-----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, DtyA2qge44fbagFYQDurnxpXPsUz1US6qcCa9NgVpmgksNTHv1fKJUiyoJfogLzb +LSHzU4twDoZJ6241rfeoQ== /in/edgar/work/0000950144-00-013566/0000950144-00-013566.txt : 20001114 0000950144-00-013566.hdr.sgml : 20001114 ACCESSION NUMBER: 0000950144-00-013566 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20000929 FILED AS OF DATE: 20001113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VERILINK CORP CENTRAL INDEX KEY: 0000774937 STANDARD INDUSTRIAL CLASSIFICATION: [3661 ] IRS NUMBER: 942857548 STATE OF INCORPORATION: DE FISCAL YEAR END: 0627 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-28562 FILM NUMBER: 762029 BUSINESS ADDRESS: STREET 1: 145 BAYTECH DR CITY: SAN JOSE STATE: CA ZIP: 95134 BUSINESS PHONE: 4089451199 MAIL ADDRESS: STREET 1: 145 BAYTECH DR CITY: SAN JOSE STATE: CA ZIP: 95134 10-Q 1 g65370e10-q.txt VERILINK CORPORATION 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 29, 2000 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to _______ Commission file number 0-19360 VERILINK CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 94-2857548 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 127 JETPLEX CIRCLE, MADISON, ALABAMA 35758 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) 256-772-3770 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) 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 [ ]. The number of shares outstanding of the issuer's common stock as of October 27, 2000 was 14,717,591. 2 INDEX VERILINK CORPORATION FORM 10-Q
Page No. -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited): Condensed Consolidated Statements of Operations for the 3 three months ended September 29, 2000 and October 1, 1999 Condensed Consolidated Balance Sheets as of 4 September 29, 2000 and June 30, 2000 Condensed Consolidated Statements of Cash Flows for 5 the three months ended September 29, 2000 and October 1, 1999 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of 9 Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk 20 PART II. OTHER INFORMATION Item 2. Changes in Securities 21 Item 6. Exhibits and Reports on Form 8-K 21 SIGNATURE 21
2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS VERILINK CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) (Unaudited)
Three Months Ended ------------------------- September 29, October 1, 2000 1999 -------- -------- Net sales ........................................ $ 11,829 $ 14,852 Cost of sales .................................... 5,382 8,697 -------- -------- Gross profit ................................ 6,447 6,155 -------- -------- Operating expenses: Research and development .................... 2,106 3,165 Selling, general and administrative ......... 5,176 5,598 Restructuring and other non-recurring charges -- 6,900 -------- -------- Total operating expenses ................ 7,282 15,663 -------- -------- Loss from operations ............................. (835) (9,508) Interest and other income, net ................... 310 171 -------- -------- Loss before provision for income taxes ........... (525) (9,337) Provision for income taxes ....................... 6,311 -- -------- -------- Net loss ......................................... $ (6,836) $ (9,337) ======== ======== Net loss per share - Basic ....................... $ (0.46) $ (0.67) ======== ======== Net loss per share - Diluted ..................... $ (0.46) $ (0.67) ======== ======== Shares used in per share computations - Basic .... 14,715 13,949 ======== ======== Shares used in per share computations - Diluted .. 14,715 13,949 ======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements. 3 4 VERILINK CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)
September 29, 2000 June 30, (Unaudited) 2000 ----------- -------- ASSETS Current assets: Cash and cash equivalents .............................. $ 9,289 $ 6,617 Restricted cash ........................................ 500 500 Short-term investments ................................. 2,200 4,079 Accounts receivable, net ............................... 10,774 15,233 Inventories ............................................ 7,268 4,840 Notes receivable ....................................... 1,419 1,440 Other receivable ....................................... 315 515 Deferred tax assets .................................... -- 2,638 Other current assets ................................... 520 575 -------- -------- Total current assets ............................... 32,285 36,437 Property, plant and equipment, net .......................... 10,908 10,790 Restricted cash, long-term .................................. 500 500 Notes receivable, long-term ................................. 2,098 2,276 Goodwill and other intangible assets, net ................... 4,130 3,203 Deferred tax assets ......................................... -- 4,828 Other assets ................................................ 663 686 -------- -------- Total assets ....................................... $ 50,584 $ 58,720 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt ...................... $ 600 $ 600 Accounts payable ....................................... 2,703 3,601 Accrued expenses ....................................... 5,345 5,884 -------- -------- Total current liabilities .......................... 8,648 10,085 Long-term debt, less current portion above .................. 3,371 3,521 -------- -------- Total liabilities .................................. 12,019 13,606 -------- -------- Stockholders' equity: Common stock, $0.01 par value; 40,000,000 shares authorized; 18,380,114 and 18,307,751 shares issued .. 184 183 Additional paid-in capital ............................. 50,898 50,696 Treasury stock; 3,662,523 shares of common stock at cost (8,335) (8,335) Other stockholders' equity ............................. (4,182) 2,570 -------- -------- Total stockholders' equity ......................... 38,565 45,114 -------- -------- Total liabilities and stockholders' equity ......... $ 50,584 $ 58,720 ======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements. 4 5 VERILINK CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (in thousands) (unaudited)
Three Months Ended ------------------------ September 29, October 1, 2000 1999 ------- ------- Cash flows from operating activities: Net loss .......................................................... $(6,836) $(9,337) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization ................................... 842 1,144 Deferred income taxes ......................................... 6,311 -- Deferred compensation related to stock options ................ -- 49 Accrued interest on notes receivable from stockholders ........ (78) (15) Changes in assets and liabilities: Accounts receivable ...................................... 4,459 (2,135) Other receivable ......................................... 200 -- Inventories .............................................. (2,428) (1,529) Other assets ............................................. 78 638 Accounts payable ......................................... (898) (287) Accrued expenses ......................................... (539) 6,805 ------- ------- Net cash provided by (used in) operating activities .. 1,111 (4,667) ------- ------- Cash flows from investing activities: Purchases of property, plant and equipment ........................ (732) (85) Sale of short-term investments .................................... 1,879 3,434 Increase in restricted cash ....................................... -- (4) Decrease in notes receivable ...................................... 261 -- ------- ------- Net cash provided by investing activities ............ 1,408 3,345 ------- ------- Cash flows from financing activities: Long term debt payments ........................................... (150) -- Proceeds from issuance of common stock, net ....................... 203 348 Repurchase of common stock ........................................ -- (78) Proceeds from repayment of notes receivable from stockholders ..... 115 55 Change in other comprehensive income .............................. (15) -- ------- ------- Net cash provided by financing activities ............ 153 325 ------- ------- Net increase (decrease) in cash and cash equivalents ................... 2,672 (997) Cash and cash equivalents at beginning of period ....................... 6,617 6,365 ------- ------- Cash and cash equivalents at end of period ............................. $ 9,289 $ 5,368 ======= ======= Supplemental disclosures: Cash paid for interest ............................................ $ 87 $ -- ======= ======= Refund from income taxes .......................................... $ 23 $ 500 ======= =======
The accompanying notes are an integral part of these condensed consolidated financial statements. 5 6 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1. Basis of Presentation The accompanying unaudited interim condensed consolidated financial statements of Verilink Corporation (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, these statements include all adjustments, consisting of normal and recurring adjustments, considered necessary for a fair presentation of the results for the periods presented. The results of operations for the periods presented are not necessarily indicative of results which may be achieved for the entire fiscal year ending June 29, 2001. The unaudited interim condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2000 as filed with the Securities and Exchange Commission. NOTE 2. Comprehensive Income (Loss) The Company records gains or losses on the Company's foreign currency translation adjustments and unrealized gains or losses on the Company's available-for-sale investments as accumulated other comprehensive income and presents it in other stockholders' equity in the accompanying condensed consolidated balance sheets. During the first quarter of fiscal 2001 and fiscal 2000, comprehensive loss amounted to $6,851,000 and $9,337,000, respectively. NOTE 3. Restructuring Charge During the first quarter of fiscal 2000, the Company announced its plans to consolidate its San Jose operations with its facilities in Huntsville, Alabama, and outsource its San Jose-based manufacturing operations. The Company recorded charges (credits) of $6.9 million, $1.4 million, and ($0.3) million in the first, second and fourth quarters of fiscal 2000, respectively, in connection with the restructuring activities that included 1) severance and other termination benefits for the approximately 135 San Jose-based employees who were involuntarily terminated, 2) the termination of certain facility leases, 3) the write-down of certain impaired assets and 4) the pro-rata portion of the non-recurring retention bonuses offered to the involuntarily terminated employees to support the transition from California to Alabama. As of September 29, 2000, all amounts accrued for the restructuring have been paid or charged against the restructuring reserve. NOTE 4. Inventories Inventories are stated at the lower of cost, determined using the first-in, first-out method, or market. Inventories consisted of the following (in thousands):
September 29, June 30, 2000 2000 ------ ------ Raw materials $1,940 $1,517 Work in process 19 -- Finished goods 5,309 3,323 ------ ------ $7,268 $4,840 ====== ======
6 7 NOTE 5. Earnings Per Share Basic net income (loss) per share is computed by dividing net income (loss) available to common stockholders (numerator) by the weighted average number of common shares outstanding (denominator) during the period. Diluted net income (loss) per share gives effect to all dilutive potential common shares outstanding during a period. In computing diluted net income (loss) per share, the average price of the Company's Common Stock for the period is used in determining the number of shares assumed to be purchased from exercise of stock options. Following is a reconciliation of the numerators and denominators of the basic and diluted net income (loss) per share for the three months ended September 29, 2000 and October 1, 1999 (in thousands, except per share amounts):
Three months ended Sept. 29, Oct. 1, 2000 1999 -------- -------- Net income (loss) [numerator] $ (6,836) $ (9,337) ======== ======== Shares calculation [denominator]: Weighted shares outstanding - Basic 14,715 13,949 Effect of dilutive securities: Potential common stock relating to stock options (a) -- -- -------- -------- Weighted shares outstanding - Diluted 14,715 13,949 ======== ======== Net loss per share - Basic $ (0.46) $ (0.67) ======== ======== Net loss per share - Diluted $ (0.46) $ (0.67) ======== ========
(a) Options to purchase 4,002,256 and 2,686,247 shares of common stock at prices ranging from $0.50 to $19.75 per share were outstanding at September 29, 2000 and October 1, 1999, respectively, but were not included in the computation of diluted net income (loss) per share because inclusion of such options would have been antidilutive. NOTE 6. Recently Issued Accounting Pronouncements In June 1999, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities Deferral of the Effective Date of FASB No. 133", which deferred the effective date provisions of SFAS No. 133 for the Company until fiscal 2001. SFAS 133 establishes new standards of accounting and reporting for derivative instruments and hedging activities. SFAS 133 requires that all derivatives be recognized at fair value in the statement of financial position, and that the corresponding gains or losses be reported either in the statement of operations or as a component of comprehensive income, depending on the type of hedging relationship that exists. The Company currently does not hold derivative instruments or engage in hedging activities. In December 1999, the Securities and Exchange Commission released Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial Statements." This pronouncement summarizes certain of the SEC staff's views on applying generally accepted accounting principles to revenue recognition. The Company has reviewed the requirements of SAB 101 and believes that its existing accounting policies are in accordance with the guidance provided in the SAB. NOTE 7. Subsequent Event In October 2000, the Company announced agreements with Beacon Telco, L.P. ("Beacon Telco") and the Boston University Photonics Center to establish a product development center at the Photonics Center to develop 7 8 new optical networking products. As part of the agreements, the Company issued Beacon Telco warrants for 2,249,900 shares of the Company's common stock exercisable over time, subject to acceleration based upon meeting development milestones and certain events, including the market price of the Company's common stock. The issuance of these warrants will result in the dilution of the Company's earnings per share of approximately 15% in future periods. Additionally, the Company expects to record a charge to research and development expenses in the second quarter of fiscal 2001 of approximately $11 million for the warrants and other expenses related to the initial agreements. Management expects that research and development expenses will significantly increase during calendar 2001 in support of ongoing optical product development. The Company is obligated to pay Beacon Telco a bonus payment of $3,562,500 on October 13, 2001 or upon termination of the agreements, if earlier. Beacon Telco is also eligible to receive additional bonus payments based in part on meeting certain milestones and the market price of the Company's common stock. These bonus payments may be paid at the option of the Company in cash, common stock or a five-year note (payable in either cash or common stock). NOTE 8. Income Taxes As discussed in the previous note, the Company entered into agreements subsequent to the balance sheet date that will result in increased research and development expenses for the next five or six quarters. With these increased expenses, the Company expects to incur a net loss for the current fiscal year. As a result of this subsequent event and the expected losses that will arise therefrom, the Company established a full valuation allowance against its deferred tax assets that exist at September 29, 2000. Management believes that due to the net loss expected for the current fiscal year and the existing net loss carryforwards from prior years, it is more likely than not that the Company's $7,585,000 of deferred tax assets will not be realized. The valuation allowance established at September 29, 2000 included $1,155,000 related to the deferred tax assets of an acquired business for which uncertainty now exists surrounding the realization of such assets. This amount was recorded as an increase in costs in excess of net assets of the acquired company (goodwill). The valuation allowance will be used to reduce goodwill in the future when any portion of the related deferred tax assets is recognized. 8 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information in this Item 2 - "Management's Discussion and Analysis of Financial Condition and Results of Operations" contains forward-looking statements, including, without limitation, statements relating to the Company's revenues, expenses, margins, liquidity and capital needs. Such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed elsewhere herein under the caption "Factors Affecting Future Results." RESULTS OF OPERATIONS The following table presents the percentages of total sales represented by certain line items from the Condensed Consolidated Statements of Operations for the periods indicated.
Three Months Ended ------------------------ September 29, October 1, 2000 1999 ------ ------ Sales ............................................ 100.0 % 100.0 % Cost of sales .................................... 45.5 58.6 ------ ------ Gross margin ................................ 54.5 41.4 ------ ------ Operating expenses: Research and development .................... 17.8 21.3 Selling, general and administrative ......... 43.8 37.7 Restructuring and other non-recurring charges -- 46.4 ------ ------ Total operating expenses ................ 61.6 105.4 ------ ------ Loss from operations ............................. (7.1) (64.0) Interest and other income, net ................... 2.6 1.1 ------ ------ Loss before provision for income taxes ........... (4.5) (62.9) Provision for income taxes ....................... 53.3 -- ------ ------ Net loss ......................................... (57.8)% (62.9)% ====== ======
Sales. Net sales for the three months ended September 29, 2000 decreased approximately 20% to $11.8 million from $14.9 million in the comparable period of the prior fiscal year. This decrease is primarily a result of a decline in demand from the Company's enterprise access product customers, and to a lesser extent, the carrier and carrier access customers. In particular, net sales to the Company's enterprise access product customers in the first quarter of fiscal 2001 declined by approximately 33% to $4.3 million as compared to the same period last year. Net sales to the Company's top five customers increased approximately 15% to $8.3 million from $7.7 million in the first quarter of the prior year, while net sales to all other customers declined by 58% during this period due in part to the impact of the reorganization of the sales force from a geographical focus to a market focus and the implementation of a two-tier distribution channel. See "Factors Affecting Future Results -- Reorganization of Sales Force." However, it should be noted that the top five customers did not remain the same over the period. Gross Margin. Gross margin increased to 54.5% of net sales for the three months ended September 29, 2000 as compared to 41.4% for the three months ended October 1, 1999. This increase is attributable to a number of factors, including the product sales mix, the under-utilization of the San Jose manufacturing facility and the high level of non-warranty repairs that carried a lower than average gross margin in the first quarter of last year, and the benefit of the outsourcing strategy implemented as part of the Company's restructuring plan implemented during fiscal 2000. Under this strategy, the Company outsources approximately two-thirds of product manufacturing in order to reduce the negative impact of fixed manufacturing overhead costs in periods in which sales volume declines. Research and Development. Research and development expenditures for the three months ended September 29, 2000 decreased approximately 33% to $2.1 million from $3.2 million in the comparable period of the prior fiscal 9 10 year and decreased as a percentage of sales from 21.3% to 17.8%. The decrease in absolute dollars and as a percentage of net sales is due to the decrease in personnel, employment-related costs, and related support costs from the completion of the Company's restructuring and consolidation in Huntsville, Alabama. The Company continues to add resources in Huntsville to increase research and development activities. In October 2000, the Company announced its agreements with Beacon Telco and the Boston University Photonics Center that will significantly increase research and development spending during the next five to six quarters. See "Optical Networking Project and Related Warrants" and "Factors Affecting Future Results - Optical Networking Product Development." The Company believes that a significant level of investment in product development is required to remain competitive and that such expenses will vary over time as a percentage of net sales. Selling, General and Administrative. Selling, general and administrative expenses for the three months ended September 29, 2000 decreased 8% to $5.2 million from $5.6 million in the comparable period of the prior fiscal year and increased as a percentage of sales from 37.7% to 43.8%. The decrease in absolute dollars over the same period in the prior year is primarily due to the completion of the restructuring and consolidation plan during fiscal 2000 while the increase as a percentage of sales is due to lower sales levels. The Company expects the dollar amount of selling, general and administrative expenses will increase in the future and that such expenses will vary over time as a percentage of sales. Restructuring and Other Non-recurring Charges. During the first quarter of fiscal 2000, the Company announced and began implementing its plans to consolidate its operations into its existing operations located in Huntsville, Alabama, and to outsource its San Jose based manufacturing activities. The Company incurred a pretax charge of $6.9 million for restructuring and other related non-recurring activities. See Note 3 in the Notes to Condensed Consolidated Financial Statements for further details of the restructuring and other non-recurring charges. Interest and Other Income, Net. Net interest and other income was approximately $310,000 for the three month period ended September 29, 2000 as compared to $171,000 in the comparable period of the prior fiscal year. The increase was a result of higher cash and cash equivalents, restricted cash and short-term investments balances and higher market interest rates. Provision for Income Taxes. As noted in the Notes to the Condensed Consolidated Financial Statements, the Company recorded a full valuation allowance established against its deferred tax assets as of September 29, 2000. As a result, a net provision for income taxes of $6,311,000 was recorded in the first quarter of fiscal 2001. The Company did not record a tax benefit or provision for income taxes in the quarter ended October 1, 1999. OPTICAL NETWORKING PROJECT AND RELATED WARRANTS In October 2000, the Company announced agreements with Beacon Telco, L.P. ("Beacon Telco") and the Boston University Photonics Center to establish a product development center at the Photonics Center to develop new optical networking products. The goal of the project is to accelerate the development of optics-based products to expand the Company's current product offerings and market positioning, and to build in-house R&D expertise in optics technology to support potential future development of a broad variety of optics-based products. The arrangement provides the Company with access to the Photonics Center's state-of-the-art optics laboratories and specialized technical expertise, which, together with the Company's own engineering and strategic marketing resources, may accelerate the development of new optics-based products. As part of the agreements, the Company issued Beacon Telco warrants to purchase up to 2,249,900 shares of the Company's common stock (representing approximately 15% of the current outstanding common stock of the Company) at an exercise price of $4.75 per share, subject to customary anti-dilution adjustments. The warrants become exercisable over time, subject to acceleration based upon meeting development milestones and certain other events, including the market price of the Company's common stock, and will expire on October 13, 2003. The Company has agreed to appoint one designee of Beacon Telco to the Board of Directors of the Company. Until the earlier of October 13, 2005 or the date that Beacon Telco beneficially owns less than 10% of Company's common stock, including the common stock issuable upon exercise of its warrants, the Company has agreed to recommend 10 11 that stockholders elect the designee of Beacon Telco at each meeting of stockholders at which the Beacon Designee is up for election, and Beacon Telco has agreed to vote shares of Common Stock issued upon exercise of its warrants in accordance with the recommendation of the Board of Directors of the Company. In addition, Beacon Telco has agreed to certain "standstill" provisions and the Company has agreed to register Beacon Telco's resale of the common stock issuable upon exercise of the warrants under the Securities Act of 1933. The Company expects to record a charge to research and development expenses in the second quarter of fiscal 2001 of approximately $11 million for the warrants and other expenses related to the initial agreements. The Company also expects that research and development expenses will significantly increase during calendar 2001 to support on-going optical networking product development. The Company is obligated to pay Beacon Telco a bonus payment of $3,562,500 on October 13, 2001 or upon termination of the agreements if earlier. Beacon Telco is also eligible to receive additional bonus payments based in part on meeting certain milestones and the market price of the Company's common stock. These bonus payments may be paid at the option of the Company in cash, common stock or a five-year note (payable in either cash or common stock). The foregoing description is qualified by reference to the definitive documents, which are filed as exhibits hereto. LIQUIDITY AND CAPITAL RESOURCES On September 29, 2000, the Company's principal sources of liquidity included $12.0 million of cash and cash equivalents, restricted cash, and short-term investments. During the three-month period ended September 29, 2000, the cash flow provided by operating activities was approximately $1.1 million compared to $4.7 million used in operating activities during the three-month period ended October 1, 1999. Net cash provided by operating activities this quarter was primarily due to the decrease in accounts receivable of $4.5 million offset by the increase in inventories of $2.4 million. This increase in inventories was due to a build-up of finished goods in anticipation of higher sales orders at the end of the quarter that were not received as expected. Cash provided by investing activities was approximately $1.4 million for the three-month period ended September 29, 2000, as compared to approximately $3.3 million for the three-month period ended October 1, 1999. The funds provided by investing activities are primarily a result of the maturity of short-term investments being reinvested in cash and cash equivalents. Offsetting the increase in funds provided by investing activities in the first quarter of fiscal 2001 were purchases of property, plant and equipment of $732,000 that included the costs associated with the Oracle implementation project completed in July and the renovation of the new headquarters facility acquired by the Company on June 30, 2000. The renovation to the facility is expected to total approximately $3.2 million and is expected to be completed by January 2001. Cash provided by financing activities was $153,000 for the three-month period ended September 29, 2000, as compared to $325,000 for the three-month period ended October 1, 1999. Proceeds from the exercise of stock options were the primary source of cash from financing activities. In connection with the acquisition of the new headquarters facility, the Company entered into a loan agreement to borrow up to $6 million to finance the purchase price of the property and make improvements thereon. The Company expects to use the remaining $1.9 million available under the mortgage loan in the second and third fiscal quarters of 2001 to fund the renovation to the facility described above. The Company believes that its cash and investment balances, along with anticipated cash flows from operations and the remaining funds available under the multi-year mortgage will be adequate to finance current operations, anticipated investments, research and development expenses, and capital expenditures for at least the next twelve months. The Company continues to investigate the possibility of generating financial resources through committed 11 12 credit agreements, technology or manufacturing partnerships, equipment financing, and offerings of debt and equity securities. YEAR 2000 READINESS The Company's products, computing, and communications infrastructure systems have operated without year 2000 ("Y2K") related problems to date. The Company is not aware that any of its major customers or third-party suppliers have experienced significant Y2K related problems that would have a material impact on the Company. The total cost to address Y2K was not material to the Company's financial condition. FACTORS AFFECTING FUTURE RESULTS As described by the following factors, past financial performance should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods. This Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements using terminology such as "may," "will," "expects," "plans," "anticipates," "estimates," "potential," or "continue," or the negative thereof or other comparable terminology regarding beliefs, plans, expectations or intentions regarding the future. Forward-looking statements include statements regarding the Company's consolidation of its operations and outsourcing its manufacturing operations (the "Restructuring"); the goals, intended benefits and success of the Restructuring, particularly the goal of reducing expenses; the expected decrease in selling, general and administrative expenses; total budgeted capital expenditures; expected research and development expenses; results and anticipated benefits of the optical networking project; and the adequacy of the Company's cash position for the near-term. These forward-looking statements involve risks and uncertainties, and it is important to note that the Company's actual results could differ materially from those in such forward-looking statements. Among the factors that could cause actual results to differ materially are the factors detailed below as well as the other factors set forth in Item 2 hereof. All forward-looking statements and risk factors included in this document are made as of the date hereof, based on information available to the Company as of the date hereof, and the Company assumes no obligation to update any forward-looking statement or risk factor. You should consult the risk factors listed from time to time in the Company's Reports on Forms 10-Q and 10-K. Customer Concentration. A small number of customers continue to account for a majority of the Company's sales. In fiscal 2000, net sales to Nortel, WorldCom, and Ericsson accounted for 30%, 19%, and 3% of the Company's net sales, respectively, and the Company's top five customers accounted for 61% of the Company's net sales. In fiscal 1999, net sales to Nortel, WorldCom, and Ericsson accounted for 17%, 27%, and 5% of the Company's net sales, respectively, and net sales to the Company's top five customers accounted for 57% of the Company's net sales. Percentages of total revenue have been restated for prior periods as if Ericsson's May 1999 acquisition of Qualcomm's terrestrial Code Division Multiple Access (CDMA) wireless infrastructure business had been in effect for all periods presented. Other than Nortel, WorldCom, and Ericsson, no customer accounted for more than 10% of the Company's net sales in fiscal years 2000, 1999, or 1998. There can be no assurance that the Company's current customers will continue to place orders with the Company, that orders by existing customers will continue at the levels of previous periods, or that the Company will be able to obtain orders from new customers. Certain customers of the Company have been or may be acquired by other existing customers. The impact of such acquisitions on net sales to such customers is uncertain, but there can be no assurance that such acquisitions will not result in a reduction in net sales to those customers. In addition, such acquisitions could have in the past, and could in the future, result in further concentration of the Company's customers. The Company has in the past experienced significant declines in net sales it believes were in part related to orders being delayed or cancelled as a result of pending acquisitions relating to its customers. There can be no assurance that future merger and acquisition activity among the Company's customers will not have a similar adverse affect on the Company's net sales and results of operations. The Company's customers are typically not contractually obligated to purchase any quantity of products in any particular period. Product sales to major customers have varied widely from period to period. In some cases, major customers have abruptly terminated purchases of the Company's products. Loss of, or a material reduction in 12 13 orders by, one or more of the Company's major customers would materially adversely affect the Company's business, financial condition, and results of operations. See "Competition" and "Fluctuations in Quarterly Operating Results." Dependence on Outside Contractors. In September 1999, the Company entered into an agreement with a single outside contractor to outsource substantially all of the manufacturing operations previously located in San Jose, including its procurement, assembly, and system integration operations. The products manufactured by the outside contractor located in California generated a majority of the Company's revenues. There can be no assurance that this contractor will continue to meet the Company's future requirements for manufactured products, or that the contractor will not experience quality problems in manufacturing the Company's products. The inability of the Company's contractor to provide the Company with adequate supplies of high quality products could have a material adverse effect on the Company's business, financial condition, and results of operations. The loss of any of the Company's outside contractors could cause a delay in the Company's ability to fulfill orders while the Company identifies a replacement contractor. Because the establishment of new manufacturing relationships involves numerous uncertainties, including those relating to payment terms, cost of manufacturing, adequacy of manufacturing capacity, quality control and timeliness of delivery, the Company is unable to predict whether such relationships would be on terms that the Company regards as satisfactory. Any significant disruption in the Company's relationships with its manufacturing sources would have a material adverse effect on the Company's business, financial condition, and results of operations. Dependence on Key Personnel. The Company's future success will depend to a large extent on the continued contributions of its executive officers and key management, sales, and technical personnel. The Company is a party to agreements with certain