-----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, S3xhWsZY8wY0FemeB71Os0aLLcWcspuh8toman5zxOYHNqTO3M0NMABWMhY8Eyh2 9+tbFHq0NiTpGvTDpSFL3w== 0000912057-96-016078.txt : 19960805 0000912057-96-016078.hdr.sgml : 19960805 ACCESSION NUMBER: 0000912057-96-016078 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 19960802 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIGITAL LIGHTWAVE INC CENTRAL INDEX KEY: 0001016100 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 954313013 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-09457 FILM NUMBER: 96603068 BUSINESS ADDRESS: STREET 1: 601 CLEVELAND STREET STREET 2: 5TH FLOOR CITY: CLEARWATER STATE: FL ZIP: 34615 BUSINESS PHONE: 8134426677 MAIL ADDRESS: STREET 1: 601 CLEVELAND STREET STREET 2: 5TH FLOOR CITY: CLEARWATER STATE: FL ZIP: 34615 S-1 1 S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 2, 1996. REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------- DIGITAL LIGHTWAVE, INC. (Exact name of registrant as specified in its charter) DELAWARE 3663 95-4313013 (State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer of Classification Code Number) Identification incorporation or organization) Number)
601 CLEVELAND STREET, FIFTH FLOOR CLEARWATER, FLORIDA 34615 (813) 442-6677 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) BETH A. MORRIS 601 CLEVELAND STREET, FIFTH FLOOR CLEARWATER, FLORIDA 34615 (813)442-6677 (Name, address, including zip code, and telephone number, including area code, of agent for service) ---------------- COPIES TO: Seth P. Joseph, Esq. Jeffrey M. Stein, Esq. John J. Hentrich, Esq. King & Spalding Baker & McKenzie 191 Peachtree Street, N.E. Barnett Tower, Suite 1600 Atlanta, Georgia 30303-1763 701 Brickell Avenue (404) 572-4600 Miami, Florida 33131-2827 (305) 789-8960
---------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS PROMPTLY AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE. ---------------- If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / ---------------- CALCULATION OF REGISTRATION FEE
TITLE OF EACH CLASS OF PROPOSED MAXIMUM AMOUNT OF SECURITIES TO BE REGISTERED AGGREGATE OFFERING PRICE (1)(2) REGISTRATION FEE Common Stock, $0.0001 par value per share.............. $51,865,000 $17,885
(1) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(o) under the Securities Act of 1933. (2) Includes 615,000 shares of Common Stock which may be purchased by the Underwriters pursuant to an over-allotment option. ---------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- DIGITAL LIGHTWAVE, INC. CROSS REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K
FORM S-1 ITEM NUMBER AND CAPTION LOCATION IN PROSPECTUS ----------------------------------------------------- ----------------------------------------------------- 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus...................... Forepart of the Registration Statement and Outside Front Cover Page of Prospectus 2. Inside Front and Outside Back Cover Pages of Prospectus.......................................... Inside Front and Outside Back Cover Pages of Prospectus 3. Summary Information, Risk Factors; Ratio of Earnings to Fixed Charges.................................... Prospectus Summary; Risk Factors; not applicable 4. Use of Proceeds...................................... Use of Proceeds 5. Determination of Offering Price...................... Outside Front Cover Page of Prospectus; Underwriting 6. Dilution............................................. Dilution 7. Selling Security Holders............................. Principal and Selling Stockholders 8. Plan of Distribution................................. Outside Front Cover Page of Prospectus; Underwriting 9. Description of Securities to be Registered........... Description of Capital Stock; Shares Eligible for Future Sale; Dilution; Dividend Policy 10. Interest of Named Experts and Counsel................ Experts; Legal Matters 11. Information with Respect to the Registrant (1) Description of Business......................... Prospectus Summary; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Certain Transactions; Financial Statements (including the Notes thereto) (2) Description of Property......................... Business -- Facilities (3) Legal Proceedings............................... Business -- Legal Proceedings (4) Common Stock Price Range and Dividends.......... Risk Factors; Underwriting; Dividend Policy (5) Financial Statements............................ Financial Statements (including the Notes thereto) (6) Selected Financial Data......................... Prospectus Summary -- Summary Financial Data; Selected Financial Data (7) Supplementary Financial Information............. Not Applicable (8) Management's Discussion and Analysis of Financial Condition and Results of Operations... Management's Discussion and Analysis of Financial Condition and Results of Operations (9) Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............. Not Applicable (10) Directors and Executive Officers............... Management -- Executive Officers and Directors (11) Executive Compensation......................... Management -- Executive Compensation (12) Security Ownership of Certain Beneficial Owners and Management................................. Principal and Selling Stockholders (13) Certain Relationships and Related Transactions................................... Management; Certain Transactions 12. Disclosure of Commission Position on Indemnification for Securities Act Liabilities...................... Not Applicable
Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. SUBJECT TO COMPLETION, DATED AUGUST 2, 1996 4,100,000 Shares [LOGO] Common Stock ($.0001 PAR VALUE) -------------- OF THE SHARES OF COMMON STOCK ("COMMON STOCK") OFFERED HEREBY (THE "OFFERING"), 3,000,000 SHARES ARE BEING SOLD BY DIGITAL LIGHTWAVE, INC. ("DIGITAL LIGHTWAVE" OR THE "COMPANY") AND 1,100,000 SHARES ARE BEING SOLD BY THE SELLING STOCKHOLDERS NAMED HEREIN UNDER "PRINCIPAL AND SELLING STOCKHOLDERS" (THE "SELLING STOCKHOLDERS"). THE COMPANY WILL NOT RECEIVE ANY OF THE PROCEEDS OF SHARES SOLD BY THE SELLING STOCKHOLDERS. PRIOR TO THIS OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR THE COMMON STOCK. IT IS ANTICIPATED THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE BETWEEN $ AND $ PER SHARE. FOR INFORMATION RELATING TO THE FACTORS CONSIDERED IN DETERMINING THE INITIAL OFFERING PRICE TO THE PUBLIC, SEE "UNDERWRITING." APPLICATION HAS BEEN MADE TO LIST THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET, UNDER THE SYMBOL "DIGL". -------------- FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK, SEE "RISK FACTORS" BEGINNING ON PAGE 7 HEREIN. ------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR AD- EQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
UNDERWRITING PROCEEDS TO PRICE TO DISCOUNTS AND PROCEEDS TO SELLING PUBLIC COMMISSIONS COMPANY(1) STOCKHOLDERS -------------- -------------- -------------- -------------- PER SHARE............................................. $ $ $ $ TOTAL(2).............................................. $ $ $ $
(1) BEFORE DEDUCTION OF EXPENSES PAYABLE BY THE COMPANY, ESTIMATED AT $1,000,000. (2) THE COMPANY HAS GRANTED THE UNDERWRITERS AN OPTION, EXERCISABLE FOR 30 DAYS FROM THE DATE OF THIS PROSPECTUS, TO PURCHASE A MAXIMUM OF 615,000 ADDITIONAL SHARES OF COMMON STOCK TO COVER OVER-ALLOTMENTS OF SHARES. IF THE OPTION IS EXERCISED IN FULL, THE TOTAL PRICE TO PUBLIC WILL BE $ , UNDERWRITING DISCOUNTS AND COMMISSIONS WILL BE $ , AND PROCEEDS TO COMPANY WILL BE $ . -------------- THE SHARES ARE OFFERED BY THE SEVERAL UNDERWRITERS WHEN, AS AND IF DELIVERED TO AND ACCEPTED BY THE UNDERWRITERS AND SUBJECT TO THEIR RIGHT TO REJECT ORDERS IN WHOLE OR IN PART. IT IS EXPECTED THAT THE COMMON STOCK WILL BE READY FOR DELIVERY ON OR ABOUT , 1996, AGAINST PAYMENT IN IMMEDIATELY AVAILABLE FUNDS. CS FIRST BOSTON THE DATE OF THIS PROSPECTUS IS , 1996 [GRAPHIC] DIGITAL LIGHTWAVE is a trademark of the Company for which registration has been applied. All other trademarks or trade names referred to in this Prospectus are the property of their respective owners. -------------- IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. DURING THIS OFFERING, CERTAIN PERSONS AFFILIATED WITH PERSONS PARTICIPATING IN THE DISTRIBUTION MAY ENGAGE IN TRANSACTIONS FOR THEIR OWN ACCOUNT OR FOR THE ACCOUNTS OF OTHERS IN THE COMMON STOCK OF THE COMPANY PURSUANT TO EXEMPTIONS FROM RULES 10B-6, 10B-7, AND 10B-8 UNDER THE SECURITIES EXCHANGE ACT OF 1934. 2 PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION, INCLUDING "RISK FACTORS" AND THE FINANCIAL STATEMENTS AND THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. CERTAIN TERMS CONTAINED HEREIN HAVE THE MEANING SET FORTH IN THE GLOSSARY AT PAGE G-1. UNLESS OTHERWISE INDICATED, ALL INFORMATION CONTAINED IN THIS PROSPECTUS ASSUMES THE EXERCISE OF WARRANTS TO PURCHASE 1,903,120 SHARES OF COMMON STOCK PRIOR TO THE CLOSING OF THE OFFERING AND ASSUMES THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED. SEE "DESCRIPTION OF CAPITAL STOCK" AND "UNDERWRITING." THE COMPANY Digital Lightwave develops, manufactures and sells advanced computer systems that provide information concerning the performance of telecommunications networks and transmission equipment. The Company believes that there is a growing need on the part of its customers, which include telecommunications service providers and network equipment manufacturers, to obtain such information to verify and manage the transmission of voice, data and video and more effectively plan for and implement network expansion. The Company's initial product, the ASA 312, is a software-based network information computer that is designed to outperform conventional hardware-based test instruments. The ASA 312 is user friendly, lightweight, compact, and easily operated through a touch sensor over a full color display. The Company believes that the ASA 312 is the only integrated product that enables users to understand and process information simultaneously and without interruption from networks utilizing the legacy T-Carrier protocol at rates T-1 and T-3 and the fiber optic SONET protocol at rates OC-1, OC-3, OC-3c and OC-12, as well as networks transporting enhanced data services utilizing asynchronous transfer mode ("ATM") protocol. In addition, the Company is developing a family of on-line remote access products, based on its core technologies. The telecommunications service providers to which the Company has sold the ASA 312 include: (i) InterExchange Carriers ("IXCs"), such as MCI; (ii) Regional Bell Operating Companies ("RBOCs"), such as Ameritech; (iii) Competitive Access Providers ("CAPs"), such as Buckeye Cablevision; and (iv) government agencies, including three separate agencies of the Department of Defense. The network equipment manufacturers to which the Company has sold the ASA 312 include Hitachi and Tellabs. INDUSTRY OVERVIEW Over the past several years, traffic generated by LANs, WANs, wireless networks, and the Internet has placed substantial demands on the public telecommunications network. In order to satisfy the substantially increased demand for capacity, bandwidth and enhanced data services, telecommunications service providers have added newer, higher capacity fiber optic cable to their existing infrastructure. Domestic service providers have added high speed SONET fiber optic transmission equipment, at a rate estimated at over $2 billion annually over the past two years, to the installed base of legacy T-Carrier transmission equipment. With the transition to SONET transmission equipment, the number of equipment manufacturers has increased and the new entrants have gained significant market share. In addition, IXCs, RBOCs, CAPs and independent telephone companies have begun to compete actively in short-haul and long-haul markets as a result of deregulation of the domestic telecommunications industry. In light of these developments, the Company believes that the following factors are shaping the demand for network information solutions: (i) telecommunications service providers face competitive pressure to install high performance network transmission equipment to provide greater bandwidth and quality of service to their customers; (ii) in order to offer the consistent and reliable quality of service necessary to charge premium rates, telecommunications service providers may seek to monitor on a continuous basis the transmissions passing through their network elements; and (iii) equipment manufacturers have been subjected to more exacting standards in designing, engineering and manufacturing their products. These factors have created an opportunity for technology that would provide telecommunications service providers full access to information concerning their networks and provide equipment manufacturers a reliable means of designing and qualifying their products. 3 BACKGROUND AND STRATEGY In 1991, the Company's founder assembled a core group of engineers who had previously worked with him in the development of optical multiplexers and embarked upon the development of software, firmware and hardware technology to provide network information solutions. The Company developed prototypes of the ASA 312 in late 1994. During 1995, the Company created advanced feature sets for the ASA 312 in collaboration with leading telecommunications service providers and equipment manufacturers and commenced shipments of the ASA 312 in February 1996. The Company believes that the ASA 312 will position it as a leader in the rapidly growing network information segment. The Company has developed a growth strategy which is designed to increase its market share and expand distribution across a wide range of customers. In particular, the key elements of the Company's strategy for growth include: -INCREASE DOMESTIC SALES. The Company will seek to increase sales of the ASA 312 by recruiting additional internal sales staff and representatives to broaden its customer base and obtain repeat orders. In addition, the Company plans to enter the substantial domestic market for on-line remote access products through its direct sales network and by developing strategic OEM partnering relationships with transmission equipment manufacturers. Further, the Company plans to obtain an early market leadership position in the distribution of on-line SONET and ATM remote access products. -PENETRATE INTERNATIONAL MARKETS. The Company believes that significant demand exists outside the United States for products like the ASA 312 and its related family of network information computers and intends to design and develop versions of the ASA 312 and its remote access products for those markets. -MAINTAIN TECHNOLOGY LEADERSHIP. While the Company believes that its current product offers performance above that of competitive offerings, the Company intends to continue to devote a significant portion of its budget to research and development and rapidly commercialize additional products. In addition, the Company believes that it will benefit from the ability to license or acquire additional technologies to broaden its product line through acquisitions of non-core technology. The Company was incorporated in California on October 12, 1990, under the name Digital Lightwave, Inc., and reincorporated in Delaware on March 18, 1996, through its merger into a newly formed Delaware corporation. Unless the context otherwise requires, as used in this Prospectus the "Company" and "Digital Lightwave" refer to the Company and its predecessor entity. The Company's principal executive offices are located at 601 Cleveland Street, Fifth Floor, Clearwater, Florida 34615; its telephone and facsimile numbers are 813.442.6677 and 813.442.5660; its e-mail address is info@lightwave.com; and its web site address is http://www.lightwave.com. 4 THE OFFERING Common Stock Offered by: The Company.......................... 3,000,000 shares The Selling Stockholders............. 1,100,000 shares Total.............................. 4,100,000 shares Common Stock to be outstanding after the Offering.......................... 36,803,949 shares (1) Use of Proceeds........................ Working capital, retirement of short-term obligations and other general corporate purposes, including new product development, expansion of domestic and international distribution capabilities and possible funding of the acquisition of complementary businesses, products or technologies. The Company will not receive any proceeds from the sale of Common Stock by the Selling Stockholders. Proposed Nasdaq National Market Symbol................................ DIGL
- -------------- (1) Excludes 2,582,500 shares of Common Stock issuable upon the exercise of outstanding employee stock options granted prior to the date hereof. 5 SUMMARY FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
SIX MONTHS YEAR ENDED DECEMBER 31, ENDED JUNE 30, ---------------------------------------- -------------------------- 1993 1994 1995 1995 1996 ------------ ------------ ------------ ------------ ------------ (UNAUDITED) STATEMENTS OF OPERATIONS DATA: Sales.................................... $ -- $ -- $ -- $ -- $ 1,314 Gross profit............................. -- -- -- -- 792 Operating expenses....................... (545) (1,568) (2,725) (1,165) (2,280) Net interest expense..................... (41) (114) (609) (197) (392) Net income (loss)........................ $ (586) $ (1,682) $ (3,334) $ (1,362) $ (1,880) ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Net income (loss) per share.............. $ (.01) $ (.03) $ (.06) $ (.02) $ (.06) ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Weighted average shares outstanding (1)..................................... 62,904,969 62,904,969 60,503,008 62,904,969 34,081,440
AS OF JUNE 30, 1996 ------------------------- PRO FORMA ACTUAL AS ADJUSTED(2) --------- -------------- (UNAUDITED) BALANCE SHEET DATA: Working capital...................................................................... $ (1,974) $ 30,377 Total assets......................................................................... 3,424 32,626 Total debt........................................................................... 4,150 0 Total stockholders' equity (deficit)................................................. (2,340) 31,011
- -------------- (1) On November 30, 1995, 28,823,529 shares of Common Stock were purchased by the Company from a former stockholder pursuant to an option granted to the Company by the former stockholder in February 1995. See "Certain Transactions -- Transactions with Former Stockholder." In addition, pursuant to the requirements of the Securities and Exchange Commission, Common Stock, stock options and warrants issued by the Company during the twelve months prior to the initial public offering date have been included in the calculation of the weighted average shares outstanding for all periods presented using the treasury stock method based upon an assumed initial public offering price of $10.00 per share. (2) Adjusted to reflect: (i) the exercise of options to purchase 47,000 shares of Common Stock at an aggregate exercise price of $39,000 between July 1, 1996 and the date of this Prospectus; (ii) the exercise of warrants to purchase 1,903,120 shares of Common Stock at an aggregate exercise price of $6.4 million prior to the closing of the Offering; and (iii) the sale of 3,000,000 shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $10.00 per share (after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company). 6 RISK FACTORS IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY AND ITS BUSINESS BEFORE PURCHASING SHARES OF THE COMMON STOCK OFFERED HEREBY. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS." LIMITED OPERATING HISTORY; CUMULATIVE LOSSES The Company was incorporated in October 1990 and commenced shipping its products in February 1996. Since its inception, the Company has incurred substantial costs to develop and enhance its technology, to create, introduce, and enhance its product offerings, to establish marketing and distribution relationships, to recruit and train a sales and marketing group, and to build an administrative organization. As a consequence, the Company has incurred operating losses in each fiscal quarter and year since inception. As of June 30, 1996, the Company had an accumulated deficit of $8.9 million. The Company's prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early stage of development, particularly companies in new, unproven and rapidly evolving markets. There can be no assurance that the Company will be successful in addressing such risks. The limited operating history of the Company makes the prediction of future results of operations difficult or impossible, and therefore, there can be no assurance that the Company will sustain growth or achieve profitability. UNCERTAIN MARKET ACCEPTANCE OF THE COMPANY'S PRODUCTS; PRODUCT CONCENTRATION The market for network information systems is in an early stage of development and there is uncertainty regarding the size and scope of the market. While the Company has developed hardware, firmware and software which it expects to introduce in on-line remote access products, the Company currently derives all of its sales from its initial product, the ASA 312. The Company expects that sales of the ASA 312 product will continue to account for a substantial portion of the Company's sales for the foreseeable future. Broad market acceptance of this product is, therefore, critical to the Company's future success. Factors that may affect the market acceptance of the ASA 312 include the availability and price of products which carry out certain of the functions performed by the ASA 312 and the success of the sales efforts of the Company. Most of the companies to which the Company offers its products typically conduct extensive evaluations prior to ordering products in quantities. As a result, there are long lead times to complete sales of the Company's products. The Company's future performance will also depend in part on the successful development, introduction and market acceptance of new and enhanced products. See "Business - -- Industry Background," "-- Technology," "-- Products," "-- Product Development" and "-- Competition." CUSTOMER CONCENTRATION The Company's customer base at the present time consists of one or more IXCs, RBOCs, CAPs, equipment vendors and U.S. government agencies. There are a limited number of IXCs and RBOCs and these companies have accounted, and are expected to account, for a major portion of the Company's future sales. Any reduction or delay in sales of the Company's products to its principal customers or the loss of one or more of the Company's principal customers could have a material adverse effect on the Company's business, operating results and financial condition. There can be no assurance that the Company will retain its current principal customers or that it will be able to establish new customer relationships. For the six months ended June 30, 1996, sales to MCI and Tellabs accounted for 49% and 23% of total sales, respectively. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Customers." RAPID TECHNOLOGICAL CHANGE; DEPENDENCE ON NEW PRODUCT INTRODUCTIONS The market for the Company's products is expected to be characterized by frequent new product introductions, rapidly changing technology and continued emergence of new industry standards, any of which could adversely affect sales of the Company's products or render the Company's existing products obsolete. The Company's success will depend upon its ability to develop and introduce, in a timely fashion, new products and enhancements to its existing products that meet changing customer requirements and 7 emerging industry standards. The development of new, technologically advanced products and the enhancement of existing products is a complex and uncertain process requiring high levels of innovation, as well as the accurate anticipation of technological developments and market trends. There can be no assurance that the Company will be able to identify, develop, manufacture, market or support new or enhanced products successfully or on a timely basis, that new products of the Company will gain market acceptance or that the Company will be able to respond effectively to product announcements by competitors, technology changes or emerging industry standards. In addition, the Company has experienced delays in the introduction of new products and product enhancements. Furthermore, from time to time, the Company may announce new products or product enhancements, capabilities or technologies that have the potential to replace or shorten the life cycle of the Company's existing product offerings and that may cause customers to defer purchasing existing products of the Company. See "Business -- Technology," "-- Products," and "-- Product Development." COMPETITION The market for the Company's products is intensely competitive and subject to frequent product introductions with improved price/performance characteristics and continued emergence of new industry standards. Hewlett Packard, Tektronics and TTC manufacture test instruments utilized to check the status of one transmission speed or protocol at a time and Applied Digital Access, Hekimian and Lucent produce on-line remote monitoring products utilized to test the integrity of DS-1 and DS-3 signals within specific network equipment. In addition to its current competitors, the Company anticipates that it will face competition from other companies as the market for its products grows and as it releases additional and enhanced products. Furthermore, many of the Company's large competitors offer customers a broader product line than the Company currently offers or can be expected to offer. Many of the Company's current and potential competitors have longer operating histories and substantially greater financial, technical, sales, marketing and other resources, as well as greater name recognition and a larger installed customer base, than the Company. As a result, these competitors are able to devote greater resources to the development, promotion, sale and support of their products than the Company. In addition, competitors with larger installed customer bases may have a competitive advantage over the Company when selling similar products or alternative network information solutions to such customers. Increased competition could result in significant price competition, reduced profit margins or loss of market share, any of which could have a material adverse effect on the Company's business, operating results and financial condition. There can be no assurance that the Company will be able to compete successfully against current and potential future competitors. See "Business -- Competition." SUBSTANTIAL INCREASE IN MANUFACTURING OPERATIONS; DEPENDENCE ON CONTRACT MANUFACTURING AND LIMITED SOURCE SUPPLIERS The Company is in the process of substantially increasing its flow of materials, contract manufacturing capacity and internal test and quality functions to respond to anticipated customer demand for its products and to reduce its order lead times. Any inability to increase product flow would limit the Company's revenue, could adversely affect the Company's competitive position and could result in cancellation of orders. The Company's operational strategy relies on outsourcing of manufacturing. The Company currently subcontracts component procurement and kitting and printed circuit board assembly to a single company (Q-1 Technologies) that specializes in those services. The Company is seeking to secure additional sources of supply, including additional contract manufacturers. Certain key components used in the manufacture of the Company's products are currently purchased only from single or limited sources. At present, the Company's only single-sourced component is a SONET overhead terminator. Limited-source components include a single board computer included in the ASA 312, a power supply, a touch sensor and controller, plastic housing units and other discrete components. The Company has experienced in the past, and may in the future experience, problems with its various component suppliers, such as inferior quality, insufficient quantities and late delivery. There can be no assurance that such problems will not generate material liabilities for the Company or adversely impact the Company's relations with its customers in the future. In addition, the Company may in the future experience 8 pricing pressure from its contract manufacturers. There can be no assurance that the Company will manage its contract manufacturers effectively or that these manufacturers will meet the Company's future requirements for timely delivery of products of sufficient quality and quantity. The Company intends to introduce certain new products and product enhancements in 1996 and 1997, which will require that the Company rapidly achieve volume production by coordinating its efforts with those of its suppliers and contract manufacturers. The inability of the Company's contract manufacturers to provide adequate supplies of high- quality products or the loss of any of the Company's contract manufacturers could cause a delay in the Company's ability to fulfill orders while the Company identifies a replacement manufacturer and could have a material adverse effect upon the Company's business, operating results and financial condition. See "Business -- Production." DEPENDENCE ON KEY PERSONNEL AND HIRING OF ADDITIONAL PERSONNEL The Company's success depends to a significant degree upon the continued contributions of key management, engineering, sales and marketing and manufacturing personnel, certain of whom would be difficult to replace. In particular, the Company believes that its future success is highly dependent on Dr. Bryan J. Zwan, Chairman and Chief Executive Officer, and Doug C. Dohring, President. The Company does not intend to maintain key man life insurance covering its key personnel. The Company believes its future success will also depend in large part upon its ability to attract and retain highly skilled managerial, engineering, sales and marketing, finance and manufacturing personnel. In particular, the Company requires additional technical personnel with expertise in SDH signaling standards to develop international versions of its products and requires domestic regional and international management level sales personnel to pursue increased domestic and international market share. Competition for such personnel is intense and there can be no assurance that the Company will be successful in attracting and retaining such personnel. The loss of the services of any of the key personnel, the inability to attract or retain qualified personnel in the future or delays in hiring required personnel could have a material adverse effect on the Company's business, operating results or financial condition. See "Business -- Employees" and "Management -- Executive Officers and Directors." MANAGEMENT OF GROWTH The Company has significantly expanded its operations over the past year and the success of the Company is dependent upon its continued expansion, particularly in hiring additional technical and customer support personnel, developing its sales and marketing network and expanding its manufacturing capacity. There may be only a limited number of persons with the requisite skills to serve in these positions and it may become increasingly difficult for the Company to hire such personnel. Future expansion by the Company may also significantly strain the Company's management, marketing, manufacturing, financial and other resources. In addition, the Company's future results of operations are dependent upon the continued expansion of the network of independent representatives to market the Company's products domestically and abroad. There can be no assurance that the Company's systems, procedures, controls and existing space will be adequate to support the Company's future operations. Failure to manage the Company's growth properly could have a material adverse effect on the Company's business, financial condition and operating results. RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS The Company may in the future undertake acquisitions that could present challenges to the Company's management, such as integrating and incorporating new operations, product lines, technologies and personnel. If the Company's management is unable to manage these challenges, the Company's business, financial condition or results of operations could be materially and adversely affected. Any acquisition, depending on its size, could result in the use of a significant portion of the Company's available cash, or if such acquisition is made utilizing the Company's securities, could result in significant dilution to the Company's stockholders. Acquisitions involve a number of special risks including possible adverse short-term effects on the Company's operating results, the realization of acquired intangible assets and the loss of key employees of the acquired companies. The Company does not have pending any negotiations or agreements with respect to any such acquisition. 9 RISK OF PRODUCT DEFECTS Products as complex as those offered by the Company frequently contain undetected software or hardware errors when first introduced or as new versions are released. Such errors have occurred in the past and, despite testing by the Company and by current and potential customers, the Company expects that such errors will be found from time to time in new or enhanced products after commencement of commercial shipments. The occurrence of such errors could result in the delay or loss of market acceptance of the Company's products, the impairment of development efforts and the loss of credibility with its customers, any of which could have a material adverse effect on the Company's business, operating results and financial condition. ANTICIPATED FLUCTUATIONS IN OPERATING RESULTS It is anticipated that as the Company matures, the Company's sales and operating results may fluctuate from quarter to quarter and from year to year due to a combination of factors, many of which are outside the control of the Company, including (i) the timing and amount of significant orders from the Company's customers, (ii) the ability to obtain sufficient supplies of sole or limited source components for the Company's products, (iii) the ability to attain and maintain production volumes and quality levels for its products, (iv) the mix of distribution channels and products, (v) new product introductions by the Company's competitors, (vi) the Company's success in developing, introducing and shipping product enhancements and new products, (vii) pricing actions by the Company or its competitors, (viii) changes in material costs and (ix) general economic conditions. Although the Company only recently commenced sales of the ASA 312, the Company does not anticipate that its backlog at the beginning of each quarter will be sufficient to achieve expected revenue for that quarter. To achieve its revenue objectives, the Company expects that it will have to obtain orders during a quarter for shipment in that quarter. As a result of all of the foregoing, there can be no assurance that the Company will be able to achieve or sustain profitability on a quarterly or annual basis. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." DEPENDENCE ON PROPRIETARY TECHNOLOGY The Company's success and its ability to compete is dependent in part upon its proprietary technology. Although the Company has applied for several patents on its core technologies, the Company does not hold any patents and currently relies on a combination of contractual rights, trade secrets and copyright laws to establish and protect its proprietary rights in its products. There can be no assurance that the patents for which the Company has applied will be issued or that steps taken by the Company to protect its intellectual property will be adequate to prevent misappropriation of its technology or that the Company's competitors will not independently develop technologies that are substantially equivalent or superior to the Company's technology. In the event that protective measures are not successful, the Company's business, operating results and financial condition could be materially and adversely affected. In addition, the Company's growth strategy includes a plan to enter the international market, and the laws of some foreign countries do not protect the Company's proprietary rights to the same extent as do the laws of the United States. The Company is also subject to the risk of adverse claims and litigation alleging infringement of intellectual property rights of others. Given that patent applications in the United States are not publicly disclosed until the patent issues, applications may have been filed which, if issued as patents, could relate to the Company's products. The Company is subject to the risk of claims and litigation alleging infringement of the intellectual property rights of others. Although the Company believes that its technology does not infringe on the proprietary rights of others and has not received any notice of claimed infringements, there can be no assurance that third parties will not assert infringement claims against the Company in the future based on patents or trade secrets or that such claims will not be successful. The Company could incur substantial costs in defending itself and its customers against any such claims, regardless of the merits of such claims. Parties making such claims may be able to obtain injunctive or other equitable relief which could effectively block the Company's ability to sell its products in the United States and abroad, and could result in an award of substantial damages. In the event of a successful claim of infringement, the Company, its customers and end-users may be required to obtain one or more licenses from third parties. There can be no assurance that the Company or its customers could obtain necessary licenses from third parties at a reasonable cost or at all. The defense of any lawsuit could result in time-consuming and expensive litigation, 10 damages, license fees, royalty payments and restrictions on the Company's ability to sell its products, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Intellectual Property." PRODUCT CERTIFICATIONS The Company's products must meet industry standards and receive certification for connection to certain public telecommunications networks prior to their sale. In the United States, the Company's products must comply with various regulations promulgated by the Federal Communications Commission ("FCC") and Underwriters Laboratories. Internationally, the Company's products must comply with standards established by telecommunications authorities in various countries as well as with recommendations of the Consultative Committee on International Telegraph and Telephony. In addition, certain products must be certified by Bell Communications Research, Inc. ("Bellcore") to be commercially viable. Although the Company's products have not been denied any regulatory approvals or certifications to date, any future inability to obtain on a timely basis or retain domestic or foreign regulatory approvals or certifications or to comply with existing or evolving industry standards could have a material adverse effect on the Company's business, operating results and financial condition. See "Business -- Industry Development." CONTROL BY PRINCIPAL STOCKHOLDER Following the Offering, the Company's Chairman and Chief Executive Officer, together with entities affiliated with him, will beneficially own approximately 82% of the Company's Common Stock (approximately 80% if the Underwriters over-allotment option is exercised in full). Accordingly, he will be able to elect the Company's directors, will retain the voting power to approve all matters requiring stockholder approval and will continue to have significant influence over the affairs of the Company, including the power to delay or prevent a change in control of the Company. See "Management" and "Principal and Selling Stockholders." ANTI-TAKEOVER PROVISIONS Certain provisions of the Company's charter documents, including provisions limiting the ability of stockholders to take action by written consent and limiting the ability of stockholders to raise matters at a meeting of stockholders without giving advance notice, and provisions establishing supermajority affirmative voting requirements as a prerequisite to certain extraordinary corporate transactions, may have the effect of delaying or preventing changes in control or management of the Company, which could have an adverse effect on the market price of the Company's Common Stock. In addition, the Company's Board of Directors will be divided into three classes, each of which serves for a staggered three-year term, which may make it more difficult for a third party to gain control of the Company's Board of Directors. The Board of Directors has authority to issue up to 20,000,000 shares of Preferred Stock and to fix the rights, preferences, privileges and restrictions, including voting rights, of these shares without any further vote or action by the stockholders. The rights of the holders of the Company's Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. The issuance of Preferred Stock could have the effect of delaying, deferring or preventing a change in control of the Company. Furthermore, such Preferred Stock may have other rights, including economic rights, senior to the Common Stock, and as a result, the issuance of such Preferred Stock could have a material adverse effect on the market value of the Common Stock. See "Description of Capital Stock." SHARES ELIGIBLE FOR FUTURE SALE Sales of a substantial number of shares of Common Stock in the public market following the Offering could adversely affect the market price for the Company's Common Stock. On the date of this Prospectus, no shares other than the 4,100,000 shares offered hereby will be eligible for sale. Beginning 180 days after the date of this Prospectus, an additional 30,000,000 shares will become eligible for sale in the public market subject to compliance with the provisions of Rule 144 under the Securities Act of 1933, as amended (the "Securities Act") and at various times thereafter, an additional 2,703,949 shares will become eligible for sale in the public market. See "Shares Eligible for Future Sale," "Description of Capital Stock" and "Underwriting." 11 NO PRIOR MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF STOCK PRICE Prior to the Offering, there has been no public market for the Common Stock of the Company, and there can be no assurance that an active public market will develop or be sustained after the Offering. The initial public offering price will be determined by negotiations between the Company and the Underwriters based on several factors and may not be indicative of the market price of the Common Stock after the Offering. The market price of the shares of Common Stock is likely to be highly volatile and may be significantly affected by factors such as actual or anticipated fluctuations in the Company's operating results, announcement of technological innovations or new results by securities analysts, developments with respect to patents or proprietary rights, general market conditions and other factors. In addition, the stock market has from time to time experienced significant price and volume fluctuations that have particularly affected the market prices for the common stocks of technology companies. These broad market fluctuations may adversely effect the market price of the Company's Common Stock. See "Underwriting." DILUTION The initial public offering price of the Common Stock offered hereby is substantially higher than the net tangible book value per share of the Common Stock. Therefore, purchasers of Common Stock offered hereby will incur an immediate and substantial dilution, and may incur additional dilution upon the exercise of outstanding stock options. See "Dilution." 12 USE OF PROCEEDS The net proceeds to the Company from the Offering are estimated (at an assumed initial public offering price of $10.00 per share) to be approximately $26.9 million ($32.6 million if the Underwriters' over-allotment option is exercised in full). The Company intends to use the net proceeds of the Offering for the retirement of $750,000 of its 18% subordinated promissory notes due May 31, 1997, working capital and other general corporate purposes, including an estimated $5.5 million for equipment and personnel to support accelerated product development and an estimated $3.0 million to enhance the Company's domestic and international distribution capabilities. The Company may also use a portion of the net proceeds of the Offering to fund acquisitions of complementary businesses, products or technologies, although there are no current agreements or negotiations with respect to any such acquisitions. Pending use of the net proceeds, the Company will invest the net proceeds in short-term investment grade securities. The Company will not receive any proceeds from the sale of Common Stock by the Selling Stockholders. DIVIDEND POLICY The Company has not declared or paid dividends on its Common Stock since the inception of the Company. The Company currently intends to retain any earnings for use in developing and growing its business and does not anticipate paying any cash dividends on its Common Stock in the foreseeable future. 13 CAPITALIZATION The following table sets forth the capitalization of the Company as of June 30, 1996 (i) on an actual basis, (ii) on a pro forma basis to give effect to the exercise of options to purchase 47,000 shares of Common Stock between July 1, 1996 and the date of this Prospectus at an aggregate exercise price of $39,000 and the issuance of 1,903,120 shares of Common Stock upon the anticipated exercise of warrants prior to the closing of the Offering, and (iii) on a pro forma as adjusted basis to give effect to the sale by the Company of 3,000,000 shares of Common Stock offered hereby based upon an assumed initial public offering price of $10.00 per share and the application of the estimated net proceeds therefrom. This table should be read in conjunction with the Financial Statements and Notes thereto appearing elsewhere in this Prospectus.
JUNE 30, 1996 -------------------------------------- PRO PRO FORMA AS ACTUAL FORMA (1) ADJUSTED (2) --------- ----------- -------------- (IN THOUSANDS) (UNAUDITED) Short-term debt............................................................ $ 3,150 $ 750 $ -- --------- ----------- ------- --------- ----------- ------- Long-term obligations, less current portion................................ $ 1,000 $ -- $ -- Stockholders' equity (deficit): Preferred Stock, $.0001 par value; authorized 20,000,000 shares; 0 shares issued.................................................................. -- -- -- Common Stock, $.0001 par value; authorized 200,000,000 shares; issued and outstanding, 31,853,829 shares (actual), 33,803,949 shares (pro forma) and 36,803,949 shares (pro forma as adjusted) (3) 3 3 4 Additional paid in capital............................................... 8,223 14,674 41,573 Accumulated deficit...................................................... (8,866) (8,866) (8,866) Stockholder loan......................................................... (1,700) (1,700) (1,700) --------- ----------- ------- Total stockholders' equity (deficit)................................... (2,340) 4,111 31,011 --------- ----------- ------- Total capitalization................................................. $ (1,340) $ 4,111 $ 31,011 --------- ----------- ------- --------- ----------- -------
- -------------- (1) Gives effect to (i) the exercise of options to purchase 47,000 shares of Common Stock at an aggregate exercise price of $39,000 between July 1, 1996 and the date of this Prospectus; and (ii) the exercise of warrants exercisable for 1,903,120 shares of Common Stock at an aggregate exercise price of $6.4 million prior to the closing of the Offering. (2) Adjusted to reflect: (i) the exercise of options to purchase 47,000 shares of Common Stock at an aggregate exercise price of $39,000 between July 1, 1996 and the date of this Prospectus; (ii) the exercise of warrants exercisable for 1,903,120 shares of Common Stock at an aggregate exercise price of $6.4 million prior to the closing of the Offering; and (iii) the sale of 3,000,000 shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $10.00 per share (after deducting underwriting discounts and commission and estimated offering expenses payable by the Company). (3) Excludes 5,000,000 shares of Common Stock reserved for future issuance under the Company's Option Plan, including 2,582,500 shares of Common Stock issuable pursuant to employee stock options outstanding at June 30, 1996. See "Principal and Selling Stockholders," "Management -- Option Plan" and Note 10 of Notes to Financial Statements. 14 DILUTION The pro forma net tangible book value of the Company as of June 30, 1996 was approximately $4.1 million, or $.12 per share of Common Stock, after giving effect to the exercise of options to purchase 47,000 shares of Common Stock at an aggregate exercise price of $39,000 between July 1, 1996 and the date hereof and the anticipated exercise of warrants to purchase 1,903,120 shares of Common Stock for an aggregate exercise price of $6.4 million prior to the closing of the Offering. Pro forma net tangible book value per share is equal to the Company's pro forma tangible assets less total liabilities, divided by the total number of shares of Common Stock outstanding on a pro forma basis. After giving effect to the sale of 3,000,000 shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $10.00 per share and after deducting underwriting discounts and estimated offering expenses payable by the Company (resulting in estimated net proceeds of $26.9 million), the pro forma net tangible book value of the Company as of June 30, 1996 would have been approximately $31.0 million, or $.84 per share. This represents an immediate increase of $.72 per share to existing stockholders and an immediate dilution of $9.16 per share to purchasers of Common Stock in the Offering. The following table illustrates this per share dilution: Assumed initial public offering price per share....................... $ 10.00 Pro forma net tangible book value per share at June 30, 1996........ $ .12 Increase attributable to the Offering............................... .72 --- Pro forma net tangible book value per share after the Offering........ .84 --------- Dilution per share to purchasers in the Offering (1).................. $ 9.16 --------- ---------
The following table summarizes on pro forma basis as of June 30, 1996 the number of shares of Common Stock acquired from the Company, the aggregate consideration paid and the average price per share paid by existing stockholders and to be paid by investors purchasing Common Stock from the Company in the Offering (at an assumed initial public offering price of $10.00 per share and before deducting underwriting discounts and estimated offering expenses payable by the Company):
SHARES PURCHASED TOTAL CONSIDERATION (1) AVERAGE ------------------------- -------------------------- PRICE PER NUMBER PERCENT AMOUNT PERCENT SHARE ------------ ----------- ------------- ----------- ----------- Existing stockholders (1)(2)............. 33,803,949 91.8% $ 14,677,628 32.9% $ .43 New investors (2)........................ 3,000,000 8.2% 30,000,000 67.1% 10.00 ------------ ----- ------------- ----- Total................................ 36,803,949 100.0% $ 44,677,628 100.0% ------------ ----- ------------- ----- ------------ ----- ------------- -----
- -------------- (1) As of the date of this Prospectus, there were employee stock options outstanding to purchase a total of 2,528,500 shares of Common Stock. If all such options outstanding at June 30, 1996 were exercised, the dilution per share to new investors in the Offering would be decreased by $.17 per share to a total of $8.99 per share and the average price per share paid by the Company's existing stockholders would be $.36. See "Capitalization," "Management -- Option Plan" and Note 10 of Notes to Financial Statements. (2) Sales by Selling Stockholders in the Offering will reduce the number of shares held by existing stockholders to 32,703,949 shares, or approximately 88.9% of the total shares of Common Stock outstanding, and will increase the number of shares held by new investors to 4,100,000 shares, or approximately 11.1% of the total shares of Common Stock outstanding after the Offering. 15 SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) The following selected financial data for the period from inception, October 12, 1990, through December 31, 1991, and for the years ended December 31, 1992, 1993, 1994 and 1995, and as of December 31, 1992, 1993, 1994 and 1995 are derived from the Financial Statements of the Company, which have been audited by Coopers & Lybrand L.L.P., independent certified public accountants. The Balance Sheet Data as of December 31, 1991, 1992, and 1993, and the Statements of Operations Data for the period cumulative from inception, October 12, 1990, through December 31, 1991 and for the year ended December 31, 1992 are not included in this Prospectus. The selected financial data for the six months ended June 30, 1995 and 1996 and as of June 30, 1996 are derived from unaudited financial statements prepared by the Company. The unaudited financial statements include all adjustments, consisting of normal recurring accruals, which the Company considers necessary for a fair presentation of the financial position and the results of operations for these periods. Operating results for the six months ended June 30, 1996 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 1996. The selected financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Financial Statements of the Company and Notes thereto included elsewhere in this Prospectus.
