIII - MISCELLANEOUS 8.1 Nonreversion. This Plan has been adopted by the Employer for the exclusive benefit of the Participants and their Beneficiaries. Except as otherwise provided in Section 7B.10 and Section 8.6, under no circumstances shall any funds contributed hereunder at any time revert to or be used by the Employer, nor shall any such funds or assets of any kind be used other than for the benefit of the Participants or their Beneficiaries. -104- 105 8.2 Gender and Number. When necessary to the meaning hereof, and except when otherwise indicated by the context, either the masculine or the neuter pronoun shall be deemed to include the masculine, the feminine, and the neuter, and the singular shall be deemed to include the plural. 8.3 Reference to the Internal Revenue Code and ERISA. Any reference herein to any section of the Internal Revenue Code, ERISA, or to any other statute or law shall be deemed to include any successor law of similar import. 8.4 Governing Law. The Plan and Trust, if applicable, shall be governed and construed in accordance with the laws of the state where the Employer or Trustee has its principal office in the United States. 8.5 Compliance with the Internal Revenue Code and ERISA. This Plan is intended to comply with all requirements for qualification under the Internal Revenue Code and ERISA, and if any provision hereof is subject to more than one interpretation or any term used herein is subject to more than one construction, such ambiguity shall be resolved in favor of that interpretation or construction which is consistent with the Plan being so qualified. If any provision of the Plan is held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provisions, and this Plan shall be construed and enforced as if such provision had not been included. 8.6 Contribution Recapture. Notwithstanding any other provisions of this Plan, (1) in the case of a contribution which is made by an Employer by a mistake of fact, Section 8.1 shall not prohibit the return of such contribution to the Employer within one year after the payment of the contribution, and (2) if a contribution is conditioned upon the deductibility of the contribution under Code section 404, then, to the extent the deduction is disallowed, Section 8.1 shall not prohibit the return to the Employer of such contribution (to the extent disallowed) within one year after the disallowance of the deduction. The amount which may be returned to the Employer is the excess of (1) the amount contributed over (2) the amount that would have been contributed had there not occurred a mistake of fact or a mistake in determining the deduction. Earnings attributable to the excess contribution may not be returned to the Employer, but losses attributable thereto must reduce the amount to be so returned. Furthermore, if the withdrawal of the amount attributable to the mistaken contribution would cause the balance of any Participant's Account to be reduced to less than the balance which would have been in the Participant's Account had the mistaken amount not been contributed, then the amount to be returned to the Employer would have to be limited so as to avoid such reduction. In the event that the Commissioner of the Internal Revenue determines that the Plan is not initially qualified under the Internal Revenue Code, any contribution made incident to that initial qualification by the Employer must be returned to the Employer within one year after the date the initial qualification is denied, but only if the application for the qualification is made by the time prescribed by law for filing the Employer's return for the taxable year in which the Plan is adopted, or such later date as the Secretary of the Treasury may prescribe. -105- 106 Notwithstanding the above, any excess or returned contribution shall not be returned to the Employer if the Employer has taken Davis-Bacon Act credit for such contribution. These excess or mistaken contributions shall be paid to the Employee for whom such credit is taken. -106- EX-10.13 17 INDUSTRIAL LEASE AGREEMENT 1 EXHIBIT 10.13 INDUSTRIAL REAL ESTATE LEASE BETWEEN CYPRESS LAND COMPANY, A CALIFORNIA LIMITED PARTNERSHIP AND NETCOM SYSTEMS, INC., A DELAWARE CORPORATION for 26750 AGOURA ROAD, CALABASAS, CALIFORNIA 91302 June 25, 1998 2 TABLE OF CONTENTS
Page ---- ARTICLE ONE: BASIC TERMS .................................................. 1 Section 1.1 Date of Lease ......................................... 1 Section 1.2 Landlord .............................................. 1 Section 1.3 Tenant ................................................ 1 Section 1.4 Property .............................................. 1 Section 1.5 Lease Term ............................................ 1 Section 1.6 Permitted Uses ........................................ 1 Section 1.7 Initial Security Deposit .............................. 1 Section 1.8 Rent and Other Charges Payable by Tenant .............. 2 Section 1.9 Riders ................................................ 2 ARTICLE TWO: LEASE TERMS .................................................. 2 Section 2.1 Lease of Property for Lease Term ...................... 2 Section 2.2 Holding Over .......................................... 2 Section 2.3 Option to Extend ...................................... 3 ARTICLE THREE: BASE RENT .................................................. 6 Section 3.1 Time and Manner of Payment ............................ 6 Section 3.2 Cost of Living Increases .............................. 6 Section 3.3 Security Deposit; Increases ........................... 7 Section 3.4 Termination; Advance Payments ......................... 7 ARTICLE FOUR: OTHER CHARGES PAYABLE BY TENANT ............................. 8 Section 4.1 Additional Rent ....................................... 8 Section 4.2 Property Taxes ........................................ 8 Section 4.3 Utilities ............................................. 10 Section 4.4 Insurance Policies..................................... 10 Section 4.5 Late Charges .......................................... 14 Section 4.6 Interest on Past Due Obligations ...................... 14 Section 4.7 Impounds for Insurance Premiums and Real Property Taxes ........................................ 15 ARTICLE FIVE: USE OF PROPERTY ............................................. 15 Section 5.1 Permitted Uses ........................................ 15 Section 5.2 Manner of Use ......................................... 15 Section 5.3 Hazardous Materials ................................... 16 Section 5.4 Outside Storage ....................................... 22 Section 5.5 Signs and Auctions .................................... 22 Section 5.6 Indemnity ............................................. 22 Section 5.7 Landlord's Access ..................................... 22 Section 5.8 Quiet Possession ...................................... 23 Section 5.9 Future Easements and Governmental Requirements ........ 23 ARTICLE SIX: CONDITION OF PROPERTY; MAINTENANCE, REPAIRS AND ALTERATIONS .............................................. 23 Section 6.1 Existing Conditions ................................... 23 Section 6.2 Exemption of Landlord from Liability .................. 23
3 Section 6.3 LANDLORD'S OBLIGATIONS....................... 24 Section 6.4 TENANT'S OBLIGATIONS......................... 24 Section 6.5 ALTERATIONS, ADDITIONS, AND IMPROVEMENTS................................. 26 Section 6.6 CONDITION UPON TERMINATION................... 26 Section 6.7 COMMON AREAS................................. 27 ARTICLE SEVEN: DAMAGE OR DESTRUCTION............................. 27 Section 7.1 DAMAGE TO PROPERTY........................... 27 Section 7.2 TEMPORARY REDUCTION OF RENT.................. 29 Section 7.3 WAIVER....................................... 29 Section 7.4 LANDLORD'S FAILURE TO REPAIR WITHIN 12 MONTHS....................................... 29 Section 7.5 REPAIR OF SHELL TO SIMILAR CONDITION......... 30 ARTICLE EIGHT: CONDEMNATION...................................... 31 ARTICLE NINE: ASSIGNMENT AND SUBLETTING......................... 31 Section 9.1 LANDLORD'S CONSENT REQUIRED.................. 31 Section 9.2 TENANT AFFILIATE............................. 32 Section 9.3 NO RELEASE OF TENANT......................... 32 Section 9.4 OFFER TO TERMINATE........................... 32 Section 9.5 LANDLORD'S CONSENT........................... 32 Section 9.6 LANDLORD'S SHARE OF PREMIUM.................. 33 Section 9.7 NO MERGER.................................... 34 ARTICLE TEN: DEFAULTS; REMEDIES................................. 34 Section 10.1 COVENANTS AND CONDITIONS..................... 34 Section 10.2 DEFAULTS..................................... 34 Section 10.3 REMEDIES..................................... 35 Section 10.4 REPAYMENT OF "FREE" RENT..................... 36 Section 10.5 CUMULATIVE REMEDIES.......................... 37 ARTICLE ELEVEN: PROTECTION OF LENDERS........................... 37 Section 11.1 SUBORDINATION................................ 37 Section 11.2 ATTORNMENT................................... 38 Section 11.3 SIGNING OF DOCUMENTS......................... 38 Section 11.4 ESTOPPEL CERTIFICATES........................ 39 Section 11.5 TENANT'S FINANCIAL CONDITION................. 39 ARTICLE TWELVE: LEGAL COSTS..................................... 40 Section 12.1 LEGAL PROCEEDINGS............................ 40 Section 12.2 LANDLORD'S CONSENT........................... 40 ARTICLE THIRTEEN: MISCELLANEOUS PROVISIONS...................... 41 Section 13.1 NON-DISCRIMINATION........................... 41 Section 13.2 LANDLORD'S LIABILITY; CERTAIN DUTIES......... 41 Section 13.3 SEVERABILITY................................. 42 Section 13.4 INTERPRETATION............................... 42 Section 13.5 INCORPORATION OF PRIOR AGREEMENTS; MODIFICATIONS................................ 42 Section 13.6 NOTICES...................................... 42 Section 13.7 WAIVERS...................................... 42 Section 13.8 RECORDATION.................................. 43
4 Section 13.9 BINDING EFFECT; CHOICE OF LAW................ 43 Section 13.10 CORPORATE AUTHORITY ......................... 43 Section 13.11 FORCE MAJEURE................................ 43 Section 13.12 EXECUTION OF LEASE........................... 43 Section 13.13 SURVIVAL..................................... 43 Section 13.14 DEFINITION OF CONTRACTOR..................... 43 ARTICLE FOURTEEN: BROKERS....................................... 44 Section 14.1 No Other Brokers............................. 44
Exhibit "A" - Legal Description of Property Exhibit "B" - Shell Plans and Specifications CONSTRUCTION RIDER 5 INDUSTRIAL REAL ESTATE LEASE ARTICLE ONE: BASIC TERMS This Article One contains the Basic Terms of this Lease between the Landlord and Tenant named below. Other Articles, Sections and Paragraphs of the Lease referred to in this Article One explain and define the Basic Terms and are to be read in conjunction with the Basic Terms. Section 1.1 DATE OF LEASE: June 25, 1998 Section 1.2 LANDLORD: Cypress Land Company, a California limited partnership Address of Landlord: 2203 East Carson Street, Suite A-1, Long Beach, California 90810 Section 1.3 TENANT: Netcom Systems, Inc., a Delaware corporation Address of Tenant: 20550 Nordhoff Street, Chatsworth, California. Tenant's address shall be changed to the address of the Property upon the Commencement Date of this Lease. Section 1.4 PROPERTY: 26750 Agoura Road, Calabasas, California, consisting of the land described on Exhibit "A" which legal description is attached hereto, and a building and improvements (the term "Property" includes the Tenant Improvements defined in the Construction Rider) to be constructed pursuant to the Construction Rider attached hereto. Section 1.5 LEASE TERM: One hundred twenty-three (123) months beginning on the Commencement Date (as defined in the Construction Rider). If the Commencement Date is on a day other than the first day of a month, then such partial first monthly period shall be added to the one hundred twenty-three (123) month period, and the Lease Term shall be one hundred twenty-three (123) months plus such additional first fractional month. Section 1.6 PERMITTED USES: (See Article Five) Distribution, manufacturing, general office, sales, warehousing, storage and related uses, as permitted by governmental laws, rules and regulations affecting the Property. Section 1.7 INITIAL SECURITY DEPOSIT: (See Section 3.3) Seventy-five Thousand Eighteen Dollars and Thirty Cents ($75,018.30). 1 6 Section 1.8 RENT AND OTHER CHARGES PAYABLE BY TENANT: (a) BASE RENT: Seventy-five Thousand Eighteen Dollars and Thirty Cents ($75,018.30) per month for the first thirty (30) months, as provided in Section 3.1. The initial Base Rent shall be adjusted as provided in paragraph 3.2 of the Construction Rider. The Base Rent shall be increased on the first day of the thirty-first (31st), sixty-first (61st), ninety-first (91st) and one hundred twenty-first (121st) full month of the Lease Term (individually referred to as a "Rental Adjustment Date" and collectively as "Rental Adjustment Dates") as provided in Section 3.2 of this Lease. The Comparison Base Rent (as defined in Paragraph 3.2(a)) shall be increased on each Rental Adjustment Date a minimum of seven and sixty-eight one-hundredths percent (7.68%) and a maximum of eighteen and one-half percent (18.5%). (b) ABATED RENT: Provided that Tenant is not then in monetary default under the terms of this Lease, the Base Rent for the first (1st), second (2nd) and sixty-first (61st) full months of the initial Lease Term shall be forgiven. Even though the Base Rent is forgiven under the immediate preceding sentence for the 61st month, the Base Rent shall be increased for the 61st month as calculated under Paragraph 1.8(a) above. Such forgiven rent shall be classified as "Abated Rent" under Section 10.4 below. (c) OTHER PERIODIC PAYMENTS: (i) Real Property Taxes (See Section 4.2); (ii) Utilities (See Section 4.3); (iii) Insurance Premiums (See Section 4.4); (iv) Impounds for Insurance Premiums and Property Taxes (See Section 4.7); (v) Maintenance, Repairs and Alterations (See Article Six). Section 1.9 RIDERS: The following Riders are attached to and made a part of this Lease: Construction Rider ARTICLE TWO: LEASE TERM Section 2.1 LEASE OF PROPERTY FOR LEASE TERM. Landlord leases the Property to Tenant and Tenant leases the Property from Landlord for the Lease Term. The Lease Term is for the period stated in Section 1.5 above and shall begin on the Commencement Date and end on the date specified in Section 1.5 above, unless the Lease Term terminates under any provision of this Lease. Section 2.2 HOLDING OVER. Tenant shall vacate the Property upon the expiration or earlier termination of this Lease. Tenant shall reimburse Landlord for and indemnify Landlord against all damages which Landlord incurs from Tenant's delay in vacating the Property. If Tenant does not vacate the Property upon the expiration or earlier termination of this Lease and Landlord 2 7 thereafter accepts rent from Tenant, Tenant's occupancy of the Property shall be a "month-to-month" tenancy, subject to all of the terms of this Lease applicable to a month-to-month tenancy, except that the Base Rent then in effect shall be increased by fifty percent (50%). Section 2.3 OPTION TO EXTEND. (a) Exercise. Landlord hereby grants to Tenant one (1) option (referred to herein as the "Option") to renew and extend the term of this Lease for a term of five (5) years (such five-year term for the Option is referred to herein as the "Option Term"). The Option must be exercised by written notice ("Option Notice") received by Landlord no later than six (6) months prior to the expiration of the then current Lease Term. Furthermore, the Option shall not be deemed to be properly exercised if Tenant is prohibited from exercising the Option pursuant to subparagraphs (i) or (ii), below. If the Option is not properly exercised within the Option Notice period in the manner prescribed herein, it shall expire and be of no further force and effect. Time is of the essence. Tenant may not revoke an election of the Option once Tenant makes an election to exercise the Option. Provided that Tenant has properly exercised the Option, the term of the Lease shall be extended for the Option Term (and references in this Lease to the Lease "term" shall then include the Option Term), and all terms, covenants and conditions of the Lease shall remain unmodified and in full force and effect, except that the Base Rent shall be modified as set forth in Paragraphs 2.3(b), (c) and (d), below. (i) If Tenant is in default under any provision of this Lease and such default remains uncured, then Tenant may not exercise the Option. The period of time within which the Option may be exercised shall not be extended or enlarged by reason of Tenant's inability to exercise the Option because of Tenant's default. (ii) The Option granted to Tenant in this Lease is personal to Tenant and may not be exercised or assigned, voluntarily or involuntarily, by or to any person or entity other than Tenant and any person to whom the entire Lease is assigned under Section 9.2 where Landlord's consent to such assignment is not required under Section 9.2. The Option herein granted to Tenant is not assignable to any person separate and apart from this Lease. (b) Base Rent. The Base Rent payable for the first thirty (30) months of each Option Term shall be the greater of: (i) the Fair Rental Value (as determined under Paragraph 2.3(c)); or (ii) the Base Rent during the last month immediately preceding the first 3 8 month of the Option Term as increased by the increase in the Index as if such last month was a Rental Adjustment Date under Paragraph 1.8(a). (c) Fair Rental Value. For purposes of this Section 2.3, the term "Fair Rental Value" shall mean the Fair Rental Value based upon a per square foot basis and shall be determined as follows: After Landlord's receipt of Tenant's election to exercise the Option, but no sooner than six (6) months prior to the expiration of the then current Lease term, Landlord shall determine the Fair Rental Value and provide written notice of such amount to Tenant. Tenant shall have fifteen (15) days (the "Tenant Review Period") after receipt of Landlord's notice of the Fair Rental Value within which to accept such rental or to reasonably object thereto in writing. In the event that Tenant objects in writing to Landlord within the Tenant Review Period of Landlord's determination, then Landlord and Tenant shall attempt to agree upon such Fair Rental Value. The failure of Tenant to so notify Landlord in writing of Tenant's objection of the Fair Rental Value within the Tenant Review Period shall conclusively be deemed Tenant's rejection of the Fair Rental Value determined by Landlord. If Landlord and Tenant fail to reach agreement of the Fair Rental Value within ten (10) days of the end of Tenant's Review Period, then each party shall place in a separate sealed envelope its final proposed determination as to the Fair Rental Value (which determination may be different than such party's original determination), and such determination shall be submitted to a Qualified Appraiser for determination. Tenant shall deliver to Landlord within ten (10) days after the end of Tenant's Review Period a list of four (4) Qualified Appraisers, and Landlord shall choose one (1) of such Qualified Appraisers from such list within five (5) days of Landlord's receipt of such list. If Tenant fails to deliver such list to Landlord within such ten (10) day period, then Landlord may deliver a list of four (4) Qualified Appraisers to Tenant, and Tenant shall choose one (1) of such Qualified Appraisers, or if Tenant so fails to choose a Qualified Appraiser within five (5) days of receipt of same, then Landlord may choose such Qualified Appraiser from such list. The Qualified Appraiser's determination shall be limited solely to this issue of whether Landlord's or Tenant's submitted Fair Rental Value per square foot for the Property is closest to the actual prevailing Fair Rental Value per square foot, using the criteria described herein (in which case Landlord's or Tenant's determination of the Fair Rental Value chosen by the Qualified Appraiser shall be the Fair Rental Value). Such Qualified Appraiser shall within thirty (30) days of appointment reach a decision and shall notify Landlord and Tenant of such determination and such determination shall be final. (i) The term "Qualified Appraiser" for purposes of this Paragraph 2.3(c) shall mean a professional real estate appraiser 4 9 who is a Member of the Appraisal Institute (sometimes known as an "MAI" appraiser) who shall have been active over the five (5) preceding years ending on the date of such appointment in the appraisal of similar properties within a five (5) mile radius of the subject Property. The cost of the Qualified Appraiser shall be paid equally by Landlord and Tenant. If at the time of the appointment of a Qualified Appraiser, the designation "MAI" is no longer utilized, then a qualification for appraisers most nearly equivalent to an MAI appraiser shall be utilized. (ii) The criteria by which the Qualified Appraiser, and the Landlord's and Tenant's determination, of Fair Rental Value per month shall be as follows: (a) Only available comparable office/research and development building rentals closest to the date that such Option term is to commence of equal quality to the Property within the Lost Hills Business Center shall be used. Comparable properties shall be compared on a rentable square footage basis, considering the age of the comparable building to the age of the Property. (b) Only buildings in a planned business park of at least the same quality as the business park in which the subject Property is located shall be used. (c) Fair Rental Value shall be based upon the Shell portion of the Property (as defined in the Construction Rider) and shall not include the rental value for those Tenant Improvements installed and paid for by the Tenant under the Construction Rider (except for improvements or upgrades of the Building Shell and permits and governmental entitlements which may have been included in such Tenant Improvements). (d) The Qualified Appraiser shall consider the fact that the Base Rent payable during the Option Term will increase pursuant to Paragraph 2.3(d), below. (e) No credit may be given for comparable property rentals for tenant improvement allowances, if any, given to tenants of comparable properties. (d) Increase. The monthly Base Rent payable for the first (1st) month through the thirtieth (30th) month of the Option Term shall be the new monthly Base Rent for the Option Term as determined under Paragraphs 2.3(b) and (c), above. Such Base Rent shall be increased on the thirty-first (31st) month of the Option Term (a "Rental Adjustment Date") as provided in Section 3.2; provided, however, that such rent increase on each Rental Adjustment Date shall be a minimum of seven and sixty-eight one- 5 10 hundredths percent (7.68%) and a maximum of eighteen and one-half percent (18.5%) from the Comparison Base Rent. ARTICLE THREE: BASE RENT Section 3.1 TIME AND MANNER OF PAYMENT. Upon execution of this Lease (in addition to the payment of the Security Deposit under Section 3.3), Tenant shall pay Landlord the Base Rent in the amount stated in Paragraph 1.8(a) above which shall apply to the third full month of the Lease Term. On the first day of the fourth full month of the