of its executive officers to help ensure the officers' continued service to the Company in the event of a change-in-control. Each of the Company's executive officers, and key management, sales and technical personnel would be difficult to replace. Several members of the senior management team recently joined the Company and have had only a limited time to work together. The loss of the services of one or more of the Company's executive officers or key personnel, the inability of the management team to work effectively together, or the inability to continue to attract qualified personnel would delay product development cycles or otherwise would have a material adverse effect on the Company's business, financial condition and results of operations. Management of Growth. To manage potential future growth effectively, the Company must improve its operational, financial and management information systems and must hire, train, motivate and manage its employees. The future success of the Company also will depend on its ability to increase its customer support capability and to attract and retain qualified technical, marketing and management personnel, for whom competition is intense. In particular, the current availability of qualified personnel may be limited and competition among companies for such personnel is intense. The Company is currently attempting to hire a number of engineering personnel and has experienced some delays in filling such positions. There can be no assurance that the Company will be able to effectively achieve or manage any such growth, and failure to do so could delay product development and introduction cycles or otherwise have a material adverse effect on the Company's business, financial condition and results of operations. See "Dependence on Key Personnel." Dependence on Component Availability and Key Suppliers. The Company generally relies upon a contract manufacturer to buy component parts that are incorporated into board assemblies used in its products. On-time delivery of the Company's products depends upon the availability of components and subsystems used in its products. Currently, the Company and third party sub-contractors depend upon suppliers to manufacture, assemble and deliver components in a timely and satisfactory manner. The Company has historically obtained several components and licenses for certain embedded software from single or limited sources. There can be no assurance that these suppliers will continue to be able and willing to meet the Company's and third party sub-contractors' requirements for any such components. The Company and third party sub-contractors generally do not have any long-term contracts with such suppliers, other than software vendors. Any significant interruption in the supply of, or degradation in the quality of, any such item could have a material adverse effect on the Company's results of operations. Any loss in a key supplier, increase in required lead times, increase in prices of component parts, interruption in the supply of any of these components, or the inability of the Company or its third party sub- 13 14 contractor to procure these components from alternative sources at acceptable prices and within a reasonable time, could have a material adverse effect upon the Company's business, financial condition and results of operations. Purchase orders from the Company's customers frequently require delivery quickly after placement of the order. As the Company does not maintain significant component inventories, delay in shipment by a supplier could lead to lost sales. The Company uses internal forecasts to determine its general materials and components requirements. Lead times for materials and components may vary significantly, and depend on factors such as specific supplier performance, contract terms, and general market demand for components. If orders vary from forecasts, the Company may experience excess or inadequate inventory of certain materials and components, and suppliers may demand longer lead times, higher prices, or termination of contracts. From time to time, the Company has experienced shortages and allocations of certain components, resulting in delays in fulfillment of customer orders. Such shortages and allocations may occur in the future, and could have a material adverse effect on the Company's business, financial condition, and results of operations. See "Fluctuations in Quarterly Operating Results." Fluctuations in Quarterly Operating Results. The Company's sales are subject to quarterly and annual fluctuations due to a number of factors resulting in more variability and less predictability in the Company's quarter-to-quarter sales and operating results. For example, sales to Nortel, WorldCom, and Ericsson have varied between quarters by as much as $4.0 million, and orders delayed by these customers had a significant negative impact on the Company's first quarter results of fiscal 2001 as well as the third and fourth quarter results in fiscal 1999. Most of the Company's sales are in the form of large orders with short delivery times. The Company's ability to affect and judge the timing of individual customer orders is limited. The Company has experienced large fluctuations in sales from quarter-to-quarter due to a wide variety of factors, such as delay, cancellation or acceleration of customer projects, and other factors discussed below. The Company's sales for a given quarter may depend to a significant degree upon planned product shipments to a single customer, often related to specific equipment deployment projects. The Company has experienced both acceleration and slowdown in orders related to such projects, causing changes in the sales level of a given quarter relative to both the preceding and subsequent quarters. Delays or lost sales can be caused by other factors beyond the Company's control, including late deliveries by the third party subcontractors the Company is using to outsource its manufacturing operations as well as by other vendors of components used in a customer's system, changes in implementation priorities, slower than anticipated growth in demand for the services that the Company's products support and delays in obtaining regulatory approvals for new services and products. Delays and lost sales have occurred in the past and may occur in the future. Operating results in recent periods have been adversely affected by delays in receipt of significant purchase orders from customers. The Company believes that sales in prior periods have been adversely impacted by merger activities by some of its top customers. In addition, the Company has in the past experienced delays as a result of the need to modify its products to comply with unique customer specifications. These and similar delays or lost sales could materially adversely affect the Company's business, financial condition and results of operations. See "Customer Concentration" and "Dependence on Component Availability and Key Suppliers." The Company's backlog at the beginning of each quarter typically is not sufficient to achieve expected sales for that quarter. To achieve its sales objectives, the Company is dependent upon obtaining orders in a quarter for shipment in that quarter. Furthermore, the Company's agreements with its customers typically provide that they may change delivery schedules and cancel orders within specified timeframes, typically up to 30 days prior to the scheduled shipment date, without significant penalty. The Company's customers have in the past built, and may in the future build, significant inventory in order to facilitate more rapid deployment of anticipated major projects or for other reasons. Decisions by such customers to reduce their inventory levels could lead to reductions in purchases from the Company. These reductions, in turn, could cause fluctuations in the Company's operating results and could have an adverse effect on the Company's business, financial condition, and results of operations in the periods in which the inventory is reduced. The Company's industry is characterized by declining prices of existing products, and therefore continual improvement of manufacturing efficiencies and introduction of new products and enhancements to existing products are required to maintain gross margins. In response to customer demands or competitive pressures, or to pursue new product or market opportunities, the Company may take certain pricing or marketing actions, such as price 14 15 reductions, volume discounts, or provision of services at below-market rates. These actions could materially and adversely affect the Company's operating results. Operating results may also fluctuate due to a variety of factors, particularly: - delays in new product introductions by the Company; - market acceptance of new or enhanced versions of the Company's products; - changes in the product or customer mix of sales; - changes in the level of operating expenses; - changes in the level of research and development expenses; - competitive pricing pressures; - the gain or loss of significant customers; - increased research and development and sales and marketing expenses associated with new product introductions; and - general economic conditions. All of the above factors are difficult for the Company to forecast, and these or other factors can materially and adversely affect the Company's business, financial condition and results of operations for one quarter or a series of quarters. The Company's expense levels are based in part on its expectations regarding future sales and are fixed in the short term to a large extent. Therefore, the Company may be unable to adjust spending in a timely manner to compensate for any unexpected shortfall in sales. Any significant decline in demand relative to the Company's expectations or any material delay of customer orders could have a material adverse effect on the Company's business, financial condition, and results of operations. There can be no assurance that the Company will be able to sustain profitability on a quarterly or annual basis. In addition, the Company has had, and in some future quarter may have operating results below the expectations of public market analysts and investors. In such event, the price of the Company's common stock could likely be materially and adversely affected. See "Potential Volatility of Stock Price." The Company's products are covered by warranties and the Company is subject to contractual commitments concerning its products. If unexpected circumstances arise such that the product does not perform as intended and the Company is not successful in resolving product quality or performance issues, there could be an adverse effect on the Company's business, financial condition, and results of operations. For example, during the fourth quarter of fiscal 1999, the Company was notified by one of its major customers of an intermittent problem involving one of the Company's products installed in the field. Although the Company identified a firmware fix for this problem and negotiated an agreement with the customer to share in the expense associated with the upgrade, this or similar problems in the future could increase expenses or reduce product acceptance. Potential Volatility of Stock Price. The trading price of the Company's common stock could be subject to wide fluctuations in response to quarter-to-quarter variations in operating results, announcements of technological innovations or new products by the Company or its competitors, developments with respect to patents or proprietary rights, general conditions in the telecommunication network access and equipment industries, changes in earnings estimates by analysts, or other events or factors. In addition, the stock market has experienced extreme price and volume fluctuations, which have particularly affected the market prices of many technology companies and which have often been unrelated to the operating performance of such companies. Company-specific factors or broad market fluctuations may materially adversely affect the market price of the Company's common stock. The Company has experienced significant fluctuations in its stock price and share trading volume in the past and may continue to do so. Dependence on Recently Introduced Products and New Product Development. The Company's future results of operations are highly dependent on market acceptance of existing and future applications for both the Company's AS2000 product line, and the WANsuite(TM) family of integrated access devices introduced during the third quarter of fiscal 2000. The AS2000 product line represented approximately 58% of net sales in fiscal 2000, 67% of net sales in fiscal 1999 and 86% of net sales in fiscal 1998. Sales of WANsuite(TM) products began during the last quarter 15 16 of fiscal 2000. Market acceptance of both the Company's current and future product lines is dependent on a number of factors, not all of which are in the Company's control, including the continued growth in the use of bandwidth intensive applications, continued deployment of new telecommunications services, market acceptance of integrated access devices in general, the availability and price of competing products and technologies, and the success of the Company's sales efforts. Failure of the Company's products to achieve market acceptance would have a material adverse effect on the Company's business, financial condition, and results of operations. The market for the Company's products are characterized by rapidly changing technology, evolving industry standards, continuing improvements in telecommunication service offerings, and changing demands of the Company's customer base. Failure to introduce new products in a timely manner could cause companies to purchase products from competitors and have a material adverse effect on the Company's business, financial condition and results of operations. Due to a variety of factors, the Company may experience delays in developing its planned products. New products may require additional development work, enhancement, and testing or further refinement before the Company can make them commercially available. The Company has in the past experienced delays in the introduction of new products, product applications and enhancements due to a variety of internal factors, such as reallocation of priorities, difficulty in hiring sufficient qualified personnel and unforeseen technical obstacles, as well as changes in customer requirements. Such delays have deferred the receipt of revenue from the products involved. If the Company's products have performance, reliability or quality shortcomings, then the Company may experience reduced orders, higher manufacturing costs, delays in collecting accounts receivable and additional warranty and service expenses. See "Optical Networking Product Development." Optical Networking Product Development. The Company's future results and operations are highly dependent on the success of the Company's optical product development project, the Company's cooperative research agreement with Beacon (the "Cooperative Research Agreement"), and its related Premises Access and Services Agreement with the Boston University Photonics Center (the "Facility Access Agreement"). The Cooperative Research Agreement and the Facility Access Agreement are hereinafter collectively referred to as the "Research Agreements". The Company has committed to pay the expenses related to the Research Agreements and therefore anticipates significant increases in research and development expenses in addition to increases in the ongoing development and marketing costs necessary to bring a potential optical networking product to market. Either of these expenses may exceed the budget that the Company has established and could have a material adverse effect on the Company's business, financial condition and results of operations. The Company has also agreed both to license from Beacon Telco and/or the Boston University Photonics Center or their affiliates, for additional license fees yet to be determined any background intellectual property necessary to commercialize the optical networking product and to certain limitations on the Company's ownership and use of intellectual property generated in the course of the performance of the Research Agreements. The parties may be unable to agree on the proper fees to be charged for such license of background intellectual property necessary to commercialize the optical networking product, or, if agreed, the costs of licensing background or other intellectual property could be substantial and may limit the ability of the Company to develop and market the optical networking product on a profitable basis. The success of the project may depend on the ability of the Company to effectively utilize certain resources of the Photonics Center, which are to be provided on an as-available basis at the discretion of the Trustees of Boston University. If critical resources are not made available to the Company on a timely basis, the project may be unsuccessful or may require significantly higher costs than expected. The Company's ongoing effort to develop and market an optical networking product will require high levels of innovation and may not be successful. Even if the Company does succeed in developing an optical networking product, it may have difficulty marketing and selling the product. Moreover, there can be no assurance that any product developed by the Company will gain and hold market acceptance in the rapidly growing optical networking market which is characterized by rapid innovation, numerous competing products and technologies, as well as strong competition. Failure of the Company to develop an optical networking product or to gain market acceptance for such a product would have a material adverse effect on the Company's business, financial condition and results of operations. Furthermore, the development of an optical networking product may take longer or be less successful than anticipated, which, in either event, could have a material adverse effect on the Company's business, financial 16 17 condition and results of operations. See "Rapid Technological Change," "Dependence on Recently Introduced Products and New Product Development" and "Risks Associated with Potential Acquisitions and Joint Ventures." Competition. The market for telecommunications network access equipment is highly competitive, and the Company expects competition to increase in the future. This market is subject to rapid technological change, regulatory developments, and new entrants. The market for integrated access devices such as the Access System product line and WANSuite(TM), and for enterprise devices such as the PRISM, FrameStart(TM), and Lite product lines is subject to rapid change. The Company believes that the primary competitive factors in this market are the development and rapid introduction of new product features, price and performance, support for multiple types of communications services, network management, reliability, and quality of customer support. There can be no assurance that the Company's current products and future products under development will be able to compete successfully with respect to these or other factors. The Company's principal competition to date for its current AS2000 and 4000 products has been from Quick Eagle Networks (formerly Digital Link Corporation), ADC Kentrox, a division of ADC Telecommunications, and Larscom, Inc., a subsidiary of Axel Johnson. In addition, the Company experiences substantial competition with its enterprise access and network termination products from companies in the computer networking market and other related markets. These competitors include Premisys Communications, Inc. (now a part of Zhone Technologies), Newbridge Networks Corporation, Visual Networks, Adtran, Inc., and Paradyne Inc. To the extent that current or potential competitors can expand their current offerings to include products that have functionality similar to the Company's products and planned products, the Company's business, financial condition and results of operations could be materially adversely affected. The Company believes that the market for basic network termination products is mature, but that the market for feature-enhanced network termination and network access products continues to grow and expand, as more "capability" and "intelligence" moves outward from the central office to the enterprise. The Company believes that the principal competitive factors in this market are price, feature sets, installed base, and quality of customer support. In this market, the Company primarily competes with Adtran, Quick Eagle Networks, ADC Kentrox, Paradyne, Visual Networks, and Larscom. There can be no assurance that such companies or other competitors will not introduce new products that provide greater functionality and/or at a lower price than the Company's like products. In addition, advanced termination products are emerging which represent both new market opportunities as well as a threat to the Company's current products. Furthermore, basic line termination functions are increasingly being integrated by competitors, such as Cisco and Nortel Networks, into other equipment such as routers and switches. These include direct WAN interfaces in certain products, which may erode the addressable market for separate network termination products. Many of the Company's current and potential competitors have substantially greater technical, financial, manufacturing and marketing resources than the Company. In addition, many of the Company's competitors have long-established relationships with network service providers. There can be no assurance that the Company will have the financial resources, technical expertise, manufacturing, marketing, distribution and support capabilities to compete successfully in the future. See "Factors Affecting Future Results -- Competition". Reorganization of Sales Force. In July 2000, the Company restructured its sales force from a sales force organized by geographical region to one focused on sales to particular markets and through particular distribution channels. This reorganization appeared to be disruptive in the first quarter of fiscal 2001 and may continue to be disruptive to the Company's sales in future quarters and involves numerous uncertainties, including, but not limited to, the increased costs to retrain the sales force in the methods and techniques needed to effectively approach the different markets and distribution channels available for the Company's products, the ability to retain current members of the sales force, the effectiveness of the sales force in closing sales, and the re-allocation of relationships that the sales force may have previously developed with customers in the geographic regions. As a result, the Company expects that the reorganization may continue to have a short-term negative impact on the Company's sales and results of operations. The transition to a market and distribution channel based sales force may take longer or be less successful than anticipated, which, in either event, could have a material adverse effect on the Company's business, financial condition, and results of operations. 17 18 Rapid Technological Change. The network access and telecommunications equipment markets are characterized by rapidly changing technologies and frequent new product introductions. The rapid development of new technologies increases the risk that current or new competitors could develop products that would reduce the competitiveness of the Company's products. The Company's success will depend to a substantial degree upon its ability to respond to changes in technology and customer requirements. This will require the timely selection, development and marketing of new products and enhancements on a cost-effective basis. The development of new, technologically advanced products is a complex and uncertain process, requiring high levels of innovation. The Company may need to supplement its internal expertise and resources with specialized expertise or intellectual property from third parties to develop new products. The development of new products for the WAN access market requires competence in the general areas of telephony, data networking, network management and wireless telephony as well as specific technologies such as Digital Subscriber Lines (DSL), Integrated Services Digital Networks (ISDN), Frame Relay, Asynchronous Transfer Mode (ATM), and Internet Protocols (IP). Furthermore, the communications industry is characterized by the need to design products that meet industry standards for safety, emissions, and network interconnection. With new and emerging technologies and service offerings from network service providers, such standards are often changing or unavailable. As a result, there is a potential for product development delays due to the need for compliance with new or modified standards. The introduction of new and enhanced products also requires that the Company manage transitions from older products in order to minimize disruptions in customer orders, avoid excess inventory of old products, and ensure that adequate supplies of new products can be delivered to meet customer orders. There can be no assurance that the Company will be successful in developing, introducing or managing the transition to new or enhanced products, or that any such products will be responsive to technological changes or will gain market acceptance. The Company's business, financial condition and results of operations would be materially adversely affected if the Company were to be unsuccessful, or to incur significant delays in developing and introducing such new products or enhancements. See "Dependence on Recently Introduced Products and New Product Development" and "Optical Networking Product Development." Compliance with Regulations and Evolving Industry Standards. The market for the Company's products is characterized by the need to meet a significant number of communications regulations and standards, some of which are evolving as new technologies are deployed. In the United States, the Company's products must comply with various regulations defined by the Federal Communications Commission and standards established by Underwriters Laboratories and Bell Communications Research. For some public carrier services, installed equipment does not fully comply with current industry standards, and this noncompliance must be addressed in the design of the Company's products. Standards for new services such as frame relay, performance monitoring services and Digital Subscriber Lines (DSL) are still evolving. As these standards evolve, the Company will be required to modify its products or develop and support new versions of its products. The failure of the Company's products to comply, or delays in compliance, with the various existing and evolving industry standards could delay introduction of the Company's products, which could have a material adverse effect on the Company's business, financial condition and results of operations. Government regulatory policies are likely to continue to have a major impact on the pricing of existing as well as new public network services and therefore are expected to affect demand for such services and the telecommunications products that support such services. Tariff rates, whether determined by network service providers or in response to regulatory directives, may affect the cost effectiveness of deploying communication services. Such policies also affect demand for telecommunications equipment, including the Company's products. Risks Associated With Potential Acquisitions and Joint Ventures. An important element of the Company's strategy is to review acquisition prospects and joint venture opportunities that would compliment its existing product offerings, augment its market coverage, enhance its technological capabilities or offer growth opportunities. Transactions of this nature by the Company could result in potentially dilutive issuance of equity securities, use of cash and/or the incurring of debt and the assumption of contingent liabilities, any of which could have a material adverse effect on the Company's business and operating results and/or the price of the Company's common stock. Acquisitions entail numerous risks, including difficulties in the assimilation of acquired operations, technologies and products, diversion of management's attention from other business concerns, risks of entering markets in which the Company has limited or no prior experience and potential loss of key employees of acquired organizations. Joint ventures entail risks such as potential conflicts of interest and disputes among the participants, difficulties in 18 19 integrating technologies and personnel, and risks of entering new markets. The Company's management has limited prior experience in assimilating such transactions. No assurance can be given as to the ability of the Company to successfully integrate any businesses, products, technologies or personnel that might be acquired in the future or to successfully develop any products or technologies that might be contemplated by any future joint venture or similar arrangement, and the failure of the Company to do so could have a material adverse effect on the Company's business, financial condition and results of operations. See "Optical Networking Product Development." Risks Associated With Entry into International Markets. The Company to date has had minimal direct sales to customers outside of North America. The Company has little experience in the European and Far Eastern markets, but intends to expand sales of its products outside of North America and to enter certain international markets, which will require significant management attention and financial resources. Conducting business outside of North America is subject to certain risks, including longer payment cycles, unexpected changes in regulatory requirements and tariffs, difficulties in staffing and managing foreign operations, greater difficulty in accounts receivable collection and potentially adverse tax consequences. To the extent any Company sales are denominated in foreign currency, the Company's sales and results of operations may also be directly affected by fluctuations in foreign currency exchange rates. In order to sell its products internationally, the Company must meet standards established by telecommunications authorities in various countries, as well as recommendations of the Consultative Committee on International Telegraph and Telephony. A delay in obtaining, or the failure to obtain, certification of its products in countries outside the United States could delay or preclude the Company's marketing and sales efforts in such countries, which could have a material adverse effect on the Company's business, financial condition and results of operations. Risk of Third Party Claims of Infringement. The network access and telecommunications equipment industries are characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement. From time to time, third parties may assert exclusive patent, copyright, trademark, and other intellectual property rights to technologies that are important to the Company. The Company has not conducted a formal patent search relating to the technology used in its products, due in part to the high cost and limited benefits of a formal search. In addition, since patent applications in the United States are not publicly disclosed until the related patent is issued and foreign patent applications generally are not publicly disclosed for at least a portion of the time that they are pending, applications may have been filed which, if issued as patents, could relate to the Company's products. Software comprises a substantial portion of the technology in the Company's products. The scope of protection accorded to patents covering software-related inventions is evolving and is subject to a degree of uncertainty which may increase the risk and cost to the Company if the Company discovers third party patents related to its software products or if such patents are asserted against the Company in the future. Patents have been granted recently on fundamental technologies in software, and patents may be issued which relate to fundamental technologies incorporated into the Company's products. The Company may receive communications from third parties asserting that the Company's products infringe or may infringe the proprietary rights of third parties. In its distribution agreements, the Company typically agrees to indemnify its customers for any expenses or liabilities resulting from claimed infringements of patents, trademarks or copyrights of third parties. In the event of litigation to determine the validity of any third-party claims, such litigation, whether or not determined in favor of the Company, could result in significant expense to the Company and divert the efforts of the Company's technical and management personnel from productive tasks. In the event of an adverse ruling in such litigation, the Company might be required to discontinue the use and sale of infringing products, expend significant resources to develop non-infringing technology or obtain licenses from third parties. There can be no assurance that licenses from third parties would be available on acceptable terms, if at all. In the event of a successful claim against the Company and the failure of the Company to develop or license a substitute technology, the Company's business, financial condition, and results of operations could be materially adversely affected. Limited Protection of Intellectual Property. The Company relies upon a combination of patent, trade secret, copyright, and trademark laws and contractual restrictions to establish and protect proprietary rights in its products and technologies. The Company has been issued certain U.S. and Canadian patents with respect to limited aspects of its single purpose network access technology. The Company has not obtained significant patent protection for its Access System technology. There can be no assurance that third parties have not or will not develop equivalent technologies or products without infringing the Company's patents or that a court having jurisdiction over a dispute 19 20 involving such patents would hold the Company's patents valid and enforceable. The Company has also entered into confidentiality and invention assignment agreements with its employees and independent contractors, and enters into non-disclosure agreements with its suppliers, distributors and appropriate customers so as to limit access to and disclosure of its proprietary information. There can be no assurance that these statutory and contractual arrangements will deter misappropriation of the Company's technologies or discourage independent third-party development of similar technologies. In the event such arrangements are insufficient, the Company's business, financial condition and results of operations could be materially adversely affected. The laws of certain foreign countries in which the Company's products are or may be developed, manufactured or sold may not protect the Company's products or intellectual property rights to the same extent as do the laws of the United States and thus, make the possibility of misappropriation of the Company's technology and products more likely. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. At September 29, 2000, the Company's investment portfolio consisted of fixed income securities of $2.2 million. These securities, like all fixed income instruments, are subject to interest rate risk and will decline in value if market interest rates increase. If market interest rates were to increase immediately and uniformly by 10% from levels as of September 29, 2000, the decline in the fair value of the portfolio would not be material. Additionally, the Company has the ability to hold its fixed income investments until maturity and therefore, the Company would not expect to recognize such an adverse impact in income or cash flows. The Company invests cash balances in excess of operating requirements in short-term securities, generally with maturities of 90 days or less. The Company believes that the effect, if any, of reasonably possible near-term changes in interest rates on the Company's financial position, results of operations and cash flows would not be material. 