SIX MONTHS YEAR ENDED DECEMBER 31, ENDED JUNE 30, ------------------------------------------ -------------------- 1991(1) 1992 1993 1994 1995 1995 1996 --------- --------- --------- --------- --------- --------- --------- (UNAUDITED) STATEMENTS OF OPERATIONS DATA: Sales.............................. $ -- $ -- $ -- $ -- $ -- $ -- $ 1,314 Cost of sales...................... -- -- -- -- -- -- (522) --------- --------- --------- --------- --------- --------- --------- Gross profit....................... -- -- -- -- -- -- 792 Operating expenses: Research and development......... 124 366 439 1,240 1,508 655 719 Selling, general and administrative.................. -- 77 106 327 1,217 510 1,561 --------- --------- --------- --------- --------- --------- --------- Total operating expenses........... 124 443 545 1,568 2,725 1,165 2,280 Operating income (loss)............ (124) (443) (545) (1,568) (2,725) (1,165) (1,488) Interest income (expense).......... (1) (16) (41) (114) (613) (197) (397) Other income (expense)............. -- -- -- -- 4 -- 5 --------- --------- --------- --------- --------- --------- --------- Income (loss) before income taxes............................. (125) (459) (586) (1,682) (3,334) (1,362) (1,880) Provision for income taxes......... -- (1) (1) (1) -- -- -- --------- --------- --------- --------- --------- --------- --------- Net income (loss).................. $ (125) $ (460) $ (587) $ (1,683) $ (3,334) $ (1,362) $ (1,880) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Net income (loss) per share........ $ -- $ (.01) $ (.01) $ (.03) $ (.06) $ (.02) $ (.06) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Weighted average shares outstanding (2)............................... 62,904,969 62,904,969 62,904,969 62,904,969 60,503,008 62,904,969 34,081,440
JUNE 30, 1996 DECEMBER 31, -------------------------- ------------------------------------------ PRO FORMA 1992 1993 1994 1995 ACTUAL AS ADJUSTED (3) --------- --------- --------- --------- --------- --------------- (UNAUDITED) BALANCE SHEET DATA: Working capital (deficit)............................ $ (10) $ (725) $ (1,939) $ (8,595) $ (1,974) $ 30,377 Total assets......................................... 475 194 332 1,277 3,424 32,626 Short-term notes payable............................. 239 555 1,602 7,897 3,150 -- Long-term debt....................................... -- -- 500 -- 1,000 -- Total stockholders' equity (deficit)................. (58) (645) (2,328) (8,163) (2,340) $ 31,011
- ------------------ (1) Period cumulative from inception, October 12, 1990, through December 31, 1991. (2) On November 30, 1995, 28,823,529 shares of Common Stock were purchased by the Company from a former stockholder pursuant to an option granted to the Company by the former stockholder in February 1995. See "Certain Transactions -- Transactions with Former Stockholder." In addition, pursuant to the requirements of the Securities and Exchange Commission, Common Stock, stock options and warrants issued by the Company during the twelve months prior to the initial public offering date have been included in the calculation of the weighted average shares outstanding for all periods presented using the treasury stock method based upon an assumed initial public offering price of $10.00 per share. (3) Adjusted to reflect: (i) the exercise of options to purchase 47,000 shares of Common Stock at an aggregate exercise price of $39,000 between July 1, 1996 and the date of this Prospectus; (ii) the exercise of warrants exercisable for 1,903,120 shares of Common Stock at an aggregate exercise price of $6.4 million prior to the closing of the Offering; and (iii) the sale of 3,000,000 shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $10.00 per share (after deducting underwriting discounts and commission and estimated offering expenses payable by the Company). 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS OF THE COMPANY AND THE NOTES THERETO, AND OTHER FINANCIAL INFORMATION INCLUDED ELSEWHERE IN THIS PROSPECTUS. THIS PROSPECTUS CONTAINS CERTAIN STATEMENTS REGARDING FUTURE TRENDS WHICH ARE SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES. SUCH TRENDS, AND THEIR ANTICIPATED IMPACT UPON THE COMPANY, COULD DIFFER MATERIALLY FROM THOSE PRESENTED IN THIS PROSPECTUS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS. OVERVIEW The Company manufactures and sells the ASA 312 network information computer and has other products in design and development. These products and planned products are based on the Company's core software, firmware and hardware technology. The Company developed this technology over a five year period. In February 1996, the Company commenced sales of the ASA 312. To date, the Company has not entered into long term agreements or blanket purchase orders for the sale of its products, but generally obtains purchase orders for immediate shipment and other cancelable purchase commitments. The Company's sales during a particular quarter are therefore highly dependent upon orders placed by customers during the quarter. Consequently, sales may fluctuate significantly from quarter to quarter due to the timing and amount of orders from customers, among other factors. The Company allocates all of its fixed production costs to the cost of goods sold of those products shipped during a given period. Accordingly, gross profit may fluctuate significantly from period to period as a result of the change in overall sales volumes. Gross profit may be affected in the future by the introduction of new products which generate differing gross margins and the sales mix during a given period. In addition, the Company plans to pursue OEM relationships with respect to the sale of certain of its on-line remote access products in development. The Company has not negotiated any such arrangements but anticipates that its pricing to OEM partners would be less than with respect to direct sales resulting in lower gross margins in connection with these arrangements. However, sales and marketing expenses are generally lower in the case of sales to OEM partners. The Company believes that its operating expenses will continue to increase as a result of a variety of factors including: (i) increased research and development expenses associated with the completion of the products in development and the continued enhancement of existing products; and (ii) increased selling, general and administrative expenses associated with continued expansion of sales and marketing capabilities, product advertising and promotion. The Company charges research and development costs to expense when incurred. RESULTS OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995 SALES. Sales increased from $0 for the six months ended June 30, 1995 to $1.3 million for the six months ended June 30, 1996. Following the initiation of product sales during the first quarter of 1996, total sales of $185,000 and $1.1 million were made during the first and second quarters of 1996, respectively. During the first half of 1996, sales to MCI and Tellabs accounted for 49% and 23%, respectively, of sales. COST OF GOODS SOLD. Cost of goods sold increased from $0 for the six months ended June 30, 1995 to $522,000 for the six months ended June 30, 1996. Gross margin on the sale of ASA 312 units during the first half of 1996 was 60%. Cost of goods sold include direct costs of subassemblies and components, fixed costs of the Company's production department, indirect costs, and contract services. Gross margin was 32% during the three months ended March 31, 1996 and 65% during the three months ended June 30, 1996 primarily as a result of the allocation of fixed production department costs and varying levels of sales during the first and second quarters of 1996. Fixed production costs amounted to $238,000 for the six months ended June 30, 1996. 17 OPERATING EXPENSES. Operating expenses increased 96% from $1.2 million for the six months ended June 30, 1995 to $2.3 million for the six months ended June 30, 1996 as a result of increases in research and development and selling, general and administrative expenses. Research and development expense increased 10% from $655,000 for the six months ended June 30, 1995 to $719,000 for the six months ended June 30, 1996 primarily as a result of adding engineering personnel to expand the Company's core technology and to develop new products. Selling, general and administrative expenses increased 206% from $510,000 for the six months ended June 30, 1995 to $1.6 million for the six months ended June 30, 1996 primarily due to facility expansion, employment of managerial and support staff, and commissions directly related to sales. NET INTEREST EXPENSE. Net interest expense increased 102% from $197,000 for the six months ended June 30, 1995 to $397,000 for the six months ended June 30, 1996 primarily due to servicing short-term debt of $7.9 million as of December 31, 1995, of which $3.2 million remains outstanding as of the date of this Prospectus. 1995 COMPARED TO 1994 OPERATING EXPENSES. Operating expenses increased 74% from $1.6 million for 1994 to $2.7 million for 1995 as a result of increases in research and development and selling, general and administrative expenses. Research and development expense increased 22% from $1.2 million for 1994 to $1.5 million for 1995 as a result of additional personnel costs incurred to support the development of enhancements to new applications for and pre-production costs related to the ASA 312, as well as developing new products. Selling, general and administrative expense increased 272% from $327,000 for 1994 to $1.2 million for 1995 due to increased administrative personnel and related costs and costs associated with the introduction of the Company's ASA 312 product at major trade shows. NET INTEREST EXPENSE. Net interest expense increased 436% from $114,000 for 1994 to $613,000 for 1995 primarily as a result of the incurrence of indebtedness to finance operations. 1994 COMPARED TO 1993 OPERATING EXPENSES. Operating expenses increased 188% from $545,000 in 1993 to $1.6 million for 1994 as a result of increases in research and development and selling, general and administrative expenses. Research and development expense increased 183% from $439,000 for 1993 to $1.2 million for 1994 primarily as a result of an increase in technical personnel to support development of the Company's core technology, acquisition of components to manufacture prototype products and product design expenses associated with the ASA 312. Selling, general and administrative expenses increased 210% from $106,000 for 1993 to $327,000 for 1994, primarily as a result of increased personnel and employee relocation costs. NET INTEREST EXPENSE. Net interest expense increased 178% from $41,000 for 1993 to $114,000 for 1994 primarily as a result of reliance on external debt to finance operations. LIQUIDITY AND CAPITAL RESOURCES Operating expenses during the development stage were financed with the incurrence of indebtedness and trade payables. As of December 31, 1995, the Company had incurred indebtedness of $7.9 million, all of which was short-term. During the six months ended June 30, 1996, the Company sold 1,853,829 shares of Common Stock for an aggregate of $8.6 million, issued a three-year $1.0 million 18% unsecured subordinated promissory note and issued $750,000 in 18% promissory notes due May 31, 1997. As a result of the foregoing, the short-term indebtedness of the Company was reduced to $3.2 million as of June 30, 1996, $2.4 million of which is expected to be retired from the proceeds of the anticipated exercise of currently outstanding warrants prior to the Offering and $750,000 of which will be retired utilizing a portion of the proceeds of the Offering. The Company's working capital position improved from a deficit of $8.6 million as of December 31, 1995 to a deficit of $2.0 million as of June 30, 1996 primarily due to the issuance of Common Stock, increases in accounts receivable and decreases in short-term obligations. The Company requires substantial working capital to fund its business, particularly to finance inventories and accounts receivable and for capital expenditures. The Company's future capital requirements will 18 depend on many factors, including the rate of revenue growth, the timing and extent of spending to support product development efforts and expansion of sales and marketing, the timing of introductions of new products and enhancements to existing products, and market acceptance of the Company's products. There can be no assurance that additional equity or debt financing, if required, will be available on acceptable terms or at all. Management estimates that capital expenditures will be approximately $2.0 million in 1996 and $5.8 million in 1997, and that these amounts will be used for the purchase of equipment related to product development and automation of production operations, for the purchase of tooling for plastic injection production molds, for ASA 312 production and for furniture, fixtures and equipment in connection with leasing additional space for the Company's operations. The Company believes that the net proceeds of the Offering and anticipated cash flow from operations will be sufficient to fund the Company's working capital and capital expenditure requirements at budgeted levels for the next 12 months. RECENT PRONOUNCEMENT -- In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock Based Compensation." This standard establishes a fair value method for accounting for or disclosing stock-based compensation plans. This standard will be adopted in 1996 by disclosing the proforma net income and earnings per share amounts assuming the fair value method was effective, on January 1, 1995. The adoption of this standard will not affect the Company's results of operations, financial position or cash flows. QUARTERLY OPERATING RESULTS (UNAUDITED) The following table presents unaudited quarterly operating results for each of the Company's quarters since January 1, 1995. This information has been prepared by the Company on a basis consistent with the Company's financial statements and includes all adjustments, consisting only of normal recurring accruals in accordance with generally accepted accounting principles. Such quarterly results are not necessarily indicative of future operating results. This information should be read in conjunction with the Company's financial statements, and notes thereto, included elsewhere in this Prospectus.
THREE MONTHS ENDED ----------------------------------------------------------------------------------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, 1995 1995 1995 1995 1996 1996 ------------ ------------ ------------- ------------ ------------ ------------ Sales...................... $ -- $ -- $ -- $ -- $ 185 $ 1,129 Cost of sales.............. -- -- -- -- 125 397 ------------ ------------ ------------- ------------ ------------ ------------ Gross profit............... -- -- -- -- 60 732 Operating expenses: Research and development............. 243 411 515 340 378 341 Selling, general and administrative.......... 289 222 214 491 507 1,054 ------------ ------------ ------------- ------------ ------------ ------------ Total operating expenses... 532 633 729 831 885 1,395 ------------ ------------ ------------- ------------ ------------ ------------ Operating income (loss).... (532) (633) (729) (831) (825) (663) Interest income (expense)................. (70) (127) (170) (246) (309) (88) Other income (expense)..... -- -- -- 3 2 3 ------------ ------------ ------------- ------------ ------------ ------------ Income (loss) before income taxes..................... (602) (760) (899) (1,074) (1,132) (748) Provision for income taxes..................... -- -- -- -- -- -- ------------ ------------ ------------- ------------ ------------ ------------ Net income (loss).......... $ (602) $ (760) $ (899 ) $ (1,074 ) $ (1,132) $ (748) ------------ ------------ ------------- ------------ ------------ ------------ ------------ ------------ ------------- ------------ ------------ ------------ Net income (loss) per share..................... $ (.01) $ (.01) $ (.01 ) $ (.02 ) $ (.03) $ (.02) ------------ ------------ ------------- ------------ ------------ ------------ ------------ ------------ ------------- ------------ ------------ ------------ Weighted average shares outstanding (1)........... 62,904,969 62,904,969 62,904,969 50,299,319 34,081,440 34,081,440
- ------------------ (1) On November 30, 1995, 28,823,529 shares of Common Stock were purchased by the Company from a former stockholder pursuant to an option granted to the Company by the former stockholder in February 1995. See "Certain Transactions -- Transactions with Former Stockholder." In addition, pursuant to the requirements of the Securities and Exchange Commission, Common Stock, stock options and warrants issued by the Company during the twelve months prior to the initial public offering date have been included in the calculation of the weighted average shares outstanding for all periods presented using the treasury stock method based upon an assumed initial public offering price of $10.00 per share. 19 BUSINESS Digital Lightwave develops, manufactures and sells advanced computer systems that provide information concerning the performance of telecommunications networks and transmission equipment. The Company believes that there is a growing need on the part of its customers, which include telecommunications service providers and network equipment manufacturers, to obtain such information to verify and manage the transmission of voice, data and video and more effectively plan for and implement network expansion. The Company's initial product, the ASA 312, is a software-based network information computer that is designed to outperform conventional hardware-based test instruments. The ASA 312 is user friendly, lightweight, compact, and easily operated through a touch sensor over a full color display. The Company believes that the ASA 312 is the only integrated product that enables users to understand and process information simultaneously and without interruption from networks utilizing the legacy T-Carrier protocol at rates T-1 and T-3 and the fiber optic SONET protocol at rates OC-1, OC-3, OC-3c and OC-12, as well as networks transporting enhanced data services utilizing ATM protocol. In addition, the Company is developing a family of on-line remote access products, based on its core technologies. The telecommunications service providers to which the Company has sold the ASA 312 include: (i) IXCs such as MCI; (ii) RBOCs, such as Ameritech; (iii) CAPs, such as Buckeye Cablevision; and (iv) government agencies, including three separate agencies of the Department of Defense. The network equipment manufacturers to which the Company has sold the ASA 312 include Hitachi and Tellabs. INDUSTRY DEVELOPMENT Over the past several years, LANs and WANs have evolved to satisfy the computing demands of an increasing base of users for a variety of applications, from e-mail to video conferencing. LANs and WANs have expanded in volumes of traffic, numbers of workstations and diversity of locations, becoming increasingly important conduits through which business is conducted. During the same time, there has been a rapid increase in the number of Web sites on and utilization of the Internet as well as continued growth of wireless systems. Traffic generated by LANs, WANs, wireless networks and the Internet has placed substantial demands on the public telecommunications network. In order to satisfy the substantially increased demand for capacity, bandwidth and enhanced data services, telecommunications service providers have added newer, higher capacity fiber optic cable to their existing infrastructure. Domestic service providers have added high speed SONET fiber optic transmission equipment, at a rate estimated at more than $2 billion annually over the past two years, to the installed base of legacy T-Carrier transmission equipment. With the transition to SONET equipment, the number of equipment manufacturers has increased and the new entrants have gained significant market share. In addition, IXCs, RBOCs, CAPs and independent telephone companies have begun to compete actively in short-haul and long-haul markets as a result of deregulation of the domestic telecommunications industry. The optical transmission protocols referred to as SONET in North America and SDH elsewhere provide a powerful transport technology which can carry legacy T-Carrier signals at the more rapid SONET transmission rates as well as enhanced data services packaged as ATM. SONET/SDH is designed to allow individual synchronous packages to be added to or dropped from broadband transmission without the need to multiplex or demultiplex the transmission, thereby reducing infrastructure costs and increasing efficiency. The Company anticipates that as a result of growing customer demand for high speed end-to-end performance to support enhanced data services, the advantages of more efficient transport and the reduced cost of transmission associated with fully implemented SONET transmission, ATM and other advanced transport technologies will ultimately replace T-Carrier systems. In light of these developments, the Company believes that the following factors are shaping the demand for network information solutions: -Telecommunications service providers face competitive pressure to install high performance network transmission equipment to provide greater bandwidth and quality of service to their customers. 20 -In order to offer the consistent and reliable quality of service necessary to charge premium rates, telecommunications service providers may seek to monitor on a continuous basis the transmissions passing through their network elements. -Equipment manufacturers have been subjected to more exacting standards in designing, engineering and manufacturing their products. THE DIGITAL LIGHTWAVE SOLUTION The Company has developed or is developing a series of products which are designed to: (i) assist telecommunications service providers in their installation and management of network transmission and cross-connect equipment; (ii) provide telecommunications service providers the ability to monitor network elements continuously to assure consistent and reliable quality of service; and (iii) enable equipment vendors to design, engineer and manufacture their products properly. The Company has introduced the ASA 312, a network information computer that identifies, processes and reports in real time the status of any single bit or any specified group of bits within high speed digital transmissions. The ASA 312 enables users to multiplex and demultiplex, process and report information regarding T-Carrier, SONET and ATM transmissions simultaneously. The Company plans to develop and offer the ASA 312E, a modified version of the ASA 312 to serve the international market. Based on its existing technology, the Company is developing on-line remote access products which can be permanently installed at network elements to gather and report network information on a continuous, real time basis. The Company also plans to release a series of on-line remote access products to serve the international market. In addition, the Company is developing a family of products to provide information regarding the service quality delivered to LANs and WANs from the public network. The following table sets forth the existing and planned products which will comprise the Company's solution to the management of network information.
DIGITAL LIGHTWAVE GLOBAL NETWORK INFORMATION SOLUTIONS PRODUCT FAMILY TARGET MARKET Network Information Computers ASA 312 Installers and technicians for North American telecommunications service providers and equipment manufacturers ASA 312E* Installers and technicians for international telecommunications service providers and equipment manufacturers NIC* Domestic and international engineers, architects, network planners and managers of telecommunications service providers On-line Remote Access Products* (NPPs) Strategic planners for telecommunications service providers LAN/WAN Edge Products* LAN/WAN technical managers
* In development The products listed above will enable users to determine on a continuous basis in real time the quality of service, character of content, source and destination of traffic and level of congestion, as well as complete directional and status information, for each transmission. Utilizing this information, telecommunications service providers will be able to (i) verify that each network element is functional, has been properly installed, is communicating properly with all other network elements and has the capacity to handle peak loads, (ii) provide, without service interruption, control and maintenance of transmission and cross-connect 21 equipment, (iii) plan for the growth and development of their networks and (iv) store and manage network information. The Company's products are designed to enable equipment manufacturers to design, provide quality control for and provide on-going customer support for users of their products. COMPANY STRATEGY The Company believes that the ASA 312 will position it as a leader in the rapidly growing network information segment. The Company has developed a growth strategy which is designed to increase its market share and expand distribution across a wide range of customers. In particular, the key elements of the Company's strategy for growth include: INCREASE DOMESTIC SALES. The Company will seek to increase sales of the ASA 312 by recruiting additional internal sales staff and representatives to broaden its customer base and obtain repeat orders. In addition, the Company plans to enter the substantial domestic market for on-line remote access products through its direct sales network and by developing strategic OEM partnering relationships with transmission equipment manufacturers. Further, the Company plans to obtain an early market leadership position in the distribution of on-line SONET and ATM remote access products. The Company believes that there is an opportunity to increase its share of the domestic market in which the ASA 312 competes and in which the on-line remote access products are expected to compete by: (i) generating repeat orders from a customer base which has broadened since the Company commenced its marketing of the ASA 312; (ii) obtaining orders from new customers who have recently completed their evaluation of the ASA 312; and (iii) utilizing its enhanced sales and marketing resources to develop increased market awareness of the Company and its products. PENETRATE INTERNATIONAL MARKETS. The Company believes that significant demand exists outside the United States for products like the ASA 312 and on-line remote access products and intends to design and develop versions of the ASA 312 and its planned family of remote access products for those markets. With the proceeds from the Offering, the Company plans to augment its technical staff to complete international versions of existing products and to develop new products for simultaneous release globally thereafter. MAINTAIN TECHNOLOGY LEADERSHIP. The Company believes that the ASA 312 offers performance above that of competitive offerings and the Company intends to continue to devote a significant portion of its budget to research and development to maintain its technology leadership in the rapidly growing public and private network markets. The Company also intends to further develop its technology to expand its product line. For example, the Company plans to develop products which store and report whether transmissions from a customer premise are voice, data, video or multimedia in order to enable telecommunications service providers to establish content based rate structures. In addition, the Company believes that its core technology will assist the Company in the development of ATM switching equipment. The Company intends to employ similar technologies in the development of network interface products which connect individual residential users to higher bandwidth digital signals. In addition, the Company believes that it will benefit from the ability to license or acquire additional technologies to broaden its product line through acquisitions of non-core technologies. TECHNOLOGY The Company's core technology includes: (i) a software operating environment which runs over a DOS platform; (ii) application software which operate the Company's various proprietary firmware and hardware; (iii) graphical user interface software programs; (iv) Network Protocol Translators ("NPTs"), which are modular gate arrays that supply discrete network information from signals at specific bandwidths and on specific protocols; and (v) Network Protocol Processors ("NPPs"), which are modular hardware platforms for the processing of various ranges of bandwidth and protocols. The Company's software is written in object code and provides users of the Company's network information computers with access to an intuitive graphical user interface to operate the Company's network information computers and on-line remote access products. The open architecture of the Company's software establishes a platform for the development of additional features and applications. 22 The Company's NPTs supply information as to each bit or specified groups of bits being transmitted in order to identify and process information concerning the overhead and payload carried by network transmissions. NPTs are combined with a microprocessor, discrete integrated circuits and other firmware in NPPs. The Company's NPPs interface, frame and process network information from a number of protocols and transmission speeds. The NPPs can also insert user programmable payloads and user specified overhead into a transmission. The graphic presented below illustrates the hardware architecture of NPPs and their combination with other core hardware and firmware technology utilized in the current and planned series of the Company's network information computers. The NPPs consist of hardware and firmware which isolate and process information regarding telecom munications traffic. [GRAPHIC] The non-blocking switch fabric is a high speed gate array managed by a microprocessor with dedicated RAM which allows users to switch and direct signals among different NPPs. The system microprocessor is provided by a single board computer host running proprietary software. In order to allow its customers to work simultaneously with different bandwidths and protocols, the Company has developed a non-blocking switch fabric and applications software which allow the Company's customers to "frame up" on a given signal and multiplex or demultiplex the signal into different transmission speeds and protocols. These functions allow customers efficiently to derive information concerning the functioning of the network under various existing or potential conditions. 23 The following reproduction of the switch matrix graphical user interface, which is accessed through a touch sensor over a full color display, depicts the manner in which customers can simultaneously break down high speed signals into their components, route traffic, combine lower speed signals into higher speed signals, change signals from one protocol to another and generate signals for the transmission so that the functioning of network elements under different conditions can be simulated and assessed. [GRAPHIC] PRODUCTS The Company offers or has in development network information computers, on-line remote access products and LAN/WAN edge products. NETWORK INFORMATION COMPUTERS ASA 312. The ASA 312 is a user friendly, laptop size computer which enables telecommunications service providers to access and process network information easily and efficiently. The ASA 312 was designed to compete against the test instruments currently available on the market, which are hardware based, products that provide limited capabilities, work with one transmission speed or protocol at a time, cannot simultaneously switch and multiplex or demultiplex different signals to derive information concerning embedded signals, cannot store a significant amount of data and are generally more difficult to use than the ASA 312. The ASA 312 is currently marketed at retail price of $37,500, which is at or below the price of the test instruments which the ASA 312 is designed to replace. 24 The following table sets forth certain advantages of the ASA 312 over the entire class of test instruments currently available: Feature Customer Benefit Software-based Provides for reprogrammability, custom features and field upgrades. One simple menu format for all Easy to learn. Easy to setup. protocols Touch sensor over full color windowed Easy to use by personnel of all levels of aptitude. graphics Intuitive user interface. Clear display of data. Transmitting and receiving of signals Can review multiple network elements simultaneously. at all of the protocols simultaneously Simultaneous uninterrupted operation Reduces overall task time. Can review simultaneously the interaction between multiple network elements. Allows formulation of new diagnostic procedures. Switch matrix Facilitates configuration of the product for dropping and inserting traffic from, into and between different protocols. Remote operation Provides complete, direct and identical operation of the product at a remote site. Ethernet interface Provides operation of the product via LAN. Laptop profile/lightweight Truly portable. PCMCIA card for expanded memory Can display long term history graphs. Provides recallable setups. Can store significant amounts of data. Non-Volatile memory Saves data when turned off. Software calibration Allows calibration by the customer which reduces cost and down time.
The ASA 312 processes, interleaves and transports SONET, T-Carrier and ATM protocols. The ASA 312 generates, transmits, receives and processes SONET and ATM fiber optic signals and provides access to SONET and ATM status and control overhead. The ASA 312 also generates, transmits, receives and processes T-Carrier signals and overhead. The Company believes that the ASA 312 is the only integrated product that enables users to understand and process information simultaneously without interruption from networks utilizing the legacy T-Carrier protocols at rates T-1 and T-3 and the fiber optic SONET protocol at rates OC-1, OC-3, OC-3c and OC-12, as well as networks transporting enhanced data services utilizing ATM protocol integrated into a single lightweight, compact unit. The Company currently plans to offer a factory installed OC-48 option for the ASA 312 during the fourth quarter of 1996. Each NPP within the ASA 312 operates without interruption, simultaneously with and independently from the other NPPs. Each NPP couples to each other NPPs through the Company's high speed switch fabric which allows any of the independent NPPs to provide received, generated, demapped or demultiplexed traffic to the other NPPs for processing, mapping, multiplexing, demultiplexing or transmission. The ASA 312 user interface is a touch sensor over a large color display which provides simple and intuitive windowed graphics and menus. The ASA 312 may be accessed remotely by modem or through direct connection to an Ethernet LAN so that an operator can, from any workstation, control the functions of a remote ASA 312 through the graphical user interface. The Company plans to develop and release the ASA 312E, which will process and report information concerning networks outside North America. The Company intends to commence the development of this product following the Offering. 25 NIC. The Company has in development the NIC, a notebook size network information computer that couples a fully featured personal computer with various customer selected NPPs. Different series of NICs will include various NPP cards that interface with transmission speeds ranging from 64 Kbps to 2.4 Gbps for T-Carrier, PDH, SONET, SDH and ATM protocols. Utilizing a WINDOWS environment, the NIC will enable users to access not only the network information provided by the NPPs, but also to write programs using this data intelligently to improve transmission. For example, the NIC could be programmed to extract data from a particular network element, search for a particular condition (such as a certain level of data congestion at the network element) and intervene actively to alter the way in which traffic is routed. The NIC will provide the means to transfer data derived from the NPPs to a conventional computing environment of word processing and spreadsheet programs for storage, processing and reporting. The retail price of the NIC will vary depending upon the range of transmission speed and protocol capabilities which the customer requires. ON-LINE REMOTE ACCESS PRODUCTS The Company intends to use its core hardware and firmware technology already utilized in the ASA 312 to develop a family of on-line remote access products for sale to telecommunications service providers and equipment vendors. Packaged as rack-mountable cards for permanent installation at any network element, NPPs will permit telecommunications service providers to monitor a wide range of transmission speeds and protocols from a remote location. The remote operator will be able to the Company's NPPs via the operator's Ethernet LAN or through the Internet. Featuring the Company's intuitive graphical user interface software, the on-line remote access products will allow customers to use their own computers (or the Company's NIC, for fully programmable monitoring) while still accessing the intuitive interface found on the ASA 312. The following chart sets forth certain information concerning the on-line remote access products which the Company intends to introduce.
ANTICIPATED PRODUCT PROTOCOLS TRANSMISSION RATE RELEASE DATE - ------------------------- --------------------- -------------------- ------------ NPP T-Carrier T-1, T-3 64 Kbps-45 Mbps Q4 1996 NPP PDH E-1 through E-4 64 Kbps-39 Mbps Q2 1997 NPP SONET OC-1, OC-3, OC-3c, 52-622 Mbps Q4 1996 OC-12, OC-12c NPP SDH STM-1, STM-4 52-622 Mbps Q2 1997 NPP ATM/SONET ATM/SONET 45-622 Mbps Q4 1996 NPP ATM/SDH ATM/SDH 39-622 Mbps Q2 1997 NPP OC-48 OC-48 2.4 Gbps Q4 1996 NPP STM-16 STM-16 2.4 Gbps Q2 1997
Each of the Company's on-line remote access products is also designed to be integrated into network transmission and cross-connect equipment on an OEM basis prior to installation or as a system enhancement subsequent to installation of the network element. The on-line remote access products will report information concerning the transmissions at a specific network element in real time and to break out low speed signals so that telecommunications service providers can evaluate embedded legacy protocols within a high speed optical signal. It is currently anticipated that the suggested retail price of the on-line remote access products upon introduction will range from $7,500 to $59,000. LAN AND WAN EDGE PRODUCTS NPP 155H. The Company has in development the NPP 155H, which is a hand-held ATM network analyzer for use in installation and maintenance of ATM switches and routers. The product features extensive capabilities at both the physical layer and the ATM cell layer. It will be configured with a T-3, OC-3 or 155 Mbps UTP interface. It is currently anticipated that the suggested retail price of the NPP 155H upon introduction will range from $4,600 to $12,000 depending on interface and feature set. 26 NIU 130. The Company has in development the NIU 130, which is a T-3 network interface unit which will provide the terminal interface between the network provider and customer premises equipment. The NIU 130 will be used to provide positive indication of customer service turn up, as well as testing and problem arbitration of network service and customer equipment. The NIU 130 is also designed to monitor on site the network signal performance. The unit will respond to standard far-end alarm and control (FEAC) codewords. It is currently anticipated that the suggested retail price of the NIU 130 upon introduction will be $1,500. CUSTOMERS As of July 31, 1996, the Company has sold at least one ASA 312 to each of the following customers:
IXCS CAPS - -------------------------------------------------- ------------------------------------------ MCI Buckeye Cablevision MCI Metro 5 Star Cablevision Sprint New York Development Authority MANUFACTURERS GOVERNMENT AGENCIES - -------------------------------------------------- ------------------------------------------ Hekimian United States Department of Defense Hitachi Tellabs
Sales to the United States Department of Defense were made to three separate agencies, each of which makes its own procurement decisions. In marketing the ASA 312, the Company focuses on the divisions of telecommunications service providers that are responsible for planning and installing extensions of the network. In contrast, the Company has directed its preliminary marketing efforts relating to its on-line remote access products towards the strategic planning divisions of telecommunications service providers. The Company has pursued a policy of involving key customers in the evaluation of products in development and continually solicits suggestions from customers regarding additional desirable features. Because the Company's products are software based, the Company has generally been able to satisfy generic requests for additional feature sets through field software upgrades made by the Company. SALES, MARKETING & CUSTOMER SUPPORT SALES. The Company markets its products to IXCs, RBOCs, CAPs, independent telephone companies, equipment manufacturers and government agencies through an internal sales force (currently consisting of 8 employees), which manages a domestic network of independent representatives. The Company's internal sales force includes managers based at the Company's principal executive offices and regional sales staff. The representative firms under contract with the Company have extensive experience in the sale of telecommunications equipment to the Company's existing and potential customers. The Company intends to continue to augment its internal sales organization and representative network to promote the Company's products and to ensure direct contact with the Company's current and potential customers. In order to execute a seamless and cohesive sales effort through these channels, the internal sales staff is compensated based upon the productivity of the representative firms in their respective territories. The primary roles of the Company's internal sales force are (i) to ensure that customers and potential customers in each territory are being regularly contacted, (ii) to provide support to independent representatives and determine that their sales quotas are met, (iii) to differentiate the features and capabilities of the Company's products from competitive offerings, (iv) to assist customers with the implementation of the Company's products and (v) to serve as a direct link to assure quality and timely customer support. In addition, the Company believes that its investment in its internal sales staff helps to enable the Company to monitor changing customer requirements, as well as the development of industry standards. The Company also plans to initiate an OEM partnering program for the sale of its on line remote access products in development. 27 MARKETING. The Company seeks to build awareness of its products through a variety of marketing channels and methodologies. The Company participates in numerous industry trade shows and conferences each year, publishes technical articles in the trade press and has commenced a comprehensive series of direct mailings sent to targeted potential customers. The Company also plans to initiate advertising and promotion of its products in select print media following the Offering. The Company has also established a direct telemarketing staff to provide direct access to network users. This group is also responsible for the identification of opportunities for the Company's internal sales staff and independent representatives. CUSTOMER SUPPORT. The Company is dedicated to providing comprehensive customer support. All service, repair and technical support of the Company's products are performed in-house utilizing sub-assemblies and components obtained from the Company's regular sources of supply. The Company's technical support engineers are experts in the hardware and software associated with the Company's products and with the networks and transmission equipment operated by its customers. The Company offers technical support to its customers 24 hours a day, 7 days a week via an 800 hotline and through paging systems for all support personnel. The Company offers a three-year limited warranty on all components of its products other than the laser transmitter unit, which has a one-year limited warranty, and software and firmware, which have a 90 day limited warranty. PRODUCT DEVELOPMENT The Company has in development a family of on-line remote access products, the NIC network information computer, and the NPP 155H and NIU 130 products. See "Business -- Products." The Company believes that its future success depends on its ability to maintain technological leadership through enhancements of its existing products and developments of new applications and products that meet a wide range of customer needs. Accordingly, the Company intends to continue to make substantial investments in the development of new technologies, the commercialization of new products building on the Company's existing technological asset base and the enhancement and development of additional applications for existing products. The Company has organized its product development efforts into three main groups: microelectronics development; software development; and hardware development. Within the microelectronics group, a substantial majority of the Company's efforts are devoted to the further development of hardware and firmware technologies. This group incorporates emerging, higher value components into the Company's products to provide platforms for additional applications and enhanced capacity, speed and ease of use. Within the software development group, the Company's efforts are devoted to developing new applications software for emerging signaling speeds and protocols and providing greater processing power for the Company's hardware platforms. The Company's hardware group efforts are devoted to further reducing the size and weight of the Company's products, designing printed circuit boards for new applications and developing enhancements to streamline production. The Company intends to increase the size of its technical staff by adding microelectronic and software engineers with particular understanding of international transmission protocols and standards in preparation for the commencement during the fourth quarter of 1996 of development of the ASA 312E and on-line remote access products designed for the international market. PRODUCTION The Company's manufacturing operations consist primarily of material planning and procurement, final assembly, software loading, testing and quality assurance. The Company's operational strategy relies on outsourcing of manufacturing to reduce fixed costs and to provide flexibility in meeting market demand. The Company currently subcontracts component procurement and kitting and printed circuit board assembly to a company that specializes in these services. The Company takes the printed circuit board-based modules produced by its contract manufacturer and inserts them into product enclosures in combination with the Company's software. 28 In connection with its outsourcing strategy, the Company is seeking to secure additional sources of supply, including additional contract subassembly and component manufacturers. The Company has experienced in the past, and may in the future experience, problems with its contract manufacturers, such as quality, quantity and on-time delivery. In addition, the Company may in the future experience pricing pressure from its contract manufacturers. The Company uses a rolling six-month forecast based on anticipated product orders to determine its general materials and component requirements. Lead times for materials and components ordered by the Company vary significantly, and depend on factors such as the specific supplier, purchase terms and demand for a component at a given time. Currently, the Company acquires materials and orders certain standard subassemblies based on the Company's forecast. Upon receipt of firm orders from customers, the Company assembles fully-configured systems and subjects them to a number of tests before shipment. If orders do not match forecasts, the Company may have excess or inadequate inventory of certain materials and components. The Company's financial and management information systems assist management in the timely procurement of materials and services. Although the Company generally uses standard parts and components for its products, several key components used in the manufacture of the Company's products are currently purchased only from single or limited sources. At present, the Company's only single-sourced component is a SONET overhead terminator. Limited-sourced components include a single board computer included in the ASA 312, a power supply, a touch sensor and controller, plastic housing units and other discrete components. The Company generally does not have long-term agreements with any of these single or limited sources of supply. Any interruption in the supply of any of these components, or the inability of the Company to procure these components from alternate sources at acceptable prices and within a reasonable time, could have a material adverse effect upon the Company's business, operating results and financial condition. Qualifying additional suppliers is time consuming and expensive and the likelihood of errors is greater with new suppliers. See "Risk Factors -- Substantial Increase in Manufacturing Operations; Dependence Upon Contract Manufacturing and Limited Source Suppliers." BACKLOG The Company's backlog at June 30, 1996 was approximately $312,000. All of the Company's current backlog consists of orders for the ASA 312 and is scheduled for delivery within 30 days. Variations in the size and delivery schedules of purchase orders received by the Company, as well as changes in customers' delivery requirements, may result in substantial fluctuations in backlog from period to period. Accordingly, the Company believes that its backlog cannot be considered a meaningful indicator of future financial results. COMPETITION The market in which the ASA 312 and certain of its proposed on-line remote access products will be sold is intensely competitive and subject to rapid change as a result of technological developments and other factors. The Company believes that the principal competitive factors in its market are expertise and familiarity with the transmission, storage and processing of network information relating to a wide range of bandwidth and protocols, product features, reliability, price, timeliness of new product introductions, timely adoption of emerging industry standards, service, support, size, name recognition and installed base. The Company believes that it is generally competitive with respect to most of these factors. The Company believes that there are currently no competitors that provide an integrated comprehensive solution to on-line performance monitoring transmission speeds from T-1 through OC-12 and no providers of portable equipment which cover the full range of features offered by the ASA 312. The Company believes that there are less than 20 current competitors that offers products which compete with the ASA 312 or will compete with the on-line remote access products being developed by the Company, including Applied Digital Access, Hekimian, Hewlett Packard, Lucent and Tektronics. Such competitors and certain prospective competitors have significantly longer operating histories, larger customer bases, greater name recognition and technical, financial, manufacturing and marketing resources than the Company. In 29 addition, a number of these competitors have long established relationships with the Company's customers and potential customers. The Company believes it is likely that competitors will enter the market for most if not all of the products which the Company will offer. See "Risk Factors -- Competition." INTELLECTUAL PROPERTY The Company relies on a combination of technological leadership, trade secret, copyright and trademark protection and non-disclosure agreements to protect its core technology. Although the Company has pursued and intends to continue to pursue patent protection of inventions that it considers important, the Company believes its success will be largely dependent on its reputation for technology, product innovation, affordability, marketing ability and response to customers' needs. As of the date of this Prospectus, the Company had pending two U.S. patent applications covering certain aspects of its technology. There can be no assurance that the Company will be granted any patents or that, if any patents are granted, they will provide the Company with significant protection or will not be challenged. The Company believes that the rapid rate of technological change and the relatively long development cycle for integrated circuits are also significant factors in the protection of the Company's intellectual property. The Company's NPTs incorporate unique system architectures that have been developed based on a broad understanding of public and private networks, signaling protocols and network information requirements of the Company's customer base. As part of its confidentiality procedures, the Company generally enters into non-disclosure agreements with its employees and suppliers, and limits access to and distribution of its proprietary information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use the Company's technology without authorization. Accordingly, there can be no assurance that the Company will be successful in protecting its intellectual property or that the Company's rights will preclude competitors from developing products or technology equivalent or superior to that of the Company. The telecommunications industry is characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement. Although the Company is not aware of any infringement or claimed infringement by its products or technology of the proprietary rights of others, there can be no assurance that third parties will not assert infringement claims against the Company in the future or that any such assertions will not result in costly litigation or require the Company to obtain a license to intellectual property rights of such parties. There can be no assurance that any such licenses would be available on terms acceptable to the Company, if at all. Furthermore, litigation could result in substantial cost to and diversion of efforts by the Company regardless of outcome. Any infringement claims or litigation against the Company could materially and adversely affect the Company's business, results of operations and financial condition. In addition, the Company's growth strategy includes a plan to enter the international market and the laws of some foreign countries do not protect the Company's proprietary rights regarding the products to the same extent as do the laws of the United States. See "Risk Factors -- Dependence on Proprietary Technology." FACILITIES The Company occupies 15,824 square feet of office and engineering space in Clearwater, Florida, with rent payable in the amount of $266,000 per year. This facility is leased through January 31, 1998 with an option to extend for an additional three year period. REGULATION The Company's products must meet industry standards and receive certification for connection to certain public telecommunications networks prior to their sale. In the United States, the Company's products must comply with various regulations promulgated by the FCC and Underwriters Laboratories. Internationally, the Company's products must comply with standards established by telecommunications authorities in various countries as well as with recommendations of the Consultative Committee on International Telegraph and Telephony. In addition, certain products must be certified by Bell Communications Research, Inc. to be commercially viable. Although the Company's products have not been denied any regulatory approvals or certifications to date, any future inability to obtain on a timely basis or retain 30 domestic or foreign regulatory approvals or certifications or to comply with existing or evolving industry standards could have a material adverse effect on the Company's business, operating results and financial condition. The telecommunications industry is subject to regulation in the United States and other countries. Federal and state regulatory agencies, including the FCC and the various state Public Utility Commissions ("PUCs") and Public Service Commissions regulate most of the Company's domestic customers. In February 1996, the Telecommunications Act of 1996 (the "Act") was passed. The Act allows IXCs, RBOCs, CAPs, independents and electric utility companies to compete with each other to provide local and long-distance service. The Company believes that the Act will increase the demand for systems, software and services as telecommunications service providers respond to the changing competitive environment by constructing new or enhancing existing networks. In addition, the FCC and a majority of the states have enacted or are considering regulations based upon alternative pricing methods. Under traditional rate of return pricing, telecommunications service providers were limited to a stated percentage profit on their investment. Under the new method of pricing, many PUCs have relaxed or eliminated the profit cap in return for the carrier's promise to reduce or hold service prices at current levels. In some states, the PUCs and the carriers have further agreed, in order to win relaxation of profit limits, that the carriers would invest large sums to upgrade the digital and optical capabilities of the network. The Company believes that the new methods of price regulation could increase the demand for its products. Outside the United States, telecommunications networks are primarily owned by the government or are strictly regulated by the government. Although potential growth rates of some international markets are higher than those of the United States, access to such markets is often difficult due to the established relationship between the government-owned or controlled telecommunications operating company and its traditional indigenous suppliers. However, there has been a global trend towards privatization and deregulation of the state-owned telecommunications operations. The Company believes that the current trend of privatization and deregulation will continue and that such trend could enhance the Company's international opportunities. LITIGATION The Company is not a party to any material litigation and is not aware of any pending or threatened material litigation. EMPLOYEES The Company employs a full-time staff of 57, 29 of which are technical personnel, 8 of which are internal sales staff and 20 of which are administrative personnel. The Company has agreements with all employees covering assignment of inventions and patents to the Company, confidentiality and non-competition after leaving the Company, as well as a comprehensive security agreement. The Company believes that its relationship with its employees is good. 31 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth certain information concerning the executive officers and directors of the Company:
NAME AGE POSITION - -------------------------------------------- --------- ----------------------------------------- Bryan J. Zwan............................... 48 Chairman of the Board, Chief Executive Officer and Director Doug C. Dohring............................. 38 President and Director Elizabeth W. Weigand........................ 39 Executive Vice President Beth A. Morris.............................. 42 Chief Financial Officer and Vice President of Finance Trevor Creary............................... 43 Vice President of Technology Tom V. Williams............................. 43 Vice President of Production Eric A. Mitchell............................ 35 Vice President of Sales
DR. ZWAN founded the Company in February 1991 and has served as its Chief Executive Officer and Chairman of the Board since inception. From 1987 to 1991, Dr. Zwan was Chief Executive Officer of Digital Photonics, Inc. ("DPI"), a SONET multiplexer manufacturer which he founded in 1987. DPI was purchased in December 1990 by Digital Transmission Systems, Inc., a manufacturer of digital cross connect switches and DS1 modems. From 1985 to 1987, Dr. Zwan was Vice President at DSC Communications Corporation. From 1976 to 1985, he started various businesses for the commercial development of thin film magnetic memory technologies, room temperature infrared detectors and amorphous thin film solar cells. Dr. Zwan was a member of the Research Facility Staff at the Massachusetts Institute of Technology for two years, and holds a Ph.D. from Rice University in Physics and two B.S. degrees from the University of Houston. MR. DOHRING joined the Company as its President in March 1996 and was elected as a Director in June 1996. From 1986 to March 1996, Mr. Dohring served as the Chairman and Chief Executive Officer of The Dohring Company, Inc., a privately held market research firm founded by Mr. Dohring which provides market research and consulting services In 1995, the Dohring Company had 75 employees and ranked 54th on Advertising Age's list of the top 100 market research firms in the nation. Mr. Dohring's firm developed and launched TREND TRAK, a hardware/software data collection product. MS. WEIGAND has been Executive Vice President since September 1994. Prior to joining the Company, from August 1992 to September 1994, Ms. Weigand served as administrator of a private health care concern. From March 1991 to August 1992, Ms. Weigand was Director of Sales at Kenfil Distribution, Inc., a software distributor. At Kenfil, she managed a staff of regional sales managers and account executives, restructured the sales and operations divisions and helped negotiate national contracts with companies such as Packard Bell, WordPerfect Corporation, and Borland International. MS. MORRIS has been Chief Financial Officer and Vice President of Finance of the Company since January 1996. Prior to joining the Company as Controller in January 1995, from 1989 through October 1994, Ms. Morris was the Controller of a division of Tredegar Industries, Inc., where she headed the efforts to achieve ISO 9001 certification. Ms. Morris is a Certified Public Accountant in the State of Florida. MR. CREARY has been Vice President of Technology since April 1996. Prior thereto, after joining the Company in December 1995, he was a Senior Engineer. From March 1992 until October 1995, he served as director of Hardware Development for a Sun Microsystems spin-off company, Axil Computer, Inc. From March 1987 until March 1992, Mr. Creary worked for Sun Microsystems as a Senior Staff Engineer where he was responsible for integrated circuits and systems level design for high end computer workstations. Mr. Creary served as Principal Engineer for Digital Equipment Corporation from 1976 to 1984, as Principal Engineer for Encore Computer Corporation from 1984 to 1986 and then as a member of the technical staff for Vitesse from 1986 to 1987. Mr. Creary holds an M.S.E.E. from the Massachusetts Institute of Technology. 32 MR. WILLIAMS has been Vice President of Production since April 1995. Prior to joining the Company, from March 1994 to April 1995, Mr. Williams was an independent consultant to Lockheed Martin Corporation. From February 1991 to March 1994, Mr. Williams was a Program Manager at Group Technologies Corporation, located in Tampa, Florida. MR. MITCHELL has been Vice President of Sales since April 1995. From 1992 to 1995, Mr. Mitchell was the President of Crown Herald, Inc., a manufacturer of imprinted corporate products, where he managed a sales force of independent manufacturer's representatives throughout North America. Prior to that, from 1987 to 1992, Mr. Mitchell was Regional Manager of Penn Corporation, a manufacturer of imprinted corporate products. OTHER KEY EMPLOYEES In addition to the executive officers and directors named above, certain key personnel also contribute significantly to the Company's management. RICHARD BROWN (Software Design Group Supervisor) joined the Company in December 1995. Mr. Brown is responsible for software design and development. From April 1981 to December 1995, Mr. Brown was a professional contractor working for such companies as IBM, Networking Dynamics and Real World Corporation. ROBERT GORANSSON (Quality Assurance Manager) joined the Company in March 1996. Mr. Goransson is responsible for customer support and product quality assurance. Prior to joining the Company, he served as Project Manager at Ericsson Network Systems, a manufacturer of telephone switching systems, from April 1981 until March 1996. DOUGLAS GARDNER (Senior Hardware Engineer) joined the Company in January 1996. Mr. Gardner is responsible for hardware design and engineering. Prior to joining the Company, Mr. Gardner was employed by AT&T Bell Labs from 1986 until the end of 1995. Most recently, he served AT&T as manager and lead engineer for its transmission division's undersea lightwave project. KENNETH T. MYERS (Engineering and Design Manager) joined the Company in September 1991. Mr. Myers is responsible for product design and engineering. Prior to joining the Company, Mr. Myers was the Chief Engineer at DPI from 1987 to 1991. BOARD OF DIRECTORS The Board of Directors of the Company currently consists of two members. Upon consummation of the Offering, the Board will consist of five members (at least two of whom will not be employees of, or otherwise affiliated with, the Company) and will be classified into three classes. One class of directors will be elected each year, and the members of such class will hold office for a three-year term or until their successors are duly elected and qualified. The Board of Directors of the Company will establish committees, including compensation and audit committees, each of which will report to the Board of Directors. Executive officers are appointed by, and serve at, the discretion of the Board of Directors. There are no family relationships among any of the directors or executive officers of the Company. COMPENSATION OF DIRECTORS During 1995, directors did not receive compensation for serving as members of the Board of Directors. Directors of the Company who are not officers or employees of the Company will receive an annual fee of $10,000. Directors are reimbursed for travel and other expenses relating to attendance at meetings of the Board of Directors or committees. EXECUTIVE COMPENSATION The following table shows, for 1995, the cash and other compensation awarded to, earned by or paid to Dr. Zwan and each executive officer, other than Dr. Zwan, who earned in excess of $100,000 for all services in all capacities: 33 SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION(1) ---------------------- OTHER NAME AND PRINCIPAL POSITIONS SALARY BONUS COMPENSATION - -------------------------------------------------------------------------- ---------- ---------- ------------- Bryan J. Zwan ............................................................ $ 300,000 $ -- $ -- Chairman of the Board and Chief Executive Officer Al G. Zwan ............................................................... 110,000 110,000 -- Former Executive Vice President Elizabeth W. Weigand ..................................................... 70,000 70,000 -- Executive Vice President Kenneth T. Myers ......................................................... 100,000 -- -- Engineering and Design Manager
- -------------- (1) Amounts include compensation paid during 1995 and deferred amounts. OPTION PLAN The Company's 1996 Stock Option Plan (the "Option Plan") became effective on March 5, 1996. The purpose of the Option Plan is to attract and retain qualified personnel, to provide additional incentives to employees, officers and consultants of the Company and to promote the success of the Company's business. A reserve of 5,000,000 shares of the Company's Common Stock has been established for issuance under the Option Plan. The Option Plan is administered by the Board of Directors who may delegate the administration of the plan to a Committee of the Board. The Board now has, and such committee would have, complete discretion to determine which eligible individuals are to receive option grants, the number of shares subject to each such grant, the status of any granted option as either an incentive stock option or a non-statutory option, the vesting schedule to be in effect for the option grant and the maximum term for which any granted option is to remain outstanding. Each option granted under the Option Plan has a maximum term of ten years, subject to earlier termination following the optionee's cessation of service with the Company. Options granted under the Option Plan may be exercised only for fully vested shares. The exercise price of incentive stock options and non-statutory stock option granted under the Option Plan must be at least 100% and 85%, respectively, of the fair market value of the stock subject to the option on the date of grant (or 110% with respect to holders of more than 10% of the voting power of the Company's outstanding stock). The Board or, when appointed, such committee, has the authority to determine the fair market value of the stock. The purchase price is payable immediately upon the exercise of the option. Such payment may be made in cash, in outstanding shares of Common Stock held by the participant, through a promissory note payable in installments over a period of years or any combination of the foregoing. The Board of Directors may amend or modify the Option Plan at any time, provided that no such amendment or modification may adversely affect the rights and obligations of the participants with respect to their outstanding options or vested shares without their consent. In addition, no amendment of the Option Plan may, without the approval of the Company's stockholders (i) modify the class of individuals eligible for participation, (ii) increase the number of shares available for issuance, except in the event of certain changes to the Company's capital structure, or (iii) extend the term of the Option Plan. The Option Plan will terminate on February 28, 2006, unless sooner terminated by the Board. As of the date of this Prospectus, the Company had outstanding options under the Option Plan for an aggregate of 2,582,500 shares of Common Stock. EMPLOYMENT AGREEMENT Effective March 8, 1996, the Company entered into an employment agreement with Mr. Dohring (the "Employment Agreement"). The Employment Agreement provides for Mr. Dohring's employment as President at a base salary of $200,000, with eligibility to receive a bonus of up to $25,000 during the initial 34 year of employment, and thereafter as determined by the Compensation Committee of the Board of Directors. The Employment Agreement provides for an initial term of one year with two one-year extensions unless terminated by either the Company or Mr. Dohring at the end of the initial term or a renewal term. Pursuant to the Employment Agreement, the Company awarded stock options for 1,500,000 shares of Common Stock at an exercise price of $3.33 per share, subject to a vesting schedule of 375,000 shares upon commencement and at the end of each full year served with the Company. The Employment Agreement contains confidentiality and noncompete provisions by Mr. Dohring in favor of the Company. In the event of the termination of Mr. Dohring, other than for cause following a merger, sale of assets or other change in control of the Company, Mr. Dohring will be entitled to severance payments not to exceed one year's salary. 35 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth certain information regarding beneficial ownership of the Company's Common Stock as of June 30, 1996 and as adjusted to reflect the sale of the shares offered hereby by (i) each person who is known by the Company to own beneficially more than 5% of the outstanding shares of Common Stock, (ii) each director of the Company, (iii) each named executive officer, (iv) all directors and executive officers of the Company as a group, and (v) each Selling Stockholder, after giving effect to the exercise of options and warrants prior to the closing of the offering. Unless otherwise indicated below, to the knowledge of the Company, all persons listed below have sole voting and investing power with respect to their shares of Common Stock, except to the extent authority is shared by spouses under applicable law.
