-----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, UvyZwRDBjRw11VKT6yNvKPK/qqnpqCxIzaq4fzV0IpNDlKNv3QRBKZuBx46ivCNQ x93dFyqPf48kJ6h6AQENpg== 0000317771-96-000008.txt : 19960322 0000317771-96-000008.hdr.sgml : 19960322 ACCESSION NUMBER: 0000317771-96-000008 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19951229 FILED AS OF DATE: 19960321 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: TELLABS INC CENTRAL INDEX KEY: 0000317771 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 363831568 STATE OF INCORPORATION: DE FISCAL YEAR END: 0101 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-09692 FILM NUMBER: 96537142 BUSINESS ADDRESS: STREET 1: 4951 INDIANA AVE CITY: LISLE STATE: IL ZIP: 60532 BUSINESS PHONE: 7089698800 MAIL ADDRESS: STREET 1: 4951 INDIANA AVE CITY: LISLE STATE: IL ZIP: 60532 10-K405 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 29, 1995 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from N/A to N/A Commission file number 0-9692 TELLABS, INC. (Exact name of registrant as specified in its charter) Delaware 36-3831568 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 4951 Indiana Avenue, Lisle, Illinois 60532 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (708)969-8800 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered None N/A Securities registered pursuant to Section 12(g) of the Act: Common shares, with $.01 par value (Title of Class) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] On March 1, 1996, 88,881,441 common shares of Tellabs, Inc., were outstanding, and the aggregate market value (based upon the closing sale price of the National Market System) of such shares held by nonaffiliates was approximately $3,552,039,000. Documents incorporated by reference: Portions of the registrant's Annual Report to Stockholders for the fiscal year ended December 29, 1995, are incorporated by reference into Parts I and II, and portions of the 1 registrant's Proxy Statement dated March 21, 1996 are incorporated by reference into Part III. PART I ITEM I. BUSINESS Tellabs, Inc., an Illinois corporation, began operations in 1975 and became publicly owned in 1980. During 1992, the Illinois corporation merged with and into Tellabs Operations, Inc., a wholly owned subsidiary. As a result of the merger, Tellabs Operations, Inc., became a subsidiary of Tellabs, Inc., a Delaware corporation (with its subsidiaries, unless the context indicates otherwise, "Tellabs" or the "Company"). The Company designs, manufactures, markets and services voice and data transport and network access systems that are used worldwide by public telephone companies, long-distance carriers, alternate service providers, cellular and other wireless service providers, cable operators, government agencies, utilities, and business end-users. Products provided by the Company include digital cross-connect systems, managed digital networks and network access products. Digital cross-connect systems include the Company's TITAN (a registered trademark of Tellabs Operations, Inc.) 5500 series of digital cross-connect systems. Managed digital networks include the Martis (a trademark of Martis Oy) DXX multiplexer, statistical multiplexers, packet switches, T1 multiplexers, and network management systems. Network access products include digital signal processing (DSP) products such as echo cancellers and T-coders; special service products (SSP) such as voice frequency products; and local access products such as high bit rate digital subscriber line (HDSL) products and the CABLESPAN (a trademark of Tellabs Operations, Inc.) system. The Company's products are sold in both the domestic and international marketplaces (under the Tellabs name and trademarks and under private labels) through the Company's field sales force and selected distributors to a major customer base. This base includes Regional Bell Operating Companies (RBOCs), independent telephone companies (ITCs), interexchange carriers (IXCs), local telephone administrations (PTTs), local exchange carriers (LECs), original equipment manufacturers (OEMs), cellular and other wireless service companies, cable operators, alternate service providers, system integrators, government agencies, and business end-users ranging from small businesses to Fortune 500 companies. The availability of digital technology along with the use of microprocessors and other custom and standard very large scale integrated (VLSI) circuitry continues to make it economically possible for the Company to expand its product lines to meet the changing customer demands and industry trends inherent in today's dynamic telecommunications environment. This expansion primarily involves the development of broad lines of service-provider-oriented networking systems that meet the ever increasing demands for efficient, multipurpose data, video, and voice communications services. This same availability of technology in capital equipment makes it possible for the Company to efficiently and competitively continue to produce its own products in its world class manufacturing facilities located throughout the world. 2 Each of the Company's manufacturing operations is registered under the ISO 9000 standard. ISO 9000 is an international set of standards developed to provide quality assurance for companies seeking to improve their quality standards and customer service. The final registrant was the Company's subsidiary in Finland, which successfully completed the ISO 9001 audit at the end of 1995. Digital Cross-Connect Systems The TITAN product family consists of software intensive digital cross-connect systems and network management platforms. These flagship products address the needs of RBOCs, PTTs, IXCs, alternate local exchange, cellular, cable, government and Fortune 500 companies. These complex transmission systems are designed to exceed domestic and international telephone industry standards. The SONET (synchronous optical network) Digital Cross-Connect Systems operate under software control and are typically used to build and control the wideband and broadband transmission infrastructure of the telecommunication service provider. Telecommunication managers utilize the digital cross-connect systems to reduce cycle time while minimizing capital and operating expense. Key applications include centralized and remote testing of transmission facilities, grooming of voice, data, and video signals, automated provisioning of new services, and restoration of failed facilities. All of the TITAN systems include a feature for monitoring facility performance which enhances "process of elimination troubleshooting" in a complex network. The user can determine the early warnings of facility degradation rather than reacting to a network outage. The digital cross-connect system also converts international to domestic transmission and signaling standards. These products augment the ability of users to provide current, emerging, and future service to business and residential customers. Advanced survivable business services also utilize the TITAN products for interconnecting fiber transmission. The TITAN systems vary in switching rate and facility interface speed. Tellabs offers the SONET TITAN 5300 series of cross-connect systems that can interface facilities at STS-1, DS3, DS1, E1, DS0, and subrate levels, and can switch them at DS0 levels and below. The systems in this series allow modular non-service affecting growth with capacities ranging from 8 to 4,000 ports. Tellabs offers the Company's flagship SONET TITAN 5500 system which interfaces facilities at the DS1, DS3, STS-1 and/or fiber optic OC-N levels, and cross-connects them at levels of DS1/VT1.5 and above. The TITAN 5500 is the first digital cross-connect system in the world to integrate optical (N=3,12) equipment. The high speed optical transmission facilities are designed to meet the growing SONET standard. A single TITAN 5500 system can carry the equivalent of 700,000 simultaneous phone conversations. It is expected that the SONET transmission market will continue to demonstrate significant growth through the turn of the century. New technologies in this market include fiber optics and the integration of network management and asynchronous transfer mode (ATM) switching. Digital systems products accounted for approximately 49 percent, 46 percent, and 42 percent of 1995, 1994, and 1993 sales, respectively. 3 Managed Digital Networks Since Tellabs' entry into the data communications marketplace in 1983, the Company has developed a comprehensive family of networking products to address the requirements and flexibility demanded by the users of communications services. Products within this group include the Martis DXX system and the CROSSNET (a registered trademark of Tellabs Operations, Inc.) family of network-compatible T1/E1 time division multiplexers. The Martis DXX system is a complete access and transport network designed to be used by telecommunications service providers worldwide for the delivery of business services, digital leased lines and integrated customer access. Typical business service applications include PABX networking, high speed data access, value added data services such as frame relay and X.25, and voice telephony. The Martis DXX system acts as the transport infrastructure for mobile networks such as digital and analog cellular, paging, trunked mobile radio and mobile data. Martis DXX systems can also function as general purpose networks carrying the wide variety of services that may be provided by the public telecommunications service provider. Recent enhancements to the Martis DXX system have focused on extending the current product portfolio with new features and functions including a wider variety of access configurations and speeds as well as significant enhancements to the DXX network management system to provide advanced management options to the public telecommunications service provider such as virtual private networking. The DXX system is also being enhanced to provide high speed optical synchronous digital hierarchy interfaces as well as support for cell and packet based technologies such as frame relay and ATM. The CROSSNET 440, 441 and 442 are a family of intelligent T1/E1 multiplexers that interface voice, data and video devices (up to 2.048Mbps) and multiplex them over private TDM networks. The CROSSNET 445 provides timeslot interchange and DS0/DS1 switching and is used to network 440, 441 and 442 nodes. This family of intelligent multiplexers can be provisioned (network-wide) from any one node. In addition, they can automatically provision many of the voice and data applications and have an integrated NMS system that can adjust the bandwidth in 400bps increments for highly efficient use of the DS1 or fractional DS1 facility. These products compete in the Wide Area Network (WAN) access market. End- users buy these products through value added re-sellers, service providers and direct from Tellabs. The products are used to combine voice, data and video applications for transmission over T1, FT1, E1, Nx56 and Nx64 facilities. They provide for more efficient utilization of the bandwidth and access to dedicated services. Although the CROSSNET product line serves a maturing market that is migrating to newer technologies such as frame relay, ATM and low-bit-rate-voice (LBRV), there continues to be significant opportunities for the traditional CROSSNET multiplexers in both the domestic and international markets. Tellabs has recently enhanced the CROSSNET family of multiplexers by adding LBRV compression at 8 and 16kbps in its DS0 channels and T1 trunks and enhanced CROSSNET's analog voice capability for competing in the growing branch office multiplexer market. The Company has also added a variable-speed network interface (NX64) to the CROSSNET 44X for use with international networks or satellite radio channels. 4 Managed digital networks accounted for approximately 28 percent, 27 percent, and 21 percent, of 1995, 1994, and 1993 sales, respectively. Network Access Systems Network access products are primarily modular in design and can be used either individually or in complex systems and assemblies. The three areas making up network access products are DSP products, SSP products, and local access products. The products are designed to meet telephone industry standards, and, in many applications, they directly interface with customer premises equipment. These products enhance the ability of LECs, cellular companies, and end-users to provide current, emerging, and future services to their business customers through innovative products and systems that provide more cost-effective provisioning of existing basic services. These products are deployed worldwide by LECs, PTTs, IXCs, wireless, private networks, alternate service providers and cable providers. In order to continue to grow this product area, state-of-the-art technology will be deployed and value-added content will be provided. DSP products primarily address the needs of cellular companies, LECs, and IXCs, both domestically and internationally. Such products include the Company's echo cancellation (or control) and voice compression products. The echo control products primary function is to provide voice quality enhancements such as the removal of irritating feedback (from one's own voice) that occurs on virtually all long distance connections and many wireless connections. The voice compression product (T-Coder) doubles the capacity of digital transmission facilities used for voice and data services. This product has great economic appeal to cellular companies, IXCs, and end-users who want to double T1 or E1 capacity without incurring the cost of a new facility. These DSP products have benefited from the growth of the markets that these products address. SSP products provide transmission and signaling conversion between the central office and the customers' terminal equipment. These products include: line amplifiers that compensate for loss and distortion in voice and analog data transmission applications; terminating devices that provide conversion between 4 wire transmission facilities and 2 wire local lines; signaling equipment and systems that convert station on-hook/off-hook, dialing and ringing information to signaling formats compatible with transmission over metallic voice channels; and loop treatment equipment typically used to extend the distance from a central office at which a telephone functions satisfactorily. The Company also designs, manufactures and sells a line of voice conferencing and alerting systems and a series of products with remote alignment and diagnostic maintenance capabilities. The local access product area includes CABLESPAN, a local access system, and EXPRESSPAN, (a registered trademark of Tellabs Operations, Inc.) a T1 transmission product. The CABLESPAN 2300 system is a product of Advanced Access Labs (AAL), a joint venture between the Company and Advanced Fibre Communications, Inc. (AFC), designed to address the emerging cable and alternate service provider markets. With the CABLESPAN system, cable companies can offer a variety of two-way services which include telephone, facsimile, telecommuting, video conferencing and access to information services to residential and business customers using their existing hybrid fiber coaxial networks. 5 The EXPRESSPAN high bit rate digital subscriber line (HDSL) transmission products allow LECs and large customer premise networks to address the growing need to install T1 facilities quickly without the expense of engineering, installation, and maintenance of T1 line repeaters. Network access products accounted for approximately 21 percent, 26 percent, and 35 percent of 1995, 1994, and 1993 sales, respectively. MARKETING Sales are generated through the Company's direct sales organization and selected distributors. The Domestic sales group consists of approximately 57 direct sales personnel, and additional sales agents and sales support personnel located throughout the United States. The International sales group consists of approximately 35 direct sales personnel, and additional sales agents and sales support personnel in Canada, Latin America, South America, Europe, the Middle East, Africa, Asia and Australia. The Domestic sales organization conducts its activities from the corporate headquarters and eight regional or district offices. The International sales organization conducts its activities from the corporate headquarters and fifteen regional offices. The regional offices are generally staffed by a regional sales manager, system sales engineers, and additional personnel as required. Direct orders through the Company's field sales organization accounted for approximately 88 percent of 1995 sales. The Company has national account managers to coordinate sales activities for its major customer groups, and product managers to coordinate the marketing activities for each major product area. The Domestic sales organization uses a vertical markets approach for the sales of its products. As a result, large accounts such as RBOCs, IXCs, wireless, alternate service providers, and emerging market customers are serviced by teams to better represent both product and service offerings. The International sales organization is structured to support activities on a regional basis. The Company has arrangements with a number of distributors of telecommunications equipment, both in the United States and internationally, some of whom maintain inventories of the Company's products to facilitate prompt delivery. These distributors provide information on the Company's products through their catalogs and through trade show demonstrations. The Company's field sales force also assists these distributors with regular calls to them and their customers. In addition, the Company utilizes other channels of distribution, including approximately 13 value added resellers for its CROSSNET line of networking multiplexers. Distributors, as a group, accounted for approximately 12 percent of 1995 sales. No single distributor accounted for more than 10 percent of 1995 sales. CUSTOMER SERVICE Tellabs maintains a worldwide customer service organization focused on providing its customers high quality technical and administrative product support. To ensure global support, Tellabs has five worldwide logistic 6 centers (Lisle, Illinois; Shannon, Ireland; Mississauga, Canada; Espoo, Finland; and Hong Kong). Tellabs' customer service organization supports its customers with a wide range of services that include application engineering and support, installation, post-sale support, service agreements, on-site training, product repair (warranty administration), on-site maintenance, third party maintenance, consultation, logistics management, and 24-hour technical support. The Tellabs technical support organization consists of unique and highly-trained teams that focus on customer support of the TITAN 5500, TITAN 53XX, 44X, 33X, VF and Martis DXX product lines. The teams track customer complaints to capture, collect and report on product performance and overall customer profiles, as they continue to track the status of customers' calls until completion. Tellabs provides product warranties for periods ranging from one to five years for the repair or replacement of customer premises-located modules and systems found to be faulty due to defective material. Tellabs has an Advance Replacement Policy that allows for the immediate replacement of customer modules in response to a time critical service outage. CUSTOMERS Sales to customer groups as a percentage of total sales were approximately as follows: 1995 1994 1993 Bell Operating Companies 28% 26% 23% Independent Telephone Companies 5% 7% 10% Interexchange Carriers 16% 16% 12% Corporate America, OEMs, Governmental Agencies, Cellular Companies, Utility and Railroad Companies, Alternate Service Providers, and System Integrators 14% 17% 25% Foreign Sales North America (primarily Canada) 4% 4% 9% International 33% 30% 21% ---- ---- ---- TOTAL 100% 100% 100% ==== ==== ==== At December 29, 1995, and December 30, 1994, backlogs were approximately $84 million and $80 million, respectively. All of the December 29, 1995, backlog is expected to be shipped in 1996. The Company considers backlog to be an indicator, but not the sole predictor, of future sales. COMPETITION The Company's products are sold in global markets and compete on the following key factors: responsiveness to customer needs, customer-oriented planning, price, product features, performance, reliability, breadth of product line, technical documentation, and prompt delivery. The digital cross-connect systems compete principally with AT&T, Alcatel and DSC Communications Corporation (DSC). 7 The managed digital network products compete in two areas. The principal competition for the multiplexers are Newbridge Networks Corporation, General DataComm Industries Inc., Premisys, Timeplex, Inc. and Ascend. The major competitors of the Martis DXX type networks are Newbridge Networks Corporation, Nokia Telecommunications, and Network Equipment Technologies. The network access products currently compete in five product areas: special services, echo cancellers, transcoders, HDSL and CABLESPAN. The principal competitors in the special services market are Teltrend and Westell. The leading competitors in the echo canceller market are Coherent Communications, DSC and Ditech. The major competitors in the transcoder market are DSC and Aydin. In the HDSL arena, Pair Gain and Adtran are the principal competitors. CABLESPAN competitors are Nortel, Motorola, Scientific Atlanta and ADC Telecommunications, Inc. RESEARCH AND DEVELOPMENT The telecommunications industry continues to be characterized by rapid technological change. Historically, the technology of this industry had been mainly analog, characterized by signals continuous in time with information contained in the frequency and amplitude of the signals. The industry has rapidly shifted toward digital technology in which information is coded in discrete pulses. The Company's current product development effort is directed almost entirely toward designing new products utilizing digital, fiber optic and ATM technology. The Company has also focused much of its research and development efforts on large system software development and associated processes. Many products used in network access system applications are well-suited to the use of digital implementation techniques, including utilization of microprocessors and other VLSI devices. The Company's ability to combine analog and digital technologies has been an important ingredient in its product development. The Company currently manufactures a number of products using microprocessor control circuitry which make extensive use of microprocessors and complex system software. The Company is also actively developing products which utilize high speed fiber optic technologies to provide higher performance transmission characteristics in today's telecommunication networks. The Company is continually updating its research and development capabilities through the addition of new computer-aided design (CAD) and computer-aided software engineering (CASE) tools, which assist in electronic, mechanical, and software design. Use of such tools is imperative as the Company seeks to respond to industry and customer demands for intelligent digital systems and networking products with capabilities for automated remote maintenance and provisioning. The Company is involved in several product-oriented alliances. In April 1994, the Company entered into a joint venture agreement with AFC, a Petaluma, California-based provider of next-generation digital loop carrier equipment. Under the agreement, the Company and AFC formed a 50/50 joint venture partnership (AAL) for the development and manufacture of a telephony-over-cable transport system which is being marketed by the Company under the tradename CABLESPAN. The CABLESPAN system, which is currently in field trial, allows customers to use existing hybrid fiber-coax for telephone and other new services such as telecommuting, video conferencing and access to information services. In addition to its investment in AAL, the Company has made several equity investments in AFC. 8 In 1995, the Company renegotiated the OEM agreement and licensing agreement with Cisco Systems, Inc. Under the terms of the agreements, the Company retained the right to market Cisco's existing ATM product and received licensing rights to develop derivative works of the product. Although, the Company has cancelled the PORTSPAN 4000 development project which uses the Promptus Communications technology, the Company continues to have the right to manufacture the Promptus OASIS 1000 (a registered trademark of Promptus Communications, Inc.) bandwidth manager, an inverse multiplexing and switched digital services access product. Martis Oy in Espoo, Finland, and Tellabs Holdings Ltd. in Shannon, Ireland, are the focal points for the Company's research and development efforts for the European Economic Community. The Company's Canadian subsidiary discontinued its research and development efforts in early 1996. These agreements, relationships and international development efforts allow the Company access to technology that is important to the future of its products. In addition, to ensure that the technologies Tellabs uses are in keeping with industry developments and to increase the Company's ability to develop new technologies, the Company conducts research at its laboratory in Mishawaka, Indiana, and also utilizes its research facilities at its Espoo, Finland-based subsidiary along with a separate facility in Oulu, Finland, and its Shannon, Ireland-based subsidiary for the European marketplace. Research and development expenses were $81.9 million in 1995, $64.8 million in 1994, and $51.0 million in 1993. The Company plans to spend approximately $95.0 million on research and development in 1996. These expenditures reflect the Company's commitment to the enhancement of existing products and development of new products designed to satisfy the needs of communications service providers worldwide. MANUFACTURING AND EMPLOYEES The Company assembles its products from standard components and from fabricated parts which are manufactured by others to the Company's specifications. Such purchased items represented approximately 72 percent of cost of sales in 1995. Most purchased items are standard commercial components available from a number of suppliers with only a few items procured from a single-source vendor. Management believes that alternate sources could be developed for those parts and components of proprietary design and those available only from single or limited sources. However, future shortages could result in production delays that could adversely affect the Company's business. As part of the manufacturing process, hazardous waste materials that are present are handled and disposed of in compliance with all Federal, State and local provisions. These waste materials and their disposal have no significant impact on either the Company's production process or its earnings or capital expenditures. At December 29, 1995, the Company had 2,814 employees, of which 618 were employed in the sales, sales support and marketing area, 786 in product development, 1,172 in manufacturing, and 238 in administration. The Company considers its employee relations to be good. It is not a party to any collective bargaining agreement. 9 TRADEMARKS, PATENTS AND COPYRIGHTS The Company has various trade and service marks, both registered and unregistered, in the U.S. and in numerous foreign countries (collectively, Marks). All of these Marks are important in that they differentiate the Company's products and services within the industry through brand name recognition. Current Marks of the Company include TELLABS, MARTIS, ALTA, ASC, CABLESPAN, CLEARCALL, CROSSNET, DATAPLEXER, DXX, DYNAMIC SIGNAL TRANSFER, ESQ, ExpresSPAN, FLASHLOAD, INTERMAKER, NAVIGATING CHANGE, NMCS 2500, PORTSPAN, RADAR, RA SERIES, SONET TO THE CORE, T-CODER, TELEMARK, TITAN, TURNING YOUR COPPER INTO GOLD, VANTAGE POINT, WE PUT THE WIRE IN WIRELESS, YOUR NETWORKING PARTNER, 331 XPLEXER, and the Company's logos. The Company is not aware of any factor which would affect its ability to utilize any of its major trademarks. The Company has developed certain proprietary, confidential software programs which are important to its business. The Company owns various rights, which are protectable under copyright and trade secret laws, in such software programs. The Company currently holds 14 U.S. and 3 Canadian patents. Although patents may be important to certain of the Company's products, the Company believes generally that patents are of substantially less significance to its business than are the design, engineering, and development capabilities of its personnel. BUSINESS SEGMENT AND GEOGRAPHICAL INFORMATION The Company operates in one business segment. Information with respect to the Company's operations in its two geographical areas for the fiscal years ended December 29, 1995, December 30, 1994 and December 31, 1993, is set forth in Note I on page 35 of the registrant's Annual Report to Stockholders and is incorporated herein by reference. ITEM 2. PROPERTIES Tellabs' corporate headquarters is located on 18-1/2 acres of Company-owned land approximately 30 miles west of Chicago in Lisle, Illinois. Located on this property are three buildings. The first is a 65,000 square foot building that functions as the Company's headquarters and houses a portion of the Digital Systems division's marketing and engineering personnel. The second is a 103,000 square foot building which houses customer service, research and development and administrative functions. The third building is a 54,000 square foot building utilized by the majority of the Digital Systems division's engineering operations. The Company also owns 50 acres of land in Bolingbrook, Illinois (near Lisle) where a 230,000 square foot manufacturing, engineering and office building was completed and occupied in July 1993. The Company expects to begin construction of a new 300,000 square foot addition to this facility in the spring of 1996. Construction of the addition, which is expected to be completed by mid-1997, is expected to cost approximately $33,000,000. The Company also owns approximately 75 acres of land in Round Rock, Texas, and approximately 2.6 acres of land in Mississauga, Ontario, Canada. The Texas property includes an 84,000-square foot manufacturing facility. The Canadian property includes a 20,000-square foot office/warehousing 10 building. The Company also owns three office/manufacturing facilities in Espoo, Finland. A 62,000-square foot building is used for engineering, marketing, and administrative offices. The second building of approximately 150,000 square feet is used for production. The third is a 35,000 square foot office building which is currently used for engineering offices. The Company leases additional facilities at the following locations: Mishawaka, Indiana (research); Atlanta, Georgia (sales); White Plains, New York (customer service); Naperville, Illinois (sales); Denver, Colorado (sales); Pulallup, Washington (customer service); Irving, Texas (sales); Rockville, Maryland (sales); Costa Mesa, California (Sales); San Jose, California (Sales); Littleton, Colorado (Sales); St. Louis, Missouri (Sales); and Lisle, Illinois (training). Some of the Company's international subsidiaries also lease space for their operations, including a 56,000 square foot sales and production facility in County Clare, Ireland and additional space in Espoo, Finland and Oulu, Finland for administration and engineering, respectively. The Company owns substantially all the equipment used in its business. The Company believes that its facilities are adequate for the level of production anticipated in 1996, and that suitable additional space and equipment will be available to accommodate expansion as needed. ITEM 3. LEGAL PROCEEDINGS On October 13, 1995, Tellabs Operations, Inc., a wholly-owned subsidiary of the Company, was served with a complaint filed by DSC Technologies Corporation and DSC Communications Corporation (collectively, DSC) in The Circuit Court of Cook County, Illinois, alleging misappropriation of DSC's trade secrets. The complaint seeks a permanent injunction on the use, disclosure or dissemination of DSC's trade secret information, actual and exemplary damages, disgorgement of any unjust enrichment, a constructive trust for the benefit of DSC holding all profits generated by the alleged misappropriation of DSC's trade secrets and costs in connection with the complaint. Pursuant to the terms of the joint venture agreement between the Company and AFC, AFC is obligated to defend and indemnify the Company against any and all damages and costs, including attorney's fees, arising out of these claims. The Company has tendered the complaint to AFC pursuant to the joint venture agreement. The Company believes that it has meritorious defenses to the complaint and intends to pursue them vigorously. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 11 EXECUTIVE OFFICERS OF THE REGISTRANT NAMES AND BUSINESS EXPERIENCE YEAR OF CURRENT BIRTH POSITION Michael J. Birck 1938 President, Chief President, Chief Executive Officer Executive Officer and and Director since 1975. Director Peter A. Guglielmi 1942 President, Tellabs President, Tellabs International, International, Inc., Inc. and Director since 1993; Executive Vice President, Executive Vice President, Chief Chief Financial Officer, Financial Officer and Treasurer Treasurer and Director since 1990; Secretary 1988 to 1993. Tellabs, Inc., and Tellabs Operations, Inc. Brian J. Jackman 1941 President, Tellabs President, Tellabs Operations, Inc. Operations, Inc, and Director since 1993; Executive Executive Vice President Vice President, since 1990. and Director Charles C. Cooney 1941 Vice President, Sales and Vice President, Sales and Service, Service, Tellabs Operations, Tellabs Operations, Inc. since 1993; Inc. Vice President, Sales, 1979 to 1993. Carol Coghlan Gavin 1956 Vice President, General Vice President and General Counsel, Counsel and Secretary, Tellabs Operations, Inc. since Tellabs Operations, Inc., 1992; Secretary since 1993; Secretary Assistant Secretary 1989 to 1993; General Counsel, 1988 to 1992. Jon C. Grimes 1947 Vice President and General Vice President and General Manager, Manager, Network Access Network Access Systems Division, Systems Division, Tellabs Operations, Inc. since 1993; Tellabs Operations, Inc. Vice President and General Manager, Network Products Division 1989 to 1993. J. Thomas Gruenwald 1948 Vice President, Strategic Vice President, Strategic Resources, Resources, Tellabs Tellabs Operations, Inc. since 1995; Operations, Inc. Director, Engineering 1991 to 1995. J. Peter Johnson 1949 Vice President, Finance and Vice President, Finance and Treasury, Treasury, Assistant Secretary Assistant Secretary and Controller, and Controller, Tellabs, Inc., Tellabs Operations, Inc. since 1992; and Tellabs Operations, Inc. Vice President, Finance and Treasury, Assistant Secretary and Controller, 1990 to 1992. John C. Kohler 1952 Vice President, Manufacturing, Vice President, Manufacturing, Tellabs Tellabs Operations, Inc. Operations, Inc. since 1993; Vice President, Product Support Services, 1989 to 1993. 12 Harvey R. Scull 1949 Vice President, Advanced Vice President, Advanced Business Development, Tellabs Business Development, Tellabs Operations, Inc. Operations, Inc. since 1993; Director, New Business Development, 1989 to 1993. Richard T. Taylor 1948 Vice President and General Vice President and General Manager, Manager, Digital Systems Digital Systems Division, Tellabs Division, Tellabs Operations, Inc. since 1993; Director Operations, Inc. of Marketing and Product Development, Digital Systems Division, 1989 to 1993. Jeffrey J. Wake 1949 Vice President and General Vice President and General Manager, Europe, Middle East Manager, Europe, Middle East and Africa, Tellabs and Africa, Tellabs International, International, Inc. Inc. since 1993; Director of International Sales, 1992; Sales Director, Tellabs Pty. Ltd, 1990 to 1992. Nicholas J. Williams 1947 Vice President and General Vice President and General Manager, The Americas, Manager, The Americas, Tellabs Tellabs International, Inc. International, Inc. since 1993; Vice President and General Manager, Advanced Technology Products, AT&T Paradyne Corporation, 1992 to 1993; Vice President, North American Sales, AT&T Paradyne Corporation, 1989 to 1991. 13 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The sections entitled "Common Stock Market Data" on pages 5 and 42 of the Company's Annual Report to Stockholders for the year ended December 29, 1995 (the "Annual Report") are incorporated herein by reference. They are also included in Exhibit 13, as filed with the SEC. See discussion referred to in Item 7 below for dividend information. ITEM 6. SELECTED FINANCIAL DATA The section entitled "Five-Year Summary of Selected Financial Data" on page 4 of the Annual Report is incorporated herein by reference. It is also included in Exhibit 13, as filed with the SEC. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The section entitled "Management's Discussion and Analysis" on Pages 37 to 40 of the Annual Report is incorporated herein by reference. It is also included in Exhibit 13, as filed with the SEC. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Report of Independent Certified Public Accountants and the Consolidated Financial Statements and Notes thereto on pages 21 through 36 of the Annual Report are incorporated herein by reference. They are also included in Exhibit 13, as filed with the SEC. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 14 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required, except for information relating to the executive officers of the registrant which appears at the end of Part I above, is incorporated herein by reference to the section entitled "Election of Directors" in the registrant's Proxy Statement (the "Proxy Statement") dated March 21, 1996. ITEM 11. EXECUTIVE COMPENSATION The section entitled "Executive Compensation" in the Proxy Statement is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The section entitled "Security Ownership of Management and Certain Other Beneficial Owners" in the Proxy Statement is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The section entitled "Executive Compensation" in the Proxy Statement is incorporated herein by reference. 15 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. Financial Statements: The following Consolidated Financial Statements of Tellabs, Inc., and Subsidiaries, included in registrant's Annual Report to Stockholders for the year ended December 29, 1995, are incorporated by reference in Item 8: Report of Independent Certified Public Accountants Consolidated Balance Sheets: December 29, 1995 and December 30, 1994 Consolidated Statements of Earnings: Years ended December 29, 1995, December 30, 1994 and December 31, 1993 Consolidated Statements of Stockholders' Equity: Years ended December 29, 1995, December 30, 1994, and December 31, 1993 Consolidated Statements of Cash Flows: Years ended December 29, 1995, December 30, 1994 and December 31, 1993 Notes to Consolidated Financial Statements 2. Financial Statement Schedules: The following Consolidated Financial Statement Schedules of Tellabs, Inc., and Subsidiaries are included herein pursuant to Item 14(d): Report of Independent Certified Public Accountants on Schedule Schedule II Valuation and Qualifying Accounts and Reserves Schedules not included have been omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or Notes thereto. (b) The Registrant filed a report on Form 8-K on or about April 25, 1995, as disclosed in the second quarter 10-Q and another report on Form 8-K on or about March 15, 1996. (c) Exhibits: 3.1 Restated Certificate of Incorporation 5/ 3.2 Amended and Restated By-Laws, as amended 3/ 4. Upon request of the Securities and Exchange Commission, registrant hereby agrees to furnish to the Commission copies of instruments (not filed) defining the rights of holders of long-term debt of the Company. (This undertaking is in lieu of a separate exhibit.) 10.1 Tellabs, Inc. Deferred Compensation Plan, as amended and its related trust 10.2 1981 Incentive Stock Option Plan, as amended and restated 1/ 10.3 1984 Incentive Stock Option Plan, as amended and restated 1/ 10.4 1986 Non-Qualified Stock Option Plan, as amended and restated 1/ 16 Exhibits: (Continued) 10.5 1987 Stock Option Plan for Non-Employee Corporate Directors, as amended and restated 1/ 10.6 1989 Stock Option Plan, as amended and restated 1/ 10.7 Employee Quality Stock Award Program 2/ 10.8 Form of Employment Agreement 3/ 10.9 1991 Stock Option Plan, as amended and restated 1/ 10.10 Description of Split-Dollar Insurance Arrangement with the Michael J. Birck Irrevocable Trust 3/ 10.11 1994 Stock Option Plan 4/ 11. Computation of Per Share Earnings 13. Annual Report to Stockholders 20.1 Agreement of Merger Between Tiger Merger Co., and Steinbrecher Corporation dated as of March 11, 1996 21. Subsidiaries of the Registrant 23. Consent of Independent Certified Public Accountants 27. Financial Data Schedule Exhibits 10.1 through 10.11 are management contracts or compensatory plans or arrangements required to be filed as an Exhibit to this Form 10-K pursuant to Item 14(c) hereof. (d) Schedules: See Item 14(a)2 above. 1/ Incorporated by reference from Tellabs, Inc. Post-effective Amendment No. 1 on Form S-8 to Form S-4 filed on or about June 29, 1992 (File No. 33-45788). 2/ Incorporated by reference from Tellabs, Inc. Form 10-Q Quarterly Report for the quarter ended April 1, 1988 (File No. 0-9692). 3/ Incorporated by reference from Tellabs, Inc. Form 10-K Annual Report for the year ended January 1, 1993 (File No. 0-9692). 4/ Incorporated by reference from Tellabs, Inc. Form 10-K Annual Report for the year ended December 31, 1993 (File No. 0-9692). 5/ Incorporated by reference from Tellabs, Inc. Form 10-Q Quarterly Report for the quarter ended June 30, 1995 (File No. 0-9692). 17 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TELLABS, INC. March 20, 1996 By /s Michael J. Birck Date Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. SIGNATURE TITLE DATE /s Michael J. Birck President and Director March 20, 1996 (Principal Executive Officer) /s Peter A. Guglielmi Executive Vice President March 20, 1996 (Principal Financial Officer) and Director /s J. Peter Johnson Controller (Principal March 20, 1996 Accounting Officer) /s Brian J. Jackman Director March 20, 1996 /s John D. Foulkes Director March 20, 1996 /s Frederick A. Krehbiel Director March 20, 1996 /s Stephanie Pace Marshall Director March 20, 1996 /s Robert P. Reuss Director March 20, 1996 /s William F. Souders Director March 20, 1996 /s Thomas H. Thompson Director March 20, 1996 18 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE Board of Directors Tellabs, Inc. In connection with our audit of the consolidated financial statements of Tellabs, Inc., and Subsidiaries, referred to in our report dated January 17, 1996, which is included in the annual report to shareholders and incorporated by reference in Part II of this form, we have also audited Schedule II for each of the three years in the period ended December 29, 1995. In our opinion, this schedule presents fairly the information required to be set forth therein. Grant Thornton LLP Chicago, Illinois January 17, 1996 19
TELLABS, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES Three Years Ended December 29, 1995, December 30, 1994 and December 31, 1993 ($ in thousands) Additions Balance at charged to Balance beginning costs and Deduc- at end of year expenses tions (A) of year --------- --------- --------- ------- 1995 Allowance for doubtful receivables $992 $1,407 $82 $2,317 ====== ====== 1994 Allowance for doubtful receivables $844 $259 $111 $992 ====== ====== 1993 Allowance for doubtful receivables $1,498 $83 $737 $844 ====== ====== NOTE: (A) - Uncollectible accounts charged off, net of recoveries.