20 21 PART II. OTHER INFORMATION ITEM 2: CHANGES IN SECURITIES On October 13, 2000, and in consideration of the execution of the agreements described under "Optical Networking Project and Related Warrants" above, the Company issued Beacon Telco warrants to purchase 2,249,900 shares of the Company's common stock at an exercise price of $4.75 per share. The warrants were issued in reliance on the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended, for transactions by an issuer not involving a public offering. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Index: Exhibit Number Description of Exhibit -------------- ---------------------- 10.51 Second Amendment to the Verilink Corporation 1993 Amended and Restated Stock Option Plan 10.52 Second Amendment to the Verilink Corporation 1996 Employee Stock Purchase Plan 10.53 Cooperative Research Agreement between the Registrant and Beacon Telco, L.P. dated October 13, 2000 10.54 Warrant and Stockholder's Agreement between the Registrant and Beacon Telco, L.P. dated October 13, 2000 10.55 Premises License and Services Agreement between the Registrant, Beacon Telco, L.P., and Trustees of Boston University dated October 16, 2000 27.1 Financial Data Schedule (b) No reports on Form 8-K were filed during the quarter ended September 29, 2000. SIGNATURES Pursuant to the requirements 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. VERILINK CORPORATION November 13, 2000 By: /s/ Ronald G. Sibold ---------------------------------------- Ronald G. Sibold, Vice President and Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer) 21 EX-10.51 2 g65370ex10-51.txt SECOND AMENDMENT 1 Exhibit 10.51 SECOND AMENDMENT VERILINK CORPORATION AMENDED AND RESTATED 1993 STOCK OPTION PLAN VERILINK CORPORATION, a corporation organized and existing under the laws of the State of Delaware with its principal place of business in Huntsville, Alabama, (the "Company") hereby adopts and publishes on this the 10th day of August, 2000 this Amendment to the Verilink Corporation Amended and Restated 1993 Stock Option Plan (the "Plan"), as follows: WHEREAS, the Company has determined that an increase in the number of shares of Company common stock subject to the Plan is necessary; and WHEREAS, Section 3(a) of the Plan is hereby amended to increase the number of shares of Company common stock subject to the Plan; and WHEREAS, by written unanimous consent of the Board of Directors of the Company, said Board did specifically approve and adopt by resolution the amendment hereinafter set forth. NOW, THEREFORE, in consideration of the premises hereinabove set forth, the Company amends said Plan, as follows: 1. Section 3(a) shall be amended and restated as follows: "(a) An aggregate of not more than 8,800,000 shares of Stock shall be available for the grant of stock options under the Plan. If an option is surrendered (except surrender for shares of Stock) or for any other reason ceases to be exercisable in whole or in part, the shares which were subject to such option but as to which the option had not been exercised shall continue to be available under the Plan. Any Stock which is retained by the Company upon exercise of an option in order to satisfy the exercise price for such option or any withholding taxes due with respect to such option exercise shall be treated as issued to the Optionee and will thereafter not be available under the Plan." The Company has caused this Amendment to be executed by its duly authorized officer and its corporate seal to be affixed hereunto on the day and year first above written. VERILINK CORPORATION /s/ Graham G. Pattison -------------------------------------------- By: Graham G. Pattison Its: President ATTEST: /s/ C. W. Smith - ------------------------------------ By: C. W. Smith Its: Secretary (CORPORATE SEAL) EX-10.52 3 g65370ex10-52.txt SECOND AMENDMENT 1 Exhibit 10.52 SECOND AMENDMENT VERILINK CORPORATION 1996 EMPLOYEE STOCK PURCHASE PLAN VERILINK CORPORATION, a Corporation organized and existing under the laws of the State of Delaware with its principal place of business in Huntsville, Alabama, (the "Company'), hereby adopts and publishes on this the 10th day of August, 2000, this Amendment to the Verilink Corporation 1996 Employee Stock Purchase Plan (the "Plan"), as follows: WHEREAS, the Company, effective April 19, 1996, established the Plan for the benefit of its employees; and WHEREAS, said Plan provides that the Company reserves the right for any reason by action of its Board of Directors to amend in whole or in part any and all provisions of the Plan; and WHEREAS, Section 12(a) of the Plan is hereby amended to increase the number of shares of Company common stock available under the Plan; and WHEREAS, by unanimous written consent of the Board of Directors of the Company, the Board did specifically approve and adopt by resolution the amendment hereinafter set forth. NOW, THEREFORE, in consideration of the premises hereinabove set forth, the Company amends said Plan, as follows: 1. Section 12(a) shall be amended and restated as follows: "(a) The maximum number of shares of the Company's Common Stock which shall be made available for sale under the Plan shall be 750,000 shares, subject to adjustment upon changes in capitalization of the Company as provided in paragraph 18. If on a given Exercise Date the number of shares with respect to which options are to be exercised exceeds the number of shares then available under the Plan, the Company shall make a pro rata allocation of the shares remaining available for purchase in as uniform a manner as shall be practicable and as it shall determine to be equitable." The Company has caused this Amendment to be executed by its duly authorized officer and its corporate seal to be hereunto affixed on the day and year first above written. VERILINK CORPORATION /s/ Graham G. Pattison -------------------------------------------- By: Graham G. Pattison Its: President ATTEST: /s/ C. W. Smith - ------------------------------------ By: C. W. Smith Its: Secretary (CORPORATE SEAL) EX-10.53 4 g65370ex10-53.txt COOPERATIVE RESEARCH AGREEMENT 1 Exhibit 10.53 COOPERATIVE RESEARCH AGREEMENT BETWEEN BEACON TELCO L.P., (hereinafter "Contractor") AND Verilink Corporation (hereinafter "Participant") Contractor and Participant being hereinafter referred to individually as a "Party" and jointly referred to as the "Parties" BACKGROUND This Agreement is for the implementation of a research and development project intended to create marketable optical networking products for the telecommunications access market with modular, extendable architectures, with software to be developed hereunder (the "Project") and which involves the Parties (as defined above), and the shared access to and use of the Boston University Photonics Center (the "BU Photonics Center") as well as certain personnel of the Trustees of Boston University (the "University") assigned to the BU Photonics Center, pursuant to a separate agreement between Participant and the University (the "Premises License and Service Agreement"). The overall goal of the Project is the development of an optical networking prototype product for the telecommunications access market of a type to be defined as part of Phase 0 of the PACE(TM) Phase Description and Deliverable Milestone Document relating to developing the specifications of the Developed Prototype Product(s) and the milestones for the work described in Appendix A-1 of this Agreement (the "Developed Prototype Product(s)") that will leverage commercially available off-the-shelf hardware components in order to facilitate time to market. To facilitate that effort, Participant employees, contractors and consultants who are engaged by Participant and designated to work on the Project (the "Participant's Developers") and members of Contractor's work force identified in accordance with this Agreement (the "Contractor's Developers") will work together cooperatively and jointly under Participant's management at the BU Photonics Center in connection with Participant's pursuit and achievement of the preceding objectives. However, any personnel of the BU Photonics Center that in any way participate in this Project shall be supplied to Participant solely pursuant to the terms and conditions of the Premises License and Services Agreement, shall be designated and assigned only by the University, and shall remain employees of only the University. This overall Project is intended to represent a cooperative initiative. Accordingly, agreements that will be entered into in connection with this Project and which will bear the same Effective Date (the "Project Agreements") consist of the following: (a) this Agreement, which shall be deemed to include the PACE(TM) Phase Description and Deliverable Milestone Document 1 2 relating to developing the specifications of the Developed Prototype Product(s) and the milestones for the work described in Appendix A-1 of this Agreement (b) a Premises License and Services Agreement between Participant, Contractor and the University providing Participant at the University's sole discretion, with certain non-exclusive rights of access to and use of the identified space in the BU Photonics Center as well as access to certain of its personnel, only for purposes of the development and testing (and not, for example, the manufacturing or commercialization) of the Developed Prototype Product(s) and (c) A Warrant and Stockholder's Agreement, all dated October 13, 2000. However, each of these agreements shall exist separate and apart from each other, and termination of any agreement(s) shall not result in termination of any other of these agreements except to the extent expressly set forth herein or therein. ARTICLE I. DEFINITIONS "Agreement" means this Cooperative Research Agreement, as amended from time to time. Words such as "herein," "hereinafter," "hereof," "hereto," and "hereunder" shall refer to this Agreement as a whole, unless the context otherwise requires. "Background Intellectual Property" means patents or copyrights owned by either Party to this Agreement which were in existence prior to this Agreement or are first conceived and/or first produced or reduced to practice outside this Agreement and which would be of use to the Parties in conducting the work under this Agreement. In the case of inventions in those identified items, the inventions must have been conceived outside of this Agreement, whether or not first actually produced or reduced to practice under this Agreement to qualify as Background Intellectual Property. Licensing of Background Intellectual Property, if agreed to by the Parties, shall be the subject of separate licensing agreements between the Parties; provided, however, that any Background Intellectual Property of Contractor which is necessary for the Participant to use in the performance of its obligations under this Agreement shall be deemed to have been licensed to Participant on a royalty-free, nonexclusive basis but solely for use in performing its research and development activities hereunder... To the extent that a license(s) to Contractor's Background Intellectual Property, and/or to Boston University Intellectual Property would be necessary at law with respect to the use, sale, manufacturing or commercialization of the Developed Prototype Product(s) by Participant after conclusion of this Agreement, the Parties will negotiate a mutually agreed license for such Background Intellectual Property. Background Intellectual Property and Boston University Intellectual Property are not Subject Inventions for ownership and rights of use purposes. "Boston University Intellectual Property" shall have the meaning given such term in the Premises License and Services Agreement between Participant and the University. "Confidential Information" means information such as, but not limited to, (i) trade secrets, ideas, concepts, know-how, algorithms, designs, formulae, inventions (whether or not patentable), customer lists, product or marketing information, or (ii) commercial or financial information which is privileged or confidential, once it is marked as Confidential Information, or otherwise clearly designated as proprietary, confidential, or secret in accordance with the provisions of 2 3 Article VIII of this Agreement. Confidential Information shall in any event be deemed to include this Agreement, per Article IX of this Agreement. "Developed Prototype Product" means the prototype to be developed hereunder, based upon the specifications to be defined as part of Phase 0 of the PACE(TM) Phase Description and Deliverable Milestone Document relating to such Product, but excluding any Generated Information, Subject Inventions, Mask Works, Intellectual Property, and Background Intellectual Property content to the extent owned by Contractor, Beacon Photonics, Inc., Beacon Photonics, L.P. or Trustees of Boston University, including but not limited to Boston University Intellectual Property. "Generated Information" means all information, however characterized, originally developed or created by either Party in the performance of or otherwise in connection with this Agreement, including but not limited to, the source and object code of any software developed hereunder but excluding any Confidential Information or Background Intellectual Property, Boston University Intellectual Property, or content, of any Party who did not generate it. "Intellectual Property" means patents, pending patent applications, copyrights, Mask Works, Confidential Information, and other forms of comparable property rights protected by Federal Law, state law, and foreign counterparts. "Mask Work" means a series of related images, however fixed or encoded, having or representing the predetermined, three-dimensional pattern of metallic, insulating or semiconductor material present or removed from the layers of a semiconductor chip product; and in which series the relation of the images to one another is that each image has the pattern of the surface of one form of the semiconductor chip product. "PACE(TM)" means Product And Cycle Time Excellence Product development methodology developed by Pittiglio Rabin Todd & McGrath (PRTM) utilizing a phased approach to product development. Each sequential phase focuses on key activities culminating in a group of deliverables which are presented and approved at a milestone review prior to moving to the next sequential phase. "Subject Invention" means any invention(s) of the Contractor or Participant, both first conceived and actually reduced to practice (as defined under the United States patent laws), in the performance of work under this Agreement, but excluding any Background Intellectual Property and Boston University Intellectual Property content. ARTICLE II. STATEMENT OF PROJECT OBJECTIVE The Statement of Project Objective describes the work to be performed hereunder and is attached to and made a part of this Agreement as Appendix A. All work of Contractor, Participant, Participant's Developers and any of Contractor's Developer's in connection with the Project shall be performed in a workmanlike and professional manner by persons having a level of skill in the area commensurate with the requirements of the scope of 3 4 work to be performed. However, Participant acknowledges and agrees that to the extent Participant receives or obtains access to or input and/or guidance from Contractor or personnel at the BU Photonics Center in connection with this Project, it shall be provided by such entities and accepted by Participant on an AS-IS basis only. ARTICLE III. FUNDING & COSTS A. Participant will reimburse Contractor for all incremental costs incurred by Contractor as a result of and throughout the Term of this Agreement in accordance with the terms and conditions hereof. An estimate of Contractor's projected incremental costs for each milestone will be provided to the Participant at the initiation of each milestone for approval by Participant (a "Milestone Budget"). Contractor shall be entitled, but not obligated, to suspend its performance hereunder until such approval is received, which approval shall not be unreasonably withheld. For purposes of this provision, Contractor's incremental costs shall be deemed to include Contractor's incremental out-of-pocket costs and expenses such as travel and living expenses solely for purposes of this Project; provided that (I) all travel or living expenses may be incurred only in accordance with Participant's Travel Expense Reimbursement Policy a copy of which shall be provided to Contractor on the Effective Date, as amended from time to time by Participant for its own business operations, and (ii) any other individual incremental expenditures in excess of $10,000 individually, or in excess of the Milestone Budget in the aggregate shall require the prior written approval of Participant shall also be obligated to pay Contractor whatever incremental costs are incurred by it in connection with this Project, as defined in and pursuant to the terms and conditions of the Premises License and Service Agreement. B. Contractor will not charge Participant for Participant's use of existing facilities utilized, existing equipment utilized, or for any time or services of Contractor's Developers. However, this does not include extended time allocation by Contractor engineers and technicians, which, if required, will be subject to approval by and, upon such approval paid for by, Participant. The terms and conditions to govern Participant's access to and use of the BU Photonics Center and non-Contractor personnel at that Center, shall be governed solely by the terms and conditions of the Premises License and Services Agreement. In any event, however, any and all input, services and assistance provided to Participant by any and all personnel shall be provided on an as-available and AS-IS basis only. C. At the end of Milestone 3 Participant will perform an informed analysis, on a best efforts basis, to assess the reasonably foreseeable costs and expenses of completing the Milestones 4 & 5 (which will include a good faith estimate to be provided by Contractor of the incremental costs for which Contractor will be entitled to be reimbursed by Participant per the preceding Paragraph A) and establish a budget therefore (the "Completion Budget"). Upon establishment of the Completion Budget, both Parties agree to use all reasonable efforts to perform all activities in a manner sufficient to successfully complete Milestones 4 and 5 within the Completion Budget. If despite such efforts, however, Milestones 4 and 5 remain incomplete after Completion Budget for these Milestones have been exceeded by 50% percent, Contractor shall not be obligated to continue or complete the Project unless Participant elects to do so provided, however, that it is at 4 5 no cost or expense to Contractor and that Participant continues to reimburse Contractor for incremental costs pursuant to the requirements of this Agreement. In the event that Participant ceases performance in accordance with the provisions of this Agreement, Participant shall promptly render to Contractor, a pro rata portion of the Bonus Amount referenced in Article IV based upon the extent to which the Milestones referenced in Exhibit A have been completed. D. Subject to the provisions of Paragraph C above, Participant shall notify Contractor if, as and when the actual costs have exceeded the Completion Budget by 50%, as determined by Participant based upon Participant's sole but good faith assessment. Termination of this Agreement by either Party as a result, must be pursuant to the provisions of Article XXV. All invoices for reimbursement of incremental costs incurred shall detail the Project-related purpose of the expense and out-of-pocket reimbursable expenses incurred by Contractor (and the University) during the period covered, which shall be passed through at actual cost without upcharge or markup of any kind. Participant shall promptly review Contractor's invoices and approve for payment all amounts properly do under this Agreement, and shall pay all such amounts within thirty (30) days of Participant's receipt and approval of the invoice. Participant shall approve or disapprove each invoice within five (5) business days of its receipt by Participant. Disapproval of any invoice shall be in writing, specifying what portions thereof are disapproved and the reasons therefore; any portion of the invoice that is not disapproved shall be paid on time. Interest shall be assessed against any and all amounts not paid when due at the rate of 12% per annum, or the highest rate permissible by law, whichever is less. Interest will not be charged with respect to any amounts which are the subject of a bona fide dispute. E. The effective date of this Agreement shall be the date on which this Agreement and all Project Agreements identified in the Background Article referenced above have been fully executed and are deemed to be effective by their own respective terms (the "Effective Date"). The Parties will cooperate with each other and use their respective reasonable efforts to complete the work to be performed under this Agreement within eighteen (18) months from the Effective Date. ARTICLE IV. CERTAIN BONUS PAYMENTS On execution of this Agreement, and in partial consideration for assistance which has already been provided by Contractor (which shall nonetheless be deemed to have been provided pursuant to the terms and conditions of this Agreement) Contractor shall be entitled to receive and Participant shall be obligated to pay Contractor, the first bonus payment in an amount of Three Million Five Hundred Sixty Two Thousand and Five Hundred Dollars ($3,562,500) ("Bonus Payment 1"), where W equals the U.S. Dollar price of one share of Participant Common Stock as valued, on the date of signing this Agreement, which Bonus Payment shall be deemed to be fully vested. HOWEVER, Contractor has agreed to defer receipt of the full amount of this Bonus Payment 1 until, and Participant shall accordingly deliver the Bonus Payment 1 to Contractor, one (1) year after the date of this Agreement, or prior thereto upon termination of this Agreement if that is to occur earlier. 5 6 Subject to the provisions of Article III and this Article IV, upon and subject to completion of Milestone 5 as set forth in Appendix A-1, Participant will deliver to Contractor a second bonus payment (or a pro rata portion of such payment per Article XXV) as follows: (Y x 1,500,000) - (Z x 1,500,000) = Bonus Amount 2 Where, Y = $ 4.75; and Z = I) zero when the market value of Participant's common stock is $ 4.75 or greater, or ii) $ 4.75 minus the market price, when the market price of Participant's common stock is less than $ 4.75 Both bonus payments will be made in the form of either: 1) a Promissory Note in the form attached hereto as Appendix B (the "Bonus Note"), payable in cash or at Participant's sole election, in Participant's common stock with a balloon maturity in five years, or at Participant's option, 2) Participant's common stock equating to the Bonus Amount. Contractor may, at its option, use all or part of the Bonus Note as payment toward the Strike Price at the time of exercise of the Warrants. ARTICLE V. PERSONAL PROPERTY AND FACILITY ACCESS A. The terms and conditions to govern Participant's access to and use of the BU Photonics Center and services shall be as set forth solely in the separate Premises License and Services Agreement among Participant, Contractor and the University. Accordingly, to the extent of any inconsistencies or conflicts between express provisions of this Agreement and the such Premises License and Services Agreement as they relate, directly or indirectly to the BU Photonics Center, the terms and conditions of the Premises License and Services Agreement shall govern. B. To the extent that any equipment and/or tangible property will need to be purchased for this Project, such equipment and property shall be owned exclusively by the Party who purchased the same, unless such Party has been reimbursed for such equipment and/or tangible property by the other Party, in which case such equipment and/or tangible property shall be owned by the reimbursing Party. However, to the extent that any equipment or property is purchased solely by Participant and/or jointly with Contractor and becomes a fixture of the BU Photonics Center, Participant agrees to sell its ownership interest in the same on a depreciated cost basis consistent with industry practice, to Contractor's designee which shall be deemed to be the University, and which shall therefore be pursuant to the terms and conditions of the Premises License and Services Agreement. ARTICLE VI. DISCLAIMER AND REPRESENTATIONS A. EACH PARTY REPRESENTS TO THE OTHER PARTY THAT IT IS AUTHORIZED TO ENTER INTO THIS AGREEMENT AND TO UNDERTAKE THE OBLIGATIONS SET FORTH THEREIN, AND WILL NOT BE IN BREACH OF ANY AGREEMENT OR COMMITMENT WITH ANY THIRD PARTY BY DOING SO. EXCEPT AS OTHERWISE EXPRESSLY SET FORTH WITHIN THIS ARTICLE VI, NO EXPRESS WARRANTIES 6 7 HAVE BEEN MADE BY EITHER PARTY TO THIS AGREEMENT, AND ANY WARRANTIES THAT COULD BE IMPLIED, INCLUDING BUT NOT LIMITED TO ANY WARRANTY OF NON-INFRINGEMENT, OR AS TO THE CONDITIONS OR ADEQUACY OF THE BU PHOTONICS CENTER, THE CONDITIONS OR SUITABILITY OF THE EQUIPMENT OR SOFTWARE THAT MAY BE AVAILABLE, ANY SERVICES OR ASSISTANCE TO BE SUPPLIED, COMPLIANCE OF THE DEVELOPED PROTOTYPE PRODUCT(S) WITH ANY APPLICABLE SPECIFICATION, FREEDOM FROM DEFECTS, ERRORS, VIRUSES OR OTHER DISABLING DEVICES, OR AS TO ANY INTELLECTUAL PROPERTY OR PROTOTYPE MADE, OR DEVELOPED UNDER THIS AGREEMENT, OR THE OWNERSHIP,MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OF THE RESEARCH OR ANY DEVELOPED PROTOTYPE PRODUCT(S), ARE HEREBY EXPRESSLY DISCLAIMED BY BOTH PARTIES. B. Contractor represents that the Contractor official executing this Agreement on Contractor's behalf has the requisite authority to do so. C. Participant represents that it has the requisite power and authority to enter into this Agreement and that the Participant official executing this Agreement has the requisite authority to do so. ARTICLE VII. LIMITATIONS OF LIABILITY Except for and to the extent of, but only to the extent of, any liability resulting from any grossly negligent or willful and wanton acts or omissions of Contractor resulting in any personal injury (including death) or damage to tangible personal property of any third party, Contractor shall not be liable to Participant or to any third party for any damages, costs and expenses, however characterized, and including attorney's fees, arising out of or otherwise resulting directly or indirectly from, Participant's performance or any failure to perform its obligations under this Agreement, the making, using or selling of the Developed Prototype Product(s) and/or any product based upon or otherwise arising out of the Developed Prototype Product(s), as well as any process or service by or on behalf of the Participant, its assignees, licensees, or any third party(s), whether or not derived from the work performed under this Agreement. In no event shall Beacon Photonics, Inc., Beacon Photonics L.P., Globalvest Management Company, L.P. or the University be liable to Participant or to any third party, in contract, tort or in equity and regardless of whatever form of action or theory of law, for any claims, suits, allegations of damages, however characterized, which may in any way arise out of this Agreement. The sole and exclusive liability of the University and of Beacon Photonics, Inc. with respect to any matters directly or indirectly related to this Project, shall be as expressly set forth and limited in the Premises License and Services Agreement. Accordingly, and with the limited exception of the personal injury claims as referenced above, Participant agrees to defend Contractor, including its employees, contractors, consultants, officers and directors from and against any and all suits, claims and allegations arising out of the foregoing, including but not limited to, any and all intellectual property infringement and/or misappropriation claims and agrees to indemnify and hereby holds them jointly and severally harmless from and against any and all judgements, 7 8 settlements and damages, whether or not awarded and however characterized, arising out of the foregoing. EXCEPT WITH RESPECT TO THE PERSONAL INJURY CLAIMS REFERENCED ABOVE AND ANY BREACH BY CONTRACTOR OF ITS WARRANTIES UNDER ARTICLE VI ABOVE AS WELL AS ANY BREACH OF ITS OBLIGATIONS UNDER ARTICLE VIII, BUT SUBJECT TO THE PROVISIONS OF ARTICLE VII, CONTRACTOR SHALL HAVE NO LIABILITY TO PARTICIPANT OR TO ANY THIRD PARTY, IN CONTRACT, TORT, AND/OR ANY OTHER THEORY OF LAW, AND IRRESPECTIVE OF FAULT OR NEGLIGENCE, FOR ANY DAMAGES SUFFERED BY THE PARTICIPANT OR ANY THIRD PARTY WHICH, DIRECTLY OR INDIRECTLY, WERE CAUSED BY OR ARE OTHERWISE ATTRIBUTABLE TO, CONTRACTOR IN CONNECTION WITH THIS PROJECT OR AGREEMENT. Contractor's sole and exclusive responsibility with respect to this Project shall be to perform whatever services it provides hereunder in accordance with the express requirements of the last paragraph of Article II, failing which Participant's sole and exclusive remedy shall be for Contractor to re-perform the service which failed to meet the required standard, without charge to Participant. With the same exceptions noted above, and with the further exception of Participant's express obligations under this Article VII, Participant's liability to Contractor hereunder shall not exceed in U.S. Dollars, the combined value of (i) the stock issued or issuable to Contractor pursuant to the warrants which are the subject of the Warrant and Stockholder's Agreement referenced in this Agreement as of the Effective Date of this Agreement, or the date on which the Developed Prototype Product(s) is first announced as being publicly available, whichever is greater, and (ii) the Bonus Payments payable under Article IV hereof. With the foregoing stated exceptions, in no event shall either Party be liable for any special, indirect, consequential, incidental or exemplary damages, including but not limited to, any manner of economic loss or damage, and regardless of whether the applicable Party was advised of the possibility of such damages. IN NO EVENT SHALL THE UNIVERSITY, BEACON PHOTONICS, INC., BEACON PHOTONICS, L.P. OR GLOBALVEST MANAGEMENT COMPANY, L.P. HAVE ANY LIABILITY WHATSOEVER TO PARTICIPANT OR TO ANY THIRD PARTY FOR DAMAGES SUFFERED AND/OR ARISING OUT OF THIS AGREEMENT, REGARDLESS OF THE APPLICABLE THEORY OF LAW OR RECOVERY, AND REGARDLESS OF WHETHER SUCH DAMAGES CONSITUTE DIRECT, INDIRECT, SPECIAL, INCIDENTAL, CONSEQUENTIAL OR EXEMPLARY DAMAGES. PARTICIPANT'S SOLE AND EXCLUSIVE REMEDY AND RECOURSE SHALL BE AS TO CONTRACTOR ALONE AND ON THE BASIS SET FORTH HEREIN. ARTICLE VIII. OBLIGATIONS AS TO CONFIDENTIAL INFORMATION A. Confidential Information may be disclosed orally, electronically, visually or in a written or other tangible form. However, neither Party shall be obligated to treat the other Party's Confidential Information in accordance with this Article unless and until such information is disclosed to the recipient Party in accordance with the requirements of this Paragraph. Specifically, Confidential Information disclosed in tangible form shall be conspicuously labeled "Confidential" or with words of similar import; if disclosed in intangible form, the disclosing 8 9 Party shall advise the recipient Party of the confidential nature of the information at the time of such disclosure and shall provide the recipient Party with written confirmation of the specific information disclosed and its confidential nature, within 10 business days of each such disclosure. Once Confidential Information has been disclosed to the recipient Party in this manner, the recipient Party shall be obligated to treat it in accordance with the requirements of this Agreement; any subsequent disclosures of the same information to the recipient Party need not be in accordance with the administrative requirements of this Agreement in order to qualify as Confidential Information of the other Party. Information received by either Party from the other Party prior to such information being identified as Confidential Information in accordance with these requirements must be treated as the Confidential Information of the other Party after such information is identified as Confidential Information in accordance with this Paragraph unless, prior to such information being identified as Confidential Information, the same has entered the public domain. However, notwithstanding the foregoing, each Party shall use reasonable efforts to keep confidential all information it receives or to which it otherwise obtains access in connection with the Project, and to consult with the other Party before disclosing information which the recipient Party should reasonably understand is Confidential Information due to the nature of the specific information and/or the circumstances surrounding the recipient Party's access to such information. Each Party agrees not to use Confidential Information provided by the other Party for any purpose other than that set forth in this Agreement, nor disclose such Confidential Information (which shall include any notes, extracts, analyses or materials which would disclose such Confidential Information) to anyone without written approval of the providing Party other than (i) the other Party, or (ii) the other Party's employees or agents having a need to know such Confidential Information for the sole purpose of performing the recipient Party's express obligations hereunder, provided that each such employee has executed an agreement with its employer prior to receipt of any Confidential Information which obligates it to treat the same in a manner consistent with the requirements of this provision. Any and all manner of notes, extracts, analyses or materials which are prepared by each or any Party, whether or not at the site of the Contractor's facilities, and which embody any of the other Party's Confidential Information, shall be treated in accordance with its obligations with respect to that same Party's Confidential Information. B. Confidential Information in tangible form shall be returned to the disclosing Party or destroyed with a certificate of destruction submitted to the disclosing Party, upon request by the disclosing Party, during the term of this Agreement or upon termination or expiration of this Agreement. However, the recipient Party shall always be entitled to (i) retain copies of such Confidential Information in connection with any license of any Background Intellectual Property that may be licensed to such Party hereunder, or (ii) maintain a single copy of such Confidential Information in the locked files of its in-house or outside legal counsel, for the sole purpose of monitoring its obligations with respect to such Confidential Information. C. All Confidential Information disclosed in accordance with Article VIII shall be protected by the recipient Party as the other Party's proprietary and Confidential Information except to the extent, but only to the extent that any portion of such Confidential Information: (i) becomes publicly known due to no act or omission attributable to the recipient Party constituting a breach of this Agreement; (ii) comes into recipient Party's possession from a third party without an obligation of confidentiality on the recipient Party, provided that the third party had the right to 9 10 disclose it to the recipient Party and on such basis (iii) is independently developed by employees or agents of the recipient Party who did not have access to nor in any way benefit from the other Party's Confidential Information, (iv) is intentionally released by the disclosing Party to a third party without restriction, or (v) is released for disclosure with the written consent of the disclosing Party., Before releasing Confidential Information in response to any legal or regulatory requirement compelling such disclosure, the recipient Party shall first notify the disclosing Party reasonably in advance of such disclosure in order to allow the disclosing Party to seek and obtain a protective order with respect to such Information; any Confidential Information