Lease Term and each month thereafter, Tenant shall pay Landlord the Base Rent, in advance, without offset, deduction or prior demand. Additionally, on the Commencement Date the Tenant shall pay to Landlord the initial Base Rent attributable to the first fractional month of the Lease Term, if any. The Base Rent shall be payable at Landlord's address or at such other place as Landlord may designate in writing. Section 3.2 COST OF LIVING INCREASES. The Base Rent shall be increased on each date (the "Rental Adjustment Date") stated in Paragraph 1.8(a) above and under Paragraph 2.3(d) in accordance with the increase in the United States Department of Labor, Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers (all items for the geographical Statistical Area in which the Property is located which currently is the Los Angeles-Riverside-Orange County statistical area on the basis of 1982-1984 = 100) (the "Index") as follows: (a) The Base Rent (the "Comparison Base Rent") in effect immediately before each Rental Adjustment Date shall be increased by the percentage that the Index has increased from the date (the "Comparison Date") on which payment of the Comparison Base Rent began through the month in which the applicable Rental Adjustment Date occurs. The Base Rent shall not be reduced by reason of such computation. Landlord shall notify Tenant of each increase by a written statement which shall include the Index for the applicable Comparison Date, the Index for the applicable Rental Adjustment Date, the percentage increase between those two Indices, and the new Base Rent. Any increase in the Base Rent provided for in this Section 3.2 shall be subject to any minimum or maximum increase, as provided for in Paragraph 1.8(a). (b) Tenant shall pay the new Base Rent from the applicable Rental Adjustment Date until the next Rental Adjustment Date. Landlord's notice may be given after the applicable Rental Adjustment Date of the increase, and Tenant shall pay Landlord the accrued rental adjustment for the months elapsed between the effective date of the increase and Landlord's notice of such increase within ten (10) days after Landlord's written notice. If the 6 11 format or components of the Index are materially changed after the Commencement Date, Landlord shall substitute an index which is published by the Bureau of Labor Statistics or similar agency and which is most nearly equivalent to the Index in effect on the Commencement Date. The substitute index shall be used to calculate the increase in the Base Rent unless Tenant objects to such index in writing within fifteen (15) days after receipt of Landlord's notice. If Tenant objects, Landlord and Tenant shall submit the selection of the substitute index for binding arbitration in accordance with the rules and regulations of the American Arbitration Association at its office closest to the Property. The costs of arbitration shall be borne equally by Landlord and Tenant. Section 3.3 SECURITY DEPOSIT; INCREASES. (a) Upon the execution of this Lease, Tenant shall deposit with Landlord a cash Security Deposit in the amount set forth in Section 1.7 above. Landlord may apply all or part of the Security Deposit to any unpaid rent or other charges due from Tenant or to cure any other defaults of Tenant. If Landlord uses any part of the Security Deposit, Tenant shall restore the Security Deposit to its full amount within ten (10) days after Landlord's written request. Tenant's failure to do so shall be a material default under this Lease. If Landlord retains a portion of the Security Deposit upon the expiration or sooner termination of this Lease, then Landlord shall apply such retained portion of the Security Deposit to any unpaid rent or other charges due from Tenant towards curing any defaults of Tenant or damages which Tenant is required to pay under this Lease. No interest shall be paid on the Security Deposit. Landlord shall not be required to keep the Security Deposit separate from its other accounts and no trust relationship is created with respect to the Security Deposit. (b) If the Base Rent is increased under paragraph 3.2 of the Construction Rider, Tenant shall deposit additional funds with Landlord sufficient to increase the Security Deposit to an amount which equals the adjusted initial Base Rent under paragraph 3.2 of the Construction Rider. Section 3.4 TERMINATION; ADVANCE PAYMENTS. Upon termination of this Lease under Article Seven (Damage or Destruction), Article Eight (Condemnation) or any other termination not resulting from Tenant's default, and after Tenant has vacated the Property in the manner required by this Lease, Landlord shall refund or credit to Tenant (or Tenant's successor) the unused portion of the Security Deposit, any advance rent or other advance payments made by Tenant to Landlord, and any amounts paid for real property taxes and other reserves which apply to any time periods after termination or expiration of this Lease. 7 12 ARTICLE FOUR: OTHER CHARGES PAYABLE BY TENANT Section 4.1 ADDITIONAL RENT. All charges payable by Tenant other than Base Rent are called "Additional Rent." Unless this Lease provides otherwise, Tenant shall pay all Additional Rent then due with the next monthly installment of Base Rent. The term "rent" shall mean Base Rent and Additional Rent. Section 4.2 PROPERTY TAXES. (a) REAL PROPERTY TAXES. Tenant shall pay real property taxes on the Property (including any fees, taxes or assessments against, or as a result of, any tenant improvement installed on the Property by or for the benefit of Tenant) during the Lease Term. Subject to Paragraph 4.2(b) and Section 4.7 below: (i) Landlord shall provide to Tenant at least fifteen (15) days prior to the delinquency date of such taxes a photocopy of the property tax bill; (ii) provided that Tenant shall have received a copy of the property tax bill, such payment shall be made by Tenant on or before the later of fifteen (15) days after Tenant's receipt of the property tax bill or ten (10) days prior to the delinquency date of the taxes; and (iii) prior to such date by which Tenant is to pay such taxes, Tenant shall furnish Landlord with satisfactory evidence that the real property taxes have been paid by Tenant. Landlord shall promptly reimburse Tenant for any real property taxes paid by Tenant covering any period of time prior to or after the Lease Term. If Tenant fails to pay the real property taxes when due, Landlord may pay the taxes and Tenant shall reimburse Landlord for the amount of such tax payment as Additional Rent. (b) LANDLORD MAY PAY TAXES. Landlord may elect, at Landlord's sole and absolute discretion, to pay the real property taxes (due under this Section 4.2) to the appropriate governmental authority and have Tenant pay such amount to Landlord, by Landlord delivering evidence of such tax amount(s) (including the tax bill from the governmental agency) to Tenant. Tenant shall pay over any such tax amount(s) to Landlord within thirty (30) days of Landlord's delivery of request for payment to Tenant, but not sooner than ten (10) days prior to the date on which such taxes are due to the applicable governmental agency. If Tenant fails to timely pay such tax amount(s) to Landlord, then such amount(s) shall be treated as a failure of Tenant to pay Landlord a monetary amount due under the terms of this Lease, and Tenant shall be deemed to be in default under this Lease and shall owe Landlord such taxes plus any interest and penalties provided for in this Lease. If Landlord elects for Tenant to reimburse Landlord for such real property taxes under this paragraph (b) for the first year or the last year of the Lease Term, then Tenant shall only be obligated to reimburse Landlord for that amount of the real 8 13 property taxes allocable to the Lease Term portion (including any applicable Option periods). (c) DEFINITION OF "REAL PROPERTY TAX." "Real property tax" or "real property taxes" means (i) any fee, license fee, license tax, business license fee, commercial rental tax, levy, charge, assessment, penalty or tax imposed by any taxing authority against the Property; (ii) any tax on the Landlord's right to receive, or the receipt of, rent or income from the Property or against Landlord's business of leasing the Property; (iii) any tax, assessment or charge for fire protection, streets, sidewalks, road maintenance, landscaping, refuse or other services provided to the Property by any governmental agency; (iv) any tax imposed upon this transaction or based upon a reassessment of the Property due to a change in law, a change of ownership, as defined by applicable law, or other transfer of all or part of Landlord's interest in the Property; and (v) change in the property tax laws and any charge or fee replacing any tax previously included within the definition of real property tax. "Real property tax" does not, however, include Landlord's federal or state income, franchise, inheritance or estate taxes. If after the Commencement Date there is an assessment against the Property and Landlord is given the option of paying such assessment in installments or a lump sum, then if Landlord elects to pay such assessment in a lump sum, Tenant shall only be obligated to pay such assessment each year in the amount as if Landlord had made the election to pay such assessment in installments. (d) JOINT ASSESSMENT. If the Property is not separately assessed, Landlord shall reasonably determine Tenant's share of the real property tax payable by Tenant under Paragraph 4.2(a) from the assessor's worksheets or other reasonably available information. Tenant shall pay such share to Landlord within fifteen (15) days after receipt of Landlord's written consent. (e) PERSONAL PROPERTY TAXES. (i) Tenant shall pay all taxes charged against trade fixtures, furnishings, equipment or any other personal property belonging to Tenant. Tenant shall try to have personal property taxed separately from the Property. (ii) If any of Tenant's personal property is taxed with the Property, Tenant shall pay Landlord the taxes for the personal property within fifteen (15) days after Tenant receives a written statement from Landlord for such personal property taxes. (f) APPLICATION FOR REDUCTION IN TAXES. The Tenant, at Tenant's sole cost and expense, may protest the real property tax valuation of the Property or any real property tax increases for INITIALS___ ___ 9 14 the Property which affects Tenant's obligation hereunder before the assessment appeals board or by judicial proceedings. Landlord agrees, at no cost or expense to Landlord, to cooperate with Tenant in effectuating such protest or legal proceeding. Tenant shall pay any of Landlord's legal fees in such proceeding or preparation therefor. Tenant shall pay all such taxes or assessments claimed to be due even if Tenant files a protest, appeal or legal proceeding relating to such taxes, assessments or valuation. The Tenant shall pay all of the attorneys' fees, appraisal fees and judicial proceedings and agrees to defend, indemnify and hold the Landlord harmless regarding same. Section 4.3 UTILITIES. Tenant shall pay, directly to the appropriate supplier, the cost of all natural gas, heat, light, power, sewer service, telephone, water, refuse disposal, and other utilities and services supplied to the Property. However, if any services or utilities are jointly metered with other property, Landlord shall make a reasonable determination of Tenant's proportionate share of the cost of such utilities and services and Tenant shall pay such share to Landlord within fifteen (15) days after receipt of Landlord's written consent Section 4.4 LIABILITY POLICIES. (a) LIABILITY INSURANCE. During the Lease Term, Tenant shall maintain a policy of commercial general liability insurance (sometimes known as broad form comprehensive general insurance) insuring Tenant against liability for bodily injury, property damage (including loss of use of property) and personal injury arising out of the operation, use or occupancy of the Property. Tenant shall name Landlord as an additional insured under such policy, and Tenant shall be responsible for the deductible, if any, under such policy. The initial amount of such insurance shall be Two Million Dollars ($2,000,000) per occurrence and shall be subject to periodic increase based upon inflation, increased liability awards, recommendation of Landlord's professional insurance advisers and other commercially reasonable relevant factors. The liability insurance obtained by Tenant under this Paragraph 4.4(a) shall: (i) be primary and non-contributing; (ii) contain cross-liability endorsements; and (iii) insure Landlord against Tenant's performance under Section 5.6, if the matters giving rise to the indemnity under Section 5.6 result from the acts or negligence of Tenant. The amount and coverage of such insurance shall not limit Tenant's liability nor relieve Tenant of any other obligation under this Lease. Landlord may also obtain, at Landlord's cost, additional comprehensive public liability insurance in an amount and with coverage determined by Landlord insuring Landlord against liability arising out of the ownership, operation, use or occupancy of the Property. The policy obtained INITIALS___ ___ 10 15 by Landlord shall not be contributory and shall not provide primary insurance. (b) PROPERTY AND RENTAL INCOME INSURANCE. During the Lease Term, Landlord shall maintain at Tenant's cost policies of insurance covering loss of or damage to the Property in the full amount of its replacement value. The deductible amounts under such policies shall not exceed Twenty Thousand Dollars ($20,000) per occurrence (except such limitation shall not apply in the case of earthquake insurance if same is required to be carried by Landlord's lender). Such policy shall contain an Inflation Guard Endorsement and shall provide protection against all perils included within the classification of fire, extended coverage, vandalism, malicious mischief, special extended perils (all risk), sprinkler leakage and any other perils which Landlord deems reasonably necessary. Landlord shall have the right to obtain (and require Tenant to pay for same) flood and earthquake insurance if required by any lender holding a security interest in the Property. During the Lease Term, Landlord shall also maintain a rental income insurance policy, with loss payable to Landlord, in an amount equal to twelve (12) months' Base Rent, plus estimated real property taxes and insurance premiums. Tenant shall be liable for the Payment of any deductible amount under Landlord's or Tenant's insurance policies maintained pursuant to this Paragraph 4.4(b), (except with respect to any deductible for earthquake insurance required to be obtained by Landlord's lender under this Paragraph 4.4(b), which Landlord and Tenant shall each pay fifty percent (50%) of the deductible amount of such earthquake insurance). If this Lease is terminated by Landlord under the provisions of Article Seven (and this Lease is not terminated by Tenant) due to damage from an earthquake, then as to the earthquake insurance described in the immediate preceding sentence for which Tenant is responsible for fifty percent (50%) of the deductible amount, Tenant shall not be responsible for fifty percent (50%) of such earthquake insurance deductible amount upon the termination of this Lease (provided, however, if Tenant elects to terminate this Lease as permitted under the terms of Article Seven, then Tenant shall remain obligated to pay such 50% deductible amount). Tenant shall not do or permit anything to be done which invalidates any such insurance policies. All property insurance and rental income insurance obtained by Landlord under this Paragraph 4.4(b) shall provide for all payments of proceeds to be made to Landlord (and/or lender(s) designated by Landlord). (c) PAYMENT OF PREMIUMS. Subject to Section 4.7, Tenant shall pay all premiums (and reimburse Landlord for Landlord's payments of such premiums) for the insurance policies described in Paragraphs 4.4(a) and (b) (whether such insurance is obtained by Landlord or Tenant) within thirty (30) days after billing by Landlord or where Tenant is to pay the insurance company directly INITIALS___ ___ 11 16 within thirty (30) days after Tenant's receipt of a copy of the premium statement or other evidence of the amount due. Before the Commencement Date, Tenant shall deliver to Landlord a copy of any policy of insurance which Tenant is required to maintain under this Section 4.4. At least thirty (30) days prior to the expiration of any such policy, Tenant shall deliver to Landlord a renewal of such policy. As an alternative to providing a policy of insurance, Tenant shall have the right to provide Landlord a certificate of insurance, executed by an authorized officer of the insurance company, showing that the insurance which Tenant is required to maintain under this Section 4.4 is in full force and effect and containing such other information which Landlord reasonably requires. (d) GENERAL INSURANCE PROVISIONS. (i) Any insurance which Tenant is required to maintain under this Lease shall include a provision which requires the insurance carrier to give Landlord not less than thirty (30) days' written notice prior to any cancellation or modification of such coverage. (ii) If Tenant fails to deliver any policy, certificate or renewal to Landlord required under this Lease within the prescribed time period or if any such policy is canceled or materially modified during the Lease Term without Landlord's consent, or if Tenant fails to pay premiums for any insurance policy, Landlord may obtain such insurance (or pay premiums on an existing insurance policy), in which case Tenant shall reimburse Landlord for the cost of such insurance and premiums within fifteen (15) days after receipt of a statement that indicates the cost of such insurance and premiums. (iii) Tenant may at its sole option obtain, at Tenant's sole cost and expense, from any insurance company chosen by Tenant, a separate policy of earthquake insurance ("Tenant's Earthquake Insurance") or other insurance ("Tenant's Special Property Insurance") in addition to the insurance required under Paragraphs 4.4(a) and 4.4(b) which insures the Tenant Improvements and Tenant's trade fixtures, equipment and other personal property, and Tenant may be designated as the sole loss payee of such Tenant's earthquake Insurance and Tenant's Special Property Insurance. The phrase "Tenant's Special Property Insurance" specifically excludes any insurance which is required to be maintained under Paragraphs 4.4(a) and 4.4(b). Tenant may receive such Tenant's Earthquake Insurance and Tenant's Special Property Insurance proceeds (and Tenant shall be required to pay all premiums and the entire deductible amount for such Tenant's Earthquake Insurance and Tenant's Special Property Insurance policies). As to such Tenant's Earthquake Insurance and Tenant's INITIALS___ ___ 12 17 Special Property Insurance of which Tenant is the loss payee under the immediately preceding sentence (and which is not required to be obtained by Landlord's lender), if this Lease is terminated under the provisions of Article Seven (as permitted thereunder) and this Lease in fact terminates, then Tenant may keep such insurance proceeds from Tenant's Earthquake Insurance and Tenant's Special Property Insurance. However, if Landlord is required to obtain earthquake insurance insuring the Property by a lender holding a security interest in the Property under Paragraph 4.4(b), above, then Tenant shall be required to pay all of the premiums for such earthquake insurance (for the entire Property) as required by such lender, and Landlord (or the lender as the lender shall require) shall be designated as the loss payee of such insurance policy, and Landlord and Tenant shall each be responsible for the payment of fifty percent (50%) of the deductible amount of such earthquake insurance (and such insurance shall not be classified as "Tenant's Earthquake Insurance"). If Tenant as a loss payee or otherwise receives or is entitled to receive any earthquake insurance proceeds on the Property including the Tenant Improvements (whether or not such insurance is Tenant's Earthquake Insurance or is required by Landlord's lender), then Tenant agrees to utilize such insurance proceeds to repair and reconstruct any damage to the Property; provided, however, if this Lease is terminated under the provisions of Article Seven, Tenant may retain such insurance proceeds from Tenant's Earthquake Insurance and Tenant's Special Property Insurance policies, if any, (but not any other insurance policy required under Paragraph 4.4(a) or 4.4(b)) insuring the Tenant Improvements. (iv) Tenant shall maintain all insurance required to be maintained by Tenant under this Lease with companies holding a "General Policy Rating" of A-12 or better, as set forth in the most current issue of "Best Key Rating Guide." Tenant acknowledges that the insurance described in Paragraph 4.4(b) is for the primary benefit of Landlord. Landlord makes no representation as to the adequacy of such insurance to protect Landlord's or Tenant's interests. Therefore, Tenant shall obtain any such additional property or liability insurance which Tenant deems necessary to protect Landlord and Tenant. (v) Notwithstanding any other provision of this Lease, unless prohibited under any applicable insurance policies maintained, Landlord and Tenant each hereby waive any and all rights of recovery against the other, or against the officers, employees, agents or representatives of the other, for loss of or damage to its property or the property of others under its control, to the extent such loss or damage is actually reimbursed from any proceeds from an insurance policy in force (whether or not described in this Lease) at the time of such loss or damage. Upon obtaining the required policies of insurance, Landlord and Tenant INITIALS___ ___ 13 18 shall give notice to the insurance carriers of this mutual waiver of subrogation. (vi) Additionally, Tenant shall obtain at Tenant's cost casualty insurance for Tenant's fixtures or equipment installed by Tenant on the Property. (vii) If Landlord obtains a blanket insurance policy covering more than one (1) property owned by Landlord, then Landlord agrees to have the insurance company for such blanket insurance policy allocate any insurance deductible amount on a per property basis in order that the Property has a separate stated deductible amount under such blanket insurance policy. Section 4.5 LATE CHARGES. Tenant's failure to pay rent promptly may cause Landlord to incur unanticipated costs. The exact amount of such costs are impractical or extremely difficult to ascertain. Such costs may include, but are not limited to, processing and accounting charges and late charges which may be imposed on Landlord by any ground lease, mortgage or trust deed encumbering the Property. Therefore, if Landlord does not receive any rent payment within five (5) days after Landlord's written notice to Tenant that such rent payment is due, Tenant shall immediately pay Landlord a late charge equal to ten percent (10%) of the overdue amount. After Landlord has given to Tenant at any time during this Lease term two (2) written notices that rent payments are past due, Landlord shall no longer have to give Tenant such written notice under the immediately preceding sentence, and thereafter if Landlord does not receive any rent payment within five (5) days after such rent payment becomes due, Tenant shall immediately pay Landlord a late