SHARES BENEFICIALLY SHARES BENEFICIALLY OWNED PRIOR TO OWNED AFTER THE THE OFFERING (1) NUMBER OF OFFERING (1) ------------------------- SHARES ------------------------- NAME NUMBER PERCENT OFFERED NUMBER PERCENT - ------------------------------------------------------- ------------ ----------- ----------- ------------ ----------- Bryan J. Zwan (2)...................................... 30,000,000 88.8% -- 30,000,000 81.5% Doug C. Dohring (3).................................... 375,000 1.1% -- 375,000 1.0% Norton S. Karno (4).................................... 1,350,000 4.0% 420,000 930,000 2.5% Ellenburg Capital Corp. (5)............................ 300,000 * 220,572 79,428 * Paul Hedlund (6)....................................... 177,500 * 155,261 22,239 * Michael J. Baum (7).................................... 177,000 * 154,761 22,239 * Stanley P. Zurn........................................ 40,000 * 40,000 -- David A. Wagner or Patricia Flanagan Wagner............ 34,906 * 17,456 17,450 * George W. Murgatroyd (8)............................... 35,500 * 12,500 23,000 * Edward F. Guignon (9).................................. 26,175 * 9,500 16,675 * Jakob Kryszek.......................................... 17,000 * 9,500 7,500 * Alfred J. Cade......................................... 17,000 * 7,000 10,000 * ASK Brown Trust........................................ 14,046 * 7,000 7,046 * Nicholas Brown......................................... 8,811 * 4,900 3,911 * Frank & Jean Dufek..................................... 8,500 * 4,700 3,800 * Carl R. Gratz Residuary Trust.......................... 8,500 * 4,700 3,800 * Venture Tech Investors................................. 8,876 * 4,400 4,476 * First Trust Corp. TTEE for Bert Rettner................ 4,250 * 4,250 -- Ruth Cantley........................................... 8,500 * 3,500 5,000 * Tony Lonstein.......................................... 7,000 * 7,000 -- * Monte Factor TTEE under the will of Ted H. Factor...... 8,500 * 2,800 5,700 * Douglas J. Sterne...................................... 4,250 * 2,250 2,000 * Frank G. McGuire III/Jordon Trust...................... 8,500 * 2,100 6,400 * George J. Baxter....................................... 9,036 * 2,100 6,936 * Sean Lilly............................................. 8,500 * 2,000 6,500 * Margaret A. Guignon (10)............................... 18,003 * 1,750 16,253 * All executive officers and directors as a group (7 persons) (11)...................................... 30,375,000 94.3% -- 30,375,000 81.7%
- ------------------ * Less than one percent (1) Includes shares of Common Stock issuable pursuant to options held by the individuals listed above that may be exercised within 60 days after June 30, 1996. (2) Includes 7,000,000 shares of Common Stock held by the Zwan Family Limited Partnership (the "Zwan Partnership"). Dr. Zwan is a general partner of the Zwan Partnership, in which he holds a 1% general partnership interest. As the general partner, he has sole voting and investment control over the shares of Common Stock held by the Zwan Partnership. Dr. Zwan's address is 601 Cleveland Street, Fifth Floor, Clearwater, Florida 34615. (3) Consists of 375,000 shares of Common Stock issuable pursuant to employee stock options that may be exercised by Mr. Dohring within 60 days after June 30, 1996. Mr. Dohring's address is 601 Cleveland Street, Fifth Floor, Clearwater, Florida 34615. (4) Includes 600,000 shares of Common Stock issuable pursuant to presently exercisable warrants. Mr. Karno has disclaimed beneficial ownership of 450,000 shares of Common Stock. (5) Includes 300,000 shares of Common Stock issuable pursuant to presently exercisable warrants. Ellenburg Capital Corp. has disclaimed beneficial ownership of such shares of Common Stock. (6) Includes 3,870 shares of Common Stock issuable pursuant to presently exercisable warrants. (7) Includes 10,000 shares of Common Stock issuable pursuant to presently exercisable warrants. (8) Includes 10,000 shares of Common Stock issuable pursuant to presently exercisable warrants. (9) Includes 2,500 shares of Common Stock issuable pursuant to presently exercisable warrants. (10) Includes 1,750 shares of Common Stock issuable pursuant to presently exercisable warrants. (11) Includes shares of Common Stock issuable pursuant to employee stock options held by executive officers that may be exercised within 60 days after June 30, 1996. 36 CERTAIN TRANSACTIONS LOAN TO FOUNDER On December 21, 1995, the Company loaned Dr. Zwan, the Company's Chairman of the Board and Chief Executive Officer, $1.7 million which he advanced to LMI, Inc. ("LMI"), a corporation wholly owned by Dr. Zwan, to enable LMI to repay a loan extended to LMI by a former stockholder of the Company. See " -- Transactions with Former Stockholder" below. The loan to Dr. Zwan is due on December 20, 1997. Interest only is payable monthly at the rate of 9% per annum and the original principal amount of the loan remains outstanding as of the date of this Prospectus. LOANS MADE BY FOUNDER Since 1991, Dr. Zwan from time to time has advanced personal funds to the Company to fund working capital needs. These loans were evidenced by demand promissory notes bearing interest at 9% per annum. All such loans have been satisfied as of June 30, 1996. LOANS GUARANTEED BY FOUNDER Dr. Zwan and/or his wife have personally guaranteed most of the Company's indebtedness incurred since inception. Currently, Dr. Zwan and/or his wife are obligated as personal guarantor of the Company's indebtedness in the principal amount of $2.4 million due August 20, 1996 to a former stockholder of the Company which is expected to be retired with proceeds from the exercise of outstanding warrants prior to the Offering. See " -- Transactions with GAF USA." TRANSACTIONS WITH FORMER STOCKHOLDER On June 21, 1994, Dr. Zwan sold 28,823,529 of the 58,823,529 shares of the Common Stock then outstanding (after giving effect to subsequent splits and conversions) to an unaffiliated third party (the "Former Stockholder") for a purchase price of $500,000 pursuant to a Stock Purchase Agreement. In connection with that transaction, the Former Stockholder became a member of the Company's Board of Directors and the Former Stockholder and the Company entered into a Shareholders' Agreement (the "Stockholders' Agreement") restricting both the stockholders' ability to transfer their shares and the Company's ability to issue additional shares of Common Stock and any other securities. Sale of the 28,823,529 shares was originally intended to be a part of a series of transactions pursuant to which Dr. Zwan would also acquire stock of and provide technological support to certain companies owned by the Former Stockholder, the businesses of which are not related to telecommunications. Subsequently, Dr. Zwan determined not to proceed with the planned affiliation and on February 9, 1995, the Company acquired from the Former Stockholder the option to repurchase the shares of Common Stock held by the Former Stockholder for a price of $2.5 million (the "Option"). The Option originally provided that the Company would be credited with a $1.6 million partial payment of the Option purchase price upon payment of such amount to GAF HK (hereinafter defined) by LMI with respect to the GAF HK Loan (hereinafter defined). The Option subsequently was modified to reduce the price to $800,000 and eliminate the credit for LMI's payment of the GAF HK Loan. On November 30, 1995, the Company exercised the Option by repurchasing the 28,823,529 shares subject to the Option for $800,000 (the "Repurchase") and the Former Stockholder resigned from the Board of Directors. TRANSACTIONS WITH GAF USA Pursuant to the Stock Purchase Agreement, in June 1994 the Former Stockholder caused Great American Fun Corp., an Ohio corporation which was wholly owned by the Former Stockholder ("GAF USA"), to provide the Company with a $3 million line of credit facility secured by the Company's business assets (the "GAF USA Loan"). The Company has borrowed $2.4 million of the principal amount available under the GAF USA Loan. The principal of the GAF USA Loan bears interest at the prime rate and matures on August 20, 1996, at which time the entire principal balance of $2.4 million together with all accrued interest and extension fees, aggregating approximately $2.7 million, will be due and payable. The GAF USA Loan is secured by 13,800,000 shares of Common Stock held of record by Dr. Zwan. It is anticipated that the GAF USA loan will be retired with proceeds from the exercise of outstanding warrants prior to the Offering. 37 TRANSACTIONS WITH GAF HK On June 25, 1994, LMI borrowed $1.5 million (the "GAF HK Loan") from Great American Fun (HK) Ltd., a Hong Kong corporation wholly owned by the Former Stockholder ("GAF HK"). The GAF HK Loan had an original maturity date of August 31, 1995, but was extended until December 22, 1995. On December 22, 1995, the GAF HK Loan was retired with the proceeds of a loan by the Company to Dr. Zwan, which he advanced to LMI. See " -- Loan to Dr. Zwan." 38 DESCRIPTION OF CAPITAL STOCK The authorized capital stock of the Company consists of 20,000,000 shares of Preferred Stock, $.0001 par value, issuable in series and 200,000,000 shares of Common Stock, $.0001 par value. The following statements are brief summaries of certain provisions relating to the Company's capital stock contained in its Certificate of Incorporation (the "Certificate") and Bylaws and in the laws of Delaware. COMMON STOCK The Company's authorized Common Stock consists of 200,000,000 shares, $.0001 par value, of which 31,900,829 shares are issued and outstanding as of the date of this Prospectus. The issued and outstanding shares of Common Stock are fully paid and non-assessable. Holders of the Company's Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders. As of the date of this Prospectus, there are 66 holders of record of the Company's Common Stock. Each share of the Company's Common Stock is entitled to equal dividend rights and to equal rights in the assets of the Company available for distribution to holders of Common Stock upon liquidation, subject to the rights of outstanding series of Preferred Stock. The Company's Certificate and Bylaws do not provide for preemptive rights of the holders of its Common Stock. The Transfer Agent and Registrar for the Common Stock is American Stock Transfer & Trust Company. PREFERRED STOCK The Company's Board of Directors may, without further action by the Company's stockholders, from time to time direct the issuance of Preferred Stock in series and may, at the time of issuance, determine the rights, preferences and limitations of each series. Satisfaction of any dividend preferences of outstanding Preferred Stock would reduce the amount of funds available for the payment of dividends on shares of the Common Stock. See "Dividend Policy." Also, holders of Preferred Stock would normally be entitled to receive a preference payment in the event of any liquidation, dissolution or winding-up of the Company before any payment is made to the holders of Common Stock. The issuance of Preferred Stock may have the effect of delaying, deferring or preventing a change in control of the Company without further action by the stockholders. The issuance of Preferred Stock with voting and conversion rights may adversely affect the voting powers of the holders of Common Stock, including the loss of voting control to others. No shares of Preferred Stock have been issued. While the Company has in the past entertained proposals to issue Preferred Stock to various investors, no agreements to issue Preferred Stock exist at the present time. WARRANTS The Company has outstanding warrants to purchase an aggregate of 1,903,120 shares of Common Stock which will expire prior to the completion of the Offering, if not earlier exercised. CERTAIN VOTING PROVISIONS Stockholders' rights and related matters are governed by Delaware corporate law, the Company's Certificate and its Bylaws. Certain provisions of the Certificate and Bylaws which are summarized below may affect potential changes in control of the Company. The Board of Directors believes that these provisions are in the best interests of stockholders because they will encourage a potential acquiror to negotiate with the Board of Directors, which will be able to consider the interests of all stockholders in a change of control situation. However, the cumulative effect of these terms may be to make it more difficult to acquire and exercise control of the Company and to make changes in management more difficult. Article Eight of the Certificate contains provisions (the "Fair Price Provisions") which require the approval (an "Unaffiliated 70% Vote") of the holders of 70% of those shares that are not beneficially owned or controlled by a stockholder who owns directly or indirectly 10% or more of the outstanding voting shares of the Company (a "Related Person"), defined to exclude the sole incorporator of the Company, Bryan J. Zwan, or his affiliates, as a condition to specified business combinations (the "Business Combinations") with or proposed by any Related Person, except where the transaction (i) has been approved by two-thirds of the directors who are not affiliated with the Related Person (the "Continuing Directors") or (ii) meets certain 39 minimum price criteria and procedural conditions. If the Business Combination satisfies either of these criteria, the usual requirements of applicable law, regulations and other provisions of the Certificate would apply. A Business Combination includes, among others, the following: (i) a merger or consolidation of the Company or any subsidiary of the Company with a Related Person; (ii) the sale, lease, mortgage or other disposition by the Company or any subsidiary of the Company of assets worth more than a specified amount to a Related Person; (iii) the sale, lease or mortgage to the Company or any subsidiary of the Company of all or more than a specified amount of the assets of a Related Person or its affiliates; (iv) the issuance, pledge or transfer of stock or other securities of the Company or any of its subsidiaries to a Related Person in exchange for cash or property worth more than a specified amount, unless such person is acting as an underwriter with respect to such securities; (v) the adoption of any plan or proposal to liquidate or dissolve the Company that is proposed by a Related Person; (vi) any reclassification of securities, recapitalization or other transaction which has the direct or indirect effect of increasing the voting power or proportionate share of the outstanding stock (or of any class or series of stock) of the Company or any subsidiary of the Company owned by a Related Person; (vii) any agreement, contract or other arrangement providing directly or indirectly for any of the foregoing; or (vii) any series of transactions that not less than two-thirds of the Continuing Directors determine are related and, if taken together, would constitute a Business Combination. The Fair Price Provisions require the consideration to be paid to the Company's stockholders in a Business Combination not approved by either two-thirds of the Continuing Directors or an Unaffiliated 70% Vote to be either cash or the same type of consideration paid by the Related Person in acquiring the Company's voting stock that it previously acquired. The fair market value of any consideration other than cash or publicly traded securities would be determined by a majority of the Continuing Directors. The Fair Price Provisions require the Related Person to meet the minimum price criteria with respect to each class or series of Common or Preferred Stock, whether or not the Related Person owned shares of that class or series prior to proposing the Business Combination. The Board of Directors has observed situations in corporate takeovers involving the payment of cash to acquire equity interests in a company followed by a payment to the remaining stockholders of a price for their shares that is lower than the price paid to acquire control or that is in a different form of consideration. The Board of Directors considers that such two-step acquisitions often are unfair to a target company's stockholders, since they tend (and are sometimes designed) to cause concern on the part of the stockholders that if they do not act promptly, they risk either being relegated to the status of minority stockholders in a controlled company or being forced to accept a lower price for all of their shares. The Fair Price Provisions are intended to prevent certain of the potential inequities of those Business Combinations that involve two or more steps, since such provisions will tend to discourage purchasers whose objective is to seek control of the Company at a relatively inexpensive price without meeting minimum fair price and procedural requirements for acquiring the remaining equity interest. In the absence of compliance with such minimum price and procedural requirements, only the approval of two-thirds of the Continuing Directors or an Unaffiliated 70% Vote of the stockholders can approve the transaction. However, since the Continuing Directors would have the authority to eliminate the Unaffiliated 70% Vote requirement, the Fair Price Provisions may tend to insulate current management against the possibility of removal in the event of a takeover bid and may deter a potentially beneficial change of control. The Certificate provides that following the annual meeting of stockholders in 1996, each director will serve for a three-year term and that approximately one-third of the directors are to be elected annually. Candidates for directors shall be nominated only by the Board of Directors or by a stockholder who gives written notice to the Company at least 120 days before the annual meeting. The Company may have one to nine directors as determined from time to time by the Board. The Board of Directors currently consists of two members. Between stockholders' meetings, the Board may appoint new directors to fill vacancies or newly created directorships. A director may be removed from office only for cause and only by the affirmative vote of at least 70% of the combined voting power of the then outstanding shares of stock entitled to vote generally in the election of directors. 40 The Certificate further provides that stockholder action must be taken at a meeting of stockholders and may not be effected by any consent in writing unless approved by a vote of two-thirds of the Continuing Directors. Special meetings of stockholders may be called only by the President or by a majority of the Board of Directors. If a stockholder wishes to propose an agenda item for consideration, he must give a brief description of each item and notice to the Company not less than 120 nor more than 180 days prior to the meeting. Stockholders will need to present their proposals or director nominations in advance of the time they receive notice of the meeting since the Company's Bylaws provide that notice of a stockholders' meeting must be given not less than ten or more than 60 days prior to the meeting date. The Certificate generally provides further that the foregoing provisions of the Certificate and Bylaws may be amended or repealed by the stockholders only with the affirmative vote of at least 70% of the shares entitled to vote generally in the election of directors voting together as a single class unless two-thirds of the Continuing Directors approve the changes in which event a majority vote would be sufficient. These provisions exceed the usual majority vote requirement of Delaware law and are intended to prevent the holders of less than 70% of the voting power from circumventing the foregoing terms by amending the Certificate or Bylaws. These provisions, however, enable the holders of more than 30% of the voting power to prevent amendments to the Certificate or Bylaws even if they are approved by the holders of a majority of the voting power. The effect of such provisions of the Company's Certificate and Bylaws may be to make more difficult the accomplishment of a merger or other takeover or change in control of the Company. To the extent that these provisions have this effect, removal of the Company's incumbent Board of Directors and management may be rendered more difficult. Furthermore, these provisions may make it more difficult for stockholders to participate in a tender or exchange offer for Common Stock and in so doing may diminish the market value of Common Stock. The Company is not aware of any proposed takeover attempt or any proposed attempt to acquire a large block of Common Stock. PERSONAL LIABILITY OF DIRECTORS Delaware law authorizes a Delaware corporation to eliminate or limit the personal liability of a director to the corporation and its stockholders for monetary damages for breach of certain fiduciary duties as a director. The Company believes that such a provision is beneficial in attracting and retaining qualified directors, and accordingly the Certificate includes a provision eliminating liability for monetary damages for any breach of fiduciary duty as a director, except as provided under Delaware law. Pursuant to Delaware law, directors of the Company are not insulated from liability for breach of their duty of loyalty (requiring that, in making a business decision, directors act in good faith and in the honest belief that the action was taken in the best interest of the corporation), or for claims arising under the federal securities laws. The foregoing provisions of the Certificate may reduce the likelihood of success of derivative litigation against directors for breaches of their fiduciary duties, even though such an action, if successful, might otherwise have benefited the Company and its stockholders. Furthermore, the Company intends to enter into indemnity agreements with present and future officers and directors for the indemnification of and the advancing of expenses to such persons to the full extent permitted by law. REGISTRATION RIGHTS Holders of 1,900,829 shares of Common Stock and warrants to purchase an aggregate of 1,903,120 shares of Common Stock currently possess the right to have the shares of Common Stock registered under the Securities Act whenever the Company proposes to register Common Stock under the Securities Act for sale to the public. Such holders may require the Company, subject to certain limitations, to include all or any portion of their Common Stock in such registration (the "Piggyback Registration") and to pay such stockholders' registration expenses, but not underwriting commissions or discounts in connection with such registrations. To the extent the managing underwriter associated with such registration determines to include only shares offered by the Company, the Company will not have an obligation to register any shares held by such holders for sale. In addition, the number of shares to be included will be reduced pro-rata with all other secondary shares. The Company has agreed to indemnify the holders against certain liabilities, including liabilities under the Securities Act, in connection with the registration of their shares. 41 SHARES ELIGIBLE FOR FUTURE SALE Prior to the Offering, there has not been any public market for securities of the Company. No prediction can be made as to the effect, if any, that market sales of shares or the availability of shares for sale will have on the market price prevailing from time to time. Nevertheless, sales of substantial amounts of Common Stock in the public market could adversely affect the prevailing market price. Upon completion of the Offering, the Company will have outstanding 36,803,949 shares of Common Stock (based upon shares outstanding as of June 30, 1996 and assuming the anticipated exercise of warrants and options to purchase shares of Common Stock prior to the Offering). Of these shares, the 4,100,000 shares sold in the Offering will be freely tradable without restriction or further registration under the Securities Act of 1933, as amended (the "Securities Act"), except that shares owned by "affiliates" of the Company, as that term is defined in Rule 144 under the Securities Act ("Affiliates"), may generally only be sold in compliance with applicable provisions of Rule 144. The remaining 32,703,949 shares of Common Stock (the "Restricted Shares") held by existing stockholders upon completion of the Offering will be "restricted" securities within the meaning of Rule 144 and may not be sold except in compliance with the registration requirements of the Securities Act or an applicable exemption under the Securities Act, including sales pursuant to Rule 144. All directors and officers and each of the Selling Stockholders have agreed with the Underwriters not to sell or otherwise dispose of any shares of Common Stock for a period of 180 days after the date of this Prospectus without the prior written consent of CS First Boston Corporation. See "Underwriting." Beginning 180 days after the date of this Prospectus, 30,000,000 additional Restricted Shares subject to such agreements will become eligible for sale in the public market pursuant to Rule 144. CS First Boston Corporation may, in its sole discretion and at any time without notice, waive the provisions of the lock-up agreements. In general, under Rule 144, a person (or persons whose shares are aggregated), including an Affiliate, who has beneficially owned Restricted Shares for at least two years (including the holding period of certain prior owners), will be entitled to sell in "restricted brokers' transactions" or to market makers, within any three-month period commencing 90 days after the Company becomes subject to the reporting requirements of Section 13 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), a number of Restricted Shares that does not exceed the greater of (i) 1% of the then outstanding shares of Common Stock (approximately 370,000 shares immediately after the Offering) or (ii) the average weekly trading volume in the Common Stock during the four calendar weeks immediately preceding such sale, subject, generally, to the filing of a Form 144 with respect to such sales and certain other limitations and restrictions. In addition, a person (or person whose shares are aggregated), who is not deemed to have been an Affiliate at any time during the 90 days immediately preceding the sale and who has beneficially owned the Restricted Shares proposed to be sold for at least three years, is entitled to sell such shares under Rule 144(k) without regard to the limitations described above. Further, Rule 144A under the Act permits the immediate sale of restricted shares to certain qualified institutional buyers without regard to the volume restrictions described above. In general, under Rule 701 of the Securities Act, any employee, consultant or advisor of the Company who purchased shares from the Company in connection with a compensatory stock or option plan or other written compensatory agreement is entitled to resell such shares without having to comply with the public information, holding period, volume limitation or notice provisions of Rule 144 and Affiliates are entitled to sell their Rule 701 shares without having to comply with holding-period restrictions under Rule 144, in each case commencing 90 days after the Company becomes subject to the reporting requirements of Section 13 of the Exchange Act. Rule 701 is available for stockholders of the Company as to all shares issued pursuant to exercises of options granted prior to the Offering. 42 As of the date hereof, the Company has authorized an aggregate of up to 5,000,000 shares of Common Stock for issuance pursuant to its Option Plan. As of the date hereof, options to purchase 2,582,500 shares have been granted pursuant to the Option Plan. The Company intends to file registration statements under the Securities Act within approximately 90 days after the date of this Prospectus to register up to 5,000,000 shares available for issuance under the Option Plan. After the effective date of the applicable registration statement, shares of Common Stock issued under the Option Plan will be immediately available for sale in the public market, subject in certain cases to the lock-up restrictions described above and subject, in the case of sales by Affiliates, to certain limitations and restrictions under Rule 144. 43 UNDERWRITING Under the terms and subject to the conditions contained in an Underwriting Agreement dated , 1996 (the "Underwriting Agreement") among the Company, the Selling Stockholders and the underwriters named below (the "Underwriters"), the Underwriters have severally but not jointly agreed to purchase from the Company and the Selling Stockholders the respective number of shares of Common Stock set forth opposite their names below.
NUMBER OF UNDERWRITER SHARES ---------- CS First Boston Corporation...................................................... ---------- Total...................................................................... 4,100,000 ---------- ----------
The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent and that the Underwriters will be obligated to purchase all of the shares of Common Stock offered hereby (other than those shares covered by the over-allotment option described below) if any are purchased. The Underwriting Agreement provides that, in the event of a default by an Underwriter, in certain circumstances the purchase commitments of non-defaulting Underwriters may be increased or the Underwriting Agreement may be terminated. The Company has granted to the Underwriters an option exercisable by CS First Boston Corporation on behalf of the Underwriters, expiring at the close of business on the 30th day after the date of this Prospectus, to purchase up to 615,000 additional shares of the Common Stock at the initial public offering price less underwriting discounts and commissions, all as set forth on the cover page of this Prospectus. The Underwriters may exercise such option only to cover over-allotments, if any, in the sale of the shares of Common Stock. To the extent such option is exercised, each Underwriter will become obligated, subject to certain conditions, to purchase approximately the same percentage of such additional shares of Common Stock as it was obligated to purchase pursuant to the Underwriting Agreement. The Company and the Selling Stockholders have been advised by the Underwriters that the Underwriters propose to offer the shares of Common Stock to the public initially at the public offering price set forth on the cover page of this Prospectus and, through the Underwriters, to certain dealers at such price less a concession of $ per share, and the Underwriters and such dealers may allow a discount of $ per share on sales to certain other dealers. After the initial public offering, the public offering price and concession and discount to dealers may be changed by the Underwriters. The Underwriters have informed the Company that they do not expect discretionary sales by the Underwriters to exceed 5% of the shares being offered hereby. The Company, its officers and directors and the Selling Stockholders have agreed that they will not offer, sell, contract to sell, announce their intention to sell, pledge or otherwise dispose of, directly or indirectly, or, in the case of the Company, file with the Securities and Exchange Commission (the "Commission") a registration statement under the Securities Act relating to any additional shares of the Company's Common Stock or securities convertible into or exchangeable or exercisable for any shares of the Company's Common Stock, without the prior written consent of CS First Boston Corporation for a period of 180 days after the date of this Prospectus, except issuances pursuant to the exercise of stock options granted under the Option Plan. 44 The Company and the Selling Stockholders have agreed to indemnify the Underwriters against certain liabilities, including civil liabilities under the Securities Act, or to contribute to payments which the Underwriters may be required to make in respect thereof. Application has been made to list the shares of Common Stock on The NASDAQ National Market. Prior to the Offering, there has been no public market for the Common Stock. The initial public offering price for the shares of Common Stock has been negotiated between the Company and the Underwriters. Among the factors considered in the determining the initial public offering price of the Common Stock were the Company's historic performance, estimates of the business potential and earnings prospects of the Company and its industry in general, an assessment of the Company's management, the market valuation of companies in related businesses, the general condition of the equity securities market and other relevant factors. There can be no assurance that the initial public offering price of the Common Stock will correspond to the price at which the Common Stock will trade in the public market subsequent to the Offering, or that an active public market for the Common Stock will develop and continue after the Offering. NOTICE TO CANADIAN RESIDENTS RESALE RESTRICTIONS The distribution of the Common Stock in Canada is being made only on a private placement basis exempt from the requirement that the Company prepare and file a prospectus with the securities regulatory authorities in each province where trades of Common Stock are effected. Accordingly, any resale of the Common Stock in Canada must be made in accordance with applicable securities laws which will vary depending on the relevant jurisdiction, and which may require resales to be made in accordance with available statutory exemptions or pursuant to a discretionary exemption granted by the applicable Canadian securities regulatory authority. Purchasers are advised to seek legal advice prior to any resale of the Common Stock. REPRESENTATIONS OF PURCHASERS Each purchaser of Common Stock in Canada who receives a purchase confirmation will be deemed to represent to the Company, the Selling Stockholders and the dealer from whom such purchase confirmation is received that (i) such purchaser is entitled under applicable provincial securities laws to purchase such Common Stock without the benefit of a prospectus qualified under such securities laws, (ii) where required by law, that such purchaser is purchasing as principal and not as agent, and (iii) such purchaser has reviewed the text above under "Resale Restrictions." RIGHTS OF ACTION AND ENFORCEMENT The securities being offered are those of a foreign issuer and Ontario purchasers will not receive the contractual right of action prescribed by section 32 of the Regulation under the SECURITIES ACT (Ontario). As a result, Ontario purchasers must rely on other remedies that may be available, including common law rights of action for damages or rescission or rights of action under the civil liability provisions of the U.S. federal securities laws. All of the issuer's directors and officers as well as the experts named herein may be located outside of Canada and, as a result, it may not be possible for Ontario purchasers to effect service of process within Canada upon the issuer or such persons. All or a substantial portion of the assets of the issuer and such persons and the Selling Stockholders may be located outside of Canada and, as a result, it may not be possible to satisfy a judgment against the issuer or such persons and the Selling Stockholders in Canada or to enforce a judgment obtained in Canadian courts against the issuer or such persons outside of Canada. NOTICE TO BRITISH COLUMBIA RESIDENTS A purchaser of Common Stock to whom the SECURITIES ACT (British Columbia) applies is advised that such purchaser is required to file with the British Columbia Securities Commission a report within ten days of the sale of any Common Stock acquired by such purchaser pursuant to the Offering. Such report must be 45 in the form attached to British Columbia Securities Commission Blanket Order BOR #95/17, a copy of which may be obtained from the Company. Only one such report must be filed in respect of Common Stock acquired on the same date and under the same prospectus exemption. LEGAL MATTERS The validity of Common Stock offered hereby will be passed upon for the Company by Baker & McKenzie. Certain legal matters in connection with the Offering will be passed upon for the Underwriters by King & Spalding. EXPERTS The balance sheet as of December 31, 1995 and 1994 and the statements of operations, stockholders' deficit, and cash flows for each of the three years in the period ended December 31, 1995 and cumulative for the period from inception, October 12, 1990, through December 31, 1995, appearing in this Prospectus and Registration Statement in reliance on the report, which includes an explanatory paragraph regarding the Company's ability to continue as a going concern, of Coopers & Lybrand, L.L.P. independent accountants, given on the authority of that firm as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement on Form S-1 (together with all amendments and exhibits thereto, the "Registration Statement") under the Securities Act with respect to the shares of Common Stock offered by this Prospectus. This Prospectus, which constitutes part of the Registration Statement, does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto, certain parts of which have been omitted as permitted by the rules and regulations of the Commission. For further information with respect to the Company and the shares of Common Stock offered hereby, reference is hereby made to the Registration Statement including the exhibits and schedules thereto. Statements contained in this Prospectus as to the contents of any contract, agreement or any other document referred to herein are not necessarily complete and, where such contract, agreement or other document is an exhibit to the Registration Statement, reference is made to such exhibit for a complete description of the matter involved, and each such statement is qualified in all respects by the provisions of such exhibit. Copies of the Registration Statement, including the exhibits and schedules thereto, may be inspected without charge at the public reference facilities maintained by the Securities and Exchange Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 or obtained from the Commission upon payment of fees prescribed by the Commission. The Registration Statement may also be obtained through the Commission's Internet address at "http:// www.sec.gov." The Company intends to furnish its stockholders with annual reports containing audited financial statements and a report thereon by its independent public accountants and with quarterly reports for the first three quarters of each fiscal year containing unaudited interim financial information. 46 INDEX TO FINANCIAL STATEMENTS
PAGE ----- Report of Independent Accountants.......................................................................... F-2 Balance Sheets............................................................................................. F-3 Statements of Operations................................................................................... F-4 Statements of Stockholders' Deficit........................................................................ F-5 Statements of Cash Flows................................................................................... F-6 Notes to Financial Statements.............................................................................. F-7
F-1 REPORT OF INDEPENDENT ACCOUNTANTS The Board of Directors Digital Lightwave, Inc. We have audited the accompanying balance sheets of Digital Lightwave, Inc. (a Development Stage Enterprise) as of December 31, 1994 and 1995, and the related statements of operations, stockholders' deficit, and cash flows for the years ended December 31, 1993, 1994 and 1995 and cumulative for the period from inception, October 12, 1990, through December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Digital Lightwave, Inc. (a Development Stage Enterprise) as of December 31, 1994 and 1995, and the results of its operations and its cash flows for the years ended December 31, 1993, 1994 and 1995 and cumulative for the period from inception, October 12, 1990, through December 31, 1995, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company incurred cumulative losses of approximately $6.2 million for the period from inception, October 12, 1990, through December 31, 1995, and has a stockholders' deficit of approximately $8.2 million as of December 31, 1995, which raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Tampa, Florida February 16, 1996, except as to the information in Notes 6 and 10, for which the dates are June 30, 1996 and July 25, 1996, respectively F-2 DIGITAL LIGHTWAVE, INC. (A DEVELOPMENT STAGE ENTERPRISE) BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
JUNE 30, 1996 DECEMBER 31, DECEMBER 31, ----------- 1994 1995 ------------ ------------ (UNAUDITED) Current assets: Cash and cash equivalents............................................ $ 26 $ 72 $ 951 Receivables.......................................................... -- 10 1,001 Inventories.......................................................... 97 622 563 Prepaid expenses..................................................... 25 48 231 ------------ ------------ ----------- Total current assets............................................... 148 752 2,746 Property and equipment, net............................................ 172 515 664 Other assets........................................................... 12 10 14 ------------ ------------ ----------- $ 332 $ 1,277 $ 3,424 ------------ ------------ ----------- ------------ ------------ ----------- LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable and accrued liabilities............................. $ 449 $ 1,278 $ 1,404 Notes payable........................................................ 1,500 7,695 3,150 Notes payable -- related party....................................... 102 202 -- Capital lease obligation, current portion............................ 36 172 166 ------------ ------------ ----------- Total current liabilities.......................................... 2,087 9,347 4,720 Notes payable.......................................................... 500 -- 1,000 Capital lease obligation............................................... 73 88 42 Other long-term liabilities............................................ -- 5 2 ------------ ------------ ----------- Total liabilities.................................................. 2,660 9,440 5,764 ------------ ------------ ----------- Commitments (Notes 6, 7, 8, and 10) Stockholders' deficit: Preferred stock, $.0001 par value; authorized 20,000,000 shares; no shares issued or outstanding........................................ -- -- -- Common stock, $.0001 par value; authorized 200,000,000 shares; issued and outstanding 58,823,529, 30,000,000, and 31,853,829 shares, respectively........................................................ 6 3 4 Additional paid-in capital........................................... 521 521 8,223 Deficit accumulated during the development stage..................... (2,855) (6,987) (8,867) ------------ ------------ ----------- (2,328) (6,463) (640) Less: Note receivable from stockholder............................... -- (1,700) (1,700) ------------ ------------ ----------- Total stockholders' deficit........................................ (2,328) (8,163) (2,340) ------------ ------------ ----------- Total liabilities and stockholders' deficit...................... $ 332 $ 1,277 $ 3,424 ------------ ------------ ----------- ------------ ------------ -----------
The accompanying notes are an integral part of these financial statements. F-3 DIGITAL LIGHTWAVE, INC. (A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
CUMULATIVE YEAR ENDED DECEMBER 31, SINCE ------------------------------------------- OCTOBER 12, 1993 1994 1995 1990 ------------- ------------- ------------- ----------- SIX MONTHS ENDED JUNE 30, ---------------------------- 1995 1996 ------------- ------------- (UNAUDITED) (UNAUDITED) Sales................... $ -- $ -- $ -- $ -- $ -- $ 1,314 Cost of goods sold...... -- -- -- -- -- (522) ------------- ------------- ------------- ----------- ------------- ------------- Gross profit........ -- -- -- -- -- 792 ------------- ------------- ------------- ----------- ------------- ------------- Operating expenses: Research and development.......... 439 1,241 1,509 3,679 654 719 General and administrative....... 106 179 1,017 1,379 407 1,101 Sales and marketing... -- 67 199 266 104 460 Relocation............ -- 81 -- 81 -- -- ------------- ------------- ------------- ----------- ------------- ------------- Total operating expenses........... 545 1,568 2,725 5,405 1,165 2,280 ------------- ------------- ------------- ----------- ------------- ------------- Operating income (loss)................. (545) (1,568) (2,725) (5,405) (1,165) (1,488) Interest income......... 2 1 8 12 2 85 Interest expense........ (43) (115) (621) (797) (199) (482) Other income............ -- -- 4 4 -- 5 Income (loss) before income taxes....... (586) (1,682) (3,334) (6,186) (1,362) (1,880) Provision for income taxes.................. (1) (1) -- (3) -- -- ------------- ------------- ------------- ----------- ------------- ------------- Net income (loss)... $ (587) $ (1,683) $ (3,334) $ (6,189) $ (1,362) $ (1,880) ------------- ------------- ------------- ----------- ------------- ------------- ------------- ------------- ------------- ----------- ------------- ------------- Net income (loss) per share................ $ (0.01) $ (0.03) $ (0.06) $ (0.02) $ (0.06) ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- Weighted average common and common equivalent shares outstanding..... 62,904,969 62,904,969 60,503,008 62,904,969 34,081,440
The accompanying notes are an integral part of these financial statements. F-4 DIGITAL LIGHTWAVE, INC. (A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF STOCKHOLDERS' DEFICIT (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE COMMON STOCK ADDITIONAL RECEIVABLE -------------------------- PAID-IN FROM SHARES AMOUNT CAPITAL (DEFICIT) STOCKHOLDER TOTAL ------------- ----------- -------------- --------- ----------- ------------- Sale of common stock, October, 1990...... 58,823,529 $ -- $ -- $ -- $ -- $ -- Contributed capital...................... -- 8 735 -- -- 743 Assets exchanged for note payable (See Note 9)................................. -- (2) (214) -- -- (216) Net loss from inception.................. -- -- -- (585) -- (585) -- ------------- -------------- --------- ----------- ------------- Balance, December 31, 1992............... 58,823.529 6 521 (585) -- (58) Net loss................................. -- -- -- (587) -- (587) -- ------------- -------------- --------- ----------- ------------- Balance, December 31, 1993............... 58,823,529 6 521 (1,172) 0 (645) Net loss................................. -- -- -- (1,683) -- (1,683) -- ------------- -------------- --------- ----------- ------------- Balance, December 31, 1994............... 58,823,529 6 521 (2,855) -- (2,328) Purchase and retirement of common stock, November................................ (28,823,529) (3) -- (798) -- (801) Note receivable from stockholder......... -- -- -- -- (1,700) (1,700) Net loss................................. -- -- -- (3,334) 0 (3,334) -- ------------- -------------- --------- ----------- ------------- Balance, December 31, 1995............... 30,000,000 3 521 (6,987) (1,700) (8,163) Issuance of common stock in exchange for debt, March, $0.88 (unaudited).......... 300,000 0 264 0 0 264 Issuance of common stock in exchange for debt, March, $3.33 (unaudited).......... 781,544 1 2,603 0 0 2,604 Issuance of common stock in exchange for debt, March, April, May, $6.00 (unaudited)............................. 439,297 0 2,637 0 0 2,637 Sale of common stock, March, April, $6.00, (unaudited)...................... 232,988 0 1,398 0 0 1,398 Sale of common stock, May, April $8.00 (unaudited)............................. 100,000 0 800 0 0 800 Net loss (unaudited)..................... 1 0 -- (1,880) -- (1,880) -- ------------- -------------- --------- ----------- ------------- Balance, June 30, 1996 (unaudited)....... 31,853,829 $ 4 $ 8,223 $ (8,867) $ (1,700) $ (2,340) -- -- ------------- -------------- --------- ----------- ------------- ------------- -------------- --------- ----------- -------------
The accompanying notes are an integral part of these financial statements. F-5 DIGITAL LIGHTWAVE, INC. (A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, CUMULATIVE SIX MONTHS ENDED JUNE SINCE 30, ------------------------------- OCTOBER 12, ------------------------ 1993 1994 1995 1990 1995 1996 --------- --------- --------- ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) Cash flows from operating activities: Net loss...................................... $ (587) $ (1,683) $ (3,334) $ (6,189) $ (1,362) $ (1,880) Adjustments to reconcile net loss to net cash used by operating activities: Interest expense converted to equity........ -- -- -- -- -- 113 Depreciation and amortization............... 41 59 102 207 37 68 Loss on disposal of property................ -- 43 -- 43 -- -- Changes in operating assets and liabilities: Increase in receivables................... -- -- (10) (10) -- (991) (Increase) decrease in inventories........ -- (97) (526) (622) (337) 59 (Increase) decrease in prepaid expenses and other assets......................... -- (29) (21) (58) 15 (187) Increase in accounts payable and accrued liabilities.............................. 91 241 760 1,209 714 (184) --------- --------- --------- ----------- ----------- ----------- Net cash used by operating activities... (455) (1,466) (3,029) (5,420) (933) (3,002) --------- --------- --------- ----------- ----------- ----------- Cash flows for investing activities: Purchases of property and equipment........... (40) (93) (173) (327) (135) (200) --------- --------- --------- ----------- ----------- ----------- Net cash used by investing activities... (40) (93) (173) (327) (135) (200) --------- --------- --------- ----------- ----------- ----------- Cash flows from financing activities: Capital contributions by stockholder.......... -- -- -- 744 -- -- Stockholder borrowings........................ -- -- (1,700) (1,700) -- -- Proceeds from notes payable................... 300 2,000 5,696 7,995 1,202 2,350 Principal payments on notes payable........... -- (300) -- (560) -- (571) Proceeds from notes payable, related party.... 146 152 100 528 -- -- Principal payments on notes payable, related party........................................ (130) (305) -- (305) (102) (202) Principal payments, capital lease obligation................................... (16) (19) (47) (82) (22) (69) Cash paid for common stock.................... -- -- -- -- -- 2,573 Purchase and retirement of common stock....... -- -- (801) (801) -- -- --------- --------- --------- ----------- ----------- ----------- Net cash provided by financing activities............................. 300 1,528 3,248 5,819 1,078 4,081 --------- --------- --------- ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents.................................... (195) (31) 46 72 10 879 Cash and cash equivalents at beginning of period......................................... 252 57 26 -- 26 72 --------- --------- --------- ----------- ----------- ----------- Cash and cash equivalents at end of period...... $ 57 $ 26 $ 72 $ 72 $ 36 $ 951 --------- --------- --------- ----------- ----------- ----------- --------- --------- --------- ----------- ----------- ----------- Supplementary information: Cash paid for interest........................ $ 12 $ 88 $ 154 $ 253 --------- --------- --------- ----------- --------- --------- --------- ----------- Cash paid for income taxes.................... $ -- $ -- $ 3 $ ---- --------- --------- ----------- --------- --------- ----------- --------- --------- Noncash investing and financing activities: Capital lease obligation...................... $ 92 $ 51 $ 246 $ 389 $ -- $ 17 --------- --------- --------- ----------- ----------- ----------- --------- --------- --------- ----------- ----------- ----------- Accrued interest converted to equity.......... $ -- $ -- $ -- $ -- $ -- $ 92 --------- --------- --------- ----------- ----------- ----------- --------- --------- --------- ----------- ----------- ----------- Fixed asset additions included in accounts payable at period end........................ $ -- $ -- $ 25 $ -- $ -- $ -- --------- --------- --------- ----------- ----------- ----------- --------- --------- --------- ----------- ----------- ----------- Assets exchanged for note payable............. $ -- $ -- $ -- $ 217 $ -- $ -- --------- --------- --------- ----------- ----------- ----------- --------- --------- --------- ----------- ----------- ----------- Equipment contributed by stockholder.......... $ -- $ -- $ -- $ 23 $ -- $ -- --------- --------- --------- ----------- ----------- ----------- --------- --------- --------- ----------- ----------- -----------
The accompanying notes are an integral part of these financial statements. F-6 DIGITAL LIGHTWAVE, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: GENERAL -- Digital Lightwave, Inc. (the "Company") was incorporated on October 12, 1990. The Company commenced business on February 15, 1991 to develop and manufacture network information systems. BASIS OF PRESENTATION -- The Company is classified as a development stage enterprise and has incurred cumulative losses of approximately $6.2 million for the period from inception, October 12, 1990, through December 31, 1995 and has a stockholders' deficit of approximately $8.2 million as of December 31, 1995. The Company has experienced significant losses as substantially all of the proceeds from issuance of common stock, capital contributions and notes payable have been used to fund product development of network information systems. The Company introduced its first product at a major trade show in March 1995. As of June 30, 1996, the Company had sales of $1.3 million of product. However, there can be no assurance that the Company will be successful in marketing the network information systems, which raises substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from this uncertainty. COMMENCEMENT OF OPERATIONS -- During the period from inception, October 12, 1990, to December 31, 1995, the Company was a developmental stage company as defined in Financial Accounting Standards Board Statement No. 7, "Development Stage Enterprises." Principal operations began June 30, 1996. INTERIM FINANCIAL INFORMATION -- The unaudited financial statements as of June 30, 1996, and for the six months ended June 30, 1995 and 1996, include, in the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary to present fairly the Company's financial position, results of operations, and cash flows. Operating results for the six months ended June 30, 1996 are not necessarily indicative of the results that may be expected for the year ended December 31, 1996. CASH EQUIVALENTS -- The Company considers all highly liquid investments with an initial maturity of three months or less to be cash equivalents. INVENTORIES -- Inventories are stated at the lower of cost (first-in, first-out) or market. The costs of certain inventory units are charged to expense if the Company determines that the units will be used for demonstration purposes. REVENUE RECOGNITION -- Revenue is recognized at the date of shipment as the Company has no further significant obligations and, therefore, the earnings process is complete. PROPERTY AND EQUIPMENT -- The Company's property and equipment, including certain assets under capital leases, are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are provided using the straight-line method over estimated useful lives of 5-7 years, or over the lesser of the term of the lease or the estimated useful life of assets under the capital lease. Maintenance and repairs are expensed as incurred while renewals and betterments are capitalized. Upon the sale or retirement of property and equipment, the accounts are relieved of the cost and the related accumulated depreciation and amortization, and any resulting gain or loss is included in the results of operations. RESEARCH AND DEVELOPMENT -- Research and development costs are charged to expense when incurred. INCOME TAXES -- The Company accounts for income taxes under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements F-7 DIGITAL LIGHTWAVE, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and the tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. COMPUTATION OF NET LOSS PER SHARE -- Net loss per common and common equivalent share for the years ended December 31, 1993, 1994 and 1995 and for the six months ended June 30, 1995 (unaudited) and June 30, 1996 (unaudited) have been computed using the weighted average number of common and common equivalent shares outstanding using the treasury stock method, as adjusted for the common stock split described in Note 10 for all periods presented, and for the years ended December 31, 1993, 1994 and 1995 and for the six months ended June 30, 1995 (unaudited) and June 30, 1996 (unaudited) is summarized as follows:
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, ---------------------------------------- -------------------------- 1993 1994 1995 1995 1996 ------------ ------------ ------------ ------------ ------------ (UNAUDITED) (UNAUDITED) Weighted average common stock outstanding 59,907,164 59,907,164 57,505,203 59,907,164 31,083,635 Weighted average common stock equivalents outstanding 2,997,805 2,997,805 2,997,805 2,997,805 2,997,805 ------------ ------------ ------------ ------------ ------------ Shares used in net loss per share calculation 62,904,969 62,904,969 60,503,008 62,904,969 34,081,440 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Pursuant to the requirements of the Securities and Exchange Commission, common stock, stock options, and warrants issued by the Company during the twelve months immediately preceding the initial public offering date have been included in the calculation of the weighted average shares outstanding for all periods presented using the treasury stock method based on the estimated initial public offering price. Accordingly, weighted average common stock outstanding includes 1,083,635 shares of common stock issued during the six months ended June 30, 1996 shown as outstanding for all periods presented. Weighted average common stock equivalents outstanding includes 47,000 common stock equivalent shares for options issued during the year ended December 31, 1995 and 4,485,620 common stock equivalent shares for options issued during the six months ended June 30, 1996. CONCENTRATIONS OF CREDIT RISK -- Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents. As of December 31, 1994 and 1995, substantially all of the Company's cash balances, including amounts representing outstanding checks, were deposited with what management believes to be high-quality financial institutions. USE OF ESTIMATES -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NEW ACCOUNTING PRONOUNCEMENT -- In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock Based Compensation." With respect to stock options granted to employees, SFAS No. 123 permits companies to continue using the accounting method promulgated by the Accounting Principles Board Opinion No. 25 (APB No. 25), "Accounting for Stock Issued to Employees," to measure compensation or to adopt the fair value based method prescribed by SFAS No. 123. If APB No. 25's method is continued, pro forma disclosures are required as if SFAS No. 123 accounting provisions were F-8 DIGITAL LIGHTWAVE, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) followed. Management has determined not to adopt SFAS No. 123's accounting recognition provisions. In the opinion of management, SFAS No. 123 is not expected to have a material impact on the Company's financial statements. RECLASSIFICATIONS -- Certain reclassifications have been made to 1994 balance sheet amounts, as well as to cumulative since October 12, 1990 amounts on the statement of cash flows in order to conform with current year presentations. The reclassification had no impact on the results of operations for 1994 or for the cumulative period since October 12, 1990. 2. INVENTORIES: Inventories consist of the following:
DECEMBER 31, DECEMBER 31, 1994 1995 ------------ ------------ JUNE 30, 1996 ----------- (UNAUDITED) Raw materials................................................. $ 97 $ 418 $ 300 Work-in-progress.............................................. -- 204 263 ------------ ------------ ----------- $ 97 $ 622 $ 563 ------------ ------------ ----------- ------------ ------------ -----------
3. PROPERTY AND EQUIPMENT: Property and equipment consists of the following:
DECEMBER 31, DECEMBER 31, 1994 1995 ------------ ------------ JUNE 30, 1996 ----------- (UNAUDITED) Test equipment................................................ $ 211 $ 211 $ 282 Computer equipment and software............................... 27 304 384 Tooling....................................................... -- 119 126 Office furniture, fixtures and equipment...................... 8 56 116 ------------ ------------ ----------- 246 690 908 Less: accumulated depreciation and amortization............... (74) (175) (244) ------------ ------------ ----------- $ 172 $ 515 $ 664 ------------ ------------ ----------- ------------ ------------ -----------
Equipment under capital lease and related accumulated amortization, included above, consist of the following:
DECEMBER 31, DECEMBER 31, 1994 1995 ------------ ------------ JUNE 30, 1996 ----------- (UNAUDITED) Test equipment................................................ $ 143 $ 143 $ 143 Computer equipment and software............................... -- 246 301 ------------ ------------ ----------- 143 389 444 Less: accumulated amortization................................ (61) (133) (167) ------------ ------------ ----------- $ 82 $ 256 $ 277 ------------ ------------ ----------- ------------ ------------ -----------
F-9 DIGITAL LIGHTWAVE, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 4. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES: Accounts payable and accrued liabilities consist of the following:
DECEMBER 31, DECEMBER 31, 1994 1995 ------------ ------------ JUNE 30, 1996 ------------ (UNAUDITED) Accounts payable............................................. $ 209 $ 500 $ 372 Accrued audit/consulting fees................................ 12 25 4 Deferred compensation........................................ 99 548 342 Advance from stockholder..................................... -- -- 400 Accrued sales commissions.................................... -- -- 110 Accrued interest............................................. 88 154 123 Accrued vacation............................................. 20 31 33 Accrued payroll taxes........................................ 16 13 4 Other........................................................ 5 7 16 ------------ ------------ ------------ $ 449 $ 1,278 $ 1,404 ------------ ------------ ------------ ------------ ------------ ------------
F-10 DIGITAL LIGHTWAVE, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 5. INCOME TAXES: The provision for income taxes for the years ended December 31, 1993 and 1994 represents minimum California franchise taxes. The tax effected amounts of temporary differences consist of the following:
DECEMBER 31, DECEMBER 31, 1994 1995 ------------ ------------ JUNE 30, 1996 ----------- (UNAUDITED) Current Deferred Tax Assets: Deferred Compensation............................................... $ 37 $ 206 $ 129 Other............................................................... 7 11 12 Valuation Allowance................................................. (44) (213) (138) ------------ ------------ ----------- Total Current Deferred Tax Asset.................................. -- 4 3 ------------ ------------ ----------- ------------ ------------ ----------- Net Current Deferred Tax Asset.................................. -- 4 3 ------------ ------------ ----------- ------------ ------------ ----------- Non-Current Deferred Tax Asset: Net Operating Loss Carryforward..................................... 741 1,854 2,531 Other............................................................... -- -- 124 Research and Experimentation Credit................................. 119 142 142 Valuation Allowance................................................. (856) (1,953) (2,734) ------------ ------------ ----------- Total Non-Current Deferred Tax Asset.............................. 4 43 63 ------------ ------------ ----------- Deferred Tax Liability: Property Related...................................................... (4) (47) (66) ------------ ------------ ----------- Total Deferred Tax Liability........................................ (4) (47) (66) ------------ ------------ ----------- Net Non-Current Deferred Tax Asset.............................. -- -- -- ------------ ------------ ----------- ------------ ------------ -----------
Management believes that it is more likely than not that the tax benefit associated with these deferred tax assets will not be realized and therefore as of December 31, 1995, the Company has established a valuation allowance of $2,167,594. The result is an increase in the valuation allowance from December 31, 1994 of $21,266,024. As of December 31, 1995, the Company had net operating loss carryforwards of approximately $5,665,000 for tax purposes. Due to certain change of ownership requirements of section 382 of the IRC, utilization of the Company's net operating losses incurred prior to July 1, 1993 is expected to be limited to approximately $7,500 per year. This limitation in conjunction with the expiration period for these pre-July 1, 1993 net operating losses results in the Company's total net operating losses available being limited to approximately $4,930,000. Loss carryforwards will expire during the years 2005 and 2010. As of December 31, 1995, the Company also had general business credit carryforwards of $142,000, which expire between the years 2008 and 2010. These credits are also subject to the section 382 annual limitation. Approximately $15,000 of these credits are subject to the 382 annual limitation. F-11 DIGITAL LIGHTWAVE, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 5. INCOME TAXES: (CONTINUED) Following is a reconciliation of the applicable federal income tax as computed at the federal statutory tax rate to the actual income taxes reflected in the statement of operations.