disclosed pursuant to any such order or directive shall nonetheless continue to be deemed to be Confidential Information. D. Notwithstanding the foregoing, to the extent but only to the extent that Confidential Information of either Party falls within any of the foregoing exemptions, the recipient Party shall not be entitled to use such information if it is the subject of any patent, copyright, mask work or other such intellectual property right, unless and to the extent that the recipient Party has otherwise been granted an express license under this Agreement with respect to any Background Intellectual Property which may include such Confidential Information. E. In no case shall either Party provide the other Party's Confidential Information to any third party person or entity, whether or not for commercial purposes. However, Participant acknowledges that while the University, Beacon Photonics, Inc., Beacon Photonics, L.P. and Globalvest Management Company, L.P. are third parties with respect to this Agreement in every respect, certain of these entities will likely have access to Participant's Confidential Information through no act of Contractor as a result of Participant's own use of the BU Photonics Center pursuant to the Premises License and Services Agreement and the interaction of Participant's own personnel with the personnel of such entities. In the event that Contractor authorizes Participant in a separate writing to provide Contractor's Confidential Information to a third party in connection with any decision by Participant to commercialize the Developed Prototype Product, it shall be pursuant to terms and conditions which are acceptable to Contractor. In any event, Contractor reserves the right to require that its Confidential Information be disclosed to any such third party pursuant to an agreement between Contractor and such third party, or pursuant to an agreement between Participant and such third party which expressly permits Contractor to enforce its provisions directly against such third party. ARTICLE IX. OBLIGATIONS AS TO CONFIDENTIAL INFORMATION A. Each Party shall mark its Confidential Information, in accordance with the requirements of Article VIII, any and all Generated Information that it produces. To the extent that any Generated Information is produced by personnel of both Parties, it shall be labeled as the Confidential Information of both Parties. B. For a period of 3 years from the date that a given item of Confidential Information is first disclosed to the recipient Party, the recipient Party agrees not to disclose such Information to any third party, and not to use that information for any purpose whatsoever, subject to the provisions of Article VIII E. above; provided that the restrictions on disclosure and use of Confidential 10 11 Information herein with respect to any Confidential Information that constitutes a trade secret of the disclosing Party under applicable law shall continue for so long as such information retains its status as trade secret information of the disclosing Party. C. In any event, the terms and conditions of this Agreement shall be deemed to be the Confidential Information of both Parties, and neither Party may disclose the existence or terms of this Agreement without the express, prior written consent of the other Party. For the avoidance of doubt, each Party's performance of their respective obligations concerning this Project shall be subject to these restrictions as well as the provisions of Article VIII, rather than an exception thereto, unless and to the extent otherwise expressly agreed in writing and on a case by case basis. ARTICLE X. EXPORT CONTROL THE RESPECTIVE PARTIES UNDERSTAND THAT ANY GENERATED INFORMATION OR INTELLECTUAL PROPERTY TO WHICH EITHER PARTY HAS TITLE PURSUANT TO THE TERMS OF THIS AGREEMENT AND RESULTING FROM THE PERFORMANCE OF THIS AGREEMENT MAY BE SUBJECT TO EXPORT CONTROL LAWS AND THAT THE OWNER(S) OF SUCH GENERATED INFORMATION AND INTELLECTUAL PROPERTY ALONE ARE RESPONSIBLE FOR THEIR OWN RESPECTIVE COMPLIANCE WITH SUCH LAWS. HOWEVER, NOTWITHSTANDING THE FOREGOING, PARTICIPANT ALONE SHALL BE RESPONSIBLE FOR COMPLYING WITH ANY AND ALL SUCH LAWS, REGARDLESS OF OWNERSHIP, TO THE EXTENT APPLICABLE AND NECESSARY IN ORDER TO EXERCISE ITS EXCLUSIVE LICENSE GRANTS HEREUNDER. ARTICLE XI. REPORTS The Parties agree to provide the following deliverables to Participant: 1. Reports required by the PACE(TM) Phase Description and Deliverable Milestone Document; and 2. Reports required by Article XIV hereof; and 3. A final report, to include a list of Subject Inventions, subject to the restrictions of Article VIII and Article IX; and 4. Other topical/periodic reports subject to Article VIII and Article IX where the nature of research and magnitude or dollar justify the same. 11 12 ARTICLE XII. PRE-PUBLICATION REVIEW A. The Parties anticipate that some of Contractor's Developers assigned to the Project may wish to publish technical developments and/or research findings generated in the course of this Agreement. On the other hand, the Parties recognize that a principal objective of this Agreement is to provide business advantages to Participant. In order to reconcile publication and business concerns, the Parties agree to a review procedure as follows: 1. Contractor or Contractor's Developers ("Submitter") shall submit to the Participant, in advance, proposed written and oral publications pertaining to work under the Agreement. Proposed oral publications shall be submitted to Participant in the form of a written presentation synopsis and a written abstract. 2. Participant shall provide a written response to the Submitter within thirty (30) days, either objecting or not objecting to the proposed publication. Submitter shall consider all objections of Participant and shall not unreasonably refuse to incorporate the suggestions and meet the objections of Participant. The proposed publication shall be deemed not objectionable, unless the proposed publication contains Confidential Information, Background Intellectual Property of Participant or material that would create potential statutory bars to filing the United States or corresponding foreign patent applications, in which case express written permission shall be required for publication. B. The Parties agree that neither will use the name of the other Party or its employees in any promotional activity, such as advertisements, with reference to any product or service resulting from this Agreement, without prior written approval of the other Party in each instance, which approval shall not be unreasonably withheld. ARTICLE XIII. GENERATED INFORMATION & COPYRIGHTS Each Party shall have exclusive ownership in and to Generated Information that it creates under this Agreement, including the resulting copyright to such original work, unless and to the extent expressly agreed otherwise on a case by case basis in writing. Accordingly, each Party's right to use its Generated Information, as defined, shall be subject to the following provisions A. Each Party agrees to place applicable copyright and other notices, as appropriate for the protection of copyright and mask work rights, in human readable form onto all physical media, and in digitally encoded form in the header of machine readable information recorded on such media such that the notice will appear in human readable form when the digital data is off loaded or the data is accessed for display or printout. B. Notwithstanding each Party's exclusive ownership of all Generated Information it creates, Participant shall have the exclusive right to use all Generated Information to commercialize the Developed Prototype Product(s) as an optical networking product within, and for use in, the telecommunications access market segments agreed to by the Parties in writing within 60 days of the Effective Date of this Agreement ("Field A") and Contractor shall have the non-exclusive 12 13 right to use such Generated Information outside Field A (Field B), provided however, that Contractor shall make Generated Information owned by Contractor available to Participant only to the extent it applies to Field A and only for Participant's use in Field A, but Contractor shall be entitled to make market related Generated Information available to service providers in both Fields. ARTICLE XIV. REPORTING SUBJECT INVENTIONS A. The Parties agree to disclose to each other through their respective Project Managers and maintain in confidence, each and every Subject Invention, whether or not patentable, protectable under the Patent Act, or otherwise reduced to practice. For the avoidance of doubt, the Parties shall be obligated to promptly disclose, in writing and on a confidential basis, inventive ideas conceived in connection with this Project. B. These disclosures, to the extent known, shall be enabling to the extent required under 35 USC 112. The disclosure shall also identify any known actual or potential statutory bars (i.e. any disclosure of the invention without restrictions as to disclosure or use imposed upon the recipient, any offer to sell, and any public use of the invention). The Parties further agree to promptly disclose to each other, each and any subsequently known event(s) which is already or may later become, a statutory bar to obtaining patent protection on any given Subject Invention(s) anywhere in the world. All invention disclosures shall be marked as confidential, ARTICLE XV. TITLE TO INVENTIONS & THE DEVELOPED PROTOTYPE PRODUCTS A. Subject Inventions shall be owned jointly by the Parties if they constitute joint inventions of such Parties. To the extent that either Party is the sole inventor of any Subject Invention(s), that Party alone shall, as between the Parties, be the sole owner thereof. However, and notwithstanding ownership of any given Subject Invention, to the extent that any Subject Invention is based on or otherwise arose out of access to any Party's Confidential Information, each Party's right to use the Subject Invention, including the right to pursue patent protection thereon, shall be subject to its non-disclosure obligations with respect to the other Party's Confidential Information. Subject to the foregoing, and with respect to all Subject Inventions owned solely by Contractor or jointly with Participant, Contractor, agrees to grant Participant the exclusive, transferable, unrestricted and fully paid-up (subject, however, to the remaining portions of this Paragraph A as they apply to additional license terms and conditions that may be required in order for Participant to exercise any such license and which may contain restrictions and monetary obligations) right and license to use the Subject Inventions solely for the commercial exploitation of the Developed Prototype Product(s) as an optical networking product within, and for use in, Field A; and in partial consideration for such grant, Participant hereby grants to Contractor the non-exclusive, transferable, unrestricted and fully paid-up right and license to use Subject Inventions owned solely by Participant or jointly with Contractor, in all areas and for all purposes outside of Field A (Field B). For purposes of Contractor's license with respect to Participant's sole Subject Inventions, such license shall apply only to those Subject Inventions which relate to, or which otherwise arose out of Participant's access to, Contractor's 13 14 Confidential Information, Contractor's Background Intellectual Property, and/or any Boston University Intellectual Property. It is agreed, however, that Participant's exercise of its license grant, as well as its right to use Subject Inventions which were conceived and reduced to practice solely by Participant, shall be subject to the Parties reaching agreement as to the terms and conditions to govern any license grant to Participant under any applicable Background Intellectual Property Rights owned or licensed by Contractor, and/or any Intellectual Property Rights owned or licensed by Beacon Photonics, Inc., Beacon Photonics, L.P. or the University, to the extent that such Intellectual Property is embodied in, or a license would otherwise be required at law in order to use any Subject Inventions pursuant to such license grant without infringing any Intellectual Property rights of Contractor, Beacon Photonics Inc., Beacon Photonics, L.P. or the University. B. Notwithstanding anything to the contrary set forth in this Article XV or elsewhere in this Agreement, all Developed Prototype Product(s) developed hereunder, are the sole property of Participant and as between the Parties to this Agreement, Participant has the sole and exclusive right to make, use, manufacture and otherwise commercialize such Developed Prototype Product(s) in any market throughout the world, including, without limitation, Field A and Field B, subject to obtaining whatever licenses are required under this Agreement and at law with respect to any Subject Inventions, Generated Information and which were not expressly granted by Contractor under this Agreement with respect to Field B, as well as any licenses required with respect to any Background Intellectual Property of Contractor, the Beacon Photonics, Inc., Beacon Photonics, L.P., Boston University Intellectual Property and any third party Intellectual Property Contractor covenants and agrees that whatever ownership rights it may have at law with respect to the Developed Prototype Products are expressly waived and Contractor agrees not to make, use, manufacture or otherwise commercialize the Developed Prototype Product(s) in any market in the world, including, without limitation, Field B. Participant acknowledges and agrees, however, that no provision of this Agreement shall be deemed to restrict Contractor from developing, alone or with the cooperation of any third parties, any manner of telecommunications products, whether or not they compete with the Developed Prototype Products, so long as Contractor does not use Participant's Confidential Information or any Generated Information or Subject Inventions owned solely by Participant that Contractor was not licensed hereunder to use. ARTICLE XVI. FILING PATENT APPLICATIONS A. The Parties agree that each Party shall be entitled to pursue, at its own respective cost and expense, patent protection on any Subject Inventions of which it is the sole inventor except to the extent that doing so would disclose any Confidential Information of the other Party. In such event, that other Party's prior permission shall be required, absent which the inventing Party shall be obligated to modify the patent application to remove any such Confidential Information content. With respect to Subject Inventions which constitute joint inventions, the inventing Parties shall determine, on a case by case basis, whether or not and to what extent patent protection will be pursued, if at all, it being understood that any co-inventor Party wishing not to pursue such protection in the interests of preserving the confidentiality of its Confidential Information shall be entitled to make the final decision. Subject to the preceding provision, the 14 15 costs and expenses of pursuing and maintaining patent protection in the U.S. by co-inventor Parties shall be shared equally in every respect; to the extent that the co-inventor Parties are not in agreement regarding the extent to which foreign patent protection should be pursued, the co-inventor Party desirous of pursuing such protection may do so on its own, and at its own cost and expense. In such event, the other co-inventor Party who desired not to pursue such protection shall have no rights with respect to any resulting foreign patent(s) unless and until it reimburses the other co-inventor for its share of the out-of-pocket expenses incurred in pursuing such protection. With respect to Subject Inventions where the sole inventor Party does not itself wish to pursue patent protection but is willing to do so in the interests of any other Party, all costs and expense incurred in connection with the pursuit and maintenance of such protection shall be borne solely by the non-inventor Party desiring such protection. In any event, any Party's decision to practice a Subject Invention shall be at its own risk, cost and expense. B. Consistent with the provisions of this Agreement as they relate to Participant's exclusive rights with respect to Field A and Contractor's non-exclusive rights with respective to Field B, Contractor (regardless of ownership), shall not be entitled to authorize any third party to in any manner use or practice, directly or indirectly, any Generated Information or Subject Invention respectively, within Field A for a period of _1__ year from expiration or termination of this Agreement at which time, all exclusive rights shall terminate. ARTICLE XVIII. ASSIGNMENT OF PERSONNEL A. Personnel assigned by either Party to participate in the research to be performed under this Agreement shall at all times remain the employees of the assigning Party for any and all purposes, regardless of whatever assistance such personnel may provide to the other Party. B. Except to the extent expressly set forth in Article III above, each Party shall bear any and all costs and expenses with regard to its own personnel who participate in this Project. In this regard, both Parties acknowledge and agree, however, that the intent of this Project is for Participant to hire, and Participant agrees to promptly hire, however many qualified individuals are necessary in order for all Milestones to be met in accordance with the requirements of this Agreement, it being understood and agreed that Contractor's obligation hereunder is only to provide guidance to Participant's employees in order to facilitate their successful achievement and completion of all Milestones. C. Participant may request the removal of any Contractor Developer(s) who is not qualified to perform the work envisioned by this Agreement. Upon such request, Contractor shall use reasonable efforts to promptly replace such Contractor Developer(s) with substitute Contractor Developer(s) having appropriate skills and training. Participant acknowledges that Contractor cannot guarantee the availability of any specific personnel for any specific period of time, but Contractor agrees to use reasonable efforts to maintain continuity with respect to personnel assigned to this project to the extent within Contractor's reasonable control. 15 16 ARTICLE XIX. FORCE MAJEURE No failure or omission by Contractor or Participant in the performance of any obligation under this Agreement shall be deemed a breach of this Agreement or create any liability if the same shall arise from any cause or causes beyond the control of Contractor or Participant, including but not limited to the following, which, for the purpose of this Agreement, shall be regarded as beyond the control of the Party in question: Acts of God, fire, storm, flood, earthquake, accident, acts of the public enemy, war, rebellion, insurrection, riot, sabotage, invasion, quarantine, restriction, transportation embargoes, or failures or delays in transportation. ARTICLE XX. ASSIGNMENT OF THE AGREEMENT This Agreement may not be delegated, transferred or assigned directly, indirectly or by operation of law by either Party or any subsequent permitted assignee or transferee thereof without the prior written consent of the other Party, which may be given or withheld in that other Party's discretion. Notwithstanding the foregoing, this Agreement may be assigned by the Contractor to the University without Participant's consent, so long as all other Project Agreements to which Contractor is a party are also simultaneously assigned by Contractor to the University at the time of its assignment of this Agreement. Contractor agrees to provide Participant with advance written notice of any such transfer or assignment by Contractor to the University. Contractor shall have no further responsibilities except for the confidentiality, use and/or non-disclosure obligations of this Agreement. This Agreement shall not be assignable by Participant without Contractor's express prior written consent, which shall not be unreasonably withheld. This Agreement shall be binding upon and inure to the benefit of the Parties, and their respective permitted successors and assigns. ARTICLE XXI. RECORDS AND ACCOUNTING The Contractor shall keep its usual and customary records and documentation for purposes of substantiating any expenses submitted in any invoice for reimbursement or payment by Participant under Article III, which records shall be made available on an individual record basis within 15 business days after Contractor's receipt of Participant's written request or dispute of any charge. In addition, these records shall be made available for audit at Contractor's offices only, and on a confidential basis by an independent auditor selected by Participant and acceptable to Contractor, not more than once every 12 months during the term of this Agreement and for a period of one year after the earlier to occur of (a) completion of the work contemplated hereby; or (b) expiration or termination of this Agreement. The costs and expenses of conducting any such audit shall be borne solely by Participant, and shall be conducted during Contractor's normal business hours and work day (excluding Contractor's observed holidays) in a manner which is not unreasonably disruptive to Contractor's business or employees. 16 17 ARTICLE XXII. NOTICES A. Any communications required by this Agreement, if given by personal delivery or by postage prepaid first class U.S. Mail addressed to the Party to receive the communication, shall be deemed made as of the day of receipt of such communication by the addressee, or on the date given if by verified facsimile. Address changes shall be given in accordance with this Article and shall be effective thereafter. All such communications, to be considered effective, shall include specific reference to this Agreement. B. The addresses, telephone numbers and facsimile numbers for the Parties are as follows: If to Participant: Verilink Corporation 950 Explorer Blvd. Huntsville, AL 35806, Attention: Ronald G. Sibold, Vice President and Chief Financial Officer Fax: (256) 774-2425 with a courtesy copy to: Powell, Goldstein, Frazer & Murphy LLP 191 Peachtree Street, N.E, 16th Floor, Atlanta, Georgia 30303 Attention: Eliot Robinson Fax: 404-572-6999 If to Contractor: Beacon Telco, L.P. C/o Beacon Photonics, Inc., its General Partner 8 St. Mary Street, Suite 910 Boston, MA 02115 Attention: Alok Prasad, President Fax: (617) 358-1536 with a courtesy copy to: Bingham Dana LLP 150 Federal Street Boston, MA 02110, Attention: Jack Concannon Fax: 617-951-8736 17 18 Boston University Office of the General Counsel 125 Bay State Road Boston, Massachusetts 02215 Attn: General Counsel Fax: (617) 353-5529 ARTICLE XXIII. DISPUTES The Parties shall attempt to jointly resolve all disputes from this Agreement. If the Parties are unable to jointly resolve dispute within a reasonable period of time, they agree to follow the following dispute resolution process: A. Negotiations. Any dispute or question related to this Agreement shall first be submitted for resolution through good-faith negotiations between the chief executive officers of Participant and Contractor. If after a reasonable period of negotiations, either Party concludes that the Parties cannot resolve the dispute or question through negotiations, the Party may request pursuit of the following resolution procedures. B. Mediation. Any dispute or question relating to this Agreement that has been the subject of good-faith negotiation, as provided above, but remains unresolved shall next be subject to mediation (unless mediation is waived by agreement of both Participant and Contractor). The mediation shall be conducted by one mediator who shall be selected jointly by the Parties within ten (10) days after either Party requests mediation by written notice to the other. If the Parties cannot agree on a mediator, each Party shall select a mediator within five (5) days after the Parties' failure to agree upon a mediator. The two mediators so selected shall select a third mediator, who shall conduct the mediation. The mediation shall be non-binding and shall commence within ten (10) days after the selection of the mediator. The mediation shall occur in at a geographical location that is acceptable and convenient for both Parties. Each of the Parties shall attend the mediation through one or more persons that has authority to settle the dispute or question on behalf of the Party. All expenses of the mediator shall be shared equally by the Parties. All other expenses of a Party in connection with the mediation shall be borne by that Party. The mediation shall continue until the earliest of the following: (i) The dispute(s) is (are) settled or the question(s) is (are) determined, as the case may be; (ii) The mediator declares by written notice to both Parties that the Parties are at an impasse and not all disputes can be resolved or not all questions can be determined as the case may be; and (iii) The date which is the sixty-first (61st) day after the date of the appointment of the mediator, unless both Parties agree to extend that date. 18 19 C. Arbitration. Upon termination of mediation (or upon the failure of negotiations, if mediation has been waived in writing by all Parties), any unresolved disputes or questions may be submitted to arbitration in accordance with the following: 1. The arbitration shall be conducted in accordance with the Rules for the Resolution of Commercial Disputes of the American Arbitration Association. The arbitration shall be concluded in the Commonwealth of Massachusetts. 2. Either Party may invoke arbitration by serving written notice on the other Party within thirty (30) days of the termination of the mediation (or within thirty (30) days from when mediation is waived). The notice shall include a list of arbitrator candidates. If the Parties do not agree to one of those arbitrators, within ten (10) days after the notice is given, each Party shall thereafter select one disinterested representative. The two disinterested representatives shall then seek in good faith to select a single arbitrator. If after reasonable good faith efforts the two disinterested representatives cannot do so, each representative shall select an arbitrator, and those two arbitrators shall select a third arbitrator (the "neutral arbitrator"), who shall alone conduct the arbitration. 3. The neutral arbitrator alone shall establish all procedures for the arbitration, to the extent not specified by applicable law or the Rules for the Resolution of Commercial Disputes of the American Arbitration Association. Each Party shall be responsible for payment of all fees and expenses (including travel, lodging and other expenses of attending any arbitration hearing) of the arbitrator selected by it and of its own attorneys or other advisors or appointed representatives. The expenses and fees of the neutral arbitrator, and of the arbitration itself (as opposed to the fees or expenses of an arbitrator selected by a Party) shall be shared equally by the Parties. 4. To the extent permitted by law, the Parties agree that grounds for vacating, modifying or correcting an award of the arbitrator shall include a manifestly incorrect determination of material fact by the arbitrator if such determination would have resulted in a materially different outcome in the arbitration. Except as provided in this and the preceding subparagraph, the award of the arbitrator shall be final. 5. The arbitrator must base his or her decision and/or award solely on the applicable law governing this Agreement and any applicable Federal Law. The arbitrator may not award any punitive, consequential or tort damages, or attorneys' fees or costs or expenses. However, any award in arbitration may grant specific performance or other equitable remedy if the arbitrators so determine. In the event of a dispute, both Parties shall continue work on the Project unless mutually agreed otherwise or unless the dispute concerns material issues which have an impact upon the Project in which event, Contractor shall be entitled to suspend its performance until the issue or dispute is resolved. Neither a request or demand for negotiations, mediation or arbitration, nor pendency of any such proceedings, shall forestall any pending notice of 19 20 termination or toll any period for cure of a breach, nor shall the same preclude a Party from terminating this Agreement pursuant to its terms. Neither mediation nor arbitration may be invoked, and neither proceeding may consider, any dispute as to any decision by a Party to withhold its consent or approval as to any matters as to which a specific provision of this Agreement requires such consent or approval, unless consent or approval is not to be unreasonably withheld by the terms of this Agreement. In connection with a third-party claim, it may be that indemnification or other recourse can be claimed under this Agreement, or that the other Party to this Agreement must or may be made a Party to the third-party claim, or that other action is appropriate. In such case the indemnification, other recourse, or other action may be pursued in connection with the proceeding in which the third-party claim is pending without need for any of the above procedures. ARTICLE XXIV. ENTIRE AGREEMENT AND MODIFICATIONS A. It is expressly understood and agreed that this Agreement with its Appendices, which are attached hereto and incorporated herein by reference, contains the entire agreement between the Parties with respect to the subject matter hereof and that all prior representations or agreements relating hereto, other than documents expressly referred to herein, are thus superseded in totality by this Agreement. B. Any agreement to change any terms or conditions of this Agreement or the Appendices shall be valid only if the change is made in writing and executed by the Parties hereto. ARTICLE XXV. TERMINATION A. Unless terminated sooner per the remaining provisions of this Article, the Term of this Agreement shall be for a term of eighteen (18) months from the Effective Date and may be extended by the Parties on the basis set forth in Paragraph D. below. B. Either Party may terminate this Agreement for cause only in the event of any breach of a material provision of this Agreement by the other Party which, for purposes of this provision, shall be deemed to include any breach by Participant of any provision of the Warrant and Stockholder's Agreement or the Premises License and Services Agreement. Termination by the Party not in breach may not occur, however, unless and until that Party provides the Party in breach with a written notice (a "Default Notice") detailing the nature and extent of the breach and 30 days during which to cure the breach. In the event that the breach is not cured within the required period, the Party not in breach shall be entitled to terminate this Agreement by giving the Party in breach written notice of termination (a "Termination Notice") without liability or penalty; provided that, as a condition precedent of Contractor's right to terminate for cause under this section, Contractor shall be required to execute and deliver to Participant, along with Contractor's Termination Notice hereunder, Contractor's irrevocable written waiver of any unvested portion of the Warrant. Termination by either Party with cause shall have no bearing upon Contractor's right to receive the entire amount of the first Bonus Payment and a pro-rata 20 21 portion of the remaining Bonus Amount referenced in Article IV of this Agreement to the extent that any Milestones were completed prior to Contractor's Termination Notice. C. The Participant may terminate this Agreement without cause at any time on thirty (30) days written notice to the Contractor. In the event that Participant terminates in accordance with this provision of this Agreement, Participant shall promptly render to Contractor, the full amount of the first Bonus Payment and a pro rata portion of the Bonus Amount referenced in Article IV based upon the extent to which the Milestones referenced in Appendix A-1 have been completed. After two years from the date of signing the Contractor may terminate this Agreement without cause on 30 days written notice. D. This Agreement is intended to co-exist with the Premises License and Service Agreement, with the term of the Premises License and Services Agreement to ultimately govern the term of this Agreement. Hence, and notwithstanding the provisions of Paragraph A above, should the Premises License and Service Agreement terminate, for whatever reason, prior to expiration of the intended 18 month term of this Agreement, this Agreement will terminate simultaneously. E. Each Party shall assign and identify in writing a Project Manager prior to the start of the Agreement. Either Party may change its Project Manager by providing written notification to the other Party. Each Project Manager shall be responsible for coordinating all matters relating to this Agreement, the Statement of Project Objective, and all other related matters between the Parties. All communications between the Parties relating to this Agreement shall take place between the Project Managers. F. Project Managers for this Agreement are as follows: For Contractor: -------------------------------------- For Participant: -------------------------------------- ARTICLE XXVI. GOVERNING LAW To the extent that there is no applicable U.S. Federal law, this Agreement and performance thereunder shall be governed by the law of the Commonwealth of Massachusetts, without reference to that state's conflict of laws provisions. 