20 EX-10 2 EXHIBIT 10.1 TELLABS, INC. 401(k) Excess-Deferred Income Plan Tellabs, Inc. (the "Company") hereby establishes a non-qualified deferred compensation program for certain of its employees or employees of its subsidiaries who have adopted the Plan. For purposes hereof, "Company" shall also mean any subsidiary which has adopted the Plan and is the employer of the participant in question. The following shall constitute the terms and conditions of the 401(k) Excess-Deferred Income Plan (the "Plan"), effective April 1, 1992 (the "Effective Date"). I. Administration 1. Full power and authority to construe, interpret and administer the Plan shall be vested in the Tellabs, Inc. Employee Benefits Committee (the "Committee"). The Committee shall have the authority to make determinations provided for or permitted to be made under the Plan and to promulgate such rules and regulations, if any, as the Committee considers necessary and appropriate for the ongoing administration of the Plan. II. Eligibility and Participation 2. An employee of the Company shall be eligible to participate in the Plan on the January 1st following the date upon which he or she becomes: an officer or operating director in pay grade 26 or higher with nine months continuous Company service The Committee shall have the discretion to allow other selected management or highly-compensated employees to participate in the Plan, it being intended that this Plan be an unfunded plan of deferred compensation as described in Section 201(2) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). III. Deferred Compensation Elections 3. Each eligible employee may elect in writing to defer a maximum of 15% of his or her salary and incentive pay and/or a maximum of 25% of any bonus payable with respect to such year, subject to such limits as the Company may establish from year to year and to the following Plan provisions. 4. Elections to defer Compensation shall be irrevocable and shall be made prior to the first day of each calendar year. Deferrals shall relate only to compensation for services to be performed during such period, except that, employees becoming newly eligible may elect within sixty (60) days after eligibility for the Plan to defer compensation to be earned for services performed in the balance of the year remaining after the date the deferral election is made. Such newly eligible employees shall be deemed, for all other Plan purposes, to have made the deferral election on the immediately preceding December 31. 5. "Compensation" for purposes of this Plan means the annual gross salary, incentive pay, and bonuses payable to the participant, before reduction for taxes or pursuant to this or any other employee benefit plan. In the initial year of the Plan, "Compensation" shall be deemed to be gross salary and bonuses payable to the participant with respect to the portion of the year beginning on the effective date of the Plan and ending on December 31. IV. Earnings on Deferrals 6. The Company shall establish a Deferral "Account" in the name of each participant on the books and records of the Company. The Account shall carry the amount of the deferrals, as made, plus any earnings thereon, as a liability of the Company to the participant. 7. The Company shall annually credit the Account balance as of December 31 of each year with earnings applied and compounded annually for the entire deferral year at 12%. 8. If a participant becomes entitled to payments or benefits, as provided in Article V, prior to December 31, then crediting of earnings to the Account shall occur as of the date of such entitlement. 9. Amounts paid to the participants or beneficiaries pursuant to this Plan shall be deducted from the Account balance as of the first day of the month in which such payment is made. V. Payments and Benefits 10. Retirement Benefit: The benefit is a level, annual payment of the Account balance amortized at 12% for the duration of payments. Commencement of this the first day of the year following the latest of actual retirement, age 55, or five years of plan participation. The participant shall elect the number of payments (five minimum, 20 maximum), when the election to defer compensation is made. 11. Death Benefits: If the participant dies prior to the commencement of any other benefits set forth in paragraphs 10 through 13, the participant's beneficiary shall receive the Account balance in a lump sum in lieu of any other benefits hereunder. If a participant dies after commencement of any such benefits, any amounts unpaid pursuant to paragraphs 10 through 13 of Section V shall be continued to the beneficiary. Payment shall be made within thirty (30) days of a Committee determination that a payment is due and on each subsequent anniversary thereof, if applicable. 12. Disability Benefits: At the time the deferral election is made, each participant shall elect whether, if he or she becomes disabled under the Long Term Disability Program of Tellabs, Inc., the Account balance shall be paid as a Retirement Benefit pursuant to paragraph 10, or a Termination Benefit, pursuant to paragraph 13. Payment shall be made within thirty (30) days of a Committee determination that a payment is due and on each subsequent anniversary thereof, if applicable. 13. Termination Benefit: Upon termination of employment for reasons other than death, retirement or, if applicable, disability, the Company shall pay the terminated participant his or her Account balance. Payment shall be made within thirty (30) days of a Committee determination that a payment is due and on each subsequent anniversary thereof, if applicable. 14. Payment of the Termination Benefit shall be in a lump sum, except for those participants who terminate within the first three (3) years of Plan participation, in which event payment shall occur over a three (3) year period in equal annual amounts, amortized at the rate applicable in paragraph 7. 15. Interim Distributions: When the election to defer compensation is made, the participant may also elect to receive one (1) lump sum Interim Distribution from the Deferral Account balance. Such distribution shall equal the amount of the Compensation deferred. Interim Distributions may be elected to be paid the first day of any specified year following the seventh year after the deferral. 16. Hardship Distributions: The Committee has the authority to make or accelerate distributions on account of hardship. Participants must petition the Committee in writing for such distributions, which may be granted, in the sole discretion of the Committee upon its determination that failure to make such distribution would create or continue, urgent and severe financial hardship for the participant. The amount of the distribution shall not exceed an amount reasonably necessary to eliminate the hardship. VI. Beneficiary Designation 17. Each participant shall designate in writing a legal or natural person or persons as beneficiary to whom benefits hereunder are to be paid, if the participant dies before receiving his or her entire Account ("Beneficiary"). The beneficiary designation may be changed by the participant from time to time by written election delivered to the Committee. 18. If a participant fails to designate a Beneficiary as provided above, or if all designated Beneficiaries of a participant die before the participant, or before complete payment of all amounts due hereunder, the Committee, in its discretion, may direct the Company to pay the unpaid amounts to one or more of such participant's relatives by blood, adoption or marriage in any manner permitted by law which the Committee considers to be appropriate, including but not limited to payment to the legal representative or representatives of the estate of the last to die of participant and participant's designated Beneficiaries. VII. Incapacity of Participant 19. If, in the Committee's opinion, a participant or other person then entitled to payment of benefits under the Plan is under a legal disability or is in any way incapacitated so as to be unable to manage his or her financial affairs, then the Committee may (but shall have no obligation), until claim is made by a conservator or other person legally charged with the care of his or her person or of his or her estate, direct the Company to make payment to a relative or friend of such person for his or her benefit. Thereafter, any benefits under the Plan to which such participant or other person is entitled shall be paid to such conservator or other person legally charged with the care of his or her person or his estate. VIII. Rights of Participants. 20. Compensation deferred shall be part of the general assets of the Company. The Company shall not be required to segregate, set aside or escrow the compensation deferred, nor earnings credited thereon. With respect to benefits payable under this Plan, the participants shall have the status of general creditors of the Company; participants may look only to the Company and its general assets for payment of the Account. 21. In its sole discretion, the Company may acquire insurance policies or other financial vehicles for the purpose of providing future Company assets to meet its anticipated liabilities under this Plan. Such policies or other investments, shall at all times be and remain unrestricted general property and assets of the Company. Plan participants shall likewise have no rights, other than as general creditors, with respect to such policies or other acquired assets. IX. Deferred Compensation Trust 22. Notwithstanding any other provision or interpretation of this Plan, the Company may establish a trust in which to hold cash, insurance policies or other assets to be used to make or reimburse the Company for payments to the participants of the benefits under this Plan, provided, however, that the trust assets shall at all times remain subject to the claims of general creditors of the Company in the event of the Company's insolvency. 23. If a trust permitted by this Section is established, the participants shall be notified and a copy of the trust document made available to them on request. 24. The Company and not the trust shall be liable for paying the benefits set forth in Section V. However, after its payment of benefits pursuant to this Plan, the Company may be reimbursed by the trust for the after-tax cost of the benefit payment, upon proof of payment and request for reimbursement. 25. Any payment of benefits made by the trust shall satisfy the Company's obligation to make such payment to the affected participant. X. Effect on Other Benefits 26. Except as otherwise required by applicable law, the compensation deferred by a participant shall be included in the participant's annual compensation for purposes of calculating the participant's bonuses and awards, insurance, and other employee benefits, except that in accordance with the terms of any plan qualified under Section 401 of the Internal Revenue Code of 1986 maintained by the Company, the amount deferred under Section III shall not be included as calendar year compensation in calculating the participant's benefits or contributions by or on behalf of the participant under such plan or plans. Benefits under the Plan shall be excluded from compensation in years paid for purposes of calculating a participant's bonuses and awards, insurance, and other employee benefits. XI. Claims Procedure 27. Any claim by a participant or his Beneficiary (hereinafter "Claimant") for benefits shall be submitted to the Committee. The Committee shall be responsible for deciding whether such claim is within the scope provided by the Plan (a "Covered Claim") or is otherwise subject to payment pursuant to the terms of any plan, and for providing full and fair review of the decision on such claim. In addition, the Committee shall provide a full and fair review in accordance with ERISA, including without limitatio Section 503 thereof. Each Claimant or other interested person shall file with the Committee such pertinent information as the Committee may specify, and in such manner and form as the Committee may specify and provide, and such person shall not have any rights or be entitled to any benefits or further benefits hereunder, as the case may be, unless such information is filed by the Claimant or on behalf of the Claimant. Each Claimant shall supply at such times and in such manner as may be required, written proof that the benefit is covered under the Plan. If it is determined that a Claimant has not incurred a Covered Claim or if the Claimant shall fail to furnish such proof as is requested, no benefits or no further benefits hereunder, as the case may be, shall be payable to such Claimant. Notice of a decision by the Committee with respect to a Claim shall be furnished to the Claimant within ninety (90) days following the receipt of the claim by the Committee (or within ninety (90) days following the expiration of the initial ninety (90) day period, in a case where there are special circumstances requiring extension of time for processing the claim). If special circumstances require an extension of time for processing the claim, written notice of the extension shall be furnished by the Committee to the Claimant prior to the expiration of the initial ninety (90) day period. The notice of extension shall indicate the special circumstances requiring the extension and the date by which the notice of decisions with respect to the claim shall be furnished. Commencement of benefit payments shall constitute notice of approval of a claim to the extent of the amount of the approved benefit. If such claim shall be wholly or partially denied, such notice shall be in writing and worded in a manner calculated to be understood by the claimant, and shall set forth: (i) the specific reason or reasons for the denial; (ii) specific reference to pertinent provisions of the Plan on which the denial is based; (iii) 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 (iv) an explanation of the Plan's claims review procedure. If the Committee fails to notify the Claimant of the dec regarding his claim in accordance with these "Claims Procedure" provisions, the claim shall be deemed denied and the Claimant shall then be permitted to proceed with the claims review procedure provided herein. Within sixty (60) days following receipt by the Claimant of notice of the claim denial, or within sixty (60) days following the close of the ninety (90) day period referred to herein, or if the Committee fails to notify the Claimant of the decision within such ninety (90) day period, the Claimant may appeal denial of the claim by filing a written application for review with the Committee. Following such request for review, the Committee shall fully and fairly review the decision denying the claim. Prior to the decision of the Committee, the Claimant shall be given an opportunity to review pertinent documents and to submit issues and comments to the Committee in writing. The decision of the Committee shall be made within sixty (60) days following receipt by the Committee of the request for review (or within one hundred and twenty (120) days after such receipt, in a case where there are special circumstances requiring extension of time for reviewing such denied claim). The Committee shall deliver its decision to the Claimant in writing. If the decision on review is not furnished within the prescribed time, the claim shall be deemed denied on review. For all purposes under the Plan, the decision with respect to a claim if no review is requested and the decision with respect to a claim if review is requested shall be final, binding and conclusive on all interested parties as to matters relating to the Plan. XII. Miscellaneous Provisions 28. Non-Alienation: Neither a participant nor anyone claiming through him or her shall have any right to commute, sell, assign, transfer or otherwise convey the right to receive any payments hereunder, which payments and the rights thereto hereby are expressly declared to be non-assignable and non-transferable, nor shall any such right to receive payments hereunder be subject to the claims of creditors of a participant or anyone claiming through him or her or to any legal, equitable, or other proceeding or process for the enforcement of such claims. 29. Tax Withholding: Notwithstanding the provisions of Section IX, the Company may withhold from any payment made by it under the Plan such amount or amounts as may be required for purposes of complying with the tax withholding or other provisions of the Internal Revenue Code of 1986 or the Social Security Act or any state income or employment tax act or for purposes of paying any estate, inheritance or other tax attributable to any amounts payable hereunder. 30. Non-Secured Promise: The rights under this Plan of a participant and any person or entity claiming through him shall be solely those of an unsecured, general creditor of the Company. Any insurance policy or other asset acquired or held by the Company shall not be deemed to be held by the Company for or on behalf of a participant, or any other person, or to be security for the performance of any obligations hereunder of the Company, but shall, with respect to this Plan, be a general, unpledged, unresticted asset of the Company. No assets held by any trust established under Section IX shall constitute security for the performance of any obligations hereunder. 31. Independence of Plan: Except as otherwise expressly provided herein, this Plan shall be independent of, and in addition to, any other employment agreement or employment benefit agreement or plan or rights that may exist from time to time between the parties hereto. This Plan shall not be deemed to constitute a contract of employment between the Company and a participant, nor shall any provision hereof restrict the right of the Company to discharge a participant, or restrict the right of a participant to terminate his employment with the Company. 32. Paragraph Headings: The Paragraph headings used in this Plan are for convenience of reference only and shall not be considered in construing this Plan. 33. Responsibility for Legal Effect: Neither the Committee nor the Company makes any representations or warranties, express or implied, or assumes any responsibility concerning the legal, tax, or other implications or effects of this Plan. 34. Committee Determinations Final: Each determination provided for in the Plan shall be made in the absolute discretion of the Committee. Any such determination shall be binding on all persons. 35. Amendment: The Company may in its sole discretion amend the Plan from time to time. No such amendment shall adversely affect the rights of any participant or beneficiary with respect to benefits under the Plan related to amounts previously deferred. 36. Extension to Subsequent Periods: This Plan applies only to the year 1993. Nevertheless, by amendment attached hereto, the Company may adopt the provisions of this Plan in their entirety for any one or more subsequent years, in which case reference herein to 1993 or other specific dates shall be accordingly adjusted. In such event, however, all of the provisions of this Plan for each year shall be interpreted and applied as if there were a separate and independent plan for each such year. 37. Termination at the Company's Option: Notwithstanding any other provision of this Plan, the Company may terminate this Plan at any time if the Committee, in its sole and absolute discretion, determines that any change in federal or state law, or judicial or administrative interpretation thereof, has materially affected the Company's cost of providing the benefits otherwise payable under this Plan, or for any other reason whatsoever. Except with the consent of a participant, no such termination shall adversely affect the rights of any participant or beneficiary with respect to benefits under the Plan related to amounts previously deferred. 38. Notwithstanding paragraph 37, payment of benefits accrued under the Plan shall not be accelerated as a result of a Plan termination but shall continue to be paid in the normal forms provided for in the Plan, unless the Committee, in its sole discretion, elects to pay the Account balance in a lump sum at the time of termination of the Plan. 39. Successors, Acquisitions, Mergers, Consolidations: The terms and conditions of this Plan and each Deferral Election shall inure to the benefit of and bind the Company, the participants, their successors, assigns, and personal representatives. 40. Controlling Law and Venue: The Plan shall be construed in accordance with the laws of the State of Illinois to the extent not preempted by laws of the United States of America. Venue shall lie in Du Page County, Illinois. Signed this 1st day of April, 1992, with the approval and authorization of the Board of Directors. Tellabs Operations, Inc. By: Peter A. Guglielmi Title: Executive Vice President, Chief Financial Officer 401(k) Excess-Deferred Income Plan Amendment Pursuant to Article XII, Paragraph 35 of the Tellabs, Inc. 401(k) Excess- Deferred Income Plan dated April 1, 1992, the Plan is hereby amended (the new language has been highlighted) as follows: Introductory paragraph: The name of the Plan is changed from "the 401(k) Excess-Deferred Income Plan" to "THE TELLABS, INC. DEFERRED INCOME PLAN." Article II, Paragraph 2: Paragraph 2 is changed to read as follows: "An employee of the Company shall be eligible to participate in the Plan on the January 1st following the date upon which he or she becomes: - an officer or operating director - in pay grade 26 or higher - with nine months continuous Company service FOR PURPOSES OF THIS PLAN, SUCH EMPLOYEES SHALL BE REFERRED TO AS 'ELIGIBLE EMPLOYEES' AND ELIGIBLE EMPLOYEES PARTICIPATING IN THE PLAN SHALL BE REFERRED TO AS 'PARTICIPANTS.' The Committee shall have the discretion to allow other selected management or highly- compensated employees to participate in the Plan, it being intended that this Plan be an unfunded plan of deferred compensation as described in Section 201(2) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")." Article III, Paragraph 3: Paragraph 3 is changed to read as follows: "Each eligible employee may elect in writing to defer a maximum of 15% of his or her salary and incentive pay and/or A MAXIMUM OF 25% OF PAYMENT TO BE RECEIVED FROM STOCK APPRECIATION RIGHTS AND/OR a maxmim of: (I) IN THE CASE OF ANY ELIGIBLE EMPLOYEE WITH GRADE LEVEL 29 OR HIGHER, 100% OF ANY BONUS PAYABLE IN 1995 WITH RESPECT TO 1994 WHICH SUCH EMPLOYEE ELECTED TO DEFER IN 1994; (II) IN THE CASE OF ANY ELIGIBLE EMPLOYEE WITH GRADE LEVEL 27 OR HIGHER, 100% OF ANY BONUS PAYABLE IN 1996 WITH RESPECT TO 1995 WHICH SUCH EMPLOYEE ELECTED TO DEFER IN 1995 AND 100% OF ANY BONUS PAYABLE WITH RESPECT TO 1996 OR ANY YEAR THEREAFTER; AND (III) IN THE CASE OF ALL OTHER ELIGIBLE EMPLOYEES, 25% OF ANY BONUS PAYABLE with respect to such year, subject to such limits as the Company may establish from year to year and to the following Plan provisions. ANY OF THE PROVISIONS HEREOF WITH RESPECT TO 1996 AND SUBSEQUENT YEARS ARE EXPRESSLY SUBJECT TO THE CONDITION THAT THE COMPANY ADOPT THIS PLAN DURING SUCH YEAR, AS PROVIDED IN ARTICLE XII, PARAGRAPH 36." Article III, Paragraph 4: Paragraph 4 is changed to read as follows: "Elections to defer Compensation shall be irrevocable and shall be made prior to the first day of each calendar year. Deferrals shall relate only to compensation for services to be performed during such period, EXCEPT AS PROVIDED IN PARAGRAPH 3 ABOVE, AND except that, employees becoming newly eligible may elect within sixty (60) days after eligibility for the Plan to defer compensation to be earned for services performed in the balance of the year remaining after the date the deferral election is made. Such newly eligible employees shall be deemed, for all other Plan purposes, to have made the deferral election on the immediately preceding December 31." Article IV is re-titled "Earnings" and Article IV, Paragraph 6: Paragraph 6 is changed to read as follows: "The Company shall establish an "Account" in the name of each participant on the books and records of the Company. The Account shall carry the amount of the deferrals, as made, plus ANY CONTRIBUTIONS MADE PURSUANT TO ARTICLE XIII, PARAGRAPHS 41 AND 42, PLUS any earnings thereon, as a liability of the Company to the participant." Article IV, Paragraph 7: Paragraph 7 is amended by adding the following sentence at the end of the paragraph: "THE COMPANY RESERVES THE RIGHT TO ADJUST THE ANNUAL CREDITING RATE REFERRED TO HEREIN FROM TIME TO TIME IN THE COMPANY'S DISCRETION AND IN ACCORDANCE WITH PARAGRAPH 35 OF THE PLAN." Article V, Paragraph 14: Paragraph 14 is changed to read as follows: "PAYMENT OF THE TERMINATION BENEFIT SHALL BE IN A LUMP SUM." Article XII, Paragraph 36: Paragraph 36 is amended by adding the following sentence at the end of the paragraph: "THE COMPANY HEREBY RATIFIES AND CONFIRMS THAT THE PLAN WAS DULY ADOPTED FOR YEARS 1993, 1994 AND 1995." Article XIII, Paragraphs 41 and 42: A new Article XIII "Additional Contributions" shall be added. Paragraphs 41 and 42 shall be added to Article XIII to read as follows: "41. BENEFITS IN EXCESS OF APPLICABLE TAX LAW LIMITATIONS: SECTION 401(A)(17) OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED FROM TIME TO TIME, LIMITS THE CONTRIBUTIONS ("EXCESS BENEFIT LIMITATION") THE COMPANY MAY MAKE TO THE TELLABS ADVANTAGE PROGRAM, AS AMENDED AND RESTATED AS OF JANUARY 2, 1995 (THE "ADVANTAGE PROGRAM"). THE COMPANY SHALL CONTRIBUTE AMOUNTS TO THE PLAN FOR THE BENEFIT OF THOSE PARTICIPANTS TO WHICH THE EXCESS BENEFIT LIMITATION APPLIES ("RESTORATION CONTRIBUTIONS"). THE RESTORATION CONTRIBUTION FOR EACH QUALIFYING PARTICIPANT SHALL EQUAL, DURING EACH YEAR, THE DIFFERENCE BETWEEN THE AMOUNT CONTRIBUTED ON BEHALF OF SUCH PARTICIPANT UNDER THE ADVANTAGE PROGRAM AND THE AMOUNT THAT WOULD HAVE BEEN CONTRIBUTED UNDER THE ADVANTAGE PROGRAM WITHOUT REGARD TO THE EXCESS BENEFIT LIMITATION. RESTORATION CONTRIBUTIONS SHALL BE MADE FOR EACH QUALIFYING PARTICIPANT IN SUBSEQUENT YEARS SUBJECT TO THE CONDITION THAT THE COMPANY ADOPT THIS PLAN DURING SUCH YEAR, AS PROVIDED IN ARTICLE XII, PARAGRAPH 36. 42. THE COMPANY HAS DETERMINED TO MAKE A ONE-TIME CONTRIBUTION TO CERTAIN PARTICIPANTS EFFECTIVE AS OF JANUARY 1, 1994. THE PARTICIPANTS AND THE CONTRIBUTIONS SUCH PARTICIPANTS SHALL RECEIVE ARE AS FOLLOWS: WILLIAM BARTHOLOMEW $ 916 MICHAEL BIRCK $13,047 JON GRIMES $ 1,322 PETER GUGLIELMI $ 5,886 LARRY HENDERSON $ 712 BRIAN JACKMAN $ 7,425 MICHAEL JOHNSON-FOGG $ 402 JAMES MELSA $ 2,153 CRAIG SPEAK $ 8,776." Effective as of January 1, 1995 and signed this 25th day of April 1995, with the approval and authorization of the Board of Directors. Tellabs, Inc. By: s\ Peter A. Guglielmi ------------------------ Peter A. Guglielmi Title: Executive Vice President and Chief Financial Officer TRUST DOCUMENT INDEX Section 1. The Trust Section 2. Contributions Section 3. Investment of Trust Assets Section 4. Accounting by the Trustee Section 5. Distribution and Payment of Trust Assets Section 6. Responsibilities of Parties in Event of Insolvency Section 7. Responsibility of Trustee Section 8. Compensation and Expenses of Trustee Section 9. Resignation and Replacement of Trustee Section 10. Amendment or Termination Section 11. Communication Section 12. Severability and Alienation Section 13. Governing Law Section 14. Miscellaneous TRUST DOCUMENT This Trust Agreement made as of this 31st day of January, 1995, by and between Tellabs Operations, Inc., a Delaware corporation (the "Company"), and Harris Trust and Savings Bank (the "Trustee"). This Trust Agreement provides for the establishment of a trust to be known as the Tellabs, Inc. Deferred Income Plan Trust (hereinafter called the "Trust") to hold funds for certain payments required to be made by the Company to certain of its key employees (the "Participants") pursuant to the Tellabs, Inc. Deferred Income Plan (the "Plan"). WITNESSETH: WHEREAS, the Company expects to become obligated under the Plan to make payments to the Participants and their beneficiaries, and WHEREAS, the Company wishes to establish the Trust to hold certain Company assets, subject to the claims of the Company's creditors in the event the Company is Insolvent (as defined in Section 6 hereof) until the Participants and their beneficiaries have received all of their benefits pursuant to the Plan. NOW THEREFORE, in consideration of the mutual undertakings of the parties and other good and valuable consideration, the parties do hereby establish the Trust and agree that the Trust shall be comprised, held and disposed of as follows: Section 1. The Trust - --------------------- (a) The Company hereby establishes the Trust with the Trustee for the benefit of Plan Participants, to the extent set forth herein. (b) The Trustee accepts the Trust established under this Trust Agreement on the terms and subject to the provisions set forth herein. (c) This Trust is intended to be a grantor trust, within the meaning of Section 671 of the Internal Revenue Code of 1986, as amended (the "Code"), and shall be construed accordingly. (d) The purpose of the Trust is to help ensure that the Company's obligation to make benefit payments pursuant to the Plan will be fulfilled to each of the Participants and their beneficiaries. The Trust is not designed or intended to qualify under Section 401(a) of the Code. (e) The principal of the Trust, and any earnings thereon (such principal, together with any earnings thereon and other increases thereof, reduced by any losses and distributions from the Trust and any other reductions thereof, is sometimes referred to herein as the "Trust Assets"), shall be held separate and apart from other funds of the Company for the purposes herein set forth. However, the Participants and their beneficiaries shall not have any preferred claim on, or any beneficial ownership interest in, any of the Trust Assets prior to the time such Trust Assets are paid to the Participants and their beneficiaries pursuant to the terms of this Trust Agreement, and all rights created under the Plan and this Trust Agreement shall be mere unsecured contractual rights of the Participants and their beneficiaries against the Company. (f) Notwithstanding the foregoing paragraph (e) or any other provisions of this Trust Agreement, the Trust Assets shall remain subject to the claims of the Company's general creditors in the event the Company is Insolvent (as defined in Section 6 hereof). Section 2. Contributions - ------------------------- (a) Upon execution of this Trust Agreement by both parties, the Company shall make an initial contribution of one hundred dollars ($100.00) to the Trust. The Trustee shall invest the initial contribution in accordance with Section 3 hereof. (b) The Company shall contribute to the Trust not later than ninety (90) days after the last day of each calendar year, the amount, if any, necessary so that the balance of the assets in the Trust is then equal to the amount of all benefits credited under the Plan to the Accounts (as such term is defined in the Plan and as here- inafter referred to the "Accounts") of the Participants as of such last day of the calendar year. The Company, in its sole discretion, may at any time, or from time to time, make additional contributions of cash or other property in trust with the Trustee to augment the principal to be held, administered and disposed of by the Trustee as provided in this Trust Agreement. Neither the Trustee nor any Participant or beneficiary shall have any right to compel such additional contributions. At the time of each contribution, the Company shall certify to the Trustee the amount of the contribution being made with respect to the Accounts of each Participant and the Trustee shall allocate the amounts accordingly. (c) The Company shall also contribute such amounts to the Trust as may be required pursuant to Sections 8 and 14 (b) hereof within ten (10) days of receiving written notice from the Trustee of payments by the Trustee from the Trust pursuant to Sections 8 and 14 (b). (d) Upon a Change of Control (as defined in Section 14 hereof), the Company shall, as soon as possible, but in no event longer than sixty (60) days following such Change of Control make an irrevocable contribution to the Trust in an amount that is sufficient to pay each Participant or beneficiary the benefits to which Participants or their beneficiaries would be entitled pursuant to the terms of the Plan as of the date on which the Change of Control occurred. Section 3. Investment of Trust Assets - -------------------------------------- (a) The Tellabs, Inc. Employee Benefits Committee (the "Committee") shall have the right and power to direct the Trustee with respect to investment of the Trust Assets. It is anticipated that the Trust Assets will be invested to the maximum extent possible in life insurance policies to be specifically named by the Committee. All such policies shall name the Trustee as owner and beneficiary. (b) In the event that the Committee shall fail to provide the investment direction specified in paragraph (a), the Trustee shall invest and reinvest the principal and income of the Trust in accordance with the Tellabs, Inc. Investment Policy, as amended from time to time (the Tellabs, Inc. Investment Policy effective July 20, 1988 is attached hereto as Exhibit A). (c) Notwithstanding the discretion provided to the Committee and the Trustee, under no circumstances shall Trust Assets be invested in "employer securities," as such term is defined in Section 407 of the Employee Retirement Security Act of 1974, as amended other than a de minimus amount held in common investment vehicles in which the Trust Assets are invested. Section 4. Accounting by the Trustee - ------------------------------------- (a) The Trustee shall keep accurate and detailed records of all investments, receipts, disbursements, and all other transactions required to be done, including amounts contributed or credited with respect to each Participant's Account and disbursements charged thereto and such other specific records as shall be agreed upon in writing between the Company and the Trustee. Within sixty (60) days following the close of each calendar year and within sixty (60) days after removal or resignation of the Trustee, the Trustee shall deliver to the Company a written account of its administration of the Trust during such year or during the period from the close of the last preceding year to the date of such removal or resignation, setting forth all investments, receipts, disbursements and other transactions effected by it, including a description of all securities and investments purchased and sold with the cost or net proceeds of such purchases or sales (accrued interest paid or receivable being shown separately), showing all cash, securities and other property held in the Trust at the end of such year or as of the date of such removal or resignation, as the case may be, and the book and fair market value of any such asset. (b) The Company shall furnish the Trustee with copies of the Plan and any and all amendments thereto. The Company will promptly provide the Trustee with any and all information the Trustee reasonably requests or the Company believes would be useful in order to enable the Trustee to determine at any time and from time to time the amount of any payment which would be due to a Participant or a Participant's beneficiary. (c) The Trustee shall notify the Company of any payment made from the Trust to a Participant or a Participant's beneficiary pursuant to the terms of the Plan, and the Company shall notify the Trustee of any other payment pursuant to the terms of the Plan. (d) All accounts, books and records maintained pursuant to this Section 4 shall be opened to inspection and audit at all reasonable times by the Company and on an annual basis, after receipt of the written account described in the next sentence, by the Participants; provided, however, that no Participant shall have access to information about another Participant's Account other than in the normal course of performing his duties as an employee of the Company. (e) Within ninety (90) days of the end of each calendar year, the Company shall provide the Trustee with a current list of Participants, the amount which each Participant has deferred for the preceding year of Plan participation, the amount of earnings for the calendar year on the Participant's deferrals, the balance of each Participant's accounts and copies of any participation or election forms completed by a Participant during the preceding year. Section 5. Distribution and Payment of Trust Assets - ---------------------------------------------------- (a) The Trustee shall make payments to the Participants (and his/her beneficiaries) and the Company in accordance with the provisions of this Trust, provided that the Company is not Insolvent (as defined in Section 6 hereof) at the time any such payment is required to be made. Prior to making any payments to the Participants (or his/her beneficiaries), the Trustee shall receive from the Company a schedule that indicates the amounts payable to each Participant (and his/her beneficiaries) that provides a formula or other instructions for determining the Plan benefits payable and the time of commencement for Plan benefit payments. Except as otherwise provided herein, the Trustee shall make Plan benefit payments in accordance with such schedule. (b) Payment of the benefits promised in the Plan shall be and remain the primary obligation and liability of the Company. Plan benefit payments shall be made from the Trust only upon occurrence of the events specified hereafter. (c) If the Company should fail or refuse to make any scheduled Plan benefit payment when due pursuant to the Plan, then, upon notification of and verification by the Trustee of the fact of non-payment, the Trustee is hereby authorized and directed to make scheduled and unpaid benefit payments directly from the Trust to Participants who shall request such payment in writing. (d) Prior to any payment or series of payments which the Trustee intends to make pursuant to paragraph (c) of this Section 5, the Trustee shall notify the Company of its intention, and the Company shall have until the later of thirty (30) days from the date of default or ten (10) days from the date of the Trustee's notice to cure its default and make payment consistent with its obligations under the Plan. (e) The Trustee shall require reasonable verification as to the amount and fact of non-payment by the Company. (f) After making any Plan benefit payment to Participants or their beneficiaries pursuant to the Plan, the Company shall have the right upon written request to receive payment from the Trust of amounts equal to the after-tax cost of the Plan benefit payments, provided that such amount does not exceed the amount of Trust Assets then credited to the Participant's Account. (g) After all Plan benefit payments to Participants and their beneficiaries have been made, the Trustee is authorized to pay the remainder of the Trust Assets to the Company subject to Section 10 (b), upon written request for such payment by the Company. Further, if Trust Assets should at any time exceed 125% of the amount necessary so that the balance of the assets in the Trust is then equal to the amount of all benefits credited under the Plan to the Accounts of the Participants as of each calendar year, then the Company may upon request received by the Trustee not later than ninety (90) days after the last day of each calendar year receive payment of such excess Trust Assets for amounts equal to any net corporate outlay it has incurred with respect to the Plan and the Trust. (h) Subject to the terms of Section 3 (a), the Trustee shall manage the Trust Assets in the manner which shall maximize the financial return for the Trust and best ensure that the Participants and their beneficiaries receive the benefits promised under the Plan. This management of Trust Assets for the benefit of the Participants and their beneficiaries shall include the right to surrender all or a portion of any insurance policies owned by the Trust, if, in the opinion of the Trustee, the tax due by the Company upon such surrender would cause the Company to resume benefit payments which it has failed or refused to make for reasons other than Insolvency (as defined in Section 6 hereof). (i) Following any notice of non-payment of benefits by the Company, the Trustee shall determine whether the Trust has sufficient assets to make all scheduled Plan benefit payments at the applicable crediting rate provided in the Plan. If it appears to the Trustee that there will not be sufficient assets to make the scheduled Plan benefit payments at the promised crediting rates, the Trustee may reduce the amount to be paid to Participants and their beneficiaries by the Trust to such amount which is anticipated to provide all Participants and their beneficiaries with a proportional share of Trust Assets relative to their Account balances, but, for any Participant (or his/her beneficiary), to the extent possible, an amount which shall in no event be less than the amount of his or her deferrals. (j) Anything in this Trust Agreement to the contrary notwithstanding, all payments pursuant to this Section 5 or Section 14 (a) may be made without the approval or direction of the Company and shall be made despite any direction to the contrary by the Company. Section 6. Responsibilities of Parties in Event of Insolvency - -------------------------------------------------------------- (a) The Company shall be considered "Insolvent" for purposes of this Trust Agreement if (i) the Company is unable to pay its debts as they mature, or (ii) the Company is subject to a pending proceeding as a debtor under the United States Bankruptcy Code or any similar law of any state. (b) At all times during the continuance of this Trust, the principal and income of the Trust shall be subject to the claims of general creditors of the Company as hereinafter set forth, and at any time the Trustee has actual knowledge or has determined that the Company is Insolvent, the Trustee shall deliver any undistributed Trust Assets to satisfy such claims as a court of competent jurisdiction may direct. (c) The Board of Directors and the chief executive officer of the Company shall have the duty, promptly and in writing, to inform the Trustee of the Company's Insolvency upon their knowledge of such Insolvency. (d) In the event that the Trustee has actual knowledge or is informed of Insolvency pursuant to Section 6 (c), the Trustee shall suspend payments to Participants and their beneficiaries and reimbursement to the Company and will hold the assets of the Trust for the benefit of general creditors of the Company. In addition, if the Trustee receives other written allegation of Insolvency that the Trustee in good faith believes is reliable, the Trustee shall suspend payments to Participants and their beneficiaries, shall hold the assets of the Trust for the benefit of such general creditors, and shall take such steps as it determines in its sole discretion to be reasonably necessary to determine within thirty (30) days whether Insolvency has occurred. Upon a determination that the Company is not Insolvent, whether or not the Company was previously Insolvent, the Trustee shall resume payments, including any benefits previously suspended and not otherwise paid. In carrying out its obligations under this Section 6 (d), the Trustee shall rely on good faith written notice provided by the Company stating whether or not the Company is Insolvent or has ceased to be Insolvent (where there has been no entry of a court order concerning the disposition of the Trust Assets). In the case of the Trustee's actual knowledge of or determination of Insolvency, the Trustee will deliver Trust Assets as directed by a court of competent jurisdiction to satisfy claims of the Company's general creditors. For purposes of this Trust Agreement, the Trustee shall be considered to possess any knowledge and information concerning the Company that is in the possession of any department of the Trustee and which can reasonably be imputed to the Trustee under procedures generally prevailing in the banking industry as then in effect. Nothing in this Trust Agreement shall in any way diminish any rights of a Participant (or his/her beneficiary) to pursue his rights as a general creditor of the Company with respect to the Plan or otherwise. (e) If the Trustee discontinues payments from the Trust to any Participant or his/her beneficiary pursuant to Section 6 (d) and subsequently resumes such payments, provided that there are sufficient assets, the first payment following such discontinuance shall, subject to Sections 5 (a) and 5 (b) hereof, include the aggregate amount of all payments which would have been made to the Participant or his/her beneficiary, together with interest at a rate equal to the higher of (i) the rate determined pursuant to Section 1274 of the Internal Revenue Code, on the amount delayed and (ii) 8% during the period of such discontinuance, less the aggregate amount of payments made to each such Participant or beneficiary by the Company in lieu of the payments provided for hereunder during any such period of discontinuance. Section 7. Responsibility of Trustee - ------------------------------------- (a) The Trustee shall act with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims; provided, however, that the Trustee shall incur no liability to anyone for any action taken pursuant to a direction, request, or approval given by the Company or any Participant contemplated by and complying with the terms of this Trust Agreement except to the extent that this paragraph is inconsistent with Section 5 (j). (b) The Trustee may consult with legal counsel (who may also be counsel for the Trustee generally) with respect to any of its duties or obligations hereunder, and shall be fully protected in acting or refraining from acting in accordance with the advice of such counsel. (c) Subject to Sections 3 (a) and 5 (h) above, the Trustee is authorized and empowered to (i) purchase, hold, sell, invest and reinvest the Trust Assets, together with income therefrom; (ii) hold, manage and control all property at any time forming part of the Trust Assets, including the right to borrow or withdraw cash values from insurance policies; (iii) sell, convey, transfer, exchange, surrender and otherwise dispose of the Trust Assets from time to time in such manner, for such consideration and upon such terms and conditions as it shall determine; (iv) make payments from the Trust as provided hereunder; and (v) exercise all the further rights, powers, options and privileges granted, provided for or vested in trustees generally under applicable Federal or State of Illinois law, as amended from time to time (other than any power to lend funds to the Company), it being intended that, except as herein otherwise provided, the powers conferred upon the Trustee herein shall not be construed as being in limitation of any authority conferred by law, but shall be construed as in addition thereto. (d) The Trustee in any and all events is authorized and empowered to do all other acts necessary or desirable for the proper administration of the Trust Assets, as though the absolute owner thereof, including, but not limited to, authorization and power to: (i) cause any property of the Trust to be issued, held or registered in the individual name of the Trustee, or in the name of its nominee, or in such form that title will pass by delivery, provided, the records of the Trustee shall indicate the true ownership of such property; (ii) employ such agents and counsel as may be reasonably necessary in managing and protecting the Trust Assets and to pay them reasonable compensation; and (iii) undertake or defend any litigation arising in connection with the Trust Agreement, and settle, compromise or abandon with the consent of the Company all claims and demands from other than the Participants, their beneficiaries or the Company in favor of or against the Trust Assets. (e) Notwithstanding anything to the contrary elsewhere in this Agreement (including the authority of the Committee to direct the Trustee with respect to the investment of the Trust Assets), the Trustee shall not have the power to start, to enter into, or otherwise to engage in any business enterprise, or to continue to operate any business interest that becomes part of the Trust, if such activity constitutes "carry(ing) on business for joint profit" within the meaning of section 301.7701-2(a) of the treasury procedural and administrative regulations of the United States Treasury. Section 8. Compensation and Expenses of Trustee - ------------------------------------------------ The Trustee shall be entitled to receive such reasonable compensation for its services as shall be agreed by the Company and the Trustee. The Trustee shall also be entitled to receive its reasonable expenses incurred with respect to the administration of the Trust, including counsel fees and fees incurred by the Trustee pursuant to Sections 7 (b), 7 (c) and 7 (d) of this Trust Agreement. Such compensation and expenses shall be payable by the Company and if not so paid, shall be paid by the Trustee from the Trust Assets. In the event any Trust Assets are used or required pursuant to the preceding sentence to pay compensation and expenses to the Trustee, the Company shall promptly contribute to the Trust any such amount. Section 9. Resignation and Replacement of Trustee - -------------------------------------------------- (a) The Trustee may resign at any time during the term of this Trust by delivering to the Company a written notice of the proposed resignation. Such resignation shall take effect upon the qualification of a successor Trustee and when such successor Trustee commences to act. (b) In the event that the Trustee notifies the Company of its intention to resign, in accordance with the foregoing provisions of this Section 9, the Company shall appoint a successor Trustee which shall be a bank or trust company. The Trustee hereunder shall thereupon deliver to the successor Trustee all property of this Trust, together with such records and documents as may be reasonably required to enable the successor Trustee to properly administer the Trust, reserving such funds as it reasonably deems necessary to cover its unpaid bills and expenses and closing costs. (c) Upon qualification of a successor Trustee, all right, title and interest of the resigning Trustee in the Trust Assets and all rights and privileges under this Trust Agreement theretofore vested in such resigning Trustee shall vest in the successor Trustee where applicable, and thereupon all future liability of said resigning 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. (d) Nothing in this Trust Agreement shall be interpreted as depriving the Trustee or the Company of the right to have a judicial settlement of the Trustee's accounts, and upon any proceeding for a judicial settlement of the Trustee's accounts or for instructions the only necessary parties thereto will be the Trustee and the Company. Section 10. Amendment or Termination - ------------------------------------ (a) This Trust Agreement may be amended by a written instrument executed by the Trustee and the Company to the extent that (i) its purposes and irrevocability are not changed, (ii) the amendment does not permit the Trust Assets to be used, diverted or encumbered for purposes other than those described elsewhere herein, unless required under applicable law or regulation, and (iii) such amendment is not contrary to applicable law or regulation. (b) This Trust shall be irrevocable and remain in effect until the receipt by the Trustee of a certification from the Company, satisfactory to the Trustee, that all liabilities under the Plan have been satisfied; provided that, if any payment made from the Trust or to be made pursuant to the Plan is being contested or litigated, the Trust shall remain in effect until such contest, litigation or dispute is resolved. This Trust shall, in all events, terminate not later than twenty-one (21) years after the death of the last of the Participants in the Plan. (c) At the termination of the Trust pursuant to Section 10 (b), the Trustee shall, as soon as practicable but in any event within ninety (90) days of the date of such termination, transfer to the Company the value of the Trust Assets as of the termination date. Section 11. Communication - ------------------------- (a) Communications to the Company and the Committee shall be addressed to the Company at: Tellabs Operations, Inc. 4951 Indiana Avenue Lisle, IL 60532 Attention: Employee Benefits Committee (b) Communications to the Trustee shall be addressed to it at: Harris Trust and Savings Bank 111 West Monroe Chicago, IL 60603 Attention: Personal Trust Administration Section 12. Severability and Alienation - --------------------------------------- (a) Any provision of this Trust Agreement prohibited by law shall be ineffective to the extent of any such prohibition without invalidating or in any other way limiting the remaining provisions hereof. (b) The interest, if any, of Participants or their beneficiaries in the Trust or with respect to payments from the Trust Assets may not be anticipated, assigned (either at law or in equity), alienated or subject to attachment, garnishment, levy, execution or other legal or equitable process except as required by law. Any attempt by a Participant to anticipate, alienate, assign, sell, transfer, pledge, encumber or charge the same shall be void. The Trust Assets shall not in any manner be subject to the debts, contracts, liabilities, engagements or torts of any Participant or any beneficiary and shall not be considered an asset of a Participant or his/her beneficiary in the event of his/her insolvency or bankruptcy. Section 13. Governing Law - ------------------------- This Trust Agreement shall be governed by and construed in accordance with the laws of the State of Illinois, without reference to principles of conflicts of law, except to the extent superseded by federal law. Section 14. Miscellaneous - ------------------------- (a) The Trustee shall not be either individually or severally liable for any taxes of any kind levied or assessed under existing or future laws against the Trust Assets. The Trustee shall withhold from each payment to any Participant or beneficiary the amount of any Federal, state or local withholding taxes which are from time to time required to be deducted under applicable laws. To the extent that any taxes levied or assessed upon the Trust are not paid by the Company, the Trustee shall pay such taxes out of the Trust Assets. (b) Expenses and fees of the Company for the administration of this Trust and services in relation thereto for actuarial, legal and accounting and other similar expenses, including any costs with respect to the creation of the Trust, shall be paid by the Company and, if not so paid may be paid by the Trustee from the Trust Assets provided, however, that if Trust Assets are so paid, the Company shall promptly contribute to the Trust any such amount so paid. (c) A Participant's status as a beneficiary of the Trust shall not give such Participant any right to be retained as an employee of the Company nor any rights other than those specifically enumerated herein or in any agreement applicable to any Participant or pursuant to which such Participant has become a beneficiary hereof. (d) Any payment to any Participant or his/her beneficiary in accordance with the provisions of the Trust shall, to the extent thereof, be in full satisfaction of all claims against the Trustee and the Company under the Plan and this Trust Agreement. Nothing in this Trust shall relieve the Company of its liability to pay benefits to Participants or their beneficiaries under the Plan, except to the extent such liabilities are met through the use of the Trust Assets. (e) Headings in this Trust Agreement are inserted for convenience or reference only and are not to be considered in the construction of the provisions hereof. (f) This Trust Agreement may be executed in several counterparts, each of which shall be deemed an original, and said counterparts shall constitute but one and the same instrument, which may be sufficiently evidenced by any one counterpart. (g) This Trust Agreement shall inure to the benefit of, and be binding upon, the parties hereto and their successors and assigns. (h) As used in this Trust Agreement, the masculine gender shall include the feminine and neuter genders. (i) Any action of the Company pursuant to this Trust Agreement, including all orders, requests, data, directions, instructions and other related information shall be in writing and signed on behalf of the Company by an officer or named designee of the Company. (j) For the purposes of this Trust, Change of Control shall be deemed to occur when and only when the first of the following events occurs: (i) Any "person" or "group" (as such terms are used in Section 3(a), 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended, and regulations promulgated thereunder (the "Act")), other than (1) a trustee or other fiduciary holding securities under any employee benefit plan of Tellabs, Inc., the parent holding company of the Company (the "Holding Company"), or any of its subsidiaries, (2) a corporation owned directly or indirectly by the stockholders of the Holding Company in substantially the same proportions as their ownership of stock in the Holding Company, (3) Michael J. Birck, his spouse, any of his descendants or the spouse of any such descendants, the estate of Michael J. Birck, his spouse, any of his descendants or the spouse of any such descendant, any trust or other arrangement for the benefit of Michael J. Birck, his spouse or any of his descendants or the spouse of any such descendants (the "Birck Family") or (4) any group which includes the Birck Family if a majority of the voting securities of the Holding Company beneficially owned by the members of such group are beneficially owned by a member or members of the Birck Family, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Holding Company representing 20% or more of the total voting power of the then outstanding securities of the Holding Company entitled to vote generally in the election of directors (the "Voting Stock"); or (ii) Individuals who are members of the Incumbent Board, cease to constitute a majority of the Board of Directors of the Holding Company, or (iii) (1) The merger or consolidation of the Company with any other corporation or entity, other than a merger or consolidation which would result in the Voting Stock 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 Stock or the voting securities of such surviving entity outstanding immediately after such merger or consolidation, (2) the sale, transfer or disposition of all or substantially all of the Holding Company's assets to any other corporation or entity, or (3) the dissolution or liquidation of the Holding Company. (k) The term "Incumbent Board" shall mean (i) the members of the Board of Directors of the Holding Company on January 1, 1995, and (ii) any individual who becomes a member of the Board of Directors of the Holding Company after January 1, 1995, if he or his election or nomination for election as a director was approved by the affirmative vote of a majority of the then Incumbent Board. IN WITNESS WHEREOF, the Company and the Trustee have executed this Agreement as of the date first above written. Tellabs Operations, Inc. Harris Trust and Savings Bank By: s\ Brian J. Jackman By: s\ Irene Demeur ------------------------------ ----------------------------- Name: Brian J. Jackman Name: Irene Demeur Title: President Title: Vice President Exhibit A (Page 1 of 2) TELLABS, INC. INVESTMENT POLICY (Effective July 20, 1988) OBJECTIVE: - --------- Maximize current income to the extent consistent with the preservation of capital and liquidity by investing in high quality money market instruments. INVESTMENT PARAMETERS: - --------------------- - All instruments should be rated by an appropriate agency and receive their rating as outlined in the attached table. - All instruments should mature within two years, subject to thirty (30) day review by Treasurer. (Except investments in Puerto Rico) - All instruments purchased must be easily sold in active secondary markets. - Investments under direct control shall be limited to $2.5 million to any one issuer, with the exception of U.S. Governmental obligations. - Credit enhancements such as Letters of Credit and insurance guarantees shall be by an issuer who meets the appropriate investment criteria. New investment securities to the market place; not otherwise covered in this policy; may be purchased, subject to the discretion of the Treasurer, not to exceed the lesser of 10% of the total portfolio or $3 million. - Investment decisions shall adhere to the above policy as it applies to the portfolio at date of the investment. Subsequent portfolio changes shall not necessitate premature disposals to bring the portfolio in compliance with the policy. Exhibit A (Page 2 of 2) TELLABS, INC. INVESTMENT POLICY (Effective July 20, 1988)
MAXIMUM INVESTMENT CRITERIA % OF MAXIMUM MINIMUM RATINGS SECURITY TYPE PORTFOLIO MATURITY S&P/MOODYS/Duff & Phelps - ------------- --------- -------- ------------------------ U.S. Treasury 100% 2 years N/A U.S. Government Agencies 10% 2 years N/A Municipals 40% (2) 18 months (1) AA (4) / Aa3 / 4 SP1 / MIG2 / 1 A2 / P2 / 1 Commercial Paper 50% (2) 9 months A1 / P1 / 1 20% (3) 9 months A2 / P2 / 1 Open end Demand Notes 10% N/A A1 / P1 / 1 Corporate Notes 10% 12 months AA / Aa3 / 4 Certificate of Deposit 50% 2 years (1) N/A / P1 / 1 Bankers Acceptances 40% 9 months Banks with asset size greater than $3 Billion (US Bank) or $20 Billion (non-US Bank). Preferred Stocks 20% N/A A / A3 / 7 Common Stocks 5% N/A A / A3 / 7 Bonds 20% 2 years AA / Aa3 / 4 Eurodollar Time Deposits 10% 18 months same as BA's Repo's 20% 1 year (1) same as BA's (fully collateralized) Other 10% 1 year N/A
(1) Except investments in Puerto Rico maximum shall be 5 years. (2) % of Portfolio for all grades. (3) % of Portfolio for lower grades (4) Except Escrowed to Maturity by U.S. government securities- non-rated is acceptable. EX-11 3 EXHIBIT 11 TELLABS, INC. AND SUBSIDIARIES COMPUTATION OF PER SHARE EARNINGS (In thousands, except per share data) PRIMARY EARNINGS PER SHARE 1995 1994 1993 ---- ---- ---- Weighted average number of common shares outstanding during the period 88,194 86,812 84,616 Net additional shares assuming dilutive stock options exercised and proceeds used to purchase treasury shares at average fair market value 3,433 3,747 3,596 ------ ------ ------ Weighted average number of common shares and common equivalent shares outstanding 91,627 90,559 88,212 ======= ======= ======= Net earnings $115,606 $72,389 $31,967 ======= ======= ======= Primary earnings per share $1.26 $0.80 $0.36 ===== ===== ===== FULLY DILUTED EARNINGS PER SHARE Weighted average number of common shares outstanding during the period 88,194 86,812 84,616 Net additional shares assuming dilutive stock options exercised and proceeds used to purchase treasury shares at fair market value 3,516 3,852 3,855 ----- ----- ----- Weighted average number of common shares and common equivalent shares outstanding 91,710 90,664 88,471 ======= ======= ======= Net earnings $115,606 $72,389 $31,967 ======= ======= ======= Fully diluted earnings per share $1.26 $0.80 $0.36 ===== ===== ===== [FN] NOTE: Restated to reflect the stock splits in 1995, 1994 and 1993. EX-13 4 EXHIBIT 13
Five-Year Summary of Selected Financial Data (In thousands, except per-share data) 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- Net sales $635,229 $494,153 $320,463 $258,560 $212,751 Gross profit $363,835 $270,003 $164,255 $125,876 $100,154 Earnings before income taxes $162,825 $97,824 $35,801 $19,152 $7,025 Net earnings before cumulative effect of accounting change $115,606 $72,389 $30,467 $16,854 $6,631 Cumulative effect of accounting change ---- ---- $1,500 ---- ---- Net earnings $115,606 $72,389 $31,967 $16,854 $6,631 Earnings per share before cumulative effect of accounting change $1.26 $0.80 $0.34 $0.20 $0.08 Cumulative effect on earnings per share ---- ---- $0.02 ---- ---- Earnings per share $1.26 $0.80 $0.36 $0.20 $0.08 Stockholders' equity $433,233 $292,790 $207,006 $167,144 $145,043 Total assets $552,051 $390,067 $328,766 $210,748 $185,964 Net working capital $267,806 $138,317 $64,285 $109,201 $96,753 Long-term debt $2,850 $2,850 $2,850 $2,850 $3,992 No cash dividends per common share were paid. Per-share amounts are restated to reflect stock splits in 1995, 1994 and 1993. COMMON STOCK MARKET DATA (Restated for stock splits in 1995 and 1994) 1995 1994 High Low High Low First Quarter 32 7/8 23 1/2 15 3/8 10 15/16 Second Quarter 48 1/4 28 18 5/8 12 5/8 Third Quarter 52 3/4 39 1/4 22 7/8 14 1/8 Fourth Quarter 42 3/4 29 3/4 28 21 The Company's common stock is traded over-the-counter under the symbol TLAB. The shares are included in the NASDAQ National Market System, which reports sales prices for actual transactions. At February 28, 1996, there were approximately 2,685 stockholders of record. Management Statement of Financial Responsibilities The financial statements of Tellabs, Inc., and Subsidiaries have been prepared under the direction of management in conformity with generally accepted accounting principles. In the opinion of management, the financial statements set forth a fair presentation of the consolidated financial condition of Tellabs, Inc., and Subsidiaries at December 29, 1995, and December 30, 1994, and the consolidated results of its operations for the years ended December 29, 1995, December 30, 1994, and December 31, 1993. The Company maintains accounting systems and related internal controls which, in the opinion of management, provide reasonable assurances that transactions are executed in accordance with management's authorization, that financial statements are prepared in accordance with generally accepted accounting principles, and that assets are properly accounted for and safeguarded. Ethical decision-making is fundamental to the Company's management philosophy. Management recognizes its responsibility for fostering a strong ethical climate so that the Company's affairs are conducted to the highest standards of personal and corporate conduct. Employee awareness of these objectives is achieved through key written policy statements. The Board of Directors has appointed two of its non-employee members as an Audit Committee. This committee meets periodically with management and the independent certified public accountants, who have free access to this committee without management present, to discuss the results of their audit work and their evaluation of the internal control structure and the quality of financial reporting. Michael J. Birck Peter A. Guglielmi President and Executive Vice President, Chief Executive Officer, Chief Financial Officer and Treasurer, Tellabs, Inc. Tellabs, Inc. January 17, 1996 January 17, 1996 Report of Independent Certified Public Accountants We have audited the accompanying consolidated balance sheets of Tellabs, Inc., and Subsidiaries as of December 29, 1995, and December 30, 1994, and the related consolidated statements of earnings, stockholders' equity and cash flows for the years ended December 29, 1995, December 30, 1994 and December 31, 1993. 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 consolidated financial position of Tellabs, Inc., and Subsidiaries at December 29, 1995, and December 30, 1994, and the consolidated results of its operations and its consolidated cash flows for the years ended December 29, 1995, December 30, 1994 and December 31, 1993, in conformity with generally accepted accounting principles. As discussed in Note G to the consolidated financial statements, effective January 2, 1993, the Company changed its method of accounting for income taxes. Grant Thornton LLP Chicago, Illinois January 17, 1996
CONSOLIDATED STATEMENTS OF EARNINGS (In thousands, except per-share data) Year Year Year Ended Ended Ended 12/29/95 12/30/94 12/31/93 -------- -------- -------- Net sales $635,229 $494,153 $320,463 Cost of sales 271,394 224,150 156,208 ------- ------- ------- Gross Profit 363,835 270,003 164,255 Operating expenses Marketing 85,843 67,310 55,611 Research and development 81,893 64,765 50,987 General and administrative 36,878 35,857 24,926 Goodwill amortization 2,568 2,389 685 ------- ------- ------- 207,182 170,321 132,209 ------- ------- ------- Operating Profit 156,653 99,682 32,046 Other income (expense) Interest income 5,855 3,185 2,935 Interest expense (124) (1,773) (487) Other 441 (3,270) 1,307 ------- ------- ------- 6,172 (1,858) 3,755 Earnings Before Income Taxes and Cumulative Effect of Change in Accounting Principle 162,825 97,824 35,801 Income taxes 47,219 25,435 5,334 Earnings Before Cumulative Effect on Prior Years of Changing to a Different Method of ------- ------- ------- Accounting for Income Taxes 115,606 72,389 30,467 Cumulative effect on prior years of changing to a different method of accounting for income taxes --- --- 1,500 ------- ------- ------- Net Earnings $115,606 $72,389 $31,967 ======= ======= ======= Average number of common and common equivalent shares outstanding 91,710 90,664 88,471 Earnings per Share Before Cumulative Effect on Prior Years of Changing to a Different Method of Accounting for Income Taxes $1.26 $0.80 $0.34 Cumulative effect on prior years of changing to a different method of accounting for income taxes --- --- 0.02 ----- ----- ----- Earnings per Share $1.26 $0.80 $0.36 ===== ===== ===== The accompanying notes are an integral part of these statements.