charge equal to ten percent (10%) of the overdue amount. The parties agree that such late charge represents a fair and reasonable estimate of the costs Landlord will incur by reason of such late payment. If such late charge is not paid when due hereunder, such failure shall be deemed a default by Tenant, and Tenant shall (in addition to Landlord's other remedies) pay to Landlord interest (at the rate specified in Section 4.6, but not greater than the maximum rate permitted by law on such late charge) on such late charge from the date such late charge is to be paid to Landlord. Section 4.6 INTEREST ON PAST DUE OBLIGATIONS. Any amount owed by Tenant to Landlord which is not paid when due shall bear interest at the rate of fifteen percent (15%) per annum from the due date of such amount. However, interest shall not be payable on late charges to be paid by Tenant under this Lease. The payment of interest on such amounts shall not excuse or cure any default by Tenant under this Lease. If the interest rate specified in this Lease is higher than the rate permitted by law, the interest rate 14 19 is hereby decreased to the maximum legal interest rate permitted by law. Section 4.7 IMPOUNDS FOR INSURANCE PREMIUMS AND REAL PROPERTY TAXES. If requested by any ground lessor or lender to whom Landlord has granted a security interest in the Property, or if Tenant is more than ten (10) days late in the payment of rent more than once in any consecutive twelve (12) month period, Tenant shall pay Landlord a sum equal to one-twelfth (1/12) of the annual real property taxes and insurance premiums payable by Tenant under this Lease, together with each payment of Base Rent. Landlord shall hold such payments in a non-interest bearing impound account. If unknown, Landlord shall reasonably estimate the amount of real property taxes and insurance premiums when due. Tenant shall pay any deficiency of funds in the impound account to Landlord upon written request. If Tenant defaults under this Lease, Landlord may apply any funds in the impound account to any obligation then due under this Lease. Upon the first to occur of the termination of such impound account or the termination of this Lease, Landlord and Tenant shall reconcile the amounts held in such impound account and shall pay such amount due to Tenant or to Landlord (or ground lessor or lender), as the case may be. ARTICLE FIVE: USE OF PROPERTY Section 5.1 PERMITTED USES. Tenant may use the Property only for the Permitted Uses set forth in Section 1.6 above. Section 5.2 MANNER OF USE. Tenant shall not cause or permit the Property to be used in any way which constitutes a violation of any law, ordinance, or governmental regulation or order, which annoys or interferes with the rights of any other tenants of Landlord, or which constitutes a nuisance or waste. Subject to Landlord's duties to obtain certain permits under the Construction Rider, Tenant shall obtain and pay for all permits required for Tenant's occupancy of the Property. Tenant shall promptly take all actions necessary to comply with all applicable statutes, ordinances, rules, covenants, conditions and restrictions, regulations, orders and requirements regulating the use by Tenant of the Property, including the Occupational Safety and Health Act. Tenant acknowledges that this Lease and Tenant's leasehold interest under this Lease are subordinate to any covenants, conditions and restrictions ("CC&Rs") presently or in the future promulgated or recorded in connection with the Property and as a requirement of any parcel map, and any amendments or modifications thereto. Tenant agrees to comply with any such CC&Rs and to pay any costs, assessments or charges under such CC&Rs which are charged or assessed against the Property. Tenant agrees to execute and acknowledge any document evidencing the subordination 15 20 described in this paragraph, as requested by Landlord from time to time. Tenant agrees to comply with all of the provisions of such, including but not limited to use and maintenance of the Property, requirements of any governmental body, including but not limited to use and maintenance of the Property, provisions for earth berms, landscaping, parking, storage and waste removal, trucking and load, drainage care, maintenance and repair of signs. Tenant shall be responsible for all costs of maintenance, and any assessments or charges as related to Tenant's Property under any CC&Rs. Notwithstanding the above provisions of this Section 5.2, if the Shell portion of the Building (as such capitalized terms are defined in the Construction Rider) including the parking lot are required to be modified by the validly-organized industrial park association formed under the CC&Rs or by another landowner in the industrial park enforcing the CC&Rs by a judgment of a court of competent jurisdiction, because same were not constructed in compliance with the CC&Rs as such CC&Rs lawfully existed on the Commencement Date, then Landlord agrees to pay for any such required modifications. Section 5.3 HAZARDOUS MATERIALS. (a) DEFINITIONS. As used in this Section 5.3, the following definitions shall apply: (i) "Environmental Laws" shall mean all federal, state and local laws, ordinances, rules and regulations now or hereafter in force, as amended from time to time, in any way relating to or regulating human health or safety, or industrial hygiene or environmental conditions, or protection of the environment, or pollution, or contamination of the air, soil, surface water or ground water, including but not limited to the Comprehensive Environmental Response, Compensation and Liability Act of 1980, the Resource Conservation and Recovery Act, the Clean Water Act, the Hazardous Substance Account Act, California Health and Safety Code provisions, the California Hazardous Waste Control Law, the California Medical Waste Management Act, and the California Porter-Cologne Water Quality Control Act. (ii) "Hazardous Material" shall mean any substance or material that is described as a toxic or hazardous substance, waste or material, or a pollutant or contaminant, or words of similar import, in any of the Environmental Laws, and includes asbestos, petroleum (including crude oil or any fraction thereof, natural gas, natural gas liquids, liquified natural gas, or synthetic gas useable for fuel, or any mixture thereof), petroleum products, polychlorinated biphenyls, urea formaldehyde, radon gas, radioactive matter, medical waste, and chemicals which may cause cancer or reproductive toxicity. 16 21 (iii) "Release" shall mean any spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping or disposing into the environment. (iv) For purposes of this Section 5.3, the activities, acts, use, production, processing, manufacturing, generation, treatment, handling, storage and Release by "Tenant" shall mean those of Tenant, Tenant's employees, contractors, sublessees, customers, licensees, guests, contractors, invitees and/or agents. (b) COVENANT ON USE OF PROPERTY. Tenant shall not use, produce, process, manufacture, generate, treat, handle, store or dispose of any Hazardous Material in, on or under the Property, or use the Property for any such purposes, or Release any Hazardous Material into any air, soil, surface water or ground water at, on or about the Property, or permit any person using or occupying the Property or any part thereof to do any of the foregoing, which are in violation of any Environmental Laws. Tenant assumes the risk that Environmental Laws may change in the future. Subject to Landlord's obligations pursuant to Paragraph 5.3(f) below, Tenant shall comply, and shall cause all persons using the Property or any part thereof to comply with all Environmental Laws applicable to the Property, or the use or occupancy thereof, or any operations or activities therein or thereon. Tenant shall obtain all permits, licenses and approvals required by all applicable Environmental Laws for the use and occupancy of, and all operations and activities in the Property, comply fully with all such permits, licenses and approvals, and keep all such permits, licenses and approvals in full force and effect. Landlord's consent in allowing Tenant to permit or engage in any activity relating to Hazardous Material shall not be construed to mean Landlord in any way approves of the manner in which the Tenant is engaging in such activities, or that Landlord has determined that such activity or manner of activity is safe. (c) NO STORAGE TANKS. Tenant shall not install or use any storage tanks on the Property below ground without Landlord's prior written permission. In no event, however, shall Landlord be required to consent to the installation or use of any storage tanks on the Property, and Landlord may refuse to allow the installation thereof for or not for any reason. (d) NOTICE TO LANDLORD OF PRESENCE OF HAZARDOUS MATERIAL ON PROPERTY. In the event that any Hazardous Material is present or Released, or there is a threatened Release of Hazardous Material on or under the Property which has violated or which may violate an Environmental Law (or any nearby property which can migrate into or onto the Property), or that any violation of any Environmental Laws may have occurred at the Property, Tenant shall immediately give notice to Landlord thereof if Tenant has knowledge thereof. 17 22 Additionally, Tenant shall immediately furnish to Landlord copies of all written communications received by Tenant from any person or given by Tenant to any person concerning any past or present Release or threatened Release of Hazardous Material in, on or under the Property (or any nearby property which could migrate to the Property), or any past or present violation of any Environmental Laws which may affect the Property. Landlord shall have the right, but not the obligation, to obtain from Tenant, at any time, any additional information reasonably requested by Landlord and available to Tenant regarding Hazardous Material generated, produced, brought onto, used, stored, treated or disposed of by Tenant or any other person on or above the Property, and/or activities relating thereto, on or about the Property. Tenant shall immediately comply with Landlord's requests. (e) ENVIRONMENTAL REPORT AND LANDLORD'S RIGHT TO INSPECT AND AUDIT. Landlord shall have the right, but not the obligation, to enter the Property to investigate at any time the presence of Hazardous Material, and the compliance with Environmental Laws, and to take all actions reasonably necessary to remediate any threat or breach of any Environmental Laws or from any Release of Hazardous Material on or about the Property. If Landlord has reasonable cause to believe there has been a Release of Hazardous Materials on the Property or by Tenant, then Tenant, at Tenant's sole expense, shall have an environmental audit (which may, in Landlord's determination, include a Phase I and/or a Phase II environmental report) or other appropriate investigation of the Property conducted by a third party satisfactory to Landlord and approved by Landlord regarding the presence of Hazardous Material and compliance with Environmental Laws. Tenant acknowledges that any such inspections or reports undertaken by Tenant and Landlord are solely for the protection of Landlord, and agrees that Landlord has no duty to tenant with respect to Hazardous Material or Environmental Laws as a result of any such inspections or reports. Landlord, at Landlord's expense, has obtained a Phase I environmental report for the Property dated June 5, 1998 prepared by Neblett and Associates, Inc., has delivered a copy of such Phase I environmental report to Tenant, and Tenant has reviewed such Phase I environmental report. Tenant shall obtain on the termination or expiration of this Lease a Phase I environmental report at Tenant's expense and deliver a copy of same to Landlord. (f) REMEDIATION WORK. If any Release of Hazardous Material in, on or under the Property occurs by any person during the term of this Lease (other than underground migration of Hazardous Materials under the Property which originates outside of the Property through no fault of Tenant) or by Tenant at any time, Tenant shall immediately give notice of the condition to Landlord, and Tenant shall promptly clean up and remove all Hazardous Material so released and restore the Property to be in compliance 18 23 with all Environmental Laws (the "Remediation Work"). Tenant shall comply with the orders and directives of all persons having jurisdiction over the Property or the Remediation Work. Landlord may review any plans and specifications for the Remediation Work before such Remediation Work is performed. Any such plans or specifications shall be prepared by a qualified, licensed engineer or contractor, which Landlord shall have the right to approve (which approval shall not be unreasonably withheld or delayed), and shall comply with all applicable Environmental Laws, and all other laws, ordinances, rules and regulations. Tenant shall be responsible at Tenant's sole expense to obtain all permits, licenses and approvals for the Remediation Work and to complete the Remediation Work diligently and in a timely manner. Tenant shall pay for all Remediation Work, including the cost of plans, utilities, permits, fees, taxes and insurance premiums in connection therewith. Tenant shall furnish to Landlord promptly upon receipt, copies of all reports, studies, analysis, investigations, contracts, correspondence, claims, complaints, pleadings and other information and communications received or prepared by Tenant at any time in connection with any Remediation Work. If there is underground migration of Hazardous Materials under the Property in violation of Environmental laws which originate outside of the Property through no fault of Tenant, and an authorized governmental agency requires Landlord to investigate, remediate or remove such Hazardous Materials, the Landlord, at Landlord's sole cost, agrees to comply with such governmental order. Additionally, if Hazardous Materials (other than Hazardous Materials contained in the building materials of the Property) exist on the Property prior to the Commencement Date through no fault of Tenant or Tenant's contractors which are not part of the Tenant Improvements, and an applicable governmental agency orders that Landlord investigate, remediate or remove such Hazardous Materials, then Landlord at Landlord's sole cost agrees to comply with such governmental order. (g) RIGHT TO PARTICIPATE BY LANDLORD. Landlord shall have the right, but not the obligation, to participate in any action or proceeding relating to any past or present Release or threatened Release of any Hazardous Material in, on or under the Property, or any past or present violation of any Environmental Laws at the Property, or the necessity for or adequacy of any Remediation Work. Tenant shall provide immediate notice upon receipt to Landlord and allow Landlord to participate in any negotiations or discussions with any federal, state or local governmental agency, including environmental, occupational or public health and safety agencies with regard to Hazardous Material or any Environmental Laws, including all settlement or discussions regarding abatement or Remediation Work. 19 24 (h) BURDEN OF PROOF. The burden of proof under this Section regarding establishment of a date upon which a Hazardous Material was or was not placed or appeared or did not appear in, on or under the Property shall be upon the Tenant. (i) REQUIRED INSURANCE. In the event that Tenant is required to obtain a permit or other governmental authorization to use Hazardous Materials, and Tenant shall permit Hazardous Material upon the Property or engage in activities relating to Hazardous Material on, about or above the Property, then unless such insurance is not available at commercially reasonable rates as a result of Hazardous Materials existing on the Property as of the Commencement Date through no fault of Tenant or Tenant's contractor, Tenant shall, at Tenant's expense, procure and maintain insurance coverage insuring Tenant and Landlord against any and all liability arising from such Hazardous Material or activities relating thereto. Tenant shall duly provide Landlord with a certificate of such insurance coverage, in such amounts and from such carriers as Landlord shall require. (j) INDEMNIFICATION BY TENANT. Tenant shall indemnify, reimburse, defend and hold harmless Landlord (and its employees, partners, agents, affiliates, successors, lenders and representatives) against all claims, demands, liabilities, losses, damages, costs and expenses in any way arising from, relating to, or connected with: (i) the use, generation, manufacture, storage, disposal, handling, or Release or threatened Release of any Hazardous Material in, on or under the Property by any person during the term of this Lease or by Tenant at any time; (ii) any violation of Environmental Laws at the Property by any person during the term of this Lease or by Tenant at any time; (iii) any breach of any duty to perform Remediation Work required of Tenant under this Section 5.3; and/or (iv) any breach of any covenant, representation or warranty made by Tenant hereunder, or any failure of Tenant to perform any of Tenant's covenant's or obligation in accordance with this Section. Tenant's duties to indemnify Landlord under this Paragraph 5.3(j) shall not apply to any underground migration of Hazardous Materials under the Property which originate outside of the Property through no fault of Tenant. The indemnification hereunder shall include all expenses of investigation and monitoring, costs of containment, abatement, removal, repair, clean up, restoration and remedial work, penalties and fines, reasonable attorneys' fees and disbursements and other response costs. The indemnification hereunder shall also include any lost rental amounts and other damages because of the release of Hazardous Material, violation of Environmental Laws, or because such Hazardous Material must be remediated from the Property. If Tenant fails to perform any obligation of Tenant in accordance with this Section, Landlord shall have the right, but not the obligation, to perform such obligation on behalf of Tenant. Tenant 20 25 shall, on demand, pay to Landlord all sums expended by Landlord in the performance of any such obligations of Tenant, together with interest thereon after such demand at the maximum rate of interest then provided by law. The term "attorneys' fees" under this Section shall mean reasonable fees charged by the attorneys in question based upon such attorneys' then prevailing hourly rates as opposed to any statutory presumption specified by any statute then in effect in the State of California. (k) LANDLORD'S REPRESENTATIONS AND WARRANTIES. Landlord represents and warrants to the best of Landlord's actual knowledge on the date hereof that: (i) on the Commencement Date there are no Hazardous Materials present on the Property or in the soil or ground water which are in violation of Environmental Laws existing on the Commencement Date for which Landlord is required to remediate same; (ii) on the Commencement Date there are no underground storage tanks or asbestos-containing building materials present on the Property in violation of Environmental Laws existing on the Commencement Date which require Landlord's remediation of same; and (iii) on the date hereof Landlord has received no written notice of any action, proceeding or claim which is pending or threatened against Landlord concerning the Property's violation of any Environmental Laws. If Landlord should violate any of the representations or warranties of Landlord under this paragraph (k), then Tenant's sole remedy shall be to require Landlord to correct such violation of Environmental Laws if such correction is required by a governmental agency, and Landlord shall not be liable for any consequential damage to any person, property or business. The above representations and warranties of Landlord under this paragraph (k) shall not apply to any of the Tenant Improvements installed by Tenant or Tenant's contractors, any Hazardous Material brought onto the Property by Tenant or Tenant's contractors, or any violation of any Environmental Laws caused by Tenant or Tenant's contractors. (l) SURVIVABILITY. All representations, warranties and indemnifications under this Section shall survive the termination of the Lease. Tenant waives the right to assert any statute of limitations as a bar to the enforcement of this Section or to any action brought to enforce the provisions of this Section. (m) REMEDIES CUMULATIVE. This Section shall not affect, impair or waive any rights or remedies of Landlord or any obligations of Tenant with respect to Hazardous Materials imposed or created by Environmental Laws (including Landlord's rights of reimbursement or contribution under Environmental Laws). The remedies in this Section are cumulative and in addition to all remedies provided by law. 21 26 Section 5.4. OUTSIDE STORAGE. In addition to any other provision specified in this Lease or as required by any law, rule or regulation, Tenant agrees to not have any outside storage of inventory or materials (other than for designated trash areas in compliance with all laws) and to keep the exterior of the Property free from debris. Section 5.5. SIGNS AND AUCTIONS. Tenant may place signs on the Property subject to Landlord's prior written consent, which consent shall not be unreasonably withheld. All signs shall comply with all federal, state and local laws, rules and regulations. Landlord reserves the right to approve the size, type and appearance of any sign. Landlord may require that any sign be installed only by companies approved by Landlord, and such approval shall not be unreasonably withheld or delayed. Tenant shall pay all costs for the construction and maintenance of any signs. Tenant shall not conduct or permit any auctions or sheriff's sales at the Property. Landlord agrees during the Lease Term to not place any "For Sale" signs on the Property. Section 5.6. INDEMNITY. Tenant shall indemnify Landlord against and hold Landlord harmless from any and all costs, claims or liability arising from: (a) Tenant's use of the Property; (b) the conduct of Tenant's business or anything else done or permitted by Tenant to be done in or about the Property; (c) any breach or default in the performance of Tenant's obligations under this Lease; (d) any misrepresentation or breach of warranty by Tenant under this Lease; or (e) other acts or omissions of Tenant. Tenant shall defend Landlord against any such cost, claim or liability at Tenant's expense with counsel reasonably acceptable to Landlord or, at Landlord's election, Tenant shall reimburse Landlord for any reasonable legal fees or costs incurred by Landlord in connection with any such claim. As a material part of the consideration to Landlord, Tenant assumes all risk of damage to property or injury to persons in or about the Property arising from any cause, and Tenant hereby waives all claims in respect thereof against Landlord, except for claims for Landlord's or Landlord's employees' or contractors' willful misconduct or negligence prior to the Commencement Date which occur during the construction of the Building. As used in this Section, the term "Tenant" shall include Tenant's employees, agents, contractors and invitees, if applicable. Section 5.7. LANDLORD'S ACCESS. Landlord or its agents may enter the Property at all reasonable times to show the Property to potential buyers, investors or during the last