21 22 IN WITNESS WHEREOF, the Parties hereto execute this Agreement as of the respective dates set forth below. FOR CONTRACTOR: By: /s/ Alok Prasad ------------------------------------------ Name: Alok Prasad ------------------------------------------ Title: President ------------------------------------------ Date: October 13, 2000 ------------------------------------------ FOR PARTICIPANT: By: /s/ Graham G. Pattison ------------------------------------------ Name: Graham G. Pattison ------------------------------------------ Title: President and Chief Executive Officer ------------------------------------------ Date: October 13, 2000 ------------------------------------------ LIST OF ATTACHMENTS APPENDIX A STATEMENT OF PROJECT OBJECTIVE APPENDIX A-1 MILESTONES APPENDIX B FORM OF BONUS NOTE 22 23 APPENDIX A STATEMENT OF PROJECT OBJECTIVE 23 24 APPENDIX A-1 MILESTONES 24 25 APPENDIX B FORM OF BONUS NOTE PROMISSORY NOTE _______________, 200__ FOR VALUE RECEIVED, the undersigned VERILINK CORPORATION with an address at 950 Explorer Boulevard, Huntsville, AL 35806 (hereinafter referred to as "Maker"), promises to pay to the order of _______________________________________________, with an address at ____________________________________________________________________ (hereinafter referred to as "Payee", Payee and any and all other holders of this Note being hereinafter referred to as "Holder") the principal sum of ___________________________________________________ AND NO/100 DOLLARS ($________________________), together with interest as provided in this Note, at the above-referenced address of Payee or such other place as any Holder hereof may designate in writing, as follows: From and after the date hereof, until maturity or default as hereinafter provided, interest shall accrue at an annual rate equal to ______ percent (__ %) per annum. The entire unpaid principal balance of this Note, together with all accrued and unpaid interest thereon shall be due and payable in full, on the fifth anniversary of the date hereof, _________, 200__. Notwithstanding any provisions in this Note the total liability for payments legally regarded as interest shall not exceed the maximum limits imposed by the Laws of the Commonwealth of Massachusetts in effect on the date hereof, and any payment of same in excess of the amount allowed thereby shall, as of the date of such payment, automatically be deemed to have been applied to the payment of the principal indebtedness evidenced hereby, or, if same has been fully repaid, shall be deemed to be held by Holder as security for all remaining indebtedness of Maker to Holder and shall be repaid to Maker upon demand after all of such indebtedness has been fully repaid. Any notation or record of Holder with respect to such required application that is inconsistent with the provisions of this paragraph shall be disregarded for all purposes and shall not be binding upon either Maker or Holder. All sums payable under this Note shall be paid in either legal tender, for public and private purposes, of the United States of America at the time of such payment, or, at the sole option of Maker, in shares of common stock of Maker valued as set forth below. In addition, at the sole option of Holder, all or a portion of this Note may be used to pay all or any portion of the "Strike Price" payable by Holder to Maker under that certain Warrant and Stockholder's Agreement dated ___________, 2000 between Maker and Holder (the "Warrant") by surrender of this Note, together with the Warrant and delivery of the Notice of Exercise (in the form attached to the Warrant), duly executed, at the principal office of the Company during the exercise period specified in the Warrant. Upon Holder's election to use part of this Note to pay any portion of the "Strike Price" due under the Warrant, unless this Note has been fully used for such purpose or has been paid in full, a new Note representing the remaining balance of the Note based on the 25 26 portion of the Note not used to pay the "Strike Price" due under the Warrant shall also be issued to the Holder within thirty (30) days of delivery of the Note in payment of any portion of the "Strike Price" due under the Warrant. This Note may, at Maker's sole option, be paid in shares of common stock of Maker, with the number of shares of Maker's common stock to be issued therefore to be computed based upon the Current Market Price at the time of payment equal to the principal and interest then due under the Note. For purposes of this Note, the term "Current Market Price" shall mean (x) if such Maker common stock is listed or admitted for trading on any national securities exchange, the last sale price of such common stock, regular way, or the average of the closing bid and asked prices thereof if no such sale occurred, in each case as officially reported in the principal securities exchange on which such securities is listed, or (y) if not reported as described in clause (x) the average of the closing bid and asked prices of such common stock in the over-the-counter market as shown by the Nasdaq National Market, or any similar system of automated dissemination of quotations of securities prices then in common use, if so quoted, as reported by any member firm of the New York Stock Exchange selected by Maker, or (z) if not quoted as described in (y), the average of the closing bid and asked prices for such security as reported by the National Quotation Bureau Incorporated or any similar successor organization, as reported by any member firm of the New York Stock Exchange selected by Maker. If such common stock is quoted on a national securities or central market system in lieu of a market or quotation system described above, the closing price shall be determined in the manner set forth in clause (x) of the preceding sentence if actual transactions are reported and in the manner set forth in clause (y) of the preceding sentence if bid and asked prices are reported but actual transactions are not. If none of clauses (x), (y) or (z) applies, the Current Market Price shall be the fair market value most recently determined by the Maker's Board of Directors in good faith. Upon any default or event of default hereunder, which default or event of default is not cured within ten (10) days after written notice thereof from Holder to Maker, then, at the option of Holder, and upon written notice to Maker, the entire principal amount outstanding hereunder, together with all accrued interest, shall at once become due and payable. Failure to exercise such option shall not constitute a waiver of the right to exercise such option if Maker is in default hereunder. Time is of the essence of this Note. Maker shall have the right to prepay this Note in whole or in part, in cash or in Participant's Common Stock, at any time, without penalty and without the payment of any unearned interest. All partial prepayments shall be applied against principal. Neither this Note nor any of Holder's rights or benefits hereunder may be transferred, assigned or delegated, directly, indirectly or by operation of law, to any third party without the prior written consent of Maker, except that this Note may be transferred or assigned to any permitted assignee or transferee of the Warrant, in whole or in part pro rata as to any portion of the Warrant so assigned. From time to time, without affecting the obligation of Maker or the heirs, legal representatives, successors or assigns of Maker to pay the outstanding principal balance of this Note and observe the covenants of Maker contained herein, without affecting the guaranty of any person, corporation, partnership or other entity for payment of the outstanding principal balance of this Note, without giving notice to or obtaining the consent of Maker, the heirs, legal 26 27 representatives, successors or assigns of Maker or guarantors, and without liability on the part of Holder, Holder may, at the option of Holder, extend the time for payment of said outstanding principal balance, interest or any part thereof, reduce the payments thereon, release anyone liable on any of said outstanding principal balance, accept a renewal of this Note, modify the terms and time of payment of said outstanding principal balance or join in any extension or subordination agreement, and agree in writing with Maker to modify the rate of interest or period of amortization of this Note or change the amount of the installments, if any, payable hereunder. No one or more of such actions shall constitute a novation. Presentment for payment, protest and notice of demand, notice of dishonor and demand, are hereby waived by Maker and all sureties, guarantors and endorsers hereof. Maker further waives any and all homestead and exemption rights under the laws and constitutions of the United States of America, the State of ____________ and any other State. This Note shall be the joint and several obligation of Maker and all sureties, guarantors and endorsers, and shall be binding upon them and their heirs, legal representatives, successors and assigns. Upon default, if this Note is collected by or through an attorney at law, Maker agrees to pay Holder all costs of collection including reasonable attorneys fees and all court costs. This Note shall be governed and construed in accordance with the laws of the State of _____________. IN WITNESS WHEREOF, Maker has executed this Note under seal, as of the date first above written. VERILINK CORPORATION By: (Seal) ---------------------------------- Name: -------------------------------- Title: ------------------------------- 27 EX-10.54 5 g65370ex10-54.txt WARRANT AND STOCKHOLDER'S AGREEMENT 1 Exhibit 10.54 WARRANT AND STOCKHOLDER'S AGREEMENT THIS WARRANT AND STOCKHOLDER'S AGREEMENT (the "Agreement"), dated this 13th day of October, 2000, is made and entered into by and between Verilink Corporation, a Delaware corporation ("Verilink") and Beacon Telco, L.P., a Delaware limited partnership ("Beacon"). WHEREAS, Verilink and Beacon have entered into a Cooperative Research Agreement dated the date hereof (the "Research Agreement") for the implementation of a research and development project for optical networking products for the telecommunications access market; and WHEREAS, Verilink and the Trustees of Boston University, a Massachusetts non-profit corporation (the "University"), have entered into a Premises License and Services Agreement dated the date hereof (the "Premises Agreement"), providing for Verilink to participate in the Photonics Center Incubator and Accelerator Program of the University and, as a part thereof, to obtain a license from the University to use certain University premises and to obtain certain engineering support services of the University's Photonics Center in furtherance of such project; and WHEREAS, in consideration of the execution and delivery of the Research Agreement and the Premises Agreement, Verilink has proposed to grant Beacon a warrant to purchase up to Two Million Two Hundred Forty-Nine Thousand Nine Hundred (2,249,900) shares (subject to adjustment, as provided herein) of common stock of Verilink on the terms and conditions set forth herein; and WHEREAS, the parties desire to provide for the terms of such warrant and certain other rights and obligations related to the warrant and the common stock issuable upon the exercise thereof; NOW, THEREFORE, in consideration thereof and for other good and valuable consideration, the receipt and sufficiency of which hereby are acknowledged, the parties hereto, subject to the terms and conditions set forth below, hereby agree as follows: ARTICLE I - DEFINITIONS 1.1 Definitions. Capitalized terms used herein and not defined herein will have the meaning set forth in the Research Agreement. In addition to the terms defined elsewhere herein, the following terms have the following meanings when used herein with initial capital letters: (a) "Affiliate" of any Person means any other Person, that, directly or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, such Person; and, for the purposes of this definition only, "control" (including the terms "controlling", "controlled by" and "under common control with") means the possession, direct or 2 cause the direction of the management, policies or activities of a Person whether through the ownership of securities, by contract or agency or otherwise. (b) "Assumption Agreement" means an agreement in writing in substantially the form of Exhibit B hereto pursuant to which the party thereto agrees to be bound by the terms and provisions of this Agreement. (c) "Average Trading Price" at any date means the average of the Market Prices for the Common Stock for the five (5) consecutive trading days immediately prior to such date. (d) "Beacon" means and includes Beacon as well as any Permitted Transferees, as applicable. (e) A Person will be deemed the "Beneficial owner" of, and will be deemed to "Beneficially own", and will be deemed to have "Beneficial ownership" of: (i) any securities that such Person or any of such Person's Affiliates is deemed to "beneficially own" within the meaning of Rule 13d-3 under the Exchange Act, as in effect on the date of this Agreement; and (ii) any securities (the "underlying securities") that such Person or any of such Person's Affiliates has the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding (written or oral), or upon the exercise of conversion rights, exchange rights, rights, warrants or options, or otherwise (it being understood that such Person will also be deemed to be the Beneficial owner of the securities convertible into or exchangeable for the underlying securities). (f) "Board" means the Board of Directors of Verilink. (g) "Board Approval" means the approval of a majority of the members of the Board who neither (i) are a Beacon Designee nor (ii) are an Affiliate of Beacon. (h) "Change in Control" means the occurrence of any of the following events: (i) the merger or consolidation of Verilink with or into another entity, unless the holders of Verilink's Voting Securities immediately prior to such transaction continue to hold at least a majority of outstanding voting power of the surviving entity following such transaction, (ii) any Person or Group (other than Beacon, its Permitted Transferees, their Affiliates, or any Subsidiary of Verilink or any employee benefit plan sponsored by Verilink) becomes the Beneficial Owner of 50% or more of the outstanding Voting Securities, or (iii) the sale of all or substantially all of the assets of Verilink. (i) "Common Stock" means the common stock, $.01 par value per share, of Verilink as constituted on the date hereof, together with any other equity securities that may be issued by Verilink in substitution therefor. 2 3 (j) "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. (k) "Exercise Price" means $4.75 per share. (l) "Expiration Date" means the third (3rd) anniversary of the date hereof. (m) "Group" shall have the meaning as set forth in Rule 13d-5 under the Exchange Act. (n) "Market Price" at any date means the closing price of the Common Stock on the Nasdaq Stock Market or the principal national securities exchange on which the Common Stock is admitted to trading or listed, or if not then listed on a national securities exchange or the Nasdaq Stock Market, the closing sale price as reported on the Over the Counter Bulletin Board or Electronic "Pink Sheets", as applicable, or if the closing sale price is not then reported, the average of the closing bid and ask prices so reported, or if not then publicly traded or quoted, the fair market price of the Common Stock as determined by the Board. (o) "Permitted Acquisition" means (i) any acquisition by Beacon of Warrant Stock pursuant to or contemplated by this Agreement, (ii) any other acquisition of Voting Securities after Beacon has received prior Board Approval of such acquisition, and (iii) any Common Stock received by Beacon upon payment of a Bonus Amount or Bonus Note (as such terms are used in the Research Agreement). (p) "Permitted Transferees" means any Person to whom the Warrant or Common Stock is Transferred in a Transfer in accordance with Section 2.1 or Section 3.2(a)(i) of this Agreement or a Transfer otherwise not in violation of this Agreement, which includes any Person to whom a Permitted Transferee of Beacon (or a Permitted Transferee of a Permitted Transferee) so further Transfers Common Stock, and who is required to, and does, become bound by the terms of this Agreement. (q) "Person" means an individual, a corporation, a partnership, a limited partnership, a limited liability company, an association, a trust or other entity or organization, including without limitation a government or political subdivision or an agency or instrumentality thereof. (r) "Public Offering" means the sale of shares of any class of Voting Securities to the public pursuant to an effective registration statement (other than a registration statement on Form S-4 or S-8 or any similar or successor form) filed under the Securities Act. (s) "Registrable Stock" shall mean those shares of Common Stock issued to Beacon either upon exercise of the Warrant (including shares issuable as a result of the adjustments provided for herein) or in payment of a Bonus Amount or a Bonus Note under Article IV of the Research Agreement. 3 4 (t) "SEC" means the Securities and Exchange Commission. (u) "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. (v) "Standstill Period" means the period commencing on the date of this Agreement and ending on the tenth (10th) anniversary thereof. (w) "Transfer" means a transfer, sale, assignment, pledge, hypothecation or disposition. (x) "Warrant Stock" means up to Two Million Two Hundred Forty-Nine Thousand Nine Hundred (2,249,900) shares of Common Stock deliverable upon such exercise of the Warrant granted pursuant to Article II hereof and as adjusted from time to time. (y) "Verilink" means and includes Verilink as well as (i) any successor corporation resulting from the merger or consolidation of such corporation with another corporation, or (ii) any corporation to which such corporation has transferred its property or assets as an entirety or substantially as an entirety. (z) "Voting Securities" means the Common Stock and any other securities of Verilink entitled to vote generally in the election of directors of Verilink, and all other securities convertible into, exchangeable for or exercisable for any such securities (whether immediately or otherwise). ARTICLE II - GRANT OF WARRANT 2.1 Grant of Warrant. Verilink hereby agrees that Beacon is entitled, subject to the provisions of this Agreement, to purchase from Verilink, commencing on the dates as set forth in Article II herein and expiring at 5:00 P.M. New York City time on the Expiration Date, the Warrant Stock at a price equal to the Exercise Price (the "Warrant"). The number of shares of Warrant Stock to be received upon the exercise of this Warrant may be adjusted from time to time as hereinafter set forth. This Warrant is non-transferable and non-assignable, except that this Warrant may be assigned or transferred (a) to any Affiliates of Beacon, or (b) pursuant to a merger or sale of all or substantially all the assets or stock of Beacon; provided that in either such event, the Transferee executes an Assumption Agreement. 2.2 Exercise Events. Subject to the provisions set forth in this Agreement, this Warrant may be exercised to purchase the number of shares of Warrant Stock upon the occurrence of such events (each, an "Exercise Event" and collectively, the "Exercise Events") set forth in subsections (a) through (e) below: (a) MILESTONE 1 -- SIGNING. Seven Hundred Forty-Nine Thousand Nine Hundred (749,900) shares of Warrant Stock at any time following the execution of this Agreement; 4 5 (b) MILESTONE 2 -- PHASE O. An additional Two Hundred Fifty Thousand (250,000) shares of Warrant Stock following the earliest of: (i) twelve (12) months after the completion of Milestone 2 -- Phase 0 as set forth in the PACE(TM) Phase Description and Deliverable Milestone Document relating to developing the specifications of the Developed Product(s) and the milestones for the work attached as Appendix A-1 to Research Agreement, as such may be supplemented or amended from time to time by mutual agreement of the parties (the "PACE Document"); (ii) a change in control of Verilink, or (iii) sixty (60) months after the date hereof; (c) MILESTONE 3 -- PHASE 1. An additional Five Hundred Thousand (500,000) shares of Warrant Stock upon the earliest of (i) twelve (12) months after the completion of Milestone 3 - Phase 1 as set forth in the PACE Document; (ii) a Change in Control of Verilink, or (iii) sixty (60) months after the date hereof; (d) MILESTONE 4 -- PHASE 2 ALPHA. An additional Two Hundred Fifty Thousand (250,000) shares of Warrant Stock, upon the earlier of (i) twelve (12) months after the completion of Milestone 4 - Phase 2 Alpha as set forth in the PACE Document, with such twelve (12) month period reduced by two (2) weeks for each full week that such phase is duly completed prior to the date such phase is scheduled to be completed as mutually determined by the parties as contemplated by the PACE Document, (ii) a Change in Control occurring after the completion of Phase 2 Alpha as set forth in the PACE Document or (iii) sixty (60) months after the date hereof; (e) MILESTONE 5 -- PHASE 2 BETA. An additional Five Hundred Thousand (500,000) shares of Warrant Stock upon the earlier of (i) twelve (12) months after the completion of Milestone 4 - Phase 2 Beta as set forth in the PACE Document, with such twelve (12) month period reduced by (x) two (2) weeks for each full week that the Milestone 4 is duly completed prior to the date such phase is scheduled to be completed as mutually determined by the parties as contemplated by the PACE Document and (y) by one week for each full week that Milestone 5 is duly completed prior to the date such phase is scheduled to be completed as set as mutually determined by the parties as contemplated by the PACE Document, (iii) a Change in Control occurring after the completion of Phase 2 Beta as set forth in the PACE Document or (iii) sixty (60) months after the date hereof; and (f) ACCELERATION. Notwithstanding sub-sections (a) through (e) above, the Warrant will become exercisable for one-half the number of shares of Warrant Stock for which the Warrant would not yet then be exercisable but for this sub-section whenever (i) twelve months (12) after the date hereof, if the Average Trading Price for the Common Stock as of such date is greater than $11.88; or (ii) upon the completion of an underwritten Public Offering of capital stock either (x) providing gross proceeds to Verilink of $20 million or more or (y) at a price per share to the public of at least two hundred percent (200%) of the Exercise Price. 5 6 2.3 Exercise of Warrant. (a) Beacon may exercise this Warrant by presentation and surrender of the Warrant Exercise Form, in the form attached hereto as Exhibit A (the "Warrant Exercise Form"), to Verilink at its principal office, or to its stock transfer agent, if any, duly executed and accompanied by payment of the Exercise Price for the number of shares of Warrant Stock specified in such form. The Exercise Price may be paid either, at Beacon's option, (i) in cash or by certified or official bank check, payable to the order of Verilink, or by wire transfer of immediately available funds to an account designated by Verilink, or (ii) if a Bonus Amount (as defined in the Research Agreement) has been paid by the issuance of a Note pursuant to Article IV of the Research Agreement (the "Bonus Note"), by the delivery and cancellation of the Bonus Note, with the aggregate principal amount of the Bonus Note credited against the exercise price for the number of shares specified in such form. (b) In connection with any requested exercise of this Warrant, and in lieu of the payment of the Exercise Price as described in paragraph (a) of this Section 2.3, at the request of Beacon, Verilink shall convert this Warrant, in whole or in part and at any time or times, into Warrant Stock (the "Conversion Right"), as follows: Upon exercise of the Conversion Right, Verilink shall deliver to Beacon (without payment by Beacon of any Exercise Price) that number of shares of Warrant Stock equal to the quotient obtained by dividing (i) the difference of (A) the aggregate Market Price for all Warrant Stock issuable upon exercise of the Warrants being converted, less (B) the aggregate Exercise Price for all such Warrant Stock, by (ii) the Market Price of one share of Warrant Stock. (c) Upon receipt by Verilink of the Warrant Exercise Form and the Exercise Price (the "Exercise Time"), at its office, or by the stock transfer agent of Verilink at its office, Beacon shall be deemed to be the holder of record of the shares of Warrant Stock issuable upon such exercise, notwithstanding that the stock transfer books of Verilink shall then be closed or that certificates representing such shares of Warrant Stock shall not then be actually delivered to Beacon. (d) Verilink will deliver to Beacon certificates for Warrant Stock purchased upon exercise of this Warrant within ten (10) business days after the Exercise Time. (e) The issuance of certificates for Warrant Stock upon exercise of this Warrant will be made without charge to Beacon for any issuance tax in respect thereof or other cost incurred by Verilink in connection with such exercise and the related issuance of Warrant Stock. Beacon or its transferee shall pay any transfer tax payable in respect of a transfer of the Warrant Stock to a third party. 2.4 Reservation of Shares. Verilink shall at all times authorize and reserve for issuance and delivery all shares of Warrant Stock issuable upon exercise of this Warrant. All such shares shall be duly authorized and, when issued upon exercise in compliance with the terms of this Agreement, shall be validly issued, fully paid and non-assessable. No fractional shares or scrip 6 7 representing fractional shares shall be issued upon the exercise of this Warrant, but Verilink shall pay Beacon an amount equal to the applicable Exercise Price multiplied by such fraction in lieu of each fraction of a share otherwise called for upon any exercise of this Warrant. If at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of this Warrant, Verilink will use its best efforts to take such corporate action as may, be reasonably necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose. Verilink shall use its best efforts to take all such actions as may be reasonably necessary to assure that all such shares of Common Stock may be so issued without violation of any applicable law or governmental regulation or any requirements of any securities exchange or inter-dealer quotation system upon which shares of Common Stock may be listed or traded (except for official notice of issuance which shall be immediately transmitted by Verilink upon issuance). 2.5 Adjustments. (a) Capital Adjustments. If Verilink at any time or from time to time after the date hereof effects a subdivision of the outstanding Common Stock (by stock split, stock dividend, recapitalization or otherwise) or a combination the outstanding shares of Common Stock into a smaller number of shares (by reverse stock split, recapitalization or otherwise), (i) the Exercise Price in effect immediately before the subdivision or combination shall be automatically adjusted by multiplying the Exercise Price by a fraction (the "Capital Adjustment Factor"), (A) the numerator of which is the total number of shares of Common Stock issued and outstanding immediately prior to the time of such subdivision or combination, and (B) the denominator of which is the total number of shares of Common Stock issued and outstanding immediately after such subdivision or combination, and (ii) the number of shares of Warrant Stock issuable upon exercise of this Warrant shall be automatically adjusted by dividing such number of shares by the Capital Adjustment Factor. (b) Reorganizations, Mergers, Consolidations or Sales of Assets. If at any time or from time to time after the date hereof, there is a capital reorganization of the Common Stock (other than a recapitalization, subdivision, combination, reclassification, exchange or substitution of shares provided for elsewhere in Article II), as a part of such capital reorganization, provision shall be made so that Beacon shall thereafter be entitled to receive upon exercise of this Warrant the number of shares of stock or other securities or property of Verilink to which a holder of the number of shares of Warrant Stock deliverable upon exercise of this Warrant would have been entitled in connection with such capital reorganization, subject to adjustment in respect of such stock or securities by the terms thereof. In any such case, appropriate adjustment shall be made in the application of the provisions of this Article II with respect to the rights of Beacon after the capital reorganization to the end that the provisions of this Article II (including adjustment of the Exercise Price and the number of shares of Warrant Stock issuable upon exercise of this Warrant then in effect) shall be applicable after that event and be as nearly equivalent as practicable. 7 8 (c) Notice to Beacon of Adjustment. Whenever the number of shares of Warrant Stock issuable upon exercise of this Warrant is adjusted as herein provided, Verilink shall cause to be mailed to Beacon in accordance with the provisions of this Section 2.5(c), a notice (i) stating that an event giving rise to an adjustment hereunder has occurred, (ii) setting forth the adjusted number of shares of Warrant Stock and (iii) showing in reasonable detail the computations and the facts upon which such adjustments are based. 2.6 Beacon Representations and Warranties. Beacon hereby represents and warrants to, and agrees with, Verilink, as of the date of this Agreement and each date that the warrant is exercised, as follows: (a) Beacon is a limited partnership duly organized, validly existing and in good standing under the laws of the State of Delaware. Beacon has all necessary power and authority under all applicable provisions of law to execute and deliver this Agreement and to carry out its provisions. All partnership action on the part of Beacon necessary for the authorization, execution and delivery of this Agreement, the performance of the obligations of Beacon under this Agreement has been taken. This Agreement has been duly executed and delivered by Beacon and constitutes legal, valid and binding obligations of Beacon enforceable in accordance with its terms. (b) The execution, delivery and performance of this Agreement and the performance by Beacon of its obligations hereunder do not and will not conflict with or violate any provision of the certificate of limited partnership, limited partnership agreement or bylaws of Beacon or any law, statute, rule or regulation or any agreement, contract or instrument or any order, judgment or decree to which Beacon is subject or by which any of its assets are bound. (c) Beacon understands that neither the Warrant nor the Warrant Stock has been registered under any state securities act or the Securities Act. Beacon also understands that the Warrant and the Warrant Stock are being offered and sold pursuant to an exemption from registration contained in applicable state securities acts and the Securities Act based in part upon Beacon's representations contained in this Warrant. (d) Beacon has substantial experience in evaluating and investing in private placement transactions of securities in companies similar to Verilink so that Beacon is capable of evaluating the merits and risks of its investment in Verilink and has the capacity to protect its own interests. Beacon must bear the economic risk of this investment indefinitely unless the Warrant or the Warrant Stock is registered pursuant to the Securities Act, or an exemption from registration is available. Beacon also understands that there is no assurance that any exemption from registration under the Securities Act will be available and that, even if available, such exemption may not allow Beacon to transfer all or any portion of the Warrant or the Warrant Stock under the circumstances, in the amounts or at 8 9 the times Beacon might propose. Beacon can bear the economic risk of losing its entire investment in Verilink. (e) Beacon is acquiring the Warrant and the Warrant Stock for its own account for investment only, and not with a view towards their resale or distribution in violation of applicable securities laws. (f) Beacon represents that, by reason of its management's business or financial experience, Beacon has the capacity to protect its own interests in connection with the transactions contemplated in this Agreement. Further, Beacon is aware of no publication of any advertisement in connection with the transactions contemplated by this Agreement. (g) Beacon represents that it is an accredited investor within the meaning of Regulation D under the Securities Act. (h) Beacon has had an opportunity to discuss Verilink's business, management and financial affairs with directors, officers and management of Verilink. Beacon has also had the opportunity to ask questions of, and receive answers from, Verilink and its management regarding the terms and conditions of this investment. Beacon has had an adequate opportunity to inspect and copy all material documents relating to Verilink which it has requested. 2.7 Verilink Representations and Warranties. Verilink hereby represents and warrants to, and agrees with, Beacon as follows: (a) Organization. Verilink is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Verilink has all requisite corporate power and authority to execute and deliver this Agreement, and to issue the shares of Warrant Stock upon exercise of the Warrant. (b) Capitalization. The authorized capital stock of Verilink as of October 2, 2000, consists of (i) 40,000,000 shares of Common Stock, 14,717,791 shares of which are issued and outstanding and 3,662,523 shares held in treasury and (ii) 1,000,000 shares of preferred stock, par value $.01 per share, none of which are outstanding. Other than 2,192,343 options available for grant and outstanding options to purchase 4,002,406 shares of Common Stock under Verilink's option plans, 806,116 of which were vested as of September 30, 2000 and 180,995 shares of Common Stock reserved for issuance under Verilink's Employee Stock Purchase Plan, there are no outstanding options, warrants or other securities convertible into or exercisable for common stock, other than the Warrant granted hereby. (c) Authorization; Binding Obligations. All corporate action on the part of Verilink necessary for the authorization, execution and delivery of this Agreement, the performance of the obligations of Verilink under this Agreement and for the authorization, sale, issuance and delivery of the Warrant Stock issuable upon exercise of the Warrant has been taken. When issued in compliance with the 9 10 provisions of this Agreement, the Warrant Stock will be duly authorized, validly issued, fully paid and nonassessable. This Agreement has been duly executed and delivered by Verilink and constitutes legal, valid and binding obligations of Verilink enforceable in accordance with its terms. (d) No Violations. The execution, delivery and performance of this Agreement and the performance by Verilink of its obligations hereunder do not and will not conflict with or violate any provision of the certificate of incorporation or bylaws of Verilink or any law, statute, rule or regulation or any agreement, contract or instrument or any order, judgment or decree to which Verilink is subject or by which any of its assets are bound. (e) No Other Representations or Warranties. The representations and warranties made by Verilink in this Agreement supersede any prior statements, representations and warranties of any person with respect to Verilink or the transactions contemplated hereby. The representations and warranties of Verilink in this Agreement are the only representations and warranties by Verilink upon which Beacon may rely in connection with transactions contemplated by this Agreement. 2.8 Notices of Record Date, Etc. In case: (a) Verilink shall establish a record date for the holders of its Common Stock for the purpose of entitling them to receive any dividend or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or to receive any other right; of any capital reorganization of Verilink, any reclassification of the capital stock of Verilink, any consolidation or merger of Verilink with or into another corporation, any share exchange for shares of capital stock of another corporation or any conveyance of all or substantially all of the assets of Verilink to another corporation; (b) of any voluntary or involuntary dissolution, liquidation or winding up of Verilink; or (c) Verilink shall enter into a letter of intent or agreement with respect to a transaction by which all of the outstanding shares of Common Stock of Verilink are to be acquired by a third party; then Verilink shall mail or cause to be mailed to each holder of the Warrant at the time outstanding a notice specifying, as the case may be, (i) the date on which a record is to be taken for the purpose of such dividend, distribution or rights, and stating the amount and character of such dividend, distribution or rights, (ii) the date on which such reorganization, reclassification, consolidation, merger, conveyance, dissolution, liquidation or winding up is to take place, and the time, if any is to be fixed, as to which the holders of record of Common Stock shall be entitled to exchange their shares for securities or other property deliverable upon the completion of such transaction, or (iii) the closing of the acquisition by a third party of all of the outstanding 10 11 shares of Common Stock. Such notice shall be mailed as soon as practicable after the occurrence or likelihood of such event is publicly disclosed. 2.9 Automatic Exercise. Notwithstanding any provision of this Agreement to the contrary, immediately prior to the termination of this Warrant, it shall be automatically exercised as follows. If a Bonus Note is outstanding immediately prior to the termination of the Warrant, the outstanding Bonus Note shall be automatically cancelled (whether or not physically delivered) and the aggregate principal amount hereof, together with accrued interest thereon, shall be applied against the remaining aggregate exercise price for the remaining Warrant Stock. To the extent the Warrant is not fully exercised after applying the principal amount hereof, together with accrued interest thereon, of any outstanding Bonus Note to purchase Warrant Stock, the Warrant shall be automatically exercised to purchase the balance of the Warrant Stock pursuant to the provisions of Section 2.3(b) of this Agreement, unless the holder gives five (5) business days' notice to Verilink that this Warrant shall not be exercised pursuant to the provisions of this Section 2.9. 