DECEMBER 31, DECEMBER 31, DECEMBER 31, 1993 1994 1995 ------------ ------------ ------------ JUNE 30, JUNE 30, 1995 1996 ----------- ----------- (UNAUDITED) (UNAUDITED) Tax at U.S. Federal Income Tax Rate........ (200) (572) (1,134) (463) (639) State Income Tax, Net of federal Benefit... (21) (61) (121) (50) (68) IRC Section 382 Limitation................. 86 -- -- -- -- Other...................................... -- 29 11 -- 2 Valuation Allowance Increase............... 164 695 1,266 535 705 Research and Experimentation Credit........ (29) (91) (22) (22) -- ------------ ------------ ------------ ----------- ----------- Provision for Income Taxes............... -- -- -- -- --
6. NOTES PAYABLE: Notes payable consist of the following:
DECEMBER 31, DECEMBER 31, 1994 1995 ------------ ------------ JUNE 30, 1996 ------------- (UNAUDITED) Note payable, collateralized by 46% of the outstanding shares of common stock, and guaranteed by the Company's sole stockholder at December 31, 1995; interest at prime, interest and principal due and payable June 20, 1996; total credit facilities $1,500,000(4)........ $ 1,500 $ 1,500 $ 1,500 Note payable, collateralized by 46% of the outstanding shares of common stock, and guaranteed by the Company's sole stockholder at December 31, 1995; interest at prime, interest and principal due and payable June 20, 1996; total credit facilities $1,500,000(4)........ 500 900 900 Notes payable, guaranteed by the Company's sole stockholder at December 31, 1995, interest at 16% and principal due and payable at various dates in January, February, and March of 1996 (1)(2)........ -- 2,100 -- Note payable, collateralized by 51% of the entire class of common stock; interest at 16%, interest payable monthly, principal due and payable September 20, 1996; total credit facilities $2,500,000 (2)................................................................. -- 1,900 -- Note payable, guaranteed by the Company's sole stockholder at December 31, 1995; interest at 37.55% with payments of principal due as follows: $200,000 on January 8, 1996, $300,000 on January 31, 1996 and $200,000 on February 15, 1996 (1)(2)(3).................... -- 700 -- Notes payable, unsecured, interest at 9% and principal due and payable upon demand; convertible to equity upon approval by both parties (2)......................................................... -- 250 --
F-12 DIGITAL LIGHTWAVE, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 6. NOTES PAYABLE: (CONTINUED)
DECEMBER 31, DECEMBER 31, 1994 1995 ------------ ------------ JUNE 30, 1996 ------------- (UNAUDITED) Note payable, guaranteed by the Company's sole stockholder at December 31, 1995, interest at 50%, interest and principal due and payable June 21, 1996 (1)........................................... -- 100 -- Note payable, guaranteed by the Company's sole stockholder at December 31, 1995, interest at 50%, interest and principal due and payable June 22, 1996 (1)........................................... -- 100 -- Note payable, unsecured, interest at 35% and principal due and payable on January 10, 1996......................................... -- 75 -- Note payable, guaranteed by the Company's sole stockholder at December 31, 1995, interest at 50%, interest and principal due and payable July 11, 1996 (1)........................................... -- 70 -- Note payable, unsecured, subordinated to all secured debt and any future lines of credit of up to $2 million; interest at 16% payable semi-annually; principal due January 2, 1999........................ -- -- 1,000 Notes payable, unsecured, interest at 18%, interest due and payable August 30, 1996, November 30, 1996, February 29, 1997, and May 31, 1997; principal due and payable May 31, 1997........................ -- -- 750 ------------ ------------ ------------- 2,000 7,695 4,150 Less current portion................................................. 1,500 7,695 3,150 ------------ ------------ ------------- $ 500 $ -- $ 1,000 ------------ ------------ ------------- ------------ ------------ -------------
- ------------------------ (1) The notes, excluding $100,000 may be exchanged prior to April 30, 1996 for stock ownership equivalent to 8,500 shares for each $51,000 of notes payable outstanding as of the date of conversion. As of April 30, 1996, approximately $2,631,000 of the notes, including principal and interest, were converted into 438,558 shares. See Note 10. (2) Subsequent to year-end, the Company entered into subscription agreements to exchange the outstanding balance on certain notes on the date of conversion to common stock at a range between $0.88 and $3.33 per share. As of June 30, 1996, approximately $2,268,200 of the notes, including principal and interest, were converted into 901,364 shares. See Note 10. (3) The note was modified on March 18, 1996 to extend the January 31 and February 15 payments of principal and interest as follows: $133,000 on March 18, 1996, $200,000 on March 27, 1996 and $15,000 on April 2, 1996. In addition, the interest rate changed to 53%. (4) The note was modified on June 18, 1996 to extend the payment date to August 20, 1996. F-13 DIGITAL LIGHTWAVE, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Notes payable-related party consist of the following:
DECEMBER 31, DECEMBER 31, 1994 1995 --------------- --------------- JUNE 30, 1996 --------------- (UNAUDITED) Note payable, uncollateralized; interest at 9%, interest payable on demand, principal due on demand................... $ 102 $ 102 -- Note payable, uncollateralized; interest at 9%, interest payable on demand, principal due on demand................... -- 100 -- -- ----- ----- $ 102 $ 202 -- -- -- ----- ----- ----- -----
The prime rate at December 31, 1994 and 1995 was 8.5%. 7. LEASES: The Company is obligated under various noncancelable leases for equipment and office space. Future minimum lease commitments under operating and capital leases were as follows as of December 31, 1995:
CAPITAL OPERATING YEAR LEASES LEASES - ------------------------------------------------------------------------------------ ----------- ----------- 1996................................................................................ $ 200 $ 258 1997................................................................................ 93 322 1998................................................................................ -- 26 1999................................................................................ -- -- ----- ----- 293 $ 606 ----- ----- ----- Less: amount representing interest.................................................. 33 ----- Present value of minimum lease payments............................................. 260 Less: current portion............................................................... 172 ----- $ 88 ----- -----
Total rental expense was approximately $37,000 $66,100 $147,900 and $293,600 for the years ended December 31, 1993, 1994 and 1995, and cumulative for the period from inception, October 12, 1990, through December 31, 1995, respectively. 8. COMMITMENTS: At December 31, 1995, the Company had contractual commitments to purchase certain inventory items totaling approximately $496,800. 9. RELATED PARTY TRANSACTIONS: During 1992, a stockholder contributed certain property and equipment to the Company which he purchased at an auction for $22,909, which represented a significant discount from their estimated fair market value of approximately $239,450. The assets were exchanged for a note in the amount of $239,450. The note is due on demand and bears interest at prime per annum. The difference between the stockholder's cost of the assets and the note payable has been reflected in the statement of stockholders' deficit as a reduction to contributed capital. During February 1995, the Company entered into a Stock Purchase Option (the Option) with a former stockholder to repurchase the 28,823,529 shares of the then outstanding class of common stock held by the former stockholder for a purchase price of $2,500,000. The purchase price was subsequently reduced to $800,522. On November 30, 1995, the Company exercised the option and immediately retired the shares of treasury stock acquired. The exercise is reflected in the accompanying statement of stockholder's deficit for F-14 DIGITAL LIGHTWAVE, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 9. RELATED PARTY TRANSACTIONS: (CONTINUED) the year ended December 31, 1995. In addition, the $2.0 million included in notes payable-related party as of December 31, 1994 has been reclassified to notes payable to reflect the termination of the stockholder status in accordance with the exercise of the option. These notes remain outstanding as of December 31, 1995. During December 1995, the remaining stockholder borrowed $1,700,000 from the Company. This note accrues interest at 9% with interest payments being made on a monthly basis. The principal sum and any accrued interest thereon is due and payable in December 1997. The note is included in the accompanying financial statements as an increase in stockholders' deficit as of December 31, 1995. In addition, the stockholder loaned the Company $100 during December 1995. This note, including interest accrued at 9%, is due on demand. 10. COMMON STOCK, STOCK OPTIONS, AND WARRANTS: STOCK OPTIONS During 1995, the Company entered into option agreements with certain parties to purchase an aggregate of up to $701,000 worth of shares of common stock at the price to the public per share, in the event of an initial public offering of common stock of the Company, at an aggregate purchase price equal to $154,500. Subsequent to year-end, the Company terminated several agreements which reduced the aggregate shares subject to such options to $470,000, at an aggregate price equal to $39,000 as of April 30, 1996. The options were exercised during July 1996. SUBORDINATED NOTE -- On January 2, 1996, the Company issued (i) its 16% Subordinated Promissory Note due January 2, 1999 in the original principal amount of $1 million, and (ii) warrants to purchase 300,000 shares of Common Stock at an exercise price of $3.33 per share. The warrants terminate on the earlier to occur of: (i) thirty (30) days following the filing of a registration statement for an initial public offering of the Common Stock of the Company, (ii) thirty (30) days following an announcement of a change in control of the Company; or (iii) January 2, 1999. CORPORATE MERGER -- Pursuant to an Agreement and Plan of Merger (the Merger) dated January 9, 1996, Digital Lightwave, Inc., a California corporation merged into Digital Lightwave, Inc., a Delaware corporation effective March 18, 1996. The merger increased the number of shares of common stock authorized from 1,000,000, no par value, to 80,000,000, $.0001 par value. In connection with the merger, the Company also authorized 20,000,000 shares of $.0001 par value preferred stock. Each share of outstanding common stock of the California corporation was converted into 5,882.3529 shares of common stock of the Delaware corporation. All applicable share and per share amounts in the accompanying financial statements have been retroactively adjusted to reflect these events. Effective July 25, 1996, the Board of Directors authorized an increase in the number of authorized shares of common stock from 80,000,000 shares to 200,000,000 shares. ISO EMPLOYEE STOCK OPTION PLAN -- The Company's 1996 Stock Option Plan (the Option Plan) became effective on March 5, 1996. A reserve of 5,000,000 shares of the Company's common stock has been established for issuance under the Option Plan. The Option Plan will terminate on February 28, 2006, unless sooner terminated by the Board. Effective March 5, 1996, the Company entered into an employment agreement with a new President for a term of three years, as well as stock option agreements with certain executives. Pursuant to the employment agreement, the Company awarded stock options of 1,500,000 shares of common stock at an exercise price of $3.33 per share, subject to a vesting schedule of 375,000 shares upon commencement and at the end of each full year of service. The Company also granted an aggregate of 1,082,500 stock options to the other executives and employees each exercisable prices ranging from $3.33 to $8.00 per share, which vest in equal amounts over a three year period. F-15 DIGITAL LIGHTWAVE, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 10. COMMON STOCK, STOCK OPTIONS, AND WARRANTS: (CONTINUED) SUBSCRIPTION AGREEMENTS -- As discussed in Note 6, subsequent to year end, the Company entered into subscription agreements (the Agreements) with certain noteholders for the issuance of an aggregate of 1,174,346 shares of common stock for the surrender of the outstanding balance on the notes (excluding certain accrued interest) of an aggregate of $4,074,000. Pursuant to the Agreements, the Company issued warrants to purchase 1,575,000 and 28,120 shares of common stock at an exercise price of $3.33 and $6.00 per share, respectively. The warrants expire on the earlier of (a) March 1, 1999; (b) thiry (30) days following the filing of a registration statement for an initial public offering of the common stock of the Company, or (c) a change of control of the Company. On May 29, 1996, the Company entered into a subscription agreement with an institutional investor for the issuance of 100,000 shares of common stock at a price of $12.00 per share. In the event that on or before May 23, 1997 the Company completes an initial public offering of its Common Stock, then the price of the Shares shall be adjusted by: 1) payment by the stockholder to the Company in the amount equal to the excess, if any, over $12.00 per share of the price to the public per share times 75% (the 75% price), or by 2) a payment by the Company to stockholder equal to the excess, if any, of $12.00 per share over the 75% price. The Company has recorded a liability as of June 30, 1996, based upon management's estimate of the expected payment to the institutional investor. PRIVATE PLACEMENT -- During the period March 13, 1996 through April 30, 1996, the Company sold 233,727 shares of common stock, par value $.0001 per share, at a price of $6.00 per share. 11. SIGNIFICANT CUSTOMERS (UNAUDITED) For the six months ended June 30, 1996, sales to two customers accounted for approximately 72% of total sales. F-16 GLOSSARY ADD/DROP - Adding is including a lower transmission rate signal in a higher transmission rate signal. For example, an OC-3 signal can be added to an OC-12 signal without altering the OC-3 signal. Dropping is removing a lower transmission rate signal from a higher transmission rate signal. ASYNCHRONOUS - Signals that are not generated from the same timing reference and are therefore not identical in frequency. ATM (ASYNCHRONOUS TRANSFER MODE) - An information transfer standard that is one of a general class of technologies that relay traffic by way of an address contained within the first five bytes of a standard 53-byte-long packet or cell. The ATM format can be used by many different information systems, including LANs, to deliver traffic at varying rates, permitting the efficient delivery of enhanced data services and multimedia, which is a mix of voice, video and data. BANDWIDTH - The range of frequencies that can be transmitted through a medium, such as glass fibers, without distortion. The greater the bandwidth, the greater the information-carrying capacity of such medium. BIT - A contraction of the term binary digit which represents a single digit of information expressed as a 0 or 1, high or low, or yes or no. BROADBAND - A communications system that can transmit large quantities of voice, data and video. Examples of broadband communication systems include DS-3, which can transmit 672 simultaneous voice conversations and higher speed fiber optic systems or a broadcast television station signal, which can transmit high resolution audio and video signals into the home. Broadband connectivity is also an essential element for interactive multimedia applications. CAP (COMPETITIVE ACCESS PROVIDER) - A company that provides its customers with an alternative to the RBOC for local transport of private line, special access and interstate transport of telecommunications service. CROSS-CONNECT EQUIPMENT - Distribution system equipment used to terminate and administer communication circuits. In a wire cross connect, jumper wires or patch cords are used to make circuit connections. In an optical cross connect, fiber patch cords are used. DIGITAL - A method of storing, processing and transmitting information through the use of distinct electronic or optical pulses that represent the binary digits 0 and 1. Digital transmission and switching technologies (both fiber and microwave) employ a sequence of these pulses to represent information as opposed to the continuously variable analog signal. The precise digital numbers minimize distortion (such as graininess or snow in the case of video transmission, or static or other background distortion in the case of audio transmission) DS-1, DS-3 - Standard telecommunications industry digital signal formats, which are distinguishable by bit rate (the number of binary digits (0 and 1) transmitted per second). DS-1 service has a bit rate of 1.544 Mbps and can transmit 24 simultaneous voice conversations. DS-3 service has a bit rate of 45 megabits per second and can transmit 672 simultaneous voice conversations. ETHERNET - A protocol commonly used on LANs. ENHANCED DATA SERVICES - Products and services designed for the transport and delivery of integrated information to include voice, data and video and any combination thereof. FEAC (FAR END ALARM AND CONTROL) - A special sequence of bits which enable telecommunications service providers the ability to control the functioning of a remote network element. FCC - Federal Communications Commission. FIRMWARE - Software that is contained permanently in a hardware device and which can be rewritten. G-1 GIGABIT PER SECOND (GBPS) - One billion bits of information per second. The information carrying capacity (i.e., bandwidth) of a circuit may be measured in "gigabits per second." GRAPHICAL USER INTERFACE - A type of display format that enables the user to choose commands, start programs and see lists of files and other options by pointing to pictoral representations and lists of menu items on the screen. INTEGRATED CIRCUIT (MICROPROCESSOR) - A series of miniaturized interconnected electronic circuits inseparably associated within a silicon or geranium substitute. IXC (INTEREXCHANGE CARRIER) - A company providing long distance services or service within local access and transport areas on an intrastate or interstate basis. KILOBIT PER SECOND (KBPS) - One thousand bits of information per second. The information-carrying capacity (i.e., bandwidth) of a circuit may be measured in "kilobits per second." LAN (LOCAL AREA NETWORK) - A group of computers and other devices dispersed over a relatively limited area and connected by a communications link that enables any device to interact with any other on the network. MEGABIT PER SECOND (MBPS) - One million bits of information per second. The information-carrying capacity (i.e., bandwidth) of a circuit may be measured in "megabits per second." OC-1, OC-3, OC-3C, OC-12, OC-48 - Optical carrier signaling rates, measured in bits transmitted per second. The basic rate for OC-1 is 51.840 Mbps. All higher levels are direct multiples of OC-1 (e.g., OC-12 = 12 times 51.840Mbps) OEM (ORIGINAL EQUIPMENT MANUFACTURER) - The customer of a component manufacturer, which integrates the components into the products sold by the customer in the ordinary course of its business. PDH (PLESIOCHRONOUS DIGITAL HIERCHY) - Two signals that are not generated from the same timing reference but are nominally at the same frequency to a defined degree of precision. PROTOCOL - A specific set of rules, procedures or conventions relating to the format and timing of data transmission between two devices. RBOCS (REGIONAL BELL OPERATING COMPANIES) - The seven local telephone companies (formerly part of AT&T) established by court decree in 1982. SDH (SYNCHRONOUS DIGITAL HIERARCHY) - An electronics and network architecture utilized on most continents other than North America for variable bandwidth products which enables transmission of voice, video and data (multimedia) at very high speeds. SONET (SYNCHRONOUS OPTICAL NETWORK TECHNOLOGY) - An electronics and network architecture utilized primarily in North America for variable-bandwidth products which enables transmission of voice, video, and data (multimedia) at very high speeds. SWITCH - A device that opens or closes circuits or selects the paths or circuits to be used for transmission of information. Switching is a process of interconnecting circuits to form a transmission path between users. T-CARRIER - Insulated copper wire cables which carry electrically transmitted digital signals. A T-1 carries a DS-1 signal, and a T-3 carries a DS-3 signal. Also, a generic name for any of several digitally multiplexed carrier systems originally designed to carry digitalized voice signals. WAN (WIDE AREA NETWORK) - A group of LANs dispersed over a relatively wide area and interconnected on dedicated telecommunication lines. G-2 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH DATE. -------------- TABLE OF CONTENTS
PAGE --------- Prospectus Summary............................. 3 Risk Factors................................... 7 Use of Proceeds................................ 13 Dividend Policy................................ 13 Capitalization................................. 15 Dilution....................................... 14 Selected Financial Data........................ 16 Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 17 Business....................................... 20 Management..................................... 32 Principal and Selling Stockholders............. 35 Certain Transactions........................... 36 Description of Capital Stock................... 37 Shares Eligible For Future Sale................ 40 Underwriting................................... 42 Legal Matters.................................. 44 Experts........................................ 44 Additional Information......................... 44 Index to Financial Statements.................. F-1 Glossary....................................... G-1
-------------- UNTIL , 1996 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL DEALERS EFFECTING TRANSACTIONS IN THE SHARES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. [LOGO] 4,100,000 Shares Common Stock ($.0001 per share) P R O S P E C T U S [LOGO] - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth an itemized statement of certain estimated expenses incurred in connection with the issuance and distribution of the securities being registered, other than underwriting discounts and commissions: Securities and Exchange Commission registration fee................ $ 17,885 NASD filing fee.................................................... $ 5,686 Nasdaq National Market listing fee................................. $ 50,000 Blue Sky fees and expenses......................................... * Printing and engraving expenses.................................... * Legal fees and expenses............................................ * Accounting fees and expenses....................................... * Registrar and Transfer Agent's fees and expenses................... * Miscellaneous...................................................... * --------- Total............................................................ $ * --------- ---------
- -------------- * To be completed by amendment. All amounts except the Securities and Exchange Commission registration fee, the NASD filing fee and Nasdaq National Market listing fee are estimated. The Company intends to pay all expenses of registration with respect to shares being sold by the Selling Stockholders hereunder, with the exception of underwriting discounts and commissions. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Company has authority under the Delaware General Corporation Law to indemnify all directors and officers to the extent provided in such statute. The Company's Certificate of Incorporation provides that the Company shall indemnify its directors to the fullest extent permitted by law either now or hereafter. The Company has also entered into an agreement with each of its directors and certain of its officers wherein it has agreed to indemnify each of them to the fullest extent permitted by law. At present, there is no pending litigation or proceeding involving a director or officer of the Company as to which indemnification is being sought, nor is the Company aware of any threatened litigation that may result in claims for indemnification by any officer or director. Pursuant to the Underwriting Agreement filed as Exhibit 1.01 to this Registration Statement, the Underwriters have agreed to indemnify the directors, officers and controlling persons of the Company against certain civil liabilities that may be incurred in connection with this offering, including certain liabilities under the Securities Act of 1933, as amended (the "Securities Act"). ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES (1) The Registrant granted options to the persons identified below as follows: (a) On March 17, 1995, Digital Lightwave, Inc., a California corporation (the "Predecessor"), granted an option, solely in the event of an initial public offering (an "IPO") to purchase $150,000 worth of shares of Common Stock at a price equal to 50% of the IPO effective price per share to Michael Baum and Skip Murgatroyd in reliance on Sections 3(b) and 4(2) of the Act; II-1 (b) On June 19, 1995, the Predecessor granted an option to purchase $400,000 worth of shares of Common Stock at a price equal to 1% of the IPO effective price per share to Stanley P. Zurn in reliance on Sections 3(b) and 4(2) of the Act; (c) On June 22, 1995, the Predecessor granted an option, solely in the event of an IPO of the Predecessor, to purchase $30,000 worth of shares of Common Stock at a price equal to 50% of the IPO effective price per share to Edward F. Guignon in reliance on Sections 3(b) and 4(2) of the Act; (d) On June 23 1995, the Predecessor granted an option, solely in the event of an IPO of the Predecessor, to purchase $30,000 worth of shares of Common Stock at a price equal to 50% of the IPO effective price per share to Paul J. Hedlund in reliance on Sections 3(b) and 4(2) of the Act; (e) On July 12 1995, the Predecessor granted an option, solely in the event of an IPO of the Predecessor, to purchase $21,000 worth of shares of Common Stock at a price equal to 50% of the IPO effective price per share to Margaret A. Guignon in reliance on Sections 3(b) and 4(2) of the Act; (f) On August 15, 1995, the Predecessor granted an option to purchase 300,000 shares of Common Stock to Michael Baum and Paul J. Hedlund upon conversion of a promissory note evidencing a Loan made by such persons to the Registrant in reliance on Sections 3(b) and 4(2) of the Act; and (g) On September 7, 1995, the Predecessor granted an option, solely in the event of an IPO of the Predecessor, to purchase $70,000 worth of shares of Common Stock at a price equal to 50% of the IPO effective price per share to Tony Charles Lonstein in reliance on Sections 3(b) and 4(2) of the Act. (2) On January 2, 1996, the Registrant issued a three-year subordinated promissory note in the original principal amount of $1 million and a warrant to purchase 300,000 shares of Common Stock at an exercise price of $3.33 per share to Renato Kasinsky, a citizen and resident of Brazil, in reliance on Regulation S promulgated under the Act. (3) On March 12, 1996, the Registrant issued an aggregate of 781,544 shares of Common Stock and warrants to purchase 1,575,000 shares of Common Stock at an exercise price of $3.33 per share to six noteholders of the Company, other than those described in paragraph (1) above, in consideration of the satisfaction of indebtedness of the Registrant in an aggregate amount of $2,605,041 in reliance on Sections 3(b) and 4(2) of the Act. (4) On March 18, 1996, the Registrant issued 30,000,000 shares of Common Stock to the sole stockholder of the Predecessor, upon the effective date of the merger between the Registrant and the Predecessor in reliance on Section 3(a)(9) of the Act. (5) On March 28, 1996, the Registrant issued 300,000 shares of Common Stock for an aggregate purchase price of $263,190 to the persons identified in subparagraph 1(f) above pursuant to the exercise of their option to purchase shares of Common Stock described in subparagraph 1(f) in satisfaction of the indebtedness evidencing their loan to the Registrant in reliance on Sections 3(b) and 4(2) of the Act. (6) Between March 31, 1996 and May 15, 1996, the Registrant issued an aggregate of 672,285 shares of Common Stock to 57 persons for an aggregate of $4,033,710 (consisting of cash subscriptions and the surrender of $2,449,000 of the Company's indebtedness) in reliance on Sections 3(b) and 4(2) of the Act. Holders of the options described in subparagraphs 1(a), 1(c), 1(d) and 1(e) above surrendered such options in exchange for warrants exercisable for an aggregate of 28,120 shares of Common Stock at a price of $6.00 per share. (7) On May 27, 1996, the Registrant issued 100,000 shares of Common Stock to Bulldog Capital Management L.P. for an aggregate purchase price of $1,200,000 in reliance on Sections 3(b) and 4(2) of the Act. (8) On May 31, 1996, the Company issued an aggregate of $750,000 of its 18% subordinated promissory notes due May 31, 1997 to 11 persons in reliance on Sections 3(b) and 4(2) of the Act. II-2 (9) On July 29, 1996, the Registrant issued 40,000 shares of Common Stock for an aggregate purchase price of $4,000 to the person identified in subparagraph (1)(b) above pursuant to the exercise of his option to purchase shares of Common Stock in reliance on Sections 3(b) and 4(2) of the Act. (10) On July 29, 1996, the Registrant issued 7,000 shares of Common Stock for an aggregate purchase price of $35,000 to the person identified in subparagraph 1(g) above pursuant to the exercise of his option to purchase shares of Common Stock in reliance on Sections 3(b) and 4(2) of the Act. No underwriting discounts or commissions were paid in connection with any of the foregoing transactions. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits:
EXHIBIT NUMBER EXHIBIT - --------- --------------------------------------------------------------------------------------------------- 1.01 -- Underwriting Agreement* 3.01 -- Certificate of Incorporation of Registrant 3.02 -- By-Laws of Registrant 4.01 -- Specimen Certificate for the Common Stock* 5.01 -- Opinion of Baker & McKenzie* 10.01 -- Employment Agreement dated March 8, 1996 between Registrant and Doug C. Dohring 10.02 -- Lease Agreement dated October 7, 1994 between Registrant and Atrium at Clearwater, Limited 10.03 -- First Lease Agreement Amendment dated February 16, 1996 between Registrant and Atrium at Clearwater, Limited 10.04 -- Form of Indemnification Agreement between Registrant and officer and directors of Registrant 23.01 -- Consent of Baker & McKenzie (included in Exhibit 5.01)* 23.02 -- Consent of Coopers & Lybrand L.L.P. 24.01 -- Power of Attorney (as set forth on the signature page of the Registration Statement)
- -------------- * To be filed by amendment. (b) Financial Statement Schedules: None ITEM 17. UNDERTAKINGS The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing specified in the underwriting agreements, certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled II-3 by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes: (1) That for purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of the registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of the registration statement as of the time it was declared effective. (2) That for the purposes of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. (4) That insofar as indemnification for liabilities arising under the Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions described in Item 14 hereof, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended (the "Securities Act"), the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-1 and has fully caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Clearwater, Florida, on the 1st day of August, 1996. DIGITAL LIGHTWAVE, INC. By: /s/ BRYAN J. ZWAN ----------------------------------- Bryan J. Zwan CHIEF EXECUTIVE OFFICER POWER OF ATTORNEY Pursuant to the requirements of the Securities Act , this Registration Statement has been signed by the following persons on August 1, 1996 in the capacities indicated. Each person whose signature appears below hereby authorizes Bryan J. Zwan, Doug C. Dohring, and Beth A. Morris, and each of them acting individually with full power of substitution, to file one or more amendments, including post-effective amendments, to this Registration Statement or to file a new registration statement pursuant to Rule 462(b) of the Securities Act for the purpose of registering additional shares of Common Stock, which amendments may make such changes, or new registration statement may contain such information, as Bryan J. Zwan, Doug C. Dohring, and Beth A. Morris deem appropriate, and each person whose signature appears below, individually and in each capacity stated below, hereby appoints Bryan J. Zwan, Doug C. Dohring, and Beth A. Morris, and each of them acting individually with full power of substitution, as Attorney-in-Fact to execute his name and on his behalf to file any such amendments to this Registration Statement or any such new registration statement. Pursuant to the requirements of the Securities Act, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. NAME TITLE DATE - ------------------------------------------------------ -------------------------------------- ----------------- /s/ BRYAN J. ZWAN Chairman of the Board, Chief Executive ------------------------------------------- Officer and Director (Principal August 1, 1996 Bryan J. Zwan Executive Officer) /s/ DOUG C. DOHRING ------------------------------------------- President and Director August 1, 1996 Doug C. Dohring /s/ BETH A. MORRIS Chief Financial Officer, Secretary and ------------------------------------------- Treasurer (Principal Financial and August 1, 1996 Beth A. Morris Accounting Officer) /s/ ELIZABETH W. WEIGAND ------------------------------------------- Vice President of Operations August 1, 1996 Elizabeth W. Weigand /s/ ERIC A. MITCHELL ------------------------------------------- Vice President of Sales August 1, 1996 Eric A. Mitchell /s/ TREVOR CREARY ------------------------------------------- Vice President of Technology August 1, 1996 Trevor Creary /s/ THOMAS WILLIAMS ------------------------------------------- Vice President of Production August 1, 1996 Thomas Williams
II-5 EXHIBIT INDEX
SEQUENTIALLY EXHIBIT NUMBERED NUMBER EXHIBIT PAGES - --------- ------------------------------------------------------------------------------------- ------------- 3.01 -- Certificate of Incorporation of Registrant 3.02 -- By-Laws of Registrant 10.01 -- Employment Agreement dated March 8, 1996 between Registrant and Doug C. Dohring 10.02 -- Lease Agreement dated October 7, 1994 between Registrant and Atrium at Clearwater, Limited 10.03 -- First Lease Agreement Amendment dated February 16, 1996 between Registrant and Atrium at Clearwater, Limited 10.04 -- Form of Indemnification Agreement between Registrant and officer and directors of Registrant 23.02 -- Consent of Coopers & Lybrand L.L.P.