twelve (12) months of the Lease Term (and at any time if Tenant should then be in default) tenants or other parties; to do any other act or to inspect and conduct tests in order to monitor Tenant's compliance with all applicable Environmental Laws and all laws governing the 22 27 presence and use of Hazardous Material; or for any other purpose Landlord reasonably deems necessary. Landlord shall give Tenant at least twenty-four (24) hours prior notice to such entry, except in the case of an emergency. Tenant shall have the right to accompany Landlord at all times during Landlord's entry onto the Property (except in the case of an emergency). Landlord may place customary "For Lease" signs (but not "For Sale" signs) on the Property during the last twelve (12) months of the Lease Term (and at any time should the Tenant then be in default). Section 5.8 QUIET POSSESSION. If Tenant pays the rent and complies with all other terms of this Lease, Tenant may occupy and enjoy the Property for the full Lease Term, subject to the provisions of this Lease. Section 5.9 FUTURE EASEMENTS AND GOVERNMENTAL REQUIREMENTS. Tenant agrees that Tenant shall cooperate with Landlord in granting any easements and executing any covenants, conditions or restrictions which may be required by any governmental agency or utility for the Property, or which Landlord may otherwise require, provided that such easement, condition or restriction does not materially interfere with Tenant's use of the Property. ARTICLE SIX: CONDITION OF PROPERTY; MAINTENANCE, REPAIRS AND ALTERATIONS Section 6.1 EXISTING CONDITIONS. Subject to the Construction Rider, Tenant accepts the Property in its current condition, subject to all recorded matters, laws, ordinances, and governmental regulations and orders. Except as provided in the Construction Rider, Tenant acknowledges that neither Landlord nor any agent of Landlord has made any representation as to the condition of the Property or the suitability of the Property for Tenant's intended use. Tenant agrees that Tenant assumes responsibility for the adequacy and capacity of the Property's mechanical and electrical systems; use of the Property for Tenant's proposed purposes; and the laws, rules and regulations of federal, state and local governmental bodies affecting the Property, including parking requirements for any of Tenant's present or proposed uses of the Property. Tenant is relying upon Tenant's own investigation, and neither Landlord nor any agent of Landlord has made any representations or warranties to Tenant regarding the items stated in the preceding sentence. Section 6.2 EXEMPTION OF LANDLORD FROM LIABILITY. Landlord shall not be liable for any damage or injury to the person, business (or any loss of income therefrom), goods, wares, merchandise or other property of Tenant, Tenant's employees, invitees, customers or any other person in or about the Property, 23 28 whether such damage or injury is caused by or results from: (a) fire, steam, electricity, water, gas or rain; (b) the breakage, leakage, obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures or any other cause; (c) conditions arising in or about the Property or from other sources or places; or (d) any act or omission of any other tenant of Landlord. Landlord shall not be liable for any such damage or injury even though the cause of or the means of repairing such damage or injury are not accessible to Tenant. Section 6.3 LANDLORD'S OBLIGATIONS. This Section 6.3 is subject to the provisions of Article Seven (Damage or Destruction), Article Eight (Condemnation), and paragraph 4 of the Construction Rider (Landlord's Warranty). Landlord has absolutely no responsibility to repair, maintain or replace any portion of the Property at any time, except as follows. Landlord agrees to repair, maintain and as required replace the structural elements of the Building walls, the structural elements of the roof (specifically excluding the roof membrane and any other parts of the roof), the foundation of the Building, any interior structural support columns, and the structural portion of the mezzanine deck. If any of the structural elements of the Building walls, the structural elements of the roof (specifically excluding the roof membrane and any other parts of the roof), the foundation of the Building, any interior structural support columns, or any structural portion of the mezzanine deck is required to be modified because of changes to governmental laws, rules or regulations after the Commencement Date (and such foundation or structural items are not allowed by the applicable governmental agency to remain unmodified), then Landlord agrees to pay the cost of such changes. Landlord's obligation under this Section 6.3 shall solely be to repair or replace same as may be required, and Landlord shall not be liable for any consequential damages to any person, property or business of Tenant. Landlord shall not be responsible (and tenant shall be responsible) for any damage to the structural portion of the building, roof or columns caused by Tenant's acts or negligence or those of Tenant's employees, contractors, customers or invitees. Tenant waives the benefit of any present or future law which might give Tenant the right to repair the Property at Landlord's expense. Section 6.4 TENANT'S OBLIGATIONS. (a) TENANT. Except as provided in Section 6.3 (Landlord's Obligations), Article Seven (Damage or Destruction), Article Eight (Condemnation), and paragraph 4 of the Construction Rider (Landlord's Warranty), Tenant shall keep all portions of the Property (including but not limited to nonstructural, roof membrane and nonstructural portions of the roof, interior, systems, Tenant Improvements and equipment) in good order, condition and repair and maintain same (including interior repainting and refinishing, as 24 29 needed and any changes or repairs required by changes to governmental laws, rules or regulations effective after the Commencement Date). If any portion of the Property or any system or equipment in the Property which Tenant is obligated to repair cannot be fully repaired or restored, Tenant shall promptly replace such portion of the Property or system or equipment in the Property, regardless of whether the benefit of such replacement extends beyond the Lease Term. Tenant shall maintain a preventive maintenance contract providing for the regular inspection and maintenance of the heating and air conditioning system by a licensed heating and air conditioning contractor. In carrying out Tenant's obligations under this Paragraph 6.4(a), Tenant may utilize any insurance proceeds paid under an insurance policy under Section 4.4 to Landlord or Tenant which is then available for the repair of such portion of the Property and, additionally, Landlord shall cooperate with Tenant in enforcing any warranties regarding the Property as described in paragraph 4.1 of the Construction Rider. If any part of the Property is damaged by any act or omission of Tenant, Tenant shall either repair the damaged part of the Property or pay Landlord the cost of repairing or replacing such damaged property, even if Landlord would otherwise be obligated to pay the cost of maintaining or repairing such property. Landlord shall have the right, in Landlord's discretion, to require Tenant to utilize maintenance and landscape companies and contractors approved by Landlord to keep in good order, condition and repair the Property, including, but not limited to, the painting of the exterior and interior of any improvements on the Property, the repair and maintenance of the parking areas, landscaping of the Property, and the maintenance of the roof, all at periodic intervals. Specifically, under the immediate preceding sentence, Landlord may require Tenant to utilize Landlord's chosen landscapers (provided the cost of same is competitive for the area for the same quality) in order to keep the landscaping in first-class condition and may have such landscapers bill Tenant directly or Landlord may bill Tenant for such landscapers. Any such costs and expenses done or paid for by Landlord shall be paid and reimbursed by Tenant to Landlord directly or upon billing by the Landlord, and shall be treated as monetary amounts due under the terms of the Lease. It is the intention of Landlord and Tenant that at all times Tenant shall maintain the portions of the Property which Tenant is obligated to maintain in an attractive, first-class, and fully operative condition. (b) TENANT'S FAILURE. Tenant shall fulfill all of Tenant's obligations under this Section 6.4 at Tenant's sole expense. If Tenant fails to maintain, repair or replace the Property as required by this Section 6.4, Landlord may, upon ten (10) days' prior notice to Tenant (except that no notice shall be required in the case of any emergency), enter the Property and perform such maintenance or repair (including replacement, as needed) on behalf 25 30 of Tenant. In such case, Tenant shall reimburse Landlord for all costs incurred in performing such maintenance or repair immediately upon demand. Section 6.5 ALTERATIONS, ADDITIONS, AND IMPROVEMENTS. (a) NO ALTERATIONS WITHOUT LANDLORD'S CONSENT. Tenant shall not make any alterations, additions, or improvements to the Property without Landlord's prior written consent, except for non-structural alterations which do not exceed Twenty-Five Thousand Dollars ($25,000) per calendar year and which are not visible from the outside of any building of which the Property is part. Landlord shall not unreasonably withhold or delay Landlord's consent under the immediately preceding sentence. Landlord may require Tenant to provide demolition and/or lien and completion bonds in forms and amounts satisfactory to Landlord. Tenant shall promptly remove any alterations, additions, or improvements constructed in violation of this Paragraph 6.5(a) upon Landlord's written request. All alterations, additions, and improvements shall be done in a good and workmanlike manner, in conformity with all applicable laws and regulations, and by a contractor approved by Landlord. Upon completion of any such work, Tenant shall provide Landlord with "as built" plans, copies of all construction contracts, and proof of payment for all labor and materials. (b) PAYMENT REQUIRED. Tenant shall pay when due all claims for labor and material furnished to the Property. Tenant shall give Landlord at least twenty (20) days' prior written notice of the commencement of any work on the Property, regardless of whether Landlord's consent to such work is required. Landlord may elect to record and post notices of non-responsibility on the Property. Section 6.6 CONDITION UPON TERMINATION. Upon the termination of this Lease, Tenant shall surrender the Property (including the Tenant Improvements) to Landlord, broom clean and in the same condition as received except for ordinary wear and tear which Tenant was not otherwise obligated to remedy under any provision of this Lease. However, Tenant shall not be obligated to repair any damage which Landlord is required to repair under Article Seven (Damage or Destruction), and this Section 6.6 is subject to Article Seven. In addition, Landlord may require Tenant to remove any alterations, additions or improvements made without Landlord's written consent, except for the Tenant Improvements constructed pursuant to the Construction Rider and alterations made in compliance with the first sentence of Section 6.5, prior to the expiration of this Lease and to restore the Property to its prior condition, all at Tenant's expense. All alterations, additions, Tenant Improvements, and other improvements which Landlord has not required Tenant to remove shall become Landlord's property and shall be surrendered to Landlord upon the expiration or earlier 26 31 termination of this Lease, except that Tenant may remove any of Tenant's machinery or equipment (which are not Tenant Improvements) which can be removed without material damage to the Property. Tenant shall repair, at Tenant's expense, any damage to the Property caused by the removal of any such machinery or equipment. In no event, however, shall Tenant remove any of the following materials or equipment (which shall be deemed Landlord's property) without Landlord's prior written consent: the Tenant Improvements (as defined in the Construction Rider); any power wiring or power panels; lighting or lighting fixtures; wall coverings; drapes, blinds or other window coverings; carpets or other floor coverings; heaters, air conditioners or any other heating or air conditioning equipment; fencing or security gates; or other similar building operating equipment and decorations. Notwithstanding the above, upon the termination of this Lease, Tenant shall remove Tenant's signs from the Property, at Tenant's expense, and repair any damage caused by such removal. Section 6.7 COMMON AREAS. Subject to Section 5.2, Tenant shall pay monthly, in advance, any common area maintenance and repair costs, assessments and charges for the Property under any CC&Rs (defined in Section 5.2). Tenant shall also comply with any CC&Rs respecting the management, care and safety of the common areas of the industrial park and grounds of which the Property is a part, including parking areas, landscape areas, walkways and other areas provided for the common use and convenience of other occupants of the industrial park of which the Property is a part. ARTICLE SEVEN: DAMAGE OR DESTRUCTION Section 7.1 DAMAGE TO PROPERTY. (a) INSURED LOSS. Tenant shall notify Landlord in writing immediately upon the occurrence of any damage to the Property. If there is damage to the Property caused by a casualty and the proceeds received by Landlord from the insurance policies maintained under Paragraph 4.4(b) (where Landlord or Landlord's lender is the loss payee) plus any deductible amount required to be paid by Landlord and/or Tenant are sufficient to pay for the necessary repairs to the Property, this Lease shall remain in effect and Landlord shall repair the damage to the Property within twelve (12) months of the occurrence of same, and Tenant shall pay to Landlord any deductible amounts under any insurance policies (subject to subparagraph 4.4(d)(iii)). (b) INSURANCE PROCEEDS ARE NOT SUFFICIENT. If there is damage to the Property caused by a casualty, and if the insurance proceeds received by Landlord plus any deductible amount required to be paid by Landlord and/or Tenant are not sufficient to pay the 27 32 entire cost of repair, or if the cause of the damage is not covered by the insurance policies which are maintained under Paragraph 4.4(b) where Landlord or Landlord's lender is the loss payee, then Landlord may elect either to: (i) repair the damage to the Shell (but not the Tenant Improvements) as soon as reasonably possible, in which case this Lease shall remain in full force and effect, and Tenant shall repair at Tenant's cost the Tenant Improvements; or (ii) terminate this Lease as of the date the damage occurred. If Landlord elects to repair the damage to the Shell under the immediately preceding sentence, then Landlord shall make available to Tenant (or Landlord shall utilize same or establish a construction draw account) all insurance proceeds which Landlord receives which are designated by the insurance company for the construction of the Tenant Improvements (and not the Shell) and which are not subject to Landlord's lender's other requirements. If under the immediately preceding sentence Landlord's lender should require that the insurance proceeds otherwise designated for the Tenant Improvements (and not the Shell) be used to pay amounts of Landlord's debt to such lender secured by the Property, then Landlord agrees to make available to Tenant for repairing the Tenant Improvements (or establish a construction draw account) an amount equal to such insurance proceed which Landlord's lender has so utilized to make payments on such loan. Landlord shall notify Tenant within thirty (30) days after receipt of notice of the occurrence of the damage whether Landlord elects to repair the damage to the Shell or terminate the Lease. If Landlord elects to repair the damage to the Shell, Landlord shall repair such damage to the Shell within twelve (12) months of Landlord's receipt of notice of such damage, and Tenant shall pay Landlord the "deductible amount" (if any) under any insurance policies (subject to Paragraph 4.4(b)) and, if damage was due to an act, omission or negligence of Tenant, or Tenant's customers, licensees, visitors, employees, agents, contractors or invitees, the difference between the actual cost of repair and any insurance proceeds received by Landlord (and this Lease may not be terminated by Tenant under Section 7.4). If Landlord elects to terminate this Lease, Tenant may elect by written notice to continue this Lease in full force and effect, in which case Tenant shall repair any damage to the entire Property and any building in which the Property is located (including both the Shell and the Tenant Improvements), and Tenant shall pay the cost of such repairs (if there is earthquake insurance required by landlord's lender on the Shell and the Tenant Improvements, then Landlord and Tenant shall each pay 50% of any deductible amount under such earthquake insurance policy), Landlord shall deliver to Tenant any insurance proceeds (or establish an account for construction draws) received by Landlord for the damage repaired by Tenant. Tenant shall give Landlord written notice of such election within ten (10) days after receiving Landlord's termination notice. If under this Paragraph 7.1(b) Landlord elects to terminate this Lease and Tenant does not elect to continue this 28 33 Lease, and if Landlord's lender is not a loss payee on such insurance, then any Tenant's Earthquake Insurance proceeds (for policies under subparagraph 4.4(b)(iii) solely obtained by Tenant for the Tenant Improvements and not the Shell), as specifically stated on the policy allocable to the Tenant Improvements and which proceeds are received by Tenant, may be retained by Tenant. (c) SUBSTANTIAL DAMAGE DURING LAST TWELVE MONTHS. If the damage by a casualty to the Shell portion of the Property is substantial (i.e., greater than 50% of the area of the Building is damaged) and occurs during the last twelve (12) months of the Lease Term (including any options to extend the Lease Term which are then exercised) and such damage will require more than ninety (90) days to repair, either Landlord or Tenant may elect to terminate this Lease as of the date the damage occurred. Either party shall give written notification to the non-terminating party of such election within thirty (30) days after the terminating party's actual receipt of written notice of the occurrence of the damage. In the event of any termination of this Lease under this paragraph (c), Landlord (or Landlord's lender, as the case may be) shall have the right to retain all of the insurance proceeds for insurance policies obtained under Paragraph 4.4(b). Section 7.2 TEMPORARY REDUCTION OF RENT. If the Property is destroyed or damaged and Landlord or Tenant repairs or restores the Property pursuant to the provisions of this Article Seven, any rent payable during the period of such damage, repair and/or restoration shall be reduced, but in an amount not to exceed the amount of the proceeds of rental continuation insurance received by Landlord covering such period of time. Except for such possible reduction in Base Rent, insurance premiums and real property taxes, Tenant shall not be entitled to any compensation, reduction, or reimbursement from Landlord as a result of any damage, destruction, repair, or restoration of or to the Property. Section 7.3 WAIVER. Tenant waives the protection of any statute, code or judicial decision which grants a tenant the right to terminate a lease in the event of the substantial or total destruction of the leased property. Tenant agrees that the provisions of Sections 7.1, 7.2, 7.4 and 7.5 shall govern the rights and obligations of Landlord and Tenant in the event of any casualty damage to the Property. Section 7.4 LANDLORD'S FAILURE TO REPAIR WITHIN 12 MONTHS. If under Paragraphs 7.1(a) or 7.1(b) Landlord fails to fulfill Landlord's obligations to repair the Shell portion of the Building (specifically excluding the Tenant Improvements) as required thereunder within twelve (12) months of the date that Landlord receives written notice of such damage, then Tenant's sole remedy against Landlord for such failure shall be to elect by written 29 34 notice to Landlord within thirty (30) days of the termination of the twelve (12) month period to terminate this Lease. Tenant shall also have the right to terminate the Lease if Landlord's then designated architect states in writing that it will take Landlord more than twelve (12) months from the date that Landlord receives written notice of such damage to fulfill Landlord's obligations to repair the Shell portion of the Building. In the event of such written election by Tenant to terminate under this Section 7.4, Landlord shall pay to Tenant an amount equal to the Tenant's cost of the Tenant Improvements (which cost shall be agreed to by Landlord and Tenant under paragraph 3.3 of the Construction Rider) multiplied times a fraction of which the numerator is the number (if any) of remaining months in the initial Lease Term, and the denominator is one hundred twenty-three (123). Tenant's right to terminate the Lease under this Article Seven for Landlord's failure to repair the Property within twelve (12) months shall only apply to Landlord's failure to repair the Shell, and shall not apply to Landlord's failure to repair the Tenant Improvements within such twelve (12) month period. Any duty of Landlord to construct or repair the Tenant Improvements as part of the Property under this Article Seven shall only require Landlord to use Landlord's reasonable efforts to complete such repairs within such specified period of time, and Tenant shall not have any right to terminate this Lease regarding any such failure. Section 7.5 REPAIR OF SHELL TO SIMILAR CONDITION. If, pursuant to Paragraphs 7.1(a) or (b), Landlord because of a casualty is obligated or elects to repair and restore the Shell and/or the Tenant Improvements, Landlord shall repair and restore the Shell and/or Tenant Improvements, as required under such paragraphs to the extent of available insurance proceeds, to substantially the same condition (or better condition) which the Shell and/or Tenant Improvements existed immediately prior to the casualty damage, subject to any changes that might be required to the design, repair or restoration of the Shell and/or Tenant Improvements under any laws, rules or regulations, including but not limited to any zoning or similar laws. Similarly, if, pursuant to Paragraphs 7.1(a) or (b), Tenant because of a casualty is obligated or elects to repair and restore the Tenant Improvements and/or the Shell, Tenant shall repair and restore the Tenant Improvements and/or the Shell to substantially the same condition (or better condition) which the Tenant Improvements and/or the Shell existed immediately prior to the damage, subject to any changes that might be required to the design, repair or restoration of the Tenant Improvements and/or the Shell under any laws, rules or regulations, including but not limited to any zoning or similar laws. 30 35 ARTICLE EIGHT: CONDEMNATION If all or any portion of the building portion of the Property (but not the land) is taken under the power of eminent domain or sold under the threat of that power (all of which are called "Condemnation"), this Lease shall terminate as to the part taken or sold on the date the condemning authority takes title or possession, whichever occurs first. If more than sixty percent (60%) of the floor area of the building which is located on the Property, is taken, either Landlord or Tenant may terminate this Lease as of the date the condemning authority takes title or possession, by delivering written notice to the other within ten (10) days after receipt of written notice of such taking (or in the absence of such notice, within ten (10) days after the condemning authority takes title or possession). If neither Landlord nor Tenant terminates this Lease, this Lease shall remain in effect as to the portion of the Property not taken, except that the Base Rent shall be reduced in proportion to the reduction in the floor area of the Property. Any Condemnation award or payment shall be distributed to Landlord for compensation for reduction in the value of the leasehold, the taking of the fee, or otherwise. Any Condemnation award or payment shall be paid to Landlord (with the exception that any Condemnation award which is specifically designated by the governmental agency for the taking of the Tenant Improvements, Tenant's moving expenses and trade fixtures shall be paid to Tenant as long as such award does not diminish any award that would otherwise have been paid to Landlord). If this Lease is not terminated, Landlord shall repair any damage to the Property caused by the Condemnation, except that Landlord shall not be obligated to repair any damage for which Tenant has been reimbursed by the condemning authority (and Tenant shall use any Condemnation award paid to Tenant for the repair of the Tenant Improvements). If the severance damages received by Landlord are not sufficient to pay for such repair, Landlord shall have the right to either terminate this Lease or make such repair at Landlord's expense. ARTICLE NINE: ASSIGNMENT AND SUBLETTING Section 9.1 LANDLORD'S CONSENT REQUIRED. No portion of the Property or of Tenant's interest in this Lease may be acquired by any other person or entity, whether by sale, assignment, mortgage, sublease, transfer, operation of law, or act of Tenant, without Landlord's prior written consent, except as provided in Section 9.2 below. Landlord has the right to grant or withhold its consent as provided in Section 9.5 below. Any attempted transfer without consent shall be void and shall constitute a non-curable breach of this Lease. 