2.10 Registered Owner. Except as otherwise expressly provided herein, Verilink may deem and treat the registered owner of the Warrant and the Warrant Stock as the absolute owner hereof (notwithstanding any notation of ownership or other writing thereon made by anyone) for all purposes and shall not be affected by any notice (other than a duly executed Assumption Agreement) to the contrary. 11 12 ARTICLE III - STOCKHOLDER'S AGREEMENT 3.1 Standstill. (a) Additional Ownership. Except in connection with a Permitted Acquisition, during the Standstill Period, Beacon will not purchase or otherwise acquire Beneficial ownership of any Voting Security. (b) Other Restrictions. Without prior Board Approval, except as otherwise permitted hereunder, during the Standstill Period, Beacon will not, nor will it encourage any other person to do, any of the following: (i) solicit proxies from other stockholders of Verilink in opposition to, or prior to the issuance of, a recommendation of the Board for any matter to be considered at any meeting of holders of securities of Verilink; (ii) form, join or participate in or encourage the formation of a Group with respect to any securities of Verilink other than a group consisting solely of Affiliates of Beacon; (iii) deposit any securities of Verilink into a voting trust or subject any such securities to any arrangement or agreement with respect to the voting thereof, other than any such trust, arrangement or agreement (A) the only parties to, or beneficiaries of, which are Affiliates of Beacon; and (B) the terms of which do not require or expressly permit any party thereto to act in a manner inconsistent with this Agreement; or (iv) tender any securities in any tender offer involving Verilink unless such tender offer has received Board Approval. 3.2 Transfer of Common Stock. (a) Transferability. Beacon agrees that it will not Transfer any Common Stock Beneficially owned by it, except in strict compliance with the terms of this Section 3.2. (i) Affiliates. Notwithstanding any other provision of this Agreement other than Section 3.3 relating to securities law compliance, Beacon may Transfer all or any part of the Common Stock owned by it at any time, without compliance with Section 3.2(b), to any Affiliate of Beacon; provided that, prior to such Transfer, (A) notice of such Transfer is given to Verilink and (B) the Affiliate to whom such Common Stock is to be Transferred enters into an Assumption Agreement. (ii) Transfer After First Anniversary. From and after the first (1st) anniversary of the date of this Agreement, Beacon may Transfer all or any part of the 12 13 Warrant Stock Beneficially owned by it, without compliance with Section 3.2(b), provided that such transaction (A) is pursuant to an available exemption from the registration requirements under applicable securities laws and (B) does not involve the Transfer of Common Stock representing five percent (5%) or more of the outstanding Voting Securities to any one Person or Group. (iii) 5% Transfer After First Anniversary. Subject to compliance with the requirements of Section 3.2(b) hereof, from and after the first (1st) anniversary of the date of this Agreement, Beacon may Transfer Common Stock representing five percent (5%) or more of the outstanding Common Stock to any one Person or Group, following compliance with Section 3.2(b); provided, that with respect to any such Transfer, such Transfer shall -------- ---- be conditioned on the Permitted Transferee agreeing (A) to be bound by the provisions of this Agreement and (B) not to acquire more than two percent (2%) of the outstanding Voting Securities during any twelve (12) month period except in compliance with this Agreement. Notwithstanding any other provision of this Agreement to the contrary, open market sales of Common Stock shall not be deemed for any purpose a Transfer to one Person or Group unless transferor has actual knowledge that such Transfer would result in a Person or Group becoming the Beneficial owner or five percent (5%) or more of the outstanding Common Stock. (iv) Void Transfer. In the event of any purported Transfer by Beacon of Common Stock not made in compliance with this Section 3.2, such purported Transfer will be void and of no effect and Verilink will not give effect to such Transfer. Verilink shall be entitled to treat the prior owner as the holder of any such securities not Transferred in accordance with this Agreement. (v) Legend. Each certificate representing Common Stock issued to Beacon will bear a legend on the face thereof substantially to the following effect (with such additions thereto or changes therein as Verilink may be advised by counsel are required by law (the "Legend")): "THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A STOCKHOLDERS AGREEMENT BETWEEN VERILINK CORPORATION AND BEACON TELCO, L.P. A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF VERILINK CORPORATION. NO TRANSFER, SALE, ASSIGNMENT, PLEDGE, HYPOTHECATION OR OTHER DISPOSITION OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY BE MADE EXCEPT IN ACCORDANCE WITH THE PROVISIONS OF SUCH STOCKHOLDERS AGREEMENT." "THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 13 14 1933 AND MAY NOT BE TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS THEY HAVE BEEN REGISTERED UNDER THAT ACT OR ANY OTHER APPLICABLE LAW OR AN EXEMPTION FROM REGISTRATION IS AVAILABLE." The Legend will be removed by Verilink by the delivery of substitute certificates without such Legend in the event of (A) a Transfer permitted by Section 3.2(a) to any Person who is not required to enter into an Assumption Agreement as a condition to such Transfer or (B) the termination of this Article III pursuant to the terms of this Agreement, provided, however, that the second paragraph of such Legend will only be removed if at such time a legal opinion from counsel to the Transferee shall have been obtained to the effect that such Legend is no longer required for purposes of applicable securities laws. In connection with the foregoing, Verilink agrees that, if Verilink is required to file reports under the Exchange Act, for so long as and to the extent necessary to permit Beacon to sell any Common Stock pursuant to Rule 144, Verilink will use its best efforts to file, on a timely basis, all reports required to be filed with the SEC by it pursuant to Section 13 of the Exchange Act, furnish to Beacon upon request a written statement as to whether Verilink has complied with such reporting requirements during the twelve (12) months preceding any proposed sale under Rule 144 and otherwise use its best efforts to permit such sales pursuant to Rule 144. (b) Right of First Offer for Five Percent (5%) Sales. (i) Prior to Beacon effecting a Transfer described in Section 3.2(a)(iii) (a "Third-Party Sale"), Beacon will deliver to Verilink a written Notice (an "Offer Notice") specifying the amount of consideration (the "Offer Price") and the other material terms pertaining to such Third Party Sale for which Beacon proposes to sell the Common Stock to be offered in such Third-Party Sale (the "Offered Stock") and, to the extent known or contemplated, the proposed purchaser of the Offered Stock. (ii) If Verilink delivers to Beacon a written notice (an "Acceptance Notice") within five (5) calendar days of receipt of the Offer Notice (such five (5) calendar day period being referred to herein as the "ROFO Acceptance Period") stating that Verilink or its designee (the "ROFO Purchaser") is willing to purchase all of the Offered Stock for the Offer Price and on the other terms set forth in the Offer Notice, Beacon will sell all of the Offered Stock to the ROFO Purchaser, and Verilink will purchase such Offered Stock from Beacon, on the proposed terms and subject to the conditions set forth below. (iii) The consummation of any purchase of the Offered Stock by the ROFO Purchaser pursuant to this Section 3.2(b) (the "ROFO Closing") will occur no more than fifteen (15) calendar days following the delivery of the 14 15 Acceptance Notice (such fifteen (15) calendar day period being referred to herein as the "ROFO Closing Period") at 10:00 a.m. (Eastern Time) at Verilink's offices or at such other time of day and place as may be mutually agreed upon by Beacon and the ROFO Purchaser. At the ROFO Closing, (x) the ROFO Purchaser will deliver to Beacon by wire transfer to an account designated by Beacon an amount in immediately available funds equal to the Offer Price, (y) Beacon will deliver one or more certificates evidencing the Offered Stock, together with such other duly executed instruments or documents (executed by Beacon) as may be reasonably requested by the ROFO Purchaser to acquire the Offered Stock free and clear of any and all claims, liens, pledges, charges, encumbrances, security interests, options, trusts, commitments and other restrictions of any kind whatsoever (collectively, "Encumbrances"), except for Encumbrances created by this Agreement, or federal or state securities laws ("Permitted Encumbrances"), and (z) in connection with the foregoing, Beacon will represent and warrant to Verilink that, upon the ROFO Closing, Beacon will convey and Verilink will acquire the entire record and Beneficial ownership of, and good and valid title to, the Offered Stock, free and clear of any and all Encumbrances, except for Permitted Encumbrances. (iv) If no Acceptance Notice relating to the proposed Third-Party Sale is delivered to Beacon prior to the expiration of the ROFO Acceptance Period, or an Acceptance Notice is so delivered to Beacon but the ROFO Closing fails to occur prior to the expiration of the ROFO Closing Period (unless the ROFO Purchaser was ready, willing and able prior to the expiration of the ROFO Closing Period to consummate the transactions to be consummated by the ROFO Purchaser at the ROFO Closing), Beacon may, during the three hundred sixty (360) calendar day period immediately following the expiration of the ROFO Acceptance Period (in the event that no Acceptance Notice was timely delivered to Beacon) or the three hundred sixty (360) calendar day period immediately following the expiration of the ROFO Closing Period (in the event that an Acceptance Notice was timely delivered to Beacon but the ROFO Closing failed timely to occur other than as a result of a failure by Beacon to perform its obligations under Section 3.2(b)(iii) hereof) at a gross price at least equal to the Offer Price and on such other terms no more favorable to the Transferee than those set forth in the Offer Notice, consummate the Third-Party Sale in accordance with Section 3.2(a)(iii). After the applicable three hundred sixty (360) day period, any Transfer pursuant to Section 3.2(a)(iii) shall not be made unless Beacon again complies with the provisions of this Section 3.2(b). (v) For purposes of this Section 3.2(b), the value of any consideration other than cash that is payable or receivable in the Third Party Sale will be as determined by the Board in good faith or, if Beacon gives Verilink written 15 16 notice of its disagreement with such valuation within ten (10) business days after receipt of written notice of such value, such value will be determined in accordance with the appraisal procedures set forth on Exhibit C. The various time periods described above relating to any actions regarding the exercise of a right of first offer will be extended for the duration of any period in which the value of any non-cash consideration is subject to dispute pursuant to Section 3.2(b). (c) Transfer Prohibited prior to First Anniversary. Beacon shall not effect any Transfer (other than to an Affiliate pursuant to Section 3.2(a)(i) above or Section 5.4 below, or as contemplated by a Piggyback Registration, under Section 4.1) of any amount of Warrant Stock prior to the first (1st) anniversary of the date of this Agreement, and any such purported Transfer shall be void as provided in Section 3.2(a)(iv) above. 3.3 Securities Law Restrictions. In order to comply with applicable securities laws, Beacon further agrees not to make any transfer of all or any portion of the Common Stock unless and until: (a) there is then in effect a registration statement under the Securities Act covering such proposed Transfer and such Transfer is made in accordance with such registration statement; or (b) Beacon shall have furnished Verilink, at the expense of Beacon or its transferee, with an opinion of counsel, reasonably satisfactory to Verilink (it being agreed that an opinion of Bingham Dana LLP shall be reasonably satisfactory), that such disposition shall not require registration of such securities under the Securities Act. (c) Notwithstanding the provisions of paragraphs (1) and (2) above, no such registration statement or opinion of counsel shall be required: (i) for any transfer of any of the Common Stock in compliance with Rule 144 or Rule 144A promulgated under the Securities Act, or (ii) for any transfer of the Common Stock by Beacon or a Permitted Transferee, if such holder is a partnership or a corporation to (A) a partner of such partnership, shareholder of such corporation or controlled subsidiary of such partnership or corporation, (B) a retired partner of such partnership who retires after the date hereof, (C) the estate of any such partner or shareholder, or (iii) for the transfer by gift, will or intestate succession by the holder to his or her spouse or lineal descendants or ancestors or any trust for any of the foregoing, provided that in each of the foregoing cases the subsequent Permitted Transferee agrees in writing to be subject to the terms of this Section 3.3. 3.4 Board Representative. (a) Promptly after the date hereof, Verilink shall take all necessary action to appoint or elect to the Board one person designated by Beacon and reasonably acceptable to Verilink (the "Beacon Designee"). For so long as Beacon Beneficially owns at 16 17 least ten percent (10%) of the outstanding Voting Securities, Verilink, at each meeting of stockholders of Verilink at which directors are elected or pursuant to which such action is to be taken by written consent, will nominate such Beacon Designee for election as a director of Verilink. Ninety (90) calendar days prior to any such meeting or action by written consent, Beacon will provide Verilink with the information required pursuant to Regulation 14A under the Exchange Act with respect to such Beacon Designee. Verilink will solicit proxies from its stockholders for such nominees, vote all proxies in favor of such nominees, except for such proxies that specifically indicate to the contrary, and otherwise use its best efforts to cause such nominees to be elected to the Board as herein contemplated. (b) The Beacon Designee will serve until his or her successor is elected and qualified or until his or her earlier resignation, retirement, disqualification, removal from office, or death. (c) If the Beacon Designee ceases to be a director of Verilink for any reason, Verilink will promptly upon the request of Beacon cause a person designated by Beacon to replace such director if Beacon is then so entitled. (d) Beacon agrees to cause the Beacon Designee to promptly resign in the event Beacon's Beneficial ownership of the outstanding Voting Securities falls below ten percent (10%). (e) Verilink shall reimburse reasonable expenses of the Beacon Designee incurred in connection with the performance of his or her duties as a director of Verilink in accordance with Verilink's policies regarding director reimbursement and on the same basis as all other non-employee directors of Verilink. (f) Beacon and its Permitted Transferees shall vote all Common Stock owned by any of them for the election of directors nominated by the Nominating Committee of the Board and in accordance with the recommendations of the Board on all other matters at each stockholder meeting, or shall execute written consents for such purpose at the request of Verilink. ARTICLE IV - REGISTRATION RIGHTS 4.1 Incidental Registration. If Verilink proposes to register any Common Stock under the Securities Act for sale by Verilink in an underwritten Public Offering, it will each such time give written notice to Beacon of its intention so to do. Upon the written request of Beacon given within ten (10) days after receipt of any such notice (stating the number of shares of Registrable Stock to be disposed of by Beacon) and notwithstanding Section 3.2, Verilink will use its best efforts to cause all such shares of Registrable Stock intended to be disposed of to be registered under the Securities Act so as to permit the disposition by Beacon in the proposed underwritten Public Offering (a "Piggyback Registration"), subject, however, to the limitations set forth in Section 4.2. 17 18 4.2 Limitations on Incidental Registration. Beacon may not participate in any underwritten registration hereunder unless Beacon (i) agrees to sell its Registrable Stock on the basis provided in any underwriting arrangements approved by Verilink, (ii) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements and (iii) agrees to pay its pro rata portion of all underwriting discounts and commissions and any fees and expenses of its counsel. Notwithstanding any provision of Section 4.1, if the managing underwriter determines that marketing or other factors require a limitation of the number of shares of Registrable Stock to be included in the underwritten offering, the managing underwriter may exclude or otherwise limit the number of shares of Registrable Stock to be included in the registration and underwriting to the extent that it also excludes from registration of shares to be offered by officers and directors of Verilink as well on a pro rata basis based on the number of shares requested to be included in such registration. Shares to be offered by Verilink shall have priority in registration. Verilink shall so advise Beacon, and no Registrable Stock excluded from the underwriting by reason of the managing underwriter's determination shall be included in such registration. 4.3 S-3 Registration. (a) Verilink agrees to use its best efforts, upon written request of Beacon at any time after the first anniversary of the date hereof, to file and cause to be declared effective a valid "shelf" registration on Form S-3 (a "Demand Registration") providing for the registration and sale on a continuous or delayed basis all of the Registrable Stock, pursuant to Rule 415 under the Securities Act and/or any similar rule that may be adopted by the Commission. Verilink will use its best efforts to keep the Demand Registration current and effective until the earliest to occur of (i) the seventh anniversary of the date hereof, (ii) the date all of the Registrable Stock then held by Beacon and its Permitted Transferees is eligible for sale under Rule 144 within a single three-month period, and the date on which all the Registrable Stock registered thereunder has been sold. (b) In connection with any underwritten Public Offering pursuant to a Demand Registration, the managing underwriter shall be an investment banking firm reasonably acceptable to Verilink. (c) Notwithstanding the foregoing, Verilink may delay filing a registration statement relating to a Demand Registration and may withhold its efforts to cause such registration statement to become effective for not more than sixty (60) days and for not more than ninety (90) days in the aggregate during any twelve (12) month period, if Verilink determines in good faith that such registration might (i) interfere with or affect the negotiation or completion of any transaction that is being contemplated by Verilink (whether or not a final decision has been made to undertake such transaction) at the time the right to delay is exercised, or (ii) involve initial or continuing disclosure obligations that might not be in the best interests of Verilink's stockholders. 18 19 4.4 Cooperation by Beacon. Beacon will furnish to Verilink such information as Verilink may reasonably require from Beacon in connection with the registration statement (and the prospectus included therein) and shall not effect sales of the shares included in the registration after receipt of telegraphic or written notice from Verilink to suspend sales to permit Verilink to correct or update a registration statement or prospectus. 4.5 Expenses of Registration. All expenses incurred in effecting any registration pursuant to this Agreement, including, without limitation, all registration and filing fees, printing expenses, expenses of compliance with blue sky laws, fees and disbursements of counsel for Verilink and expenses of any audits incidental to or required by any such registration shall be borne by Verilink, except that all additional expenses, fees and disbursements of any counsel retained by Beacon, and all underwriting discounts, fees and commissions shall be borne by Beacon, according to the quantity of its Registrable Stock so registered. 4.6 Indemnification. (a) To the extent permitted by law, Verilink will indemnify Beacon, each agent, officer and director of Beacon, each person, if any, who controls Beacon within the meaning of Section 15 of the Securities Act, each underwriter and selling broker of the securities so registered (collectively, "Indemnitees") against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any prospectus, offering circular or other document incident to any registration, qualification or compliance (or in any related registration statement, notification or the like) or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances in which they were made, or any violation by Verilink of any rule or regulation promulgated under the Securities Act applicable to Verilink and relating to an action or inaction required of Verilink in connection with any such registration, qualification or compliance, and will reimburse each such Indemnitee for any legal and any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action; provided, however, that Verilink will not be liable in any such case to the extent that any such claim, loss, damage, liability or action is caused by any untrue statement or omission so made in conformity with written information furnished to Verilink by such Indemnitees and except that the foregoing indemnity agreement is subject to the condition that, insofar as it relates to any such untrue statement (or alleged untrue statement) or omission (or alleged omission) made in the preliminary prospectus but eliminated or remedied in the amended prospectus on file with the SEC at the time the registration statement becomes effective or in the amended prospectus filed with the SEC pursuant to Rule 424(b) (the "Final Prospectus"), such indemnity agreement shall not inure to the benefit of any underwriter, or any Indemnitee if there is no underwriter, if a copy of the Final Prospectus was not furnished to the person or entity asserting the loss, liability, claim or damage at or prior to the time such furnishing is required by the Securities Act; provided, further, that this indemnity shall not be deemed to relieve any underwriter of any of its due diligence obligations; 19 20 provided, further, that the indemnity agreement contained in this Section 4.6(a) shall not apply to amounts paid in settlement of any such claim, loss, damage, liability or action if such settlement is effected without the consent of Verilink, which consent shall not be unreasonably withheld. (b) To the extent permitted by law, Beacon and each underwriter of the securities so registered will indemnify Verilink and its officers and directors and each person, if any, who controls Verilink within the meaning of Section 15 of the Securities Act and their respective successors against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any prospectus, offering circular or other document incident to any registration, qualification or compliance (or in any related registration statement, notification or the like) or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances in which they were made and will reimburse Verilink and each other person indemnified pursuant to this subsection (b) for any legal and any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action, provided, however, that this subsection (b) shall apply only if (and only to the extent that) such statement or omission was made in reliance upon and in conformity with written information furnished to Verilink by Beacon or underwriter and except that the foregoing indemnity agreement is subject to the condition that, insofar as it relates to any such untrue statement (or alleged untrue statement) or omission (or alleged omission) made in the preliminary prospectus but eliminated or remedied in the amended prospectus on file with the SEC at the time the registration statement becomes effective or in the Final Prospectus, such indemnity agreement shall not inure to the benefit of (i) Verilink and (ii) any underwriter if a copy of the Final Prospectus was not furnished to the person or entity asserting the loss, liability, claim or damage at or prior to the time such furnishing is required by the Securities Act; provided, further, that the indemnity agreement contained in this Section 4.6(b) shall not apply to amounts paid in settlement of any such claim, loss, damage, liability or action if such settlement is effected without the consent of Beacon or underwriter, as the case may be, which consent shall not be unreasonably withheld; and provided, further, that the obligations of Beacon shall be limited to an amount equal to the proceeds to Beacon of Registrable Stock sold as contemplated herein, unless such claim, loss, damage, liability or action resulted from Beacon's fraudulent misconduct. (c) Each party entitled to indemnification hereunder (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnification may be sought, and shall permit the Indemnifying Party (at its expense) to assume the defense of any claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or litigation, shall be satisfactory to the 20 21 Indemnified Party, and the Indemnified Party may participate in such defense at such party's expense, and provided, further, that the omission by any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Section 4.6 except to the extent that the omission results in a failure of actual notice to the Indemnifying Party and such Indemnifying Party is damaged solely as a result of the failure to give notice. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement that either (i) does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation or (ii) contains any finding of a violation of law by an Indemnified Party. (d) The reimbursement required by this Section 4.6 shall be made by periodic payments during the course of the investigation or defense, as and when bills are received or expenses are incurred. (e) If the indemnification provided for in this Section 4.6 is unavailable to an Indemnified Party in respect of any losses, claims, damages or liabilities referred to therein, then each Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of such losses, claims, damages or liabilities in such proportion as is appropriate to reflect the relative fault of Verilink on the one hand, and of Beacon and any other sellers participating in the registration statement on the other hand, in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative benefits received by Verilink on the one hand, and Beacon and any other sellers participating in the registration statement on the other hand, shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) to Verilink bear to the total net proceeds from the offering (before deducting expenses) to Beacon and any other sellers participating in the registration statement. The relative fault of Verilink on the one hand, and of Beacon and any other sellers participating in the registration statement on the other hand, shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by Verilink or by Beacon or other sellers participating in the registration statement and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. (f) Verilink and Beacon agree that it would not be just and equitable if contribution pursuant to this Section 4.6 were determined by pro rata allocation or by any other method of allocation that does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an Indemnified Party as a result of the losses, claims, damages and liabilities referred to in the immediately preceding paragraph shall be deemed to include, 21 22 subject to the limitations set forth above, any legal or other expenses reasonably incurred by such Indemnified Party in connection with investigating or defending any such action or claim. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. (g) The obligations under this Section 4.6 shall survive the completion of any offering of Registrable Stock in a registration statement under this Agreement or otherwise. 4.7 "Stand-Off" Agreement. In consideration for Verilink performing its obligations under this Agreement, Beacon agrees for a period of time (not to exceed one hundred eighty (180) days) from the effective date of any registration of securities of Verilink (upon request of Verilink or of the underwriters managing any underwritten offering of Verilink's securities) not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any Warrants or Registrable Stock or other securities exercisable or exchangeable for, or convertible into, Common Stock, other than shares of Registrable Stock included in the registration, without the prior written consent of Verilink and such underwriters, provided that all executive officers and directors of Verilink shall enter into similar agreements. ARTICLE V - MISCELLANEOUS PROVISIONS 5.1 Applicable Law. The Agreement shall for all purposes be governed by and construed in accordance with the internal laws of the State of Delaware, without regard to conflicts of laws principles. 5.2 Entire Agreement. This Agreement, the Research Agreement, the Premises Agreement and the existing Confidentiality Agreement and the other agreements, certificates and documents delivered in connection with this Agreement contain the entire agreement between Verilink and Beacon with respect to the transactions described herein, and supersede all prior agreements or statements, written or oral, with respect thereto. 5.3 Termination. The provisions of this Agreement specified below will terminate, and be of no further force or effect (other than with respect to prior breaches), as follows: (a) Article II will terminate upon the earlier of (A) the exercise in full of the Warrant; or (B) seven (7) years from the date hereof; (b) Section 3.1 will terminate upon the expiration of the Standstill Period; (c) Section 3.2 will terminate upon the earlier of (A) Beacon ceasing to be the Beneficial owner of five percent (5%) or more of the outstanding voting securities or (B) five (5) years from the date hereof; 22 23 (d) Section 3.4 will terminate upon the earlier of (A) Beacon ceasing to be the Beneficial owner of ten percent (10%) or more of the outstanding Voting Securities; or (B) five (5) years from the date hereof; (e) Article IV will terminate on the earlier of (A) the tenth (10th) anniversary of the date of this Agreement or (B) at such time when Beacon would be permitted to sell all of the Warrant Stock held by Beacon within a single three (3) month period pursuant to Rule 144(k); and (f) Any portion or all of this Agreement will terminate and be of no further force and effect upon a written agreement of the parties to that effect. 5.4 Transfer and Assignment. The provisions of this Agreement will be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, provided, however, that neither of the parties may assign, delegate or otherwise transfer any of their rights or obligations under this Agreement except as follows: (a) with the written consent of the other party hereto, (b) to any Affiliate of Beacon or pursuant to a merger or sale of substantially all the assets or stock of Beacon, provided that the Permitted Transferee executes an Assumption Agreement. (c) Beacon's rights under Section 3.4 and Article IV of this Agreement may only be assigned, transferred, pledged or hypothecated in any way (whether by operation of law or otherwise) to an Affiliate in connection with a Transfer of the Warrant or the Warrant Stock in accordance with Section 2.1 or Section 3.2(a)(i). (d) Except as otherwise expressly set forth in this Agreement, including without limitation Section 3.2(a) and Section 5.4, this Agreement, the Warrant, the Warrant Stock or any rights hereunder may not be assigned, transferred, pledged or hypothecated in any way (whether by operation of law or otherwise). The Warrant and the Warrant Stock shall not be subject to execution, attachment or similar process. Any attempted assignment, transfer, pledge, hypothecation or other disposition of the Warrant and/or the Warrant Stock contrary to the provisions of this Agreement shall be null and void and without legal effect. Except upon assignment or transfer expressly permitted by any this Agreement, this Agreement nor any provision hereof is intended to confer upon any Person other than the parties hereto any rights or remedies hereunder. 5.5 Notices. All notices required hereunder must be in writing and shall be deemed given when telefaxed, delivered personally or by overnight delivery service or within three days after mailing when mailed by certified or registered mail, return receipt requested, if to Verilink, at: 23 24 Verilink Corporation 950 Explorer Blvd. Huntsville, AL 35806, Attention: Ronald G. Sibold, Vice President and Chief Financial Officer Fax: (256) 774-2425 with a courtesy copy to: Powell, Goldstein, Frazer & Murphy LLP 191 Peachtree Street, N.E, 16th Floor, Atlanta, Georgia 30303 Attention: Eliot Robinson Fax: 404-572-6999 and if to Beacon, at: Beacon Telco, L.P. 8 St. Mary Street, Suite 910 Boston, MA 02115 Attention: Alok Prasad, President Fax: (617) 351-1636 with a courtesy copy to: Bingham Dana LLP 150 Federal Street Boston, MA 02110, Attention: Jack Concannon Fax: 617-951-8736 or at such other address of which Verilink or Beacon has been advised by notice hereunder. 5.6 Rights as a Stockholder. Unless otherwise expressly provided herein, Beacon shall have no rights as a stockholder with respect to any Warrant Stock until the date of issuance of such shares. No provision hereof, in the absence of affirmative action by Beacon to purchase Warrant Stock, and no enumeration herein of the rights or privileges of Beacon shall give rise to any liability of such holder for the Exercise Price of Warrant Stock acquirable by exercise hereof or as a stockholder of Verilink. 5.7 Specific Performance. The parties agree that any breach by any of them of any provision of this Agreement would irreparably injure Verilink or Beacon, as the case may be, and that money damages would be an inadequate remedy therefor. Accordingly, the parties agree that the other party will be entitled to one or more injunctions enjoining any such breach and requiring specific performance of this Agreement and consent to the entry thereof, in addition to any other remedy to which such other party are entitled at law or in equity. 24 25 5.8 Amendment; Waivers. (a) Any provision of this Agreement may be amended or waived if, and only if, such amendment or waiver is in writing and signed, in the case of an amendment, by Verilink and Beacon (who shall have the authority to bind all Permitted Transferees), or in the case of a waiver, by the party against whom the waiver is to be effective. (b) No failure or delay by any party in exercising any right, power or privilege hereunder will operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided will be cumulative and not exclusive of any rights or remedies provided by law. 5.9 Counterparts; Effectiveness. This Agreement may be signed in any number of counterparts, each of which will be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement will become effective when each party hereto shall have received a counterpart hereof signed by the other party hereto. 