CONSOLIDATED BALANCE SHEETS ASSETS (In thousands) 12/29/95 12/30/94 -------- -------- Current Assets Cash and cash equivalents $92,485 $51,460 Investments in marketable securities 69,751 23,209 Accounts receivable -- primarily trade, net of allowance for doubtful receivables of $2,317,000 at December 29, 1995 and $992,000 at December 30, 1994 127,565 84,397 Inventories Raw materials 31,302 20,898 Work in process 11,694 12,396 Finished goods 24,719 18,587 ------- ------- 67,715 51,881 Other current assets 8,854 9,609 ------- ------- Total Current Assets 366,370 220,556 Property, Plant and Equipment -- at Cost Buildings and improvements 55,852 46,516 Equipment 139,117 114,853 ------- ------- 194,969 161,369 Less accumulated depreciation 84,419 69,300 ------- ------- 110,550 92,069 Land 6,472 5,562 ------- ------- 117,022 97,631 Goodwill 44,958 44,252 Other Assets 23,701 27,628 ------- ------- Total Assets $552,051 $390,067 ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY 12/29/95 12/30/94 (In thousands) -------- -------- Current Liabilities Accounts payable-trade $30,097 $22,606 Accrued liabilities Compensation 23,861 23,200 Payroll and other taxes 6,268 5,146 Other 12,054 10,470 ------ ------ Total accrued liabilities 42,183 38,816 Income taxes 26,284 20,817 ------ ------ Total Current Liabilities 98,564 82,239 Long-Term Debt 2,850 2,850 Long-Term Income Taxes --- 6,572 Other Long-Term Liabilities 6,179 3,844 Deferred Income Taxes 11,225 1,772 Commitments --- --- Stockholders' Equity Preferred stock: authorized 5,000,000 shares of $.01 par value; no shares issued and outstanding --- --- Common stock: authorized 200,000,000 shares of $.01 par value; issued 88,798,372 shares at December 29, 1995, and 87,288,692 shares at December 30, 1994 888 436 Additional paid-in capital 72,385 54,150 Cumulative translation adjustment 7,842 2,102 Unrealized net gains (losses) on available-for-sale securities 48 (803) Retained earnings 352,070 236,905 ------- ------- Total Stockholders' Equity 433,233 292,790 ------- ------- Total Liabilities and Stockholders' Equity $552,051 $390,067 The accompanying notes are an integral ======== ======== part of these statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Additional Cumulative Unrealized Common Paid-In Translation Net Gains Retained (In thousands) Stock Capital Adjustment (Losses) Earnings Total ------- ------- ------- ------- ------- ------- Balance at January 2, 1993 $138 $34,373 ($205) $ --- $132,838 $167,144 Net earnings --- --- --- --- 31,967 31,967 Stock options exercised 5 10,591 --- --- --- 10,596 Employee stock awards --- 108 --- --- --- 108 Stock Split 72 --- --- --- (72) --- Unrealized net gains on available-for-sale marketable securities --- --- --- 28 --- 28 Foreign currency translation adjustment --- --- (2,837) --- --- (2,837) Balance at ------ ------ ------ ------ ------- ------- December 31, 1993 215 45,072 (3,042) 28 164,733 207,006 ====== ====== ====== ====== ======= ======= Net earnings --- --- --- --- 72,389 72,389 Stock options exercised 4 8,883 --- --- --- 8,887 Employee stock awards --- 195 --- --- --- 195 Stock split 217 --- --- --- (217) --- Unrealized net losses on available-for-sale marketable securities --- --- --- (831) --- (831) Foreign currency translation adjustment --- --- 5,144 --- --- 5,144 Balance at ------ ------ ------ ------ ------- ------- December 30, 1994 436 54,150 2,102 (803) 236,905 292,790 ====== ======= ====== ====== ======== ======== Net earnings --- --- --- --- 115,606 115,606 Stock options exercised 11 18,128 --- --- --- 18,139 Employee stock awards --- 107 --- --- --- 107 Stock split 441 --- --- --- (441) --- Unrealized net gains on available-for-sale marketable securities --- --- --- 851 --- 851 Foreign currency translation adjustment --- --- 5,740 --- --- 5,740 Balance at ------ ------ ------ ------ ------- ------- December 29, 1995 $888 $72,385 $7,842 $48 $352,070 $433,233 ====== ======= ====== ====== ======== ======== The accompanying notes are an integral part of these statements.
CONSOLIDATED STATEMENTS OF CASH FLOW Year Year Year Ended Ended Ended (In thousands) 12/29/95 12/30/94 12/31/93 -------- -------- -------- Operating Activities Net earnings $115,606 $72,389 $31,967 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 23,682 19,502 14,511 Provision for doubtful receivables 1,396 254 83 Deferred income taxes 9,214 (1,757) (1,902) Gain on sale of long-term investment (929) --- --- Cumulative effect of change in accounting principle --- --- (1,500) Net (increase) decrease in current assets, net of effects from purchase of subsidiary: Accounts receivable (42,689) (7,660) (16,868) Inventories (14,696) 92 (8,446) Other current assets 353 (724) (410) Net increase (decrease) in current liabilities, net of effects from purchase of subsidiary: Accounts payable 7,067 7,001 (4,060) Accrued liabilities 2,807 9,991 9,315 Income taxes 3,793 9,054 2,777 Net increase in other assets (3,637) (665) (9,537) Net (decrease) increase in other liabilities (4,312) 3,638 675 ------ ------ ------ Net Cash Provided by Operating Activities 97,655 111,115 16,605 Investing Activities Acquisition of property, plant and equipment, net (35,191) (22,956) (28,671) Proceeds from sales and maturities of 65,780 7,543 60,271 marketable securities Payments for purchases of marketable securities (111,168) (15,602) (37,112) Payments for purchases of long-term investments (1,215) (9,005) (5,102) Proceeds from sale of long-term investment 3,429 --- --- Payment for purchase of subsidiary, net of cash acquired --- --- (56,866) ------- ------- ------- Net Cash Used by Investing Activities (78,365) (40,020) (67,480) Consolidated Statements of Cash Flows (continued) (In thousands) Year Year Year Ended Ended Ended 12/29/95 12/30/94 12/31/93 -------- -------- -------- Financing Activities Common stock sold through stock-option plans 18,246 9,082 10,704 Proceeds from notes payable --- --- 60,000 Payments of notes payable --- (60,000) --- ------ ------ ------ Net Cash Provided(Used) by Financing Activities 18,246 (50,918) 70,704 Effect of Exchange Rate Changes on Cash 3,489 1,694 (477) Net Increase in Cash And Cash Equivalents 41,025 21,871 19,352 Cash and Cash Equivalents At Beginning of Year 51,460 29,589 10,237 ------- ------- ------- Cash and Cash Equivalents At End of Year $92,485 $51,460 $29,589 ======= ======= ======= Other Information Interest paid $111 $1,798 $507 Income taxes paid $28,646 $10,664 $3,333 Supplemental Schedule of Non-cash Investing and Financing Activities: In acquiring all of the outstanding shares of Martis Oy during 1993, the Company paid direct costs totaling $71,263,000. In conjunction with the acquisition, liabilities were assumed as follows: (In thousands) Fair value of assets acquired $40,070 Costs in excess of fair value 45,429 Direct costs paid (71,263) ------- Liabilities assumed $14,236 ======= The accompanying notes are an integral part of these statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note A: Summary of Significant Accounting Policies Nature of Business Operating in one business segment, the Company and its Subsidiaries design, assemble, market and service a diverse line of electronic communications equipment used in public and private communications networks worldwide. Consolidation The consolidated financial statements include the accounts of the Company and its Subsidiaries. All significant intercompany balances and transactions have been eliminated. The Company's investment in a joint venture is accounted for under the equity method. The results of Martis Oy are included since the purchase date of October 7, 1993. Certain reclassifications have been made in the 1993 and 1994 consolidated financial statements to conform to the 1995 presentation. The presentation of the consolidated financial statements requires the use of estimates by management. Cash Equivalents The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Fair Value of Financial Instruments The Company's financial instruments include cash and cash equivalents, marketable securities, cost-basis investments, and long-term debt. The carrying value of the cash and cash equivalents and long-term debt approximates their estimated fair values based upon quoted market prices. The fair value of investments in marketable securities is estimated based on quotes from brokers or current rates offered for instruments with similar characteristics. Management believes the estimated fair value of a cost-basis investment equals or exceeds its carrying value although there are no independent means of assuring that this is the case. Inventories Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out method. Depreciation Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives, on both the declining-balance and straight-line methods. Income Taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial- statement carrying amounts of existing assets and liabilities and their respective tax bases at enacted tax rates when such amounts are supposed to be realized or settled. Goodwill On an ongoing basis, management reviews the valuation and amortization of goodwill. As part of this review, the Company estimates the value and future benefits of the net income generated by the related subsidiaries to determine that no impairment has occurred. Goodwill is amortized over 20 Note A: Summary of Significant Accounting Policies (continued) years using the straight-line method. The accumulated amortization of goodwill is approximately $6,092,000 and $3,524,000 as of December 29, 1995 and December 30, 1994, respectively. Stock Awards When an employee stock award is granted (see Note D), compensation expense is charged for the fair market value of the shares issued. Revenue Recognition The Company recognizes revenue at the date of shipment. Earnings Per Share Earnings per share are based on the weighted average number of common and common equivalent shares outstanding during each period along with the dilutive effect of outstanding stock options. On October 21, 1993, the Company declared a 3-for-2 stock split, payable in the form of a 50 percent stock dividend. On April 22, 1994, the Company declared a 2-for-1 stock split, payable in the form of a 100 percent stock dividend. On April 25, 1995, the Company declared a 2-for-1 stock split, payable in the form of a 100 percent stock dividend. All references to the number of common shares and per share amounts have been retroactively restated to give effect to the stock dividends. Foreign Currency Translation The financial statements of the Company's subsidiaries are generally measured using the local currency as the functional currency. Accordingly, the effect of translating a subsidiary's financial statements into U.S. dollars is recorded as a separate component of stockholders' equity. Foreign Exchange Gains and losses from changes in exchange rates are recognized in "Other Income (Expense)." Net losses of $302,000 and $1,555,000 were recorded in 1995 and 1994, respectively, and a net gain of $1,118,000 was recorded in 1993. Foreign Exchange Contracts The Company enters into foreign exchange contracts as a hedge against net foreign accounts receivable and payable. Market value gains and losses on the contracts are recognized and are combined with offsetting foreign exchange gains or losses on those accounts. Note B: Investments Available-for-sale marketable securities are accounted for at market with the unrealized gain or loss net of deferred income taxes shown as a separate component of stockholders' equity. At December 29, 1995, and December 30, 1994, they consisted of the following: Amortized Unrealized Market (In thousands) Cost Gain (Loss) Value 1995 ------- ------- ------- State and municipal securities $39,938 $151 $40,089 Preferred and common stocks 12,423 (30) 12,393 U.S. government and corporate debt obligations 16,022 (53) 15,969 ------- ------- ------- $68,383 $68 $68,451 ======= ======= ======= Amortized Unrealized Market Cost Gain (Loss) Value ------- ------- ------- 1994 State and municipal securities $7,748 ($262) $7,486 Preferred and common stocks 5,496 (305) 5,191 U.S. government and corporate debt obligations 11,051 (519) 10,532 ------- ------- ------- $24,295 ($1,086) $23,209 ======= ======= ======= Held-to-maturity securities are carried at their amortized cost. At December 29, 1995, and December 30, 1994, the balance was $1,300,000, which consists entirely of U.S. government and corporate debt obligations maturing in 1996. This amount is included in "Investments in Marketable Securities" in 1995 and included in "Other Assets" in 1994. In the ordinary course of managing its assets and liabilities, the Company uses financial instruments, which are not reflected in the financial statements, to reduce or eliminate its exposure to foreign exchange risks. Foreign currency risk is managed through forward exchange contracts. At December 29, 1995, the Company had forward exchange contracts, generally having maturities of less than 120 days, in the amount of $41,914,000. These contracts are primarily denominated in Finnish markka but also include contracts for Irish punts and Canadian dollars. During 1995, the Company sold one of its long-term investments for a gain of $929,000 and, in accordance with the equity method of accounting, wrote down its investment in the joint venture by $988,000.
Note C: Long-Term Debt The long-term debt of $2,850,000 comprises industrial revenue bonds that were issued on December 20, 1991, with the principal payable in October 2014. Interest is payable quarterly based on a variable interest rate set weekly based on market conditions for similar instruments. The effective rates for 1995, 1994 and 1993 were 3.94 percent, 2.88 percent and 2.43 percent, respectively. The debt is unsecured. The provisions of the loan agreement contain restrictive covenants, including a minimum net worth and debt-to-equity ratio. Note D: Stock Options and Awards The Company's 1981 Incentive Stock Option Plan is a tax-qualified plan that provided for 2,160,000 shares of common stock to be reserved for options issued under the plan. No grants have been made under the 1981 Plan since its expiration on November 24, 1991. Unless the option agreement provides otherwise, options granted under the 1981 plan terminated at the end of five years after grant. At December 29, 1995, all shares that had been granted under the 1981 Plan had been exercised or cancelled. The Company's 1984 Incentive Stock Option Plan is a tax-qualified plan that provides for 2,400,000 shares of common stock to be reserved for options that may be issued under the plan. The plan also provides that the option price shall be the market value of the shares as of the date of grant, except for options granted to holders of 10 percent or more of the outstanding shares, in which case the option price shall be 110 percent of the market value of the shares as of the date of grant. Unless the option agreement provides otherwise, options granted under this plan become exercisable on a cumulative basis at the rate of 25 percent during each of the second through fifth years after grant. Unless the option agreement provides otherwise, options under this plan terminate at the end of ten years after the grant. The Company's 1986 Non-Qualified Stock Option Plan provides for 6,000,000 shares of common stock to be reserved for options that may be issued under the plan. The plan provides that the option price shall be the market value of the shares as of the date of grant. Unless the option agreement provides otherwise, options granted under this plan become exercisable on a cumulative basis at the rate of 25 percent during each of the second through fifth years after grant. Unless the option agreement provides otherwise, options granted under the plan terminate at the end of five years after the grant. The Company's 1987 Stock Option Plan for Non-Employee Corporate Directors provides for the non-discretionary grant of options to non-employee directors of the Company to purchase a combined maximum of 600,000 shares of common stock of the Company at a per-share price not less than the fair market value per share of the common stock on the date of grant. The plan provides that each non-employee director, on the date such person becomes a non-employee director, will be granted options to purchase 10,000 shares of common stock and, provided such person is still serving as a non-employee director, will automatically be granted options to purchase 6,000 additional shares of common stock each year thereafter on the anniversary of the last day of the month in which the initial options were granted. Note D: Stock Options and Awards (continued) The Company's 1989 Stock Option Plan provides for 6,000,000 shares of common stock to be reserved for options under the plan. The plan allows grants to employees of incentive or non-qualified options for up to 6,000,000 shares and up to 6,000,000 stock appreciation rights (SARs). The SARs may be granted in conjunction with, or independently of, the options under the plan. The plan provides that the option price and the SAR price shall be the market value of the Company's shares as of the date of grant. Unless the option or SAR agreement expressly provides otherwise, options and SARs granted under this plan become exercisable on a cumulative basis at the rate of 25 percent during each of the second through fifth years after grant. Unless the option agreement provides otherwise, options and SARs granted under the plan terminate at the end of 10 years after the grant. At December 29, 1995, 762,000 SARs with grant prices ranging from $1.50 to $2.17 and 5-year terms and 390,000 SARs with a grant price of $3.04 and 10-year terms had been granted. At that date, a total of 1,011,500 SARs had been exercised and 7,500 had been cancelled, leaving 133,000 outstanding. The Company's 1991 Stock Option Plan provides for 3,000,000 shares of common stock to be reserved for options under the plan. The plan allows grants to employees of incentive or non-qualified options for up to 3,000,000 shares. The plan provides that the option price shall be the market value of the Company's shares as of the date of grant. Unless the option agreement provides otherwise, options granted under this plan become exercisable on a cumulative basis at the rate of 25 percent during each of the second through fifth years after grant. Unless the option agreement provides otherwise, options granted under the plan terminate at the end of 10 years after the grant. The Company's 1994 Stock Option Plan provides for 4,000,000 shares of common stock to be reserved for options under the plan. The plan allows grants to employees of incentive or non-qualified options for up to 4,000,000 shares. The plan provides that the option price shall be the market value of the Company's shares as of the date of grant. Unless the option agreement expressly provides otherwise, options granted under this plan become exercisable on a cumulative basis at the rate of 25 percent during each of the second through fifth years after grant. Unless the option agreement provides otherwise, options granted under the plan terminate at the end of 10 years after the grant. The Company has a program to award shares of the Company's common stock to employees in recognition of their past service. Each full-time employee who has worked for a continuous 5- or 20-year period is awarded 10 or 25 shares, respectively, of the Company's common stock as of the first business day of the month in which the employee's 5- or 20-year anniversary occurs. Common shares totaling 2,235 were awarded in 1995; totaling 6,140 in 1994; and totaling 6,280 in 1993. The Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, (SFAS 123), issued in October 1995, establishes accounting and reporting standards for stock-based employee compensation plans with adoption required for fiscal years beginning after December 15, 1995. As permitted under the provisions of this Statement, the Company has elected to continue the use of APB Opinion No. 25 to measure compensation costs, and will make the pro forma disclosures of net income and earnings per share.
Note D: Stock Options and Awards (continued) The following table summarizes the changes in the number of common shares under stock options granted pursuant to the preceding plans. 1981 and 1984 1986 Non-Qualified Incentive Stock Stock Option Option Plans Plan Average Average Option Option Price Price Shares per share Shares per share ------- --------- ------- --------- Options outstanding at January 2, 1993 1,154,340 $2.25 924,384 $2.35 Option changes - 1993 Granted 42,000 10.46 860,000 10.00 Exercised (675,028) 2.28 (434,184) 2.39 Cancelled (22,500) 2.08 --- --- Options outstanding at ------- ------- December 31, 1993 498,812 $2.71 1,350,200 $7.21 ======= ======= Option changes - 1994 Granted --- --- 14,000 $13.19 Exercised (158,800) 2.48 (164,698) 3.01 Cancelled (752) 1.59 (12,000) 10.00 Options outstanding at ------- ------- December 30, 1994 339,260 $2.53 1,187,502 $7.84 ======= ======= Option changes - 1995 Granted --- --- 42,500 33.50 Exercised (146,335) 2.14 (291,700) 4.50 Cancelled --- --- (30,000) 10.00 Options outstanding at ------- ------- December 29, 1995 192,925 $3.34 908,302 $10.04 ======= ======= Exercisable: December 31, 1993 316,532 490,200 December 30, 1994 274,762 536,502 December 29, 1995 156,925 453,302 Available for grant: December 31, 1993 74,408 15,238 December 30, 1994 --- 13,238 December 29, 1995 --- 738
Note D: Stock Options and Awards (continued) 1987 Stock Option Plan For Non-Employee 1989 Stock Corporate Directors Option Plan Average Average Option Option Price Price Shares per share Shares per share ------- --------- ------- --------- Options outstanding at January 2, 1993 126,000 $2.48 3,110,208 $2.16 Option changes - 1993 Granted 30,000 6.28 332,000 8.64 Exercised (72,000) 2.22 (1,390,452) 2.04 Cancelled --- --- (41,264) 2.40 Options outstanding at ------- ------- December 31, 1993 84,000 $4.07 2,010,492 $3.31 ======= ======= Option changes - 1994 Granted 30,000 16.55 684,000 13.68 Exercised (54,000) 5.31 (537,026) 2.58 Cancelled --- --- (33,506) 5.40 Options outstanding at ------- ------- December 30, 1994 60,000 $9.20 2,123,960 $6.80 ======= ======= Option changes - 1995 Granted 30,000 40.25 48,500 33.78 Exercised (18,000) 8.01 (402,996) 3.74 Cancelled --- --- (45,004) 12.05 Options outstanding at ------- ------- December 29, 1995 72,000 $22.43 1,724,460 $8.14 ======= ======= Exercisable: December 31, 1993 66,000 1,213,460 December 30, 1994 42,000 971,706 December 29, 1995 54,000 949,335 Available for grant: December 31, 1993 294,000 657,648 December 30, 1994 264,000 7,154 December 29, 1995 234,000 3,656
Note D: Stock Options and Awards (continued) 1991 Stock 1994 Stock Option Plan Option Plan Average Average Option Option Price Price Shares per share Shares per share ------- --------- ------- --------- Options outstanding at January 2, 1993 2,907,148 $2.92 --- --- Option changes - 1993 Granted 22,000 10.00 --- --- Exercised (343,988) 2.86 --- --- Cancelled (54,448) 2.86 --- --- Options outstanding at ------- ------- December 31, 1993 2,530,712 $4.39 --- --- ======= ======= Option changes - 1994 Granted 91,002 13.35 469,200 13.19 Exercised (393,952) 2.90 --- --- Cancelled (31,010) 4.16 (4,000) 13.19 Options outstanding at ------- ------- December 30, 1994 2,196,752 $3.40 465,200 13.19 ======= ======= Option changes - 1995 Granted 5,000 33.50 318,500 $33.36 Exercised (601,802) 3.13 (45,700) 13.19 Cancelled (44,164) 4.84 (25,900) 13.19 Options outstanding at ------- ------- December 29, 1995 1,555,786 $3.56 712,100 $22.21 ======= ======= Exercisable: December 31, 1993 874,396 N/A December 30, 1994 1,157,246 --- December 29, 1995 1,213,536 65,700 Available for grant: December 31, 1993 83,448 N/A December 30, 1994 23,456 3,534,800 December 29, 1995 62,624 3,242,200
Note E: Employee Benefit and Retirement Plans The Company maintains a defined contribution 401(k) retirement plan for the benefit of eligible employees. Under the plan, a participant may elect to defer a portion of annual compensation. Matching contributions equal to the first 3 percent of annual compensation were made by the Company for all eligible participants. The Company may contribute additional amounts at the discretion of the Board of Directors. Company contributions to the plan were $4,707,000, $3,480,000 and $2,419,000 in 1995, 1994 and 1993, respectively. Contributions to the plan are immediately vested in plan participants' accounts. The Company maintains a deferred compensation plan that permits officers and certain management employees to defer portions of their compensation. Unless the plan is amended by the Company, the deferred amounts earn an annual interest rate of 12 percent during the term of the plan. The liabilities for the deferred salaries plus interest are included in "Other Long-Term Liabilities". The Company began money purchase and profit sharing plans for the benefit of eligible employees during 1993. Under the plans, 4 percent of eligible annual compensation was contributed by the Company for each participant in 1994 and 3 percent in 1993. No part of the contribution is vested until after a service period of five years, at which time the participant is fully vested. Company contributions to the plan were $3,451,000, $3,134,000 and $2,111,000 for 1995, 1994 and 1993,respectively.
Note F: Quarterly Financial Data (Unaudited) Selected quarterly financial data for 1995 and 1994 is as follows: (In thousands, except per-share data) First Second Third Fourth Quarter Quarter Quarter Quarter Total ------- ------- ------- ------- ------- 1995 Net sales $142,212 $159,939 $151,754 $181,324 $635,229 Gross profit 79,269 90,956 84,415 109,195 363,835 Net earnings 22,941 27,118 27,441 38,106 115,606 Earnings per share $0.25 $0.30 $0.30 $0.42 $1.26 * First Second Third Fourth Quarter Quarter Quarter Quarter Total ------- ------- ------- ------- ------- 1994 Net sales $99,538 $123,029 $123,015 $148,571 $494,153 Gross profit 53,411 66,632 66,665 83,295 270,003 Net earnings 11,198 17,018 18,098 26,075 72,389 Earnings per share $0.12 $0.19 $0.20 $0.29 $0.80 Per-share amounts are restated to reflect stock splits in 1995 and 1994. * The earnings-per-share computation for the year is a separate, annual calculation. Accordingly, the sum of the quarterly earnings-per-share amounts do not necessarily equal the earnings per share for the year.
[CAPTION] Note G: Income Taxes (In thousands) Year Ended Year Ended Year Ended 12/29/95 12/30/94 12/31/93 Components of the Company's -------- -------- -------- earnings before income taxes are as follows: Domestic source $97,372 $50,962 $15,593 Foreign source 65,453 46,862 20,208 ------- ------- ------- Total $162,825 $97,824 $35,801 ======= ======= ======= The provisions for income tax expense (benefit) consists of the following: Current: Federal $24,111 $16,689 $4,237 State 2,220 1312 301 Foreign 11,674 9,191 2,698 ------ ------ ------ 38,005 27,192 7,236 Deferred: Federal 7,435 (906) (2,054) Reduction of valuation allowance ---- (1,544) ---- Foreign and State 1,779 693 152 ------ ------ ------ 9,214 (1,757) (1,902) ------ ------ ------ Total $47,219 $25,435 $5,334 ====== ====== ====== Deferred tax assets (liabilities) under FASB 109 for 1995 and 1994 are comprised of the following: Ending Ending (In thousands) Balance Balance 12/29/95 12/30/94 Deferred tax assets -------- -------- Inventory reserves $2,710 $3,069 Deferred employee benefit expenses 2,933 3,627 Deferred Compensation Plan 1,607 740 Accrued liabilities 2,502 1,790 Alternative minimum tax carryforwards ---- 5,135 Research and development credit carryforwards 457 1,890 Other 61 391 ------ ------ Gross deferred tax assets 10,270 16,642 Deferred tax liabilities Depreciation (12,625) (9,203) Other untaxed reserves - Martis Oy (614) (566) Other (332) (414) ------ ------ Gross deferred tax liabilities (13,571) (10,183) ------ ------ Net Deferred Tax (Liability) Asset ($3,301) $6,459 ====== ======
Note G: Income Taxes (continued) Year Ended Year Ended Year Ended 12/29/95 12/30/94 12/31/93 --------- --------- --------- Federal income taxes at the statutory rate are reconciled with the Company's income tax provision as follows: Statutory U.S. income tax rate 35.0% 35.0% 35.0% Foreign income taxes (5.1) (7.2) (11.7) Foreign tax credit and research and (0.6) (2.9) (17.1) development credit Reduction of valuation allowance --- (1.6) --- Benefits attributable to foreign (0.3) (0.9) (1.2) sales corporation Dividends received from foreign subsidiaries --- --- 11.8 Resolution of certain income tax contingencies --- --- (3.0) Other - net --- 3.6 1.1 ---- ---- ---- Effective Income Tax Rate 29.0% 26.0% 14.9% ==== ==== ====
Note G: Income Taxes (continued) In January 1993, the Company changed its method of accounting for income taxes from Accounting Principles Board Opinion No. 11 (APB 11) and adopted Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes." The adoption of SFAS 109 changed the Company's method of accounting for income taxes from the deferred method to an asset-and-liability approach. Previously, the Company deferred the past tax effects of timing differences between financial reporting and taxable income. The asset-and-liability approach requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Deferred income taxes decreased to a liability balance of $3,301,000 at December 29, 1995, from an asset balance of $6,459,000 at December 30, 1994. The reduction of the deferred tax balance is attributable to the utilization of alternative minimum tax credits and research and development credits that were in the deferred income tax asset balance at the end of 1994. In 1994, the Company had reduced the valuation reserve required by SFAS 109 to zero from the 1993 balance of $1,544,000. This reduction resulted from the Company's re-evaluation of the realization of tax benefits from the future utilization of research and development tax credit carryforwards and alternative minimum tax credit carryforwards. The Company's projections for domestic income made the realization of these carryforwards more likely than not. The Company has research and development tax credit carryforwards for state income tax purposes of approximately $457,000 that will expire in the year 2000. Deferred U.S. income taxes are not provided on the undistributed cumulative earnings of foreign subsidiaries because such earnings are considered to be permanently invested in those operations. The cumulative earnings of foreign subsidiaries were approximately $98,203,000 at December 29, 1995. The amount of unrecognized deferred tax liability for undistributed cumulative earnings of foreign subsidiaries at December 29, 1995, was approximately $19,413,000. Note H: Major Customers No single customer accounted for more than 10 percent of consolidated net sales in 1995. Single customers accounted for approximately 15.3 percent and 12.3 percent of consolidated net sales in 1994 and 1993, respectively.