31 36 Section 9.2 TENANT AFFILIATE. Tenant may assign this Lease or sublease the Property, without Landlord's consent, to any corporation which controls, is controlled by, or is under common control with Tenant ("Tenant's Affiliate"). In such case, any Tenant's Affiliate shall assume in writing all of Tenant's obligations under this Lease. Tenant may merge its entire business into another corporation or sell all of its assets to another corporation without Landlord's consent under this Article Nine provided that Tenant provides Landlord written notice of the name of such acquiring corporation and the description of such transfer prior to closing such transaction. Nothing under this Section 9.2 shall release Tenant from having continuing liability under the terms of this Lease or waive any other required Landlord's consent to any other future transfers of the Tenant's leasehold interest under this Lease. Section 9.3 NO RELEASE OF TENANT. No transfer permitted by this Article Nine (even if to Tenant's Affiliate), whether with or without Landlord's consent, shall release Tenant or change Tenant's primary liability to pay the rent and to perform all other obligations of Tenant under this Lease. Landlord's acceptance of rent from any other person is not a waiver of any provision of this Article Nine. Consent to one transfer is not a consent to any subsequent transfer. If Tenant's transferee defaults under this Lease, Landlord may proceed directly against Tenant without pursuing remedies against the transferee. Landlord may consent to subsequent assignments or modifications of this Lease by Tenant's transferee, without notifying Tenant or obtaining its consent. Such action shall not relieve Tenant's liability under this Lease. Section 9.4 OFFER TO TERMINATE. Subject to Section 9.2, if Tenant desires to assign the Lease or sublease the Property, Tenant shall have the right, at Tenant's sole option, to offer, in writing, to terminate the Lease as of a date specified in the offer. If Landlord elects in writing to accept the offer to terminate within twenty (20) days after notice of the offer the Lease shall terminate as of the date specified and all the terms and provisions of the Lease governing termination shall apply. If Landlord does not so elect in writing, the Lease shall continue in effect until otherwise terminated under this Lease and the provisions of Section 9.5 with respect to any proposed transfer shall continue to apply. Section 9.5 LANDLORD'S CONSENT. Tenant's request for consent to any transfer described in Section 9.1 shall set forth in writing the details of the proposed transfer, including the name, business and financial condition of the prospective transferee, type of the prospective transferee including, but not limited to, the use of Hazardous Material, financial details of the proposed transfer (e.g., the term of and the rent and security deposit 32 37 payable under any proposed assignment or sublease), and any other information Landlord reasonably deems relevant. Landlord shall have the right to withhold consent, if reasonable, or to grant consent, based on the following factors: (1) the business of the proposed assignee or subtenant and the proposed use of the Property including, but not limited to, the use of any Hazardous Material; (ii) the net worth and financial reputation of the proposed assignee or subtenant; and (iii) the prospective assignee's or sublessee's compliance with all of the obligations under the Lease. Section 9.6 LANDLORD'S SHARE OF PREMIUM. If Tenant assigns or subleases the Property or any portion thereof (except in the case of transfers to a Tenant Affiliate or a merger or sale of Tenant's entire business as described in Section 9.2), the following provisions shall apply: (i) Tenant shall pay to Landlord as additional rent under the Lease the Applicable Percentage of the Profit (defined below) on such transaction as and when received by Tenant (or to Landlord directly if Landlord gives written notice that Landlord's share of such Profit shall be paid by the assignee or subtenant to Landlord directly). The "Profit" means all amounts paid to Tenant for such assignment or sublease, including "key" money, monthly rent in excess of the monthly rent payable under the Lease and all fees and other consideration paid for the assignment or sublease, including fees under any collateral agreements less: (a) brokerage commissions paid for such sublease or assignment paid to third-party licensed brokers; (b) attorneys' fees paid by Tenant in connection with such sublease or assignment up to a Three Thousand Dollar ($3,000) maximum amount; and (c) after considering any free rent amortized without interest over the sublease or assignment term. The Profit in the case of a sublease of less than all the Property is the rent allocable to the subleased space as a percentage on a square footage basis. The "Profit" shall not include amounts paid to Tenant by the assignee or sublessee for the Tenant's out-of-pocket costs incurred by Tenant (and then actually reimbursed by Tenant to Landlord or paid by Tenant directly to the governmental authority, insurance company or repair contractor, as the case may be) for the normal and regular maintenance, repair and replacement of the Property and real estate taxes and insurance premiums which are paid directly by Tenant. The "Applicable Percentage" of Profits paid for the first sixty (60) months of the Lease Term shall be twenty percent (20%), and for any period of the Lease thereafter (including option terms) shall be forty percent (40%). If the Profit is in the form of increased rent, then the amount of the Applicable Percentage for each portion of the Profit shall be based upon when each such portion of the Profit is to be paid under the sublease or assignment; with the exception that if a lump sum amount or "key" money is paid covering a period more than one month, such amount shall be spread pro rata (without 33 38 interest) over the term of the sublease or remaining term of the assigned Lease, as the case may be, to determine when each portion of the Profit is to be received for purposes of determining the Applicable Percentage. (ii) Tenant shall provide Landlord a written statement certifying all amounts to be paid from any assignment or sublease of the Property within thirty (30) days after the transaction documentation is signed, and Landlord may inspect from time to time Tenant's books and records to verify the accuracy of such statement. On written request, Tenant shall promptly furnish to Landlord copies of all the transaction documentation, all of which shall be certified by Tenant to be complete, true and correct. Landlord's receipt of landlord's share of the Profit shall not be a consent to any further assignment or subletting. The breach of Tenant's obligation under this Section 9.6 shall be a material default of the Lease. Section 9.7 NO MERGER. No merger shall result from Tenant's sublease of the Property under this Article Nine, Tenant's surrender of this Lease, or the termination of this Lease in any other manner. In any event, Landlord may terminate any or all subtenancies or succeed to the interest of Tenant as sublandlord under any or all subtenancies. ARTICLE TEN: DEFAULTS; REMEDIES Section 10.1 COVENANTS AND CONDITIONS. Tenant's performance of each of Tenant's obligations under this Lease is a condition as well as a covenant. Tenant's right to continue in possession of the Property is conditioned upon such performance. Time is of the essence in the performance of all covenants and conditions. Section 10.2 DEFAULTS. Tenant shall be in default under this Lease: (a) VACATION. If Tenant's vacation of the Property results or will result in the cancellation of any insurance described in Section 4.4 and Tenant fails to have such insurance corrected within five (5) days after Tenant receives notice from Landlord or any insurance company of such cancellation or intention to cancel (Tenant's vacation of the Property shall also be a default unless Tenant continues to provide a regular security service in order to protect the Property); (b) FAILURE TO PAY. If Tenant fails to pay rent or any other charge or amount when due; 34 39 (c) NONPERFORMANCE. If Tenant fails to perform any of Tenant's non-monetary obligations under this Lease for a period of thirty (30) days after written notice from Landlord; provided that if more than thirty (30) days are required to complete such performance, Tenant shall not be in default if Tenant commences such performance within the thirty (30) day period and thereafter diligently pursues its completion. The notice required by this paragraph is intended to satisfy any and all notice requirements imposed by law on Landlord and is not in addition to any such requirement. (d) GENERAL ASSIGNMENT AND BANKRUPTCY. (i) If Tenant makes a general assignment or general arrangement for the benefit of creditors; (ii) if a petition for adjudication of bankruptcy or for reorganization or rearrangement is filed by or against Tenant and is not dismissed within thirty (30) days; (iii) if a trustee or receiver is appointed to take possession of substantially all of Tenant's assets located at the Property or of Tenant's interest in this Lease and possession is not restored to Tenant within thirty (30) days; or (iv) if substantially all of Tenant's assets located at the Property or of tenant's interest in this Lease is subjected to attachment, execution or other judicial seizure which is not discharged within thirty (30) days. If a court of competent jurisdiction determines that any of the acts described in this paragraph (d) is not a default under this Lease, and a trustee is appointed to take possession (or if Tenant remains a debtor in possession) and such trustee or Tenant transfers Tenant's interest hereunder, then Landlord shall receive, as Additional Rent, the excess, if any, of the rent (or any other consideration) paid in connection with such assignment or sublease over the rent payable by Tenant under this Lease. Section 10.3 REMEDIES. On the occurrence of any default by Tenant, Landlord may, at any time thereafter, with or without notice or demand and without limiting Landlord in the exercise of any right or remedy which Landlord may have: (a) TYPES OF REMEDIES. Terminate Tenant's right to possession of the Property by any lawful means, in which case this Lease shall terminate and Tenant shall immediately surrender possession of the Property to Landlord. In such event, Landlord shall be entitled to recover from Tenant all damages incurred by Landlord by reason of Tenant's default, including: (i) the worth at the time of the award of the unpaid Base Rent, Additional Rent and other charges which Landlord had earned at the time of the termination; (ii) the worth at the time of the award of the amount by which the unpaid Base Rent, Additional Rent and other charges which Landlord would have earned after termination until the time of the award exceeds the amount of such rental loss that Tenant proves Landlord could have reasonably avoided; (iii) the worth at the time 35 40 of the award of the amount by which the unpaid Base Rent, Additional Rent and other charges which Tenant would have paid for the balance of the Lease Term after the time of the award exceeds the amount of such rental loss that Tenant proves Landlord could have reasonably avoided; and (iv) any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform its obligations under the Lease or which in the ordinary course of things would be likely to result therefrom, including, but not limited to, any costs or expenses Landlord incurs in maintaining or preserving the Property after such default, the cost of recovering possession of the Property, expenses of reletting, including necessary renovation or alteration of the Property, Landlord's reasonable attorneys' fees incurred in connection therewith, and any real estate commission paid or payable. As used in subparts (i) and (ii) above, the "worth at the time of the award" is computed by allowing interest on unpaid amounts at the rate of fifteen percent (15%) per annum, or such lesser amount as may then be the maximum lawful rate. AS used in subpart (iii) above, the "worth at the time of the award" is computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of the award, plus one percent (1%). If Tenant has abandoned the Property, Landlord shall have the option of (i) retaking possession of the Property and recovering from Tenant the amount specified in this Paragraph 10.3(a), or (ii) proceeding under Paragraph 10.3(b). (b) MAINTAIN TENANT'S RIGHT OF POSSESSION. Maintain Tenant's right to possession (in California under California Civil Code Section 1951.4, as amended, or its successor provision), in which case this Lease shall continue in effect whether or not Tenant has abandoned the Property. In such event, Landlord shall be entitled to enforce all of Landlord's rights and remedies under this Lease, including the right to recover the rent as it becomes due. Landlord and Tenant agree that the limitations on assignment and subletting contained in Article Nine of this Lease are reasonable. Landlord and Tenant specifically agree that Landlord's acts, if any, of maintenance or preservation, and Landlord's efforts to relet Property, or the appointment of a receiver to protect Landlord's interest under this Lease, shall not constitute a termination of Tenant's right to possession. (c) OTHER REMEDIES. Pursue any other remedy now or hereafter available to Landlord under the laws or judicial decisions of the state in which the Property is located. Section 10.4 REPAYMENT OF "FREE" RENT. If this Lease provides for a postponement of any monthly rental payments, a period of "free" rent, "forgiven" rent or other rent concession, such postponed or "free" rent is called the "Abated Rent". Tenant shall be credited with having paid all of the Abated Rent on 36 41 the expiration of the Lease Term only if Tenant has fully, faithfully, and punctually performed all of Tenant's obligations hereunder, including the payment of all rent (other than the Abated Rent) and all other monetary obligations and the surrender of the Property in the physical condition required by this Lease. Tenant acknowledges that its right to receive credit for the Abated Rent is absolutely conditioned upon Tenant's full, faithful and punctual performance of its obligations under this Lease. If Tenant defaults and does not cure within any applicable grace period, the Abated Rent shall immediately become due and payable in full, and this Lease shall be enforced as if there were no such rent abatement or other rent concession; and in such case the Abated Rent shall be calculated based on the full initial rent payable under this Lease increased as if there had never been such Abated Rent. Section 10.5 CUMULATIVE REMEDIES. Landlord's exercise of any right or remedy shall not prevent it from exercising any other right or remedy. ARTICLE ELEVEN: PROTECTION OF LENDERS Section 11.1 SUBORDINATION. Landlord shall have the right to subordinate this Lease to any ground lease, deed of trust or mortgage encumbering the Property, any advances made on the security thereof and any renewals, modifications, consolidations, replacements or extensions thereof, whenever made or recorded, provided that Tenant's right of quiet enjoyment under this Lease shall not be disturbed if Tenant is not in default. Tenant shall cooperate with Landlord and any lender which is acquiring a security interest in the Property or the Lease provided that Tenant's obligations under this Lease shall not be increased in any material way or Tenant's rights under this Lease diminished in any material way. Provided that such lender executes in favor of Tenant an agreement not to disturb Tenant's right of quiet enjoyment under this Lease so long as Tenant is not in default and performs Tenant's obligations under this Lease, and provided that Tenant's obligations under this Lease shall not be increased in any material way or rights diminished in any material way (the performance of ministerial acts by Tenant such as the required giving of notices or giving Landlord's lender the right to cure a Landlord default within a reasonable period of time shall not be deemed material), Tenant shall execute such further documents and assurances as such lender may require including, but not limited to, subordination and attornment agreements. Tenant's right to quiet possession of the Property during the Lease Term and rights under this Lease shall not be disturbed if Tenant pays the rent and performs all of Tenant's obligations under this Lease and is not otherwise in default. If any ground lessor, beneficiary or 37 42 mortgagee elects to have this Lease prior to the lien of its ground lease, deed of trust or mortgage and gives written notice thereof to Tenant, this Lease shall be deemed prior to such ground lease, deed of trust or mortgage whether this Lease is dated prior or subsequent to the date of said ground Lease, deed of trust or mortgage or the date of recording thereof. Landlord represents to Tenant (but to no other person) that as of the date of this Lease there are no mortgages, deeds of trust or ground leases which are currently recorded against the Property. Nothing herein is intended to or shall prevent Landlord from encumbering the Property or placing a mortgage, deed of trust or ground lease on the Property after the date of this Lease. Notwithstanding anything to the contrary in this Section 11.1, Tenant's obligation to subordinate this Lease to a ground lease, mortgage or deed of trust, or to sign any document(s) so subordinating this Lease, shall be conditioned upon Tenant's receipt of a nondisturbance agreement from the ground lessor, mortgagee or deed of trust beneficiary which provides that in the event of a foreclosure or a deed in lieu of foreclosure such ground lessor, mortgagee or beneficiary, as the case may be, will recognize all of Tenant's rights under this Lease and that this Lease will not be terminated (except under the terms of this Lease) so long as Tenant is not in default under the terms of this Lease and performs all of Tenant's obligations and duties under the terms of this Lease. Any nondisturbance agreement under the immediately preceding sentence may provide that this Lease is subordinated and that Tenant attorns to such ground lessor, mortgagee or beneficiary and may require Tenant to perform such acts as giving notices to Landlord's lender and give Landlord's lender the right to cure a Landlord default within a reasonable period of time, plus additional items that are commercially reasonable. Section 11.2 ATTORNMENT. If Landlord's interest in the Property is acquired by any ground lessor, beneficiary under a deed of trust, mortgagee, or purchaser at a foreclosure sale, Tenant shall attorn to the transferee of or successor to Landlord's interest in the Property and recognize such transferee or successor as Landlord under this Lease. Tenant waives the protection of any statute or rule of law which gives or purports to give Tenant any right to terminate this Lease or surrender possession of the Property upon the transfer of Landlord's interest. Section 11.3 SIGNING OF DOCUMENTS. Tenant shall sign and deliver any instrument or documents necessary or appropriate to evidence any such attornment or subordination or agreement to do so, provided that Tenant's obligations under this Lease shall not be increased in any material way or Tenant's rights under this Lease diminished in any material way. 38 43 Section 11.4 Estoppel Certificates. (a) REQUIREMENTS. Upon Landlord's written request, Tenant shall execute, acknowledge and deliver to Landlord a written statement certifying: (i) that none of the terms or provisions of this Lease have been changed (or if they have been changed, stating how they have been changed); (ii) that this Lease has not been canceled or terminated; (iii) the last date of payment of the Base Rent and other charges and the time period covered by such payment; (iv) that Landlord is not in default under this Lease (or, if Landlord is claimed to be in default, stating why); and (v) such other representations or information with respect to Tenant or the Lease as Landlord may reasonably request or which any prospective purchaser or encumbrancer of the Property may reasonably require. Tenant shall deliver such statement to Landlord within ten (10) days after Landlord's request. Landlord may give any such statement by Tenant to any prospective purchaser or encumbrancer of the Property. Such purchaser or encumbrancer may rely conclusively upon such statement as true and correct. (b) TENANT'S NONDELIVERY. If Tenant does not deliver such statement to Landlord within such ten (10) day period, Landlord, and any prospective purchaser or encumbrancer, may conclusively presume and rely upon the following facts: (i) that the terms and provisions of this Lease have not been changed except as otherwise represented by Landlord; (ii) that this Lease has not been canceled or