5.10 Calculation of Beneficial Ownership. Any provision in this Agreement that refers to a percentage of Voting Securities shall be calculated based on the aggregate number of issued and outstanding shares of Common Stock at the time of such calculation (including any shares of Common Stock that would then be issuable upon the exercise of the Warrant and the conversion of any outstanding convertible security), but shall not include any shares of Common Stock issuable upon any other options, warrants or other securities that are exercisable for Common Stock. 5.11 Severability. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstances, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be in any way impaired thereby, it being intended that all of the rights and privileges of the parties hereto shall be enforceable to the fullest extent permitted by law. 5.13 No Strict Construction. The parties hereto have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties hereto, and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Agreement. [Signature page follows] 25 26 IN WITNESS WHEREOF, Verilink and Beacon have caused this Agreement to be signed as of the day and year first above written. VERILINK CORPORATION By: /s/ Graham G. Pattison ---------------------------------------- Name: Graham G. Pattison ------------------------------------- Title: President and Chief Executive Officer ------------------------------------- BEACON TELCO, L.P. By: /s/ Alok Prasad ---------------------------------------- Name: Alok Prasad ------------------------------------- Title: President ------------------------------------- 26 27 EXHIBIT A WARRANT EXERCISE FORM To: VERILINK CORPORATION 1. The undersigned hereby irrevocably elects to purchase __________________ shares of Common Stock ("Stock") of VERILINK CORPORATION (the "Company") pursuant to the terms of the Warrant and Stockholder's Agreement dated as of ________ __, 2000 by and between the Company and Beacon Telco, L.P., (the "Agreement"), and tenders herewith payment of the purchase price for the Stock. 2. The undersigned understands that the issuance of the Stock to the undersigned has not been registered under the Securities Act of 1933, as amended (the "Act") or any state securities laws and can only be resold or transferred pursuant to an effective registration statement under the Act or an applicable exemption from such registration, and in accordance with the restrictions on transfer set forth in the Agreement. 3. The undersigned is an "accredited investor" as defined in Rule 502 of Regulation D under the Act and confirms that each of its representations and warranties set forth in Section 2.6 of the Agreement are true and correct as of the date hereof. 4. The undersigned understands the instruments evidencing the Stock may bear a restrictive legend as set forth in the Agreement. Date: [BEACON TELCO, L.P.] ------------------------ By: ---------------------------------------- Name: Title: - -------------------------------------------------------------------------------- CASHLESS EXERCISE PROVISION (To be executed upon exercise of Warrant pursuant to Section 2.3(b) of the Agreement) The undersigned hereby irrevocably elects to surrender ____________________ shares purchasable under the attached Warrant for such shares of Common Stock issuable in exchange therefor pursuant to the Conversion Right provision of Section 2.3(b) of the Agreement. Date: [BEACON TELCO, L.P.] ------------------------ By: ---------------------------------------- Name: Title: 28 EXHIBIT B ASSUMPTION AGREEMENT The undersigned hereby agrees, effective as of the date hereof, to become a party to, and be bound by the provisions of, that certain Warrant and Stockholder's Agreement (the "Agreement") dated as of ________ ___, 2000 by and between Verilink Corporation and Beacon Telco, L.P. and for all purposes of the Agreement, the undersigned shall be included within the term "Permitted Transferee" (as defined in the Agreement). The address and facsimile number to which notices may be sent to the undersigned is as follows: ---------------------------- ---------------------------- ---------------------------- Facsimile No. -------------- [Name] By: ---------------------------------------- Name: Title: 29 EXHIBIT C APPRAISAL PROCEDURES If the ROFO Purchaser gives the Offering Stockholder written notice of its disagreement as to the valuation of any non-cash consideration payable or receivable in a Third Party Sale in accordance with Section 3.2(b) (the "Agreement Deadline"), then appraisals hereunder shall be undertaken by two (2) Appraisers (as defined below), one selected by the ROFO Purchaser and one selected by the Offering Stockholder, which appointment shall be made within fifteen (15) calendar days after the Agreement Deadline. Such Appraisers shall have thirty (30) calendar days following the appointment of the last Appraiser to be appointed to agree upon the value of the consideration other than cash proposed to be received in the Third Party Sale pursuant to Section 3.2(b) of this Agreement (the "Consideration Value"). In the event that such Appraisers cannot so agree within such period of time, (x) if such Appraisers' valuations do not vary by more than twenty (20%) percent, then the Consideration Value shall be the average of the two valuations and (y) if such Appraisers' valuations differ by more than twenty (20%) percent, such Appraisers shall mutually agree on a third Appraiser who shall calculate the Consideration Value independently. In the event that the two original Appraisers cannot agree upon a third Appraiser within thirty (30) calendar days following the end of the thirty (30) day period referred to above, then the third Appraiser shall be determined by lottery from a group of two (2) Appraisers, one of whom will be designated by the ROFO Purchaser and one of whom will be designated by the Offering Stockholder. The third Appraiser shall make its determination as to Consideration Value within thirty (30) calendar days of its appointment. The third Appraiser's valuation will be the Consideration Value for all purposes hereof and will not be subject to appeal or challenge by either the ROFO Purchaser or the Offering Stockholder. For purposes of this Exhibit C, "Appraiser" means a nationally recognized investment banking firm that (a) does not have a direct or indirect material financial interest in the ROFO Purchaser or the Offering Stockholder, (b) has not received in excess of $50,000 in fees or other compensation from the ROFO Purchaser, the Offering Stockholder or any of their respective subsidiaries or affiliates in the preceding three hundred sixty (360) days, and (c) is otherwise qualified to render an appraisal of the Consideration Value. EX-10.55 6 g65370ex10-55.txt PREMISES LICENSE AND SERVICES AGREEMENT 1 Exhibit 10.55 PREMISES LICENSE AND SERVICES AGREEMENT This Premises License and Services Agreement ("Agreement") dated as of the 16th day of October, 2000 is by and among TRUSTEES OF BOSTON UNIVERSITY, a Massachusetts non-profit corporation with an address at 147 Bay State Road, Boston, Massachusetts 02215 (the "University"), Beacon Telco, L.P., a Delaware Limited Partnership with an address at 8 St. Mary's Street, Boston, MA 02215 ("Telco") and VERILINK CORPORATION, a Delaware corporation with an address at 950 Explorer Blvd., Huntsville, AL 35806 (the "Company"). WHEREAS, Company entered into a Cooperative Research Agreement on October 13, 2000 with Telco with respect to the development of an optical networking product prototype for the telecommunications access market (the "Developed Prototype Product") (the "Cooperative Research Agreement"); WHEREAS, Company desires to participate in the Photonics Center Incubator and Accelerator Program and, as a part thereof, to obtain a license from Trustees of Boston University to use certain University premises and to obtain certain engineering support services of the University's Photonics Center in furtherance of the objective which is a research and development project subject to the Cooperative Research Agreement (the "Project") and intended to create prototype products based on an optical networking product for the telecommunications access market with modular, extendable architectures, with software to be developed thereunder (the "Project"); WHEREAS, the University is willing to license the use of certain University premises to Company, and to permit Company to access certain engineering support services, all in furtherance of the Project; and WHEREAS, the parties intend that in consideration for Company being provided with access to certain University premises and services granted by the University to Company under this Agreement, Company shall issue and deliver Warrants and Bonus Payments to Telco, pursuant to the terms and conditions of the Cooperative Research Agreement (for purposes of the first Bonus Payment) and a separate Warrant and Stockholders Agreement between Company and Telco. NOW THEREFORE, in consideration of the mutual promises and agreements set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the University, Telco and Company hereby agree as follows: ARTICLE I CERTAIN DEFINITIONS SECTION 1.01. DEFINED TERMS. As used in this Agreement, the following terms shall have the meaning accorded to them below: "BACKGROUND INTELLECTUAL PROPERTY" means Intellectual Property owned by University which was in existence prior to this Agreement and which would be of use to Company in conducting its work under this Agreement. Licensing of Background Intellectual Property, if agreed to by the Parties, shall be the subject of separate licensing agreements between the University and Company, provided however, that any Background Intellectual Property of the University which is necessary for Company to use in performing the research and development activities referenced in this Agreement shall be deemed to have been licensed to Company on a 1 2 royalty-free basis, but solely for performing such research and development during the Term of and pursuant to the Cooperative Research Agreement.. To the extent that a license(s) to Boston University Intellectual Property would be necessary at law with respect to the use, sale, manufacturing or commercialization of the Developed Prototype Product by Company after conclusion of the Cooperative Research Agreement, such license(s) shall be subject to the mutual agreement of Company and the University. Background Intellectual Properties and Boston University Intellectual Property are not Subject Inventions for ownership and rights of use purposes. "BOSTON UNIVERSITY INTELLECTUAL PROPERTY" shall be deemed to mean any Intellectual Property in existence as of the Effective Date of this Agreement which is owned exclusively by the University, and which the University has the right to license for the purpose specified in the separate license agreement referenced above. "BUILDING" means the building located at 8 St. Mary's Street, Boston, MA 02215 "DEVELOPED PROTOTYPE PRODUCT" means the prototype to be developed pursuant to the Cooperative Research Agreement, and which expressly excludes any Generated Information, Subject Inventions, Mask Works, Intellectual Property, and Background Intellectual Property content to the extent owned by Telco, Beacon Photonics, Inc., Beacon Photonics, L.P., or the University, including but not limited to, Boston University Intellectual Property. "GENERATED INFORMATION" means all information, however characterized, originally developed or created by each Party's personnel in connection with the Cooperative Research Agreement, including but not limited to, the source and object code of any software developed hereunder but, excluding any Confidential Information, Background Intellectual Property, Boston University Intellectual Property or content of the Party who did not generate it. "INTELLECTUAL PROPERTY" means patents, pending patent applications, Trademarks, copyrights, Mask Works, Confidential Information and other forms of comparable property rights protected by Federal Law, state law, and foreign counterparts. "LICENSED PREMISES" means as applied to Company (a) approximately 2500 square feet of office space on the sixth (6th) Floor of the Building as more particularly described on the floor plan attached as Exhibit A hereto, and (b) shared access to, on a basis reasonably equivalent to other users thereof as determined solely by the University in its good faith discretion, (i) the Optics Laboratory 615 on the sixth (6th) Floor of the Building; and (ii) other laboratories in the Building, and the equipment therein. Access to these other laboratories will be coordinated through the University in its sole good faith discretion. "MASK WORK" means a series of related images, however fixed or encoded, having or representing the predetermined, three-dimensional pattern of metallic, insulating or semiconductor material present or removed from the layers of a semiconductor chip product; and in which series the relation of the images to one another is that each image has the pattern of the surface of one form of the semiconductor chip product. "PERMITTED USES" means for purposes of the Company, research and development for purposes limited to the Project, but excluding any manufacturing or commercialization purposes. "SUBJECT INVENTION" means any invention(s) of the University, Telco or Company, both first conceived and actually reduced to practice (as defined under the United States patent laws), in the performance of work under this Agreement, but excluding any Intellectual Property of any Party(s) not the inventor. 2 3 "TRADEMARK" means a distinctive mark, symbol or emblem used in commerce by a producer or manufacturer to identify and distinguish its goods or services from those of others. ARTICLE II TERM AND TERMINATION SECTION 2.01. TERM OF AGREEMENT. This Agreement shall co-exist with the term of the Cooperative Research Agreement and shall commence on the date that the Cooperative Research Agreement, Warranty and Stockholder's Agreement, and this Agreement have been fully executed (the "Term Commencement Date"). This Agreement shall terminate on the expiration or termination of the Cooperative Research Agreement or in eighteen (18) months from the Term Commencement Date, whichever first occurs (which date for the termination of the term hereof shall hereafter be called the "Termination Date"). SECTION 2.02. TERMINATION. In the event that Company shall neglect or fail to perform or observe any of Company's covenants and agreements herein, and such nonperformance continues for thirty (30) business days after receipt of written notice thereof to Company, as the case may be, the University may terminate this Agreement with respect to the Party in breach without prejudice to any other right or remedy of the University or of Telco with respect to the Warranty Agreement and with respect to Telco's right to receive the first Bonus Payment pursuant to Article IV of the Cooperative Research Agreement and Company shall forthwith upon request by the University, vacate and yield up the Licensed Premises; provided, however, that if Company again neglects or fails to perform or observe its covenants and agreements of the same nature herein after having cured such covenants and agreements in the past, the University may terminate this Agreement as to that Party at any time without further notice. ARTICLE III CONSIDERATION FOR LICENSED PREMISES, PHOTONICS CENTER SERVICES AND ENGINEERING SUPPORT SECTION 3.01. ISSUANCE OF WARRANTS AND BONUS PAYMENTS. Company acknowledges and agrees that in partial consideration for the University granting Company a premises license pursuant to Article V and the services to be provided pursuant to Article IV, Company has agreed to issue and deliver Warrants and Bonus Payments as defined in, and pursuant to, the terms and conditions of the Warrant and Stockholders Agreement and the Cooperative Research Agreement executed between Company and Telco, bearing the same Effective Date as this Premises License and Services Agreement. ARTICLE IV SERVICES PROVIDED BY THE UNIVERSITY SECTION 4.01. GENERAL SERVICES OF LICENSED PREMISES. The University agrees to provide to the Licensed Premises, at no additional cost to Company, janitorial services, waste disposal services of the Office of Environmental Health Services pursuant to Section 5.15., electricity, heat, air conditioning, and domestic water in the same manner and amounts as such services and utilities are provided to other occupants of the Building. The University reserves the right to interrupt, curtail, stop or suspend the furnishing of services provided for in this Section 4.01 and the operation of Building systems, when necessary by reason of accident or emergency, or of repairs, alterations, replacements or improvements in the reasonable judgment of the University desirable or necessary to be made, or of difficulty or inability in securing supplies or labor, or of strikes, or of any other cause beyond the reasonable control of the University, until 3 4 said cause has been removed. The University shall have no responsibility or liability for any such interruption, curtailment, stoppage, or suspension of services or systems. SECTION 4.02. OFFICE SUPPLIES AND EQUIPMENT. During the Term, the University shall provide Company with (i) use of office furniture currently located in the office space portion of the Licensed Premises, (ii) use of a telephone (not including the fees for the use thereof), (iii) shared use of and access to a copy machine, and (iv) access to the University network consistent with the University's computer use policies and under the direction of the University's Office of Information. SECTION 4.03. LABORATORY SUPPLIES. Company shall be solely responsible for providing all of the laboratory supplies and consumables that it requires for use in the Licensed Premises related to the development of the Project, as well as the maintenance, loss of, or damage to any of these laboratory supplies and consumables. In the event that the University provides any such laboratory supplies and consumables to Company, Company shall pay the University for all such laboratory supplies and consumables it uses, at rates customarily imposed, as well as be responsible for the maintenance, loss of, or damage to any such miscellaneous laboratory supplies and consumables. The University shall invoice Company for such laboratory supplies and consumables to be paid by Company within thirty (30) days of receipt of an invoice. SECTION 4.04. TECHNICAL AND ENGINEERING DEVELOPMENT SUPPORT. In addition to the services to be provided pursuant this Article IV, Company shall be entitled to have access to technical and engineering personnel of the University through its Photonics Center, as determined solely by the University in its good faith discretion, to provide assistance only and solely with respect to the Project (the "Engineering Services"). SECTION 4.05. UNIVERSITY PERSONNEL AGREEMENTS AND POLICIES. Company and Telco each acknowledges and agrees that as a condition of employment by the University, the technical, engineering and academic personnel of the University are required to execute agreements with the University which, by their terms, will result in all Intellectual Property Rights, Generated Information and Subject Inventions conceived and/or developed by such personnel while employed by the University, belonging solely and exclusively to the University. Accordingly, and notwithstanding any separate confidentiality agreements that Company may enter into with any University personnel pursuant to Article 6.01.a. of this Agreement, all such Intellectual Property Rights, Generated Information and Subject Inventions shall be owned exclusively by the University and accordingly, no disclosure of the same to the University by such University personnel shall be deemed to be a disclosure of Company Confidential Information in violation of any obligations which any such personnel may have undertaken with Company. Company and Telco each acknowledges and agrees that no provision of this Agreement or of the Cooperative Research Agreement is intended to or shall otherwise operate in any way to modify or waive the requirements contained in such agreements. With respect to Company Confidential Information, Company acknowledges and agrees that any disclosures of such Confidential Information by Company must only be pursuant to confidentiality agreements between Company and University personnel as individuals. The terms and conditions of such confidentiality agreements are for Company alone to dictate, and the University shall not be responsible or liable to Company or to any third party for any breach of those agreements by such personnel and any damages which the Company or any such third party might incur as a result. ARTICLE V LICENSE OF THE LICENSED PREMISES SECTION 5.01. LICENSED PREMISES. The University hereby grants to Company, and Company hereby accepts from the University, the non-exclusive right to use the Licensed 4 5 Premises as the same may from time to time be constituted after changes therein, additions thereto and eliminations therefrom pursuant to the terms and conditions of this Agreement and subject to the rights of the University hereinafter reserved. Company hereby acknowledges and agrees that the Licensed Premises, including but not limited to all manner of resources to which Company will have access in connection therewith, are being provided by the University and are hereby accepted by Company on an "AS IS" and "AS SHOWN" basis with no warranties or representations of any kind having been made by the University or to be implied. SECTION 5.02. APPURTENANT RIGHTS. Company shall have, as determined solely by the University, as appurtenant to the Licensed Premises, rights to use as well as the right to permit others to use in common, subject to any University safety policies and procedures in effect during the Term and generally applicable to other users of the Building, those common roadways, walkways, elevators, lobbies, hallways and stairways necessary and appropriate, for access to that portion of the Building occupied by the Licensed Premises. Company shall also have access, in common with other occupants of the Building, to conference rooms on an "as-available" basis. SECTION 5.03. EXCLUSIONS AND RESERVATIONS. All the perimeter walls of the Licensed Premises except the inner surfaces thereof, any balconies, terraces or roofs adjacent to the Licensed Premises, and any space in or adjacent to the Licensed Premises used for shafts, stacks, pipes, conduits, wires and appurtenant fixtures, ducts, electric or other utilities, or other Building facilities, and the use thereof, as well as the right of access through the Licensed Premises for the purpose of operation, maintenance, decoration and repair, are expressly reserved to the University. SECTION 5.04. LICENSE AGREEMENT. THE PARTIES ACKNOWLEDGE AND AGREE THAT THE RIGHT TO ACCESS AND USE THE LICENSED PREMISES UNDER THIS AGREEMENT SHALL BE DEEMED TO BE A LICENSE ONLY AND SHALL NOT BE CONSTRUED TO BE A LEASE, JOINT VENTURE, OR PARTNERSHIP, OR AS EVIDENCING ANY RELATIONSHIP BETWEEN THE UNIVERSITY AND COMPANY OTHER THAN AS LICENSOR AND LICENSEES RESPECTIVELY. NO INTEREST IN THE REAL ESTATE INCLUDING BUT NOT LIMITED TO ANY AND ALL ASSOCIATED FIXTURES IS CONVEYED BY THE UNIVERSITY TO COMPANY. SECTION 5.05. PERMITTED USES. Company shall be entitled to occupy and use the Licensed Premises solely for the Permitted Use and for no other purpose. Service and utility areas (whether or not a part of the Licensed Premises) shall be used only for the particular purpose for which they were designated. SECTION 5.06. PROHIBITED USES. Notwithstanding any provision of this Agreement which may indicate or suggest the contrary, including but not limited to Section 5.05 above, Company agrees not to use, or suffer or permit the use of, or suffer or permit anything to be done in or around any part thereof (i) which would violate any of the covenants, agreements, terms, provisions and conditions of this Agreement, (ii) for any unlawful purposes or in any unlawful manner, or (iii) which, in the reasonable judgment of the University, shall in any way (a) impair or tend to impair the appearance or reputation of the Building, (b) impair or interfere with or tend to impair or interfere with any of the Building services or the proper and economic heating, cleaning, air conditioning or other servicing of the Building, or (c) occasion discomfort, inconvenience or annoyance to any of the other tenants or occupants of the Building, whether through the transmission of noise or odors or otherwise. SECTION 5.07. LICENSES AND PERMITS. To the extent allowed by any applicable laws and regulations, Company may conduct research and development in pursuit of the Project and 5 6 consistent with the terms of the Cooperative Research Agreement, and dispose of waste materials, under University's existing licenses and permits but such licenses and permits shall not be deemed to in any way expand upon the singular purpose for which the University has agreed to permit Company to access and use the Licensed Premises which is solely for the Permitted Use. Company shall have no right to use University licenses and permits outside of the Licensed Premises and any other University owned property without the written permission of the University. In addition, Company shall coordinate any handling or disposal of any hazardous material with the University pursuant to Section 5.15. If any governmental license or permit other than existing University licenses and permits shall be required for the proper and lawful conduct of the Permitted Use by Company, or if such existing licenses and permits are otherwise insufficient for the Permitted Use, Company, at no cost or expense to the University or any third party, shall duly procure and thereafter maintain for the duration of this Agreement whatever licenses and/or permits are required, such additional license or permit and submit the same to inspection by the University. Company, at Company's expense, shall at all times comply with the terms and conditions of each such license or permit in this Section 5.07. SECTION 5.08. CHANGES OR ALTERATIONS BY THE UNIVERSITY. The University reserves the right, exercisable by itself or its nominee, at any time and from time to time without the same constituting an actual or constructive eviction and without incurring any liability to Company therefor or otherwise affecting Company's obligations under this Agreement, to make such changes, alterations, additions, improvements, repairs or replacements in or to the Building (including the Licensed Premises) and the fixtures and equipment thereof, as well as in or to the street entrances, halls, passages, elevators, escalators, and stairways thereof, as it may deem necessary or desirable, and to change the arrangement and/or location of entrances or passageways, doors and doorways, and corridors, elevators, stairs, toilets, or other public parts of the Building. Nothing contained in this Section 5.08 shall be deemed to relieve Company of any duty, obligation or liability of Company with respect to making or causing to be made any repair, replacement or improvement or complying with any law, order or requirement of any governmental or other authority. To the extent that Company purchases any equipment or property pursuant to the Cooperative Research Agreement in connection with the Project such equipment or property may not become a fixture of the Building without the University's express prior written consent in each instance. In the event any equipment and/or property does become a fixture of the Building, the University shall be entitled to purchase, and Company agrees to sell to the University, Company's ownership interest in any and all such equipment and property on a depreciated cost basis consistent with industry practice. SECTION 5.09. ALTERATIONS AND IMPROVEMENTS BY COMPANY. Company agrees not to make any alterations, installations, removals, additions or improvements in or to the Licensed Premises without the University's prior written consent, which consent shall be in the University's sole and unfettered discretion. SECTION 5.10. REPAIRS BY COMPANY. Company agrees to keep or cause to be kept the Licensed Premises neat and clean and in such repair, order and condition as the same are in on the Term Commencement Date or may be put in during the Term, reasonable use and wear thereof and damage by fire or unavoidable casualty excepted. Without limiting the generality of the foregoing, Company agrees to replace all windows with glass of the same quality whenever broken as a result of negligence or misconduct attributable to Company. Company agrees that any and all repairs hereunder shall be made by or at the direction of the University's Office of the Physical Plant and, unless otherwise agreed, at Company's sole and respective cost and expense. SECTION 5.11. RULES AND REGULATIONS. Company and an their respective servants, employees, agents, visitors and licensees will faithfully observe such rules and regulations as the University hereafter at any time or from time to time may make and may communicate in writing to Company, and which in the reasonable judgment of the University shall be necessary for the 6 7 reputation, safety, care or appearance of the Building and the land on which it is situated (together, the "Property"), or the preservation of good order therein, or the operation or maintenance of the Property, or the equipment thereof, or the comfort of tenants or others in the Building, provided, however, that in the case of any conflict between the provisions of this Agreement and any such rules and regulations, the provisions of this Agreement shall control, and provided further that nothing contained in this Agreement shall be construed to impose upon the University any duty or obligation to enforce such rules and regulations or the terms, covenants or conditions in any other lease, license or occupancy agreement as against any other tenant or occupant and the University shall not be liable to Company for violation of the same by any other tenant or occupant, its servants, employees, agents, visitors, invitees or licensees. Consistent with this provision, University shall be entitled to require that Company promptly remove any of its employees and/or agents from the BU Photonics Center who University reasonably believes are in violation of any rules, regulations or policies of the University in general or of the BU Photonics Center in particular. University rules, regulations and policies to which Company and its personnel are required to comply may be viewed on the University Website www.bu.edu but are not all-inclusive and may change, from time to time. Accordingly, it shall be Company's responsibility to ensure that it remains current and complies with the University's then-current published rules, regulations and policies, as well as with whatever other rules, regulations or policies are otherwise required and imposed by the University with the appropriate informative notice. SECTION 5.12. ACCIDENTS TO SANITARY AND OTHER SYSTEMS. Company agrees to give to the University prompt notice of any fire or accident in the Licensed Premises or in the Building and of any damage to, or defective condition in, any part or appurtenance of the Building's sanitary, electrical, heating and air conditioning or other systems located in, or passing through, the Licensed Premises. Company agrees not to suffer or permit the Licensed Premises or any fixtures, equipment or utilities therein or serving the same, to be overloaded, damaged or defaced. Company agrees not to permit any hole to be drilled or made in any structural part of the Licensed Premises of the Building, without the prior written consent of the University, which consent shall be at the University's sole and unfettered discretion. SECTION 5.13. SIGNS, BLINDS AND DRAPES. Company agrees not to place any signs on the exterior of the Building or on or in any window, public corridor or door visible from the exterior of the Licensed Premises without the prior written approval of the University. Company shall be responsible for obtaining any required sign permits for signs it erects. No blinds may be put on or in any window nor may any Building drapes or blinds be removed by Company. SECTION 5.14. ESTOPPEL CERTIFICATE. In connection with any proposed sale or financing of all or part of the Building, Company shall upon not less than ten (10) days' prior notice by the University to Company execute, acknowledge and deliver to such prospective purchaser or lender a statement in writing certifying whether this Agreement is unmodified and/or in full force and effect (or, if there have been modifications, that the same is in full force and effect as modified and stating the modifications), and the dates to which any fees and other charges have been paid in advance, if any, and stating whether or not to the best knowledge of the signer of such certificate the University is in default in the performance of any covenant, agreement, term, provision or condition contained in this Agreement and, if so, specifying each such default of which the signer may have knowledge, it being intended that any such statement delivered pursuant hereto may be relied upon by any prospective purchaser of any interest of the University in the Property or any lender, mortgagee or prospective lender or mortgagee of the University. SECTION 5.15. PROHIBITED ITEMS. Subject to the provisions of Section 5.07, Company agrees not to bring or permit to be brought or kept in or on the Licensed Premises or elsewhere in the Building any radioactive, hazardous, inflammable, combustible or explosive fluid, material, chemical or substance (hereinafter referred to as "Hazardous Materials") (except such as are 7 8 related to Company's use of the Licensed Premises, provided that the Hazardous Materials are stored, handled and disposed of in a proper fashion consistent with applicable University and legal standards) or take any action with respect thereto in violation of, or in a manner that would give rise to liability under any applicable law, including without limitation, M.G.L. c. 21C or 21E. Company shall abide by policies of, coordinate with and notify in writing the University's Office of Environmental Health and Safety (the "Office of EHS") with respect to (i) the use, storage, handling and disposal of any Hazardous Materials, and (ii) any applicable training requirements. Company also agrees that any and all disposal of its Hazardous Materials hereunder shall be made by or at the direction of the Office of EHS. The University shall initially be responsible for all costs and expenses of disposal of Company's and Telco's Hazardous Materials unless the University determines, in its sole and unfettered discretion, that the volume of Company's Hazardous Materials for disposal is too large, all such disposal costs and expenses shall then be paid solely by Company at rates customarily imposed. SECTION 5.16. REQUIREMENTS OF LAW, FINES AND PENALTIES. Company , at its sole expense, shall comply with all laws, rules, orders and regulations of Federal, State, County and Municipal Authorities and with any direction of any public officer or officers, pursuant to law, which shall impose any duty upon the University or Company with respect to and arising out of Company's use or occupancy of the Licensed Premises, provided however that Company may contest any such law, rule, order or regulation in good faith so long as the University is not adversely affected thereby. Company shall reimburse and compensate the University for all expenditures made by, or damages or fines sustained or incurred by, the University due to nonperformance or noncompliance with or breach or failure to observe any term, covenant or condition of this Agreement upon Company's part to be kept, observed, performed or complied with. If Company receives notices of any violation of law, ordinance, order or regulation applicable to the Licensed Premises, it shall give prompt notice thereof to the University. SECTION 5.17. COMPANY'S ACTS, EFFECTS ON INSURANCE. Company agrees not to do or permit to be done any act or thing upon the Licensed Premises or elsewhere in the Building which will invalidate or be in conflict with any customary insurance policies covering the