Note I: Business Segment and Geographical Information The Company operates in one business segment. Products include voice and data communication and networking equipment used in public and private communication networks worldwide. The Company operates in two principal geographic areas: North America and Europe. A summary of the Company's operations by area is presented below. Adjustments (In thousands) North and Consolidated America Europe Elimination Total 1995 ------- ------- ------- ------- Net Sales Unaffiliated customers $457,161 $178,068 --- $635,229 Intergeographic 2,751 7,156 ($9,907) --- ------- ------- ------- ------- Total $459,912 $185,224 ($9,907) $635,229 Operating profit $87,573 $69,080 --- $156,653 Identifiable assets $371,729 $180,322 --- $552,051 1994 Net Sales Unaffiliated customers $377,554 $116,599 --- $494,153 Intergeographic 5,796 5,034 ($10,830) --- ------- ------- ------- ------- Total $383,350 $121,633 ($10,830) $494,153 Operating profit $53,277 $46,405 --- $99,682 Identifiable assets $249,224 $140,843 --- $390,067 1993 Net Sales Unaffiliated customers $272,495 $47,968 --- $320,463 Intergeographic 5,307 4,671 ($9,978) --- ------- ------- ------- ------- Total $277,802 $52,639 ($9,978) $320,463 Operating profit $15,497 $16,549 --- $32,046 Identifiable assets $208,594 $120,172 --- $328,766
Operating profit is net sales less all related costs of sales, marketing, research and development, general and administrative and goodwill amortization, excluding interest and income taxes. Identifiable assets are those assets considered as necessary for the ongoing activities and operations of each geographic area. Intergeographic sales are accounted for as sales and as cost of sales between the domestic parent and its subsidiaries. The sales price or cost is dependent upon the product, consists of a discount from list price and is sufficient to recover cost plus an appropriate markup for profit. North American operating revenues include export sales to unaffiliated customers of approximately $33,105,000, $31,018,000, and $18,645,000 in 1995, 1994, and 1993, respectively. Note J: Commitments The Company and its subsidiaries have a number of operating lease agreements primarily involving office space, buildings and office equipment. These leases are non-cancellable and expire on various dates through 2009. As of December 29, 1995, future minimum lease commitments under non-cancellable operating leases are as follows: (In thousands) 1996 $5,822 1997 3,784 1998 1,797 1999 562 2000 442 2001 and thereafter 2,445 ------ Total Minimum Lease Payments $14,852 ====== Rental expense for the years ended December 29, 1995, December 30, 1994, and December 31, 1993, was approximately $3,420,000, $2,782,000, and $3,314,000, respectively. MANAGEMENT'S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS Sales during 1995 hit a record high as they exceeded the half-billion-dollar mark to reach $635,229,000 versus $494,153,000 in 1994. The 1995 sales growth of 28.5 percent was representative of both the continued strength and acceptance in the domestic marketplace of the TITAN (a registered trademark of Tellabs Operations, Inc.) 5500 digital cross-connect system and the growth of the Company's leading international product, the Martis DXX (a trademark of Martis Oy, a subsidiary of Tellabs, Inc.) integrated access and transport system. Each of these products addresses a different geographic marketplace, which provided for growth of 24 percent domestically and 38 percent internationally. Additionally, all of the major product groups posted gains over 1994 sales, as was the case in the prior two years. Digital cross-connect sales for 1995 reached the $300,000,000 mark, with an increase of almost $81,000,000 over that of the previous year. Sales of the Titan 5500 digital cross-connect system grew by 46 percent and continue to drive this product group. The Titan 5500 system is now standard in all but one of the major local exchange carriers and in most of the interexchange carriers in North America. The digital cross-connect group accounted for approximately 49 percent of total product sales as it continues to lead all product groups. The managed digital networks area exceeded last year's sales by 27 percent. The acceptance of the Martis DXX system in the international marketplace and agreements with Ericsson helped drive its $53,000,000 increase in sales during 1995. As was expected, the remaining products in this group, such as the CROSSNET (a registered trademark of Tellabs Operations, Inc.) data multiplexer and 33X packet switch products, experienced decreases in their sales over that of the previous year. Sales of network access products, which include analog voice-frequency products, digital echo cancellers and digital transcoders, exceeded the previous year's sales in each of the last five years, even though they continue to decrease as a percent of total product sales. Sales of the digital products within this group continued to grow as the products are incorporated into cellular networks. However, sales of the analog products continue to decline as customers migrate to digital technology. Net earnings for 1995 were $115,606,000, up 59.7 percent from 1994 earnings of $72,389,000. Earnings per share were $1.26 in 1995, compared with 80 cents in 1994. (The earnings-per-share amounts for both years are adjusted to reflect the effect of the 2-for-1 stock splits that occurred in May 1995 and May 1994.) This significant increase in earnings was primarily due to the increase in sales during 1995 and a corresponding 34.7 percent increase in gross profit dollars. Although operating expenses exceeded 1994's total, they continue to decrease as a percentage of sales. Sales during the fourth quarter of 1995 were a record $181,324,000, supporting the Company's typically strong fourth-quarter sales pattern. Sales of the TITAN 5500 system and Martis DXX system led the 22 percent sales increase over the 1994 fourth quarter. Net earnings for the quarter were $38,106,000, a 46.1 percent increase over 1994 earnings of $26,075,000. Earnings per share were 42 cents for the fourth quarter of 1995 and 29 cents for the fourth quarter of 1994. (The earnings-per-share amounts for both years are adjusted to reflect the effect of the 2-for-1 stock splits that occurred in May 1995 and May 1994.) The gross profit margin for 1995 improved significantly to a record level of 57.3 percent versus 54.6 percent in 1994. This improvement reflects both the sales of higher-margin products, including a small amount of higher-margin software sales, and the continuation of highly productive and efficient manufacturing operations. It will be a challenge to sustain the gross profit margin at this record-setting level. Total operating expenses increased 21.6 percent during 1995, an increase that was evenly divided between marketing and research and development. Marketing expenses increased 27.5 percent due to headcount-related expenses, international marketing activities, and customer support and service expenses. Research and development expenses increased 26.4 percent due to increased headcount-related expenses in support of planned enhancements to the Company's domestic and international product base. As a percentage of sales, total 1995 operating expenses were 32.6 percent compared to 34.5 percent in 1994. Each category as a percentage of sales decreased from 1994. Interest income increased to $5,855,000 in 1995, an 83.8 percent increase, compared with $3,185,000 in 1994. This was the result of interest-bearing investments more than doubling during 1995. Interest expense for 1995 of $124,000 decreased by $1,649,000 from 1994 expense of $1,773,000. The expense incurred in 1994 was primarily related to the bank debt used to finance the acquisition of Martis Oy. The debt was entirely repaid by the fourth quarter of 1994. The Company's investment in Advanced Access Labs, a joint venture between Advanced Fibre Communications, Inc. (AFC) and the Company by which the two companies combined their efforts in the local loop transport area to develop the CABLESPAN (a trademark of Tellabs Operations, Inc.) 2300 system, was written down to reflect the Company's share of the losses of the joint venture in accordance with the equity method of accounting. The equity in cumulative losses of the joint venture increased to $2,000,000 by the end of 1995 from $1,012,000 at the end of 1994. The technology platform that forms the basis for the CABLESPAN system is provided by AFC. As previously disclosed, AFC is in litigation with DSC Technologies Corporation and DSC Communications Corporation (collectively, DSC) relating to the intellectual property comprising that platform. DSC is seeking, among other things, a permanent injunction prohibiting AFC's sale or other use of the property. AFC has denied DSC's allegations and has filed counterclaims. If AFC were to lose its rights to the intellectual property, the Company's ability to continue to promote its CABLESPAN system as currently configured could be adversely affected. While there can be no assurance that AFC will prevail in this litigation, it has represented to the Company that it believes DSC's claims to be without merit (see also Part I, Item 3, "Legal Proceedings" of the Company's 1995 Annual Report on Form 10-K). Foreign exchange losses of $302,000 in 1995 were the result of the strength of the Finnish markka and the Irish punt versus the U.S. dollar. The significantly higher foreign exchange losses of $1,555,000 in 1994 were primarily the result of the strength of the Finnish markka versus the Swedish krona, U.S. dollar and other European currencies to which the Company has exposure. The effective tax rate was approximately 29 percent for 1995 and 26 percent for 1994. The increase in the effective tax rate for 1995 is primarily due to the reduction of research and development tax credits and reduced foreign tax rate benefits. The 1995 effective rate reflects adjustments from the federal statutory rate attributable to foreign tax rate benefits. Sales during 1994 approached the half-billion-dollar mark by totaling $494,153,000 versus $320,463,000 in 1993. The growth of 54.2 percent was representative of both the continued strength and acceptance in the domestic marketplace of the TITAN 5500 digital cross-connect system and the inclusion of a full year of sales of the Company's leading international product, the Martis DXX integrated access and transport system. As mentioned earlier, each of these products addresses a different geographic marketplace, which provided for growth in both the domestic and international sales channels. Additionally, all of the major product groups posted gains over 1993 sales, as was the case in the prior year. Total 1994 sales of network access products, which include analog voice- frequency products, digital echo cancellers and digital transcoders, exceeded the previous year's sales in each of the last four years even though they decreased as a percent of total product sales. Cellular operators became the frequent purchasers of these digital products. However, the increasing need for digital network access products had the opposite effect on the Company's sales of analog voice-frequency products. The digital cross-connect area surpassed the $200,000,000 mark during 1994 after just surpassing the $100,000,000 mark in the previous year. As was mentioned previously, the leader in this area was the TITAN 5500 digital cross-connect system, whose sales doubled in 1994. The customers of this product included five of the RBOCs and most of the interexchange carriers in the United States. The digital cross-connect group continued to lead all product groups in percent of total product sales. The managed digital networks area saw a resurgence in the percentage of total Tellabs sales in 1994 with the inclusion of the Martis DXX system in the last quarter of 1993. This group also includes data products such as the CROSSNET data multiplexer and 33X packet switch products, whose growth has slowed in the last few years. Net earnings for 1994 were $72,389,000, up 126.4 percent from 1993 earnings of $31,967,000. Earnings per share were 80 cents in 1994, compared with 36 cents in 1993. (The earnings-per-share amounts for both years have been adjusted to reflect the effect of the 2-for-1 stock splits that occurred in May 1995 and May 1994 and also the 3-for-2 stock split that occurred in November 1993). This significant increase in earnings was again primarily due to the increase in sales during 1994 and a corresponding 64.4 percent increase in gross profit dollars. Operating expenses in 1994 exceeded the 1993 total but decreased by almost 7 percent as a percentage of sales. Sales during the fourth quarter of 1994 were a then-record $148,571,000, reflecting the Company's typically strong fourth-quarter finish. Sales in 1994 of the TITAN 5500 system and Martis DXX system led the 38.6 percent increase over the 1993 fourth quarter. Net earnings for the 1994 fourth quarter were $26,075,000, a 72.1 percent increase over 1993 earnings of $15,155,000. Earnings per share were 29 cents for the fourth quarter of 1994 and 17 cents for the fourth quarter of 1993. (The earnings-per-share amounts for both years have been adjusted to reflect the effect of the 2-for-1 stock splits that occurred in May 1995 and May 1994 and also the 3-for-2 stock split that occurred in November 1993). The gross profit margin for 1994 improved significantly to a then-record level of 54.6 percent versus 51.3 percent in 1993. This improvement reflected both the sales of higher-margin products and the continuation of highly productive and efficient manufacturing operations. Total operating expenses increased 28.8 percent during 1994, an increase that was spread throughout all expense categories. Included in each category discussed below for 1994 are 12 months of Martis' operating expenses versus only three months for 1993. Marketing expenses increased 21 percent in total due to increases in customer support and service expenses, headcount-related expenses and increased international marketing activities. Research and development expenses increased 27 percent in total due to increased headcount-related expenses in support of planned enhancements to the Company's products. General and administrative expenses increased 43.9 percent in total due to both the expense associated with compensation tied to the market price of the Company's stock and additional headcount-related expenses. As a percentage of sales, total 1994 operating expenses were 34.5 percent compared to 41.3 percent in 1993. Each category except general and administrative has shown a constant decrease as a percentage of sales since 1991. Interest income increased to $3,185,000 in 1994, an 8.5 percent increase over $2,935,000 in 1993. Interest-bearing investments increased as additional cash balances became available to invest. The $1,286,000 increase in 1994 interest expense resulted from the interest paid on the demand notes payable that were outstanding throughout most of 1994. In April 1994, the Company and AFC began a joint venture. The equity in losses of the joint venture totaled $1,012,000 in 1994. Foreign exchange losses of $1,555,000 in 1994 were the result of the strength of the Finnish markka versus the U.S. dollar and other European currencies to which the Company has exposure. The foreign exchange gains of $1,118,000 in 1993 were primarily the result of the devaluation of the Irish punt in the first quarter of 1993, which accounted for $882,000 of the total amount. The effective tax rate was approximately 26 percent for 1994 and 14.9 percent for 1993. The 1994 effective rate primarily reflects adjustments from the federal statutory rate attributable to foreign tax rate benefits, benefits attributable to foreign tax credits and research and development credits, and reduction in the valuation allowance. The 1993 effective rate reflected greater benefits attributable to foreign tax rates, foreign tax credits and research and development credits. LIQUIDITY AND CAPITAL RESOURCES The Company has never paid a cash dividend, and current policy is to retain earnings to provide funds for the operation and expansion of the business. The Company does not anticipate paying cash dividends in the foreseeable future. Net working capital at December 29, 1995, was $267,806,000, compared with working capital of $138,317,000 at December 30, 1994. The Company's current ratio at December 29, 1995 was 3.7 to 1. The increase in net working capital is primarily due to the Company's record earnings. Management believes this level of working capital will be adequate to meet the Company's liquidity needs related to normal operations both currently and in the foreseeable future. Sufficient resources exist to support the Company's growth either through currently available cash, through cash generated from future operations, or through additional short-term or long-term financing. Operating activities provided the Company with a significant amount of cash due to net earnings of $115,606,000. Net trade accounts receivable increased by $43,168,000 to a year-end balance of $127,565,000, due primarily to the record-level sales volume in the fourth quarter of 1995. Total inventory levels increased by $15,834,000 from 1994 levels. Raw materials increased in support of the introduction of the CABLESPAN system and the increased volume of cross-connect sales. The increase in finished goods inventory is consistent with the increase in current sales levels versus 1994 and with 1996 sales forecasts. The inventory turnover ratio increased to 4.5 times from 4.4 times in 1994. The increase of $9,453,000 in the deferred income tax balance is attributable to the utilization of alternative minimum tax credits and research and development credits. The 1994 long-term income taxes represented Martis Oy income taxes due in 1996. The Company increased its holdings in marketable securities by $46,542,000 as additional cash balances became available for investment. The Company also invested approximately $35,000,000 during 1995 in property, plant and equipment. Additions were made to increase manufacturing capacity at international locations, with the remainder of the increase representing equipment to support domestic manufacturing and R&D capabilities. Finally, an additional $18,245,000 of cash was provided to the Company through the exercise of stock options under the Company's stock option plans. OUTLOOK The outlook for 1996 anticipates growth at both the international and domestic levels. International growth will be primarily driven by sales of the Martis DXX system. Domestic growth continues to be dependent upon even stronger TITAN 5500 system sales. Adding to the growth of both international and domestic channels will be the emergence of the CABLESPAN system. At December 29, 1995, backlog increased to approximately $84,000,000 from $80,000,000 at the end of the prior year. All of the 1995 backlog is expected to be shipped in 1996. The Company considers backlog to be an indicator, but not the sole predictor, of future sales. During 1996, the Company will continue to focus on providing the resources to support revenue growth in the most cost-effective method possible. To that end, total operating expenses for 1996 are expected to average approximately 32 percent of planned revenues. Research and development expenses are expected to maintain an average of approximately 13 percent of sales. Marketing and general and administrative expenses are expected to average approximately 19 percent of sales. Management believes these levels, which are relatively consistent with 1995 and 1994, can be attained while supporting the sales and product growth slated for 1996 and beyond as the Company continues to invest in its future growth. The 1996 capital expenditure plan totals $45,000,000. It is anticipated that 1996 working capital requirements and capital expenditures will be met with funds currently on hand and funds generated by future earnings. Earnings for 1996 are expected to be taxed at a 29 percent rate. The Company believes that the formation of business relationships with compatible organizations is important to future growth in that it allows the Company the opportunity to share in the development of new markets, products and technologies. It is for this reason that the Company will continue to pursue the establishment of such relationships. EX-20 5 AGREEMENT OF MERGER Dated as of March 11, 1996 Among TELLABS, INC., TIGER MERGER CO., and STEINBRECHER CORPORATION TABLE OF CONTENTS ARTICLE I DEFINITIONS . . . . . . . . . . . . . . . . . . .2 1.1. Definitions . . . . . . . . . . . . . . . . . . .2 ARTICLE II THE MERGER. . . . . . . . . . . . . . . . . . . 10 2.1. Surviving Corporation . . . . . . . . . . . . . 10 2.2. Effects of the Merger . . . . . . . . . . . . . 11 2.3. Certificate of Incorporation, By-Laws, Directors and Officers. . . . . . . . . . . . . 11 ARTICLE III CONVERSION OF SHARES; DETERMINATION OF PURCHASE PRICE. . . . . . . . . . . . . . . . . 11 3.1. Conversion Terms. . . . . . . . . . . . . . . . 11 3.2. Dissenting Shares . . . . . . . . . . . . . . . 14 3.3. Exchange of and Payment for Shares, Options and Warrants. . . . . . . . . . . . . . . . . . 15 3.4. Lost Certificates and Agreements. . . . . . . . 16 3.5. Unclaimed Funds . . . . . . . . . . . . . . . . 16 3.6. Withholding Rights. . . . . . . . . . . . . . . 17 3.7. Indemnity Escrow Agreement. . . . . . . . . . . 17 3.8. Further Assurances. . . . . . . . . . . . . . . 18 ARTICLE IV CLOSING . . . . . . . . . . . . . . . . . . . . 18 4.1. Closing Date. . . . . . . . . . . . . . . . . . 18 4.2. Filing Certificate of Merger and Effectiveness . . . . . . . . . . . . . . . . . 18 4.3. Parent's Additional Deliveries. . . . . . . . . 19 4.4. Mergerco's Deliveries . . . . . . . . . . . . . 19 4.5. The Company's Deliveries. . . . . . . . . . . . 20 ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE COMPANY . . . . . . . . . . . . . . . . . . . . 21 5.1. Organization and Capital Structure. . . . . . . 21 5.2. Subsidiaries and Investments. . . . . . . . . . 23 5.3. Authority . . . . . . . . . . . . . . . . . . . 24 5.4. Financial Statements. . . . . . . . . . . . . . 25 5.5. Operations Since Balance Sheet Date . . . . . . 25 5.6. No Undisclosed Liabilities. . . . . . . . . . . 28 5.7. Taxes . . . . . . . . . . . . . . . . . . . . . 28 5.8. Availability of Assets and Legality of Use. . . 30 5.9. Governmental Permits. . . . . . . . . . . . . . 30 5.10. Real Property . . . . . . . . . . . . . . . . . 31 5.11. Real Property Leases. . . . . . . . . . . . . . 31 5.12. Condemnation. . . . . . . . . . . . . . . . . . 31 5.13. Personal Property . . . . . . . . . . . . . . . 31 5.14. Personal Property Leases. . . . . . . . . . . . 31 5.15. Intellectual Property; Software . . . . . . . . 32 5.16. Accounts Receivable; Inventories. . . . . . . . 35 5.17. Title to Property . . . . . . . . . . . . . . . 36 5.18. Employee Benefit Plans. . . . . . . . . . . . . 36 5.19. Employee Relations. . . . . . . . . . . . . . . 41 5.20. Contracts; Product Warranties . . . . . . . . . 41 5.21. Status of Contracts . . . . . . . . . . . . . . 43 5.22. No Violation, Litigation or Regulatory Action. . . . . . . . . . . . . . . . . . . . . 43 5.23. Environmental Matters . . . . . . . . . . . . . 44 5.24. Insurance . . . . . . . . . . . . . . . . . . . 46 5.25. Customers and Suppliers . . . . . . . . . . . . 47 5.26. Budgets . . . . . . . . . . . . . . . . . . . . 47 5.27. No Finder . . . . . . . . . . . . . . . . . . . 47 5.28. Financial Projections . . . . . . . . . . . . . 47 5.29. Proxy Statement . . . . . . . . . . . . . . . . 47 5.30. Opinion of Financial Advisor. . . . . . . . . . 48 ARTICLE VI REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGERCO. . . . . . . . . . . . . . . . . . 48 6.1. Organization and Capital Structure. . . . . . . 48 6.2. Authority . . . . . . . . . . . . . . . . . . . 48 6.3. No Finder . . . . . . . . . . . . . . . . . . . 50 6.4. No Litigation or Regulatory Action. . . . . . . 50 6.5. Investment Representation . . . . . . . . . . . 50 ARTICLE VII ACTION PRIOR TO THE EFFECTIVE TIME. . . . . . . 50 7.1. Investigation of the Company by Parent. . . . . 50 7.2. Preserve Accuracy of Representations and Warranties. . . . . . . . . . . . . . . . . . . 51 7.3. Consents of Third Parties; Governmental Approvals . . . . . . . . . . . . . . . . . . . 51 7.4. Conduct of Business Prior to the Effective Time. . . . . . . . . . . . . . . . . . . . . . 52 7.5. Notification by the Company of Certain Matters . . . . . . . . . . . . . . . . . . . . 55 7.6. Mutual Cooperation; Reasonable Best Efforts . . 55 7.7. No Solicitation . . . . . . . . . . . . . . . . 55 7.8. Subsequent Financial Statements . . . . . . . . 56 7.9. Antitrust Law Compliance. . . . . . . . . . . . 57 ARTICLE VIII ADDITIONAL AGREEMENTS . . . . . . . . . . . . . 57 8.1. Preparation of Proxy Statement; Action by Company. . . . . . . . . . . . . . . . . . . 57 8.2. Restricted Parent Common Stock Pool . . . . . . 58 8.3. Indemnification and Insurance . . . . . . . . . 58 ARTICLE IX CONDITIONS PRECEDENT TO OBLIGATIONS OF PARENT AND MERGERCO . . . . . . . . . . . . . . 59 9.1. No Misrepresentation or Breach of Covenants and Warranties. . . . . . . . . . . . . . . . . 59 9.2. No Changes or Destruction of Property . . . . . 59 9.3. No Restraint or Litigation. . . . . . . . . . . 60 9.4. Necessary Governmental Approvals. . . . . . . . 60 9.5. Necessary Consents. . . . . . . . . . . . . . . 60 9.6. Stockholders' Approval; Dissenters' Rights. . . 60 9.7. Indebtedness. . . . . . . . . . . . . . . . . . 61 9.8. Warrants. . . . . . . . . . . . . . . . . . . . 61 9.9. FIRPTA Certificate. . . . . . . . . . . . . . . 61 9.10. Fairness Opinion. . . . . . . . . . . . . . . . 61 ARTICLE X CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY . . . . . . . . . . . . . . . . . . 62 10.1. No Misrepresentation or Breach of Covenants and Warranties. . . . . . . . . . . . . . . . . 62 10.2. No Restraint or Litigation. . . . . . . . . . . 62 10.3. Necessary Governmental Approvals. . . . . . . . 62 ARTICLE XI INDEMNIFICATION . . . . . . . . . . . . . . . . 62 11.1. Indemnity Fund. . . . . . . . . . . . . . . . . 62 11.2. Indemnification from Indemnity Fund . . . . . . 63 11.3. Termination of Indemnity Fund . . . . . . . . . 64 11.4. Notice and Determination of Claims. . . . . . . 64 11.5. Stockholder Representatives . . . . . . . . . . 66 11.6. Actions of the Stockholder Representatives. . . 67 11.7. Third Person Claims . . . . . . . . . . . . . . 67 ARTICLE XII TERMINATION . . . . . . . . . . . . . . . . . . 68 12.1. Termination Rights. . . . . . . . . . . . . . . 68 12.2. Notice of Termination . . . . . . . . . . . . . 69 12.3. Effect of Termination . . . . . . . . . . . . . 69 ARTICLE XIII GENERAL PROVISIONS. . . . . . . . . . . . . . . 69 13.1. Survival of Obligations . . . . . . . . . . . . 69 13.2. Confidential Nature of Information; Non-Solicitation. . . . . . . . . . . . . . . 69 13.3. No Public Announcement. . . . . . . . . . . . . 70 13.4. Notices . . . . . . . . . . . . . . . . . . . . 70 13.5. Successors and Assigns. . . . . . . . . . . . . 71 13.6. Entire Agreement; Amendments. . . . . . . . . . 72 13.7. Interpretation. . . . . . . . . . . . . . . . . 72 13.8. Waivers . . . . . . . . . . . . . . . . . . . . 72 13.9. Fees and Expenses . . . . . . . . . . . . . . . 73 13.10. Partial Invalidity. . . . . . . . . . . . . . . 74 13.11. Execution in Counterparts . . . . . . . . . . . 74 13.12. Further Assurances. . . . . . . . . . . . . . . 75 13.13. Governing Law . . . . . . . . . . . . . . . . . 75 AGREEMENT OF MERGER AGREEMENT OF MERGER, dated as of March 11, 1996 (this "Agreement"), among Tellabs, Inc., a Delaware corporation ("Parent"), Tiger Merger Co., a Delaware corporation indirectly wholly-owned by Parent ("Mergerco"), and Steinbrecher Corporation, a Delaware corporation (the "Company"), (Mergerco and the Company being hereinafter sometimes referred to as the "Constituent Corporations"). W I T N E S S E T H: WHEREAS, Mergerco is a Delaware corporation having an authorized capital of 1,000 shares of common stock, par value $.01 per share ("Mergerco Common Stock"), all of which are issued and outstanding and owned of record and beneficially by Tellabs Operations, Inc., a Delaware corporation and a wholly-owned subsidiary of Parent ("Operations"); and WHEREAS, the Company is a Delaware corporation having (i) an authorized capital of 25,000,000 shares of common stock, par value $.01 per share (the "Company Common Stock"), of which, as of the date hereof, 1,530,679 shares are issued and outstanding; (ii) 1,000,000 shares of special preferred stock, $.01 par value per share (the "Special Preferred Stock"), none of which are issued and outstanding; and (iii) 10,411,429 shares of convertible preferred stock, $1.00 par value per share (the "Company Preferred Stock"), of which, as of the date hereof, 9,147,548 shares are issued and outstanding; and WHEREAS the Company also has outstanding certain Warrants and Stock Options (as defined below); and WHEREAS, the Company is engaged in the business of developing, manufacturing and selling wideband wireless communication systems; and WHEREAS, the respective Boards of Directors of Parent and the Constituent Corporations have approved the merger (the "Merger") of Mergerco into the Company pursuant to the terms and conditions of this Agreement, Operations has approved the Merger and adopted this Agreement as the sole stockholder of Mergerco, and the Board of Directors of the Company has directed that this Agreement be submitted to its stockholders for adoption; and WHEREAS, Parent, Mergerco and the Company desire to make certain representations, warranties and agreements in connection with the Merger and to prescribe various conditions to the Merger. NOW, THEREFORE, in consideration of the mutual cove- nants and agreements hereinafter set forth, it is hereby agreed among the parties as follows: ARTICLE I DEFINITIONS 1.1. Definitions. In this Agreement, the following terms have the meanings specified or referred to in this Sec- tion 1.1 and shall be equally applicable to both the singular and plural forms and reference to the neuter gender includes the masculine and feminine where appropriate. Any agreement referred to below shall mean such agreement as amended, supplemented and modified from time to time to the extent permitted by the applicable provisions thereof and by this Agreement. "Accruing Dividends" has the meaning specified in paragraph 3 of Article FOURTH of the Company's Certificate of Incorporation as in effect on the date hereof. "Acquisition Expenses" has the meaning specified in Section 13.9(a). "Acquisition Proposal" shall have the meaning specified in Section 7.7. "Affiliate" means, with respect to any Person, any other Person which directly or indirectly controls, is controlled by or is under common control with such Person. "Agreement" shall have the meaning specified in the first paragraph of this Agreement of Merger. "Aggregate Merger Consideration" has the meaning specified in Section 3.1(k). "Associate" has the meaning specified in Section 5.18(j). "Audited Financial Statements" has the meaning specified in Section 5.4. "Balance Sheet" means the audited balance sheet of the Company as of December 31, 1995 included in Schedule 5.4. "Balance Sheet Date" means December 31, 1995. "Cash Flow Projection" means the cash flow projection from the Company's calendar year 1996 Business Plan, as amended on January 31, 1996, a copy of which is attached as Schedule I to the Parent Loan Agreement. "CERCLA" means the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Subsection 9601 et seq., any amendments thereto, any successor statutes, and any regulations promulgated thereunder. "Claim Notice" has the meaning specified in Section 11.4(a). "Closing" means the closing of the Merger of Mergerco with and into the Company in accordance with Article IV. "Closing Date" has the meaning specified in Section 4.1. "Code" means the Internal Revenue Code of 1986, as amended from time to time. "Common Stock Premium" means, with respect to any date, 5% of $2.02, compounded annually, calculated from August 5, 1987 up to and including such date. "Company" has the meaning specified in the first paragraph of this Agreement. "Company Agreements" has the meaning specified in Section 5.21. "Company Ancillary Agreements" means the Certificate of Merger identified in Section 4.2 and all certificates to be executed and delivered by or on behalf of the Company under this Agreement. "Company Common Stock" has the meaning specified in the second WHEREAS clause of this Agreement. "Company Group" means any "affiliated group" (as defined in Section 1504(a) of the Code without regard to the limitations contained in Section 1504(b) of the Code) that files or has filed a consolidated federal income Tax Return and that, at any time on or before the Effective Time, includes or has included the Company or any predecessor of or successor to the Company (or another such predecessor or successor), or any other group of corporations which, at any time on or before the Effective Date, files or has filed Tax Returns on a combined, consolidated or unitary basis with the Company or any predecessor of or successor to the Company (or another such predecessor or successor). "Company Preferred Stock" has the meaning specified in the second WHEREAS clause of this Agreement. "Company Property" means any real or personal property, plant, building, facility, structure, underground storage tank, equipment or unit, or other asset owned, leased or operated by the Company (including any surface water thereon or adjacent thereto and any soil or ground water thereunder), whether currently or at any previous time. "Confidentiality Agreement" means that certain Non-Disclosure Agreement dated January 30, 1996, between Parent and the Company. "Constituent Corporations" has the meaning specified in the first paragraph of this Agreement. "Contaminant" means any waste, pollutant, hazardous or toxic substance or waste, petroleum, petroleum-based substance or waste, special waste, or any constituent of any such substance or waste. "Court Order" means any judgment, order, award or decree of any foreign, federal, state, local or other court or tribunal and any award in any arbitration proceeding. "DGCL" means the Delaware General Corporation Law, as amended. "Dissenting Consideration" has the meaning specified in Section 3.2. "Dissenting Shares" has the meaning specified in Section 3.2 "Effective Date" and "Effective Time" have the respective meanings specified in Section 4.2. "Encumbrance" means any lien, claim, charge, security interest, mortgage, pledge, easement, conditional sale or other title retention agreement, defect in title, covenant or other restriction of any kind. "Environmental Encumbrance" means an Encumbrance in favor of any Governmental Body for (i) any liability under any Environmental Law, or (ii) damages arising from, or costs incurred by such Governmental Body in response to, a Release or threatened Release of a Contaminant into the environment. "Environmental Law" means all Requirements of Laws derived from or relating to all federal, state and local laws or regulations relating to or addressing the environment, health or safety, including but not limited to CERCLA, OSHA and RCRA and any state equivalent thereof. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, including any regulations promulgated thereunder. "Expense" means any and all expenses incurred in connection with investigating, defending or asserting any claim, action, suit or proceeding incident to any matter indemnified against hereunder (including, without limitation, court filing fees, court costs, arbitration fees or costs, witness fees and reasonable fees and disbursements of legal counsel, investigators, expert witnesses, consultants, accountants and other professionals). "Extra Per Share Payment" has the meaning specified in Section 3.1(j). "Governmental Body" means any foreign, federal, state, local or other governmental authority or regulatory body. "Governmental Permits" has the meaning specified in Section 5.9. "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. "Indemnity Agent" has the meaning specified in Section 11.1. "Indemnity Agreement" has the meaning specified in Section 11.1. "Indemnity Amount" has the meaning specified in Section 3.7. "Indemnity Fund" has the meaning specified in Section 3.7. "IRS" means the Internal Revenue Service. "Leased Real Property" has the meaning specified in Section 5.11. "Loss" means any and all losses, costs, obligations, liabilities, settlement payments, awards, judgments, fines, penalties, damages, expenses, deficiencies or other charges. "Material Adverse Change" or "Material Adverse Effect" means any change or effect (or any development that, insofar as can be reasonably foreseen, would result in any change or effect) that is materially adverse to the assets, business, financial condition or results of operations of the applicable Person or Persons. "MCRC Warrant" has the meaning specified in the definition of "Warrants" below. "Merger" has the meaning in the fifth WHEREAS clause of this Agreement. "Mergerco" has the meaning specified in the first paragraph of this Agreement. "Mergerco Common Stock" has the meaning specified in the first WHEREAS clause of this Agreement. "1988 Stock Plan" means the 1988 Incentive Stock Option Plan adopted by the Board of Directors of the Company on October 19, 1988, as amended on August 17, 1990, July 19, 1991, February 1, 1993 and November 30, 1993. "1994 Stock Plan" means the 1994 Stock Option/Stock Issuance Plan adopted by the Board of Directors of the Company on April 12, 1994, as amended on September 16, 1994. "Option Consideration" has the meaning specified in Section 3.1(h). "OSHA" means the Occupational Safety and Health Act, 29 U.S.C. Subsection 651 et seq., any amendment thereto, any successor statute, and any regulations promulgated thereunder. "Parent" has the meaning specified in the first para- graph of this Agreement. "Parent Ancillary Agreements" means the Indemnity Agreement and all certificates to be executed and delivered by or on behalf of Parent under this Agreement. "Parent Group Member" means Parent and its Affiliates and their respective successors and assigns, including, after the Effective Time, the Surviving Corporation. "Parent Loan Agreement" means that certain Loan Agreement, dated as of February 26, 1996, between Parent as Lender and the Company as Borrower. "Paying Agent" has the meaning specified in Section 3.3(a). "Paying Agency Agreement" has the meaning specified in Section 3.3(a). "Per Common Share Price" has the meaning specified in Section 3.1(c). "Per Preferred Share Price" means the amount into which any share of Company Preferred Stock is convertible pursuant to Sections 3.1(d), 3.1(e), 3.1(f) or 3.1(g). "Permitted Encumbrances" means (i) liens for Taxes not yet due or liens for Taxes being contested in good faith and by appropriate proceedings if adequate reserves with respect thereto are reflected on the Balance Sheet of the Company in accordance with generally accepted accounting principles; (ii) liens on property or assets of the Company, such as carriers', warehousemen's, landlord's and mechanics' liens and other similar liens, in each case, arising in the ordinary course of business and that do not in the aggregate materially detract from the value of the property or assets subject thereto or materially impair the use thereof in the operation of the business of the Company; (iii) pledges or deposits incurred or made in connection with workmen's compensation, unemployment insurance and other social security benefits, or securing the performance of bids, tenders, leases, contracts (other than for the repayment of borrowed money), statutory obligations, progress payments, surety and appeal bonds and other obligations of like nature, in each case incurred in the ordinary course of business, not involving in excess of $100,000 in the aggregate; (iv) liens under Article 2 of the Uniform Commercial Code that are special property interests in goods identified as goods to which a contract refers; (v) liens under Article 9 of the Uniform Commercial Code that are purchase money security interests attaching to the assets acquired in connection therewith; (vi) existing liens described on Schedule 5.17 and existing liens securing lease obligations which involve the payment by the Company of less than $10,000 per year; and (vii) liens in favor of Parent. "Person" means any individual, corporation, partner- ship, limited liability company, joint venture, association, joint-stock company, trust, unincorporated organization or Governmental Body. "Proxy Statement" has the meaning specified in Section 5.29. "RCRA" means the Resource Conservation and Recovery Act, 42 U.S.C. Subsection 6901 et seq., and any successor statute, and any regulations promulgated thereunder. "Release" means any release, spill, emission, leaking, pumping, injection, deposit, disposal, discharge, dispersal, leaching or migration of a Contaminant into the indoor or outdoor environment or into or out of any Company Property, including the movement of Contaminants through or in the air, soil, surface water or groundwater of any Company Property. "Remedial Action" means actions required to (i) clean up, remove, treat or in any other way address Contaminants in the indoor or outdoor environment; (ii) prevent the Release or threatened Release or minimize the further Release of Contaminants or (iii) investigate and determine if a remedial response is needed and to design such a response and post-remedial investigation, monitoring, operation and maintenance and care. "Requirements of Laws" means any foreign, federal, state and local laws, statutes, regulations, rules, codes or ordinances enacted, adopted, issued or promulgated by any Governmental Body (including, without limitation, those pertaining to electrical, building, zoning, environmental and occupational safety and health requirements) or common law. "Securities" means, collectively, shares of Company Common Stock and Company Preferred Stock, Stock Options and Warrants. "Series A Preferred Stock," "Series B Preferred Stock," "Series C Preferred Stock" and "Series D Preferred Stock" each has the meaning set forth in Section 5.1(b). "Software" has the meaning specified in Section 5.15(b). "Special Preferred Stock" has the meaning specified in the second WHEREAS clause of this Agreement. "Stock Agreements" has the meaning specified in Section 3.3(b). "Stock Certificates" has the meaning specified in Section 3.3(b). "Stock Options" means the option agreements granted under the Company's 1988 Stock Plan or 1994 Stock Plan for the purchase of shares of Company Common Stock. "Stockholder Representatives" means two Persons (and an alternate Person, to serve in the event either of them is unable or unwilling to act) designated in writing by the Company to Parent prior to the delivery of the Proxy Statement pursuant to Section 8.1, or if such Person is unable or unwilling to act, then the Person appointed by a written instrument or instruments delivered to Parent and signed by the holders of Securities (other than shares of Series D Preferred Stock and Dissenting Shares) who would be entitled to receive a majority of the Aggregate Merger Consideration at the Effective Time pursuant to Section 3.1. "Stockholders' Meeting" has the meaning specified in Section 5.29. "Subordinated Note" means that certain 8 1/2% Subordinated Note, in the aggregate principal amount of $1,000,000, dated March 5, 1993, issued to Massachusetts Capital Resource Company. "Subsidiary" means, for any Person, any corporation, partnership, joint venture or other entity of which the Person (i) owns, directly or indirectly, 50% or more of the outstanding voting securities or equity interests, or (ii) is a general partner. "Surviving Corporation" has the meaning specified in Section 2.1. "Surviving Corporation Common Stock" has the meaning specified in Section 3.1(a). "Tax" (and with correlative meaning "Taxes", "Taxing" and "Taxable") means: (i) any federal, state, local or foreign net income, alternative or add-on minimum, gross income, gross receipts, property, ad valorem, value added, sales, use, transfer, gains, license, franchise, severance, excise, employment, payroll, environmental, windfall profit, withholding, stamp or any other tax, custom, duty, governmental fee or other like assessment or charge of any kind whatsoever, together with any interest or any penalty, addition to tax or additional amount imposed by any Governmental Body; and (ii) any liability of the Company for the payment of amounts with respect to payments of a type described in clause (i) of this definition as a result of being a member of an affiliated, consolidated, combined or unitary group, or as a result of any obligation of the Company under any Tax Sharing Arrangement or Tax indemnity arrangement. "Tax Return" means any return, report or similar statement required to be filed with any Taxing authority with respect to any Taxes (including any attached schedules), including, without limitation, any information return, claim for refund, amended return or declaration of estimated Tax. "Tax Sharing Arrangement" means any written or unwritten agreement or arrangement for the allocation or payment of Tax liabilities or payment for Tax benefits with respect to a consolidated, combined or unitary Tax Return which Tax Return includes or included the Company (or predecessors or successors of the Company). "Unaudited Financial Statements" has the meaning specified in Section 5.4. "Warrant Consideration" has the meaning specified in Section 3.1(i). "Warrants" means (i) that certain Common Stock Purchase Warrant, dated March 5, 1993 (the "MCRC Warrant"), to acquire 238,095 shares of Company Common Stock issued to Massachusetts Capital Resource Company pursuant to a certain Subordinated Note and Warrant Purchase Agreement, dated as of March 5, 1993, between the Company and Massachusetts Capital Resource Company, and (ii) that certain Stock Purchase Warrant to purchase 20,000 shares of Company Common Stock issued to Financing for Science International, Inc. ARTICLE II THE MERGER 2.1. Surviving Corporation. Upon the terms and subject to the conditions contained herein and in accordance with the provisions of this Agreement and the DGCL, at the Effective Time, Mergerco shall be merged with and into the Company, which, as the corporation surviving in the Merger (the "Surviving Corporation"), shall continue to exist under and be governed by the laws of the State of Delaware. Upon the effectiveness of the Merger, the separate existence of Mergerco shall cease except to the extent provided by the DGCL and the Surviving Corporation shall succeed to and assume all the rights and obligations of Mergerco in accordance with the DGCL. 2.2. Effects of the Merger. The Merger shall have the effects set forth in Sections 259 through 261 of the DGCL. 2.3. Certificate of Incorporation, By-Laws, Directors and Officers. At the Effective Time, the Certificate of Incorporation of the Company, as in effect immediately prior to the Effective Time, shall be amended so that Article FOURTH thereof reads in its entirety as follows: "The authorized capital stock of the Corporation shall be 1,000 shares of Common Stock, $0.01 par value". As so amended, such Certificate of Incorporation shall be the Certificate of Incorporation of the Surviving Corporation until thereafter changed or amended as provided therein or by applicable law. The By-Laws of the Company, as in effect immediately prior to the Effective Time, shall continue in full force and effect as the By-Laws of the Surviving Corporation. The directors of Mergerco immediately prior to the Effective Time shall be the initial directors of the Surviving Corporation until their resignation or removal or until their respective successors are duly elected and qualified. The statutory officers of the Company immediately prior to the Effective Time shall be the initial statutory officers of the Surviving Corporation until their resignation or removal or until their respective successors are duly elected and qualified. ARTICLE III CONVERSION OF SHARES; DETERMINATION OF PURCHASE PRICE 3.1. Conversion Terms. As of the Effective Time, by virtue of the Merger and without any action on the part of any stockholder of the Company or Mergerco: (a) Mergerco Common Stock. Each share of Mergerco Common Stock issued and outstanding immediately prior to the Effective Time shall be converted into and become one fully paid and nonassessable share of common stock, par value $.01 per share, of the Surviving Corporation ("Surviving Corporation Common Stock"). From and after the Effective Time, each outstanding certificate theretofore representing shares of Mergerco Common Stock shall be deemed for all purposes to evidence ownership of, and to represent the number of shares of, Surviving Corporation Common Stock into which such shares of Mergerco Common Stock shall have been converted. (b) Treasury Stock. All shares of Company Common Stock and Company Preferred Stock that immediately prior to the Effective Time are held in the treasury of the Company shall be canceled and retired and no cash or other consideration shall be paid or delivered in exchange therefor and the Merger will effect no conversion thereof. (c) Company Common Stock. Subject to the provisions of Section 3.7 and Article XI, each share of Company Common Stock issued and outstanding immediately prior to the Effective Time, including any shares of Company Common Stock issued after the date of this Agreement upon the exercise of existing Stock Options or Warrants, or the conversion of existing shares of Company Preferred Stock in accordance with their respective terms (other than shares to be canceled pursuant to Section 3.1(b)), shall be converted into and become the right to receive, without interest, $2.02 plus the accrued and unpaid Common Stock Premium up to and including the Effective Date and plus (to the extent provided in Section 3.1(j)) the Extra Per Share Payment (such aggregate amount being hereinafter referred to as the "Per Common Share Price"). All such shares of Company Common Stock, when so converted, shall no longer be outstanding and shall automatically be canceled and retired; and each holder of a certificate representing any such Company Common Stock shall cease to have any rights with respect thereto, except the right to receive the Per Common Share Price for each share of Company Common Stock. (d) Series A Preferred Stock. Subject to the provisions of Section 3.7 and Article XI, each share of Series A Preferred Stock issued and outstanding immediately prior to the Effective Time (other than shares to be canceled pursuant to Section 3.1(b)) shall be converted into and become the right to receive, without interest, $4.20 plus the unpaid Accruing Dividends with respect thereto (whether or not declared) and plus (to the extent provided in Section 3.1(j)) the Extra Per Share Payment times 4.20 divided by 1.26. All such shares of Series A Preferred Stock, when so converted, shall no longer be outstanding and shall automatically be canceled and retired; and each holder of a certificate representing any such Series A Preferred Stock shall cease to have any rights with respect thereto, except the right to receive the Per Preferred Share Price specified in the foregoing sentence for each share of Series A Preferred Stock. (e) Series B Preferred Stock. Subject to the provisions of Section 3.7 and Article XI, each share of Series B Preferred Stock issued and outstanding immediately prior to the Effective Time (other than shares to be canceled pursuant to Section 3.1(b)) shall be converted into and become the right to receive, without interest, $2.02 plus the unpaid Accruing Dividends with respect thereto (whether or not declared) and plus (to the extent provided in Section 3.1(j)) the Extra Per Share Payment times 2.02 divided by 1.26. All such shares of Series B Preferred Stock, when so converted, shall no longer be outstanding and shall automatically be canceled and retired; and each holder of a certificate representing any such Series B Preferred Stock shall cease to have any rights with respect thereto, except the right to receive the Per Preferred Share Price specified in the foregoing sentence for each share of Series B Preferred Stock. (f) Series C Preferred Stock. Subject to the provisions of Section 3.7 and Article XI, each share of Series C Preferred Stock issued and outstanding immediately prior to the Effective Time (other than shares to be canceled pursuant to Section 3.1(b)) shall be converted into and become the right to receive, without interest, $2.10 plus the unpaid Accruing Dividends with respect thereto (whether or not declared) and plus (to the extent provided in Section 3.1(j)) the Extra Per Share Payment. All such shares of Series C Preferred Stock, when so converted, shall no longer be outstanding and shall automatically be canceled and retired; and each holder of a certificate representing any such Series C Preferred Stock shall cease to have any rights with respect thereto, except the right to receive the Per Preferred Share Price specified in the foregoing sentence for each share of Series C Preferred Stock. (g) Series D Preferred Stock. Each share of Series D Preferred Stock issued and outstanding immediately prior to the Effective Time (other than shares to be canceled pursuant to Section 3.1(b)) shall be converted into and become the right to receive, without interest, $8.00. All such shares of Series D Preferred Stock, when so converted, shall no longer be outstanding and shall automatically be canceled and retired; and each holder of a certificate representing any such Series D Preferred Stock shall cease to have any rights with respect thereto, except the right to receive the Per Preferred Share Price specified in the foregoing sentence for each share of Series D Preferred Stock. (h) Stock Options. Subject to Section 3.7 and Article XI, each unexpired Stock Option outstanding immediately prior to the Effective Time shall, effective as of the Effective Time, be converted into the right to receive, without interest, for each share of Company Common Stock subject thereto, the Per Common Share Price less the per share exercise price of such Stock Option (in each case, the "Option Consideration"), as and when received by the holders of the shares of Company Common Stock. (i) Warrants. Subject to Section 3.7 and Article XI, each unexpired Warrant outstanding immediately prior to the Effective Time shall, effective as of the Effective Time, be converted into the right to receive, without interest, for each share of Company Common Stock subject thereto, the Per Common Share Price less the per share exercise price of such Warrant (but not less than $0) (in each case, the "Warrant Consideration"), as and when received by the holders of the Company Common Stock. (j) Extra Per Share Payment. The "Extra Per Share Payment" shall be an amount equal to the Aggregate Merger Consideration minus all amounts payable under Sections 3.1(c) - (i) (excluding any portion thereof attributable to the Extra Per Share Payments) divided by the number of all of the shares of Company Common Stock issued and outstanding immediately prior to the Effective Time (assuming the exercise of the MCRC Warrants and all Stock Options outstanding immediately prior to the Effective Time and the conversion of all shares of Series of A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock outstanding immediately prior to the Effective Time for shares of Company Common Stock). (k) Total Consideration. Notwithstanding anything in this Agreement to the contrary, in no event shall the aggregate merger consideration payable by Parent, Mergerco or the Surviving Corporation to holders of Securities in connection with the Merger exceed $76,000,000 (the "Aggregate Merger Consideration"). 