terminated except as otherwise represented by Landlord; (iii) that not more than one month's Base Rent or other charges have been paid in advance; and (iv) that Landlord is not in default under the Lease. In such event, Tenant shall be estopped from denying the truth or such facts. Section 11.5 TENANT'S FINANCIAL CONDITION. Within ten (10) days after written request from Landlord in connection with Landlord's sale or financing of the Property, Tenant shall deliver to Landlord such financial statements as Landlord reasonably requires to verify the net worth of Tenant or any assignee, subtenant, or guarantor of Tenant. In addition, Tenant shall deliver to any lender designated by Landlord any financial statements required by such lender to facilitate the financing or refinancing of the Property. If Tenant is a company whose stock is registered and traded on a national exchange so that Tenant's financial statements are publicly available on at least a quarterly basis, then if Tenant delivers such annual and quarterly financial statements to Landlord as Landlord shall request, same shall be deemed to satisfy Tenant's obligations to deliver financial statements under this Section 11.5. Tenant represents and warrants to Landlord that each such financial statement is a true and accurate statement as of the date of such statement. If Tenant is not a company whose stock is registered and traded on a national 39 44 exchange, all financial statements shall be deemed confidential and shall be used only for the purposes set forth in this Lease. ARTICLE TWELVE: LEGAL COSTS Section 12.1 LEGAL PROCEEDINGS. If Tenant or Landlord shall be in breach or default under this Lease, such party (the "Defaulting Party") shall reimburse the other party (the "Nondefaulting Party") upon demand for any legal fees and costs that the Nondefaulting Party incurs in connection with any breach or default of the Defaulting Party under this Lease, whether or not suit is commenced or judgment entered. Such costs shall include legal fees and costs incurred for the negotiation of a settlement, enforcement of rights or otherwise. Furthermore, if any action for breach of or to enforce the provisions of this Lease is commenced, the court in such action shall award to the party in whose favor a judgment is entered, a reasonable sum as attorneys' fees and costs. The losing party in such action shall pay such attorneys' fees and costs. Tenant shall also indemnify Landlord against and hold Landlord harmless from all costs, expenses, demands and liability Landlord may incur if Landlord becomes or is made a party to any claim or action (a) instituted by Tenant against any third party, or by any third party against Tenant, or by or against any person holding any interest under or using the Property by license of or agreement with Tenant; (b) for foreclosure of any lien for labor or material furnished to or for Tenant or such other person; (c) otherwise arising out of or resulting from any act or transaction of Tenant or such other person; or (d) necessary to protect Landlord's interest under this Lease in a bankruptcy proceeding, or other proceeding under Title 11 of the United States Code, as amended. Tenant shall defend Landlord against any such claim or action at Tenant's expense with counsel reasonably acceptable to Landlord or, at Landlord's election, Tenant shall reimburse Landlord for any legal fees or costs Landlord incurs in any such claim or action. Section 12.2 LANDLORD'S CONSENT. Tenant shall pay Landlord's reasonable attorneys' fees incurred in connection with Tenant's request for Landlord's consent under Article Nine (Assignment and Subletting), or in connection with any other act which Tenant proposes to do and which requires Landlord's consent. Tenant's obligation under this Section 12.2 shall be limited to Two Thousand Dollars ($2,000) per transaction. The $2,000 amount under the immediately preceding sentence shall be increased each year in proportion to the increase in the Index as described in Section 3.2. 40 45 ARTICLE THIRTEEN: MISCELLANEOUS PROVISIONS Section 13.1 NON-DISCRIMINATION. Tenant promises, and it is a condition to the continuance of this Lease, that there will be no discrimination against, or segregation of, any person or group of persons on the basis of race, color, sex, creed, national origin or ancestry in the leasing, subleasing, transferring, occupancy, tenure or use of the Property or any portion thereof. Section 13.2 LANDLORD'S LIABILITY; CERTAIN DUTIES. (a) "LANDLORD". As used in this Lease, the term "Landlord" means only the current owner or owners of the fee title to the Property or the leasehold estate under a ground lease of the Property at the time of question. Each Landlord is obligated to perform the obligations of Landlord under this Lease only during the time such Landlord has title to the fee interest in the Property. Any Landlord who transfers its title or interest in the Property is relieved of all liability with respect to the obligations of Landlord under this Lease to be performed on or after the date of transfer. However, each Landlord shall deliver to its transferee all funds that Tenant previously paid if such funds have not yet been applied under the terms of this Lease. Notwithstanding the above provisions of this Paragraph 13.2(a) and Paragraph 13.2(c), if Cypress Land Company transfers its interest in the Property, Cypress Land Company shall remain obligated (if Cypress Land Company's transferee fails to perform): (i) to construct the Shell portion of the Building as described in the Construction Rider; (ii) to perform Landlord's warranty (if such warranty period has not then expired) under paragraph 4.2 of the Construction Rider; and (iii) to repair the Shell under Article Seven if there has been a casualty loss and the required repairs under such Article Seven by Cypress Land Company have not yet been completed at the time of such transfer. (b) NOTICE. Tenant shall give written notice of any failure by Landlord to perform any of its obligations under this Lease to Landlord and to any ground lessor, mortgagee or beneficiary under any deed of trust encumbering the Property whose name and address have been furnished to Tenant in writing. Landlord shall not be in default under this Lease unless Landlord (or such ground lessor, mortgagee or beneficiary) fails to cure such non-performance within thirty (30) days after receipt of Tenant's notice. However, if such non-performance reasonably requires more than thirty (30) days to cure, Landlord shall not be in default if such cure is commenced within such thirty (30) day period and thereafter diligently pursued to completion. (c) LIABILITY. Notwithstanding any term or provision herein to the contrary but subject to Paragraph 13.2(a), the liability of 41 46 Landlord for the performance of its duties and obligations under this Lease is limited to Landlord's interest in the Property, and neither the Landlord nor its partners, shareholders, officers or other principals shall have any personal liability under this Lease. Section 13.3 SEVERABILITY. A determination by a court of competent jurisdiction that any provision of this Lease or any part thereof is illegal or unenforceable shall not cancel or invalidate the remainder of such provision or this Lease, which shall remain in full force and effect. Section 13.4 INTERPRETATION. The captions of the Articles or Sections of this Lease are to assist the parties in reading this Lease and are not a part of the terms or provisions of this Lease. Whenever required by the context of this Lease, the singular shall include the plural and the plural shall include the singular. The masculine, feminine and neuter genders shall each include the other. In any provision relating to the conduct, acts or omissions of Tenant, the term "Tenant" shall include Tenant's agents, employees, contractors, invitees, successors or others using the Property with Tenant's expressed or implied permission. Section 13.5 INCORPORATION OF PRIOR AGREEMENTS; MODIFICATIONS. This Lease is the only agreement between the parties pertaining to the lease of the Property and no other agreements are effective. All amendments to this Lease shall be in writing and signed by all parties. Any other attempted amendment shall be void. Section 13.6 NOTICES. All notices required or permitted under this Lease shall be in writing and shall be personally delivered, delivered by next day delivery by a recognized overnight mail delivery service, or sent by certified mail, return receipt requested, postage prepaid. Notices to Tenant shall be delivered to the address specified in Section 1.3 above, except that upon Tenant's taking possession of the Property, the Property shall be Tenant's address for notice purposes. Notices to Landlord shall be delivered to the address specified in Section 1.2 above. All notices shall be effective upon delivery. It shall be presumed that a notice has been delivered if the delivering party receives a receipt or written acknowledgement from the delivery service that such notice was delivered. Either party may change its notice address upon written notice to the other party. Section 13.7 WAIVERS. All waivers must be in writing and signed by the waiving party. Landlord's failure to enforce any provision of this Lease or its acceptance of rent shall not be a waiver and shall not prevent Landlord from enforcing that provision or any other provision of this Lease in the future. No statement 42 47 on a payment check from Tenant or in a letter accompanying a payment check shall be binding on Landlord. Landlord may, with or without notice to Tenant, negotiate such check without being bound to the conditions of such statement. Section 13.8 RECORDATION. Tenant shall not record this Lease without prior written consent from Landlord. Landlord may require that a "Short Form" memorandum of this Lease be executed by both parties and be recorded. Section 13.9 BINDING EFFECT; CHOICE OF LAW. This Lease binds any party who legally acquires any rights or interest in this Lease from Landlord or Tenant. However, Landlord shall have no obligation to Tenant's successor unless the rights or interests of Tenant's successor are acquired in accordance with the terms of this Lease. The laws of the state of California shall govern this Lease. Section 13.10 CORPORATE AUTHORITY. Each person signing this Lease on behalf of Tenant represents and warrants that he has full authority to do so and that this Lease binds the corporation. On the date this Lease is signed, Tenant shall deliver to Landlord a certified copy of a resolution of Tenant's Board of Directors authorizing the execution of this Lease or other evidence of such authority reasonably acceptable to Landlord. Section 13.11 FORCE MAJEURE. If Landlord cannot perform any of its obligations due to events beyond Landlord's control, the time provided for performing such obligations shall be extended by a period of time equal to the duration of such events. Events beyond Landlord's control include, but are not limited to, acts of God, war, civil commotion, labor disputes, strikes, fire, flood or other casualty, shortages of labor or material, government regulation or restriction and weather conditions. Section 13.12 EXECUTION OF LEASE. This Lease may be executed in counterparts and, when all counterpart documents are executed, the counterparts shall constitute a single binding instrument. Landlord's delivery of this Lease to Tenant shall not be deemed an offer to lease and shall not be binding upon either party until executed and delivered by both parties. Section 13.13 SURVIVAL. All representations and warranties of Landlord and Tenant shall survive the termination of this Lease. Section 13.14 DEFINITION OF CONTRACTOR. If Tenant utilizes the same contractor to construct the Tenant Improvements (as defined in the Construction Rider) that Landlord has utilized to construct the Shell, then any reference to Tenant's "contractor" under this Lease shall include such contractor, and any acts or 43 48 negligence of such contractor in constructing the Tenant Improvements shall not be attributed to the Landlord. ARTICLE FOURTEEN: BROKERS Section 14.1 NO OTHER BROKERS. Tenant represents and warrants to Landlord that the only agents, brokers, finders or other parties with whom Tenant has dealt who are or may be entitled to any commission or fee with respect to this Lease or the Property are The Seeley Company and Delphi Business Properties. Landlord and Tenant have signed this Lease at the place and on the dates specified adjacent to their signatures below and have initialled all Riders which are attached to or incorporated by reference in this Lease. "LANDLORD" Signed on June 30th, 1998 Cypress Land Company, a at 2203 E. Carson St., Ste A-1 California limited partnership Long Beach, CA 90810 By: Harvico, Inc., a California Corporation, General Partner By: /s/ BRIAN L. HARVEY ------------------------- Brian L. Harvey, President "TENANT" Signed on 6/25, 1998 Netcom Systems, Inc. at 20550 Nordhoff St. a Delaware Corporation Chatsworth, CA 91311 By: /s/ WARREN B. PHELPS ----------------------------- Warren B. Phelps, President By: /s/ DWIGHT OLSON ----------------------------- Dwight Olson, Vice President 44 49 EXHIBIT "A" LEGAL DESCRIPTION OF PROPERTY LOT 6 OF TRACT 32952, IN THE CITY OF CALABASAS, COUNTY OF LOS ANGELES, STATE OF CALIFORNIA, AS PER MAP RECORDED IN BOOK 1081 PAGES 30 TO 34, INCLUSIVE, OF MAPS, IN THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY. 50 EXHIBIT "B" SHELL PLANS AND SPECIFICATIONS 1. Building is to be constructed to Landlord's normal construction standards and quality of materials. 2. The electrical service shall be supplied by a 2400 amp single panel. 3. At least two dock doors. 4. Elevator pit for mezzanine area (Tenant shall be responsible for the construction of the elevator and elevator shaft as part of the Tenant Improvements). 5. Plans pages: Architectural A1.0, A1.1, A1.2, A1.3, A2.1, A2.2, A2.3, A3.1, A4.1, A4.2, A4.3, A4.4, A4.5, A4.6, A5.1, A5.2, A5.3, A5.4, A6.1, A8.1; Structural: S1.1, S2.1, S2.2, S2.3, S2.4, S2.5, S2.6, S3.3, S3.2, S3.3, S3.4, S4.1, S5.1, S5.2, S5.3, S5.4, S5.5, S5.6, S5.7, S5.8; Plumbing: P1.0, P1.1, P2.1, P2.2, P2.3, P3.0; and Electrical: E1.0, E1.1, E2.1, E2.2, E2.3, E3.1, E4.1, E4.2, prepared by Nadel Architects dated June 23, 1998 and specifications prepared by Nadel Architects dated December 1997. These plans and specifications may be modified after the date of the Lease in order to change the Building elevations (including adding additional windows), changing the mezzanine area, and changing the loading dock doors. 6. The mezzanine area of the Shell shall be constructed to a rectangular design. 51 CONSTRUCTION RIDER TO INDUSTRIAL REAL ESTATE LEASE DATED JUNE 25, 1998 BY AND BETWEEN CYPRESS LAND COMPANY, A CALIFORNIA LIMITED PARTNERSHIP, AND NETCOM SYSTEMS, INC., A DELAWARE CORPORATION - -------------------------------------------------------------------------------- 1. DESIGN AND CONSTRUCTION OF THE BUILDING SHELL: Landlord shall construct upon the land constituting the Property the shell ("Shell") portion of the building ("Building") of approximately one hundred seven thousand one hundred sixty-nine (107,169) square feet, which Shell portion of the Building includes a second-story mezzanine area of approximately thirty-four thousand two hundred fifty-seven (34,257) square feet, parking areas, site improvements, landscaping, exterior drainage, landscape irrigation, gutters, exterior lighting, walkways and driveways. The square footages under the immediately preceding sentence are only approximate and it is anticipated that they may change upon completion of the final modified Shell plans. Landlord shall design and construct the Shell based upon the specifications stated on Exhibit "B", attached hereto and incorporated herein by this reference. References to the term "Property" in this Construction Rider shall mean both the Shell and the Tenant Improvements (as such term is defined in Paragraph 2, below). 1.1 Plans and Specifications of Shell. Landlord and Tenant have agreed to the plans and specifications for the construction of the Shell ("Shell Plans and Specifications"), as described on Exhibit "B". Landlord may make changes in the Shell Plans and Specifications as Landlord deems necessary for the construction of the Building Shell provided such modification does not materially interfere with the design of the Tenant Improvements or Tenant's use of the Property (subject to subparagraph 1.1(a) below). Landlord shall submit the Shell Plans and Specifications to the City of Calabasas for the issuance of a building permit by the City of Calabasas for the Building Shell. If the City of Calabasas requires changes in the Shell Plans and Specifications, then Landlord and Tenant agree that Landlord may make the changes required by the City of Calabasas, provided such modification does not materially interfere with the design of the Tenant Improvements or Tenant's use of the Property (subject to subparagraph 1.1(a) below). (a) Modifications By the City of Calabasas. The current conditional use permit for the Property is for ninety-eight thousand nine hundred thirty-seven (98,937) square feet. Tenant and Landlord agree that they will use their reasonable -1- 52 efforts to have the City of Calabasas approve the Building to be approximately one hundred seven thousand one hundred sixty-nine (107,169) square feet. However, if the City of Calabasas does not permit the construction of the Building to be increased from 98,937 square feet to approximately 107,169 square feet, then neither Landlord nor Tenant may terminate this Lease, and Landlord may redesign the Building in order to reflect such lesser square footage amount (which shall be at least 98,937 square feet). Additionally, Landlord may make modifications without Tenant's consent to the design of the Shell to comply with the conditional use permit and modifications thereof issued by the City of Calabasas; provided that the shape of the mezzanine shall be as described in item 6 of Exhibit "B". If Landlord modifies the design of the Shell Plans and Specifications due to a change requested by the City of Calabasas in the current conditional use permit governing the Property, and such modification in the Shell Plans and Specifications results in delays in Tenant's design or construction of the Tenant Improvements, then such delay caused by Landlord's change to the Shell shall not be deemed a "Tenant Delay" under subparagraphs 1.3(a) or 3.1(b). Landlord shall promptly notify Tenant of any such reduction in the square footage of the Building or modifications to the Shell required by the City of Calabasas to comply with the conditional use permit or modifications thereof. 1.2 Construction of the Shell. Upon obtaining the necessary permits, Landlord shall construct at Landlord's cost the Shell in accordance with the Shell Plans and Specifications. Subject to subparagraph 2.5(a)(i) below, Landlord shall pay the permit fees for construction of the Shell and the utility connection charges for the "stub in" for the electrical, sewer, water and gas to the Shell (but not for the Tenant Improvements nor utility connection charges for the Tenant Improvements which are in addition to the basic "stub in" costs of such utility connections) which are required to be paid to the City of Calabasas prior to the City of Calabasas issuing a building permit for the construction of the Shell. 1.3 Completion Defined. This Paragraph 1.3 is subject to subparagraph 3.1(b) below. The term "Completion" is defined as the date that the City of Calabasas shall have approved that the Shell is substantially complete (such as by the city issuing the final inspection or approval for the Shell, or a certificate of occupancy for the Shell) or otherwise gives permission for the occupancy of the Shell portion of the Building. If the City of Calabasas will not certify that the Shell is substantially complete or fails to issue a final inspection approval for the Shell because either: (i) the non-completeness of the Tenant Improvements due to a Tenant Delay, -2- 53 or (ii) the non-completeness of the Shell due to the non-completeness of the Tenant Improvements due to a Tenant Delay (such as if there is a hole in the Building's roof for installation of the Tenant Improvements and there has been a Tenant Delay), then it shall be deemed that there has in fact been "Completion" of the Shell for purposes of the Lease. The date of Completion of the Shell is referred to herein as the "Completion Date." The term "Tenant Delay" is defined in subparagraph 1.3(a) below, subject to subparagraph 3.1(b) below. (a) Target Date to Complete Shell. Landlord shall use its reasonable efforts to have the Completion of the Shell occur on or before February 1, 1999, subject to any delays caused by a Tenant Delay or by Force Majeure events (defined in Section 13.12 of the Lease). A "Tenant Delay" shall mean any of the following items which cause a delay in the construction of the Shell: (i) Tenant's failure to timely comply with the time limitations or dates under Paragraph 2.1 or 2.2, or those items and dates described in Paragraph 2.3; (ii) Tenant requests a change order under Paragraph 2.4; (iii) there is an installation of any Special Improvements under Paragraph 2.7; (iv) Tenant fails to timely perform or deliver information under Paragraph 2.1 or 2.2; or (v) if Tenant or Tenant's contractor interferes with or delays Landlord's construction of the Shell. (b) Landlord To Make Shell Available to Construct Tenant Improvements. Landlord shall make available to Tenant the Shell portion of the Property on or before October 15, 1998 (the "Tenant Improvements Start Date") in order that Tenant or its contractors may commence construction of the Tenant Improvements by such date. Tenant and Landlord understand that the shell may not be completed by such Tenant Improvements Start Date. If Landlord fails to so make available the Shell for Tenant to commence construction of the Tenant Improvements by the Tenant Improvements Start Date, then Tenant's sole remedy for such delay shall be as follows: for each day that Landlord delivers the Shell to Tenant or Tenant's contractor after the Tenant Improvements Start Date, the number of days (if any) which Tenant is being charged as a Tenant Delay under either Paragraph 1.3 or subparagraph 3.1(b)(i) shall be reduced by one (1) day, but not reduced more than the total number of days for which Tenant is being charged as a Tenant Delay. Landlord's delinquency, if any, in delivering the Property for construction of the Tenant Improvements under this subparagraph 1.3(b) shall not offset any days under subparagraphs 3.1(b)(ii) or (iii). -3- 54 2. DESIGN AND CONSTRUCTION OF THE TENANT IMPROVEMENTS: Tenant shall be responsible for and shall pay all of the costs for the design and construction of the tenant improvements ("Tenant Improvements") as described below, including the office areas, air conditioning and heating of the warehouse and office areas, all restrooms, screening of all air conditioning units (roof and ground mounted), equipment screens and signage. The Tenant Improvements shall be constructed by Tenant, at Tenant's sole cost and expense, pursuant to the plans and specifications, as described below. Tenant shall be responsible for the timely completion of all plans and specifications for the Tenant Improvements. 