Building and the fixtures and property therein and shall not do, or permit to be done, any act or thing upon the Licensed Premises which shall subject the University to any liability or responsibility for injury to any person or persons or to property by reason of any business or operation being carried out on said Licensed Premises or for any other reason. Company shall not (i) do, or permit anything to be done, in or upon the Licensed Premises, or bring or keep anything therein, except as will not increase the rate for any insurance applicable to the Building, or (ii) use the Licensed Premises in a manner which shall increase such insurance rates on the Building or on property located therein, over that applicable when Company first took occupancy of the Licensed Premises hereunder. If by reason of failure of Company to comply with the provisions hereof the insurance rate applicable to any policy of insurance shall at any time thereafter be higher than it otherwise would be, then Company shall reimburse the University for that part of any insurance premiums thereafter paid by the University, which shall have been charged because of such failure by Company. SECTION 5.18. CASUALTY AND TAKING. If during the Term all or any substantial part of the Licensed Premises or Building is damaged materially by fire or any other cause or by action of public or other authority in consequence thereof or is taken by eminent domain or the University receives compensable damage by reason of anything lawfully done in pursuance of public or other authority, this Premises License shall terminate at the University's election, which may be made, notwithstanding the University's entire interest may have been divested, by notice to Company and/or Telco, as applicable, within thirty (30) days after the occurrence of the event giving rise to the election to terminate, which notice shall specify the effective date of termination which shall be not less than ten nor more than thirty (30) days after the date of notice of such termination. If in any such case the Licensed Premises are rendered unfit for use and 8 9 occupation and the Agreement is not so terminated, the University shall use due diligence to put the Licensed Premises, or, in case of a taking, what may remain thereof (excluding any items installed or paid for by Company which Company may be required or permitted to remove) into proper condition for use and occupation to the extent permitted by the net award of insurance or damages available to the University. SECTION 5.19. REAL ESTATE TAXES. Company covenants to pay promptly any or all increases in real estate taxes levied or assessed or becoming payable for or in respect of the Building and other improvements located therein, attributable to this Agreement or to Company's use of the Licensed Premises, and provided further that the University shall provide Company with copies of the then current (increased) real estate tax bill, the prior bill and a breakdown of the taxes allocable to the Licensed Premises. SECTION 5.20. RESERVATION OF AWARD. The University reserves to itself any and all rights to receive awards made for damages to the Licensed Premises, Building or Property and the license hereby created, or any one or more of them, accruing by reason of exercise of eminent domain or by reason of anything lawfully done in pursuance of public or other authority. Company hereby releases and assigns to the University all of its rights to such awards and covenants to deliver such further assignments and assurances thereof as the University may from time to time request and hereby irrevocably designates and appoints the University as its attorney-in-fact to execute and deliver in Company's name, as applicable, and on its behalf all such further assignments thereof. It is agreed and understood, however, that the University does not reserve to itself, and neither does Company assign to the University, any damages payable for (i) movable trade fixtures installed by Company, or any person claiming under Company, at its own expense or (ii) relocation expenses recoverable by Company from such authority in a separate action. SECTION 5.21. END OF TERM. Upon the expiration or other termination of the Term with respect to the Company, the Company shall peaceably quit and surrender to the University the Licensed Premises and all alterations and additions thereto which the Company is not entitled or required to remove under the provisions of this Agreement, broom-clean, in good order, repair and condition excepting only reasonable use and wear and damage by fire or other casualty for which, under other provisions of this Agreement, the Company has no responsibility of repair or restoration. SECTION 5.22. ABANDONED PROPERTY. Any personal property in which Company has an interest which shall remain in the Building or on the Licensed Premises after the expiration or termination of the Term shall be conclusively deemed to have been abandoned, and may be disposed of in such manner as the University may see fit. Notwithstanding the foregoing, Company will, upon request of the University made not later than thirty (30) days after the expiration or termination of the Term, promptly remove from the Building any personal property or, if any part thereof shall be sold, that the University may receive and retain the proceeds of such sale and apply the same, at its option, against the expenses of the sale, the cost of moving and storage, any arrears of charges payable hereunder by Company the University and any damages to which the University may be entitled under this Agreement or pursuant to law, with the balance, if any, to be paid to Company. 9 10 ARTICLE VI INTELLECTUAL PROPERTY SECTION 6.01. INTELLECTUAL PROPERTY RIGHTS. a. CONFIDENTIAL INFORMATION- Any disclosure of confidential information between Company and the University shall be solely pursuant to the terms and conditions of a separate Non-Disclosure Agreement between these same Parties. Accordingly, to the extent that Company may need to disclose any of its Confidential Information (as defined in the Cooperative Research Agreement) to any of the University's personnel who are designated by the University as being accessible to Company for purposes of the Project, Company shall be responsible for entering into its own confidentiality agreements with such individuals, pursuant and subject to the provisions of Section 4.05 above. b. GENERATED INFORMATION & COPYRIGHTS Each Party shall have exclusive ownership in and to Generated Information that it creates, including the resulting copyright to such original work, unless and to the extent expressly agreed otherwise on a case by case basis in writing. Accordingly, each Party's right to use its Generated Information, as defined, shall be subject to the following provisions: (i) Each Party agrees to place applicable copyright and other notices, as appropriate for the protection of copyright and mask work rights, in human readable form onto all physical media, and in digitally encoded form in the header of machine readable information recorded on such media such that the notice will appear in human readable form when the digital data is off loaded or the data is accessed for display or printout. (ii) Notwithstanding each Party's exclusive ownership of all Generated Information it creates, Company shall have the exclusive right to use all Generated Information with respect to the Developed Prototype Products as an optical networking product within, and for use in, the telecommunications access market segments agreed to by Telco and Company pursuant to the Cooperative Research Agreement ("Field A") and Telco and as well as the University shall have the non-exclusive right to use such Generated Information outside Field A ("Field B"), provided however, that the University shall make Generated Information owned by the University available to Company only to the extent that it applies to Field A, but the University shall be entitled to make market related Generated Information available to service providers in both Fields. c. REPORTING SUBJECT INVENTIONS (i) The Parties agree to disclose to each other through their respective Project Managers and maintain in confidence, each and every Subject Invention, whether or not patentable, protectable under the Patent Act, or otherwise reduced to practice. For the avoidance of doubt, the Parties shall be obligated to promptly disclose, in writing and on a confidential basis, inventive ideas conceived in connection with this project. (ii) These disclosures, to the extent known, shall be enabling to the extent required under 35 USC 112. The disclosure shall also identify any known actual or potential statutory bars (i.e. any disclosure of the invention without restrictions as to disclosure or use imposed upon the recipient, any offer to sell, and any public use of the invention). The Parties further agree to promptly disclose to each other, each and any subsequently known event(s) which is already or may later become, a statutory bar to obtaining patent protection on any given Subject Invention(s) anywhere in the world. All invention disclosures shall be marked as confidential d. TITLE TO INVENTIONS (i) Subject Inventions shall be owned jointly by the Parties if they constitute joint inventions of such Parties. To the extent that either Party is the sole inventor of any Subject Invention(s), that Party alone shall, as between the Parties, be the sole owner thereof. However, 10 11 and notwithstanding ownership of any given Subject Invention, to the extent that any Subject Invention is based on or otherwise arose out of access to any Party's Confidential Information, each Party's right to use the Subject Invention, including the right to pursue patent protection thereon, shall be subject to its non-disclosure obligations with respect to the other Party's Confidential Information. Subject to the foregoing, and with respect to all Subject Inventions owned solely by the University or jointly by the University with Company, the University agrees to grant Company the exclusive, transferable, unrestricted and fully paid-up (subject, however, to the remaining portions of this subparagraph d. as they apply to additional license terms and conditions that may be required in order for Company to exercise any such license and which may contain restrictions and monetary obligations) right and license to use the Subject Inventions solely for the commercial exploitation of the Developed Prototype Product as an optical networking product within, and for use in Field A. In partial consideration for such grant, Company hereby grants to the University the non-exclusive, transferable, unrestricted and fully paid-up right and license to use Subject Inventions owned solely by Company or jointly with the University, in all areas and for all purposes outside of Field A ("Field B") For purposes of the University's license with respect to Company's sole Subject Inventions, such license shall apply only to those Subject Inventions which relate to, or which otherwise arose out of Company's access to, Telco's Confidential Information, Telco's Background Intellectual Property and/or the University's Background Intellectual Property. It is agreed, however, that Company's exercise of its license grant, as well as its right to use Subject Inventions which were conceived and reduced to practice solely by Company, shall be subject to the Parties reaching agreement as to the terms and conditions to govern any license grant to Company under any applicable Background Intellectual Property Rights owned or licensed by Contractor, and/or any Intellectual Property Rights owned or licensed by Beacon Photonics, Inc. and/or Beacon Photonics, L.P. or any Boston University Intellectual Property to the extent that such Intellectual Property is embodied in, or a license would otherwise be required at law in order to use any Subject Inventions pursuant to such license grant without infringing any Intellectual Property rights of Telco, Beacon Photonics, Inc. Beacon Photonics, L.P. or the University. (ii) Notwithstanding anything to the contrary in this Agreement, all Developed Prototype Products developed under the Cooperative Research Agreement shall be the sole property of Company, and as between the Parties to this Agreement, Company has the sole and exclusive right to make, use, manufacture and otherwise commercialize such Developed Prototype Products in any market throughout the world, including without limitation, Field A and Field B, subject to obtaining whatever licenses are required under this Agreement, and at law, with respect to any Subject Inventions, Generated Information which were not expressly granted by the University under this Agreement with respect to Field B, as well as any licenses required with respect to any Background Intellectual Property of the University, Beacon Photonics, Inc., Beacon Photonics, L.P., Boston University Intellectual Property and any third party Intellectual Property. The University covenants and agrees that any rights it may have at law with respect to the Developed Prototype Products are expressly waived, and the University agrees not to make, use, manufacture or otherwise commercialize the Developed Prototype Products in any market in the world, including without limitation, Field B. Company acknowledges and agrees, however, that no provision of this Agreement shall be deemed to restrict the University from developing, alone or with the cooperation of any third parties, any manner of telecommunications products, whether or not they compete with the Developed Prototype Products, so long as the University does not use any confidential information received from Company pursuant to any non-disclosure agreement that may be executed between the University and Company (which shall not be deemed to mean or include any non-disclosure of agreements which may be executed between Company and any University personnel) with respect to the Project, or any Generated Information or Subject Inventions owned solely by Company that the University was not licensed hereunder to use. 11 12 e. FILING PATENT APPLICATIONS (i) The Parties agree that each Party shall be entitled to pursue, at its own respective cost and expense, patent protection on any Subject Inventions of which it is the sole inventor except to the extent that doing so would disclose any Confidential Information of the other Party. In such event, that other Party's prior permission shall be required, absent which the inventing Party shall be obligated to modify the patent application to remove any such Confidential Information content. With respect to Subject Inventions which constitute joint inventions, the inventing Parties shall determine, on a case by case basis, whether or not and to what extent patent protection will be pursued, if at all, it being understood that any co-inventor Party wishing not to pursue such protection in the interests of preserving the confidentiality of its Confidential Information shall be entitled to make the final decision. Subject to the preceding provision, the costs and expenses of pursuing and maintaining patent protection in the U.S. by co-inventor Parties shall be shared equally in every respect; to the extent that the co-inventor Parties are not in agreement regarding the extent to which foreign patent protection should be pursued, the co-inventor Party desirous of pursuing such protection may do so on its own, and at its own cost and expense. In such event, the other co-inventor Party who desired not to pursue such protection shall have no rights with respect to any resulting foreign patent(s) unless and until it reimburses the other co-inventor for its share of the out-of-pocket expenses incurred in pursuing such protection. With respect to Subject Inventions where the sole inventor Party does not itself wish to pursue patent protection but is willing to do so in the interests of any other Party, all costs and expense incurred in connection with the pursuit and maintenance of such protection shall be borne solely by the non-inventor Party desiring such protection. In any event, any Party's decision to practice a Subject Invention shall be at its own risk, cost and expense. (ii) Consistent with the provisions of this Agreement as they relate to Company's exclusive rights with respect to Field A as well as the University's shared non-exclusive rights with respective to Field B, University (regardless of ownership), shall not be entitled to authorize any third party to in any manner use or practice, directly or indirectly, any Generated Information or Subject Invention respectively, within Field A for a period of one (1) year from expiration or termination of this Agreement at which time, all exclusive rights shall terminate. SECTION 6.02. OTHER LICENSING RIGHTS. Any license granted to Company pursuant to this Article VI shall be subject to the Boston University Charles River Patent Policy, the provisions of the Bayh-Dole Act, Public Laws 96-517 and 98-620 (codified at 35 U.S.C. 200 et seq.)(the "Bayh-Dole Act") and the University's prior agreements with other sponsors and shall provide (i) for a reasonable royalty on net sales of products utilizing the licensed technology to be paid to the University, (ii) for the University to retain a non-exclusive license, with the right to grant sub-licenses, for research purposes only, (iii) that the rights of the United States of America arising from the Bayh-Dole Act, and the restrictions imposed upon the University by the Act, including any federal agency approvals required by or restrictions imposed by ss.202(c)(7), be specifically reserved and incorporated, and (iv) that Company (and its sub-licensees, if any) will exert its best efforts to introduce products utilizing the licensed technology into public use as rapidly as practicable. ARTICLE VII INABILITY TO PERFORM, EXCULPATORY CLAUSE SECTION 7.01. INABILITY TO PERFORM, EXCULPATORY CLAUSE. Except as otherwise expressly provided in this Agreement, this Agreement and the obligations of Company to pay any fees or charges hereunder and perform all other covenants, agreements, terms, provisions and conditions hereunder on the part of Company to be performed shall in no way be affected, impaired or excused because the University is unable to fulfill any of its obligations under this Agreement or is unable to supply or is delayed in supplying any service expressly or impliedly to 12 13 be supplied or is unable to make or is delayed in making any repairs, replacements, additions, alterations, improvements or decorations or is unable to supply or is delayed in supplying any equipment or fixtures if the University is prevented or delayed from doing so by reason of strikes or labor troubles or any other similar or dissimilar cause whatsoever beyond the University's reasonable control, including but not limited to, governmental preemption in connection with a national emergency or by reason of any rule, order or regulation of any department of subdivision thereof or any governmental agency or by reason of the conditions of supply and demand which have been or are affected by war, hostilities or other similar or dissimilar emergency. In each instance of inability of the University to perform, the University shall exercise reasonable diligence to eliminate the cause of such inability to perform. ARTICLE VIII INSURANCE, EXONERATION AND EXCULPATION. SECTION 8.01. INSURANCE. Company shall maintain at its sole expense: (a) Commercial General Liability Insurance naming the University, any managing agent designated by the University, and any holder of a mortgage of the Building as additional insureds, subject to a combined single limit of at least One Million U.S. Dollars ($1,000,000) each occurrence and Five Million U.S. Dollars ($5,000,000) in the aggregate for bodily injury and property damages, and from time to time thereafter in such higher amounts, if procurable, as may be reasonably required by the University are customarily carried by responsible office and laboratory tenants in the City of Boston; (b) so-called contents and improvements insurance adequately insuring all property belonging to or removable by Licensee and situated in the Licensed Premises; (c) worker's compensation insurance providing for the payment of statutory benefits required by law covering the persons employed by Company; and (d) employer's liability insurance with a minimum limit of One Million U.S. Dollars ($1,000,000). SECTION 8.02. CERTIFICATES OF INSURANCE. Such insurances shall be effected with insurers authorized to do business in Massachusetts under valid and enforceable policies, and such policies shall name the University and Company, and any additional parties designated by the University as the insureds, as their respective interests appear. Such insurance shall provide that it shall not be canceled without at least ten (10) days' prior written notice to each insured named therein. On or before the Term Commencement Date and thereafter prior to the expiration of each expiring policy, original copies of the policies provided for in Section 8.01. issued by the respective insurers, or certificates or binders of such policies setting forth in full the provisions thereof and issued by such insurers, shall be delivered by Company to the University and certificates as aforesaid of such policies shall upon the request of the University be delivered by Company to the holder of any mortgage affecting the Licensed Premises. SECTION 8.03. WAIVER OF SUBROGATION. Any insurance carried by either party with respect to the Licensed Premises and property therein or occurrences thereon shall include a clause or endorsement denying to the insurer rights of subrogation against the other party to the extent rights have been waived by the insured prior to occurrences of injury or loss. Each party, notwithstanding any provisions of this License to the contrary, hereby waives any rights of recovery against the other for injury or loss due to hazards covered by insurance containing such clause or endorsement to the extent of the indemnification received thereunder. SECTION 8.04. PROPERTY OF COMPANY. In addition to and not in limitation to the foregoing, Company covenants and agrees that all of its merchandise, furniture, fixtures and property of every kind, nature and description which may be in or upon the Licensed Premises or Building, in the public corridors, or on the sidewalks, areaways and approaches adjacent thereto, during the Term of this Agreement, shall be at the sole risk and hazard of Company, and that if the whole or any part thereof shall be damaged, destroyed, stolen or removed from any cause or 13 14 reason whatsoever, no part of said damage or loss shall be charged to, or borne by University, unless such damage or loss is due solely to University's negligence or willful misconduct. ARTICLE IX INDEMNIFICATION SECTION 9.01. Company agrees to defend (with counsel reasonably acceptable to the University), hold harmless and indemnify the University, its employees and agents, from and against any liability for injury, loss, accident, damages (however characterized), judgements, or settlements, with respect to any person or property and from any claims, actions, proceedings and expenses and costs in connection therewith (including, without implied limitation, reasonable counsel fees): (i) arising from the omission, fault, willful act, negligence or other misconduct of Company or any of its officers, directors, employees, agents, representatives or others for whose conduct Company may be responsible, or from any use made or thing done or occurring on the Licensed Premises not due to the negligence of the University (ii) resulting from the failure of Company, or any of its officers, directors, employees, agents, representatives or others for whose conduct Company may be responsible, to perform and discharge its covenants and obligations under this Agreement; and/or (iii) otherwise arising directly or indirectly out of the Project, including but not limited to, any products liability or intellectual property infringement and/or trade secret misappropriation claims with respect to the Developed Prototype Product(s) as well as any follow on products, whether or not considered to be successors of such Prototype Products. ARTICLE X LIMITATION OF LIABILITY SECTION 10.01. With the exception of Company's obligations pursuant to the preceding Article IX, Company shall not be liable and in no event shall the University be liable with respect to any consequential, incidental, special or other indirect damages, such as lost profits, even if the such party has knowledge of the likelihood of such damages. Company acknowledges and agrees that any and all service(s) performed and input provided by University personnel are being supplied without charge and on an AS-IS basis only and University shall accordingly have no responsibility or liability with respect to any such services or input. For any claim concerning the performance or nonperformance of services by the University hereunder, Company's sole remedy shall be, at the University's option, to reperform the services at no charge to Company Subject to the foregoing, for any claims related whatsoever to the subject matter of this Agreement, regardless of the form of action, whether in contract or in tort, the liability of the each Party and its employees and agents for damages shall be restricted to direct damages, and such Party's maximum aggregate liability to the other with respect to any and all such claims shall not exceed the fees paid by Company to the University under this Agreement for the right to use the Licensed Premises. 14 15 ARTICLE XI ASSIGNMENT, MORTGAGING, SUBLICENCING SECTION 11.01. Company covenants and agrees that neither this Agreement nor the term and estate hereby granted nor any interest herein, including any services, will be assigned, mortgaged, pledged, encumbered or otherwise transferred (whether voluntarily or by operation of law), and that neither the Licensed Premises, nor any part thereof, will be encumbered in any manner by reason of any act or omission on the part of Company, or used or occupied, or permitted to be used or occupied, or utilized for any reason whatsoever, by anyone other than Company, or for any use or purpose other than Permitted Uses of Licensed Premises, or be sublicensed, or offered or advertised for sublicensing, without prior written consent of the University in every case, which consent shall be at the University's sole and unfettered discretion. Notwithstanding the foregoing, this Agreement may be transferred or assigned without University consent to any wholly-owned subsidiary of Company or to any party that acquires all or substantially all of the stock or assets of the Company. ARTICLE XII BILLS SECTION 12.01. All bills and statements for reimbursement or other payments or charges due from Company and Telco to the University hereunder shall be due and payable in full thirty (30) days, unless herein otherwise provided, after submission thereof by the University to Company and/or Telco, as applicable. Company's failure to make timely payment of any undisputed amounts indicated by such bills and statements, for work done by the University at Company's, reimbursement provided for by this Agreement, or any other sums properly owing by Company to the University under this Agreement, shall be treated as default of this Agreement, in which event the University shall have the right to terminate this Agreement as to the defaulting Party upon thirty (30) days written notice to Company the defaulting Party in addition to all rights and remedies provided in this Agreement. SECTION 12.02. INCREMENTAL COSTS. Company agrees to reimburse the University for all incremental costs incurred by the University with respect to any and all University personnel that are designated by the University as being available to the Company with respect to the Project. Incremental costs shall be deemed to include the University's out-of-pocket costs and expenses such as travel and living expenses for University personnel engaged in the Project, provided that (i) all travel and living expenses are incurred only in accordance with Company's Travel Expense Reimbursement Policy, a copy of which has been provided to the University, as amended from time to time by Company for its own business operations, and (ii) any other individual incremental expenses in excess of $10,000 individually, shall require the prior written approval of the Company. Incremental costs shall further include all hiring costs, commissions and salaries of any part-time or full-time personnel who are hired or are otherwise retained by the University solely for the duration of the Project or any portion thereof 15 16 ARTICLE XIII PUBLICITY SECTION 13.01. Either party may publish or otherwise publicly disclose the fact that the parties have entered into an agreement to incubate and accelerate Company at the Photonics Center; provided that, no party may disclose the specific terms of this Agreement without the prior written consent of the other party. Beyond this, no party shall use the name of the other party or of any of their respective personnel in any publication, advertising or promotional material without the prior written consent of the other, which consent will not unreasonably be withheld. In any such statements, the relationship of the parties shall be accurately and appropriately described. ARTICLE XIV GENERAL PROVISIONS SECTION 14.01. SURVIVAL OF OBLIGATIONS. In the event of any termination of this Agreement, (i) the provisions of Articles III, VI, IX, X, XIII, XIV and Sections 2.02, 5.19., as well as any accrued payment obligation under this Agreement, shall survive any such termination; and (ii) such termination shall not affect either party's rights with respect to any breach or non-performance by any other party prior to such termination. SECTION 14.02. GOVERNING LAW. This Agreement shall be governed and construed in accordance with the internal laws of the Commonwealth of Massachusetts, without regard to its rules concerning conflicts of laws. SECTION 14.03. EXCLUSIVE VENUE; CONSENT TO JURISDICTION. Any action, suit or other proceeding pursuant to, arising under, or touching or concerning this Agreement or the transactions contemplated hereby shall be brought exclusively in any court of competent jurisdiction in Suffolk County, Commonwealth of Massachusetts. The parties agree to take any and all necessary or appropriate action to submit to the exclusive jurisdiction of any such court. In any such action, suit or proceeding, in addition to any other relief to which such party may be entitled. SECTION 14.04. AMENDMENT AND WAIVER. No provision of or right under this Agreement shall be deemed to have been waived by any act or acquiescence on the part of either party, its agents or employees, but only by an instrument in writing signed by an authorized officer of each party. No waiver by either party of any breach of this Agreement by the other party shall be effective as to any other breach, whether of the same or any other term or condition and whether occurring before or after the date of such waiver. SECTION 14.05. INDEPENDENT CONTRACTORS. Each party represents that it is acting on its own behalf as an independent contractor and is not acting as an agent for or otherwise on behalf of any other Party to this Agreement nor any third party. This Agreement and the relations hereby established by and between the University and the Company do not constitute a partnership, joint venture, agency or contract of employment between them. SECTION 14.06. SUCCESSORS AND ASSIGNS. This Agreement shall bind and inure to the benefit of the parties hereto and their respective successors and permitted assigns. SECTION 14.07. NOTICES. All communications hereunder shall be in writing and shall be deemed to have been duly given upon receipt by the addressee at the addresses set forth below, or such other address as either party may specify by notice sent in accordance with this section 15.06: 16 17 If to the University: Boston University Photonics Center 8 Saint Mary's Street Boston, MA 02215 Attention: Deputy Director of the Photonics Center With a copy to: Boston University Office of the General Counsel 125 Bay State Road Boston, MA 02215 Attention: General Counsel If to Telco: Beacon Telco, L.P. c/o Beacon Photonics, Inc., its General Partner 8 Saint Mary's Street, suite 910 Boston, MA 02215 Attention: Alok Prasad With a copy to: Bingham Dana LLP 150 Federal Street Boston, MA 02110 Attention: Jack Concannon If to Company: Verilink Corporation 950 Explorer Blvd. Huntsville, AL 35806 Attention: Vice President and CFO With a copy to: Powell, Goldstein, Frazer & Murphy LLP 191 Peachtree Street, N.E., 16th Floor Atlanta, GA 30303 Attention: Eliot Robinson SECTION 14.08. SEVERABILITY. In the event any provision of this Agreement shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other term or provision hereof. The parties agree that they will negotiate in good faith or will permit a court or arbitrator to replace any provision hereof so held invalid, illegal or unenforceable with a valid provision which is as similar as possible in substance to the invalid, illegal or unenforceable provision. SECTION 14.09. CONFLICT OR INCONSISTENCY. In the event of any conflict or inconsistency between the terms and conditions hereof and any terms or conditions set forth in any purchase order or other document relating to the transactions contemplated by this Agreement, the terms and conditions set forth in this Agreement shall prevail. SECTION 14.10. CAPTIONS. Captions of the sections and subsections of this Agreement are for reference purposes only and do not constitute terms or conditions of this Agreement and shall not limit or affect the terms and conditions hereof. 17 18 SECTION 14.11. WORD MEANINGS. Words such as herein, hereinafter, hereof and hereunder refer to this Agreement as a whole and not merely to a section or paragraph in which such words appear, unless the context otherwise requires. The singular shall include the plural, and each masculine, feminine and neuter reference shall include and refer also to the others, unless the context otherwise requires. SECTION 14.12. ENTIRE AGREEMENT. This Agreement contains the entire understanding of the parties hereto with respect to the transactions and matters contemplated hereby, supersedes all prior agreements and understandings relating to the subject mater hereof, and no representations, inducements, promises or agreements, whether oral or otherwise, between such parties not contained herein or incorporated herein by reference shall be of any force or effect. SECTION 14.13. RULES OF CONSTRUCTION. The parties agree that they have participated equally in the formation of this Agreement and that the language and terms of this Agreement shall not be presumptively construed against either of them. SECTION 14.14. COUNTERPARTS. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. In making proof of this Agreement, it shall not be necessary to produce or account for more than one such counterpart. (Remainder of page intentionally left blank.) 18 19 IN WITNESS WHEREOF, the University, Telco and Company have caused this instrument to be executed under seal, as of the day and year first above written. TRUSTEES OF BOSTON UNIVERSITY By: /s/ Martin J. Howard ---------------------------------------- Name: Martin J. Howard Title: Assistant Treasurer VERILINK CORPORATION By: /s/ Graham G. Pattison ---------------------------------------- Name: Graham G. Pattison Title: President and Chief Executive Officer BEACON TELCO, L.P. BY BEACON PHOTONICS, INC., ITS GENERAL PARTNER By: /s/ Alok Prasad ---------------------------------------- Name: Alok Prasad Title: President 19 EX-27.1 7 g65370ex27-1.txt FINANCIAL DATA SCHEDULE
5 THIS FINANCIAL SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS CONTAINED IN THE FORM 10-Q OF VERILINK CORPORATION FOR THE FIRST FISCAL QUARTER ENDED SEPTEMBER 29, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS JUN-29-2001 JUL-01-2000 SEP-29-2000 9,289 2,200 11,266 492 7,268 32,285 23,415 12,507 50,584 8,648 0 0 0 184 38,381 50,584 11,829 11,829 5,382 5,382 7,282 0 0 (525) 6,311 (6,836) 0 0 0 (6,836) (0.46) (0.46)
-----END PRIVACY-ENHANCED MESSAGE-----