3.2. Dissenting Shares. Notwithstanding anything in this Agreement to the contrary, shares of Company Common Stock and Company Preferred Stock issued and outstanding immediately prior to the Effective Time which are held of record by stockholders who shall not have voted such shares in favor of the Merger and who shall have demanded properly in writing appraisal of such shares in accordance with the provisions of Section 262 of the DGCL ("Dissenting Shares") shall not be converted into the right to receive the Per Common Share Price specified in Section 3.1(c) or the Per Preferred Share Price specified in Section 3.1(d), 3.1(e), 3.1(f) or 3.1(g), as applicable, but the holders thereof instead shall be entitled to, and the Dissenting Shares shall only represent the right to receive, payment of the fair value of such shares in accordance with the provisions of Section 262 of the DGCL (the "Dissenting Consideration"); provided, however, that (i) if such a holder fails to demand properly in writing from the Surviving Corporation the appraisal of its shares in accordance with Section 262(d) of the DGCL or, after making such demand, subsequently delivers an effective written withdrawal of such demand, or fails to establish its entitlement to appraisal rights as provided in Section 262 of the DGCL, if so required, or (ii) if a court shall determine that such holder is not entitled to receive payment for its shares or such holder shall otherwise lose its appraisal rights, then in any such case, each share of Company Common Stock or Company Preferred Stock, as the case may be, held of record by such holder shall automatically be converted into and represent only the right to receive the applicable consideration specified in Sections 3.1(c) - - (g), upon the surrender of the certificate or certificates representing such Dissenting Shares. 3.3. Exchange of and Payment for Shares, Options and Warrants. (a) Immediately after the Effective Time and subject to Section 3.7 and Article XI, Parent shall make available, by transferring to First Chicago Trust Company of New York, or another financial institution mutually acceptable to Parent and the Company (the "Paying Agent"), cash in an amount necessary to make the payments provided for in Section 3.1 hereof with respect to the outstanding Company Common Stock and Company Preferred Stock not constituting Dissenting Shares, and all of the Stock Options and Warrants. The Paying Agent shall hold such funds and deliver them in accordance with the terms hereof and the terms of a Paying Agency Agreement to be entered into by and between the Paying Agent and Parent and reasonably acceptable to the Company (the "Paying Agency Agreement"). (b) Subject to receipt by the Paying Agent and Parent of sufficient information from the Company to satisfy such obligations, the Paying Agent shall promptly mail or cause to be mailed to each record holder (other than the Company) of a certificate or certificates which, immediately prior to the Effective Time, represented outstanding shares of Company Common Stock or Company Preferred Stock except for shares to be canceled pursuant to Section 3.1(b) (the "Stock Certificates"), and to each holder of an agreement evidencing any Stock Options or Warrants (collectively, the "Stock Agreements"), a form letter of transmittal (the "Transmittal Letter") specifying that delivery shall be effected, and risk of loss and title to the Stock Certificates and Stock Agreements shall pass, only upon proper delivery of the Stock Certificates and Stock Agreements to the Paying Agent, and instructions for use in effecting the surrender of the Stock Certificates and the Stock Agreements in exchange for payment therefor. (c) After the Effective Time and subject to Section 3.7 and Article XI, each holder of a Stock Certificate, except for shares to be canceled pursuant to Section 3.1(b), and each holder of a Stock Agreement, in each case outstanding immediately prior to the Effective Time, may surrender such Stock Certificate or Stock Agreement to the Paying Agent, and, subject to the provisions of this Section 3.3, the Paying Agent shall promptly deliver or cause to be delivered to such holder a check in an amount equal to the consideration exchangeable therefor pursuant to Section 3.1, minus the portion of the Indemnity Amount allocable to each such holder as provided in Section 3.7, with respect to such Stock Certificates and/or Stock Agreements. In no event shall the holder of any such surrendered Stock Certificates or Stock Agreements be entitled to receive interest on any of the funds to be received in the Merger. If such check is to be sent to a Person other than the Person in whose name the Stock Certificates or Stock Agreements are registered, among other things, it shall be a condition of the exchange that the Person requesting such exchange shall pay to the Paying Agent the transfer Taxes required by reason of the delivery of such check to a Person other than the registered holder of the Stock Certificates or Stock Agreements surrendered, or shall establish to the satisfaction of Parent that such Tax has been paid or is not applicable. (d) Until so surrendered, each outstanding Stock Certificate and each outstanding Stock Agreement, in each case immediately prior to the Effective Time, shall not be transferable on the books of the Surviving Corporation or Parent after the Effective Time, but shall be deemed for all purposes to evidence only the right to receive such Per Common Share Price, Per Preferred Share Price, Option Consideration or Warrant Consideration, as the case may be, as such holders are entitled to receive pursuant to the terms of this Agreement. 3.4. Lost Certificates and Agreements. In the event any Stock Certificate or Stock Agreement shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the record holder thereof claiming such Stock Certificate or Stock Agreement to be lost, stolen or destroyed, the Paying Agent shall pay to such Person the amount of cash payable to the holder of such lost, stolen or destroyed Stock Certificate or Stock Agreement determined in accordance with Sections 3.1 and 3.3. When authorizing such payment in exchange for any lost, stolen or destroyed Stock Certificate or Stock Agreement, the Person to whom the cash is to be paid shall, as a condition precedent to the payment thereof, give the Surviving Corporation a bond satisfactory to the Surviving Corporation in such sum as it may direct, or otherwise indemnify the Surviving Corporation in a manner satisfactory to the Surviving Corporation, against any claim that may be made against Parent, Mergerco or the Surviving Corporation with respect to the Stock Certificates or Stock Agreements alleged to have been lost, stolen or destroyed. 3.5. Unclaimed Funds. Thirty days after the first anniversary of the Effective Time, Parent shall be entitled to require the Paying Agent to deliver to the Parent any funds which have not been disbursed to holders of Stock Certificates or Stock Agreements, and thereafter such holders shall be entitled only to look to Parent and the Surviving Corporation (subject to abandoned property, escheat or other similar laws) for the cash payable upon due surrender of their Stock Certificates or Stock Agreements (and Parent and the Surviving Corporation shall, subject to such laws, be required to make such cash payments). None of Parent, Mergerco, the Surviving Corporation, the Company or the Paying Agent shall be liable to any Person in respect of any cash delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. 3.6. Withholding Rights. Parent shall be entitled to deduct and withhold from the Per Common Share Price, the Per Preferred Share Price, the Option Consideration or the Warrant Consideration (or any component thereof) otherwise payable pursuant to this Agreement to any holder of Company Common Stock, Company Preferred Stock, Stock Options or Warrants, or to any designee of such holder, such amounts as may be required to be deducted and withheld with respect to the making of such payments under the Code, or any provision of state, local or foreign tax law. To the extent practicable, Parent shall instruct the Paying Agent with respect to tax matters relating to employee tax withholding prior to the Effective Time. At least five days before the Effective Date, the Company shall provide to Parent all information reasonably necessary to permit Parent to determine the amounts, if any, required to be withheld with respect to employee tax withholding. 3.7. Indemnity Escrow Agreement. Notwithstanding anything else to the contrary in this Agreement, $2,500,000 of the aggregate amount payable under this Article III to the holders of Stock Certificates (not representing Dissenting Shares) and Stock Agreements (collectively, the "Indemnity Amount") shall not be deposited with the Paying Agent and shall not be paid to such holders upon the surrender of such certificates and agreements to the Paying Agent. Instead, the Indemnity Amount shall be deposited by Parent immediately after the Effective Time with the Indemnity Agent and shall constitute the initial escrow fund to be held and released in accordance with the provisions of Article XI and the Indemnity Agreement (the "Indemnity Fund"). The Indemnity Amount shall be allocated among and withheld from payment to the holders of Securities, other than holders of Series D Preferred Stock and holders of Dissenting Shares, pro-rata based on their ownership of shares of Company Common Stock (assuming the conversion of all shares of Company Preferred Stock (other than shares of Series D Preferred Stock and other than Dissenting Shares) and the exercise of the MCRC Warrant and the Stock Options). 3.8. Further Assurances. If, at any time after the Effective Time, the Surviving Corporation shall consider or be advised that any deeds, bills of sale, assignments or assurances or any other acts or things are necessary, desirable or proper (i) to vest, perfect or confirm, of record or otherwise, in the Surviving Corporation its right, title and interest in, to or under any of the rights, privileges, powers, franchises, properties or assets of either of the Constituent Corporations or (ii) otherwise to carry out the purposes of this Agreement, the Surviving Corporation, and its proper officers and directors or their designees shall be authorized to execute and deliver, in the name and on behalf of either Constituent Corporation, all such deeds, bills of sale, assignments and assurances and to do, in the name and on behalf of either Constituent Corporation, all such other acts and things as may be necessary, desirable or proper to vest, perfect or confirm the Surviving Corporation's right, title and interest in, to and under any of the rights, privileges, powers, franchises, properties or assets of such Constituent Corporation and otherwise to carry out the purposes of this Agreement. ARTICLE IV CLOSING 4.1. Closing Date. The Closing of the Merger shall take place at 10:00 A.M., local time, on April 17, 1996 at the offices of Foley, Hoag & Eliot, One Post Office Square, Boston, Massachusetts, or as soon thereafter as reasonably practicable consistent with the terms and provisions of this Agreement. The date on which the Closing is actually held is hereinafter sometimes referred to as the "Closing Date." Each party agrees to use its reasonable best efforts to satisfy promptly all conditions to the respective obligations of the parties hereto in order to close the Merger on April 17, 1996, or, if the parties are unable after using such reasonable best efforts to close on such date, in order to close as soon thereafter as is reasonably practicable. 4.2. Filing Certificate of Merger and Effectiveness. Subject to the fulfillment or waiver of the conditions to the respective obligations of each of the parties set forth in Article IX or Article X, as the case may be, at the Closing the parties shall cause the Merger to be consummated by filing a Certificate of Merger (which shall be in form and substance reasonably satisfactory to the parties hereto), executed and acknowledged in accordance with the laws of the State of Delaware, in the office of the Secretary of State of the State of Delaware. The Merger shall become effective upon such filing as provided by the DGCL. The date and time on such date of effectiveness of the Merger are herein called, respectively, the "Effective Date" and the "Effective Time." 4.3. Parent's Additional Deliveries. Subject to fulfillment or waiver of the conditions set forth in Article IX, at the Effective Time Parent shall deliver to the Company all of the following: (a) a copy of the Certificate of Incorporation of Parent, certified as of a recent date by the Secretary of State of the State of Delaware; (b) a certificate of good standing of Parent, issued as of a recent date by the Secretary of State of the State of Delaware; (c) a certificate of the Secretary or an Assistant Secretary of Parent, dated the Effective Date, in form and substance reasonably satisfactory to the Company, as to (i) no amendments to the Certificate of Incorporation of Parent since a specified date; (ii) the By-laws of Parent; (iii) the resolutions of the Board of Directors of Parent authorizing the execution and performance of this Agreement and the transactions contemplated herein; and (iv) the incumbency and signatures of the officers of Parent executing this Agreement and any Parent Ancillary Agreement; (d) an opinion of internal counsel to Parent and Mergerco, dated the Effective Date and in form and substance reasonably satisfactory to the Company; (e) the certificate contemplated by Section 10.1, duly executed by the President or any Vice President of Parent; (f) all consents, waivers or approvals obtained by Parent with respect to the consummation of the transactions contemplated by this Agreement; and (g) the Indemnity Agreement duly executed by Parent. 4.4. Mergerco's Deliveries. Subject to fulfillment or waiver of the conditions set forth in Article IX, at the Effective Time Mergerco shall deliver to the Company all of the following: (a) a copy of the Certificate of Incorporation of Mergerco certified as of a recent date by the Secretary of State of the State of Delaware; (b) a certificate of good standing of Mergerco, issued as of a recent date by the Secretary of State of the State of Delaware; (c) a certificate of the Secretary or an Assistant Secretary of Mergerco, dated the Effective Date, in form and substance reasonably satisfactory to the Company, as to (i) no amendments to the Certificate of Incorporation of Mergerco since a specified date; (ii) the By-laws of Mergerco; (iii) the resolutions of the Board of Directors of Mergerco authorizing the execution and performance of this Agreement and the transactions contemplated herein and the written consent of Operations adopting this Agreement in accordance with Section 251 of the DGCL; and (iv) the incumbency and signatures of the officers of Mergerco executing this Agreement; and (d) the certificate contemplated by Section 10.1, duly executed by the President or any Vice President of Mergerco. 4.5. The Company's Deliveries. Subject to fulfillment or waiver of the conditions set forth in Article X, at the Effective Time the Company shall deliver to Parent all of the following: (a) a copy of the Certificate of Incorporation of the Company, certified as of a recent date by the Secretary of State of the State of Delaware; (b) a certificate of good standing of the Company, issued as of a recent date by the Secretary of State of the State of Delaware; (c) a certificate of the Secretary or an Assistant Secretary of the Company, dated the Effective Date, in form and substance reasonably satisfactory to Parent, as to (i) no amendments to the Certificate of Incorporation of the Company since a specified date; (ii) the By-laws of the Company; (iii) the resolutions of the Board of Directors of the Company authorizing the execution and performance of this Agreement and the transactions contemplated herein and the resolutions of the stockholders of the Company adopting this Agreement in accordance with Section 251 of the DGCL; and (iv) the incumbency and signatures of the officers of the Company executing this Agreement and any Company Ancillary Agreement; (d) An opinion of Foley, Hoag & Eliot, counsel to the Company, dated the Effective Date and in form and substance reasonably satisfactory to Parent; (e) all consents, waivers or approvals obtained by the Company with respect to the consummation of the transactions contemplated by this Agreement; (f) resignations of each of the directors of the Company, effective as of the Effective Time; (g) the certificates contemplated by Sections 9.1, 9.2, 9.6, 9.7(a) and 9.10 duly executed by the appropriate officer of the Company; (h) the documents contemplated by Section 9.7(b) to be delivered to Parent; (i) copies of the consents of Warrant holders to the cancellation of their Warrants pursuant to the Merger to be delivered pursuant to Section 9.8; and (j) the Indemnity Agreement duly executed by the Stockholder Representatives; and (k) the FIRPTA certificate contemplated by Section 9.9. ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE COMPANY As an inducement to Parent and Mergerco to enter into this Agreement and to consummate the transactions contemplated hereby, the Company represents and warrants to Parent and Mergerco and agrees as follows: 5.1. Organization and Capital Structure. (a) The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. The Company is duly qualified to transact business as a foreign corporation and is in good standing in each of the jurisdictions listed in Schedule 5.1(a), which are the only jurisdictions in which the ownership or leasing of its assets or the conduct of its business requires such qualification, and no other jurisdiction has demanded, requested or otherwise indicated that the Company is required to so qualify, in each case other than those jurisdictions where the failure to be so qualified would not have a Material Adverse Effect on the Company. The Company has full power and authority to own or lease and to operate and use its assets and to carry on its business as now conducted. True and complete copies of the Certificate of Incorporation and all amendments thereto and of the By-laws, as amended, of the Company have been delivered to Parent. (b) The authorized capital of the Company consists of (i) 25,000,000 shares of Company Common Stock, of which 1,530,679 have been issued and are outstanding, none of which are held as treasury shares and, except as set forth in Schedule 5.1(b), none of which is reserved for any purpose; (ii) 10,411,429 shares of Company Preferred Stock, of which 476,192 shares of Series A convertible redeemable preferred stock, par value $1.00 per share ("Series A Preferred Stock") are issued and outstanding, 1,143,568 shares of Series B convertible redeemable preferred stock, par value $1.00 per share ("Series B Preferred Stock") are issued and outstanding, 3,166,669 shares of Series C convertible redeemable preferred stock, par value $1.00 per share ("Series C Preferred Stock") are issued and outstanding and 4,361,119 shares of Series D convertible redeemable preferred stock, par value $1.00 per share ("Series D Preferred Stock") are issued and outstanding, and none of which are held as treasury shares or are reserved for any purpose; and (iii) 1,000,000 shares of Special Preferred Stock, none of which have been issued or are outstanding. All of the outstanding shares of capital stock of the Company are validly issued, fully paid and nonassessable. Schedule 5.1(b) sets forth (i) as of February 29, 1996, the unpaid Accruing Dividends (whether or not declared) with respect to each holder of shares of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock and (ii) commencing on March 1, 1996 and up to and including the Effective Date, the per diem accrual rate of the Accruing Dividends (whether or not declared) on each share of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock. Schedule 5.1(b) also sets forth (i) as of February 29, 1996, the unpaid Common Stock Premium and (ii) commencing on March 1, 1996 and up to and including the Effective Date, the per diem accrual rate of the Common Stock Premium. There are no declared but unpaid dividends or other distributions with respect to any shares of Company Common Stock or Company Preferred Stock. (c) All of the Company Common Stock, Company Preferred Stock, Stock Options and Warrants are held of record by the holders and in the amounts identified in Schedule 5.1(c). Schedule 5.1(c) also sets forth the number of shares of Company Common Stock into which each share of Company Preferred Stock is convertible, the "exercise price" per share of each Stock Option and each Warrant, the date of grant of each Stock Option and Warrant and the expiration date thereof and the number of shares of Company Common Stock issuable upon the exercise of each Stock Option or Warrant. True and complete copies of the stock record books, agreements evidencing Warrants and, to the extent available to the Company, agreements evidencing Stock Options have been made available to Parent. Each Warrant and Stock Option was duly issued, and is valid and in full force and effect. (d) The sum of the number of shares of outstanding Company Common Stock, the number of shares of Company Common Stock into which all the outstanding shares of Company Preferred Stock are convertible and the number of shares of Company Common Stock issuable upon the exercise of all of the Stock Options and Warrants is 13,893,974. (e) Except as set forth in Schedule 5.1(e), the consideration to be received by holders of the shares of Company Common Stock, Company Preferred Stock, Stock Options and Warrants and the treatment of such holders pursuant to Section 3.1 is in accordance with and consistent with the Certificate of Incorporation of the Company, as amended to date, and the Stock Agreements. Commencing from the Effective Time, neither Parent nor the Surviving Corporation shall have any further obligation with respect to Stock Options other than the payment of the Option Consideration in accordance herewith and remitting to the appropriate Governmental Body any amount withheld with respect thereto under Section 3.6. (f) Except for the Stock Options and Warrants described in Schedule 5.1(c) and except as set forth in Schedule 5.1(f), there are no agreements, arrangements, options, warrants, calls, rights or commitments of any character relating to the issuance, sale, purchase or redemption of any shares of capital stock or other equity interest of the Company, whether on conversion of other securities or otherwise. None of the issued and outstanding shares of Company Common Stock or Company Preferred Stock has been issued in violation of, or is subject to, any preemptive or subscription rights. Except as set forth in this Agreement or in Schedule 5.1(f), the Company is not a party to, and does not otherwise have any knowledge of the current existence of, any stockholder agreement, voting trust agreement or any other similar contract, agreement, arrangement, commitment, plan or understanding restricting or otherwise relating to the voting, dividend, ownership or transfer rights of any shares of capital stock of the Company. The Company has not issued any security in breach of any applicable Requirements of Laws of the United States of America or any state thereof. (g) The Company is its own "ultimate parent entity" (as defined in 16 C.F.R. Section 801.1(a)(3) (1994)). 5.2. Subsidiaries and Investments. Except as set forth in Schedule 5.2, the Company does not own directly or indirectly any outstanding voting securities or equity interests in any corporation, partnership, limited liability company, joint venture or other entity and is not a partner in any partnership or a joint venturer in any joint venture. 5.3. Authority. (a) The Company has full power and authority to execute, deliver and perform this Agreement and all of the Company Ancillary Agreements. The execution, delivery and performance of this Agreement and the Company Ancillary Agreements by the Company have been duly authorized and approved by the Company's Board of Directors and, except for the adoption of this Agreement by Company's stockholders in accordance with Section 8.1(b) and the filing contemplated by Section 4.2, no other corporate proceedings on the part of the Company are necessary to authorize this Agreement and the transactions contemplated hereby. This Agreement has been duly authorized, executed and delivered by the Company and is the legal, valid and binding obligation of the Company enforceable in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by the effect of general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law), and each of the Company Ancillary Agreements has been duly authorized by the Company and will be duly executed and delivered at the Closing. (b) Except as set forth in Schedule 5.3, neither the execution and delivery of this Agreement, any of the Company Ancillary Agreements or the consummation of any of the transactions contemplated hereby or thereby nor compliance with or fulfillment of the terms, conditions and provisions hereof or thereof, in each case by the Company will: (i) conflict with, result in a breach of the terms, conditions or provisions of, or constitute a default, an event of default or an event creating rights of acceleration, termination or cancellation or a loss of rights under, or result in the creation or imposition of any Encumbrance upon, any of the Company's assets, under (1) the Certificate of Incorporation or By-laws of the Company, (2) any Company Agreement, (3) any other material note, instrument, agreement, mortgage, lease, license, franchise, permit or other authorization, right, restriction or obligation to which the Company is a party or any of its assets or business is subject or by which the Company is bound, (4) any Court Order to which the Company is a party or any of its assets or business is subject or by which the Company is bound, other than such as do not and would not reasonably be expected to have a Material Adverse Effect on the Company, or (5) any Requirements of Laws affecting the Company or its assets or business, other than such as do not and would not reasonably be expected to have a Material Adverse Effect on the Company; or (ii) require the approval, consent, authorization or act of, or the making by the Company of any declaration, filing or registration with, any Person, except for the applicable requirements of the HSR Act and the filing contemplated by Section 4.2 with the Secretary of State of the State of Delaware. 5.4. Financial Statements. Schedule 5.4 contains (i) the audited balance sheets of the Company as of December 31, 1995 and March 31, 1995 and the related audited statements of operations (the "Statements of Income"), stockholder's equity and cash flows for the nine months ended December 31, 1995 and the fiscal years ended March 31, 1995 and March 31, 1994, together with the appropriate notes to such financial statements, accompanied by the report thereon of Ernst & Young L.L.P., independent public accountants (the "Audited Financial Statements"), and (ii) the unaudited balance sheet of the Company as of February 24, 1996 and the related unaudited statement of operations for the two months then ended (the "Unaudited Financial Statements"). Except as disclosed in the notes thereto, the Audited Financial Statements and the Unaudited Financial Statements have been prepared in conformity with generally accepted accounting principles consistently applied and fairly present in all material respects the financial position of the Company at the dates of such balance sheets and the results of its operations and cash flows for the respective periods indicated, except that the Unaudited Financial Statements are subject to normal year-end audit adjustments and the addition of footnotes. Except as set forth on Schedule 5.4 or in the Unaudited Financial Statements, the Unaudited Financial Statements include all adjustments, which consist only of normal recurring accruals, necessary for such fair presentation, other than normal year-end audit adjustments. All costs and expenses incurred in generating the revenues reflected in the Statements of Income during the respective periods covered thereby which are required by generally accepted accounting principles to be reflected in the Statements of Income are so reflected. 5.5. Operations Since Balance Sheet Date. (a) Except as set forth in Schedule 5.5(a), since the Balance Sheet Date, there has been: (i) no Material Adverse Change in the assets, business, financial condition or results of operations of the Company, and, to the Company's knowledge, no fact or condition exists or is threatened which might reasonably be expected to cause such a change in the future (other than general business and economic conditions); and (ii) no damage, destruction, loss or claim, whether or not covered by insurance, or condemnation or other taking adversely affecting in any material respect any of the Company's assets or its business. (b) Except as set forth in Schedule 5.5(b), since the Balance Sheet Date, the Company has conducted its business only in the ordinary course and in conformity with past practice. Without limiting the generality of the foregoing, since the Balance Sheet Date, except as set forth in such Schedule, the Company has not: (i) issued, delivered or agreed (conditionally or unconditionally) to issue or deliver, or granted any option, warrant or other right to purchase, any of its capital stock or other equity interest or any security convertible into its capital stock or other equity interest; (ii) issued, delivered or agreed (conditionally or unconditionally) to issue or deliver any of its bonds, notes or other debt securities, or borrowed or agreed to borrow any funds, other than from Parent under the Parent Loan Agreement; (iii) paid any obligation or liability (absolute or contingent) other than current liabilities reflected on the Balance Sheet and current liabilities incurred since the Balance Sheet Date in the ordinary course of business consistent with past practice; (iv) declared or made, or agreed to declare or make, any payment of dividends or distributions to its stockholders or purchased or redeemed, or agreed to purchase or redeem, any of its capital stock or other equity interest; (v) except in the ordinary course of business consistent with past practice, made or permitted any material amendment or termination of any Company Agreement; (vi) undertaken or committed to undertake capital expenditures other than in accordance with the Cash Flow Projection; (vii) made any charitable donations; (viii) sold, leased (as lessor), transferred or otherwise disposed of, or mortgaged or pledged, or imposed or suffered to be imposed any Encumbrance on, any of the assets reflected on the Balance Sheet or any assets acquired by the Company after the Balance Sheet Date, except for inventory and minor amounts of personal property sold or otherwise disposed of for fair value in the ordinary course of its business consistent with past practice and except for Permitted Encumbrances; (ix) canceled any debts owed to or claims held by the Company (including the settlement of any claims or litigation) other than in the ordinary course of its business consistent with past practice; (x) created, incurred or assumed, or agreed to create, incur or assume, any indebtedness for borrowed money other than borrowings from Parent under the Parent Loan Agreement or entered into, as lessee, any capitalized lease obligations (as defined in Statement of Financial Accounting Standards No. 13); (xi) accelerated or delayed collection of notes or accounts receivable in advance of or beyond their regular due dates or the dates when the same would have been collected in the ordinary course of its business consistent with past practice; (xii) delayed or accelerated payment of any account payable or other liability beyond or in advance of its due date or the date when such liability would have been paid in the ordinary course of its business consistent with past practice; (xiii) entered into or become committed to enter into any other material transaction except in the ordinary course of business other than transactions with Parent; (xiv) allowed the levels of raw materials, sup- plies, work-in-process or other materials included in the inventory of the Company to vary in any material respect from the levels customarily maintained in its business; (xv) instituted any increase in any compensation payable to any employee of the Company or in any profit-sharing, bonus, incentive, deferred compensa- tion, insurance, pension, retirement, medical, hospi- tal, disability, welfare or other benefits made available to employees of the Company; (xvi) made any change in the accounting principles and practices used by the Company from those applied in the preparation of the Balance Sheet and the related statements of income, stockholder's equity and cash flow for the nine months ended on the Balance Sheet Date; or (xvii) prepared or filed any Tax Returns in a manner inconsistent with past practice or, on such Tax Returns, taken any position, made any election, or adopted any method that is inconsistent with the positions taken, elections made or methods used in preparing and filing similar Tax Returns in prior periods (including positions which would have the effect of deferring income to periods after the Balance Sheet Date or accelerating deductions to periods on or prior to the Balance Sheet Date). 5.6. No Undisclosed Liabilities. Except as set forth in Schedule 5.6 or in the Audited Financial Statements or the Unaudited Financial Statements (including the footnotes thereto) and except for liabilities of a type required to be disclosed elsewhere in this Article V, the Company is not subject to any liabilities which are, in the aggregate, material to the business, operations or financial condition of the Company, whether absolute, contingent, accrued or otherwise, which are not shown or which in aggregate are in excess of amounts shown or reserved for in the Balance Sheet, other than liabilities of the same nature as those set forth on the Balance Sheet and the footnotes thereto, and reasonably incurred in the ordinary course of its business consistent with past practice after the Balance Sheet Date. 5.7. Taxes. (a) Except as set forth on Schedule 5.7, (i) the Company and each Company Group has filed all Tax Returns required to be filed, as of the date filed (or subsequently amended) all such Tax Returns are complete and accurate in all material respects, and all Taxes shown to be due on such Tax Returns have been timely paid (ii) all Taxes (whether or not shown on any Tax Return) owed by the Company or any Company Group and required to be paid on or before the Effective Date have been timely paid or, in the case of Taxes which the Company or any Company Group is presently contesting in good faith, the Company has established an adequate reserve for such Taxes on the Balance Sheet or the balance sheet included in the Unaudited Financial Statements; (iii) all Taxes (whether or not shown on any Tax Return) that are or will be owed by the Company or any Company Group with respect to taxable years or periods (or portions thereof) ending on or prior to the date of the balance sheet included in the Unaudited Financial Statements have been fully paid or shown as a liability on the Unaudited Financial Statements; (iv) none of the Company or any member of any Company Group has waived any statute of limitations in respect of Taxes (and no request for any such waiver is currently pending); (v) the income Tax Returns referred to in clause (i) have been examined by the IRS or the appropriate state, local or foreign taxing authority or the period for assessment of the Taxes in respect of which such income Tax Returns were required to be filed has expired; (vi) there is no action, suit, investigation, audit, claim or assessment pending or, to the Company's knowledge, proposed or threatened with respect to Taxes of the Company or any Company Group and, to the Company's knowledge, no valid basis exists therefor; (vii) all material deficiencies asserted or assessments made as a result of any examination of the Tax Returns referred to in clause (i) have been paid in full; (viii) all Tax Sharing Arrangements and Tax indemnity arrangements to which the Company is or has been a party will terminate prior to the Effective Date and the Company will not have any liability thereunder on or after the Effective Date; (ix) there are no liens for Taxes upon the assets of the Company except liens relating to current Taxes not yet due; (x) all material Taxes which the Company or any Company Group are required by law to withhold or to collect for payment have been duly withheld and collected, and have been paid or accrued, reserved against and entered on the books of the Company; (xi) the Company has never been a member of any Company Group, (xii) as a result of a change in accounting method for a Tax period beginning on or before the Balance Sheet Date, the Company will not be required to include any adjustment under Section 481(c) of the Code (or any corresponding provisions of state, local or foreign Tax law) in taxable income for any period ending after the Balance Sheet Date; and (xiii) there are no Tax rulings, requests for rulings, or closing or similar agreements relating to the Company or any Company Group which could affect the Company's liability for Taxes for any period after the Balance Sheet Date. (b) The federal income tax "regular" and "alternative minimum tax" carryforwards of the Company for each of the taxable years of the Company ending on or prior to December 31, 1995 (the "NOLs"), and the taxable years in which the NOLs arose, are set forth in the footnotes to the Audited Financial Statements. None of the NOLs constitute separate return limitation year ("SRLY") or consolidated return change of ownership ("CRCO") losses with respect to the Company immediately prior to the Effective Date and, except as set forth in Schedule 5.7, none of the NOLs constitute "dual consolidated losses" (as defined in Section 1503 of the Code and the regulations thereunder) which cannot be offset against United States federal taxable income of the Company. (c) No transaction contemplated by this Agreement is subject to withholding under Section 1445 of the Code and no stock transfer Taxes, sales Taxes, use Taxes, real estate transfer Taxes, or other similar Taxes will be imposed on the Company as a result of the Merger. (d) As a result of the transactions contemplated by this Agreement, none of the Company or the Parent will be obligated to make a payment to an individual that would be an "excess parachute payment" to a "disqualified individual" as those terms are defined in Section 280G of the Code, without regard to whether such payment is reasonable compensation for personal services performed or to be performed in the future. 5.8. Availability of Assets and Legality of Use. Except as set forth in Schedule 5.8 the assets owned, leased or licensed by the Company constitute all the assets used in its business as currently conducted (including, but not limited to, all books, records, computers and computer programs and data processing systems), have been maintained in accordance with normal industry practice and are generally suitable for the uses for which intended. 5.9. Governmental Permits. (a) The Company owns, holds or possesses all licenses, franchises, permits, privileges, immunities, approvals and other authorizations from Governmental Bodies which are necessary to entitle it to own or lease, operate and use its assets and to carry on and conduct its business substantially as currently conducted, except for those as to which the failure to so own, hold or possess would not have a Material Adverse Effect on the Company (herein collectively called "Governmental Permits"). Schedule 5.9(a) sets forth a list of such Governmental Permits, except for such incidental licenses, permits and other authorizations which would be readily obtainable by any qualified applicant without undue burden in the event of any lapse, termination, cancellation or forfeiture thereof. Complete and correct copies of all of the Governmental Permits have heretofore been delivered to Parent. (b) Except as set forth in Schedule 5.9(b), (i) the Company has fulfilled and performed in all material respects its obligations under each of the Governmental Permits, and to the Company's knowledge, no event has occurred or condition or state of facts exists which constitutes or, after notice or lapse of time or both, would constitute a breach or default in any material respect under any such Governmental Permit or which permits or, after notice or lapse of time or both, would permit revocation or termination of any such Governmental Permit, or which could reasonably be expected to adversely affect in any material respect the rights of the Company under any such Govern- mental Permit, except in each case such as would not have a Material Adverse Effect on the Company; (ii) no written notice of cancellation, of default or of any material dispute concerning any Governmental Permit except in each case such as would not have a Material Adverse Effect on the Company, or of any event, condition or state of facts described in the preceding clause, has been received by, or is known to, the Company; and (iii) except to an extent that would not have a Material Adverse Effect on the Company, each of the Governmental Permits is valid, subsisting and in full force and effect and will continue in full force and effect after the Effective Date of the Merger, in each case without (x) the occurrence of any breach, default or forfeiture of rights thereunder, or (y) the consent, approval, or act of, or the making of any filing with, any Governmental Body. 5.10. Real Property. The Company does not own any parcel of real property and does not hold any option to acquire any real property. 5.11. Real Property Leases. Schedule 5.11 sets forth a list of each lease or similar agreement under which the Company is lessee of, or holds or operates, any real property owned by any third Person (the "Leased Real Property"). Except as set forth in such Schedule (or in any agreement listed thereon), the Company has the right to quiet enjoyment of all the real property described in such Schedule of which it is the lessee for the full term of each such lease or similar agreement (and any related extension option) relating thereto, and the leasehold or other interest of the Company in such real property is not subject or subordinate to any Encumbrance except for Permitted Encumbrances. Complete and correct copies of any such leases or similar agreements, including amendments thereto, regarding any Leased Real Property have heretofore been delivered to Parent. 5.12. Condemnation. Neither the whole nor any part of any Leased Real Property is subject to any pending suit for condemnation or other taking by any public authority or other Person, and, to the Company's knowledge, no such condemnation or other taking is threatened or contemplated. 5.13. Personal Property. Schedule 5.13 contains a list of all machinery, equipment, vehicles, furniture and other personal property owned by the Company having an original cost of $10,000 or more. 5.14. Personal Property Leases. Schedule 5.14 sets forth a list of each lease or agreement or under which the Company is lessee of, or holds or operates, any machinery, equipment, vehicle or other tangible personal property owned by a third Person, except for any such lease or agreement that is terminable by the Company without penalty or payment on notice of 30 days or less, or which involves the payment by the Company of rentals of less than $10,000 per year. 5.15. Intellectual Property; Software. (a) Schedule 5.15 contains a list and description (showing in each case any product, device, process, service, business or publication covered thereby, the registered or other owner, expiration date and number, if any) of all United States and foreign patents, patent applications, continuations, continuations-in-part, divisions and reissues, registered Trademarks, and registered Copyrights and applications for registration of Trademarks and Copyrights, in each case, owned by the Company. For purposes of this Agreement, the "Intellectual Property" means: (i) all United States and foreign patents, patent applications, continuations, continuations-in-part, divisions, reissues, patent disclosures, inventions (whether or not patentable) or improvements thereto ("Patent Rights"); (ii) all United States, state and foreign trademarks, service marks, logos, trade dress and trade names (including all assumed or fictitious names under which the Company is conducting its business or has within the previous five years conducted its business), whether registered or unregistered, and pending applications to register the foregoing ("Trademarks"); (iii) all United States and foreign copyrights, whether registered or unregistered and pending applications to register the same ("Copyrights"); and (iv) all confidential ideas, trade secrets, know-how, concepts, methods, processes, formulae, reports, data, customer lists, mailing lists, business plans, or other proprietary information ("Trade Secrets"). (b) Schedule 5.15 contains a list of all material computer software programs and software systems owned by, licensed to, or currently used by the Company in the conduct of the Company's business, including, without limitation, all databases, compilations, tool sets, compilers, higher level or proprietary languages, whether in source code, object code or human readable form ("Software"), provided, however, that Schedule 5.15 and Schedule 5.20 may omit in all instances (i) Software licensed to or used by the Company that is or was available in consumer retail stores and subject to no license agreement or to license agreements that purport to become effective without execution by the purchaser and (ii) license agreements for Software described in clause (i) immediately above. (c) Schedule 5.15 contains a list of all material agreements, commitments, contracts, understandings, licenses, sublicenses, assignments and indemnities which relate or pertain to Company Intellectual Property or Software or to disclosure or use of ideas or information of the Company or third Persons to which the Company is a party, showing in each case the parties thereto. For purposes of this Agreement, "Company Intellectual Property" means any Intellectual Property owned by, currently used by, or licensed to or by the Company. (d) Except as disclosed on Schedule 5.15 or in any agreement listed thereon, the Company either: (i) owns the entire right, title and interest in and to the Company Intellec- tual Property and Software, free and clear of any Encumbrance, other than security interests disclosed elsewhere herein in favor of Parent or NationsCredit Commercial Corporation and other than Permitted Encumbrances applying generally to the assets of the Company; or (ii) has the perpetual, royalty-free right to use the same. (e) Except as disclosed on Schedule 5.15, the Company is not in breach of any material provision of any material agreement, commitment, contract, understanding, license, sublicense, assignment or indemnity which relates to any of the Company Intellectual Property or Software, and the Company has not taken any action which would impair or otherwise adversely affect its rights in any of the Company Intellectual Property or Software, other than any actions that, at the time they were taken, were reasonable and customary in the Company's industry. The Company has all right, power and authority with respect to material Company Intellectual Property, Software and materials identified in Section 5.15, to execute and deliver this Agreement and the Company Ancillary Agreements, to consummate the transactions contemplated hereby and thereby and to comply with or fulfill the terms, conditions or provisions hereof or thereof. The transactions contemplated by this Agreement and the Company Ancillary Agreements shall have no adverse effect on the validity and enforceability of any of the material Company Intellectual Property, Software or materials identified in Section 5.15, and the Company's right, title and interest thereto immediately after the Effective Time shall be identical to that of the Company immediately prior to the Effective Time. (f) Except as disclosed on Schedule 5.15: (i) all registrations for Intellectual Property identified as being owned by the Company are valid and in force, and all applications to register any unregistered Intellectual Property identified as being owned by the Company are pending and in good standing, all without challenge of any kind; and (ii) the Company has the sole and exclusive right to bring actions for infringement or unauthorized use of the Intellectual Property and Software owned by the Company, and to the Company's knowledge, there is no basis for any such action. Correct and complete copies of: (x) registrations for all registered Copyrights and Trademarks, and copies of all issued Patent Rights, identified as being owned by the Company; (y) all pending applications for Patent Rights or to register unregistered Copyrights or Trademarks identified as being owned by the Company (together with any subsequent correspondence or filings relating to the foregoing); and (z) all items identified in Section 5.15(c), have heretofore been made available by the Company to Parent. (g) Except as disclosed in Schedule 5.15, no infringement by the Company of any Patent Rights, Copyrights or Trade Secrets or, to the knowledge of the Company, Trademarks of any other Person has occurred or results in any way from the operations of the Company's business. Except as disclosed in Schedule 5.15, no claim of any infringement of any Intellectual Property of any other Person has been made or asserted in respect of the operations of the Company's business. Except as disclosed in Schedule 5.15, the Company has not had notice of, or knowledge of any basis for, a claim against the Company that its operations, activities, products, Software, equipment, machinery or processes of the Company's business infringe any Intellectual Property of any other Person. (h) Except as disclosed on Schedule 5.15 or any agreement listed thereon: (i) the Software is not subject to any transfer, assignment, site, equipment, or other operational limitations; (ii) the Company has maintained and protected all computer software programs and software systems owned by the Company, including, without limitation, all databases, compilations, tool sets, compilers, higher level or proprietary languages, whether in source code, object code or human readable form ("Owned Software") (including, without limitation, all source code and system specifications) with appropriate proprietary notices (including, without limitation, in the case of published Software, the notice of copyright in accordance with the requirements of 17 U.S.C. Section 401) and confidentiality and non-disclosure agreements; (iii) the Owned Software has been registered or is eligible for protection and registration under applicable copyright law and no copyright in the Owned Software has been forfeited to the public domain; (iv) the Company has copies of all releases or separate published versions of the Owned Software so that the same may be subject to registration in the United States Copyright Office; (v) the Company has complete and exclusive right, title and interest in and to the Owned Software; (vi) the Company has developed the Owned Software through its own efforts and for its own account without the aid or use of any consultants, agents, independent contractors or Persons (other than Persons that are employees of the Company); (vii) the Owned Software does not infringe any Patent Rights, Copyrights or Trade Secrets or, to the knowledge of the Company, Trademarks of any other Person; (viii) the Company has lawful possession of the source code, system documentation, statements of principles of operation and schematics relating to the Owned Software, as well as any pertinent commentary, explanation, program (including compilers), workbenches, tools, and higher level or proprietary language necessary for the development, maintenance, implementation and use thereof, sufficient to permit a trained computer programmer to develop, maintain, support, compile and use all releases or separate versions of the same that are currently subject to maintenance obligations by the Company; (ix) there are no agreements or arrangements in effect with respect to the marketing, distribution, licensing or promotion of the Owned Software by any other Person; (x) the Company has complied with all applicable Requirements of Laws relating to the export or reexport of the Owned Software by the Company; and (xi) the Owned Software may be exported or reexported to all countries without the necessity of any license (other than a general license), other than to those countries, projects or persons specified as prohibited destinations or recipients pursuant to applicable regulations of the U.S. Department of Commerce, the United States State Department and/or the United States Treasury Department. (i) Except as disclosed on Schedule 5.15, each employee, agent, consultant, or contractor who has contributed to or participated in the creation or development of any copyrightable, patentable or Trade Secret material on behalf of the Company or any predecessor in interest thereto either: (i) is a party to a "work-for-hire" agreement under which the Company is deemed to be the original owner/author of all property rights therein (or, by operation of law, all works he created or creates are "works made for hire" under the Unites States Copyright Act); or (ii) has executed an assignment or an agreement to assign in favor of the Company (or such predecessor in interest, as applicable) of all right, title and interest in such material. 