2.1 Schematic Tenant Improvement Plans and Specifications. (a) Preparation. Tenant has or shall retain a space planner to prepare at Tenant's expense (subject to subparagraph 2.3(a)(iii)) all architectural, electrical, plumbing, heating, ventilating and air conditioning plans for construction of the Tenant Improvements. Tenant shall be responsible for the timely performance of its space planner in the preparation of the Tenant Improvement plans and specifications hereunder. Tenant shall have prepared the schematic plans and specifications showing the basic floor plans of the Tenant Improvements ("Schematic Tenant Improvements Plans and Specifications") to construct the Tenant Improvements upon the Property. Tenant shall immediately deliver to Landlord and the space planner all information that may be required to timely complete the Schematic Tenant Improvements Plans and Specifications. (b) Date. Tenant shall have such Schematic Tenant Improvements Plans and Specifications prepared by June 22, 1998 (and if Tenant does not have prepared such Schematic Tenant Improvements Plans and Specifications by such date, then Landlord's sole remedy for such failure is to claim a Tenant Delay under the provisions of subparagraphs 1.3(a) and 3.1(b). On or before June 22, 1998, Tenant shall have such Schematic Tenant Improvements Plans and Specifications delivered to Landlord for Landlord's approval, which approval shall not be unreasonably withheld. Landlord shall have five (5) business days from the receipt of such Schematic Tenant Improvements Plans and Specifications to approve or disapprove. If Landlord does not disapprove of such plans in the manner specified in this subparagraph (b) by written notice to Tenant within such five (5) business day period, then Landlord shall be deemed to have approved of same. If Landlord disapproves of such plans and specifications, then Landlord and Tenant shall, within five (5) days from the expiration of the five (5) business day period, use their best -4- 55 efforts to resolve such dispute. Landlord and Tenant agree to negotiate in good faith with each other regarding any of Landlord's disapproved items described above. (c) Basis for Final Plans and Specifications. The Final Plans and Specifications for the Tenant Improvements (as such term is defined in Paragraph 2.2 below) shall be based upon the Schematic Tenant Improvements Plans and Specifications. 2.2 Final Plans and Specifications for Tenant Improvements. (a) Design. (i) Tenant, by August 15, 1998, shall have prepared, at Tenant's expense, and deliver to Landlord final plans and specifications for the Tenant Improvements ("Final Plans and Specifications"). If subparagraph 3.1(b) applies (where Tenant uses a Qualified Space Planner), Landlord hereby grants to Tenant a thirty (30) day grace period to have completed such Final Plans and Specifications, so in such event such Final Plans and Specifications do not have to be completed until September 15, 1998 in order for Landlord to have a remedy against Tenant for Tenant's delinquency in the preparation of such Final Plans and Specifications. If Tenant Engages by July 1, 1998 (as defined in subparagraph 3.1(b)) H. Hendy Associates as a Full Service Space Planner under subparagraph 3.1(b), then H. Hendy Associates shall complete such Final Plans and Specifications as soon as possible, and there shall be no specific required completion date for such Final Plans and Specifications. Landlord's sole remedy should Tenant fail to have prepared such Final Plans and Specifications by the required date shall be to assert that there is a "Tenant Delay" under the provisions of subparagraphs 1.3(a) and 3.1(b). The Final Plans and Specifications shall be based upon the Schematic Tenant Improvements Plans and Specifications and shall show the final design and specifications (including, but not limited to, architectural, electrical, plumbing, ventilating, heating and air conditioning) of the Tenant Improvements. (ii) Landlord, upon receipt of such Final Plans and Specifications, shall have five (5) business days from receipt of the Final Plans and Specifications to approve or disapprove same based upon the foregoing. If Landlord does not disapprove of such Final Plans and Specifications in the manner specified herein, by written notice to Tenant within such five (5) business day period, then Landlord shall have been deemed to have approved of same. If Landlord disapproves of the Final Plans and Specifications, then Landlord and -5- 56 Tenant shall use their best efforts to resolve such dispute in order to conform such Final Plans and Specifications to the Schematic Tenant Improvements Plans and Specifications. Landlord and Tenant agree to negotiate in good faith with each other regarding any of Landlord's disapproved items, described above. The Final Plans and Specifications shall supersede any prior plans concerning the construction of the Tenant Improvements, including but not limited to, any inconsistencies with the Schematic Tenant Improvements Plans and Specifications. (iii) Regardless of whether Landlord approves or disapproves of any plans or specifications, Tenant shall remain solely responsible for the design of the Tenant Improvements and any specifications thereof, and the construction thereof. Specifically, Tenant shall be solely responsible that the design and construction of the Tenant Improvements conforms to Tenant's required use of the Property and complies with all laws, rules and regulations, including, but not limited to, all conditional use permits and building codes. (iv) Tenant shall have the Final Plans and Specifications submitted to the City of Calabasas for the issuance of a building permit by the City of Calabasas. Tenant agrees to consult with Landlord in the submission of such plans and to allow Landlord to submit such plans to the City. If the City of Calabasas requires changes in the Final Plans and Specifications, then Landlord and Tenant agree that the space planner (after consulting with Landlord) may make the changes. It is understood that neither Landlord nor Landlord's representatives or consultants have any ability to influence the actions or timeliness of performance of the City of Calabasas, public utilities or other governmental bodies involved with the construction of the Tenant Improvements or the issuance of permits regarding same. 2.3 Tenant's Cooperation. (a) Tenant's Duties. (i) Landlord shall have the right, from time to time, to review and provide comments to the plans and specifications for the Tenant Improvements as they are being prepared by the space planner. Landlord may communicate with the space planner at any time and shall have the right to have a representative attend meetings with such space planner and Tenant regarding the preparation of such plans and specifications. -6- 57 Tenant has designated either Dwight Olson or Gil Cabral of Tenant, as persons who have the actual authority to make any changes to any plans and specifications on behalf of Tenant and to give any approvals or waivers on behalf of the Tenant regarding any plans or specifications, and to make all decisions in connection with the construction of the Tenant Improvements, and the Lease and Construction Rider, on behalf of the Tenant. (ii) In order to timely prepare the plans and specifications for the Tenant Improvements stated in Paragraph 2.1 and 2.2 above, and to construct the Tenant Improvements in a timely manner, Tenant agrees to timely and promptly respond to the space planner's request for information. Tenant agrees to promptly deliver all required information to the space planner necessary to prepare the Tenant Improvements' plans and specifications. In addition to the specific approval dates of Tenant outlined in Paragraphs 2.1 and 2.2 above, architects, designers and engineers will be requesting Tenant's review and approval of plans, specifications and other items at periodic intervals. Tenant agrees to promptly respond to all of these requests. (iii) In order to design the Tenant Improvements, Tenant is employing the space planner for the Tenant Improvements, and consultants for the architectural and engineering work relating to the Tenant Improvements, which costs for such persons shall be paid by Tenant over the space planner allowance to be paid by Landlord under the immediate following sentence. Landlord shall reimburse Tenant for Tenant's preliminary space planner to assist in preparing the Schematic Tenant Improvements Plans and Specifications in an amount not to exceed Fifteen Cents ($0.15) per square foot of the Building (which square footage of the Building is defined in Paragraph 3.2, below). 2.4 Change Orders. (a) Definition. For purposes of this Lease, a "change order(s)" shall mean: (a) any requested Tenant changes, additions or alterations of the Tenant Improvements' Final Plans and Specifications, whether such changes, additions or alterations occur on, before or after the commencement of the construction of the Building or Tenant Improvements; or (b) any changes to items, plans or specifications for the Tenant Improvements previously approved by Tenant. (i) Tenant shall pay for all costs including but not limited to any architectural, engineering, design, -7- 58 contractor or material costs caused by such Tenant change orders (whether to the Tenant Improvements or the Shell). (ii) If Tenant desires a change order, then Tenant shall deliver a written request for such change order to Landlord. Landlord's consent to any change order shall not be unreasonably withheld. (iii) Any change order which causes a delay in construction of the Tenant Improvements or the Shell shall be deemed a Tenant Delay. 2.5 Construction of Tenant Improvements. (a) Construction By Tenant. The Tenant Improvements shall be constructed by Tenant at Tenant's sole cost and expense in conformance with the Final Plans and Specifications. The Tenant Improvements shall be constructed by Tenant in compliance with all federal, state, city and county laws, codes, ordinances and regulations. (i) Tenant shall pay all of the permit fees, costs, fees, utility fees, charges and assessments for the construction of the Tenant Improvements which are required to be paid to any governmental body or agency for the construction, occupancy or use of the Tenant Improvements. Landlord shall pay for the bridge and thoroughfare fees related to the Property ("Bridge Fee"), which is based upon Three Dollars Ten Cents ($3.10) per square foot of Building area, including the mezzanine area ("Current Bridge Fee"). If the Tenant Improvements requested by Tenant cause the Bridge Fee relating to the Property to exceed for any reason the Current Bridge Fee, then Tenant shall be responsible for paying for the amount of such increase in the Bridge Fee for the entire Property. Tenant shall pay for the increase in the Bridge Fee under the immediately preceding sentence by payment of such amount to Landlord at the time that the building permits for the Tenant Improvements are to be obtained from the City of Calabasas (even if the City of Calabasas allows Landlord to defer the payment of such Bridge Fee by the City of Calabasas recording a covenant or encumbrance against the Property or receiving other contractual promises from the Landlord to pay such Bridge Fee). (ii) Tenant shall pay all of the costs of any space planners, designers, architectural costs, engineering costs and construction costs of the Tenant Improvements (except as to that amount for the preliminary space planner's fee which Landlord has agreed to pay for under subparagraph 2.3(a)(iii) above). -8- 59 (iii) All of the Tenant Improvements shall become part of the Property, shall be maintained and repaired by Tenant as part of the Property under the Lease, and none of the Tenant Improvements may be removed by Tenant upon the termination of the Lease. (iv) Tenant shall have the right to hire a general contractor of Tenant's choice to construct the Tenant Improvements. Landlord shall have the right to review and approve of Tenant's choice of general contractors, which approval shall not be unreasonably withheld. Tenant shall enter into the contract with the general contractor. Landlord shall have the right to review and approve such contract prior to Tenant's entering into same, which approval shall not be unreasonably withheld; provided, however, that Landlord may not request any changes to such general contractor's contract which would materially cause an increase in the cost of the construction of the Tenant Improvements, materially delay the completion of the Tenant Improvements or the design of the Tenant Improvements. Regardless of Landlord's approvals, Tenant shall be responsible for all of the liabilities and obligations of the Tenant under such contract and Landlord shall have no liability or obligations thereunder. (v) Landlord shall use its reasonable efforts to allow Tenant to begin construction of the Tenant Improvements as soon as possible during the construction of the Building Shell. See subparagraph 1.3(b) for the definition of the Tenant Improvements Start Date. Tenant agrees to have Tenant's contractors coordinate with Landlord and Landlord's contractors, and not interfere with same, in order that the construction of the Shell is not delayed by the construction of the Tenant Improvements. Similarly, Landlord agrees to have Landlord's Shell general contractor coordinate with Tenant's Tenant Improvements general contractor (if different from the Shell general contractor). (vi) Tenant shall be responsible that the general contractor that constructs the Tenant Improvements: (i) has adequate insurance, including liability insurance, and designates Landlord as an additional insured under such liability insurance; and (ii) has adequate workers compensation insurance. Any costs of builder's risk insurance (whether obtained by Landlord or otherwise) which is allocated to the Tenant Improvements shall be paid by Tenant or reimbursed to Landlord. Landlord shall be designated as the loss payee for such builder's risk insurance. If Landlord receives proceeds from such builder's risk insurance which are designated by such policy for the Tenant Improvements, then Landlord agrees to utilize such proceeds (or make such -9- 60 proceeds available to Tenant) to pay for the repair or reconstruction of the Tenant Improvements. Tenant shall be responsible to verify that there is adequate builder's risk and casualty insurance for the Tenant Improvements and their construction. Landlord shall have the right (but not the obligation) to verify with Tenant and Tenant's contractor, from time to time, that the insurance described in this subparagraph has been obtained. 2.6 Payment for Tenant Improvements. Tenant shall pay all expenses, fees and costs relating to the construction and design of the Tenant Improvements. Tenant shall promptly (within 20 days of Landlord's billing) reimburse Landlord for any amounts Landlord or Landlord's contractor expends for the construction of those items of the Tenant Improvements which Tenant has previously approved in writing (but it shall not be necessary that Tenant approved in advance the amount of such item) for such item. (a) Indemnification. Tenant shall indemnify, defend and hold Landlord harmless (including the payment of Landlord's reasonable attorneys' fees and costs) from any and all costs, claims or liability arising from: (a) Tenant's construction of the Tenant Improvements on the Property; (b) the conduct of any of Tenant's general contractor or subcontractors or other persons in connection with the construction of the Tenant Improvements; (c) any breach or default in the performance of Tenant's obligations under this Construction Rider; and (d) any claims or mechanic's liens against Landlord or the Property related to the construction of the Tenant Improvements. Tenant shall immediately pay when due all claims for labor and materials furnished in connection with the construction of the Tenant Improvements and agrees to immediately have removed from the Property any mechanic's liens or notices of action if same are filed against the Property. Tenant's duty to indemnify Landlord under this subparagraph 2.6(a) shall not apply to the negligent or willful misconduct of Landlord or Landlord's employees or contractors during the period of constructing the Shell and Tenant Improvements. (b) Letter of Credit. (i) Because of the large amount of Tenant Improvements being installed ion the Building, Tenant agrees to obtain a "Letter of Credit" (as described below) prior to the commencement of construction of the Tenant Improvements in favor of the Landlord in the aggregate amount of the cost of the construction of the Tenant Improvements (including any permits or fees relating to same). The amount of the Letter -10- 61 of Credit under the immediately preceding sentence shall be reasonably determined by Landlord based upon the general contractor's cost for construction of the Tenant Improvements and the other permits and fees relating thereto. The Letter of Credit shall be an irrevocable unconditional Letter of Credit in favor of the Landlord as the designated beneficiary for a stated term of at least six (6) months in favor of Landlord as the designated beneficiary, drawn on a major Los Angeles bank reasonably approved by Landlord. Tenant shall deliver such original Letter of Credit to Landlord prior to the commencement of construction of the Tenant Improvements and shall maintain such Letter of Credit until the completion of the construction of the Tenant Improvements and the first to occur of the following (the "Letter of Credit Termination Date"): (i) the payment of all suppliers and contractors for the Tenant Improvements and Landlord's receipt of final lien releases from each such supplier and contractor (including all subcontractors and the general contractor); and (ii) the occurrence of both of the following: (a) thirty (30) days after the expiration of the requisite time periods to record mechanics' liens under California law ("Lien Expiration Date") but not sooner than the Commencement Date, and (b) no mechanic's lien, lawsuit or legal action has been filed against the Property or Landlord regarding the construction of the Tenant Improvements, or if a mechanic's lien shall have been filed against the Property, such lien shall have been released or bonded against in order that such lien is released. (ii) Landlord may draw upon the Letter of Credit only in the following events: (a) the Letter of Credit is not renewed on or before thirty (30) days prior to its required renewal or expiration, (b) a lawsuit, arbitration or other action or proceeding is filed against Landlord or the Property regarding the construction of the Tenant Improvements by a contractor, subcontractor or material supplier, and Tenant fails to promptly reimburse Landlord for the costs incurred by Landlord resulting from the filing of such lawsuit, arbitration or other action or proceeding, or (c) a mechanic's lien is filed against the Property and the lien is not released by payment or by a recordation of a statutory lien release bond in accordance with the requirements of California Civil Code Section 3143 within five (5) business days after Tenant receives notice (by service of process or otherwise) of the existence of such mechanic's lien. (iii) If the Letter of Credit is issued so that Landlord may draw down on part of the Letter of Credit while the remaining portion of the Letter of Credit remains effective, then the following provisions shall apply: (a) if -11- 62 Landlord has the right to draw upon the Letter of Credit as a result of an event described in subparagraph 2.6(b)(ii)(b), Landlord may draw only upon that amount necessary to pay the costs described in such subparagraph 2.6(b)ii)(b); and (b) if Landlord has the right to draw upon the Letter of Credit as a result of an event described in subparagraph 2.6(b)(ii)(c), then Landlord may only draw upon that amount necessary to cause the mechanic's lien in question to be released and to reimburse Landlord for its attorneys' fees and cost regarding same. (iv) If Landlord draws upon the Letter of Credit because of an event described in subparagraph 2.6(b)(ii)(a), and Tenant subsequently replaces the Letter of Credit in accordance with the requirements hereof, then Landlord shall return all proceeds from the Letter of Credit held by Landlord upon the Landlord's receipt of such replacement Letter of Credit. If Tenant fails to provide a replacement Letter of Credit, then Landlord shall return to Tenant all remaining Letter of Credit proceeds held by Landlord on the Letter of Credit Termination Date after the application of such proceeds under this subparagraph 2.6(b). All proceeds form the Letter of Credit held by Landlord shall be placed in a separate account in Landlord's name and only used for the purposes permitted herein. (c) Notice of Non-responsibility and Notice of Completion. Landlord may post a notice of non-responsibility for the construction of the Tenant Improvements. Within five (5) days after completion of construction of the Tenant Improvements, Tenant shall cause a Notice of Completion to be recorded in the office of the County Recorder of Los Angeles County in accordance with the civil code of the State of California, and Tenant shall furnish a copy thereof to Landlord at the time of such recordation. If Tenant fails to so record such Notice of Completion, Landlord may execute and file same on behalf of Tenant as Tenant's agent and at Tenant's expense. (d) Plans. At the conclusion of the construction of the Tenant Improvements, Tenant shall cause to be delivered to Landlord a final set of working drawings for the Tenant Improvements to reflect all of the changes to the Tenant Improvements made during the course of construction. Such working drawings shall include all of the design of the Tenant Improvements, mechanical systems, plumbing and electrical, along with the specifications of the Tenant Improvements. Although Tenant shall retain all written warranties, guaranties and operating manuals for the Tenant Improvements, -12- 63 copies of such items shall be delivered to Landlord upon the termination or expiration of the Lease. 2.7 Special Improvements. Prior to the Commencement Date of the Lease, Tenant may, provided that same does not delay or in any way interfere with Landlord's construction of the Building Shell, install (at Tenant's sole cost and expense) telephones, computer systems, cable and special electrical work, with the prior written approval of Landlord ("Special Improvements"). Any work on such Special Improvements shall be solely the responsibility of Tenant and shall be installed at Tenant's sole cost and expense. Tenant shall indemnify and hold Landlord harmless for any damage to person or property as a result of any installation and work on the Special Improvements and such work shall be governed by the provisions of Section 6.5 of the Lease. 2.8 Other Improvements or Alterations. Tenant's right to make any alterations or additions to the Property after the Commencement Date of the Lease shall be subject to Section 6.5 of the Lease. 