EX-3.01 2 EXHIBIT 3.01 DIGITAL LIGHTWAVE, INC. CERTIFICATE OF INCORPORATION FIRST: The name of the Corporation is Digital Lightwave, Inc. SECOND: The address of the registered office of the Corporation in the State of Delaware is Corporation Trust Center, 1209 Orange Street, in the city of Wilmington, County of New Castle. The name of its registered agent at that address is The Corporation Trust Company. THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. FOURTH: (a) General. The aggregate number of shares which the Corporation is authorized to issue is 100,000,000 shares, of which 20,000,000 shall be shares of Preferred Stock, $.0001 par value per share (the "Preferred Stock") and 80,000,000 shall be shares of Common Stock, $.0001 par value per share (the "Common Stock"). (b) Preferred Stock. The Board of Directors is authorized, subject to limitations prescribed by law and the provisions of this Article Fourth, to provide for the issuance of the shares of the Preferred Stock in series, and by filing a certificate pursuant to the applicable law of the State of Delaware, to establish from time to time the number of shares to be included in each such series, and to fix the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations or restrictions thereof. The authority of the Board of Directors with respect to each series of the Preferred Stock shall include, but not be limited to, determination of the following: (i) The number of shares constituting that series and the distinctive designation of that series; (ii) The dividend rate on the shares of that series, whether dividends shall be cumulative, and, if so, from which date or dates, and the relative rights of priority, if any, of payment of dividends on shares of that series; (iii) Whether that series shall have voting rights, in addition to the voting rights provided by law, and, if so, the terms of such voting rights; (iv) Whether that series shall have conversion privileges, and, if so, the terms and conditions of such conversion, including provision for adjustment of the conversion rate in such events as the Board of Directors shall determine; (v) Whether or not the shares of that series shall be redeemable, and, if so, the terms and conditions of such redemption, including the date or date upon or after which they shall be redeemable, and the amount per share payable in case of redemption, which amount may vary under different conditions and at different redemption dates; (vi) Whether that series shall have a sinking fund for the redemption or purchase of shares of that series, and, if so, the terms and amount of such sinking fund; (vii) The rights of the shares of that series in the event of voluntary or involuntary liquidation, dissolution or winding up of the Corporation, and the relative rights of priority, if any, of payment of shares of that series; and (viii) Any other relative rights, preferences and limitations of that series. (c) Common Stock. Each share of Common Stock issued and outstanding shall have one vote upon matters submitted to the common stock shareholders for a vote. FIFTH: The Board of Directors shall have the power to adopt, amend and repeal the Bylaws of the Corporation (except so far as the Bylaws of the Corporation adopted by the stockholders shall otherwise provide). Any Bylaws adopted by the directors under the powers conferred hereby may be amended or repealed by the directors or by the stockholders. Notwithstanding the foregoing and anything contained in this Certificate of Incorporation to the contrary, Article II, Sections 1(c), 5 and 7; Article III, Section 2; and Article V of the Bylaws as originally adopted by the sole incorporator shall not be amended or repealed and no provision inconsistent therewith shall be adopted without the affirmative vote of the holders of at least 70% of the voting power of all the shares of the Corporation entitled to vote generally in the election of directors voting together as a single class; provided, however, that the Continuing Directors by a two-thirds vote of such Continuing Directors as defined in Article Eighth hereof may amend or repeal the foregoing Bylaw provisions without the requirement of such shareholder vote. Notwithstanding anything contained in this Certificate of Incorporation to the contrary, the affirmative vote of the holders of at least 70% of the voting power of all the shares of the Corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to alter, amend, adopt any provision inconsistent with or repeal this Article Fifth; provided, however, that if the Continuing Directors as defined in Article Eighth shall by a two-thirds vote of such Continuing Directors have adopted a resolution approving the amendment or repeal proposal and have determined to recommend it for approval by the holders of stock entitled to vote thereon, then the vote required shall be the affirmative vote of the holders of at least a majority of the outstanding shares entitled to vote thereon. -2- SIXTH: Any action required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of such holders and may not be effected by any consent in writing by such holders; provided, however, that any action required to be taken by the stockholders of the Corporation may be effected by a consent to such action signed by the holders of a majority of the class of stock entitled to vote thereon if approved by a two-thirds vote of the Continuing Directors. Except as otherwise required by law and subject to the rights of the holders of the Preferred Stock, special meetings of stockholders of the Corporation may be called only by the President, or the Board of Directors pursuant to a resolution approved by a majority of the whole Board of Directors. Notwithstanding anything contained in this Certificate of Incorporation to the contrary, the affirmative vote of the holders of at least 70% of the voting power of all shares of the Corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to alter, amend, or adopt any provision inconsistent with or repeal this Article Sixth; provided, however, that if the Continuing Directors as defined in Article Eighth shall by a two-thirds vote of such Continuing Directors have adopted a resolution approving the amendment or repeal proposal and have determined to recommend it for approval by the holders of stock entitled to vote thereon, then the vote required shall be the affirmative vote of the holders of at least a majority of the outstanding shares entitled to vote thereon. SEVENTH: (a) The business and affairs of the Corporation shall be managed by the Board of Directors of the Corporation. (b) Except as otherwise provided for or fixed by or pursuant to the provisions of Article Fourth hereof relating to the rights of the holders of Preferred Stock to elect directors under specified circumstances, the number of the directors of Corporation shall be fixed from time to time by or pursuant to the Bylaws of the Corporation. From and after the annual meeting of stockholders held in 1996, the directors, other than those who may be elected by the holders of Preferred Stock, shall be classified, with respect to the time for which they severally hold office, into three classes, as nearly equal in number as possible, as shall be provided in the manner specified in the Bylaws of the Corporation, one class to be originally elected for a term expiring at the annual meeting of stockholders to be held in 1997, another class to be originally elected for a term expiring at the annual meeting of stockholders to be held in 1998, and another class to be originally elected for a term expiring at the annual meeting of stockholders to be held in 1999, with each class to hold office until its successor is elected and qualified. At each annual meeting of the stockholders, the successors of the class of Directors whose term expires at that meeting shall be elected to hold office for a term expiring at the annual meeting of Stockholders held in the third year following the year of their elections. (c) Advance notice of stockholder nominations for the election of directors shall be given in the manner provided in the Bylaws of the Corporation. Election of directors need not be by written ballot unless the Bylaws of the Corporation shall so provide. (d) Except as otherwise provided for or fixed by or pursuant to the provisions of Article Fourth hereof relating to the rights of the holders of Preferred Stock to elect directors -3- under specified circumstances, newly created directorships resulting from any increase in the number of directors and any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal or other cause shall be filled by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the Board of Directors. Any director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the class of directors in which the new directorship was created or the vacancy occurred and until such director's successor shall have been elected and qualified. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. (e) Subject to the rights of any Preferred Stock to elect directors under specified circumstances, any director may be removed from office only with cause and only by the affirmative vote of the holders of at least 70% of the voting power of all shares to Corporation entitled to vote generally in the election of directors, voting together as a single class; provided, however, that if the Continuing Directors, as defined in Article Eighth, shall by a majority vote of such Continuing Directors have adopted a resolution approving the removal of any director and have determined to recommend such removal for approval by the holders of stock entitled to vote thereon, then such director may be removed from office with or without cause upon the affirmative vote of the holders of at least a majority of the outstanding shares entitled to vote thereon, voting together as a single class. (f) To the fullest extent permitted by the General Corporation Law of the State of Delaware, a director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. Any repeal or modification of this paragraph shall be prospective only, and shall not adversely affect any limitation on the personal liability of a director of the Corporation with respect to any act or omission occurring prior to the time of such repeal or modification. (g) Notwithstanding anything contained in this Certificate of Incorporation to the contrary, the affirmative vote of the holders of at least 70% of the voting power of all outstanding shares of the Corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to alter, amend, adopt any provision inconsistent with or repeal this Article Seventh; provided however, that if the Continuing Directors as defined in Article Eighth shall by a two-thirds vote of such Continuing Directors have adopted a resolution approving the amendment or repeal proposal and have determined to recommend it for approval by the holders of stock entitled to vote thereon, then the vote required shall be the affirmative vote of the holders of at least a majority of the outstanding shares entitled to vote thereon. EIGHTH: (a) In addition to any affirmative vote required by law, this Certificate of Incorporation, any resolution or resolutions adopted by the Board of Directors pursuant to its authority under Article Fourth of this Certificate of Incorporation, any agreement with any national securities exchange or otherwise, any Business Combination involving the Corporation or any Subsidiary and any Related Person or any Affiliate or Associate of a Related Person shall -4- be subject to approval or authorization in the manner provided by this Article Eighth. Certain capitalized terms used herein are defined in paragraph (d) of this Article Eighth. (b) Except as otherwise expressly provided in paragraph (c) of this Article Eighth, no Business Combination shall be consummated or effected, either directly or indirectly, unless such Business Combination shall have been approved or authorized by the affirmative vote of the holders of not less than seventy percent (70%) of the outstanding shares of Voting Stock which are not Beneficially Owned by any Related Person or an Affiliate or Associate of such Related Person, voting together as a single class (it being understood for purposes of this Article Eighth, each share of Voting Stock shall have one vote, notwithstanding any provision contained in Article Fourth to the contrary), notwithstanding the fact that no vote for such transaction or approval by some lesser percentage of stockholders may be required or specified by law, this Certificate of Incorporation, any resolution or resolutions adopted by the Board of Directors of the Corporation pursuant to its authority under Article Fourth of this Certificate of Incorporation, any agreement with any national securities exchange or otherwise. (c) The approval or authorization of any Business Combination in the manner provided for by paragraph (b) of this Article Eighth shall not be required if all the conditions specified in either paragraph (c)(i) or paragraph (c)(ii) of this Article Eighth are satisfied: (i) such Business Combination shall have been expressly approved by not less than two-thirds of the Continuing Directors, either in advance of or subsequent to a Related Person having become a Related Person; or (ii) all of the conditions specified in the following clauses shall have been met: (A) the Fair Market Value as of the Consummation Date of the consideration to be received per share of each class or series of Capital Stock by Disinterested Stockholders in the Business Combination is not less than the Highest Per Share Price (it being understood that the provisions of this subparagraph (c)(ii)(A) shall be required to be met with respect to every class or series of the outstanding Capital Stock, whether or not the Related Person has previously acquired any shares of a particular series or class of Capital Stock); and (B) the form of consideration to be received by Disinterested Stockholders in the Business Combination shall be United States currency or the form of consideration used by the Related Person in acquiring the largest aggregate number of shares of the Capital Stock that such Related Person has previously acquired; and -5- (C) after such Related Person has become a Related Person and prior to the Consummation Date: (1) except as approved by not less than two-thirds of the Continuing Directors, there shall have been no failure to declare and pay at the regular date therefor any full quarterly dividends (whether or not cumulative) on the outstanding Capital Stock; and (2) such Related Person shall have not become the Beneficial Owner of any additional shares of Voting Stock except as part of the transaction which results in such Related Person becoming a Related Person; and (D) after such Related Person has become a Related Person, such Related Person shall not have received the benefit, directly or indirectly (except proportionately as a stockholder of the Corporation), of any loans, advances, guarantees, pledges or other financial assistance or tax advantages provided by the Corporation or any Subsidiary, whether in anticipation of or in connection with such Business Combination or otherwise: and (E) a proxy or information statement describing the proposed Business Combination and complying with the requirements of the Act as then in effect shall have been mailed to all Disinterested Stockholders at least thirty (30) days prior to the date of the stockholders' meeting at which such Business Combination is to be considered (whether or not a proxy or information statement is required to be mailed pursuant to the Act) and such proxy or information statement shall have contained at the front thereof, in a prominent place, such recommendations and other relevant information concerning the Business Combination as a majority of the Continuing Directors may determine so to include. (d) For the purposes of this Article Eighth: (i) The term "Act" shall mean the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder, or any similar United States statute enacted to supercede or supplement the Act. (ii) The term "Affiliate" shall have the meaning ascribed to it in Rule 12b-2 under the Act, as in effect on December 1, 1995, and shall include any Person that, after giving effect to a Business Combination, would become an Affiliate. (iii) The term "Announcement Date" shall mean the date of the first public announcement of a proposed Business Combination. -6- (iv) The term "Associate" shall have the meaning ascribed to it in Rule 12b-2, under the Act as in effect on December 1, 1995 (the term "registrant, as used in such Rule 12b-2, meaning in this case the Corporation), and shall include any Person that, after giving effect to a Business Combination, would become an Associate. (v) The terms "Beneficial Owner" or "Beneficially Owned" shall mean, or refer to stock ownership by, any person who beneficially owns any Voting Stock within the meaning ascribed in Rule 13d-3 under the Act as in effect on December 1, 1995 or who has the right to acquire any such beneficial ownership (whether or not such right is exercisable immediately, with the passage of time or subject to any condition) pursuant to any agreement, contract, arrangement or understanding or upon the exercise of any conversion, exchange or other right, warrant or option, or otherwise. A Person shall be deemed the Beneficial Owner of all Capital Stock of which any Affiliate or Associate of such Person is the Beneficial Owner. (vi) The term "Business Combination" shall mean any (A) merger or consolidation of the Corporation or a Subsidiary with or into a Related Person or any other corporation which is, or after such merger or consolidation would be, an Affiliate or Associate of a Related Person; (B) sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) to or with any Related Person or any Affiliate or Associate of any Related Person, of all or any Substantial Amount of the assets of the Corporation, one or more Subsidiaries, or the Corporation and one or more Subsidiaries, other than in the ordinary course of business; (C) adoption of any plan or proposal for the liquidation or dissolution of the Corporation proposed by or on behalf of a Related Person or any Affiliate or Associate of any Related Person; (D) sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) to the Corporation, one or more Subsidiaries, or the Corporation and one or more Subsidiaries (in one transaction or a series of transactions) of all or any Substantial Amount of the assets of a Related Person or any Affiliate or Associate of any Related Person, other than in the ordinary course of business; (E) issuance, pledge or transfer of securities of the Corporation, one or more Subsidiaries, or the Corporation and one or more Subsidiaries (in one transaction or a series of transactions) to or with a Related Person or any Affiliate or Associate of any Related Person in exchange for a Substantial Amount of cash, securities or other property (or a combination thereof), except any issuance, pledge or transfer of such securities to any such Person if such Person is acting as an underwriter with respect to such securities; (F) reclassification of securities (including any reverse stock split) or recapitalization of the Corporation, any merger or consolidation of the Corporation with or into one or more Subsidiaries, or any other transaction that would have the effect, either directly or indirectly, of increasing the voting power or the proportionate share of any class of equity or convertible securities of the Corporation or any Subsidiary which is directly or indirectly Beneficially Owned by any Related Person or any Affiliate or Associate of any Related Person; (G) agreement, contract or other arrangement providing for any of the transactions described in this definition of Business Combination; and (H) any series of transactions that not less than two-thirds of the Continuing -7- Directors determine are related and, if taken together, would constitute a Business Combination under this definition of Business Combination (vii) The term "Capital Stock" shall mean all capital stock of any class of the Corporation authorized to be issued from time to time under this Certificate of Incorporation whether now or hereafter outstanding. (viii) The term "Consummation Date" shall mean the date of the consummation of the Business Combination. (ix) The term "Continuing Director" shall mean any member of the Board of Directors of the Corporation who is not the Related Person, and not anAffiliate, Associate, representative or nominee of the Related Person or of suchan Affiliate or Associate, that is involved in the relevant Business Combination, and (A) was a member of the Board of Directors prior to the Determination Date with respect to such Related Person or (B) whose initial election as a director of the Corporation succeeds a Continuing Director and was recommended by a majority vote of the Continuing Directors then in office; provided, that in either case, such Continuing Director shall have continued in office after becoming a Continuing Director. (x) The term "Determination Date" shall mean the date and time at which a Person became a related Person. (xi) The term "Disinterested Stockholder" shall mean a holder ofshares of a particular class or series of Capital Stock who is not (A) a Related Person with or for the benefit of whom a Business Combination is proposed to be consummated or (B) an Affiliate or Associate of such Related Person. (xii) The term "Fair Market Value" shall mean (A) in the case of United States currency, the amount thereof; (B) in the case of stock and other securities, the highest closing sales price during the 30-day period immediately preceding the date in question of a share or trading unit of such stock or security on the Composite Tape for New York Stock Exchange -- Listed Stocks, or, if such stock or security is not listed on the New York Stock Exchange, on the principal United States securities exchange registered under the Act on which such stock or security is listed, or, if such stock or security is not listed on any such securities exchange, the highest closing sale price or bid quotation with respect to a share or trading unit of such stock or security during the 30-day period on the National Association of Securities Dealers, Inc. Automated Quotations System or any successor system or, if no such quotations are available, the fair market value on the date in question of a share or trading unit of such stock or security as determined in good faith by a majority vote of the Continuing Directors; and (C) in the case of property other than cash, stock or other securities, the fair market value of such property on the date in question as determined in good faith by a majority vote of the Continuing Directors. -8- (xiii) The term "Highest Per Share Price" shall mean, with respect to the consideration to be received per share of each class or series of Capital Stock by Disinterested Stockholders in any particular Business Combination, the higher of the following: (A) the highest per share price (including brokerage commissions, transfer taxes and soliciting dealers' fees) paid by or on behalf of the Related Person in acquiring Beneficial Ownership of any of its holdings of such class or series of Capital Stock of this corporation (1) within the two-year period immediately prior to the Announcement Date or (2) in the transaction or series of transactions in which the Related Person became a Related Person, whichever is higher; or (B) the Fair Market Value per share of the shares of Capital Stock being acquired in the Business Combination as of (1) the Announcement Date or (2) the date on which the Related Person became a Related Person, whichever is higher. For the purposes of this paragraph (d)(xiii), (A) the price deemed to have been paid by a Related Person for any shares of Capital Stock of which an Affiliate or Associate is the Beneficial Owner shall be the price which is the highest of the following: (1) the price paid upon the acquisition thereof by the relevant Affiliate or Associate (if any, and whether or not such Affiliate or Associate was an Affiliate or Associate at the time of such acquisition) or (2) the Fair Market Value of such Capital Stock as of the day when the Related Person became a Beneficial Owner thereof; (B) in determining the Highest Per Share Price, all purchases by the Related Person shall be taken into account, regardless of whether the shares were purchased before or after the Related Person became a Related Person; (C) a Person shall be deemed to have acquired a share of Capital Stock at the time when such Person became the Beneficial Owner thereof; and (D) appropriate adjustments shall be made to reflect the relevant effect of any stock dividends, splits and distributions and any combination or reclassification of Capital Stock. (xiv) The phrase "consideration to be received" as used in subparagraph (c)(ii)(A) of this Article Eighth shall include, without limitation, the shares of Common Stock or any other class or series of Capital Stock retained by the Disinterested Stockholders in the event of a Business Combination that is a merger or consolidation in which the Corporation is the surviving entity. (xv) The term "Person" shall mean any individual, corporation, partnership or other entity, including any group comprised of any Person and any other Person or any Affiliate or Associate thereof with whom such Person or any Affiliate or Associate thereof has any agreement, arrangement or understanding, directly or indirectly, for the purpose of acquiring, holding, voting, or disposing of Voting Stock and each Person, and any Affiliate or Associate thereof, that is a member of such group. -9- (xvi) The term "Related Person" shall mean any person who alone or together with any Affiliates or Associates is: (A) the Beneficial Owner, directly or indirectly, of an aggregate percentage of the outstanding Voting Stock equal to or exceeding ten percent (10%), or (B) an assignee of or otherwise has succeeded to the Beneficial Ownership of any shares of Voting Stock which were at any time within the two-year period immediately prior to the date in question Beneficially Owned by any Related Person, if such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933, as amended; provided, however, that the term "Related Person" shall not include (w) the sole incorporator of the Corporation or any of his Affiliates or Associates as designated in his sole discretion by him, (x) the Corporation or any Subsidiary all of the Capital Stock of or other ownership interest in which is directly or indirectly owned by the Corporation, (y) any Person whose acquisition of such aggregate percentage of Voting Stock was approved by not less than a two-thirds vote of the Continuing Directors prior to such acquisition or (z) any pension, profit sharing, employee stock ownership or other employee benefit plan of the Corporation or any Subsidiary or any trustee or fiduciary when acting in such capacity with respect to any such Plan. (xvii) The term "Subsidiary" shall mean any Person a majority of any class of equity securities in which is owned, directly or indirectly, by the Corporation, one or more Subsidiaries, or the Corporation and one or more Subsidiaries. (xviii) The term "Substantial Amount" shall mean an amount of stock, securities or other assets or property having a Fair Market Value equal to ten percent or more of the Fair Market Value of the total consolidated assets of the Corporation and its Subsidiaries taken as a whole as of the end of the most recent fiscal year of the Corporation ended prior to the time as of which the determination is being made. (xix) The term "Voting Stock" shall mean all Outstanding Common Stock of the Corporation and all other Outstanding Capital Stock, if any, entitled to vote on each matter on which the holders of record of Common Stock shall be entitled to vote, and each reference to a proportion of shares of voting Stock shall refer to such proportion of the votes entitled to be cast by the holders of such shares of Common Stock and other Capital Stock voting as one class (it being understood that for purposes of this Article Eighth, each share of voting Stock shall have the number of votes granted to it in accordance with Article Fourth of this Certificate of Incorporation). -10- (e) The fact that any Business Combination complies with the provisions of paragraph (c)(ii) of this Article Eighth shall not be construed to impose any fiduciary duty, obligation or responsibility on the Board of Directors, or any member thereof, to approve such Business Combination or recommend its adoption or approval to the stockholders of the Corporation, nor shall such compliance limit, prohibit or otherwise restrict in any manner the Board of Directors, or any member thereof, with respect to evaluations of or actions and responses taken with respect to such Business Combination. (f) A two-thirds majority of the Continuing Directors of the Corporation shall have the power and duty to determine for the purposes of this Article Eighth, on the basis of information known to them after reasonable inquiry, (i) whether a person is a Related Party, (ii) the number of shares of Voting Stock Beneficially Owned by any person, and (iii) whether a person is an Affiliate or Associate of another. A two-thirds majority of the Continuing Directors of the Corporation shall have the further power to interpret all of, the terms and provisions of this Article Eighth. (g) The affirmative vote of not less than seventh percent (70%) of the outstanding shares of Voting Stock which are not Beneficially Owned by any Related Person or any Affiliate or Associate of a Related Person shall be required to alter, amend or repeal, or adopt any provisions inconsistent with, the provisions set forth in this Article Eighth; provided, however, that if the Continuing Directors shall by a two-thirds vote of such Continuing Directors have adopted a resolution approving the amendment or repeal proposal and have determined to recommend it for approval by the holders of stock entitled to vote thereon, then the vote required shall be the affirmative vote of the holders of at least a majority of the outstanding shares entitled to vote thereon. NINTH: Subject to the other terms of this Certificate of Incorporation, the Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute and this Certificate of Incorporation, and all rights conferred on stockholders herein are granted subject to this reservation. TENTH: The name and address of the sole incorporator is as follows: Bryan J. Zwan 601 Cleveland Street, Fifth Floor Clearwater, Florida 34615 ELEVENTH: The period of duration of the Corporation is perpetual. TWELFTH: The number of the members of the initial Board of Directors is one (1), and the name and address of the person to serve as the initial director of the Corporation until his successors are duly elected and qualified as provided in the Corporation's bylaws is: -11- Bryan J. Zwan 601 Cleveland Street, Fifth Floor Clearwater, Florida 34615 THE UNDERSIGNED, being the sole incorporator hereinbefore named, for the purpose of forming a corporation pursuant to the General Corporation Law of the State of Delaware does make this certificate, hereby declaring and certifying that this is his act and deed and the facts herein stated are true, and accordingly has hereunto set forth his hand this 3rd day of January, 1996. /s/ Bryan J. Zwan ----------------------------------- Bryan J. Zwan -12- CERTIFICATE OF AMENDMENT TO THE CERTIFICATE OF INCORPORATION OF DIGITAL LIGHTWAVE, INC. Pursuant to the provisions of Sections 228 and 242 of the Delaware General Corporation Law, the undersigned corporation adopts the following Certificate of Amendment to its Certificate of Incorporation; 1. The name of the corporation is Digital Lightwave, Inc. (the "Corporation"). 2. The following amendment to the Certificate of Incorporation of the Corporation was duly adopted by the written consent of 94.18 percent of the votes attributable to the aggregate issued and outstanding shares of the capital stock of the Corporation: Article Fourth, section (a) is deleted in its entirety and the following inserted in lieu thereof: FOURTH: (a) General. The aggregate number of shares which the Corporation is authorized to issue is 220,000,000 shares, of which 20,000,000 shall be shares of Preferred Stock, $.0001 par value per share (the "Preferred Stock") and 200,000,000 shall be shares of Common Stock, par value $.0001 per share (the "Common Stock"). 3. The foregoing amendments have been duly adopted in accordance with the provisions of Sections 228 and 242 of the Delaware General Corporation Law. Dated: July 25, 1996. Digital Lightwave, Inc. a Delaware corporation By: /s/ Bryan J. Zwan ------------------------------------ Bryan J. Zwan, Chief Executive Officer By: /s/ Beth A. Morris ------------------------------------ Beth A. Morris, Secretary EX-3.02 3 EXHIBIT 3.02 DIGITAL LIGHTWAVE, INC. BYLAWS ARTICLE I OFFICES SECTION 1. REGISTERED OFFICE. The registered office of the Corporation in the State of Delaware shall be in the City of Wilmington, County of New Castle, State of Delaware. SECTION 2. OTHER OFFICES. The Corporation also may have offices at such other places both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the Corporation may require. ARTICLE II STOCKHOLDERS SECTION 1. STOCKHOLDER MEETINGS. (a) TIME AND PLACE OF MEETINGS. Meetings of the stockholders shall be held at such times and places, either within or without the State of Delaware, as may from time to time be fixed by the Board of Directors and stated in the notices or waivers of notice of such meetings. (b) ANNUAL MEETING. The annual meeting of the stockholders shall be held during the third week of the month of May in each year as designated by the Board of Directors, or at such other date as may be designated by the Board of Directors, for the election of directors and the transaction of such other business properly brought before such annual meeting of the stockholders and within the powers of the stockholders. (c) SPECIAL MEETINGS. Special meetings of the stockholders of the Corporation for any purpose or purposes may be called at any time only by the Chairman of the Board of Directors, or the Board of Directors pursuant to a resolution approved by a majority of the whole Board of Directors. Business transacted at any special meeting of the stockholders shall be limited to the purposes stated in the notice of such meeting. (d) NOTICE OF MEETINGS. Except as otherwise provided law, the Certificate of Incorporation or these Bylaws, written notice of each meeting of the stockholders shall be given not less than ten days nor more than sixty days before the date of such meeting to each stockholder entitled to vote thereat, directed to such stockholder's address as it appears upon the books of the Corporation, such notice to specify the place, date, hour and purpose or purposes of such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail, postage prepaid, addressed to the stockholder at his address as it appears on the stock ledger of the Corporation. When a meeting of the stockholders is adjourned to another time and/or place, notice need not be given of such adjourned meeting if the time and place thereof are announced at the meeting of the stockholders at which the adjournment is taken, unless the adjournment is for more than thirty days or unless after the adjournment a new record date is fixed for such adjourned meeting, in which event a notice of such adjourned meeting shall be given to each stockholder of record entitled to vote thereat. Notice of the time, place and purpose of any meeting of the stockholders may be waived in writing either before or after such meeting and will be waived by any stockholder by such stockholder's attendance thereat in person or by proxy. Any stockholder so waiving notice of such a meeting shall be bound by the proceedings of any such meeting in all respects as if due notice thereof had been given. (e) QUORUM. Except as otherwise required by law, the Certificate of Incorporation or these Bylaws, the holders of not less than a majority of the shares entitled to vote at any meeting of the stockholders, present in person or by proxy, shall constitute a quorum and the affirmative vote of the majority of such quorum shall be deemed the act of the stockholders. If a quorum shall fail to attend any meeting of the stockholders, the presiding officer of such meeting may adjourn such meeting from time to time to another place, date or time, without notice other than announcement at such meeting, until a quorum is present or represented. At such adjourned meeting at which a quorum is present or represented, any business may be transacted that might have been transacted at the meeting of the stockholders as originally noticed. The foregoing notwithstanding, if a notice of any adjourned special meeting of the stockholders is sent to all stockholders entitled to vote thereat which states that such adjourned special meeting will be held with those present in person or by proxy constituting a quorum, then, except as otherwise required by law, those present at such adjourned special meeting of the stockholders shall constitute a quorum and all matters shall be determined by a majority of the votes cast at such special meeting. SECTION 2. DETERMINATION OF STOCKHOLDERS ENTITLED TO NOTICE AND TO VOTE. To determine the stockholders entitled to notice of any meeting of the stockholders or to vote thereat, the Board of Directors may fix in advance a record date as provided in Article VII, Section 1 of these Bylaws, or if no record date is fixed by the Board of Directors, a record date shall be determined as provided by law. SECTION 3. VOTING. (a) Except as otherwise required by law, the Certificate of Incorporation or these Bylaws, each stockholder present in person or by proxy at a meeting of the stockholders shall be entitled to one vote for each full share of stock registered in the name of such stockholder - 2 - at the time fixed by the Board of Directors or by law as the record date of the determination of stockholders entitled to vote at such meeting. (b) Every stockholder entitled to vote at a meeting of the stockholders may do so either (i) in person or (ii) by one or more agents authorized by a written proxy executed by the person or such stockholder's duly authorized agent, whether by manual signature, typewriting, telegraphic or facsimile transmission or otherwise. Every proxy must be executed in writing (which shall include telegraphing or facsimile transmission) by the stockholder or by his duly authorized agent, but no proxy shall be voted on after eleven (11) months from its date, unless the proxy provides for a longer period. (c) Voting may be by voice or by ballot as the presiding officer of the meeting of the stockholders shall determine. On a vote by ballot, each ballot shall be signed by the stockholder voting, or by such stockholder's proxy, and shall state the number of shares voted. (d) In advance of or at any meeting of the stockholders, the Chairman of the Board or Chief Executive Officer may appoint one or more persons as inspectors of election (the "Inspectors") to act at such meeting. Such Inspectors shall take charge of the ballots at such meeting. After the balloting on any question, the Inspectors shall count the ballots cast and make a written report to the secretary of such meeting of the results. Subject to the direction of the presiding officer of the meeting, the duties of such Inspectors may further include without limitation: determining the number of shares outstanding and the voting power of each; the shares represented at the meeting; the existence of a quorum; the authenticity, validity, and effect of proxies; receiving votes, ballots or consents; hearing and determining all challenges and questions in any way arising in connection with the right to vote; counting and tabulating all votes of consents and determining when the polls shall close; determining the result; and doing such acts as may be proper to conduct the election or vote with fairness to all stockholders. An Inspector need not be a stockholder of the Corporation and any officer of the Corporation may be an Inspector on any question other than a vote for or against such officer's election to any position with the Corporation or on any other questions in which such officer may be directly interested. If there are three or more Inspectors, the determination, report or certificate of a majority of such Inspectors shall be effective as if unanimously made by all Inspectors. SECTION 4. LIST OF STOCKHOLDERS. The officer who has charge of the stock ledger of the Corporation shall prepare and make available, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote thereat, arranged in alphabetical order, showing the address of and the number of shares registered in the name of each such stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to such meeting, either at a place within the city where such meeting is to be held and which place shall be specified in the notice of such meeting, or, if not so specified at the place where such meeting is to be held. The list also shall be produced and kept at the time and place of the meeting of the stockholders during the whole time thereof, and may be inspected by any stockholder who is present. - 3 - SECTION 5. ACTION BY CONSENT OF STOCKHOLDERS. Any action required or permitted to be taken by the stockholders must be effected at a duly called annual or special meeting of such stockholders and may not be effected by any consent in writing by such stockholders; provided, however, that any action required to be taken by the stockholders of the Corporation may be effected by a consent to such action signed by the holders of a majority of the class of stock entitled to vote thereon if approved by a two- thirds vote of the Continuing Directors, as such term is defined in the Certificate of Incorporation. All such consents shall be filed with the corporate records. SECTION 6. CONDUCT OF MEETINGS. The presiding officer of the meeting shall have full and complete authority to determine the agenda, to set the procedures and order the conduct of meetings, all as deemed appropriate by such person in his sole discretion with due regard to the orderly conduct of business. SECTION 7. NOTICE OF AGENDA MATTERS. If a stockholder wishes to present to the Chairman of the Board or the Chief Executive Officer an item for consideration as an agenda item for a meeting of stockholders, he must give timely notice to the Secretary of the Corporation and give a brief description of the business desired to be brought before the meeting. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation, not less than one hundred twenty days nor more than one hundred eighty days prior to the meeting. ARTICLE III BOARD OF DIRECTORS SECTION 1. GENERAL POWERS. Unless otherwise restricted by law, the Certificate of Incorporation or these Bylaws as to action which shall be authorized or approved by the stockholders, and subject to the duties of directors as prescribed by these Bylaws, all corporate powers shall be exercised by or under the authority of, and the business and affairs of the Corporation shall be controlled by, the Board of Directors. Without prejudice to such general powers, but subject to the same limitations, the directors shall have the following powers: (a) To select and remove all the other officers, agents and employees of the Corporation, prescribe such powers and duties for them as may not be inconsistent with law, the Certificate of Incorporation or these Bylaws, fix their compensation and require from them security for faithful service. - 4 - (b) To conduct, manage, and control the affairs and business of the Corporation and to make such rules and regulations therefor not inconsistent with law, the Certificate of Incorporation or these Bylaws, as they may deem best. (c) To change the principal office for the transaction of the business of the Corporation from one location to another as provided in Article I, Section 2, hereof; to designate any place within or without the State of Delaware for the holding of any stockholders' meeting or meetings and to adopt, make and use a corporate seal, and to prescribe the forms of certificates of stock, and to alter the form of such seal and of such certificates from time to time, as in their judgment they may deem best, provided such seal and such certificates shall at all times comply with the provisions of law. (d) To authorize the issue of shares of stock of the Corporation from time to time, upon such terms as may be lawful, in consideration of money paid, labor done or services actually rendered, debts or securities cancelled, or tangible or intangible property actually received or, in the case of shares issued as a dividend, against amounts transferred from surplus to stated capital. (e) To borrow money and incur indebtedness for the purposes of the Corporation, and to cause to be executed and delivered therefor, in the corporate name, promissory notes, bonds, debentures, deeds of trust, mortgages, pledges, hypothecation or other evidences of debt and securities therefor. (f) To adopt and put into effect such stock purchase plans and stock option plans, both of general and restricted stock option plan character, as they may deem advisable for the benefit of employees of the Corporation, and to issue stock in accordance with and pursuant to any such plan. SECTION 2. ELECTION OF DIRECTORS. (a) NUMBER, QUALIFICATION AND TERM OF OFFICE. The authorized number of directors of the Corporation shall be fixed from time to time by the Board of Directors, but shall not be less than one nor more than nine. The exact number of directors shall be determined from time to time, either by a resolution or Bylaw provision duly adopted by a majority of the whole Board of Directors. Directors need not be stockholders. (b) RESIGNATION. Any director may resign from the Board of Directors at any time by giving written notice to the Secretary of the Corporation. Any such resignation shall take effect at the time specified therein, or if the time when such resignation shall become effective shall not be so specified, then such resignation shall take effect immediately upon its receipt by the Secretary; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. - 5 - (c) NOMINATION OF DIRECTORS. Candidates for director of the Corporation shall be nominated only either by: (i) the Board of Directors or a committee appointed by the Board of Directors, or (ii) nomination at any stockholders' meeting by or on behalf of any stockholder entitled to vote thereat; provided, that written notice of such stockholder's intent to make such nomination or nominations shall have been given, either by personal delivery or by United States certified mail, postage prepaid, to the Secretary of the Corporation not later than (1) with respect to an election to be held at an annual meeting of the stockholders, thirty days in advance of such annual meeting, and (2) with respect to an election to be held at a special meeting of the stockholders for the election of directors, the close of business on the tenth day following the date on which notice of such special meeting is first given to the stockholders entitled to vote thereat. Each such notice by a stockholder shall set forth: (1) the name and address of the (A) stockholder who intends to make the nomination and (B) person or persons to be nominated; (2) a representation that the stockholder is a holder of record of stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (3) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder; (4) such other information regarding each nominee proposed by such stockholder as would be required to be included in a proxy or information statement filed with the Securities and Exchange Commission pursuant to the proxy rules promulgated under the Securities Exchange Act of 1934, as amended, or any successor statute thereto, had the nominee been nominated, or intended to be nominated, by the Board of Directors; and (5) the manually signed consent of each nominee to serve as a director of the Corporation if so elected. The presiding officer of the meeting of the stockholders may refuse to acknowledge the nominee of any person not made in compliance with the foregoing procedure. (d) PREFERRED STOCK PROVISIONS. Notwithstanding the foregoing, whenever the holders of any one or more classes or series of stock issued by the Corporation having a preference over the Common Stock as to dividends or upon liquidation shall have the right, voting separately by - 6 - class or series, to elect directors at an annual or special meeting of the stockholders, the elections term of office, filling of vacancies, nomination, terms of removal and other features of such directorships shall be governed by the terms of Article Fourth of the Certificate of Incorporation and the resolution or resolutions establishing such class or series adopted pursuant thereto. SECTION 3. MEETINGS OF THE BOARD OF DIRECTORS. (a) REGULAR MEETINGS. Regular meetings of the Board of Directors shall be held without call at the following times: (i) at such times as the Board of Directors shall from time to time by resolution determine; and (ii) one-half hour prior to any special meeting of the stockholders and immediately following the adjournment of any annual or special meeting of the stockholders. Notice of all such regular meetings hereby is dispensed with. (b) SPECIAL MEETINGS. Special meetings of the Board of Directors may be called by the Chief Executive Officer or the Board of Directors pursuant to a resolution approved by a majority of the whole Board of Directors. Notice of the time and place of special meetings of the Board of Directors shall be given by the Secretary or an Assistant Secretary of the Corporation, or by any other officer authorized by the Board of Directors. Such notice shall be given to each director personally or by mail, messenger, telephone, facsimile or telegraph at such director's business or residence address. Notice by mail shall be deposited in the United States mail, postage prepaid, not later than the third day prior to the date fixed for such special meeting. Notice by telephone, facsimile or telegraph shall be sent, and notice given personally or by messenger shall be delivered, at least twenty-four hours prior to the time set for such special meeting. Notice of a special meeting of the Board of Directors need not contain a statement of the purpose of such special meeting. (c) ADJOURNED MEETINGS. A majority of directors present at any regular or special meeting of the Board of Directors or any committee thereof, whether or not constituting a quorum, may adjourn any meeting from time to time until a quorum is present or otherwise. Notice of the time and place of holding any adjourned meeting shall not be required if the time and place are fixed at the meeting adjourned. (d) PLACE OF MEETINGS. Unless a resolution of the Board of Directors or the written consent of all members of the Board of Directors given either before or after the meeting and filed with the Secretary of the Corporation designates a different place within or without the State of Delaware, meetings of the Board of Directors, both regular and special, shall be held at the Corporation's principal executive offices. - 7 - (e) PARTICIPATION BY TELEPHONE. Members of the Board of Directors or any committee may participate in any meeting of the Board of Directors or committee through the use of conference telephone or similar communications equipment, so long as all members participating in such meeting can hear one another, and such participation shall constitute presence in person at such meeting. (f) QUORUM. At all meetings of the Board of Directors or any committee thereof, a majority of the total number of directors of the entire then authorized Board of Directors or such committee shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any such meeting at which there is a quorum shall be the act of the Board of Directors or any committee, except as may be otherwise specifically provided by law, the Certificate of Incorporation or these Bylaws. A meeting of the Board of Directors or any committee at which a quorum initially is present may continue to transact business notwithstanding the withdrawal of directors so long as any action is approved by at least a majority of the required quorum for such meeting. (g) WAIVER OF NOTICE. The transactions of any meeting of the Board of Directors or any committee, however called and noticed or wherever held, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum be present and if, either before or after the meeting, each of the directors not present signs a written waiver of notice, or a consent to hold such meeting, or an approval of the minutes thereof. All such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. SECTION 5. ACTION WITHOUT MEETING. Any action required or permitted to be taken by the Board of Directors at any meeting or at any meeting of a committee may be taken without a meeting if all members of the Board of Directors or such committee consent in writing and the writing or writings are filed with the minutes of the proceedings of the Board of Directors or such committee. SECTION 6. COMPENSATION OF DIRECTORS. Unless otherwise restricted by law, the Certificate of Incorporation or these Bylaws, the Board of Directors shall have the authority to fix the compensation of directors. The directors may be paid their expenses, if any, for attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as director. No such payment shall preclude a director from serving the Corporation in any other capacity and receiving compensation therefor. Members of committees of the Board of Directors may be allowed like compensation for attending committee meetings. - 8 - SECTION 7. COMMITTEES OF THE BOARD. (a) COMMITTEES. The Board of Directors may, by resolution adopted by a majority of the Board of Directors, designate one or more committees of the Board of Directors, each Committee to consist of one or more directors. Each such Committee, to the extent permitted by law, the Certificate of Incorporation and these Bylaws, shall have and may exercise such of the powers of the Board of Directors in the management and affairs of the Corporation as may be prescribed by the resolutions creating such committee. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board of Directors. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. The Board of Directors shall have the power, at any time for any reason, to change the members of any such committee, to fill vacancies, and to discontinue any such committee. (b) MINUTES OF MEETINGS. Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required. (c) AUDIT COMMITTEE. From and after the annual meeting of stockholders in 1996, the Board of Directors shall appoint an Audit Committee consisting of at least two directors, none of whom shall be employees of the Corporation. The Audit Committee shall review the financial affairs and procedures of the Corporation from time to time with management and meet with the auditors of the Corporation to review the financial statements and procedures. SECTION 8. INTERESTED DIRECTORS. In addition to the statutory and corporate common law of Delaware, no contract or transaction between the Corporation and one or more of its directors or officers, or between the Corporation and any other Corporation partnership, association, or other organization in which one or more of its directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board of Directors or committee thereof which authorizes the contract or transaction, or solely because his or their votes are counted for such purpose if (i) the material facts as to his or their relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the Board of Directors or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (ii) the material facts as to his or their relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (iii) the contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified, by the Board of Directors, a - 9 - committee thereof or the stockholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction. ARTICLE IV OFFICERS SECTION 1. OFFICERS. (a) NUMBER. The officers of the Corporation shall be chosen by the Board of Directors and may include a Chairman of the Board of Directors (who must be a director as chosen by the Board of Directors) and shall include a Chief Executive Officer, a President, a Vice President, a Secretary, a Chief Financial Officer, and a Treasurer. The Board of Directors also may appoint one or more Assistant Secretaries or Assistant Treasurers and such other officers and agents with such powers and duties as it shall deem necessary. Any Vice President may be given such specific designation as may be determined from time to time by the Board of Directors. Any number of offices may be held by the same person, unless otherwise required by law, the Certificate of Incorporation or these Bylaws. The Board of Directors may delegate to any other officer of the Corporation the power to choose such other officers and to describe their respective duties and powers. (b) ELECTION AND TERM OF OFFICE. The officers shall be elected annually by the Board of Directors at its regular meeting following the annual meeting of the stockholders and each officer shall hold office until the next annual election of officers and until such officer's successor is elected and qualified, or until such officer's death, resignation or removal. Any officer may be removed at any time, with or without cause, by a vote of the majority of the whole Board of Directors. Any vacancy occurring in any office may be filled by the Board of Directors. (c) SALARIES. The salaries of all officers of the Corporation shall be fixed by the Board of Directors or a Committee thereof from time to time. SECTION 2. CHAIRMAN OF THE BOARD OF DIRECTORS. The Chairman of the Board of Directors, if there be a chairman, shall preside at all meetings of the stockholders and the Board of Directors and shall have such other power and authority as may from time to time be assigned by the Board of Directors. SECTION 3. CHIEF EXECUTIVE OFFICER The Chief Executive Officer shall be the senior executive officer of the Corporation and shall preside at all meetings of the stockholders and the Board of Directors (if a Chairman of the Board has not been elected) and shall see that all orders and resolutions of the Board of - 10 - Directors are carried into effect. Subject to the provisions of these Bylaws and to the direction of the Board of Directors, the President shall have the general and active management of the business of the Corporation, may execute all contracts and any mortgages, conveyances or other legal instruments in the name of and on behalf of the Corporation, but this provision shall not prohibit the delegation of such powers by the Board of Directors to some other officer, agent or attorney-in-fact of the Corporation SECTION 4. PRESIDENT In the event the Corporation does not appoint a Chief Executive Officer, the President shall assume all of the duties and responsibilities of the Chief Executive Officer, subject to the provisions of the bylaws and the direction of the Board of Directors. In all other respects the President shall be the chief operating officer of the Corporation, responsible for the day to day operation of the Corporation and other functions as may be delegated by the Board of Directors or Chief Executive Officer. SECTION 5. VICE PRESIDENTS. In the absence or disability of the President, the Vice Presidents in order of their rank as fixed by the Board of Directors, or if not ranked, the Vice President designated by the Board of Directors, shall perform all the duties of the President, and when so acting shall have all the powers of, and be subject to all the restrictions upon, the President. The Vice Presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them, respectively, by the Board of Directors or these Bylaws. SECTION 6. SECRETARY AND ASSISTANT SECRETARIES. The Secretary shall record or cause to be recorded, in books provided for the purpose, minutes of the meetings of the stockholders, the Board of Directors and all committees of the Board of Directors; see that all notices are duly given in accordance with the provisions of these Bylaws as required by law; be custodian of all corporate records (other than financial) and of the seal of the Corporation, and have authority to affix the seal to all documents requiring it and attest to the same; give, or cause to be given, notice of all meetings of the stockholders and special meetings of the Board of Directors; and, in general, shall perform all duties incident to the Office of Secretary and such other duties as may, from time to time, be assigned to him by the Board of Directors or by the President. At the request of the Secretary, or in the Secretary's absence or disability, any Assistant Secretary shall perform any of the duties of the Secretary and, when so acting, shall have all the powers of, and be subject to all the restrictions upon, the Secretary. SECTION 7. TREASURER AND ASSISTANT TREASURERS. The Treasurer shall be the Chief Financial Officer of the Corporation, and shall keep or cause to be kept the books of account of the Corporation and shall render statements of the - 11 - financial affairs of the Corporation in such form and as often as required by the Board of Directors or the President. The Treasurer, subject to the order of the Board of Directors, shall have custody of all funds and securities of the Corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. He shall disburse the funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements. The Treasurer shall perform all other duties commonly incident to his office and shall perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. At the request of the Treasurer, or in the Treasurer's absence or disability, any Assistant Treasurer may perform any of the duties of the Treasurer and, when so acting, shall have all the powers of, and be subject to all the restrictions upon, the Treasurer. Except where by law the signature of the Treasurer is required, each of the Assistant Treasurers shall possess the same power as the Treasurer to sign all certificates, contracts, obligations and other instruments of the Corporation. ARTICLE V INDEMNIFICATION AND INSURANCE SECTION 1. ACTIONS AGAINST DIRECTORS AND OFFICERS. The Corporation shall indemnify to the full extent permitted by, and in the manner permissible under, the laws of the State of Delaware any person made, or threatened to be made, a party to an action or proceeding, whether criminal, civil, administrative or investigative, by reason of the fact that such person or such person's testator or intestate is or has a director or officer of the Corporation or any predecessor of the Corporation, or served any other enterprise as a director or officer at the request of the Corporation or any predecessor of the Corporation. SECTION 2. CONTRACT. The provisions of Section 1 of this Article V shall be deemed to be a contract between the Corporation and each director and officer who serves in such capacity at any time while such Bylaw is in effect, and any repeal or modification thereof shall not affect any rights or obligations then existing with respect to any state of facts then or theretofore existing or any action, suit or proceeding theretofore or thereafter based in whole or in part upon any such state of facts. SECTION 3. NON-EXCLUSIVITY. The rights of indemnification provided by this Article V shall not be deemed exclusive of any other rights to which any director or officer of the Corporation may be entitled apart from the provisions of this Article V. SECTION 4. INDEMNIFICATION OF EMPLOYEES AND AGENTS. - 12 - The Board of Directors in its discretion shall have the power on behalf of the Corporation to indemnify any person, other than a director or officer, made a party to any action, suit or proceeding by reason of the fact that such person or such person's testator or intestate, is or was an employee or agent of the Corporation. SECTION 5. INSURANCE. Upon a resolution or resolutions duly adopted by the Board of Directors of the Corporation, the Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation against any liability asserted against such person and incurred by him in any capacity, or arising out of his capacity as such, whether or not the Corporation would have the power to indemnify such person against such liability under the provisions of applicable law, the Certificate of Incorporation or these Bylaws. ARTICLE VI CERTIFICATES FOR SHARES AND THEIR TRANSFER SECTION 1. CERTIFICATES FOR SHARES. Unless otherwise provided by a resolution of the Board of Directors, the shares of the Corporation shall be represented by a certificate. The certificates of stock of the Corporation shall be numbered and shall be entered in the books of the Corporation as they are issued. They shall exhibit the Holder's name and number of shares and shall be signed by or in the name of the Corporation by (a) the Chairman of the Board of Directors, the President or any Vice President and (b) the Treasurer, any Assistant Treasurer, the Secretary or any Assistant Secretary. Any or all of the signatures on a certificate may be facsimile. In case any officer of the Corporation transfer agent or registrar who has signed, or whose facsimile signature has been placed upon such certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, such certificate may nevertheless be issued by the Corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issuance. SECTION 2. CLASSES OF STOCK. (a) If the Corporation shall be authorized to issue more than one class of stock or more than one series of any class, the powers, designations, preferences and relative participating, optional or other special rights of each class of stock or series thereof and the qualification, limitations, or restrictions of such preferences or rights shall be set forth in full or summarized on the face or back of the certificate that the Corporation shall issue to represent such class or series of stock; provided, that, except as otherwise provided in Section 202 of the General Corporation Law of the State of Delaware, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate a statement that the Corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences - 13 - and relative participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences or rights. (b) Within a reasonable time after the issuance or transfer of uncertified stock, the Corporation shall send to the registered owner thereof a written notice containing the information required to be set forth or stated on certificates pursuant to applicable law (including Sections 151, 156, 202(a), or 218(a) of the General Corporation Law of the State of Delaware) or a statement that the Corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences or rights. SECTION 3. TRANSFER. Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Upon receipt of proper transfer instructions from the registered owner of uncertificated shares such uncertificated shares shall be cancelled, issuance of new equivalent uncertificated shares or certificated shares shall be made to the person entitled thereto and the transaction shall be recorded upon the books of the Corporation. SECTION 4. RECORD OWNER. The Corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof, and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share on the part of any other person, whether or not it shall have express or other notice thereof, save as expressly provided by the laws of the State of Delaware. SECTION 5. LOST CERTIFICATES. The Board of Directors may direct a new certificate or certificates or uncertificated shares to be issued in place of any certificate or certificates theretofore issued by the Corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates or uncertificated shares, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof require the owner of such lost, stolen or certificate or certificates, or his legal representative, to advertise the same in such manner as the Board of Directors shall require and to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen or destroyed. - 14 - ARTICLE VII MISCELLANEOUS SECTION 1. RECORD DATE. (a) In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of the stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty nor less than ten days prior to the date of such meeting nor more than sixty days prior to any other action. If not fixed by the Board of Directors, the record date shall be determined as provided by law. (b) A determination of stockholders of record entitled to notice of or to vote at a meeting of the stockholders shall apply to any adjournments of the meeting, unless the Board of Directors files a new record date for the adjourned meeting. (c) Holders of stock on the record date are entitled to notice and to vote or to receive the dividend, distribution or allotment of rights or to exercise the rights, as the case may be, notwithstanding any transfer of the shares on the books of the Corporation after the record date, except as otherwise provided by agreement or by law, the certificate of Incorporation or these Bylaws. SECTION 2. EXECUTION OF INSTRUMENTS. The Board of Directors may, in its discretion, determine the method and designate the signatory officer or officers, or other persons, to execute any corporate instrument or document or to sign the corporate name without limitation, except where otherwise provided by law, the Certificate of Incorporation or these Bylaws. Such designation may be general or confined to specific instances. SECTION 3. VOTING OF SECURITIES OWNED BY THE CORPORATION. All stock and other securities of other corporations held by the Corporation shall be voted, and all proxies with respect thereto shall be executed, by the person so authorized by resolution of the Board of Directors, or, in the absence of such authorization, by the President. SECTION 4. CORPORATE SEAL. The Corporation shall have a corporate seal in such form as shall be prescribed and adopted by the Board of Directors. - 15 - SECTION 5. CONSTRUCTION AND DEFINITIONS. Unless the contest requires otherwise, the general provisions, rules of construction and definitions in the General Corporation Law of the State of Delaware and the Certificate of Incorporation shall govern the construction of these Bylaws. SECTION 6. AMENDMENTS. Subject to the provisions of the Certificate of Incorporation and these Bylaws, these Bylaws may be altered, amended or repealed at any annual meeting of the stockholders (or at any special meeting thereof duly called for that purpose) by a majority vote of the shares represented and entitled to vote thereat; provided, that in the notice of any such meeting, notice of such purpose shall be given. Subject to the laws of the State of Delaware, the Certificate of Incorporation and these Bylaws, the Board of Directors may by majority vote of the whole Board of Directors amend these Bylaws, or enact such other Bylaws as in their judgment may be advisable for the regulation of the conduct of the affairs of the Corporation. EX-10.01 4 EXHIBIT 10-01 EXECUTIVE EMPLOYMENT AGREEMENT This Employment Agreement ("Agreement") is effective as of March 8, 1996, between DIGITAL LIGHTWAVE, INC., a Delaware corporation ("Company"), and DOUG C. DOHRING ("Employee"). RECITALS The Company desires to employ Employee and Employee desires to accept such employment in an executive capacity as President, in accordance with the terms and conditions set forth below. AGREEMENTS In consideration of the mutual covenants contained herein, and for other good and valuable consideration, receipt of which is acknowledged by the parties, the Company and Employee agree as follows: 1. TERM OF EMPLOYMENT: The Company employs Employee and Employee accepts employment with the Company for a period of one year beginning on the effective date of this Agreement as set forth above ("Initial Employment Term"). This Agreement shall be renewed automatically for an additional one-year period on the first anniversary date and on each subsequent one-year anniversary date unless the Company's Board of Directors notifies Employee in writing or Employee notifies the Company's Board of Directors in writing that such renewal shall not take place. Said notice shall be given not less than thirty (30) days prior to any such anniversary date. In the event of any extension of this Agreement for one or more consecutive one (1) year terms, the terms of this Agreement shall be deemed to continue in effect for the term of such extension ("Extended Employment Term"). The Initial Employment Term and the Extended Employment Term will be collectively referred to as the "Employment Term," unless otherwise specified by the Company's Board of Directors. Any Extended Employment Term must be in writing, signed by the Chief Executive Officer of the Company. 2. DUTIES OF EMPLOYEE: Employee shall serve as the President of the Company throughout the Employment Term. In his capacity as President, Employee shall perform such duties as may be delegated to him from time-to-time by the Chief Executive Officer. Such duties may include, but shall not be limited to, overseeing the sales, marketing and production functions of the Company. 3. EXCLUSIVE SERVICES: Employee's services shall be exclusive to the Company, and Employee shall devote such portion of his productive time and attention to the business of the Company as shall be reasonably necessary to carry out his duties during the Employment Term. Employee shall not engage in any other businesses, duties, or pursuits whatsoever, or directly or indirectly render any services of a business, commercial, or professional nature to any other person or organization, whether for compensation or otherwise, unless such activity is fully disclosed to the Company and approved by the Company's Board of Directors. This Agreement shall not be interpreted to prohibit Employee from making passive personal investments or conducting private business affairs if such activities do not materially interfere with the services required under this Agreement. Notwithstanding Employee's agreement to deliver exclusive services to the Company, as set forth in this Section 3, the parties further agree that while employed by Company, Employee may remain as Chairman of the Board of Directors of The Dohring Company, and perform all necessary duties in connection with or incidental to such position; provided however, that such duties shall not in any respect materially interfere with Employee's duties and obligations as President of the Company pursuant to this Agreement. 4. NON-COMPETITION: To induce the Company to enter into this Agreement, Employee agrees that: A. DEFINED TERMS: The principal business of the Company is the design, manufacturing and sale of test instrumentation for optical transmission equipment used in telecommunications (the "Business"). The region serviced by the Company is a geographic area which currently includes the United States of America (the "Region"). Employee's employment with the Company will bring Employee into close contact with the members and other customers of the Company and with the trade secrets and other confidential affairs of the Company. Employee has not previously been employed in the telecommunications industry and will derive substantial information concerning the telecommunication industry, key customers, technology and opprtunities for related businesses as a result of his employment by the Company and at the expense of the Company. The Company has a significant interest in protecting its proprietary interest in, and the good will associated with, the foregoing. As used in this Section 4, the term "Restricted Period" means the period of three years following termination of Employee's employment with the Company (whether for cause, upon expiration of the employment period or otherwise). B. PERIOD OF EMPLOYMENT: During the term of Employee's employment hereunder, Employee shall not, directly or indirectly, either as an employee, employer, consultant, agent, principal, partner, stockholder, corporate officer, director, or in any other individual or representative capacity, engage or participate in or acquire, hold, or retain any interest in any business which is competitive with the Business of the Company in any location, or its shareholders or any business selling to or doing business with the Company, unless such participation or interest is fully disclosed to the Company and approved by a majority of the Company's Board of Directors. The foregoing notwithstanding, Employee may acquire, hold or retain equity ownership of any publicly held company, provided that such equity ownership does not exceed five percent (5%) of the issued and outstanding shares of the voting stock of such company., C. RESTRICTED PERIOD: During the Restricted Period, unless the Company and Employee shall otherwise agree in writing, Employee shall not, (i) compete directly 2 with the Company in the Region; (ii) enter into the employ of, or render any services to, as an independent contractor or otherwise, any person or entity engaged in the Business (or any aspect thereof) in competition with the Company in the Region; (iii) become interested, as an individual, partner, co-venturer, shareholder, officer, director, employee, principal, agent, trustee or in any other relationship or capacity, in any person or entity engaged in the Business (or any aspect thereof) in competition with the Company in the Region; or (iv) on his own behalf or on behalf of or as an employee or agent of any other person or business, contact or approach any person or business wherever located, with a view to selling or assisting others to sell products or services substantially competing with the Business. The Company and Employee shall meet periodically to review the kinds of businesses each deems to be in competition with the Company in the Region. They shall seek to reach agreement as to such kinds of businesses solely for the purposes of this Agreement. Any such agreement shall not be indicative of what business or businesses may be in competition with the Company for any other purpose. In the event such periodic reviews do not occur, competing kinds of businesses shall be those contemplated by the term "Business" in Subsection 4.A. D. ENFORCEABILITY: If any portion of Section 4 is held to be illegal, unenforceable, void, or voidable, the remainder shall remain in full force and effect, and Section 4 shall be deemed altered and amended to the minimum extent necessary to bring it within the legal requirements of enforceability. 5. UNIQUE SERVICES: Employee hereby represents and agrees that the services to be performed under the terms of this Agreement are of a special, unique, unusual, extraordinary, and intellectual character that gives them a peculiar value, the loss of which cannot be reasonably or adequately compensated in damages in any action at law. Employee, therefore, expressly agrees that the Company, in addition to any rights or remedies that the Company might possess, shall be entitled to injunctive and other equitable relief to prevent or remedy a breach of this Agreement by Employee. 6. INDEMNIFICATION: The Company shall defend Employee against all claims made against Employee, and it shall indemnify Employee for all losses sustained by Employee, in direct consequence of the discharge of Employee's duties on the Company's behalf, including any claim brought against, or any loss sustained by, Employee in his role as an officer or employee of the Company based on a claim that any of the Company's products or services infringe a third party patent, copyright or trade secret; provided, that Employee promptly notifies the Company in writing of any such claim, gives the Company full authority for the conduct of such defense and participates in and aids the Company's counsel by giving whatever time, information, expertise and assistance is reasonably requested for such defense. Employee agrees to indemnify and hold the Company and its shareholders harmless, individually and collectively, from and against any liabilities, claims, costs, or expenses (including shareholders) as a result of actions by Employee in excess of his authority as set forth herein. 7. CONFIDENTIAL INFORMATION: Employee acknowledges that in his employment 3 hereunder, and during prior period of employment with the Company, he has occupied and will continue to occupy a position of trust and confidence. During the period of Employee's employment hereunder and the Restricted Period thereafter, Employee shall not, except as may be required to perform his duties hereunder or as required by applicable law, without limitation in time or until such information shall have become public other than by Employee's unauthorized disclosure, disclose to others or use, whether directly or indirectly, any Confidential Information regarding the Company. "Confidential Information" shall mean information about the Company, and its respective clients and customers that is not disclosed by the Company that was learned by Employee in the course of his employment by the Company, including (without limitation) any proprietary knowledge, trade secrets, data, formulae, information and client and customer lists, pricing policies, suppliers, market strategies, product development concepts and all papers, resumes, and records (including computer records) of the documents containing such Confidential Information. Employee acknowledges that such Confidential Information is specialized, unique in nature and of great value to the Company, and that such information gives the Company a competitive advantage. The Employee agrees to deliver or return to the Company, at the Company's request at any time or upon termination or expiration of his employment or as soon thereafter as possible, all documents, computer tapes and disks, records, lists, data, drawings, prints, notes and written information (and all copies thereof) furnished by the Company or prepared by the Employee during the term of his employment by the Company. 8. COMPENSATION: A. SALARY: The Company shall pay Employee an annual base salary of $ 200,000.00 ("Salary"), payable in equal biweekly or bi-monthly installments in accordance with the normal payroll procedures of the Company or at such other time or times as Employee and the Company shall agree. Except as otherwise provided herein, the Company's obligation to pay Employee's Salary under this Agreement shall cease as of the date of termination of Employee's employment. B. INCENTIVE COMPENSATION: Employee shall be eligible to an incentive bonus of up to $ 25,000.00 ("Bonus") during the first year after the effective date of this Agreement. Thereafter, Employee's eligibility for incentive compensation and the amount thereof shall be as determined by the Compensation Committee of the Board of Directors of the Company. C. STOCK OPTIONS: Employee shall be eligible to participate in the Company's 1996 Stock Option Plan on the terms and conditions as set forth in the Grant Agreement entered into by Employee and the Company on the same date as this Agreement. 9. TAX WITHHOLDING: The Company shall have the right to deduct or withhold from the compensation due to Employee hereunder any and all sums required for any and all federal, social security, state and local taxes, assessments or charges now applicable or that may be enacted and become applicable in the future. 4 10. EMPLOYEE BENEFITS: A. VACATION TIME AND SICK LEAVE: Employee shall be entitled to ten (10) days of vacation and five (5) days of sick leave without loss of compensation each year during the Employment Term. For the purposes of this paragraph, a year shall begin on the effective date of this Agreement as set forth above. In the event that Employee takes vacation time or sick leave in excess of the minimum numbers set forth in this paragraph, the Board of Directors shall determine whether or not Employee shall receive compensation for such excess days. Unless otherwise established by the Company's Board of Directors, in the event that Employee does not for any reason take the total amount of vacation time authorized during any year, he shall be deemed to have waived any entitlement to vacation time for that year. Sick days may not be accumulated. B. ADDITIONAL BENEFITS: Employee shall be entitled to all employment benefits made available to other employees of the Company and its affiliates, commensurate with Employee's position and title with the Company and the Employee's work location. Such benefits shall include, but are not limited to, such health insurance, disability insurance, life insurance, pension, and retirement plans as are adopted from time to time by the Company. 11. TERMINATION OF THE AGREEMENT: A. TERMINATION FOR CAUSE: The Company may terminate Employee's employment under this Agreement for "Cause," at any time, but only in the event of (a) Employee's conviction of a felony (provided, however, that following indictment for a felony, and prior to conviction, the Company may, without limiting or modifying in any other way its obligations under this Agreement, suspend Employee from the performance of his duties hereunder), or (b) a determination by the Company's Chief Executive Officer or Board of Directors, acting reasonably and in good faith, that Employee has (1) neglected his material duties or performed his material duties in an incompetent manner, (2) committed fraudulent or dishonest actions, or (3) deliberately injured or attempted to injure the Company; provided, however, that Employee shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to him a copy of a resolution duly adopted by the affirmative vote of a majority of the entire membership of the Board of Directors of the Company, finding that, in the good faith opinion of such board, he was guilty of or had engaged in conduct constituting Cause as set forth herein and specifying the particulars thereof in detail, or a notice of such from the Company's Chief Executive Officer B. EFFECT OF TERMINATION FOR CAUSE: In the event of termination of Employee for cause as set forth in Subsection 11.A, or a voluntary termination by Employee in breach of this Agreement without the consent of the Company, Employee shall have no right to any bonuses, salaries, benefits or entitlements other than those required by law or specifically provided under the terms of the applicable plan document. Payment of any further bonuses or other salaries claimed by Employee will be in the sole and absolute 5 discretion of the Company, and Employee shall have no entitlement thereto. C. DISABILITY AND DEATH: If, during the Employment Term, Employee should die or suffer any physical or mental illness that renders him incapable of fulfilling his obligations under this Agreement, and such incapacity exists or may reasonably be expected to exist for more than ninety (90) calendar days in the aggregate, the Company may, upon five (5) calendar days written notice to Employee, terminate this Agreement. The determination of the Company that Employee is incapable of fulfilling his obligations under this Agreement shall be final and binding. In the event of termination under this Subsection 11.C, Employee, or his estate, shall be entitled to an amount equal to one (1) months' Salary and any other accrued compensation, plus such additional benefits, if any, as may be approved by the Company's Board of Directors or Chief Executive Officer. Employee, or his estate, shall, upon termination under the terms of this Subsection 11.C, be further entitled to additional compensation, to be calculated on a pro rata basis according to the number of accrued vacation days, if any, not taken by Employee during the year defined for the purposes of vacation, in which Employee was terminated. D. VOLUNTARY TERMINATION BY EMPLOYEE AT THE END OF THE EMPLOYMENT TERM: In the event of voluntary termination by Employee at the end of the Initial Employment Term, or any Extended Employment Term, Employee shall be entitled only to those amounts that have accrued to the date of termination or are expressly payable under the terms of the Company's applicable benefit plans or are required by applicable law. The Company may, in its sole and absolute discretion, confer such other benefits or payments as it determines, but Employee shall have no entitlement thereto. E. TERMINATION BY EMPLOYER AT THE END OF THE EMPLOYMENT TERM: In the event that Employee's employment is terminated by the Company at the end of the Initial Employment Term or any Extended Employment Term as a result of the Company's notice specified in Section 1 above, Employee shall be treated as in Subsection 11.D, but in addition shall be entitled to the following severance benefits, depending on the Employee's length of service with the Company: Length of Service Severance Benefit ----------------- ----------------- 0 -24 months 2 months' Salary 24 or more months 4 months' Salary In addition to the severance benefit, such Employee shall be entitled to Company-provided health benefits (under the same terms as active employees) for the period of the severance benefit. The severance benefit may, at the option of the Company, be provided in a lump sum at the time of termination of employment or periodically over the severance benefit period. 6 F. TERMINATION BY EMPLOYER DURING THE EMPLOYMENT TERM: In the event of termination by the Employer other than at the end of the Initial Employment Term or Extended Employment Term, other than for cause under Subsection 11.A, in addition to the benefits payable to Employee under Subsection 11.E, above, Employee shall be entitled to one (1) month's additional severance benefit (i.e. one month's Salary plus health benefits) and a pro-rata portion of the stock options which would otherwise vest at the next anniversary date of this Agreement in accordance with the terms of any existing Grant Agreements between Employee and the Corporation. G. TERMINATION FOLLOWING MERGER OR ACQUISITION: If the Company merges or consolidates with another company, if substantially all of the assets of the Company are sold, or if a majority of the outstanding stock of the Company is acquired by another company, the Company shall assign this Agreement and all of its rights and obligations hereunder to the acquiring or surviving entity, provided that such entity shall assume in writing all of the obligations of the Company. If Employee's employment is subsequently terminated by the Company or surviving entity other than for cause as described in Subsection 11.B, Employee shall be entitled to severance benefits as described below based on length of service with the Company: Length of Service Severance Benefits ----------------- ------------------ 0-12 months 6 months' Salary plus health benefits 12 months or more 12 months' Salary plus health benefits In addition to the foregoing, any outstanding stock options (including substituted stock options of the acquiring or surviving company in such merger or acquisition) which have not vested in accordance with their terms will become fully vested and exercisable at the time of such termination. For purposes of this Subsection 11.G, Employee shall be entitled to treat a material demotion in title or function or a physical relocation of worksite of more than 35 miles as a termination under this Subsection 11.G, but only if Employee expressly so notifies the Company and terminates his employment hereunder within thirty (30) days of such demotion or relocation. If Employee is offered a substantially similar position with the surviving entity and no physical relocation (beyond a 35-mile radius from Employee's regular worksite) is required by such position, Employee's refusal to accept such position shall not be treated as subject to this Subsection 11.G, but rather shall be treated as a voluntary termination by Employee under Subsections 11.B or 11.D, as applicable. H. SUPPLEMENTAL BENEFIT: In addition to the severance benefit Employee is entitled to receive under Subsection 11.E or 11.F above, Employee is also entitled to receive a supplemental benefit in exchange for providing the Company with a valid waiver and release 7 agreement, in a form acceptable to the Company. The terms of such waiver and release agreement, the timing of delivery thereof by Employee, its revocability and other aspects thereof shall be determined by the Company in its sole discretion. The supplemental benefit shall be determined based on Employee's length of service with the Company, as follows: Length of Service Supplemental Benefit ----------------- -------------------- 0 - 6 months 1 months' Salary 6 - 24 months 3 months' Salary Over 24 months 7 months' Salary The supplemental benefit shall be payable as a lump-sum amount upon termination, or spread over the period of months of benefit payable, as the Company shall determine. I. NONCOMPETITION; CONFIDENTIALITY: Nothing in this Section 11 shall affect the rights of the parties under Sections 4 and 7 above. 12. ASSIGNMENT OF INTELLECTUAL PROPERTY RIGHTS: A. DEFINITION OF "INVENTIONS": As used herein, the term "Inventions" shall mean all inventions, discoveries, improvements, trade secrets, formulas, techniques, data, programs, systems, specifications, documentation, algorithms, flow charts, logic diagrams, source codes, processes, and other information, including works-in-progress, whether or not subject to patent, trademark, copyright, trade secret, or mast work protection, and whether or not reduced to practice, which are made, created, authored, conceived, or reduced to practice by Employee, either alone or jointly with others, during the period of employment with the Company and for one year following the termination of Employee's employment with the Company which (1) relate to the actual or anticipated business, activities, research, or investigations of the Company, or (2) result from or is suggested by work performed by Employee for the Company (whether or not made or conceived during normal working hours or on the premises of the Company), or (3) which result, to any extent, from use of the Company's premises or property. B. WORK FOR HIRE: Employee expressly acknowledges that all copyrightable aspects of the Inventions are to be considered "works made for hire" within the meaning the Copyright Act of 1976, as amended (the "Act"), and that the Company is to be "author" within the meaning of such Act for all purposes. All such copyrightable works, as well as all copies of such works in whatever medium fixed or embodied, shall be owned exclusively by the Company as of its creation, and Employee hereby expressly disclaims any and all interest in any of such copyrightable works and waives any right of DROIT MORALE or similar rights. 8 C. ASSIGNMENT: Employee acknowledges and agrees that all Inventions constitute trade secrets of the Company or the member of the Company, as applicable, and shall be the sole property of the Company, as applicable or any other entity designated by the Company. In the event that title to any or all of the Inventions or any part or element thereof, may not, by operation of law, vest in the Company, as applicable, or such Inventions may be found as a matter of law not to be "works made for hire" within the meaning of the Act, Employee hereby conveys and irrevocably assigns to the Company, as applicable, without further consideration, all his right, title and interest, throughout the universe and in perpetuity, in all Inventions and all copies of them, in whatever medium fixed or embodied, and in all written records, graphics, diagrams, notes, or reports relating thereto in Employee's possession or under his control, including, with respect to any of the foregoing, all rights of copyright, patent, trademark, trade secret, mask work, and any and all other proprietary rights therein, the right to modify and create derivative works, the right to invoke the benefit of any priority under any international convention and all rights to register and renew same. D. PROPRIETARY NOTICES; NO FILINGS; WAIVER OF MORAL RIGHTS: Employee acknowledges that all Inventions shall at the sole option of the Company bear the Company's patent, copyright, trademark, trade secret, and mask work notices. Employee agrees not to file any patent, copyright, or trademark applications relating to any Invention, except with prior written consent of an authorized representative of the Company. Employee hereby expressly disclaims any and all interest in any Inventions and waives any right of DROIT MORALE or similar rights, such as rights of integrity or the right to be attributed as the creator of the Invention. E. FURTHER ASSURANCES: Employee agrees to assist the Company, or any party designated by the Company, promptly on the Company's request, whether before or after the termination of employment however such termination may occur, in perfecting, registering, maintaining, and enforcing, in any jurisdiction, the Company's rights in the Inventions by performing all acts and executing all documents and instruments deemed necessary or convenient by the Company, including, by way of illustration and not limitation: a. Executing assignments, applications, and other documents and instruments in connection with (1) obtaining patents, copyrights, trademarks, mask works, or other proprietary protections for the Inventions and (2) confirming the assignment to the Company of all right, title, and interest in the Inventions or otherwise establishing the Company's exclusive ownership rights therein. b. Cooperating in the prosecution of patent, copyright, trademark and mask work applications, as well as in the enforcement of the Company's rights in the Inventions, including, but not limited to, testifying in court or before any patent, copyright, trademark or mask work registry office, or any other administrative body. 9 Employee will be reimbursed for all out-of-pocket costs incurred in connection with the foregoing, if such assistance is requested by the Company after the termination of employment. In addition, to the extent that, after the termination of employment for whatever reason, Employee's technical expertise shall be required in connection with the fulfillment of the aforementioned obligations, the Company will compensate Employee at a reasonable rate for the time actually spent by Employee at the Company's request rendering such assistance. F. POWER OF ATTORNEY: Employee hereby irrevocably appoints the Company to be his Attorney-in-Fact in his name and on his behalf to execute any document and to take any action and generally to use his name for the purpose of giving to the Company the full benefit of the assignment provisions set forth above. G. CONSENT TO USE OF NAME: The Company reserves the right (but shall not have the obligation) to publicize Employee's name and background in connection with the marketing of the Inventions or the enforcement of the Company's rights therein. Employee is responsible for supplying to the Company his resume or curriculum vitae for such purposes. Employee agrees that the Company shall have the sole control over the type style, type size, or placement of his name on any materials, or over the final content of any biography used in said material. H. DISCLOSURE OF INVENTIONS: Employee will make full and prompt disclosure to the Company of all Inventions subject to assignment to the Company, and all information relating thereto in Employee's possession or under his control as to possible applications and use thereof. I. NO VIOLATION OF THIRD PARTY RIGHTS: Employee represents, warrants, and covenants that he: a. will not, in the course of employment, infringe upon or violate any proprietary rights of any third party (including, without limitation, any third party confidential relationships, patents, copyrights, mask works, trade secrets, or other proprietary rights); b. is not a party to any conflicting agreements with third parties which will prevent him from fulfilling the terms of employment and the obligations of this Agreement; c. does not have in his possession any confidential or proprietary information or documents belonging to others and will not disclose to the Company, use, or induce the Company to use, any confidential or proprietary information or documents of others; and 10 d. agrees to respect any and all valid obligations which he may now have to prior employers or to others relating to confidential information, inventions, or discoveries which are the property of those prior employers or others, as the case may be. Employee has supplied or shall promptly supply to the Company a copy of each written agreement to which Employee is subject (other than any agreement to which the Company is a party) which includes any obligation of confidentiality, assignment of Inventions, or non-competition. Employee agrees to indemnify and save harmless the Company from any loss, claim, damage, costs or expenses of any kind (including without limitation, reasonable attorney's fees) to which the Company may be subjected by virtue of a breach by Employee of the foregoing representations, warranties, and covenants. J. OBLIGATIONS UPON TERMINATION: In the event of any termination of his employment, for whatever reason, Employee will promptly (1) deliver to the Company all physical property, discs, documents, notes, printouts, and all copies thereof and other materials in Employee's possession or under Employee's control pertaining to the business of the Company, including, but not limited to, those embodying or relating to the Inventions and the Confidential Information (as defined in Sections 7 and 12.A herein), (2) deliver to the Company's patent department or legal department or other person designated by the Company all notebooks and other data relating to research or experiments or other work conducted by Employee in the scope of employment or any Inventions made, created, authored, conceived, or reduced to practice by Employee, either alone or jointly with others, and (3) make full disclosure relating to any Inventions. If Employee would like to keep certain property, such as material relating to professional societies or other non-confidential material, upon the termination of employment with the Company, he agrees to discuss such issues with the Company. Where such a request does not put Confidential Information of the Company at risk, the Company will customarily grant the request. Upon termination of employment with the Company, Employee's obligations under this Section 12 shall survive and the Employee shall, if requested by the Company, reaffirm Employee's recognition of the importance of maintaining the confidentiality of the Company's Confidential Information and reaffirm all of the Employee's obligations set forth in this Section 12. 13. LIFE INSURANCE: The Company may, in its sole discretion, purchase such life insurance policies as it deems necessary or appropriate, naming Employee as the insured and the Company as beneficiary. Employee hereby agrees to submit to any reasonable medical examination required for the purchase of such insurance. 11 14. NOTICES: Any notices to be given hereunder by either party to the other shall be in writing and may be transmitted by personal delivery or by certified mail, return receipt requested. Mailed notices shall be addressed to the parties as follows: If notice is to the Company, to: Digital Lightwave, Inc. 601 Cleveland Street Clearwater, Florida 34615 Attn: Chief Executive Officer with copy to: Baker & McKenzie 701 Brickell Avenue, Suite 1600 Miami, Florida 33131 Attn: Seth P. Joseph, Esq. If notice is to Employee, to: Doug C. Dohring _______________ _______________ Either party may change its address by written notice in accordance with this Section 14. Notices delivered personally shall be deemed communicated as of the dates of actual receipt; mailed notices shall be deemed communicated as of forty-eight (48) hours after the date of mailing. 15. ARBITRATION: Any controversy between the parties involving the construction or application of any of the terms, provisions or conditions of this Agreement or in any way connected with Employee's employment with the Company, including but not limited to, breach of this Agreement, termination or discharge, claims of age, gender, race or disability discrimination, sexual harassment or civil rights violations shall, within thirty days of the written notice to the other party, be submitted to final and binding arbitration as follows: A. The arbitration shall be held in Miami, Florida. B. The arbitration shall be conducted by one arbitrator, who is a member of the American Arbitration Association ("AAA") and in accordance with the rules of the AAA then in effect, subject to the specific exceptions set out in Subsection 15.C, unless both parties agree otherwise. The arbitrator shall be chosen from a panel of persons with knowledge of and experience in employment and employment law issues. 12 C. Notwithstanding any rule of the AAA to the contrary, (l) the parties shall be entitled to conduct discovery (i.e., investigation of facts through deposition and other means) which shall be governed by the Florida Rules of Civil Procedure then in effect; (2) the arbitrator shall have all power and authority relating to such discovery as are allowed under the Florida Rules of Civil Procedure; (3) the arbitrator shall apply Florida substantive law; (4) at the election and at the expense of either party, a Court Reporter may record the hearing and such recording will be the official record of the proceeding; and (5) the arbitrator shall specify the basis for, and the type of damage award, if any, entered. D. The arbitrator's authority to order discovery and enter judgment shall be final and binding. It may be enforced through an order of a court of competent jurisdiction. Such judgment may be reviewed by a court only on the grounds of bias, improper conduct of the arbitrator, abuse of discretion, or violation of public policy. Notwithstanding the foregoing agreement to arbitrate, either party may apply to any court of competent jurisdiction for temporary restraining orders, preliminary injunctions, permanent injunctions, or other extraordinary relief, to remedy any actual or threatened unauthorized disclosure of confidential information or unauthorized use, copying, marketing, or distribution of confidential information. Such application shall be made before the arbitrator is appointed and assumes his or her responsibilities. The seeking of injunctive relief shall not operate to prejudice the rights of the parties to arbitrate their disputes. 16. ATTORNEYS' FEES AND COSTS: If either party fails to perform its respective obligations under this Agreement, and the other party is thereby required to incur attorneys' fees or other fees or costs, including but not limited to the costs of arbitration, the party so incurring such fees and costs shall be entitled to the payment of those fees and costs by the breaching party. 17. ENTIRE AGREEMENT: This Agreement supersedes any and all other agreements, either oral or in writing, between the parties hereto with respect to the employment of Employee by the Company and contains all of the covenants and agreements between the parties with respect to that employment in any manner whatsoever. Each party to this Agreement acknowledges that no representations, inducements, promises, or agreements, oral or written, have been made by any party, or anyone acting on behalf of any party, which are not embodied herein, and that no other agreement, statement, or promise not contained in this Agreement shall be valid or binding on either party. 18. MODIFICATIONS: Any modification of this Agreement shall be effective only if it is in writing and signed by both parties. 19. EFFECT OF WAIVER: The failure of either party to insist on strict compliance with any of the terms, covenants, or conditions of this Agreement by the other party shall not be deemed a waiver of that term, covenant, or condition, nor shall any waiver or relinquishment of any right or power at any one time or times be deemed a waiver or relinquishment of that right or power for all or any other times. 13 20. PARTIAL INVALIDITY: If any provision of this Agreement is held by a court of competent jurisdiction to be invalid, void, or unenforceable, the remaining provisions shall nevertheless continue in full force without being impaired or invalidated in any way, unless such partial invalidity materially affects the intent of the parties. 21. GOVERNING LAW: This Agreement shall be governed by and construed in accordance with the laws of the State of Florida. 22. ASSIGNABILITY: The rights and duties of either party hereunder shall not be assignable by either party, except that this Agreement and all rights and obligations hereunder may be assigned by the Company to, and be assumed by, any corporation or other business entity which succeeds to all or substantially all of the assets and business of the Company through merger, consolidation, acquisition of assets, or other corporate reorganization. 23. SURVIVAL: The covenants, agreements, representations and warranties contained in or made pursuant to this Agreement shall survive Employee's termination of employment irrespective of any investigation made by or on behalf of any party. IN WITNESS WHEREOF, the parties have executed this Agreement effective as of the day and year first above written. DIGITAL LIGHTWAVE, INC. By: /s/ ------------------------------- Name: ------------------------------ Title: ----------------------------- EMPLOYEE: /s/ ------------------------------------ Doug C. Dohring 14 EX-10.02 5 EXHIBIT 10.02 ATRIUM AT CLEARWATER, LIMITED OFFICE LEASE AGREEMENT THIS OFFICE LEASE AGREEMENT (this "Lease") is made and entered into on the ____ day of ___________, 199__ (the "Effective Date"), by and between ATRIUM AT CLEARWATER, LIMITED, a Florida Limited Partnership ("Landlord") and DIGITAL LIGHTWAVE, INC., as ("Tenant"). W I T N E S S E T H: 1. DEFINITIONS. Landlord and Tenant hereby agree that the words and phrases herein shall have the following meanings: a) "Base Rental" shall mean the sum of $124,736.00 per annum payable $10,394.67 monthly and as adjusted pursuant to Paragraph 5 hereof together with applicable Florida sales tax. NOTWITHSTANDING ANYTHING TO THE CONTRARY HEREIN TENANT SHALL OBTAIN RENT ABATEMENT FOR THE SECOND (2ND) AND 1/2 OF THE THIRD (3RD) MONTH OF THE FIRST YEAR OF THE LEASE. b) "Building Standard" shall mean the type of materials Landlord designates from time to time to be the minimum quality to be used as the Leasehold Improvements as defined herein. c) "Building" or "Buildings" shall mean all office buildings now or hereafter located upon the real property described in Exhibit "A" attached hereto and made a part hereof (the "Property"). Reference to the "Property" in this Lease shall be deemed to include the Building and Landlord's interest in the Parking Garage unless expressly provided otherwise. The Building presently consists of one, nine-story structure containing 133,007 rentable square feet. The Landlord's interest in the Parking Garage presently represents an exclusive right to the third and fourth floors of the four (4) story Parking Garage located on the parcel identified in Exhibit "A-1". Landlord's interest in the Parking Garage may increase to all four levels of the Parking Garage and several adjacent uncovered parking spaces if Landlord exercises its option to acquire the remaining fifty percent (50%) interest in the Parking Garage from The City of Clearwater. The Building has an address of 601 CLEVELAND STREET, CLEARWATER, FLORIDA 34615, and is located at the Southeast corner of Cleveland Street and Park Street. The Building is known as the "Atrium at Clearwater" and/or the "Sun Bank Building". The Parking Garage has an address of 613 PARK STREET, CLEARWATER, FLORIDA 34615 and is located ACROSS THE STREET, TO THE SOUTH OF THE BUILDING. The Parking Garage is sometimes referred to as the "Park Street Garage". d) "Commencement Date" shall mean NOVEMBER 1, 1994, subject to adjustment as provided in Paragraphs 3(b) and 3-C- hereof. e) "Common Areas" shall mean those areas of the Building devoted to corridors, atrium(s), walkways, overhead-covered walkway to the Parking Garage, elevator foyers and elevator cabs, restrooms, mechanical rooms, janitorial closets, electrical and telephone closets, vending areas and other similar facilities to be utilized for the common use or benefit of tenants generally and/or the public, provided Landlord shall have the right, at any time, to change the size and location of the Common Areas. f) "Existing Improvements" means the improvements in the Premises on the Effective Date. g) "Exterior Common Areas" shall mean the portions of the Property not located within the Building and which are provided and maintained for the common use and benefit Page 1 of Landlord and tenants of the Building and their respective employees, invitees and licensees, including, without limitation, all unassigned parking areas, and all streets, sidewalks and landscaped areas. h) "Hazardous Materials" shall mean any substance defined in the definitions of "hazardous substances", "hazardous wastes", "hazardous materials", "toxic substances", "contaminants", or "pollutants" under applicable federal, state, or local laws, ordinances, codes, or regulations now or hereafter in effect. i) "Leasehold Improvements" shall mean those improvements, if any, which Landlord has agreed to complete as set forth herein or in the Work Letter Agreement attached hereto as Exhibit "C" (the "Work Letter"). j) "Lease Term" shall mean a term commencing on the Commencement Date (NOVEMBER 1, 1994) and continuing until OCTOBER 31, 1997. k) "Lease Year" shall mean the 12 month period starting on the first day of the first full month following the Commencement Date and thereafter, each successive 12-month period. l) "Normal Business Hours" shall mean 8:00 A.M. - 6:00 P.M., Monday through Friday, excluding legal holidays and from 9:00 a.m. to 1:00 p.m. on Saturdays. m) "Premises" shall mean Suite 500 of the Building as outlined on the floor plan attached to this Lease as Exhibit "B" and made a part hereof. n) "Rentable Floor Area of the Premises" shall mean 7,796 square feet of floor area which includes the interior useable area of the Premises, as herein defined, and a pro rata portion of the Common Areas. The ratio of the total Common Areas relative to the Rentable Floor Area shall not vary after the effective date if Landlord changes the size of the Common Areas. o) "Security Deposit" shall mean the sum of $10,394.67 which has been paid to Landlord by Tenant concurrent with the execution of this Lease by Tenant (See paragraph 38 below). p) "Service Areas" shall mean those areas within the exterior walls of the Building used for elevator mechanical rooms, building stairs, fire towers, elevator shafts, flues, vents, stacks, pipe shafts and vertical ducts (but shall not include any such areas designated for the exclusive use or benefit of any Tenant). Landlord shall have the right, at any time and from time to time, to change the size or location of the Service Areas. q) "Total Rentable Area" shall mean 133,007 square feet which includes the total floor area within the exterior walls of the Building less the Service Areas. 2. LEASE GRANT. Subject to and upon the terms, provisions and conditions herein set forth, and each in consideration of the covenants of the other hereunder, Landlord leases to Tenant and Tenant leases from Landlord the Premises. 3. LEASE TERM. a) This Lease shall continue in force during the Lease Term until terminated or extended as provided herein. b) If by the Commencement Date, the Leasehold Improvements have not been substantially completed pursuant to the Work Letter or the terms set forth herein, due to any act, omission, delay or default by Tenant or anyone acting under or for Tenant, the Landlord shall have no liability for such failure to complete, and Tenant's obligations under this Lease Page 2 (including its obligations to pay Rent) shall nonetheless commence as of the Commencement Date. Furthermore, Tenant has not obtained all of the local governmental approvals in order to open for business, the Commencement Date shall be delayed until Tenant obtains such approvals; however, this delay shall be no more than thirty (30) days and the Commencement Date shall be no later than SEPTEMBER 1, 1995, regardless of the date of Tenant's actual occupancy of the Premises. PROVIDED THAT LOCAL GOVERNMENT IS NOT SHUT DOWN DUE TO STATE OF EMERGENCY OR OTHER SUCH UNREASONABLE BUREAUCRATIC DELAYS. c) If, however, by the Commencement Date, the Leasehold Improvements are not substantially completed due to causes other than acts, omissions, delays or defaults by Tenant or anyone acting under or for Tenant, then as Tenant's sole and exclusive remedy for the delay in Tenant's occupancy of the Premises, the Commencement Date shall be postponed and the Rent payments deferred until the earlier of: (i) The date of actual occupancy of the Premises by Tenant; or (ii) Three days after the date the Improvements are substantially completed and notice thereof is given to Tenant. d) If Landlord does not complete the Premises on or before DECEMBER 31, 1994, then Tenant shall have the option to terminate this Lease UPON THIRTY (30) DAYS PRIOR WRITTEN NOTICE OF SUCH ELECTION PROVIDED THAT LANDLORD DOES NOT COMPLETE CONSTRUCTION AND DELIVER PREMISES WITHIN SUCH THIRTY (30) DAY PERIOD. IF LANDLORD FAILS TO COMPLETE SAID CONSTRUCTION OF PREMISES WITHIN SUCH THIRTY (30) DAY PERIOD ALL DEPOSITED MONIES SHALL BE REFUNDED. 4. USE. a) The Premises shall be used and occupied by Tenant solely for the purpose of THOSE USES PERMITTED BY LOCAL GOVERNMENT REGULATIONS use and for no other purpose. Tenant agrees not to use or permit the use of the Premises for any purpose which is illegal, or which, in Landlord's reasonable opinion, creates a nuisance or which would increase the cost of insurance coverage with respect to the Property. b) Tenant represents and warrants that Tenant will keep the Premises free from contamination by Hazardous Materials and that the Premises and the activities to be conducted thereon will not pose any hazard to human health or violate any applicable current federal, state, or local laws, ordinances, rules, codes, or regulations pertaining to Hazardous Materials or industrial hygiene or environmental conditions (collectively referred to herein as "Environmental Laws"). Tenant at its sole cost and expense shall conform to all existing and any future changes in the Environmental Laws, whether foreseen or unforeseen, and will take all direct and indirect actions required in order to keep its Premises or any activities conducted therein free from any violation of any current or future applicable Environmental Laws. Tenant agrees to indemnify, defend and hold Landlord (and Landlord's partners, affiliates, directors, officers, shareholders, employees, mortgagees, heirs successors and assigns, as applicable) harmless from and against any and all claims, losses, damages (including, without limitation, unforeseeable consequential and incidental damages), fines or penalties resulting from the violation of any Environmental Laws applicable to the Building and/or the Premises which have been caused by or necessitated by the acts of Tenant and/or its agents. All sums paid and costs incurred by Landlord with respect to the foregoing matters shall be payable by Tenant to Landlord as additional rent due on demand. c) Landlord hereby represents and warrants to Tenant that to the best of Landlord's knowledge as of the date of this Lease, no hazardous material has been leaked, spilled, discharged or incorporated into the Premises or the Building. Landlord shall notify Tenant immediately if Landlord should discover any hazardous materials or violations of any Page 3 laws or regulations regarding hazardous materials. Landlord will, at Landlord's sole expense, take all action necessary to remove or abate any hazardous materials should they be found on or in the Premises. 5. RENTAL. a) Tenant covenants and agrees to pay during the Lease Term, to Landlord, without any counterclaim, set off or deduction whatsoever, the Base Rental as set forth in Section 1(a) of the Lease and this Section 5 of the Lease and all such other sums of money as shall become due hereunder (ALL OF WHICH ARE SOMETIMES HEREIN COLLECTIVELY CALLED "RENT"). The Base Rental payable during each calendar year or portion thereof during the Lease Term, shall be due and payable in 12 equal installments on the first day of each calendar month during the Lease Term and any extensions or renewals thereof, and Tenant hereby agrees to pay such Base Rental and any adjustments thereto to Landlord at Landlord's address provided herein (or such other address as may be designated by Landlord in writing from time to time). The Tenant hereby waives any and all right to offset or charge any amount owed to Tenant by Landlord against the Rent, Operating Expenses, Operating Expense reimbursements, or any other monies that may be due the Landlord by Tenant under this Lease. NOTWITHSTANDING ANYTHING TO THE CONTRARY HEREIN TENANT SHALL OBTAIN RENT ABATEMENT FOR THE SECOND (2ND) AND 1/2 OF THE THIRD (3RD) MONTH OF THE FIRST YEAR OF THE LEASE. b) It is also further agreed that the Landlord may collect a "Late Charge" equal to five percent (5%) of any monthly payment which is not paid within five (5) days of the due date thereof, to cover the extra expense involved in handling delinquent payments, provided that collection of said Late Charge(s) shall not be deemed a waiver by the Landlord of any of its other rights under this Lease. All installments of Rent not paid when due and payable notwithstanding any grace period provided pursuant to Paragraph 29(a) hereof, shall bear interest from the date due and payable until paid at eighteen percent (18%) per annum but no more than the maximum rate allowed under the laws of the State of Florida. Such interest shall constitute additional rent under this Lease and shall be due and payable on demand, BUT NO LATER THAN THE NEXT DUE DATE FOR ANY RENT DUE HEREUNDER. c) Tenant shall pay all sales and use taxes levied or assessed against all payments of Rent due under this Lease simultaneously with each payment required hereunder on the date required hereunder without further notice, provided, however, that Landlord will provide Tenant with prior notice of any change in the sales and use taxes that are so assessed. Until such further notice, the Florida State sales tax applicable to all payments of Rent due hereunder shall be deemed to be seven percent (7%). d) Upon COMMENCEMENT DATE, Tenant shall deposit with Landlord the amount of $20,789.34 which shall be applied to the Base Rental, Operating Expenses, and sales tax due for the first month of the Lease Term and then applied against the Rent due for the last month of the Lease Term to the extent then available ("Rent Deposit"). e) Tenant shall pay the monthly installments of the Base Rental through the end of the first Lease Year, and thereafter the Base Rental shall be increased annually at the commencement of each succeeding Lease Year, including all extensions and renewals of this Lease ("Succeeding Lease Year") according to the following schedule: BASE RENTAL CALCULATIONS ------------------------ LEASE TENANT'S BASE RENTAL BASE RENTAL YEAR DATES SF RATE PSF ANNUALLY MONTHLY - ------------------------------------------------------------------------------- 1 11/1/94 - 11/31/94 7796 16.00 124,736.00 10,394.67 1 12/1/95 - 1/31/95 7796 16.00 N/A 5,197.34 Page 4 1 1/31/95 - 10/31/95 7796 16.00 124,736.00 10,394.67 2 11/1/95 - 10/31/96 7796 16.80 130,972.80 10,914.40 3 11/1/96 - 10/31/97 7796 17.64 137,521.44 11,460.12 If Tenant extends the Lease Term as provided in Paragraph 55 beyond the conclusion of this THREE (3) year period as specified above, the Base Rent for the Premises defined herein shall increase as defined in Paragraph 55 below. 