5.16. Accounts Receivable; Inventories. All accounts receivable of the Company have arisen from bona fide transactions by the Company in the ordinary course of its business. All accounts receivable reflected in the Balance Sheet have been collected or are good and collectible in the ordinary course of business at the aggregate recorded amounts thereof, net of any applicable allowance for doubtful accounts reflected in the Balance Sheet. The inventories of the Company (including raw mate- rials, supplies, work-in-process, finished goods and other mater- ials) reflected in the Balance Sheet are in merchantable condition and are reflected in the books and records of the Company at the lower of average cost or market value. The inventory obsolescence policies of the Company are appropriate for the nature of the products sold and the marketing methods used by the Company, and the reserve for inventory obsolescence contained in the Balance Sheet fairly reflects the amount of obsolete inventory as of the Balance Sheet Date. The Company has heretofore delivered to Parent a list of places where material inventories of the Company were located as of the date hereof. 5.17. Title to Property. The Company has good title to all of its assets reflected on the Balance Sheet as being owned by it and all of the assets thereafter acquired by it (except to the extent that such assets have been disposed of after the Balance Sheet Date in the ordinary course of business consistent with past practice), free and clear of all Encumbrances, except for Permitted Encumbrances and except as set forth in Schedule 5.17. 5.18. Employee Benefit Plans. (a) Set forth in Schedule 5.18(a) is a true and complete list of each "employee pension benefit plan" (as such term is defined in Section 3(2) of ERISA) maintained by the Company or an ERISA Affiliate (defined in clause (j) below), or with respect to which the Company or an ERISA Affiliate is or will be required to make any payment, or which provides or will provide benefits to present or prior employees of the Company or an ERISA Affiliate due to such employment (the "Pension Plans"). Set forth in Schedule 5.18(a) is a true and complete list of each "employee welfare benefit plan" (as such term is defined in Section 3(1) of ERISA) maintained by the Company, or with respect to which the Company is or will be required to make any payment, or which provides or will provide benefits to present or prior employees of the Company due to such employment (the "Welfare Plans") (the Pension Plans and Welfare Plans being the "ERISA Benefit Plans"). In addition, set forth in Schedule 5.18(a) is a true and complete list of each other "employee pension benefit plan" (as such term is defined in Section 3(2) of ERISA) that is or has ever been subject to Section 302 of ERISA and (i) maintained by the Company or an ERISA Affiliate at any time during the six-year period prior to the Effective Time, or (ii) with respect to which the Company or an ERISA Affiliate was required to make any payment at any time during such period (the "Prior Pension Plans"). (b) Other than those listed in Schedule 5.18(a), set forth in Schedule 5.18(b) is a true and complete list of each of the following to which the Company is a party or with respect to which it is or will be required to make any payment (the "Non-ERISA Commitments"): (i) each retirement, savings, profit sharing, deferred compensation, severance, stock ownership, stock purchase, stock option, performance, bonus, incentive, vacation or holiday pay, hospitalization or other medical, disability, life or other insurance, or other welfare, benefit or fringe benefit plan, policy, trust, understanding or arrangement of any kind, whether written or oral; and (ii) each material understanding or arrangement and each agreement, in each case in effect, whether written or oral, with or for the benefit of any present or prior officer, director, employee, agent or consultant (including, without limitation, each employment, compensation, deferred compensation, severance or consulting agreement or arrangement, confidentiality agreement (excluding any for the benefit of the Company), covenant not to compete (excluding any for the benefit of the Company) and any agreement or arrangement associated with a change in ownership or control of the Company, but excluding employment agreements terminable by the Company without premium or penalty on notice of thirty (30) days or less under which the only monetary obligation of the Company is to make current wage or salary payments and provide current fringe benefits). The Company has delivered to Parent correct and complete copies of (i) all written Non-ERISA Commitments and (ii) all insurance and annuity policies and contracts and other documents relevant to any Non-ERISA Commitment. Schedule 5.18(b) contains a complete and accurate description of all material oral Non-ERISA Commitments. Except as disclosed in Schedule 5.18(a) or Schedule 5.18(b), none of the ERISA Benefit Plans or the Non-ERISA Commitments is subject to the law of any jurisdiction outside of the United States of America. (c) The Company has delivered to Parent with respect to each ERISA Benefit Plan and with respect to each Prior Pension Plan, other than any ERISA Benefit Plan or Prior Pension Plan which is a "multiemployer plan" (as such term is defined in Section 3(37) of ERISA), correct and complete copies, where applicable, of (i) all plan documents and amendments thereto, trust agreements and amendments thereto and insurance and annuity contracts and policies, (ii) the current summary plan description, (iii) the Annual Reports (Form 5500 series) and accompanying schedules, as filed, for the most recently completed three plan years for which such reports have been filed, (iv) the financial statements for the most recently completed three plan years for which such statements have been prepared, (v) the actuarial reports for the most recently begun three plan years for which such reports exist, (vi) the most recent determination letter issued by the IRS, (vii) PBGC Form 1 for the most recently begun plan year and (viii) all correspondence with the IRS, Department of Labor and Pension Benefit Guaranty Corporation concerning any controversy during the last six years. Each report described in clause (v) of the preceding sentence accurately describes the funded status of the plan to which it relates and subsequent to the date of such report there has been no adverse change in the funding status or financial condition of such plan. With respect to each Pension Plan that is a "multiemployer plan" (the "Multiemployer Plans"), (A) the Company has delivered to Parent correct and complete copies of all plan documents and amendments thereto and trust agreements and amendments thereto, the items described in clauses (ii), (iii) and (v) of the second preceding sentence but with respect to the reports described in such clauses (iii) and (v) only such reports for the most recent year, and all correspondence and other information in the Company or any ERISA Affiliate's possession relating to any anticipated increases in contribution rates with respect to such plan, and (B) set forth in Schedule 5.18(c) is a true and complete list of the amounts which each of the Company and each ERISA Affiliate paid to such plan with respect to each of the calendar years 1994 through 1995. The Company has delivered to Parent with respect to each of the Multiemployer Plans and with respect to each of the Prior Pension Plans which is a "multiemployer plan" (the "Prior Multiemployer Plans") correct and complete copies of all correspondence and other information in the Company's or any ERISA Affiliate's possession relating to the amount for which the Company or any ERISA Affiliate is or could be liable under Title IV of ERISA for a total or partial withdrawal as of any date or for any other reason. (d) With respect to each Pension Plan subject to Section 302 of ERISA other than any Multiemployer Plan, (i) no proceeding has been initiated to terminate such plan, (ii) there has been no "reportable event" (as such term is defined in Section 4043(b) of ERISA), (iii) no "accumulated funding deficiency" (within the meaning of Section 412 of the Code), whether or not waived, has occurred, (iv) no person has failed to make a required installment or any other payment required under Section 412 of the Code before the applicable due date, (v) neither the Company nor any ERISA Affiliate has provided or is required to provide security to such plan under Section 401(a)(29) of the Code due to a plan amendment that results in an increase in current liability, and (vi) without any additional contributions being made to such plan, the assets of such plan are sufficient to satisfy all obligations of the plan if the plan were to terminate (regardless of whether the plan can legally terminate). Each Pension Plan which is intended to qualify under Section 401(a) of the Code has been determined to be so qualified by the IRS, and to the Company's knowledge no circumstance has occurred or exists which could reasonably be expected to cause such plan to cease being so qualified. (e) There is no pending or, to the Company's knowledge, threatened claim in respect of any of the ERISA Benefit Plans other than claims for benefits in the ordinary course of business. Except as set forth in Schedule 5.18(e), each of the ERISA Benefit Plans other than any Multiemployer Plans (i) has been administered in accordance with its terms and (ii) complies in form, and has been administered in accordance, with the requirements of ERISA and, where applicable, the Code, except for such failures to comply or be so administered that would not individually or in the aggregate have a Material Adverse Effect on the Company. The Company and each ERISA Affiliate have complied, except for such failures to comply that would not individually or in the aggregate have a Material Adverse Effect on the Company, with the health care continuation requirements of Part 6 of Title I of ERISA. The Company has no obligation under any ERISA Benefit Plans or otherwise to provide health or other welfare benefits to any prior employees or any other person, except as required by Part 6 of Title I of ERISA. The consummation of the transaction contemplated by this Agreement will not result in an increase in the amount of compensation or benefits or accelerate the vesting or timing of payment of any compensation or benefits payable to or in respect of any participant under any ERISA Benefit Plan. The Company is in compliance with the requirements of the Workers Adjustment and Retraining Notification Act ("WARN") and has no material liabilities pursuant to WARN. (f) To the Company's knowledge, no proceeding has been initiated to terminate any Multiemployer Plan, and there has been no "reportable event" (as such term is defined in Section 4043(b) of ERISA) with respect to any such plan. No Multiemployer Plan is in reorganization as described in Section 4241 of ERISA or insolvent as described in Section 4245 of ERISA. Assuming the Company and each ERISA Affiliate incurred a complete withdrawal under Section 4203 of ERISA from each Multiemployer Plan, the withdrawal liability arising under Section 4201 of ERISA with respect to each such plan as a result thereof would not exceed the amount set forth in Schedule 5.18(f). Except as described in Schedule 5.18(f), neither the Company nor any ERISA Affiliate has failed to make a required or disputed contribution to any Multiemployer Plan or any Prior Multiemployer Plan. Except as described in Schedule 5.18(f), (i) neither the Company nor any ERISA Affiliate has incurred any liability on account of a "partial withdrawal" or a "complete withdrawal" (within the meaning of Sections 4205 and 4203, respectively, of ERISA) from any multiemployer plan (as such term is defined in Section 3(37) of ERISA), no such liability has been asserted, there are no events or circumstances which could result in any such partial or complete withdrawal, and neither the Company nor any ERISA Affiliate is bound by a contract or agreement or has any obligation or liability described in Section 4204 of ERISA. To the Company's knowledge, each Multiemployer Plan (i) complies in form, and has been administered in accordance, with the requirements of ERISA and, where applicable, the Code, and (ii) is qualified under Section 401(a) of the Code as amended to the date hereof. (g) Except as to Multiemployer Plans (as to which this representation and warranty is made only to the Company's knowledge), neither the Company nor, to the Company's knowledge, any other "disqualified person" (within the meaning of Section 4975 of the Code) or "party in interest" (within the meaning of Section 3(14) of ERISA) has taken any action with respect to any ERISA Benefit Plan which could reasonably be expected to subject any such plan (or its related trust) or the Company or any officer, director or employee of any of the foregoing to the penalty or tax under Section 502(i) or Section 502(l) of ERISA or Section 4975 of the Code. (h) The Company has no potential liability, whether direct or indirect, contingent or otherwise, under Section 4063, 4064, 4069, 4204 or 4212(c) of ERISA. (i) Schedule 5.18(i) contains: (i) a list of all employees or commission salespersons of the Company as of December 31, 1995 whose then current annual compensation was in excess of $35,000; (ii) the then current annual compensation of, and a description of the fringe benefits (other than those generally available to employees of the Company) provided by the Company to any such employees or commission salespersons; (iii) a list of all present or former employees or commission salespersons of the Company paid in excess of $35,000 in calendar year 1995 who have terminated or given notice of their intention to terminate their relationship with the Company; (iv) a list of any increase, effective after December 31, 1995, in the rate of compensation of any employees or commission salespersons if such increase exceeds 6% of the previous annual salary of such employee or commission salesperson; and (v) a list of all substantial changes in job assignments of, or arrangements with, or promotions or appointments of, any employees or commission salespersons whose compensation as of December 31, 1995 was in excess of $35,000 per annum. (j) For purposes of this Agreement, "ERISA Affiliate" means (i) any corporation which at any time on or before the Effective Time is or was a member of the same controlled group of corporations (within the meaning of Section 414(b) of the Code) as the Company; (ii) any partnership, trade or business (whether or not incorporated) which at any time on or before the Effective Time is or was under common control (within meaning of Section 414(c) of the Code) with the Company; and (iii) any entity which at any time on or before the Effective Time is or was a member of the same affiliated service group (within the meaning of Section 414(m) of the Code) as either the Company, any corporation described in clause (i) of this paragraph or any partnership, trade or business described in clause (ii) of this paragraph. An "Associate" of any Person means (i) a corporation or organization of which such Person is an officer or partner or is, directly or indirectly, the beneficial owner of 10 percent or more of any class of equity securities, (ii) any trust or other estate in which such Person has a substantial beneficial interest or as to which such Person serves as trustee or in a similar fiduciary capacity and (iii) any relative or spouse of such Person, or any relative of such spouse, who has the same home as such Person or who is a director or officer of the Person or any of its parents or Subsidiaries. 5.19. Employee Relations. (a) Except as set forth in Schedule 5.19(a), the Company has complied in all material respects with all applicable laws, rules and regulations which relate to wages, hours, discrimination in employment and collective bargaining and is not liable for any arrears of wages or any taxes or penalties for failure to comply with any of the foregoing. The Company believes that the Company's relations with its employees are satisfactory. The Company is not a party to any collective bargaining agreement and the Company is not a party to, and, to the Company's knowledge, it is not affected by or threatened with, any dispute or controversy with a union or with respect to unionization or collective bargaining involving its employees. To the Company's knowledge, the Company is not materially affected by any dispute or controversy with a union or with respect to unionization or collective bargaining involving any supplier or customer of the Company. Schedule 5.19(a) sets forth a description of any union organizing or election activities involving any non-union employees of the Company which have occurred since January 1, 1995 or, to the Company's knowledge, are threatened as of the date hereof. (b) Except as set forth in Schedule 5.19(b), to the Company's knowledge, the Company is not involved in any transaction with any employee, officer, director or Affiliate of the Company (other than transactions with such Persons in their capacities as employees, officers, directors or Affiliates of the Company) pursuant to which the Company provides or receives any benefit. 5.20. Contracts; Product Warranties. Except as set forth in Schedule 5.20 or any other Schedule hereto, the Company is not a party to or bound by: (i) any contract for the purchase, sale or lease of real property; (ii) any contract for the purchase of raw mate- rials which involved the payment of more than $50,000 in 1995, which the Company reasonably anticipates will involve the payment of more than $50,000 in 1996 or which extends beyond December 31, 1996; (iii) any contract for the sale of goods or services which involved the payment of more than $50,000 in 1995, which the Company reasonably anticipates will involve the payment of more than $50,000 in 1996 or which extends beyond December 31, 1996; (iv) any contract for the purchase, licensing or development of Software to be used by the Company; (v) any consignment, distributor, dealer, manu- facturers representative, sales agency, advertising representative or advertising or public relations contract which involved the payment of more than $50,000 in 1995, which the Company reasonably anticipates will involve the payment of more than $50,000 in 1996 or which extends beyond December 31, 1996; (vi) any guarantee of the obligations or liabilities of customers, suppliers, officers, directors, employees, Affiliates of the Company or others; (vii) any agreement which provides for, or relates to, the incurrence by the Company of debt for borrowed money or the extension of credit (other than in the ordinary course of business consistent with past practice) by the Company to any other Person; (viii) any agreement or understanding with a third Person that restricts the Company from carrying on its business anywhere in the world; (ix) any material contract which provides for, or relates to, any non-competition or confidentiality arrangement with any Person, but not including any such contract with any current or former officer or employee of the Company for the benefit of the Company; (x) any contract or group of related contracts for capital expenditures other than in accordance with the Cash Flow Projection; (xi) any partnership, joint venture or other similar arrangement or agreement involving a sharing of profits or losses; (xii) any contract which involves payments or receipts by the Company of more than $50,000; or (xiii) any contract for any purpose (whether or not made in the ordinary course of the business or otherwise not required to be listed or described in Schedule 5.20) which is material to the Company or its business. The reserve for liabilities with respect to warranty claims contained in the Balance Sheet fairly reflects in all material respects the amount required in accordance with generally accepted accounting principles to be shown thereon as of the Balance Sheet Date. 5.21. Status of Contracts. Except as set forth in Schedule 5.21 or in any other Schedule hereto, and assuming the due authorization, execution and delivery thereof by each other party thereto, each of the leases, contracts and other agreements listed in Schedules 5.11, 5.14, 5.15, 5.18 and 5.20 (collectively, the "Company Agreements") constitutes a valid and binding obligation of the Company, and to the Company's knowledge, each other party thereto, and is in full force and effect. The Company has fulfilled and performed in all material respects its obligations under each of the Company Agreements in accordance with the terms thereof, and the Company is not in, or alleged to be in, breach or default in any material respect under, nor is there or is there alleged to be any valid basis for termination of, any of the Company Agreements and, to the Company's knowledge, no other party to any of the Company Agree- ments has breached or defaulted thereunder in any material respect, and, to the Company's knowledge, no event has occurred and no condition or state of facts exists which, with the passage of time or the giving of notice or both, would constitute such a default or breach by the Company or, to the Company's knowledge, by any such other party. The Company is not currently renegotiating any of the Company Agreements or paying liquidated damages in lieu of performance thereunder. Complete and correct copies of each of the written Company Agreements have heretofore been made available to Parent. 5.22. No Violation, Litigation or Regulatory Action. Except as set forth in Schedule 5.22: (i) the Company's assets and their uses comply in all respects with all applicable Requirements of Laws and Court Orders, except for such failures to so comply which would not have a Material Adverse Effect on the Company; (ii) the Company has complied in all respects with all Requirements of Laws and Court Orders which are applicable to the Company's assets or its business, except for such failures to so comply which would not have a Material Adverse Effect on the Company; (iii) there are no lawsuits, claims, suits, proceedings or investigations pending or, to the Company's knowledge, threatened against or affecting the Company or its assets or business nor, to the Company's knowledge, is there any valid basis for any of the same, and there are no lawsuits, suits or proceedings pending in which the Company is the plaintiff or claimant; and (iv) there is no action, suit or proceeding pending or, to the Company's knowledge, threatened which questions the legality or propriety of the trans- actions contemplated by this Agreement. 5.23. Environmental Matters. Except as set forth in Schedule 5.23: (i) the Company's past and present operations of the Company's business have complied and are in compliance in all material respects with all applicable Environmental Laws; (ii) the Company has obtained all environmental, health and safety Governmental Permits necessary for the operation of its business except where the failure so to obtain such Governmental Permit would not have a Material Adverse Effect on the Company, and all such Governmental Permits are in good standing and the Company is in compliance in all material respects with all terms and conditions of such permits; (iii) neither the Company, nor any of the Company Property that is currently leased (as lessee) by the Company ("Current Company Property"), nor, to the Company's knowledge, any of the Company Property that was previously leased (as lessee) or owned by the Company ("Previous Company Property"), is subject to any on-going investigation by, order from or agreement with any Person (including without limitation any prior owner or operator of any Company Property) or any material liability respecting (i) material noncompliance with any Environmental Law, (ii) any Remedial Action or (iii) any claim of Losses and Expenses arising from the Release or threatened Release of a Contaminant into the environment that could reasonably be expected to give rise to any material Loss on the part of the Company; (iv) The Company is not subject to any judicial or administrative proceeding, order, judgment, decree or settlement alleging or addressing a violation of or liability under any Environmental Law; (v) The Company has not: (a) reported a Release of a hazardous substance pursuant to Section 103(a) of CERCLA, or any state equivalent; (b) filed a notice pursuant to Section 103(c) of CERCLA; (c) filed notice pursuant to Section 3010 of RCRA, indicating the generation of any hazardous waste, as that term is defined under 40 CFR Part 261 or any state equivalent; or (d) filed any notice under any applicable Environmental Law reporting a substantial violation of any applicable Environmental Law; (vi) there is not now on or in any Current Company Property (or, to the Company's knowledge, any Previous Company Property), nor to the Company's knowledge has there ever been, on or in any Company Property: (a) any treatment, recycling, storage or disposal of any hazardous waste, as that term is defined under 40 CFR Part 261 or any state equivalent, that requires or required a Governmental Permit pursuant to Section 3005 of RCRA; or (b) any underground storage tank or surface impoundment or landfill or waste pile. (vii) there is not now on or in any Current Company Property (or, to the Company's knowledge, any Previous Company Property) any polychlorinated biphenyls (PCB) used in pigments, hydraulic oils, electrical transformers or other equipment which would give rise to any material liability under any Environmental Law; (viii) the Company has not received any notice or claim to the effect that it is or may be liable to any Person as a result of the Release or threatened Release of a Contaminant into the environment on any Company Property or generated by the Company; (ix) no Current Company Property (or, to the Company's knowledge, no Previous Company Property) has been listed or, to the Company's knowledge, proposed for listing on the National Priorities List pursuant to CERCLA, on the Comprehensive Environmental Response, Compensation and Liability Information System List or any state list of sites requiring Remedial Action; (x) the Company has not sent or arranged for the transport of any Contaminant to any site listed on the National Priorities List pursuant to CERCLA or that otherwise could reasonably be expected to give rise to material liability on the part of the Company for Remedial Action, Losses or Expenses; (xi) no Environmental Encumbrance has attached to any Current Company Property (or, to the Company's knowledge, any Previous Company Property); (xii) any asbestos-containing material which is on or part of any Current Company Property (or, to the Company's knowledge, any Previous Company Property) (excluding any raw materials used in the manufacture of products or products themselves) is in good repair according to the current standards and practices governing such material, and its presence or condition does not violate in any material respect any currently applicable Environmental Law; and (xiii) none of the products that the Company manufactures, distributes or sells in connection with its business, now or in the past, contains asbestos or asbestos-containing material. 5.24. Insurance. Schedule 5.24 sets forth a list and brief description (including nature of coverage, limits, deduc- tibles, premiums and the loss experience for the most recent five years with respect to each type of coverage) of all policies of insurance maintained, owned or held by the Company during the period from April 1, 1995 up to and including on the date hereof. The Company shall keep or cause such insurance or comparable insurance to be kept in full force and effect through the Effective Date. The Company has complied in all material respects with each of such insurance policies and has not failed to give any notice or present any claim thereunder in a due and timely manner. Except as set forth in Schedule 5.24, each of such policies is in full force and effect and will not be affected by or terminate or lapse by reason of the transactions contemplated by this Agreement. The Company has delivered to Parent correct and complete copies of the most recent inspection reports, if any, received from insurance underwriters as to the condition of the Company's assets. 5.25. Customers and Suppliers. Set forth in Schedule 5.25 hereto is a list of names and addresses of the ten largest customers and the ten largest suppliers (measured by dollar volume of purchases or sales in each case) of the Company during the nine months ended December 31, 1995 and the fiscal year ended March 31, 1995. Except as set forth in Schedule 5.25, there exists no actual or, to the Company's knowledge, threatened termination, cancellation or limitation of, or any material adverse modification or change in, the business relationship of the Company with any customer or group of customers listed in Schedule 5.25, or with any supplier or group of suppliers listed in Schedule 5.25. 5.26. Budgets. Schedule 5.26 sets forth (a) as of the date hereof, the budgets of capital, payroll and other expenditures of the Company prepared in the ordinary course of its business for the fiscal year ending December 31, 1996 and (b) the total capital expenditures through February 24, 1996, if any, for each capital expenditure project for which funds are proposed to be expended during 1996. 5.27. No Finder. Neither the Company nor any Person acting on behalf of the Company has paid or become obligated to pay any fee or commission to any broker, finder or intermediary for or on account of the transactions contemplated by this Agreement, other than to Alex. Brown & Sons Incorporated. Complete and correct copies of the engagement and indemnification agreements entered into with Alex. Brown & Sons Incorporated have been furnished to Parent. 5.28. Financial Projections. The Company has made available to Parent certain financial projections with respect to the Company's business which projections were prepared for internal use only. The Company makes no representation or warranty regarding the accuracy of such projections or as to whether such projections will be achieved or otherwise, except that the Company represents and warrants that such projections were prepared in good faith and are based on assumptions believed by them to be reasonable. 5.29. Proxy Statement. The proxy statement and related materials (collectively, the "Proxy Statement") to be prepared by the Company in accordance with Section 8.1 and used in connection with the Company's meeting of stockholders described in Section 8.1 at which the approval of the Merger and the adoption of the Merger Agreement will be considered (the "Stockholders' Meeting") will, when prepared by the Company and distributed to the stockholders, comply in all material respects with the provisions of the DGCL and will not, at the time of the mailing of the Proxy Statement to the stockholders of the Company, at the time of the Stockholders' Meeting or at the Effective Time, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they are made, not misleading; provided, that the Company makes no representation with respect to information concerning Parent (including information concerning Parent's intentions concerning the operations of the business) or information as to the federal income tax consequences of the Merger supplied by Parent to the Company for inclusion in the Proxy Statement. 5.30. Opinion of Financial Advisor. The Company has received the opinion of Alex. Brown & Sons Incorporated dated the date of this Agreement, to the effect that, as of the date of this Agreement, the consideration to be received in the Merger by the Company's stockholders is fair to the Company's stockholders from a financial point of view, and a complete and correct signed copy of such opinion has been, or promptly upon receipt thereof will be, delivered to Parent. ARTICLE VI REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGERCO As an inducement to the Company to enter into this Agreement and to consummate the transactions contemplated hereby, Parent and Mergerco hereby jointly and severally represent and warrant to the Company and agree as follows: 6.1. Organization and Capital Structure. Parent is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has full corporate power and authority to own or lease and to operate and use its properties and assets and to carry on its business as now conducted. Mergerco is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Mergerco has not engaged in any business since it was incorporated which is not in connection with this Agreement. All of the outstanding shares of capital stock of Mergerco are validly issued, fully paid and nonassessable and owned of record and beneficially by Operations, free from all Encumbrances. 6.2. Authority. (a) Parent has full corporate power and authority to execute, deliver and perform this Agreement and all of the Parent Ancillary Agreements. The execution, delivery and performance of this Agreement and the Parent Ancillary Agreements by Parent have been duly authorized and approved by Parent's Board of Directors and no other corporate proceedings on the part of Parent are necessary to authorize this Agreement, the Parent Ancillary Agreements and the transactions contemplated hereby and thereby. This Agreement has been duly authorized, executed and delivered by Parent and is the legal, valid and binding obligation of Parent enforceable in accordance with its terms and each of the Parent Ancillary Agreements has been duly authorized by Parent and upon execution and delivery by Parent will be a legal, valid and binding obligation of Parent enforceable in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by the effect of general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law). (b) Mergerco has full corporate power and authority to execute, deliver and perform this Agreement. The execution, delivery and performance of this Agreement by Mergerco have been duly authorized and approved by Mergerco's Board of Directors, Operations has approved the Merger and adopted this Agreement as the sole stockholder of Mergerco, and, except for the filing contemplated by Section 4.2, no other corporate proceedings on the part of Mergerco are necessary to authorize this Agreement and the transactions contemplated hereby. This Agreement has been duly authorized, executed and delivered by Mergerco and is the legal, valid and binding agreement of Mergerco enforceable in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by the effect of general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law). (c) Neither the execution and delivery of this Agreement or any of the Parent Ancillary Agreements or the consummation of any of the transactions contemplated hereby or thereby nor compliance with or fulfillment of the terms, conditions and provisions hereof or thereof, in each case by Parent or Mergerco will: (i) conflict with, result in a breach of the terms, conditions or provisions of, or constitute a default, an event of default or an event creating rights of acceleration, termination or cancellation or a loss of rights under, or result in the creation or imposition of any Encumbrance upon any of Parent's, Operation's or Mergerco's assets under, (1) the Certificate of Incorporation or By-laws of Parent, Operations or Mergerco, (2) any material note, instrument, agreement, mortgage, lease, license, franchise, permit or other authorization, right, restriction or obligation to which Parent, Operations or Mergerco is a party or any of their respective assets or business is subject or by which Parent, Operations or Mergerco is bound, (3) any Court Order to which Parent, Operations or Mergerco is a party or any of their assets or business is subject or by which Parent, Operations or Mergerco is bound or (4) any Requirements of Laws affecting Parent, Operations or Mergerco or any of their assets or business; or (ii) require the approval, consent, authorization or act of, or the making by Parent, Operations or Mergerco of any declaration, filing or registration with, any Person, except for the applicable requirements of the HSR Act and the filing contemplated by Section 4.2 with the Secretary of State of the State of Delaware. 6.3. No Finder. Neither Mergerco, Operations or Parent nor any Person acting on their behalf has paid or become obligated to pay any fee or commission to any broker, finder or intermediary for or on account of the transactions contemplated by this Agreement other than to Goldman Sachs & Co., whose fees and expenses, to the extent payable, shall be paid by Parent. 6.4. No Litigation or Regulatory Action. Except as set forth in Schedule 6.4, there is no action, suit or proceeding pending or, to Parent's knowledge, threatened against Parent which questions the legality or propriety of the transactions contemplated by this Agreement, or which would, if adversely determined, impair Parent's ability to consummate the transactions contemplated hereby. 6.5. Investment Representation. Each of Parent and Operations is acquiring the Surviving Corporation Common Stock for its own account for investment, and not with a view to, or for sale in connection with, any distribution thereof, nor with any present intention of distribution or selling the same. Neither Parent nor Operations has any present or contemplated agreement, undertaking, arrangement, obligation or commitment providing for the disposition of the Surviving Corporation Common Stock after the Closing. ARTICLE VII ACTION PRIOR TO THE EFFECTIVE TIME The respective parties hereto covenant and agree to take the following actions between the date hereof and the Effective Time: 7.1. Investigation of the Company by Parent. The Company shall afford to the officers, employees and authorized representatives of Parent (including, without limitation, its independent public accountants, attorneys, environmental consultants and financial advisors) complete access during normal business hours and upon reasonable advance notice to the offices, properties, employees and business, Tax and financial records (including, without limitation, computer files, retrieval programs and similar documentation) of the Company to the extent Parent shall deem necessary or desirable, and shall furnish to Parent or its authorized representatives such additional information concerning the operations, properties and business of the Company as may be reasonably requested to enable Parent or its representatives to verify the accuracy of the representations and warranties contained in this Agreement, to verify that the covenants of the Company contained in this Agreement have been complied with and to determine whether the conditions set forth in Article IX have been satisfied. Parent agrees that such investigation shall be conducted in such a manner as not to interfere unreasonably with the operations of the Company. With- out limiting the foregoing, the Company shall permit Parent, or its representatives, to conduct an environmental audit of any of the Leased Real Property with respect to any environmental health and safety issues deemed material by Parent. No investigation made by Parent or its representatives hereunder shall affect the representations and warranties of the Company hereunder. 7.2. Preserve Accuracy of Representations and Warranties. Each of the parties hereto shall refrain from taking any action which would render any representation or warranty con- tained in Article V or VI and Section 7.9 of this Agreement inaccurate as of the Effective Time. Each party shall promptly notify the other parties of any action, suit or proceeding that shall be instituted or threatened against such party to restrain, prohibit or otherwise challenge the legality of any transaction contemplated by this Agreement. Each party shall promptly notify the other party of any lawsuit, claim, proceeding or investigation that may be instituted or threatened against the first party which would have been listed in Schedule 5.22 or Schedule 6.4 if such lawsuit, claim, proceeding or investigation had arisen prior to the date hereof. 7.3. Consents of Third Parties; Governmental Approvals. (a) The Company will act diligently and reasonably to secure, before the Effective Time, the consent, approval or waiver, in form and substance reasonably satisfactory to Parent, from any party to any Company Agreement required to satisfy the conditions set forth in Section 9.5; provided that no party hereto shall have any obligation to offer or pay any consideration in order to obtain any such consents or approvals; and provided, further, that the Company shall not make any agreement or understanding affecting the Company or its assets or business as a condition for obtaining any such consents or waivers except with the prior written consent of Parent. During the period prior to the Effective Time, Parent shall act diligently and reasonably to cooperate with the Company to obtain the consents, approvals and waivers contemplated by this Section 7.3(a). (b) During the period prior to the Effective Time, the parties hereto shall act diligently and reasonably, and shall cooperate with each other, to secure any consents and approvals of any Governmental Body required to be obtained by them in order to permit the consummation of the transactions contemplated by this Agreement or to otherwise satisfy the conditions set forth in Section 9.4; provided that the Company shall not make any agreement or understanding affecting the Company or its assets or business as a condition for obtaining any such consents or approvals except with the prior written consent of Parent. 7.4. Conduct of Business Prior to the Effective Time. (a) Except as expressly contemplated by this Agreement, the Company shall carry on its business in, and not enter into any material transaction other than in accordance with, the ordinary course consistent with past practice and, to the extent consistent therewith, use its reasonable best efforts to preserve intact its current business organization, keep available the services of its current officers and key employees and preserve its relationships with customers, suppliers and others having business dealings with it (except, in each case, with the prior written consent of Parent). Without limiting the generality of the foregoing, and except as expressly contemplated by this Agreement, the Company shall not, without the prior written consent of Parent: (i) (A) declare, set aside or pay any dividends on, or make any other actual, constructive or deemed distributions in respect of, any of its capital stock, or otherwise make any payments to any stockholder in its capacity as such, (B) split, combine or reclassify any of its capital stock or issue, sell or authorize the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock or (C) purchase, redeem or otherwise acquire any shares of capital stock of the Company or any other securities thereof; (ii) issue, deliver, sell, pledge, dispose of or otherwise encumber any shares of its capital stock or other securities (including, without limitation, any rights, warrants or options to acquire any shares of its capital stock or other securities other than any issuance of shares of Common Stock upon the exercise of Stock Options and Warrants or the conversion of Company Preferred Stock in accordance with the terms thereof as in effect on the date hereof); (iii) amend its Certificate of Incorporation or By-laws; (iv) acquire or agree to acquire by merging or consol- idating with, or by purchasing a substantial portion of the assets of or equity in, or by any other manner, any business or any corporation, partnership, association or other busi- ness organization or division thereof; (v) other than incurring indebtedness to Parent under the Parent Loan Agreement, incur or assume any indebtedness for borrowed money, enter into (as lessee) any capitalized lease obligation, guarantee any such indebtedness or obligation, issue or sell any debt securities, guarantee any debt securities of others or make any loans, advances or capital contributions to, or investments in, any other Person; (vi) make or incur or agree to make or incur any new capital expenditure or expenditures other than in accordance with the Cash Flow Projection; (vii) pay, discharge or satisfy any claims, liabili- ties or obligations (absolute, accrued, asserted or unasserted, contingent or otherwise), other than the pay- ment, discharge or satisfaction thereof in the ordinary course of business consistent with past practice; (viii) alter through merger, liquidation, reorganiza- tion, restructuring or in any other fashion its corporate structure; (ix) enter into or adopt, or amend, any bonus, incentive, deferred compensation, insurance, medical, hospi- tal, disability or severance plan, agreement or arrangement or enter into or amend any employee benefit plan or employment, consulting or management agreement, other than any such amendment to an employee benefit plan that is made to maintain the qualified status of such plan or its contin- ued compliance with applicable law and annual renewals of such plans that do not materially increase the benefits accruing to plan participants or the total cost or liability to the Company; (x) make any change in accounting practices or policies applied in the preparation of the financial statements referred to in Section 5.4, except as required by generally accepted accounting principles; (xi) modify any Company Agreement, enter into any agreement, understanding, obligation or commitment, or incur any indebtedness or obligation, of the type that would have been a Company Agreement if in existence on the date hereof, or enter into any contract which requires any approval or consent by any other Person to the transactions contemplated by this Agreement; (xii) pay or commit to pay any bonus to any officer or employee of the Company, or make any other material change in the compensation of its employees; provided, however, that nothing contained herein shall preclude the Company from adjusting salaries for its employees pursuant to the Company's normal year-end salary review process in an aggregate amount not to exceed 6% of the prior year's aggregate compensation base as reflected on Form W-3 for the employee group subject to such salary review; (xiii) make any change in its business or operations or make any expenditure which shall exceed the amount, as set forth in Schedule 5.26, budgeted therefor; (xiv) enter into any contract for the purchase of real property or exercise any option to extend a lease listed in Schedule 5.11; (xv) sell, lease (as lessor), transfer or otherwise dispose of, or mortgage or pledge, or impose or suffer to be imposed any Encumbrance on, any of the Company's assets, other than inventory and minor amounts of personal property sold or otherwise disposed of for fair value in the ordinary course of the Company's business consistent with past practice and other than Permitted Encumbrances; (xvi) cancel any debts owed to or claims held by the Company (including the settlement of any claims or litigation) other than in the ordinary course of the Company's business consistent with past practice; (xvii) accelerate or delay collection of any notes or accounts receivable in advance of or beyond their regular due dates or the dates when the same would have been collected in the ordinary course of its business consistent with past practice; (xviii) delay or accelerate payment of any account payable or other liability beyond or in advance of its due date or the date when such liability would have been paid in the ordinary course of its business consistent with past practice; (xix) allow the levels of raw materials, sup- plies, work-in-process or other materials included in its inventory to vary in any material respect from the levels customarily maintained in its business; (xx) prepare or file any Tax Returns in a manner inconsistent with past practice or, on such Tax Returns, take any position, make any election, or adopt any method that is inconsistent with the positions taken, elections made or methods used in preparing and filing similar Tax Returns in prior periods; or (xxi) enter into any other transaction affecting the business of the Company, other than in the ordinary course of business consistent with past practice or as expressly contemplated by this Agreement. 