3. ESTABLISHMENT OF INITIAL LEASE TERM AND INITIAL BASE RENT: 3.1 Commencement Date. (a) If Tenant Does Not Utilize Full Service Space Planner. If Tenant does not employ a Full Service Space Planner under the terms of subparagraph 3.1(b), below, then the following provisions of this subparagraph 3.1(a) shall apply. The term of the Lease under Section 1.5 of the Lease shall commence on the earlier of: (i) thirty (30) days after the Completion Date (as the Completion Date is defined in Paragraph 1.3, above); or (ii) the date a certificate of occupancy (either temporary or permanent) is issued for the Tenant Improvements, a final inspection approval is issued for the Tenant Improvements or the City of Calabasas otherwise allows Tenant's occupancy of the Tenant Improvements. Such date is herein referred to as the "Commencement Date" of the Lease. Landlord and Tenant recognize that the Commencement Date of the Lease could occur prior to the completion of construction of the Tenant Improvements. (b) If Tenant Utilizes a Full Service Space Planner. If Tenant on or before July 1, 1998 Engages a "Full Service Space Planner" approved by Landlord, which approval shall not be unreasonably withheld, to provide all of the architectural, engineering, construction supervision and design services for the Tenant Improvements, then the term of the Lease under Section 1.5 of the Lease shall commence on the first to occur -13- 64 of the following dates: the date a certificate of occupancy (permanent or temporary) is issued for the Property; the date that a final inspection approval has been issued for the Property; or the date that the City of Calabasas otherwise allows Tenant's legal occupancy of the Property for conducting business. Such date is herein referred to as the "Commencement Date" of the Lease. If the provisions of this subparagraph 3.1(b) apply, then subparagraph 3.1(a) shall not apply. Such Commencement Date under this subparagraph 3.1(b) shall occur: (i) one (1) day earlier than the defined Commencement Date, above, for each day that a "Tenant Delay" as defined below causes a delay in the construction of the Tenant Improvements or the Shell; (ii) one (1) day earlier than the defined Commencement Date, above, for each day that Tenant's general contractor takes longer than one hundred eight (108) days to complete construction of the Tenant Improvements from the date that Landlord makes the Shell available to Tenant for the commencement of construction of the Tenant Improvements; and (iii) one (1) day earlier than the defined Commencement Date, above, for each day that the Final Plans and Specifications are completed after September 15, 1998; except that if Tenant Engages by July 1, 1998 H. Hendy Associates as a Full Service Space Planner, then subparagraphs 3.1(b)(ii) and (iii) shall not apply. The following items causing a delay in construction of the Tenant Improvements or the Shell shall be a "Tenant Delay" under this subparagraph 3.1(b) instead of the definition of "Tenant Delay" under subparagraph 1.3(a): Tenant's failure to timely deliver information to, or attend meetings with, the space planner; Tenant requests a change order under Paragraph 2.4; there is an installation of any Special Improvements under Paragraph 2.7; or Tenant fails to timely pay the space planner or the general contractor, except if nonpayment is due to the fact that such space planner or general contractor is in default of its contract with Tenant. For purposes of this subparagraph 3.1(b), the term "Full Service Space Planner" shall mean a full service space planner who provides all architectural, engineering, construction supervision and design services for the Tenant Improvements on a "turn key" basis. For purposes of this Construction Rider, Tenant "Engages" a Full Service Space Planner or H. Hendy Associates, as the case may be, when the Tenant orally or in writing contracts such space planner to begin the full-time design and construction services for the Tenant Improvements and, in fact, such space planner begins such full-time design and construction services for the Tenant Improvements by the specified date, and Tenant by such specified date delivers to Landlord a letter signed by such space planner so indicating such space planner's commencement of space planning design and construction services. -14- 65 (c) Initial Lease Term. The initial Lease Term shall terminate one hundred twenty-three (123) months after the Commencement Date (determined under the applicable subparagraph 3.1(a) or 3.1(b)). If the Commencement Date of the initial Lease Term is on a day other than the first day of a month, then such first fractional month shall be added to the initial one hundred twenty-three (123) month Lease Term. 3.2 Adjustment to Initial Base Rent Based Upon Square Footage of the Building. On the Commencement Date, the initial monthly Base Rent under Paragraph 1.8(a) of the Lease shall be adjusted to equal the product of the following: Square Feet of the Building multiplied times Seventy Cents ($0.70) per square foot. "Square Feet of the Building" shall mean the square feet of the Building including the Square Feet of the mezzanine areas measured from the outside of each outside wall to the outside of each outside wall (including any stairwells or elevator shaft areas), as calculated by Landlord's architect using those plans for which the City of Calabasas has issued a building permit for the Shell. 3.3 Amendment to Lease. On the Commencement Date, Landlord and Tenant shall promptly execute an amendment to the Lease confirming: (a) the Commencement Date and termination date of the initial Lease Term; (b) the Square Feet of the Building; (c) the initial Base Rent as calculated under Paragraph 3.2 above; (d) the costs of the Tenant Improvements; and (e) an acknowledgment that Landlord has complied with all of the terms of Paragraph 1, above, for purposes of Article 7 of the Lease. Regardless of the execution of such amendment, the Lease shall remain in full force and effect with the Commencement Date and termination date described in Paragraph 3.1 above, and the initial Base Rent and square feet of the Building calculated under Paragraph 3.2 above. 3.4 Tenant's Option to Terminate Lease If No Completion of Shell By Specified Date. If Completion of construction of the Shell has not occurred by September 1, 1999, which date shall be extended one (1) day for each day that any Tenant Delay (defined in subparagraph 1.2(a)) causes a delay in the completion of the construction of the Shell (the "Shell Completion Termination Date") or if the permit to construct the Building Shell is not obtained by Landlord by December 31, 1998 (the "Shell Permit Termination date"), then Tenant shall have the option to elect to terminate this Lease by delivering written notice to Landlord of Tenant's election to terminate this Lease. Such written option notice of Tenant to terminate this Lease must be delivered to Landlord on or before twenty (20) days after the Shell Completion Termination Date or the Shell Permit Termination Date, as applicable. If the Lease is properly terminated by Tenant under this Paragraph 3.4, then Landlord shall promptly return to Tenant Tenant's security -15- 66 deposit and first month's rent which Tenant has previously paid to Landlord along with the Letter of Credit, provided that all amounts for the Tenant Improvements have been paid to date and there are no mechanics' liens recorded against the Property relating to the Tenant Improvements. Time is of the essence in Tenant's election to terminate this Lease under this Paragraph 3.4 and if Tenant does not elect to terminate this Lease in strict compliance with the terms of this Paragraph 3.4 for any reason, then this right to terminate by Tenant shall be of no further force or effect. If Tenant does not provide written notice to Landlord to elect to terminate this Lease during the time periods specified in this Paragraph 3.4, then this Lease shall be deemed to have not been terminated, and Landlord shall continue to construct the Shell in compliance with the terms of this Construction Rider. 3.5 Landlord's Option to Terminate the Lease if No Completion of Shell by Specified Date. If completion of the construction of the Shell has not occurred by September 1, 1999 due to acts of God, war, fire, flood, earthquake or other casualty, government regulation or restrictions, or severe weather conditions, then Landlord shall have the option to elect to terminate the Lease by delivering written notice to Tenant of Landlord's election to terminate the Lease. Such written option notice of Landlord to terminate the Lease must be delivered to Tenant by September 20, 1999. If Landlord elects to terminate the Lease, then the same provisions of Paragraph 3.4 regarding the return of Tenant's deposits and the Letter of Credit shall apply. 4. LANDLORD'S WARRANTY REGARDING BUILDING SHELL AND TENANT IMPROVEMENTS: 4.1 Warranty. Landlord warrants: (1) For a period of twelve (12) months from the Commencement Date ("Warranty Period") that the Shell portion of the Building has been constructed in a good and workmanlike manner in compliance with then applicable laws and using new materials without defects; and (ii) for a period of twenty-four (24) months from the Commencement Date that the roof has been constructed in a good and workmanlike manner, in compliance with then applicable laws, and using new materials without defects. Landlord's warranty under this Paragraph 4 is in addition to Landlord's obligations under Section 6.3 of the Lease for maintenance and repair of certain structural elements, the foundation and structural portions of the mezzanine deck. Landlord is specifically not warranting any of the Tenant Improvements, and Tenant shall be responsible to repair and maintain such Tenant Improvements in compliance with the terms of this Lease. If there are contractor or material supplier -16- EX-10.18 18 FIRST AMENDMENT TO CREDIT AGREEMENT 1 Exhibit 10.18 FIRST AMENDMENT TO CREDIT AGREEMENT THIS FIRST AMENDMENT TO CREDIT AGREEMENT (this "First Amendment"), dated as of May 13, 1999, is entered into among NETCOM SYSTEMS, INC., a California corporation ("Borrower"), the lenders listed on the signature pages hereof (collectively, the "Lenders"), and NATIONSBANK, N.A. (successor by merger to NationsBank of Texas, N.A.), as Administrative Agent (in said capacity, the "Administrative Agent"). BACKGROUND A. The Borrower, the Lenders and the Administrative Agent heretofore entered into that certain Credit Agreement, dated as of August 29, 1997 (the "Credit Agreement"; the terms defined in the Credit Agreement and not otherwise defined herein shall be used herein as defined in the Credit Agreement). B. The Borrower, the Lenders and the Administrative Agent desire to make an amendment to the Credit Agreement. NOW, THEREFORE, in consideration of the covenants, conditions and agreements hereinafter set forth, and for other good and valuable consideration, the receipt and adequacy of which are all hereby acknowledged, the Borrower, the Lenders and the Administrative Agent covenant and agree as follows: 1. AMENDMENTS TO CREDIT AGREEMENT. (a) Section 1.1 of the Credit Agreement is hereby amended by adding the following defined terms thereto in proper alphabetical order to read as follows: "Cash and Cash Equivalents" means, collectively, the following property: (i) cash (which, after the occurrence and during the continuance of an Event of Default, shall exclude any cash proceeds of Accounts), (ii) securities issued or directly and fully guaranteed or insured by the United States Government or any agency or instrumentality thereof having maturities of not more than one year from the date of acquisition, (iii) certificates of deposit and Eurodollar time deposits with maturities of one year or less from the date of acquisition, bankers' acceptances with maturities not exceeding one year and overnight bank deposits, in each case with any Lender or with any domestic commercial bank having capital and surplus in excess of $500,000,000, (iv) repurchase 2 obligations with a term of not more than seven days for underlying securities of the types described in clauses (ii) and (iii) entered into with any financial institution meeting the qualifications specified in clause (iii) above, (v) commercial paper issued by any Lender of the parent corporation of any Lender, and commercial paper rated A-2 or the equivalent thereof by Standard & Poor's Ratings Group, a Division of McGraw-Hill, Inc., a New York corporation, or P-2 or the equivalent thereof by Moody's Investors Service, Inc., and in each case maturing within one year after the date of acquisition, and (vi) a readily redeemable "money market mutual fund" advised by a bank described in clause (iii) hereof, or an investment advisor registered under Section 203 of the Investment Advisors Act of 1940, that has and maintains an investment policy limiting its investments primarily to instruments of the types described in clauses (i) through (v) hereof and having on the date of such Investment total assets of at least One Hundred Million Dollars ($100,000,000.00)." " 'Restricted Foreign Subsidiary' has the same meaning as the term 'Foreign Restricted Subsidiary'." " 'Unencumbered Cash and Cash Equivalents' means Cash and Cash Equivalents of the Borrower and the Restricted Subsidiaries of the Borrower that are not subject to or covered by any Lien or any negative pledge, escrow arrangement or other restriction on the use or disposition thereof by the Borrower or the applicable Restricted Subsidiary of the Borrower; provided, however, that to the extent that any of the Cash and Cash Equivalents of the Borrower or any Restricted Subsidiaries of the Borrower are subject to or covered by any Lien that (i) constitutes a Permitted Lien under clause (q) or clause (r) of the definition of "Permitted Liens", and (ii) secures only the customary and recurring service fees of the holder of such Lien in connection with such Cash and Cash Equivalents, the portion of such Cash and Cash Equivalents in excess of the aggregate amount of such customary and recurring service fees for one calendar quarter (or such longer period of time as the holder of such Lien may utilize in charging such fees, if applicable) shall not be excluded from constituting Unencumbered Cash and Cash Equivalents by virtue of the existence of such Lien." (b) The definition of "Permitted Distributions" set forth in Section 1.1 of the Credit Agreement is hereby amended by (i) adding the parenthetical clause "(other than redemptions and dividends permitted by clause (e) of this definition)" after the word "to" in the first line of clause (a) thereof and (ii) adding the following after the last existing paragraph thereof: "(e) redemptions of, and related dividends with respect to, the NetCom Redeemable Preferred Stock if, and to the extent that, (i) such redemptions and the payment of related dividends takes place on or before December 31, 1999, (ii) such redemptions and related dividends do not exceed $56,000,000 in the aggregate amount, (iii) contemporaneously with such redemptions and the payment of such related dividends, 100% of the - 2 - 3 Netcom Redeemable Preferred Stock is redeemed and cancelled by the Borrower and the Borrower thereafter has no further payment obligations in connection with such Netcom Redeemable Preferred Stock, (iv) prior to the making and payment of any such redemptions and related dividends, the Borrower has consummated an initial Public Equity Offering of common stock of the Borrower and the Borrower has received at least $65,000,000 in Net Cash Proceeds therefrom, (v) immediately prior to, and after giving effect to, such redemptions and the payment of such related dividends, no Default or Event of Default exists, and (vi) at least 5 Business Days prior to the date of making or payment (whichever is earlier) of any such redemption or any such related dividend, the Administrative Agent has received a Compliance Certificate from the Borrower evidencing compliance with the requirements of clause (v) above." (c) The Administrative Agent and each of the Lenders hereby acknowledge and agree that the prepayment provisions of Section 2.5(d) of the Credit Agreement shall not apply to the Net Cash Proceeds received by the Borrower in connection with the initial Public Equity Offering of common stock of the Borrower contemplated by paragraph (e) of the definition of "Permitted Distributions" in the Credit Agreement if the Borrower utilizes such Net Cash Proceeds, or a portion thereof, to redeem and cancel 100% of the Netcom Redeemable Preferred Stock in accordance with the provisions of such paragraph (e). (d) Section 7.15 of the Credit Agreement is hereby amended in its entirety to read as follows: "Section 7.15. Fiscal Year. Neither the Borrower nor any Restricted Subsidiary of the Borrower shall change its fiscal year from December 31." (e) Article 7 of the Credit Agreement is hereby amended by adding Section 7.19 to the end thereof to read as follows: "Section 7.19 Minimum Liquidity. The Borrower and the Restricted Subsidiaries of the Borrower shall, at all times after the payment of the redemptions and related dividends with respect to the Redeemable Preferred Stock pursuant to paragraph (e) of the definition of "Permitted Distributions" in the Credit Agreement, on a consolidated basis, maintain Unencumbered Cash and Cash Equivalents in an aggregate amount of at least (i) $10,000,000 plus (ii) the aggregate outstanding principal balance of the Revolving Credit Notes at such time." (f) In addition to the scheduled payments of the outstanding principal balance of the Term Loan Advances required by Section 2.8(b) of the Credit Agreement and in addition to any - 3 - 4 other or additional payments that may be required under the Loan Documents with respect to the Term Loan Advances, on each of the two Quarterly Dates immediately next succeeding the consummation of the initial Public Equity Offering of common stock of the Borrower contemplated by paragraph (e) of the definition of "Permitted Distributions" the Borrower shall repay an additional $5,000,000 of the outstanding principal amount of the Term Loan Advances. Such additional principal payments by the Borrower shall be applied to the regularly scheduled payment of the Term Loan Advances in the inverse order of their maturity. 2. REPRESENTATIONS AND WARRANTIES TRUE; NO EVENT OF DEFAULT. By its execution and delivery hereof, the Borrower represents and warrants that, as of the date hereof and after giving effect to the amendments contemplated by the foregoing Section 1: (a) the representations and warranties contained in the Credit Agreement and the other Loan Documents are true and correct in all material respects on and as of the date hereof as if made on and as of such date (except insofar as any such representation or warranty relates specifically to a different date by its own terms, in which case such representation or warranty is true and correct in all material respects as of such specified date); (b) no event has occurred and is continuing which constitutes a Default; (c) the Borrower has full power and authority to execute and deliver this First Amendment and the Credit Agreement, as amended hereby, and this First Amendment and the Credit Agreement, as amended hereby, constitute the legal, valid and binding obligations of the Borrower enforceable in accordance with their respective terms, except as enforceability may be limited by applicable debtor relief laws and by general principles of equity (regardless of whether enforcement is sought in a proceeding in equity or at law) and except as rights to indemnity may be limited by federal or state securities laws; and (d) no authorization, approval consent, or other action by, notice to, or filing with, any governmental authority or other Person, is required for the execution, delivery or performance by the Borrower of this First Amendment. 3. CONDITIONS OF EFFECTIVENESS. This First Amendment shall be effective as of May 13, 1999, subject to the following; (a) The Administrative Agent shall have received counterparts of this First Amendment executed by the Determining Lenders; (b) The Administrative Agent shall have received counterparts of this First Amendment executed by the Borrower, and - 4 - 5 (c) the Administrative Agent shall have received, in form and substance satisfactory to the Administrative Agent and its counsel, such other documents, certificates and instruments as the Administrative Agent shall require. 4. REFERENCE TO THE CREDIT AGREEMENT. (a) Upon the effectiveness of this First Amendment, each reference in the Credit Agreement to "this Agreement", "hereunder", or words of like import shall mean and be a reference to the Credit Agreement, as amended by this First Amendment. (b) The Credit Agreement, as amended by this First Amendment, and all other Loan Documents shall remain in full force and effect and are hereby ratified and confirmed. 5. COSTS, EXPENSES AND TAXES. The Borrower agrees to promptly pay all reasonable out-of-pocket costs and expenses of the Administrative Agent in connection with the preparation, negotiation, execution and delivery of this First Amendment and the other instruments and documents to be delivered hereunder (including, but not limited to, the reasonable fees and disbursements of Special Counsel). 6. EXECUTION IN COUNTERPARTS. This First Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same instrument. 7. GOVERNING LAW; BINDING EFFECT. This First Amendment shall be governed by and construed in accordance with the laws of the State of Texas and shall be binding upon the Borrower and each Lender and their respective successors and assigns. 8. HEADINGS. Section headings in this First Amendment are included herein for convenience of reference only and shall not constitute a part of this First Amendment for any other purpose. 9. ENTIRE AGREEMENT. THE CREDIT AGREEMENT, AS AMENDED BY THIS FIRST AMENDMENT, AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS BETWEEN THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. ================================================================================ REMAINDER OF PAGE LEFT INTENTIONALLY BLANK ================================================================================ -5- 6 IN WITNESS WHEREOF, the parties hereto have executed this First Amendment as the date first above written. NETCOM SYSTEMS, INC. By: ------------------------------------- Name: -------------------------------- Title: ------------------------------- NATIONSBANK, N.A. (successor by merger to NationsBank of Texas, N.A.), as Administrative Agent, Issuing Bank and a Lender By: ------------------------------------- Name: -------------------------------- Title: ------------------------------- BANKBOSTON, N.A., as Documentation Agent and a Lender By: ------------------------------------- Name: -------------------------------- Title: ------------------------------- - 6 - EX-21.1 19 LIST OF SUBSIDIARIES OF REGISTRANT 1 EXHIBIT 21.1 The Company has the following wholly-owned subsidiaries: Netcom Systems Europe S.A.R.L., a company organized under the laws of France. Netcom (Barbados) Limited, a Foreign Sales Corporation. EX-23.1 20 CONSENT OF ARTHUR ANDERSEN LLP 1 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. /s/ Arthur Andersen LLP ------------------------------------ ARTHUR ANDERSEN LLP Los Angeles, California May 14, 1999 EX-27.1 21 FINANCIAL DATA SCHEDULE (FISCAL 1998)
5 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 19,597 14,731 10,035 675 2,676 49,962 4,915 1,251 54,155 18,160 37,500 52,579 48,518 3 (102,605) 54,155 73,474 73,474 15,912 25,078 0 325 3,545 30,139 11,557 18,582 0 0 0 18,582 5.74 0.63
EX-27.2 22 FINANCIAL DATA SCHEDULE (FIRST QUARTER 1999)
5 1,000 3-MOS DEC-31-1998 JAN-01-1999 MAR-31-1999 17,970 16,339 10,640 489 3,201 50,684 7,698 1,602 57,264 19,635 35,000 53,363 48,518 3 (99,255) 57,264 19,513 19,513 4,873 7,710 44 30 724 6,572 2,531 4,041 0 0 0 4,041 1.17 0.13
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