6. OFFSET: The Tenant hereby waives any and all right to offset or charge any amount owed to Tenant by Landlord against the Base Rent or Tenant's Pro Rata Share of Operating Expenses, or any other monies due the Landlord by Tenant under this Lease. Tenant shall nevertheless be able to pursue its own separate cause of action for any alleged breach pursuant to this Lease by Landlord. 7. PAYMENT OF OPERATING EXPENSES. a) INCLUDED IN the Base Rent Tenant shall pay to Landlord as additional rent, Tenant's Pro Rata Share, as hereinafter defined, of the "Operating Expense(s)" incurred by Landlord in connection with the ownership, operation and management of the Property. The Operating Expenses shall be determined in accordance with generally accepted accounting principles as applied to the ownership, management and operation of the Property and shall be defined as the total of all expenses and costs of every kind and nature which Landlord shall incur, pay or be obligated to pay because of or in connection with the ownership, management, preservation and operation of the Property, including but not limited to the following: (i) Reasonable wages and salaries and all payroll costs or benefits and bonuses (including social security, medical, reasonable bonuses, and insurance costs) paid to or on behalf of Landlord's employees engaged in the direct operation, maintenance and security of the Property. (ii) Administrative costs of managing the Property, including a management fee (limited to five percent (5%) of gross collections), reasonable attorneys' fees, accountants' fees and Landlord's internal administrative expenses attributable to the Property. (iii) Costs of all utilities furnished to the Building and/or the Property, including those furnished to Tenant's Premises. Such utilities shall include, the cost of water, sewer, trash removal, electricity, fuel, lighting, elevator telephones, security monitor telephones and backup generator costs. Such utility costs shall include only those costs that are actually billed by the utility company, and shall not include any profit to the Landlord. Tenant understands that tenants (existing and prospective) within the Building are not and are not anticipated to be separately metered and the use of utilities within the Building (and within Tenant's Premises) is being shared as provided herein unless provided to the contrary in paragraph 15 below. (iv) Cost of all supplies and materials and repairs and maintenance used in the operation of and relating to the maintenance of the Property including sprinkler charges and stand-by sprinkler charges, painting, paving, elevators, planters, garage equipment, garage walkway, supplies and repairs to the Common Areas of the Property. (v) Cost of all maintenance and service agreements such as alarm or security service, landscape maintenance, window cleaning, water treatment, janitorial and elevator or air conditioning service. Page 5 (vi) Cost of operating and maintaining the first floor atrium area and second floor walkway and cover walkway connecting the Building to the Parking Garage. (vii) Cost of all insurance, including but not limited to, fire, casualty, liability (for owner's benefit or as well as owner's management agents or the personnel of either or both) and loss of rent insurance applicable to the Property, the Landlord's interest in the Parking Garage, and Landlord's personal property used in connection with any of the foregoing. (viii) All real or personal property taxes and assessments (or payments in lieu of such taxes), excises, levies, fees, future impact fees (not occurring prior to the date of this Lease) or charges, general and special, ordinary and extraordinary, unforeseen as well as foreseen, of any kind which are assessed, levied, charged, confirmed, or imposed by any public authority upon the Property and Landlord's interest in the Parking Garage, their use, their operations or the Rent provided for in this Lease and other leases of the Property or the Parking Garage. (ix) tools, equipment and supplies necessary for the performance of repairs and maintenance (which are not required to be capitalized for federal income tax purposes); (x) maintenance and repair of all mechanical and electrical equipment relocating to Landlord's interest in the Parking Garage and the Building(s); (xi) maintenance and repair of elevators, restrooms, lobbies, hallways and other common areas of the Building; (xii) maintenance of pavement, curbs, walkways, lighting facilities, landscaping, driveways, parking areas, Parking Garage and drainage areas upon the Property; (xiii) Amortization of capital improvements made to the Property by Landlord subsequent to the Commencement Date which are intended to improve the operating efficiency, aesthetic value or security of the Property including Landlord's interest in the Parking Garage or which are required by a governmental authority. (xiv) all amounts collected and held by Landlord with respect to reserve accounts for those items which Landlord has designated, and which shall include painting, refurbishing, re-carpeting, redecorating or landscaping any portion of the Building and the Property and/or common and public areas of the Building which shall include, but not be limited to (a) roof maintenance; (b) repainting and reglazing of the Building as necessary and, -C- maintenance of the Parking Garage walkway, parking lot and Parking Garage, but which shall specifically exclude any work done in any tenant's space (existing or prospective). b) Operating Expenses shall not include: (1) leasing commissions; (2) interest or amortization of mortgages secured by the Property, the Parking Garage or the costs of obtaining such financing; (3) any expense billed to and paid directly by the Tenant or any other tenant of the Property for their own account or attributable exclusively to such tenant's special use such as its own "overtime" air conditioning usage; (4) expenses for repairs or replacement to the extent that same are reimbursed by insurance proceeds; (5) attorneys' fees and costs incurred in enforcing remedies under leases affecting any portion of the Property; Page 6 (6) costs incurred in connection with the construction or remodeling of improvements within the premises of any other tenant; (7) depreciation including reserves for bad debts or lost rent (or insurance against rent losses not caused by fire or other casualty), or any other charge not involving the payment of money to third parties; and (8) management fees in excess of five percent (5%) of gross receipts. c) "Tenant's Pro Rata Share" of the Operating Expenses shall be equal to a fraction the numerator of which is the Rentable Floor Area and the denominator of which is the Total Rentable Area (133,007 square feet). Accordingly, Tenant's Pro Rata Share of the Operating Expenses is deemed to be 5.8%. d) Promptly following the beginning of each calendar year occurring during the Lease Term including any extensions, Landlord shall deliver to Tenant a statement setting forth Landlord's projection of the Operating Expenses for the then current calendar year and Tenant's Pro Rata Share thereof based on the portion of such calendar year during which this Lease is in effect. Tenant's Pro Rata Share of such projected Operating Expenses shall be payable in equal monthly installments in advance on the first day of each calendar month during the Lease Term. e) Within one hundred and twenty (120) days after the end of each calendar year, Landlord shall set forth the actual amount of the Operating Expenses incurred during the immediately preceding calendar year together with Tenant's Pro Rata Share of the Operating Expenses (apportioned for any partial Lease Year), and any underpayment or overpayment calculation based on Tenant's monthly payment(s) of the projected Operating Expenses made during the preceding calendar year. In the event of any underpayment by Tenant, Tenant shall pay the full amount of such deficiency to Landlord within fifteen (15) days after receipt of Landlord's statement. Any overpayment by Tenant shall be deducted from the next due monthly installment(s) of Tenant's Pro Rata Share of the Operating Expenses or promptly refunded by Landlord if it cannot be deducted from the next due monthly installment of Tenant's Pro Rata Share of the Operating Expenses. f) Tenant's obligation to pay its Pro Rata Share of the Operating Expenses shall survive the termination of this Lease. Similarly, Landlord's obligation to refund any overpayment of Tenant's Pro Rata Share of Expenses shall survive termination of this Lease. NOTWITHSTANDING ANYTHING TO THE CONTRARY AS MAY BE SETFORTH IN THIS PARAGRAPH #7 OR ELSEWHERE IN THIS LEASE TENANT SHALL NOT BE RESPONSIBLE FOR PAYMENT OR REIMBURSEMENT TO LANDLORD FOR ANY PORTION OF THE OPERATING EXPENSES OF THE BUILDING OR THE PREMISES DURING THE INITIAL TERM OF THIS LEASE. IT IS UNDERSTOOD THAT THIS LEASE IS INTENDED TO BE A GROSS LEASE AND THAT TENANT'S SOLE RENTAL OBLIGATION SHALL BE TO PAY THE BASE RENT AS SET FORTH IN PARAGRAPH #5 ABOVE. IT IS ALSO UNDERSTOOD THAT ALL OF THE UTILITIES CONSUMED WITHIN THE PREMISES AND THE BUILDING SHALL BE PAID FOR BY LANDLORD INCLUDING THE COST OF ELECTRIC CONSUMPTION, AIR CONDITIONING, WATER, JANITORIAL AND OTHER CUSTOMARY OFFICE SERVICES. IF TENANT USES, REQUEST THE USE OF SERVICES NOT CUSTOMARILY PROVIDED IN A FULL SERVICE OFFICE BUILDING, LANDLORD RESERVES THE RIGHT TO MAKE REASONABLE ADDITIONAL CHARGES FOR SUCH UNUSUAL ADDITIONAL SERVICES. 8. SERVICES TO BE FURNISHED BY LANDLORD. Subject to Paragraph 7 of this Lease, Landlord agrees to use commercially reasonable efforts to furnish Tenant the following services: a) Water at those existing points of supply provided for the general or common use of Tenant and other tenants in the Building. b) Central heat and air conditioning to the Building, Service Areas, Common Areas, and the Premises during Normal Business Hours provided Tenant shall bear the entire Page 7 additional cost of any "Overtime Use" of the air conditioning systems within Tenant's Premises as provided herein. c) Routine maintenance and electric lighting service for all Common Areas and Service Areas of the Building in the manner and to the extent deemed by Landlord to be standard and/or reasonable. d) Janitorial service to the Premises and all Common Areas, Mondays through Fridays, exclusive of normal business holidays. e) Facilities to provide all electrical current as Landlord, in its sole discretion, determines is necessary for normal office use within the Premises and for use and operation of the Common Areas (interior and exterior). f) All florescent bulb replacement in the Premises and florescent and incandescent bulb replacement in the Common Areas and Service Areas. g) Control of access to the Building during other than Normal Business Hours shall be provided in such form as Landlord deems appropriate. Landlord, however, shall have no liability to Tenant, its employees, agents, invitees or licensees for bodily injury, death, or for damages to or loss of property suffered or incurred by any party whomsoever, caused by or arising from theft or burglary or entry of unauthorized persons onto the Property and neither shall Landlord be required to insure against any such losses except if caused by the Landlord's gross negligence or gross negligence of the Landlord's employees. Tenant shall cooperate fully to maintain security in the Building and on the Property and shall follow all regulations promulgated by Landlord. h) Elevator service to each floor of the Premises, provided that Tenant shall be limited in its use of such elevators for the purpose of moving its property in and out of the Building which moving activities shall be done: (i) Only during other than Normal Business Hours or such other hours as Landlord may approve in writing; (ii) Only after first obtaining Landlord's consent to such use, which request shall be submitted in writing to Landlord no less than five (5) days in advance of each desired move (which consent shall not be unreasonably withheld); (iii) Only after arranging with Landlord to obtain security and/or other supervisory staff of Landlord to be present during such move; and (iv) Only after Landlord advises Tenant in writing of what physical protections Landlord might require Tenant to provide or install in order to protect the Building or its components as a condition precedent to such move. Tenant shall pay Landlord promptly for all costs associated with Tenant's moving including the operation of the elevator (for moving purposes), the cost of any operator, supervisory or security personnel and all other costs required herein. Tenant shall also promptly reimburse Landlord's cost to repair any damage to the elevator or the elevator cab(s), the Common Areas, floors, walls, or other components of the Building resulting from Tenant's moving activities. The failure by Landlord to any extent to furnish the defined services noted above, in whole or in part, or the interruption or termination of any such services, or the failure of any equipment or machinery used in the provision of such services to cease to function properly shall not render Landlord liable in any respect nor be construed as an eviction (constructive or otherwise) of Tenant, nor cause an eviction of Tenant, nor cause an offset or abatement of Rent, nor relieve Tenant from the obligation to fulfill any covenant or Page 8 agreement hereof. Notwithstanding the foregoing, if any of the foregoing defined services to be provided by Landlord is interrupted or terminated for more than seven (7) consecutive business days, Tenant shall have the right to terminate this Lease upon giving prior written notice to Landlord provided such services have not been reinstated in the meantime. 9. IMPROVEMENTS TO THE PREMISES. Landlord's obligations to construct or install and to pay the cost of improvements to the Premises except those specifically set forth herein or in the Work Letter attached hereto as Exhibit "C", TENANT HEREBY ACCEPTS THE STATUS OF THE EXISTING IMPROVEMENTS WITHIN THE PREMISES AS THEY EXIST AS OF THE DATE OF THIS LEASE EXCEPT FOR ANY SPECIFIC WORK OR IMPROVEMENTS SET FORTH IN OR IN THE ATTACHED EXHIBIT "C". EXCEPT FOR THE IMPROVEMENTS AS REFERRED TO ABOVE; Tenant shall not make any installation(s) or improvement(s) to the Premises except at Tenant's sole cost and expense and only after having obtained Landlord's prior written approval. By taking possession of the Premises, Tenant acknowledges that Landlord has performed Landlord's obligations hereunder and/or under the Work Letter and accepts the Premises, in the "as is" condition as of the date Tenant takes such possession. 10. MAINTENANCE AND REPAIR OF BUILDING BY LANDLORD. EXCEPT FOR THOSE SPECIFIC RESPONSIBILITIES OF TENANT AS PROVIDED HEREIN, Landlord shall repair and maintain in good repair and serviceable condition the roof, foundations, exterior walls and windows of the Building, Landlord's portion of the Parking Garage, underground utility and sewer pipes outside the exterior walls of the Building (unless covered or made inaccessible by Tenant's use of the Premises), the Exterior Common Areas (including the first floor atrium and covered walkway to the Parking Garage), the Common Areas (including the first floor atrium area), and the heating, air conditioning, lighting, electrical, ventilation, plumbing, and storm drainage equipment servicing the Building whether located inside or outside the exterior walls of the Building (EXCEPT FOR SUCH HEATING, AIR CONDITIONING AND ELECTRIC SERVICES WITHIN THE PREMISES WHICH TENANT IS SPECIFICALLY RESPONSIBLE). Except as otherwise expressly provided herein, Landlord shall not be required to make any repairs to the Premises. 11. CARE OF THE PREMISES BY TENANT. Tenant shall, at its sole expense, keep the Premises in good repair during the Lease Term, including without limitation, the doors (both sides and door locks and hardware), interior Building windows and interior walls within the Premises. Tenant shall not commit or allow any waste to be committed on any portion of the Premises, and at the termination of this Lease, Tenant shall deliver up the Premises to Landlord broom clean and in the same good condition as exists at the Commencement Date, ordinary wear and tear and damage by fire and other casualty excepted. 12. REPAIRS AND ALTERATIONS BY TENANT. a) Tenant covenants and agrees with Landlord, at Tenant's sole expense, to repair any damage done to the Premises or any part thereof, including necessary replacement, where such damage is caused by Tenant or Tenant's agents, employees, invitees, visitors, licensees or permitted assigns. All such work or repairs by Tenant shall be in compliance with all applicable laws; provided, however, if Tenant fails to make such repairs or replacements promptly, Landlord may, at its option, make such repairs or replacements, and Tenant shall pay the cost thereof to the Landlord within fifteen (15) days after Landlord's demand therefore, as additional rent. In such event, Tenant hereby grants Landlord reasonable access to Tenant's Premises for the foregoing purposes. Tenant agrees with Landlord not to make or allow to be made any improvements or alterations to the Premises, install any vending machines on the Premises, or place signs on the Premises which are visible from outside the Premises or in the corridors, without first obtaining the prior written consent of Landlord which consent shall not be unreasonably withheld. Any and all permanent alterations or additions to the Premises made by Tenant shall become the property of Landlord upon installation by Tenant. Upon termination, Landlord may, nonetheless, require Tenant to remove any and all fixtures, equipment and other improvements so Page 9 installed on the Premises. In the event that Landlord so elects, and Tenant fails to remove such improvements, Landlord may remove such improvements at Tenant's sole expense, and Tenant shall promptly pay Landlord the cost of restoring the Premises to the same condition they were in prior to the installation thereof ordinary wear and tear excepted. b) In the event any damage to the Building or the Property is due in whole or in part to the action or inaction of Tenant, or Tenant's agents, employees, invitees, visitors, licensees, or permitted sublessees or assigns, the necessary repair, including replacement, may be made by Landlord, at Tenant's sole cost and expense which shall be due to Landlord as Additional Rent payable within fifteen (15) days after Landlord's demand. 13. GRAPHICS. Landlord shall provide and install, at Landlord's sole expense, all letters or numerals on doors entering the Premises or on a wall near Tenant's main entry door. All such letters and numerals shall be in the standard graphics as approved by Landlord for the Building, and no other sign, graphics or other displays which are visible outside the Premises shall be permitted without Landlord's prior written consent which consent shall not be unreasonably withheld. A directory in the lobby designed and maintained by the Landlord shall contain the name of all tenants within the Building. 14. USE OF ELECTRICAL SERVICES BY TENANT. a) Tenant's use of electrical services furnished by Landlord shall not exceed, either in voltage, rated capacity, or overall load that which Landlord in its reasonable discretion determines, from time to time, is necessary for normal office use including normal desk-top office equipment and normal copying equipment. In the event Tenant consumes electrical services in excess of that so determined by Landlord to be reasonable, Landlord may refuse to consent to or continue such usage or may consent of such usage upon such conditions as Landlord elects including the requirement that upgraded supply facilities and/or sub-meters be installed at Landlord's expense. In such event, Tenant shall be obligated to pay for such electric consumption at the same rates as are charged to Landlord by such utility company providing such service and Tenant shall pay such amounts to Landlord or pay such amounts directly to the utility, as Landlord may so elect. In the event Tenant is requested by Landlord to pay for its electric consumption within the Premises, or reimburse Landlord for Tenant's consumption within the Premises, and if Tenant pays Landlord (reimburses Landlord) for its usage, then Tenant shall be entitled to a credit to its annual Base Rent for the balance of the original Lease Term equal to $1.00 per square foot. If such direct payment of electric consumption is paid by Tenant in any lease extension term, then Landlord shall credit Tenant for the same amount against the electric charges which would have otherwise been included in the CAM Reimbursement provisions of Paragraph 7 above. 15. PARKING. Tenant shall have no rights to use any portion of the Parking Garage unless set forth herein. a) Neither Tenant nor any of its invitees shall have any right to access the Parking Garage except as specifically provided for herein. As referred to herein, the Landlord's portion of the Parking Garage as of this date is limited to the third and fourth floors of the Parking Garage. The Landlord as of this date has an option to purchase the first and second floors of the Parking Garage which is presently owned by The City of Clearwater which would then give the Landlord control of one hundred percent (100%) of the Parking Garage; however, this one hundred percent (100%) control shall not be construed to grant Tenant and other parties any greater rights to use any portion of the Parking Garage. b) The designated parking spaces granted to Tenant as provided for herein shall be initially located on the third and fourth floors of the Parking Garage; however, after Landlord exercises its option to purchase the first and second floors of the Parking Garage, Landlord may relocate the designated parking spaces at Landlord's sole discretion. For the period of time prior to the Landlord exercising its option to purchase the first and second floors of the Parking Garage, the City of Clearwater will continue to Page 10 own said floors and presumably offer these spaces to the general public. During said time, Tenant and its invitees shall have the "non-exclusive" right to use the City of Clearwater's portion of the Parking Garage (the first and second floors) at parking rates established by the City of Clearwater from time to time subject to any other party or parties utilizing the City of Clearwater's portion of the Parking Garage prior to the time Tenant or its invitees may desire to use such parking facilities. However, The City of Clearwater is obligated to sell its interest in the Parking Garage to Landlord under an option agreement and the use of the City of Clearwater's portion of the Parking Garage (as charges set by the City of Clearwater) may be removed at anytime and cannot be relied upon by Tenant or its invitees as a source of available parking spaces. c) During the Lease Term, Tenant shall have the right to use _10_ parking spaces which shall be designated as "covered" and _10_ parking spaces which shall be designated to as "uncovered" parking spaces, all of which shall be located in Landlord's portion of the Parking Garage at a cost of _$ 0_ per month for each "covered" space and _$_0_ per month for each "uncovered" space which cost SHALL INCREASE BY FIVE PERCENT (5%) IN EACH LEASE YEAR. Access to such parking spaces shall be through the driveways and walkways located in the Parking Garage and/or on the Property which shall be used by Tenant on a non-exclusive basis with Landlord and other tenants of the Building or other authorized users of the Parking Garage, including the general public who might have access to the Parking Garage while the City of Clearwater owns a portion of said Parking Garage. Landlord shall have the right, in Landlord's sole and reasonable discretion, to establish rules and regulations for use of the driveways, walkways, parking spaces and areas and to designate the right for the exclusive use of particular parking spaces to other tenants in the Building. Landlord reserves the right to reassign, change or relocate any designated parking spaces within the Property or the Parking Garage. Landlord shall also have the right to establish or modify the methods used to control traffic and parking on the Property and the Parking Garage, including, without limitation, the installation of traffic control devices, Parking Garage gate entrance controls, or the hiring of parking attendants. The parking charges for "covered" and "uncovered" parking spaces as provided above shall be due each month as stated herein with Tenant's monthly installments of Base Rent and shall be subject to all terms, provisions, conditions and covenants of this Lease pertaining to defaults in the payments of Rent. Landlord may, at any time, during the term of the Lease, by notice to Tenant, designate for Tenant's use, other reasonable designated parking spaces in the Parking Garage, provided the total number of parking spaces is not reduced, and the number of "covered" or "uncovered" is not changed. d) No commercial or recreational vehicles shall be parked in the parking areas on the Property except those vehicles parked on a temporary basis while delivering, repairing or servicing the Building and/or its tenants. In order to allow Landlord to enforce these provisions including, but not limited to, provisions relating to designated parking spaces, Tenant shall cause its employees to provide Landlord with a complete list of employees together with their automobile license tag numbers and make and model of cars which they own or expect to park on the Property or in the Parking Garage. Landlord may designate the specific names of Tenant's employees or users of any "covered" and/or "uncovered" parking spaces and if any such employee or designee does not park in such space and parks somewhere else in the Parking Garage or elsewhere on the property of Landlord, Landlord may tow such automobile of any employee or party violating these restriction whether or not the Tenant is financially complying with its parking charge payments to Landlord. Landlord shall not be liable for any damage to or any theft of any vehicle, or any contents therefrom, while in or about the parking areas located on or about the Property or the Parking Garage area. e) No permanent or part time employee, invitee, agent, or subcontractor of Tenant shall be permitted to park in any parking space designated as "Visitor" or in any space designated (by letter identification on such parking space) for use by another tenant ("Other Tenant") as such Other Tenant spaces may be designated from time to time by Page 11 Landlord. The Visitor Parking Spaces or other tenant spaces as designated from time to time by Landlord shall NOT be occupied by any person who conducts part- time or full-time work on or about Tenant's Premises. Landlord reserves the right to enforce the restrictions or designations set forth herein by towing violators or other enforcement actions as Landlord deems necessary. f) Landlord shall have the right, after reasonable notice to Tenant and in Landlord's sole and reasonable discretion, to change the location of any designated or undesignated parking spaces whether for visitors, other tenants, handicapped or otherwise WITHOUT CHANGE TO THE NUMBER OF COVERED PARKING SPACES. g) Tenant agrees that it will collect the parking charges from its employees and remit the monthly collections to Landlord in one single payment with a notice in writing of any non-paying employee which notice may be relied upon by Landlord in enforcing the parking provisions herein. h) Notwithstanding anything to the contrary set forth elsewhere in this Lease, any default in the payment of monthly parking charges as set forth herein shall not constitute a monetary default under this Lease provided Landlord shall have the right to unilaterally discontinue parking privileges for any space for which parking charges are not paid current within sixty (60) days. If parking rights are so discontinued by Landlord for such non-payment, Landlord may enforce such discontinuance by towing, tagging, or any other measures necessary to remove such non-paying employee from the Property or the Parking Garage. Any such non-paying employee also shall be prohibited from parking on the ground level parking lot and be restricted to the uncovered portions of the garage parking areas as may be designated from time to time by Landlord with Landlord similarly having towing rights for any violation hereof. i) Tenant shall have the right to __5__ additional "covered" parking spaces at a monthly rental rate of _$30.00_ and/or __0__ additional "uncovered" parking spaces at a monthly rental rate of __$ 0__ to escalate at the rate of five percent (5%) per annum after such election is made. j) Notwithstanding anything to the contrary set forth elsewhere in this Lease, any default in the payment of monthly parking charges as set forth herein shall NOT constitute a monetary default under this Lease provided Landlord shall have the right to unilaterally discontinue parking privileges for any space for which parking charges are not paid current within sixty (60) days. If parking rights are so discontinued by Landlord for such non-payment, Landlord may enforce such discontinuance by towing, tagging, or any other measures necessary to remove such non-paying employee from the covered portions of the Parking Garage. Any such non-paying employee also shall be prohibited from parking on the ground level parking lot and be restricted to the uncovered portions of the garage parking areas as may be designated from time to time by Landlord with Landlord similarly having towing rights for any violation hereof. 16. LAWS AND REGULATIONS. Tenant agrees to comply with all applicable laws, ordinances, rules and regulations of any governmental entity, agency or authority having jurisdiction of the Premises or Tenant's use thereof. 17. BUILDING RULES AND REGULATIONS. Tenant will comply with the rules and regulations of the Building adopted and modified by Landlord from time to time and will cause all of its agents, employees, invitees and visitors to do so. Landlord shall provide Tenant with notice of all such rules and regulations and any modifications thereto. 18. ENTRY BY LANDLORD. Tenant agrees to permit Landlord or its agents or representatives to enter into and upon any part of the Premises at all reasonable hours and with advance notice (and in emergencies at all times) to inspect the condition, occupancy or use thereof, to show the Premises to prospective purchasers, mortgagees, tenants or insurers, and to clean or make repairs, alterations or additions thereto, and Tenant shall not be entitled to any abatement or reduction of Rent by reason thereof; provided, however, that Tenant's Page 12 business is not reasonably interrupted by any of the foregoing activities. 19. ASSIGNMENT AND SUBLETTING. a) Tenant shall not assign, sublease, transfer, pledge, encumber or otherwise convey this Lease, the Premises or any portion thereof or interest therein (a "Transfer"), as the case may be, either voluntarily or by operation of law, without Landlord's prior written consent. If WHICH WILL NOT BE UNREASONABLY WITHELD. If Tenant is either a corporation or a partnership, Any sale, transfer, pledge, encumbrance or other conveyance of any stock or partnership interests therein shall comprise a Transfer. A partial assignment of Tenant's leasehold interest shall comprise a Transfer. Any attempted assignment or Transfer by Tenant in violation of the terms and covenants of this paragraph shall be void. b) In the event Landlord consents to any assignment of this Lease or any sublease of all or any part of the Premises, Tenant shall pay to Landlord, on a monthly basis, an amount equal to all rent and other consideration paid under said assignment or sublease during each month in excess of the Base Rental for said month and Tenant shall remain liable for the full and faithful performance of all the covenants and conditions of this Lease. 20. MECHANIC'S LIENS. Tenant will not permit any mechanic's lien or liens to be placed upon the Premises, and nothing in this Lease shall be deemed or construed in any way as constituting the consent or request of Landlord, express or implied, by inference or otherwise, to any person for the performance of any labor or the furnishing of any materials to the Premises, or as giving Tenant any right, power or authority to contract for or permit the rendering of any services or the furnishing or any materials that would or might give rise to any mechanic's or other liens against the Premises. This provision shall comprise notice to all parties that Landlord's interest in the Property, including the Premises, are and shall not be subject to liens or liability to secure or satisfy claims of any party contracting or otherwise dealing with Tenant or Tenant's agents or contractors. In the event any such lien is claimed against the Premises, then Tenant shall discharge same or transfer such lien to security other than the Premises and the Property, as soon as possible, but no later than ten (10) days after notice thereof. In the event that Tenant fails to discharge or otherwise remove any such liens, then, in addition to any other right or remedy of Landlord, Landlord may, but shall not be obligated to, discharge the same. Any amount paid by Landlord pursuant to this Paragraph shall be reimbursed by Tenant to Landlord promptly after Landlord's demand therefore as additional Rent, but no later than thirty (30) days thereafter. 21. PROPERTY INSURANCE. a) Subject to Paragraph 7 of this Lease, Landlord shall maintain fire and extended coverage insurance on the Building in an amount as Landlord shall deem appropriate and payments for losses thereunder shall be made solely to Landlord or Landlord's mortgagee(s), as their interests shall appear. b) Tenant shall maintain, at its sole expense, in an amount equal to full replacement cost, fire and extended coverage insurance on all of its improvements and personal property, including removable trade fixtures, located at the Premises and such additional amounts as are required to meet Tenant's obligations pursuant to Paragraph 25 hereof. Upon the execution of this Lease, upon policy renewals and upon Landlord's request from time to time, Tenant shall provide Landlord with current certificates of insurance evidencing Tenant's compliance with the terms of this Paragraph 21 and Paragraph 22 hereof. Tenant shall, simultaneously with the execution of this Lease, obtain and deliver to Landlord the written agreement or endorsement of Tenant's insurers to notify Landlord by certified mail, return receipt requested, at least 30 days prior to the cancellation, expiration or modification of any insurance coverage required of Tenant herein. 22. LIABILITY INSURANCE. Tenant, at its sole expense, shall maintain a policy or Page 13 policies of comprehensive general liability insurance with respect to its activities in the Building and on the Property, with the premiums thereon fully paid on or before the due date therefore, issued by and binding upon an insurance company approved by Landlord. Such insurance shall afford minimum protection of not less than $1,000,000.00 combined single limit for bodily injury and property damage, and Landlord shall be named as an insured thereon. 23. ASSUMPTION OF RISKS. Landlord shall not be liable to Tenant or Tenant's customers, licensees, invitees, agents, guests or employees for any loss of life, injury, loss or damages to its, his or their persons or property created by any cause whatsoever, including, but not limited to: (i) Acts or omissions of Landlord, its employees, agents or independent contractors unless such acts or omissions are grossly negligent or willful; (ii) The acts or omission of any other tenant in the Building; (iii) Construction defects, water, rain, sleet, fire, storms, negligence and accidents, breakage, stoppage or leaks of gas, water heating or sewer pipes, boilers, wiring or plumbing; or (iv) any other defects (latent or patent) in or about the Premises. Tenant expressly assumes all liability for or on account of any such loss of life, injury, loss or damage, and shall at all times, indemnify, defend and save Landlord harmless from and against all claims, causes of action, liability, damage or expense, including, without limitation, attorneys' fees and costs suffered or incurred by Landlord by reason of any loss of life, injury, loss or damage to persons or property arising out of, related to or connected with the occupancy, use, repair or maintenance of the Premises or any other portion thereof by Tenant, its employees, agents, customers, invitees, licensees, or contractors or due in whole or in part to the acts or omissions of Tenant, its employees, agents, customers, invitees, licensees, or contractors. 24. WAIVER OF SUBROGATION RIGHTS. Anything in this Lease to the contrary notwithstanding, Tenant hereby waives any and all rights of recovery, claim, action, or cause of action, against Landlord, its agents, officers or employees, for any loss or damage that may occur to the Premises, the Building or the Property, or any improvements thereto, or any personal property of Tenant therein, by reason of fire, the elements or any other causes which are insured against under the terms of the fire and extended coverage insurance policies which Tenant is required to carry as required herein, regardless of cause or origin, including the negligence of Landlord, its agents, officers or employees; provided that such waiver by Tenant does not limit in any way Tenant's right to recovery under such insurance policies. Tenant shall obtain an endorsement to all of its insurance policies which provides for such waivers as required herein shall not limit Tenant's right to recover under such policies, and upon the execution hereof Tenant shall deliver a copy of such endorsement to Landlord. 25. CASUALTY DAMAGE. a) If the Premises or any part thereof shall be damaged by fire or other casualty and all or any portion of the Building shall be so damaged that substantial reconstruction of the Building, shall in Landlord's sole opinion, be required (whether or not the Premises shall have been damaged by such casualty), or if the Premises shall by reason of such occurrence be rendered substantially untenantable, or if the holder of any mortgage on the Property should require that the insurance proceeds payable as a result of a casualty be applied to the payment of the mortgage debt, or if a casualty should occur during the last two (2) years of Page 14 the Lease Term or during any renewal period, or if insurance proceeds actually received or expected to be received by the either Landlord or Tenant (excluding amounts paid to the holders of mortgages upon the Property) are insufficient for full repair of the casualty, or if the casualty is not covered by Landlord's insurance, Landlord may, at its option, terminate this Lease by notifying Tenant in writing of such termination within ninety (90) days after the date of such damage. b) If any of the events set forth in subparagraph (a) above take place or occur and if Landlord elects to terminate this Lease, Landlord's obligation to restore shall be limited to the to the restoration of the Leasehold Improvements provided, however, that in no event shall Landlord be required to spend an amount in excess of the insurance proceeds actually received by Landlord as a result of the casualty and allocable to the damage to the Premises after deduction of Landlord's reasonable expenses in obtaining such proceeds and any amounts required to be paid to the mortgagees of the Property. Tenant, at Tenant's expense, shall promptly perform all other repairs to restore the Premises to the same good condition as existed immediately prior to the casualty, using Building Standard or better materials (the "Tenant Restoration Work"). The proceeds of Tenant's insurance policies or other funds required for this purpose shall be held in trust for the purpose shall be held in trust for the purpose of performing the Tenant Restoration Work. c) Landlord shall not be liable for any inconvenience or annoyance to Tenant or injury to the business of Tenant resulting in any way from such damage or the repair thereof. If the Premises or any other portion of the Building shall be damaged by fire or other casualty resulting from the fault or negligence of Tenant or any of Tenant's agents, employees, or invitees, the Rent hereunder shall not be diminished during the repair of such damage, and Tenant shall be liable to Landlord for the entire cost of the repair and restoration of the Building caused thereby; otherwise, Landlord shall allow Tenant a pro rata abatement of Rent during the time and to the extent the Premises are unfit for occupancy as a result thereof. 26. CONDEMNATION. If more than twenty percent (20%) of the Property shall be taken for any public or quasi-public use, by right of eminent domain or otherwise, or if more than twenty percent (20%) shall be sold in lieu of condemnation, then this Lease shall terminate as of the date when physical possession of the Property is taken. If less than twenty percent (20%) of the whole of the Property is thus taken or sold (whether or not the Premises are affected thereby), then Landlord may, at its option, terminate this Lease by giving written notice thereof to Tenant, in which event this Lease shall terminate as of the date when physical possession of such portion of the Property is taken. If this Lease is not terminated after any such taking or sale of the Property and the Premises are directly affected by such taking, the Base Rental payable hereunder shall be reduced in the same proportion that the Floor Area of the Premises so taken or conveyed bears to such Floor Area immediately prior to such taking or conveyance, and Landlord shall restore the Building and the remaining Premises to substantially their former condition. All amounts awarded upon a taking of any part or all of the Property shall belong to Landlord, and Tenant shall not be entitled to and expressly waives all claims to any such compensation. 27. DAMAGES FROM CERTAIN CAUSES. Landlord shall not be liable to Tenant for any delays in performance of Landlord's duties hereunder or for any loss or damage to any property or person occasioned by theft, fire, act of God, public enemy, injunction, riot, strike, insurrection, war, court order, requisition, order of governmental body or authority or any other cause beyond the control of Landlord. Landlord shall not be liable to the Tenant for any damage or delay or inconvenience which may arise in connection with the repair or alteration of any part of the Property resulting from the foregoing or other causes. 28. EVENTS OF DEFAULT/REMEDIES. a) The following events shall be deemed to be events of default by Tenant under this Lease: Page 15 (i) Tenant shall fail to pay any Rent or any other sums of money due hereunder and such failure shall continue for a period of five (5) days after the date such Rent or other sums is due (with no notice being required of Landlord); (ii) Tenant shall fail to comply with any other provision of this Lease or any other agreement between Landlord and Tenant, including the Work Letter, if applicable; (iii) The leasehold hereunder demised shall be taken on execution or other process of law in any action against Tenant; (iv) Tenant shall fail to promptly move into, take possession of and operate its business on the Premises when the Premises are ready for occupancy or shall cease to do business in or vacate or abandon any substantial portion of the Premises for more than ten (10) consecutive days; (v) Tenant shall become insolvent or unable to pay its debts as they become due, Tenant files a petition in bankruptcy or for reorganization under the bankruptcy laws or an admission, answer or other responsive pleading to, or requesting the relief afforded by the bankruptcy laws; (vi) Tenant makes an assignment for the benefit of creditors, within the meaning of the bankruptcy laws or Tenant consents to the appointment of a receiver or custodian for all or a substantial part of its property; or (vii) the filing against Tenant of a petition in bankruptcy or for reorganization under the bankruptcy laws, the adjudication of Tenant as a bankrupt, the entry of a court order appointing a receiver, custodian or trustee for all or a substantial part of its property without its consent or the assuming of custody or sequestration by a court of competent jurisdiction of all or substantially all of Tenant's property, and within thirty (30) days thereafter such filing is not dismissed, or such court order is not vacated or such assumption or sequestration is not released; or (vii) The adjudication of Tenant as a bankruptor; or (viii) Tenant shall attempt to assign, transfer, sublet all or any part of its interests in the Premises or in this Lease without Landlord's prior written consent subject to the provisions of Section 19 above. b) Upon the occurrence of any event or events of default or other breach of this Lease by Tenant, whether enumerated in this Paragraph or not, Landlord shall have the option to pursue any one or more of the following remedies: (i) Landlord shall have the right, at its election, to cancel and terminate this Lease and dispossess Tenant by summary proceedings or other lawful means; (ii) Landlord shall have the right to declare all amounts and rents due under this Lease for the remainder of the existing term (and any applicable extension or renewal thereof) to be immediately due and payable, and thereupon all rents and other charges due hereunder to the end of the initial term and any renewal term, if applicable, shall be accelerated; (iii) Landlord may elect to enter and repossess the Premises and relet the Premises for Tenant's account, holding Tenant liable in damages for all Page 16 expenses incurred in any such reletting and for any difference between the amount of rent received from such reletting and the rent due and payable under the term of this Lease; and (iv) Landlord may enter upon the Premises and do whatever Tenant is obligated to do under this Lease (and Tenant agrees to reimburse Landlord on demand for any expenses which Landlord may incur in effecting compliance with Tenant's obligations under this Lease and Tenant further agrees that Landlord shall not be liable for any damages resulting to the Tenant from such action). All such remedies of Landlord shall be cumulative and not exclusive, and in addition, Landlord may pursue any other remedies that may be permitted by law or in equity. Forbearance by Landlord to enforce one or more of the remedies herein provided upon an event of default shall not be deemed or construed to constitute a waiver of such default or remedy. c) This Paragraph 29 shall be enforceable to the maximum extent permissible by applicable law, and the unenforceability of any portion hereof shall not thereby render unenforceable any other portion. d) Landlord shall not be in default hereunder unless Landlord has not begun to cure any failure of its obligations hereunder within thirty (30) days after the receipt by Landlord of written notice from Tenant of the alleged failure to perform and does not continue to pursue the cure thereof. Except as otherwise specifically provided in this Lease, in no event shall Tenant have the right to terminate or rescind this Lease or to offset the Rent amount due Landlord as a result of Landlord's default as to any covenant or agreement contained in this Lease or as a result of the breach of any promise or inducement hereof, whether in this Lease or elsewhere. Tenant hereby waives such remedies of termination and rescission and hereby agrees that Tenant's remedies for default hereunder and for breach of any promise or inducement by Landlord shall be limited to a suit for damages and/or injunction. Tenant hereby covenants that, prior to the exercise of any such remedies, it will give the mortgagees on the Property written notice and a reasonable period of time in which to cure any alleged default. e) TENANT HEREBY WAIVES ANY RIGHT IT OR ITS SUCCESSORS OR ASSIGNS MAY HAVE TO A JURY TRIAL IN ANY LITIGATION BETWEEN LANDLORD AND TENANT ARISING OUT OF OR RELATING TO THIS LEASE. TENANT ACKNOWLEDGES THAT THIS PROVISION WAS A MATERIAL INDUCEMENT TO LANDLORD ENTERING INTO THIS LEASE. 29. TENANT'S PROPERTY TAXES AND ASSESSMENTS. Tenant shall be liable for all taxes levied or assessed against the personal property, furniture fixtures and equipment placed by or used by Tenant in the Premises or as presently exists within the Premises. If any such taxes for which Tenant is liable are levied or assessed against Landlord or the Property or if the assessed value of the Property is increased by inclusion of the personal property, furniture, fixtures and equipment now located within the Premises or to be placed by Tenant in the Premises or used within the Premises by Tenant, Tenant shall promptly pay to Landlord upon demand that part of such taxes for which Tenant is liable hereunder. 30. PEACEFUL ENJOYMENT. Tenant shall, and may peacefully have, hold and enjoy the Premises against all persons claiming by, through or under Landlord, subject to the other terms hereof, provided that Tenant pays the Rent and other sums to be paid by Tenant hereunder and performs all of Tenant's covenants and agreements herein contained. 31. Intentionally Deleted. Page 17 32. HOLDING OVER. In the event Tenant continues to occupy the Premises after the termination of this Lease (as it may be extended by written agreement of the Landlord and Tenant), Tenant covenants and agrees, throughout the entire holdover period, to pay monthly rent equal to twice the Base Rental for the last full month immediately preceding the termination of this Lease. No possession by Tenant after the expiration of the terms of this Lease shall be construed to extend the term of this Lease. Throughout any holdover period Tenant shall by deemed a tenant-at-sufferance. 33. SUBORDINATION TO MORTGAGE. a) This Lease is and shall be subject and subordinate to any ground lease, mortgage, deed of trust or other lien created by Landlord, whether presently existing or hereafter arising upon all or any portion of the Property and to any renewals, refinancing and extensions thereof. Landlord is hereby irrevocably vested with full power and authority to subordinate this Lease to any ground lease, mortgage, deed of trust or other lien now existing or hereafter placed upon all or any portion of the Property, and Tenant agrees upon demand to execute such further instruments subordinating this Lease or attorning to the holder of such ground lease, mortgage, deed of trust or other lien as Landlord may request. Tenant hereby irrevocably constitutes Landlord as its attorney-in-fact to execute such instruments in Tenant's name, place and stead, it being agreed that such power is once coupled with an interest. b) Tenant agrees that it shall from time to time within fifteen (15) days after request by Landlord execute and deliver to such persons as Landlord shall request a statement in recordable form certifying that: (i) This Lease is unmodified and in full force and effect or stating any modifications thereto; (ii) Stating the dates of which rent and other charges payable under this Lease have been paid; (iii) Stating that Landlord is not in default hereunder (or if Tenant alleges a default stating the nature of such alleged default); and (iv) Further stating such other matters as Landlord or its mortgagee(s) shall reasonably require. Tenant shall, in the event of the sale or assignment of Landlord's interest in all or any portion of the Property or in the event of any proceedings brought for the foreclosure of, or in the event of the exercise of the power of sale under, or transfer in lieu of foreclosure of any mortgage, or other lien made by Landlord covering the Premises, attorn to the purchaser and recognize such purchaser as Landlord under this Lease and Tenant agrees that such purchaser shall not be liable for any prior act, omission or default by Landlord or subject to any offset or defenses Tenant may have against Landlord. 34. LANDLORD'S LIEN. Tenant hereby grants to Landlord a lien and security interest on all property of Tenant now or hereafter placed in or upon the Premises, and such property shall be and remain subject to such lien and security interest of Landlord for payment of all rent and other sums to be paid by Tenant herein and for the performance by Tenant of all of Tenant's obligations hereunder. The provisions of this paragraph relating to such lien and security interest shall constitute a security agreement under the Uniform Commercial Code of the State of Florida so that Landlord shall have and may enforce a security interest on all Page 18 property of Tenant now or hereafter placed in or on the Premises, in addition to and cumulative with Landlord's liens and rights provided by law or by the other terms and provisions of this Lease. Tenant agrees to execute as debtor such financing statement or statements and such other documents as Landlord may now or hereafter request in order to perfect, continue or further protect Landlord's security interest. In the event Landlord retakes possession of the Premises in exercise of Landlord's rights hereunder, Landlord may remove any personal property located on the Premises and place same in storage without notice or liability to Tenant for such removal. Such property may be placed in a commercial storage facility in the name of Tenant and Tenant shall be liable for the cost of such removal and storage as additional rent hereunder. In the event Tenant does not pay the storage costs, the property stored may be abandoned by Landlord which shall have no obligation and no liability for declining to pay such costs or to protect such property. The foregoing rights shall be in addition to Landlord's claim for Landlord's lien and Landlord's rights under Chapter 715 Florida Statutes. 35. ATTORNEY'S FEES. The parties hereto agree that the prevailing party shall be entitled to recover from the non-prevailing party all reasonable attorneys' fees and costs incurred in litigation between the parties hereto arising out of or related to this Lease. The term attorneys' fees and costs as used in this Lease shall mean such costs at all levels from pretrial through final appeal. 36. NO IMPLIED WAIVER. The failure of Landlord to insist at any time upon the strict performance of any covenant or to exercise any right or remedy in this Lease shall not be construed as a waiver thereof for the future. No payment by Tenant or receipt by Landlord of a lesser amount than the monthly installment of rent due under this Lease shall be deemed to be other than on account of the earliest rent due hereunder, nor shall any endorsement or statement on any check or any letter accompanying any check or payment as rent be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such rent or pursue any other remedy provided in this Lease or at law or equity. 37. LIMITATION OF LIABILITY. The liability of Landlord for any default by Landlord under this Lease shall be limited to the interest of Landlord in the Property. Tenant agrees to look solely to such interest for the satisfaction thereof and neither Landlord nor any of its partners shall be personally liable for any obligations hereunder. 38. SECURITY DEPOSIT. The Security Deposit shall be held by Landlord without liability for interest and as security for the performance by Tenant of Tenant's covenants and obligations under this Lease, it being expressly understood that the Security Deposit shall not be considered an advance payment of rental or a measure of Landlord's damages in case of default by Tenant. Landlord may, from time to time, without prejudice to any other remedy, apply the Security Deposit to arrearage of rent or to the cost of performing any other covenant or obligation of Tenant hereunder. Following any such application of the Security Deposit, Tenant shall pay to Landlord on demand the amount so applied in order to restore the Security Deposit to its original amount. If Tenant is not in default at the termination of this Lease, the balance of the Security Deposit remaining after any such application(s) shall be returned by Landlord to Tenant. If Landlord transfers its interest in the Premises during the term of this Lease, Landlord may assign the Security Deposit to the transferee and thereafter Landlord shall have no further liability for the return of such Security Deposit. 39. NOTICE. Any notice or demand given pursuant to this Lease must be in writing and be given or be served by depositing the same in the United States mail, postpaid and certified and addressed to the party to be notified, with return receipt requested, or by delivering the same in person or by commercial overnight courier service to such party to be notified at the address stated in this Lease or such other address of which notice has been given to the other party in accordance with the terms of this Paragraph 40. Notice deposited in the mail in the manner hereinabove described shall be effective from and after the expiration of three (3) Page 19 days after it is so deposited. Notwithstanding any provision of this Lease to the contrary however, Landlord may always give Tenant notice by addressing or delivering same to the Premises. Until further notice, the addresses for the parties shall be as follows: As to Landlord: ATRIUM AT CLEARWATER, LIMITED c/o Mackey/Krumm Ventures, Incorporated 921 Chatham Lane, Suite 110 Columbus, OH 43221-2458 Attn: Walter J. Mackey, Jr. With copies to: (1) Walter J. Mackey, Jr. Centurion Tower, Suite 805 1601 Forum Place West Palm Beach, FL 33401 As to Tenant DIGITAL LIGHTWAVE, INC. 601 Cleveland Street, Suite 500 Clearwater, Florida 34615 40. SEVERABILITY. If any term or provision of this Lease, or the application thereof to any person or circumstances shall, to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each term and provision of this Lease shall be valid and enforceable to the fullest extent permitted by law. 41. RECORDATION. Tenant agrees not to record this Lease or any memorandum hereof, but Landlord may record this Lease or a memorandum thereof, at its sole election, and Tenant agrees to execute such memorandum upon request by Landlord. 42. GOVERNING LAW. This Lease and the rights and obligations of the parties hereto shall be interpreted, construed and enforced in accordance with the laws of the State of Florida. 43. TIME OF PERFORMANCE. Except as expressly otherwise herein provided, with respect to all required acts of Tenant, time is of the essence of this Lease. 44. FORCE MAJEURE. Whenever a time period is herein prescribed for Landlord or Tenant to take action, neither Landlord nor Tenant shall be liable or responsible for, and there shall be excluded from the computation of such period of time, any delays due to strikes, riots, acts of God, shortages of labor or materials, war, governmental laws, regulations or restrictions, financing, or any other cause whatsoever beyond the control of either Landlord or Tenant. 45. TRANSFERS BY LANDLORD. Landlord shall have the right to transfer and assign, in whole or in part, all its rights and obligations hereunder and in the Premises, and, in such event and upon such transfer, Landlord shall be released from any further obligations hereunder, and Tenant agrees to look solely to such successor in interest of Landlord for the performance of such obligations. However, Landlord shall remain liable for any adjudicated judgment in favor of Tenant provided such judication has been rendered prior to such transfer. 46. BROKERS. Landlord and Tenant represent and warrant to each other that neither of them has employed, engaged, or consulted with any broker in connection herewith except for __N/A______________________________________________ ("Broker"). Landlord and Page 20 Tenant hereby agree to indemnify and to hold each other harmless against any loss, expense or liability with respect to any claims for commissions or brokerage fees arising out of any breach of the foregoing representation and warranty. Landlord has agreed to pay Broker a commission in accordance with a separate written agreement. 47. EFFECT OF DELIVERY OF THIS LEASE. Landlord has delivered a copy of this Lease to Tenant for Tenant's review only, and the delivery hereof does not constitute an offer to Tenant until or unless it has been fully executed by both Tenant and Landlord. 