7.5. Notification by the Company of Certain Matters. During the period prior to the Effective Time, the Company shall promptly advise Parent in writing of (i) any change or event having a Material Adverse Effect on the Company, (ii) any notice or other communication from any third Person alleging that the consent of such third Person is or may be required in connection with the transactions contemplated by this Agreement, and (iii) any material default under any Company Agreement or event which, with notice or lapse of time or both, would become such a default on or prior to the Effective Time and of which the Company has knowledge. 7.6. Mutual Cooperation; Reasonable Best Efforts. The parties hereto shall cooperate with each other, and shall use their respective reasonable best efforts to cause as promptly as practicable the fulfillment of the conditions to each other party's obligations hereunder, including without limitation Sections 9.3 and 10.2, and to obtain as promptly as practicable all consents, authorizations, orders or approvals from each and every third party, whether private or governmental, required in connection with the transactions contemplated by this Agreement; provided, however, that the foregoing shall not require Parent or the Company to make any divestiture or consent to any divestiture in order to obtain any consent, authorization or approval or fulfill any condition. 7.7. No Solicitation. From and after the date of this Agreement and prior to the Effective Time, except as provided below, the Company agrees that (a) the Company shall not, and the Company shall not authorize or permit its officers, directors, Affiliates, employees or authorized agents and representatives (including, without limitation, any investment banker, attorney or accountant retained by it) to, initiate, solicit or encourage, directly or indirectly, any inquiries or the making or implementation of any proposal or offer with respect to a merger, acquisition, consolidation or similar transaction involving, or any purchase of all or any significant portion of the assets or any equity securities of, the Company (excluding discussions with holders of currently outstanding Warrants and Stock Options relating to the exercise or termination thereof) (any such proposal or offer being hereinafter referred to as an "Acquisition Proposal") or engage in any negotiations concerning, or provide any confidential information or data to, or have any substantive discussions with, any Person relating to an Acquisition Proposal, or otherwise facilitate any effort or attempt to make or implement an Acquisition Proposal; and (b) it will notify Parent immediately if any such inquiries or proposals are received by, any such information is requested from, or any such negotiations or discussions are sought to be initiated or continued with, it, including the identity of the Person making the inquiry or proposal and the terms of any proposal; provided, however, that nothing contained in this Section 7.7 shall prohibit the Board of Directors of the Company from furnishing information to or entering into discussions or negotiations with, any Person that indicates an interest in making a Superior Proposal (as hereinafter defined) if, and only to the extent that the Board of Directors determines in good faith that such action is required for the Board of Directors to comply with its fiduciary duties to stockholders imposed by laws as advised by the Company's outside counsel in writing. If any Person makes a Superior Proposal, upon receipt thereof the Company shall immediately provide written notice (a "Notice of a Superior Proposal") to Parent of such Superior Proposal, including the identity of the Person making such Superior Proposal and the terms and structure thereof, and if, within five business days following the delivery of the Notice of a Superior Proposal, the Superior Proposal does not continue to be superior in terms of the aggregate value to be received by the holders of Securities in light of any improved transaction proposed by Parent prior to the expiration of such five-day period, the Company shall cease all discussions or negotiations with such Person. For purposes of this Agreement, "Superior Proposal" means an unsolicited bona fide Acquisition Proposal in writing that the Board of Directors determines in its good faith judgment (based on the advice of a nationally recognized investment banking firm) provides greater aggregate value to the holders of Securities than the transactions contemplated by this Agreement. Subject to Article XII, nothing in this Section 7.7 shall (i) permit the Company to terminate this Agreement, (ii) permit the Company to enter into any agreement with respect to an Acquisition Proposal during the term of this Agreement or (iii) affect any other obligation of any party under this Agreement. The Company shall enforce and not waive any "standstill" agreement currently in effect with any Person. 7.8. Subsequent Financial Statements. Prior to the Effective Date, the Company shall deliver to Parent, not later than 10 business days after the end of each monthly period and in the form customarily prepared by the Company, the unaudited internal financial statements of the Company, including an income statement, for the monthly period then ended and for the period from the beginning of the current fiscal year to the end of such monthly period. 7.9. Antitrust Law Compliance. Parent and the Company shall use their respective reasonable best efforts to file, on or before March 12, 1996, with the Federal Trade Commission and the Antitrust Division of the Department of Justice the notifications and other information required to be filed under the HSR Act, or any rules and regulations promulgated thereunder, with respect to the transactions contemplated hereby. Each of Parent and the Company warrants that all such filings by it will be, as of the date filed, true and accurate and in accordance with the requirements of the HSR Act and any such rules and regulations. Each of Parent and the Company agrees to make available, or cause to be made available, to the other party such information as each of them may reasonably request relative to its business, assets and property as may be required of each of them to file any additional information requested by such agencies under the HSR Act and any such rules and regulations. ARTICLE VIII ADDITIONAL AGREEMENTS 8.1. Preparation of Proxy Statement; Action by Company. (a) The Company shall prepare the Proxy Statement as promptly as practicable after the date hereof and shall submit the proposed Proxy Statement to Parent and its counsel not less than three days prior to submitting the Proxy Statement to its stockholders. The Company shall use its reasonable best efforts to mail the Proxy Statement to all holders of Securities on or before March 18, 1996. If prior to the Effective Time either (i) the Company determines that the Proxy Statement needs to be amended or supplemented in order for the representation and warranty of the Company in Section 5.29 to be correct or (ii) Parent determines that any information included in the Proxy Statement and supplied by Parent needs to be supplemented or amended, the Company or Parent, as the case may be, shall notify the other of such determination and shall deliver to the other such amendment or supplement as such party believes is necessary. The Company shall consider all such amendments proposed by Parent, and shall cause all the amendments or supplements that the Company reasonably believes are necessary to be mailed to its stockholders as soon as practicable after such delivery. (b) The Company shall duly call, give notice of, convene and hold a meeting of its stockholders for the purpose of approving the Merger and adopting this Agreement. The Company will, through its Board of Directors, recommend to its stockholders the adoption of this Agreement; provided, however, that, without relieving the Company of its other obligations under this Section 8.1(b), the Board of Directors shall not be required to make, and shall be entitled to withdraw, such recommendation if such Board of Directors concludes in good faith on the basis of the written advice of its outside counsel that the making of, or the failure to withdraw, such recommendation would violate the fiduciary obligations of such Board of Directors under applicable law. The Company shall use all reasonable efforts to hold the Stockholders' Meeting on or before April 17, 1996. 8.2. Restricted Parent Common Stock Pool. Simultaneously with the Closing of the Merger, Parent will establish a plan to encourage retention of key employees of the Company. Under such plan, such key employees who continue to be employed by the Company during the applicable vesting periods would be eligible to receive (without payment of any consideration by such employee) shares of Parent Common Stock having an aggregate market value of $1 million as of the Closing. Such shares would vest and be payable in two equal installments on the first and second anniversary of the Closing of the Merger and Parent will use its best commercial efforts to cause the shares to be registered on Form S-8 under the Securities Act of 1933, as amended, on or before the first anniversary of the Closing. The Company will be entitled to recommend, subject to Parent's approval, the persons eligible to participate in the plan and the amounts they may receive. 8.3. Indemnification and Insurance. (a) After the Effective Time, the Surviving Corporation shall, to the fullest extent provided under the Company's Certificate of Incorporation or By-Laws as in effect on the date hereof, indemnify and hold harmless, each present and former director, officer, employee, fiduciary and agent of the Company (collectively, the "Indemnified Parties") against any Losses or Expenses in connection with any claim, action, suit, proceeding or investigation, whether civil, criminal, administrative or investigative, arising out of or pertaining to any action or omission occurring at or prior to the Effective Time for a period of six years after the Effective Date. In the event of any such claim, action, suit, proceeding or investigation (whether arising before or after the Effective Time), (i) the Surviving Corporation shall control the defense thereof, (ii) the Indemnified Parties shall be entitled, at their expense, to participate in any defense of such claims, (iii) the Indemnified Parties will cooperate in the defense of any such matter, and (iv) Parent shall have the right in its sole discretion to settle any such claim, provided that release of all the liabilities of the indemnified party with respect to the settled claim shall be a condition to any settlement by Parent of such claim under this Section 8.3(a); provided, however, that, in the event that any claims for indemnification are asserted or made within such six-year period, all rights to indemnification in respect of any such claim or claims shall continue until the disposition thereof. (b) For a period of three years after the Effective Time, Parent shall cause the Surviving Corporation to use its best efforts to maintain in effect, if available, directors' and officers' liability insurance covering those persons who are currently covered by the Company's directors' and officers' liability insurance policy (a copy of which has been heretofore delivered to Parent) on terms comparable to those applicable to the current directors and officers of the Company; provided, however, that in no event shall the Surviving Corporation be required to expend in excess of 150% of the annual premium currently paid by the Company for such coverage, and provided, further, that if the premium for such coverage exceeds such amount, the Surviving Corporation shall purchase a policy with the greatest coverage available for such 150% of the annual premium. To the extent that the Surviving Corporation is unwilling or unable to make the payments contemplated by this Section 8.3(b), Parent agrees to make such payments. (c) This Section shall survive the consummation of the Merger at the Effective Time, is intended to benefit the Company, the Surviving Corporation and the Indemnified Parties, and shall be binding on all successors and assigns of the Surviving Corporation and shall be enforceable by the Indemnified Parties. ARTICLE IX CONDITIONS PRECEDENT TO OBLIGATIONS OF PARENT AND MERGERCO The obligations of Parent and Mergerco under this Agreement shall, at the option of Parent and Mergerco, be subject to the satisfaction, on or prior to the Effective Time, of the following conditions: 9.1. No Misrepresentation or Breach of Covenants and Warranties. There shall have been no breach by the Company in the performance of any of its covenants and agreements herein; none of the representations and warranties of the Company contained herein shall be untrue or incorrect in any respect and at the Effective Time such representations and warranties shall be true and correct in all material respects as though made at the Effective Time except for changes therein specifically permitted by this Agreement; and there shall have been delivered to Parent and Mergerco a certificate or certificates to such effect, dated the Effective Date and signed on behalf of the Company by the President of the Company. 9.2. No Changes or Destruction of Property. Between the date hereof and the Effective Time, there shall have been (a) no Material Adverse Effect with respect to the Company; and (b) no material damage to the Company's assets by fire, flood, casualty, act of God or the public enemy or other cause, regardless of insurance coverage for such damage; and there shall have been delivered to Parent and Mergerco a certificate or certificates to such effect, dated the Effective Date and signed on behalf of the Company by the President of the Company. 9.3. No Restraint or Litigation. The waiting period under the HSR Act shall have expired or been terminated, and no action, suit, investigation or proceeding shall have been instituted or threatened by any Governmental Body to restrain or prohibit or otherwise challenge the legality or validity of the transactions contemplated hereby. No Court Order shall be in effect restraining or prohibiting such transactions. 9.4. Necessary Governmental Approvals. The parties shall have received all approvals and actions of or by all Governmental Bodies which are necessary to consummate the trans- actions contemplated hereby, which are either specified in Schedule 5.3 or otherwise required to be obtained prior to the Closing by applicable Requirements of Laws or which are necessary to prevent a Material Adverse Effect on the Company. 9.5. Necessary Consents. The Company shall have received consents, in form and substance reasonably satisfactory to Mergerco and Parent, to the transactions contemplated hereby from the other parties to all contracts, leases, agreements and permits to which the Company is a party or by which the Company or any of its assets is affected and which are specified in Schedule 9.5 or are otherwise necessary to prevent a Material Adverse Effect on the Company. 9.6. Stockholders' Approval; Dissenters' Rights. (a) This Agreement shall have been adopted by the affirmative vote of (i) the holders of two-thirds of the issued and outstanding Company Preferred Stock, voting as a single class, and (ii) the holders of a majority of the issued and outstanding Company Common Stock and Company Preferred Stock, voting together as a single class, in each case entitled to vote thereon, as required by the DGCL and the Certificate of Incorporation of the Company. (b) Holders of not more than five percent (5%) of the Company Common Stock (assuming the conversion of all of the shares of Company Preferred Stock), shall have (i) delivered to the Company, before the taking of the vote on the Merger, a written demand for appraisal of their capital stock pursuant to Section 262 of the DGCL and (ii) not voted in favor of or consented to the Merger. (c) The Company shall have given all notices required to be given pursuant to subparagraph 6J of Article FOURTH of the Company's Certificate of Incorporation and all notices required to be given under the Warrants to the holders thereof in connection with the Merger. (d) There shall have been delivered to Parent and Mergerco a certificate confirming compliance with the foregoing requirements of this Section 9.6, dated the Effective Date and signed on behalf of the Company by the President or any Vice President of the Company. 9.7. Indebtedness. (a) As of the Effective Time, the Company shall have no indebtedness for borrowed money (including capitalized lease obligations) other than borrowings from Parent under the Parent Loan Agreement, the Subordinated Note, and other than existing capitalized lease obligations (i) listed on the Schedules hereto or (ii) involving payment of less than $10,000 per year; and there shall have been delivered to Parent and Mergerco a certificate to such effect, dated the Effective Date and signed on behalf of the Company by the President or any Vice President of the Company. (b) NationsCredit Commercial Corporation (formerly known as Greyrock Business Credit) shall have, in each case in form and substance satisfactory to Parent, (i) issued and delivered to Parent a pay off letter (stating among other things that the Company owes it no indebtedness as of the Closing Date); (ii) agreed to release all obligations of the Company, the Surviving Corporation and Parent thereto upon payment of the amount of indebtedness set forth in the pay off letter; and (iii) agreed to execute and deliver all documents necessary to release any security interest such party may have in any of the assets of the Company and shall have returned any collateral held thereby in respect of any indebtedness to the Company. 9.8. Warrants. (a) The Company shall have received the written acknowledgment, in form reasonably acceptable to Parent, of each holder of a Warrant that at the Effective Time the Warrant shall be converted into the right described in Section 3.1(i), and that after the Effective Time neither the Company nor Parent has any obligations to such holders pursuant to such Warrants, except for the obligations of Parent contained in this Agreement with respect to payment of the Warrant Consideration. 9.9. FIRPTA Certificate. The Company shall have delivered to Parent, not more than 30 days prior to the Effective Date, a statement in accordance with Treas. Reg. Subsection 1.1445-2(c)(3) and 1.897-2(h) certifying that the Company is not, and has not been a "United States real property holding corporation" for purposes of Sections 897 and 1445 of the Code and Parent shall have no actual knowledge that such statement is false or receive a notice that the statement is false pursuant to Treas. Reg. Section 1.1445-4. 9.10. Fairness Opinion. The opinion of Alex. Brown & Sons Incorporated that the consideration to be received in the Merger by the Company's stockholders is fair to the Company's stockholders from a financial point of view shall not have been withdrawn or modified in any respect; and there shall have been delivered to Parent and Mergerco a certificate to such effect, dated the Effective Date and signed on behalf of the Company by the President or any Vice President of the Company. ARTICLE X CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY The obligations of the Company under this Agreement shall, at the option of the Company, be subject to the satisfaction, on or prior to the Effective Time, of the following conditions: 10.1. No Misrepresentation or Breach of Covenants and Warranties. There shall have been no breach by Parent or Mergerco in the performance of any of their respective covenants and agreements herein; none of the representations and warranties of Parent or Mergerco contained or referred to herein shall be untrue or incorrect in any respect and at the Effective Time such representations and warranties shall be true and correct in all material respects as though made at the Effective Time except for changes therein specifically permitted by this Agreement; and there shall have been delivered to the Company a certificate or certificates to such effect, dated the Effective Date and signed on behalf of Parent by the President or any Vice President of Parent and on behalf of Mergerco by the President or any Vice President of Mergerco. 10.2. No Restraint or Litigation. The waiting period under the HSR Act shall have expired or been terminated, and no action, suit or proceeding shall have been instituted or threatened by any Governmental Body to restrain, prohibit or otherwise challenge the legality or validity of the transactions contemplated hereby. No Court Order shall be in effect restraining or prohibiting such transactions. 10.3. Necessary Governmental Approvals. The parties shall have received all approvals and actions of or by all Governmental Bodies necessary to consummate the transactions contemplated hereby, which are required to be obtained prior to the Closing by applicable Requirements of Laws. ARTICLE XI INDEMNIFICATION 11.1. Indemnity Fund. Immediately after the Effective Time, Parent shall transfer and deposit the Indemnity Amount with The First National Bank of Chicago, or another financial institution selected by Parent and reasonably acceptable to the Company, as Indemnity Fund and escrow agent (the "Indemnity Agent"). Such deposit shall constitute the initial Indemnity Fund and shall be governed by the terms set forth herein and in the Indemnity Agreement, substantially in the form of Exhibit A hereto, among Parent, the Stockholder Representatives and the Indemnity Agent (the "Indemnity Agreement"). All funds or other property received by the Indemnity Agent shall be retained by it as part of the Indemnity Fund. The Indemnity Fund shall be available to indemnify hold harmless and reimburse the Parent Group Members from and against any Loss or Expense indemnifiable under this Article XI and as provided in the Indemnity Agreement. All fees and expenses of the Indemnity Agent shall be borne by Parent; provided that any amounts relating to indemnification of the Indemnity Agent shall be paid one-half by Parent and one-half from the Indemnity Fund. 11.2. Indemnification from Indemnity Fund. (a) Subject to Section 11.1, from and after the Effective Time, each Parent Group Member shall be indemnified, held harmless and reimbursed from the Indemnity Fund from and against any and all Losses and Expenses incurred by such Parent Group Member in connection with or arising from: (i) any breach or failure to perform by the Company of any of its agreements, covenants or obligations in this Agreement to be performed by the Company up to and including the Effective Time; (ii) any breach of any warranty or the inaccuracy of any representation of the Company contained in Article V or Section 7.9 of this Agreement or any certificate delivered by or on behalf of the Company pursuant to Articles IV or IX of this Agreement; or (iii) incurrence by the Company of any Acquisition Expenses in excess of $900,000 in the aggregate. provided, however, that the Indemnity Fund shall be used to indemnify and hold harmless hereunder with respect to any provision of Article V (other than Sections 5.1, 5.7, 5.17, 5.27 and 5.29, as to which this proviso shall not apply) only to the extent that the aggregate amount (without duplication) of Losses and Expenses borne by the Parent Group Members with respect thereto exceeds $150,000. Any payment pursuant to this Section 11.2 shall be made in the form of a transfer of funds to the applicable Parent Group Member(s) pursuant to the Indemnity Agreement. (b) The indemnification provided for in this Section 11.2 shall terminate one year after the Effective Date (and no claims shall be made by any Parent Group Member under this Section 11.2 thereafter), except that the indemnification by the Indemnity Fund shall continue as to any Losses or Expenses in connection with which Parent gives a Claim Notice in accordance with the requirements of Section 11.4 on or prior to the date such indemnification obligation would otherwise terminate in accordance with this Section 11.2, as to which the indemnification obligation of the Indemnity Fund shall continue until the liability of the Indemnity Fund shall have been determined pursuant to this Article XI, and all Parent Group Members shall have been reimbursed out of the Indemnity Fund for the full amount of such Loss and Expense for which the Indemnity Fund is responsible in accordance with this Article XI. (c) The sole source of recovery for any claim under this Article XI shall be the Indemnity Fund. From and after the Effective Time, the sole and exclusive remedy of any Parent Group Member with respect to any and all claims (other than claims of, or causes of action arising from, fraud) for money damages or other monetary relief relating to or arising out of any breach or failure to perform by the Company of any of its agreements, covenants or obligations in this Agreement or any breach of any warranty or the inaccuracy of any representation of the Company contained in this Agreement or in any certificate delivered pursuant to this Agreement shall be pursuant to the indemnification provisions set forth in this Article XI. 11.3. Termination of Indemnity Fund. Upon termination of the Indemnity Fund's indemnification obligations under this Article XI and reimbursement of the Parent Group Members of all Losses and Expenses payable thereto hereunder, the Indemnity Fund shall terminate and shall be distributed to the Paying Agent (or if the Paying Agency Agreement then shall have terminated, to Parent) in accordance with the Indemnity Agreement after payment of any amounts therefrom due to the Indemnity Agent and the Stockholder Representatives in accordance with the Indemnity Agreement. Amounts so distributed to the Paying Agent (or in lieu thereof to Parent) shall be allocated among all holders of Securities (excluding Series D Preferred Stock and Dissenting Shares) based on each such holder's ownership of shares of Company Common Stock (assuming the conversion of all shares of Company Preferred Stock (other than Series D Preferred Stock) and the exercise of the MCRC Warrant and all Stock Options). To the extent so allocated to them, such amounts shall then be distributed to the holders of Securities who shall have complied with the requirements of Section 3.3 to receive their portion of the Aggregate Merger Consideration. 11.4. Notice and Determination of Claims. (a) If any Parent Group Member wishes to make a claim for indemnification from the Indemnity Fund, such Parent Group Member (individually or collectively the "Claiming Party") shall so notify the Indemnity Agent in writing (the "Claim Notice") of the facts giving rise to such claim for indemnification hereunder. The Claim Notice shall be accompanied by a certificate of the Claiming Party attesting to the Claiming Party's contemporaneous delivery of a duplicate copy of the Claim Notice to the Stockholder Representatives. Such Claim Notice shall describe in reasonable detail (to the extent then known) such Losses or Expenses and the method of computation of such Losses or Expenses and contain a reference to the provisions of this Agreement in respect of which such Loss or Expense shall have occurred. If the Claiming Party is not Parent, the Claim Notice must be accompanied by a certificate from Parent confirming that the Claiming Party is a Parent Group Member. Subject to Section 11.4(b), the Indemnity Agent shall, on the twentieth (20th) business day after receipt of a Claim Notice with respect to indemnification for a specified amount, pay or deliver to Parent, for its account or the account of each Parent Group Member named in the Claim Notice the Indemnity Fund or the portion thereof specified in the Claim Notice. Payment shall be delivered as specified in the Claim Notice. (b) At the time of delivery of any Claim Notice to the Indemnity Agent, a duplicate copy of such Claim Notice shall be delivered to the Stockholder Representatives. Notwithstanding the provisions of Section 11.4(a), the Indemnity Agent shall not make any payment of the Indemnity Fund or any portion thereof with respect to a Claim Notice if during the twenty (20) business days after the Indemnity Agent's receipt of such Claim Notice the Stockholder Representatives shall have delivered to the Indemnity Agent a written objection to the claim made in the Claim Notice (an "Objection"). At the time of delivery of any Objection to the Indemnity Agent, a duplicate copy of such Objection shall be delivered to the Claiming Party. (c) Upon receipt of an Objection pursuant to this Agreement, the Indemnity Agent shall (1) deliver to the Claiming Party cash out of the Indemnity Fund, in an amount equal to that portion, if any, of the Claim which is not disputed by the Stockholder Representatives and (2) shall designate and segregate out of the Indemnity Fund the amount subject to the Claim which is disputed by the Stockholder Representatives. Thereafter, the Indemnity Agent shall not dispose of that remaining portion of the Indemnity Fund subject to the Claim until the Indemnity Agent shall have received a certified copy of the final decision of the arbitrators as contemplated by this Section 11.4(c) with respect to the Claim or Claims set forth in the Claim Notice, or the Indemnity Agent shall have received a copy of a written agreement between the Claiming Party and the Stockholder Representatives resolving such dispute and setting forth the amount, if any, of the Claim which such Claiming Party is entitled to receive. The Indemnity Agent will pay the Claiming Party out of the Indemnity Fund the amount that the Claiming Party is entitled to receive as set forth in such arbitration decision after the expiration of ten (10) business days from the receipt of such decision or, in the event that the amount to which the Claiming Party is entitled is established pursuant to an agreement between the Claiming Party and the Stockholder Representatives, as soon as possible after the Indemnity Agent's receipt of such agreement. Copies of any written agreement between the Stockholder Representatives and the Claiming Party confirming that the Claiming Party is entitled to a portion but not all of the amount claimed by the Claiming Party may be filed by the Claiming Party with the Indemnity Agent, with the effect set forth in the preceding sentence as to the agreed amount, but no such agreement or filing thereof shall operate as a waiver of the Claiming Party's rights as to the disputed amount, including without limitation its right to recover the same, and any decision of the arbitrators as contemplated by this Section 11.4(c) that the Claiming Party is entitled to receive the disputed amount may be filed with the Indemnity Agent and shall, when filed with the Indemnity Agent, be acted on as set forth above. If the Claiming Party and the Stockholder Representatives do not resolve a dispute regarding a Claim within thirty (30) days after the delivery of an Objection, either the Claiming Party or the Stockholders Representatives may, by written notice to the other, demand arbitration of the matter; and in such event the matter shall be settled by arbitration conducted by three arbitrators. Within fifteen (15) days after such written notice is sent, the Claiming Party and the Stockholders Representatives shall each select one arbitrator, and the two arbitrators so selected shall select a third arbitrator. The decision of the arbitrators as to the validity and amount of any Claim shall be binding, and conclusive upon the parties, and the Indemnity Agent shall be entitled to act in accordance with such decision and make or withhold payments out of the Indemnity Fund in accordance therewith. Judgment upon any award rendered by the arbitrators may be entered in any court having jurisdiction. Any such arbitration shall be held in Chicago, Illinois under the commercial rules then in effect of the American Arbitration Association. The non-prevailing party to an arbitration shall pay its own expenses, the fees of each arbitrator, the administrative fee of the American Arbitration Association, and the expenses, including without limitation, attorneys' fees and costs, reasonably incurred by the other party to the arbitration. In the case of the Stockholder Representatives, any such payment shall be made from the Indemnity Fund. (d) The foregoing provisions in this Section 11.4 may be supplemented or amended pursuant to the terms of the definitive Indemnity Agreement. 11.5. Stockholder Representatives. (a) The Stockholder Representatives shall act as agents of the holders of Securities (other than Dissenting Shares and Series D Preferred Stock) and are entitled to give and receive notices and communications, to authorize delivery to the Parent Group Members of the funds or other property from the Indemnity Fund in satisfaction of claims by the Parent Group Members, to object to such deliveries in accordance herewith and in accordance with the Indemnity Agreement, to agree to, negotiate, enter into settlements and compromises of, and comply with orders of courts and awards of arbitrators with respect to such claims, and to take all actions necessary or appropriate in the judgment of the Stockholder Representatives for the accomplishment of the foregoing. No bond shall be required of the Stockholder Representatives, and the Stockholder Representatives shall receive no compensation for their services; however, the Stockholder Representatives shall be reimbursed for reasonable expenses incurred in connection with their duties out of the Indemnity Fund to the extent provided in the Indemnity Agreement. (b) The Stockholder Representatives shall not be liable to the holders of Securities for any act done or omitted hereunder or under the Indemnity Agreement as Stockholder Representatives not constituting fraud or gross negligence. (c) The Stockholder Representatives shall treat confidentially and not disclose any nonpublic information from or about the Company to anyone (except on a need to know basis to individuals who agree to treat such information confidentially). 11.6. Actions of the Stockholder Representatives. A decision, act, consent or instruction of the Stockholder Representatives shall constitute a decision of all holders of Securities for whom any portion of the Indemnity Amount otherwise issuable to them is deposited in the Indemnity Fund and shall be final, binding and conclusive upon each such holder of Securities, and the Indemnity Agent and Parent may rely upon any decision, act, consent or instruction of the Stockholder Representatives as being the decision, act, consent or instruction of each and every such holder of Securities. The Indemnity Agent and each Parent Group Member are hereby relieved from any liability to any person for any acts done by them in accordance with such decision, act, consent or instruction of the Stockholder Representatives. For purposes of this Agreement and the Indemnity Agreement any action by a majority of the then Stockholder Representatives shall be deemed to be the action of and binding upon all of the Stockholder Representatives. 11.7. Third Person Claims. In the event Parent becomes aware of a third-party claim which Parent believes will result in a demand against the Indemnity Fund, Parent shall notify the Stockholder Representatives of such claim, and the Stockholder Representatives shall be entitled, at their expense, to participate in any defense of such claim. Parent shall have the right in its sole discretion to settle any such claim; provided, however, that Parent may not effect the settlement of any such claims without the consent of the Stockholder Representatives, which consent shall not be unreasonably withheld. In the event that the Stockholder Representatives have consented to any such settlement, the Stockholder Representatives shall have no power or authority to object under Section 11.4 or any other provision of this Article XI to the amount paid in settlement of such claim. ARTICLE XII TERMINATION 12.1. Termination Rights. Anything contained in this Agreement to the contrary notwithstanding, this Agreement may be terminated at any time prior to the Effective Time: (a) by mutual written consent of Parent and the Company; (b) by the Company if: (i) there is a Superior Proposal and the Board of Directors of the Company determines in good faith as advised in writing by the Company's outside counsel that the failure to approve such Superior Proposal would be inconsistent with the fiduciary duties to stockholders of the Board of Directors of the Company; provided, however, that the right to terminate this Agreement pursuant to this clause shall not be available (A) if the Company has breached any of its obligations under Section 7.7, or (B) the Superior Proposal shall not provide a greater aggregate value to the holders of Securities than the aggregate value to such holders pursuant to the Merger (as increased pursuant to any revised proposal of Parent pursuant to Section 7.7); or (ii) there has been a material breach by Parent or Mergerco of any of their respective agreements, representations or warranties contained herein and such breach has not been cured within seven days following receipt by Parent or Mergerco of notice from the Company requesting that such breach be cured; (c) by Parent if: (i) the Board of Directors of the Company shall have failed to recommend, or withdrawn, modified or amended in any material respect its approval or recommendation of, the Merger Agreement and the Merger or shall have resolved to do any of the foregoing; or (ii) there has been a material breach by the Company of any of its agreements, representations or warranties contained herein and such breach has not been cured within seven days following the Company's receipt of notice from Parent requesting that such breach be cured; (d) by either Parent or the Company if: (i) the Effective Time shall not have occurred on or before June 30, 1996 (or such later date as may be mutually agreed to by all of the parties hereto); or (ii) at the Stockholders' Meeting, or upon any adjournment or postponement thereof, the stockholders of the Company shall have failed to give any approval of this Agreement or the Merger required by applicable law. 12.2. Notice of Termination. Any party desiring to terminate this Agreement pursuant to Section 12.1 shall give notice of such termination to each of the other parties to this Agreement. 12.3. Effect of Termination. In the event that this Agreement shall be terminated pursuant to this Article XII, all further obligations of the parties under this Agreement (other than under Sections 13.2 and 13.9) shall be terminated without further liability of any party to the others; provided, however, that nothing herein shall relieve any party from liability for its willful breach of this Agreement. ARTICLE XIII GENERAL PROVISIONS 13.1. Survival of Obligations. All representations, warranties, covenants and obligations contained in this Agreement shall survive the consummation of the transactions contemplated by this Agreement; provided, however, that, except as otherwise provided in Article XI, the representations and warranties contained in Articles V and VI and in Section 7.9 shall terminate on the first anniversary of the Effective Date. Except as otherwise provided herein, no claim shall be made for the breach of any representation or warranty contained in Articles V or VI or Section 7.9 or under any certificate delivered with respect thereto under this Agreement after the date on which such representations and warranties terminate as set forth in this Section. 13.2. Confidential Nature of Information; Non-Solicitation. (a) Each party agrees that it will treat in confidence all documents, materials and other information which it shall have obtained regarding the other parties during the course of the negotiations leading to the consummation of the transactions contemplated hereby (whether obtained before or after the date of this Agreement), the investigation provided for herein and the preparation of this Agreement and other related documents, and, in the event the transactions contemplated hereby shall not be consummated, each party will return to the other parties all copies of nonpublic documents and materials which have been furnished in connection therewith. Such documents, materials and information shall not be communicated to any third Person (other than, in the case of Parent and Mergerco, to their counsel, accountants, financial advisors or lenders, and in the case of the Company, to its counsel, accountants or financial advisors). No other party shall use any confidential information in any manner whatsoever except solely for the purpose of evaluating the proposed Merger; provided, however, that after the Effective Time, Parent and the Surviving Corporation may use or disclose any confidential information included in the assets of the Company as of the Effective Time or otherwise reasonably related to the assets or business of the Company. The obligation of each party to treat such documents, materials and other information in confidence shall not apply to any information which (i) is or becomes available to such party without restriction on disclosure from a source other than such party and without breach of any known obligation of confidentiality, (ii) is or becomes available to the public other than as a result of disclosure by such party or its agents, (iii) is required to be disclosed under applicable law or judicial process, but only to the extent it must be disclosed, or (iv) such party reasonably deems necessary to disclose to obtain any of the consents or approvals contemplated hereby. (b) Each party agrees that for a period of two years from the date of this Agreement it will not solicit any employee of the other parties to become an employee of or consultant to such party or any of its Affiliates. The foregoing prohibition on solicitation shall not apply to solicitation through general advertisements or "head hunting" calls that are not exclusively targeted at such employees. The provisions of this Section 13.2(b) shall cease to be effective at the Effective Time. 13.3. No Public Announcement. No party hereto shall, without the approval of all of the other parties, make any press release or other public announcement concerning the transactions contemplated by this Agreement, except as and to the extent that any such party shall be so obligated by law or the rules of any stock exchange, in which case such party shall so advise the other parties and all parties shall use their reasonable best efforts to cause a mutually agreeable release or announcement to be issued; provided that the foregoing shall not preclude communications or disclosures necessary to implement the provisions of this Agreement or to comply with accounting and Securities and Exchange Commission disclosure obligations. 13.4. Notices. All notices or other communications required or permitted hereunder shall be in writing and shall be deemed given or delivered when delivered personally or four days after being mailed by registered or certified mail, return receipt requested, or one day after being sent by private overnight prepaid courier addressed as follows: (a) if to Parent, Mergerco or the Surviving Corporation, to it: c/o Tellabs International, Inc. 1000 Remington Boulevard Bolingbrook, IL 60440 Attention: President and to: Tellabs Operations, Inc. 4951 Indiana Avenue Lisle, IL 60532 Attention: General Counsel with a copy to: Sidley & Austin One First National Plaza Chicago, IL 60603 Attention: Thomas A. Cole Imad I. Qasim (b) if to the Company (prior to the Effective Time), to: Steinbrecher Corporation 30 North Avenue Burlington, MA 01803 Attention: R. Douglas Shute and to: Steinbrecher Corporation 30 North Avenue Burlington, MA 01803 Attention: Mitchell Mackoff with a copy to: Foley, Hoag & Eliot One Post Office Square Boston, MA 02109 Attention: David R. Pierson or to such other address as such party may indicate by a notice delivered to the other parties hereto. 13.5. Successors and Assigns. (a) The rights of each party under this Agreement shall not be assignable by such party prior to the Effective Time without the written consent of each of the other parties, except that the rights of Parent hereunder may be assigned prior to the Effective Time, without the consent of any other party hereto, to any corporation all of the outstanding capital stock of which is owned by Parent; provided that (i) the assignee shall assume in writing all of Parent's obligations hereunder, (ii) Parent shall not be released from any of its obligations hereunder by reason of such assignment and (iii) the obligations of the Company under this Agreement shall be subject to the delivery by such assignee, on or prior to the Effective Time, of a certificate signed on its behalf containing representations and warranties similar to those made by Parent in Article VI and an opinion of internal counsel to Parent, with respect to the assignee which is similar to the opinion with respect to Parent to be delivered pursuant to Section 4.3. Following the Effective Time, any party may assign any of its rights hereunder, but no such assignment shall relieve it of its obligations hereunder. (b) This Agreement shall be binding upon and inure to the benefit of the parties hereto and their successors and per- mitted assigns. The successors and permitted assigns hereunder shall include without limitation, in the case of Parent, any permitted assignee as well as the successors in interest to such permitted assignee (whether by merger, liquidation (including successive mergers or liquidations) or otherwise). Nothing in this Agreement, expressed or implied, is intended or shall be construed to confer upon any Person other than the parties and successors and assigns permitted by this Section 13.5 any right, remedy or claim under or by reason of this Agreement. 13.6. Entire Agreement; Amendments. This Agreement, the Indemnity Agreement and the Exhibits and Schedules referred to herein and the documents delivered pursuant hereto contain the entire understanding of the parties hereto with regard to the subject matter contained herein or therein, and supersede all prior agreements, understandings or letters of intent between or among any of the parties hereto, including without limitation the Confidentiality Agreement. This Agreement shall not be amended, modified or supplemented except by a written instrument signed by an authorized representative of each of the parties hereto. 13.7. Interpretation. Titles to articles and headings to sections herein are inserted for convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Agreement. The Schedules and Exhibits referred to herein shall be construed with and as an integral part of this Agreement to the same extent as if they were set forth verbatim herein. Except as expressly stated to the contrary herein, all dollar amounts in this Agreement refer to lawful money of the United States of America. 13.8. Waivers. Any term or provision of this Agree- ment may be waived, or the time for its performance may be extended, by the party or parties entitled to the benefit thereof. Any such waiver shall be validly and sufficiently authorized for the purposes of this Agreement if, as to any party, it is authorized in writing by an authorized representative of such party. The failure of any party hereto to enforce at any time any provision of this Agreement shall not be construed to be a waiver of such provision, nor in any way to affect the validity of this Agreement or any part hereof or the right of any party thereafter to enforce each and every such provision. No waiver of any breach of this Agreement shall be held to constitute a waiver of any other or subsequent breach. 13.9. Fees and Expenses. (a) Except as otherwise provided in this Section 13.9, each of the parties hereto shall bear its own costs and expenses (including, without limitation, fees and disbursements of its counsel, accountants and other financial, legal, accounting or other advisors), incurred by it or its Affiliates in connection with the preparation, negotiation, execution, delivery and performance of this Agreement and each of the documents and instruments executed in connection with or contemplated by this Agreement and the consummation of the transactions contemplated hereby and thereby (collectively, "Acquisition Expenses"); provided, however, that, except for up to $900,000 of Acquisition Expenses of the Company relating to the transactions contemplated by this Agreement, which $900,000 of Acquisition Expenses are attributable to and shall be borne by the Company, the Acquisition Expenses of the Company shall be borne entirely by the Indemnity Fund. (b) If (A) the Company terminates this Agreement pursuant to Section 12.1(b)(i) or Parent terminates this Agreement pursuant to Section 12.1(c)(i) or (B) within 180 days after either the Company or Parent terminates this Agreement pursuant to Section 12.1(d)(ii), either an Acquisition Proposal is consummated (other than the issuance of equity securities (i) to generate capital for the Company's operations or (ii) not in excess in the aggregate of 10% of the issued and outstanding shares of Company Common Stock on the date hereof (assuming all shares of Company Preferred Stock are converted)) or the Company enters into an agreement with respect to an Acquisition Proposal (other than the issuance of equity securities (i) to generate capital for the Company's operations or (ii) not in excess in the aggregate of 10% of the issued and outstanding shares of Company Common Stock on the date hereof (assuming all shares of Company Preferred Stock are converted)), then the Company shall pay Parent $2,500,000. In the case of clause (A) above, such payment shall occur promptly after such termination, but in no event later than two business days after such termination, and, in the case of clause (B) above, such payment shall occur simultaneously with the earlier to occur of the consummation of such Acquisition Proposal or the entry into any such agreement relating to an Acquisition Proposal. If the Company fails to pay such amounts when due in accordance with the immediately preceding sentence, which failure is finally determined by a court of competent jurisdiction, Parent shall be entitled to the payment from the Company, in addition to such amount, of any legal fees and expenses incurred in procuring such judicial determination. Any termination pursuant to Section 12.1(b)(i) or Section 12.1(c)(i) shall constitute an "Event of Default" pursuant to the Parent Loan Agreement once 30 days shall have elapsed after such termination. (c) If this Agreement is terminated (i) pursuant to Section 12.1(b)(i) or Section 12.1(c)(i), or (ii) pursuant to Section 12.1(d)(ii) and, within 180 days of such termination pursuant to Section 12.1(d)(ii) an Acquisition Proposal is consummated (other than the issuance of equity securities (i) to generate capital for the Company's operations or (ii) not in excess in the aggregate of 10% of the issued and outstanding shares of Company Common Stock on the date hereof (assuming all shares of Company Preferred Stock are converted)) or the Company enters into an agreement with respect to an Acquisition Proposal (other than the issuance of equity securities (i) to generate capital for the Company's operations or (ii) not in excess in the aggregate of 10% of the issued and outstanding shares of Company Common Stock on the date hereof (assuming all shares of Company Preferred Stock are converted)), then the Company shall reimburse Parent and Mergerco (not later than two business days after submission of statements therefor) for all of their Acquisition Expenses; provided, however, that the amount to be paid to Parent and Mergerco pursuant to this Section 13.9(c) shall not exceed $900,000. 