48. CAPTIONS. The paragraph captions used herein are for convenience and reference only. 49. JOINT AND SEVERAL LIABILITY OF TENANT. If there is more than one person comprising Tenant, the obligations imposed upon Tenant hereunder shall be joint and several. If there is a guarantor or guarantors of Tenant's obligations hereunder, Landlord need not first proceed against Tenant before proceeding against any such guarantor, nor shall any such guarantor be released from its guaranty for any reason whatsoever, including, without limitation, any amendment to this Lease, any waiver of any provision hereof or the failure to give such guarantor any notice hereunder. 50. ENTIRE AGREEMENT. This Lease constitutes the entire agreement between the parties hereto with respect to the subject matter hereof. There are no terms, understandings, representations or warranties, express or implied, other than those set forth herein. All prior communications, negotiations, representations, agreements and understanding, whether oral or written, between the parties hereto are merged herein. 51. AMENDMENTS. This Lease may not be modified or amended, except by an instrument in writing and signed by both parties hereto. 52. BINDING EFFECT. This Lease shall be binding upon and inure to the benefit of Landlord, its successors and assigns, and Tenant, its heirs, personal representatives, successors and, to the extent assignment is permitted under the provisions hereof, Tenant's assigns. 53. OPTION TO EXTEND TERM. The Landlord hereby grants to the Tenant the right to renew this Lease for ONE (1) additional period(s) of THREE (3) years (each), which right shall be conditional upon the Tenant's satisfying all the following conditions: a) The option(s) for renewal must be exercised with written notice of that intention delivered to Landlord not less than 180 days to the expiration of the initial lease term or the expiration of any preceding option period, if more than one option period is granted herein. If written notice is not received by Landlord within the foregoing time period, the option to extend shall be considered null and void. b) The option(s) to renew granted herein is only exercisable in the event that the Tenant is not n default of the Lease or in the performance of any of the terms and conditions of this Lease at the time of exercise or the option and at the commencement date of the option term. c) If the option to renew is exercised, all of the conditions in the Lease shall remain the same, with the following exception: The Base Rent shall be increased by five percent (5%) for each year of the Option Period over the monthly Base Rental payable for the preceding one year period. 54. RIGHT OF FIRST OFFER. DURING THE INITIAL SIX (6) MONTHS OF THE Page 21 LEASE TERM, LANDLORD SHALL GRANT TENANT AN EXCLUSIVE RIGHT OF FIRST OFFER (THE "OFFER RIGHT") TO ANY VACANT AREA ON THE FIFTH FLOOR, OF THE PREMISES (THE "OFFERED PREMISES"), AS BOTH ARE SET FORTH ON EXHIBIT "E" ATTACHED HERETO, PURSUANT TO THE FOLLOWING TERMS AND CONDITIONS, AND FOR THE REMAINDER OF THE three (3) years of the Lease term, Landlord shall grant Tenant a Right of First Offer (the "Offer Right") to any vacant area on the FIFTH floor, of the Premises (the "Offered Premises"), as both are set forth on Exhibit "E" attached hereto, pursuant to the following terms and conditions: a) Upon Landlord commencement of bona fide negotiations with a prospective tenant (the "Prospective Tenant") for all or any portion of the Offered Premises, Landlord shall notify Tenant in writing ("Offer Notice") of Landlord's intent to lease any portion of such Offered Premises, and Tenant shall have ten (10) days from receipt of the Offer Notice to exercise its Offer Right by delivery of written notice to Landlord of its commitment to lease such Offered Premises per the terms and conditions as set forth in the Offer Notice. b) Tenant shall only exercise its Offer Right if it intends to fully occupy, lease and use all of the Offered Premises for the conduct of its business. c) Tenant's failure to notify Landlord of its commitment to lease any portion of such Offered Premises and so exercise its Offer Right for such portion of the Offered Premises shall render such Offer Right null and void, and of no further force and effect for this particular portion of the Offered Premise provided such Prospective Tenant finalizes a lease on the Offered Premises within six (6) months of delivery of the Offer Notice to Tenant on substantially similar terms to those set for in the Offer Notice for such Offered Premises. d) Tenant's rights to the Offered Premises occupied by _N/A__________ are subordinate to __N/A__________ s renewal rights. e) If the Offer Notice includes a proposed lease term which extends beyond the Lease Term as set forth herein, the Tenant shall be obligated to extend the Lease Term for the Premises defined herein to a date which is the same termination date as defined in the Offer Notice and this extension of the Lease Term herein shall be a condition precedent to Tenant's right to lease either or both of the Offered Premises as referred to herein. Furthermore, if one or more of the TWO (2) year renewal periods (as granted in paragraph 53 above) shall be unexercised as of the date of this Offer Right is exercised, then any unexercised Option(s) to extend shall be deferred until the end of the lease term as extended according to the requirements of this paragraph 54. f) LANDLORD AND TENANT ACKNOWLEDGE THAT LANDLORD WILL NOT RENT ANY SPACE ON THE FIFTH (5TH) FLOOR TO ANY OTHER TENANT FOR THE FIRST SIX MONTHS AFTER THE COMMENCMENT DATE AND THIS IS THE DEFINITION OF "EXCLUSIVE RIGHT OF FIRST OFFER" AS WRITTEN ABOVE. IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease in multiple original counterparts on the day and year first above written. WITNESSES: TENANT: DIGITAL LIGHTWAVE, INC. /s/ By:/s/ - ---------------------------- ----------------------------------- Page 22 /s/ As:/s/ - ---------------------------- ------------------------------------ WITNESSES: LANDLORD: ATRIUM AT CLEARWATER, LIMITED a Florida Limited Partnership /s/ By:/s/ - ---------------------------- ------------------------------- Walter J. Mackey, Jr., Vice President /s/ Atrium at Clearwater, Incorporated, - ---------------------------- General Partner EXHIBITS ATTACHED: "A" Real Property Description "A-1" Site Plan "B" Floor Plan of Premises "C" Work Letter "C-1" Description of Additional Work "D" Rules and Regulations "E" Floor Plan of Premises and Offered Premises "F" Radon Gas Disclosure Page 23 EX-10.03 6 EXHIBIT 10.03 FIRST LEASE AMENDMENT This First Lease Amendment, dated February ______, 1996 by and between ATRIUM AT CLEARWATER, LIMITED, a Florida limited partnership, LANDLORD AND DIGITAL LIGHTWAVE, INCORPORATED (Tenant) WITNESSETH: WHEREAS, ATRIUM AT CLEARWATER, LIMITED, Landlord, and DIGITAL LIGHTWAVE, INC., Tenant, did make and execute a Lease Agreement dated October 7, 1994 for space designated as Suite 500, comprising approximately 7,796 square feet (the "Premises") located within the project known as THE SUN BANK BUILDING, CLEARWATER SQUARE or THE ATRIUM AT SUN BANK BUILDING located on the real property described in Exhibit "A" attached hereto with an address of 601 Cleveland Street, Clearwater, Florida (the "Property"); and WHEREAS, the parties hereto desire to further alter and modify said Lease the manner hereinafter set forth; NOW THEREFORE, in consideration of the mutual and reciprocal promises herein contained, Tenant and Landlord hereby agree that said Lease shall hereby be amended and modified as follows: 1. EXPANSION OF PREMISES. Tenant hereby agrees to expand the size of its Existing Premises containing 7,796 rentable square feet of area on the 5th floor, as set forth in the Lease (hereinafter referred to as the "Existing Premises") by adding to the Existing Premises an area comprised of 8,028 rentable square feet of area also located on the 5th floor (hereinafter referred to as the "Expansion Premises"). The Existing Premises and the Expansion Premises are hereinafter collectively referred to as the Expanded Premises and any reference to the Premises as may be set forth in the Lease shall hereinafter be meant to refer to the Expanded Premises as referred to and defined herein. Thus, any reference after this date to the Premises or the Expanded Premises shall be deemed to refer to the area on the 5th Floor consisting of 15,824 rentable square feet as depicted on the attached Exhibit "B". Exhibit "B" sets forth the dimensions, locations and configurations (existing and proposed) of both the Existing 1 and Expansion Premises which together are referred to as the Expanded Premises. The Expanded Premises are intended to include the total rentable office area on the 5th floor of the Building including the 5th Floor elevator lobby area, within which lobby area tenant shall be allowed to locate a reception or other working areas provided that Tenant at all times shall comply with all governmental codes and regulations (including fire and building regulations) regarding the use of such lobby space and provided Tenant shall bear and assume all risks regarding security or loss of property in this lobby area which Tenant acknowledges cannot be locked off from the rest of the Building or from the remaining Premises of Tenant since the lobby area is part of the Common Area of the Building. Tenant shall include the 5th floor lobby in its insurance policy regarding liability and property coverages as required in the Lease. Notwithstanding the above, Tenant at its expense may implement an elevator system or install added elevator equipment and/or one-way locks on the fire stairways provided such comply with local fire, building and other regulations so the Tenant can "lock off" access to the 5th floor after Normal Business Hours, provided such equipment does not unreasonably interfere with the Landlord's or any other tenant's use of and/or operations within the Building and does not violate any local governmental codes or regulations. 2. LEASE TERM. Landlord and Tenant agree that the lease term for the Expanded Premises shall commence May 1, 1996, and expire January 31, 1998 and that the latter date (January 31, 1998) shall hereinafter be referred to as the Termination Date of the Lease. Landlord will use its best efforts to cause construction of the tenant finish work for the Expanded Premises to be completed on or before April 1, 1996, but no later than the 90th day after this First Lease Amendment has been mutually signed by Landlord and Tenant and the attached plans and specifications are approved. Construction of the Expanded Premises shall be deemed substantially completed at such time as such improvements as set forth in Exhibit "C" are sufficiently complete so as to allow Tenant to occupy and use the Premises for general office purposes; provided however, that if a building or construction permit is or will be obtained by Landlord from the CITY OF CLEARWATER in order to do any portion of the construction set forth in Exhibit "C", then Landlord shall also obtain a certificate of occupancy for the Premises from the City of Clearwater, Florida for such areas. Landlord, its employees, agents and contractors shall be allowed to enter upon the Premises at any and all reasonable time following the Commencement Date as is necessary to complete any unfinished details, and such entry shall not constitute an actual or constructive eviction of Tenant, in whole or part, nor shall it entitle Tenant to any abatement or diminution of rent or relieve Tenant from any of its obligations under 2 the Lease, provided such completion of any unfinished details shall not prevent tenant from using the Premises for general office purposes. Until Landlord has notified Tenant of Landlord's completion, Tenant shall not attempt to enter the Premises or have any of its employees, agents, or subcontractors enter the Premises if such access will hinder, impede, or slow down Landlord's attempts to complete Landlord's improvements. No permit shall be required for the renovations or construction work in the Existing Premises as set forth on Exhibit "C". 3. SCOPE OF WORK. The scope of work to be required of Landlord to install and complete in the Expanded Premises is set forth in the attached Exhibit "C". Any other work shall be performed and paid for by Tenant, but only after Tenant shall have obtained the prior written approval of Landlord. Landlord shall complete construction of the Expansion Area and make certain changes to the Existing Premises according to the plans and specifications (attached as Exhibit C) all of which work shall be done at Landlord's sole expense. Any changes or additions to these plans and any delays caused by such changes initiated by Tenant shall be paid for by Tenant. 4. RENT. The Rent for the Expanded Premises with 15,824 rentable square feet shall be $16.80 per rentable square foot, plus all applicable state and local sales taxes, commencing as of the Commencement Date for the Expanded Premises and continuing through October 31, 1996, after which time the Rent will escalate by five (5%) percent. The Rent is summarized in the chart below. In addition to the above rent Tenant will also pay a $2.00 per square foot reimbursement to Landlord for certain tenant finish work which is above building standard which amount shall not increase as other portions of Base Rent as provided herein. Accordingly, as of the Commencement Date for the Expanded Premises (estimated to be May 1, 1996), the rent for the Existing Premises shall increase from the prior rental rates to $16.80 per square foot per year which, together with the Rent for the Expansion Premises, shall be payable initially at $22,153.60 per month all of which except the $2.00 per square foot construction cost reimbursement shall increase by 5% as of November 1, 1996. 3 DIGITAL LIGHTWAVE, INC. RENTAL CALCULATIONS - EXPANDED PREMISES TENANT'S BASE RENTAL BASE RENTAL DATES SF RATE PSF ANNUALLY MONTHLY 05/01/96 - 10/31/96 15,824 16.80 265,843.20 22,153.60 11/01/96 - 01/31/98 15,824 17.64 279,135.36 23,261.28 This rent shall be deemed on a gross basis and Tenant shall not make any separate reimbursement to Landlord for operating expenses, except that Tenant shall pay for overtime use of air conditioning services requested for the Expanded Premises based on a charge of $30.00 per hour for hourly periods after Normal Business Hours (referred to as "Overtime Usage") as set forth in the Lease. At any time following the execution of this First Lease Amendment by both parties, Landlord may install in the Premises, at Landlord's cost and expense, a timer to enable Tenant to control the heating, ventilation and cooling of the Premises after Normal Business Hours subject to the charges for Overtime Usage as set forth above. The above rent is not intended to INCLUDE a $2.00 per square foot reimbursement to Landlord for certain tenant finish work which is above building standard which will not escalate at five percent (5%) which $2.00 per square foot reimbursement shall be paid by Tenant on a monthly basis in addition to the rent commencing at $16.80 per square foot as set forth above. 5. LIMITED EXPENSE REIMBURSEMENT. a. This paragraph 5. a. shall only be applicable to the Expansion Premises with 8,028 sf. To the extent that insurance costs increase by more than 5% per annum over the amount for such items taken individually for the calendar year 1995, Tenant shall pay its Prorata Share for Expansion Premises only with 8,028 sf. (deemed to be 6.0%) of any such increases (over and above a 5% per annum increase) which payment shall be due as of February 15, 1997 for the preceding lease year and each succeeding February 15th thereafter for the preceding calendar year's reimbursement and prorated for any partial year. b. Tenant shall not be responsible for payment or reimbursement to Landlord for any portion of the Operating Expenses of the Building or the Premises during the initial term of this lease except that Tenant shall pay for overtime use of air conditioning services requested for any portion of the Expanded Premises based on a charge of $30.00 per hour for hourly periods after Normal Business Hours (referred to as "Overtime Usage") as set forth in the Lease and except for the Limited Reimbursement as set forth in the 5.a. for the Expansion Premises. At any time following the execution of this First Lease Amendment by both parties, Landlord may install in the Premises, at Landlord's cost and expense, a timer to enable Tenant to 4 control the heating, ventilation and cooling within the Expanded Premises after Normal Business Hours subject to the charges for Overtime Usage as set forth in the Lease. It is understood that this Lease is intended to be a Gross Lease and that Tenant's sole rental obligation shall be to pay the Base Rent, upgraded construction cost reimbursement (of $2.00 psf), Limited Expense Reimbursement per paragraph 5.a. and overtime electric use. It is also understood that all of the utilities consumed within the Premises and the Building during Normal Business Hours shall be paid for by Landlord including the cost of electric consumption, air conditioning, water, janitorial and other customary office services. If Tenant requires the use of services not customarily provided in a full service office building, Landlord reserves the right to make reasonable additional charges for such unusual additional services. 6. RULES AND REGULATIONS. The attached Rules and Regulations shall replace those Rules and Regulations attached to the original Lease and such new Rules & Regulations shall be applicable to the full Expanded Premises as of the date of this First Lease Amendment. 7. COMPUTER ROOM AIR CONDITIONER. Tenant shall have the right to install a small air conditioning unit in the ceiling above the computer room within Tenant's Expanded Premises, provided Tenant shall be responsible for the installation and use associated with this air conditioning unit and provided that Tenant understands that there may not be any fresh air make-up for this unit and provided further that Tenant shall bear the cost of installing and operating (including electric consumption) such added air conditioning unit including, but not limited to, a separate electric meter for such unit if elected by Landlord or a mutually approved fixed estimate of such added electric consumption costs. Agreement to the means of measuring such electric consumption shall be a condition precedent to Tenant's right to install such additional air conditioning equipment. 8. GRAPHICS. Landlord hereby grants its permission to Tenant to install tenant signage within the elevator lobby common area. All such letters and numerals shall be approved by Landlord for the Building, and no other sign, graphics or other displays which are visible outside the Premises shall be permitted without Landlord's prior written consent which consent shall not be unreasonably withheld. Tenant intends to create special signage at the elevator lobby which Landlord will approve provided Tenant pays for its installation, removal and repair of the wall areas around such signage areas. A directory in the lobby designed and maintained by the Landlord shall contain the name of all tenants within the Building. 9. PARKING. Tenant shall have no rights to use any portion of the Parking Garage unless set forth herein. a. Neither Tenant nor any of its invitees shall have any right to access the Parking Garage except as specifically provided for herein. As referred to herein, the Landlord's portion of the Parking Garage as of this 5 date is limited to the third and fourth floors of the Parking Garage. The Landlord as of this date has an option to purchase the first and second floors of the Parking Garage which is presently owned by The City of Clearwater which would then give the Landlord control of one hundred percent (100%) of the Parking Garage; however, this one hundred percent (100%) control shall not be construed to grant Tenant or other parties any greater rights to use any portion of the Parking Garage. Prior to Landlord's purchase of the City's portion of the Garage, Landlord has the right to lease parking various parking spaces in the garage at the rate of $27.50 per space, per month. b. The designated parking spaces granted to Tenant, if any, as provided for herein shall be initially located on the third and fourth floors of the Parking Garage or the spaces on the first or second floors if Tenant subleases any of the City's parking areas from Landlord who may lease such spaces from the City; however, after Landlord exercises its option to purchase the first and second floors of the Parking Garage, Landlord may relocate the designated parking spaces at Landlord's sole discretion anywhere within the garage. For the period of time prior to the Landlord exercising its option to purchase the first and second floors of the Parking Garage, the City of Clearwater will continue to own the first and second floors and offer these spaces to the general public, including Landlord and other tenants in the Building. During said time, Tenant and its invitees shall have the "non-exclusive" right to use the City of Clearwater's portion of the Parking Garage (the first and second floors) at parking rates established by the City of Clearwater from time to time SUBJECT TO any other party or parties utilizing the City of Clearwater's portion of the Parking Garage on a priority basis prior to the time Tenant or its invitees may elect to use such parking facilities. However, the use of the City of Clearwater's portion of the Parking Garage (at charges set by the City of Clearwater) may be removed at anytime regardless of the monthly charges for each space and cannot be relied upon by Tenant or its invitees as a source of available parking spaces. c. During the Lease Term, Tenant with regard to its undertaking to lease the Original Premises, shall continue to have the right to use TWENTY (20) parking spaces which shall be designated as "uncovered garage" parking spaces ("Rooftop"), all of which shall be located in Landlord's portion of the Parking Garage at a cost of -0- per month for each "uncovered garage" (rooftop) parking space. These 20 uncovered free parking spaces shall be granted in addition to the existing spaces (10 free covered, 10 free uncovered and 5 additional covered spaces at $30.00 6 per month) as granted in the original Lease dated October 7, 1994 for a total of 45 parking spaces. With regard to Tenant's lease of the Expansion Premises, Tenant shall have the right to sublease some added parking spaces that Landlord will attempt to lease from the City at the current rate of $27.50 per month escalating at 5% per annum as of December 31, 1996 up to a total of forty-eight (48) spaces for the Expansion Premises. Note that the same forty-eight (48) spaces are being offered at $35.00 per month by the City and the $27.50 per month rate is a discounted rate only available to Landlord. Landlord will not warrant that the City will honor its lease obligations to Landlord; however, Landlord will use its best efforts to obtain these forty-eight (48) leased spaces from the City and if successful in this effort, then Landlord will sublease these forty-eight(48) spaces to Tenant as long as the City honors its agreement with Landlord. The parking charges for "covered" and "uncovered" parking spaces as provided above shall be due each month as stated herein with Tenant's monthly installments of Base Rent and shall be subject to all terms, provisions, conditions and covenants of this Lease pertaining to defaults in the payments of Rent. It is also acknowledged between Landlord and Tenant that Tenant may lease on a month to month basis additional parking spaces from Landlord and/or from the City of Clearwater at a monthly cost which shall be established from time to time by either such party provided that such month to month parking may be terminated by Landlord or the City upon thirty (30) days prior notice. If the City contracts for a longer period such longer commitment may be terminated by Landlord in the event Landlord exercises its option to acquire the balance of the parking garage owned by the City as of this date and as referred to above. d. Access to such parking spaces shall be through the driveways and walkways located in the Parking Garage and/or on the Property which shall be used by Tenant on a non-exclusive basis with Landlord and other tenants of the Building or other authorized users of the Parking Garage, including the general public who might have access to the Parking Garage while the City of Clearwater owns a portion of said Parking Garage. Provided the total number of parking spaces is not reduced, and the number of "covered" or "uncovered" is not changed. Landlord shall have the right, in Landlord's sole and reasonable discretion, to establish rules and regulations for use of the driveways, walkways, parking spaces and areas and to designate the right for the exclusive use of particular parking spaces to other tenants in the Building. Landlord reserves the right to reassign, change or relocate any designated parking spaces within the Property or the Parking Garage. Landlord shall also have the right to establish or modify the methods used to control traffic and parking on the Property and the Parking Garage, including, without limitation, the 7 installation of traffic control devices, Parking Garage gate entrance controls, or the hiring of parking attendants. LANDLORD RESERVES THE RIGHT TO ENFORCE THE RESTRICTIONS OR DESIGNATIONS SET FORTH HEREIN BY TOWING VIOLATORS OR OTHER ENFORCEMENT ACTIONS AS LANDLORD DEEMS NECESSARY. e. No commercial or recreational vehicles shall be parked in the parking areas on the Property except those vehicles parked on a temporary basis while delivering, repairing or servicing the Building and/or its tenants. In order to allow Landlord to enforce these provisions including, but not limited to, provisions relating to designated parking spaces, EACH EMPLOYEE OF TENANT WHO EXPECTS TO PARK IN AN ASSIGNED PARKING SPACE SHALL FIRST PROVIDE LANDLORD WITH THE NAME, VEHICLE MAKE AND LICENSE NUMBER OF SUCH PERSON AND ONLY THOSE PERSONS SO PRE-REGISTERED WITH LANDLORD SHALL BE PERMITTED TO PARK IN THE PARKING SPACES SPECIFICALLY DESIGNATED AND ASSIGNED TO TENANT AS PROVIDED HEREIN. TENANT SHALL PROVIDE LANDLORD WITH THE NAME, VEHICLE IDENTIFICATION AND LICENSE PLATE NUMBER FOR EACH ASSIGNED PARKING SPACE AND ONLY PARTIES WHO ARE EMPLOYEES WORKING WITHIN THE PREMISES SHALL BE ENTITLED TO ASSIGNED PARKING SPACES. Landlord may designate the specific names of Tenant's employees or users of any "covered" and/or "uncovered" parking spaces ("Rooftop") and if any such employee or designee does not park in such space and parks somewhere else in the Parking Garage or elsewhere on the property of Landlord, Landlord may tow such automobile of any employee or party violating these restriction whether or not the Tenant (or the employee) is financially complying with its parking charge payments to Landlord. LANDLORD SHALL NOT BE LIABLE FOR ANY DAMAGE TO OR ANY THEFT OF ANY VEHICLE, OR ANY CONTENTS THEREFROM, WHILE IN OR ABOUT THE PARKING AREAS LOCATED ON OR ABOUT THE PROPERTY OR THE PARKING GARAGE AREA. f. No permanent or part time employee, invitee, agent, or subcontractor of Tenant shall be permitted to park in any parking space designated as "Visitor" or in any space designated (by letter identification on such parking space) for use by another tenant ("Other Tenant") as such Other Tenant spaces may be designated from time to time by Landlord. The Visitor Parking Spaces or other tenant spaces as designated from time to time by Landlord shall not be occupied by any person who conducts part-time or full-time work on or about Tenant's Premises. Landlord reserves the right to enforce the restrictions or designations set forth herein by towing violators or other enforcement actions as Landlord deems necessary. g. Landlord shall have the right, after reasonable notice to Tenant and 8 in Landlord's sole and reasonable discretion, to change the location of any designated or undesignated parking spaces whether for visitors, other tenants, handicapped or otherwise without change to the number or allocation of covered and uncovered parking spaces. h. Tenant agrees that it will be solely responsible for collecting the parking charges from its employees and remitting the monthly payments for base rent and parking charges to Landlord in one single payment. Tenant in its sole discretion may provide Landlord with a notice in writing of any non-paying employee which notice may be relied upon by Landlord in enforcing the parking provisions herein including termination of parking rights for such default unless Tenant elects to maintain payment of all parking charges and Tenant reassigns such defaulted space. i. Notwithstanding anything to the contrary set forth elsewhere in this Lease, any default in the payment of monthly parking charges as set forth herein shall constitute a monetary default under this Lease provided Landlord shall also have the right to unilaterally discontinue parking privileges for any space for which parking charges are not paid current within sixty (60) days. If parking rights are so discontinued by Landlord for such non-payment, Landlord may enforce such discontinuance by towing, tagging, or any other measures necessary to remove such non-paying employee from the Property or the Parking Garage. Any such non-paying employee also shall be prohibited from parking on any ground level parking area and be restricted to the uncovered portions of the garage parking areas as may be designated from time to time by Landlord with Landlord similarly having towing rights for any violation hereof. 10. OPTION TO EXTEND TERM. The Landlord hereby grants to the Tenant the right to renew this Lease for ONE (1) additional period(s) of THREE (3) years (each), which right shall be conditional upon the Tenant's satisfying all the following conditions: a) The option(s) for renewal must be exercised with written notice of that intention delivered to Landlord not less than 180 days to the expiration of the initial lease term (January 31, 1998) or the expiration of any preceding option period, if more than one option period is granted herein. If written notice is not received by Landlord within the foregoing time period, the option to extend shall be considered null and void. b) The option(s) to renew granted herein is only exercisable in the event that the Tenant is not in default of the Lease or in the performance of any of the terms and conditions of this Lease at the time of exercise or the option and at the commencement date of the option term. c) If the option to renew is exercised, all of the conditions in the Lease shall remain 9 the same, with the following exception: (i) The Base Rent shall be $18.52 per square foot ($293,060.48 per year) for the first year of the Option Period and then increased by five percent (5%) for each year thereafter over the monthly Base Rental payable for the preceding one year period. (ii) With regard to the Expansion Premises of 8,028 square feet (6% of the total Building area) Tenant shall continue to be obligated to reimburse Landlord for certain operating expense increases which shall be in addition to Base Rent as provided in paragraph 5(a) above except that increases in real estate taxes shall be deemed to be included in paragraph 5(a) expenses during the option period only. (iii) IN THE EVENT TENANT DOES EXERCISE ITS RIGHT TO EXTEND ITS LEASE, TENANT SHALL BE ENTITLED TO A CREDIT IN THE RENTAL OBLIGATION FOR BOTH THE ORIGINAL AREA AND EXPANSION AREA (THE EXPANDED PREMISES) IN THE AMOUNT OF $1.17 PER SQUARE FOOT PER YEAR. THIS CREDIT REPRESENTS A RETURN OF ABOUT $2.00 PER SQUARE FOOT PER YEAR IN RENT WHICH TENANT WILL HAVE PAID BETWEEN MAY 1, 1996 AND JANUARY 31, 1998 AS A REIMBURSEMENT TO LANDLORD FOR UPGRADED TENANT FINISH COSTS PAID FOR BY LANDLORD AS PROVIDED HEREIN. THIS REIMBURSEMENT FOR TENANT FINISH COSTS IS SET FORTH SEPARATELY IN THE RENT AFTER MAY 1, 1996 AND IS NOT PART OF THE BASE RENT OF $16.80 PER SQUARE FOOT (PLUS ESCALATIONS) AS STATED HEREIN. 11. RIGHT OF FIRST OFFER. During the initial first (1) year of the date this First Lease Amendment is mutually signed, Landlord shall grant Tenant a Right of First Offer (the "Offer Right") to any vacant area on the 9TH OR 6TH floor, of the Premises (the "Offered Premises"), as both are set forth on Exhibit "E" attached hereto, pursuant to the following terms and conditions: a. Upon Landlord commencement of bona fide negotiations with a prospective tenant (the "Prospective Tenant") for all or any portion of the Offered Premises, Landlord shall notify Tenant in writing ("Offer Notice") of Landlord's intent to lease any portion of such Offered Premises, and Tenant shall have ten (10) days from receipt of the Offer Notice to exercise its Offer Right by delivery of written notice to Landlord of its commitment to lease such Offered Premises per the terms and conditions as set forth in the Offer Notice. b. Tenant shall only exercise its Offer Right if it intends to fully occupy, lease and use all of the Offered Premises for the conduct of its business. c. Tenant's failure to notify Landlord of its commitment to lease any portion of such Offered Premises and so exercise its Offer Right for such portion of the Offered Premises shall render such Offer Right null and void, and of no further force and effect for this particular portion of the Offered Premise provided such Prospective Tenant finalizes a lease on the Offered Premises within six (6) months of delivery of the Offer Notice to Tenant on substantially similar terms to those set for in the Offer Notice for such Offered Premises. 10 d. Omitted. e. If the Offer Notice includes a proposed lease term which extends beyond the Lease Term as set forth herein, the Tenant shall be obligated to extend the Lease Term for the Premises defined herein to a date which is the same termination date as defined in the Offer Notice, but no less than three (3) years after the Offer Notice date, and this extension of the Lease Term herein shall be a condition precedent to Tenant's right to lease the Offered Premises as referred to herein. Furthermore, if one or more of the ONE THREE (3) year renewal periods (as granted in paragraph 10 above) shall be unexercised as of the date of this Offer Right is exercised, then any unexercised Option(s) to extend shall be deferred until the end of the lease term as extended according to the requirements of this paragraph 11. 12. CONSTRUCTION COST REIMBURSEMENT BY TENANT. Landlord and Tenant agree that Tenant shall pay Landlord $14,616 within 30 days of the mutual execution of this First Lease Amendment which amount shall constitute a portion of certain construction costs which are over and above the Landlord's standard building allowance. This amount shall be in addition to the $2.00 per square foot construction cost reimbursement owed by Tenant to Landlord as provided herein so that Tenant is paying for a portion of the construction costs which will be incurred by Landlord in accommodating Tenant's requests for various upgraded tenant finish construction that is to be performed by Landlord exclusively within and for the benefit of Tenant during the Lease term. All of the tenant finish work (upgraded and otherwise) shall remain the property of the Landlord at the termination of the Lease or any extension period (if exercised) regardless of any Tenant construction cost reimbursement as provided in this First Lease Amendment. 13. Notwithstanding anything to the contrary in the original lease or any amendment or modification thereto, Tenant agrees that it will not remodel, alter, change, remove, destroy or make any additions to any of the improvements to the Premises without first obtaining the written consent and authorization from Landlord which may be withheld in Landlord's sole discretion. However, Landlord's consent shall not be unreasonably withheld if: (i) Tenant has such work performed by contractors approved by Landlord or by Landlord itself; (ii) Tenant pays Landlord for 100% of the cost of such work before any work is commenced (Landlord will be in control of accepting the work as well as determining the compatibility with other operating systems of the Building); (iii) Tenant shall pay to Landlord an amount equal to Landlord's estimate to replace, reinstall, repair or return the Premises to their current condition at the termination of Tenant's Lease, and (iv) Landlord shall not be obligated to pay costs of such improvements even if work is approved as required herein unless Landlord received lien releases for such 11 payments. 14. MISCELLANEOUS. a. Tenant is currently in possession of and is presently conducting business at the Premises referred to in this Lease. There are no actions, either voluntary or involuntary, pending against the Tenant under the bankruptcy laws of the United States. b. Tenant is not entitled to any credit, offset or reduction in rent for any reason whatsoever and Tenant has no defenses to the enforcement of the Lease by Landlord. There exist no claims or potential claims by Tenant against Landlord. If other than a living person, Tenant is existing and in good standing in the jurisdiction of its formation, is qualified to do business in Florida, and Tenant and the individual signing below has the full power and authority to execute this First Lease Amendment. c. All terms in the First Lease Amendment shall have the same meaning ascribed to them in the Lease, except as expressly provided to the contrary in this First Lease Amendment. In the event of a conflict between the terms and conditions of the Lease and terms and conditions of the First Lease Amendment, this First Lease Amendment shall govern and supersede. d. Except as specifically and expressly modified herein, the Lease is ratified and confirmed in all respects and shall remain binding on and inure to the benefit of the parties hereto, and their successors and assigns. All other terms of the Lease as amended to this date shall remain in full force and effect except as provided to the contrary as set forth herein. IN WITNESS WHEREOF, Tenant and Landlord have caused this instrument to be executed as of the date first above written by their respective officers or parties thereunto duly authorized. WITNESSES: LANDLORD: ATRIUM AT CLEARWATER, LIMITED, a Florida limited partnership _________________________ BY: ________________________________ Walter J. Mackey, Jr., President _________________________ Atrium at Clearwater, Incorporated, General Partner Date Signed: ______________ 12 WITNESSES: TENANT: DIGITAL LIGHTWAVE, INC. /s/ BY: /s/ - ----------------------------- --------------------------- /s/ TITLE: - ----------------------------- ------------------------ Date Signed: ------------------ Exhibit A - Legal Description of Property Exhibit B - 5th Floor Premises (including Original Premises and Expanded Premises) Exhibit B-1 - Existing Premises and Proposed Expansion Area Exhibit C - Plans of Areas to be Modified Exhibit C-1 - Plan of Existing Areas to be Modified Exhibit C-2 - Plan of Existing Areas to be Modified Exhibit C-3 - Specifications for Modification Exhibit D - New Rules and Regulations Exhibit E - Offered Premises (6th Floor) 13 EX-10.04 7 EXHIBIT 10.04 INDEMNIFICATION AGREEMENT THIS INDEMNIFICATION AGREEMENT (the "Agreement") is effective as of the ___ day of [ ] between DIGITAL LIGHTWAVE INC., a Delaware corporation (the Company"), and [ ] (the "Indemnitee"). WITNESSETH: WHEREAS, it is essential to the Company to retain and attract as directors and officers the most capable persons available; WHEREAS Indemnitee is a director of the Company; WHEREAS, both the Company and Indemnitee recognize the increased risk of litigation and other claims being asserted against directors and officers of public companies in today's environment; and WHEREAS, in recognition of Indemnitee's need for substantial protection against personal liability in order to enhance Indemnitee's continued service to the Company in an effective manner and in part to provide Indemnitee with specific contractual assurance that the indemnification protection provided by the Certificate of Incorporation, as amended (the "Certificate of Incorporation"), and Bylaws of the Company will be available to Indemnitee (regardless of, among other things, any amendment to or revocation of such Certificate of Incorporation and Bylaws or any change in the composition of the Company's Board of Directors or acquisition transaction relating to the Company), and in order to induce Indemnitee to continue to provide services to the Company as a director and officer thereof, the Company wishes to provide in this Agreement for the indemnification of and the advancing of expenses to Indemnitee to the fullest extent (whether partial or complete) permitted by law and as set forth in this Agreement, and, to the extent insurance is maintained, for the continued coverage of Indemnitee under the Company's directors and officers' liability insurance policies. NOW, THEREFORE, in consideration of the premises and of Indemnitee continuing to serve the Company directly or, at its request, another enterprise, and intending to be legally bound hereby, the parties agree as follows: 1. CERTAIN DEFINITIONS. (a) CHANGE IN CONTROL: shall be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company or a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly of securities of the Company representing twenty percent (20%) or more of the total voting power represented by the Company's then outstanding Voting Securities, or (ii) during any period of two (2) consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company and any new director whose election by the Board of Directors or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof, or (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the Voting Securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into Voting Securities of the surviving entity) at least eighty percent (80%) of the total voting power represented by the Voting Securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company (in one transaction or a series of transactions) of all or substantially all the Company's assets. (b) CLAIM: any threatened, pending or completed action, suit, proceeding or alternate dispute resolution mechanism, or any inquiry, hearing or investigation, whether conducted by the Company or any other party, that Indemnitee in good faith believes might lead to the institution of any such action, suit, proceeding or alternate dispute resolution mechanism, whether civil, criminal, administrative, investigative or other. (c) EXPENSES: include attorneys' fees and all other costs, travel expenses, fees of experts, transcript costs, filing fees, witness fees, telephone charges, postage, delivery service fees, expenses and obligations of any nature whatsoever paid or incurred in connection with investigating, defending, being a witness in or participating in (including on appeal), or preparing to defend, be a witness in or participate in any Claim relating to any Indemnifiable Event. (d) INDEMNIFIABLE Event: any event or occurrence that takes place either prior to or after the execution of this Agreement related to the fact that Indemnitee is or was a director, officer, employee, agent or fiduciary of the Company, or is or was serving at the request of the Company as a director, officer, employee, trustee, agent or fiduciary of another corporation, partnership, joint venture, employee benefit plan, trust or other enterprise, or by reason of anything done or not done by Indemnitee in any such capacity. (e) POTENTIAL CHANGE IN CONTROL: shall be deemed to have occurred if (i) the Company enters into an agreement or arrangement, the consummation of which would result in the occurrence of a Change in Control; (ii) any person (including the Company) publicly announces an intention to take or to consider taking actions which if consummated would constitute a -2- Change in Control; (iii) any person, other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company acting in such capacity or a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, who is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing ten percent (10%) or more of the combined voting power of the Company's then outstanding Voting Securities, increases his beneficial ownership of such securities by five percent (5%) or more over the percentage so owned by such person on the date hereof; or (iv) the Board of Directors adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. (f) REVIEWING PARTY: any appropriate person or body consisting of a member or members of the Company's Board of Directors or any other person or body appointed by the Board who is not a party to the particular Claim for which Indemnitee is seeking indemnification, or Independent Legal Counsel. (g) INDEPENDENT LEGAL COUNSEL: Independent Legal Counsel shall refer to an attorney, selected in accordance with the provisions of SECTION 3 hereof, who shall not have otherwise performed services for the Company or Indemnitee within the last five years (other than in connection with seeking indemnification under this Agreement). Independent Legal Counsel shall not be any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee's rights under this Agreement, nor shall Independent Legal Counsel be any person who has been sanctioned or censured for ethical violations of applicable standards of professional conduct. (h) VOTING SECURITIES: any securities of the Company which vote generally in the election of directors. 2. BASIC INDEMNIFICATION ARRANGEMENT. (a) In the event Indemnitee was, is or becomes a party to or witness or other participant in, or is threatened to be made a party to or witness or other participant in, a Claim by reasons of (or arising in part out of) an Indemnifiable Event, the Company shall indemnify Indemnitee to the fullest extent permitted by law as soon as practicable but in any event no later than thirty (30) days after written demand is presented to the Company, against any and all Expenses, judgments, fines, penalties and amounts paid in settlement (including all interest, assessments and other charges paid or payable in connection with or in respect of such Expenses, judgments, fines, penalties or amounts paid in settlement) of such Claim and any federal, state, local or foreign taxes imposed on the Indemnitee as a result of the actual or deemed receipt of any payments under this Agreement (including the creation of the trust referred to in SECTION 4 hereof). If so requested by Indemnitee, the Company shall advance (within five (5) business days of such request) any and all Expenses to Indemnitee (an "Expense Advance"). Notwithstanding -3- anything in this Agreement to the contrary and except as provided in SECTION 5, prior to a Change in Control Indemnitee shall not be entitled to indemnification pursuant to this Agreement in connection with any Claim initiated by Indemnitee against the Company or any director or officer of the Company unless the Company has joined in or consented to the initiation of such Claim. (b) Notwithstanding the foregoing, (i) the obligations of the Company under SECTION 2(a) shall be subject to the condition that the Reviewing Party shall not have determined (in a written opinion, in any case in which the Independent Legal Counsel referred to in SECTION 3 hereof is involved) that Indemnitee would not be permitted to be indemnified under applicable law, and (ii) the obligation of the Company to make an Expense Advance pursuant to SECTION 2(a) shall be subject to the condition that, if, when and to the extent that the Reviewing Party determines that Indemnitee would not be permitted to be so indemnified under applicable law, the Company shall be entitled to be reimbursed by Indemnitee (who hereby agrees to reimburse the Company) for all such amounts theretofore paid; provided, however, that if Indemnitee has commenced legal proceedings in a court of competent jurisdiction to secure a determination that Indemnitee should be indemnified under applicable law, any determination made by the Reviewing Party that Indemnitee would not be permitted to be indemnified under applicable law shall not be binding and Indemnitee shall not be required to reimburse the Company for any Expense Advance until a final judicial determination is made with respect thereto (as to which all rights of appeal therefrom have been exhausted or lapsed). Indemnitee's obligation to reimburse the Company for Expense Advances shall be unsecured and no interest shall be charged thereon. If there has not been a Change in Control, the Reviewing Party shall be selected by the Board of Directors, and if there has been such a Change in Control, (other than a Change in Control which has been approved by a majority of the Company's Board of Directors who were directors immediately prior to such Change in Control) the Reviewing Party shall be the Independent Legal Counsel referred to in SECTION 3 hereof. If there has been no determination by the Reviewing Party or if the Reviewing Party determines that Indemnitee substantively would not be permitted to be indemnified in whole or in part under applicable law, Indemnitee shall have the right to commence litigation in any court in the State of Delaware having subject matter jurisdiction thereof and in which venue is proper seeking an initial determination by the court or challenging any such determination by the Reviewing Party or any aspect thereof, or the legal or factual bases therefor and the Company hereby consents to service of process and to appear in any such proceeding. Any determination by the Reviewing Party otherwise shall be conclusive and binding on the Company and Indemnitee. 3. CHANGE IN CONTROL. The Company agrees that if there is a Change in Control of the Company (other than a Change in Control which has been approved by a majority of the Company's Board of Directors who were directors immediately prior to such Change in Control) then Independent Legal Counsel shall be selected by Indemnitee and approved by the Company (which approval shall not be unreasonably withheld) and such Independent Legal Counsel shall determine whether the officer or director is entitled to indemnity payments and Expense Advances under this Agreement or any other agreement of Articles of Incorporation or -4- Bylaws of the Company now or hereafter in effect relating to Claims for Indemnifiable Events. Such Independent Legal Counsel, among other things, shall render its written opinion of the Company and Indemnitee as to whether and to what extent the Indemnitee will be permitted to be indemnified. The Company agrees to pay the reasonable fees of the Independent Legal Counsel and to indemnify fully such Independent Legal Counsel against any and all expenses (including attorneys' fees), claims, liabilities and damages arising out of or relating to this Agreement or the engagement of Independent Legal Counsel pursuant hereto. 4. ESTABLISHMENT OF TRUST. In the event of a Potential Change in Control, the Company shall, upon written request by Indemnitee, create a trust for the benefit of Indemnitee and from time to time upon written request of Indemnitee shall fund such trust in an amount sufficient to satisfy any and all Expenses reasonably anticipated at the time of each such request to be incurred in connection with investigating, preparing for and defending any Claim relating to an Indemnifiable Event, and any and all judgments, fines, penalties and settlement amounts of any and all Claims relating to an Indemnifiable Event from time to time actually paid or claimed, reasonably anticipated or proposed to be paid. The amount or amounts to be deposited in the trust pursuant to the foregoing funding obligation shall be determined by the Reviewing Party, in any case in which the Independent Legal Counsel referred to above is involved. The terms of the trust shall provide that upon a Change in Control (i) the trust shall not be revoked or the principal thereof invaded, without the written consent of Indemnitee, (ii) the trustee shall advance, within five (5) business days of a request by Indemnitee, any and all Expenses to indemnitee (and Indemnitee hereby agrees to reimburse the trust under the circumstances under which Indemnitee would be required to reimburse the Company under SECTION 2(b) of this Agreement), (iii) the trust shall continue to be funded by the Company in accordance with the funding obligation set forth above, (iv) the trustee shall promptly pay to Indemnitee all amounts for which Indemnitee shall be entitled to indemnification pursuant to this Agreement or otherwise, and (v) all unexpended funds in such trust shall revert to the Company upon a final determination by the Reviewing Party or a court of competent jurisdiction, as the case may be, that Indemnitee has been fully indemnified under the terms of this Agreement. The trustee shall be chosen by Indemnitee. Nothing in this SECTION 4 shall relieve the Company of any of its obligations under this Agreement. All income earned on the assets held in the trust shall be reported as income by the Company for federal, state, local and foreign tax purposes. 5. INDEMNIFICATION FOR ADDITIONAL EXPENSES. The Company shall indemnify Indemnitee against any and all expenses (including attorneys' fees) and, if requested by Indemnitee, shall (within five business days of such request) advance such expenses to Indemnitee, which are incurred by Indemnitee in connection with any claim asserted against or in connection with any action brought by Indemnitee for (i) indemnification or advance payment of Expenses by the Company under this Agreement or any other agreement or Certificate of Incorporation or Bylaws of the Company now or hereafter in effect relating to Claims for Indemnifiable Events and/or (ii) recovery under any directors' and officers' liability insurance policies maintained by the Company, regardless of whether Indemnitee ultimately is determined -5- to be entitled to such indemnification, advance expense payment or insurance recovery, as the case may be. 6. PARTIAL INDEMNITY, ETC. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of the Expenses, judgment, fines, penalties and amounts paid in settlement of a Claim but not, however, for all of the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion thereof to which Indemnitee is entitled. Moreover, notwithstanding any other provision of this Agreement, to the extent that Indemnitee has been successful on the merits or otherwise in defense of any or all Claims relating in whole or in party an Indemnifiable Event or in defense of any issue or matter therein, including dismissal without prejudice, Indemnitee shall be indemnified against all Expenses incurred in connection therewith. 7. DEFENSE TO INDEMNIFICATION, BURDEN OF PROOF AND PRESUMPTIONS. It shall be a defense to any action brought by the Indemnitee against the Company to enforce this Agreement (other than an action brought to enforce a claim for expenses incurred in defending a claim in advance of its final disposition where the required undertaking has been tendered to the Company) that the Indemnitee has not met the standards of conduct that make it permissible under the General Corporation Law of Delaware for the Company to indemnify the Indemnitee for the amount claimed. In connection with any determination by the Reviewing Party or otherwise as to whether the Indemnitee is entitled to be indemnified hereunder, the burden of providing such a defense shall be on the Company. Neither the failure of the Company (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such action by the Indemnitee that Indemnification of the claimant is proper under the circumstances because he or she has met the applicable standard of conduct set forth in the General Corporation Law of Delaware, nor an actual determination by the Company (including its Board of Directors, independent legal counsel, or its stockholders) that the Indemnitee had not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the Indemnitee has not mete the applicable standard of conduct. For purposes of this Agreement, the termination of any claim, action, suit or proceeding, by judgment, order, settlement (whether with or without court approval) or conviction, or upon a plea of nolo contendere, or its equivalent, shall not create a presumption that Indemnitee did not meet any particular standard of conduct or have any particular belief or that a court has determined that indemnification is not permitted by applicable law. 8. NON-EXCLUSIVITY, ETC.. The rights of Indemnitee hereunder shall be in addition to any other rights Indemnitee may have under the Certificate of Incorporation or Bylaws of the Company or the General Corporation Law of Delaware or otherwise. To the extent that a change in the General Corporation Law of Delaware (whether by statute or judicial decision) permits greater indemnification by agreement than would be afforded currently under the Certificate of Incorporation and Bylaws of the Company and this Agreement, it is the intent of -6- the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits so afforded by such change. 9. NO CONSTRUCTION AS EMPLOYMENT AGREEMENT. Nothing contained herein shall be construed as giving Indemnitee any right to be retained in the employ of the Company or any of its subsidiaries. 10. LIABILITY INSURANCE. To the extent the Company maintains an insurance policy or policies providing directors' and officers' liability insurance, Indemnitee shall be covered by such policy or policies, in accordance with its or their terms, to the maximum extent of the coverage available for any Company director or officer. 11. PERIOD OF LIMITATIONS. No legal action shall be brought and no cause of action shall be asserted by or in the right of the Company or any affiliate of the Company against Indemnitee, Indemnitee's spouse, heirs, executors, administrators or personal or legal representatives after the expiration of two years from the date of accrual of such cause of action, and any claim or cause of action of the Company or its affiliate shall be extinguished and deemed released unless asserted by the timely filing of a legal action within such two- year period; provided, however, that if any shorter period of limitations is otherwise applicable to any such cause of action such shorter period shall govern. 12. AMENDMENTS, ETC. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver. 13. SUBROGATION. In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable the Company effectively to bring suit to enforce such rights. 14. NO DUPLICATION OF PAYMENTS. The Company shall not be liable under this Agreement to make any payment in connection with any claim made against Indemnitee to the extent Indemnitee has otherwise actually received payment (under any insurance policy, Articles of Incorporation or Bylaws of the Company or otherwise) of the amounts otherwise indemnifiable hereunder. 15. BINDING EFFECT, ETC. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors, assigns, including any direct or indirect successor by purchase, merger, consolidation or otherwise to all -7- or substantially all of the business and/or assets of the Company, spouses, heirs, and personal and legal representatives. The Company shall require and cause any successor (whether direct or indirect by purchase, merger, consolidation or otherwise) to all, substantially all, or a substantial part, of the business and/or assets of the Company, by written agreement in form and substance satisfactory to Indemnitee, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. This Agreement shall continue in effect regardless of whether Indemnitee continues to serve as a director and officer of the Company or of any other enterprise at the Company's request. 16. SEVERABILITY. The provisions of this Agreement shall be severable in the event that any of the provisions hereof (including any provision within a single section, paragraph of sentence) are held by a court of competent jurisdiction to be invalid, void or otherwise unenforceable, and the remaining provisions shall remain enforceable to the fullest extent permitted by law. Furthermore, to the fullest extent possible, the provisions of this Agreement (including, without limitation, each portion of this Agreement containing any provision held to be invalid, void or otherwise unenforceable, that is not itself invalid, void or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable. 17. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware applicable to contracts made and to be performed in such state without giving effect to the principles of conflicts of laws. IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Agreement as of the date first above written. DIGITAL LIGHTWAVE INC., a Delaware corporation By: ___________________________________ Bryan J. Zwan, Chief Executive Officer _________________________________________ Indemnitee EX-23.02 8 EXHIBIT 23.02 Exhibit 23.02 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this registration statement on Form S-1 of our report, which includes an explanatory paragraph regarding the Company's ability to continue as a going concern, dated February 16, 1996, except as to the information in Notes 6 and 10, for which the dates are June 30, 1996 and July 25, 1996 respectively, on our audits of the financial statements of Digital Lightwave, Inc. (a Development-Stage Enterprise). We also consent to the reference to our firm under the caption "Experts." Tampa, FL August 1, 1996 -----END PRIVACY-ENHANCED MESSAGE-----