13.10. Partial Invalidity. Wherever possible, each provision hereof shall be interpreted in such manner as to be effective and valid under applicable law, but in case any one or more of the provisions contained herein shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such provision shall be ineffective to the extent, but only to the extent, of such invalidity, illegality or unenforceability without invalidating the remainder of such invalid, illegal or unenforceable provision or provisions or any other provisions hereof, unless such a construction would be unreasonable. 13.11. Execution in Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be considered an original instrument, but all of which shall be considered one and the same agreement, and shall become binding when one or more counterparts have been signed by each of the parties hereto and delivered to each of the other parties. 13.12. Further Assurances. From time to time after the Effective Time, the officers and directors of the Surviving Corporation shall be authorized to execute and deliver, in the name and on behalf of Mergerco, the Company or otherwise, such deeds and other instruments and to take or cause to be taken such further or other action as shall be necessary or desirable in order to vest or perfect in or to confirm, of record or otherwise, in the Surviving Corporation title to, and possession of, all of the property, rights, privileges, powers, immunities and franchises of Mergerco and the Company and otherwise carry out the purposes of this Agreement. 13.13. Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws (as opposed to the conflicts of law provisions) of the State of Delaware. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed the day and year first above written. TELLABS, INC. By s\ Michael J. Birck Name: Michael J. Birck (Corporate Seal) Title: President ATTEST: s\ Peter A. Guglielmi Name: Peter A. Guglielmi Title: Exec. Vice President, Treasurer, and Chief Financial Officer TIGER MERGER CO. By s\ Michael J. Birck Name: Michael J. Birck Title: President (Corporate Seal) ATTEST: s\ Peter A. Guglielmi Name: Peter A. Giglielmi Title: Vice President and Treasurer STEINBRECHER CORPORATION By s\ R. Douglas Shute Name: R. Douglas Shute Title: President (Corporate Seal) ATTEST s\Mitchell Mackoff Name: Mitchell Mackoff Title: Chief Financial Officer VOTING AGREEMENT VOTING AGREEMENT (this "Agreement"), dated as of March __, 1996, by and among Tellabs, Inc., a Delaware corporation ("Parent"), Tiger Merger Co., a Delaware corporation and an indirect subsidiary of Parent ("Mergerco"), and the stockholder of Steinbrecher Corporation, a Delaware corporation (the "Company"), named on the signature page hereto (the "Stockholder"). WHEREAS, Parent, Mergerco and the Company are entering into an Agreement of Merger of even date herewith (as the same may be amended or supplemented, the "Merger Agreement") providing for the merger (the "Merger") of Mergerco with and into the Company upon the terms and subject to the conditions contained in the Merger Agreement; WHEREAS, the Stockholder owns the shares of capital stock of the Company set forth on Annex I hereto (the "Subject Shares"); and WHEREAS, as a condition to their willingness to enter into the Merger Agreement, Parent and Mergerco have requested that the Stockholder enter into this Agreement. NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein and other good and valuable consideration, the adequacy of which is hereby acknowledged, and intending to be legally bound hereby, the parties hereto agree as follows: 1. Representations and Warranties of the Stockholder. The Stockholder hereby represents and warrants to Parent and Mergerco as follows: (a) Authority. The Stockholder has all requisite power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. This Agreement has been duly authorized, executed and delivered by the Stockholder and constitutes a valid and binding obligation of the Stockholder enforceable in accordance with its terms. The execution and delivery of this Agreement does not, and the consummation of the transactions contemplated hereby and compliance with the terms hereof will not, conflict with, or result in any violation of, or default (with or without notice or lapse of time or both) under any provision of, any trust agreement, loan or credit agreement, note, bond, mortgage, indenture, lease or other agreement, instrument, permit, concession, franchise, license, judgment, order, notice, decree, statute, law, ordinance, rule or regulation applicable to the Stockholder or to the Stockholder's property or assets. No consent, approval, order or authorization of, or registration, declaration or filing with, any court, administrative agency or commission or other governmental authority or instrumentality, domestic, foreign or supranational, is required by or with respect to the Stockholder in connection with the execution and delivery of this Agreement or the consummation by the Stockholder of the transactions contemplated hereby. (b) Title. The Stockholder has good and marketable title to the Subject Shares, free and clear of any claims, liens, encumbrances and security interests whatsoever. The Stockholder owns no shares of capital stock, or rights, options or warrants to purchase shares of capital stock, of the Company except as set forth on Annex I. (c) No Other Rights. Except for this Agreement and except as set forth on Schedule 5.1(f) of the Merger Agreement, there are no voting agreements, proxies or other agreements or instruments relating to the voting of the shares of capital stock of the Company owned by such Stockholder. 2. Representations and Warranties of Parent and Mergerco. Parent and Mergerco hereby represent and warrant to the Stockholder as follows: (a) Authority. Each of Parent and Mergerco has all requisite corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement by Parent and Mergerco, and the consummation of the transactions contemplated hereby, have been duly authorized by all necessary corporate action on the part of Parent and Mergerco. This Agreement has been duly executed and delivered by Parent and Mergerco and constitutes a valid and binding obligation of Parent and Mergerco enforceable in accordance with its terms. (b) No Conflicts. The execution and delivery of this Agreement does not, and the consummation of the transactions contemplated hereby and compliance with the terms hereof will not, conflict with, or result in any violation of, or default (with or without notice or lapse of time or both) under any provision of, any trust agreement, loan or credit agreement, note, bond, mortgage, indenture, lease or other agreement, instrument, permit, concession, franchise, license, judgment, order, notice, decree, statute, law, ordinance, rule or regulation applicable to Parent or Mergerco or their respective properties or assets. No consent, approval, order or authorization of, or registration, declaration or filing with, any court, administrative agency or commission or other governmental authority or instrumentality, domestic, foreign or supranational, is required by or with respect to Parent or Mergerco in connection with the execution and delivery of this Agreement or the consummation by Parent and Mergerco of the transactions contemplated hereby. 3. Covenants of the Stockholder. Up to the date of termination of the Merger Agreement, the Stockholder agrees as follows: (a) Vote in Favor of Merger Agreement. At any meeting of stockholders of the Company called to vote upon the Merger and the Merger Agreement or at any adjournment thereof or in any other circumstances upon which a vote, consent or other approval with respect to the Merger and the Merger Agreement is sought, the Stockholder shall vote (or cause to be voted) the Subject Shares in favor of the Merger, the adoption by the Company of the Merger Agreement and the approval of the terms thereof and each of the other transactions contemplated by the Merger Agreement. (b) Vote Against Certain Proposals. At any meeting of stockholders of the Company or at any adjournment thereof or in any other circumstances upon which the Stockholder's vote, consent or other approval is sought, the Stockholder shall vote (or cause to be voted) the Subject Shares against (i) any merger agreement or merger (other than the Merger Agreement and the Merger), consolidation, combination, sale of substantial assets, reorganization, recapitalization, dissolution, liquidation or winding up of or by the Company or any Acquisition Proposal (as defined in the Merger Agreement) or (ii) any amendment of the Company's certificate of incorporation or by-laws or other proposal or transaction involving the Company or any of its subsidiaries, which amendment or other proposal or transaction would in any manner impede, frustrate, prevent or nullify the Merger Agreement, the Merger or any of the other transactions contemplated by the Merger Agreement. (c) No Sale, Transfer or Other Agreements. The Stockholder agrees not to (i) other than by operation of law, sell, transfer, pledge, assign or otherwise dispose of, or enter into any contract, option or other arrangement (including any profit sharing arrangement) with respect to the sale, transfer, pledge, assignment or other disposition of, the Subject Shares to any person other than Mergerco or Mergerco's designee or (ii) enter into any voting arrangement, whether by proxy, voting agreement or otherwise, in connection, directly or indirectly, with any Acquisition Proposal. (d) No Solicitation. The Stockholder shall not, nor shall it permit any investment banker, attorney or other adviser or representative of the Stockholder to, (i) directly or indirectly solicit, initiate or encourage the submission of, any Acquisition Proposal or (ii) directly or indirectly participate in any discussions or negotiations regarding, or furnish to any person any information with respect to, or take any other action to facilitate any inquiries or the making of any proposal that constitutes, or may reasonably be expected to lead to, any Acquisition Proposal. (e) Irrevocable Proxy. In the event that the Stockholder shall breach its covenants set forth in this Section 3, the Stockholder (without any further action on the Stockholder's part) shall be deemed to have hereby irrevocably appointed Parent as the attorney and proxy of the Stockholder pursuant to the provisions of Section 212 of the Delaware General Corporation Law, with full power of substitution, to vote (including by execution of any written consent or otherwise) all of the Subject Shares that the Stockholder is entitled to vote at any meeting of stockholders of the Company (whether annual or special and whether or not an adjourned or postponed meeting) or in connection with any consent in lieu of any such meeting, as set forth in Sections 3(a) and 3(b); provided, that in any such vote or other action pursuant to such proxy, Parent shall not have the right (and such proxy shall not confer the right) to vote to reduce the consideration to be paid in exchange for the Subject Shares in the Merger or to otherwise modify or amend the Merger Agreement to reduce the rights or benefits of the Company or any stockholders of the Company (including the Stockholder) under the Merger Agreement or to reduce the obligations of Parent and/or Mergerco thereunder; THIS PROXY AND POWER OF ATTORNEY IS IRREVOCABLE AND COUPLED WITH AN INTEREST. The Stockholder hereby revokes, effective upon the execution and delivery of the Merger Agreement by the parties thereto, all other proxies and powers of attorney with respect to the Subject Shares that the Stockholder may have heretofore appointed or granted, and no subsequent proxy or power of attorney (except in furtherance of the Stockholder's obligations under this Section 3) shall be given or written consent executed (and if given or executed, shall not be effective) by the Stockholder with respect to the matters described in Sections 3(a) and 3(b) so long as this Agreement remains in effect. (f) Other Voting Agreements. The Stockholder agrees that, during the term of this Agreement, such Stockholder will not become a party to or cause such Stockholder's Subject Shares to become subject to any voting agreement or other agreement relating to the voting of such Stockholder's Subject Shares, except for this Agreement or any amendment hereto. (4) Further Assurances. The Stockholder will, from time to time, execute and deliver, or cause to be executed and delivered, such additional or further transfers, assignments, endorsements, consents and other instruments as Parent or Mergerco may reasonably request for the purpose of effectively carrying out the transactions contemplated by this Agreement. (5) Assignment. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties without the prior written consent of the other parties, except that Mergerco may assign, in its sole discretion, any or all of its rights, interests and obligations hereunder to Parent or to any direct or indirect wholly owned subsidiary of Parent. Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of and be enforceable by the parties and their respective successors and assigns. (6) Termination. This Agreement shall terminate upon the termination of the Merger Agreement. (7) General Provisions. (a) Expenses. Except as set forth in Merger Agreement, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such expense. (b) Amendments. This Agreement may not be amended except by an instrument in writing signed by each of the parties hereto. (c) Notice. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally or sent by overnight courier (providing proof of delivery) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): (i) if to Parent or Mergerco, to: c/o Tellabs International, Inc. 1000 Remington Boulevard Bolingbrook, Illinois 60440 Attention: President and to: Tellabs Operations, Inc. 4961 Indiana Avenue Lisle, Illinois 60532 Attention: General Counsel with a copy to: Sidley & Austin One First National Plaza Chicago, Illinois 60603 Attention: Thomas A. Cole Imad I. Qasim (ii) if to the Stockholder, to the address set forth on Annex I hereto. with a copy to: Foley, Hoag & Eliot One Post Office Square Boston, Massachusetts 02109 Attention: David R. Pierson (d) Interpretation. When a reference is made in this Agreement to Sections, such reference shall be to a Section to this Agreement unless otherwise indicated. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Wherever the words "include", "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation". (e) Counterparts. This Agreement may be executed in two or more counterparts, all of which shall be considered one and the same agreement, and shall become effective when one or more of the counterparts have been signed by each of the parties and delivered to the other party, it being understood that each party need not sign the same counterpart. (f) Entire Agreement; No Third-Party Beneficiaries. This Agreement (including the documents and instruments referred to herein) (i) constitutes the entire agreement and supersedes all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof and (ii) is not intended to confer upon any person other than the parties hereto any rights or remedies hereunder. (g) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware without regard to any applicable conflicts of law. 8. Stockholder Capacity. No person executing this Agreement who is or becomes during the term hereof a director or officer of the Company makes any agreement or understanding herein in his or her capacity as such director or officer. Each Stockholder executes this Agreement solely in his or her capacity as the record holder and beneficial owner of, or the trustee of a trust whose beneficiaries are the beneficial owners of, such Stockholder's Subject Shares and nothing herein shall limit or affect any actions taken by a Stockholder in his or her capacity as an officer or director of the Company to the extent specifically permitted by the Merger Agreement. 9. Enforcement. The parties agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions of this Agreement in any court of the United States located in the State of Delaware or in a Delaware state court, this being in addition to any other remedy to which they are entitled at law or in equity. In addition, each of the parties hereto (i) consents to submit such party to the personal jurisdiction of any Federal court located in the State of Delaware or any Delaware state court in the event any dispute arises out of this Agreement or any of the transactions contemplated hereby, (ii) agrees that such party will not attempt to deny or defeat such personal jurisdiction by motion or other request for leave from any such court, (iii) agrees that such party will not bring any action relating to this Agreement or any of the transactions contemplated hereby in any court other than a Federal court sitting in the State of Delaware or a Delaware state court and (iv) waives any right to trial by jury with respect to any claim or proceeding related to or arising out of this Agreement or any of the transactions contemplated hereby. IN WITNESS WHEREOF, each of Parent, Mergerco and the Stockholder has caused this Agreement to be signed by its officer thereunto duly authorized as of the date first written above. TELLABS, INC. By: ______________________________ Name: Title: TIGER MERGER CO. By: ______________________________ Name: Title: [STOCKHOLDER] By: ______________________________ Name: Title: INDEMNITY ESCROW AGREEMENT This INDEMNITY ESCROW AGREEMENT (the "Indemnity Agreement"), is dated as of _______ __, 1996 among Tellabs, Inc., a Delaware corporation ("Parent"), __________ and __________ (the "Stockholder Representatives"), and The First National Bank of Chicago, as indemnity and escrow agent (the "Indemnity Agent"). W I T N E S S E T H: WHEREAS, Steinbrecher Corporation, a Delaware corporation (the "Company), Tiger Merger Co., a Delaware corporation ("Mergerco"), and Parent are parties to that certain Agreement of Merger, dated as of March __, 1996 (the "Merger Agreement"), pursuant to which Mergerco shall be merged with and into the Company (the "Merger"), with the Company being the surviving corporation (as such, the "Surviving Corporation"); WHEREAS, the stockholders of the Company have approved the Merger Agreement; WHEREAS, under the Merger Agreement all Parent Group Members (as defined in the Merger Agreement) shall be indemnified, held harmless and reimbursed as provided in Article XI of the Merger Agreement; WHEREAS, to ensure that funds will be available to indemnify, hold harmless and reimburse the Parent Group Members as required by Article XI of the Merger Agreement, Section 3.7 of the Merger Agreement provides that in connection with the Merger, $2,500,000 from the amounts payable under Article III thereof (the "Indemnity Amount") shall be deposited with the Indemnity Agent in an escrow account established pursuant to this Indemnity Agreement and held, invested and subsequently disbursed in accordance with the terms of this Indemnity Agreement (such Indemnity Amount, together with any interest earned and gains received thereon (net of any payment to Parent pursuant to Paragraph 5(b)) being herein collectively referred to as the "Indemnity Fund"). WHEREAS, the Merger Agreement provides for the Stockholder Representatives to act in accordance herewith in connection with this Indemnity Agreement and the indemnification obligations contained in the Merger Agreement; and WHEREAS, the Indemnity Agent has agreed to hold the Indemnity Amount pursuant to the terms of this Indemnity Agreement; NOW, THEREFORE, in consideration of the mutual promises and covenants herein contained, the parties hereto agree as follows: 1. Definitions. Capitalized terms used but not defined herein shall have the meanings set forth in the Merger Agreement. 2. Deposit and Use of Indemnity Amount. (a) Immediately after the Effective Time, the Indemnity Amount shall be deposited by Parent in escrow with the Indemnity Agent. (b) Immediately after receipt from Parent of the Indemnity Amount, the Indemnity Agent shall confirm to the Parent and the Stockholder Representatives such receipt in writing. (c) The Indemnity Agent agrees to hold, invest and disburse the Indemnity Fund and to act as Indemnity Agent in accordance with the terms, conditions and provisions of this Indemnity Agreement. 3. Disposition of Indemnity Amount. (a) Each Parent Group Member shall be entitled to receive payment directly from the Indemnity Agent out of the Indemnity Fund in the amount which, at any time and from time to time, such Parent Group Member is entitled to be indemnified, reimbursed and held harmless from the Indemnity Fund as provided in Article XI of the Merger Agreement, in each case in accordance with the following provisions. (i) If any Parent Group Member (individually or collectively, the "Claiming Party") wishes to make a claim for indemnification from the Indemnity Fund with respect to Losses or Expenses, the Claiming Party shall so notify the Indemnity Agent in writing (the "Claim Notice") of the facts giving rise to such claim for indemnification under the Merger Agreement. The Claim Notice shall be accompanied by a certificate of the Claiming Party attesting to the Claiming Party's contemporaneous delivery of a duplicate copy of the Claim Notice to the Stockholder Representatives. Such Claim Notice shall describe in reasonable detail (to the extent then known) such Losses or Expenses and the method of computation of such Losses or Expenses and contain a reference to the provisions of the Merger Agreement in respect of which such Loss or Expense shall have occurred. If the Claiming Party is not Parent, the Claim Notice must be accompanied by a certificate from Parent confirming that the Claiming Party is a Parent Group Member. Subject to Paragraph 3(a)(ii), the Indemnity Agent shall, on the twentieth (20th) business day after receipt of a Claim Notice with respect to any claim for indemnification the amount of which is specified therein, pay or deliver to the Claiming Party, for its account the Indemnity Fund or a portion thereof specified in the Claim Notice. Payment shall be delivered as specified in the Claim Notice. (ii) At the time of delivery of any Claim Notice to the Indemnity Agent, a duplicate copy of such Claim Notice shall be delivered to the Stockholder Representatives. Notwithstanding the provisions of Paragraph 3(a)(i), the Indemnity Agent shall not make any payment of the Indemnity Fund or any portion thereof with respect to a Claim Notice if during the twenty (20) business days after the Indemnity Agent's receipt of such Claim Notice (the "Response Period") the Stockholder Representatives shall have delivered to the Indemnity Agent a written objection to the claim made in the Claim Notice (an "Objection"). At the time of delivery of any Objection to the Indemnity Agent, a duplicate copy of such Objection shall be delivered to the Claiming Party. (iii) If the Indemnity Agent does not receive an Objection within the Response Period with respect to any claim for indemnification the amount of which is specified, then the Stockholder Representatives shall be deemed to have acknowledged the correctness of such claim for the full amount thereof as specified in the Claim Notice, and the Indemnity Agent, shall deliver to the Claiming Party out of the Indemnity Fund cash in the amount specified in the Claim Notice, or the balance thereof if less than the amount so specified in the Claim Notice, as set forth in Paragraph 3(a)(i). (iv) Upon receipt of an Objection during the applicable Response Period, the Indemnity Agent shall (1) deliver to the Claiming Party cash out of the Indemnity Fund, in an amount equal to that portion, if any, of the Claim which is not disputed by the Stockholder Representatives and (2) shall designate and segregate out of the Indemnity Fund the amount subject to the Claim which is disputed by the Stockholder Representatives. Thereafter, the Indemnity Agent shall not dispose of that remaining portion of the Indemnity Fund subject to the Claim until the Indemnity Agent shall have received a certified copy of the final decision of the arbitrators as contemplated by Paragraph (v) immediately below with respect to the Claim or Claims set forth in the Claim Notice, or the Indemnity Agent shall have received a copy of a written agreement between the Claiming Party and the Stockholder Representatives resolving such dispute and setting forth the amount, if any, of the Claim which such Claiming Party is entitled to receive. The Indemnity Agent will pay the Claiming Party out of the Indemnity Fund the amount that the Claiming Party is entitled to receive as set forth in such arbitration decision after the expiration of ten (10) business days from the receipt of such decision or, in the event that the amount to which the Claiming Party is entitled is established pursuant to an agreement between the Claiming Party and the Stockholder Representatives, as soon as possible after the Indemnity Agent's receipt of such agreement. Copies of any written agreement between the Stockholder Representatives and the Claiming Party confirming that the Claiming Party is entitled to a portion but not all of the amount claimed by the Claiming Party may be filed by the Claiming Party with the Indemnity Agent, with the effect set forth in the preceding sentence as to the agreed amount, but no such agreement or filing thereof shall operate as a waiver of the Claiming Party's rights as to the disputed amount, including without limitation its right to recover the same, and any final decision of the arbitrators that the Claiming Party is entitled to receive the disputed amount may be filed with the Indemnity Agent and shall, when filed with the Indemnity Agent, be acted on as set forth above. (v) If the Claiming Party and the Stockholder Representatives do not resolve a dispute regarding a Claim within thirty (30) days after the delivery of an Objection, either the Claiming Party or the Stockholders Representatives may, by written notice to the other, demand arbitration of the matter; and in such event the matter shall be settled by arbitration conducted by three arbitrators. Within fifteen (15) days after such written notice is sent, the Claiming Party and the Stockholders Representatives shall each select one arbitrator, and the two arbitrators so selected shall select a third arbitrator. The decision of the arbitrators as to the validity and amount of any Claim shall be binding, and conclusive upon the parties, and the Indemnity Agent shall be entitled to act in accordance with such decision and make or withhold payments out of the Indemnity Fund in accordance therewith. Judgment upon any award rendered by the arbitrators may be entered in any court having jurisdiction. Any such arbitration shall be held in Chicago, Illinois under the commercial rules then in effect of the American Arbitration Association. The non-prevailing party to an arbitration shall pay its own expenses, the fees of each arbitrator, the administrative fee of the American Arbitration Association, and the expenses, including without limitation, attorneys' fees and costs, reasonably incurred by the other party to the arbitration. In the case of the Stockholder Representatives, any such payment shall be made from the Indemnity Fund. (b) The Indemnity Agent shall not dispose of all or any portion of the Indemnity Fund other than as provided in this Indemnity Agreement. 4. Delivery of Indemnity Amount Upon Termination. (a) On the first anniversary of the Effective Date (the "Distribution Date"), the Indemnity Agent shall, subject to the provisions of Paragraph 5 below, deliver to the Paying Agent (as defined in the Merger Agreement) (or, if the Paying Agency Agreement shall then have terminated, to Parent) an amount (the "Distribution Amount") equal to (A) the amount remaining in the Indemnity Fund, less (B) any amount designated as subject to a Claim pursuant to a Claim Notice to the extent such Claim has not been resolved prior to such date, less (C) any amount previously designated in writing by the Stockholder Representatives to the Indemnity Agent (with a copy delivered to Parent) as amounts that should be withheld to cover their expenses incurred in connection with their activities hereunder (to the extent the Indemnity Agent shall then have received written notice from the Stockholder Representatives to such effect in accordance with Paragraph 7(c)). Upon its receipt of such Distribution Amount, the Paying Agent or Parent, as the case may be, shall disburse the Distribution Amount in accordance with the terms of the Merger Agreement. Any amount retained in escrow after the Distribution Date shall be held by the Indemnity Agent and shall be used to indemnify the Parent Group Members subject to the terms and conditions of this Indemnity Agreement and upon resolution and payment out of the Indemnity Fund in satisfaction of applicable pending Claims, any remaining amounts in escrow shall be paid to the Stockholder Representatives with respect to out of pocket expenses incurred by them in connection with their activities hereunder (to the extent the Indemnity Agent shall then have received written notice from the Stockholder Representatives to such effect in accordance with Paragraph 7(c)), and any remaining amounts shall be distributed to the Paying Agent (or, if the Paying Agency Agreement shall then have terminated, to Parent), who shall disburse such portion in the manner set forth in the preceding sentence. (b) Upon distribution of the entire amount of the Indemnity Fund, the Indemnity Agent shall give the Paying Agent notice to such effect. Such notice shall be given to the following address, or to such other address as Parent may designate: First Chicago Trust Company of New York 525 Washington Blvd. Suite 4660 Jersey City, NJ 07310 Attention: Tenders & Exchanges Administration Upon such distribution, this Indemnity Agreement shall be terminated. (c) At any time prior to final termination of the Indemnity as provided in Paragraph 4(b), the Indemnity Agent shall, if so instructed in a writing signed by Parent and the Stockholder Representatives, release from the Indemnity Fund to Parent or the Paying Agent, as directed, the amount of cash specified in such writing. 5. Investments; Interest. (a) The Indemnity Agent is hereby authorized and directed to hold the Indemnity Fund in a segregated escrow account and to disburse such Indemnity Fund only in accordance with the terms of this Indemnity Agreement. From the date hereof until the date of disbursement of the Indemnity Fund pursuant to Paragraph 4 of this Indemnity Agreement, the Indemnity Agent is authorized and directed to invest and reinvest the Indemnity Fund in any of the following investments in each case pursuant to joint instructions of the Parent and the Stockholder Representatives: (i) readily marketable obligations maturing within six (6) months after the date of acquisition thereof issued by the United States of America or any agency or instrumentality thereof; (ii) readily marketable obligations maturing within six (6) months after the date of acquisition thereof issued by any state or municipality within the United States of America, or any political subdivision, agency or instrumentality thereof, rated "A" or better by either Standard & Poor's Corporation or Moody's Investors Service Inc.; (iii) readily marketable commercial paper maturing within one hundred eighty (180) days after the date of issuance thereof which has the highest credit rating of either Standard & Poor's Corporation or Moody's Investors Service, Inc.; or (iv) 6 month certificates of deposit issued by any bank incorporated and doing business pursuant to the laws of the United States of America or any state thereof having combined capital and surplus of at least $500,000,000. In the event the Indemnity Agent does not receive joint instructions from Parent and the Stockholder Representatives to invest or reinvest the Indemnity Fund or any portion thereof, the Indemnity Agent agrees to invest and reinvest such funds in the Prairie Institutional Treasury Prime Cash Management Fund, or a successor or similar fund agreed to by Parent and the Stockholder Representatives in writing, which invests in direct obligations of, or obligations fully guaranteed as to principal and interest by the United States Government and repurchase agreements with respect to such securities. Interest accruing on, and any profit resulting from, such investments shall be added to, and become a part of, the Indemnity Fund pursuant to this Indemnity Agreement less the payments to Parent required under Paragraph 5(b). For purposes of this Indemnity Agreement, "interest" on the Indemnity Fund shall include all proceeds thereof and investment earnings with respect thereto. The Indemnity Agent shall have full power and authority to sell any and all securities held by it under this Indemnity Agreement as necessary to make disbursements in cash under Paragraph 3 and this Paragraph 4 of this Indemnity Agreement. The Indemnity Agent, Parent, the Surviving Corporation and the Stockholder Representatives shall not be responsible for any unrealized profit or realized loss realized on such investments. (b) The Indemnity Agent shall promptly pay to the Parent from funds held hereunder at the end of each calendar quarter and immediately prior to termination of this Indemnity Agreement an amount equal to the product of (i) the accrued interest and net gains earned on the investments during such calendar quarter or during the calendar quarter in which such termination occurs, as the case may be, and (ii) 39%. 6. Liability and Compensation of Indemnity Agent. The duties and obligations of the Indemnity Agent hereunder shall be determined solely by the express provisions of this Indemnity Agreement, and the Indemnity Agent shall, in determining its duties hereunder, be under no obligation to refer to any other documents between or among the parties related in any way to this Indemnity Agreement, it being specifically understood that the following provisions are accepted by all of the parties hereto. Parent shall indemnify and hold the Indemnity Agent harmless from and against any and all liability and expense which may arise out of any action taken or omitted by the Indemnity Agent in accordance with this Indemnity Agreement, except such liability and expense as may result from the gross negligence or willful misconduct of the Indemnity Agent. Parent shall be entitled to be reimbursed out of the Indemnity Fund for fifty percent (50%) of any amount that Parent is required to pay to the Indemnity Agent pursuant to such indemnification obligation. (a) The Indemnity Agent shall not be liable to any person by reason of any error of judgment or for any act done or step taken or omitted by it, or for any mistake of fact or law or anything which it may do or refrain from doing in connection herewith unless caused by or arising out of its own gross negligence or willful misconduct. (b) The Indemnity Agent shall be entitled to rely on, and shall be protected in acting in reliance upon, any instructions or directions furnished to it in writing signed by both Parent and the majority of the Stockholder Representatives pursuant to any provision of this Indemnity Agreement and shall be entitled to treat as genuine, and as the document it purports to be, any letter, paper or other document furnished to it by any Parent Group Member or the Stockholder Representatives, and believed by the Indemnity Agent to be genuine and to have been signed and presented by the proper party or parties. In performing its obligations hereunder, the Indemnity Agent may consult with counsel to the Indemnity Agent and shall be entitled to rely on, and shall be protected in acting in reliance upon the advice or opinion of such counsel. (c) The Indemnity Agent shall be entitled to its customary fee for the performance of services by the Indemnity Agent hereunder for each year or portion thereof that any portion of the Indemnity Fund remains in escrow and shall be reimbursed for reasonable costs and expenses incurred by it in connection with the performance of such services (such fees, costs and expenses are hereinafter referred to as the "Indemnity Agent's Compensation"). The Indemnity Agent shall render statements to Parent setting forth in detail the Indemnity Agent's Compensation and the basis upon which the Indemnity Agent's Compensation was computed. The Indemnity Agent's Compensation shall be paid by Parent. (d) The Indemnity Agent may resign at any time by giving sixty (60) days written notice to Parent and the Stockholder Representatives; provided that such resignation shall not be effective unless and until a successor Indemnity Agent has been appointed and accepts such position pursuant to the terms of this Paragraph 6(d). In such event, Parent and the Stockholder Representatives shall appoint a successor Indemnity Agent or, if Parent and the Stockholder Representatives are unable to agree upon a successor Indemnity Agent within sixty (60) days after such notice, the Indemnity Agent shall be entitled to appoint its own successor, provided that such successor is a reputable national banking association. Such appointment, whether by Parent and the Stockholder Representatives, on the one hand, or the Indemnity Agent, on the other hand, shall be effective on the effective date of the aforesaid resignation (the "Indemnity Transfer Date"). On the Indemnity Transfer Date, all right title and interest to the Indemnity Fund, including interest thereon, shall be transferred to the successor Indemnity Agent and this Indemnity Agreement shall be assigned by the Indemnity Agent to such successor Indemnity Agent, and thereafter, the resigning Indemnity Agent shall be released from any further obligations hereunder. The Indemnity Agent shall continue to serve until its successor is appointed, accepts the Indemnity and receives the transferred Indemnity Fund. (e) The Indemnity Agent shall not have any right, claim or interest in any portion of the Indemnity Fund except in its capacity as Indemnity Agent hereunder. 7. Stockholder Representatives. (a) Pursuant to the Merger Agreement, the Stockholder Representatives are authorized to give and receive notices and communications, to authorize delivery to Parent of all or a portion of the Indemnity Amount in satisfaction of claims of Parent, to object to such deliveries, to agree to, negotiate, enter into settlements and compromises of, and comply with orders of courts and awards of arbitrators with respect to such claims, and to take all actions necessary or appropriate in the judgment of the Stockholder Representatives for the accomplishment of the foregoing. (b) The Stockholder Representatives shall not be liable to any holder of Securities for any act done or omitted under the Merger Agreement or hereunder as Stockholder Representatives not constituting fraud or gross negligence. (c) The Stockholder Representatives shall receive no compensation for their services hereunder. At least five (5) days prior to thirty (30) days after the first anniversary of the Effective Date, the Stockholder Representatives shall deliver notice to the Indemnity Agent and Parent setting forth the amount of the reasonable expenses incurred by the Stockholder Representatives in connection with their duties under the Merger Agreement and hereunder (the "Stockholder Representatives' Expenses"), which expenses shall be reimbursed pursuant to the terms of Paragraph 4.1(a). Any expenses of the Stockholder Representatives not reimbursed pursuant to Paragraph 4.1(a) shall be reimbursed by the holders of Securities entitled to distributions under this Indemnity Agreement on a pro rata basis. (d) Neither Parent, any Parent Group Member nor the Indemnity Agent shall be responsible or liable for any acts or omissions of any Stockholder Representative in such Stockholder Representative's capacity as such, and each of them may rely on any action or writing of majority of the Stockholder Representatives as being binding on all Stockholder Representatives for all purposes. 8. Taxes. All interest and net gains earned on the Indemnity Fund shall be accounted for by the Indemnity Agent separately from the Indemnity Fund and shall be treated as having been received by the Parent and included in its income for tax purposes. The Indemnity Agent shall, consistent with such treatment, arrange that for income tax reporting and withholding purposes Parent is named or treated as the payee of such amounts. In this regard, Parent shall provide the Indemnity Agent with any certification or forms required under any applicable tax laws. 9. Representations and Warranties. (a) Each of Parent, the Indemnity Agent and each Stockholder Representative, to the extent any such Stockholder Representative is a corporation or partnership, represents and warrants to each of the other parties hereto that it is a corporation or partnership duly organized, validly existing and in good standing under the laws of its jurisdiction of formation; that it has the corporate or partnership power and authority to execute and deliver this Indemnity Agreement and to perform its obligations hereunder; that the execution, delivery and performance of this Indemnity Agreement by it has been duly authorized and approved by all necessary corporate or partnership action; that this Indemnity Agreement constitutes its legal, valid and binding obligation, enforceable against it in accordance with its terms; and that the execution, delivery and performance of this Indemnity Agreement by it will not result in a breach of or loss of rights under or constitute a default under or a violation of any trust (constructive or other), agreement, judgment, decree, order or other instrument to which it is a party or it or its properties or assets may be bound. (b) Each Stockholder Representative, to the extent such Stockholder Representative is an individual, represents to each of the other parties hereto that he or she has the power and authority to execute and deliver this Indemnity Agreement and to perform his or her obligations hereunder; that this Indemnity Agreement constitutes his or her legal, valid and binding obligation, enforceable against him or her in accordance with its terms; and that the execution, delivery and performance of this Indemnity Agreement by him or her will not result in a breach of or loss of rights under or constitute a default under or a violation of any trust (constructive or other), agreement, judgment, decree, order or other instrument to which he or she is a party or his or her properties or assets may be bound. 10. Benefit; Successor and Assigns. This Indemnity Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns but shall not be assignable by any party hereto without the written consent of all of the other parties hereto; provided, however, that Parent may assign its rights and delegate its obligations hereunder to any person to whom the rights of Mergerco may be assigned under the Merger Agreement and to any successor corporation in the event of a merger, consolidation or transfer or sale of all or substantially all of their respective stock or assets and that the Indemnity Agent may assign its rights hereunder to a successor Indemnity Agent appointed hereunder. Except for the persons specified in the preceding sentence, this Indemnity Agreement is not intended to confer on any person not a party hereto any rights or remedies hereunder. 11. Notices. All notices or other communications required or permitted hereunder shall be in writing and shall be deemed given or delivered when delivered personally or four days after being mailed by registered or certified mail, return receipt requested, or one day after being sent by private prepaid overnight courier addressed as follows: If to the Indemnity Agent: The First National Bank of Chicago One First National Plaza - Suite 0673 Chicago, Illinois 60670-0673 Attention: Corporate Trust Administrator If to Parent or any Parent Group Member, to it: c/o Tellabs International, Inc. 1000 Remington Boulevard Bolingbrook, IL 60440 Attention: President And to: Tellabs Operations, Inc. 4951 Indiana Avenue Lisle, IL 60532 Attention: General Counsel With copy to: Sidley & Austin One First National Plaza Chicago, IL 60603 Attention: Thomas A. Cole Imad I. Qasim If to the Stockholder Representatives: __________________ __________________ __________________ With copy to: Foley, Hoag & Eliot One Post Office Square Boston, Massachusetts 02109 Attention: David R. Pierson or such other address as the Indemnity Agent, Parent or the Stockholder Representatives, as the case may be, shall designate in writing to the parties hereto; provided that the Stockholder Representatives may not specify more than one address at any time. 12. Governing Law. This Indemnity Agreement shall be governed by and construed in accordance with the laws (as opposed to conflicts of law provisions) of the State of Illinois. 13. Counterparts. This Indemnity Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 14. Headings. The section headings contained in this Indemnity Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Indemnity Agreement. 15. Partial Invalidity. Wherever possible, each provision hereof shall be interpreted in such manner as to be effective and valid under applicable law, but in case any one or more of the provisions contained herein shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such provision shall be ineffective in the jurisdiction involved to the extent, but only to the extent, of such invalidity, illegality or unenforceability without invalidating the remainder of such invalid, illegal or unenforceable provision or provisions or any other provisions hereof, unless such a construction would be unreasonable. 16. Entire Agreement; Modification and Waiver. This Indemnity Agreement and the Merger Agreement embody the entire agreement and understanding among the parties hereto with respect to the subject matter hereof and supersede any and all prior agreements and understandings relating to the subject matter hereof. Notwithstanding the preceding sentence, the parties hereto acknowledge that the Indemnity Agent is not a party to nor is it bound by the Merger Agreement. No amendment, modification or waiver of this Indemnity Agreement shall be binding or effective for any purpose unless it is made in a writing signed by the party against whom enforcement of such amendment, modification or waiver is sought. No course of dealing between the parties to this Indemnity Agreement shall be deemed to affect or to modify, amend or discharge any provision or term of this Indemnity Agreement. No delay by any party to or any beneficiary of this Indemnity Agreement in the exercise of any of its rights or remedies shall operate as a waiver thereof, and no single or partial exercise by any party to or any beneficiary of this Agreement of any such right or remedy shall preclude any other or further exercise thereof. A waiver of any right or remedy on any one occasion shall not be construed as a bar to or waiver of any such right or remedy on any other occasion. IN WITNESS WHEREOF, the parties hereto have duly executed this Indemnity Agreement as of the date first above written. THE FIRST NATIONAL BANK OF CHICAGO By: _______________________________ Its: ______________________________ TELLABS, INC. By: _______________________________ Its: ______________________________ _______________________________ Stockholder Representatives _______________________________ Stockholder Representatives Listed below are the Schedules to the Merger Agreement which have been omitted from this exhibit. The issuer will supplementally furnish a copy of any omitted Schedules to the Commission upon request. Schedules --------- - - Representations and Warranties of the Company 5.1 Organization and Capital Structure Schedule 5.1(a) Schedule 5.1(b) Schedule 5.1(c) Schedule 5.1(e) Schedule 5.1(f) 5.2 Subsidiaries and Investments Schedule 5.2 5.3 Authority Schedule 5.3 5.4 Financial Statements Schedule 5.4 5.5 Operations Since Balance Sheet Date Schedule 5.5(a) Schedule 5.5(b) 5.6 No Undisclosed Liabilities Schedule 5.6 5.7 Taxes Schedule 5.7 5.8 Availability of Assets and Legality of Use Schedule 5.8 5.9 Governmental Permits Schedule 5.9(a) Schedule 5.9(b) - - Representations and Warranties of the Company 5.11 Real Property Leases Schedule 5.11 5.13 Personal Property Schedule 5.13 5.14 Personal Property Leases Schedule 5.14 5.15 Intellectual Property; Software Schedule 5.15 5.17 Title to Property Schedule 5.17 5.18 Employee Benefit Plans Schedule 5.18(a) Schedule 5.18(b) Schedule 5.18(c) Schedule 5.18(e) Schedule 5.18(f) Schedule 5.18(i) 5.19 Employee Relations Schedule 5.19(a) Schedule 5.19(b) 5.20 Contracts; Products Warranties Schedule 5.20 5.21 Status of Contracts Schedule 5.21 5.22 No Violation, Litigation or Regulatory Action Schedule 5.22 - - Representations and Warranties of the Company 5.23 Environmental Matters Schedule 5.23 5.24 Insurance Schedule 5.24 5.25 Customers and Suppliers Schedule 5.25 5.26 Budgets Schedule 5.26 - - Representations and Warranties of the Parent and Mergerco 6.4 No Litigation or Regulatory Action Schedule 6.4 - - Conditions Precedent to Obligations of Parent and Mergerco 9.5 Necessary Consents Schedule 9.5 EX-21 6 EXHIBIT 21 TELLABS, INC. AND SUBSIDIARIES SUBSIDIARIES OF THE REGISTRANT AS OF FEBRUARY 20, 1996 State or Other Jurisdiction of Name Incorporation Tellabs Operations, Inc. Delaware Tellabs Export, Inc. Delaware Telecommunications Laboratories, Inc. Illinois Tellabs International, Inc. Illinois Tellabs Singapore Private Liminted Singapore Tellabs Communications Canada Ltd. Ontario, Canada Tellabs (V.I.), Inc. U.S. Virgin Islands Tellabs H.K. Ltd. Hong Kong Tellabs NZ Limited New Zealand Tellabs Korea, Inc. Korea Tellabs PTY. Ltd. Australia Tellabs Holdings Ltd. Ireland Tellabs Ltd. Ireland Tellabs (Ireland) Ltd. Ireland Tellabs Research Ltd. Ireland Tellabs U.K. Ltd. United Kingdom Tellabs GmbH Germany Tellabs Southern Europe, S.A. Spain Tellabs Mexico, Inc. Delaware Tellabs de Mexico, S.A. de C.V. Mexico Martis Oy Finland Tellabs AB Sweden Tellabs SAS France EX-23 7 EXHIBIT 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACOUNTANTS We have issued our reports dated January 17, 1996, accompanying the consolidated financial statements and schedules incorporated by reference or included in the Annual Report of Tellabs, Inc. and Subsidiaries on Form 10-K (Exhibit 13) for the year ended December 29, 1995. We hereby consent to the incorporation by reference of said reports in the Registration Statements of Tellabs, Inc. on Form S-8 (File Nos. 33-48972, 33-45788 and 33-55487). GRANT THORNTON LLP Chicago, Illinois March 20, 1996 EX-27 8
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER 29, 1995, INCOME STATEMENT AND BALANCE SHEET AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10-K. YEAR DEC-29-1995 DEC-29-1995 92485000 69751000 129882000 2317000 67715000 366370000 194969000 84419000 552051000 98564000 2850000 0 0 888000 432345000 552051000 635229000 635229000 271394000 271394000 0 1396000 (5731000) 162825000 47219000 115606000 0 0 0 115606000 1.26 1.26
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